Wall Street bounced off session lows and finished lower after the US reported much hotter-than-expected CPI data for June, which printed at 9.1% year on year for the headline inflation, and 5.9% for the core inflation excluding food and energy. The jump in the consumer price strengthened more aggressive moves by the Fed, with a full percentage rate hike in July being priced in, according to the CME Fed watch tool.
Despite another shocking figure, broad markets were resilient as the growth sectors, typically in consumer discretionary stocks outperformed amid dip-buys. However, the inversion between the benchmark bond yields on 10-year and 2-year deepened to the widest since 2000, though it does not necessarily lead to an immediate economic recession according to history.
The spread between 10-year and 2-year US Treasury yields
Source: Fred, Federal Reserve Bank of St. Louis (click to enlarge the chart)
Bank of Canada raised the interest rate by 1 full percentage to 2.5%, following a 50-bps rate hike by both the Reserve Bank of New Zealand and Bank of Korea. Central banks intend to pressure demands by speeding up rate hikes to counter hot inflation, however, the measures are doing little to solve the issue from the supply side.
Elsewhere, Asian equity markets are set to open higher after China-led broad gains amid strong trade balance data. China’s export rose 17.9% year on year in June, and import was up 1.0%, leading to a record surplus of US$98 billion.
AU and NZ day ahead
The S&P/ASX 200 is set to open lower, the futures were down 0.06%. The recent bounce in the tech sectors led the local equity markets to gains on Wednesday. Notably, the Australian bond yields sharply dropped, suggesting that traders bet on a peak in rate hikes by the RBA as inflation expectations tend to fall.
The S&P/NZX 50 rose 0.25% in the first-hour trading. The NZ equity markets were under pressure after the RBNZ raised the OCR by 50 bps for the third time in a row since April on Wednesday. However, the recent resilient NZX’s performance suggests that the impact of the reserve bank’s “front-loading” rate hikes might have been priced in, and the NZ 50 index is still on a course of a bottom reversal since mid-June. Notably, the local renewable energy stocks have been outperforming on the back of the global fossil fuel energy supply issues. Companies with strong outlooks were also strong, such as Air NZ, A2 milk, F&P healthcare, and Sparks NZ, despite the economic headwinds.
US
The Dow Jones Industrial Average fell 0.68%, the S&P 500 was down 0.45%, and Nasdaq declined 0.15%.
9 out of 11 sectors in the S&P 500 finished lower, with industrial stocks leading losses. Major energy stocks rebounded from the previous day's losses. Mega-cap companies' shares were mixed (See the below table). Netflix announced to partner with Microsoft for its ad-supported service, while warning of a 2 million loss in subscribers for the second quarter. The live streamer is scheduled to report earnings next Wednesday after the closing bell.
The major companies’ performance overnight (14 July 2022)
Europe
Major European indices also finished lower on the US surprisingly hot inflation data. UK’s GDP grew 0.5% year on year in May, back to growth after a two-month contraction. However, this will not change the BOE’s stance on rate hikes.
The Stoxx 50 (-0.95%), FTSE 100 (-0.74%), DAX (-1.16%), CAC 40 (-0.73%).
Commodities
Commodity markets rebounded from the recent lows, with both crude oil and copper slightly up. But central banks’ rate hikes may continue to pressure energy and resource prices as demands may be weakening further on recession concerns. Precious metals rose on a softened USD. Agricultural products were mostly lower.
WTI: US$96.10 (-0.21%), Brent: US$99.57 (+0.08%), Natural Gas: US$6.61 (-1.24%)
COMEX Gold futures: US$1, 734.00 (+0.5%), COMEX Silver futures: US$19.15 (-1.5%), Copper futures: US$3.309 (+1.72%)
Wheat: US$810.75 (-0.43%), Soybean: US$1,349.50 (+0.48%), Corn: US$595.25 (+1.49%).
Currencies
The US dollar index fell for the second session, down 0.05%, to 107.85 as long-dated bond yields start to decline, though the short-dated yields were higher on expectations of a 1 full percentage rate hike by the US Fed. EUR/USD consolidated above the parity level at 1.0054. The Canadian dollar firmed after the BOC’s supersized rate hike. USD/JPY started rolling again after a one-day pull back, toward the highest since 1998.
Treasuries
The US long-dated bond yield fell further while the short-dated bond yield climbed. The deepened inversion between the 10-year and 2-year bond yield suggests a strong expectation of rate hikes and a slowdown in economic growth falling on the horizon.
US 10-year: 2.93%, US 2-year: 3.15%.
Germany bund 10-year: 1.14%, UK gilt 10-year: 2.06%.
Australia 10-year: 3.39%, NZ 10-year: 3.68%.
Cryptocurrencies
The crypto markets rebounded by responding to the tech shares in the equity markets.
(See below prices at AEST 9:10 am according to Coinmarketcap.com)
Bitcoin: US$19,898 (+2.57%)
Ethereum: US$1,089 (+4.31%)
Cardano: US$0. 4272 (+0.34%)
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