Good morning

As Nord Stream will likely be turned back on but uncertain as to what extent, the Dutch TTF natural gas price is up 5% to 162 after falling by 3% yesterday when it was said it would pipe some gas again hopefully starting tomorrow. This equates to about $52 per mmBTU vs the US price today at $7.30. The euro is down a touch after 3 days of gains and European bourses went negative again at around 6:30am. No need to state the obvious the extreme damage that will be done to German industry if they don’t get enough natural gas, the low cost feedstock they so desperately rely on.

Dutch TTF

As we progress through more earnings reports, there remains a high confidence on the part of some CEO’s that we will not enter a recession in that what many see right now, according to them, don’t point to it (even though CFO surveys seen more concerning). The bank CEO’s in particular have been pretty optimistic over the past week. In yesterday’s JB Hunt’s earnings call, an executive said “We have had concern from customers on inventory, having the wrong inventory, and where it is located, but I’ve not heard any customers tell us that there’s a downturn coming or anything to plan for.” I will say that a recession is not an event, it is a progression of business activity that slows over time and culminates in higher unemployment and a recession and why pinpointing the exact moment is never easy. With respect to the employment story, I need to remind people that recessions start soon after it bottoms, and expansions begin soon after it tops. I heard Fed Governor Waller last week who said he couldn’t imagine how a recession can start with the unemployment rate at just 3.6%. I encourage him to look at history.

With the average 30 yr mortgage rate ticking back up to 5.82% from 5.74%, mortgage apps fell again. Purchases declined for a 3^rd straight week, by 7.3% and are lower by 19% y/o/y. Refi’s dropped by 4.3% w/o/w and by 80% y/o/y. We clearly know what’s going on in the housing market so no need to add much here other than to say demand continues to slow sharply. The purchase component in particular is at the lowest level since April 2020.

Purchases

Tomorrow the ECB will be nonsensically debating on whether they should hike rates by 25 or 50 bps to either keep them below zero or taking it to exactly zero. At the same time Germany today said PPI was up 32.7% y/o/y, though a touch below the estimate of up 33.7%. Prices were still up 15.5% y/o/y ex energy. As the number was about as expected, however painful, the German 10 yr inflation breakeven is unchanged at 2.12%. The 5 yr is unchanged too at 2.54% and was as high as 3.47% back in April.

German PPI y/o/y

After BoE Governor Andrew Bailey yesterday said they could hike 50 bps in August instead of 25 bps, UK CPI in June seen today was up 9.4% y/o/y, one tenth more than anticipated and a fresh 40 yr high with a core rate of up 5.8% as expected. The retail price index, which is used to price inflation linkers, was up 11.8% y/o/y. PPI input prices jumped 24% and output charges grew by 16.5%, both just above expectations. The main here is two fold. Consumers are seeing sharply falling real wages and corporate profit margins are getting squeezed. There is little change in UK inflation breakevens and the pound is down a hair after a 3 day winning streak.

Ahead of tonight’s BoJ meeting, the 10 yr JGB yield closed just under .25% and the 40 yr yield which I always watch was up 2 bps at 1.47%, a few bps from a 6 1/2 yr high. The yen is unchanged. I don’t expect Kuroda to make any changes but will certainly be curious what he says on how he will balance yen weakness with his continued obsession with 2% inflation and keeping YCC intact.