Tomorrow we get the release of the final June CPI figures for the Euro Area. Since we already had the preliminary numbers at the start of the month, it's much less likely to catch the market by surprise. But, there could be a lot more attention on the figure ahead of the ECB's meeting on Thursday. The consensus of expectations is that the data will confirm what has already been released: Inflation of 8.6% compared to 8.1% in May. That would be the highest rate since the beginning of the Euro. Core inflation is expected to show a mild deceleration to 3.7% compared to 3.8% in May. The question now is, what will the ECB do about it? The context matters Last week, the EC updated its economic forecasts for the year, which it does only every six months. Not surprisingly, the governing body cut its economic growth forecast, and raised its expectations for inflation. But what is significant is the magnitude and the duration. The EC is currently expecting inflation this year to average 6.1% and to still average above target at 2.7% next year. This seems to suggest that they don't see peak inflation yet, and that it will take a long time for the ECB to get inflation under control. And that this effort to control inflation will impact economic growth both this year and the next. Effectively, the EC is forecasting a year and a half of stagflation. Silence leads to speculation ECB members are in the blackout period ahead of the interest rate decision. The last member to comment might be pivotal to understand where policy is going: Findlan's Rhein. Normally he's understood to have a neutral position. So, traders noticed his most recent comments that he expected a 25bps rate hike at the next meeting, followed by another 50bps in September. With the Fed widely expected to raise rates by at least 150bp in that same period, this doesn't do much to close the interest rate gap between the world's two largest economies with the most traded currency. But, it does seem to be enough to help slow the fall of the Euro vs the dollar. With inflation in the US outpacing inflation in Europe, it's expected that the US will be more aggressive in monetary policy. Consequently, the shared currency might continue to be weaker, even if the ECB delivers on the expectation of rate hikes. It's not just the interest rate The market expects a rate hike, but where there is more concern is around the so-called "anti-fragmentation" package. This is a tool the ECB is looking to use in order to prevent higher interest rates in the periphery. The problem is that the periphery has higher inflation. The usual counter for that higher inflation is higher interest rates. But the anti-fragmentation tool would presumably get in the way of that, and potentially allow higher inflation in the periphery while tamping down inflation in the central region. The end result could be a different kind of fragmentation, and less effectiveness in getting inflation under control. That, on top of taking a much more restrained approach on interest rates than other central banks such as the BOE and Fed.

Tomorrow we get the release of the final June CPI figures for the Euro Area. Since we already had the preliminary numbers at the start of the month, it's much less likely to catch the market by surprise. But, there could be a lot more attention on the figure ahead of the ECB's meeting on Thursday. The consensus of expectations is that the data will confirm what has already been released: Inflation of 8.6% compared to 8.1% in May. That would be the highest rate since the beginning of the Euro. Core inflation is expected to show a mild deceleration to 3.7% compared to 3.8% in May. The question now is, what will the ECB do about it? The context matters Last week, the EC updated its economic forecasts for the year, which it does only every six months. Not surprisingly, the governing body cut its economic growth forecast, and raised its expectations for inflation. But what is significant is the magnitude and the duration. The EC is currently expecting inflation this year to average 6.1% and to still average above target at 2.7% next year. This seems to suggest that they don't see peak inflation yet, and that it will take a long time for the ECB to get inflation under control. And that this effort to control inflation will impact economic growth both this year and the next. Effectively, the EC is forecasting a year and a half of stagflation. Silence leads to speculation ECB members are in the blackout period ahead of the interest rate decision. The last member to comment might be pivotal to understand where policy is going: Findlan's Rhein. Normally he's understood to have a neutral position. So, traders noticed his most recent comments that he expected a 25bps rate hike at the next meeting, followed by another 50bps in September. With the Fed widely expected to raise rates by at least 150bp in that same period, this doesn't do much to close the interest rate gap between the world's two largest economies with the most traded currency. But, it does seem to be enough to help slow the fall of the Euro vs the dollar. With inflation in the US outpacing inflation in Europe, it's expected that the US will be more aggressive in monetary policy. Consequently, the shared currency might continue to be weaker, even if the ECB delivers on the expectation of rate hikes. It's not just the interest rate The market expects a rate hike, but where there is more concern is around the so-called "anti-fragmentation" package. This is a tool the ECB is looking to use in order to prevent higher interest rates in the periphery. The problem is that the periphery has higher inflation. The usual counter for that higher inflation is higher interest rates. But the anti-fragmentation tool would presumably get in the way of that, and potentially allow higher inflation in the periphery while tamping down inflation in the central region. The end result could be a different kind of fragmentation, and less effectiveness in getting inflation under control. That, on top of taking a much more restrained approach on interest rates than other central banks such as the BOE and Fed.

