Outlook: Markets are skipping back and forth between fear of inflation and fear of recession. This results in some peculiar price actions. For what it’s worth, the Bloomberg Economics’ “probability of a recession in the next 12 months at 38%, up from zero just months ago. Morgan Stanley predicts the euro-area will slide into a recession at the end of 2022, and Citigroup analysts reckon the odds of a worldwide pullback in the next two years are about even.” We can’t resolve the issue and even if we had a perfect crystal ball, it might not tell us how to trade because the process of getting there bends and kinks some other things. Twilight Zone music. We saw it is spades yesterday--commodity prices mostly lower while the 2/10 ran to -0.04. These two things are not necessarily at odds, but certainly not “normal.”  The 2/10 spread ran up, it ran down, it ran up again. It’s slippery as a greased pole. Meanwhile, the European bond market (aka the Bund) is far steadier and on a rising trajectory, with a bump or two. This implies two things—the market in US Treasuries is wobbly and somewhat indecisive between the idea the Fed will back down and the Fed will not back down. In any event, we will know fairly soon—Powell’s fancy inflation forecast comes on July 15 (the index of common inflation expectations) and the policy meeting itself is July 27. We have to wait a lot longer for the ECB to decide whether to fight inflation or fight recession, and so far it looks like it would rather fight recession, with wimpy rate hikes (if any). This means the yield gap is widening. A widening yield gap favors the hiker. The correlation of the two-year differential with the euro/dollar is strong. See the chart from kshitij.com. Deduction: that Shock that takes the euro to parity might be on the schedule as soon as the market comes to accept this is the picture. If so, expect an overshoot. So, which asset is right—bonds, equities commodities and what about those oil prices? A drop in most commodities, ex-European oil and natgas, implies recession might not be on the schedule, after all. Besides, a drop in input prices is nice for European manufacturers, especially in Germany, the engine of growth. Granted, yesterday’s industrial production was a sad -2.15% y/y and the chart is not encouraging, but those outcomes came before commodity prices started falling. Is it possible German manufacturing picks up on demand from Asia and falling input prices? Yes. The PMI’s are still over the boom/bust line of 50. Q3 could bring a trade deficit, but a resilient economy can overcome it. The Trading Economics forecast for Q2 is 1.1% (due end-July), a drop from 3.8% for Q1 but not a negative. Bottom line—Europe could have been saved by excessive pessimism. Note this is decidedly the minority point pf view and only a suggestion, not a forecast. Now if only Russia could be wished away. And the meaning of Russia today is a single thing—oil. The oil market is nuts. Everyone knows that. Back in the last crisis, there was a point when there was more oil traded in futures than existed, not to mention wild swings driven by …. nothing at all. What about going under $100 this week? Fear of recession? What happened to those supply constraints even from the mighty Saudis? Bloomberg reports the oil market is in good form as shown by backwardation. “Nearby oil contracts continue to trade at a big premium to contracts for later delivery. The downward curve slope, known as backwardation, is a hallmark of a very tight physical oil market. At about $4 a barrel, the front-to-second front month backwardation is near its strongest ever. “ If not basic supply and demand, which really should NOT seesaw every day, then it’s trader positioning. “Liquidity in oil market futures is very poor, leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Both happened this week. Over the summer, several big producer-hedging deals are likely, including the annual deal used by the Mexican government to lock in prices for the following year. On Tuesday, oil traders reported Wall Street banks buying put options for 2023 in large size — likely a sign that a big client was in the market hedging oil prices. Don’t misinterpret one day’s price decline as presaging a relaxation of the pressure that’s pushed Brent up by more than 50% in the past year.” Whew, we needed that dose of reality-checking. What we learn from it is that deduction in economics/finance is riskier than you think. We do get perverse outcomes, quite often, in fact, and much of the time the cause is trader positioning and/or market conditions, especially liquidity, and...

