Oil Lowest Since February Promoting Peak Inflation


US equities slipped on Thursday as mixed earnings outlooks and more hawkish Fed official commentary offered little encouragement to investors ahead of today’s US Non-Farm Payroll. A return in US-China tensions also weighed on sentiment following headlines that 22 Chinese Air Force planes entered Taiwan’s air defence zone and crossed the Taiwan Strait median line.

Still, market exhaustion and nonfarm payroll anticipation were common themes among markets during the reasonably quiet New York session on Thursday.


The most meaningful read-through from this week is the oil markets’ newfangled predisposition to treat the bearish news as overly bearish and discount good news.

The deteriorating demand picture in the US seemingly justified the downswing despite OPEC’s reluctance to deploy strategic spare capacity.


Risk traded firm into the NY afternoon, assisting EM FX outperformance.

In G10, GBP tumbled despite the Bank of England’s most significant rate hike of 50bp since 1995 and the reasonably hawkish short-term guidance but retraced most of the move throughout the rest of the New York session.

Markets: In a Nutshell, It’s Pure Goldilocks with Nary a Rabbit Hole in Sight + Oil Tanks on a Weaker US Consumer Demand Signposts


US equities were stronger WednesdayS&P up 1.6%. Tech led, with NASDAQ up 2.6% on solid earnings while US10yr yields down as Brent. Crude slipped 3.5% and is back below USD100/bbl for the first time since July 12.

For stock investors, lower oil prices are a pleasure to behold as not only did the US 10-year yields drop but slip sliding oil prices also downshifted inflation expectations supporting that slower hiking pace thesis.

And another goldilocks ISM, this time from the services side, inspired investors and helped US stocks glide higher under the surface. New orders were notably higher while the prices paid index fell markedly. In a nutshell, it’s pure goldilocks with nary a rabbit hole in sight.


West Texas Intermediate crude oil fell $3.76 to $90.66 per barrel to close at its lowest level since March 16. At Wednesday’s close, WTI is 23% below the June 8 closing high of $117.15 per barrel. The overnight weakness comes after EIA data showed an inventory build in the US, and OPEC agreed to increase crude oil output by 100,000 barrels per day in September.

OPEC has agreed to a 100k b/d supply hike for September. Initially, Brent futures held near the highs as traders ran the calculus amid given growing recession and a sturdy dollar. So the smallest supply increase in history didn’t appear all that material. Still, when fused with US demand destruction implied in the inventory data, Oil traders were quick off the mark to trim long and re-establish short positions.

The weekly inventory report shows crude oil inventory was down 223k bbl due to a 4.7 mn fall in SPR inventory last week. Excluding SPR, commercial oil inventory was actually up 4.5 mn. End-product stocks were mixed. Jet fuel and gasoline inventories were higher by 1.5 mn bbl and 163k bbl, respectively, but distillate was down 2.4 mn. And as expected on this type of data WTI and RBOB futures fell quite hard after the data release due to inventory buildup.

The refinery utilization rate fell another 1.2 percentage points last week to 91%, the lowest since May. Traders will surmise the fall in utilization was triggered by a decline in consumer demand. Typically we only see a fall in utilization at this time of year due to a major hurricane on the Gulf Coast, of which there have been no active storms.

Pelosi Jitters and Less Dovish Comments From Fed Officials Veer Markets Risk Off


Less dovish comments from Fed officials overnight snapped yields higher, with the US 10yrs rallying back to 2.75%. At the same time, more sabre rattling from China sapped some confidence from equity markets with a sea of red this morning across major global indices.

As we wrote on yesterday’s Asia close note, prepare for The Fed speaker pivot push-back offensive to begin. With so few people believing in the 3.25% terminal rate, who buys this duration rally? Meanwhile, the China tail risk re-emerges, Ferrari’s order book confirms the burgeoning income disparities, Uber re-ignites reopening, and BP can prepare for a populist backlash after a massive beat and dividend raise.

US equities whipsawed between gains and losses before ultimately finishing lower on Tuesday, as geopolitical tensions remained at the forefront. Headlines surrounding US House Speaker Nancy Pelosi’s arrival in Taiwan were greeted by China announcing missile tests, keeping investors on edge, despite Pelosi maintaining that her arrival did not alter longstanding US policy in the region.

China’s military drill is about 12 nautical miles from Taipei and 9 nautical miles from Keelung, which is very dangerous for military escalation between China and Taiwan as UN law defines territorial sea as within 12 nautical miles.

US Treasury 10yr yields soared 20bp on the day, with yields rising across the curve after a hawkish chorus of FED speak reminded investors that the Fed’s work is “nowhere near almost done.”Although the global benchmark S&P 500 was trying to hold on to the 4100 level, the combination of Pelosi-induced Taiwain jitters and the Federal Reserve officials ultimately reaffirming their commitment to bring inflation under control proved to be the indexes undoing.

Rates had been suspiciously priced for a soft landing taking equities to a similar place. And while it sounds all too far-fetched, some stock market enthusiasts are still likely living in ISM manufacturing goldilocks Nirvana with activity down but not collapsing while deflationary pressures are building, ignoring the upcoming July FOMC reality check.


Oil prices rose after swaying to and fro in a choppy session as traders hedged against the possibility of more crude coming to market after the OPEC+ production meeting.

Brent is still trading below $100 this morning as both event and headline risk continues to keep energy traders quick on the uptake. At the same time, the hawkish push-back from Fed members strengthening the US dollar provides yet another hurdle for oil bulls to clear.

Aside from a possible event risk from a shift in OPEC+ production policy when the group meets later, oil traders remain laser-focused on global macro data, particularly concerning the two largest oil-consuming economies in the world, the USA and China.

Storm clouds building over the Taiwan Strait


US equities were a bit weaker on Monday, with S&P down 0.3% amid light northern summer volumes and  US10yr yields down 8bps to 2.57%. But oil was a significant casualty overnight and closed down nearly  4 % after European governments delayed plans to restrict insurance provision to tankers carrying Russian crude.

It looks like the downturn in equities may be related to US House of Representatives Nancy Pelosi, with media reports saying that she is, after all, expected to visit Taiwan. After grinding higher through much of the London session, US stocks have erased all the gains and some throughout the North American trading day. So with headline risk out of China and Ukraine. Right now, the US Bond market could be seen as a safe harbour.

Risk is mounting. The Biden administration is trying to downplay the tension between US and China. But as Pelosi is almost sure to visit Taiwan on Tuesday, now it is on China’s hands to see if the situation escalates. According to local media, one possible response is that China will send fighter jets to fly over the island in the next 48 hours.

China’s onshore investors are not overly concerned and do not think there will be a war but believe it will be more war games “action.” It could be little more than a tempest in a teapot still; international, and Taiwan investors are pretty concerned.

ISM manufacturing was better than feared and helped the tape to recover from overnight Pelosi jitters. UST yields continue to move lower on the long end with the curve, unfortunately, flattening further as a result. The peak Fed hawkishness narrative continues to gain traction, with fed funds futures still implying a Fed pivot in March 2023, but at a lower rate than prior, with peak fed funds at around 3.30%

Whether the Fed Chair intended it or not, his comments last week, framed dovish by a weak US GDP, seem to have been interpreted as signalling a ‘pivot’ of sorts on the time and pace to the top of the rate hike cycle.

It is clear that many of my colleagues out there don’t believe in the recent rally – but are still asking when and what to buy. And with “Fed pivot” overrunning the markets lexicon, I’m sure folks have been forced to chase. The key for most remains the Fed.

