• US S&P Global July flash services PMI 47.0 vs 52.6 expected
• Canada May retail sales +2.2% vs +1.6% expected
• RBC forecasts a 12% drop in Canadian house prices
• ECB’s Nagel: I’m confident that TIP could withstand legal challenges
• Risky week next week. Calendar of earnings is full and then there is the Fed and GDP

Markets:

• Gold up $5 to $1723
• US 10-year yields down 15 bps to 2.75%
• WTI crude down $1.69 to $94.69
• S&P 500 down 1.0%
• JPY leads, CAD lags

The bond market is signaling less fear about inflation and more about growth. Yields continue to fall dramatically in a sign that bonds have seen enough hiking to price out inflation with the growing possibility that a hard landing is on the way.

Most of the worries are focused on Europe but today’s US services PMI was the worst since 2009 aside from a few months during the pandemic. It was far below estimates and initially caused USD selling on fewer Fed hikes but eventually transitioned to a classic ‚risk off‘ move on worries about global growth.

That sent commodity currencies on a ride as they initially strengthen but then completely reversed to finish the day lower. The euro and pound were stuck in the same dollar rollercoaster as they initially benefited only to give it all back.

The steady winner was the yen as the market begins to envision the rest of the world back in the low-inflation, low-growth trap that the BOJ has been struggling with for decades. USD/JPY fell 100 pips but yen crosses fell further.

This article was written by Adam Button at www.forexlive.com.

The economic data today was all about global PMIs from S&P Global and there was a similar theme in all of them:

Germany July flash manufacturing PMI 49.2 vs 50.6 expected

France July flash services PMI 52.1 vs 52.7 expected

Eurozone July flash services PMI 50.6 vs 52.0 expected

UK July flash services PMI 53.3 vs 53.0 expected

Australia July flash Manufacturing PMI 55.7 (prior 56.2) & Services 50.4 (prior 52.6)

Japan Jibun Markit preliminary manufacturing PMI July 52.2 (prior 52.7)

US services PMI 47.0 vs 52.6 expected

Each one aside from the UK disappointed.

But it wasn’t until the US release that risk trades began to suffer. Why?

The market actually wants to see some economic softness because it will mean lower inflation and, by extension, interest rates. However there’s a limit. Most of those releases look like a soft landing but the US print looks like a recession. I think the market would have been forgiving if that was a reading on manufacturing because it’s suffering from a pandemic boom-and-bust but services are supposed to be holding up.

My hope is that this chart is the real tell:

There’s pessimism and uncertainty in the air but corporate and household balance sheets are strong.

But at the moment, the market is looking at a higher probability of a hard landing. Europe is in energy crisis, China is stuck fighting a hopeless covid battle and the idea that the US was much stronger is being put to the test.

So who is the loser in all of that?

Counter-intuitively it’s the Australian dollar. It’s a country that’s highly-levered to the global economy, particularly demand for raw materials. If we do get a hard landing in the US, it bodes poorly for the rest of the world and we can see that in the reversal in AUD today.

One thing that has caught my eye is that copper prices are up 0.6% today. Generally copper is a great barometer of global economic growth. It’s fallen badly since early June and was at the leading edge of pricing in a slowdown but it has stabilized lately and that’s worth watching.

This article was written by Adam Button at www.forexlive.com.

Closing changes for the main North American markets:

• S&P 500 -1.0%
• Nasdaq -2.0%
• DJIA -0.4%
• Russell 2000 -1.8%
• Toronto S&P/TSX Comp -0.6%

On the week:

• S&P 500 +2.6%
• Nasdaq +3.3%
• DJIA +2.0%
• Toronto S&P/TSX Comp +3.1%

It was a disappointing day for the bulls but still an encouraging week.

This article was written by Adam Button at www.forexlive.com.

With the Bank of Canada hiking rates more aggressively, Canada’s largest bank new sees a deeper correction in the nation’s housing market.

They now project home resales to fall nearly 23% this year and 15% next year
in Canada, and the national benchmark price to drop 12.4% from
peak to trough by the second quarter of 2023.

A 12% drop would be larger than in any cycle over the past 40 years.

„Rising rates are squeezing housing affordability hard. By the time the
Bank of Canada is done, RBC’s aggregate affordability measure could
easily be at it worst-ever level nation-wide,“ they write.

Many are worried the decline could be even worse with Canada scoring some of the worst metrics globally for home prices and after a 50% rise during the pandemic. However RBC says it will be a correction, not a collapse.

„While a more severe or prolonged slump cannot be ruled out, we expect
the correction to be over sometime in the first half of 2023—lasting
approximately a year—with some markets likely stabilizing faster than
others. Solid demographic fundamentals (including soaring immigration)
and a low likelihood of overbuilding should keep the market from
entering a death spiral,“ the write.

Of course, no matter what the set of facts, would you expect the country’s biggest bank to forecast a housing collapse?

Read the report here.

This article was written by Adam Button at www.forexlive.com.

