Societe Generale
Focus switches to the US, even if there’s a very strong consensus about what the FOMC will decide on Wednesday.
After a week in which the market was more focused on the ECB, Italy and natural gas flows from Russian to Germany, than anything happening elsewhere, attention switches back to the US – a bit, anyway. The market seems overwhelmingly convinced that the FOMC will hike rates by 75bp on Wednesday, and pretty confident that will be accompanied by a strong signal that there’s another 75bp coming in September. At the same time, the market is increasingly comfortable with the idea that Fed Funds will peak in late 2022, rather than in 2023. ¢ The danger of course, is that against the backdrop of a strong consensus, the FOMC is a damp squib and quickly forgotten ahead of Thursday’s GDP report, where a 0.5% q/q SAAR consensus ides a -1.6% to +2% range. If the data do throw up a negative print, it’ll trigger lots more recession chatter after Q1s =1.6%. This would not be a technical recession, as much as recession on a technicality, but fear of the recession to come would only grow. ¢
I’ve listened to any number of discussions of the US economic outlook and what I think is missing, is awareness that what makes this difficult, is that policy only affects the inflation rate with a lag -and a big one at that. The sheer number of discrete shocks hitting the global economy and the lags before policy reaction takes effect, are why I think avoiding recession will be so hard, but the good news is that whenever I hear talk of a ‘hard landing’ these days, it’s with reference to 2009/2009. That’s good news because if 2008/09 is now the benchmark for a hard landing, the chances of this one being soft by comparison, are very high. The bad news is that it still won’t be fun.
As long as recession fears are to the fore, US Treasuries will be capped. As long as they are capped, USD/JPY will be too, but more importantly, Bund yields will be capped, and so will EUR/JPY. The dollar can retain a risk aversion bid, but EUR/JPY looks to me to have turned the corner. EUR/JPY downside would be significant in case of any further reduction in the flow of gas through pipelines from Russia.
ING
EUR: EU decision on gas reduction in focus
The EUR continued to show some relatively elevated intraday volatility yesterday, despite remaining largely attached to the 1.0200 gravity line. Today, all eyes will be on the EU emergency meeting to discuss last week’s European Commission proposal to reduce gas consumption by 15%. The original EC draft has been heavily revised and the new proposal reportedly includes a number of exceptions and lower targets based on each country’s specific circumstances. The meeting follows Gazprom’s announcement that it will further cut gas flows via the Nord Stream link to around 20% of the pipeline’s capacity due to technical issues.
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Written by James Harte
With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.
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Daily Market Outlook, July 26, 2022
Source: Tickmill
