UPCOMING
EVENTS:

Wednesday:
RBNZ Policy Announcement, BoC Policy Announcement, US CPI.

Friday: US
University of Michigan Sentiment Survey.

The market
focus this week will be entirely on the US CPI data on Wednesday. At the moment
the market expects a 75 bps hike at the July FOMC meeting with some little
pricing of 100 bps. A surprisingly hot CPI will certainly cause pain in the
markets and raise the pricing on the more aggressive 100 bps hike. We may even
see a positioning into the report. But let’s see first the other notable events
coming this week…

On Wednesday
the RBNZ is expected to hike the cash rate by 50 bps bringing it to 2.50%. The
RBNZ already stated that the monetary conditions will need to act as a
constraint on demand and the risk of doing too little too late is worse than
too much too soon (something the Fed is pursuing as well). Finally, the Bank of
Canada is expected to hike rates by 75 bps bringing the rate to 2.25% after the
hot CPI data cemented the more aggressive path.

The US CPI
data is expected to rise 8.7% for the Y/Y figure and 1.0% for the M/M reading
due to high energy and food prices. The Core measure is expected to cool a bit
with 5.7% Y/Y reading and 0.5% for the M/M one. As we saw in the previous
month, the Fed is responding aggressively to any upside surprise in inflation data,
and this means that another hot inflation report will put even more pressure on
them and kick a debate between 75 and 100 bps at the next meeting and no longer
the 50/75 as we’ve been seeing till now. The US Dollar would certainly
appreciate even more in case of an upside surprise.

Finally on
Friday we will get the University of Michigan Consumer Sentiment Survey. The
report is expected to show another dip in consumer sentiment to 49.0 making a
new record low for the series. Such an awful consumer sentiment is of course
really bad for the economy as a whole. The market will focus especially on the
long run inflation expectations as an uptick in the previous report acted as an
extra pressure for the Fed to go for the more aggressive 75 bps hike as Fed
Chair Powell stated himself.

In the
bigger picture, we are clearly in a recessionary cycle coupled this time with a
high inflation that forces the Fed to focus solely on tightening monetary
conditions and disregard economic growth. As of now, we have an equities bear
market, an inverted yield curve, big losses in commodities sensitive to global
growth like copper, a very strong US Dollar, high inflation, an aggressive
tightening by the Fed, consumer sentiment at record low and leading components
in the PMIs in contractionary territory. If this doesn’t scream to you that
we’re in a recession or heading into one, then you must be a very optimistic
person.

If we
weren’t coming off of such a high inflation rate but say a 3% one, then we most
probably would have had the Fed already cutting interest rates. But not this
time. Every cycle is the same except for what’s different. Keep in mind
the bigger picture and avoid being caught in the noise.

This article
was written by Giuseppe Dellamotta.

This article was written by ForexLive at www.forexlive.com.