Rates Spark: The plot thickens

Rates Spark: The plot thickens

ING Economics ING Economics 16.08.2022 15:53
If you think the US doesn’t face enough policy challenges, try Europe. We doubt European markets would react well to either a more hawkish or more dovish European Central Bank. Curve flattening, and lower Bund yields, is our base case for now A European recession is now part of the economic consensus Goldilocks doesn't travel well to Europe... The struggle by the Fed to tighten back financial conditions as markets perceive a pivot around the corner should not distract from the even greater policy challenge faced by the ECB. As our economics team noted, adverse news are raining thick and fast on the eurozone, unlike the water needed to bring up the Rhine River levels. A European recession is now part of the economic consensus. It is no longer a question of if, nor of when, but of how bad things will get over the winter months. Swaps are pricing inflation under control in the US, but surging in Europe Source: Refinitiv, ING   In a related development, eurozone inflation expectations, as priced by swaps, have further diverged from their US equivalent. Whilst this probably owes in large part to higher energy prices, this throws an even greater policy challenge to the ECB. Even if it hikes 50bp in September, the meeting and accompanying forecast should see it finally acknowledge the dismal economic prospects facing the eurozone. Call that taking a leaf out of the Bank of England’s playbook. Even if it persists in seeing the world through pink-tinted goggles, European markets will struggle to see that glass half full. European markets will struggle to see that glass half full Indeed, the ECB faces the unenviable task of choosing between tightening financial conditions to fight an inflation problem it is ill-equipped to resolve, or to stand pat in the face of higher-than-expected inflation. As the Fed’s experience has shown, perception of a more dovish central bank (aka a pivot) can actually result in higher inflation expectations, higher rates volatility, and higher long-end rates – hardly a favourable backdrop for risk sentiment. ... and she has some questions about Bund valuations At this stage of its hiking cycle, it is possible that the ECB continues to bang the hawkish drum in order to salvage some inflation-fighting credibility. The US experience suggests that the curve should flatten on such headlines. The difference is that the ECB is earlier in its hiking cycle, and that inflation risks being stickier than in the US. This in turn could make ECB hawkish sound bites more credible to markets. 10Y Bund rallying to 0.6% would also see the curve flatten further Source: Refinitiv, ING   Risk aversion will continue to exert downward pressure on long-end yields, resulting in a further flattening Will this propagate to higher long-end rates? Possibly, but we think the burden of proof lies with those arguing for a change in market dynamics. For now, we think risk aversion will continue to exert downward pressure on long-end yields, resulting in a further flattening. The counter argument is whether all the bad news is already in the price. Bunds travelled back to 1% last week temporarily and a bottoming out of the Zew expectations today could indicate that peak negativity has been reached. Still, our Bund yields forecast for early 2023 is 0.6% as it seems too early to argue that eurozone recession fears are already priced in. Today's events and market view The Zew survey of investors offers, as always, a read on market sentiment early in the month of August. Bloomberg consensus has the widely-followed expectations component stabilise at low levels. This comes after a week where bonds struggled to rally despite a steady drumbeat of bad economic headlines, begging the question of how much bad news is in the price already. Germany kicks off this week’s front-end focused supply slate (the next item is France on Thursday) with a €4bn 5Y auction, adding a technical short-term driver to our curve flattening view. US data releases feature housing starts and building permits, both important gauges of the housing sector health, and thus of how much will the shelter component of the CPI decline in the coming year. The National Home Builders Association’s survey released yesterday clearly point to more weakness. US industrial production will be the last data point for the day. Read this article on THINK TagsRates Daily Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Oh My! Commodities Prices Are Affected By Stronger USD (US Dollar) And Chinese Data

Oh My! Commodities Prices Are Affected By Stronger USD (US Dollar) And Chinese Data

