Futures Hit Fresh 52 Week High, Dollar Sinks In Global Post-CPI Rally

For the second day in a row, US equity futures are higher as part of a global risk-on move one which has sent spoos to fresh 52 weeks highs, and fast approaching the Jan 2022 all time high. Tech is again outperforming led by the "magnificent 7" megacaps following the unexpectedly soft CPI print which sparked expectations that after the July hike the Fed is done, and has accelerated the dollar tumble. As of 7:45am ET, S&P futures were 0.3% higher to 4,522 while Nasdaq futures rose 0.6%. Bond yields and the USD continue their move lower, with steepening in the belly of the curve. The DXY has made a 52-wk low today. The plunge in the dollar means that commodities are bid with strength across all 3 segments; keep an eye on Ags as India may move to restrict rice exports and the Black Sea Grain Initiative expires next week. Today’s macro data focus is on PPI, which will boost confidence that yesterday’s CPI print was not a fluke. Keep an eye on PPI in the future as China’s negative PPI and the lack of money supply growth may put accelerating downward pressure on input costs. Bank earnings kick off tomorrow.

In premarket trading, airline stocks rose after Delta Air Lines increased its adjusted earnings per share outlook for the year and reported stronger-than-expected second-quarter results; Delta shares jumped as much as 4.2% premarket. Walt Disney shares rose 1.3% in premarket trading after the entertainment company extended the contract of Chief Executive Officer Bob Iger for another two years. US-listed Chinese stocks also rose as Beijing urged Washington to immediately end unilateral sanctions on Chinese companies to help bilateral economic and trade cooperation. Alibaba (BABA) +1.4%, Baidu (BIDU) +2.5%, JD.com (JD) +2.8%, Bilibili (BILI) +3.0%. Here are some other notable premarket movers:

• SoFi Technologies Inc. drops 4.5% after the US online lender was cut to underweight from equal-weight at Morgan Stanley.
• Viasat Inc. plunges 22% as the company said an unexpected event occurred during reflector deployment that may materially impact the performance of the ViaSat-3 Americas satellite.
• Trade Desk shares rise 3.8% in premarket trading, after Nasdaq said the stock would replace Activision Blizzard in the Nasdaq 100.
• Ess Tech and MillerKnoll Inc. are among the most active industrials stocks in early premarket trading, gaining 8.6% and falling 5.9% respectively
• Delta Air Lines is up 4.4% after increasing its adjusted earnings per share outlook for the year and reporting stronger- than-expected second-quarter results.
• Axonics gains 0.9% after shares were initiated with an overweight rating at KeyBanc Capital Markets, which sees opportunity for improved investor sentiment as the medtech company addresses some near-term pressures.
• BioCryst Pharmaceuticals rises 7% after BofA Global Research raised the recommendation to buy from neutral.
• Carvana falls 5.8% as JPMorgan cut its recommendation on the used-car retailer to underweight from neutral, saying shares have again disconnected from fundamentals.
• Coinbase fell as much as 2.1% as Barclays cut its recommendation on the biggest US crypto exchange to underweight from equal-weight, saying the regulatory overhang on the stock is likely to last for some time.
• Cryoport shares plummet 29% after the cryogenic storage firm reported preliminary second-quarter revenue that missed estimates. Analysts saw the update as disappointing, with Stephens noting that it raised a “variety of questions.”
• Intercept Pharmaceuticals gains 9.6% after HC Wainwright & Co. double-upgraded the company’s recommendation to buy from sell saying that strong interim results from a mid-stage trial “look to breathe new, longer life to the franchise.”
• LL Flooring tumbles 4.9% as Loop Capital downgrades to sell from hold, writing that the company faces a tough macroeconomic environment, with declining home sales and interest rates likely to rise.
• Meta Platforms rises 1.4% as Cowen upgrades its rating to outperform from market perform, citing factors including Threads monetization optionality. Meanwhile, Morgan Stanley boosts its price target.
• Snowflake Inc. shares are up 2% after Scotiabank upgrades the software company to sector outperform from sector perform.

In case it wasn't clear yet, investors are piling back into equities as concerns over higher interest rates and a potential recession ease. Data Wednesday showed the US inflation rate slid to a two-year low, while today's PPI report is expected to show a decline from a year ago.

