FXTRADING.com's Exclusive Market Insights for 5 July

We just had the July 4 holiday, so the US is open this morning and it’s back to flat.

The SPI was flat yesterday, while the HSI and Nikkei were just off slightly and close to flat

Given the holiday in the US, we would like to put out our big picture view for the US economy.

It’s been the worst 6-month start to a year since 1970. The Nasdaq lost 30%, the S&P 500 shed 21%, while the Dow Jones (the best of the three) only gave back 15%.

There have been very few places to 'hide' so far in 2022... stocks, bonds, gold and even Bitcoin are all down.?Energy and USD have been strong, and this is actually not a bad thing for the Fed, as a strong dollar is deflationary for the US

Amazon has cancelled or delayed plans for at least 16 warehouses this year. The company is scaling back warehouse footprint amidst e-commerce slowdowns.

Earnings season is starting next week, and we are likely going to see margin compression. We've seen a P re-rating as bond yields have risen, and the discount factor has risen. Soon we are likely to see the E in PE matters, and it will be falling.

Consumer sentiment is coming off, and a consequence this will lead to:

·????????Slowing consumer demand

·????????Inventory build-up

·????????Staff cuts while input costs remain elevated, so rises in employment

·????????Consumers spending less

·????????Companies making less

·????????GDP falling (70% of US GDP is tied to consumer spending).

Watch out for ‘margin pressure and headwinds’. The outlook is likely to be negative.

Markets discount and right now everyone is starting to talk about recession and inflation coming off. Markets are already pricing big cuts from the Fed in 2023 (black)

In the last 90 years outside of 1987, a 30% drop in the S&P has guaranteed a recession

The key for me is watching this CPI number.

If 8% handle CPI hangs around for several more months, the Fed has no choice but to stay very aggressive. Powell could not be any clearer that unless things get REALLY UGLY, he is hiking and hiking and hiking until inflation breaks.

Being late to the game increases the probability that the Fed overreacts, because it didn't act soon enough. This increases uncertainty and elevates the probability of a hard landing, which is what everybody wants to avoid.?A hard landing means we go into a serious recession, like the one associated with the Great Financial Crisis.

Every recession after 1955 (9 in total) was caused by aggressive Fed tightening.

We haven’t gotten close to the level of volatility associated with a major or even minor low.

Chart via Macro Intelligence 2 Partners

So to summarise, I think there is a real risk we haven’t seen the lows and there is further downside to come.?This is more a medium-term view. In the short term, with this sort of volatility we can certainly get some rallies, but I will remain in the ‘selling rips’ camp as to opposed to ‘buying dips’.

Perhaps a better way to say this is that I don't think you need to be in a rush to buy stocks, because the only reason why you needed to be in a rush last decade is you were trying to anticipate the Fed coming to your rescue. That was it.

The Fed isn’t going to come to our rescue so fast this time, as they have made it very clear that their intent is to get inflation to come down, by hiking rates and removing liquidity.

"For the first time since shortly after German reunification (May 1991), Germany has a trade deficit...and with that a major pillar supporting the strength of the German economy and the euro as a currency is gone."

Once could argue the factor that kept the euro afloat versus other majors was the trade balance surplus...now this is gone

Eurozone PPI (Y/Y) May: 36.3% (est 36.6%; prev 37.2%).

Eurozone PPI (M/M) May: 0.7% (est 0.9%; prev 1.2%).

Swiss CPI MoM at 0.3 vs 0.7%.

CPI YoY 3.1 vs 2.9%.

The RBA makes its interest rate announcement today, and is expected to hike 50bps, to lift the cash rate to 1.35%.

RBA should just go 65bps tomorrow to get us off these silly non 25bps intervals. Phil Lowe said no to 75bps, nothing about 65bps (still think it will be 50bps).

ANZ job adds increased 1.4 m/m in June – the highest since 08…

The Australian mortgage market held firm in May, despite the RBA commencing its rate tightening cycle with an initial 0.25% hike.

According to the Australian Bureau of Statistics (ABS), the total value of new mortgage commitments rose a seasonally adjusted 1.7% in May 2022, but was down 0.4% year-on-year.

Iron ore futures prices fell by US$5.29, or 4.6%, to US$109.94 a tonne.

Australia, New Zealand and Canada have huge housing bubbles, and these are going to come under pressure

Stay away from anything in discretionary spending – that includes JB Hi-Fi, Harvey Norman and Wesfarmers. Aussie stocks in general are also showing signs of a bottom.

That’s the state of the market as of 5 July – FXTRADING.com hopes that these insights prove useful to its clients and followers.??