What happened today in a few bullet points


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1. The most important thing to appreciate is that the market has moved to price in not one, but two price increases next year. The first is priced into the September Fed Funds futures, the second is in the futures on the Fed funds in December. This is in response to weaker than expected data leading to heightened recession fears. Atlanta Fed GDPNow puts Q2 growth at -2.1%. Banks have revised downwards their forecasts, but none of the 59 economists in the Bloomberg poll have forecast a negative number. The June jobs report is the data highlight and the median forecast in Bloomberg’s poll is 273k. The annual pace of average weekly earnings is expected to have slowed for the third straight month.

2. The euro fell close to $1.0365 before the weekend but stayed above $1.04 on Monday. The ECB meets on July 21. Most expect a 25 basis point hike, but the focus is on the tool/efforts to prevent divergence in European interest rates, which the ECB says is disrupting its monetary policy transmission mechanism. On a different front, Germany reported its first monthly trade deficit in 21 years in May as exports fell (0.5%) and imports rose (2.7%). Instead of an expected surplus of 1.6 billion euros, a trade deficit of 1 billion euros was recorded. Some have blamed Germany’s trade surplus for a number of world ills, including the US trade deficit. Ironically, the German trade deficit reflects problems (higher energy prices, weaker foreign demand).

3. The US 10-year Treasury yield fell 25 basis points last week, the most since March 2020. The yen was the only major currency to appreciate (albeit slightly) against the dollar. CFTC data showed that the net short position in the yen was reduced for the seventh consecutive week. It is now at its lowest level for the year at a still respectable 52.6k contracts (less than half of the mid-May high). It’s the longest short-covering spell since 2019. The dollar played at its 20-day moving average (slightly below JPY135) for the second consecutive day on Monday. It has not closed below this moving average since late May. Japan has upper house elections on Sunday 10th July. A poll by the Yomiuri newspaper projects that the LDP and its partner, the Komeito Party, will win 65-80 of the 125 disputed seats.

4. The US dollar peaked near CAD 1.2965 before the weekend before retreating. It continued to pare gains on Monday, falling briefly below CAD$1.2840 at one point. The Bank of Canada’s quarterly survey released on Monday showed that inflation expectations from businesses and executives are still rising. The market has almost fully priced in a 75 basis point hike for the July 13th central bank meeting. However, BA futures are at a discount of 33bps in Q4 2023, but the probability of a US-like move in Q3 2023 is estimated at just over 70%. The highlight of the week is the job report on Friday. In May, Canada reported blowout numbers, creating !135,000 full-time jobs. At 5.1%, the unemployment rate is at its lowest level since the time series began in the mid-1970s. The US dollar has not settled below its 20-day moving average (~CA$1.2865) since June 9th. The 1.2800 CAD area is a key technical support and a break could reach CAD1.2680-CAD1.2730.

5. Late last week, the Australian dollar fell to fresh two-year lows (~$0.6765). It rallied to close around $0.6815 and close to almost $0.6890 on Monday. The Reserve Bank of Australia will raise interest rates tomorrow morning. It has discounted 40 basis points of tightening. That implies 100% confidence in a 25 basis point move and a 60% probability of a 50 basis point increase instead of 25 basis points. The final composite (and services PMI) will be announced shortly before the central bank’s decision. The composite PMI declined to 52.9 from 55.9 in May. The preliminary estimate was 52.6.

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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.


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