I’ve been trading this instrument for decades and have never seen sentiment towards the S&P 500 1,000-point spread wide. Ask macro traders what they are positioned for, and the answer comes back as 3,500. Ask what they expect is possible, and it’s 4,500.

So with everybody being a momentum player these days, the question is: how long can this rally last, driven chiefly by positioning and systematic buying?


Oil traded over 4% not just because of the Taiwan worries but also on the back of ongoing China economic woes.China is always a big worry, but it has a solid energy security program and continues to buy crude through thick or thin. Although China is not consuming as much as it was, month-over-month demand is improving.

Libyan production has reportedly recovered to 1.2mb/d from ~860kb/d last week, following the lifting last month of force majeure resulting from protests and militia activity that led to the closure of several major fields and export facilities. And while few are willing to price in stable Lybian output at the current level, the rebound in production weighs slightly on the oil price.

Also negative for oil in the near term is news that European governments are delaying plans to restrict insurance provision to tankers carrying Russian crude. Insurance restrictions would likely have limited Russia’s ability to redirect flows away from Europe toward Asian buyers (notably China and India), who have significantly increased purchases from Russia this year. So the physical brokers are then forced to find a home for more Middle East crude than they had expected.

Dovish Messaging from the FOMC Supports Risk Taking


US equities were stronger Friday, S&P up 1.4% to 4.3% over the week. US10yr yields were down 3bps Friday to 2.65%, down 10bps for the week. Oil up 2.1%.

Dovish messaging from the FOMC and better than feared corporate earnings have supported equities.

At best, earnings beats have been average, but the lack of fireworks means boring is beautiful.

Still, investors have been diving back into growth stocks with a rapidly slowing economy hinting at less aggressive tightening. And with the market in the bad data is good mode, there has been little good economic news to reverse the path of least resistance. Put another way, monetary policy is no longer on a pre-determined course and will be data-dependent.

So with slowdown fears dominating and the deceleration in market-implied inflation trends looking increasingly optimistic, investors were broadening their risk-taking appetites.

But investors may pause from chasing the current trend, stock higher, and yields lower, ahead of the ISM and nonfarm payroll data this week. However, reasons are also solid for the Fed continuing on a less aggressive path with core inflation slowing two months in a row, and there are few signs of a wage-price spiral in the country.

Still, CPI releases will become even more critical. Slow-to-decline CPI inflation would suggest market pricing is not aggressive enough. With an increasingly data-dependent Fed, the volatility of central bank decisions increases, requiring a higher risk premium.

Moreover, history suggests inflationary cycles do not end abruptly. Persistent inflation that forces Fed tightening into restrictive territory points to further significant downside in duration-sensitive assets on a 3-6m horizon.


Energy traders have little in the way of new oil newsflows to whet their appetite; hence, they have moved on to the OPEC+ meeting on 3 August. Still, oil traded higher on dimming expectations that the producer group will imminently boost supply. But uncertainty around the meeting and an uptick in headline and event risk premium could keep oil traders on their toes to start the week.

From our vantage point, however, the OPEC + meeting doesn’t seem likely to rock the boat and be a significant oil price catalyst.

The broader focus remains on risks to demand from recessionary fears, which looks increasingly probable.

The US has expressed optimism about the potential for an OPEC+ supply response. However, it seems highly unlikely there will be much appetite for a significant increase in production, with Brent still ~15% down from year-to-data highs and -12% in the last month. OPEC+ seems more likely to signal a willingness to continue cooperating long-term, but it would be a surprise if the upcoming meeting resulted in a significant policy shift.


With softer US rates driving flows, USD has been on the back foot. Expectations coalescing around a rapidly slowing economy hint at less aggressive tightening, markets priced out the more jumbo Fed hike scenario, and the pullback in US yields led to the unwinding of well-owned long USD positioning. With risk sentiment staying firm, the risk beta cast of characters is trading more upbeat.

Markets Ponder a Fed Pivot


Peak Fed hawkishness and weak US growth data have helped US yields and the entire curve break below the recent ranges, driving growth stock outperformance as traders ponder a Fed Pivot.

The global benchmark( SPX) has seen a robust 7% increase during the past two weeks. This period also coincides with the entirety of the 2Q earnings season thus far. And while I wouldn’t go as far as suggesting that extraordinary earnings have pushed stocks higher, I think it is appropriate to say the market got a bit too bearish ahead of results, and we surpassed that bar.

But, of course, what is good for Main Street and what is good for Wall Street are not necessarily the same. Mainly because the financial markets, by their very nature, pull “the good times” forward, whereas the public lives the gloom of recessionary doom in real-time.


The choppy and often directionless price action of late is a stark reminder of speculators’ role in the market.

Still, nowhere better to view the disconnect between Main Street and Wall Street this day is in the energy space. While anticipatory assets ( stocks) are rallying hard on hopes of a Fed pivot, prompt Oil prices are struggling due to negative macro data. Most driving-age adults are tightening purse stings as they live in economic slowdown gloom in real-time.

Despite the softer Fed tone, which should eventually support growth, it still seems like traders need little justification to pare bullish bets against a generally gloomy economic backdrop and the threat of a protracted economic slowdown.

The Bar High For Even A Subtle FED Pivot


US equities were weaker Tuesday, S&P down 1.2% after mixed earnings reports. US10yr yields are little changed ahead of the Fed, up 1bp to 2.81%.

European gas prices rose above EUR200/MWh for the first time since 9 March after Russia reduced gas flow through the Nord Stream pipeline. Leaving cross-asset traders doing little more than trading “pipeline risk.”

However, Nasdaq futures rebounded from intraday lows after Alphabet earning release. Investors are likely relieved that Google’s ad revenues were less battered than Snap’s were last week.

Markets are pricing at a slower pace of tightening before the Fed pivots to an easing stance in 2023. However, Fed Chair Jerome Powell has been pushing back against a recession outcome while highlighting an outsized focus on combating inflation. Cross asset price action suggests that traders think the bar may be significantly higher for even a subtle FED pivot if the pace of moderation in core inflation does not accelerate. Hence, the extent to which this equity bear market rallies transition into a more sustained uptrend depends mainly on how quickly CPI  inflation recedes.


Even though bullish sentiment is creeping back into the overall narrative as traders feel the latest sell-off is overdone, the stronger US dollar and concerns about weaker global demand continue to weigh on the oil market’s top side ambitions.

Indeed, there is scant hard evidence to suggest the widespread demand destruction that would explain the more than $20/b swing in oil over the last month or so. But with the market backdrop generally cautious amid the threat of recession due to aggressive front-loaded rate hikes, traders seem to need little justification to trim longs position into rallies ahead of another expected jumbo Fed hike, effectively keeping prices capped for now.

The FOMC forward guidance could negatively impact growth expectations, especially if they wax hawkish. But fortunately, the Fed is unlikely to surprise on the hawkish side after the flack they received after last month’s more jumbo surprise.


The USD is rallying into today’s Fed meeting along with headlines on reduced Nord Stream 1 capacity and EU countries looking to ration winter gas use.

While ECB rate hikes are helpful for the euro, they are not the dominant drivers. The single currency has been and will remain highly vulnerable to further gas shutoffs from Russia.

Nord Stream 1 Will Reopen; Hence Markets Have One Less Pain in the Gas to Deal With


Equities are rallying back from yesterday’s weakness – most are pointing to the eventual reopening of the Nord Stream 1 pipeline as one of the sources of renewed risk appetite. Still, there has been a massive multi-level sigh of relief across global capital markets that Russian gas will flow back to Europe, triggering a convincing recessionary dubbed bear market relief rally.


