Bank of Canada shocks with 1% rate increase – Daily Market Brief, July 14, 2022

Hotter than expected, US CPI and German PPI are weighing on investor sentiment and lifting the US dollar.

·     US CPI rose to 9.1%, boosting the chances of a 1% rate hike from the Fed in July

·     German PPI fell less than expected to 21.2%, down from 22.9% – the DAX is set to extend yesterday’s losses.

·     US earning season kicks off with the banks and is expected to shed light on how corporate America is faring as inflation surges.

US stocks closed lower yesterday, but notably well above the session lows, despite US inflation surging to a new 4-decade high. US CPI rose to 9.1% YoY, up from 8.6% in May and above the 8.8% forecast. Core inflation slipped to 5.9% YoY, down from 6%. A move in the right direction but too small to be able to read anything significant into the move.

Fed Bostic voiced his concern over the jump in inflation and hinted toward a 1% rate hike in July.

Following the data, the market started to price in a much more aggressive Federal Reserve. The CME Fed Funds are now pricing in an 80% probability of a 1% rate hike in July, up sharply from 10% yesterday before the data.

The BoC raising interest rates by 1% caught the market off guard yesterday and sent the CAD higher. However, it could have also paved the way for a super-sized hike by the Fed.  

A significantly more hawkish Fed raises the prospect of the central bank pushing the economy into recession.

While US futures push lower, the USD is gaining ground. USD/JPY trades at a fresh 24-year high of over 138.00 on central bank divergence. EUR/USD remains pressurised, falling towards 1.00

European stocks are pointing to a weaker start as inflation, and recession fears drag on sentiment. The DAX, which closed over 1% lower yesterday, is set to open 0.1% lower today as investors worry over stronger than forecast German PPI inflation data. PPI in June was 21.2%, down slightly from 22.9% in May but above the 20.4% forecast.

US earning season

Earnings season kicks off today with the banks and is set to be the first significant test for investor sentiment in the second half of the year. The slew of earnings over the coming weeks will provide insight into how well companies are coping with soaring inflation, changes to consumer spending, and supply chain disruptions. Guidance for the coming months is likely to be a key focus for clues as to how top management views the immediate outlook.

Fears over a slowdown in consumer spending and recession fears are likely to just be fears for now and are not expected to show up in these numbers. However, those fears are likely to be more evident on earning calls. There is a greater probability that full-year guidance will be towards the lower end. Inflation and passing on costs and exchange rates are also likely to be key themes.

Wall Street analysts estimate that average S&P500 revenue will be 10.4% higher than last year with 5.6% earnings growth, although profit margins are expected to narrow. Excluding the energy sector, which benefited from surging oil and gas sales, sales are forecast to fall 2.4%, and earnings rise 6.7%.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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