ING Economics ING Economics 16.08.2022 15:43
Commodities have come under pressure. Poor macro data from China and a rebound in the USD have weighed heavily on the complex. Specifically for oil, the prospect of an Iranian nuclear deal is certainly not helping   Energy - edging closer to a nuclear deal Oil is under further pressure. ICE Brent settled more than 3% lower yesterday, whilst WTI broke below US$90/bbl. This weakness has carried through into early morning trading today. Weaker than expected Chinese data has raised demand concerns once again, not just for oil, but for the broader commodities complex. As mentioned in yesterday’s note, refinery activity in July fell to its lowest levels since March 2020, whilst apparent demand was down around 10% YoY. These demand concerns have coincided with a recovery in the USD, which surged yesterday. Prospects of an Iranian nuclear deal have only weighed further on the market. Iran has reportedly responded to the EU’s proposal for a resumption of the Iranian nuclear deal. And the Iranians expect to receive a response in the next couple of days. The Iranian foreign minister is of the view that a deal could be reached in the next few days, although it will require some ‘flexibility’ from the US. As for the US’ stance, they will reportedly relay their views directly to EU negotiators. A revival of the deal and lifting of oil sanctions could potentially see Iran increasing oil supply in the region of 1.3MMbbls/d over time, which would help to ease some of the expected tightness in the oil market over 2H23. While the short term outlook appears more negative, the longer term outlook is still somewhat constructive. US drilling activity is increasing, although the pace has been slower than we have seen in previous upcycles. US producers still seem to be relying on drilled but uncompleted wells (DUCs). The latest drilling productivity report released by the EIA yesterday shows that DUC inventory fell by 20 over July, to leave the total number of DUCs at 4,277- the lowest since at least December 2013. We have seen 25 consecutive months of declines in the DUC inventory, falling by 4,530 over that period. US producers have relied on DUCs to sustain production post Covid, however, given the low inventory, producers will be unable to rely on DUCs moving forward, instead we will need to see a further increase in drilling activity.   Hot weather in Europe has provided a boost to European natural gas prices. TTF settled almost 6.8% higher yesterday, whilst prices hit EUR230/MWh at one stage yesterday- levels we have not seen since early March. However, European gas storage continues to edge higher, reaching almost 75%, which is in-line with the 5-year average and well above the 62% seen at this stage last year. Assuming we do not see any further reductions in Russian gas flows, the EU should hit its target of having storage 80% full by 1 November. However, that is a big assumption to make in the current environment. Metals - power shortages in Sichuan province The announcement of an interest-rate cut from the People's Bank of China (PBoC) failed to stop a slide in the metals complex yesterday. Instead market participants continue to be concerned about the demand outlook, following the latest poor economic data from China, as well as the domestic Covid situation. A stronger USD only applied further pressure to metal markets. Whilst there are clear demand concerns, supply risks are growing. Sichuan province in China has ordered some industrial plants to halt activities from 15 August until 20 August, as heat waves have led to power shortages. The region has been struggling with high temperatures and dry weather since July, and relies heavily on hydro for power generation. According to the Shanghai Metals Market, around 390ktpa of capacity in Sichuan province has been affected by the power shortages. Turning to ferrous metals, the SGX’s most active iron ore contract fell close to 4% yesterday, given the weaker macro data from China. The latest data from the National Bureau of Statistics shows that crude steel output fell 6.4% YoY to 81.43mt in July, as demand from the property sector continues to worsen. Cumulatively, output fell 6.4% YoY to 609.3mt over the first seven months of the year. Shandong province (the third largest steel producing hub) in East China, plans to cap steel output at around 76mt in 2022, slightly lower than the 76.5mt produced last year. Agriculture - Russian grain exports off to a slow start The latest numbers from the Russian Grain Union shows that Russia exported 4.67mt of wheat in the season that began on 1 July, down 13% compared to a year earlier. It is also estimated that the number of nations buying Russian wheat has reduced from 43 a year ago to just 23. Total grain exports declined 12% YoY to 5.6mt over the same period. The USDA’s latest weekly crop progress report for the US shows that 90% of the winter wheat crop was harvested as of 14 August, compared to 86% a week ago and 97% at the same stage last season. For corn, the USDA rated 57% of the crop in good-to-excellent condition, down from 58% a week ago and 62% last year. 58% of the soybean crop was rated good-to-excellent, marginally down from 57% last year. Read this article on THINK TagsRussia Power shortages Oil Iran nuclear deal Aluminium Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
How Could Funds Rate React To The Expected (50bps) Fed Decision?

How Could Funds Rate React To The Expected (50bps) Fed Decision?