“The question now is whether the market continues to trade off the easing inflation narrative,” ING Bank NV strategists led by Antoine Bouvet wrote in a note. “There is an excuse to do so as today’s PPI report is also expected to be friendly.”

One driver for the surge in risk assets is a rout in the dollar; some top money managers said the dollar is poised for further losses as US exceptionalism wanes. Hedge funds turned net sellers of the dollar for the first time since March, according to data from the CFTC. “The recent USD underperformance reflects a qualitative shift in market comfort with being short USD as the terminal Fed policy rate looks increasingly capped,” Steven Englander, head of global G-10 FX research and North America strategy for Standard Chartered Bank, wrote in a note.

Back to stocks, European shares extended Wednesday’s rally, which saw the Stoxx 600 Index surge 1.5%. The European benchmark is in the midst of its longest rising streak since mid-April and has almost erased its second-half losses. Swatch Group AG, the maker of Omega and Longines watches, jumped more than 6% as China’s reopening fueled a rise in profits. Watches of Switzerland Group Plc, the biggest retailer of Rolex watches in the UK, soared 10%. US equity futures rose after solid gains on Wall Street. Here are some of the more notable European movers:

• Swatch shares jump as much as 6.9% after the Swiss watchmaker reported earnings that beat estimates.
• Watches of Switzerland soars as much as 12%, the most since January 2022, after the UK retailer of Rolex watches reported results and kept its guidance unchanged for the year
• Aker BP climbs as much as 2.3% after Norway’s second-biggest oil and gas producer increased its production guidance for the year
• Valeo gains as much as 4% after Stifel raised the French automotive supplier to buy from hold
• Experian shares rise as much as 0.9% after the consumer credit reporting company reaffirmed its full-year organic revenue forecast
• Barratt Developments drops as much as 5.4%, after the UK homebuilder noted a “significant deterioration” in demand during the second quarter. Peers also fell
• Schneider Electric falls as much as 3.7%, the most since May, after BofA double downgraded the French maker of electrical products to underperform from buy
• BASF shares decline as much as 2.3%, before paring the drop, as its new lower Ebit guidance for the full year implies a cut to consensus at the mid-point of about 14%
• Bufab drops as much as 13%, the most since March 2020, after the Swedish bolt and fastener maker reported 2Q results which DNB said fell short of expectations in terms of revenue and organic growth
• Barry Callebaut shares dip as much as 2% after reporting volume growth that Vontobel said is lower than expected, partly as a result of inflationary conditions
• Orpea shares fall as much as 1.7% after the French retirement-home operator cut its FY23 EbitdaR outlook, citing low occupancy rates in France, an “adverse reputational context” and high staff costs

Earlier in the session, the MSCI Asia Pacific Index headed for the highest close in more than three weeks, with stocks in Hong Kong recording some of the biggest gains. Chinese Premier Li Qiang met with senior executives from firms including Alibaba Group Holding Ltd. and ByteDance Ltd., a sign that the government is ending its crackdown on the technology industry.

In FX, the Bloomberg Dollar Index fell 0.3%, taking losses this week to 1.8% and a fresh 52-week low after Wednesday’s CPI print gave momentum to the bearish greenback trend. NZD/USD and AUD/USD led gains, both climbing around 1%, while the British pound extended its rally to a sixth day, staying above the $1.30 level that it hit Thursday for the first time since April 2022, after data showed the UK economy shrank less than expected in May.

“A further decline in PPI and a rise in claims could see dollar losses extend,” wrote Chris Turner head of FX strategy at ING, who sees the selloff potentially marking the start of the dollar’s long-awaited cyclical decline. “DXY should press big psychological support at 100.00, the next target would be 99.00 on a breakout”