Outlook: Markets are skipping back and forth between fear of inflation and fear of recession. This results in some peculiar price actions. For what it’s worth, the Bloomberg Economics’ “probability of a recession in the next 12 months at 38%, up from zero just months ago. Morgan Stanley predicts the euro-area will slide into a recession at the end of 2022, and Citigroup analysts reckon the odds of a worldwide pullback in the next two years are about even.” We can’t resolve the issue and even if we had a perfect crystal ball, it might not tell us how to trade because the process of getting there bends and kinks some other things. Twilight Zone music. We saw it is spades yesterday--commodity prices mostly lower while the 2/10 ran to -0.04. These two things are not necessarily at odds, but certainly not “normal.”  The 2/10 spread ran up, it ran down, it ran up again. It’s slippery as a greased pole. Meanwhile, the European bond market (aka the Bund) is far steadier and on a rising trajectory, with a bump or two. This implies two things—the market in US Treasuries is wobbly and somewhat indecisive between the idea the Fed will back down and the Fed will not back down. In any event, we will know fairly soon—Powell’s fancy inflation forecast comes on July 15 (the index of common inflation expectations) and the policy meeting itself is July 27. We have to wait a lot longer for the ECB to decide whether to fight inflation or fight recession, and so far it looks like it would rather fight recession, with wimpy rate hikes (if any). This means the yield gap is widening. A widening yield gap favors the hiker. The correlation of the two-year differential with the euro/dollar is strong. See the chart from kshitij.com. Deduction: that Shock that takes the euro to parity might be on the schedule as soon as the market comes to accept this is the picture. If so, expect an overshoot. So, which asset is right—bonds, equities commodities and what about those oil prices? A drop in most commodities, ex-European oil and natgas, implies recession might not be on the schedule, after all. Besides, a drop in input prices is nice for European manufacturers, especially in Germany, the engine of growth. Granted, yesterday’s industrial production was a sad -2.15% y/y and the chart is not encouraging, but those outcomes came before commodity prices started falling. Is it possible German manufacturing picks up on demand from Asia and falling input prices? Yes. The PMI’s are still over the boom/bust line of 50. Q3 could bring a trade deficit, but a resilient economy can overcome it. The Trading Economics forecast for Q2 is 1.1% (due end-July), a drop from 3.8% for Q1 but not a negative. Bottom line—Europe could have been saved by excessive pessimism. Note this is decidedly the minority point pf view and only a suggestion, not a forecast. Now if only Russia could be wished away. And the meaning of Russia today is a single thing—oil. The oil market is nuts. Everyone knows that. Back in the last crisis, there was a point when there was more oil traded in futures than existed, not to mention wild swings driven by …. nothing at all. What about going under $100 this week? Fear of recession? What happened to those supply constraints even from the mighty Saudis? Bloomberg reports the oil market is in good form as shown by backwardation. “Nearby oil contracts continue to trade at a big premium to contracts for later delivery. The downward curve slope, known as backwardation, is a hallmark of a very tight physical oil market. At about $4 a barrel, the front-to-second front month backwardation is near its strongest ever. “ If not basic supply and demand, which really should NOT seesaw every day, then it’s trader positioning. “Liquidity in oil market futures is very poor, leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Both happened this week. Over the summer, several big producer-hedging deals are likely, including the annual deal used by the Mexican government to lock in prices for the following year. On Tuesday, oil traders reported Wall Street banks buying put options for 2023 in large size — likely a sign that a big client was in the market hedging oil prices. Don’t misinterpret one day’s price decline as presaging a relaxation of the pressure that’s pushed Brent up by more than 50% in the past year.” Whew, we needed that dose of reality-checking. What we learn from it is that deduction in economics/finance is riskier than you think. We do get perverse outcomes, quite often, in fact, and much of the time the cause is trader positioning and/or market conditions, especially liquidity, and...

Euro nearing parity with dollar It continues to be a miserable July for EUR/USD, which has declined 3.12%. The euro continues to deliver fresh 20-year lows, dropping to 1.0071 late in the Asian session. The euro has since recovered most of today’s losses, but the psychologically-important parity line is getting closer by the day, as the euro continues to stumble. On the economic front, US nonfarm payrolls outperformed, with a reading of 381 thousand, well above the consensus of 240 thousand. The ECB released the minutes of its June meeting on Thursday, with investors hunting for clues about the lift-off hike at the July meeting. The minutes didn’t provide any new insights, which could be a disappointment but shouldn’t really be all that surprising. The July 21st meeting will be live, with a modest 25bp increase being the most likely scenario, with another rate hike to follow in September. Still, the ECB has not shut the door on a larger hike at the upcoming meeting, and we have recently seen higher-than-expected moves by the Federal Reserve and other central banks. Lagarde & Co. will be keeping a close eye on next week’s inflation reports out of Germany and France, the two largest economies in the eurozone. If inflation remains unchanged or dips lower, it will provide ammunition for the doves who are content with a 25bp move. Conversely, a rise in inflation will put pressure on the ECB to respond with a 50bp increase. Another factor in the rate decision could be the exchange rate. A weak euro is attractive for exports but also contributes to inflation.  The euro hasn’t been at parity with the US dollar since 2002, and some ECB members may feel that the central bank’s credibility is on the line if the euro continues to slide and falls below parity. EUR/USD Technical EUR/USD tested support at 1.0124 and 1.0075 in the Asian session. There is resistance at 1.0221 and 1.0324.

