Negative economic news flow continues with weaker US data and IMF global growth outlook downgrade. EU agrees to cut gas consumption by 15%; gas prices surge again

A barrage of negative news including weaker data, an IMF economic downgrade and surging gas prices has seen US equities fall over 1% and the USD recover. The EUR has underperformed, falling 1%, while the NZD shows a modest fall and NZD/AUD settling below 0.90. The US 10-year rate fell as much as 8bps overnight, but has since risen back to 2.79%, little changed from the NZ close.

The economic news flow remains dismal, following on from last week’s bad run. Whereas last week risk appetite increased regardless and US equities had a good week, this week the market is more alert to the negative news. The S&P500 is currently down 1.3%, led by a more than 3% fall in the Consumer Discretionary sector.  Earnings news has been mixed, with Walmart’s poor earnings report after the bell yesterday dragging down retail stocks, but household names like McDonalds, Coca Cola and GE produced strong earnings reports.

The IMF cut it global growth forecasts by 0.4pts to 3.2% for 2022 and by 0.7pts to 2.9% for 2023. Global inflation was revised higher and is projected to remain elevated for longer. The IMF noted an “increasingly gloomy and uncertain outlook”, with stalling growth across the US, euro area and China. Risks to the outlook were “overwhelmingly” tilted to the downside and it cited a plausible scenario that would send the global economy into recession.

The Conference Board measure of US consumer confidence fell by more than expected to a 17-month low of 95.7. This measure remains well above the record low reading of the University of Michigan index. The survey showed deteriorating labour market conditions, with the share of those saying jobs were plentiful falling to just over 50%, the lowest level in over a year. New home sales plunged 8.1% to their lowest level in over two years, providing further evidence that the housing market was rapidly slowing. Supply of unsold new houses is now 9.3 months of sales, a 12-year high, suggesting an over-supplied market and plenty more downside potential in activity.

EU countries agreed to voluntarily cut their gas usage by 15% from 1 August through next winter, in anticipation of a complete halt of Russian gas supply. Gasprom is about to cut supply via Nordstream to just 20% of capacity, increasing the chance of gas shortages later in the year. Reduced gas consumption now might help Europe to refill storage to 80%, ahead of winter, but that might still not be enough to get through winter without power rationing. All roads lead to higher gas prices being sustained and the energy crunch overhanging the euro area economy.

European natural gas prices rose another 15%, on top of yesterday’s 10% increase, to €202/MWh, their highest level since the early-March spike. US natural gas prices also surged, briefly passing a 14-year high on record-hot temperatures and spillover from higher European prices.

Lower European bond rates dragged down US Treasury yields, with Germany’s 10-year rate down 9bps to 0.92%, but then the market remembered that the FOMC meeting was coming up and US rates went back up. The 10-year rate was down as much as 8bps to 2.705% and now trades back up to 2.79%, little changed from the NZ close. The curve has flattened, with the 2-year rate higher on the day, up 2bps to 3.04%.

The risk-off vibe has seen the USD back in favour, alongside CHF and JPY. The EUR has been the hardest hit, down 1% to 1.0125. One hedge fund, EDL Capital, is betting that EUR/USD will plunge to 0.80, with Europe on the brink of disaster, which could lead to its break-up. GBP shows a much smaller loss. The NZD, AUD and CAD are all weaker, the NZD again being the worst of the commodity currencies, seeing NZD/AUD down to 0.8980, with the NZD down to 0.6225 and the AUD at 0.6930.

It was a very quiet day in the domestic rates market, ahead of the key risk events ahead, including the Australian CPI and FOMC meeting. Swap and NZGB rates showed small falls across the curves, with 2-year swap back below 4% at 3.99% and 10-year swap at 3.76%.

The economic calendar picks up pace from this afternoon, with the release of Australian Q2 CPI data, where the consensus is for headline inflation to surge to 6.3% y/y and strong underlying inflation as well, with the trimmed mean at 1.5% q/q and 4.7% y/y. Trading should be quiet tonight in the lead up to the Fed’s latest policy announcement at 6am NZ time. Almost all economists pick a 0.75% hike, taking the top of the Fed Funds target range to 2.5%. There will be more interest in Chair Powell’s press conference at 6:30am.  He is likely to remain focused on bringing inflation down, and the market will be looking for cues on whether the pace of hikes might slip to 50bps from September.