In rates, yields were broadly lower as investors unwound bets that the Fed would raise rates again following an expected hike this month; treasuries continued their bull-steepening streak as yields on the two-year slumped as much as 12 basis points to 4.63%, the lowest level in four weeks; as odds of another Federal Reserve hike after July are receding. The 5s30s spread is wider by ~5bp; 10-year around 3.82%, lower by 3bp on the day, with bunds and gilts outperforming by 6bp and 2bp in the sector. European bonds also rallied, led by Italy; traders are no long fully pricing another 50 basis points of hikes for the European Central Bank and erased bets on the Bank of England taking the key rate to 6.5%, seeing a peak of 6.25% instead. Germany’s 10-year yield dropped eight basis points to 2.49%. Yields are richer across the curve with front-end outperforming.  The week’s auction cycle concludes with $18 billion 30-year reopening at 1pm New York time, which follows strong demand for 3- and 10- year sales that drew minimal market reaction. The WI 30-year yield at ~3.935% is ~3bp cheaper than last month’s, which stopped 1.1bp through. As investors globally continue to digest Wednesday’s benign US CPI data, Thursday brings PPI and 30-year bond auction, adding to steepening pressure on the curve.

In commodities, crude oil was steady even after the International Energy Agency said cut its forecast for demand growth. Iron ore rose as hopes increased that Beijing will deliver more economic aid for the beleaguered property sector and as investors shrugged off disappointing Chinese trade data.

Bitcoin is comfortably above the USD 30k mark but yet to make much traction above the USD 30.5k figure with catalysts light and price action broadly still a function of Wednesday's inflation update.

Looking to the day ahead now, and data releases include the US PPI reading for June, the weekly initial jobless claims, as well as UK GDP and Euro Area industrial production for May. From central banks, we’ll hear from the Fed’s Daly and Waller, whilst the ECB will be publishing the accounts of their June meeting. Lastly, earnings releases include PepsiCo and Delta Air Lines.

Market Snapshot

• S&P 500 futures up 0.3% to 4,522.25
• MXAP up 1.7% to 167.86
• MXAPJ up 1.9% to 529.98
• Nikkei up 1.5% to 32,419.33
• Topix up 1.0% to 2,242.99
• Hang Seng Index up 2.6% to 19,350.62
• Shanghai Composite up 1.3% to 3,236.48
• Sensex up 0.6% to 65,806.88
• Australia S&P/ASX 200 up 1.6% to 7,246.91
• Kospi up 0.6% to 2,591.23
• STOXX Europe 600 up 0.4% to 460.49
• German 10Y yield little changed at 2.49%
• Euro up 0.3% to $1.1164
• Brent Futures up 0.5% to $80.52/bbl
• Gold spot up 0.2% to $1,961.03
• U.S. Dollar Index down 0.24% to 100.28

Top Overnight News

• China’s trade data for June undershoots the Street, with exports -12.4% Y/Y (vs. the Street -10%) and imports -6.8% (vs. the Street -4.1%). BBG
• Washington-Beijing relationship will be tested (again) as the White House proceeds with plans to impose restrictions on American investment in China (the US Treasury has sought to narrow the scope of the restrictions). NYT  
• China is sending its strongest signal yet that it supports the development of platform companies, putting an end to years of probes into tech firms at a time when Beijing is going all-out to prevent economic growth from sputtering. SCMP
• Global energy demand forecast is trimmed by 220K BPD by the IEA given mounting economic headwinds (although demand overall will hit a fresh record this year). IEA
• Russia offered a deal to extend the grain export agreement in exchange for the country’s agricultural bank could see a subsidiary connected to the SWIFT int’l payment system. RTRS
• Junk market shrinks by nearly ~$200B since its peak in 2021, helping to prop up prices despite a softer growth backdrop. FT
• The Federal Trade Commission has opened an expansive investigation into OpenAI, probing whether the maker of the popular ChatGPT bot has run afoul of consumer protection laws by putting personal reputations and data at risk. WaPo
• PEP kicked off earnings season on an upbeat note, posting organic revenue growth of +13% (the Street was modeling +9.8%) with EPS of 2.09 (more than 10c ahead of the Street’s 1.96 forecast). The EPS beat was driven by better revenue, GMs, and op. margins (and the tax rate was actually a bit higher than anticipated, which means underlying earnings power was even stronger than it seems). RTRS
• DAL reported strong Q2 earnings, with EPS of 2.68 (vs. the Street’s 2.41), and they raise guidance for the year. They now see EPS of $6-7 for 2023 (vs. previously pointing to the high-end of $5-6) with Q3 EPS targeted at 2.20-2.50 (vs. the Street’s 2.06 forecast). RTRS
• Remote work risks wiping $800 billion from the value of office buildings in major cities by 2030, McKinsey said. That would represent a 26% drop compared to levels in 2019, and an even worse decline of 42% is possible. The trend is set to continue as employers downsize space as soon as long-term leases come to an end. Only 37% of people are back at the office every day. (BBG)