ING Economics ING Economics 16.08.2022 15:36
Since April the Federal Reserve has hiked by 200bp, but over the same period financial conditions have improved, bringing them back to where they were in April. Why? Market rates have fallen and credit spreads have narrowed, especially since June. This must reverse. Else the Fed has no choice but to get tougher. Another reason for the US 10yr to re-test 3% US financial conditions have loosened so much it looks like we're back to square one Long before the Federal Reserve started to hike in March this year, US financial conditions had moved from being ultra-loose around the turn of the year to being reasonably tight just before that first hike. In effect the market was doing the tightening for the Fed ahead of their first hike.   Measured in terms of standards of deviations away from the mean, financial conditions moved from +1 (ultra loose) to -0.5 (reasonably tight). They then tightened more as market rates continued to rise, credit spreads tightened and the dollar strengthened. By end-June, US financial conditions were at -1.5 (very tight). But since then, financial conditions have loosened. They are now at -0.2, which is only moderately tight (after months of official tightening)!   US financial conditions have in fact loosened in an impressive manner since early July, so much so that they're now back to where they were in February (and briefly again in April). But here's the thing. Since April the Fed has delivered 200bp in rate hikes, with the implied purpose of tightening financial conditions. We're not quite back to square one, but this looks quite odd all the same. In a sense, the financial markets have undone the tightening down by the Federal Reserve since they started to get serious with out-sized hikes. Why? Two reasons (graphs below). 1. We’ve been generically risk-on in the past six weeks, with credit spreads well off their highs and still tightening, and 2. Market rates have fallen (from 3.5% in June, the US Treasury yield almost got to 2.5% before backing off). Given that the Fed wants financial conditions tighter (else why hike), this combination can’t continue. The loosening in financial conditions that needs to be reversed Source: Macrobond, ING estimates Expect financial conditions to re-tighten in the weeks and months ahead. After all that's what the Fed wants and needs Between now and the 21st September FOMC meeting, and assuming no material change from the prognosis of easing but sticky underlying inflation, the Fed will be hoping that financial conditions re-tighten. That way they can ratify the tightening with a hike. Else the Fed will be left with the less comfortable position of coaxing tighter financial conditions, whether through the verbal or policy action route. When the Federal Reserve hikes on 21st September (we think by 50bp), it will bring the effect funds rate to a level that is practically flat to where the US 10yr Treasury yield currently trades at today. From there things get interesting. In all probability the Fed needs to do more; we think they get to 3.5% to 3.75% by year end. As we noted in a previous piece (here), the 10yr yield can trade through the fund rate, but will only sail through it when the funds rate has actually peaked. Specifically, the 10yr yield should not trade more than 50bp through the fund rate unless the funds rate has peaked. In fact typically it would tend to be no more than 25bp through pre the peak, and once the funds rate has peaked, then the 10yr can get as far as 150bp through. But the funds rate has not peaked as of yet, so the 25-50bp range through the funds rate is where the extreme should be. That also places upward pressure on market rates. Look for the US 10yr to head back above 3%, even on a slowdown So, if the Fed is heading to 3.5% or higher, that must put upward pressure on the 10yr Treasury yield in the months ahead. We maintain our view that the US 10yr needs to get back to a 3% handle, and in fact it could hit 3.25% given the Fed ambition (our view of their ambition) to get the funds rate north of 3.5%. The risk asset environment will have to re-calibrate too. Implicit in the notion of tighter credit spreads is a discount for a more tame financial environment and a reduction in recession, and by extension, default risk. The thing is if inflation does not fall fast enough the Fed will feel emboldened to continue to hike even as the economy creaks, re-heightening the recession / default risks that lie ahead. And further loosening in fincnaical conditions places even more presssure on the Fed to act as an offset. Better then for financial market to anticipate this, and move in a direction that re-tightens financial conditions. Apart from higher market rates, that also includes widening pressure on credit spreads. The signaling for that can come from a higher interest rates narrative; one that is deemed persistant till the job is one. The idea of a seemingly never ending sequence of hikes from the Fed and a ratcheting higher in market rates can be enough to dampen the enthusiam in risk asset space.   We are attempting to thread a very tight needle here in the sense that we have also called the top for the US Treasury yield at 3.5% (here); the level hit in mid-June. The factors that drove that call remain in play, as the 5yr now has a persistent richness attached to it (classic turning point tendency) and inflation expectations have calmed and remain well down from where they were. So the call remains that 3.5% was the peak. The fall in rates since then made sense. But the threat of the move below 2.5% was too far too fast. And we have since been calling for the 10yr to head back up to a 3% handle (and potentially extend to 3.25%). Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Lisk (LSK): Introduction And Potential. How Does Lisk Work?

Lisk (LSK): Introduction And Potential. How Does Lisk Work?