Euro nearing parity with dollar It continues to be a miserable July for EUR/USD, which has declined 3.12%. The euro continues to deliver fresh 20-year lows, dropping to 1.0071 late in the Asian session. The euro has since recovered most of today’s losses, but the psychologically-important parity line is getting closer by the day, as the euro continues to stumble. On the economic front, US nonfarm payrolls outperformed, with a reading of 381 thousand, well above the consensus of 240 thousand. The ECB released the minutes of its June meeting on Thursday, with investors hunting for clues about the lift-off hike at the July meeting. The minutes didn’t provide any new insights, which could be a disappointment but shouldn’t really be all that surprising. The July 21st meeting will be live, with a modest 25bp increase being the most likely scenario, with another rate hike to follow in September. Still, the ECB has not shut the door on a larger hike at the upcoming meeting, and we have recently seen higher-than-expected moves by the Federal Reserve and other central banks. Lagarde & Co. will be keeping a close eye on next week’s inflation reports out of Germany and France, the two largest economies in the eurozone. If inflation remains unchanged or dips lower, it will provide ammunition for the doves who are content with a 25bp move. Conversely, a rise in inflation will put pressure on the ECB to respond with a 50bp increase. Another factor in the rate decision could be the exchange rate. A weak euro is attractive for exports but also contributes to inflation.  The euro hasn’t been at parity with the US dollar since 2002, and some ECB members may feel that the central bank’s credibility is on the line if the euro continues to slide and falls below parity. EUR/USD Technical EUR/USD tested support at 1.0124 and 1.0075 in the Asian session. There is resistance at 1.0221 and 1.0324.

The bears awoke from their winter sleep and took control of Wall Street. However, they haven’t conquered the gold market yet! The Bear Market It’s official: there is a bear market in equities! As the chart below shows, last month, the S&P 500 Index plunged more than 20% from its historic peak of 4797 points in early January 2022. A decline of greater than 20% is considered to mark a bear market as opposed to a normal correction within the bull market. The Dow Jones hasn’t yet crossed that threshold, but the S&P better reflects the condition of the US stock market, so we can firmly state that bears took control of Wall Street for the first time since the pandemic crash. How long will the bear market last? According to Reuters, after World War II, on average, stocks declined slightly over a year from the peak to the bottom. So, the current bear market could continue for a few months. Similarly, on average, the S&P 500 index fell by 32.7% during modern bear markets. Hence, there is room for further declines in the stock market. What does the bear market in equities mean for the US economy? Well, the bear market in stocks doesn’t have to be something disturbing for the whole economy. As the old joke goes, “the stock market has predicted nine of the past five recessions.” Indeed, 25 bear markets have happened since 1928, of which only fourteen have also seen recessions. However, in modern times, the relationship between the stock market and overall economic activity has strengthened. There have been eleven bear markets since 1956, of which eight have been accompanied by recessions. Since 1968, all bear markets but one (the infamous 1987 crash) have coincided with overall economic crises. Finally, all four recent cases of bear markets (1990, 2000-2003, 2007-2009, and 2020) were accompanied by recessions (see the chart below). Hence, we should take the bearish stock market seriously. Although a bear market doesn’t necessarily cause a recession, it sometimes portends one. For example, the dot-com bubble in the stock market reached its peak and burst in August 2000, seven months before the US economy fell into recession. When this occurred in March 2001, the S&P500 just entered bear market territory. Later, the stock market peaked again in October 2007, just two months before the official beginning of the Great Recession. It entered bearish territory in September 2008, when Lehman Brothers collapsed, triggering the most acute phase of the global financial crisis. Given that we are already five months since the S&P 500’s most recent peak and one month since the index entered a bear market, a recession may be on the horizon (theoretically, we could be already in one, as the NBER declares official beginnings many months after they have already started). Of