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded higher as the region reacted to the softer-than-expected US inflation data which underpinned the global risk appetite, while weaker-than-expected Chinese trade data failed to dampen the spirit. ASX 200 was firmer with all sectors lifted by the constructive mood and as yields continued to decline. Nikkei 225 reclaimed the 32,000 level at the open after the US CPI data provided a rising tide for stocks. Hang Seng and Shanghai Comp were positive with outperformance in the Hong Kong benchmark due to tech strength after Chinese Premier Li met with several HK-listed tech giants, endorsed the platform economy and pledged more support for the sector, while gains in the mainland were somewhat capped alongside the latest Chinese trade data which missed forecasts. Credit Suisse upgrades Chinese equities to Overweight.

Top Asian News

• China's Customs said the nation's exports showed strong resilience in H1 but also noted that sluggish global economic growth, slowing global trade and investment, geopolitical risks and weakening external demand continue to impact China's trade. Furthermore, it stated that China's trade growth faces relatively big pressure but China is confident it can consolidate its market share in global trade this year, while a Customs official noted feelings of pressure and optimism for China trade in H2, according to Reuters.
• US Secretary of State Blinken will meet with China's top diplomat Wang Yi at the ASEAN meetings.
• Chinese hackers reportedly breached the email of US Commerce Secretary Raimondo and State Department officials, according to WSJ.
• Bank of Korea kept its base rate unchanged at 3.50%, as expected, with the rate decision made unanimously and 6 members wanted to keep the door open for one more rate hike. BoK said domestic economic growth is expected to recover gradually, while GDP growth and consumer price inflation this year are expected to be consistent with forecasts. Furthermore, BoK Governor Rhee said several board members expressed concern about the rise in household debt, while he added that inflation will rebound to around 3% by year-end and fall again to the 2% level next year.
• Fast Retailing (9983 JT) 9-month(JPY): PBT 359bln, +2.8%; Operating Profit 330.6bln, +21.9%; Net Profit 238bln, +0.3%. CFO says Chinese consumption appears to be recovering strongly.
• Japan Top FX Diplomat Kanda says closely watching FX market moves; there is a view that speculative Yen short positions are unwinding rapidly; there is a view that deflationary norm may be changing.

European bourses are modestly firmer across the board in a continuation of the post US CPI trade, Euro Stoxx 50 +0.6%. Sectors are primarily in the green with Retail names outperforming after Fast Retailing while Homebuilders lag following Barratt Developments earnings commentary. Stateside, futures are also firmer ahead of IJC and Fed speak ES +0.3%; NQ +0.6% outperforms as yields continue to pullback. PepsiCo Inc (PEP) Q2 2023 (USD): Core EPS 2.09 (exp. 1.96), Revenue 22.32bln (exp. 21.73bln); raises annual revenue and profit forecasts after price hikes and steady demand. FY EPS view 7.47 (exp. 7.32). +3.1% in pre-market trade. US FTC investigating whether ChatGPT harms consumers, WaPo reports.

Top European News

• UK PM Sunak is set to be presented a plan on Thursday to give a million public sector workers a pay rise of around 6%, according to The Telegraph.
• ECB's Visco says we are not very far from a peak in interest rates, somewhat disagrees with the preference for tightening.
• ECB's Stournaras says we said a July hike was likely, but data since has become weaker, via Econostream; September hike is not a given, particularly since data points to a Q3 stagnation. Emphasises data-dependence.