Headlines:

• Germany July flash manufacturing PMI 49.2 vs 50.6 expected
• France July flash services PMI 52.1 vs 52.7 expected
• Eurozone July flash services PMI 50.6 vs 52.0 expected
• Euro sinks as German PMI data points to contraction in activity
• Bond yields slide as euro area PMI data sounds recession alarm bells
• 10-year German bund yields fall to seven-week lows
• ECB’s de Cos: We will see about September, we are data dependent
• ECB’s Kažimír: It is possible to expect 25 or 50 bps rate hike in September
• ECB’s Villeroy: Frontloading rate hikes does not mean terminal rate will be higher
• UK July flash services PMI 53.3 vs 53.0 expected
• UK June retail sales -0.1% vs -0.3% m/m expected

Markets:

• JPY leads, EUR lags on the day
• European equities higher; S&P 500 futures down 0.2%
• US 10-year yields down 10.7 bps to 2.801%
• Gold up 0.5% to $1,727.63
• WTI crude down 1.6% to $94.79
• Bitcoin up 1.9% to $23,558

Just a day after the ECB decided to raise rates, leading indicators in Europe started to flash recession signals with the PMI data suggesting that the Eurozone economy contracted in the month of July. Soaring prices and energy costs are to blame as demand conditions deteriorated. The worst part? Things look set to intensify in the months ahead with a gas crisis looming.

The euro tumbled on the headlines with EUR/USD falling from 1.0200 to 1.0130 before finding some footing to stick around 1.0150-60 levels, though still down 0.6% on the day currently.

The dollar caught a bid as risk sentiment also retreated slightly before some pushing and pulling is leaving the greenback more mixed now. GBP/USD also fell from 1.1985 to 1.1915 but the lows held at the 200-hour moving average once again.

Meanwhile, AUD/USD dropped from 0.6920 to 0.6895 before pulling itself up to 0.6940 at the moment, with European stocks recovering after the earlier drop on the PMI data.

However, bond yields sank hard with 10-year German bund yields dropping by nearly 19 bps to 1.03% – its lowest in seven weeks – while 10-year Treasury yields are also seen down by nearly 11 bps to 2.80% on the day.

That weighed on USD/JPY as the pair fell from 137.60 to 136.90 now as we look towards US trading.

This article was written by Justin Low at www.forexlive.com.

• 90% of gas price difference in sourcing from alternatives will be passed on to consumers
• We cannot stop the effects of higher prices from breaking through
• Uniper rescue is important because no company would not have been affected
• It is remarkable that Russia is not keeping to commitment on gas deliveries

Well, if you poke the bear, you best be ready for when it bites back. In any case, the headline remark just means more pain coming to consumers in having to already deal with rising costs on a daily basis.

This article was written by Justin Low at www.forexlive.com.

The bid in bonds is continuing to flow and that is seeing 10-year German bund yields fall to its lowest since 31 May. It is down by roughly 19 bps on the day to 1.03% in a second day of big inflows into the bond market.

Elsewhere, 10-year Treasury yields are also down by over 11 bps now to 2.794% – the lowest in over two weeks. The drop in yields today is lighting a bid in the yen now with USD/JPY falling to the lows for the day near 137.00 after having held around 137.50-60 levels at the start of European morning trade.

This article was written by Justin Low at www.forexlive.com.

The Bundesbank is out with its monthly report, noting that the economy is likely to have grown less than anticipated in Q3 and may face a new inflation spike come September as government subsidies expire. Adding that the energy crisis is marring the outlook and makes for a very distressing economic situation.

For some context, German government subsidies on fuel and rail tickets are set to expire on 31 August.

The German central bank says that „the future development of the energy market is very uncertain, especially with regard to natural gas deliveries from Russia“ and that „the risks for the price outlook are clearly pointing upwards“.

This article was written by Justin Low at www.forexlive.com.

• The data convinced me to start rate hike cycle with a bang
• Rate hike is the beginning of a series of similar steps to tame inflation
• It will take a while to get inflation to desired levels

So, now 25 bps is back in play for September? What is going on..

The minute forward guidance goes out the window, everything is just turning into a massive mess right now. And just a day after starting their rate hike cycle, we are already seeing fresh recession indicators from the PMI data today. It goes to show how the ECB has really dropped the ball on this one.

This article was written by Justin Low at www.forexlive.com.

Headlines:

• Dollar turns to gains after early stumble
• Gas deliveries reportedly to have resumed via Nord Stream 1 pipeline
• Italian prime minister Draghi: I will resign
• Italian bonds slump hard amid political upheaval
• It is shaping up to be another stinging day for oil
• BOJ’s Kuroda: Will not hesitate to ease monetary policy further if necessary
• BOJ’s Kuroda: A large rate hike would be needed to stop yen weakness

Markets:

• EUR leads, NZD lags on the day
• European equities lower; S&P 500 futures down 0.2%
• US 10-year yields up 2 bps to 3.056%
• Gold down 0.8% to $1,683.33
• WTI crude down 4.6% to $95.23
• Bitcoin down 2.6% to $22,646

It is a big morning in Europe with two out of three key risk events having played out. The Nord Stream 1 pipeline saw gas flows restart and return back to capacity prior to the maintenance period i.e. 40% or 67 million cubic metres. That provided some early relief for the euro before Italian prime minister Draghi announced his resignation, as expected.

EUR/USD climbed up from 1.0200 to 1.0230 early on before being pulled back to 1.0170-80 levels at the moment. The dollar was also initially softer before finding a footing as risk sentiment also erred slightly more negatively during the session.

USD/JPY pushed up from 138.30 to 138.70-80 levels as the BOJ stood pat and Kuroda reaffirmed that the central bank isn’t going to be shifting its policy stance any time soon.

GBP/USD hit a high of 1.2003 in the handover from Asia to Europe but settled lower as the dollar came back, falling to 1.1920 and is holding just above that now.

As equities eased lower, the aussie and kiwi also saw early advances turn the other direction with AUD/USD falling from 0.6910 to 0.6870 and NZD/USD from 0.6240 to 0.6190 – keeping at the lows for the day currently.

It is on to the ECB next as the final key risk event for the euro today.

This article was written by Justin Low at www.forexlive.com.