Binance Academy Binance Academy 16.08.2022 15:30
TL;DR Lisk is an open-source blockchain application platform that improves Web3 accessibility for developers and users. It offers a simple-to-use software development kit (SDK) that enables developers to build blockchain applications using JavaScript, one of the most widely used programming languages. Lisk is designed to eventually allow developers to deploy sidechains onto their network, so that their blockchain applications can scale while staying connected to the wider Lisk ecosystem.   Introduction One of the major challenges blockchain technology faces in the Web3 era is the lack of accessibility. Different blockchains use a variety of programming languages, which makes it difficult for developers to build applications that can be flexibly used across multiple platforms. What is Lisk? Lisk is an open-source, layer-1 blockchain application platform that aims to help projects onboard users into the crypto and Web3 space. Through its easy-to-use SDK, developers can build scalable blockchain applications easily. The metaverse projects, DAOs, NFT marketplaces, and many other applications they create can also offer faster transaction speed at lower fees for users.   How does Lisk work? Lisk was founded in 2016 by Max Kordek and Oliver Beddows. It focuses on improving Web3 accessibility for developers and users. Some of Lisk’s main features include:  Delegated Proof of Stake (DPoS) Lisk uses the Delegated Proof of Stake (DPoS) consensus algorithm to secure the blockchain. DPoS is considered a more efficient and democratic version of the popular Proof of Stake (PoS) mechanism. It allows validators to outsource the block validation through a voting system. On the Lisk blockchain, voters can use their LSK tokens to vote for a maximum of 10 delegators to secure the network on their behalf and share the LSK rewards among them. Generally, a delegator with more votes is more likely to be selected to generate the subsequent blocks. Since the process is distributed among 100+ delegated validators, Lisk can operate in a fairly decentralized manner. It also enables the network to achieve scalability and increase its transactions per second (TPS) rate.  The Lisk SDK A unique feature of Lisk is its software development kit based on JavaScript, one of the world’s most widely-used programming languages. Popular blockchain networks often rely on different languages. For example, Bitcoin (BTC) uses C++, while Ethereum is built on Solidity. Unless they have a strong command of several languages, it can be challenging for developers to interact with different blockchains.  Lisk’s solution to this is an open-source and modular SDK on JavaScript to make blockchain and Web3 universally accessible to a broader range of developers. Using a very common programming language removes the hurdle for those new to building blockchain applications. Newcomers can start building using JavaScript and TypeScript immediately, without having to invest time and effort in learning blockchain-specific languages.  Furthermore, after the launch of the prospective Lisk Platform, developers will be able to leverage the Lisk SDK to implement their applications on sidechains instead of smart contracts. The sidechains’ interoperability will enhance scaling and keep transaction fees minimal. The Lisk SDK is also expected to support the development of NFTs, P2P, and Proof-of-Authority (PoA) modules. Scalable sidechains To facilitate interoperability between all application-specific blockchains in the network, Lisk is building the Lisk Platform, which is designed to allow developers to build scalable applications with greater autonomy and flexibility on sidechains. Sidechains are separate blockchains that connect to the main chain. On Lisk, developers will be able to deploy their own sidechains to scale their blockchain applications and offer lower transaction fees and greater TPS. Sidechains will communicate with one another directly through cross-chain messages. This interoperability is expected to ensure smooth asset exchange between sidechains and the main Lisk blockchain.  The Lisk team is working on expanding its ecosystem by facilitating interoperability with other layer-1 blockchains and protocols, such as Ethereum (ETH), Polkadot (DOT), and Cosmos (ATOM). The vision is for users to benefit from a growing ecosystem of apps interconnected through Lisk bridges.   What is LSK? Lisk (LSK) is the native cryptocurrency and utility token of Lisk. It is used to pay transaction fees and reward delegators on the network. LSK holders can also use the token to secure the Lisk network through DPoS. They can stake their LSK tokens in the Lisk Desktop wallet to vote or delegate, and the tokens will be locked for as long as the user is performing either of these roles.  LSK’s utility is expected to grow, with more use cases emerging as the Lisk network achieves interoperability with other blockchains. For example, LSK could be used for registering blockchain applications or transferring messages between different applications.    How to buy LSK on Binance? You can buy the Lisk token (LSK) on cryptocurrency exchanges like Binance.  1. Log in to your Binance account and click [Trade] - [Spot]. 2. Search “LSK” to see the available trading pairs. We’ll use LSK/BUSD as an example. 3. Go to the [Spot] box and enter the amount of LSK to buy. In this example, we will use a Market Order. Click [Buy LSK] and the purchased tokens will be credited to your Spot Wallet. Closing thoughts Many believe that one of the key components to achieving the mass adoption of Web3 is to make blockchain technology more widely accessible. With projects like Lisk, more developers can build blockchain applications easily using coding languages they’re already familiar with. At the same time, users can benefit from a growing ecosystem of interconnected applications with faster transactions at lower fees. Source: What Is Lisk (LSK)?
Czech Republic: Lower financing needs than MinFin expects, but still a lot to cover

Czech Republic: Lower financing needs than MinFin expects, but still a lot to cover

