Overnight Headlines

* Powell hammers home unconditional commitment to cool prices

* UK consumer confidence falls to lowest since records began

* Japanese consumer inflation tops BoJ target for second month

*Asian equity markets broadly higher, US and European futures in the green

US equities erased earlier losses to finish higher, even as Fed Chair Powell gave no let-up to further Fed hikes to curb inflation. Heavyweight, beaten-up growth stocks saw some relief from recent selling. The Nasdaq led the gains, jumping by 1.47%, the broader S&P500 climbed 0.95% and the Dow closed up 0.64%. The positive mood has fed over into Asia today with South Korea leading the advances. Futures point to a positive start in both Europe. This is after the Eurostoxx 50 closed lower by 0.8% yesterday.

USD was modestly stronger against its peers except for the yen. DXY was higher by 0.2%, trading just above 104. EUR traded to an intraday low of 1.0482 before closing above 1.05. GBP continues to trade just below 1.23. USD/JPY ended the day markedly lower at 134.93 from 136.19. AUD and NZD both closed softer while USD/CAD popped up above 130 before closing at 1.2990.

Event Takeaway – PMIs see rate bets reined in

We had the release of global PMIs yesterday. It’s been hard to getaway from the “r” word this week and that theme intensified after this data. Both US and eurozone business activity growth slowed more than expected in June. The fall in European services was especially notable. This came earlier than forecast ahead of the normally strong summer months.

Numerous economists raised their projected probabilities of recessions. Bond yields tumbled as markets reassessed the magnitude of rate hikes to be delivered by central banks. US interest rates are now seen peaking at around 3.4% by next March. This is far below the 4% mark priced for June 2023 before last week’s Fed meeting. The December ECB meeting went 15bps lower to 156bps of rate hikes. Markets are clearly worried about growth weakening faster than expected. Rate cuts in the US are now priced in after March 2023. This is well before the timing projected by the FOMC’s “dot plot”. That sees rates falling only from 2024.

Chart of the Day – Cable is coiling

While PMIs sank elsewhere, the UK economy showed signs of holding up. Its composite PMI remained unchanged while the services beat expectations. This steady print makes it easier to argue for a 50bp rate hike at the BoE’s next meeting. On the flipside, we got more evidence this morning that the consumer is wilting. The GFK consumer confidence reported at the weakest level since the start of the series, for the second straight month. We also had more political noise with the Conservative party losing two by-elections. This raises further questions about the leadership and PM Johnson’s position.

GBP/USD continues to range trade between 1.22 and 1.23. Price action has been similar over the last two sessions. A move lower has seen buyers step in around 1.2155. This is the mid-May low and initial support. Resistance is 1.2315/25 and 1.2405.