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The day's best news for risk was Germany confirming that the government had received a positive signal from Canada regarding delivering a turbine needed to maintain the Nord Stream 1 gas pipeline to Germany. If it is confirmed it was received, I would expect a sharper correction in EU natural gas prices, the bleeding to temporarily stop on the Euro and a general recovery in European and global risk sentiment.
Friday's solid US non-farm payroll should keep the Fed on the path of a 75bp hike. But with aggressive Fed pricing already in the books, the strong print had less of a “good was bad” vibe. Last month, good was bad for a solid non-farm payrolls number, as good data gave a green light for aggressive hikes. I think that narrative has shifted.
A 75bp hike is almost entirely priced for July, and the market is moving closer to a 50/50 split between 50bp and 75bp in September
- July: 72.6bp
- September: 57bp (50/50 split between 50bp/75bp would be 62.5bp)
- November: 39.4bp
- December: 19.3bp
Even though this week's CPI is the marquee data point with expectations for it to come in hot – the disinflationary forces of late, specifically lower commodity prices, will not be in the government data yet, which may complicate the market's reaction function to another hot print.
But we think the market may look past the June data, given the recent pullback in crude and gasoline prices and the slowdown in freight data.
Also, UMich inflation expectations still matter, but the Fed's weight on the data should be lower after last month's revision – especially given 5y5y breaks staying grounded.
Just like the NFP number would have needed to be vastly different from the consensus to trigger a real market reaction, we think even more so for this week's CPI. Although an unexpected downswing would be stellar for risk
I am putting the inflation data slightly to one side and am more interested in the US activity numbers. Both big ones come on Friday: the Empire Manufacturing Survey and Retail Sales.
Ultimately central banks do not care about what people say but what people do. Hence, I think retail sales could be a market mover.
More importantly, the Q2 earnings season will kick off next week, starting with the big banks. Do not forget that the forward guidance revision from retailers fueled recession concerns in the last quarter.
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