ING Economics ING Economics 16.08.2022 15:29
We expect this year's deficit to be lower than MinFin forecasts, implying lower financing needs. On the other hand, MinFin still needs to cover an unusually large part of its needs by the end of the year. Bond supply should remain high in coming months, resulting in government bonds cheapening in ASW terms. Spreads should remain wider than in previous years Czech Republic Ministry of Finance building in Prague Fiscal policy again suggests a happy ending The state budget reported a deficit of CZK192.7bn (2.8% of GDP) in the January-July period. Although total revenues are below the current plan, tax revenues are higher by CZK17.3bn. EU inflows, on the other hand, are well below plan, but this should be offset in the coming months. On the tax side, the details show that all items except excise are above the Ministry of Finance's (MinFin) expectations. On the expenditure side, the overall picture is basically balanced compared to the government's plan. Current expenditure is slightly higher but mainly due to the prefinancing of the transfer to municipalities. On the other hand, investment is lower than planned in the middle of the year, which should be compensated for in the coming months. In nominal terms, however, it is the highest on record. We project a general government deficit of 4.1% of GDP this year and 3.3% of GDP next year So the overall picture looks good given the conditions, and it is all the more interesting because the government recently approved an increase in the planned deficit from CZK280bn (4.1% of GDP) to CZK330bn (4.9% of GDP) and the proposal is expected to be approved by the Chamber of Deputies in the coming weeks. The government's draft increases spending mainly related to rising energy prices while boosting expected tax revenues. However, as every year, we believe the spending plan will not be met and tax revenues have room to outperform the updated MinFin estimate. Moreover, the CZK7.6bn on the expenditure side should serve as a buffer for any unexpected expenses. Thus, overall, we retain an optimistic bias and expect this year's general government budget to show a deficit of CZK310bn (4.6% of GDP). Combined with the surplus of municipalities and the balanced performance of social security funds, we project a general government deficit of 4.1% of GDP this year and 3.3% of GDP next year. Czech state budget (CZKbn) Source: MinFin, ING forecast Czech government bond supply should remain strong despite seasonality On Friday, MinFin published an update of its funding strategy based on the approved state budget adjustments. As expected, this change has moved the projections of this year's financing needs to CZK595.8bn. Given our fiscal policy forecast, we see slightly lower financing needs of CZK575.6bn (8.5% of GDP). According to our calculations, MinFin has covered roughly 72% of all financing needs since the beginning of the year. CZK70.5bn matures in September, however, we believe MinFin has covered this by issuing T-bills, which have been rolling over since the beginning of the year. Thus, the rest of the CZK needs will be purely driven by the state budget developments over the rest of the year. However, MinFin covered significantly less of its needs in the first half compared to previous years and after a long time, we should see solid Czech government bond supply (CZGB) in the second half of the year as well, which we believe reflects the Czech National Bank hiking cycle. MinFin significantly shortened the maturity of the offered bonds from the average maturity of 12y+ in January to 4.5y in June due to the decreasing demand in the first half of the year. However, demand has come back with average bid/cover back above 2, and MinFin will thus look to extend the average maturity of its portfolio again from the current 6.4y closer to or above its 6.5y target, we believe, which implies supply mainly in the 8-10y segment. 72% Covered financing needs ING estimate Pre-financing as an opportunity for EUR issuance under local law We also estimate that this year's EUR needs of CZK3.4bn were covered by a combination of EUR issuance under local law, money market loans and loans from supranational institutions. However, part of this financing is likely to mature in the first half of the next year, which we expect MinFin to try to prefinance later this year with at least EUR2bn. In our view, the number one option for MinFin remains to issue euro-denominated CZGBs under local law. Technically, it can use the current issues (2y and 5y), which each offer EUR1bn of free limit, to do so. However, MinFin can be expected to introduce a new issue to further expand this new market. Total financing needs (CZKbn) Source: MinFin, ING forecast Technicals: Strong inflows despite worse rating outlook Fitch downgraded the outlook from stable to negative for the Czech Republic in May and Moody's did the same in August. In both cases, the main reason was the Czech Republic's energy dependence, which is one of the highest in the region, and its impact on fiscal indicators in case of supply problems. Given the earlier views of the rating agencies, the deterioration in the outlook is not surprising. A similar move can be expected from S&P in October. However, we do not expect a downgrade in the rating itself. In general, we expect better development of fiscal indicators and a full cut-off from Russian gas is not our baseline at the moment, but it is necessary to keep an eye on this issue. During the summer months, MinFin has been silent on the secondary market, but given the financial needs, we expect activity to pick up in September, especially in taps. Currently, MinFin has around CZK100bn of CZGBs in its portfolio with the largest holdings of CZGB 1.75/32, CZGB 3.50/35 and CZGB 0.00/24 expected to circulate in the taps. In the GBI-EM space, we don't see much of a story for the coming months. Pretty much all eligible bonds are included in the index at this point except CZGB 1.95/37 and CZGB 4.85/57. However, there are currently four bonds in the 10y+ maturity bucket, so we don't see much chance of the remaining bonds being included in the index. In case of exclusion, the first candidate is CZGB 0.45/23, however, this is not an issue until March next year. Foreign bond holders in CEE (%) Source: Macrobond, ING   As of June, the proportion of foreign holders of CZGBs has fallen to 28.6%, slightly above the average for this year, but still confirms the trend of a long-term decline from levels above 40% three years ago. However, in relative terms, the Czech Republic remains the highest in the region. In nominal terms, foreign holdings are stagnant, but debt growth has been covered mainly by domestic banks. But, over the past two months, we believe the trend has changed and the peak hiking cycle has attracted foreign buyers across the Central and Eastern European region, which should be reflected in official numbers soon. CZGB 10y ASW (bp) Source: Macrobond, ING Market view: CZGBs cheapening should continue After a massive tightening of the asset spreads vs IRS curve due to strong buying interest, CZGBs finally saw some relief. However, spreads still remain tighter than would be consistent with previous years and the normal seasonal pattern. Although we expect lower financing needs than MinFin for this year, there is still an unusually large amount to cover by the end of the year. Supply will thus remain elevated in the months ahead. Therefore, we expect CZGBs to get even cheaper in ASW terms and spreads to remain wider compared to previous years. Read this article on THINK TagsCzech Republic government bonds Czech Republic financing Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Could Unemployment Rate In The UK Increase In The Near Future?