Recessionary fears and dollar strength have been a headwind for commodities, but oil prices, in particular, have been hurt. So far this week, the US dollar is a bit softer, and deep EU recessionary concerns have eased, helping both risk sentiment and oil prices lift as short positions have unwound and fresh buying has returned to oil markets.

Boots on the ground have reported Nord Stream 1 will restart on Thursday, but at a level below the total 160mcm/d capacity. As a reminder, the pipeline was operating at 40% of capacity pre-maintenance and following the turbine dispute in June, so this is viewed as good news from a risk perspective.

But oil is higher as fundamentally the market remains undersupplied, with OPEC suggesting the shortfall next year could be up to a million barrels a day which is relatively unprecedented and signals higher prices ahead.

While OPEC tends to err on the bullish side, the curve backs up its message: there is a shortage of physical barrels, with spot barrels much more expensive than forwarding barrels despite the balances looking bad into next year. Hence traders are taking advantage of that backwardation, selling puts or buying calls on deferred contracts that are much lower than the spot and could provide attractive payouts, all things being equal.

Refined products have a similar curve shape with strong backwardation. Typically, a lot of diesel flows to Amsterdam and into Central Europe. But since the Russian invasion of Ukraine, there has been less gasoline and diesel supply out of the Baltics.

People have been switching out of Delta 1 products – just being long the futures or long via the index – into options because of the sharp pullback. They have changed from being completely exposed to the downside to exploring it via options, tending towards buying calls, call spreads, and selling puts.

China is always a big worry. It has a solid energy security policy and is building domestic stocks. It is buying cheap barrels of Russian crude because it is one of the few countries that can. It is processing those and creating gasoline and diesel, preventing its refiners from exporting. It may change policy and give the rest of the world diesel and petrol.

China’s growth story is unlike the rest of the world, where growth reemerged after covid. China’s growth has been slow to return because it has not gotten out of a lockdown. Still, month-over-month demand is slightly better, but it is by no means consuming as much as it was.

The base metals market correlates more to China’s growth than the oil market. Each time there is disappointing China news flow, base metals have led the complex lower. There is lower attendance at factories and delays in building the country’s infrastructure – China still has the Belt and Road Initiative, but lockdowns directly impact that.


Gold seems to be the odd person out, not participating in any broader relief rally, a weaker US dollar, or the 2’s 10’s curve staying inverted. Central banks’ front-loaded rate hikes tarnish the gold markets’ glittering appeal.


Base metals have been elevated for much of this year but are now back at ‘normal’ prices, having sold all that way off. If the world is at an average level of demand, then base metals are in deficit, so higher prices are warranted. Looking at curve shapes on base metals, a significant amount of backwardation has disappeared. It is still there out towards the longer dates of the curve, but at the front, there is some real softness in that forward curve. There has been a return to the default position for aluminum and copper, which is contango.


While markets are still on edge around recessionary, USD experienced a period of weakness Tuesday, primarily driven by a Reuters report suggesting the ECB is considering a 50bp hike on Thursday. And beaten down $ bloc risk betas had a rare day in the sun after risk sentiment jumped on reports the Nord Stream 1 was set to resume gas flows to Europe.

Hoping for a ‘Kitchen-Sink’ Quarter Where Corporates Flush Out All the Bad News at Once


US equities were weaker Monday; the S&P closed down 0.9% despite bank earnings beating expectations after initially trading higher. Weakness later in the session followed a report that Apple plans to slow hiring. US10yr yields up 7bps to 2.99%, 2yrs up 5bps to 3.17%. Oil is up 4.5%.

With Apple putting up their hand and acknowledging they have too many staff, it is a clear sign of caution from the mega-cap heavyweight giants amid an uncertain time leaving macro investors trying to look beyond what promises to be a volatile 2H. Investors are hoping for a ‘kitchen-sink’ quarter where corporates flush out all the bad news at once – but I am not sure that will happen, and I think this makes it difficult to put an absolute bottom on the equity selloff.

Equities are still struggling to quantify the impact higher borrowing costs will have on growth. By and large, the market continues to price a softish landing with the terminal rate relatively well anchored.

The probability of recession is dominating US discussions as inflation might have peaked in June while the Fed still has a couple of massive hikes ahead before possibly pausing. We always hear that the rate hikes are in the price, but they are always a shock when the market actualizes the reality, especially when they are of the jumbo variety.

So with inflation staying higher for longer, real yields jumping more than anticipated, and growth risks rising, investors remain highly reluctant to push stocks higher at the index level.

However, the risk-on tone at the start of the week might be a taste of what could happen if Fed hikes were becoming less of a threat. Investors have taken note of the quick and effective way Fed officials have dismissed the 100bp hike idea. But with oil prices bouncing higher again market started to price out any hope for a Fed pause.

At the same time, over in Europe, increasing chatter of a coming ceasefire in Ukraine could produce the best outcome. Both postive views – the Fed being close to the end and a truce in Ukraine – look premature at this point, even if they might materialize in October or November.

But Once investors anticipate such outcomes, the dollar might reach its peak and equities hit bottom. Investors, though, must first get through what could be a tumultuous Q3 and the start of Q4.

GAZPROM ” Force Majeure”

Gazprom is retroactively invoking force majeure on natural gas supplies to “at least one major customer” from June 14 – the Nord Stream 1 turbine dispute kicked off, according to Reuters. There are no specifics beyond that, but Uniper was Gazprom’s biggest customer, and it said it started withdrawing gas from storage last week.

It is interesting Gazprom continues to try to maintain some level of legal cover for its behaviour, evidence perhaps of the (misguided, in my opinion) view there is a path back to a normal relationship with European buyers in the medium term.

On Monday, the Russian newspaper Kommersant reported that Canada would fly the NS1 turbine via plane rather than send it by ship to speed up the NS1 restart process.


Crude oil is higher to start the week, with Brent rising over 4% despite news of rising covid infections in China that raise the risk of new lockdowns or, at the very least, argue for a slower easing of restrictions already in place.

Support seems to be coming from the recognition that concerns about a supply response from Saudi and OPEC were unfounded after Biden’s visit to Saudi failed to deliver any concessions.

The OPEC+ agreement ends in September, and oil had fallen partly on concerns that Saudi and others with spare capacity might commit to a production increase once freed from the OPEC+ production quotas.

Sentiment from strategic energy investors remains the same — OPEC has limited spare capacity and is unlikely to step up to the plate, particularly after the colossal correction in oil prices. The next OPEC+ meeting is slated for Aug. 3.

China intensified policy support in Q2, but covid restrictions have limited their effectiveness. That said, energy investors are warming up to the prospect of the government to further strengthen policy support in H2, likely bringing forward future infrastructure projects and funding. The sentiment was also boosted by Hong Kong health officials weighing an easing of curbs and a building of natural immunity.


Three significant events lie ahead this week in Europe. First, Nord Stream 1’s maintenance ends on Thursday, and the market anxiously awaits to see if natural gas deliveries start again on Friday. Second, Italy may be heading for snap elections—attempts to form a new coalition are so far unsuccessful, and Prime Minister Mario Draghi addresses the Italian parliament on Wednesday. Third, the European Central Bank meets this week and will likely roll out its anti-fragmentation tool.

Risk sentiment started to find a base at the end of last week, and investors have backed away from a 100bp hike by the Federal Reserve, focusing instead on a 75bp walk for July. As a result, the greenback is giving up some recent gains against the euro.

With EURUSD trading below parity last week, some market participants are trimming positions for the moment, heading into a crucial week for the Eurozone, primarily the European Central Bank and the Nord Stream I maintenance uncertainty.

Still, to change the market sentiment over the medium-term, there is a need to improve the underlying situation in Europe, specifically energy supply, recession fear and fragmentation.