Outlook. We lower our GDP forecast for 2022 to 2.7% (from 3.7%) while keeping the 5.7% forecast for 2023.  The economy recovered in June in a post-lockdown rebound. However, China is facing renewed headwinds from rising property stress and weakening US and euro demand. Q2 GDP was weaker than we expected falling 2.6% q/q. Uncertainty over new possible covid restrictions takes a big toll on private consumption and small businesses and the arrival of the more contagious Omicron variant BA.5 is adding to the uncertainty. The main impetus to growth comes from stimulus, not least the part related to infrastructure.  China today Growth. PMIs rebounded further in June and the credit impulse is robust. Retail sales increased in June but is still weak. Confidence is very low. The property sector is still in a deep crisis and stress among developers has increased again lately. Inflation. PPI inflation declined further to 6.1% in June coming from 13.5% in October. CPI inflation is edging higher to 2.5% in June from 2.1% in May, but still below the 3% target. Monetary policy. PBoC has kept the RRR rate unchanged since April. China is reluctant to cut rates and prefers fiscal policy to underpin growth. M1 growth is still weak. CNY. The yuan is still stable against USD after weakening in May. Stock markets. Stocks declined lately on renewed concerns over the property sector and covid. The China USD offshore high yield rate has pushed higher to almost 26%. Download The Full China Macro Monitor

Outlook. We lower our GDP forecast for 2022 to 2.7% (from 3.7%) while keeping the 5.7% forecast for 2023.  The economy recovered in June in a post-lockdown rebound. However, China is facing renewed headwinds from rising property stress and weakening US and euro demand. Q2 GDP was weaker than we expected falling 2.6% q/q. Uncertainty over new possible covid restrictions takes a big toll on private consumption and small businesses and the arrival of the more contagious Omicron variant BA.5 is adding to the uncertainty. The main impetus to growth comes from stimulus, not least the part related to infrastructure.  China today Growth. PMIs rebounded further in June and the credit impulse is robust. Retail sales increased in June but is still weak. Confidence is very low. The property sector is still in a deep crisis and stress among developers has increased again lately. Inflation. PPI inflation declined further to 6.1% in June coming from 13.5% in October. CPI inflation is edging higher to 2.5% in June from 2.1% in May, but still below the 3% target. Monetary policy. PBoC has kept the RRR rate unchanged since April. China is reluctant to cut rates and prefers fiscal policy to underpin growth. M1 growth is still weak. CNY. The yuan is still stable against USD after weakening in May. Stock markets. Stocks declined lately on renewed concerns over the property sector and covid. The China USD offshore high yield rate has pushed higher to almost 26%. Download The Full China Macro Monitor

Market sentiment remains anxious, at one point today US stocks were up nearly 1%, following on from a brighter mood in Europe and Asia, however they closed the session down more than 0.96%. The driver of this shift in sentiment was Apple, who announced that it would slow hiring and spending growth in certain regions. This news comes ahead of Apple’s earnings that are scheduled for release next week. Overall, the key themes remain: the market appears to have settled at a 75bp hike for the Federal Reserve next week, CME Fedwatch is now suggesting that there is a 71% probability of a 75bp rate hike from the Fed next week, last week the balance was in favour of a 100bp rate hike. The ECB is expected to hike rates later this week, the PBOC has promised supportive monetary policy to help beleaguered home builders in China, which as a sector is larger than the entire US stock market, and US earnings season continues to ramp up.  Don’t expect the end of the bear market this summer  There are two themes that have guided our analysis so far this year: 1, fundamentals matter more than technicals at this stage of the economic cycle, so it’s important to be aware of key economic data releases, and 2, bear markets historically last 9 months, thus any uptick in sentiment, like we saw at the end of last week, is most likely temporary and a bear-market rally. We would categorise the sharp rise in stocks at the end of last week, as a weak market clinging to any bit of good news, namely that consumer confidence was better than expected for July. The University of Michigan index of Consumer Sentiment rose to 51.1 from 50.0 in June. While this was better than expected, it remains close to historic lows, and the index of consumer expectations continued to decline, reaching its lowest point since 2011. The share of consumers who blamed inflation for eroding their living standards continued to rise reaching 49%, which is the worst reading since the financial crisis. Interestingly, these negative views endured even though oil prices have fallen, and gas pump prices are significantly lower over the month. Another bright spot in the report was that inflation expectations held steady or improved. Median year ahead inflation remained steady at 5.2%, while long run inflation expectations fell to 2.8%, below the 2.9-3.1% median expectations of the last 11 months. This may only be a small improvement; however, it is feeding the narrative of peak inflation in the US.  Waiting for a US recession… Overall, the economic picture in the US is mixed. US homebuilder sentiment fell to its lowest level since the early months of the pandemic, as a sharp rise in US interest rates causes fear to build about the future of housing demand. In fairness, this is exactly what the Fed wants to see as surging shelter costs are a large contributor to rising core inflation, thus a slowdown in this sector could lead to a less aggressive Fed down the line, which, in theory, should be good news for risky assets.  However, the threat of recession is real, the Fed is unlikely to take its foot off the gas in the next 6-months, which is about the extent of forward planning that goes on in the investment community. So, stocks remain ripe to be sold off. The corporate earnings data has been mixed at the start of this important week. Bank of America and Goldman Sachs both beat expectations when they announced their results on Monday. BOA results saw stronger revenue on the back of higher interest rates; however, the firm boosted its provisions for credit losses. Profits also sunk by 32% compared to last year. The Bank said that its consumer clients remained resilient last quarter with strong deposit balances and spending levels. Loan growth is also strong. This does not sound like an economy that is on the brink of recession, however, there can be no doubt that rising interest rates and sky-high levels of inflation will hurt the consumer, the question now is when that will happen. GS saw earnings growth boosted by record IB revenue and M&A growth. This is typical GS, benefitting when the rest of the market is hurting!  We will continue to watch earnings reports closely, including Netflix. Morgan Stanley said that it expects a “streaming recession”, and plenty of people I know (not an empirical survey), would ditch Netflix subscriptions first if push came to shove. The Apple news needs to be looked at in the context of next week’s earnings release, however, if one of the world’s most valuable companies is laying off workers, risk seekers should take note. This murky outlook is supportive of a defensive equity trading...