Could Unemployment Rate In The UK Increase In The Near Future?

ING Economics ING Economics 16.08.2022 15:09
The latest UK jobs numbers present a complicated picture for the Bank of England. Job vacancies are falling but labour supply issues remain a challenge, even if there are some encouraging signs that migration is starting to recover. We expect another 50bp rate hike in September, even if the Bank is nearing the end of its tightening cycle The number of people inactive in the jobs market – neither employed nor actively seeking a job – increased again last month, mostly due to long-term sickness   There are three key takeaways from the latest UK jobs numbers. Firstly, hiring demand is clearly falling, and that’s most evident from a decline in unfilled job vacancies – a trend that’s likely to continue, according to more up-to-date online vacancy numbers. That’s not to say firms are letting staff go – redundancy levels haven’t budged from their lows over recent weeks and unemployment doesn’t appear to be rising, even if the jobs market has stopped tightening. The second thing that stands out is that the number of people inactive – neither employed nor actively seeking a job – increased abruptly again last month. As the chart shows, the vast majority of the increase in inactivity we’ve seen since the pandemic began (and indeed in recent months) is linked to long-term sickness. There are now more than 300,000 extra people that fall into this category compared to pre-pandemic, and the challenges in the NHS suggest this story unfortunately isn’t going to improve very quickly. Contributions to the increase in inactivity since late 2019 Source: ONS, ING   The final takeaway is that the number of foreign nationals working in the UK jobs market has increased noticeably this year, having fallen earlier in the pandemic, though this is almost solely driven by non-EU workers. The number of EU nationals working in the UK is down more than 6% compared to the 2019 average. All of this presents a complicated picture for the Bank of England. Hiring demand is fading, but at the same time the skill shortages and labour supply issues that have plagued the jobs market for several months now are showing only limited signs of improvement. Inactivity remains high, even if migration – a key source of worker shortages through the pandemic – is showing some signs of bouncing back. The number of non-EU nationals working in the UK has increased over recent months Source: ONS, ING   The Bank of England’s official forecasts point to a material increase in the unemployment rate over the next couple of years, but policymakers will be looking for signs that firms are ‘hoarding’ staff even where margins are squeezed, amid concerns about their ability to rehire again in the future. Wage growth has decent momentum right now, and the committee will be concerned that this could be sustained. In practice, we think wage pressures will begin to cool as margins are squeezed into winter. But for now, we think there’s not much in these latest figures that will stop the Bank of England from hiking rates by 50bp again in September, even if we are nearing the end of the tightening cycle. Read this article on THINK TagsUK jobs Jobs Bank of England Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Natgas Fought Back And Now Have A Solid Position! Iron And Copper Are Out Of Fashion!?

Natgas Fought Back And Now Have A Solid Position! Iron And Copper Are Out Of Fashion!?

