Headlines

* US equities boosted by big bank results, megacap tech earnings up next

* Dollar holds steady above 15-month lows on strong core retail sales

* New Zealand inflation slows less than forecast in Q2

* China growth risks hurt Asia stocks, yen lower on Ueda comments

FX: USD printed a doji candle as it hovered just above recent lows and 100. Retail sales came in mixed while industrial production was much weaker than expected. The economy may be weakening due to tighter policy but a soft landing scenario is holding up.

The 2-year yield which follows Fed funds futures closely and so sensitive to changes in interest rate expectations dipped to 4.66% before closing at 4.77%. The benchmark 10-year yield traded modestly lower as it battles with long-term trendline resistance/support.

EUR popped up to the long-term Fib level (61.8%) of the 2021/22 decline at 1.1275. It then settled marginally lower. Reports suggested that ECB officials consider communication about what will happen after next week’s rate hike as their biggest challenge. They are keen to avoid any strong signals of either another hike or a pause. A prominent ECB hawk, Klaus Knot, said hikes beyond July are possible but not a certainty.

GBP closed near its low of the day at 1.3034. Cable is dropping this morning ahead of the CPI report.

USD/JPY looks to have found a base above 138 in recent sessions. A small bid today is pushing the major up above 139. Last week’s low was at 137.23. BoJ Chief Ueda comments hinted at no policy changes or tweaks to YCC. He said there is still some distance to sustainably achieving the 2% inflation target.

AUD is dropping this morning after printing a doji candle yesterday. The RBA minutes hinted that further tightening may be needed but this is not helping the aussie.  Prices are potentially back in the long-held range held between March and July, between 0.68 and 0.66 more or less. CAD moved below the 50-day SMA and 1.32. Firmer oil prices helped the loonie after Canada CPI printed softer than expected.   

Stocks: US equities rallied hitting fresh highs. The benchmark S&P 500 climbed 0.71% to close at 4554. The tech-laden Nasdaq added 0.84%. The Dow outperformed jumping 1.06% to finish at 34,951. That is a new high close for this year. Gains in the big banks, Morgan Stanley and Bank of America helped the Dow. (nb. Goldman Sachs report today, not yesterday as we stated.) Morgan Stanley surged over 6% as the bank predicted it would eventually triple its assets under management. This came even as quarterly profits dropped due to lower bond trading revenues. Charles Schwab was the benchmark’s best performer, leaping nearly 13% as it reported that deposit outflows has slowed.

Asian stocks were mixed, even after the positive handover from Wall Street. The Nikkei 225 rose to a two-week high on the dovish comments from BoJ Governor Ueda. Every industry group on the TSE was in the green. The Hang Seng lagged on China growth concerns.

US equity futures are mildly in the red. European equity futures are mixed. The Euro Stoxx 50 closed up 0.3% yesterday.

Gold broke higher and pushed near to the highs from May and June around $1984. The mystical $2000 level is not far away. Dovish central bank speak from ECB officials helped gold bugs.

Day Ahead – UK CPI to dictate size of August BoE rate hike

Today’s UK June inflation report will be a huge input for the Bank of England’s August rate hike decision. That means it is the next key test for GBP strength. Headline CPI is expected to cool to 8.2% y/y from 8.7% previously. Core is forecast to remain steady at 7.1% y/y after an unexpected advance last month. That was a 30-year high and major concern for the MPC.

If core drops below 7%, expectations of a 50bps rate hike at the August meeting would cool, which brings GBP downside into play. But wage metrics have remained strong, and another higher-than-expected core CPI print would bring volatility in sterling and gilts. Markets currently price in well over 100bps if more hikes this year.

Chart of the Day – Tesla results to drive price action

Tesla earnings after the US close will grab the headlines later today. Investors will focus on Tesla delivery and revenue outlooks. The EV giant has already reported delivery numbers for Q2 2023, indicating that they grew 83% y/y. These rates were driven in part by a favourable comparison with Q2 2022 when the company’s Chinese business declined sharply amid the Covid-19-related lockdowns. But Tesla has also likely benefited from price cuts on popular models and an expansion of manufacturing capacity. While higher volumes are positive, Tesla’s average selling prices are likely to trend meaningfully lower and this is could impact margins over Q2.

April saw Tesla slipped back after the electric car maker’s Q1 results released on 19 April missed on revenue, profit and total gross margin. By the end of April, the stock had found a base around $150. Since then, the stock has risen more than 80% to current levels of around $293. Bullish momentum picked up at the end of May on reports that many of its peers, including Ford, GM, Volkswagen and Mercedes, would adopt its US charging standard. Resistance now stands at $295 and August 2022 highs around $314.