All Eyes on Europe +Oil+ FOREX ( EUR & RNBZ new repo facility)


Japan holiday today will sap some liquidity from Asian trade today, and US cash treasuries will be closed in the region.

US equities were stronger FridayS&P up 1.9% on better US data, closing the week 0.9% lower. US 10yr yields finished down 4bps to 2.92% and 17bps for the week. Oil closed up 2.1% and back above USD100/bbl for now.

Overall the robust US data on Friday eased concerns about an imminent recession but is also unlikely to mount an additional case for a 100 bp Fed hike. And it was about as goldilocks of a mix of headline data risk as one could have expected given the FED’s dilemma of balancing Inflation vs Growth. Especially as stubbornly high inflation could lead to the FED overshooting and market pricing in a much higher risk of recession. But the decline in US long-term inflation expectations and less hawkish Fed speak on Friday helped temper the pricing of aggressive hikes and helped US equities close higher.


OIl is opening the week softer as the market digests the demand impact of the rise in new Covid cases in China and as the market cautiously awaits the monumental event risk if Nordstream 1 gas flow from Russia to Europe will resume later this week.

The OPEC+ quota system ends in September, and attention is turning to what will happen next.

As long as the agreement is in effect, Saudi Arabia has made it transparent that individual producers with spare capacity should not exceed their quota to offset underproduction elsewhere within the group.

From October, however, this changes. Nigeria, Libya, Venezuela, Iran, and Ecuador are all struggling to meet their quotas, while Saudi, Iraq, Kuwait and the UAE have 2mb/d of spare capacity.

In addition, Venezuela could add 1.25mb within a year if US sanctions ease, according to our recent expert call, and Iran is ~700kb/d below pre-agreement production and ~1.3mb/d below stated capacity.

As the market reprices a delayed reopening in China and potentially more barrels coming back to the market in October, oil could struggle to make new highs. And It could crash later this week if the gas flow from Nordstream1 doesn’t return, which would undoubtedly tip Europe into a deep recession.


After hitting parity for the first time since 2002, the Euro faces several critical tests in the week ahead—the first ECB hike in over a decade along with an anti-fragmentation backstop tool, a potential further interruption to Russian gas flows, and now the risk of an early election in Italy.

And while an ECB rate hike and rolling out an anti-fragmentation too could temporarily stabilize the EURO near the recent low end of the trading range, the prospect of a prolonged gas flow disruption is likely to hang over the Euro-like a storm could throughout the week. But, even in the markets baseline scenario that gas flows will partially return (to about 40% of normal), it is crucial to keep in mind that anything less than 100% will almost certainly require either higher prices pushed on to the consumer or government rationing—in parts of Europe, likely leading to a recession in Germany and Italy.

New Standing Repo Facility From RBNZ

The Reserve Bank of New Zealand announced a standing repo facility Monday morning after funding via FX forwards crashed in April and May as the domestics chased USD. The repo facility will help to prevent this by allowing eligible counterparties to lend NZ overnight and TN at 15bp below the official cash rate (OCR).

Offshore banks will then have a mechanism for lending NZD surplus, given these banks generally run USD surplus. This should help anchor the front-end FX forwards as it provides more liquidity when the system balance remains above 50 bn and should be more beneficial to offshore banks looking to lend out surplus NZD better than the FX forward implied.

Sticky Core Inflation Makes it Tricky To Fade Headline CPI +Bank Of Canada Dented the Reversion Party + Oil Struggles


US equities were weaker Wednesday, S&P down 0.4%. US10yr yields down 4bps to 2.93%, 2yrs up 10bps to 3.15% after a beat on US CPI and BoC hiked by 100bps. At -22bps, 2s10s are most inverted since November 2000, and the market has moved to a price ~90bps ahead of walking into the July FOMC meeting. EURUSD briefly fell through parity against USD, though recovered back to 1.0040-50 in recent trading.

Core components show inflation is still sticky across most items, making it trickier than hoped to fade the headline shocker in good size and price in peak; hence most folks are not adding to risk more content to trade around current hedges and the short side of the ledger.

As rates veered to moonshot mode, pricing in some risk premiums for a 100bp hike in July, most risk assets initially took it on the chin as the market added to the short sharp shock on rates.

Still, stocks bounced off the CPI lows as the market thinks the Fed will hike quicker and cut sooner, with the first cut now priced for March 2023 versus May.

But The Bank of Canada dented the reversion party opting for a surprise 100bp rate hike because inflation pressures have been spreading more broadly across the economy, according to BoC Governor Tiff Macklem.

In the post-decision press conference, Macklem said front-loading rate hikes would avoid higher interest rates down the road.

Indeed this is precisely the impulse that US Treasuries are trading for the US and the Federal Reserve next Wednesday: front-loading hikes given high CPI, which means more cuts down the road.


Crude prices are stabilizing today after Tuedays’s aggressive selloff, although Brent tried to rally through $ in the New York session and failed. President Biden begins his negotiations with OPEC about boosting supplies, and it seems the market is waiting to see what comes out of these meetings.

Still, with the broader market again worrying about a possible FED overshoot and Europe mired in stagflation concerns, oil is struggling to break free from its current recessionary malaise as traders remain in risk reduction mode due to the slightly softer demand outlook this year on China’s slow covid recovery, a much stronger USD than forecast. But mainly, it is all about the shift in sentiment as numerous levels of recessionary scenarios are priced in, and a risk-off attitude takes hold. Here I stress ” sentiment,” not fundamentals.


As the dust settles after the highest US CPI print in 40 years, the EURUSD is still trading above parity and USD bulls must be disappointed with the lack of follow-through and the fact that the pair failed to hold below 1.0 for 1.0 Still, until Nordstream 1 turns back on the EURUSD and G-10 beta currencies could remain on the defensive as the market frets about stagflation. And I would underscore that the stress points run beyond the German natural gas shortage to the broader European energy market, which is now in deep crisis.

But with the market bringing forward Fed rate cuts, it makes for a messy FX picture where the USD should still be out-performing but perhaps less so, knowing the Fed pivot is likely to see a more asymmetric dollar reaction towards weakness.


Riding a Sea of Green, Oil in Focus +G7 Makes it Official on Gold, Forex Focus on Sintra

Indeed, it was an epic bear market bounce, especially as doom and gloom prophecies have recession storm clouds billowing vertically with the horizon.

We calculate the lack of selling was enough to explain some of the bounce as there was minimal buy flow from retail or otherwise bankrolling this rotation rally.

On bonds, we think the street will wait until we are closer to the next CPI release to re-enter shorts as seasonal factors support the duration rally, so there might be more breathing room for stocks amid this fragile détente.

University of Michigan’s final release revised the 5-10y inflation expectation to 3.1% from 3.3%. And the 1y inflation expectation was adjusted to 5.3% from 5.4%.

On the surface, it suggests it was unreasonable for the Fed to decide on monetary policy with a backward-looking approach. With 5y5y breaks still in check, many now think it was unnecessary to hike 75bp based on one data survey. So, the softer Fed Funds curve on Friday was due to the more faded inflation reprint.

I would ignore it for a straightforward reason. Higher oil prices are inflation enemy number one for the Fed. And lower gasoline prices are at the top of the Biden administration’s election plan ahead of the November midterms. With the Fed focusing on the headline over core, US monetary policy is increasingly captive to oil prices. That observation implies higher volatility around the Fed’s reaction function. Hence with oil and gasoline prices staying high, the Fed will keep the rate hike pedal to the metal.

In addition, any hot data prints will provide room for higher repricing in front meetings, especially with a narrow window for the FED to sprint to the finish line and hit the end-of-year terminal rates target. In that view, the risk-reward for further front-loading of hikes is attractive.

