Summary and Price Action Rundown
Global risk assets are rebounding this morning after yesterday’s selloff, while Treasury yields are continuing to rise ahead of US inflation data. S&P 500 futures indicate a 0.8% higher open after yesterday’s 0.8% decline pared the year-to-date gain to 3.2%, with the index hovering around 1% below February’s all-time high. Equities in the EU and Asia were muted and mixed overnight. The dollar is fluctuating near two-year lows while longer-dated Treasury yields are extending their upside, with the 10-year yield at 0.67%, its highest level since early July. Brent crude prices are back above $45 per barrel.
US Inflation Figures in Focus
After yesterday’s release of producer price inflation showed faster-than-anticipated increases in price pressures, the focus today will be on the consumer price gauge (CPI). With longer-dated Treasury yields vaulting higher yesterday and continuing to move upwards this morning, traders will be particularly attuned to this morning’s US CPI reading for July, with an upside surprise likely to fuel a further rise in Treasury yields. US CPI increased to 0.6% in June from May’s four-and-a-half-year low of 0.1% and is expected to edge up to 0.7% for July. June’s pace of price increases was the fastest in three months as businesses reopened after the coronavirus lockdown, led by food and food at home prices, as well as energy costs and medical care services. On a monthly basis, prices went up 0.6% in June, the most since August of 2012, slightly beating market consensus of a 0.5% gain. The annual US core consumer price inflation rate, which excludes volatile items such as food and energy, stood at 1.2% year-on-year in June, unchanged from the previous month’s nine-year low and slightly above market expectations of 1.1%. For context, the Fed targets 2% inflation and may pivot to “enhanced guidance” at the September meeting, which would more formally link interest rate and asset purchase policies to this benchmark. However, the Fed favors an alternate inflation metric, core PCE, over CPI. Yesterday, US producer prices (PPI) rose 0.6% in July from a month earlier, reversing the 0.2% decline in June and beating forecasts of only a 0.3% gain. Last month’s data marked the largest increase in producer prices since October 2018, mainly driven by rising energy costs following the easing of coronavirus-induced restrictions.
UK Data Reflects Deep Recession
UK GDP figures for the second quarter (Q2) showed a worse slump than any other major European economy, shrinking by a fifth and falling into its deepest recession on record. A preliminary estimate indicated that UK gross domestic product shrank by 20.4% on quarter (q/q) and 21.7% from a year prior in Q2, equivalent to an annualized rate of 59.8%, the most since comparable records began in 1955, which was roughly in line with expectations of a 20.5% quarterly contraction. A recovery from the depths of the lockdown gained momentum in June, with output growing 8.7% from the prior month, faster than most economists had expected, although broadly in line with the Bank of England’s latest predictions. This means GDP has grown 11.3% since its April low, but remains 17.2% beneath its level in February, before the coronavirus crisis hit. Analysts said the UK’s underperformance was partly due to the length of its lockdown, and partly because the consumer-facing services sector that was hardest hit by social distancing has a bigger weight in GDP, accounting for 80% of the economy. Private consumption accounted for more than 70% of the decline in the GDP, down by 23.1%. There was also notable retrenchment in gross fixed capital formation (-25.5%) and government consumption (-14.0%). The services sector fell 19.9% q/q, accounting for three-quarters of the fall in GDP.
Additional Themes
Kodak Mum on Loan – After the market closed yesterday, Eastman Kodak released its second quarter earnings report posting a net loss of $5 million and $213 million in revenue, down 31% year-over-year. While investors were interested in the financial state of the company and its resilience to the pandemic, the main focus was on updates regarding the proposed $765 million Defense Production Act loan from the International Development Finance Corporation (IDFC). Shares experienced meteoric gains in recent weeks upon news of a potential government loan to fund the operational restructuring towards establishing Kodak as a major domestic supplier of pharmaceutical ingredients. However, shares toppled 28% over the past week amid allegations of insider trading by Kodak executives who had prior knowledge of the potential deal. On Monday, the White House responded that Kodak will not receive the loan unless the company is cleared of wrongdoing. During the earnings call yesterday evening Kodak stated it will not “discuss the potential loan or the related matters” as the company is currently under internal review. Kodak also chose to not hold a Q&A session post-conference. While investigators are currently conducting an internal review of Kodak’s executives’ actions, public disclosures filed with Congress reveal Kodak spent $870,000 lobbying Congress and federal agencies during the second quarter. The last time the company spent on lobbying was $5,000 in Q1 2019.
US-China Trade in Focus – Reports this morning indicate that China is intent on bringing the impending US bans on TikTok and WeChat into the Phase One trade deal review talks schedule for the middle of this month. China’s agricultural purchase commitments are another key issue.