Marc Chandler Marc Chandler 16.08.2022 14:19
Overview: After retreating most of last week, the US dollar has extended yesterday’s gains today. The Canadian dollar is the most resilient, while the New Zealand dollar is leading the decline with a nearly 0.75% drop ahead of the central bank decision first thing tomorrow. The RBNZ is expected to deliver its fourth consecutive 50 bp hike. Most emerging market currencies are lower as well, led by central Europe. Equities in Asia Pacific and Europe are mostly higher today. Japan and Hong Kong were exceptions, and China was mixed with small gains in Shanghai and Shenzhen composites, but the CSI 300 slipped. Europe’s Stoxx 600 is stretching its advance for the fifth consecutive session. It is at two-month highs. US futures are softer. The US 10-year yield is slightly firmer near 2.80%, while European benchmark yields are mostly 2-4 bp higher, but Italian bonds are under more pressure and the yield is back above the 3% threshold. Gold is softer after being repulsed from the $1800 area to test $1773-$1775. A break could signal a test on the 20-day moving average near $1761. October WTI tested last week’s lows yesterday near $86 a barrel on the back of the poor Chinese data. It is straddling the 200-day moving average (~$87.95). The market is also watching what seems like the final negotiations with Iran, where a deal could also boost supply. US natgas prices are more than recouping the past two days of losses and looks set to challenge the $9 level. Europe’s benchmark leapt 11.7% yesterday and is up another 0.5% today. Iron ore has yet to a base after falling more than 5.5% in the past two sessions. It fell almost 0.65% today. September copper has fallen by almost 2.5% over the past two sessions and is steady today. Lastly, September wheat is slipping back below $8 a bushel and is trading heavily for the third consecutive session. Asia Pacific Japan's 2.2% annualized growth in Q2 does not stand in the way of a new government support package  Prime Minister Kishida has been reportedly planning new measures and has instructed the cabinet to pull it together by early next month. He wants to cushion the blow of higher energy and food prices. An extension of the subsidy to wholesalers to keep down the gasoline and kerosene prices looks likely. Kishida wants to head off a surge in wheat prices. Without a commitment to maintain current import prices of wheat that is sold to millers, the price could jump 20% in October, according to reports. Separately, and more controversially, Kishida is pushing for the re-opening of nine nuclear plants that have passed their safety protocols, which have been shut since the 2011 Fukushima accident.  The minutes from the Reserve Bank of Australia's meeting earlier this month signaled additional rate hikes will be forthcoming  After three half--point hikes, it says that the pace going forward will be determined by inflation expectations and the evolving economic conditions. The minutes noted that consumer spending is an element of uncertainty given the higher inflation and interest rates. Earlier today, the CBA's household spending report shows a 1.1% jump month-over-month in July and a 0.6% increase in June. The RBA wants to bring the cash target rate to neutral (~2.50%). The target rate is currently at 1.85% and the cash rate futures is pricing in about a 40% chance of a 50 bp hike at the next RBA meeting on September 6. It peaked near 60% last week. On Thursday, Australia reports July employment. Australia grew 88.4k jobs in June, of which almost 53k were full-time positions. The median forecast in Bloomberg's survey envisions a 25k increase of jobs in July.  The offshore yuan slumped 1.15% yesterday  It was the biggest drop since August 2019 and was sparked by the unexpected cut in rates after a series of disappointing economic data. The US dollar reached almost CNH6.82 yesterday, its highest level in three months. It has steadied today but remains firm in the CNH6.7925-CNH6.8190 range. China's 10-year yield is still under pressure. It finished last week quietly near 2.74% and yesterday fell to 2.66% and today 2.63%. It is the lowest since May 2020. As we have noted, the dollar-yen exchange rate seems to be more sensitive to the US 2-year yield (more anchored to Fed policy) than the 10-year yield (more about growth and inflation)  The dollar is trading near four-day highs against the yen as the two-year yield trades firmer near 3.20%. Initial resistance has been encountered in Europe near JPY134.00. Above there, the JPY134.60 may offer the next cap. Support now is seen around JPY133.20-40. The Australian dollar extended yesterday's decline and slipped through the $0.7000-level where A$440 mln in options expire today. It also corresponds with a (50%) retracement of the run-up form the mid-July low (~$0.6680). The next area of support is seen in the $0.6970-80 area. The greenback rose 0.45% against the onshore yuan yesterday after gapping higher. Today it gapped higher again and rose to almost CNY6.7975, its highest level since mid-May. It reached a high then near CNY6.8125. The PBOC set the dollar's reference rate at CNY6.7730, slightly less than the median in Bloomberg's survey (CNY6.7736). The takeaway is the central bank did not seem to protest the weakness of the yuan. Europe The euro has been sold to a new seven-year low against the euro near CHF0.9600 The euro has been sold in eight of the nine weeks since the Swiss National Bank hiked its policy rate by 50 bp on June 16. Half of those weekly decline were 1% or larger. The euro has fallen around 7.4% against the franc since the hike. Swiss domestic sight deposit fell for 10 of 11 weeks through the end of July as the SNB did not appear to be intervening. However, in the last two weeks, as the franc continued to strengthen, the Swiss sight deposits have risen, and recorded their first back-to-back increase in four