We think the next multiple legs lower in the S & P 500 will come from a de-rating in earnings. Last week I suggested there was no need to risk a career mistake selling blocks of SPX 3700 at +30 VIX. Indeed, institutional sellers will need a lot more confidence that the earnings deterioration is happening now and that the consumer has stopped spending. Both go hand in hand; declining consumer spending does represent the main threat to earnings for big-ticket items – especially in the case of a recession.

And, of course, with the most significant pension month-end and quarter-end rebalancing buy estimate since March 2020 laying in wait, folks are less inclined to step in front of a month-end bounce.

Energy equities were under enormous pressure until Friday’s reversal, consistent with the broad drawdown across the commodity complex driven by growing recession and demand concerns. And that should remain a pressure point.

Hence, I suspect commodity markets will remain in focus, particularly oil, given the extent to which energy inflation fears have driven risk this year.

Oil Prices

Price action will soon tell us if the latest dive was a function of demand destruction or crowded positioning? But one thing is sure: the oil complex is not nearly as impervious as many had thought.

After getting hammered most of last week due to recession and fuel demand destruction concerns, oil prices rallied into the weekend on the back of physical demand. Those global economic worries were seemingly offset by higher China demand for “real world barrels.”

Indeed, energy demand in Northern, Central and Northwestern China hit record levels as millions turned on the AC to escape the oppressive heatwave, which likely created the Domino effect. Record-high electricity impacts not only fuel-intensive industry production but also oil prices.

There could have been some element of the tail (time spreads) wagging the dog(spot), but the curve in heavy backwardation for a while, but when word starts spreading that China is a premium for prompt barrels, it’s more than enough to spook shorts.

Although oil is a spot asset usually driven by supply and demand fundamentals, it is not unusual for the complex to trade like an anticipatory asset (stocks and forex) driven by the broader economic growth rate of demand, which is slowing if the PMI data are dependable.

Our view has been unwavering; in the absence of fresh supply, it will be challenging to see Brent trading below 100 as Ukraine -Russia war escalation will continue to drive energy price fears.

On the other hand, it is a fallacy to think Brent Crude l could stay +$120 given the amount of central bank-induced slowdown likely to be seen later in the year. The Fed and other inflation-fighting central banks want lower commodities, which is what they are explicitly trying to engineer.


G-7 countries will make it official that they have stopped buying Russian Gold. Since Russian Bars have been considered politically tainted in the West following the country’s invasion of Ukraine, I doubt making it official will have much impact on the gold market as it was assumed that Russia would keep domestic production at home to soak up surplus USD and prevent excessive appreciation of the Ruble. But there could be some headline bounce at the open.



Last week’s Eurozone PMIs added to a laundry list of reasons to be suspicious about chasing the Euro higher. From the Ukraine War to China’s lockdowns, economic activity looks bleak. At the same time, this would typically be enough to send the EURUSD shuffling towards parity on the back of a hawkish Fed. However, the street is conflicted with the ECB on the brink of a momentous policy pivot while setting the springboard to exit negative rates.

I do not think the street wanted to be short Euro ahead of this week’s Sintra meeting that could cement expectations for an impending exit from negative rates and possibly rolling out a functional anti-fragmentation “backstop.”

On another counter-trend trade, we still think the Yen offers attractive skew due to rising US recession risks and the prospect of a change in monetary policy in Japan itself. And with intervention rhetoric picking up, Tokyo could be guarded about buying dollars up here.

Asia FX

As usual, the Ringgit continues to be driven by external factors while underperforming the terms of trade improvement due to its high beta to CNH weakness, outflows from domestic investors, and exporters unwilling to convert USD due to the hawkish Fed.

However, with global risk sentiment improving and the Yuan rallying, we could see follow-through below 4.40 early in the week if US yields continue to trade soft.

All Eyes on BoJ Today Amid the Global Race to Hike Rates Is Nowhere Near the Finishing Line

Global Macro and Stock Markets Analysis

Equities sold off aggressively, reverting the post-FOMC pop and more. The narrative has flipped back to the Fed needing to impair the economy to control inflation after capitulating to 75bp from their 50bp-per-meeting hike path.

And not helping the market or US dollars cause was weaker US data. Jobless claims at 229k, consensus looked for a pullback to 217k, previous week revised a bit higher. Philly Fed down 5.9pts to 3.3, lowest since May 2020.

But if the Fed opened the door to a supersized G-10 central bank hawkish pivot, the Swiss National Bank and the Bank of England were more than happy to walk through with others joining the cue. No Central bankers worth their weight would put inflation-fighting credentials on the line and import higher energy inflation via a weaker currency.

And in what is a highly ominous signal for stock market investors, given the broader index’s sensitivity to rising bond yields, is that the global race to hike rates is nowhere near the finishing line.

The S&P 500 has been down 12% in the last two weeks. The big move lower has been broad-based with severe selling for all risk groups thanks to the FED fallout as “Financials Conditions have tightened… and that’s a good thing” Yesterday, Powell confirmed former NY Fed President Dudley’s comments in April hence the read though is the Fed wants tighter financial conditions regardless of how low stock go. In other words, the fabled ” Powell Put” is shelved.

The Fed is cheering for tighter financial conditions to stem inflation when equity fundamentals worsen, and economic activity may just now be rolling over. So do not expect the economy to save the stock market. It is a challenging set up regardless of how bearish the sentiment may be.


Oil prices rose on Thursday in an unthinking reaction after the United States announced new sanctions on Iran.

Indeed, in a shrewd move by the US administration to up Iran sanctions it provides a much-improved Middle East security commitment soundboard ahead of the US President’s Middle East visit, where the discussion will most definitely veer towards OPEC swing producer upping their game and delivering more barrels and laggards to catch up on their quotas.

Against a constant drone attack threat from Yemen’s Houthi rebel group, an Iranian proxy, Middle East producers will be more than eager for the US to show a more significant commitment to Middle East security. And while it remains unclear what such a commitment would entail, one would have to assume the makeup to be like “oil for security” via a defence commitment.

On the inflation front, higher oil prices are the primary driver of consumer price inflation worldwide; let us face it, oil is everywhere. It permeates our daily lives in ways we never think about. So, with Fed and other central banks now focused on headline inflation, not ex-energy, it suggests they are on a mission to or risk even a domestic recession for on-target headline inflation. Powell says, “We’re responsible for inflation in the law, and inflation means headline inflation, so that’s our ultimate goal. ” So now energy prices are pinging loudly on the Fed inflation radar.

While this does not mean oil will tank, it could mean that this year’s sizzling 55 % rally could run out of steam if higher energy prices continue to force the Fed and other central bankers’ hands to hike rates into economically restrictive territory.

As I have suggested in the past, given the global supply shortage, there are only two ways that oil prices can fall 1) a global recession and 2) OPEC delivering more barrels.


Gold is finding support from the weaker dollar, and the global central bank is willing to risk a recession by hiking rates to tame inflation. Economic data has already started to roll over, suggesting after the string of front-loaded massive rate hikes has tamed inflation, rate cuts will begin getting brought forward into 2023 to repair the economic damage left in the hawkish wake.

Asia EM FX currencies are lagging G10 amid the significant reversal in the dollar. DXY is down 1.4% as the market plays the G10 central-bank catchup theme following the shift in SNB and BOE.

If the Yuan and other Asia FX currencies start to catch up to G-10, we could see a pick-up in physical demand from the Asian gold community that remains muted due to weak local currency.

Fed out of the way, the market is shifting back to geopolitical drivers that should continue to support gold in an inflationary world of hurt.


