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Wages up, sterling up, Bank of England rate hike expectations even more concrete – market pricing in 70% chance the MPC votes for a 50bps hike in August after UK wage growth remained at a record high 7.3% in the three months to May. As we’ve noted here on many occasions, soaring wage growth – even if real wages are still stagnant (or perhaps because they are still stagnant) - gets us into the kind of wage-price spiral dynamics that central banks absolutely hate and usually do anything to avoid. So far, all the Bank does is demand wage restraint and raise rates to market levels. Messrs Hunt and Bailey were at again last night, calling for ordinary folks to accept lower living conditions in order to fix the mess they created. The BoE remains, as ever, behind the curve, but is catching up. Two-year gilt yields slid to 5.311%, some way off last week’s 15-year highs, as traders expect the BoE speed-up to result in cuts earlier than if it had sat on its hands for longer. Meanwhile sterling rose to a fresh 15-month high against a broadly softer US dollar. There is a sense that the inflationary-hiking phase is going on too long – time to get it done, break some eggs, and move onto cutting rates again! The previous 50bps hike by the BoE was the recession hike and now it needs to follow that up with another jumbo hike. 

European stocks were higher in early trading Tuesday after a broad rally in Asia and modest gains for Wall Street in the prior session. The FTSE 100 lagged peers at the open, struggling to make any headway but a stronger pound might be a factor. The DAX added 0.3% and the CAC rose 0.6%. The S&P 500 held the 4,400 area yesterday to finish up a quarter of a percent, whilst the Dow rose 0.62%.   

Elsewhere today, Germany’s ZEW economic sentiment report is worth a watch with the euro trading above $1.10 again as the dollar pulls back on lower Treasury yields still in the wake of the jobs report on Friday. German CPI was confirmed at +0.3% on the month in June, +6.4% on the year, which was up from 6.1% the previous month.  

Citi – downgrades US equities to neutral, upgrades Europe to overweight...mainly just valuations after the run-up this year and with earnings ahead there are plenty of headwinds for bulls to justify the rally given yields are not going down (10yr recently back to 4%, highest since March) and recession risks seem to be just about as elevated as they have been...policy mistake risks are now acute just as inflation expectations moderate and inflation surprises come in – the Fed is apt to inflate too much and for too long on the way up and deflate too much on the way down.  

Sterling broke out to the upside against a broadly weaker US dollar, with cable making a 15-month high north of 1.28. The move certainly brings 1.30 into near-term focus and perhaps if that can be scaled we can look at the 78.6% retracement area around 1.341. 


 

USDJPY still dropping like a stone, watching the 50-day SMA…market not just pricing intervention now but moving ahead of possible BoJ normalisation moves later this year. Big reversal of short-yen, long-Nikkei in the offing.


 

Crude oil – trending firmer, 100-day line around $73.50 proving resistance for bulls 


 

S&P 500 futures – stalled at the last Fib level, 21-day EMA is around 4,417 offering key near-term support. 


 

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