course, each case is unique, and this time may be different. However, there are important reasons to worry. After all, the stock market dived due to the Fed’s tightening cycle, initiated to curb high inflation. Although necessary to tame upward price pressure, it could trigger a recession. The last three economic downturns – and bear markets in equities – were preceded by hikes in the federal funds rate, as the chart below shows. Implications for Gold What does it all mean for the gold market? Well, bear markets that accompany recessions are generally positive for the yellow metal. However, the relationship is more nuanced than one could intuitively expect. In 2000-2001, gold declined initially in tandem with the stock market and bottomed out in April 2001, one month after the S&P 500 entered a bear market, as the chart below shows. Then, it started a multi-year rally that ended in March 2008, in the middle of the Great Recession. Gold remained in a downward trend by November 2008, plunging in tandem with the stock market, although to a lesser extent. Only then did it start its fabulous surge. A similar pattern occurred in 2020: during the pandemic March, gold declined alongside the S&P 500, albeit to a lesser extent, and began to rally shortly after the initial sell-off. This suggests that we could be close to the bottom in the gold market. If there is an asset sell-off when investors scramble for cash needed to fulfill their obligations and cover their margin calls, the yellow metal could decline further. However, when this phase of a crisis is over, gold should shine. Rising interest rates could continue to exert a downward pressure on the yellow metal for a while, but when they peak, gold will have a clear field to run.

In this article we’re going to take a quick look at the Elliott Wave charts of USDNOK, published in members area of the website. We have favoring the long side due to impulsive bullish sequences the pair is showing in the cycle from the 9.33 low. Consequently, we recommended members to avoid selling the pair, while keep favoring the long side.  Recently the pair made a short term pull back that has given us buying opportunities.  In the further text we are going to explain the Elliott Wave Forecast and trading strategy. USD/NOK Elliott Wave 1hour chart 07.07.2022 Currently the pair is giving us intraday (ii) blue pull back that is unfolding as Elliott Wave Zig Zag Pattern.  Wave (ii) Pull back looks incomplete at the moment. We expect to see more downside toward 10.041-9.976 ( Blue Box – buying zone) . We don’t recommend selling the pair against the main bullish trend. Strategy is waiting for the price to reach blue box zone, before entering the long trades. We expect buyers to appear at the blue box for the further rally toward new high ideally or for a 3 waves bounce at least . Once bounce reaches 50 Fibs against the  b red  high, we will make long position risk free ( put SL at BE). Invalidation for the trade would be break of marked invalidation level 9.976 USD/NOK Elliott Wave 1 hour chart 07.08.2022 USDNOK has given us more downside toward blue box as expected. The pair found buyers at the Blue Box area: 10.041-9.976  and we are getting good reaction from there. Raly from the buying zone made break of previous peak confirming wave (ii) is done and we can be ideally trading within (iii) blue.  As a result , all long trades are risk free (put SL at BE) + partial profits have been taken.

The US labour market created 372K new jobs in June, close to the rate of growth in the previous three months when growth was 398K, 368K and 384K. The data came out better than expectations, which suggested a slowdown to 260K–290K. The rate of wage growth in the same month a year earlier slowed to 5.1% in June after peaking at 5.6% in March. Fed officials in the last couple of days have hinted to markets that the rate could be raised again by 75 points at the end of July, as monetary officials prefer to bring the gap between projected inflation and the Fed Funds rate closer to zero before the end of the year. A strong labour market is likely to strengthen the Fed in its intentions. At least that is what the market thinks, having priced in a rate hike of 75 points later this month. Interestingly, the stronger-than-expected report did not cause the Dollar to strengthen. It is more likely that the markets are “selling the fact” as the Dollar has already broken several records this week.  At the same time, investors and traders should be prepared that market participants may soon return to active Dollar buying due to carry-trade and a more optimistic outlook for the US economy than most developed countries.