The market is playing the G10 central-bank catchup theme following the shift in SNB and BOE, and in other words, the Fed hawkishness is not occurring in a vacuum as other central banks are more than willing to join the rate hike race.

Focus on the BoJ as vol in USDJPY jumped to nearly 40 as many people expect a BOJ shift. I imagine G10 FX will be slammed if the BoJ disappoints.

For a look at all of today’s economic events, check out our economic calendar.

Powell to Follow Volcker – Oil Traders Quick to Take Profits

Global Macro and Stock Markets Analysis

With the market sensing that a hawkish FED knows full well they are behind the curve and have little option but to step on the rate hike pedal, a significant repricing has gone through the front-end market in the US afternoon. The Fed Fund strip is pricing 70bp for the next two Fed meetings.

The capitulatory risk unfriendly result of the markets having to price the potential that Powell will have to follow Volcker – raise rates to such a level that the economy materially weakens; the S&P 500 fell 3.87% Monday and is now down 22% from its December 29 peak. Monday’s close was the lowest since January 29, 2021.

Worth noting Energy is among the worst-performing sectors(XOP -6.23%) – considering the industry has been perceived as “safest” right now, given the fundamental background. If you are looking for more signs of capitulation, Energy is probably the most obvious, given it was one of the last bastions for survival management

Oil Fundamental Analysis

Crude is acting better now than it did during yesterday’s Asia session but off intraday highs. Discussion within the oil complex still revolve around Libya’s decline in production, China continuing to impose measures to slow the spread of Covid, and concerns around global recession woes driving demand destruction.

Despite the headwinds, my sense is most of the conversations are still positive medium/long-term for crude. Still, after a 55% jump in oil prices this year, it makes sense that investors are increasingly concerned with downside risks and are quick to take profits so far this week.

For a look at all of today’s economic events, check out our economic calendar.

Oil, Gold and Forex Analysis – The Rude Inflation Wake Up Call

Global Macro and Stock Markets Analysis

US CPI for May was a nightmare for risk markets as the headline came in well above the consensus. Inflation is back on the highs; critically, it is across the board.

Just education services were negative at -0.1%. The Fed’s policy is influencing financial conditions- the housing market is slowing in terms of mortgages written and sales volume dropping, but that is not yet hitting inflation data where the housing component was still up 0.8%.

The Fed needs to see the non-energy sectors of the economy slowing – i.e., those segments it “should” be able to influence. There is not much sign of that in the data, and it is the second-round effects that are coming through loud and clear.

A 50bp rate hike from the Fed this Wednesday was a done deal in any case, so this data is not an immediate policy influence. Instead, what it does is cement the September 50bp hike.

The sizable CPI beat and hawkish ECB are reminders that elevated inflation will continue to compete with the slowing growth narrative.

The immediate reaction in markets to the hot CPI print was to worry the Fed would be forced into a more aggressive rate path that would end up hitting growth much harder.

For the last few weeks, there has been a cautious calm in markets – rates not pricing anything unforeseen, and equities able to make small gains. But the strength of CPI completely upended that apple cart.

The market is now thinking much more about the Fed driving rates sharply higher to get on top of inflation and then having to cut back as growth drops. Indeed, this will leave rates traders and hence stock market investors deliberating how much further tightening central banks’ will be able to deliver and, therefore, how much higher yields can go from here. And we all know nothing ever good happens when interest rate volatility spikes in capital markets.

The S&P e-minis finished down 2.76% on the day, all related to CPI, while hard landing concerns fueled the US dollar freight train.

A string of central banks beating market rate hike expectations last week fostered concern around a ‘hard landing’ and has weighed on risk, with equities tanking and the USD aggressively bid in tandem. Hence the safe-haven USD was again considered the cleanest dirty shirt in the laundry basket, especially after US front-end rates went through yet another “horrific for risk” Fed hike repricing. The next three meetings are now pricing 54.6bp, 59.4bp and 51bp of hikes, respectively. Surely, we are not going to start aiming for 75bp.

This week’s FOMC meeting should have been a sideshow with a 50bp rate hike a done deal. The only issue is how far members wanted to push up their dots for terminal rates, but the US CPI has opened up a fresh can of rate hike complexity that will be difficult for the stock markets to digest over the short term.

The dots are going to be important, but the key is going to be Powell’s guidance. At the last meeting, he said there would be “a couple” more 50s. After CPI, one assumes (the market does, anyway) there are at least three more 50s to come, so Powell’s guidance into next year will be critical.

In summary, Fed tightening expectations hit fresh highs. Clouds are forming again on the China Covid reopening horizon. The market remains sensitive to headlines and vulnerable to positioning imbalances as investors’ willingness to buy the dip remains low, and liquidity remains challenging.

A hawkish ECB and hotter-than-feared CPI report have the rate hike stew bubbling over and with no sign of s of re-grossing as Hedge Funds hammered the sell button and added short hedges post CPI.

Oil Fundamental Analysis

Oil traded lower as Fed tightening expectations hit fresh highs driving recession fears to multi-storey levels amid Clouds forming again on the coronavirus reopening horizon in China. Indeed, the stronger greenback and stagflation fears proved to be the bullish market’s undoing.

China remains the significant near-term downside risk, but most view the gradual normalization of Chinese demand as a powerful positive for oil despite the potential for lockdown noise in the coming weeks as current demand is far from reflecting normal conditions.

The approach of the peak US driving season is keeping the focus on tight global oil and product markets, and Brent remains near the top of the recent range despite the concerns about China and recession. Indeed, oil prices work in a vacuum relative to other risk assets.

Gold Fundamental Analysis

The precious metal saw some volatility following the US CPI print. Still, colossal dip-buying was prevalent as investors rushed to cover both inflation and recession risk thinking gold could provide a safe harbour against stagflation risks clouding the horizon even while the US dollar soared and 10 Y UST settled at 3.165% +.008 on the day.


USDJPY, once again, topped out in the 134.50 zone overnight on the back of a combination of interest to sell cross JPY and the joint written statement issued by the Band of Japan (BoJ), Ministry of Finance, and Financial Services Agency. The statement is a step up from the usual verbal intervention from Finance Minister Suzuki. For now, the market will likely take this to mean the 2002 135.00/20 high is an initial line in the sand for Japanese officials.

Central bankers’ reaction function has changed globally towards preventing high inflation rather than stabilizing the economy, which will eventually apply to the Bank of Japan.

But the market is not in line with that view yet, thinking the BoJ is unlikely to tighten the policy despite the JPY depreciation and the next governor after Kuroda, either current deputy governor Amamiya or former deputy governor Nakaso, will not rush to start policy normalization next year.

For a look at all of today’s economic events, check out our economic calendar.

Circularity Stagflation Concerns, Euro Falls Like a Faulty Hot Air Balloon and Oil Wobbles

Global Macro and Stock Markets Analysis

Equities are selling off again with a lot of macro data points to digest ahead of CPI later today, including China’s Covid situation regressing and the hawkish pivot from several central banks this week triggering rates higher stock markets lower negative feedback loop. Not to mention the increasing number of corporate profit warnings, as inventories swell they tend not to age well.

With monetary policy feeding lower growth expectations, there is a degree of circularity stagflation concerns building as central banks continue surprising to the hawkish side with no end in sight until inflation moves more convincingly towards the target. Indeed, this week highlights a broader point about central banks’ implicit comfort in accepting lower asset prices.

But worryingly, the markets are now concerned US CPI did not peak in March, and indeed there may be even higher prints in the coming months. Continued strong inflation prints would put the FOMC under pressure to move faster on rate hikes which would provide massive soundboard for the hard landing crowd.

