Headlines

*Australia headline CPI misses forecasts, easing rate hike bets

*Google parent Alphabet’s small sales miss eases recession worries

*Microsoft posts slowest sales growth since 2020 on strong dollar

*Asian currencies weaken, USD steady as markets remain cautious

US equities were led lower by US retailers as Walmart warned that higher inflation would hurt its profits. The broad S&P500 shed 1.15% with consumer cyclicals suffering the biggest declines. The tech-heavy Nasdaq lost 1.96% with recession and earnings fears abounding. But better-than-expected results at Microsoft and Google have helped steady the nervous mood. MSFT forecast strong revenue growth in FY23. GOOGL posted solid search engine ad sales. Nasdaq futures are up 1.5% and the S&P500 futures are gaining 0.46%.

USD rose yesterday as the euro weakened and government bonds rallied. Russia moved to further cut gas supplies to the EU and the IMF slashed its global growth forecasts. Cable printed a “doji” candle but has found a small bid this morning as it nears the recent high at 1.2090. AUD fell after Q2 CPI missed estimates. USD/JPY is steady and trading around 137.

Day Ahead – Fed Day

The FOMC is expected to hike rates by another 75bps, taking the target range to 2.25%-2.5%. There is no fresh dot plot or economic forecasts to be released. So, all the attention will be on the post-meeting statement language and tone set by Chair Powell. He is expected to be relatively hawkish, indicating the bank’s desire to bring inflation back to its 2% target as quickly as possible through continued aggressive rate hikes, even if that causes some economic pain.

The last few meetings have seen Powell signal the expected size of the next rate move. But with two fresh jobs reports between now and the next FOMC meeting, it seems likely that Powell may be more flexible this time. The continued strength of the labour market will likely serve as evidence that the economy can bear more policy tightening. Strength in core inflation also leaves little room for complacency, even if the recent falls in gasoline prices offer some hope that 9.1% is “peak inflation”.

Money markets are pricing in another 125bps or so of rate hikes after an assumed 75bp rate hike at this July meeting. That takes the terminal rate up to 3.25%-3.5%, which is a recent low point. A strident Fed could push this up higher once more, as the relative hawkishness of the world’s most important central bank stands out among its peers. But markets will seize upon any slight “pivot” by Powell if he is less hawkish than expected.

Chart of the Day – DXY steadies as euro eases

Euro dropped 1% yesterday as energy security concerns heightened anxiety about a recession in the region. That saw the DXY push higher, having stabilised above 106. The common currency holds a 57.6% weighting in the basket of six currencies. GBP and JPY have the next biggest with 11.6% and 13.6%.

Focus will now also turn to the Fed later today. Any shift in the inflation/growth dynamic with fewer rate hikes suggested could see the dollar turn lower and test the 106 area. Support below here is at 105.78. Bulls will aim for a break higher above 107.35 towards 108.