The US Bureau of Labor (sic) Statistics usually releases its Non-Farm Payroll (NFP) report on the first Friday of each month. But occasionally, like now, it’s the second Friday. So, we have to wait until the 8th July to get the latest update. Historically, the NFP is considered the most important data release of each month. It is the most extensive employment measure of the world’s biggest economy, so is considered a strong indicator of global economic health, even though it is backward-looking. It’s important to traders as it can often lead to dramatic market movements, particularly if the release is significantly outside market expectations. Payrolls versus inflation But we have seen a marked shift in attitude towards the Non-Farm Payroll data. This has been particularly noticeable over the last year and a half, as we move further away from the chaotic month-on-month payroll changes we saw as the pandemic took hold. The NFP release has lost its ranking as the top monthly data release. Instead, it is inflation numbers, particularly the Consumer Price Index (CPI) and Core Personal Consumption Expenditures (PCE) that now engage traders and commentators alike. Dual mandate The US Federal Reserve has a dual mandate. One part is to maximise employment and the other is to work to ensure financial stability. The former requires no explanation, but the latter is all about controlling inflation. The Federal Reserve has a 2% inflation target, as measured by Core Personal Consumption Expenditures. Core PCE differs from Core CPI in that it only measures goods and services targeted towards and consumed by individuals. It tends to understate inflation when compared to the CPI data. But most investors focus on CPI, even when considering the Fed’s 2% target.  Record lows Back in 2020, as governments around the world responded to the coronavirus by locking down the global economy, the US lost over 21.5 million NFP jobs in just two months. Since then, there’s been a relatively steady increase in payrolls. While still just over a million short of making back all those lost jobs, the Unemployment Rate stands at 3.6%. That is just 0.1% above the pre-pandemic level, which was itself close to a 50-year low. For now, at least, employment isn’t the issue. Inflation is. We’re already experiencing soaring prices and a cost-of-living crisis, leading directly to a fall in demand. Consumption is estimated to account for around 70% of US economic activity when measured by GDP. Put a dent in this and companies will lay off workers. The government loses tax revenues while benefit payments rise, and the jobless cut back on spending. Corporations cut more staff, and a downward spiral takes hold within a recessionary environment.  Inflation and monetary policy Headline year-on-year CPI stood at 1.5% in March 2020. It dropped to +0.1% in May, its lowest in just under five years, before pushing higher. By May 2021 it stood at 5.0%, well above the 2% target, as members of the US Federal Reserve insisted it was transitory and nothing to worry about. Last month it reversed a small decline to hit 8.6%, its highest level in forty years. The fear is that it has yet to peak. This has forced the US central bank to switch to an unexpectedly aggressive pace of monetary tightening. Just to give some perspective, between the beginning of 2016 and December 2018, the Federal Reserve raised rates to 2.5% from below 0.25%. By the summer of 2019 it was reversing course, cutting rates until the Fed Funds was back below 0.25% by April 2020. It began raising rates in March this year and has continued at each meeting since, taking the Fed Funds rate up to an upper limit of 1.75%. The Fed is expected to raise rates to 2.5% at its July meeting, with the terminal rate expected to be between 3.5 and 4.0%, possibly by year-end. This tightening is having a devastating impact on equity and bond prices. The S&P 500 has been in decline since the beginning of the year. And so far, every rally attempt has been met with a wave of selling. The outlook seems grim, with second quarter earnings expected to be a disaster. What could possibly stop the rot? Well, any indication that inflation has peaked, and that the Federal Reserve can ease up on raising rates. That’s why the central bank, and investors everywhere, are fixated on the release of every single scrap of inflation data. For now, Payrolls take a back seat. 

