The US retail sales data today just became a whole lot more critical, after Fed’s Waller sided with a 75 bps rate hike for later this month – only willing to change his mind if retail sales and housing market data are “materially stronger than expected”.

The consensus is for June retail sales to see a monthly increase of 0.8% after the 0.3% drop in May:

The ex-autos reading is expected to see a 0.6% monthly increase after a 0.5% jump in the month before. If meeting estimates, those are some decent numbers for the US consumer but at the end of the day, it is how the Fed interprets them to be is what matters.

An easy way to look at it is that any material beat will push markets to believe that a 100 bps rate hike in two weeks’ time is plausible. However, we’ll have to hear from Fed speakers to confirm that and only Bostic is scheduled to speak today. So, markets may be left to their own devices to think about that.

Meanwhile, any miss on estimates will likely keep market pricing grounded with the option of 75 bps to be cemented. For risk trades, this scenario would be the most ideal after a struggling week – despite modest recoveries late in the session in the past two days.

China emerged a little more from harsh lockdown restrictions during June, helping economic activity to improve.

Data for June:

Economic growth data for the April to June quarter of 2022 from China.

China Q2 GDP % q/q

It’s a quieter start to the new day with major currencies not doing a whole lot and equities being little changed. The mood is likely to keep that way as all eyes are on the US CPI data later today.

The RBNZ delivered on expectations by raising its OCR by 50 bps to 2.50%, with the decision earlier here. The Bank of Canada is set to continue the central bank bonanza this month by hiking rates by 75 bps to 2.25% later today.

After briefly touching parity yesterday, EUR/USD saw a slight pullback as the dollar also ceded some ground. But in the grand scheme of things, the greenback remains in good stead as risk tones continue to look fairly sluggish so far this week.

A deeper inversion in the US 2s10s could also be something to be wary about as markets start to identify with stronger indicators of a recession. But all else being equal, there will be a slow churn towards key central bank meeting decisions next week (BOJ and ECB) and later in the month (Fed).

Looking ahead today, euro area inflation data will help to move things along but expect markets to stay focused on what the US CPI data has to offer before committing to any further moves this week.

0600 GMT – UK May monthly GDP data
0600 GMT – Germany June final CPI figures
0645 GMT – France June final CPI figures
0700 GMT – Spain June final CPI figures
0900 GMT – Eurozone May industrial output
1100 GMT – US MBA mortgage applications w.e. 8 July

That’s all for the session ahead. I wish you all the best of days to come and good luck with your trading! Stay safe out there.

• Prior -28.0
• Current conditions -45.8 vs -34.5 expected
• Prior -27.6

Slight delay in the release by the source. That’s a significant miss as ZEW notes that the combination of concerns about energy supply in Germany, the ECB’s planned rate hikes and further pandemic-related restrictions in China have led to a considerable deterioration in the economic outlook.

Cites 3 factors:

• “Currently, across the advanced economies, unit labor cost growth, core inflation, and the expected total increase in the policy rate are generally running at levels similar to the run-up of the typical advanced economy recession,”
• “Higher measures of economic overheating in the U.S., U.K., and Canada than in Japan and the Euro area suggest that the next recession may be somewhat less shallow in these English-speaking G10 economies.”

Hatzius’ forecasts:

• risk that “the economy enters a recession in the next year at 30% in the U.S., 40% in the Euro area, and 45% in the UK,”

The headline reading is a 22-month low but the more standout detail is that manufacturing output actually contracted for the first time since the early days of the pandemic and lockdowns in Europe. This pretty much provides a comprehensive overview of what is happening across the region as industrial activity is hit by rising prices:

The fear now is that a recession may be looming towards the latter stages of the year. S&P Global notes that:

“Eurozone manufacturing has moved into decline in June, with production dropping for the first time for two years amid a steepening downturn in demand. Orders for goods have fallen at an accelerating rate over the past two months, dropping in June in every country surveyed with the exception of the Netherlands, and even here the rate of growth has weakened markedly in recent months.

“Demand is now weakening as firms report customers to be growing more cautious in relation to spending due to rising prices and the uncertain economic outlook.

“The downturn looks set to gain momentum in coming months. Inventories of both raw materials and unsold stock are rising due to lower than expected production and sales volumes respectively, hinting that an inventory correction will act as an additional drag on the sector in coming months. Backlogs of work are meanwhile falling, which is often a prelude to firms reducing operating capacity, and business confidence in the outlook has fallen to the gloomiest for just over two years.

“Supply for many important inputs also remains constrained, and concerns over energy and food supply have added to nervousness about the future.

“One upside to the recent weakening of demand is an alleviation of some supply chain constraints, which has in turn helped cool  inflation  pressures for industrial goods. With the survey data indicating an increasing likelihood of the manufacturing sector slipping into a recession, these price pressures should ease further in the third quarter.”

The Caixin survey has a greater representation of smaller firms than does the official PMI survey (from China’s NBS).

Comes in at its highest in 13 months, 51.7