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WEEKLY ROUND-UP Thru JULY 15th 2022; What is the Terminal Rate?

Hello folks, even with the strong finish on Friday markets still managed to close down on the week. We are coming into the thick of key US Economic Data along with Q2 Corp Earnings. Get my take on where to from here;


Major indexes finished lower on the week despite a solid finish on Friday with stocks Thursday morning in the S&P touching its lowest intraday level since June 22 before staging a sharp rally on Friday to end the week. Anticipation over the week’s important inflation data dominated sentiment even before the reports’ released mid-week. The CPI rose by 9.1% over the 12 months ended in June, the highest increase since 1981, with prices jumping 1.3% in June alone. While an 11.2% jump in gas prices in June was partly to blame, core (less food and energy) inflation also surprised on the upside (0.6% versus 0.5%) and picked up from May’s pace. And if that was not enough, the PPI rose 1.1% in June which was more than expected as well. In a preliminary survey of consumer sentiment, Americans’ five-year inflation expectations had declined sharply in early July to 2.8%, their lowest level in over a year. The decline seemed to feed expectations that the Fed would move less aggressively than feared at its next policy meeting, raising rates by 75 basis points (0.75%) rather than the 100 basis points futures markets had begun to indicate while Consumer Retail sales remains strong thus far this year. Some analysts feels the current forward EPS estimates for 2022 (230) are too high and will need to be revised downward as well as unemployment moving higher.

The yield on the benchmark 10-year U.S. Treasury note fell over the week, as an inversion in the closely watched 2-year/10-year segment of the Treasury yield curve, considered by some to be a recession signal, reached its widest level since 2000. The current Fed Fund rate is at 1.5% – 1.75% with the futures markets currently pricing in an end of year target rate of 3.50% – 3.75%. That would imply additional rate hikes of 2.0% – 2.25% with 4 more Fed meeting dates set (average slightly over 50 bps per meeting).

Meanwhile, over in Europe, Russia closed the Nord Stream 1 gas pipeline supplying Germany for scheduled maintenance work until the following Friday. The German government is concerned that Russia may not fully reopen it on that date in retaliation against European sanctions, which could force Germany to impose rationing on industries and households to preserve winter stockpiles. The European Commission lowered its economic forecasts for Europe and raised its prediction for inflation due to the continuing adverse impact of Russia’s invasion of Ukraine. According to its summer forecasts, gross domestic product (GDP) in 2022 is unrevised at 2.7% but is now seen slowing sharply in 2023 to 1.5% instead of to 2.3%, as previously forecast. Inflation is predicted to accelerate to 8.3% in 2022, up from a previous forecast of 6.8%. The rate for 2023 is also raised to 4.6% from 3.2%.

Bank of Japan (BoJ) Governor Haruhiko Kuroda reiterated the central bank’s commitment to its ultra-loose monetary policy, stating that it will not hesitate to take additional easing steps as necessary. With the BoJ’s dovish stance diverging from the aggressive tightening pursued by the U.S. Federal Reserve, the yen continued to weaken against the U.S. dollar having hit a fresh 24-year low during the week.
Chinese stock markets eased as data revealed that the country’s economy slowed sharply in the second quarter, and a growing movement among homebuyers to stop paying their mortgages hurt property and banking shares. China’s GDP for the June quarter grew a worse-than-expected 0.4% from a year earlier, official data showed, compared with a 4.8% expansion recorded in the first quarter.

Enjoy this week’s Round-Up:

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