Bumper payroll report, CPI up next

Markets

After a bumper nonfarm payrolls print, market attention turns to US CPI on Wednesday. A slowdown in inflation remains the base case, but details of the CPI data will be critical. Back-to-back storming inflation prints will likely lead to complete repricing of the September Fed meeting and, ultimately, where the Fed ends up.

Still, last Friday's payroll report indicates an overheated labour market that continues to tighten further. Hence at minimum, the markets expect another 100bp of Fed funds rate increases over the next three meetings: +50bp in September and +25bp in November and December, with risks skewed towards significant increases.

 The FOMC would prefer to decelerate the pace of rate hikes, but the data permits them to do so. Lately, the data the FOMC uses as critical inputs for its decision-making process has shown signs of an overheated labour market and intense wage pressures. Hence this week's inflation report seems very unlikely to offer "compelling evidence" of a slowdown needed for the Fed to pull away from its aggressive inflation-fighting mode.

Oil

Brent has fallen to a 6-month low, with analysts struggling to produce a satisfactory explanation when investors ask why. 

The broader market sentiment has turned negative on recession risk, leading to growing concerns about oil demand. The base case for most commentators is that demand growth will slow globally, and demand destruction is not happening. The broader market is seeing fewer signs of stagflation. NFP was up 528k, consumer spending looks strong, and few signs of consumer demand destruction from the hawkish Fed.

Still, there have been several bearish headlines recently, Chinese officials downplaying the 5.5% GDP target, US inventory data showing a crude build and weaker product demand, and renewed efforts to revive Iran nuclear talks, but nothing that has triggered a change in oil fundamentals that would explain a price drop of this magnitude. 

On the bullish side, last week's OPEC+ meeting is confirmation of OPEC/Saudi unwillingness to respond to US pressure for an increase in production. Still, renewed speculation about where OPEC sits is heightening volatility.

' OPEC-10 production is ~1mb/d below quota, with OPEC+ ~2.8mb/d, and even if the spare capacity figures are accurate, there are valid concerns about the pace at which production can ramp up from here.

Saudi Arabia's raised OSPs, and they will not raise prices if demand is not there, suggesting market tightness. 

In addition, we have not yet seen the complete supply impact of western sanctions on Russian oil. Most of Europe and the US have not bought has found its way to India and China. Still, there could be a significant drop next year, particularly if sanctions expand to include restrictions on shipping and insurance. 

We are grasping at straws here as traders still do not have a quantitative or qualitative answer beyond the fact that sentiment has turned negative to explain this month's dive in the plunge tank. And trying to anticipate sentiment shifts rather than relying on macro data for trend analysis makes it difficult to estimate where prices will stabilize and how soon. Still, the market structure seems more sensitive to bad news than good news for now.

This year's estimates for oil prices range from Brent $50 to $115; hence, it appears the market is pulling numbers out of a hat to determine price forecasts.

Forex

JPY

The Yen has been volatile in recent trading sessions, especially since the July FOMC, its weakness leading up to mid-July surprised expectations for JPY strength on growing US recession risks. However, when looking at various periods of risk-off in markets, it is clear that the direction of rates is a crucial determinant of the path of USDJPY. Hence  JPY should remain tethered to the hip of 10-year US yields and how they react to this week's US inflation print.

THB

Brighter outlook ahead on tourism rebound, dip in oil and lower freight shipping costs. The number of foreign tourists in H1 exceeded BoT's expectation, notably in Q2, given the faster-than-expected relaxation of inbound travel and return quarantine restrictions globally.

 The Thai Baht has depreciated almost 7% against the USD YTD and has underperformed several NJA currencies (on a spot basis), primarily driven by divergent monetary policies between the US Fed and the BoT. 

However, we expect the BOT to start normalizing policy with a 25bp hike on the 10th of August MPC meeting, followed by a 25bp hike at the subsequent meetings until the policy rate reaches 2.5%.