The US Bureau of Labor (sic) Statistics usually releases its Non-Farm Payroll (NFP) report on the first Friday of each month. But occasionally, like now, it’s the second Friday. So, we have to wait until the 8th July to get the latest update. Historically, the NFP is considered the most important data release of each month. It is the most extensive employment measure of the world’s biggest economy, so is considered a strong indicator of global economic health, even though it is backward-looking. It’s important to traders as it can often lead to dramatic market movements, particularly if the release is significantly outside market expectations. Payrolls versus inflation But we have seen a marked shift in attitude towards the Non-Farm Payroll data. This has been particularly noticeable over the last year and a half, as we move further away from the chaotic month-on-month payroll changes we saw as the pandemic took hold. The NFP release has lost its ranking as the top monthly data release. Instead, it is inflation numbers, particularly the Consumer Price Index (CPI) and Core Personal Consumption Expenditures (PCE) that now engage traders and commentators alike. Dual mandate The US Federal Reserve has a dual mandate. One part is to maximise employment and the other is to work to ensure financial stability. The former requires no explanation, but the latter is all about controlling inflation. The Federal Reserve has a 2% inflation target, as measured by Core Personal Consumption Expenditures. Core PCE differs from Core CPI in that it only measures goods and services targeted towards and consumed by individuals. It tends to understate inflation when compared to the CPI data. But most investors focus on CPI, even when considering the Fed’s 2% target.  Record lows Back in 2020, as governments around the world responded to the coronavirus by locking down the global economy, the US lost over 21.5 million NFP jobs in just two months. Since then, there’s been a relatively steady increase in payrolls. While still just over a million short of making back all those lost jobs, the Unemployment Rate stands at 3.6%. That is just 0.1% above the pre-pandemic level, which was itself close to a 50-year low. For now, at least, employment isn’t the issue. Inflation is. We’re already experiencing soaring prices and a cost-of-living crisis, leading directly to a fall in demand. Consumption is estimated to account for around 70% of US economic activity when measured by GDP. Put a dent in this and companies will lay off workers. The government loses tax revenues while benefit payments rise, and the jobless cut back on spending. Corporations cut more staff, and a downward spiral takes hold within a recessionary environment.  Inflation and monetary policy Headline year-on-year CPI stood at 1.5% in March 2020. It dropped to +0.1% in May, its lowest in just under five years, before pushing higher. By May 2021 it stood at 5.0%, well above the 2% target, as members of the US Federal Reserve insisted it was transitory and nothing to worry about. Last month it reversed a small decline to hit 8.6%, its highest level in forty years. The fear is that it has yet to peak. This has forced the US central bank to switch to an unexpectedly aggressive pace of monetary tightening. Just to give some perspective, between the beginning of 2016 and December 2018, the Federal Reserve raised rates to 2.5% from below 0.25%. By the summer of 2019 it was reversing course, cutting rates until the Fed Funds was back below 0.25% by April 2020. It began raising rates in March this year and has continued at each meeting since, taking the Fed Funds rate up to an upper limit of 1.75%. The Fed is expected to raise rates to 2.5% at its July meeting, with the terminal rate expected to be between 3.5 and 4.0%, possibly by year-end. This tightening is having a devastating impact on equity and bond prices. The S&P 500 has been in decline since the beginning of the year. And so far, every rally attempt has been met with a wave of selling. The outlook seems grim, with second quarter earnings expected to be a disaster. What could possibly stop the rot? Well, any indication that inflation has peaked, and that the Federal Reserve can ease up on raising rates. That’s why the central bank, and investors everywhere, are fixated on the release of every single scrap of inflation data. For now, Payrolls take a back seat. 

Better-than-expected jobs data raised the likeliness of a bumper rate hike this month, but with markets having finally stabilised it seems the focus will instead shift to corporate earnings. US employment data proves resilient for now “The latest US jobs report helped alleviate fears that the widely anticipated recession could begin to hit business investment and hiring decisions. Nevertheless, we have seen some weakness for US markets as better-than-expected payrolls, and stable unemployment/wages strengthen the case for a 75 basis-point hike in three-weeks’ time. Inflation remains the key concern for the Fed, and the absence of major red flags in the economy serves to raise the likeliness of Fed action to stifle price pressures. As ever, it is the tech-focused Nasdaq that suffers to the greatest degree, with bloated valuations coming into question in the face of surging rates and a potential recession.” Focus to shift to earnings, as rising commodities impact demand and margins “Economic concerns are expected to take a back seat in the coming weeks, with US banks kicking off earnings season on Thursday. Inflation remains the key concern for businesses and customers alike, as we keep a keen eye out for whether rising costs are passed on to the bill or the bottom line. With commodities such as Lumber and Natural Gas outperforming over the course of the week, companies must continue to decide whether to price out demand or slash their margins.”

