An upbeat US June payroll report is already betting the market on a 75 basis point hike in the Federal Reserve this month, pushing bond yields higher.
Underscoring the global nature of the inflation problem, central banks in Canada and New Zealand are expected to continue to tighten this week. [NZ/INT] [CA/INT]
Although Wall Bourse recorded some gains last week, market sentiment will be tested by results from JPMorgan and Morgan Stanley on Thursday, and Citigroup and Wells Fargo the following day.
“Consensus expects S&P 500 2Q EPS growth to be just +6% year-over-year,” said Goldman Sachs analyst David J. Kostin. “While companies are likely to breach this low bar, we expect the cautious comments to lead to reductions in forward estimates.”
If the economy manages to avoid recession, Kostin sees EPS growth of 8% in 2022 and 6% in 2023, with the S&P 500 index dropping to 4,300. In a moderate recession, EPS could drop 11%.
Early Monday, S&P 500 futures were down 0.2% and Nasdaq futures were down 0.3%.
MSCI’s broadest index of stocks in the Asia-Pacific region, excluding Japan, was flat. South Korea fell 0.3%, but the Japanese Nikkei gained 1.5%.
Japan’s conservative coalition government is expected to increase its majority in upper house elections on Sunday, two days after the assassination of former prime minister Shinzo Abe.
A major headwind will be Wednesday’s US consumer price report, where markets see a further acceleration in headline inflation to 8.8%, but a slight slowdown in the base measure to 5.8%.
An early reading of consumer inflation expectations this week will also get the Fed’s attention.
“Unexpected weakness in these releases will be needed to dislodge expectations of a 75 basis point Fed rate hike on July 27, which rose from around 71 basis points to 74 basis points after the US earnings report. wages,” said Ray Attrill, head of currency strategy at NAB.
PARITY PARTY
Similarly, Treasury yields climbed about 10 basis points after the jobs report and the 10-year rate stood at 3.08% on Monday, from a recent low of 2.746%.
A hawkish Fed combined with recession fears, particularly in Europe, kept the dollar at 20-year highs against a basket of competitors. The dollar was closed at 136.30 yen, just off its recent high of 137.00.
The Euro continued to struggle at $1.0164, after losing 2.4% last week to hit its lowest level in two decades and its main retracement target at $1.0172.
“With little economic relief on the horizon for Europe, and U.S. inflation data likely to mark a new high for the year and keep the Fed rising aggressively, we believe risks remain biased in favor greenback,” said Jonas Goltermann, senior market economist at Capital Economics.
“Indeed, we believe that the EUR/USD rate will cross the parity shortly, and could well be trading a little above this level.”
Rising interest rates and a strong dollar were a headache for non-performing gold, which suffered $1,742 an ounce after falling for four straight weeks. [GOL/]
Oil prices also fell around 4% last week as demand concerns offset supply constraints. [O/R]
Data from China due Friday is likely to confirm that the world’s second-largest economy contracted sharply in the second quarter due to coronavirus lockdowns.
On Monday, Brent was trading 12 cents lower at $106.90, while US crude fell 34 cents to $104.45 a barrel.