Drivers for the Week of July 17, 2022

July 17, 2022
Here's a look at the main drivers in Developed Markets this week.

The dollar continues to gain.  Friday’s relief rally was fueled by the notion that the Fed would hike rates “only” 75 bp this month rather than 100 bp.  That said, recent data suggest the Fed still has a long ways to go in terms of tightening.  Contrast this iwth the rest of the world, where many countries are struggling to avoid recession.  From a relative value standpoint, the dollar remains king.


Markets are still digesting the inflation data for June. Headline inflation came in at 9.1% y/y vs. 8.8% expected and 8.6% in May. The only ray of hope was that core inflation decelerated for the third straight month to 5.9% y/y, the lowest since December. This suggests that the Fed’s preferred measure core PCE may do the same. That said, the Fed realizes that headline is what really counts for the average household and so the aggressive tightening cycle will continue. Period.

Fed tightening expectations have picked up. WIRP suggests a 75 bp hike at the next meeting July 27 is now fully priced in, with 70% odds of a 100 bp move. A 75 bp hike September 21 is now also fully priced in, followed by 25 bp November 2. One last 25 bp hike December 14 is about 50% priced in, which would take the Fed Funds ceiling up to 3.75%. Of note, WIRP then suggests the beginning of an easing cycle by Q1 23. Similarly, the swaps market is now pricing in 200 bp of tightening over the next 6 months that would see the policy rate peak near 3.75%, followed by the start of an easing cycle over the subsequent 6 months. This is a much earlier timeframe for easing and one that we think is very, very premature since it would imply a recession hitting the U.S. near the end of this year or early next year.

As of midnight last Friday, the Fed’s media blackout went into effect. There will be no more Fed speakers until Chair Powell’s post-decision press conference July 27. Ahead of the blackout last week, Fed officials implied that nothing was off the table after the CPI report. Bostic said “everything is in play” while Mester said there was no reason for a smaller hike. Daly said 75 bp was her “most likely posture.” Of note, the Fed’s Beige Book released last week noted that price increases remained “substantial” across the nation in recent weeks, though some regions saw signs of cooling inflation.

The slope of the U.S. yield curve is getting more concerning. Faithful readers will know that we focus on the 3-month to 10-year curve, which until very recently was quite steep. As recently as early June, this curve was near 185 bp but has since fallen to 67 bp, the flattest since October 2020. Yes, the 2- to 10-year curve has already inverted and we acknowledge that the 3-month to 10-year curve may follow it into inversion. However, it is not a sure thing.

Housing data take center stage this week. July NAHB housing market index will be reported Monday. June building permits and housing starts will be reported Tuesday. Existing home sales will be reported Wednesday.

Regional Fed manufacturing surveys for July will continuing rolling out. Philly Fed reports Thursday and is expected at 1.7 vs. -3.3 in June. Last week, the Empire survey came in at 11.1 vs. -1.2 in June. S&P Global also reports its preliminary July PMI readings Friday. Manufacturing is expected at 51.0 vs. 52.7 in June, while services is expected at 52.0 vs. 52.7 in June. If so, the composite PMI would fall sharply from 52.3 in June.

Canada highlight will be June CPI data Wednesday. May retail sales Friday will also be important. The Bank of Canada surprised markets with a 100 bp hike to 2.5% last week vs. 75 bp expected. WIRP suggests a 75 bp hike to 3.25% is nearly 75% priced in. Looking ahead, the swaps market is pricing in 125 bp of tightening over the next 6 months that would see the policy rate peak near 3.75%. Similar to what’s priced in for the Fed, the swaps market sees the BOC starting an easing cycle over the subsequent 6 months.


The European Central Bank is meets Thursday and is expected to hike rates 25 bp. Despite some hawks calling for a 50 bp hike, it seems clear that the bank will opt for a more cautious move. Updated macro forecasts won’t be released until the September 8 meeting. As usual, Madame Lagarde’s press conference is likely to provide the fireworks, whether good or bad. We know that the divide between the hawks and doves remains wide. A 50 bp hike is fully priced in for the next meeting September 8, with some odds seen of a 75 bp move. Expected moves at the subsequent meetings October 27 (50 bp) and December 15 (25 bp) would see the deposit rate near 1.0% at year-end. Looking ahead, the swaps market is now pricing in 200 bp of tightening over the next 12 months that would see the deposit rate peak near 1.5%.

The ECB is also expected to reveal some more details about its new anti-crisis tool. As always, we are braced for disappointment but perhaps the ECB will surprise us. As things stand, it’s very apparent that there is the usual split between the debtor and creditor nations. Bundesbank President Nagel has made it clear that the creditors remain reluctant to write a blank check to the debtors. As a result, it seems likely that the Governing Council will be unable to agree on the trigger and conditionality for the planned anti-crisis tool.