Cable lost traction after upbeat US jobs data and returned below 1.20 handle, erasing the good part of Thursday’s recovery. Fresh weakness generates initial signal that bounce was short-lived, as technical studies on daily chart are bearish and the latest US data added to negative fundamentals for pound, as better than expected June figures confirm the strength of the labor market, supporting Fed’s idea of another aggressive hike this month that would further inflate the greenback. Bears look for eventual close below pivotal supports at 1.2080/00 (Fibo 76.4% of psychological 1.20 support after two attempts failed that would confirm bearish stance and risk deeper drop. Res: 1.2055; 1.2084; 1.2104; 1.2152 Sup: 1.1919; 1.1875; 1.1822; 1.1751

China Q2 GDP – 15/07 – this week’s China Q2 GDP numbers are unlikely to tell a positive story. With retail sales and industrial production affected by the various covid lockdowns that were imposed across the country and Shanghai locked down for most of April it’s going to be a very tall order for the Chinese economy get anywhere close to its annual GDP target for this year of 5.5%. In Q1 the economy was said to have seen an expansion of 4.8%, which comes across as extremely generous. Retail sales plunged in April and May and are likely to have remained weak in June, while industrial production has also been disappointing. The various lockdowns have also shutdown Chinese ports as well businesses. One particularly significant statistic during April was that not a single car was sold in Shanghai through the entire month. Against such a backdrop its hard to make the case for any sort of significant economic expansion during Q2 at all. Annualised GDP is expected to come in at 1% and decline -2.3% Q/Q.   China retail sales (Jun) – 15/07 – it’s set to be a disappointing quarter for Chinese retail sales. Having declined by -11.1% and -6.7% in April and May it’s hard to make a case for a significant pick up apart from a reopening bounce as lockdown restrictions got eased and people were briefly allowed out to restock on essentials. Another monthly decline in retail sales activity would be the worst run since the first lockdown was announced back at the beginning of 2020. Industrial production appears to be showing more signs of life having rebounded by 0.7% in May after slipping by -2.9% in April. Nonetheless economic activity is likely to remain subdued while Chinese authorities continue to lockdown at the merest hint of an outbreak.   US CPI/PPI (Jun) 13/07 – ordinarily US CPI numbers aren’t something that prompts the US central bank to shift on policy given that its preferred inflation measure is core PCE. The recent May CPI numbers prompted a different reaction, rising sharply to 8.6% and in so doing marking a significant shift in central bank thinking during a policymaker blackout period. The act of anonymously briefing financial markets through friendly journalists that a 75bps rate hike was being actively considered in a significant shift in guidance was hugely controversial and also fraught with danger when it comes to future guidance expectations. It’s still highly uncertain as to whether the May CPI number was a one-off given that all other inflation measures do appear to show signs of plateauing. Recent PPI numbers appear to support this mindset down from 9.6% in March and falling to 8.3% in May. We already have a number of Fed policymakers arguing for another 75bps rate hike at the July meeting. Expectations for this week’s June CPI number is for a rise to 8.8%, and a new forty year peak. This rather flies in the face of recent prices paid data, as well as the recent weakness in PPI and core PCE, which have been trending lower since March. If US CPI suddenly slips back in June, does that weaken the case for a 75bps, and make the prospect of a 50bps more likely? Time will tell, but weak CPI and PPI numbers for June probably won’t weaken the case for 75bps at the July meeting, but they could weaken the argument for further aggressive rate action over the rest of the year.         US Retail Sales (Jun) – 15/07 – having seen US retail sales post four successive months of gains at the start of this year, we were somewhat overdue a slowdown in May. That we saw retail sales slide by -0.3% came as a bit of surprise, but should it have done? When looking at the rising cost of living from energy and food prices, as well as the wider cost of living its perhaps not surprising that US consumer spending slowed sharply in May. Consumer confidence has been falling steadily for months now, and it was only a matter of time before it showed up in the retail sales numbers. June retail sales are expected to come in at 0.9%, which seems optimistic at a time when consumer confidence is still plunging and prices are still rising.    Bank of Canada rate decision – 13/07 – at its last rate meeting the Bank of Canada raised interest rates by 50bps which was in line with expectations, however the statement suggested more aggressive hikes were likely, due to the risks of elevated CPI becoming entrenched. CPI in Canada has already risen to 7.7% in May, jumping sharply from 6.8% in April. The risks of elevated CPI “has risen”, which suggests that the Bank of Canada will...