FX

• DXY extends post-CPI decline towards 100.000 as Treasury yields retreat further and markets position for less aggressive Fed.
• Kiwi and Aussie outperform due to high beta properties, with NZD/USD probing 0.6350 and AUD/USD touching 0.6850.
• Pound encouraged by less weak than feared UK GDP data and Euro gains at the expense of soft Dollar, as Cable tops 1.3050 and EUR/USD approaches 1.11-75-85 resistance zone.
• Yen lags after stalling near 138.00 and takes note of verbal intervention from Japan's top currency diplomat Kanda.
• PBoC set USD/CNY mid-point at 7.1527 vs exp. 7.1623 (prev. 7.1765)

Fixed Income

• Bonds bounce further in follow-on reaction to soft US inflation data.
• Bunds breach several resistance levels and trip stops on the way to 133.13 from 131.92.
• Gilts more contained within 94.91-33 range post-better than forecast UK GDP and OBR warning on Government's debt recovery strategy.
• T-note nearer 112-24+ peak than 112-07 trough after big block trade in 5 year futures that looked like a buy given price action at the time.

Commodities

• Crude benchmarks are incrementally firmer but well within earlier ranges as Brent loses a little bit of its upward momentum after surpassing USD 80/bbl.
• Meanwhile, spot gold is inching higher as the USD remains downbeat but with upside once again capped by the broader tone; base metals firmer, given the aforementioned factors are both supportive.
• Russian Urals oil price has moved USD 2-3/bbl above the price cap on Thursday, via Reuters' calculations.
• IEA Monthly Oil Market Report: oil demand is set to increase by 2.2mln BPD in 2023 to reach a record 102.1mln BPD (vs. June view of 102.3mln BPD). China is to account for 70% of global oil demand gains. China’s widely anticipated reopening has so far failed to extend beyond travel and services.
• EU's VP Sefcovic says the EU has gathered 16BCM of demand in the second round of joint gas purchases, results which exceed expectations.

Geopolitics

• North Korea said it test-launched a Hwasong-18 ICBM on Wednesday and leader Kim guided the missile test, while Kim said they will continue military offensive measures until the US abandons its hostile policy against Pyongyang.
• UN Security Council is to meet publicly on Thursday regarding North Korea's missile launch, according to Reuters.

US Event Calendar

• 08:30: June PPI Final Demand MoM, est. 0.2%, prior -0.3%
• 08:30: June PPI Final Demand YoY, est. 0.4%, prior 1.1%
• 08:30: June PPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
• 08:30: June PPI Ex Food and Energy YoY, est. 2.6%, prior 2.8%
• 08:30: July Initial Jobless Claims, est. 250,000, prior 248,000
• 08:30: July Continuing Claims, est. 1.72m, prior 1.72m
• 14:00: June Monthly Budget Statement, est. -$184b, prior -$88.8b

DB's Jim Reid concludes the overnight wrap

Markets have put in a very strong performance over the last 24 hours, thanks to a promising US CPI report that boosted hopes of a soft landing in the markets' eyes. There were several details that investors liked, but a key one was that it marked the first time in 29 months that the monthly core inflation print had been beneath 2% on an annualised basis. So the Fed would be very happy if we got some more reports like yesterday’s, and markets moved to price in more rate cuts for next year as a result. In turn, that led to a significant rally, with the S&P 500 (+0.74%) closing at a 15-month high, whilst yields on 10yr Treasuries came down -11.2bps to 3.86%.

What the financial world and the Fed will have to weigh up is whether the improvement in inflation is coming just in time or too late to change the direction of travel. Monetary policy operates with a lag and we still have several hundred basis points of hikes to fully work through the system. Ironically, if inflation is falling back to trend but the Fed takes some time to move to an easing bias, then policy will become more restrictive in real terms. However, it's fair to say that this print gives them the ability to move to an easing bias earlier. So you can see why markets would get excited.

When it came to the specifics of the CPI release, the main news was that inflation continued to soften, with monthly headline CPI at just +0.18% in June. That was beneath the consensus expectation for a +0.3% reading, and it took the year-on-year measure down to just +3.0%, which is the lowest it’s been since March 2021. On core CPI there was even better news, as the monthly print came in at +0.16%, which is the weakest since February 2021 before the current inflation spike really got going. Similarly, that took the year-on-year core CPI print down to +4.8%.

