OVERNIGHT NEWS
# Dollar off highs after FOMC voters Waller and Bullard douse speculation of 100bp hike, back 75bp in July. July pricing drops to 81bp from high of 92bp after CPI. 10y UST yield 4bp lower at 2.92%.
# Day ahead: Euro trade balance, ECB speaker Rehn. US retail sales, Michigan confidence, industrial output, Fed speakers Bostic and Bullard.
# China 2Q GDP contracts 2.6% qoq (+0.4% yoy), SG economics slash 2022 forecast to 2.7% from 4% (analysis here). June retail sales +3.1% yoy after 6.7% decline in May, industrial output accelerates to 3.9% yoy from 0.7%, FAI moderates to 6.1% ytd.
# Italy: President Mattarella rejects PM Draghi’s offer to resign, parliament to hold confidence vote next week Wednesday.
# Nikkei +0.6%, EUR 10y IRS -6bp at 1.935%, Brent crude +0.5% at $99.5/b, Gold flat at $1,710/oz.
China 2Q GDP annual growth slows to 0.4%
Down to the data
The debate of 100bps vs 75bps for the FOMC July decision may well be settled by today’s catalysts. To be specific, Michigan inflation expectations for July will publish at 10:00 EDT and retail sales for June will be released before at 08:30 – Fed speakers have explicitly indicated that these data prints will be important and our economists see upside risks. Ahead of blackout, UST and broader US assets will be sensitive to any Fedspeak, with Bostic and Bullard both speaking ahead of Michigan. We pay more attention to the latter but would not rule out unscheduled appearances.
US equities will also be distracted by Q2 earnings, but risk sentiment was generally steadier overnight. This translates to a lightly weaker USD and higher crude oil prices, though base metals remain more fragile. This relates to ongoing concerns about China with a weak Q2 GDP print and Covid concerns. We are cognizant of headline risk going into the weekend. Italy politics will also provide such headlines in the coming week, but we see limited impact for EUR. CLP markets will be in focus after the central bank announced new FX intervention late Thursday that will provide some relief, while ILS will be focused on imminent local inflation data.
Fed Governor Waller supports 75bp July hike, puts focus on retail sales, housing data; Post-CPI UST flattening recedes; EUR/USD hits 0.9952, closes above parity despite political uncertainty in Italy; 10y BTP-Bund spread widens to ~207bp; USD/JPY hits new high since 1998; US 10y at 2.959% (+2.6bp).
Latin America:
Latam currencies were largely driven by weaker global risk appetite and a stronger dollar. The exception to this was PEN, which appreciated 1.3%, to 3.90, potentially supported by local corporate flows as well as a PEN300mn net placement of FX swaps by the BCRP amid no maturities for the session. CLP led the region’s weakness, depreciating 3.9%, to 1049, as copper prices declined another 2.7%, to $3.23/lb, and the BCCh underwhelmed markets, hiking only 75bp with unclear forward policy guidance. BRL followed, depreciating 0.7%, to 5.43, while MXN depreciated 0.4%, to 20.82. COP started the session weaker but rallied back amid no specific catalyst to end the session nearly flat at 4492.
Local rates ended the session higher overall. In Colombia, COPxIBR had the largest adjustment higher, as the curve ended 52bp higher across every tenor; the 10y ended the session at 10.16%. Chile followed with a significant bear-flattening of ~30bp in 2s10s to -313bp, as the market priced out imbedded rates cuts. Moves in Mexico TIIE were largely in line with US rates in the belly of the curve; 10y TIIE ended the session 3bp higher at 8.91%. Brazil DIs drifted higher, and bear-flattened as January 2026s ended 12bp higher, to 13.03%, and January 2033s ended 7bp higher, to 13.21%.