In any case, this stagflation narrative has begun to play out in broader macro, with curves flattening and commodities struggling to push on while the dollar remains bid. Therefore, it is unsurprising to see areas of the equity market sensitive to global growth get massively hit.

Oil Fundamental Analysis

After shaking off the China lockdown, for the most part, the oil complex has accepted China’s stop and start economics; crude oil is taking a bit of a hit due to the stronger US dollar as stagflation concerns knock down broader markets again.

And another stifling point for energy bulls is since the ongoing global release of strategic reserves and the recent increase in OPEC+ production quotas are doing little to cool oil prices, they think US policymakers could grow increasingly desperate ahead of the November elections and may even allow Venezuelan export to Europe, which could be a price capper.

But the clearest read-through for oil markets, regardless of what stock markets are doing, is as we head deeper into the US summer driving season, tight oil and product markets should still support oil.

Meanwhile, an explosion and fire at the Freeport LNG terminal support natural gas prices and provide a bullish knock-on effect across the energy spectrum. The US has been the biggest exporter of LNG this year and has played a significant role in alleviating some pressure on Europe as Russian gas exports have declined.

The Freeport outage will support prices in the near term and recovering Asian demand may mean fewer LNG cargoes for redirection to Europe ahead of the 2022/23 winter season. The gas storage situation in Europe is looking less dire than at the start of the year, but there are still considerable risks in the coming months which mean it may be too early to count on gas prices beginning to normalize.

Friday’s FOREX Follies


The Euro is falling like a faulty hot air balloon where the action speaks louder than words.

The ECB’s message was clear about leaving the door open for more extensive hikes due to wage growth concerns and admission of faulty forecasting. But crucially, the much-talked-about spread control tool was merely hot air. After all, any buying program would have been hard to justify in the context of exit from APP and negative rates and PEPP reinvestments just will not cut it.

Markets have priced out a 50 bp hike in July, while a 25 bp hike in July was already a foregone conclusion as far as the market was concerned. Now that the ECB has laid out its intentions regarding July being on the table, it is now a case of action speaks louder than words

Why the ECB talked themselves into a corner by more or less committing to 25bp is not clear, but if they see the market become concerned about peripheral spreads, it is unlikely they would go 50bp in July before they have worked that out through some spread control tool.


Time for the USDJPY catch-up trade?

One of the potential drivers of the USDCNH rally was CNHJPY hitting 20. With CNHJPY back up around 20 after the latest move in USDJPY, it is worth adding longs again, given the previous inclination for FX traders to play catch up with the USDJPY


IN an ominous signal, the loonie is lower despite a hawkish Tiff. And for us, that cut our FX chops trading CAD on Bay Street, and who refer to the loonie as the ” truth,” it is a gnarly sign for global growth.

Bank of Canada Governor Tiff Macklem sounded hawkish on the wires, saying chances of rates going above 3% have risen and more or more significant rate hikes could be on the cards, yet the Canadian dollar underperformed severely.

For the central bank fraternity intent on frontloading rates, as we turn to chapter two of the current playbook, it now reads that aggressive tightening risks a material decline in housing, consumer confidence, and consumption that will eventually drive their respective economies into recession and send stocks tumbling.


Even temporarily losing the China tailwind exposes the underbelly of the AUD, a housing bubble sitting atop an iron ore mine.

RBA will continue front loading rate hikes, focusing firmly on getting inflation under control. As fixing periods end, these hikes will hit like a Mike Tyson punch in the face to Australian homeowners, some of the highest leveraged property owners on the planet. Aggressive RBA tightening risks a more secular decline in housing and a hard landing for the economy.

USD/JPY, Stocks and Crude Oil Analysis: Crude Rally Dominates Cross-Asset Sentiment

Global Macro and Stock Markets Analysis

Both Treasuries and equities sold off as soaring crude futures reignited fears the Fed may ratchet up hawkish rhetoric at next Wednesday’s FOMC meeting. Hence a pullback in crude would be crucial for any prolonged risk rally, given implications for inflation expectations.

And for the central bank fraternity intent on frontloading rates, chapter two of the current playbook reads that aggressive tightening risks a material decline in housing, consumer confidence, and consumption that will eventually drive their respective economies into recession and send stocks tumbling.

So until we reach peak inflation which will trigger a less hawkish Fed and lower recession odds, it could be a gloomy summer for global stock pickers.

Oil Fundamental Analysis

US inventory data brings more attention to the current energy crisis enveloping global markets, so higher oil prices. According to the Energy Information Administration, US crude oil inventories at Cushing, the largest US hub, fell 1.59 million barrels last week. Gasoline inventories also declined despite soaring prices. The gasoline situation encapsulates just how tight markets are,

Prices are likely to increase as China’s demand picks up, with big-city dwellers feeling increasingly confident to leave their lockdown cocoon. As we move deeper into peak summer US driving season, higher prices at the pump do not seem to be stunting demand, which could also keep gasoline stocks in short supply this summer.

If you doubt we are in or on the precipice of an energy crisis, you may want to pay attention to recent comments from the IEA and Trafigura. Earlier in the week, Jeremy Weir, CEO of Trafigura, warned that the oil market could reach a “parabolic state” and warned of issues for the next six months. He also said the economy had not seen the worst of the energy crisis. On Wednesday morning, IEA chief Birol warned of energy rationing in Europe this winter if freezing weather coincides with a pick up in economic growth.

Forex Fundamental Analysis

Besides higher energy and the US vs JP interest rate differentials supporting the bid, FX traders bought USDJPY into the Tokyo Fix for the past three days. Japanese Banks and life insurers continued to sell foreign bonds in May hence the steady bid into the morning FX. This coincides with the headline that Japanese life insurers will buy JGBs and pare FX hedges for the fiscal year through March 2023.

For a look at all of today’s economic events, check out our economic calendar.

US Yields Soar Ahead of This Weeks Closely Watched US Bond Auction – Oil Lower on Rare Supply Good News

Global Macro and Stock Markets Analysis

Investors are hyper-focused on inflation, economic growth, and future Fed policy. Most assume the worst and think a financial tsunami will hit the US and global markets thanks to the quorum of US-based bank CEOs that have given the gloomy growth narrative their imprimatur. Anything less than that outcome is going to surprise a lot of folks.

The market turned from strong out of the gates to fader’s fancy, with growth stocks leading the fade as the velocity of the move in US yields was just too much for stocks to handle.

The US 10y yields broke through 3.03% to start ‘CPI week’ 3.03 being the highest level since May 11, the prior CPI release.

But more problematic for risk is the FOMC members will likely be unhappy to see a 5y5y break now back to 2.49%. Put another way; the market is pricing in higher inflation expectations ahead of this week’s US CPI; hence, the implication is the Fed will need to shift into a more aggressive rate hike mode.

The bond markets have a lot on their plate this week as traders will digest their first round of supply after the start of the Fed’s unwinding of its balance sheet with USD44 bn new 3y on Tuesday, 10y reopening for USD33 bn on Wednesday, and 30y reopening for USD19 bn on Thursday.

Oil Fundamental Analysis

While prices are supported by the higher-than-expected Aramco OSPs for July and the ongoing easing of Covid restrictions in China, however, the updraft was offset by rare positive news on the supply side as Libya’s largest oil field restarted over the weekend: the 300kb/d El Sharara field is producing at 180kb/d after being shut.

There is also some anecdotal scuttlebutt making the rounds that the US will sanction Iran barrels back to market despite the widow to return the JCPOA shrinking.