To be honest, it was difficult to find any negative spin from yesterday’s release. At worst, you could highlight the outsized contribution of airfares (-8.1%) to the core CPI slowdown and say some of the stickier factors were a bit stronger, but even those were still coming down from their levels over recent months. For instance, the Atlanta Fed breaks down the CPI into a sticky and flexible CPI series, and their sticky CPI print hit a 24-month low of +0.24% in June. On top of that, it was clear the declines were broad-based, as the Cleveland Fed’s trimmed mean that excludes the biggest outliers in either direction came in at +0.22%, which is the lowest since February 2021.

Although the CPI report was a downside surprise, it doesn’t look like it’d be enough to dissuade the Fed from hiking in a couple of weeks’ time. They’ve been consistent that they want to see a succession of lower numbers before they ease policy, particularly after summer 2021 when some weaker numbers led to false hope that inflation would prove transitory. This cautious message was supported by comments from Richmond Fed President Barkin, who said that backing off too soon would require the Fed to do even more. Market pricing has been reflective of that too, with expectations for a July hike unchanged yesterday at 89%. But even as a July hike looks almost-locked in, the CPI print led investors to lower the rate path further out. For example, terminal rate pricing for November came down by -4.8bps to 5.38%. And when it comes to next year, pricing for the December 2024 came down by -18.6bps on the day to 3.91%, and is down another -5.3bps overnight to 3.86%.

With investors pricing in more rate cuts, sovereign bonds rallied strongly across the world. The 10yr US Treasury yield was down -11.2bps to 3.86%, whilst the 2yr yield was down by an even larger -12.9bps to 4.75%. Bear in mind it was less than a week ago after the bumper ADP print that the 2yr yield went as high as 5.12%, so we’ve seen a pretty big turnaround since then. The rates rally was led by real yields, with 10yr real Treasury yield down -15.5bps on the day, its sharpest daily decline since March. Treasury yields have extended their decline overnight, with 2yr yields down another -4.4bps to 4.70%, whilst the 10yr yield has also fallen another -0.8bps to 3.85%. In Europe yesterday it was much the same story, with yields on 10yr gilts (-14.9bps), OATs (-11.6bps) and BTPs (-15.8bps) all plummeting.

The CPI report also led to some pretty seismic movements in FX markets, with the dollar index (-1.19%) posting its worst day in 8 months and falling to a 14-month low. That led to several milestones elsewhere, with the euro closing above $1.11 for the first time since March 2022 and this morning it’s up further to another 2023 high of $1.115. In the meantime, the pound surpassed the $1.30 mark for the first time since April 2022.

This backdrop was favourable for equities, and both the S&P 500 (+0.74%) and the NASDAQ (+1.15%) closed at 15-month highs. Over in Europe there were even larger advances, with the STOXX 600 (+1.51%) surging, and the DAX (+1.47%) posting its strongest daily performance since the financial turmoil in March.

Elsewhere yesterday, the Bank of Canada delivered a 25bp hike as expected, taking their overnight rate to a 22-year high of 5%. There were hawkish elements to the decision as well, as their latest Monetary Policy Report is now projecting a slower return to the 2% target relative to April, with a return to 2% in the middle of 2025. The statement said that the Governing Council “remains concerned that progress towards the 2% target could stall, jeopardizing the return to price stability.” Looking forward, overnight index swaps are currently pricing 7.9bps of hikes at the September meeting, so a roughly one-in-three likelihood of another 25bp hike.

Asian equity markets have followed up with further gains overnight, with a strong rally amidst the prospect of the Fed moving less aggressively. That’s led to major gains across the board, with the Hang Seng (+2.49%), the Nikkei (+1.67%), the CSI 300 (+1.12%), the Shanghai Composite (+0.86%) and the KOSPI (+0.82%) all advancing. US equity futures are similarly pointing to a positive start later, with those on the S&P 500 up +0.26%, whilst NASDAQ 100 futures are up +0.44%.

Lastly overnight, the Bank of Korea left its key interest rate unchanged at 3.5% as expected. That’s the 4th consecutive meeting that rates have been on hold now, but the statement said that the Board would “maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability.”

To the day ahead now, and data releases include the US PPI reading for June, the weekly initial jobless claims, as well as UK GDP and Euro Area industrial production for May. From central banks, we’ll hear from the Fed’s Daly and Waller, whilst the ECB will be publishing the accounts of their June meeting. Lastly, earnings releases include PepsiCo and Delta Air Lines.