months. This is consistent with modest intervention. The UK added 160k jobs in Q2, almost half of the jobs gain in the three months through May, illustrating the fading momentum  Still, some 73k were added to the payrolls in July, well above expectations. In the three months through July, job vacancies in the UK fell (~19.8k) for the first time in nearly two years. Average weekly earnings, including bonuses, rose 5.1% in Q2. The median forecast was for a 4.5% increase. Yet, real pay, excluding bonuses and adjusted for inflation slid 3% in the April-June period, the most since at least 2001. The ILO measure of unemployment in Q2 was unchanged at 3.8%. The Bank of England warns it will rise to over 6%. The market still favors a 50 bp hike next month. The swaps market has it at a little better than an 80% probability. The euro is extending its retreat  It peaked last week, near $1.0365 and tested this month's low near $1.0125 in the European morning. The intraday momentum indicators are stretched, and that market does not appear to have the drive to challenge the 1.2 bln euros in options struck at $1.0075 that expire today. With yesterday's loss, the euro met the (50%) retracement objective of the bounce off the mid-July 22-year low (~$0.9950). The next retracement objective (61.8%) is near $1.0110. Nearby resistance may be met near $1.0160-70. Sterling has been sold for the fourth consecutive session. It approached the $1.20-level, which may be the neckline of a double top. If violated it could signal a return to the low seen in mid-July around $1.1760. Sterling is holding in better than the euro now. The cross peaked before the weekend in front of GBP0.8500 and is approaching GBP0.8400 today. A break would look ominous and could spur a return to the GBP0.8340 area. America The Empire State manufacturing survey and the manufacturing PMI line up well  Both bottomed in April 2020 and peaked in July 2021. The outsized decline in the August Empire State survey points to the downside risks of next week's preliminary August manufacturing PMI. Recall that the July manufacturing PMI fell to 52.2, its third consecutive decline and the lowest reading since July 2020. There was little good in the Empire survey. Orders and shipments fell dramatically. Employment was also soft. Prices paid softened to the lowest this year, but prices received edged higher. The US reports housing start and permits and industrial output today The housing market continues to slow from elevated levels. Housing starts are expected to have fallen 2% in July, matching the June decline. It would be the third consecutive decline, and the longest declining streak since 2018. Still, in terms of the absolute level of activity, anything above 1.5 mln units must still be regarded as strong. They stood at almost 1.56 mln in June. Permits fell by 10% in April-May before stabilizing in June. The median forecast in Bloomberg's survey projects a 3.3% decline. Permits were running at 1.685 mln in June. From April 2007 through September 2019, permits held below 1.5 mln. The industrial production report may attract more attention Output fell in June (-0.2%) for the first time this year, and even with it, industrial product has risen on average by 0.4% a month in H1 22, slightly above the pace seen in H1 21. Helped by manufacturing and utility output, industrial production is expected to rise by around 0.3%. In the last cycle, capacity use spent four months (August-November 2018) above 80%. It had not been above 80% since the run-up to the Great Financial Crisis when it spent December 2006 through March 2008 above the threshold and peaked slightly above 81.0%. Last month was likely the fourth month in this cycle above the 80% capacity use rate. Note that the Atlanta Fed's GDPNow tracker will be updated later today. The update from August 10 put Q3 GDP at 2.5%. Housing starts in Canada likely slow last month, which would be the first back-to-back decline this year  The median forecast (Bloomberg's survey) calls for a 3.6% decline after an 8.4% fall in June. Still, the expected pace of 264k is still 10% higher since the end of last year. On Monday, Canada reported that July existing home sales fell by 5.3%, the fifth consecutive decline. They have fallen by more than a third since February. Canada also reports its monthly portfolios. Through May, Canada has experienced C$98.5 bln net portfolio inflows, almost double the pace seen in the first five months last year. However, the most important report today is the July CPI. A 0.1% increase, which is the median forecast in Bloomberg's survey would be the smallest of the year and the year-over-year pace to eased to 7.6% from 8.1%. If so, it is the first decline since June 2021. Similar with what the US reported, the core measures are likely to prove sticky. After the employment data on August 5, the swaps market was still leaning in favor a 75 bp hike at the September 7 meeting (64%). However, since the US CPI report, it has been hovering around a 40% chance. While the US S&P 500 rose reached almost four-month highs yesterday, the Canadian dollar found little consolation  It held in better than the other dollar-bloc currencies and Scandis, but it still suffered its biggest decline in about a month yesterday. The greenback reached almost CAD1.2935 yesterday and is consolidating in a narrow range today above CAD1.2890. The next important chart point is near CAD1.2975-85 and the CAD1.3050. After testing the MXN20.00 level yesterday, the US dollar was sold marginally through last week's low (~MXN19.8150). It is consolidating today and has not been above MXN19.8850. It has come a long way from the month's high set on August 3 near MXN20.8335. The greenback's downside momentum seems to have eased as it stalls in front of MXN19.81 for the third consecutive session.     Disclaimer   Source: Greenback Remains Firm

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