Finally, OPEC can only deliver lower oil prices by relaxing the quotas imposed on individual OPEC+ participants. Only then can the group achieve an actual increase in production. The UAE and possibly Iraq and Kuwait have enough spare capacity to offset production issues elsewhere within OPEC+, at least temporarily. Still, while the new increased monthly targets continue to be driven by proportional contributions from all participants (including Russia), it is unrealistic to expect an increase close to the headline figure.

For a look at all of today’s economic events, check out our economic calendar.

Conviction Remains Low Even After a Risk Friendly NFP – What OPEC Gives OPEC Then Takes Away

Global Macro and Stock Markets Analysis

Growth concerns have temporarily wrestled the public eye away from inflation worries; hence, the markets trimmed the Fed’s probability of tightening into restrictive territory. However, with oil prices on the boil again, inflation concerns are never far from the spotlight.

Indeed, this can best be encapsulated by the market’s reaction to Friday’s Non-Farm Payroll number, which should have been a respectable data set for stocks. NFP is a touch higher, and AHE is steady; the overriding summary here is strong employment & low inflation should auger well for the FED & risk going forward. But clearly, there are signs of low conviction even when we were assessing the upper end of the ranges last week, suggesting those investors who are participating are knowingly sifting through the rubble under the premise of bear market condition.

Amid a brewing global energy crisis, the market has predisposed itself to believe weaker data is for real while discounting upside surprises in so much as the expectations going forward look much gloomier, especially on the consumption front. Hence the market skew is towards softer data in the future.

US yields increased despite lower inflation in the jobs data as recession odds decreased somewhat on the strong NFP headline print. But this also illustrates just how sensitive stock markets are and susceptible to higher rates, even on good data.

The following two FOMC meetings have 50bps of hikes “baked in the cake,” even Lael Brainard has her pins on the board. But the September meeting is priced at close to an 80% probability of a 50bp hike. That area of the fund’s strip will get the most attention and likely drive cross-asset volatility over the summer.

The NFP continues to lose its punch as a market mover. It screened dovish, but the price action did not move in that direction. Anyone who waited behind the terminal to trade NFP was sorely disappointed and probably questioned their choices in life. I would have been better off catching the 7:15 PM Bangkok showing of Top Gun Maverick.

Oil Fundamental Analysis

What OPEC gave OPEC then takes away. Mere days after opening the spigots a bit wider, Saudi Arabia wasted little time hiking its official selling price for Asia, its primary market. Saudi Light OSP jumped, seeing knock-on effects at the Futures Open across the oil market spectrum.

OPEC+ production, even after the modest bump in output, is too small to fix the oil market structural deficit and glaringly illustrated last week when the EIA report showed a considerable reduction in US crude stocks, even removing the seasonality effect.

The strong US payrolls will likely reduce concerns about a consumer spending slowdown over the near term, hence less chance of a broader buyer strike at the pump over the summer.

The other good news for oil bulls is China’s reopening which might be gradual through the summer, but demand should pick up the slack in Q3 when the US summer driving season ebbs and the Chinese stimulus multiplier effects kick into a higher gear.

While an additional surge in core-OPEC production later this summer could weigh on sentiment and crude fundamentals. And so would higher prices at the pump elicit growing concerns around the global end-demand outlook; those views are playing second fiddle to refinery demand for prompt summer barrels and increasing China demand.

FOREX Fundamental Analysis

The post NFP currency read via the rebound in Treasury yields screens support for the broad Dollar over the near term.

Oddly, the employment report components look aligned towards bond friendly, risk positive, and USD negative on the main. Still, with oil prices on the boil, another can of inflationary hence recessionary worms has opened.

A pullback in crude would be crucial for any prolonged risk rally, given implications for inflation expectations.

It is otherwise hard to see FED deliver anything other than a 50 bp hike in September, not to mention the negative consequences for Europe, with the ECB increasingly vocal on hiking aggressively even though the root cause of inflation in Europe is mainly driven by energy. Indeed, this is vastly different from the supply and demand pressures the Fed is hiking into and might not be a EURO-friendly outcome.

JPY is struggling again in the US yields up oil prices up environment even more so after the BoJ seems to be embracing a weaker Yen after Deputy Governor Wakatabe suggested the bank needs to maintain “powerful” monetary easing.”

For a look at all of today’s economic events, check out our economic calendar.

Risk on the Fed Yo-Yo String – More Ink Split on OPEC Than Oil Delivered – Forex Overview

Global Macro and Stock Markets Analysis

I am not sure of a better way to describe price action than to tell it as risk sentiment is on a Fed rate hike impulse yo-yo string as this morning, at least it is the return of the “bad news is good news, “or maybe it’s just the absence of overly good news. Front end rate hike pressure that had built the day prior on robust economic data immediately eased off after a weaker than expected May ADP employment print, suggesting things are cooling off.

Seemingly, anything that keeps the FED from a more aggressive rate-hiking path appears to be greeted with open arms by equities.

Tech is leading the tape higher. Mega Caps remained well bid and out the risk curve pockets within Growth squeezing higher, despite Vice-Chair and super Fed dove Leal Brainard beating the rate hike drum. Suggesting even the September Fed rate hikes are pretty well digested.

China’s Covid situation is fluid, but it should help further ease supply chain issues/ concerns in the near term. And take the sharp edge off inflation concerns.

One would think this market would be better for sale, given the daily stew is constantly accented with anecdotal doom and gloom. However, some of the bids today may be systematic as the VIX drops below 25 for the 1st time in 6 weeks, which usually gets the machines revving up the buy engines.

However, a pullback in crude would be crucial for any prolonged risk rally, given implications for inflation expectations. It is otherwise hard to see a meaningful Fed shift in September, not to mention the negative consequences for Europe, with the ECB increasingly vocal on hiking aggressively even though the root causes of inflation in Europe are supply-side and mainly energy.

After the Fed’s next two meetings, which will likely see 50bp hikes at each, the Fed is then likely to move into ” assessing conditions mode,” which could become the most significant market mover. Any softening of inflation numbers is expected to be the primary source of volatility across asset classes, leading to higher stocks.

China, Hong Kong, and Taiwan markets will be closed on Friday for the dragon boat festival and reopen Monday. To counter growing economic headwinds, policy supports remain primary catalysts, and that support should speak for itself.

Oil Fundamental Analysis

Again, more ink was spilt on the OPEC narrative than the group will deliver to the market.

The group, led by Saudi Arabia, has been doggedly sticking to its plan for gradual monthly supply increases even after the invasion of Ukraine by Russia.

The increase would be divided proportionally between members in the usual way, delegates said. Countries that have been unable to raise production, such as Angola, Nigeria and most recently Russia, would still be allocated a higher quota. That could mean that the actual supply boosts are smaller than the official figure, as in recent months.

To put it another way, traders think the incremental increase is too small relative to the growing downside supply risks from the EU embargo amid an expected increased demand from China.

Oil trader then donned their rally caps after the EIA report showed crude oil inventories down 5068k bbl last week, which is more significant than the -2100k bbl estimated. Even removing the seasonality effect, the reduction in crude oil stocks was still considerable, about 4.2m bbl.


Traders hit the pause button on this week’s USD rally. European yields rose across the board on the back of strong Switzerland CPI ECB’s Villeroy saying inflation is too strong and broad, and even Riksbank’s Jansson saying more rate hikes than planned may be warranted. Though the rates market is trimming probabilities of “central bank puts”, equities reacted resiliently, suggesting stock investors are digesting these hikes well, making for a reasonable USD lower backdrop.

While no one has a crystal ball into the NFP – tomorrow, things can go in the opposite direction on any solid print. It is just the kind of market we are in where stock and bond market interactions are always at the nexus of currency determination.