EUR/USD built on last week’s bounce from a two-decade low amid modest USD weakness. Reduced bets for a 100 bps Fed rate hike and sliding US bond yields undermined the buck. A positive risk tone also undermined the safe-haven greenback and remained supportive. The uptick lacked bullish conviction amid recession fears and ahead of the ECB on Thursday. The EUR/USD pair kicked off the new week on a positive note and built on its modest recovery move from the vicinity of mid-0.9900s, or the lowest level since December 2002 touched last week. The uptick was sponsored by some follow-through US dollar profit-taking slide, led by diminishing odds for a more aggressive policy tightening by the Federal Reserve. In fact, two of the most hawkish FOMC members - Fed Governor Christopher Waller and St. Louis Fed President Jim Bullard - said last Thursday that they were not in favour of the bigger rate hike at the upcoming meeting in July. The remarks forced investors to scale back their expectations for a supersized 100 bps increase in the benchmark rate. This was evident from a further decline in the US Treasury bond yields, which continued undermining the greenback. On the economic data front, the US Census Bureau reported on Friday that Retail Sales increased by 1% in June as against the 0.8% rise anticipated. Excluding autos, core retail sales also surpassed market expectations and climbed 1% during the reported month, up from the 0.5% increase in May. Separately, the New York Fed's Empire State Manufacturing Index rebounded sharply from -1.2 in June to 11.1 for the current month, beating expectations for a reading of -2. Furthermore, the Prelim Michigan Consumer Sentiment Index rose to 51.1 in July from the 50.0 previous, though did little to impress the USD bulls. The upbeat data was overshadowed by not-so-hawkish comments by Atlanta Fed President Raphael Bostic, noting that moving too dramatically could undermine positive aspects of the economy and add to the uncertainty. Adding to this, signs of stability in the financial markets exerted some downward pressure on the safe-haven buck and offered support to the EUR/USD pair. Despite the supporting factors, the pair lacked bullish conviction amid fears that a halt to gas flows from Russia could trigger an economic crisis in the Eurozone. This might curtail the European Central Bank’s ability to raise rates, which acted as a headwind for the shared currency and capped the upside for the major. Hence, the focus will remain glued to the ECB monetary policy decision, scheduled to be announced on Thursday. The ECB has signalled the start of the rate hike cycle and a 25 bps rate hike is fully priced in the markets. The question, however, is whether the central bank commits the size of the rate hike in September or leaves it open. This, in turn, suggests that investors will look for fresh clues from the accompanying monetary policy statement and ECB President Christine Lagarde's comments at the post-meeting press conference. Apart from this, the flash version of the PMI prints from the Eurozone and the USD should provide a fresh directional impetus for the EUR/USD pair. In the meantime, the USD price dynamics might influence spot prices amid absent relevant market-moving economic releases on Monday. The mixed fundamental backdrop, however, makes it prudent to wait for strong follow-through buying before confirming that the pair have formed a near-term bottom and positioning for any meaningful  recovery move. Technical outlook From a technical perspective, the recent leg down stalled near descending trend-channel support extending from May 25. The EUR/USD pair, however, has been struggling to make it through the immediate resistance near the 1.0120-1.0125 region, above which spot prices could aim to reclaim the 1.0200 round-figure mark. Any subsequent move up could still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.0275 region. The mentioned barrier marks the top end of the descending channel and should now act as a pivotal point. Sustained strength beyond would shift the near-term bias in favour of bullish traders and pave the way for additional gains. On the flip side, the 1.0000 psychological mark now seems to protect the immediate downside. Some follow-through selling would expose the multi-year low, around the 0.9950 region and the descending channel support, currently near the 0.9920 area. A convincing break below the latter would be seen as a fresh trigger for bearish traders and set the stage for an extension of the recent well-established downtrend.