Preliminary eurozone July PMI readings will be reported Friday. Manufacturing is expected at 51.0 vs. 52.1 in June, services is expected at 52.0 vs. 53.0 in June, and the composite PMI is expected at 51.0 vs. 52.0 in June. Looking at the country breakdown, the German composite is expected at 50.4 vs. 51.3 in June and the French composite is expected at 51.1 vs. 52.5 in June. Italy and Spain will be reported with the final PMI readings out in early August.

Italian politics remain in flux. Prime Minister Draghi offered his resignation last week after the Five Star Movement boycotted a confidence vote in the Senate that was tied to an economic package meant to help households and businesses cope with higher inflation. He said “The loyalty agreement that was the foundation of my government has gone missing. The majority of national unity that backed this government since it was set up is not there anymore.” Conte’s Five Star Movement is the second-largest group in parliament but has seen its support plunge in recent months. If push comes to shove, we suspect it will try to avoid snap elections. President Mattarella turned down Draghi’s resignation. He could eventually call for a confidence vote that is not tied to any particular bill.

The monthly U.K. data dump continues. Labor market data will be reported Tuesday. June CPI data will be reported Wednesday. Public sector net borrowing will be reported Thursday. Retail sales will be reported Friday. Preliminary July PMI readings will also be reported Friday. Manufacturing is expected at 52.0 vs. 52.8 in June, services is expected at 54.0 vs. 54.3 in June, and the composite PMI is expected at 52.5 vs. 53.7 in June.

Bank of England expectations have eased as the headwinds pile up. WIRP suggests a 50 bp hike move at the August 4 meeting is fully priced in. 50 bp hikes are priced in for the subsequent meetings September 15 and November 3, followed by 25 bp December 15. Looking ahead, the swaps market is pricing in 175 bp of tightening over the next 6 months that would see the policy rate peak near 3.0%.

The U.K. political outlook appears to be solidifying. After the second round vote for the Tory leadership, Sunak and Mordaunt are emerging as the frontrunners with 101 and 83 votes, respectively. Truss came in third with 64, while Braverman and Badenoch were knocked out. Polls suggest Mordaunt would beat all the contenders in head to head match ups, while Truss is surely disappointed by her third place standing. There will be lots of horse-trading in the coming days and so the situation is very fluid. The third round will be held Monday, while the final two candidates should be in place by Thursday. Parliament then goes on summer recess, the final two make their case to Tory members over the subsequent six weeks, and the winner will be announced September 5.


The two-day Bank of Japan meeting ends Thursday with a decision. No change is expected for any of the bank’s policy settings. Updated macro forecasts will be released but are unlikely to signal any shift from its current ultra-dovish stance. The weak yen is likely to get a mention of concern but the pace of weakening has slowed in recent weeks. USD/JPY rose nearly 6% in March, nearly 7% in April, fell 1% in May, and rose 5.5% in June. So far in July, the pair has risen about 2%. In FX, it’s typically more about the pace than any particular level. That said, once we get to the psychological 140 level, there is not much until the August 1998 high near 147.65.

Japan also reports some key data. June trade data and machine tool orders will be reported Thursday. June national CPI data will be reported Friday. Headline is expected to fall a tick to 2.4% y/y, while core (ex-fresh food) is expected to pick up a tick to 2.2% y/y. Core ex-energy is expected to pick up a tick to 0.9% y/y. Preliminary July PMI readings will also be reported Friday.

New Zealand reports Q2 CPI Monday. Headline is expected at 7.1% y/y vs. 6.9% in Q1. If so, it would be the highest since Q2 90 and further above the 1-3% target range. Reserve Bank of New Zealand just hiked rates last week 50 bp to 2.50% and said “The Committee agreed to maintain its approach of briskly lifting the OCR until it is confident that monetary conditions are sufficient to constrain inflation expectations and bring consumer price inflation to within the target range.” WIRP suggests a 100 bp hike August 17 is about 60% priced in. The swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 4.0% followed by steady rates over the subsequent 6 months. The start of an easing cycle would be some time over the following 12 months.

Reserve Bank of Australia minutes will be released Tuesday. At that meeting, it hiked rates 50 bp to 1.35%. Updated macro forecasts won’t come until the August 2 meeting, but it’s worth noting that last week’s jobs report came in much stronger than expected, with the unemployment rate falling to a record low 3.5%. WIRP suggests a 50 bp hike is fully priced in for next month, followed by another 50 bp hike September 6. The swaps market is pricing in over 200 bp of tightening over the next 12 months that would see the policy rate peak near 3.5%. Preliminary July PMI readings will be reported Friday.

More from Mind on the Markets

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022 All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction