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German inflation comes down as government measures bite

German inflation comes down as government measures bite

ING Economics ING Economics 29.06.2022 14:43
The government's energy relief package pushed down German headline inflation in June. This is not a turning point – yet – but rather evidence that it is currently governments and not central banks that can bring down inflation Lower inflation in Germany will be temporary   German headline inflation has dropped for the first time since January. However, this is not yet the end of surging inflation rates but rather a good example that it is currently governments, not central banks, that can stop inflation. According to a first estimate based on the regional inflation data, German headline inflation came in at 7.6% year-on-year in June, up from 7.9% YoY in May. The HICP measure came in at 8.2% YoY, from 8.7% in May. Don’t be mistaken, this is not the start of the end but rather a government-induced temporary relief. Lower inflation will be temporary Judging from the available regional inflation components, the drop in headline inflation is mainly the result of the government’s energy relief package which became effective on 1 June. In fact, the tax rebate for gasoline as well as the €9 per month ticket to use regional public transportation clearly show up in lower motor fuel or transportation inflation. At the same time, however, food price inflation continued to pick up and the expected price mark-ups in the services sectors, such as leisure, hospitality and tourism gained more momentum. The energy relief package will end in August. This will also be the moment when the temporary relief to headline inflation stops. Even if pricing power both in industry and services should have reached its peak, we still expect the pass-through from higher costs to last at least over the summer months if not longer. The potential end to Russian gas for Germany is also likely to increase energy prices going into the winter season. This makes any significant retreat of headline inflation highly unlikely for 2022. It will take until 2023 before negative base effects should send the headline rate towards 2% again. For the ECB, today’s drop in German headline inflation does not bring any relief. Instead, the increase in Belgian and Spanish inflation suggests that eurozone inflation is moving up and not down like German inflation. To some extent, today’s German inflation data also sends an important message: it is currently not central banks but governments that can effectively bring down inflation. Read this article on THINK TagsMonetary policy Inflation Germany Eurozone ECB 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
Spanish inflation accelerates again, piling pressure on ECB

Spanish inflation accelerates again, piling pressure on ECB

ING Economics ING Economics 29.06.2022 12:45
Spanish inflation surprisingly rose to 10.2% in June from 8.7% last month. Rising core inflation puts further pressure on the European Central Bank Source: Shutterstock Spain's 12-month inflation surpasses 10% in June In June, consumer prices rose by 10.2% year-on-year (HICP inflation 10%) from 8.7% in May, bringing inflation to its highest level since 1985. The acceleration is mainly driven by a rise in fuel prices and food. Hotels and catering establishments saw strong price increases compared to June last year. Core inflation, excluding the more volatile energy and food prices, rose to 5.5% year-on-year from 4.9% last month. Year-on-year change in CPI and core inflation in % Source: Refinitiv, ING Research New figure puts extra pressure on the ECB The increase is much stronger than expected (the market consensus was only 8.7%), which increases the pressure on the ECB to tighten monetary policy more decisively. At yesterday's ECB forum in Sintra, Portugal, President Christine Lagarde confirmed that the central bank will stick to its approach of raising interest rates by 25 basis points in July. If the rise in other eurozone countries is also much stronger than expected, it will increase the pressure on the ECB for a more substantial rate hike in July. And it raises the likelihood of a 50bp rate hike in September, too. Spain is the first country in the eurozone to come out with its inflation figure for June. Germany will follow this afternoon. Sanchez government has EUR 9 billion plan to ease inflation pain Last week, the Spanish government announced many measures to mitigate the impact of high inflation on the population. The total plan has a price tag of EUR 9 billion and includes the following measures: VAT reduction on electricity to 5% from 10% Price cut on monthly public transit by 50% Cheque of 200 euros for the most vulnerable households The 20 cent per litre subsidy on gasoline has been extended Limiting price increases of gas and butane These measures will dampen inflation in the second half of 2022. In addition, the Iberian mechanism to curb gas prices and reduce electricity bills will put further downward pressure on the energy component of inflation in the coming months. Spanish retail sales rise 1.4% YoY in May We expect Spanish inflation to be 7.2% for the full year 2022 and to fall to 3.1% in 2023. Retail sales in Spain rose again by 1.4% YoY, following a 1.6% increase last month. In March, right after the start of the war in Ukraine, consumer confidence took a hit but has since recovered, supporting private consumption. While growth risks are definitely skewed to the downside, the Spanish economy might still benefit in the short run from a strong revival of tourism in the country. Year-on-year change in retail sales in % Source: Refinitiv, ING Research Read this article on THINK TagsSpain Retail sales Inflation Eurozone ECB 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
Eurozone economy: unsure about current strength but weakness ahead confirmed

Eurozone economy: unsure about current strength but weakness ahead confirmed

ING Economics ING Economics 29.06.2022 12:10
Economic sentiment is a bit at odds with the PMI, providing a clouded view of economic activity in June. Bank lending also remains decent for now. The outlook continues to be one of rapid slowing activity though Service sector businesses are becoming less positive about business in the months ahead Economic sentiment at odds with PMI The Economic Sentiment Indicator for the eurozone fell from 105 to 104 in June, which was less than expected. In fact, it is mainly the consumer becoming more gloomy that drove the overall index down. Manufacturing and services actually saw sentiment improve in June, which is at odds with the earlier-released PMI that showed a marked decline for both broad sectors. Manufacturers actually became more optimistic about current production in June and also about production in the months ahead. Even orders improved. Services showed strong recent demand, but service sector businesses are becoming less positive about business in the months ahead. The latter seems to bring confirmation that a further slowdown is in the making. But once again, the overall picture is much more positive than what the PMI painted last week and provides a clouded view of how the eurozone economy performed in June. Selling price expectations fall for the second month in a row Selling price expectations are also important, and this declined for the second month in a row for both industry and services, although they remain at elevated levels. This suggests that businesses are finding it increasingly tough to price higher input costs through to the consumer. Bank lending holds up while money growth continues retreat Bank lending in the eurozone remains modestly above trend at this point. Non-financial corporates saw loans increase by 0.5% month-on-month in May, which is similar to April. Household borrowing increased from 0.4 to 0.5% this month. Annual data presented by the ECB show fast increases, but these data are influenced by strong base effects and therefore the suggestion that lending is picking up drastically can be ignored. Still, with financial conditions tightening and the economic outlook worsening rapidly, it is notable that loan growth has held up so well. Broad and narrow money indicators continue to show steady declines in growth as ECB support is being taken away. Annual growth in M1 has decreased from 8.2% in April to 7.8% in May. This is generally considered to be a strong leading indicator for growth in the eurozone. Although doubts about the mechanics of this in times of asset purchases seem valid, the decline in M1 growth is just one more take that leads to a significant slowing or contracting eurozone economy. Read this article on THINK TagsInflation GDP Eurozone ECB 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
China’s economic outlook for the second half of 2022

China’s economic outlook for the second half of 2022

ING Economics ING Economics 29.06.2022 11:24
This article examines recent economic developments in China and policy implications on the economy for the second half of the year Consumer demand in China should return as Covid rules are relaxed Domestic economy impacted by Covid measures and infrastructure investments from the government China's nominal GDP reached $17.5 trillion in 2021, a growth rate of 8.1%. We expect a slower GDP growth rate in 2022 due to very tight Covid measures in the second quarter of this year. The short-term outlook is based on the possibility of more Covid-19 lockdowns, the increasing tension between China and the US and its allies regarding world politics, which could turn out to be international trade issues, and the Fed’s rate hikes. China is becoming more willing to accept single-digit Covid cases and is reopening schools and restaurants. The government announced the decision to shorten the isolation period for positive Covid cases and adjust the frequency of Covid tests according to the risk of infection, which is a more flexible policy than back in early June 2022. However, the risk of lockdowns still exists, even though the probability is lower than in early June as the government has adopted weekly covid tests in many cities. Consumer market During the worst period of lockdowns, the (negative) contribution of the consumer market to the economy was obvious. Structurally, it means the Chinese economy has transformed into a more diversified economy, with a big consumer market and more capital-intensive manufacturing activities. Consumer demand should return as Covid rules are relaxed. It is expected that retail sales will turn from negative year-on-year growth in 2Q22 to positive year-on-year growth in 2H22. Foreign exporters can also benefit from the recovery of the Chinese consumer market. Infrastructure investment: a form of fiscal stimulus With the consumer market undergoing a recovery, infrastructure investments are a key support for the economy after the contraction of most economic activities in 2Q22. We expect an infrastructure investment equivalent to around 5% of GDP for 2022. These investments are mostly funded by local government special bonds, local government financial vehicles, central government funds, and loans from policy banks in China.  China retail sales slumped during lockdowns Source: CEIC, ING Home sales' slow recovery can't stop bond defaults Homes sales have gone up slightly. Home purchase vouchers for shanty town residents are a short-term policy to boost home sales. Although this is a positive move for home sales, it is not positive for property developers that have defaulted on their bonds, whether onshore or offshore, as potential home buyers will stay away from homes sold by those developers to avoid non-completion risk and after-sales property management risk. As such, we do not expect defaulted real estate developers to get cash from home sales quickly, which will continue to put pressure on their liquidity. We will discuss this later in this article. China's residential property market missed sales target in May before a slow recovery in June Source: CEIC, ING Robust external demand, but the technology war continues External demand has been robust and Chinese port congestion has eased, which implies a better international trade environment. The US is considering removing some of the tariffs on goods imported from China that were imposed by the Trump government. But there will likely be no removal of tariffs on technology-related products produced by China, which will remain a drag on Chinese technology companies. The technology war will be a long-term issue for economic growth. China does not have the technology to manufacture semiconductor equipment for the most advanced semiconductors. The obstacle comes from the US and its allies that are preventing China from gaining access to this technology. China is trying to get talent from the rest of the world, hoping to create its own advanced technologies, which is a challenging mission. High-tech product imports and exports suffer from the technology war Source: CEIC, ING Chinese yuan and monetary policy The Chinese yuan (CNY) is suffering depreciation pressure from the widening interest rate differential with the US. The Fed is expected to continue interest rate hikes this year. At the same time, the People's Bank of China is reluctant to lower rates further as, according to governor Yi Gang, China’s real interest rate is “pretty low”. This should provide a steady interest margin for banks in China. But the risk of portfolio outflows could increase from the China sovereign bond market as US interest rates should rise relative to China’s interest rates. However, China is considered a growth market for equity investors, and Chinese equities are included in some global stock market indices. The deregulation of the e-commerce industry has attracted equity portfolio inflows into China. The two opposing forces should balance the yuan exchange rate for now. With the easing of Covid measures, net portfolio inflows can be expected to support the yuan in terms of a mild appreciation in 2H22. USD/CNY Source: CEIC, ING Loan growth to rise Deposits in terms of M2 grew faster to 11.1%YoY. Deposits increased because companies maintained a wait-and-see approach to business investment due to the uncertainty about the length of lockdowns. Banks were also reluctant to lend as credit risks increased during lockdowns. But less restrictive Covid measures announced on 28 June should bring back some confidence in business investments and loan growth. Yuan liberalisation to continue During the tough economic period caused by the March to May lockdowns, China did not stop opening up the capital account. Not only has China widened inflow channels for foreign bond investors to trade bonds in the onshore market, but it has also built a yuan reserve pool with the help of the Bank of International Settlements (BIS), which is the central bank of central banks. This should increase the importance of the yuan for the next crisis. China is also lengthening yuan trading hours to 3am. But volumes are likely to be thin. The idea is part of a plan to move yuan reforms forward. This step is not as important as opening more channels for portfolio flows but could be necessary during bad times when the yuan reserve pool is being tapped. Bond market risks China’s fiscal position is still strong. The IMF’s forecast on China’s general government gross debt as a proportion of GDP is less than 100. If there is any risk, it is mostly on subnational sovereign (i.e. local governments as issuers), not the sovereign risk. Some property developers are expected to default on their bonds in 2H22 and 2023. Furthermore, some conglomerates have begun to be affected by their property development arms and have been tight on cash. The liquidity and credit risks of these conglomerates are rising. Forecasts Our GDP forecast for China is 3.6% for 2022. An upward revision of this GDP forecast is likely if retail sales rebound strongly after the relaxation of the Covid quarantine duration.  On USD/CNY, our current forecast is 6.7, but a revision to a stronger yuan is also possible for the aforementioned reason. Read this article on THINK TagsUSDCNY Monetary policy Infrastructure GDP China 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
China: Iron Ore Prices Went Down. What About Australia And Brazil?

China: Iron Ore Prices Went Down. What About Australia And Brazil?

ING Economics ING Economics 29.06.2022 10:04
Iron ore has been unable to escape the broader sell-off in commodities. Macro concerns have been key to driving prices lower. Fundamentals have not been great either. However, low Chinese stocks and hopes of a China recovery over 2H22 should provide support in the near term. The medium to long-term outlook is more bearish Iron ore prices have fallen significantly over the past few months China's covid lockdowns and recessionary risks hit iron ore Iron ore prices have fallen significantly from their year-to-date high of US$171/t seen back in March to as low as $108/t recently. China’s attempts to squash outbreaks of Covid-19 have seen fairly tough restrictions, which have not been supportive for demand. In addition, there are growing concerns over the macro-outlook. Soaring inflation is seeing central banks, particularly the US Federal Reserve having to take a more aggressive approach to monetary tightening. The concern is that the Fed will struggle to rein in inflation without pushing the US economy into recession. Ultimately though the iron ore outlook is going to largely depend on how China approaches any further Covid outbreaks through the year as well as the scale of stimulus we see the government unleashing. China steel output lags but there's room to recover Chinese steel output has been under pressure for much of the year. The start of 2022 saw output cuts in some regions during the winter Olympics weigh on national output, whilst in more recent months Covid lockdowns have weighed further on both steel demand and supply. According to government data, cumulative crude steel production over the first five months of the year totaled a little more than 435mt, down 8% year-on-year. China’s state planner has made it clear that it wants crude steel production capped at below 2021 levels, which on the surface sounds bearish for iron ore. However, given the lower steel output seen so far this year, it does leave mills with room to increase output, whilst still keeping output below 2021 levels. China produced 560mt between June and December last year. And assuming that the full year 2022 output at most matches last year’s levels, this leaves the potential for up to 600mt of production over the remainder of the year, almost a 7% increase year-on-year. However, whether the demand is there really depends on the steps that China takes to try to hit its growth target of 5.5% for 2022. China’s zero-Covid policy means this target will be extremely difficult to achieve. China has already announced stimulus measures to try and help growth, which would include a boost in infrastructure spending. Infrastructure projects are generally metals-intensive and so should be supportive of steel demand. The industry also has a considerable amount of steel inventories to eat into. The latest data from the China Iron & Steel Association shows that inventories at major steel mills stand at 20.5mt, up almost 82% since the start of the year and 30.8% higher year-on-year. Bloated inventories have weighed on domestic steel prices, which has seen margins shrink. Therefore, the industry will need to draw this stock down to more normal levels before we can see a meaningful recovery in margins. China monthly crude steel output (m tonnes) Source: WSA, ING Research China iron ore imports lagging It is no surprise that with lower steel output from China iron ore imports have also been under pressure so far this year. The latest trade data shows that cumulative imports over the first five months of the year totaled almost 447mt, down around 5% year-on-year. Naturally, if there is an upside in steel output over the second half of this year, we would expect to see stronger import demand for iron ore. Port inventories have been drawn down quite considerably over the last few months. The latest data from SteelHome shows that port inventories stand at around 124mt, down from a little more than 160mt earlier this year. Stocks are at their lowest levels in a year, and below the five-year average of close to 130mt for this stage of the year. These lower stocks and the more recent pressure we have seen on iron ore prices could attract some Chinese buying interest. Looking at the origins of Chinese iron ore imports, Australia remains the largest source of supply by a mile, with about 69% of imports originating from Australia in May. In fact, Australia’s share of total Chinese imports has grown a fair amount over the last couple of years, when you consider that Australian supply made up 56% of total imports in August 2020. This suggests that the Australian iron ore industry has been largely unaffected by the deterioration in relations between China and Australia. Although, the Chinese government is reportedly looking to centralise procurement of iron ore, with the hope it gives buyers more bargaining power with producers in the future. China iron ore imports slow Source: NBS, ING Research It's not just China where steel output is under pressure Ex-China steel output has also struggled this year. The latest data from the World Steel Association shows that cumulative ex-China output totaled around 357mt over the first five months of the year, down a little more than 3% year-on-year. Declines were led by the CIS where year-to-date production is down more than 13% year-on-year, and unsurprisingly this is largely a result of the ongoing Russia-Ukraine war. European output has also been under pressure this year, with higher energy prices leading to some cuts. In addition, weaker downstream demand, particularly from the auto industry, has not helped. India is the standout when it comes to steel production, with it managing to grow whilst production has fallen elsewhere around the world. This growth from India has meant that cumulative ex-China Asian steel output managed marginal year-on-year growth over the January-May period. Expectations of slowing economic growth, and the growing risk of recession, are clearly not great for global steel demand. The World Steel Association had previously assumed that steel demand growth would be rather tepid this year, growing at just 0.4% year-on-year, before growing by 2.2% in 2023. Clearly, given the gloomier macro-outlook, there could still be a downside to these numbers. Ex-China cumulative crude steel production by region (Jan-May) Source: WSA, ING Research Australian iron ore supply to edge higher Australia is in the process of ramping up supply from a number of new projects, of which the largest is BHP’s 80mtpa South Flank mine which started operations in 2021. This follows the startup of Fortescue’s 30mtpa Eliwana mine which commenced operations in late 2020 and has ramped up output since. For this year, Rio’s 43mtpa Gudai Darri mine started operations in June, while Fortescue was meant to start operations at its 22mtpa Iron Bridge mine this year, but the start date of this has been pushed into 1Q23. These new projects, along with some expansion projects, should mean good supply growth from Australia this year and next. However, so far this year production has disappointed with labour constraints related to Covid-19 impacting operations. This is reflected in export numbers, with exports over the first four months of the year up just 0.5% year-on-year. Although, weaker Chinese demand will also be a factor in these export numbers. Brazilian shipments suffer this year Brazil has struggled to see iron ore shipments return to levels prior to the Brumadinho dam disaster in January 2019. In 2021, total Brazilian iron exports totaled 358mt, still down from the almost 371mt exported in 2018. And it would appear that exports in 2022 are going to struggle as well, with cumulative exports over the first five months of the year totaling a little over 122mt, down 8% year-on-year. In fact, February saw Brazil exporting the lowest volumes since February 2014. Weaker exports have been a result of disruptions following heavy rainfall earlier in the year. Despite the disruptions seen this year, Brazilian miner Vale continues to maintain its production guidance for 2022 in the range of 320-335mt, compared to the production of almost 316mt last year. Looking further ahead, Vale still aims to reach 400mtpa of annual capacity. Iron ore prices to ease in the longer term While we expect iron ore prices to be supported in 2H22 due to expectations of a recovery in China, the longer-term outlook for iron ore is more bearish. On the demand side, it appears that China will continue to cap crude steel output whilst also looking to replace older steel capacity with electric arc furnace capacity in order to help the country meet its decarbonisation goals. Growth in electric arc furnace (EAF) capacity at the expense of basic oxygen furnace (BOF) capacity will be a concern for the medium to long-term outlook for Chinese iron ore demand. It also suggests that we have already seen China’s iron ore imports peak in 2020. As for the supply picture, we should continue to see the ramping up of supply from new projects in Australia, along with Vale in Brazil continuing to target an annual production capacity of 400mtpa. More sluggish demand from China, combined with this supply growth, suggests that prices should trend lower in the medium to longer term. As a result, we see 62% Fe fines averaging US$105/t in 2023 and US$90/t in 2024. This is down from US$138/t over 2H22. Read this article on THINK TagsSteel Russia-Ukraine Iron ore China Covid Australia trade 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
Rates Spark: The hawks are circling | ING Economics

Rates Spark: The hawks are circling | ING Economics

ING Economics ING Economics 29.06.2022 09:40
Central banks have proven their ability to move rates higher once again, trumping recession fears for now. We expect no let-up at the ECB’s Sintra forum today, but any further rise in yields is subject to risk sentiment holding up. The EUR curve structure is at odds with the worsening macroeconomic backdrop All eyes will be on the European Central Bank's forum in Sintra, Portugal The ECB out-hawks the market At the start of this week, one could reasonably have doubted central bankers’ ability to push market pricing into an even more hawkish territory. After all, recession fears boiling over in the eurozone, and elsewhere, cast a long shadow on policy tightening forecasts. In addition, the European Central Bank’s (ECB) Sintra forum promised to be a hawk-fest where officials try to regain control of the narrative, and inject some much needed confidence in the market. ECB comments have rekindled EUR rates upside Source: Refinitiv, ING   Today’s line-up promises even more hawkish comments The ECB has delivered on hawkish expectations, and then some. Martin Kazaks broke ranks with the 25bp July hike consensus, and President Christine Lagarde repeated ad nauseum that inflation-fighting remains the ECB’s utmost priority. The latter was expected, and the former was a risk at least partially priced by the market going into the event. And yet, this was enough for the market to add to Monday’s double-digit rise in EUR yields. It is difficult to extrapolate this into a third day of a bonds sell-off but, if anything, today’s line-up (see events section) promises even more hawkish comments. The EUR curve structure anomaly Once again, the policy-sensitive part of the curve finds itself in the firing line. Traditionally, this has meant 5Y and maturities around it. As central banks scramble to catch up with high inflation, effectively front-loading hikes, shorter maturities have seen the most volatility. This week’s underperformance of the 5Y point may be an accident, perhaps due to supply in the sector from Germany and KFW. If it isn’t, it would signal a greater confidence into this tightening cycle being a more protracted affair than previously thought. In light of growing recession fears, we have our doubts and would expect the 5Y sector to come in on the curve, for instance with the 2s5s10s butterfly in EUR swaps converging towards zero. The EUR forward OIS curve is the only one that isn't inverted Source: Refinitiv, ING   We expect the 5Y sector to come in on the curve Similarly, a more hawkish re-pricing should in our view come with an inversion of the near-dated forwards, effectively pricing the possibility of a subsequent cut. This has long since been the case in USD and GBP rates, but the EUR swaps term structure has so far remained flat. Should the terminal deposit rate climb above the 2% line, we expect inversion to occur… provided recession doesn’t become the market’s central scenario before then. Today's events and market view Spain and Germany kick off this round of June CPI releases today. A slight acceleration in the annual EU-harmonised measures would give weight to the barrage of hawkish ECB comments we’re sure to get from and around the Sintra forum. This being said, regional Germany inflation indices available at the time of writing suggest further inflation acceleration is not a given in June. Talking of which, no less than ECB President Christine Lagarde, Fed Chair Jerome Powell, BoE Governor Andrew Bailey are taking part of a policy panel early in the European afternoon. Recent comments suggest that central bankers will look to out-hawk each other to project an aura of confidence to markets roiled by inflation risk. They will be joined by Augustin Carstens of the Bank of International Settlements who, judging by his foreword to its annual report, will lean heavily in the hawkish direction. US data consists of mortgage applications and the third read of the now dated 1Q GDP report. 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
Japan: retail sales rise while consumer sentiment weakens

Japan: retail sales rise while consumer sentiment weakens

ING Economics ING Economics 29.06.2022 09:32
We expect a consumption-led recovery in the second quarter, but weak consumer sentiment poses a risk to consumption in the second half of the year Retail sales in Japan have risen for the third consecutive month 3.6% Retail sales %YoY   Lower than expected Retail sales continue to grow but at a slower pace Japan’s retail sales in May rose 3.6% YoY, slightly missing the market consensus of 4.0%, but the previous month’s data was revised up to 3.1% (vs 2.9% preliminary). On a seasonally-adjusted month-on-month basis, retail sales gained 0.6% MoM sa in June (vs 1.0% in May). The “Golden Week” holiday season may have boosted household consumption as travel-related sales such as apparel and fuel were particularly strong. However, durable goods sales dropped for the second month in a row, and the contraction in motor vehicles even intensified from -4.6% in May to -7.4% in June. We think that overall consumer spending is making progress and expect second-quarter GDP to rebound after a 0.5%q/q saar contraction in the first quarter, but it is questionable whether the strong rebound will be sustained for the rest of the year. The consumer confidence index slid to 32.1 in June, more than offsetting the previous two months' gain Although all four sub-components declined, a willingness to buy durable goods fell the most by 2.6pt, suggesting that durable goods sales are likely to remain soft in the coming months. However, an accommodative macro policy environment will support the economy In Japan, unlike other major developed market countries, both monetary and fiscal policies remain supportive of growth. The Bank of Japan is highly likely to keep its ultra-low policy stance through the end of the year, and the government’s series of subsidy programmes will soon boost domestic consumption and partially offset the negative impact of a weak yen and rising prices. Measures such as a nationwide travel voucher programme in July, 38.4 yen/liter of gasoline subsidy (starting from tomorrow), and cash transfers for low-income households are expected to aid households in the pandemic recovery. Read this article on THINK TagsRetail sales Fiscal stimulus Consumer spending Consumer confidence Bank of Japan 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
Will Fuel Prices Shock Again? Crude Oil Price Almost Hit $120! Will EV Become More Popular Shortly?

Will Fuel Prices Shock Again? Crude Oil Price Almost Hit $120! Will EV Become More Popular Shortly?

ING Economics ING Economics 29.06.2022 09:08
Your daily roundup of commodities news and ING views Energy The oil market continues to recover following its recent sell-off. ICE Brent closed a little more than 2.5% higher yesterday, leaving the market not too far off the US$120/bbl level.  A relaxation in China’s covid policy would have been supportive, with the government cutting the length of quarantine for travellers. In addition, supply disruptions in Libya would also have provided a boost to prices. As we have mentioned several times over the last week or so, oil fundamentals remain constructive. This is evident when looking at the time spreads, which have strengthened considerably over recent weeks. Numbers overnight from the API show that US crude oil inventories declined by 3.8MMbbls over the last week, whilst Cushing crude oil stocks fell by 650Mbbls. Refined products received some relief, with the API reporting that gasoline and distillate stocks increased by 2.85MMbbls and 2.61MMbbls respectively. The EIA is scheduled to release its weekly inventory report later today, which will also include the delayed weekly report from last week. OPEC is set to meet today, while the broader OPEC+ group is set to meet tomorrow. It is widely expected that an already agreed supply increase of 648Mbbls/d for August will be confirmed. However, as we have seen in recent months, it is highly unlikely that the group will be able to boost supply by this amount, given the limited spare capacity amongst members and the expectation that Russian oil output will decline as we move closer to the EU’s ban on Russian seaborne crude oil imports. Metals The LME zinc cash/3m spread has eased considerably this week, trading down to a US$57/t backwardation, after hitting a high of US$218/t last week. The aggressive decline in on-warrant stocks appears to have eased some concerns in the market. In addition, there are some suggestions that we could see China supply stepping in to help ease the tightness in the LME market. Zinc inventories at Shanghai warehouses currently stand at around 138kt, up from 64kt at the start of the year. As for copper, the latest preliminary data from the Japan Copper and Brass Association showed that production of copper and copper-alloy fabricated products reported a fifth straight month of YoY declines in May, due to sluggish demand from the auto industry and covid-related disruption in China affecting the primary demand segments for the metal. Monthly output dropped 2.7% YoY and 9.5% MoM to 59.7kt in May, the lowest level since February. Agriculture Brazil’s sugar industry association, UNICA reported that sugar production in Center-South Brazil dropped 3.8% YoY to 2.14mt over the first half of June. Sugar production has picked up pace over recent weeks, although it remains below the levels seen a year ago. Cumulatively, sugar production has fallen by 23.6% YoY to 7.2mt. UNICA reported that sugar cane crushing increased by 5.8% to 38.6mt over the first half of June. However, sugar cane allocation for ethanol production remains high with ethanol production increasing 6.3% YoY to 1.8bn litres. Around 55.6% of sugar cane was used for ethanol production. The sugar content of the cane fell to 131kg/t over the 1H Jun compared to around 138.5kg/t a year ago. Read this article on THINK TagsZinc Sugar OPEC+ EIA China Covid 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
EUR/USD And EUR/GBP May Fluctuate! Let's Watch FX Market Closely Today! HUF: National Bank Of Hungary Raised The Interest Rate!

EUR/USD And EUR/GBP May Fluctuate! Let's Watch FX Market Closely Today! HUF: National Bank Of Hungary Raised The Interest Rate!

ING Economics ING Economics 29.06.2022 09:00
It may not feel like it today, but the FX options market expects volatility to stay high over coming months as central bankers deal with sticky inflation and are being encouraged to act fast. Insights into how aggressive central banks need to be come from the ECB's Sintra conference, where central bank governors from the US, eurozone and the UK all speak USD: Temporary calm FX markets have entered a period of temporary calm and ranges have been quite subdued this week. Half year-end may have had some bearing on the matter and yet it would not be a surprise to see some moves developing around key fixings today - especially the WMR fix at 17CET.  One might have thought these conditions would lead to lower levels of implied or expected volatility - perhaps on the notion of FX markets finding new equilibrium levels. But no, EUR/USD one-month volatility is still bid above 9%.  Keeping volatility bid remains the uncertainty as to how far and how fast central bankers need to tighten policy to keep inflation under control. Certainly listening to the Bank of International Settlements (BIS) this week, the message to central banks was to act early and to act decisively. The short-term pain of aggressive tightening (perhaps a recession) would be far more preferable to the longer-term pain of a wage-price spiral. On that subject, Federal Reserve Chairman Jerome Powell, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey all speak on a Sintra panel today at 15CET. Currently, money markets price US, eurozone and UK policy rates at 3.40%, 1.10% and 2.90%, respectively, by the end of this year. Of the three, we would think the pricing of US rates is still the most subject to upside risks. And that is why the FX option markets are allocating heavy day-weight volatilities to dates like 13 July, when the June US CPI data is released. For today, look out for those remarks from central bankers and also the US May reading for the headline and core PCE deflator readings. High month-on-month readings are expected for headline and core (0.7% and 0.4%) and any upside surprise could see US rates and the dollar nudge higher. DXY is consolidating above 104.00 and barring any large equity rally today on quarter or half year-end re-balancing, there seems little reason to expect much of a dollar sell-off.  EUR: Will business confidence take a plunge? EUR/USD continues to consolidate near 1.05 and must be keeping one wary eye on developments at the G7 summit where world leaders are trying to cap the price they pay for Russian energy, while avoiding an abrupt shut-off in Russian exports. ECB President Lagarde's remarks today will be in focus, where there is a risk that she embraces the earlier and more hawkish tightening path espoused by some of her colleagues. On that subject look out for the German state June CPI state releases today culminating in the national figure (released around 14CET) and expected to match last month's cycle high at 7.9% year-on-year. Any upside surprises here could give eurozone short-end rates and the euro a lift as well. Also in focus today will be more reports on the ECB's anti-fragmentation scheme (will it be large and effective enough?) as well as the June reading for eurozone economic, industrial and services confidence. These have all been holding up quite well. Yet cracks have appeared in business confidence this month and any downside surprise here may question whether the ECB can be as aggressive as the market is pricing. EUR/USD to probably continue tracing out a 1.0450-1.0550 range, barring any large fixing flows. GBP: Quite resilient Sterling has weathered news of another potential Scottish referendum (19 October, 2023) quite well. That may well be because the chances of Westminster granting it are unlikely - though it looks like markets may be buffeted by UK supreme court opinions on this matter over coming months and quarters. Look out for remarks from Governor Bailey today. This year the Bank of England's strategy has been to communicate less on forward guidance, which has seen UK rates track US rates more closely. With inflation staying near the highs, we doubt Governor Bailey will want to push back too much against tightening expectations today.    Also look out for testimony from new MPC external member Swati Dhingra at 1515CET. She replaces erstwhile hawk Michael Saunders, and markets will be interested to hear whether she is in the 25bp or (like Saunders) 50bp hiking camp. EUR/GBP can continue to trade near 0.8600, while cable looks more vulnerable. HUF: NBH joins the 100 basis-point club The National bank of Hungary did the impossible and surprised financial markets by raising the base rate by 185bp to 7.75% yesterday. The NBH also made a pre-commitment to hike the 1-week deposit rate by 50bp to 7.75% this Thursday. This means a slightly quicker pace of effective tightening since the last step size was 30bp. What is even more important is that from now on, the 1-week deposit rate and the base rate are at the same level. This makes the monetary policy toolkit, or at least the communication about that, simpler and easier to understand. However, as we mentioned yesterday, the forint is all about external factors and geopolitics these days. The 2y IRS differential against the euro moved to new records after yesterday's meeting and is the highest since 2008. However, the story does not change. In the short term, we expect the rate differential to widen further in the coming days, adding some more support to the forint. But we believe that under current conditions there is room for appreciation only towards the 395 level. In the long run, it is still about waiting for a turnaround in negotiations with the EU regarding Rule of Law and EU funds disputes, which will unlock the hidden potential of the forint in the second half of the year (perhaps in September). 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
ING Economics - Asia Morning Bites - 29/06/22

ING Economics - Asia Morning Bites - 29/06/22

ING Economics ING Economics 29.06.2022 08:37
US sentiment takes a nose-dive as consumers get jittery, though China quarantine relaxation could bolster Asia Source: shutterstock Macro outlook Global markets: The positive risk sentiment that marked the end of last week didn’t last long into this week. US equities dropped sharply; the NASDAQ was down just under 3% and the S&P500 was down 2%.  One trigger for this may have been the very weak consumer confidence figures from the US Conference Board. The expectations component of this survey made for particularly grisly reading. It is not quite at global financial crisis levels, unlike the University of Michigan survey, but it is getting there. A soft Richmond Fed manufacturing index and some slightly weaker than expected house price figures probably didn’t help either. US equity futures are showing a very small positive gain currently, essentially a “no direction” signal. The abrupt about-face in sentiment has lifted the USD, taking EURUSD back down to 1.0522. Cable slid to 1.2187 and the AUD is knocking on a breach of the 0.69 level on the downside once again. The JPY has not benefited from this change in sentiment, seemingly losing its safe-haven appeal, and has pushed up above 136, while the 10Y JGB has edged a little higher, but still remains below 0.25%. US Treasury yields haven’t been much affected by this latest equity swing. 2Y yields are little changed at 3.11%, while yields on the 10Y bond are down less than 3bp at 3.172%. Asian FX was mainly in the red yesterday, led by the INR and JPY. The THB bucked the trend with a small gain, buoyed by the news that China would cut its quarantine period for international visitors. Chinese tourists traditionally make up the majority of tourism flows for Thailand (see also below). G-7 Macro: Preliminary June German CPI inflation today is not expected to change much from the May 8.7% harmonised inflation reading. Yesterday, ECB President, Christine Lagarde, indicated that the European central bank would be prepared to step up the pace of tightening due to start in July if inflation continued to worsen. So there is some jeopardy in these numbers. Final 1Q22 GDP from the US won’t be of much interest to markets. Australia: May retail sales due at 0930SGT are expected to slow to a 0.4% month-on-month rate of growth, after the 0.9% gain in April. Cashed-up consumers back then powered spending growth, but price rises since then may have dented consumer spending power and confidence.   Korea: The Bank of Korea’s (BoK’s) consumer sentiment index (CSI) fell sharply to 96.4 in June (vs 102.6 in May), falling below the long-term average of 100 for the first time since Feb 2021. All six sub-components were down. Both the current assessment and expectations on domestic economic situation indices dropped significantly by 14pt and 15pt respectively.  We believe that the recent sharp drop in the KOSPI and higher mortgage/lending rates are probably hurting consumer confidence. Meanwhile, inflation expectations reached 3.9% in June (vs 3.3% in May), which could be a bigger concern for the BoK. The BoK has expressed concern about self-fulfilling inflation increases, in which expected inflation rises first then actual inflation rises accordingly. Today’s weak CSI data will further increase the likelihood that the Bank of Korea hikes by 50bp in July, but at the same time, will also add to concerns over an economic slowdown. Japan: Japan’s retail sales rose 3.6% YoY in May (vs 4.0% market consensus), but the previous month’s data was revised up to 3.1% (vs 2.9% preliminary). Retail sales have risen now for three months in a row. We still think that overall consumer spending is making progress and expect an economic rebound in 2Q.  China: The Chinese government announced that Covid quarantine and test requirements are to be adjusted to a more relaxed mode. Some cities have already relaxed testing frequency and reopened schools and restaurants. The government announcement covers the whole country, suggesting that the latest Covid peak has passed, which is a positive note for the market. Though not as relaxed as other economies, this offers help for the economy to recover. But relying on just this relaxation will not push GDP growth to the 5.5% target for 2022. China is expected to increase infrastructure investment to push economic growth closer to the target. The next thing that the Chinese economy needs is to reopen international borders by reducing further the quarantine duration. We may revise upward our GDP forecast if key indicators rebound after this announcement. What to look out for: Australia retail sales and Eurozone inflation South Korea consumer confidence (29 June) Japan retail sales (29 June) Australia retail sales (29 June) German CPI inflation (29 June) Euro zone CPI inflation (29 June) US 1Q GDP and core PCE (29 June) Powell speech (29 June) South Korea industrial production (30 June) Japan industrial production (30 June) China PMI manufacturing and non-manufacturing (30 June) Thailand trade balance (30 June) Hong Kong retail sales (30 June) US personal income and initial jobless claims (30 June) New Zealand building permits (1 July) Japan Tokyo CPI inflation, Tankan survey and job applicant ratio (1 July) South Korea trade balance (1 July) Regional PMI manufacturing (1 July) Indonesia CPI inflation (1 July) US ISM manufacturing (1 July) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
National Bank of Hungary Review: Making it simpler

National Bank of Hungary Review: Making it simpler

ING Economics ING Economics 29.06.2022 08:24
The National Bank of Hungary created a cleaner situation, levelling the base rate and the 1-week deposit rate at 7.75%. In our view, this was a necessary step to boost market confidence in the bank’s hawkish aspiration. In turn, the 50bp effective rate hike cannot be called extreme, and other risk factors will keep Hungarian assets under pressure The National Bank of Hungary in Budapest 7.75% Hungary's base rate +185bp Decisive continuation of the tightening cycle The Hungarian central bank made a huge splash in the middle of a heatwave in June. It raised the base rate by 185bp to 7.75%. Alongside with that, the whole interest rate corridor was moved up by 135bp. This means that the O/N deposit rate was moved to 7.25%, which means the bank has finally separated this deposit rate from the base rate. The upper band of the corridor, the O/N repo rate now sits at 10.25%. The National Bank of Hungary (NBH) also made a pre-commitment to hike the 1-week deposit rate by 50bp to 7.75% this Thursday. This means a bit quicker pace of effective tightening as the last step size was 30bp. What is even more important, that from now on, the 1-week deposit rate and the base rate are at the same level. This makes the monetary policy toolkit – or at least the communication about that – simpler and easier to understand. With this decision, the NBH got rid of an element which has kept the market participants confused and less convinced about the hawkish commitment of the central bank. This decision itself hasn’t eliminated all the hurdles on this extremely difficult monetary policy obstacle course. And though a big one was made to disappear; it can hardly be considered a panacea. The looming rule-of-law debate between Budapest and Brussels, recession fears, the war and sanctions, security of energy supply, twin deficits and inflation are all remain determinant for markets. Speaking about risks, the Monetary Council sees that the upside risks to inflation have strengthened further, while the latest staff projection shows a significantly higher path of inflation. This means an 11.0-12.6% average inflation in 2022 and a 6.8-9.2% range in 2023, according to the latest Inflation Report. The details behind the surprisingly high forecast will be released on Thursday, but we think the NBH's forecast contains the technical assumption of ending the price caps on 1 October (based on the latest official ruling). The forward guidance became more hawkish, flipping the continuation of the tightening cycle to “decisive” from “gradual”. With this, we see a clear upside risk to our 9.25% terminal rate call, as the NBH committed to continue its decisive tightening cycle at least until inflation peaks. If 50bp step sizes remain the base case decision on a monthly basis, we will end up at 9.25-9.75% in September-October, where we see the highest probability for inflation to peak. FX and rates markets reaction The market has moved massively higher, especially at the short end of the curve today, resulting in a bear flattening to new record levels. However, the long end of the curve has only returned to previous levels or just slightly higher, confirming our earlier view that there is not much room to rise. So, the whole story is playing out at the short end, which will be the case for the months ahead as well. Our strategy thus remains unchanged. The FRA market remains illiquid and too expensive to hold. Therefore, we see more beneficial to look beyond the currently priced terminal rate horizon, meaning the 1y-3y segment with neutral or positive carryroll. Hungarian government bonds (HGBs) have richen in ASW terms and it will take a few days for the dust to settle, but we expect HGB yields to start catching up to the current IRS move soon and bring a slight widening of the spread again. Although we can see some buying interest in the coming days, we believe the time is not yet right, especially with the summer months potentially bringing zero liquidity to the market. However, today's meeting has once again pushed the HGB market forward and, as with the forint, we believe their time will come soon. The 2y IRS differential against the euro moved to new records after today's meeting and is the highest since 2008. However, the story is not changing. Despite the surprise today, the forint remains in the grip of external factors. In the short term, we expect the rate differential to widen further in the coming days, adding some more support to the forint. However, we believe that under current conditions there is room for appreciation only towards the 395 level. In the long run, not much has changed in our view. The forint continues to be our least favourite currency in the CEE region, but we continue to watch headlines signalling a turnaround in the Rule of Law and EU funds disputes that should unlock the hidden potential of the forint in the second half of the year (perhaps in September). Read this article on THINK TagsReview National Bank of Hungary Monetary policy Interest rates Hungary 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
Stocks turn negative on Wall Street

US households feel more pain

ING Economics ING Economics 29.06.2022 08:21
The Conference board measure of consumer confidence is following the University of Michigan index sharply lower as the rising cost of living, falling equity markets and concerns over what higher interest rates might mean for the economy weigh on minds US consumer confidence continues to remain weak Consumer concerns intensify as recession talk grips the market The Conference board measure of consumer confidence fell more than expected in June to 98.7 from a downwardly revised 103.2 (consensus 100). The forward-looking expectations component bore the brunt, dropping from 73.7 to 66.4, taking this series to the lowest level since 2013. Respondents are becoming more pessimistic on business conditions, employment and their own income outlook. The current conditions series was little changed (147.1 versus 147.4 previously), presumably supported by the current strength of the jobs market and the positive support from wage gains. US consumer confidence measures Source: Macrobond, ING   As the chart above shows the Conference Board confidence has not plunged as much as the University of Michigan sentiment index. That is because the Michigan measure seems to pick up more on the cost of living dynamics and financial positions so is perhaps more susceptible to equity market weakness and surging inflation. Traditionally, the Conference Board, is viewed as putting more emphasis on the labour market situation. Nonetheless, with both series clearly on a deteriorating trend, which won’t be helped by rising interest rates as the Fed focuses on getting inflation under control, the risks are firmly centered on a weaker performance from consumer spending in the second half of the year. Solid house price gains continue Rising interest rates and weak consumer confidence is not good news for the housing market even though the US Case-Shiller 20 city house price index rose 1.8%MoM/21.2%YoY in April. The strongest performers remain in the south (Tampa, Miami, Phoenix and Dallas) with the bottom performers in the North (Minneapolis, Chicago, Cleveland, New York). This means that nationally, home prices have risen 40% since the start of the pandemic as strong, stimulus fueled demand and greater options on where to live due to working from home, spurred buying activity amid a dearth of supply. US house price levels through the pandemic Source: Macrobond, ING Housing boosts inflation for now, but expect a different story in 2023 The key take-away is that this series leads turning points in the primary and owners' equivalent rent series within CPI by around 14 months. The lag is due to actual rents typically only changing once a year while the survey respondents to the owners' equivalent rent series are not necessarily closely following house price changes month to month. The chart suggests that these housing CPI components will continue to keep headline and core inflation elevated for much of the rest of this year especially since housing is around 35% of the total basket of goods and services that make up CPI. It should support the 75bp case for the July FOMC meeting. House prices and the key rent components within CPI Source: Macrobond, ING   However, if we are right and the surge in mortgage rates, plunge in mortgage applications and more supply coming to the housing market soon starts to take the steam out of house prices, it could be a key component that drags CPI sharply lower in the second half of 2023. With Federal Reserve rate hikes and the strong dollar set to dampen activity and if favourable supply conditions emerge surrounding energy and supply chains, 2% inflation by the end of 2023 in not inconceivable. Read this article on THINK TagsUS Recession House prices Confidence 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
Japan: retail sales rise while consumer sentiment weakens

Taiwan’s economic outlook for the second half of 2022

ING Economics ING Economics 28.06.2022 14:36
We look at Taiwan's economic situation, including the risks and opportunities, and fiscal and monetary policies Taiwan dominates the global semiconductor trade The semiconductor industry is a key pillar of Taiwan's economy Taiwan is the 21st largest economy in the world, just behind Switzerland and the Netherlands with a nominal GDP of US$807bn in 2021, and GDP per capita of $33,011.  The economy grew 6.57% in 2021, the fastest growth since 2010, thanks to strong global demand for electronic products that benefited Taiwan’s semiconductor industry. In 2021, Taiwan accounted for more than 64% of the global foundry market – the outsourcing of semiconductor manufacturing. The strong demand was partly a result of demand for computer equipment due to the Covid-induced working from home trend, and from the rising demand for automobiles, including electric vehicles. Taiwan's total export and electronic export growth Source: CEIC, ING The risks of being too specialised However, this strong demand did not continue into 2022. As the Taiwan economy relies on a single growth pillar, it is difficult to be upbeat about Taiwan's economic growth while Mainland China’s consumer market is suffering from lower purchasing power after the prolonged lockdowns that have occurred since March 2022.  Another risk that Taiwan is facing is a high consumer price level as import prices of energy and food become higher. The central bank has reacted by raising interest rates and increasing the deposit reserve ratio. These tightening monetary policies are expected to continue in the second half of the year and could dampen demand for domestic investments. The risk of capital outflows is also mounting as global fund managers seem to become more doubtful about the prospects of the semiconductor industry. Taiwan's exports of electronic parts by destination Source: CEIC, ING Monetary policy: further rate hikes possible As inflation has edged higher from 2.63%YoY at the end of 2020 to 3.39% in May 2021, the central bank has raised the policy discount rate twice, once in March and once in June. The rate hike in June (12.5bp) was less drastic than March’s hike of 25bp. The discount rate now stands at 1.5%. More rate hikes by 12.5bp are expected in 2H22 to curb inflation. Taiwan's central bank policy rate and inflation Source: CEIC, ING Fiscal spending rises to offset damages from Covid As Covid numbers surged in Taiwan the government handed out fiscal stimulus for consumers and producers. This will continue to put pressure on fiscal health when tax revenues are expected to fall due to lower profits from the semiconductor industry. This may put fiscal health at risk. General government debt was 33.8% in 2020. The fiscal deficit reached a record high of 2.28% of GDP in 2020. A longer-term issue on fiscal health is that Taiwan’s aging population is a structural problem that has not been addressed by the government. By 2026, Taiwan will have at least 20% of the population aged 65 or above. Tax revenues will shrink and spending on the elderly will increase. The fiscal position will deteriorate more dramatically by 2025. A weak New Taiwan dollar The New Taiwan dollar (TWD) should be weaker from the start of 2022 due to less appetite for Taiwan equities compared to 2021. The TWSE stock index has fallen by 16% since the end of 2021. This has led to a depreciation of TWD against USD by more than 7.5% as of 24 June 2022. The TWSE stock index and USD/TWD has a statistically significant relationship. For long-term exchange rate risks, we look at the external position.  Taiwan continues to run a current account surplus thanks to the exports of semiconductors. Even with a softer trade surplus from slower semiconductor sales, Taiwan should still enjoy a current account surplus of more than 20% of GDP. External debt per GDP is still high at 113%, although this has fallen from more than 130% in 2018. Most of the external debts are corporate debts. Foreign exchange reserves have been about 280% of GDP, which is equivalent to 13 months of imports. The ample foreign exchange reserves indicate that the economy’s structure is stable.  TWD and the stock market Source: CEIC, ING Political risk Political tension is the key long-term risk faced by Taiwan, and uncertainty about the recovery of consumer demand in Mainland China poses short-term risks to the semiconductor industry and exports. But the external position of Taiwan is strong with a high level of foreign exchange reserves, and it should be able to offset these risks in sovereign rating calculations. Forecasts We have revised the GDP growth forecast lower to 3.8% for 2022 from 4.2% previously, mainly because of lower prices and a slower sales growth of semiconductors. We keep USD/TWD forecast at 29.2 by the end of 2022 as we expect mild capital inflows into the Taiwan stock market nearer the end of the year. Although this indicates a stronger TWD against USD than the spot of around 29.6, 29.2 is a lot weaker than the beginning of the year at around 27.7.  Read this article on THINK TagsUSDTWD Taiwan Semiconductor Monetary policy GDP 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
Back to black: the countries best positioned to replace Russian gas with coal

Back to black: the countries best positioned to replace Russian gas with coal

ING Economics ING Economics 28.06.2022 12:15
European countries are being forced to revive coal plants to cut back their dependency on Russian gas. Poland and Germany are in the best position for that gas-to-coal switch. Moving to more nuclear power will be tricky for many others.  And we have to consider the environmental concerns Poland and Germany could fully substitute gas use in their power sectors by running coal-fired power plants at full capacity Coal and nuclear power plants might come to the rescue Gas flows from Russia to Europe have been reduced to alarmingly low levels in recent days. On top of that, the LNG market is also tighter following an outage at the Freeport LNG export terminal in the US. This has fuelled debate about how to reduce gas use in the EU. Previously we concluded that there is no silver bullet for sectors, but the power sector could play an important role. In this article, we look at to what extent the power sector can substitute gas-fired power plants with coal-fired plants (gas-to-coal switch) or nuclear power plants (gas-to-nuke switch).   Our main conclusions are: Poland, and to a lesser extent Germany, can substitute gas use by gas-fired power plants by running coal plants at full capacity, provided that enough coal is available. The Netherlands lifted the 35% production cap for coal plants which could substitute 46% of gas-fired power generation, if the four remaining coal plants are fully utilised. France could fully substitute gas use in the power sector if it had its full fleet of nuclear power plants at its disposal. Unfortunately it has not, as 24 of the 56 nuclear reactors are shut down for maintenance. Hence, there is no room for a gas-to-nuclear switch. Belgium could substitute one-third of gas use in gas-fired power plants by running the current seven reactors at full capacity. That is unlikely to happen as two reactors will be closed soon, one in 2022 and one in 2023. Without these reactors, there is no potential to substitute power from gas plants with power from nuclear plants. The decision to extend the life cycle of two of the remaining five reactors does not change that outcome. The closure of the three remaining nuclear power plants in Germany later this year has eliminated the option for a gas-to-nuclear switch in the country. We arrived at these conclusions by looking at the extra power generation from coal and nuclear-fired power plants for a set of European countries if these plants are fully utilised – that is if they run at full capacity – and provided that there is enough coal available. More details on this theoretical exercise can be found in the box at the bottom of this page. Coal plants: burn baby burn Current energy markets provide favourable economic conditions for coal-fired power generation. The so-called dark spread is a measure of the competitiveness of coal-fired power generation compared to gas-fired power generation and shows high-profit levels for coal plants. But despite favourable economic conditions, coal plants are generating less than they can. Coal-fired power plants have been closed recently or were restricted to run at full capacity as a result of climate and energy transition policies. Our analysis suggests that gas use from gas-fired power plants can be fully substituted by coal-fired power plants in Poland and Germany and to a very large degree in Portugal, Spain, and the Netherlands. In these countries, coal is an ‘easy’ answer to addressing energy security risks, despite the fact that it goes against global climate goals. Poland and Germany could fully substitute gas use in the power sector by increasing coal-fired power generation Potential extra coal-fired power generation as a percentage of current gas-fired power generation Source: ING Research based on BNEF   Poland is the first European country that managed to top up its gas storage facilities. They are now 81% full as Poland was able to source a lot of LNG. Still, the 3.2 billion cubic metres (bcm) of stored gas is only a fraction of domestic gas consumption, at 21.3 bcm. The country is still vulnerable to prolonged gas disruptions. Poland’s power mix is highly dependent on coal as the country started to switch to gas relatively late. According to Bloomberg New Energy Finance (BNEF), the share of coal-fired power generation has come down from 94% in 2000 to 72% in 2020 on the back of more power generation from renewables and gas-fired power plants. Still, available coal capacity has not changed in the past 20 years and stands at around 30 gigawatts. By running coal plants at full capacity, Poland could easily phase out gas use in its gas plants. Our analysis yields the highest number for Poland, at a stunning 230%. So if the country runs its coal plants at the maximum level seen in the past 20 years, it would generate an additional amount of coal power that is 230% higher than the power it currently generates from gas-fired power plants. With ample capacity, it might have room to export coal power to neighbouring countries to facilitate them in their pursuit to reduce gas dependency. The intuitive answer to why this number is so high in Poland is easy: the fleet of coal-fired power plants is so much bigger than the fleet of gas-fired power plants, so it is relatively easy to substitute power and gas from gas plants. However, this can only be used if enough coal is available. Currently, coal is scarce in Poland due to the embargo on Russian coal and under-investment by coal companies. The German coalition intends to phase out coal plants in 2030 instead of 2038 when it entered office in November 2021. A gradual phase-out of lignite and hard coal power plants has already been started with Germany having run five ‘coal closer auctions’ so far in which owners of coal plants can bid on compensation for shutting down their power stations. Germany's coal exit laws set a 15 GW maximum capacity target each for lignite and hard coal, with lignite closures following a set timetable. The most recent closures, however, have now been reversed due to the potential scarcity of natural gas arising from the Ukraine crisis. If Germany fully utilises all of its coal plants, including the coal plants in the power reserve markets, it would generate around 100% more power than it produces with gas-fired power plants. In other words: it could substitute gas use from gas-fired power plants entirely, provided there is enough coal available. If one excludes the coal plants in the power reserve markets, the number drops to 59%. The Netherlands operates four coal-fired power plants of which three are relatively large and new. The Dutch Urgenda court law required the Dutch government to lower emissions by 25% by 2020 onwards. In order to reach this target, the output of coal plants in 2022 was capped at 35% of full potential for 2022. This cap has been lifted as of 20 June, so that coal plants can substitute up to 46% of the gas use in gas-fired power plants, which are the dominant source in the Dutch power system. Nuclear power plants; maintenance issues and plant closures prevent full utilisation France is Europe’s nuclear powerhouse with 56 operational nuclear power plants adding up to a whopping 64 gigawatts of capacity. In normal times these reactors meet more than 70% of the power demand in France. If these nuclear power plants ran at full capacity, France could very easily replace more than two times the amount of gas it needs for its gas-fired power plants. But unfortunately, these are not normal times. Since 2015, France’s nuclear capacity has fallen. This drop is partly explained by the closure of the Fessenheim reactor in 2020, but mostly it is caused by maintenance work and unscheduled interruptions. Currently, 24 of the 56 nuclear reactors are shut down for maintenance and just 30 gigawatt is available. As a result, power prices in France have reached historic highs. Most maintenance has to do with the refuelling of reactors that needs to be done every one or two years, and these reactors will come online soon. But some reactors need to be welded as a result of longer-term overhauls. There are also unplanned outages due to an unseasonably warm May. River water is often used for cooling reactors before being returned to the river at a higher temperature. Regulations are in place that restrict the use of cooling water in order to prevent damaging local wildlife. EDF, the state-owned operator of the reactors, is constantly updating its maintenance schedule for the fleet. EDF might be able to postpone maintenance at some plants until after the winter, but it is unlikely to bring back enough capacity to replace gas use in gas-fired power plants any time soon. France could fully substitute gas use in the power sector if it had its full nuclear fleet at its disposal Potential extra nuclear power generation as a percentage of current gas-fired power generation Source: ING Research based on BNEF   In Belgium, French utility Engie operates seven nuclear plants; four in Doel and three in Tihange. In accordance with the current law, it will proceed with the shutdown of these between 2022 and 2025: Doel 3 in 2022, Tihange 2 in 2023, and the other reactors in 2025. Their shutdown will be followed by their decommissioning and dismantling, which is set to be completed by 2040. With all seven nuclear plants running at full capacity, Belgium could save up to a third of the gas used in gas-fired power plants. But without the Doel 3 and Tihange 2 reactors – which together account for two gigawatts of nuclear capacity – there is no potential to save on gas in gas plants by running the five remaining nuclear plants at full capacity. The Belgium government, in a bid to alleviate the energy crisis, has recently said it plans to keep two reactors, known as Doel 4 and Tihange 3, running for another 10 years. Engie responded by saying that the decision to extend the operational lifetime of the reactors raises "significant safety, regulatory and implementation constraints" as maintenance has been scaled down in recent years in anticipation of the forced closure. And it still implies the closure of Doel 3 in 2022 and Tihange 2 in 2023, leaving no room to save gas in gas plants by maximising power generation in nuclear plants. Shortly after the Fukushima disaster in 2011, Germany decided to phase out its nuclear fleet (called the ‘Atomausstieg’). Three nuclear power plants remain active, down from 17 in 2011, and they’re scheduled for decommissioning at the end of this year. Three other plants that closed at the end of 2021 are in the early stages of a shutdown. All other plants are being dismantled, and can’t just be switched back on. The war prompted the government to run an assessment in March on whether it should and could delay the phaseout in light of the energy crisis. So far, the government is sticking to the current plan to close the remaining reactors by the end of the year, due to technical, legal, political, and security objections to lifetime extension. Recently, however, some members of the government publicly advocated the option to at least look into an extension. Any realistic discussion about delaying the phaseout centers around the three remaining plants in operation that are scheduled for closure this year. It is interesting to see that Japan is currently considering a reignition of reactors that were shut down after the Fukushima disaster. Bringing back to life the three plants that were recently closed does not seem to be a realistic option for Germany, at least for now. The three plants that are still running hardly provide room for a gas-to-nuclear switch. All in all, maintenance issues in France and the phase-out of nuclear power plants in Belgium and Germany have eliminated the potential of a gas-to-nuclear switch in the European Union. Increasing coal use comes with climate risks It is often said that saving gas by increasing coal use raises emissions in the power sector as coal-fired power plants emit twice as much carbon as gas-fired power plants; it feels like the wrong thing to do for the climate. However, the power sector is part of the emissions trading scheme (ETS) in the EU. That means that, on an EU level, the combined emissions of the power and manufacturing sector are capped and are being reduced in accordance with emission reduction goals. The current cap ensures 40% fewer emissions by 2030. And the Fitfor55 package raises the bar to 55% in order to set the EU on a trajectory to net-zero by 2050. As such, decisions to lower or increase coal-fired power generation do not impact the total carbon emissions for the ‘ETS sectors’ towards 2030. So, some might say that turning on coal plants isn't necessarily a climate disaster. The ETS carbon price makes sure that companies will lower their emissions according to the emission reduction goals. So far, the reaction in the EU carbon market has been muted on news of the use of more coal plants. After all, emission levels in the power sector might rise, but emissions in manufacturing are likely to drop as a result of the curtailment of production from high gas prices. This stands in sharp contrast to the market reaction in the run-up to the Fitfor55 package. Raising the bar in the ETS did indeed result in much higher carbon prices. These market reactions could be viewed as clear signs that carbon pricing is working in the sectors currently covered by the ETS. If Europe is serious about lowering carbon emissions, it should ratify the Fitfor55 proposal and not be too specific about fossil fuel technologies to get there. While increased coal use does not seem to jeopardise the emission reduction targets for Europe, the situation is less positive on a global level. Asia, for example, is also suffering from high gas prices and increasing coal production, but carbon markets are less advanced in this part of the world. As long as there is no single global carbon market, or as long as regional carbon markets are poorly interconnected, raising global coal production is not a good sign for global carbon emissions and hence global warming. The response of heavy coal users like China and India to the energy crisis will be crucial. Our methodology: calculating the potential of a gas-to-coal and gas-to-nuclear switch We have analysed 20 years of power market data from BNEF for the countries involved, from 2000 up to 2020, so that results are not impacted by drops in power demand from the Covid-19 lockdowns. We looked at both capacity and generation data for all the different technologies in a country’s power mix (coal, gas, nuclear, renewables, etc). By analysing historic load factors (the amount of power generation per unit of installed capacity), we were able to get a feel for the cyclical variation of load factors for coal and nuclear power plants driven by energy market conditions. We defined the upper range of the load factor as a proxy for a technology's full potential and applied it to the current available capacity of that technology in the market. This results in the power generation from coal or nuclear capacity if it would run on the highest load factors seen in the past 20 years, and provided that there is enough coal available to fully utilise coal plants and enough cooling water to run nuclear plants. We compared the increase in power generation with actual power generation and calculated to what extent that extra power could replace power generation from gas-fired power plants. While this analysis yields useful insights it has the following shortcomings: We looked at annual data but that does not guarantee that seasonal patterns in power demand or during peak hours can be met. There might be problems in assuring adequate capacity in order to manage electricity in peak hours. Gas plants are typically used to balance the grid and satisfy demand in peak hours. A switch to less flexible coal and/or nuclear power generation is likely to require more ‘demand-side management policies’. We only looked at gas use in the power sector, but electricity only accounts for one-fifth of energy demand in the EU. Half of the energy is used for heating and gas is an important energy source to generate heat. As such, real estate and manufacturing are also important sectors to limit gas demand. We took a short-term horizon to look for solutions in the power sector to save on gas so that energy security risks can be addressed. And with high gas prices, it might also serve the goal of an affordable energy system. The transition towards a net-zero economy is obviously the main long-term goal (sustainability). Electrification is key for decarbonisation in transportation, manufacturing, and real estate. In many countries, power demand is expected to increase strongly by 2030 (many models predict a rise of +50 to +100% by 2030). Our analysis ignores the important topic of how to meet an increasing power demand within heavily constrained power grids. Read this article on THINK TagsRussia-Ukraine Gas-to-coal Gas Energy Coal 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
EUR/USD In Focus! ECB Meeting In Sintra Is Like A Blockbuster Starring Lagarde, Powell And Bailey

May Euro Skyrocket!? Let's Watch FX Pairs With Euro! EUR/USD And EUR/GBP May Be Affected By Today's ECB's Activity!

ING Economics ING Economics 28.06.2022 09:28
The European Central Bank's Sintra forum today sees the introductory speech and press conference by Christine Lagarde, before other central bankers (Powell, Bailey) speak tomorrow. With markets pricing in 150bp of ECB tightening by year-end, the bar for a hawkish surprise is set quite high. In the US, consumer confidence data will be in focus Christine Lagarde, president of the European Central Bank USD: Commodity currencies can extend recovery Friday’s good momentum in equities only extended to the first part of yesterday’s session, as another bad day for global bonds prompted early gains to be erased. This morning, equity futures mostly point at a flat or slightly negative open, as markets continue to look for a balance between the magnitude of recession risk and the consequent impact for rates and global monetary conditions.    Interestingly, the FX market saw a reversal of the “sell-Europe” dynamic observed last week after the release of June’s PMIs, as European currencies, led by the Scandies, have started the week with a strong footing. A couple of days without major losses in global equities also let NOK and CAD - the two currencies with one of the most attractive set of fundamentals given their commodity exposure - regain some ground. These dynamics endorses our view that most near-term FX moves remain strictly tied to global equities swings, but that periods of relative stabilisation in sentiment should allow CAD and NOK emerge as key outperformers as they re-connect with their commodity and rates drivers. Today’s calendar in the US includes the release of the Conference Board Consumer Confidence index, which has steadily fallen in the past year and offers a gauge of how rising inflation expectations is starting to negatively impact household spending. Consensus is looking at another sharp drop in the index today. On the central banks’ side, markets are awaiting tomorrow’s speech by Fed Chair Jerome Powell’s at the Sintra forum. Today, Mary Daly is the only scheduled Fed speaker. Let’s see if some grim consumer confidence data today trigger another “bad news is good news” reaction for equities, which might see some further signs of stabilisation if a deteriorating economic outlook suggests less need for aggressive monetary policy action. This could generate some moderate dollar weakness, especially against the pro-cyclical/commodity currencies, although any USD correction will likely prove temporary for now given the still broadly supportive underlying narrative of Fed tightening. EUR: A high bar for hawkish surprises in Sintra ECB President Christine Lagarde is set to deliver the introductory speech at the ECB’s Sintra forum this morning, and she will be followed by Chief Economist Philip Lane before attending a press conference in the early afternoon. She will also deliver speeches tomorrow. Expect most of the discussion in Sintra to hover around the risks to the economic outlook and how those can impact monetary policy decisions. Indeed, Lagarde is expected to provide some colour on how seriously the ECB is considering a 50bp rate hike in September in light of recent activity survey pointing at a rapidly deteriorating picture for the eurozone. Also, more details of the anti-fragmentation tools discussed earlier this month will likely be addressed. A look at rate expectations embedded in the swaps market – 150bp of tightening fully in the price by year-end – suggests that the bar for a hawkish surprise is likely set quite high, and we doubt that Sintra will be the catalyst for a significant break higher in EUR/USD. Still, a softer dollar environment could help a move and stabilisation in the 1.0600-1.0650 range this week, even if we see a return to 1.0500 in the remainder of 3Q as more likely. GBP: Still no impact from Brexit headlines The pound continues to be rather unreactive to Brexit-related news. The UK Government proposed bill to unilaterally scrap part of the Norther Ireland protocol yesterday, which will now need to be voted by the House. There are surely many indications that the pound is largely pricing in this scenario, and markets remain mostly focused on other drivers of UK economic underperformance as well as assuming Brexit is not a major input in the BoE’s policy decision-making process at the moment. The re-pricing lower in BoE’s rate expectations were part of a global dynamics, which has helped the pound remain well clear of 1.2000 for now. Tomorrow’s speech by BoE’s Governor Andrew Bailey in Sintra will be the main event of the week. A broadly hawkish message could further help the pound stabilise and possibly drag EUR/GBP back below 0.8600. HUF: Bar for reversal of negative sentiment too high The main event this week in the CEE region is today's meeting of the Hungarian Central Bank. ING's Peter Virovacz expects at least 50bps hike in the base rate to 6.00% and a 30bps hike in the deposit rate to 6.75%. However, the key question is how much the MPCs will assess the current level of the forint and the pressure for further depreciation above the 400 EUR/HUF level. Although the central bank has previously shown a quick reaction to current market developments, the latest meeting, on the other hand, showed a more machine-like approach. Thus, it is the weaker forint that could push the central bank to take a bolder step. On the other hand, the market bar is too high, in our view, that the NBH could hardly surprise the market enough to turn around the negative market sentiment. Overall, we thus do not expect much from the forint today. At best, we expect a return to 395. Otherwise, one would say that the limit for further forint weakness is unlimited, but we believe that a lot of negative news is already priced in and short positioning should not allow another strong sell-off. In the long run, not much has changed in our view. The forint continues to be our least favorite currency in the CEE region, but we continue to watch headlines signaling a turnaround in Rule of Law and EU funds disputes that should unlock the hidden potential of the forint in the second half of the year (perhaps in September). 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
Rates Spark: Some two-way risk in rates

Rates Spark: Some two-way risk in rates

ING Economics ING Economics 28.06.2022 08:29
Recession fears have injected much needed two-way risks in rates markets. Inflation swaps suggest expectations are anchored, but swaptions betray a record low degree of conviction. Together, they suggest limited risk appetite and the market remaining in a wait-and-see mode   Interestingly, recession fears boiling over have brought much needed two-way risk in rates price action. This isn’t to say that the past few months were a smooth transition towards a world in higher interest rates, but it feels like last week’s rally has really woken up investors to the rates downside scenario. Central bankers are fond of splitting nominal interest rates between a real rate and an inflation expectations component, or between a short-term interest rate expectation and a risk premium. What do these approaches indicate? Inflation expectations may be under control... In the first approach, long-term inflation swaps both in USD and EUR remain well below their peak in the spring. Clearly swaps do not equate inflation expectation for the broader economy, but they are a reliable indication of where large investors see the fair compensation for inflation risk over the longer-term. In that sense, they seem to suggest that central banks have regained control of the narrative and are expected to get on top of the current inflation surge, however long and painful the process may be. We fully expect European Central Bank speakers to repeat that they are alert to recession risks at today’s Sintra forum. Inflation swaps show central banks have regained control of the narrative Source: Refinitiv, ING   Central banks have regained control of the narrative and are expected to get on top of the current inflation surge While it is premature to sound the all clear on the inflation crisis, this development is remarkable. No doubt that growing recession fears have contributed to calm long-term inflation swaps but this was far from a given. Increasingly, the debate on inflation has shifted to long-term dynamics, where a mild slowdown in growth would not guarantee a return to target. On that basis, we’re tempted to say that the upside in long-term yields is more limited than a few months ago, and that a bond market sell-off would likely be felt more acutely in the front-end. Eurozone inflation numbers, expected to show another acceleration later this week, will be a good test of this theory. ... but investor conviction is at a record low Risk premia are perhaps more difficult to measure, but there are proxies. We like to rely on the future interest rates volatility implied by the swaption market. If yields have so far remained under their recent peak, volatility has already printed new record highs. This is notable on two counts. Firstly, last week’s bond rally is the sort of event that would normally coincide with a drop in implied volatility, as market gyrations slow when rates approach their lower bound. Secondly, it shows that even with recession risks growing, investors aren’t necessarily pricing a return to the low rates environment of the past decade. Implied volatility is already above its earlier peak Source: Refinitiv, ING   We would refrain from calling the top in implied volatility With central banks no longer systematically supressing risk premia, we would refrain from calling the top in implied volatility. In the past decade, these levels of carry would have attracted investors in droves, but it seems not this time. What short volatility strategies have in common with bonds is that they offer carry but are exposed to sudden moves. It is a sign of the low degree of conviction in either of the competing narratives (durably higher inflation or severe recession) that implied volatility continues to rise, and probably points at durably depressed investor demand for bonds. Today's events and market view The main event today for anyone with an interest rates-minder is the first full day of the ECB’s Sintra forum. Separate discussions on the labour market and on energy will carry the most weight in the market’s thinking, although we doubt the event will generate headlines carrying short-term policy implications. President Christine Lagarde will give a press conference early in the afternoon. Germany will sell 5Y bonds via auction, which will add to KFW also looking for demand for its green bond in the same sector (7Y). Conference Board US consumer confidence has lagged its University of Michigan equivalent but is expected to take a plunge. Trade balance, Richmond Fed manufacturing index, and house prices complete the list of releases for today. 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
Riksbank set to hike 50bp in a bid to get ahead of the ECB

Riksbank set to hike 50bp in a bid to get ahead of the ECB

ING Economics ING Economics 27.06.2022 15:40
A weaker krona, above-expectation inflation readings, and a lack of scheduled meetings later this year, mean a 50bp rate hike from the Riksbank this Thursday looks highly likely. Any benefits for SEK may only show up at a later stage due to the current unstable risk enviornment  Inflation concerns and a lack of future scheduled meetings point to a 50bp hike The Riksbank's abrupt transformation from standout dove to hawk is almost complete. Having surprised markets with a 25 basis-point rate hike in April, policymakers are highly likely to step up the pace and hike interest rates by 50bp this week, for two key reasons: Firstly, the simple fact is that the Riksbank holds fewer meetings each year than other central banks, and that means it has to make each one count. The ECB is poised to hike twice before Swedish policymakers meet again in September, and the Riksbank will want to get out in front – not least given the recent depreciation in the krona. Secondly, the Riksbank laid out a few scenarios in April, one of which showed what would happen if core inflation came in above their central forecast at the time. Since then, recent core CPIF readings have come in higher than even this more hawkish scenario, which policymakers said at the time would justify a faster pace of tightening. Sweden is also building up to crucial wage negotiations early next year, and all the signs suggest a tight jobs market will yield a higher wage growth outcome than in previous years. Core inflation has exceeded even the RIksbank's 'high inflation' scenario Source: Macrobond, ING, Riksbank   A 50 basis-point hike seems very likely, and we could also feasibly see the Riksbank's new interest rate projection pencil in two further 50bp moves in September and November respectively. Policymakers will be aware that, despite roughly 100bp additional tightening being priced into the Swedish swaps curve since the April meeting, SEK is a little weaker than it was back then. However officials will need to balance this newly-found hawkishness against early signs of weakness in the housing market, where a little under half of new loans are on floating rates. In short, a 50 basis-point hike at this meeting, and probably another in September, look likely. What comes thereafter is less certain, given growing concerns about global growth and our view that both the Fed and ECB will largely be done with tightening by the turn of the year. FX: Krona's short-term outlook remains clouded A more aggressive monetary tightening cycle by the Riksbank and a widening gap with the ECB is undoubtedly arguing for a weaker EUR/SEK. As shown below, the last time the 2-year swap spread between the EUR and SEK was this negative, EUR/SEK was trading around 8.50.  EUR/SEK and swap spread differential Source: ING, Refinitiv   Surely, the current market conditions are very unique, and EUR/SEK is, like many other currency pairs, being driven by many other factors outside of the simple policy rate differential. The environment for global equities is likely to remain challenging due to the combination of global slowdown fears and tighter monetary conditions, and the relatively illiquid (to other G10 FX) and high-beta krona should in our view struggle to stage a sustained rebound in the near term.  We'll need to wait for a considerable stabilisation in global risk sentiment (that may only happen in 4Q) to see EUR/SEK re-connect with its rates differential, which unmistakenly argues for a weakening of the exchange rate. We still don't exclude a return to 10.10-10.20 by the end of this year, with the Riksbank's policy being a major driver of SEK restrengthening.   Read this article on THINK TagsSwedish krona Riksbank 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
New US home sales bounce, but it won’t last

New US home sales bounce, but it won’t last

ING Economics ING Economics 27.06.2022 09:38
New home sales jumped nearly 11% in April, but we see this as a short term blip higher for a series that is in a very clear downward trend. Surging mortgage borrowing costs and a general lack of affordability mean transaction numbers will fall sharply in coming months and with supply on the rise, home price growth will slow sharply and likely fall in some areas A surprise jump in new home sales What US housing market crash? New home sales jumped 10.7% month-on-month in May going from an upwardly revised annualised 629k to 696k, much better than the 590k consensus forecast. Admittedly, mortgage applications for home purchases had risen in the past two weeks as can be seen in the chart below, but it is difficult to believe that this will mark the start of a new upward trajectory. US new home sales and mortgage applications for home purchases Source: Macrobond, ING But demand will weaken through the rest of the year With affordability looking so stretched given house prices have risen nearly 40% nationally since the start of the pandemic, and mortgage rates getting close to 6%, the pool of potential buyers is rapidly shrinking. To highlight this, the Mortgage Bankers Association reported Wednesday that the average loan size for a new purchase was $422k in the week of June 17. At the start of the year when the typical 30Y fixed-rate mortgage was 3.5%, the monthly mortgage payment would have been around $1895. Today, with mortgage rates at 6%, that payment would be $2530. Higher borrowing costs are not the only issue for housing demand. Consumer confidence is being hit hard by concerns over high inflation and the plunge in equity markets. Consequently, we see today’s bounce in new home sales as a temporary blip higher in what is a very volatile series that is firmly in a downward trend. New home inventory for sale is on the rise Source: Macrobond, ING House price growth to slow with supply on the rise At the same time, inventory for sale is on an upward trend. There are now 444,000 newly built homes up for sale, the highest since May 2008 and with building permits and housing starts still growing, this number looks set to rise. To us, this means we are seeing the housing market rapidly move away from a period of huge excess demand as massive fiscal and monetary stimulus combined with the option of working from home boosted activity amid a dearth of supply. US house price levels across the country indexed to February 2020 = 100 Source: Macrobond, ING   Instead, we are now facing a market where there is a lot more property being made available for sale while demand is on a downward trend. This means that the rapid price appreciation seen across the country should soon start to slow with some hotspots facing the clear risk of a correction lower. Read this article on THINK TagsUS Mortgage Housing House prices 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
Can GBP/USD Reach 1.24!? Will EUR/GBP Prove British Pound's Strength? It's Good To Diagnose EUR/CHF Performance This Week. Can DXY (US Dollar Index) Go Down?

Can GBP/USD Reach 1.24!? Will EUR/GBP Prove British Pound's Strength? It's Good To Diagnose EUR/CHF Performance This Week. Can DXY (US Dollar Index) Go Down?

ING Economics ING Economics 27.06.2022 09:15
Global equity markets are putting in a little run of gains. The positive story seems to be that Fed Chair Powell's admission last week of the risk of recession means that global monetary tightening may not be as sharp as expected - and that's good news for equities. Quarter-end and half-year-end rebalancing may help equities and soften the dollar this week USD: Some respite in equities may help commodity FX in particular The S&P 500 is nearly 8% up from its lows at the start of the month and rallied 3% on Friday. Helping the rally has no doubt been last week's re-pricing of tightening cycles around the world where 25-50bp of expected tightening were removed from some money market curves in just a few days. Driving that pricing seemed to be the much broader discussion - including from Federal Reserve Chair Jerome Powell - over the risks of recession. It is not clear we will get many more insights into those risks this week, although probably the most important Fed communication will be Powell taking part in the ECB's central banking forum in Sintra on Wednesday afternoon. This better equity environment has seen the dollar weaken a little. There is much focus this week that quarter-end and half-year-end rebalancing by buyside fund managers will give equities a lift into Thursday. At the same time, buyside surveys have been showing a lot of cash sitting on the sidelines looking for a home. Barring fresh shocks and since it is not a big week for US data, it seems not unreasonable to think equities could post some marginal further gains this week. Most correlated to equity markets over the last three months have been the commodity FX pairs, and a benign week for equities could see the likes of the Canadian dollar and Norwegian krone play catch-up with their hawkish local central banks. This all looks like a slightly negative environment for the dollar. Yet we doubt the dollar will slump. It is far too early for central bankers to be signalling the all-clear with inflation. And signs later in the summer that central banks will still be tightening even as growth slows may trigger another wave of equity selling. For this week, however, DXY could drift back towards the recent 103.40 lows.  EUR: Temporary reprieve EUR/USD traded volatility is dipping towards the lower end of its 8-10% recent range as EUR/USD starts to show more range-bound trading. Current price action is in keeping with our baseline scenario of EUR/USD trading in a range through the summer months before making a modest turn higher at year-end should, as we believe, the market shift towards pricing the start of a Fed easing cycle in late 2023. For the time being, however, the Fed will continue to sound hawkish and EUR/USD may struggle to hold gains over the 1.0625/40 area this week. Elsewhere, the market will be looking out again at the weekly CHF sight deposit data to see if the Swiss National Bank has been selling FX reserves to engineer a stronger Swiss franc. EUR/CHF made it as low as 1.0050 on Friday and as we have been saying for the last couple of months, 1.00 should not prove much of a floor in EUR/CHF - now that the SNB wants to drive the nominal CHF stronger to fight inflation.  GBP: Equity rally could help sterling Sterling continues to defy some of the more bearish forecasts - perhaps because some of its trading partners face equal challenges. For today, headlines could be grabbed this afternoon by news that Conservatives in the lower house have backed a bill suspending parts of the Northern Ireland protocol and risking a trade war with the EU. We suspect that news is priced in, even though it will not be welcome for sterling. Helping sterling, however, should be the better equity environment where sterling has recently taken on the characteristics of a growth currency with a decent correlation with equities. In quiet markets, GBP/USD could edge up to the recent highs at 1.2400, while EUR/GBP could edge back down to the 0.8550 area. Last week saw 30bp priced out of this year's Bank of England tightening cycle - but GBP/USD held up well because a similar re-pricing was underway in the US, too.  TRY: New measures provide temporary support for the lira Turkish authorities have found a new way to boost the lira. On Friday, regulators announced that firms with excess holdings of foreign exchange would see access to commercial lira loans curtailed. The measures seem to be addressing one of the areas of lira leakage where credit growth was finding its way into FX. The measures were announced late Friday and triggered a 5% rally in the lira. Most expect that the lira will struggle to defy 70% inflation without recourse to more conventional monetary policy, thus it is not clear how long the lira can sustain these gains close to the 16.00/16.30/USD area. 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
Crude Oil Higher, Gold Price Slips, Crypto: Bitcoin (BTC/USD) Vulnerable

Stocks: S&P 500 And Nasdaq Increased On Friday. FX: EUR/USD Performed Well Too. What About AUD Attempt To Rise?

ING Economics ING Economics 27.06.2022 08:29
Asian markets positive despite debt default in Russia Source: shutterstock Macro outlook Global markets: Friday built on Thursday as a solid day for US equities. Both the S&P and NASDAQ gained more than 3%, which takes the S&P500 out, if only briefly, of bear market territory. Equity futures have since drifted into the red, but not massively so, despite the news that Russia is now in default on its foreign currency debt. Consequently, it is looking as if it will probably be a fairly upbeat start to the week in Asian markets. EURUSD drifted steadily higher on the improved risk tone on Friday, and is up to about 1.0570 now. The AUD has also pushed sharply higher, though still lies below 0.70 at 0.6954 currently. The JPY has been pretty steady over the same period and is only slightly weaker at 135.18. Within the Asian FX pack, the main standout is the PHP which continues to struggle, coming to within a whisker of 55.00. Global bond markets were reasonably quiet on Friday. Both 2Y and 10Y US Treasuries saw yields increase by about 4bp. The 10Y yield is now 3.1301%.  10Y JGBs continue to hold below 0.25%. See also this article from our rates team that considers whether we have seen the peak in rates.  Global Macro: It was a fairly quiet end to the week for macro developments. Germany’s Ifo business survey continued to fall, with both current conditions and expectations components declining. That’s not too surprising with gas rationing being discussed. The US University of Michigan consumer sentiment index fell to 50, which is considerably worse than it recorded in the depths of the global financial crisis. Though the 5-10Y inflation expectations survey actually dipped slightly to 3.1%. Whether this reflects confidence in Powell’s commitment to tame inflation, or a growing sense of looming recession, is arguable right now. Today, durable goods orders for May get released. These should show whether rising rates are beginning to weigh on US business investment plans or not. US pending home sales for May are also released. New home sales released last Friday came in a lot stronger than had been expected. Though this is not expected to last.  China: There has been a further move towards RMB internationalisation, with the creation of yuan reserves at the Bank for International Settlements (the central bank of central banks). China has already created yuan swap lines with several central banks, but this pool of yuan reserves makes the internationalisation of the yuan more visible. For this week, the key data from China is Thursday's PMI index. We expect the manufacturing PMI to be above or at 50.0, but the non-manufacturing PMI to remain below 50.0 due to isolated lockdowns. The risk to these estimates is that the non-manufacturing PMI could also come in above 50.0 since the PMI is a month-on-month comparison. Even if the non-manufacturing PMI rises above 50, the recovery of services should still be slower than manufacturing. What to look out for: Regional world manufacturing indices China industrial profits (27 June) Hong Kong trade balance (27 June) US durable goods orders and pending home sales (27 June) US conference board confidence (28 June) Philippines M3 and bank lending (28 June) South Korea consumer confidence (29 June) Japan retail sales (29 June) Australia retail sales (29 June) Euro zone CPI inflation (29 June) US 1Q GDP and core PCE (29 June) South Korea industrial production (30 June) Japan industrial production (30 June) China PMI manufacturing and non-manufacturing (30 June) Thailand trade balance (30 June) Hong Kong retail sales (30 June) US personal income and initial jobless claims (30 June) New Zealand building permits (1 July) Japan Tokyo CPI inflation, Tankan survey and job applicant ratio (1 July) South Korea trade balance (1 July) Regional PMI manufacturing (1 July) Indonesia CPI inflation (1 July) US ISM manufacturing (1 July) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
Back to black: the countries best positioned to replace Russian gas with coal

Worst Week For Crude Oil Price!? Nickel And Zinc Price Decreased On Friday OPEC Meets On Wednesday. | ING Economics

ING Economics ING Economics 27.06.2022 08:20
Your daily roundup of commodities news and ING views Energy Oil prices had their worst week since early April, with ICE Brent falling more than 7% over the last week. Concern over the macro outlook has weighed heavily on the oil market, despite fundamentals remaining constructive. As we mentioned last week, the weakness in the flat price has coincided with strength in the time spreads. The prompt ICE Brent spread is trading at more than a US$4/bbl backwardation, compared to US$2.77/bb a week ago. In addition, refinery margins remain very healthy, providing a clear incentive for refiners to maximize throughput rates, which is obviously supportive for crude oil demand. G-7 nations are meeting at the moment, and discussions around a potential price limit on Russian oil appear to be on the agenda. It is suggested that any limits would be done through insurance and shipping. However, it would likely take some time to come to an agreement. It would require the EU to renegotiate its last round of sanctions, and some member countries may be reluctant to do so, given how long it originally took EU countries to finalize its Russian oil ban.   According to EU diplomats, Iranian nuclear talks are set to restart in the coming days, after failing earlier this year. Given the strength in oil prices, Iran may feel that they are in a stronger position when it comes to negotiations. The sticking point in talks has been Iran wanting the US to remove the Islamic Revolutionary Guards Corp from its terrorist list. Given that talks have been on and off for the last year or so, we expect that discussions will likely be drawn out, and so we are assuming that the supply of Iranian oil will only start increasing in early 2023. As for the calendar this week, OPEC members are set to meet on Wednesday, which will be followed by the OPEC+ ministerial meeting on Thursday. The group already agreed at its last meeting on larger supply increases for July and August. This week’s meeting is likely to just confirm the supply increase for August. Metals Sentiment in the metals complex remained downbeat on Friday, despite a retreat in the US dollar. Prices of all major metals fell in London last week amid continued macro headwinds. LME Nickel was the worst performer amongst LME base metals, with prices falling 6.8% on Friday. Zinc prices fell more than 4%, despite the continued drawdown of on-warrant stocks in LME warehouses. The latest LME data show that zinc on-warrant stocks declined by 4.85kt, hitting a fresh new low of 15kt on Friday. This took the total decline in on warrant stocks to more than 43kt over the last week. It seems as though G7 countries are set to announce a ban on Russian gold imports, which on the surface sounds significant, given that Russia is the third-largest producer globally. However, the gold industry has already largely shunned Russian gold. The London Bullion Market Association back in March already suspended the accreditation of Russian gold refiners. This would explain why we are seeing a very limited reaction in gold prices this morning, with spot gold trading only marginally higher. The latest CFTC data show that speculators increased their bearish bets in COMEX copper for a second consecutive week. Speculators sold 9,164 lots over the last reporting week, leaving them with a net short of 15,959 lots as of last Tuesday. Moving to COMEX gold, speculators increased their net long by 12,255, leaving them with a net long of 61,816 lots as of last reporting week. Read this article on THINK TagsZinc Russian oil ban OPEC+ Nuclear talks Gold 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
It smells like a peak in US market rates

It smells like a peak in US market rates

ING Economics ING Economics 24.06.2022 16:07
When we hit 2% on the US 10yr we asked what next, and laid out a path to 3%. On hitting 3% we asked the same, and postulated the possiblilty of approaching 4%. A little over a week ago we hit 3.5%. Various signs suggest that could be the peak. That does not mean we can't get back there, as real rates are still too low and will rise. But if that was not it, we're not far off Real rates are still too low and will rise Real rates should still rise, and might just take the 10yr Treasury yield back towards the previous high We are at a point now where the peak seen at 3.5% in the 10yr US Treasury yield a little over a week ago is seeming more and more like a turning point. That does not mean we can’t get back there. But it does mean that indicators are pointing to a scenario where a dramatic break above that level is looking less likely. Nothing is impossible, but here’s the logic: First, the 5yr has been quietly decompressing on the curve over the past few days. It is now trading at 8.5bp cheap to an interpolated line between the 2yr and the 10yr, and so still in line with a bond bear market. But it is far less cheap than it was (15bp a few weeks back), and it looks like it's on a journey of decompression. It's an early call, but we're paying close attention to the journey it looks to be on. As it decompresses it typically signals a change in the cycle. Now that could change, for example should we see a surprisingly big inflation number and/or an outsized payrolls outcome in the coming weeks. But based on the developing discount, market expectations are pushing against that. Second, the 10yr breakeven inflation rate has fallen to 2.5%. That was at 3% only a month or so ago. That’s a big change in expectations. The real yield is still too low at 60bp. But even if that rises to the 1% area that we target, that would bring the 10yr Treasury yield back up to its previous high, without taking it out. For it to break above, inflation expectations would need to rise as well. It could happen of course. But then again that’s not the journey that inflation expectations are currently on. In fact, inflation expectations could even fall, muting the impact of higher real yields. As we’ve said countless times, turning points are difficult to predict, and we’ve identified the third quarter as when the turning point is likely to be. We still think we will have seen one by then, but we’d also note that it might just be from a level not too dissimilar from the 3.5% area seen on the 10yr a little over a week ago.  Watch the system risk. It's fine for now, but there are warning signs At the same time, it's important to note that price action in the past few days has been remarkable. In fact, it was astonishing in the week or so before that when 20bp moves in both directions were occurring. The move from 3.5% down to 3.1% in the 10yr must be contextualised against that, in the sense that we could journey back up again should we enter a period of "risk-on" in the weeks ahead, or on upsize data surprises. For the latter, we’d watch June payrolls on Friday week, and June CPI the following Thursday. And a final point on the system. It’s holding up fine here. Forget the elevation in the Ted spread (3mth bills spread to Libor), as that reflects a collapse in bills yields, in turn reflective of a repo market that is being strained to the downside (SOFR now at 6bp below the Fed funds floor as a record USD $2.3tr goes into the Fed's reverse repo window at 1.55%). More importantly, banks are printing 3mth commercial paper at just 15bp over the risk-free rate. This is still quite tight, compared to a long-term average at around 25bp. Hence the system is holding up quite well. But credit spreads are at stressed levels, signaling an elevation in default rates ahead of us, which is typical of recessionary periods. That in turn will result in a rise in system pressure, elevating bank funding rates relative to the risk-free rate. The market discount is no doubt factoring this, as is the Fed, which needs to get the tightening in before the system creaks. Another reason to suggest we're on the eve of a cycle change. Read this article on THINK TagsRates Federal Reserve 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
Key events in developed markets next week

Key events in developed markets next week

ING Economics ING Economics 24.06.2022 15:37
The risk of a US hard landing is increasing, and while the consumer numbers still look solid, cracks are appearing in the manufacturing sector. Eurozone inflation is set to go another leg higher on rising energy prices, while Sweden's Riksbank looks set to the join the 50bp club as policymakers try to get ahead of ECB rate hikes In this article Increasing risk of a hard landing as Fed is determined to get inflation under control Inflationary pressure persists as consumers get the short end of the straw Riksbank set to join the 50bp club Source: Shutterstock Increasing risk of a hard landing as Fed is determined to get inflation under control In the near term, the US activity story is holding up with consumers still willing to use savings accumulated through the pandemic to finance spending on leisure and “experiences”. This means we expect expenditures related to services to outperform spending on goods through the summer. However, with the Federal Reserve raising interest rates more aggressively, moving monetary policy harder and faster into restrictive territory as it tries to get a grip on inflation, there is a growing fear of a US recession later this year and into 2023. Household finances are being squeezed by inflation while higher mortgage rates are already prompting a deceleration in housing activity and the Capex outlook is deteriorating as corporate managers fret about falling stock market prices and the potential for weaker demand. We expect to see durable goods orders fall, consumer confidence remain weak, and manufacturing surveys to come under more pressure this week, which would add to a sense of impending gloom. Inflationary pressure persists as consumers get the short end of the straw The eurozone will focus on inflation figures that come out on Friday. There are no signs that inflationary pressures have abated in the meantime, with energy inflation set to trend higher again on squeezed gas supply and the oil embargo, which have both caused market prices to increase again. Core inflation is set to see another leg up as input price pressures are being priced through to consumers. While there are now more signs emerging that pipeline pressures are peaking, the question is when this will feed through to the end consumer. This can be a volatile process with further increases in energy prices not excluded given the unpredictability of geopolitics. Riksbank set to join the 50bp club The Riksbank looks set to join the ever-increasing band of central banks hiking by half-point increments, for two key reasons. Firstly, the Riksbank holds fewer meetings each year than other central banks and it has only two further scheduled opportunities to change policy after next week. Thursday’s meeting is an opportunity to get out in front of the ECB, which is poised to hike twice before the Riksbank meets again. Secondly, the Riksbank laid out a few scenarios in April, and core CPIF is so far tracking its ‘higher inflation’ path which policymakers indicated at the time would require an accelerated pace of tightening. Wage pressures are also building ahead of important negotiations later in the year. A 50bp hike at this meeting, and probably another in September, therefore, look likely. Recent SEK depreciation will be an area of nervousness, though the Riksbank will need to weigh this against early signs of a weakening in the housing market, where a little under half of new loans are on floating rates. Developed Markets Economic Calendar Source: Refinitiv, ING TagsRiksbank Federal Reserve ECB
Stocks turn negative on Wall Street

ING Economics: Key events in EMEA next week - 27/06

ING Economics ING Economics 24.06.2022 14:39
In anticipation of the National Bank of Hungary's rate-setting meeting next week, we predict a 50bp raise in the base rate Source: Shutterstock      Hungary: unchanged GDP outlook with tightening on the horizon The main event next week in Hungary is the rate-setting meeting. The situation remains delicate and although the direction is crystal clear (tightening), we are not sure exactly what to expect from the National Bank of Hungary. Our base case is the usual combination of rate hikes: 50bp rise in the base rate followed by a 30bp hike in the 1-week deposit rate on Thursday. However, should the EUR/HUF reach 400 again and stick to this stubbornly as we approach the day of the meeting, we would add a higher probability of a more aggressive rate hike, especially taking into consideration the market pricing regarding the rates in the short run. Alongside the decision, we will get the latest staff projections as well, where we see an unchanged GDP outlook, but an upwardly revised inflation path both for 2022 and 2023. This should nudge decision-makers into a further commitment to tighten in the second half of the year. We see an above 9% terminal rate in Hungary by the year-end. EMEA Economic Calendar Source: Refinitiv, ING TagsNational Bank of Hungary EMEA   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
Asia week ahead: Japan and Korea data plus regional manufacturing readings - 24.06.2022

Asia week ahead: Japan and Korea data plus regional manufacturing readings - 24.06.2022

ING Economics ING Economics 24.06.2022 14:05
Data from Japan and Korea will be the highlight for next week In this article Japan’s flurry of data releases Korean trade and industrial production data Manufacturing reports could show sustained impact of China stoppages And the rest... Source: Shutterstock Share    Download article as PDF Japan’s flurry of data releases Industrial production in Japan is expected to rebound from the previous month’s contraction on the back of better domestic demand, although gains may be capped as global supply chain disruptions are still weighing on overall production activity. Meanwhile, Tokyo CPI inflation should increase after a recent deprecation in the yen combined with higher energy and food price pressures. Japan’s labour market will also be in focus. The unemployment rate should remain unchanged at 2.5%, as service sector hiring is still picking up while there is some slowdown in manufacturing. Lastly, the Tankan surveys will possibly show an optimistic outlook for both manufacturing and services, with large companies seeing slightly stronger gains and small companies still struggling to recover from the pandemic. The Bank of Japan will be paying more attention to inflation if there are any signs of increasing demand pressure while labour market tightening could lead to stronger wage growth. Korean trade and industrial production data The reopening of Korea is boosting the domestic economy, especially private services, but the recent sharp drop in the equity market and higher mortgage/lending rates could put some downward pressure on consumer confidence. Meanwhile, business sentiment is expected to recover as domestic and global logistics conditions improve. May’s industrial production should rebound but the recovery could be marginal given China’s lockdown. Korea also reports preliminary trade data, with export growth likely moderating in June. Unfavourable calendar day effects could be one reason for the slowdown, but the trucker’s union strike has had a slight negative impact on port activity as well. Imports, on the other hand, should grow at a faster pace and the overall trade balance could post a high deficit. Upcoming data reports will be critical for the Bank of Korea, as the central bank’s next moves will possibly be impacted not just by the inflation trajectory but also by the growth outlook. Manufacturing reports could show sustained impact of China stoppages Next week also features the release of regional manufacturing indices, with China also reporting its non-manufacturing PMI on 30 June. We could see the protracted impact of work stoppages in China and their effect on the regional value chain.    And the rest... Meanwhile, India’s fiscal deficit figures on 30 June will show whether India is on track to hit its 6.4% fiscal deficit target for the fiscal year 2022/23. The April deficit figures were helpful, coming in lower than in April 2021. This bodes well for a reduction in the deficit as a percentage of nominal GDP, which should be growing strongly, lifted by higher inflation. Cuts in excise duties, higher debt service, and the higher burden of state subsidies could eat into this progress in the coming months, and there is still a long way to go, with the retention of the investment grade credit rating at stake. In Australia, the retail sales report for May is out on 29 June and will probably moderate from the 0.9% month-on-month pace recorded for April. Though it should still remain decent, rising interest rates and falling consumer sentiment, as well as peaking housing prices, may offset support from strong employment and robust wage growth. Lastly, Indonesia releases its latest inflation report next week and we could see both headline and core inflation threaten the upper end of the central bank inflation target. Bank Indonesia has held off on hiking policy rates citing still manageable inflation but elevated commodity prices may eventually force domestic inflation past the Bank's comfort zone. Faster inflation by early 3Q could be enough to kickstart the hiking cycle, with a first hike coming as early as the end of July.  Asia Economic Calendar Source: Refinitiv, ING TagsEmerging Markets Asia week ahead Asia Markets Asia Economics
An unusual drawdown is the perfect ending to an unusual bull market

Italy: Mixed signals from June confidence data

ING Economics ING Economics 24.06.2022 13:58
Consumer gloom and business resilience cannot be easily reconciled. A likely re-composition in consumption patterns and resilient industry could balance out. We suspect that a small positive growth surprise in 2022 would borrow some growth from 2023   Source: Shutterstock   The last batch of confidence data confirms that the inflation shock, supply chain constraints, and a reopening effect are hitting the Italian economy in different ways. Consumer gloom deepens The first takeaway from the June release is that households are increasingly feeling the brunt of the inflation wave. Consumer confidence fell to 98.3, the lowest level since November 2020. Respondents are concerned about a deterioration in the economic situation of their household and signal more willingness to save, the consequence being a sharp decline in purchasing intentions of durable goods. However, the improvement in retailer confidence seems to suggest that there is an ongoing re-composition in consumption patterns in favour of non-durable goods. Service businesses more upbeat, possibly on the back of reopening effects The second relevant takeaway is that services seem scarcely affected by recent developments. Confidence in services gained more than five points on the month, propelled by a strong gain in the transport services component. As confidence in tourism services confirmed recent gains, it seems that a reopening effect is still at work. Interestingly, the orders component also improved on the month, pointing to a continuation of the pattern.     Manufacturers resilient, helped by improving orders In industry, we would characterise the small confidence gains in both construction and manufacturing as a consolidation. Construction was marginally up, getting very close to recent highs. Generous tax incentives for energy-saving renovations and the inflow of Recovery Fund money in support of infrastructure investment are apparently working well and, based on the improved order component, are expected to do so in the near future. The small gain in manufacturing confidence is possibly more surprising if we factor in recent developments externally. Order books are improving and an increase in reported stocks of products goes together with increased production expectations in all main categories. For the time being, both the inflation backdrop and the sharp increase in market interest rates have scarcely affected manufacturer spirits. This is good news for the supply side angle of GDP growth.     Possible upside risk to our 2.6% GDP forecast for 2022 would possibly borrow from 2023 Today’s release highlights that the overlapping effects of new shocks and of the exit from past shocks do not allow a clear-cut view on 2Q22 GDP growth. Notwithstanding the consistent positive news flow coming from tourism, we suspect that the re-composition of consumption will not prevent private consumption from acting as a drag, while investment could confirm growth positive. International tourism flows might tilt the balance between a minor contraction (our base case) and a minor expansion in 2Q22 GDP. Our current forecast of a 2.6% average yearly growth in 2022 could be slightly conservative, but a positive surprise would probably borrow some growth from 2023. 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
National Bank of Hungary Review: Making it simpler

Hungarian labour statistics point to pipeline price pressures

ING Economics ING Economics 24.06.2022 12:53
The latest set of labour data has strengthened our view that there is more to come on inflation, as the real disposable income of households continues to grow The number of participants in the Hungarian labour market is growing   The Hungarian Central Statistical Office (HCSO) has released the latest set of labour market data (job vacancies, unemployment rate, wages) which are not short of positive developments from the real economy point of view. On the other hand, they all suggest that with Hungary being close to full employment, there is no chance of an easing in pipeline price pressures. Unemployment rate close to record low In May, the number of unemployed fell to 169,000, corresponding to an unemployment rate of 3.5%. The last time we saw such a low number in late 2019/early 2020, Hungary was suffering from a chronic labour shortage. The trend of recent months is clear: the number of participants in the labour market is growing, boosting the employment rate and reducing the number of unemployed as well. In our view, the labour market situation continues to provide a favourable environment for economic growth. However, an increasing proportion of companies are struggling with labour shortages. According to the latest official data, the number of job vacancies in Hungary (87,000) approached its previous record in the first quarter of this year. Labour market trends (%) Source: HCSO, ING   All this means that the domestic labour market is becoming tighter: fewer unemployed people are able to choose between a growing number of vacant jobs. This is expected to translate into an additional increase in labour costs for companies if they want to hire a new employee or wish to keep their own. This continues to exacerbate wage outflows in the economy. Job vacancies in Hungary Source: HCSO, ING Strong wage outflow supports consumption Gross average wages increased by 15.2% year-on-year in April 2022, showing yet another significant rise. Though it shows some deceleration compared to the previous two months, the data was affected by a major jump in bonus payments. Without bonuses, regular wages increased by 14.1% on average in April and the median gross wage almost reached HUF 400,000. There is one new element in the details: wage growth in the private sector exceeded the statistics seen in the public sector: 14.5% vs 12%. Meanwhile, due to educational institutions being reclassified as part of the non-profit sector, wage growth here remains on the extreme side: above 35% over a year. Back in the private sector, wages have risen above the average in those sectors where labour shortages are more acute and/or they are employing a higher share of low-skilled workers earning minimum wages (which was increased by 20% from January). These sectors are construction, wholesale and retail trade, logistics, accommodation, and hospitality. Wage growth in Hungary (3-month moving averages, % YoY) Source: HCSO, ING Tight labour market keeps prices on an upward trend As we said above, the latest set of labour market data all point in one direction: Hungary has probably reached full employment. Household consumption may continue to be bolstered by strong real wage growth, projecting a sustained persistence of demand-driven inflation. While households are smoothing their consumption (that is, they are using their savings to pay for their usual consumption in quantity and quality) despite rising inflation, we can hardly expect a negative impact on the price pressure. Inflation risks stemming from the labour market are still on the upside. All this clearly paves the way for tighter monetary policy during the remainder of this year. Over the longer term, even if supply-side shocks ease, as long as the labour market remains tight, demand-driven inflation will remain with us, and the HUF may need to be strengthened significantly to (at least partly) compensate this driver of inflation. Read this article on THINK TagsWages Unemployment rate Jobs Inflation Hungary 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
Weak German Ifo reading reminds us that stagflation is the base case

Weak German Ifo reading reminds us that stagflation is the base case

ING Economics ING Economics 24.06.2022 12:28
A weak Ifo reading in June should remind everyone that the German economy is feeling the full economic impact of the war in Ukraine, broader supply chain frictions, and higher inflation Consumer confidence in Germany is already in clear recession territory Short-lived optimism After two months of improving business sentiment, Germany’s most prominent leading indicator, the Ifo index, just delivered a reality check and dented any premature optimism. The Ifo index dropped to 92.3 in June, from 93.0 in May. In March, the Ifo stood at 90.8. Both the current assessment and the expectations component weakened in June, with expectations almost back down to the March levels. The reasons for dampened optimism are clear: the war in Ukraine, lockdowns in China and the consequent supply chain frictions, higher costs and prices, and weakening demand. It is actually not the first time German business sentiment seems to have had a delayed reaction to global events. Stagflation remains our base case scenario for the German economy Yesterday, the German PMI fell for the fourth consecutive month, to the lowest level since the fourth wave of the Covid-19 pandemic. The PMI details showed another sharp inventory build-up and a cooling in the services sector, a combination that definitely doesn’t bode well for future economic activity. In fact, supportive factors for the economy such as post-lockdown reopenings and filled order books have been losing momentum rapidly. Weaker global demand, supply chain frictions, and high inflation denting consumption are hitting the German economy. Supply chains continue to be disrupted due to the Shanghai lockdown and the war in Ukraine. Some might be disrupted for good. Elevated uncertainty and fear will weigh on both supply and demand in the coming months. Real disposable incomes of households will suffer, and companies will have increasing difficulties dealing with the costs of higher energy and commodity prices, putting corporate profit margins under pressure. Not a happy-go-lucky story. The German economy will definitely not plunge as it did during the 2020 lockdowns. However, consumer confidence is already in clear recession territory and today’s Ifo reading, as well as yesterday’s PMI reading, both suggest that the manufacturing sector is quickly following suit. Stagflation for the rest of the year remains our base case scenario for the German economy, and an outright recession is our risk scenario. Read this article on THINK TagsIfo index Germany Eurozone 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
Asian equities ease with Wall Street | Oanda

FX Daily: Outlining the paths for EUR/USD

ING Economics ING Economics 24.06.2022 11:53
Yesterday's PMIs triggered a "sell Europe" dynamic, and demonstrated how growth differentials are becoming an increasingly important driver for the FX market. Such differentials are one of the inputs of our EUR/USD scenario analysis for 2022-23, where we outline different paths ranging from 0.85 to 1.30. Today, central bank speakers will be in focus USD: Fed rhetoric remains hawkish The release of June’s PMIs yesterday generated some diverging dynamics in the G10 space. A widespread increase in recession fears continues to fuel a recovery in the bond market and by extension in the safe-haven yen, while pro-cyclical European currencies trended lower on the back of grim surveys out of the eurozone. PMIs dropped significantly also in the US, but the dollar is not usually highly sensitive to the release and a generalised “sell Europe” market attitude triggered some defensive inflows into the dollar. Incidentally, we continued to hear a rather hawkish tone from Fed speakers. Michelle Bowman fully backed a 75bp increase in July and suggested multiple 50bp increases should be delivered after that one. Fed Chair Jerome Powell toned down the recession discussion, sounding more upbeat on the economic outlook yesterday compared to Wednesday’s Senate testimony. Today, the Fedspeak calendar includes James Bullard’s speech on central banks and inflation and an interview with Mary Daly. Signs of building consensus around a 75bp rate hike within the FOMC should help consolidate the market’s expectations for a Fed rate around 3.25%-3.50% at the turn of the year. All this should continue to provide a rather supportive undercurrent to the dollar, and we see limited downside risks for the greenback over the near term. EUR: Growth factor becomes more relevant A larger drop than expected in eurozone’s PMIs yesterday triggered a quintessential flight-to-safety in European assets, as eurozone equities underperformed their US counterparts, bond yields dropped sharply and both the euro and the Scandies came under pressure. A set of decent PMIs before the June reading had allowed markets to maintain a relatively complacent approach to the eurozone growth story. Now, some re-alignment with the reality of a quite clouded economic outlook and persistent external woes has begun, and we cannot exclude that this continues to add some pressure today, where all the focus will be on another important survey – the German Ifo. Without doubt, the US-EZ growth differential story is becoming increasingly relevant for EUR/USD. In the scenario analysis we released yesterday, we identify this differential as one of the four major drivers of EUR/USD for the next 18 months, along with developments in the Russia-Ukraine conflict, China’s economic outlook, and the ECB-Fed policy outlook. We think that assumptions on these drivers can help outline different scenario paths for EUR/USD that vary between the bottom (0.85) to the top (1.30) of the FX option-derived range for the pair at the end of 2023. Our baseline scenario remains unchanged for now: EUR/USD to oscillate around the 1.05 mark until the end of 3Q22 as the Fed presses on with aggressive tightening, rising modestly to the 1.08 area in 4Q22 as US rates peak, staying on a moderate upward path in 2023 as the Fed turns from tightening to easing, and the EZ exits stagflation early in the year, finally reaching the 1.15 area by year-end. More details about the different scenarios and our calculation methods are included in the article. Back to today’s price actions, we suspect that the balance of risks remains skewed to the downside for EUR/USD on the back of deteriorating eurozone growth sentiment, and the pair may re-test the 1.0500 level before markets close for the weekend. Also, keep an eye on some relatively dovish ECB speakers: Mario Centeno, Pablo Hernandez de Cos and Luis de Guindos. GBP: A couple of BoE speakers to watch The UK June PMIs surprised on the upside staying flat compared to a month before, with the release gaining more importance given the sharp contrast with the eurozone and US figures. That is surely not enough to trigger a sizeable re-pricing higher in the UK’s growth expectations (retail sales this morning sent fresh warning signals), but may at least allow markets to feel more at ease with their aggressive Bank of England tightening expectations (seven hikes priced in by year-end), offering some support to GBP. All eyes today will be on speeches by the BoE Chief Economist Huw Pill, and from Jonathan Haskel, one of the three MPC members who voted for a 50bp hike last week. GBP/USD may stay in the 1.22-1.23 range for now, while EUR/GBP may keep inching lower towards the lower half of the 0.8500-0.8600 range. NOK: No benefits just yet from hawkish Norges Bank In line with our call, Norges Bank hiked by 50bp yesterday, and upgraded its rate path projections to include a 3.0% terminal rate by mid-2023. As discussed in our Norges Bank review, we are not particularly doubting the bank’s guidance for a 25bp move at the August meeting, but a weak currency and elevated commodity prices mean that another 50bp increase in September shouldn’t be ruled out. The reaction in EUR/NOK appeared rather counterintuitive given the hawkish surprise delivered by Norges Bank, with the pair quickly jumping back to 10.50 after a brief and very contained drop. We doubt this signals that the 50bp move was largely priced in (we had no evidence of that in the rates market) but instead that the challenging risk environment continues to keep investors quite structurally bearish on the krone. We believe that we’ll need to witness some material stabilisation in global sentiment for NOK to re-connect with its very attractive set of fundamentals. This may only happen later this year, and we continue to see chances of EUR/NOK trading below 10.00 before year-end. 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
UK retail sales dip as confidence falls to another all-time low

UK retail sales dip as confidence falls to another all-time low

ING Economics ING Economics 24.06.2022 11:49
UK retail sales (excluding fuel) are down by roughly 4% since last October, which reflects both the cost of living squeeze and a more general rotation from goods to services spending post-Covid. Expect further weakness ahead, though the solid jobs market should help prevent a more severe downturn in overall spending UK retail sales fell by half a percent in May   UK retail sales fell by half a percent in May, reversing a percentage increase of a similar magnitude in April. In what has always tended to be a fairly volatile data series, these are not monumental changes. Still, spending excluding fuel is down by roughly 4% since last October. It’s tempting to put this entirely down to the squeeze on household incomes, and that’s probably at least partially true. The ONS reckons the 1.6% monthly decline in food spending is down to higher prices. But the picture is muddied by a more general rotation away from goods back towards services post-Covid. One consequence is that retailers are likely to find they have excess inventory, as delayed shipments arrive in a backdrop of more tepid demand for – in particular – durable goods. Household good stores have seen sales fall by 15-20% since the same time last year. Consumer confidence has hit another all-time low Source: Macrobond, ING   At the same time, the cost of living squeeze is likely to cause a further hit to demand over the coming months. Confidence fell to another all-time low in June, despite new government support measures. The near-10% rise in petrol/diesel prices over the past month has dealt another blow to finances. Still, for the time being the jobs market is solid, and we aren't convinced we’ll see that story change significantly given persistent labour shortages (creating a strong disincentive for firms to make redundancies despite margin pressure). Consumers also have scope to tap excess savings accrued through the pandemic, albeit these are widely believed to be more highly concentrated in higher-income earners that are less acutely affected by the fall in real wages. Second-quarter UK GDP is likely to fall by roughly half a percent, though this is more of a reflection of a decrease in health spending now free Covid testing has ended, as well as the extra bank holiday for the Queen's Jubilee. Read this article on THINK TagsUK retail sales UK jobs 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
Rates Spark: taking the inflation blinkers off

Rates Spark: taking the inflation blinkers off

ING Economics ING Economics 24.06.2022 11:45
Turning points are never easy. We look again at whether it is in already. It's a close call, but we are not sold on it yet. When rates markets take their inflation blinkers off, the world they contemplate isn’t pretty. Central bank rhetoric should keep the pressure on the very front-end. Whether their message resonates with longer tenors is another question Source: Shutterstock US market rates are looking to mark a turning point. We are just not 100% sold on it just yet ... The rally in Treasuries has been impressive. Nothing new from Chair Powell yesterday, just a follow-through from what we saw on the previous days. It certainly looks and feels like a turning point rally in bonds. But is it? The collapse in inflation expectations suggests things are coming off the boil. This will please Chair Powell. The 10yr inflation expectation has dipped below 2.5%, a full 50bp below the peak hit before the May FOMC meeting. That was the one at which we believe that the Fed should have gone 75bp, but they waited till the June meeting (post a big print). The July meeting remains a toss-up between 50bp and 75bp. Lower inflation expectations argue for 50bp. But keeping the downward pressure on inflation expectations argues for 75bp (our view). 10Y US real yields are still 40bp off our 100bp target Source: Refinitiv, ING   Is that enough to justify a turning point? It helps. But we have two outstanding issues. First, real rates still look too low (by 40bp in the 10yr), and rises here should place some subsequent upwards pressure on market rates across the curve. Second, even though the 5yr has been decompressing, it remains cheap to the curve. Cheap enough to suggest that a turning point has not necessarily been seen. Our view is we're close. Very close. If the 5yr gives up and richens from here, then the turning point is likely already in. A 40bp rise in real rates would push the 10yr Treasury back up towards its peak at around 3.5% The macro element to this will come from the next CPI and payrolls numbers. So far there is no recession in the labour market. Any material change there changes everything. Note also that a 40bp rise in real rates would push the 10yr Treasury back up towards its peak at around 3.5%. But this would be muted should inflation expectations continue to fall. That argues for one more sell-off in bonds, but possibly without taking out the prior high, which would suggest the peak has been seen. Watch the 5yr on the curve. That's the key. If it holds on to a stubborn cheap valuation, we can then take out the prior high in market rates in the coming number of weeks. Turning points are never easy. Rates markets wake up to recession risk It seems bond investors took their inflation blinkers off this week, and considered the broader macro picture. The result wasn’t pretty. A 23bp rally in 10Y Treasuries in two days. For 10Y Bund, the figure is even more impressive, 32bp. One has to admire the market’s collective ability to single-mindedly focus on one issue, inflation, at the expense of everything else…and to pretty much forget about it overnight. Whether markets have durably forgotten about inflation is another question. We doubt central bankers have. They could well cause a retracement of this week’s rally. This isn't the first short-term rally in this bond market sell-off Source: Refinitiv, ING   Recession fears have been bubbling under the surface for some time Recession fears have been bubbling under the surface for some time now, so it comes as no surprise that European PMIs caught up with other sentiment indicators, such as Ifo and consumer confidence, in signalling economic angst. What’s more surprising is that the bond market chose this time to reassess wholesale the degree of tightening it expects from central banks. In our view, the slide in some key commodity prices this month has helped snap expectations of ever higher headline inflation. Germany warning of a growing risk of gas shortage added to the economic gloom. Where is the pressure point on the curve? To be blunt, rates have been leading central banks on the way up and they may well lead them on the way down too. If the market narrative durably shifts to recession at the expense of inflation fear, which isn’t a given, then central banks’ hawkish warnings will increasingly seem out of tune. The growing contingent of Fed members calling for a 75bp hike in July (with some still on the fence between 50bp and 75bp) is an illustration that hawkish rhetoric is here to stay, at least until central banks see tangible signs of declining inflation. We suspect European Central Bank comments at its Sintra forum next week will also cause some cognitive dissonance in rates markets, especially if June inflation fails to cool down. The 2023 part of European forwards curve is most likely to re-price lower Source: Refinitiv, ING   The curve could well flatten from 1Y point but re-steepen in longer tenors This hints at central banks delivering on hike expectations at the next few meetings, but feeling much less pressure to follow up by the end of the year. We suspect money market rates up to 6-12 months won’t feel much downward pressure but subsequent tenors have the potential to reprice lower. As a result, the curve could well flatten from 1Y point but re-steepen in longer tenors. Comparing hike discount on OIS curves to our own expectations suggests that the USD term structure can flatten further, while the GBP and EUR ones have the most scope to re-steepen. Today's events and market view Germany’s Ifo survey result features prominently on today’s economic calendar. A surprise dip in European PMIs yesterday coalesced with growing recession fears. The two generally agree but the Ifo is already painting a much less rosy economic picture than its PMI counterpart ever since the onset of the war in Ukraine, and rates markets have already re-priced a lot this week. US data consists of University of Michigan consumer sentiment and new home sales. The latter is expected to stabilise at low levels while the former is a final update on the June figure that was seen as instrumental (alongside May CPI) in tipping the scales in favour of a 75bp hike at the June Fed meeting. It will be interesting to see if the sharp repricing seen this week in rates has changed central bankers’ thinking, especially with regards to recession risks. From the Bank of England, Jonathan Haskel and Huw Pill will step up to the microphone. Mario Centeno and Pablo Hernandez will give European Central Bank headlines an Iberian flavour. Mary Daly and James Bullard will be their opposite numbers from the Fed. 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
Back to black: the countries best positioned to replace Russian gas with coal

The Commodities Feed: A week of pressure

ING Economics ING Economics 24.06.2022 11:43
Your daily roundup of commodities news and ING views Energy It has been a week of pressure for the oil market. ICE Brent has fallen more than 8% since last Thursday, trading at its lowest levels since late May. Hawkish comments from the US Fed continue to weigh on risk assets, with concern that the Fed will have difficulty reining in inflation without pushing the US economy into recession. The move lower in oil appears to be almost exclusively driven by macro influences, while oil fundamentals still remain supportive. We just have to look at the time spreads, which have not followed the flat price lower over the week. Instead, the prompt ICE Brent time spread has actually strengthened as the flat price has weakened. The Aug/Oct spread has traded out to a backwardation of US$3.59/bbl, up from US$2.81/bbl last Thursday. This suggests that there is tightness in the market right now and we would expect this to only grow as we lose more Russian supply. The EIA weekly petroleum report, which was scheduled to be released yesterday (already delayed due to a US public holiday on Monday) was further delayed. The EIA blamed a system issue for the further delay. The release will not be published this week, and the EIA is expected to give an update on Monday. This delay comes at a crucial time for the market when there are plenty of concerns over the tightness in refined product markets. The only report that the EIA managed to release was its weekly natural gas update, which showed that US natural gas inventories increased by 74Bcf over the last reporting week, which was more than the roughly 62Bcf the market was expecting. This larger build put pressure on US natural gas prices, with Henry Hub falling 9% yesterday. Reduced LNG exports due to the Freeport LNG outage means the potential for larger domestic storage builds in the coming weeks. Metals LME copper slumped by more than 4% yesterday as demand concerns continued to weigh on sentiment; copper prices have now dropped by around 14% from the recent peak made at the beginning of the month. A more hawkish approach from the Fed and other central banks around the world has weighed heavily on the metals complex. The risk-off sentiment in the market has not translated into higher demand for precious metals as of yet. This is likely due to the fact that real yields are in positive territory, limiting the appeal of holding gold. Total known gold ETF holdings have remained flat at around 105mOz since mid-May with physical demand also largely flat. The latest data from the ILZSG shows that the global zinc market witnessed a small deficit of around 13kt over the first four months of 2022, as refined zinc production fell over the period. Operational issues at Australian mines and high energy prices in Europe have weighed on zinc production this year. For lead, the ILZSG reported that the global market witnessed a small surplus of around 20kt with both demand and supply falling from year-ago levels. The LME zinc cash/3M spread continues to strengthen, hitting a backwardation of US$218/t, which is the highest level seen since 1997. LME zinc inventories have come under pressure in recent days, with on-warrant stocks falling to just 19.8kt, down from 59.6kt on Monday. This is the lowest level seen since at least 2000. The LME will likely be watching this closely, wanting to avoid a repeat of the squeeze seen in the nickel market earlier this year.   Read this article on THINK TagsZinc US Fed Recession risk Oil Natural gas 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
National Bank of Hungary Review: Making it simpler

National Bank of Hungary preview: All eyes on the forint

ING Economics ING Economics 23.06.2022 22:49
In our view, next week’s central bank meeting in Hungary will be both extremely complicated and very simple. Everything hinges on the level of EUR/HUF. We see at least a 50bp hike in the base rate followed by a 30bp hike in the one-week deposit rate. We now see the terminal rate above 9% The National Bank of Hungary in Budapest +50bp ING's call Change in the base rate The rationale behind our call The twists and turns within financial markets are tied to feelings and intuition nowadays, rather than to facts and data. In this context, next week’s rate-setting meeting will be a difficult one for the National Bank of Hungary. We see the direction as crystal clear (more tightening), but the magnitude of the hikes in the base rate and the one-week deposit rate will highly depend on prevailing market sentiment. We see the base case as a copy-paste from last month, with a 50bp rise in the base rate followed by a 30bp move in the one-week deposit rate on Thursday. The central bank might not want to retreat so quickly from its well-telegraphed “predictable and continuous” rate hike approach, at least not in the case of the base rate. In the recent environment, where monetary policy by its nature is essentially helpless against inflationary forces (supply-side and real disposable income shocks, labour shortages, etc.), the only logical step would be to keep the exchange rate as stable as possible. In this regard, the size of the effective rate hike (the change in the one-week deposit rate) depends mainly on the behaviour of the forint, in our view. Should we see EUR/HUF stabilising around 395, we might see that 30bp move in the one-week rate, while a break above 400 might push decision-makers to take a more aggressive, frontloaded approach in the one-week deposit rate (e.g., a hike by 50bp, matching the size of the one-off hike on 16 June). The next rate-setting meeting (unrelated to the size of the hikes) will bring us further reassurance that the central bank remains committed to tackling inflation. With the new staff projections coming (the June Inflation Report), we see the NBH revising the inflation path upwards in 2022 and 2023. This will result in forward guidance that pencils in further rate hikes over the remainder of the year, committing to a higher interest rate environment. In our view, this ongoing tightening will lead us to a 9.25% terminal rate by the end of this year, when and where the base rate and the one-week deposit rate will be merged again. Over the remainder of the year, we see the base rate being raised by 50bp each month, with the finishing touch of a 35bp move in December. As pro-inflationary risks dominate, the changes in the one-week deposit rate might be less gradual, being a bit more frontloaded. Thus, should we see HUF weakening further despite the NBH's hawkish forward guidance and commitment to tackle inflation, we might see more one-off hikes in the one-week deposit rate, reacting to idiosyncratic market shocks. ING's inflation and base rate forecasts in Hungary Source: NBH, ING What to expect in FX and rates markets As above, a hike in the one-week deposit rate is the NBH’s first line of defence as EUR/HUF continues to press 400. Even though investors seem reasonably short the forint already, it seems hard to see a sustainable rally in the currency until either the external environment improves (unlikely this summer) or some local news improves. Concessions on the Rule of Law dispute, perhaps in September, may be the best hope. CEE currencies vs EUR (1 Feb = 100%) Source: NBH, ING   We continue to see that rates are getting close to their peak, but again low liquidity in the summer months and a very volatile external environment call for extreme agility here. As we discussed in our last preview, the one- to three-year segment of the swaps curve may be the best area to be looking to receive rates – perhaps something like in the two-year area, which has recently turned lower from just under 10%. On the bond side, the focus will eventually shift to the improved fiscal balance and thus the lowered risk of excessive financing needs although with all sorts of bad headlines about windfall taxes, the dust might need more time to settle. This, along with our view on progress in the looming rule-of-law debate, suggests investors may have increasing confidence in adding to long HGB positions. With close to a 700bp concession already being built into 10-year HGB yields versus German Bunds and Bund yields looking toppish near 1.80%, we could expect to see investor interest into HGB dips this summer. Read this article on THINK TagsPreview NBH National Bank of Hungary Hungary HUF 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
The eurozone’s consumer’s still not putting their money where their mouth is

The eurozone’s consumer’s still not putting their money where their mouth is

ING Economics ING Economics 23.06.2022 15:46
Eurozone consumption is still experiencing a temporary bump from catch-up spending on services although today’s PMI figures are already starting to cast doubt on that view. This summer might still see some relief but after that, a consumption slump seems in the making Parisians are back in their favourite cafes, but how much are they really spending? Consumer confidence is at recessionary levels Since the start of the war in Ukraine, consumer confidence has dropped like a stone. Worries about the war, soaring inflation and a weakening economy cause uncertainty to return quickly among consumers. The drop in confidence has brought the eurozone back to levels last seen in the depth of the first lockdown and corresponds historically to recessionary levels as chart 1 shows. While every economic episode is different - and we wouldn’t dare base a recession call just on that chart alone - there are good reasons to expect a significant slowdown in household consumption on the back of the historic decline in real wages that the eurozone is currently experiencing (chart 2). With the first quarter already showing a decline in household consumption, is a consumer recession in the making? Consumers are very gloomy as real wage growth reaches multi-decade low Source: European Commission, Eurostat, Area-Wide Model, ING Research calculations Retail sales poor, but also just reverting back to trend? Retail sales have been falling over recent months, with a peak in November 2021 after which sales have been on a choppy downward trend. It's understandable given the quickly eroding real wages, but we also have to note that sales had been above the pre-crisis trend for most of 2021 which can be explained by the inability to spend as much on services as consumers were used to (think of vacations, restaurants, etc.). That leaves the question as to whether we are just reverting to the pre-crisis trend or whether weak sales are indicative of slowing consumption. Chart 3 shows that retail sales have developed below trend since late last year and April data suggest a further move down from trend. That suggests that the most recent developments show a weakening that goes beyond a simple correction to trend. Retail sales have recently dropped below pre-crisis trend again Source: Eurostat, ING Research calculations Mobility is looking favourable in 2Q thanks to the early 1Q Omicron dip But while retail sales are currently disappointing, the economy is still profiting from reopening effects. Google mobility data suggest a continued rise in activity since January, which comes on the back of the winter dip in activity related to the Delta variant and the start of Omicron. A big caveat in this data relates to seasonal factors, as holidays have contributed to weak January activity. Regardless, the movement has been so favourable that this does confirm expectations of strengthening domestic economic activity. At this point, the eurozone is back above ‘normal’ in terms of daily movements to stores, recreation and workplaces, outperforming last year’s summer by just a little. Mobility suggests that activity is on the rebound in 2Q Note: index of activity since 15 Feb 2020 for retail & recreation, groceries & pharmacies and workplaces using Google Covid-19 Community Mobility Reports with data through 16 June 2022. 100=baseline of activity between 3 Jan and 9 Feb 2020 Source: ING Research, Google COVID-19 Community Mobility Reports Reopening effects boost services activity Thanks to the strong mobility data, it is important not to extrapolate retail sales to total consumption at this point. Services consumption, especially tourism-related activities, have vigorously rebounded as corona restrictions and fear of the virus have been falling. This results in a shift in spending that could play out favourably for consumption in the second quarter and possibly the summer. After two years of missing out on holidays abroad or going to restaurants and bars, people seem eager to catch up on lost time and may be looking less at their bank accounts due to the exceptional circumstances of recent years. There is little current data to go on, but overnight stays have been rapidly catching up in most eurozone economies while survey data suggests very strong activity in the travel, hospitality and accommodation sectors. That indicates that eurozone consumption has experienced a sizeable tailwind from reopening effects, even if actual restrictions have already been eased quite a while ago. Today’s PMI figures for services do suggest slowing growth in these consumer-related services though, so the question is now how long these tailwinds can last. Consumer services are rebounding after two years of pandemic Source: Macrobond, European Commission, ING Research Excess savings from the pandemic are rapidly eroding With a weak June services PMI, the question becomes more important as to how long this reopening effect can continue. The main wildcard for continued strong spending, while real wages plummet, comes from savings. The pandemic saw an unprecedented runup in the savings rate, which has resulted in large excess savings. Savings figures go up to the fourth quarter of 2021 so far, which means that the latest data is still missing, but even if savings haven’t been run down so far, they have taken a serious hit. The inflation rate will evaporate significant parts of it and besides that, assets have taken a beating. Retail investors have flocked to stock and crypto markets to invest some of the excess savings they had, which have recently dropped significantly. Savings have increased, but dropping asset prices and high inflation erode potential Source: Eurostat, Macrobond, ING Research   Besides that, savings seem to have been accumulated mainly by higher income groups, which are groups that generally have a lower marginal propensity to spend. That means that the upside to how much will flow back into the economy will be limited. All in all, with savings having been eroded by inflation and losses on investments, together with the unfavourable distribution among income groups, it does not look like we can count on continued elevated spending for much longer. Consumption seems to be having its last hurrah The message around domestic consumption in the eurozone seems complicated at the moment. Bleak confidence figures and historical declines in real wages suggest that households are set to consume less. At the same time, relaxing behaviour related to the coronavirus is still giving the economy a short-term boost with mainly tourism-related spending performing very well. This is also reflected in much stronger mobility data, generally correlated with improving domestic economic activity. Consumers are able to spend a little extra in part due to improved savings over the course of the pandemic, but this is limited due to falling asset prices and lopsided savings over income groups. That means that weak consumption is around the corner. A strong tourism season could boost it until the summer, but sluggish consumption, at least, is set to kick in after that. Read this article on THINK TagsGDP Eurozone 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
Asia week ahead: Japan and Korea data plus regional manufacturing readings - 24.06.2022

Asian Currencies! USD/KRW, USD/PHP And More - FX Charts And Forecasts By ING Economics

ING Economics ING Economics 23.06.2022 15:14
USD/KRW Likely passed the peak of the year but volatile path awaits Current spot: 1286.96 The KRW touched 1,289 in mid-May, the highest since the pandemic, yet, rapidly unwound its earlier weakness as the market expected FX-related policy changes to be favourable to the KRW and foreign investors returned to the KOSPI. • The Bank of Korea is expected to hike policy rates until the end of this year. There has been ongoing discussion on a swap-like USKorea FX agreement, while the government is planning to present an fx market improvement plan soon. This could lead to the KOSPI being included in the MSCI World Index in a few years’ time. • We expect the KRW to appreciate further, albeit at a slower pace Source: Refinitiv, ING forecasts than the recent rapid movement. USD/PHP PHP weakens on widening trade deficit Current spot: 53.30 The PHP depreciated after several sessions of selling by foreign investors in the local equity market. The currency was also under pressure as the trade balance stayed in deep deficit due to surging imports. • Bangko Sentral ng Pilipinas (BSP) finally joined the rate hike club, increasing policy rates by 25bp in May. But the PHP barely reacted as the move was priced in by market participants. • The PHP faces further weakening pressure as the trade balance remains in deep deficit as imports rise. BSP has hinted at additional rate hikes, but the PHP may require more aggressive hiking to find support. USD/SGD SGD weakens on dimming global outlook Current spot: 1.3892 • The SGD tracked regional peers and weakened in May as investor sentiment wavered on concerns about global growth. But the SGD steadied at the end of May after China announced a gradual re-opening after extended lockdowns, lifting market sentiment. • Core inflation continues to accelerate suggesting that the Monetary Authority of Singapore will remain on the alert to take further action. The MAS can consider additional action in October, or at unscheduled meetings before then should core inflation move close to 4%. • The SGD should steady in the near term if global growth Source: Refinitiv, ING forecasts prospects improve after China’s economy gradually reopens. USD/TWD Capital flows vs central bank hike Current spot: 29.76 • The SGD tracked regional peers and weakened in May as investor sentiment wavered on concerns about global growth. But the SGD steadied at the end of May after China announced a gradual re-opening after extended lockdowns, lifting market sentiment. • Core inflation continues to accelerate suggesting that the Monetary Authority of Singapore will remain on the alert to take further action. The MAS can consider additional action in October, or at unscheduled meetings before then should core inflation move close to 4%. • The SGD should steady in the near term if global growth Source: Refinitiv, ING forecasts prospects improve after China’s economy gradually reopens. This article is a part of a report by ING Economics 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
Asia week ahead: Japan and Korea data plus regional manufacturing readings - 24.06.2022

Asia week ahead: Japan and Korea data plus regional manufacturing readings

ING Economics ING Economics 23.06.2022 12:52
Data from Japan and Korea will be the highlight for next week Source: Shutterstock Japan's flurry of data releases Industrial production in Japan is expected to rebound from the previous month’s contraction on the back of better domestic demand, although gains may be capped as global supply chain disruptions are still weighing on overall production activity. Meanwhile, Tokyo CPI inflation should increase after a recent deprecation in the yen combined with higher energy and food price pressures. Japan’s labour market will also be in focus. The unemployment rate should remain unchanged at 2.5%, as service sector hiring is still picking up while there is some slowdown in manufacturing. Lastly, the Tankan surveys will possibly show an optimistic outlook for both manufacturing and services, with large companies seeing slightly stronger gains and small companies still struggling to recover from the pandemic. The Bank of Japan will be paying more attention to inflation if there are any signs of increasing demand pressure while labour market tightening could lead to stronger wage growth. Korean trade and industrial production data The reopening of Korea is boosting the domestic economy, especially private services, but the recent sharp drop in the equity market and higher mortgage/lending rates could put some downward pressure on consumer confidence. Meanwhile, business sentiment is expected to recover as domestic and global logistics conditions improve. May’s industrial production should rebound but the recovery could be marginal given China’s lockdown. Korea also reports preliminary trade data, with export growth likely moderating in June. Unfavourable calendar day effects could be one reason for the slowdown, but the trucker’s union strike has had a slight negative impact on port activity as well. Imports, on the other hand, should grow at a faster pace and the overall trade balance could post a high deficit. Upcoming data reports will be critical for the Bank of Korea, as the central bank’s next moves will possibly be impacted not just by the inflation trajectory but also by the growth outlook. Manufacturing reports could show sustained impact of China stoppages Next week also features the release of regional manufacturing indices, with China also reporting its non-manufacturing PMI on 30 June. We could see the protracted impact of work stoppages in China and their effect on the regional value chain.    And the rest... Meanwhile, India’s fiscal deficit figures on 30 June will show whether India is on track to hit its 6.4% fiscal deficit target for the fiscal year 2022/23. The April deficit figures were helpful, coming in lower than in April 2021. This bodes well for a reduction in the deficit as a percentage of nominal GDP, which should be growing strongly, lifted by higher inflation. Cuts in excise duties, higher debt service, and the higher burden of state subsidies could eat into this progress in the coming months, and there is still a long way to go, with the retention of the investment grade credit rating at stake. In Australia, the retail sales report for May is out on 29 June and will probably moderate from the 0.9% month-on-month pace recorded for April. Though it should still remain decent, rising interest rates and falling consumer sentiment, as well as peaking housing prices, may offset support from strong employment and robust wage growth. Lastly, Indonesia releases its latest inflation report next week and we could see both headline and core inflation threaten the upper end of the central bank inflation target. Bank Indonesia has held off on hiking policy rates citing still manageable inflation but elevated commodity prices may eventually force domestic inflation past the Bank's comfort zone. Faster inflation by early 3Q could be enough to kickstart the hiking cycle, with a first hike coming as early as the end of July.  Read this article on THINK TagsEmerging Markets Asia week ahead Asia Markets Asia Economics 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
The eurozone’s consumer’s still not putting their money where their mouth is

French business leaders increasingly less optimistic about the future | ING Economics

ING Economics ING Economics 23.06.2022 12:23
The French business climate indicator and PMI indices fell in June due to a deterioration in the forward-looking components. Economic activity is expected to remain sluggish in the coming quarters Falling optimism In France, the business climate indicator decreased slightly in June, reaching 104 compared to 106 in May, following a drop in retail trade and in the services sector. In industry, the business climate increased slightly. Although the level of the indicator is not in itself very worrying, as it is still above its long-term average, the details give more cause for concern. Indeed, the declines observed in the services sector and in retail trade were caused by a deterioration in the forward-looking components of the indicator. The business outlook and the demand forecast for the coming months were judged less favourably by the business leaders of these sectors. In industry, too, optimism about expected activity fell sharply.  The PMI indices are all down by a large margin, and to a greater extent than expected. The composite index stood at 52.8 in June compared to 57 in May, with declines in both the service and industrial sectors. The output component for the manufacturing sector fell sharply into contraction territory (to 45.7 in June from 51 in May).  Inflation peak in sight Interestingly, both the business sentiment indicator and the PMI show continued strong price pressures, but these pressures appear to be stabilising (in the industrial sector) and even falling slightly (in the services sector). Faced with the slowdown in demand, companies therefore seem to be planning to increase their prices less in the coming months. This confirms our forecast of a peak in consumer price inflation during the summer, before a very gradual decrease during the last quarter of the year, assuming that the geopolitical backdrop does not lead to a new sharp rise in energy prices. We expect inflation to be above 5.5% for the whole of 2022. A sluggish end to the year Overall, these indicators suggest that the economic outlook remains strongly impacted by rising prices and slowing global demand. In the services sector, activity remains solid thanks to the end of health restrictions, and in particular to the very good tourist season expected for this summer. This should boost economic activity in the second and third quarters. At the same time, the outlook for services is worsening due to the inflationary environment that is depressing real household incomes, and the decline in consumer confidence. The current rebound in services looks set to end, probably by the end of the summer. In the industrial sector, companies are still struggling with supply and recruitment difficulties, which are limiting production for 72% of them. This implies that it will take time to clear the backlogs in production lines, which could continue to have a positive effect on activity. In addition, the activity forecast from industrial companies is falling sharply, which means that there is little impetus for production in the coming months beyond clearing the backlogs. Indeed, PMI surveys indicate that purchasing activity has recorded its first decline since November 2020, with companies now holding sufficient stocks to meet demand. This implies that inventories are likely to lead to a slowdown in activity. For the growth outlook, all this implies that we no longer expect a rebound in French economic activity in the second half of the year. After the contraction in the first quarter and a probable stagnation in the second, the third quarter could be the most dynamic of the year, but the fourth quarter is likely to see a contraction again, due to high prices and the marked slowdown in global growth. We expect GDP growth of 2.1% in 2022 and 0.9% in 2023.   Read this article on THINK TagsInflation GDP France Eurozone Business climate 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
Norges Bank steps up tightening pace with 50bp rate hike | ING Economics

Norges Bank steps up tightening pace with 50bp rate hike | ING Economics

ING Economics ING Economics 23.06.2022 12:20
Norway's central bank has joined the 50bp club and is signalling another 25bp move in August. Hikes at every remaining meeting this year look likely, and that may well include another 50bp hike in September. Despite a more hawkish Norges Bank, the krone should remain vulnerable in the near term due to the unstable risk environment    Norges Bank has stepped up the pace of its tightening cycle, hiking rates by 50 basis points for the first time, having previously implemented three 25bp rate rises since last September. That’s more than the consensus was expecting, but in reality, it shouldn’t come as a huge shock. Not only had policymakers flagged the possibility of a larger rate hike when they met last month, but most of the indicators Norges Bank looks at have been significantly more hawkish than they were in March when forecasts were last updated. NOK is around 10% weaker than the Bank had expected in March in trade-weighted terms, while the ever-increasing amount of tightening being priced into dollar and euro markets had also pointed to a more aggressive response from Norges Bank. Inflation has come in above expectations, too. The only thing that hasn’t budged much from the March forecasts is the price of oil. NOK is roughly 10% weaker than NB had expected for the second quarter as a whole Source: Macrobond, ING, Norges Bank   The net result is that policymakers now expect a terminal rate of 3% by next summer, up from their previous estimate of 2.5%. Interestingly, NB is pre-committing to another 25bp hike in August, and the new rate projection appears to factor in roughly 100bp of total additional tightening this year. There’s little reason to doubt this assessment right now. The guidance on a 25bp hike at the August meeting is fairly specific, and means we probably shouldn’t expect another surprise 50bp hike at that meeting unless something dramatic changes. But there is a certain advantage to frontloading in this environment, especially for an energy-intensive economy like Norway’s. We probably shouldn’t rule out another 50bp hike at the September meeting. Failing that, a rate rise at every remaining meeting this year looks increasingly likely. Norges Bank rate projections compared over time Source: Norges Bank, ING NOK: Short term remains challenging EUR/NOK traded lower only quite briefly after Norges Bank's rate hike, despite the swap market indicating that a 50bp was not priced in. Our impression is that markets remain reluctant to enter long-NOK positions in the current environment, as the low-liquidity character of the krone makes it exceptionally unattractive in periods of unstable risk sentiment. We think NOK will remain vulnerable in the near term on the back of this. Accordingly, we think that the benefit to the krone from a more hawkish Norges Bank - as well from high energy prices - will become more visible in the second part of the year, when a potentially calmer risk environment may allow the krone to re-connect with its very attractive set of fundamentals. We still target a return to sub 10.00 levels in EUR/NOK by the end of the year.  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
Eurozone economy: unsure about current strength but weakness ahead confirmed

EUR/USD: Sizing up the scenarios

ING Economics ING Economics 23.06.2022 11:53
We know when speaking to corporate treasurers that any FX forecast comes with a health warning. When presenting FX forecasts then, research teams need to do a good job spelling out a baseline set of assumptions. Here, we detail those assumptions, but also look at an alternative range of outcomes which could see EUR/USD trading to 0.85 or 1.30 by the end of 2023 Four potential paths for EUR/USD into 2023 Making the correct call on EUR/USD over the next 18 months will depend on four key drivers: The Russian-Ukraine war and what it means for European growth and the commodity supply shock Chinese growth and what it means for global demand and the global supply chain shock The Fed-ECB policy trade-off and to what degree it pushes differentials wider still US-eurozone growth prospects and what it means for global equity and FDI flows Below we outline four scenario paths for EUR/USD into the end of 2023. We have generated the possible range of EUR/USD end-2023 outcomes using expected volatility embedded into current FX options market pricing. The extreme ranges for end-2023 EUR/USD levels, 1.30 under Scenario 1 and 0.85 under Scenario 4 derive from the two standard deviation outcomes. Of the four scenarios presented, Scenario 2, ‘Fed’s U-turn’ is our baseline scenario. Given that Fed policy has been such a large driver of dollar pricing since June 2021, when Fed dot plots suggested the central bank would be normalising policy after all, a Fed shift from hiking in 2022 to cutting in 2023 should take some upside pressure off the dollar. We look for a weak EUR/USD rally through 2023 as the Fed eases and some of the headwinds to growth, including China, abate. Briefly discussing extremes, the most bullish EUR/USD story (1.30) is one of global growth recovering (somehow) in 2023 at a time when the Fed feels it can cut rates back to more neutral levels near 2.00%. The most bearish EUR/USD scenario is an early 1980s-style stagflation, where the Fed needs to continue hiking aggressively even as the global economy enters a recession. This reopens friction within the eurozone. 4 themes for EUR/USD Source: ING Financial fair value: Where rate spreads and equities can drag EUR/USD Above, we have outlined some stylised scenarios of where major drivers could place EUR/USD over the next 18 months. Quantitatively, we do not think EUR/USD is particularly cheap on a medium-term fundamental basis. But other shorter-term techniques also have a quantitative say in EUR/USD pricing. Here, we use a financial fair value model to identify short-term fair value for EUR/USD. Typically, factors like two-year EUR-USD swap spreads or the equity environment have two of the highest betas in the model. As shown in the left-end chart below, these two factors explain nearly all the drop in EUR/USD fair value since the start of 2022, while the other two inputs in the model  - the relative shape of the yield curve and relative equity performance – have had a negligible impact, displaying considerably lower betas in the model. In the right-end chart below, we present a matrix of swap spreads versus equity outcomes - which, as discussed, are the main drivers of EUR/USD - to provide some flavour as to where EUR/USD could be trading under very different market conditions.   Source: ING, Refinitiv   It must be noted that this matrix looks at short-term dynamics, and its explanatory power over the medium term – i.e. beyond 12 months - would decrease substantially as other (longer-term) factors would start to play a bigger role. The purpose of this matrix is to provide an indication of what combination of ECB-Fed monetary policy differential and global risk environment would be required to trigger some sizeable moves in EUR/USD over the next 12 months. In the scenario analysis outlined at the start of this article, we considered the “global Goldilocks” scenario as the most optimistic for EUR/USD, with the pair reaching 1.20 in the next 12 months. As shown in the matrix, that would require both a rebound in global equities beyond the January 2022 peak (+30%) and a complete erosion of the ECB-Fed policy differential. In the other extreme scenario (“extreme stagflation”), we implied a move to 0.90 by 2Q23. This would require a significant repricing higher in the Fed’s policy path relative to the ECB’s, as well as a further drop in global equities to the levels last seen in the spring of 2020. In our base-case scenario (“Fed’s U-turn”), a return to 1.08 is achievable via a gradual recovery in risk sentiment and a stabilisation in the short-term rate differentials around current levels. Below are the details of our current quarterly forecasts.  Our forecasts and the consensus view Source: ING, Consensus Economics 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
Indonesia’s central bank bucks rate hike trend amid tame inflation

Indonesia’s central bank bucks rate hike trend amid tame inflation

ING Economics ING Economics 23.06.2022 11:47
Bank Indonesia kept rates untouched noting that inflation remains within target Bank Indonesia Governor Perry Warjiyo has hinted that he will consider tightening policy if inflation becomes a problem 3.5% BI policy rate   As expected Bank Indonesia holds rate steady despite global tightening cycle Indonesia’s central bank kept its policy rate at 3.5%, in line with market expectations. Bank Indonesia Governor Perry Warjiyo pointed to manageable inflation as the main reason for the pause as the central bank hopes to deliver additional support for the economy’s recovery. BI expects the recent uptick in inflation to weigh on global growth, likely a factor in its decision to extend support to the economic recovery.     Core inflation is currently at 2.6%, comfortably within BI’s inflation target for the year. Subsidies and the recent palm oil export ban have helped keep a lid on price pressures of late, but recent pressure on the Indonesian rupiah signals that the door to keeping rates untouched may be closing. Given the current inflation readings, BI can afford to extend policy support to the economy for a bit longer but we expect Warjiyo to change his tune should core inflation edge higher to the 4% top-end of the inflation target.    BI on hold as inflation remains manageable and within target Source: Badan Pusat Statistik Dovish BI points to sustained weakness for IDR The rupiah has been hit hard of late given the disparity in central bank disposition. The Fed hiked aggressively at its last meeting and signalled even more rate hikes at the next policy meeting, which is in direct contrast to the dovish stance taken by BI. To BI’s credit, inflation has remained relatively well-behaved and has yet to breach its inflation target.  With the current dynamic expected to remain in place, we expect IDR weakness to continue in the near term until BI finally decides to adjust monetary policy, possibly in the second half of the year. IDR weakness may be capped by the partial resumption of palm oil exports which could push the trade balance to a wider surplus but the currency will likely face pressure should the Fed follow through with aggressive tightening at its July meeting.    Read this article on THINK TagsIDR Emerging Markets Bank Indonesia 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
Japan: retail sales rise while consumer sentiment weakens

Some cracks in Italian politics, but early election risk remains low

ING Economics ING Economics 23.06.2022 11:46
The break-up of the 5SM, after long-lasting internal tensions, should not affect the stability of the government, nor its composition. In view of the spring 2023 general election, keep an eye on the centrist area, whose composition might have changed by the time of the vote   Luigi Di Maio, the former leader of the Five Star Movement (5SM), and current foreign minister in the Draghi government, announced yesterday he would leave the party and form a new parliamentary group, “Together for the future”. In the process, he will be followed by some 70 MPs from his former party (62 5SM MPs are reportedly involved). As a consequence, the 5SM will no longer be the biggest party in the parliament, leaving the top position to the League. This is not an absolute surprise as differences between Di Maio and Giuseppe Conte, the current leader of the 5SM, had existed for some time. Di Maio said his decision was related to Conte’s ambiguous stance on the war in Ukraine, which had lately morphed into a request to stop sending arms to Ukraine, but this might be only part of the story. In our view, Di Maio’s departure will not add to the risk of short-term political instability. He will likely keep his foreign minister job and his group will continue to support Draghi’s government. No government reshuffle will be needed, and Conte has already reaffirmed that 5SM will continue to support the government. The reaction from the benches of the League has been extremely benign. The recent local election round, where the 5SM and the League both lost ground, appears to have further reduced any appetite to rush to the polls. This does not mean that Draghi will enjoy plain sailing until the spring 2023 general election. As has often been the case, the budget season, which gets into full swing in September, will offer the first opportunity to raise the tone of the debate and gain visibility among the electorate. Still, we don’t believe the situation will be pushed so far as to risk a government crisis - the political cost of this is just too high. Di Maio’s move might be the first in a series aiming to reconstruct an institutional centrist group. We would be not surprised to see more initiatives in this direction, and political offers to change more by the time of the 2023 elections. In the meantime, PM Draghi will likely be very busy striking a balance between the need to speed up the implementation of the recovery plan and steering the debate in the European arena.   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
Will Fuel Prices Shock Again? Crude Oil Price Almost Hit $120! Will EV Become More Popular Shortly?

Philippines: Central bank’s dovish hike points to currency weakness ahead

ING Economics ING Economics 23.06.2022 11:45
The Philippines' central bank, Bangko Sentral ng Pilipinas (BSP) hiked rates by 25 bps, signalling a gradual hike cycle and a weaker peso The Central Bank of the Philippines and other buildings as seen from the CCP Grounds Source: Shutterstock 2.5% BSP policy rate   As expected BSP sticks to dovish ways The BSP hiked policy rates by 25 bps, a move anticipated by the majority of market participants, taking the overnight repurchase rate to 2.5%. Incoming BSP Governor, Felipe Medalla, telegraphed a modest rate hike for today’s meeting while also indicating a preference for a potential follow-up 25 bps hike at the August meeting.  The central bank prefers the relatively less aggressive pace of tightening pointing to the need to support growth.  Despite inflation blowing past target again this year, the BSP believes that the current surge in prices is largely cost-push and therefore does not warrant an aggressive rate hike cycle.  Latest BSP forecasts point to inflation breaching its target both in 2022 (5%) and 2023 (4.2%). BSP carries out dovish hike despite expected inflation breach in 2022 and 2023 Source: Philippine Statistics Authority and Bangko Sentral ng Pilipinas Up ahead: faster inflation and weaker PHP With the BSP signalling its preference for a dovish rate hike cycle in the face of aggressive tightening from global central banks, we can expect even faster inflation and a weaker peso for the rest of the year.  PHP recently tumbled to multi-year weakness in rection to dovish rhetoric from the Bank and we could see the currency come under added pressure especially with the Fed signalling as much as 75 bps worth of tightening at the July meeting.   Domestic inflation is currently at 5.4% and we could see price pressures push up the headline number past 6% in the next month due to still elevated commodity prices and a weaker currency fanning imported inflation pressures.  We will need to revisit our PHP and inflation forecasts but we will likely adjust both given BSP’s dovish leaning in contrast to the more hawkish Fed.    Read this article on THINK TagsPHP Emerging Markets Bangko Sentral ng Pilipinas 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
Japan: retail sales rise while consumer sentiment weakens

FX Daily: Norges Bank may join the 50bp club today

ING Economics ING Economics 23.06.2022 09:24
High energy prices and interest rates worldwide may push Norges Bank to accelerate the pace of tightening and hike by 50bp today, lifting the krone - which however remains vulnerable to the unstable risk environment. Elsewhere, the recession topic will remain central as PMIs are released worldwide. We don't expect the USD downtrend to have legs USD: Talking recession Markets have received the headlines from yesterday’s testimony by Jerome Powell with some concern, as the Fed Chair said the steep tightening cycle will likely make a soft landing for the economy “very challenging”. We doubt this notion is particularly surprising, but investors were likely used to a more sanguine stance by the Fed when addressing the growth outlook, and some may see any shift in the growth rhetoric as a sign of a larger-than-expected slowdown. Today, we’ll hear from Powell again as he testifies before the House Financial Services panel. The dollar came under some pressure yesterday after Powell’s comments, but we see no solid basis for a broad-based dollar downtrend at this stage. The fears of a US slowdown are surely not higher than those of a eurozone or China slowdown and unlikely to drive a material outflow from the dollar based on a significant rebalancing in growth differentials. Equally, while the dollar is seeing some reduced support from the bond market (yields dropped yesterday), jitters in the equity market will likely prevent any sizeable offloading of defensive dollar positions. Accordingly, our base case is for the dollar to stabilise around current levels into the weekend or possibly stage some rebound. DXY may find some good support around last week’s 103.50 lows.   The data calendar includes the weekly jobless claims, PMIs (which are less regarded in the US than in Europe) as well as the Kansas City Fed activity index. In general, surveys should keep inching lower, but the impact from today’s releases on the dollar should be quite small. Elsewhere in the G10, the breather in the bond market has helped the Japanese yen stage a mini-rally, but that hardly appears as a sustainable driver of JPY recovery already at this stage, and upside risks to USD/JPY (unless Japanese authorities deploy FX intervention) remain tangible. In the emerging market space, it’s worth keeping an eye on today’s rate announcement by Mexico’s central bank, which is largely expected to deliver a 75bp hike. The notion of Banxico keeping a stable spread against the Fed appears largely embedded into USD/MXN pricing, and should keep the pair around the 20.00 gravity line for now.   EUR: PMIs in focus As discussed in the USD section above, we doubt that warnings from the Fed around an upcoming hard landing for the US economy will be enough to trigger growth-related outflows from the dollar. After all, the still very challenging energy price story continues to argue against a material shrinking in the US-EZ growth expectation differential, which is one factor (along with the monetary policy differential) that should keep a cap on EUR/USD at least until the end of the summer, in our view. Indeed, the growth discussion will remain central today as PMIs are released in the eurozone, and the consensus is looking at a modest drop in both the manufacturing and service surveys. Normally, the recent developments in the energy market would imply a much larger fall in PMIs, but consensus expectations have probably adapted to the recent upside surprises in the surveys. In a way, this may leave more room for a surprise to the downside. We’ll also hear from two ECB Governing Council members today: Germany’s Joachim Nagel (one of the most hawkish voices in the GC) and France’s Francois Villeroy. Barring major surprises in the PMI readings or from the ECB speakers, EUR/USD should largely remain a function of external drivers and USD dynamics. For now, a return to 1.0500 remains more likely in our view compared to an extension of the rally beyond the 1.0600 mark. GBP: Chances of 50bp hike in August rising PMIs will also be watched quite closely in the UK today, especially given the relevance of growth expectations in the Bank of England’s monetary policy debate. Like for the eurozone, consensus expectations are centred around a rather contained drop in the surveys. Markets will likely await fresh comments from Bank of England members over the coming days (none are scheduled for today) to gauge policymakers’ assessment of the freshly released CPI numbers. As discussed by our UK economist here, headline inflation may briefly hit double-digits from October, and the chances of a 50bp rate hike in August are rising. However, our base case remains a total of 75bp of tightening from now on given the deteriorating economic backdrop. In our view, sterling will have to face a dovish repricing of BoE rate expectations sooner or later, but for now – unless PMIs surprise to the downside – cable may stay around the 1.22-1.23 area and EUR/GBP may inch back below 0.8600. NOK: We expect 50bp by Norges Bank We expect Norges Bank to surprise on the hawkish side today and deliver a 50bp rate hike, the largest rate increase in the past 20 years. Despite mounting concerns about the global economic outlook, the Norwegian economy looks set to keep benefiting from high energy prices and booming demand from the rest of Europe for a prolonged period of time. Incidentally, global rates have risen significantly and inflation surprised to the upside both in the April and May readings, having now reached 5.7%, with the core rate having accelerated to 3.4%. Alternatively, Norges Bank may stick to its gradual tightening approach and hike by 25bp, but we would then expect the Bank to signal that rate increases may start happening at consecutive meetings as opposed to every other meeting. When it comes to the updated rate projections, we think the terminal rate will have to be revised higher, possibly closer to 3.0% in 2023. All in all, we think there is a higher chance of the overall message to fall firmly on the hawkish side, and given that markets appear to be only pricing in a 25bp hike today, there is considerable upside room for NOK. We expect a 50bp hike to drive EUR/NOK back to the 10.30-10.40 area. In the near term, NOK remains vulnerable to the unstable risk sentiment but is equally set to be one of the most attractive G10 currencies, in terms of its fundamentals, once sentiment stabilises. 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
Monitoring Romania | ING Economics

Monitoring Romania | ING Economics

ING Economics ING Economics 23.06.2022 09:20
In the first quarter of 2022, Romania posted its second-highest quarterly GDP advance ever. Because of this, it would now take some terrible developments to take the growth story below 5.0% this year. Inflation remains by far the main enemy, with the National Bank of Romania (NBR) having little choice but to continue its hiking cycle GDP growth in Romania is surprisingly strong   A snapshot of Romania's economy: GDP: after the +5.2% quarterly growth in 1Q22, we find little-to-no economic arguments for projecting a GDP growth below 5.0% this year. However, historical data revisions and/or abnormal statistical assumptions cannot be forecasted. Inflation: the endless upward revisions of the inflation forecasts have been a standard for the past year or so. But as energy prices have stabilised somewhat – albeit at higher levels – and second-round effects are becoming more measurable, the forecasts have somewhat stabilised as well. We see inflation at 13.0% in 2022 and 8.9% in 2023. EUR/RON: breaking above 4.95 is a matter for next year, as it's currently very stable. Budget deficit: it remains Romania's Achilles' heel, but so far the -5.8% of GDP target for this year still looks reasonable. Bond yields: with the entire curve trading in some 50 basis points around 9.0% and more hikes to come both locally and internationally, it is difficult to be constructive on it. However, we believe that current levels do price in most of the known risks, and spreads versus the region are attractive again, hence the upside looks rather limited as well. GDP growth: puzzlingly strong The +5.2% GDP advance from the first quarter was the second-highest quarterly advance in history and markedly improved the 2022 outlook. Assuming no significant data revisions, even a quasi-stagnant economy for the rest of the year would still bring the annual GDP advance in 2022 to at least 5.0%. Add on top average inflation of around 13.0%, and the nominal GDP advance will flirt with 20% in 2022. GDP growth (versus the previous quarter, %) Source: NIS, ING   Looking at the detailed growth breakdown there are some details that cannot go unnoticed, for instance the almost 10% price drop estimated for the IT sector or the meagre 3.2% increase for the retail trade. Some of these estimates could be reversed in the upcoming quarters. Nevertheless, forecasting data revisions are out of our scope here, which is why by looking at the actual numbers we find little-to-no economic arguments for projecting GDP growth below 5.0% this year. Industry January-April 2022 industrial production contracted by 3.1% versus the same period in 2021, gradually resuming its pre-pandemic downward trend. In fact, the seasonally-adjusted numbers show that compared with the similar period of 2019 industrial production is down by 4.9%. Industrial production and its main groups (YoY%) Source: NIS, ING   Issues lie within the manufacturing sector, which has an 80% share of total industrial production and is looking to be muddling through with some difficulties. Its main subcomponent – automotive manufacturing – has been constantly contracting over the past three quarters and closed the month of April 2022 almost 18% below the same month in 2021. We note that the main problem here was not the demand, but rather supply chain issues which have been strangling production for some time now. However this explanation probably brings no comfort as the outlook for supply chains remains foggy at best, while the abnormally high producer price inflation (almost 27% in April 2022 for the manufacturing sector) will in the end hurt the demand side as well. The latest confidence data is pointing towards a quasi-flat outlook for the industrial sector on the back of a marginal decrease in order books, stable inventories and stable production expectations. Economic Sentiment Index - Industry Source: EC, NSI, ING Retail sales Now that the post-pandemic consumption boom has calmed down on pent-up demand exhaustion, consumers seem to have entered some sort of comfort zone. This translates into relatively steady increases in sales with numbers not large enough to call it a consumer frenzy but sufficiently robust to alleviate any short-term worries for a hard landing in private consumption. The +6.9% annual advance of sales over the January-April 2022 period fits well with the above description. Something worth mentioning is that all subcomponents of retail sales witnessed robust advances during the first four months of 2022, with fuel sales expanding by 10.1% versus the first four months of 2021 (the number is already adjusted for the fuel price spikes from the last couple of months), followed by non-food items (+6.7%) and the less cycle-sensitive food items (+4.6%). Retail sales (YoY%) and main components (ppt) Source: NIS, ING   Looking forward, the negative impact of high inflation – which has already been eating up most of the wage advances over the past quarters – will only grow. We estimate that wage advances will fail to keep up with inflation this year, while in 2023 they might just break even. This should not necessarily mean a grim outlook for consumption, but it definitely puts a lid on the upside potential. Hence, low single-digit growth (and even periods of mild contraction) might be the new normal for some time. Construction What seemed like a normalisation of the growth pace seems to have slowly turned into a lingering stagnation trend in the construction sector. After four months of 2022, the construction index is almost flat, following a year (2021) when it decreased by just 0.6%.  In structure, it is still the residential sector that bears the growth burden as it advanced by 11.1%. After a year to forget, commercial real estate is making a comeback advancing by 10.9%. The disappointment comes from the civil engineering side where the high hopes around the public infrastructure works have not been matched by comparable actions. Construction by main groups (YoY%) Source: NIS, ING   Looking forward, the outlook for the sector remains somewhat blurred. On the one hand, the skyrocketing costs of construction materials are pressuring companies, on the other hand the interest rates environment remains stimulative, with credit rates below inflation for some time already. This is keeping the demand side afloat, although early signs of a slowdown are starting to appear. And then we have the public infrastructure works which have the potential to lift the entire sector but remain somewhat difficult to predict. Overall, for the rest of the year in inflation-adjusted terms we tend to expect a mild contraction of the construction sector, while in nominal terms the numbers will undoubtedly look very good. Services The service sector as a whole managed to deliver quite an amazing year-to-date performance, growing 23% in the first four months of this year. All the main sub-sectors are in positive territory this year. Zooming in to April's data (which is more relevant in the context of the war in Ukraine) we do see some deceleration (-0.7% versus March), but so far that’s comparable to a normal correction after 12 months of sustained growth. In structure, the real estate services have advanced by a staggering 48%, but that’s also on account of a low comparable base from early 2021. Moreover, in April the real estate contracted by 2.7% versus March, hence the boom does not look long-lived. We remain impressed by the IT sector's continuous (over)performance. The size of the sector has basically doubled over the last three years and there is little sign of it slowing down. Services and selected sub-sectors (YoY%) Source: NIS, ING   Looking forward, April has brought some signs of a tentative slowdown, although it is not a clear trend yet. Nevertheless, the usually leading transport sector did contract by 2.3% over March, with skyrocketing fuel prices likely to jeopardise a potential recovery. We estimate that the road will become bumpier as we head into the second half of 2022, on account of higher inflation, higher interest rates, and an almost certain growth slowdown compared to the first quarter. Trade balance and current account Coming in at just over €10bn (3.8% of GDP) after four months of 2022, Romania’s trade balance deficit widened by a staggering 41% compared to the same period of 2021. To put things into perspective, the January-April 2022 deficit is equal to the full-year deficit from 2016. While this can be regarded as a measure of how much larger the economy is nowadays, it also gives a measure of its structural problems that have failed to be corrected throughout the years. That’s especially true when we look at numbers in relative terms and can see that the last time Romania recorded such a deficit was in 2008, just before the economic downturn that followed in 2009-10. Trade balance Source: NIS, ING   Particularly worrying in our view is that there are very little prospects for the situation to improve in the near future. Even a full and efficient absorption of the EU funds (already a bit of a fanciful assumption) which have the potential to improve the competitiveness of the economy would – at least initially – most likely result in higher imports. We therefore anticipate the trade deficit to come in well over €30bn this year and land somewhere between -12% and -13% of GDP. The abovementioned trade deficit remains the root cause of the current account deficit, though a deterioration in both primary and secondary incomes can also be noted. Overall, we project this year’s current account to widen closer to -8.0% of GDP, from -7.0% in 2021. Balance of payments by main categories (% of GDP) Source: NBR, ING   Given the international context and specific local weaknesses, it is difficult to envisage conditions for a correction of the current account anytime soon. The gradual budget deficit adjustment towards the 3.0% of GDP target will help to a good extent, but it will need to be seconded by other factors, such as a de-escalation of the military conflict, supply-chain amelioration, an efficient absorption of EU funds, and the eternally lagging structural reforms. Budget and financing Essentially, the budget deficit problems remain at the core of Romania’s macroeconomic weaknesses. The rapid nominal GDP growth will make it a touch easier for the government to stick to its 5.8% budget deficit target in 2022. However, pressures on the 2023 budget are already shaping up to be substantial. Wages and pensions advance will most likely be sensibly below inflation this year and the pressure for a more rapid indexation will only grow. Add to this the obligation to further reduce the budget deficit from 5.8% in 2022 to 4.3% in 2023, the need to lower nominal and real growth, plus increased defence spending and we get a pretty difficult puzzle for 2023. Budget deficit (% of GDP) Source: MinFin, ING   On the financing side, things are not looking smooth either, but – somewhat counterintuitively – this might in fact be one of the motivations to stick to the deficit target. Financing for the 2022 deficit is already behind schedule, despite the Ministry of Finance accepting higher and higher yields at its auctions. As of the end of May 2022, approximately 39% of the financing needs had been covered via a mix of local currency and hard currency issuance, with more weight on the latter. We estimate the funding needs for the June-December period at RON89bn. Subtracting what we approximate for another external issuance and RRF-related inflows (with both totalling some €8bn), we are still left with a hefty RON7bn monthly issuance on the local market. Retail bonds will likely help somewhat given the decent yields that the Ministry of Finance has decided to pay (7.2% for 1Y and 7.8% for 3Y bonds) but even so we will still be left with decent amounts to be issued for local investors (say RON5bn per month or so). All in all, while challenges remain, we believe that this year’s financing needs will come to light as long as the Ministry of Finance will agree to pay close to the secondary market yields. On the public debt side, the rapid GDP growth and exchange rate stability have been decisive in maintaining the debt-to-GDP below 50% so far (49.2% at the end of April). Under the current legislation, breaking above the 50% threshold would require the government to come up with a plan for public debt reduction. Funding needs and funding mix (RON mn equivalent) Source: MinFin, ING Ratings We remain of the opinion that Romania will maintain its investment grade for the foreseeable future. Admittedly, the long-awaited (and hardly begun) fiscal consolidation process will remain a sensitive topic given the still unclear path of fiscal reforms. However, being subject to the EU’s Excessive Deficit Procedure and having already committed to fiscal reforms under the Recovery and Resilience Facility, Romania will have little choice but to apply the required measures in order to sustainably bring the deficit back to -3.0% of GDP.  Inflation and monetary policy The above expectations for GDP numbers are likely to make it easier for the National Bank of Romania (NBR) to at least maintain its 75bp hiking pace at the July and August policy meetings. However, the attitude still seems to be one of doing the least possible as long as the main equilibriums (the FX rate in particular) are kept in check. We now estimate the key rate to reach 6.00% by the end of the year and stay flat in 2023. Meanwhile, however, inflation continues to surprise to the upside and will likely exceed 15.0% in June. This could mark the peak of the current inflationary cycle but the road to lower levels will be long. We estimate this year’s average inflation at 13.0% and 8.9% in 2023. A key factor for next year’s inflation profile will be the decision on whether to extend the current price caps in place for natural gas and electricity provided to households. Given that 2023 is a pre-electoral year, we doubt that the caps will be fully removed. Inflation (YoY%) and components (ppt) Source: NIS, ING   On the FX side, the 4.95 level for the EUR/RON remains untouchable for the moment with strong offers in the 4.9480-4.9500 range taming any upward pressure. In the context of a persistent liquidity shortage for the rest of the year, the relevant rate will in fact remain the credit facility (100bp higher than the key rate). The liquidity shortage will also continue to keep market rates much decoupled from the NBR’s key rate and even from the credit facility. Estimated liquidity position in the banking sector Source: NBR, ING Read this article on THINK TagsRomanian industry Romania trade Romania sales National Bank of Romania 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
An unusual drawdown is the perfect ending to an unusual bull market

Singapore: Headline and core inflation continue ascent

ING Economics ING Economics 23.06.2022 09:10
Headline inflation rose to 5.6% in May, prompting the deployment of a relief package   Source: Shutterstock 3.6% May core inflation   As expected May core inflation rises to 3.6% Price pressures remained elevated in May, pushing Singapore’s headline inflation to 5.6%, slightly higher than market expectations. Surging global commodity prices alongside improving domestic demand conditions tag-teamed to drive inflation higher.  Core inflation, the gauge closely monitored by the Monetary Authority of Singapore (MAS) accelerated to 3.6% and is expected to average between 2.5-3.5% for the year. Food and transport inflation were high, reflecting the commodity price crunch while faster inflation for recreational activities (3.5%) points to robust demand-side pressures.   Last Tuesday, authorities unveiled a spending package to help cushion the impact of higher prices with subsidies to be deployed to vulnerable households. The additional outlay from the government highlights the likely impact current inflation dynamics will have on the growth trajectory.      Core inflation now faster than MAS full year forecast average Source: Singapore Department of Statistics Elevated inflation to keep MAS on notice Elevated price pressures are likely to persist into 3Q and should keep MAS on notice for the rest of the year. MAS moved deliberately at the onset of the price spike, delivering several tightening measures highlighted by an aggressive adjustment in 1Q.  Energy and food prices could very well stay pricey given current indications as countries resort to protectionist policies at the expense of global supply. If prices stay elevated by mid-3Q, we are not counting out the possibility of additional tightening from MAS in October.  Read this article on THINK TagsSingapore inflation MAS Emerging Markets 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
Rates Spark: taking the inflation blinkers off

Rates Spark: How to price a recession

ING Economics ING Economics 23.06.2022 08:46
Have market rates peaked? We are getting close, but are not seeing a conclusive message that the top is in just yet. Inconsistent curve dynamics and the sharpest sell-off in two decades mean the bond market isn’t the obvious place to look for signs of recession. Were this to become the market’s main focus, we look for divergence between US and European curves On turning point watch. But it's never easy or straightforward So have we seen a turning point? Has the 10yr peaked at 3.5%? Has the 2yr peaked as it now races back down towards 3%? The answer is probably not. For two reasons. We still think that real rates have room to rise. The 10yr is now at 60bp. Our target remains 1%. Second, the 5yr remains cheap to the curve and consistent with a bearish market. That all being said, could there be a chink of reversion here? Answer, yes. A notable move today has been a decompression of the cheapness attached to the 5yr. It now trades at about 11bp cheap to the curve (in net terms). That’s in from 14bp in the past couple of days. That’s a big move, but it has not broken the range seen in the past number of months. It has been at 9bp cheap on a few occasions in the past couple of months. If it were to break down to 9bp and keep going, we’d really start to question whether we’ve seen the peak already.   We identify 3Q as the quarter in which market rates peak And that’s not impossible. All the talk out there is on recession, and former NY Fed President William Dudley has given us a timely reminder that the US savings rate is fast-tracking towards 4% (having been in the 20% region during the pandemic). That’s a signal of contemporaneous strength, but poses forward-looking risks to the ability to maintain consumption expenditure at elevated levels. This market is in a mood to look through the tight labour market and look forward to the slowdown/recession. Should that continue then the peak in rates is indeed in. As a central call though, we doubt we are there yet. There is too much inflation risk and not enough macro angst (just yet) to bring the bear market for bonds to a complete close. We are getting close though. We still identify 3Q as the quarter in which market rates peak and ultimately begin a journey lower. Bonds aren't behaving like recession hedges Bonds have a patchy record in pricing recession risk so far this year. In an environment where inflation has taken precedence over growth in central banks’ policy decision-making, this is understandable. The fall in some commodity prices this week opened the door to a regime where a cooler near-term outlook for inflation allows central bankers to focus on the medium term picture. In theory, this could translate into fixed income becoming less of an investment pariah, provided old relationships between slowing economic activity and inflation apply. The Estr and Sonia curves are pricing too high a 2023 terminal rate Source: Refinitiv, ING   The degree of tightening priced by some yield curves, and in particular European ones, has reached extreme levels It is probably too early to call for a change in market regime just yet, although a double-digit rally across developed market rates curves yesterday gives credence to this view. The combination of Fed Chair Jerome Powell being increasingly candid about the recessionary risk brought on by aggressive policy tightening, and the fall in some key commodity prices were the key reasons behind the re-pricing. Regardless of whether this is the beginning of a change in market regime or merely a vicious counter-trend rally, it illustrates the fact that the degree of tightening priced by some yield curves, and in particular European ones, has reached extreme levels inconsistent with a decline in inflation next year. Recession risk in Europe could come with steeper curves It is worth remembering at this stage that GBP and EUR OIS curves are pricing a terminal rate for the Bank of England and for the European Central Bank that are respectively 125bp and 175bp above our own economists’ estimates. Admittedly, it is uncomfortable to be so far out of line with what the market is pricing. The reason we’re not calling for a sharp adjustment lower in rates just yet is because the part of the forwards curve we happen to agree with is the near-dated one. In our view BoE and ECB tightening cycles will meet a much earlier end than implied by swaps, well before 2023, leaving up to six months of potential bond market sell off. Don't listen to the yield curve, recession risk isn't lower in the eurozone Source: Refinitiv, ING   BoE and ECB tightening cycles will meet a much earlier end than implied by swaps The other place where recession risk should in theory be reflected is the shape of the yield curve. Here too the market’s record is patchy. We flagged in yesterday’s Spark that the US curve inversion is both a consequence and a key input into the market’s perceived recession risk. As it happens, the EUR curve is far from sending the same signal. Worst still, if we’re right in expecting the ECB tightening effort to fizzle out by the end of this year, it is entirely possible that the curve steepens further still, as the market reassesses the probability of 2023 hikes. Today's events and market view European PMIs are generally expected to decline in June but to remain above the 50 contraction/expansion line. This contrasts with consumer confidence released yesterday, already well into recessionary territory. Comments about energy supply angst in today's report could play into the market's recession fears. Besides the immediate path for economic activity, it is clear that the inflation sub-components will be closely watched. The US calendar is no less busy with current account, jobless claims, PMIs, and Kansas City Fed manufacturing index. Fed Chair Jerome Powell follows up yesterday’s Senate testimony with a similar intervention, this time in front of the House of Representatives. Realistically, the scope for new information to be released in this exercise is limited since it is the second one in two days. Banque de France and Bundesbank Governors Francois Villeroy and Joachim Nagel will speak at a Bundesbank event. 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
UK retail sales dip as confidence falls to another all-time low

The Commodities Feed: Recession fear weighs on the complex

ING Economics ING Economics 23.06.2022 08:45
Your daily roundup of commodities news and ING views Source: Shutterstock Energy The oil market came under pressure with the rest of the commodities complex yesterday. ICE Brent traded as low as US$107.03/bbl at one stage. Growing fears over a recession have weighed on risk assets, and comments from Jerome Powell during his congressional testimony would not have helped. Powell commented that a soft landing would be "very challenging". However, the issue for the oil market is on the supply side.  Russian supply disruptions and limited OPEC spare capacity should continue to offer support to the market. Although clearly, a slowdown in global growth is a risk to oil demand, which could help ease some of the tightness in the market. Already, we have seen demand estimates revised lower over the course of the year. While this may help to ease some of the tightness in the short to medium term, it does little to solve the longer-term supply shortfalls. The IEA released its latest World Energy Investment report yesterday, in which they estimated that upstream oil & gas spending in 2022 would grow by 10% this year from 2021 levels. This would leave upstream investment for the year at around US$418b, which would still be below pre-pandemic levels. In addition, the IEA points out that a large part of the increased spending reflects increased costs, and so adjusting for inflation makes the YoY increase in spending even less impressive. The latest data from the API overnight showed that US crude oil inventories increased by 5.61MMbbls over the last week. A similar number from the EIA later today would mean the largest crude build since early May. On the refined product side, gasoline inventories increased by 1.22MMbbls, whilst distillate stocks declined by 1.66MMbbls. If EIA gasoline inventory numbers are aligned with the API, we could see the largest build in US gasoline stocks since late January. Although, with absolute stocks still at multi-year lows, gasoline cracks are likely to remain well supported. Metals Metals markets were unable to escape the broader risk-off move across markets. LME copper fell almost 2.5%, which saw it trade down to the lowest levels since February last year. Supply risks due to strike action in Chile have offered little support to the market. Although, in the latest statement from Codelco, the miner said it has been able to continue its mining activities despite some disruptions caused by strikes. This is at odds with comments from unions, who have said that output has been hit across all mines. While the macro picture is a concern for metals, micro developments for some metals continue to point towards a tight market, especially in the ex-China market. LME zinc on-warrant stocks set a fresh new low of 26kt yesterday, with another sizable increase in cancelled warrants (15.3kt). As a result, the cash/3m spread continues to strengthen, hitting US$160/t yesterday, the highest level since May 2019. The most active SGX iron-ore contract came under further pressure yesterday, falling almost 6% to a little over US$108/t. Mysteel reported that at least 18 blast furnaces have started their planned maintenance (three times more than six days ago), with molten iron ore production falling by 54.3kt per day.  Agriculture CBOT wheat managed to resist the broader weakness across commodities after reports of a Russian attack on the Ukrainian port of Mykolayiv. The recent attacks on Ukrainian ports do little to build confidence that we could see a restart in Ukrainian grain exports from Black Sea ports anytime soon. Further supporting wheat prices was the USDA’s weekly crop progress report, which showed that US winter wheat conditions remain poor with only around 30% of the crop rated in good-to-excellent condition, compared to 31% a week ago and 49% at this stage of the crop last year. Read this article on THINK TagsWheat Russia-Ukraine Recession risk Oil Copper 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
No Turn Around Tuesday

Asia Morning Bites - 23/06/22 | ING Economics

ING Economics ING Economics 23.06.2022 08:44
Jay Powell signals possibility of recession down the road but commits to fighting inflation.  Source: shutterstock Macro outlook Global: US Stocks ended basically flat yesterday, which for Jay Powell, testifying in front of the Senate Banking Committee, probably felt like a small victory. The S&P500 and NASDAQ were down 0.13 and 0.15% respectively. That’s a lot less than European stocks yesterday, though US equity futures look quite negative, so this may be only a short-lived reprieve from re-pricing in recession risk. EURUSD is slightly higher today, trying first to push down through 1.046 and then briefly above 1.06 before settling back. Neither the USD bulls nor the bears seem able to take the upper hand at the moment, for which we may need a new Fed or macro catalyst. Cable ran the same roller-coaster path as the EUR, though is now more or less unchanged from 24 hours ago. The AUD is providing more direction, dropping to the lower end of 0.69. The AUD is probably more vulnerable to recession anxiety than either the GBP or EUR. The JPY has managed to creep just back under the 136 handle, though probably will regain its upward trajectory before long unless safe-haven buying picks up.  The Asian FX pack experienced broad-based weakness against the USD yesterday, and if we see markets returning to a risk-off pattern, that will probably be the direction today too. Bottom of yesterday’s pack were the THB, PHP, INR and IDR, though they weren’t much weaker than the rest.   There was a large rally in US Treasuries yesterday, again most likely on growing recession fears.  2Y UST yields fell 14bp to 3.056%. UST10 yields fell 11.9bp to 3.156%. At some point, we may start to see longer-dated yields falling more than shorter-dated ones if the recession narrative gains more traction. For now, the 2s10s yield spread remains positive. Macro-G-7: The key takeaway from Jerome Powell’s testimony to the Senate Banking Committee yesterday was that achieving a soft-landing would be “very challenging”. That pretty much sums it up. Powell’s comments come after a very thought-provoking article by former New York Fed President, Bill Dudley, on Bloomberg yesterday, suggesting that a recession was “inevitable” within the next 18 months. Certain 2Y ahead recession indicators are flagging a 98% chance of recession. Ask me if you want details. It only remains for the equity market to price this now. Later today, Powell again testifies, this time to the House Financial Services Committee. There’s not much else on the G-7 calendar today. South Korea: The KRW has already risen past 1300, but could extend its rise over the near-term, then possibly rise further in 3Q22. Yield inversion between Korea and the US is expected to happen from July. Yield differentials will widen further thereafter, leading to a weakening of the KRW. With the KRW a high beta currency against global growth expectations, recent market anxiety and fears surrounding the Fed’s aggressive tightening will be a major driver for KRW moves. Also, the trade balance will likely remain in the red as energy prices continue to climb, putting additional pressure on the KRW. However, the KOSPI valuation is approaching a historic low and foreigner’s positions in the equity market have become very light as they have been net sellers over the past six months, thus we think that the cash outflow won’t be as large as we saw in the first half of this year.   Taiwan: Industrial production will be released today. We expect the growth rate in May will be similar to that of April, as port logistics partially resume in Mainland China, reducing pressure on the lack of raw materials and parts for Taiwan production. Singapore:  The May inflation report is scheduled for release later in the day.  Prices are expected to rise 5.5% from a year ago, while core inflation likely accelerated to 3.6%.  Faster inflation prompted authorities to unload a fiscal package directed to vulnerable households recently highlighting the toll higher prices are taking on overall economic activity.  Accelerating inflation will likely cap recent retail sales momentum and moderate 2Q GDP.     Indonesia: Bank Indonesia (BI) holds a policy meeting today and market participants expect the central bank to keep rates unchanged.  BI Governor, Perry Warjiyo, expressed his preference to hold off on rate hikes until inflation becomes a problem.  Indonesia’s core inflation is currently still within target at 2.6%, and we could see BI hike rates when core inflation accelerates further.  IDR will likely face depreciation pressure in the near term as BI stays dovish. Philippines: Bangko Sentral ng Pilipinas (BSP) meets today to discuss monetary policy.  Market consensus points to a 25 bps increase after incoming BSP Governor Medalla signalled a preference for only a modest hike.  The PHP has come under substantial pressure in recent sessions with BSP staying dovish despite hawkish moves by the Fed.  A 25bp hike will likely translate to increased pressure on the PHP in the near term with PHP falling to multi-year lows. Japan: PMI indices will be released 9:30 am local time. We think the service PMI will continue to improve on the back of reopening and government support programs while the manufacturing PMI should increase as China's lockdowns softened and orders data remained healthy. (By the time we publish- actual data will be released)  What to look out for: US sentiment indicators and regional central bank decisions South Korea PPI inflation (23 June) Japan Jibun PMI (23 June) Singapore CPI inflation (23 June) Philippines BSP policy rate (23 June) Indonesia BI policy rate (23 June) Taiwan unemployment rate and industrial production (23 June) US initial jobless claims (23 June) Japan CPI inflation (24 June) Malaysia CPI inflation (24 June) Singapore industrial production (24 June) US new home sales and Univ of Michigan sentiment (24 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
Trading plan for Dow Jones for June 29, 2022

Czech National Bank Review: Hawks sign off with 125bp | ING Economics

ING Economics ING Economics 23.06.2022 08:42
The Czech National Bank (CNB) today raised the key interest rate by 125bps to 7.00% as expected. However, today's meeting did not bring any clarity regarding the new board's next steps. Nothing has changed in our view and we continue to believe that the market is underestimating the new board's willingness to cut interest rates earlier.  Source: Shutterstock 7.00% CNB's new policy rate +125bp Final meeting of the hawks delivers a sharp rate hike As expected, the CNB today raised its key interest rate by 125bps to 7.00%, the highest level since 1999. This was also the seventh consecutive above-standard hike, of more than 25bps. Unsurprisingly, five board members voted in favour of the move and two members voted against. Details of the vote will be released on Friday next week, but we assume nothing has changed from previous voting patterns (with Michl and Dedek against the hike).   The press conference did not bring many surprises or news. According to the CNB Governor, today's decision did not "deviate" from the staff recommendation. Higher inflationary pressures simply called for another sharp rate hike. The Board assessed the risks to the forecast as "markedly inflationary". The CNB cited higher domestic and foreign prices, steep energy price increases, a weaker koruna, and a less restrictive fiscal policy as the main risks. The war in Ukraine and monetary policy abroad remain uncertainties for the CNB forecast. During the press conference, the governor did not want to comment much on the next steps given the changes in the CNB board which come into effect July 1. However, he said the inflationary situation will not deteriorate further but he would not put any ceiling on interest rates just in case. On the other hand, the board decided today that it would not change anything about the central bank's current approach to FX interventions. According to the governor, they assess the situation on a weekly basis and are satisfied with the current situation. Here the market assumes the CNB continues to offer euros near the CZK24.70/75 area.  "Restoring price stability soon is now the CNB's absolute priority and is a necessary condition for the long-term prosperity of the Czech economy" - CNB Board statment Clean separation between two CNB eras, without any forward guidance Today's CNB meeting did not tell us anything new about the future steps of the new board and therefore nothing has changed in our outlook and strategy. The new board can afford a dovish shift given the expected peak in inflation in the coming months. On the other hand, due to energy and fuel prices, inflation is likely to peak later or the deceleration in inflation will not be what the CNB expected. Combined with the change in central bank communication, it will not be easy for the market to find a clear path. We assume that today's rate hike was the last in the current hiking cycle and the pain threshold of the new board for any further rate hikes is high. On the other hand, we expect the approach to FX intervention to remain unchanged despite rising costs. In the longer term, we continue to believe that the market is still underestimating the CNB's transformation to a dovish stance and that the first rate cut will come earlier than the middle of next year, as the market currently expects. For now, it seems to us that the turn of the year may be an opportunity to show the full force of this dovish shift for the first rate cut, given that the full effect of the comparative base from this year will already be showing up in inflation.  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
No Turn Around Tuesday

BRICS: The new name in reserve currencies

ING Economics ING Economics 22.06.2022 17:15
Raising some eyebrows today has been an address by President Putin outlining that Brazil, Russia, India, China, and South Africa (BRICS) are developing a new basket-based reserve currency. The presumption is that it will comprise real, roubles, rupees, renminbi, and rand and present an alternative to the IMF’s Special Drawing Right (SDR). Russian President Vladimir Putin addresses the nation in Moscow. Russian troops launched their anticipated attack on Ukraine on Thursday. Spheres of influence News that Russia seems to be leading a discussion on a new reserve currency perhaps should not come as such of a surprise. The speed with which western nations and its allies sanctioned Russian FX reserves (freezing around half) no doubt shocked Russian authorities. The Central Bank of Russia effectively admitted as much and no doubt some BRICS nations – especially China – took notice of the speed and stealth at which the US Treasury moved. BRICS nations may therefore feel they need an alternative reserve currency to match something like the IMF’s SDR. Recall that the IMF’s SDR is not a currency, but effectively a basket of claims on top reserve currencies such as the dollar, the euro, the pound, the yen and its most recent addition the renminbi. There are about US$950bn worth of SDR outstanding and these are designed to supplement IMF member's reserves. Most notably in August 2021 there was an additional SDR456bn released to IMF members to ease balance of payments financing needs following the shock of the pandemic. Why would the BRICS countries need an SDR-like basket currency? One can only think this is a move to address the perceived US-hegemony of the IMF and will allow BRICS to build their own sphere of influence and unit of currency within that sphere. Intriguingly this week has seen news reports that Russia might want to address rouble strength by managing it against peg or basket. Could the BRICS be the basket against which the rouble is managed? We know that the CBR is not a fan of managing the rouble, however. Without discussing the likelihood of such a proposal turning into something tangible, Russia may have a strong motivation to participate or initiate in an IMF-like scheme in order to address the mounting pressure on its capital account. Russia is used to being a net creditor to the rest of the world, as its big trade surplus would normally be balanced by the capital outflow (purchase of foreign assets). Now, in the new geopolitical reality, Russian investments are no longer welcome at its usual DM destinations due to sanctions/legal restrictions and in some cases - individual decisions by financial institutions. At the same time, the context of growing global rates may create demand in EM and frontier space for external financing at a competitive cost Market implications This may just be a trial balloon floated by President Putin, but what are some of the early considerations? Will the BRICS basket attract many FX reserves from the BRICS countries themselves or from nations seen as within their sphere of influence – e.g., countries in the CIS, or more friendly regimes in the Gulf or South Asia? We should not forget the mantra of what makes a good reserve currency: ‘safety, liquidity and return’. On the safety front, sovereign credit quality will clearly be an issue for any BRICS-basket currency, where a simple weighted average of 5-year sovereign credit default swaps (CDS) trades at least twenty times wider than a similar CDS average for SDR currencies. When it comes to FX liquidity suffice to say a basket of BRICS currencies operates in a different universe to those currencies in the SDR. The average deposit/yield on a BRICS basket would be far higher, but that is because of the much poorer credit quality where, incidentally, it looks like Russia will shortly go into sovereign default.   Our early thoughts are that this news would not be enough to trigger any substantial out-performance – relative to current fundamentals – of the BRICS currencies. While there could be some high-profile statement of political ambitions to embark on this project, we doubt the mercantilist nations involved in BRICS would want to transfer valuable FX reserves into this more local sphere of influence. If they are worried about the path of sanctions and the increasing weaponization of the dollar, they, like Russia, might prefer to move into Gold. 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
Eurozone economy: unsure about current strength but weakness ahead confirmed

Netherlands: House price decline more likely as interest rates rise | ING Economics

ING Economics ING Economics 22.06.2022 16:39
Interest rates are rising significantly. Since the beginning of this year, mortgage interest rates have roughly doubled. Higher interest rates increase the downward pressure on house prices. And if interest rates rise faster than expected, a decline in house prices is a very realistic outcome More downward pressure on house prices in the event of higher interest rates Since the beginning of this year, mortgage interest rates have roughly doubled. The average 10-year mortgage interest rate for an annuity mortgage rose this year by about 1.9 percentage points, from 1.5% to 3.4%*. The increase is linked to the sharp rise in capital market interest rates. At the beginning of this year, higher expectations of inflation in the euro area and more positive expectations about the economic recovery from the coronavirus crisis led to higher interest rates. Since the war in Ukraine started, interest rates have continued to rise on balance. Inflationary pressures have increased and European governments want to borrow more money to finance higher spending on defence and energy. This has increased the upward pressure on interest rates. Higher interest rates put downward pressure on house prices in two ways: • Higher mortgage interest rates increase the monthly expenses of an owner-occupied home when prices remain equal. As interest rates rise, people aiming to buy homes will tend to offer less for a house on average than at lower interest rates, in order to limit the increase in their housing costs. • Higher mortgage interest rates reduce the maximum amount of mortgage that households can borrow. For first-time buyers in particular, the borrowing capacity is often decisive for the price they ultimately offer for a house. Higher mortgage interest rates therefore reduce the price they can offer for a property. * Based on an unweighted average of all offered mortgage rates to 2 June 2022 inclusive (incl. changes announced at that time) for mortgages with a Loan to Value (LTV) of 100%. Capital market interest rates and mortgage market interest rates show a similar pattern *Interest rates on newly taken out mortgages for house purchases. The moment of measurement coincides with the transfer at the notary. The recent sharp rise in current market interest rates on mortgages therefore lags behind the figures. Source: DNB, Macrobond Stabilisation of house prices in the event of a slight rise in interest rates In its base case scenario for the housing market, ING Research expects house prices to stabilise over the rest of this year rather than a decline*. The starting point is a slight further increase in interest rates in the remainder of the year amounting to around 20 basis points. However, the uncertainty surrounding the course of the war in Ukraine and its impact on the Dutch economy is very great. This could mean that interest rates will rise more sharply than we currently anticipate. * Average prices are still up 13.0% on an annual basis. Between January and April, house prices had increased by 5.2%. Last year's strong increase in house prices is also still reflected in this year's annual average increase. House price drop possible if interest rates rise faster than expected *assumption: market interest rates will rise this year by about 20 basis points Source: CBS (Statistics Netherlands), estimate by ING Research Further rise in interest rates increases chances of a decline in house prices A faster than expected rise in mortgage interest rates makes a decline in house prices more realistic, as the negative effects of higher interest rates on the affordability and borrowing capacity of people aiming to buy homes should increase. The two examples below illustrate the effect of a further one percentage point increase in mortgage interest rates on monthly mortgage expenses and borrowing capacity.   1. Higher mortgage costs due to interest rates increasing by 1% Assuming a mortgage of €429,000 (the average house price in April), an interest rate increase of one percentage point would increase net monthly expenses by about €115*. The mortgage costs remain the same with a mortgage of €395,000. That is about 7.5% lower than the current average house price. In addition to the direct effect of higher interest rates on total monthly expenses, there is another adverse effect on homeowners. While interest costs increase, the amount they pay off each month on their mortgage actually decreases in the early years of the term. In the event of higher interest rates, homeowners build up equity in their homes or other wealth less quickly. At the current interest rate and with an annuity mortgage of €429,000, the monthly repayment in the first year is about €705. At an interest rate that is one percentage point higher, this amount decreases by about €105 per month to €600. 2. A lower maximum borrowing capacity as well Higher interest rates also reduce the maximum borrowing capacity of households. To take out an annuity mortgage of €429,000, a single earner would need a gross annual income of approximately €84,000 at the beginning of this year, based on the NIBUD lending standards*. A further increase in mortgage interest rates by one percentage point would mean that the same single earner could borrow approximately €20,000 less. Without equity, this translates directly into a drop in the price that this person aiming to buy a home can bid for. * Assuming an interest rate of 3.44% now on a ten-year annuity mortgage without Dutch National Mortgage Guarantee. Exact price effect is difficult to predict The exact price effect of higher interest rates on the housing market is difficult to predict. However, it is clear that higher interest rates have a negative effect on house prices. At the same time, many other factors also play a role (sentiment, income development, lending standards, etc.). Furthermore, people aiming to buy homes can limit the direct effect of higher interest rates on monthly mortgage expenses in several ways. In response to higher mortgage interest rates, they may, for example: 1. choose mortgages with a shorter term, as these mortgages have lower interest rates on average. This helps to limit the increase in monthly mortgage expenses. However, the future interest risk increases in this case. 2. choose repayment-free mortgages, to reduce monthly mortgage expenses. Homebuyers who do this miss out on mortgage interest relief and accrue home equity at a slower pace. 3. make use of what is known as the ‘meeneemregeling’ (portability arrangement). With this scheme, people who move up the housing ladder can take the interest rate of their old mortgage with them to their new mortgage. So people who agreed to their previous mortgage at a lower interest rate than the current one can thus limit the increase in their housing costs. 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
Podcast: Market rips into reverse. Evening star on Nasdaq 100

Bank Pulse: Bank bond issuance points to a change in the funding split

ING Economics ING Economics 22.06.2022 13:27
Banks have been active this year in bond markets, concentrating mostly on funding-driven issuance. Covered and preferred senior prints are running ahead of our forecasts, while bail-in senior and subordinated supply somewhat lags with the risk off mode taking its toll. We are sticking to our forecasts for now Spanish issuers, in particular, have been more active this year in preferred debt A change in the bank bond supply composition this year Banks have been active in bond markets this year with the year-to-date issuance running at €238bn in euro-denominated debt, ahead of the €161bn printed this time last year. That being said, we have seen a clear change in the composition of the debt that is being printed as compared to last year. The bulk of the increase comes in the form of covered debt followed by preferred senior unsecured paper. Bail-in senior runs a touch ahead of last year, while regulatory capital prints are clearly below the levels seen in 2021 YTD. Banks are reacting to the substantial changes in the operating environment, alongside some regulatory changes in the covered bond side. Persistent inflation has led the central banks to start raising their reference rates faster than had been anticipated, and banks have sought to lock in still attractive longer-term debt levels where they still can. Some have likely also prepared for paying back part of their TLTRO-III funds in the form of early repayments and taken into account that part of the TLTROs mature in 2022. In addition, the risk off mode has supported issuance in the funding-driven forms such as covered or preferred senior debt, at the expense of regulatory capital including Tier 2 or Additional Tier 1 debt. €238bn Bank bond supply YTD   Preferred senior and covered debt issuance ahead of last year The YTD €38bn in preferred senior unsecured issuance is ahead of the €29bn issued in 2021 on a YTD basis. Spanish issuers, in particular, have been more active this year in preferred debt, printing €7bn this year compared with €2.75bn last year. French, Norwegian and Swedish banks have also issued more preferred senior. In bail-in senior debt, the issuance of €68bn runs just ahead of last year’s level of €66bn. We have seen more deals from French, Canadian, Swiss and Dutch issuers, while US, German and Spanish banks have been less active here. Covered bond issuance at €120bn is driven mostly by an increase from Canadian, French and German banks. TLTRO funds remain a part of the bank funding equation for now We consider that the aggressive increase in expectations for interest rate hikes has changed the early repayment dynamics completely for TLTROs. A combination of the uncertain economic outlook, substantially higher refinancing costs, and the potential benefits from a higher deposit rate compared to the TLTRO interest rate make it look more interesting for banks to hold onto their TLTRO funds. European banks still rely on €2,124bn of funding from the ECB’s funding programme TLTRO-III, adjusting for the repayments this June. Of this, €66bn matures in 2022, €1,494bn in 2023 and €564bn in 2024, assuming these funds are kept until maturity. The ECB announced last week that banks will repay €74.1bn across the TLTRO-III tranches 1-10 as of 29 June 2022. Compared to the previous repayment opportunities, the total amount of repayments remains smaller than what banks repaid in September (€79bn) but higher than in March (€2bn) and December (€60bn). Early repayments are driven by a combination of the end of the easing measures (leverage ratio, collateral) and special interest rate periods, as well as refinancing and opportunistic considerations, in our view. The next repayment opportunities are in September and December 2022. Read more on the TLTRO-III dynamics in our report TLTRO-III: To repay or not to repay published on 15 June 2022. Our base case is that the TLTRO-III programme is unlikely to be extended or the terms to be further eased in the near term. Having said that, if market conditions make it more difficult for banks to refinance their TLTRO drawings next year, the ECB may seek to support bank funding conditions by, for example, offering a new LTRO or adding new tranches to the current programme. In any case, we would expect that any new programme would likely come with fewer attractive conditions attached. €365bn Our 2022 estimate for bank bond supply   We expect bank bond supply to reach €365bn this year We are forecasting the full year bank bond supply to increase to €365bn this year, from €300bn in 2021. So far 64% of the forecast has been realised, while last year at this time 54% of the full year supply had been issued. Our forecast is split between €150bn in covered, €75bn in preferred senior, €115bn in bail-in senior and €35bn in subordinated debt. The current supply is running somewhat ahead our forecast in preferred senior and covered debt, and behind our estimates in bail-in senior and especially in subordinated. This is driven by the change in the composition of the bank bond issuance this year, due to the substantial changes in the operating environment. We revised our covered supply estimate higher earlier this year, but we stick to our estimates for senior debt for now. A realisation of our subordinated debt forecast would necessitate the market prospects to improve. Bank bond supply by category Source: ING, IGM Read this article on THINK TagsBonds Bank pulse 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
Crude Oil Marches Higher, Price Of Gold Yawns

Poland: Consumer demand holding strong despite high inflation | ING Economics

ING Economics ING Economics 22.06.2022 12:35
Economic data for May points to solid growth in the second quarter, driven by consumer demand. The personal income tax rate cut from 1 July will boost net wages, supporting households’ spending in the second half of the year. Taming inflation requires further monetary tightening. In July, the National Bank of Poland will hike rates by 50-75bp Retail sales in Poland rose 8.2% YoY in May, in line with our expectations   In line with our expectations, retail sales rose 8.2% year-on-year in May (ING: 8.2% YoY; consensus: 8.8% YoY), following a 19.0% YoY increase in April. The large swings in the annual growth rate of retail sales over the past two months were a consequence of the pandemic restrictions that were in place last April. The low base bumped up this year's reading in April, and the increase in buying activity in May 2021 created a high reference base for today's reading.   The structure of sales confirms our expectations about the consumption patterns of households. High demand was observed in the case of necessities, namely clothing and footwear (17.7% YoY), pharmaceuticals and cosmetics (15.4% YoY), and food and beverages (10.5% YoY). Purchases made by Ukrainian refugees are contributing to this. Durable goods (cars, furniture, consumer electronics, household appliances) were noticeably less popular. The increase in prices slightly reduced demand for fuels. Real retail sales of goods, %YoY Source: GUS.   Consumer demand, boosted by the fiscal expansion, remains strong despite rapidly rising prices. We estimate annualised consumption growth in 2Q22 to be higher than in 1Q22. Strong consumer demand means that upward pressure on prices will continue. The implied deflator of retail goods sales rose to 14.2% YoY in May from 12.1% YoY in April. Further monetary tightening will be required to contain inflation. In July, the monetary policy council (MPC) will raise rates – we think by 50-75bp. The scale of the hike will depend on the June inflation estimate and the National Bank of Poland's July macroeconomic projection.   Construction output increased by 13.0% YoY in May (ING: 7.6% YoY; consensus: 8.7% YoY), following 9.3% YoY growth in April. The high reading was mainly due to the strong increase in building construction (34.7% YoY). The figure surprised to the upside, but the outlook for the construction sector is negative due to weakening demand for housing as a result of increased uncertainty and the rising costs of credit. The industry is also struggling with high input prices and staff shortages. Construction output, %YoY Source: GUS.   May's set of economic data (industrial production, retail sales, construction output) is suggestive of a moderate economic slowdown and does not raise major concerns about the economic conditions in 2Q22. We estimate that GDP growth will be close to 6% YoY with strong household consumption.  Read this article on THINK TagsRates outlook Inflation GDP
German inflation comes down as government measures bite

FX: UK Inflation Rate Hasn't Surprised, But Will USD (US Dollar) Shock Us Today!? Watch Out CZK (Czech Krone)! | ING Economics

ING Economics ING Economics 22.06.2022 09:13
Recession fears are growing as central bankers slow demand to curb inflation. Pro-cyclical currencies are on the back foot and the dollar remains very much in demand. These trends should remain in place today as Fed Chair Powell delivers monetary policy testimony to the Senate. Also, look out for a large and probably final rate hike in this cycle  from the CNB USD: Powell sticks to his hawkish script The narrative in financial markets seems pretty clear. Inflation needs to be addressed and given that supply-side factors show no signs of easing, central banks are going to have to take the steam out of demand by tightening monetary policy. Whether that slowdown turns into a soft-landing or a recession remains to be seen. In response, equity markets remain under broad-based pressure as growth forecasts are cut and the risk-free rate rises. Commodity prices (having caused a lot of the inflation) would also probably be a lot lower now were it not for the supply shock of the war in Ukraine. So far the Fed remains firmly set on its hawkish course. Richmond Fed President Thomas Barkin summed things up well yesterday when he said that the Fed should raise rates as fast as possible without breaking anything. It does not seem that the Fed considers the 21% year-to-date decline in the S&P 500 as representing anything being broken and the Fed's current rhetoric is that the US economy can handle higher rates. Expect this message to be communicated again at 1530CET today when Powell delivers his semi-annual testimony to the Senate. The Fed's terminal rate priced for 2023 is currently near 3.60% (off a recent high at 3.90%) and could go higher again on Powell's testimony. Presumably, that should see some bearish flattening of the US yield curve - which is a dollar positive.  DXY could drift towards the 105.00/105.50 area on a hawkish Fed and a difficult international environment that is seeing Asian FX come under pressure again.  EUR: Consolidating near the lows It seems that EUR/USD is happy to trace out a 1.0400-1.0600 range for the time being, with a downside bias on the back of Fed testimony today. In this strong dollar environment and intervention taking place to support emerging currencies (especially in Asia), EUR/USD will always be vulnerable to re-allocation flows from the central bank community. For example, large dollar selling from an Asian FX reserve manager will see euro weights in FX reserves rise above benchmarks. Portfolio managers at the central bank will then subsequently go out to sell EUR/USD to rebalance portfolios. That looks the risk near term as Asian FX reserve managers do battle with a higher $/Asia. In Europe, growth forecasts continue to be cut and concern is growing about a sudden stop in gas supplies. Investors are also probably wary of events in the Baltics where tension over Russia's outpost at Kaliningrad is growing. Equally, doubts about how hard the European Central Bank can really stamp on the monetary brakes will keep the euro on the soft side. Elsewhere, we should hear again from Swiss National Bank President Thomas Jordan. It seems pretty clear that the SNB's strategy is to guide EUR/CHF gently lower and a re-iteration of those comments today could see EUR/CHF pressing 1.0100.      GBP: No surprises from May CPI UK May CPI came in as expected at 9.1% year-on-year and looks unlikely to have much of a say on Bank of England pricing. That pricing remains very aggressive, with the policy rate still priced above 3.00% (assuming 175bp of hikes) for the December meeting this year. As per comments from BoE Chief Economist Huw Pill yesterday, the BoE remains prepared to act more forcefully - meaning that aggressive pricing may stay in the UK money market curve for some time. Let us not forget as well that sterling is quite an expensive hedge. Selling GBP versus EUR on a three-month basis now costs 2% per annum - and it is not particularly clear that GBP should perform much worse than the EUR given similar challenges faced by both economies. It is not a very fashionable view, but we suspect GBP can stay a little more supported than most expect and EUR/GBP can trace out a 0.8500-0.8600 range near term. CZK: One last large hike from the hawks The Czech National Bank board meets today to set policy rates. This will be the last meeting of the board under its hawkish formulation led by Governor Rusnok. We look for one last large hike from the hawks - in the region of 125bp to take the policy rate to 7.00%. This is in response to CPI running well above estimates and printing 16% YoY in May. This large hike has been well telegraphed, but what happens next will be intriguing. A new and perceived dovish CNB board takes over on 1 July and holds its first policy meeting on 4 August. It seems far too early for this new board to soften monetary conditions in the face of inflation, which is peaking higher and later than the CNB had originally expected. However, the focus will be on whether the new board wants to let the Czech koruna do the talking and whether - through FX intervention - the CNB wants to guide EUR/CZK lower to the 24.50 area - somewhat closer to where CNB models had been forecasting EUR/CZK to be trading (closer to 24.00 actually).  For today, EUR/CZK should either remain flat at 24.70 or go lower if today's hike is even larger than the 125bp consensus, or if the CNB tries to engineer a lower EUR/CZK. On the rates side, June has been a graveyard for those looking to receive rates. For example, the CZK 21 x 24 month FRA has risen 150bp over the last month as global rates have surged. Yet later in the summer, we suspect interest in CNB rate cuts next year will return. We think a cut could come as early as the first quarter. 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
Technical analysis of GBP/USD for June 24, 2022

UK inflation set to stay above 9% throughout 2022 | ING Economics

ING Economics ING Economics 22.06.2022 09:01
UK inflation remains above 9% and the recent rise in energy costs will probably help the headline rate go slightly into double-digits from October. The chances of a 50bp Bank of England rate hike in August are rising, though we think there's only so much further it can hike in the current fragile growth environment   UK inflation has edged a touch higher to 9.1%, helped by another chunky rise in food prices, along with another 2% increase in fuel costs. We’d previously tentatively said that inflation looked like it had peaked – or at least wouldn’t go more than another few tenths of a percentage point higher. That’s probably true in the near term, and we expect to see the headline rate inch only slightly higher over the next couple of months. That’s linked to another circa 10% rise in petrol/diesel prices in June. However, when you factor in the recent leg higher in natural gas, coupled with broader price pressure elsewhere, we’d now expect to see headline CPI go a little above 10% in October. That’s when Ofgem will next increase the household energy cap, and current futures pricing suggests that could go higher by another 45-50% - though in practice, government support payments mean that will be lower, especially for lower-income households. 9.1% UK inflation (YoY%) As expected   With the prospect of inflation staying above 9% throughout this year, it’s perhaps unsurprising that the Bank of England hawks are becoming more vocal. Catherine Mann, who was among those voting for a 50bp hike last week, has argued the Bank should move aggressively to protect the value of sterling. Today’s inflation data perhaps bolsters the camp looking for another 25bp, in that for a second consecutive month the numbers have come in more-or-less in line with expectations, ending a relentless run of above-consensus numbers. Nevertheless, with the Fed highly likely to follow through with a second consecutive 75bp hike in July, we think there’s a growing chance that the BoE follows suit with its first 50bp move – especially given that it’s now fully priced. But in practice, there’s only so far we think the BoE can hike in an environment of fragile growth, and an inflation backdrop that’s largely out of the Bank’s control. By October energy will be contributing over five percentage points to the overall headline rate. While we see scope for a 50bp hike in August, we still find it hard to see the central bank taking rates anywhere near as far as the Fed. We’re pencilling in a further 75bp of tightening in total. 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
Equities retraced amid weak US consumer confidence and near completion of quarter-end rebalancing

Rates Spark: Powell to cement US curve dynamics | ING Economics

ING Economics ING Economics 22.06.2022 08:25
Fed chair Jerome Powell’s testimony, if it confirms recent themes in Fed communication, will likely push rates higher and flatten the yield curve. Despite the growing focus on recession risk, bonds are finding no favour among investors Source: Shutterstock Hard to see what could prevent more yield upside One salient characteristic of rates price action so far this week is bonds’ ability to sell off on both risk-on and risk-off markets. Arguably, in each instance, it was a different part of the curve that was in the lead, but this is besides the point. In a week that looked like a prime candidate for a bond consolidation, with light supply and event risk, rallies look to have been systematically sold into. It seems to us that the macro environment is conducive of rates testing higher levels still, with 3.5% and 2% the obvious near term targets for 10Y Treasuries and Bund.  The Fed has capped long-term inflation expectations, but not nominal rates Source: Refinitiv, ING   The macro environment is conducive of rates testing higher levels still Only a sharp rise in already elevated recession risk, or a change in central bank tone, could change this dynamic in our view. After consistently underestimating inflation, we would discount the latter. Bostic brandishing the prospect of a pause in the Fed’s tightening looks like a communication accident that is unlikely to be repeated anytime soon. As for rising recession risk, it is notable that that idea has already entered the market’s subconscious, and failed to prevent rates upside. Exhibit one is the Fed’s June dot plot, featuring growth forecast downgrade and unemployment upgrades. Hopes of a “soft(ish)” landing were also relegated to just that, hopes. Recession risk and the Fed's short term focus mean a flatter curve With a Fed finally on its front foot when it comes to fighting inflation, and markets already aware of growing recession risks, one can reasonably ask what Powell could say today that would catch markets off guard. We entertain the hope that, having caught up with the market’s way of thinking about inflation dynamics, Fed policy, or rather its disconnect with the market consensus, is no longer a factor adding to market volatility. Bonds and swaps are paying attention to short-term developments, especially on energy markets A continued focus on more short term inflation developments, and on headline inflation rather than core, would reduce the inflation swap markets’ ability to cap long-term nominal yield upside. Taking 10Y CPI swaps dipping once more below 3% as an example, long-term inflation fears have been kept in check by an increasingly hawkish Fed. The continued sell off in nominal rates show that bonds and swaps are instead paying attention to more short-term developments, especially on energy markets. This is a step in the right direction, particularly if Thomas Barkin’s comments that his aim is to see positive real rates across the curve are to be taken at face value. Recession risk and curve inversion appear to be stuck in a self-fulfilling narrative loop Source: Refinitiv, ING   Combined with the growing focus on recession risks, the admission by the Fed that taking the Fed Fund rate well above neutral implies subsequent cuts. This points in the direction of a further inversion of Sofr forwards, and also a flattening of the spot-starting yield curve. This may only be a short-term phenomenon, either until the outlook worsens so much that the market pares back hike expectations (bull-steepening), or until markets converge with the view of stubbornly high inflation, dashing hopes of subsequent easing (bear-steepening). For now however, growing recession risks and a curve inversion are a self-sustaining dynamic that cannot be ignored. Today's events and market view It will come as no surprise that Fed chair Jerome Powell’s congress testimony is the main focal point in rates markets today. If recent central bank comments are anything to go by, the tone should be hawkish. The pull-back in rates since their pre-FOMC peak suggests markets can still be caught off guard, for instance by Powell keeping the door open to more than one 75bp hike should data require it. The chairman is the most important Fed speaker on the calendar, but by no mean the only one. Thomas Barking, Charles Evans, and Patrick Harker complete the line-up. Jon Cunliffe, of the Bank of England, Luis de Guindos, and Frank Elderson, of the European Central Bank, are also due to speak. On the economics calendar, Eurozone consumer confidence is expected to stabilise at levels already consistent with a recession. Germany will raise funds by tapping its 15Y benchmark.This will be followed in the US session by the US Treasury selling 20Y debt. 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
The Commodities Feed: Copper supply risks | ING Economics

The Commodities Feed: Copper supply risks | ING Economics

ING Economics ING Economics 22.06.2022 08:14
Your daily roundup of commodities news and ING views Source: Shutterstock Energy The oil market continues to be driven by external influences, reflecting the lack of fresh fundamental catalysts. Oil prices have resumed their sell-off in early morning trading today. A more aggressive approach from the US Fed, in order to try rein in inflation has not helped, with it likely to prove challenging for the Fed to bring inflation down without a hard landing. Oil fundamentals remain constructive with the oil market expected to continue to tighten through the year as the EU’s ban on Russian seaborne crude starts to increasingly bite. Although, how tight the market will be really depends on how willing the likes of China and India are to pick up heavily discounted Russian crude. Chinese May trade data suggests there is a strong desire, with China importing a record amount of Russian crude over the month. Another dynamic in the market which makes it difficult to be overly bearish is the tightness in the refined products market. Whether it is the US or NW Europe, refined product inventories are at or near multi-year lows. This continues to push refinery margins higher. And stronger margins for refiners should equate to stronger crude oil demand from these refiners.   Reduced Russian gas flows via the Nord Stream pipeline is being felt in other markets and regions. Spot Asian LNG has rallied by around 60% over the last week or so on the back of lower pipeline flows to Europe. In addition, the prolonged Freeport LNG outage will only tighten what is already a tight LNG market. Whilst, weak Chinese LNG demand over 1H22 offered some relief to the LNG market, we will need to see if this trend continues in 2H22- much will depend on whether we see the latter part of the year plagued with Chinese lockdowns. Coal has also benefitted from reduced Russian gas flows, with a number of EU countries including increased coal usage as part of measures to counter gas shortages. API2 prices are up around 29% over the week, whilst Newcastle has rallied by around 20% over the period. The issue fore EU buyers is that they will have to look further afield for thermal coal, given the ban on Russian coal. Metals LME zinc led gains amongst base metals yesterday, closing more than 2% higher yesterday. This appears to be on the back of a fairly large decline in LME zinc on warrant inventories, with them falling by a little over 18kt yesterday, which is the largest daily decline since April and leaves on warrant stocks at 41.6kt as of yesterday. As a result we have seen a spike in the cash/3M spread, with it hitting a backwardation of US$111/t, up from around US$33/t a week ago. Shanghai Metals Market (SMM) in its latest survey expects that Chinese refined zinc output will decline by 6% MoM and 4.6% YoY to 484.5kt in June, as flooding has disrupted power supplies to smelters located in the southern province of Guangxi. Smelters in the region hold about 550ktpa capacity, which is roughly 8% of total Chinese capacity. Workers at Codelco are set to go on a nationwide strike in Chile starting today. This is in protest to the management’s decision to close the Ventanas copper smelter. However, copper price action in early morning trading appears to be largely ignoring this development, despite the potential for a large supply impact. Clearly, the market is more focused on macro concerns.  Read this article on THINK TagsRefinery margin Oil Natural gas Copper Coal 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
USD/CHF: Swiss Franc Continues To Rise. What Will US Dollar Do?

Asia Morning Bites - Covid in Shenzen, Powell testimony to Senate | ING Economics

ING Economics ING Economics 22.06.2022 08:13
Covid in Shenzen, Powell testimony to Senate Source: shutterstock Macro outlook Global markets: The US returned from their Monday vacation in a better frame of mind and equities delivered a solid bounce on Tuesday. The S&P500 and NASDAQ both finished up about 2.5 per cent, though already doubt seems to be creeping in and US equity futures are signalling some selling pressure at the open today. The better risk sentiment didn’t do much to undermine the USD though, and EURUSD remains about 1.0533, close to its rate this time yesterday, though it did look at 1.0580 briefly before falling back.  The same holds true in other G10 currencies, with the AUD still at 0.6963, and the GBP only marginally stronger at 1.2271. Not so for the beleaguered JPY though, it soared higher, reaching 136.53. This pace of climb ought to make even the BoJ’s Kuroda uncomfortable, so it is possible we will get some verbal intervention before long – not that this seems likely to help beyond a very temporary respite – if that. Other Asian FX was pretty muted yesterday, though the PHP continued to suffer, moving up to 54.265. US Treasury yields were slightly higher yesterday, though not much compared to recent trading. The 2Y yield rose 1.8bp, while the 10Y rose 4.5bp to 3.275%. If the equity market flips back into risk-off again today, that should unwind these gains and more. In Fed news, Thomas Barkin yesterday said the Fed should normalize policy as soon as possible. That sounds like an endorsement for another 75bp rate hike in July. The main event though is Jay Powell at the Senate Banking Committee later today. G-7 Macro: Yesterday’s May US existing home sales fell almost as predicted, falling to a 5.41m annual pace. It would be surprising if they didn’t fall further as the Fed tightens rates and mortgage yields rise.  Today sees the UK release May CPI inflation data, which is expected to tick up to 9.1% from 9.0%. Canadian inflation too should rise to 7.3% from 6.8%. These figures will signal that the rise in the price of global money hasn't peaked, which won't help investor sentiment. There isn’t much due elsewhere. Australia: Minutes from the June meeting of the Reserve Bank of Australia (RBA) published yesterday didn’t add much to our understanding of the pace and duration of future rate hikes, save that they clearly have some way to go. However, as the RBA meet monthly, unlike, for example, the Fed, there was a hint that they saw less need for the sort of big hikes that the Fed is now delivering since regular 25bp increments will achieve much the same over time. China: Covid cases have been found in Shenzhen. But this time, the impact is more on Hong Kong than Shenzhen as the cases found were located at the border with Hong Kong. These cases suggest that the border between Hong Kong and Mainland China will remain closed in the coming months as 1) the number of cases in Hong Kong is rising, and 2) Mainland China will not want to take the risk that Hong Kong's Covid cases could be passed on to major cities in Mainland China. This means Hong Kong's retail businesses will need to survive without visitors from Mainland China. Business ties between Mainland China and Hong Kong could also be affected as the border has been almost closed for far longer than expected. What to look out for New Zealand trade (22 June) Thailand trade (22 June) US Mortgage application (22 June) South Korea PPI inflation (23 June) Japan Jibun PMI (23 June) Singapore CPI inflation (23 June) Philippines BSP policy rate (23 June) Indonesia BI policy rate (23 June) Taiwan unemployment rate and industrial production (23 June) US initial jobless claims (23 June) Japan CPI inflation (24 June) Malaysia CPI inflation (24 June) Singapore industrial production (24 June) US new home sales and Univ of Michigan sentiment (24 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
Video market update for June 29, 2022  | InstaForex

Deconstructing the Australian construction industry

ING Economics ING Economics 21.06.2022 14:45
Shrinking as a proportion of total GDP and with little overlap with the broader economy, we dissect the construction industry and assess its future  Construction is a far smaller element of Australian GDP than it has been in the past A breakdown of the Australian construction industry Source: CEIC, ING Construction and GDP are distant cousins When Australia's economy was hit by Covid-19 for the first time in the first quarter of 2020, it marked the first contraction of the economy in 35 quarters and a record that is hard to beat among developed economies. The previous contraction came in the first quarter of 2011, a brief and shallow interlude that was all that marked the financial crisis for Australia.  The construction industry has not been so resilient. The chart above shows instances where combined construction (dwelling and non-dwelling) exhibited a quarterly contraction (in grey) and overlays that on quarters where this coincided with a contraction in GDP.  It's not hard to see that there isn't much overlap. And so while there have been historical occasions when Australia's broader economic trends and the construction industry overlapped, for the most part there doesn't seem to be a huge amount of correlation, or probably much causation.   But with the Reserve Bank of Australia (RBA) now embarking on a tightening spree, and with costs rising, this might be one of those rare moments where the broad macro and construction fates overlap to a degree. In what follows, we dissect the industry along residential and non-residential axes and then split the non-residential sector further along its engineering and building subcomponents.     Quarterly contractions in combined construction and GDP Source: CEIC, ING Construction hasn't meaningfully contributed to GDP in years Accounting for about 10.5% of real GDP over the last four quarters, construction is a far smaller element of Australian GDP than it has been in the past. In 2013, for example, Australian construction accounted for a fifth of total GDP. This ongoing shrinkage has meant that the construction sector in Australia has not meaningfully contributed to Australian GDP growth since 2018. Though in recent years it has at least avoided the big contractions in the non-dwelling segments seen between 2013 and 2017. These were only partially offset at that time by a more buoyant residential construction market. Last year saw all segments of the construction sector creep out of contraction, but in no segment does construction look particularly robust at a point in the business cycle where rising rates and higher construction costs look likely to add considerable headwinds. Construction, contribution to GDP YoY% Source: CEIC, ING Construction sentiment is down Construction PMI indices turned abruptly lower in May of this year, following several months of robust growth readings coinciding with the re-opening of the economy post-pandemic. The downturn was equally evident across both activity and new-orders sub-indices. Such occasional swings in sentiment are not uncommon and don’t necessarily imply anything too alarming, although the fact that this has coincided with the RBA’s transition from one of the most dovish central banks in the G-10 to an increasingly hawkish one, means we might not want to dismiss negative signals on construction sentiment too readily. Construction PMI index Source: CEIC, ING Price pressures are building The most likely source of the drop in sentiment is the surge in costs within the industry. All input costs, including industry wages, have risen substantially, and while selling prices have also risen, the PMI indices imply that selling prices are rising slower than input costs. That can't be good for margins. Other PMI indices show a familiar pattern in a number of industries right now, rising delivery times and employment shortages.   Costs have surged more then selling prices Source: CEIC, ING Pipeline of work to do is bulging Another useful set of data to consider reflect how the pipeline of construction activity is shaping up. Construction approvals precede construction starts. Work done in any period determines the rate of construction completed and can give rise to swings in the amount of construction work “yet to be done” – essentially, the pipeline of construction work. Until the last few months, what we saw from pipeline construction data was a pickup in construction approvals and starts but a slower pace of construction completions. The net result of this was that the value of construction yet to be done had ballooned, although it now appears to be topping out as starts and approvals have both dropped more recently compared to work done. This suggests that construction activity will remain supported over the coming quarters as backlogs are worked through. So the near-term outlook appears positive although a recent dip in approvals and starts could see the pipeline of work to be done start to decline over the coming quarters. Pipeline measures of construction Source: CEIC, ING Building construction Construction in Australia is broadly split by building and engineering, with building accounting for about 56% of total construction and residential building a similar proportion of total building. Both residential and non-residential building construction accelerated during the first half of 2021 in response to the re-opening of the Australian economy and earlier pandemic assistance policies. But both types of building have fallen back since then. Residential building is still proceeding at a faster pace than it was in 2018/19, just prior to the pandemic, but at a slower pace than during 2015-17 when Australia managed to duck the worst of the global financial crisis and continued to enjoy strong growth helped by a low interest-rate environment. The recent dip in building activity seems like a return to a more sustainable trend growth rate after the shocks of the pandemic. Non-residential investment has experienced a much steadier pace of expansion and is holding up a little better than the more cyclical residential activity. Building construction by type Source: CEIC, ING Residential building by state Residential building construction by state shows the same surge during 2021 as low policy rates and stimulus spending gave the sector a lift. All states apart from South Australia have seen dwelling construction dip back as normal conditions have resumed, but Victoria and Queensland are holding up better than New South Wales.  Residential building by state Source: CEIC, ING Limited read-across from prices to construction There is very little overlap between dwelling construction and residential property price growth. Certainly, the sharp decline in median property price growth in Melbourne may also mirror the relatively strong supply of dwellings shown in the previous chart. But there are very few other overlaps. The main takeaway being that in all major cities, residential property price growth peaked in 2021, and has been coming down steadily since then. That could also begin to weigh on the supply side for housing if it continues. Residential property prices, by major city YoY% Source: CEIC, ING Non-residential construction Within the non-residential construction sector, it is the “other” category that has grown at a faster rate than commercial or industrial property. The fastest-growing subsectors of this catch-all group are education, followed by health, recreation, and entertainment.  Non-residential building by type of construction Source: CEIC, ING   Within the commercial sector, office space is providing the most growth. While for industrial building, warehousing is by far the strongest category. Non-residential construction – commercial Source: CEIC, ING Engineering is dominated by extraction Engineering construction refers to the subgroup of buildings that are typically structures, rather than places to live or work or conduct business. They include such things as roads, bridges, mines and harbours. Extraction (mining) accounts for the single largest expenditure in this category, although it is not seeing much growth, remaining more or less flat in 2021 compared to 2020. Other engineering sub-sectors, such as roads, power generation, and railways are providing most of the growth in this sector, possibly helped by pandemic infrastructure spending policies. If so, these may start to ease off in 2022. Power generation construction has been particularly strong. There may be some increased spending on renewables buried within this data.  Engineering by type Source: CEIC, ING   Engineering work for the extraction industries usually follows the commodity price. With iron ore and copper prices quite weak currently and gold under pressure as global interest rates rise, this is likely to stay fairly flat or even soften slightly in 2022. Engineering, major types YoY% Source: CEIC, ING Non-residential construction by state and territory Non-residential construction activity has not been evenly spread across Australia. In terms of growth rates, Tasmania has seen some of the fastest growth in spending, and amongst other things, reflects construction related to renewable energy generating projects, including green hydrogen. Other than Tasmania, New South Wales has also seen non-residential construction spending accelerate, but it has been contracting or stagnating in most other states. Non-residential construction by state and territory Source: CEIC, ING Outlook: near term looks OK, but further out is less positive The current macro setting is not a bad one for construction, though on balance we would expect to see a slower pace of construction spending over the next 12-24 months. In the very near term, the pipeline for work yet to be done could provide some support for construction through the end of this year. But residential spending will at some stage succumb to higher interest rates and growing job insecurity. This seems a way off now as the unemployment rate is at a historical low, but if it doesn’t rise it is difficult to see inflation being tamed. House price inflation is already on its way down, and in all likelihood will continue to soften. In some states, there may even be some decline in median prices. On the non-residential side, the extraction industries will likely remain subdued by global headwinds and, in particular, the weakness of the Chinese economy. This could change, but visibility on this or the evolution of the war in Ukraine and its impact on commodity prices and in turn extraction activity remain very limited. With financial markets steeling themselves for a possible global recession, anything other than a fairly sombre outlook for this sector would seem inconsistent, though supply issues can’t be ignored.  The incoming labour government may provide a little more government spending to support other non-residential projects over the coming year or two. In particular, there may be more of a boost to renewable energy construction within the engineering sector. But the bigger picture may well be the waning of pipeline projects as pandemic stimulus measures reach their natural course. Read this article on THINK TagsAustralian residential construction Australian non-residential construction Australian construction Australian building 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
Polish industrial activity weakens; price pressures remain high

Polish industrial activity weakens; price pressures remain high

ING Economics ING Economics 21.06.2022 14:43
May data from industry has confirmed a gradual slowdown in activity amid still elevated price pressures. Despite headwinds, annual growth in industrial activity in 2Q22 will be only slightly lower than in 1Q22. A high PPI paves the way for a further upswing in core inflation. The central bank will continue its rate hike cycle in July with a 50-75bp move Construction of the 'Warsaw Hub', Poland   Industrial production increased by 15.0% year-on-year in May (ING: 16.8% YoY; consensus: 15.2% YoY), following an increase of 13.0% YoY in April. The seasonally-adjusted index declined by 1.7% month-on-month. This was the second consecutive month of monthly declines in seasonally-adjusted output. Producer prices (PPI) increased by 24.7% YoY last month (ING: 25.0% YoY; consensus: 24.7% YoY), compared to a 24.1% YoY increase in April (data revised). Upward pressure from commodity prices continues, including prices of coke and refined oil products (93.4% YoY). Metal prices were also growing strongly (45.3% YoY). Food processing prices were rising as well (27.1% YoY). PPI, %YOY Source: GUS.   Although leading indicators (e.g. May manufacturing PMI) point to a deterioration in Polish manufacturing, the slowdown in domestic industry is not abrupt. We estimate that in annual terms, industrial production growth in 2Q22 will be slightly lower than in 1Q22, which was very good. Symptoms of a marked economic slowdown are visible in the construction industry though (May data will be released tomorrow). At the same time, consumer demand remains strong, which should be confirmed by tomorrow's retail sales data for May. At the moment, this suggests GDP growth close to 6% YoY in 2Q22, although we are likely to see a decline in QoQ seasonally-adjusted terms. A substantial economic slowdown is expected in the second half of the year when the negative consequences of the war in Ukraine will become more evident in terms of weaker demand for Polish exports and disruptions to supply chains. Moreover, rising prices and interest rates will dampen consumer demand, which should, however, be sustained by refugee purchases. For the full year, we estimate GDP growth at 4.7%, mainly due to the carryover effect from 2021 and a high starting point in 1Q22.   The 24.7% YoY increase in producer prices confirms that upward pressure on prices remains high, and recent readings of core inflation measures confirm that companies have no problem passing on higher costs to the prices of their finished goods. This process is likely to continue in the coming months, resulting in a further increase in core inflation. To bring inflation under control, the National Bank of Poland will have to continue raising interest rates. The market has already priced in our scenario of the reference rate reaching 8.50%. The key factors in this context will be the upcoming inflation readings (by the end of 2022 we project price growth in the range of 15-20%) and the policy direction of the main developed markets' central banks. In light of the increasing scale of monetary policy tightening by the Federal Reserve (after the 75bp rate hike in June we expect a similar move in July) and the expected start of ECB rate hikes in July, discussions about the end of the rate hiking cycle in Poland or about the space for rate cuts in 2023 are, in our opinion, premature and may negatively impact the Polish zloty rate. At the moment, there are no signs of a reversal in the rising inflation trend, and we see significant upside risks to inflation from the surge in administered prices in early 2023. 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
FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

ING Economics ING Economics 21.06.2022 11:52
USD/CNY Lockdown remains the main risk Current spot: 6.7344 The Yuan weakened in May due to a two-month long lockdown in Shanghai. The announcement of an easing in movement restrictions has led to a moderate appreciation. We can't rule out further lockdowns. But we expect they will be more flexible and will not do as much damage to the economy. Consequently, future yuan weakness should be less dramatic. The recovery of economic activity is focussed on the rebound of retail sales in June. But as residents are still hesitant about cross-province travel due to uncertain travel restrictions, we believe the retail sales recovery in June could remain quite soft. USD/INR Protected by the RBI, but for how long? Current spot: 78.14 After its sharp depreciation at the beginning of May, the INR has been improbably stable during the second half of May and early June. The stability in the INR is consistent with the shift of the Reserve Bank to a more hawkish stance, and the first rate-hike this cycle. But it also looks as if there has been some considerable central bank action behind its stability. We don’t think this will last, and we don’t think the Reserve Bank of India is fundamentally opposed to depreciation, just “disorderly” depreciation, so we believe it will depreciate further. Even with the RBI hiking again, we believe the INR will resume its weakening in the near-term. USD/IDR IDR under pressure following palm oil export ban Current spot: 14680 • In early May, the IDR retreated sharply as the government’s palm oil export ban was expected to weigh on export earnings. A narrowing of the trade surplus could undermine a key support for the currency. • Bank Indonesia also (BI) kept policy rates untouched at their last meeting, citing “manageable” inflation. They did, however, announce a plan to hike reserve requirements to 9% by 3Q to mop up excess liquidity. • The IDR has since stabilized after the authorities allowed select companies to resume palm oil exports. But the currency will remain pressured as long as the partial ban remains in place. This article is a part of a report by ING Economics 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
FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

The US returns from holiday - RBA minutes and BoK comments the main Asia highlights | ING Economics

ING Economics ING Economics 21.06.2022 09:49
The US returns from holiday - RBA minutes and BoK comments the main Asia highlights Source: shutterstock Macro outlook Global: It is of course very quiet, thanks to the US holiday yesterday, so there is nothing on the equity front to report, or Treasuries either. For what it is worth, which may not be very much, US equity futures are currently positive, and 10Y bond futures negative, though it’s anyone’s guess if that’s how it looks tomorrow morning after a day’s trading. Asian equity futures look cautiously optimistic this morning in anticipation. The US holiday may have helped the EUR to make gains, and EURUSD is back up at 1.0518 this morning, though elsewhere in the G-10, there hasn’t been much change. The AUD is still below 0.70, Cable is still in the mid-1.22s, and the JPY is just above 135. Asian FX yesterday was a mixed bag. USDCNH moved sharply lower and is now at just under 6.69. But there were also losses, led by the PHP, which has pushed above 54.0, and also the KRW, which is now at 1291. On the Macro calendar, the May US existing home sales release will be worth a look. The pace of sales has dipped sharply since the 2021 peak and is expected to fall further in the face of rapid mortgage yield increases. And in Fed news, St Louis Fed President, James Bullard, said at an event yesterday that he expected the economy to continue expanding this year (what about next year though?) and that the Fed needed to hike so inflation expectations didn’t become unanchored. Richmond Fed President, Thomas Barkin, speaks at a NABE event today. Australia: At 0930SGT, minutes of the Reserve Bank of Australia’s June policy meeting will be released. As ever, this will be scrutinised for clues about the pace of future tightening. Korea: The Bank of Korea issued a statement this morning predicting 2022 inflation to be above the current projection of 4.5%, and possibly to record the highest level in 14 years (4.7% in 2008) and added “Going forward, CPI will likely remain over 5% for the time being". Governor Rhee said last week that the BoK would make a data-dependent decision when asked whether the BoK will consider a “big step”. Thus, today’s statement can be interpreted as indicating that the big step decision is getting closer. Also, we expect the annual CPI inflation rate to be 5.2% and June CPI 6.0%YoY (vs 5.4% in May). Thus, if we are right about our June CPI forecast, then a 50bp hike at the July MPC is highly likely. We then expect the BoK to deliver 25bp hikes in August and October.  Governor Rhee will talk about the current inflation situation at 10:00 am today, so the market will closely listen to him. Korea's 20-day exports for June recorded a -3.4%YoY fall, mostly due to unfavourable calendar effects (2 days less than the previous year) combined with the trucker’s strike earlier this month.  Semiconductors and petroleum rose by 1.9% and 88.3% while auto and auto parts fell sharply. Meanwhile, imports for the same period rose 21.1% YoY. What to look out for South Korea trade balance (21 June) Hong Kong CPI inflation (21 June) US existing home sales (21 June) New Zealand trade (22 June) Thailand trade (22 June) US Mortgage application (22 June) South Korea PPI inflation (23 June) Japan Jibun PMI (23 June) Singapore CPI inflation (23 June) Philippines BSP policy rate (23 June) Indonesia BI policy rate (23 June) Taiwan unemployment rate and industrial production (23 June) US initial jobless claims (23 June) Japan CPI inflation (24 June) Malaysia CPI inflation (24 June) Singapore industrial production (24 June) US new home sales and Univ of Michigan sentiment (24 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics
Trading plan for Natural Gas on June 24, 2022

The Commodities Feed: European gas worries | ING Economics

ING Economics ING Economics 21.06.2022 09:47
Your daily roundup of commodities news and ING views Source: Shutterstock Energy The oil market managed to eke out a small gain yesterday, amid thinner volumes due to the holiday in the US. There is little in the way of strong fundamental catalysts driving the market at the moment, instead, external influences are dictating price action.   Libyan oil output has seen a recovery over the last week. The Libyan energy minister has said that output has increased to 700-800Mbbls/d, up from less than 200Mbbls/d a week ago. This recovery has apparently been driven by Libya’s largest oil field, Sharara. Libyan oil output has been under pressure this year due to protests forcing the closure of fields. Production is likely to remain volatile for the foreseeable future, with protests calling for the resignation of the prime minister unlikely to disappear. Detailed trade data from China yesterday showed increased oil flows from Russia over May. China imported a record 2.06MMbls/d of Russian oil over the month, which is about 18% of total Chinese oil imports. This is a significant increase when compared to May last year, when China imported 1.33MMbbls/d from Russia, making up 13% of total imports. Clearly, the large discounts available on Russian crude oil have been too tempting for Chinese buyers. In theory, the more displaced Russian oil we see going to the likes of China and India, the easier it should be for the global market to deal with the EU’s ban on Russian seaborne crude imports. European gas is where there is most interest in energy markets at the moment. This follows Gazprom cutting gas flows along the Nord Stream pipeline last week, which has seen flows falling to almost 62mcm/day, compared to closer to 155mcm/day prior to the disruption. Gazprom has blamed the reduced flows partly on a delay in the delivery of a turbine, which was undergoing maintenance in Canada. Sanctions have made it difficult to return it. Disrupted flows will be a concern, given that Europe is in injection season, and will be trying to hit its target of having storage 80% full by 1 November. If these reduced flows persist, this target may be difficult to achieve. In addition, Nord Stream is set to undergo its scheduled annual maintenance between 11-21 July, which will see gas flows coming to a full stop over the period. Metals The latest numbers from the International Aluminium Association (IAI) show that global primary aluminium daily output stood at 187.3kt in May, compared to 186.7kt a month earlier. Total monthly output stood at 5.8mt last month, rising 3.6% MoM, but largely flat YoY. Cumulative output over the first five months of the year stood at 27.97mt, down less than 1% YoY. Production from China rose 3.9% MoM and 1.9% YoY to 3.42mt last month, which leaves YTD production at 16.3mt, down 0.5% YoY. Agriculture In its latest monthly crop monitoring report, the European Commission once again lowered its estimate for wheat yields to 5.56t/ha for the 2022/23 season. This compares to an earlier estimate of 5.69t/ha and the 5-year average of 5.62t/ha. Hotter and drier-than-usual weather in large parts of the continent was expected to hurt the wheat crop. We have seen yield forecasts revised lower for several months now. As recently as March, they were estimated at around 5.8t/ha. A broad sell-off in financial markets and some demand concerns have weighed on wheat prices over the past few weeks. However, lower supply from Europe would tighten the market over the coming months. The European Commission also reduced estimates for corn yields from 7.92t/ha to 7.87t/ha, although yields are still marginally higher than the 5-year average of 7.86t/ha. Read this article on THINK TagsWheat Russia-Ukraine Natural gas Libya 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
Technical Update - Wheat broken key support turning bearish, but indicates higher prices longer term

Rates Spark: no news is bad news | ING Economics

ING Economics ING Economics 21.06.2022 09:45
Markets ignoring French election results suggests that their fear of monetary tightening supersedes other drivers. The ECB has managed to cap sovereign spreads for now but questions remain about its new instrument, and its impact on semi core bonds such as France’s Source: Shutterstock French bonds shrug the election results... One reason for the lack of market reaction to the French parliamentary election results, which saw president Emmanuel Macron lose his outright majority, is that they are difficult to interpret. From the point of view of the bond market, we think potential changes along three policy axes matter: fiscal, structural reforms, and European integration. Macron's political fiasco comes at a time French spreads are already wide Source: Refinitiv, ING   French election results are difficult to interpret As our economist colleagues have noted, only the probability of unpopular structural reforms can be said to have decreased. Macron’s vote deficit means he may well be pushed into an alliance with centre-right MPs favourable to fiscal consolidation, while the lack of domestic policy leeway might nudge the president in the direction of a more forceful defence of his European integrationist agenda. Combined with the uncertain shape of the future governing coalition, if any, we wouldn’t blame French bonds from shrugging the outcome of this vote. ...but remain in the market's crosshairs The lack of strong reaction suggests that investors have a much bigger monetary fish to fry. The fate of sovereign yields and spreads is beholden to monetary policy and, in that regard, European Central Bank (ECB) comments should continue to carry disproportionate importance in setting price action. In a monetary tightening environment, it is logical that spreads would widen, to 55bp in the case of 10Y France-Germany, compared to an average of 34bp in the QE era that started in 2015. SNB bond-holding statistics suggest France is at risk in case of FX intervention Source: SNB, ING   The ECB’s instrument against financial fragmentation is a double edged sword The ECB’s promise to unveil an instrument against financial fragmentation is a double edged sword. French spreads benefitted from their correlation with Italy last week but one of the proposals under review, according to Bloomberg, is for the ECB to sell core bonds each time it buys peripheral debt. The shape of the new facility isn’t the only unknown. Martins Kazaks seemed to suggest in an interview yesterday that the bar for ECB intervention is high. This adds to worries that SNB FX intervention could be most damaging to semi-core bonds, judging from its latest foreign bondholding statistics. While spreads are distracting from the real issue The debate about the shape and uses of this new fragmentation instrument has acted as a distraction to the more important debate: to what degree does the ECB need to tighten policy in the coming quarters. Lagarde repeated yesterday that the first increment will be a 25bp hike in July but the pressure is building for a larger move. Assuming the ECB sticks to its guns, this will only increase the market hike discount for subsequent meetings. This is particularly true with energy prices remaining stubbornly high, and with elevated geopolitical tensions in Eastern Europe. Linking hikes to wages would raise fears of over-tightening at the ECB Source: Refinitiv, ING   Lagarde raised the risk of over-tightening and subsequent easing perceived by the market In that respect her comment that wages have picked up, and that the portion of employee compensation covered by collective negotiation clauses will remain above average in the coming years, did resonate with markets. More than an admission that investors are right in anticipating the case for hikes to only strengthen in the coming quarters, it also suggests the ECB is setting policy based on a lagging indicator. This, to us justifies a further inversion of Estr forwards, as Lagarde raised the risk of over-tightening and subsequent easing perceived by the market. Today's events and market view Supply consists on the EU launching a new 25Y green bond. This long-end deal is one of the few primary market deals this week and we think it has contributed to the long-end underperformance in recent days. With elevated energy prices and hawkish central banks, we expect the front-end to take the lead in any subsequent bond market sell off. Central bank speakers will never be far from investors’ minds, with interventions from Lauretta Mester and Thomas Barkin. Earlier in the day, Huw Pill of the Bank of England and Olli Rehn of the European Central Bank are also due to speak. 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
Japan: retail sales rise while consumer sentiment weakens

Further Weakening Of Brazilian Real!? FX Forecasts: USD To BRL, USD To MXN & USD/CLP | ING Economics

ING Economics ING Economics 21.06.2022 08:55
USD/BRL High rates versus high risk Current spot: 4.9878 The softening in dollar rates in May allowed for a better EM environment and some resumption of equity inflows into Brazil – a key driver of strength in the real. BRL implied yields above 12% are very attractive and discourage hedging. So far there is no real sign that BACEN is ready to stop the tightening cycle and the policy rate is expected to be lifted 50bp to 13.25% in June. Politics is the main challenge for the BRL now. With 4 months to go until elections and Bolsonaro trailing Lula in the polls 30% to 46%, fiscal giveaways are the risk – eg, cutting fuel duties. US real rates heading higher this summer mean a difficult external environment, tipping the scales towards a higher $/BRL. USD/MXN Banxico ready to take ‘more forceful’ tightening measures Current spot: 20.26 The Mexican peso has been one of the strongest EMFX performers over the last month, alongside Latam currencies. MXN strength looks less driven by commodities and more by last month’s hawkish shift by Banxico. When hiking 50bp to 7.00% last month, Banxico said it is ready to take ‘more forceful’ tightening measures. This has led to widespread expectations of a 75bp hike at the June and perhaps August meeting. We had thought Banxico would merely match the Fed this year to keep a 600/625bp spread in rates. This spread could actually move nearer to 700bp and keep USD/MXN offered near 19.50. Mexico is a better-quality carry trade given its solid BBB rating. USD/CLP Monetary policy struggles to keep pace with inflation Current spot: 844.62 Chile’s central bank has recently taken the policy rate to 9%, slowing the rate hikes to a pace of 75bp. Markets price the policy rate topping out around 9.75% this summer. The problem is that inflation is still running up around the 11% YoY area and that the economy contracted in 1Q. Despite the positive commodity backdrop, we’re still a little bearish on the peso. The constitutional reform will be presented in early July and voted on in September. Some of the harsher nationalization ideas have been taken out, but concerns remain. Unless China introduces massive stimulus soon, copper prices look unlikely to surge and a current account deficit keeps CLP soft. This article is a part of a report by ING Economics 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
Crude Oil Higher, Gold Price Slips, Crypto: Bitcoin (BTC/USD) Vulnerable

Real wages in the eurozone will return to modest growth next year

ING Economics ING Economics 20.06.2022 17:14
Since the recovery from the financial crisis, nominal wage growth in the eurozone has been sluggish. This is often attributed to weaker trade unions. But wage growth in real terms is higher now than it was before the crisis. We expect a decline in 2022, but real wages will grow in 2023, although probably only modestly Most trade unions have continuously lost members since the start of the century Nominal wages suggest disconnect with labour market According to the European Commission, the eurozone unemployment rate has declined to levels below the natural rate of unemployment, and the vacancy rate is at an all-time high. But gross wage growth in nominal terms has only recently begun to accelerate after ending 2021 with a year-on-year increase of just 1.5% in the fourth quarter. This was a historic low. In the first quarter of this year, wage growth was 3%, but that was partly made up of one-off pay bonuses. Last year wasn't the only year in recent history with low growth in nominal wages. On average, the yearly wage increase after the global financial crisis (GFC) was only 1.8%, compared to 2.5% during 2000-09. Nominal wage growth was especially low during the years 2014-16 (chart 1). The slowdown in average nominal wage growth is not that surprising. After all, the economy – measured by the average size of the output gap and unemployment – performed much better in the years before the GFC than in the years after, when the eurozone had to face the euro crisis and the Covid-19 pandemic. Nevertheless, what is surprising, at first sight, is that while unemployment started to come down from 2014 onwards, it took several years before nominal wage growth increased (chart 1). Unemployment and the divergent development of nominal and real wages The weighted average is the weighted average of the 9 largest countries that make up together 95% of eurozone GDP Source: Eurostat, ECB, ILO Real wage growth shows quite a different picture Nominal wage growth is, however, a misleading indicator to judge whether trade unions have performed well in wage negotiations. In the end, it is real wages that are interesting for employees because they are adjusted for inflation and therefore more directly related to their purchasing power (chart 1). Net real wages are even more interesting for employees. However, in this article we want, among other things, to determine whether pay rises in the private sector reflect the changes in the balance between supply and demand in the eurozone labour market. Since net wages are also determined by changes in income tax and social security contributions set by the government, the development of gross wages is a better indicator to find an answer to our question. Looking at the development of real wages, it is striking that average real wage growth post-GFC was higher than pre-GFC. While average nominal wage growth per year declined after the crisis, average real wage growth almost doubled from 0.24% per year up to 0.42% (chart 2). This is remarkable because the conditions in the economy and in the labour market, measured by the unemployment rate and the output gap, were less favourable in the years after the GFC than in the years before the GFC. Eurozone nominal wage growth down but real wage growth up Source: ECB, ILO Money illusion It is the very low inflation between 2014- 2016 (between 0.2% and 0.5%) that mainly explains the low growth of nominal wages since the GFC and causes the large difference between the development of nominal and real wage growth. These three years rank in the top five of the lowest inflation years of this century (chart 3). If inflation had been higher, wage demands and nominal pay rises would have been higher too.  Commentators that lable the wage development in the eurozone as 'sluggish' and attribute this to a weakening position of the trade trade unions, base these conclusions on the wage development in nominal terms instead of real terms. This is understandable because of the fact that the media focuses on nominal pay rises, but incorrect. Looking at real wages the performance of trade unions has not been bad at all. It should be said however that the favourable outcome of the wage negotiations in real terms during 2014- 2016 was in part the result of the fact that inflation in reality was better (lower) than was expected at the time that wage demands were set. The second half of the last decade has been characterised by all-time low eurozone inflation Source: ECB   Because of the focus of commentators on nominal wages instead of real wages, a classic case of the ‘money illusion' has emerged; low nominal wage increases are incorrectly labelled as weak bargaining results that are at odds with the economic recovery and the improvement in the labour market. But, on the other hand, in 2017 and 2018, when inflation was not so low, the real wage outcome did not reflect the improvement of the economy and the labour market. Real wages decreased in 2017 and showed limited growth in 2018 (chart 1). And the fact that unions have not been able to convert (all) labour productivity growth into higher wages (chart 4) also indicates a loss of bargaining power, particularly because this didn't only happen in economically weak years but also in strong years during which jobs were not generally at risk. For example, in 2006, 2007 and 2017, employment was growing but the unions did not succeed in converting productivity increases into extra pay rises. Eurozone real wages cannot keep up with labour productivity *The weighted average is the weighted average of the 9 largest countries that make up together 95% of eurozone GDP Source: ECB, ILO Weakening position of trade unions cannot explain wage developments Most trade unions have continuously lost members since the start of the century, particularly since the GFC. And, measured by the number of striking days per 1,000 employees, data from the European Trade Union (ETUC) shows that eurozone trade unions have been less militant since the GFC than before the GFC. Cross-country analysis, however, does not support the view that declining union membership leads to weaker bargaining results. As chart 5 shows, real wage growth in countries with a relatively large loss of membership is not lower than real wage growth in countries with a smaller loss of members. As long as employers' organisations are willing to negotiate collective bargaining contracts with trade unions, the unions maintain bargaining power. There are some examples of employers (organisations) that succeeded in substituting the traditional trade unions as negotiation partners with new unions or workers' councils, but in general, the traditional unions still hold ground, despite the loss in union membership.  Unions with more membership losses don't show lower real wage growth *Years 2008 and 2016 instead of 2009 and 2019 Source: OECD   Union bargaining power (with a few exceptions) has also been strengthened by the fact that many European governments usually extend industry deals between unions and employer's organisations to all companies that are part of that industry. This phenomenon also helps to explain why a loss of union membership rates in a sector does not ‘mechanically’ result in less say over working conditions and pay in that sector (chart 5). Differences in the change of the coverage rate of collectively-bargained contracts don't relate to differences in real wage developments 2000-19 *Years 2008 and 2016 instead of 2009 and 2019 Source: OECD Outlook for wage growth 2022 was expected to be the year when the economic recovery from the pandemic and the tightness in the labour market would translate into an improvement in real wages. But this year is turning out to be a difficult one for real wages because inflation has been accelerating surprisingly fast to levels not seen since the 1970s. In our January piece, we forecast nominal wage growth to accelerate from 1.5% last year to 3- 3.5% this year. The economic outlook has deteriorated since, given the outbreak of the Russia-Ukraine war. We, nevertheless, still expect nominal wages to accelerate this year and not lose much ground next year because of the tightness of the labour market in the eurozone and because high inflation this year pushes up wage demands in both years. However, the economic slowdown will, with the usual time lag, start to put downward pressure on the bargaining results in the future. Thus far, wage demands and bargaining results in 2022 are accelerating as expected. The German union IG Metall is in the process of preparing negotiations for the German metal industry but has already announced that the demand for wage increases could be 3.5% or somewhat higher. Steel workers' wages in Germany will grow by 4.4% on a 12-month basis, as a result of the recently-agreed collective bargaining contract. Some countries where collective bargaining has already resulted in a considerable amount of contracts show a clear upward trend in the outcome of wage negotiations. In January, the average nominal wage increase in the Netherlands, for example, was 2.6% on a 12-month basis. Collective bargaining contracts in May showed an average increase of 3.8%. Austria also shows increasing wage growth, for example in the electricity sector where wages will rise by 3.5-4% on a 12-month basis. In France and Spain, wage agreements also show a clear increase in wage growth compared to last year. In Italy, wage growth remains at very low levels according to the latest data.  For 2023, much will depend on the question of how long the economic setback and high inflation, due to the war, will continue. ING expects no recession for the whole of the year but GDP growth will slow down well into 2023. Inflation will probably peak in the current quarter at 7.7% and then steadily come down in the direction of the target of 2% towards the end of next year. Inflation will diminish because, among other things, we expect oil and gas prices to increase less next year than this year and because we don’t expect a wage- price spiral. Given the current difficulties for many companies to fill vacancies, we expect employers to pursue labour hoarding during the economic slowdown so that unemployment will not rise much. The decline of inflation next year and the continuation of low unemployment rates make it possible for real wage growth to recover. In other words, we expect that unions will be able to negotiate wage increases in 2023 that better reflect the conditions of the labour market. But given our expected inflation rate of 2.5%, real wage growth in 2023 will be modest. 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
The eurozone’s consumer’s still not putting their money where their mouth is

What Macron’s loss means for the economy and markets | ING Economics

ING Economics ING Economics 20.06.2022 16:37
Emmanuel Macron has lost his absolute majority in the National Assembly in the legislative elections, which will make the country much less governable and might put structural reform at risk. French bonds are reacting with a shrug, but rising yields and spreads remain a key concern No majority, alliances needed For the first time since 1988, the newly (r)elected French President did not win an absolute majority of seats in the National Assembly. Emmanuel Macron's supporters won only 245 deputies, below the threshold of 289 to hold an absolute majority and a far cry from the 346 seats held during the previous five-year term. The alliance of left-wing parties (NUPES) becomes the leading opposition force in the Assembly with 131 seats, provided the alliance remains in place. Its leader, Jean-Luc Mélenchon, nevertheless failed in his bid to force an alliance by gaining a majority. He will definitely not be appointed Prime Minister. On the right, Les Républicains (LR) resisted very well by taking 61 seats, which puts them in a very comfortable seat as Macron will probably turn to them to form a majority. The real winner of the elections is Marine Le Pen's Rassemblement National party, which came out on top in 89 constituencies, gaining 11 times more elected officials than during the previous five-year period.  These results are a disaster for Macron who finds himself in great difficulty in terms of his ability to govern and implement his programme. At this stage, there are several possibilities. Either Macron manages to convince LR to form a majority, which would be more right-wing than Macron's position. This seems difficult at the moment, as LR is reluctant, but this could change in the next few days, especially depending on the allocation of certain ministries or key positions. Alternatively, Macron could try to get the support of left-wing elected representatives who refused to join the NUPES alliance, and some right-wing elected representatives in an effort to form a majority. It is possible that no majority will emerge and that each law will require intense negotiations to obtain ad hoc support. In the context of an economic slowdown (and probably even recession), high inflation and a public deficit of 6.5% of GDP in 2021, this could quickly become unmanageable. In any event, this is a new era for French politics, which will have to learn to deal with coalitions, agreements and consensus - something that most European countries are used to, but not France. What is certain is that a reshuffle of the current government will take place. Some ministers have failed to win in their constituencies and will therefore have to leave. This is notably the case for the Minister of Ecology, Amélie de Montchalin, and the Minister of Health, Brigitte Bourguignon. But the reshuffle could go much further in order to satisfy possible partners of a new majority. Any reform will be difficult to implement From an economic point of view, the National Assembly's new composition means that any reform will be very difficult to implement. Little progress can be expected on the most complicated issues, including pensions. Unless, of course, a coalition with the right-wing LR takes place. In that case, we could have more right-wing policies than Macron suggested in the presidential elections, which might be favourable in terms of fiscal consolidation. On European integration and European affairs, these are the areas where the President has the most leeway and the least need for support from the National Assembly. Clément Beaune, the Secretary of State for European Affairs, narrowly won his seat and will therefore be able to remain in government. In the context of domestic political blockages, Macron may therefore want to devote more energy to diplomacy and Europe. French bonds: gallic shrug The reaction in rates markets is likely going to reflect the mixed impact of the election result on a number of policy axes: fiscal consolidation, structural reforms, and European integration. Perhaps the best reason for investors to remain sanguine is that much remains to be decided on how Macron’s party will govern with the support of other party members in parliament. This may seem counterintuitive in an rising rates environment, one where fiscal and debt trajectories will receive increased attention. Widening sovereign spreads make sense in an era of policy tightening As we are fond of repeating, the market context matters. Widening sovereign spreads make sense in an era of policy tightening, especially as the European Central Bank is about to call time on its net sovereign bond purchases. This in turn could unnerve investors who are supposed to replace the central bank as the marginal buyer of French debt. The ECB pre-empted that debate last week by ‘accelerating’ work on a new financial fragmentation facility. Even though French bonds are unlikely to be a direct beneficiary, they have followed the tightening seen in peripheral spreads. Rising yields and spreads make bond investors nervous Source: Refinitiv, ING   At around 55bp, the spread between 10Y French and German bonds is higher than the QE-era norm (roughly 34bp average since 2015). We suspect political developments will take a back seat over the coming weeks as the new policy direction is ironed out. Instead, the (potentially acrimonious) debate over the design of new ECB instruments will continue to dictate direction. One proposal relayed by Bloomberg last week, for the ECB to sell core bonds (and so potentially French ones) as it buys peripheral ones, illustrates the risks facing French government bonds, so we are reluctant to call for further tightening just yet. FX: Euro has other concerns Perhaps because it is also a US public holiday today, EUR/USD has barely budged on the news that President Macron’s party has failed to secure a majority in parliament. This may also be because it is too early to conclude how Macron’s government will govern and which alliances can be secured on a policy-by-policy basis. Macron’s loss of an overall majority and the likely struggle ahead to implement his reform agenda looks to be a mild negative for the euro. Yet the bigger picture of stagflation in Europe has a much larger say in euro pricing. Here, the euro trade-weighted index is barely 1% off the lows of the year – even after this month’s hawkish shift by the ECB. Failure of EUR/USD to gain after the hawkish ECB meeting on 9 June is a reminder that the euro is a pro-cyclical currency, and that tighter policy may damage the euro through the relative growth/equity flow channel. We expect EUR/USD to continue trading towards the lower end of a 1.02-1.08 range this summer as the Fed pushes ahead with its aggressive tightening cycle. Read this article on THINK TagsMacron France Eurozone Elections 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
Video market update for June 29, 2022  | InstaForex

FX Daily: Searching for some calm | ING Economics

ING Economics ING Economics 20.06.2022 09:23
Markets are still digesting the higher re-pricing of Fed rate expectations, and global risk assets may struggle to show any sustainable rebound for now. All this should keep the dollar mostly in demand in a week where markets will focus on Powell's testimony. EUR/USD may find a floor around 1.0400-1.0450, but downside risks beyond that persist USD: US national holiday today Equity markets have started the week mostly on the back foot while US markets are closed for a national holiday today. It appears that investors still have to fully digest the 75bp rate hike by the Fed last week and above all, the re-pricing higher in US rate expectations. On Wednesday, the FOMC clearly left the door open for another 75bp move in July, but now this prospect is becoming the base case for market participants, with the OIS curve pricing in 70 out of 75bp for July. Over the weekend, FOMC member Christopher Waller explicitly backed a 75bp hike in July, mentioning that inflation needs to be taken down regardless of what is causing it. Waller is a known hawk, and this may not necessarily be the prevailing rationale among the majority of members, but signs that the Fed is indeed focused on fighting inflation over a potential economic slowdown are clear, and our base-case scenario is for another 75bp hike in July. This week is quiet data-wise in the US, with some focus on housing data. Indeed, sharply rising mortgage rates and falling consumer confidence point to further trouble for home sales data and we do expect some quite grim numbers this week – especially in existing home sales. This is not something to be underestimated given that residential construction accounts for 2% of GDP and housing transactions strongly correlate with areas of retail sales. That said, we think that Fed speakers will have a much bigger impact on global market sentiment and the FX market this week, with the main event to watch being Fed Chair Jerome Powell's two-day testimony to Congress. There are other Fed speakers lined up: James Bullard speaks on inflation today, and we’ll hear from Tom Barkin, Loretta Mester, Charles  Evans, Patrick Harker, and Mary Daly in the coming days. Unless we see some explicit pushback against a 75bp hike in July, markets may consolidate their pricing for a Fed rate around 3.50% at the end of this year, which should offer some underlying support to the dollar. Incidentally, global risk appetite may struggle to recover just yet, especially considering the recent developments in the gas market and lingering concerns about China’s economic outlook, all of which should continue to fuel demand for defensive dollar positions. A return above 105.00 in DXY in the short term is our base case. EUR: Macron in trouble A couple of months ago, markets welcomed the outcome of the French presidential elections that saw President Macron being re-elected for a second term. Some observers had noted than that Macron’s still weakened figure may have struggled to hold on to a parliamentary majority in the June elections. Current projections from yesterday’s vote show that a surge in far-right votes has indeed stripped Macron’s party of its parliamentary majority. In a way, this makes May’s presidential election’s success a half-win and raises reasonable concerns about how smoothly the pro-growth reform path in France will be over the coming years. The news doesn’t seem to have bothered the euro, and being more of a longer-term risk to the eurozone outlook, it is not too surprising. EUR/USD has once again found some anchor around the 1.0500 level, something we expect to happen over the summer months despite volatility looking likely to remain elevated. This week, markets will focus on activity surveys in the eurozone, as consensus expectations point to a modest drop in June’s PMIs and in the German Ifo, which are set to be released on Thursday and Friday, respectively. On Wednesday, consumer confidence data will also be watched closely. On the central bank side, we’ll hear from a number of ECB speakers today, including President Christine Lagarde, Chief Economist Philip Lane, Mario Centeno, Ignazio Visco, and Madis Muller. The discussions may continue to centre around the freshly announced tool to keep sovereign spreads in check, which has so far had the desired effect. We discuss this – and the FX implications – in this article. More stability in the eurozone peripheral bond market and not-so-bad PMIs may put a temporary floor under the EUR around the 1.0400-1.0450 area despite the dollar staying largely bid. But downside risks to the 1.02-1.00 area over the summer months on the back of sustained dollar strength and a deteriorating eurozone outlook persist. GBP: Any rate pushback from BoE members? The are surely a number of factors pointing to GBP weakness at the moment (above all, the grim UK economic outlook), but supported Bank of England rate expectations have indeed provided a floor for now, and GBP/USD has been stabilising at the centre of the 1.20-1.25 area. We continue to see some risks that we’ll see some dovish re-pricing of those rate expectations, but for now, that may only come from some explicit pushback by any of the BoE speakers scheduled this week (we’ll hear from Jonathan Haskel and Catherine Mann today). That’s because on the data side we could see yet another modest acceleration in headline inflation, while the core rate may stay above 6.0%. Later in the week, retail sales data will also be in focus. We could see cable hold above 1.20 for now despite the dollar staying largely bid, and EUR/GBP staying around 0.8550-0.8600. JPY: FX intervention risk remains elevated USD/JPY is stabilising around 135.00 this morning and may see limited volatility today as the US markets are shut. However, last week’s Bank of Japan announcement firmly reiterated the message that tighter monetary policy is not on the cards despite currency weakness. While short-term concerns are focused on preventing markets from disrupting the key transmission tool of loose monetary policy (low interest rates) via bond-market intervention, the currency weakness discussion is surely not getting any quieter and a hawkish tone by Powell during his testimony this week may well generate fresh weakness in the yen. We have long discussed how FX intervention is not a straightforward policy move for G7 countries, but it’s hard to argue that this remains the only option on the table for Japanese authorities unless Treasury yields start to drop. Risks for USD/JPY remain tilted to the 136-138 area (and potentially even beyond) over the coming days, in our view. 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
FX: USD/TRY: Is Turkish Lira (TRY) Going To Weaken!? What Are Forecasts For USD/ZAR, USD/KZT & USD/ILS? | ING Economics

FX: USD/TRY: Is Turkish Lira (TRY) Going To Weaken!? What Are Forecasts For USD/ZAR, USD/KZT & USD/ILS? | ING Economics

ING Economics ING Economics 20.06.2022 09:15
USD/KZT Tenge withstands geopolitical uncertainties so far Current spot: 437.05 USD/KZT moved to 420-440, in line with our positive scenario. High prices keep oil exports strong (+98% YoY in 1Q22), and capital account is protected by capped outward FX transfers, 10% subsidy to KZT deposits, and forced 75% FX sales by oil exporters. Kazakhstan renamed its oil exports via Russia (totaling 80% of annualised oil export) to KEBCO, allowing to reach US$11-12bn oil exports in 2Q22F (US$7.9bn in 1Q21) under average Brent price US$110/bbl. Geopolitics, trade ties with Russia (c.11% exports and c.42% imports) and potential relaxation of capital controls may return USD/KZT to 440-500 range, but a stronger KZT is also possible on higher oil, repatriation of previous grey capital outflows, and more inward FDI following the recent constitutional referendum. USD/TRY Currency pressures rising again Current spot: 17.25 May inflation showed no respite with continuing broad-based pricing pressures mainly driven by an accommodative monetary policy stance. Upside price risks remain at the forefront with ongoing geopolitical issues and less supportive global backdrop. Current account deficit has remained on expansionary path in March driven by commodity imports - particularly higher energy bills. As oil prices are expected to remain elevated, the current account will likely maintain the widening trend in the near term. Given this backdrop, sentiment in the currency market has turned negative since early May. Global developments as well as inflation expectations in an environment of negative real rates will remain as the determinants of the currency. USD/ZAR Impressive rand recovery Current spot: 16.06 The strength of the rand recovery has surprised us. ZAR real yields are not particularly impressive, where the policy rate is 4.75% and headline inflation is at 5.9%. The commodity story no doubt continues to help and was evidenced by a decent 1Q22 current account surplus of 2.2% of GDP. We still have our doubts about the strength of the Chinese recovery and unless Beijing introduces some bazooka-style stimulus after a late July politburo meeting, ZAR stays fragile. Our baseline view is that higher US real rates lead to a stronger dollar in 2H22 and $/ZAR heads back to the 16.00/16.20 area again. Later in the year politics will again play a role with ANC elections held in December. Ramaphosa remains the favourite to win. USD/ILS ILS poised to recover Current spot: 3.4422 $/ILS is consolidating about 3% off the highs of the year seen in mid-May. Interestingly in its review of FX markets in 1Q22, the BoI blamed ILS weakness on the domestic buy-side for uncharacteristically buying FX. It is not clear that those outflows will continue, but what may have a little more longevity are Israel’s current and FDI inflows, helped by the service sector. On the policy rate, the market may be too aggressive in pricing the policy rate at 2.50% next summer, but with growth still strong, hikes towards 1.00/1.25% look likely this year. When the dollar trend turns (early 2023?), $/ILS should turn decisively lower and sub 3.00 may well be the 2023 story. This article is a part of a report by ING Economics 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
FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

China: bank loan prime rate unchanged despite economic challenges | ING Economics

ING Economics ING Economics 20.06.2022 08:12
Banks in China have kept the 1-year and 5-year Loan Prime Rates unchanged. As the economy continues to face big challenges the recovery will likely be a slow one Leading members of the People's Bank of China, including Governor, Yi Gang (waving) Slow recovery without interest rate cut China's banks did not cut the one-year and five-year lending concession rates (LPR) today, even though the economy still faces many challenges. Unemployment is the key economic issue, as we expect the service sector to continue to be hit by limited people flows during the summer holidays. Travellers are still concerned that they will become stranded if they travel, either because they may get Covid themselves or become close contacts of positive cases. And while the manufacturing sector appears to have picked up, its growth has come mainly from coal mining and processing to ensure adequate power supplies for the hot summer months. Other manufacturing activity remained weak in May. Infrastructure benefited from the LPR cuts in May. But infrastructure alone cannot absorb all of the unemployment.  The yuan has got supported from no rate cut decision USD/CNH has gained support at around 6.710 following the decision to leave interest rates unchanged. We expect the onshore USD/CNY to do the same. Rate cuts are still in the cards With the weak economic recovery, rate cuts in the coming months are still likely as we expect the economic recovery to be slow under the Covid-zero policy. After this rate pause, the government should hand out more fiscal stimulus as monetary policy is now a secondary policy tool for supporting the economic recovery. Some local governments have stepped up to boost fiscal stimulus by selling assets, which indicates that local government debt could become a hot topic again. Read this article on THINK TagsUSDCNY Monetary policy Loan Prime Rate Fiscal stimulus China
Warning signals are flashing out of South Korea | Saxo Bank

Asia Morning Bites - 20/06/22 | ING Economics

ING Economics ING Economics 20.06.2022 08:10
US holiday today, but a slew of Fed speakers this week could keep Asian markets choppy Source: shutterstock Macro outlook Global: It wasn’t much of a bounce on Friday. The S&P500 closed 0.22% higher on the day, leaving it 22.9% down year-to-date. Tech stocks did slightly better, with the NASDAQ finishing up 1.43% on the day. These meagre gains came on very solid volumes, which hints at the difficulty the market has in rising at the moment. Equity futures remain positive at the time of writing, hinting at a better start to the week. Currency markets aren’t acting as if it’s a return to full risk on. EURUSD moved lower on Friday, falling back below 1.05.  The high beta AUD fell back below 0.70, and the USDGBP drifted back to just above 1.22. The non-descript risk sentiment provided no support for the JPY, which has surged higher again, not helped by BoJ Governor Kuroda and his monetary policy team’s inaction last Friday. In truth, few people expected any change at that meeting, but there had been a  lot of speculation about a band widening for the yield curve control policy and there were scant hints that anything like this was coming any time soon.  The lack of any policy move from the BoJ was also framed against the backdrop of the 75bp Fed hike, 50bp SNB hike, and 25bp BoE hike, which clearly didn’t help. Asian FX was mostly weaker against the USD on Friday, though the JPY was the clear standout loser. Most of the Asia FX pack was down between 0.3-0.5% on the day. US Treasury markets continue to whipsaw. 2Y UST yields rose 8.5bp on Friday to 3.179%. 10Y yields rose a modest 3bp to 3.226%. Bond futures point to further increases in yields today. It’s a holiday in the US today, but this week’s macro calendar is nonetheless stuffed full of Fed speakers, leading up to testimony by Fed Chair, Jerome Powell on 22 June in front of the Senate Banking Committee, and then on 23 June in front of the House Financial Services Panel.  The market seems to be alternately calmed by commentary that the Fed will do whatever it takes to get inflation down, and panicking about what that might mean. So this looks as if it will be another week with large swings in both directions. Which direction It ultimately takes is not clear, but "down" seems to have the edge.  China: China’s Loan Prime Rate (LPR) decision is released today. Although the MLF was left unchanged by the PBoC, there is still pressure on banks to boost loan growth. One way to achieve this is for banks to lower the LPR. We expect a 5bp cut in the 5Y LPR to boost infrastructure loans and mortgages, while the 1Y LPR should stay the same. If this is the case, it should put some depreciation pressure on the yuan. The consensus is for no change in the 1Y as well as the 5Y LPR, possibly encouraged by the fact that the PBoC has kept quiet on this topic for more than a week now. Still, our view is that boosting loan growth is one of the main agenda items for the government to restart economic growth. What to look out for: China loan prime rate (20 June) Taiwan export orders (20 June) South Korea trade balance (21 June) Hong Kong CPI inflation (21 June) US existing home sales (21 June) New Zealand trade (22 June) Thailand trade (22 June) US Mortgage application (22 June) South Korea PPI inflation (23 June) Japan Jibun PMI (23 June) Singapore CPI inflation (23 June) Philippines BSP policy rate (23 June) Indonesia BI policy rate (23 June) Taiwan unemployment rate and industrial production (23 June) US initial jobless claims (23 June) Japan CPI inflation (24 June) Malaysia CPI inflation (24 June) Singapore industrial production (24 June) US new home sales and Univ of Michigan sentiment (24 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
Rates Spark: taking the inflation blinkers off

What's Ahead Of UAH (Ukrainian Hryvnia)? What About (RUB) Russian Currency? | ING Economics

ING Economics ING Economics 17.06.2022 23:43
USD/RUB View improved, but gradual depreciation still possible   Current spot: 57.02 Having touched 67 in May (we expected 70), USD/RUB is back into 55-60 range in June on higher oil and weak imports. To help banks rebalance FX positions, Russia abandoned mandatory FX sales for exporters, allowed them to accumulate foreign FX assets, and raised limits for outward FX transfers for individuals. Capital flows are still limited externally, meaning the ruble is driven by trade flows. In May, the current account surplus narrowed to more “normal” US$14.5bn vs US$37.6bn in April on a moderation of exports. We still see gradual ruble depreciation into the year-end on finalization of EU oil embargo for non-pipeline supplies, but do not exclude near-term volatility on recent regulatory actions and tax periods that take place every second half of the month. USD/UAH NBU prevents depreciation as the war continues Current spot: 29.55 • USD/UAH stabilized very close to 29.55 in the recent weeks. With continued Russian aggression in sight, this requires massive NBU FX interventions. Stabilizing the FX rate is one of the key factors needed to curb inflation. The central bank reaffirmed this goal, when it hiked rates by 15ppt earlier this month – from 10% to 25%. • While currently only the NBU policy prevents hryvnia’s losses, we expect the currency to gain as the war de-escalates. Frozen Russian assets worldwide are expected to partially serve as postwar relief for Ukraine. Foreign aid will also be mobilized. Those in turn should be converted at least partially via the market. Stabilizing, or strengthening the currency should be one of the tools used to curb inflation during the post-war reconstruction.     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
Asian equities move higher | Oanda

Asia week ahead: Central bank decisions, Japanese inflation and RBA minutes

ING Economics ING Economics 17.06.2022 23:29
Central bank decisions and Japanese inflation are the highlights for the coming week In this article RBA Minutes Regional central bank decisions Taiwan export and industrial production reports Japan inflation data Japanese CPI is out on Friday. We expect that headline CPI inflation will rise to 2.7% year-on-year    RBA Minutes On 21 June, the Reserve Bank of Australia releases minutes of its June meeting when it raised the cash rate target to 0.85% from 0.35%, towards the top end of market expectations. The minutes will show the range of opinions expressed and offer clues about whether 50bp rises are the new normal or if we might have to consider Fed-style 75bp hikes at some point. On 23 June, PMI indices will likely continue to show both manufacturing and service sectors growing strongly. With inflation running high, and labour markets running tight, that’s maybe not the good news markets want to hear. Regional central bank decisions Bank Indonesia previously hinted at a pause for the forthcoming meeting, citing still manageable inflation and a steady currency. The Indonesian rupiah, however, has recently come under heavy pressure, all the more with the trade surplus shrinking considerably to $2.9 bn from $7.5 bn. We expect BI to finally deliver a rate hike although Governor Perry Warjiyo may opt to start off the hiking cycle with a token 25bp increase, citing the simultaneous increase in reserve requirements. Bangko Sentral ng Pilipinas will also meet next week with pressure mounting on the BSP to hike rates aggressively.  Inflation moved well past its target to 5.4% and a weakening currency will only translate to more inflation down the line. BSP Governor Benjamin Diokno signalled a 25bp increase next week but we think the beleaguered currency and accelerating inflation will be enough to force a more punchy 50bp rate hike from BSP next week. Meanwhile, Chinese banks will decide on the Loan Prime Rate (LPR) on Monday.  As the activity data points to a weak economy and slow recovery, we expect banks will cut the 5Y LPR by 5bp to 4.4%. This should support infrastructure projects and mortgages. Taiwan export and industrial production reports Taiwan will release export orders on Monday and industrial production on Thursday. We expect both figures to improve from April as logistics issues in the region should have eased in the last week of May. Export orders though will still be in contraction, though less so compared to April as consumer demand should return in coming months after Shanghai announced an end to its lockdown at the end of May. Delivery of materials for production should experience a shorter delay. Japan inflation data Japanese CPI will be out on Friday. We expect that headline CPI inflation will rise further to 2.7% year-on-year (vs 2.5% in April) as the weak yen is adding more pressure to high commodity prices. The market consensus is 2.5% as of today. Japan’s PMIs will be out on Thursday. Both manufacturing and services are expected to improve on the back of better domestic demand stimulated by the reopening. Asia Economic Calendar TagsEmerging Markets Asia week ahead Asia Markets Asia Economics   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  
FX: USD/TRY: Is Turkish Lira (TRY) Going To Weaken!? What Are Forecasts For USD/ZAR, USD/KZT & USD/ILS? | ING Economics

Poland And Turkey Highlighted In "Key events in EMEA next week" by ING Economics

ING Economics ING Economics 17.06.2022 23:23
Key events in EMEA next week   Polish activity data should remain strong next week despite the negative impact of the Ukraine war on the country's supply chain and labour force. The Central Bank of Turkey, meanwhile, may leave rates on hold Content Poland: Solid industrial and retail activity whilst labour market remains tight Turkey: CBT increases measure to combat inflation whilst policy rate is set to remain unchanged Poland: Solid industrial and retail activity whilst labour market remains tight Poland’s industrial activity was still high in May (16.8% year-on-year) as businesses still have significant backlogs of work to fill. Nevertheless, output growth is set to slow in the coming months as the war in Ukraine negatively impacts demand from the euro area, and supply-side bottlenecks are likely to continue due to China's zero-Covid policy. In May, the manufacturing PMI fell below 50pts for the first time since mid-2020 on the back of deteriorating orders and output. Retail sales are set to slow to 22.9% YoY in nominal terms in May after an impressive 33.4% YoY expansion in April. Substantial swings in annual growth are linked to Covid containment measures. Shopping malls were closed in April 2021 and reopened the following month, which created a high reference base for annual growth in May 2022. Sales of necessities are supported by the inflow of refugees from Ukraine. Money supply growth gauged by M3 aggregated remained unchanged in May (8.2% YoY) vs. April (8.2% YoY). Household deposits have rebounded after earlier outflows amplified by the outbreak of war in Ukraine, and term deposit rates went up after a series of rate hikes by the National Bank of Poland. At the same time, higher rates are hampering demand for mortgage loans as they undermine the credit eligibility of potential borrowers. In May, the registered unemployment rate continued declining and fell to 5.1% from 5.2% in April. The labour market is very tight and shortages of labour reported by many sectors are even higher as previously employed Ukrainian males left Poland to defend their homeland. This is particularly profound in the construction and transport sectors. The inflow of Ukrainian females may potentially ease labour shortages in agriculture, trade, and services. Turkey: CBT increases measure to combat inflation whilst policy rate is set to remain unchanged Since April, we have seen an increasing number of measures introduced by the Central Bank of Turkey to mitigate against growing risks. These measures include putting a break on commercial loans, strengthening FX reserves, diverting local demand away from FX, increasing demand for local government bonds, and raising the attractiveness of TRY assets for foreign investors. While the effectiveness of these measures is another discussion, they signal no imminent change to policy direction and the overall monetary stance. Given this backdrop, we expect the policy rate to remain flat at 14% at the June monetary policy committee meeting. EMEA Economic Calendar Source: Refinitiv, ING Tags Poland industrial production EMEA Central bank of Turkey 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  
China’s economic outlook for the second half of 2022

US manufacturing weakness adds to slowdown fears | ING Economics

ING Economics ING Economics 17.06.2022 17:29
US manufacturing output surprisingly fell in May and following softer housing and retail sales numbers adds to a sense of gloom that is hanging over the US economy in the wake of the Federal Reserve outlining a more aggressive interest rate hiking path. There are still pockets of strength with oil and gas drilling a key area of growth as prices remain elevated US manufacturing output fell in May Manufacturing falls led by machinery output After the weaker-than-expected retail sales figures and clear softness coming through in the housing data, we can now add weaker industrial production to the list of recent disappointments. Output rose 0.2% month-on-month, but this was below expectations of a 0.4% gain while manufacturing output actually dropped 0.1% versus predictions of a 0.3% increase.   The chief reason for the fall in manufacturing was a 2.1% drop in machinery production, but there were also declines in food and beverage output, aerospace, wood products and fabricated metal. On the positive side autos were up 0.7% while computers/electronics were up 0.9% petroleum and coal rose 2.5% and metals output increased 0.8%. Breakdown of US industrial output levels Source: Macrobond, ING   This isn’t a terrible outcome after a decent run with manufacturing output overall still up 4.8% year-on-year, but the signs of a loss of momentum and the recent weakness in some of the regional indicators mean there is reason for caution. With the Federal Reserve hiking rates more aggressively and the dollar remaining strong the sector is going to come under increasing pressure. Combined with falling equity valuations this is likely to make management more cautious on expansion plans which could dent the outlook for investment and hiring which would exacerbate the slowing US growth narrative. Baker Hughes oil and gas rig count Source: Macrobond, ING Oil and gas an areas of ongoing growth There was better news in other parts of the report with utilities output rising 1% MoM while mining output gained 1.3% within which oil and gas drilling rose 6.2%. Drilling is a real success story in the US with 489 out of the 609 increase globally in the Baker Hughes oil and gas rig count since August 2020 being in the US. Given ongoing upward pressure on global energy prices this is likely to be an important growth story to partially offset some of the increasing negativity elsewhere. Read this article on THINK TagsUS Mining Manufacturing Industrial production 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
JPMorgan says miners are exacerbating the bearish trend

Crypto Market Has Been Topping Headlines For A Very Long Time! Bitcoin Price Has Decreased Significantly! | ING Economics

ING Economics ING Economics 17.06.2022 15:28
The problems surfacing in crypto markets over the past weeks are well-known in traditional finance, as are the tools to address them. If this does not illustrate why crypto regulation is welcome, what will? While the NASDAQ composite stock index has lost about a third since November last year, bitcoin has lost double that   While all financial markets have been volatile of late, crypto assets in particular are having a very bad time. Leading cryptocurrency bitcoin is currently down 30% compared to a week ago. While crypto assets were, until not too long ago, seen by many as uncorrelated with traditional stocks, the crypto downturn since November has progressed in remarkable sync with traditional assets, tech stocks in particular. The common factors that drive down traditional markets – inflation and rate hike expectations – are weighing on crypto as well. The crypto accelerator, now in reverse Moreover, where crypto appeared to enjoy an accelerator when markets were bullish, that same accelerator is now at play in the bear market. While the NASDAQ composite stock index has lost about a third since November last year, bitcoin has lost double that (see chart). This multiplier can probably at least partly be traced back to the build-up of leverage when times were good, and the unwinding of that same leverage over the past weeks and months. Indeed a number of prominent crypto investment names currently in trouble appear to suffer from margin calls on leveraged bets gone wrong. Bitcoin and Nasdaq composite (rebased to 9 Nov 2021 = 100) Source: Macrobond Algorithmic stablecoins: the emperor's new clothes? Instrumental in the recent crypto market turmoil has been the crash of “algorithmic” stablecoin Terra, in early May. This type of stablecoin is not backed up by assets to guarantee its value, but deploys an algorithm trading in the stablecoin versus a companion currency. The idea was that the algorithm could always mint new companion currency to buy stablecoin, keeping up the value of the latter. What worked for Baron von Munchhausen, does not work for algorithmic stablecoins Yet the crucial assumption for this to work is that the companion currency is perceived to have at least some value. That assumption was proved wrong by the Terra stablecoin. As a result, its algorithm took the concept of “quantitative easing” to wholly new levels when it increased the supply of companion currency Luna more than 20,000 times (from about 350 million to over nine trillion at the peak), trying to prop up Terra. Alas, what worked for Baron von Munchhausen (getting out of the swamp by pulling up his own hair), does not work for algorithmic stablecoins in an environment of evaporating confidence. Stablecoins as full reserve banks The episode was perceived by regulators as a confirmation of the need to regulate stablecoin very much like a bank. That makes a lot of sense. Like a bank deposit, stablecoins are expected to always trade at par with the currency in which they are denominated. Stability, security and liquidity are key concepts. And like a bank, a stablecoin may face runs if confidence is tested. Banks have various mitigations and remedies in place, encouraged and imposed by regulation. We expect algorithmic stablecoins to retreat to the margins of the crypto universe Purely algorithmic stablecoins are unlikely to pass the regulatory bar, and we expect them to retreat to the margins of the crypto universe. Instead, stablecoins will likely have to be fully backed by high-quality liquid assets. In other words, stablecoins will be full reserve banks (as opposed to traditional banks that operate on fractional reserves). The full reserve operation means stablecoin issuers hardly face any credit risk, removing the need for a deposit guarantee scheme, and greatly simplifying the capital buffer framework, compared to traditional banks. The need to pre-empt systemic risks Regulators are rightly worried though that if stablecoins grow further their issuers may become systemically relevant. In case of a run and the need for asset fire sales to honour redemptions, even high-quality liquid assets may temporarily trade against a discount, imposing losses on the issuer and disrupting safe asset markets for the entire financial system. The crypto universe currently houses a few dominant stablecoins. The consensus is that these may not yet pose systemic risks as described but may well start to – if their volume issued continues to grow as it has done over the past years. A textbook bank run in crypto The crypto company that had to halt redemptions earlier this week – and in so doing started a new wave of panic – is different: it is neither a stablecoin nor a regulated bank, but for its main product offering it did use bank-like language such as “savings” and “deposit”. It also distinguished itself by offering double-digit yields that are impossible to find in traditional banking. The company has had various run-ins with US supervisors, that opined it was offering a securities product without proper registration. Faced with a run, any institution that is in principle solvent, can turn illiquid The crypto company did vaguely resemble traditional banks in the sense that its assets tended to be riskier than its liabilities tended to be perceived. Also, some of its assets appear to be locked up for a longer period, whereas its liabilities were immediately redeemable. Finally, the liquidity of some of its assets proved to deteriorate fast in current markets. These transformations of risk, maturity and liquidity are core functions of a traditional bank. They also render a bank susceptible to runs. Faced with a run, any institution that is in principle solvent (its assets are worth at least as much as its liabilities), can turn illiquid (it cannot liquidate its assets immediately at the right price to honour redemptions). For this reason, bank regulation may be the most elaborate type of regulation out there, including liquidity buffers to handle redemptions, capital buffers to absorb losses, detailed risk management, and transparency requirements. If, despite all this, a bank runs into trouble, the central bank can act as lender of last resort (against proper collateral), and if the bank does fail, deposit guarantee schemes (typically financed by the sector itself) ensure depositors don’t end up with a loss. Mutual funds have the important difference that they don’t issue liabilities at par – meaning that contrary to banks, they pass on credit risks to their investors. Insofar as their assets are tied up for a longer time, they may impose lock-up periods on investors wanting to redeem.   To summarise, the problems currently faced by some crypto companies are well known in traditional finance, as are the tools to mitigate them. If regulation had been in place, risk-taking and leverage might have been more contained, or at least have been more transparent. Does regulation guarantee things never go off the rails? Unfortunately, no. But it would have established basic investor protection, and would have allowed them to realise that there is no such thing as a free lunch: high return typically comes with high risk. Our main takeaway from this week is therefore twofold: The sooner regulation is in place in crypto, the better. It will help investors to distinguish the good from the bad and the ugly, and to choose products that match their risk appetite. As leveraged positions continue to be under pressure and a lack of confidence leads investors to want to cash out, we are likely to see more currencies, companies and platforms wobble in the weeks ahead. Read this article on THINK TagsRegulation New Money Market crash Cryptocurrency Bank pulse 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
USD/JPY Technical Analysis and Trading Tips for June 29, 2022

Bank of Japan maintains ultra-low rates | ING Economics

ING Economics ING Economics 17.06.2022 11:38
The Bank of Japan has decided to keep its current monetary policy stance despite the rest of the world moving in the opposite direction, and despite growing concerns over a weak Japanese yen Bank of Japan Governor Haruhiko Kuroda Bank of Japan governor strengthens his defense of today's rate decision Japan's central bank kept its ultra-low interest rates on hold, going against other policymakers around the world who have been hiking rates to tackle soaring inflation. The Bank of Japan (BoJ) appears to have decided to strengthen its credibility in the market and try to tame the market’s hopes for a policy adjustment. The BoJ’s firm stance was once again revealed as it confirmed its focus on supporting the economy. However, this doesn’t mean that the market will necessarily believe the central bank’s future policy action. Despite Governor Haruhiko Kuroda's comments, we expect the market to continue to price in policy change potential as the current policy is not sustainable in the current global economic situation. The rate differential with other economies will keep widening, thus the markets’ bet against the Japanese yen (JPY) is likely to strengthen for a while. Interestingly, Bank of Japan's statement mentioned the need to pay attention to developments in the FX market, but Governor Kuroda downplayed this later on at the press conference and repeated his usual rhetoric about the currency: that a rapid yen weakness is negative and not desirable for the economy. He also reiterated that the BoJ is not considering a policy change, noting that the “yield curve control is not reaching a limit”. CPI will be key to watch We think that any policy tweaks in the near term are not feasible yet, but the likelihood will increase later this year. The government’s subsidy programmes for fuel and imported food can partially limit cost-push inflation pressure, while reopening and consumption stimulus packages can drive up prices for services and possibly for wages. May CPI results come out next week (market consensus: 2.5%, ING forecast 2.7%) and we will monitor them carefully for signs of demand-side pressures building up. Read this article on THINK TagsMonetary Policy JPY CPI inflation Bank of Japan 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
Rates Spark: The hawks are circling | ING Economics

FX Daily: FX market heats up

ING Economics ING Economics 17.06.2022 10:59
As central bankers around the world try to battle inflation, currency policy is also being dragged into the fray. Now both the SNB and CNB will be selling some of their chunky FX reserves to keep their currencies stable or stronger. The BoJ remains the odd man out, but friction around the USD/JPY 135 levels looks set to keep volatility levels very high Source: iStock USD: US economy can best handle higher rates FX volatility levels remain very high as central bankers battle with high inflation and investors try to position for their next move. The dollar was briefly lower yesterday after the  Swiss National Bank's (SNB) surprise hike raised expectations that the Bank of England (BoE) and Bank of Japan (BoJ) would follow suit with 'more forceful' (that phrase has cropped up a lot recently in central bank circles) monetary policy. We discuss the BoE later, but barring a surprise announcement from BoJ Governor Kuroda at his press conference today (due at 0830CET) it looks like the BoJ is sticking to its guns and still printing money. This suggests that USD/JPY will be pressing 135 again, above which a disorderly move could prompt BoJ FX intervention. The alternative is that the Ministry of Finance instructs some state actors (buy-side) to sell a lot of dollars near 135 if Japanese authorities have failed to secure permission for intervention from the US Treasury. A relevant point here is that substantial FX intervention could add to woes in the US bond market, where US securities could be sold to raise the dollars to intervene. We mention the subject of intervention since news that the SNB could be selling from its substantial FX reserve stockpile seemed to spook European bond markets yesterday - especially the five-year sector which seems to be the average duration for central bank bond portfolios. The Czech National Bank (CNB) is already selling from its FX reserves - perhaps as much as EUR10bn over the last month as it fights Czech koruna weakness after the installation of a new dovish board. FX reserve sales and higher bond yields are not particularly helping the equity environment this summer and should maintain levels of FX volatility near the recent highs. In all of this, we would prefer to back the dollar. The US economy went into the current inflation shock operating above capacity. Regions like the eurozone were still running output gaps and the ECB is merely reacting to a supply shock. We think the pricing of the Fed tightening cycle has the longest staying power - keeping short-end US rates and the dollar bid this summer.  For today, the only US data is May industrial production and we may see some further position adjustments on June contract expiries and ahead of Monday's Juneteenth public holiday in the US. Expect DXY to find continued demand under 104. Also, look out for opening remarks from Fed Chair Jerome Powell at a conference at 1445CET today. EUR: Official selling The European Central Bank (ECB) may not take too kindly to their Czech and now Swiss counterparts potentially selling a lot of euros. A weaker euro will not help the ECB's battle with inflation. EUR/USD, however, did see a good rally yesterday as investors bought Rest of World currencies against the dollar on expectations for tighter monetary policy outside of the US. Yet that looks more a function of position adjustment and we do not see any reason for EUR/USD to embark on a sizable rally this summer - perhaps the only cause for such a move could be 8-10% declines in equity markets such that the Fed cycle is substantially re-priced. Expect volatility to remain high and EUR/USD could well bounce around in a 1.0400-1.0600 range for the near term. On the SNB, we reiterate the view that the central bank wants to manage the nominal trade-weighted CHF some 4% higher over the next year, offsetting low Swiss inflation and keeping the real CHF stable. The SNB has the firepower to achieve this. A low volatility EUR/CHF decline would seem to be the call here. GBP: Crazy day in UK markets UK markets saw some wild gyrations yesterday. As we understood it, sterling rallied after the SNB hiked by 50bp and declined when the BoE only raised by 25bp. The pound then rallied when the market re-read the MPC statement about some 'forceful' adjustment in policy. Despite only hiking 25bp yesterday, market pricing of the Bank rate at year-end rose to 3.00% from 2.84%! It seems the BoE is not in the mood to fight this market pricing at present and the next big opportunity only comes at the 4 August MPC meeting. That said, we do have two MPC speakers today, Silvana Tenreyro at 1030CET and Chief Economist Huw Pill at 16:30CET. As a more dovish MPC member, let's see how much pushback we get from Tenreyro today. Cable could sink into a 1.22-1.23 range for the time being.  HUF: National Bank of Hungary bundled into emergency hike In and amongst high FX volatility, the National Bank of Hungary raised its one-week deposit rate by 50bp yesterday to 7.25%. This had not been expected this early and looked to be a reaction to EUR/HUF trading at 400. Given that Hungary does not have a lot of FX reserves at its disposal, we assume that defence of the 400 level will come more through the rate side than the FX intervention side. 6 by 9 month HUF FRA now price HUF 3m rates as high as 9.75% towards this end of this year. Currently, we see the policy rate heading up to 8.25% later this year. How central banks react to local currencies should be a theme for central and eastern European FX currencies in general - i.e. none of the local central banks will want weaker currencies right now. We would probably back the Polish zloty to hold its value the most, given plenty of scope for rate increases and the prospect of converting EU funds into zloty on the open FX market. 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
EURUSD rejected at Kumo (cloud) resistance

Rates Spark: riding the perfect storm | ING Economics

ING Economics ING Economics 17.06.2022 10:52
Despite a calm reaction to the Fed, bond yield upside is resuming quickly - with a surprise hike from the Swiss National Bank, hawkish Bank of England interpretations, and an ECB fragmentation tool potentially swapping spread widening for yield upside. Source: Shutterstock The Fed is in line with the market but rate upside still dominates For once, it isn’t the Fed’s stance that is keeping bond investors up at night. Granted, the pace of hikes has accelerated from 25bp in March, to 50bp in May, to 75bp in June…but the Fed has managed to forewarn investors, resulting in tame price action around the meeting. Powell did not exclude a further 75bp hike but was quick to signal that this isn’t the new default increment. The Fed and financial markets now seem more aligned both on the path for rates and on economic prospects. Even if this means greater risk of recession, it looks like markets took heart from the central bank being on the same page as them.   10Y Treasuries now have 3.5% firmly in their sights This doesn’t mean rate upside has reduced however. For one thing, the Fed has just shown that its policy path will react to inflation prints and there is no guarantee that the string of upside surprises will stop. 10Y Treasuries now have 3.5% firmly in their sights even if they might wait for the next inflation release to test that level. What’s more, other central banks are not as advanced in their tightening process and the risk of hawkish surprises from various parts of the world means yield will rise further still. Hawkish surprises keep on coming The most recent example is the surprise 50bp hike from the Swiss National Bank (SNB), against a consensus for no hike. Not only does the move forces markets to rethink the central bank’s reaction function, it adds to the case for more aggressive action in other jurisdictions. Worst still, from the point of view of bondholders, the risk of FX intervention to defend the CHF means the SNB may soon sell out of its portfolio of foreign bonds. We think EUR bonds are most at risk on account of their lower liquidity compared to US peers. We have also identified the semi core sector (eg France) as being particularly vulnerable. SNB FX sales would put USD and EUR bonds at risk (FX reserves at end Q1 2022) Source: SNB, ING   At face value, the Bank of England bucked the hawkish trend at its June meeting by hiking by ‘only’ 25bp. But the accompanying statement was more hawkish, in effect opening the door to more aggressive tightening if necessary, and enough for markets to conclude that an acceleration is in the cards. At this stage, we think this rests on an assumption about future data that we are unprepared to make, but at least the sell off in gilts after the meeting is consistent with the way markets anticipate future policy more in other countries. From its recent communication, markets are looking for an even steeper path for BoE rates Source: Refinitiv, ING ECB spread management could add to yield upside If this wasn’t enough to keep bond investors on their toes, public comments about the ECB’s fragmentation instrument are coming thick and fast. The most detailed (anonymous) indication so far has come via a Bloomberg source, suggesting that the facility would sell core bonds to neutralise the effect on inflation from purchases of Italian bonds. In our view, this is a key limitation on the size of the ECB intervention as adding bond sales in one of the worst bond market sell off in recent years poses financial stability risks. This may only be one of the many potential designs under consideration but we think this constraint would diminish the facility’s efficacy, making it more likely that the ECB has to buy peripheral bonds, and so result in more purchases that necessary. The ECB fragmentation tool could be swapping wider spreads for higher yields Source: Refinitiv, ING   A range of opinions exist about what ECB intervention would look like There also seems to be competing visions of what that instrument would look like. Recent public comments have shown that a range of opinions exist about what ECB intervention would look like. For instance, Muller seems to favour a light touch approach while Visco went as far as giving a levels in the 10Y Italy-Bund spread that is warranted by fundamentals, and so as a potential target. The reality of the new instrument is likely to land somewhere in between these view but they serve to illustrate, alongside the potential constraints floated in the press, why the ECB was reluctant to launch this tool. Today's events and market view In our view, this week has shown that central banks are very much on their front foot when it comes to tightening policy in the face of higher inflation, and markets have no reason to think this will stop any time soon. This morning’s update to the Eurozone headline and core CPIs is a final reading and thus less likely to catch the market off guard. The same cannot be said of US manufacturing and industrial production. Central bankers won’t venture far from centre stage with Fed chair Powell due to speak in the morning, and with Silvana Tenreyro and Huw Pill of the BoE both making public appearances. The ECB will announce the amount of TLTRO funds banks will repay this quarter. Our financial analyst team thinks a modest €150bn will be repaid as the interest rates incentive for keeping funds grows as ECB rates increase. 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
Japan: retail sales rise while consumer sentiment weakens

Supply concerns hit the European gas market | ING Economics

ING Economics ING Economics 17.06.2022 10:49
European gas prices have rallied significantly over the last week. The strength in the market has been driven by reduced Russian flows via the Nord Stream pipeline, while the LNG market is also tighter following an outage at the Freeport LNG export terminal in the US Source: Shutterstock European gas prices jump higher The European gas market had been looking as though it was in better shape. Storage was filling up at a good pace, which saw the gap in inventory levels narrowing significantly to the 5-year average. This in turn saw prices coming off from the high levels we saw following Russia’s invasion of Ukraine.  However, this has changed abruptly this week. TTF prices have rallied by around 50%, which has taken prices back above EUR120/MWh - levels last seen back in early March. The catalyst for the move has been reduced Russian gas flows via the Nord Stream pipeline, along with the potential for reduced LNG arrivals after an outage at the Freeport LNG terminal in the US. Warmer weather across parts of Europe will also be providing some support. Nord Stream flows plummet Gas flows via the Nord Stream pipeline have started falling significantly in recent days. This is after Gazprom warned that flows would be reduced as much as 40% due to delays in receiving a turbine which had been undergoing maintenance in Canada. Sanctions against Russia has made it difficult for this to be returned. However, since then Gazprom has reported an outage for another compression turbine, which would see gas flows falling even further along the pipeline - to as low as 67mcm/day compared to the roughly 155mcm/day we usually see. The latest data shows that flows fell to a little under 88mcm/day on 14 June. Clearly with the latest announcement these will fall further. This reduction is significant for Europe. The Nord Stream pipeline is the largest source of Russian gas for Europe, with annual volumes of around 58bcm, and around 40% of total Russian pipeline flows to the EU. Adding to supply concerns is that the Nord Stream pipeline was already set to undergo its usual summer maintenance between 11-21 July, which will see flows coming to a complete standstill. The disruptions we are seeing now suggest the potential for a prolonged period of significantly reduced flows via the pipeline. Gazprom could increase flows via Ukraine to try make up for the Nord Stream shortfall. However, up until now there is no indication that they are willing to do this. In addition, flows via the Yamal-Europe pipeline have been flowing eastwards for several months rather than the usual westerly direction. Nord Stream is crucial for Russian gas flows to Europe Source: ENTSOG, EC, ING Research Freeport LNG outage The disruptions to Nord Stream gas flows follow supply concerns in the LNG market. This is after a fire at the 15mtpa (roughly 20bcm) Freeport LNG export terminal in the US. The fire will see the plant offline for a period of 90 days, significantly longer than the 3 weeks that was initially expected. Freeport LNG made up around 18% of total US LNG exports in March. Europe has increased its reliance on US LNG recently (around 70% of US LNG exports were shipped to the EU+UK in March) due to reduced Russian flows. In March, Freeport exported around 1.8bcm, of which around 1.3bcm went to the EU+UK. Whilst not significant relative to Nord Stream flows, it certainly doesn’t help at a time when Europe is needing to rely more on the LNG market for supply. How will this impact storage levels? Storage levels in Europe have seen quite the recovery this year, thanks to strong LNG imports. The gap to the 5-year average has narrowed significantly, which has left inventory levels at 52% full, not far off from the 5-year average of a little under 55%, and well above the 43% we saw at this stage last year. However, a prolonged outage will raise concerns over the ability of the EU to build enough storage going into the next heating season, and potentially see the EU falling short of its target of having storage 80% full by 1 November. We are already seeing some worrying signs for storage. European storage levels fell for the first time on the 14 June sine mid-April. Clearly this should not be happening in the injection season but reflects the lower flows along Nord Stream. This will be unsettling for the market and is likely to keep prices supported. If the Nord Stream disruption proves to be prolonged, expect further upside to prices. European gas storage (% full) Source: GIE, ING Research Read this article on THINK TagsRussia-Ukraine Nord Stream Natural gas LNG EU energy 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
Rates Spark: The hawks are circling | ING Economics

Singapore: NODX surprises on the upside, lifted by electronics exports

ING Economics ING Economics 17.06.2022 10:44
Singapore’s non-oil domestic exports surprised on the upside, rising 12.4% in May A deep water port in Singapore 12.4% May NODX YoY growth Higher than expected NODX up 12.4% vs 7.5% consensus Singapore’s non-oil domestic exports (NODX) proved resilient in May, rising 12.4%YoY compared to the market consensus for a 7.5% gain.  Electronics exports helped lift overall NODX, growing 12.9% while non-electronic exports also had a strong showing, up 12.2%.  Singapore’s electronics PMI remained in expansion, registering 50.5 for the same month, suggesting sustained demand for electronic products.  Meanwhile, exports to China managed to eke out growth, inching up by 0.2% despite work stoppages in Shanghai.  Going forward we could see moderate growth for exports bound for China in the near term as it follows a more flexible zero-Covid policy.  NODX surprises on the upside in May Source: Singapore Department of Statistics Upside surprise for NODX to help support sagging growth momentum The stronger-than-expected gain for NODX will be supportive for a decent 2Q GDP report.  Accelerating inflation will likely sap some momentum from retail sales but at least for now, both exports and industrial production have held up pretty well.  We are maintaining our 4.5% GDP forecast for 2Q22 GDP, which should also benefit from base effects.  In the near term, NODX will likely continue to expand, but slowing global trade trends will likely begin to manifest in future NODX releases.    Read this article on THINK TagsSingapore NODX 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
Ichimoku cloud indicator analysis on Gold for Tuesday June 28th, 2022.

Taiwan central bank hikes by 12.5bp | ING Economics

ING Economics ING Economics 17.06.2022 10:36
Taiwan's central bank has raised the discount rate by 12.5bp to 1.5% in an attempt to curb inflation pressure. We expect the rate hikes to continue in Taiwan in the second half of this year. Due to the higher inflation threat, we are downgrading our GDP forecast for 2022 The Taiwan central bank has raised its policy rate by 12.5bp Taiwan's rate hikes continue but this one is mild compared to the Fed's Taiwan has increased its policy rate for the second time this year. This hike of 12.5bp is smaller than the previous 25bp hike in March. The central bank continued to point to inflation as the big threat to growth and the main reason behind the rate hike. Looking at Taiwan's CPI inflation rate in relation to other major economies, Taiwan's rate is moderate at 3.39% year-on-year in May, while the US, UK, and eurozone CPI inflation rates range between 8% and 9%. This also explains the smaller hike by Taiwan's central bank.  The central bank also increased the reserves ratio by 0.25 percentage points, which should have little impact on short-term borrowing costs, and therefore overall interest rates in Taiwan in the short term. SO we may not see a significant impact on TAIBOR in June from the increase in reserve ratio. The increase in reserve ratio should have a more long-term impact on interest rates, which should be reflected in 3Q22.  Taiwan economy may not withstand fast rate hikes Taiwan's economy has a big growth engine of semiconductor manufacturing. This engine relies on consumer demand for smart devices, automobiles and other products that require semiconductor chips. Mainland China is a big consumer market nowadays, and it has only just started to recover from Covid-19 lockdowns, and the risks of further isolated, shorter lockdowns continue to exist.  As such, Taiwan is facing higher inflation as well as a more uncertain market for its semiconductor sector. The economy may not be able to withstand a steep rate hike path.  We believe a slower rate hike path is more appropriate for Taiwan, and we expect two more 12.5bp hikes in 2H22 which should balance the risk of higher inflation and the uncertainty faced by the semiconductor sector. We keep our forecasts for the policy discount rate at 1.75% by the end of 2022. At the same time, we revise our CPI inflation forecast higher which means lower real GDP growth at 3.84% for 2022.  Read this article on THINK TagsTaiwan Policy rate Inflation GDP 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
Trading plan for USDCHF on June 24, 2022

Swiss National Bank raises rates by 50bp

ING Economics ING Economics 17.06.2022 10:34
The SNB has just joined the hawkish camp by raising its rate by 50 basis points to -0.25%. This indicates a willingness to take the lead and keep the initiative given the expected rate hikes by the ECB. Over the year, the SNB should nevertheless be less aggressive than the ECB. Surprise rate hike While the consensus was that the SNB would keep its key rate unchanged in June, the central bank surprised everyone by raising its rate by 50 basis points. The key interest rate has thus been raised from -0.75% to -0.25%. According to the press release, this rate hike is aimed at countering inflationary pressures, as inflation in Switzerland reached 2.9% in May, its highest level since the summer of 2008, which is higher than the SNB's objective of having inflation between 0 and 2%. After years of fighting deflation, inflation is now too high and the SNB has decided to act quickly. This rapid change in monetary policy is also explained by the situation in the foreign exchange market. While the Swiss franc was considered by the SNB to be overvalued for years, which pushed inflation down, the SNB now believes the franc is no longer highly valued. By deciding to raise rates before the European Central Bank, the SNB is indicating that an appreciating Swiss franc is no longer a problem for them. On the contrary, it is acceptable because the appreciation of the Swiss franc allows inflation in Switzerland to remain more moderate than in neighbouring countries and avoids a real depreciation, given the inflation differential between Switzerland and neighbouring countries. Remarkably, SNB Governing Board Chairman Thomas Jordan indicated that the SNB was prepared to intervene in the foreign exchange market if the situation required it, both by buying currencies as the SNB has done for years, but also by selling in the event of too great a weakening of the Swiss franc. The September meeting will be more open In our view, today's decision indicates a willingness by the SNB to take the lead. While the ECB announced last week that it would raise rates by 25 basis points in July and by 25 or 50 basis points in September, the SNB did not want to wait until its meeting on 22 September to raise rates itself and have to catch up with the ECB's 75 basis point rate hike. Raising rates now, therefore, means that it does not have to rush into major rate hikes later on and retains the initiative. This gives the SNB room to manoeuvre in deciding what to do in September, depending on data developments and the global economic and geopolitical situation. Following today's rate hike, the September meeting is therefore more open. The SNB has revised its inflation forecast upwards, which is now based on the assumption of a policy rate of -0.25%. It now expects an average of 2.8% for 2022, 1.9% in 2023, 1.6% in 2024, and 2.1% in the first quarter of 2024. It therefore believes that inflationary pressures will remain, but will fall below the 2% mark in 2023 and 2024. The SNB also states that it "cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future". Given the inflation forecasts and the economic environment, we believe that a further 25bp rate hike is to be expected this year, but we think it unlikely that the SNB will go further than that this year. In our view, once the policy rate moves to 0%, any further rate hikes would be for 2023. The SNB should therefore be less aggressive in its rate hikes than the ECB.    FX: The SNB could now be buying Swiss francs, not selling them Today’s SNB statement marks a sea-change for the Swiss franc. For over a decade, the SNB had been battling deflation and battling Swiss franc strength. Various descriptions of CHF over-valuation had been used over the years and the SNB had accumulated over CHF800bn in FX reserves in fighting that strength. Yet today the SNB’s statement has changed markedly. Gone is the reference to the highly valued Swiss franc and the need for FX intervention to redress it. Instead, the SNB has inserted a telling phrase: ‘To ensure appropriate monetary conditions, the SNB is also willing to be active on the FX market as necessary’. We take this to mean that the SNB will now sell EUR/CHF to ensure that the trade-weighted CHF appreciates by roughly 4% per annum. Why do we say 4%? This because the SNB told us in late April it wants to keep the real CHF stable and 4% nominal appreciation in the trade-weighted CHF is required to offset the low inflation in Switzerland relative to trading partners. Expect now the SNB to use its substantial FX reserves to guide EUR/CHF lower over the next 12 months. We have a 12m target at 1.00. That target could be lower if the dollar were to be stronger than we forecast, driving USD/CHF higher and the trade-weighted CHF lower than our current projections. In that case, the SNB would need a lower EUR/CHF to offset the higher USD/CHF. The SNB selling FX reserves will now have some interesting implications for asset markets, where the SNB has been the front-runner in diversifying FX reserves into corporate debt and equities. These flows stand to go into reverse. We expect now the SNB to use its substantial FX reserves to guide EUR/CHF lower over the next 12 months Source: ING Research Euro government bonds on notice for SNB intervention The spectre of the SNB selling out of some of its FX reserves, and so of its foreign bond holdings, has not escaped the attention of the rates market. It held 37% of its reserves in EUR as of Q1 2022 and another 39% was invested in USD. On account of the greater fragmentation and lower liquidity of the EUR bond market, we would expect euro government bonds (EGB) to see the greatest impact, but the effect should be felt in core markets globally. This would add to the angst caused by a series of surprise rate hikes, including the 50bp move by the SNB today. The average maturity of the SNB’s bond holdings suggests the 5Y sector of foreign bond curves will be the hardest hit. We also infer that roughly a third of the EUR bonds it holds are investors in semi-core markets (e.g. France, Belgium) making this sector one of the most vulnerable in the event of FX intervention. In summary, the surprise SNB hike and potential for FX intervention add to the upside to developed market yields globally. We also see a risk of it exacerbating the sovereign spread widening if it decides to sell out of its semi-core or bond holdings. Read this article on THINK TagsSwitzerland Swiss National Bank Monetary policy CHF 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
Asian equities move higher | Oanda

Asian morning bites - 17/06/22

ING Economics ING Economics 17.06.2022 09:01
Stock rally fizzles after one day as global money gets more expensive Source: shutterstock Macro outlook Global: The rally in stocks didn’t last long. Wednesday’s price action hadn’t looked particularly convincing, but it is noteworthy that the relief rally post-FOMC lasted such a short time, probably not helped by the Swiss National Bank’s 50bp rate hike and a further 25bp increase from the Bank of England. Global money is getting more expensive, and it has a way to go yet. The scale of the sell-off is also eye-catching. The S&P500 fell 3.25%, the NASDAQ fell 4.08%. Selling volumes were also a bit higher than usual, though nothing yet that looks like capitulation. Stocks simply opened sharply lower and then drifted a little further during the session. Equity futures suggest a bounce as we head into the weekend. But that should probably be treated with a pinch of salt.   US Treasury yields finished lower, though not before the yield on the 10Y bond tried to reach 3.50%. at one point. 10Y yields ended down 8.9bp at 3.19%. 10Y US Treasury futures are positive, so it feels like we may see some further declines in yield today. 2Y Treasury yields also dipped by 9.7bp to finish at 3.093%. European yields were mainly up on the day, in response to the SNB move, though Italian bond yields continued to be cushioned by talk of the ECB’s theoretical anti-fragmentation tool. Whatever that ends up being.   The USD was weaker, though, despite plunging market sentiment. EURUSD recovered to 1.0548. mostly during the US session. Cable also rose, touching 1.24 at one point and now 1.2347. The AUD is also back above 0.70 again trading at 0.7043 currently. Ahead of what might be an interesting Bank of Japan (BoJ) meeting today (lots of market chatter about a possible change to the yield curve control boundaries), and the JPY is back down to 1.32. That may be enough to keep the BoJ from any action today (consensus is for no change), though the 10Y JGB yield is only just below 0.25% at 0.249%, so rule nothing out (see also below). Asian FX was a very polarised group yesterday, with JPY gains at one end, dragging along the SGD, CNH and KRW for the ride. At the other end, the THB continues to languish. The PHP and IDR also missed out on gains, though may have better luck today. Japan: The Bank of Japan meets today and markets expect no change which would leave the BoJ a dovish outlier. Inflation of above 2% and a weak JPY have created a conundrum for the BoJ. At today’s meeting, we expect the BoJ to stress its efforts to support the fragile economy but also express concern about the risk of further and, more importantly, “rapid” weakness in the JPY due to the widening yield gap with other major economies.  Interestingly, according to several newswires, there is a split in policy expectations inside and outside Japan. Although the domestic consensus remains unchanged, overseas analysts are forming a consensus that the BoJ will widen the bandwidth for YCC or expand its bond-buying operation from 10Y to other maturities. We believe that the likelihood of such an option is growing, and the BoJ may shift its stance on the YC sometime in 2H, but not at today’s meeting. Meanwhile, the Japanese government announced that it will raise travel subsidies to a max of 11,000 yen/day per person (vs 7,000 current) and expand the program nationwide in July.  The program will run until the end of August, excluding the Obon summer holidays. Such a program will boost domestic demand but also play a factor to push inflation further up. Singapore: May NODX is just out and posted a stronger than expected 12.4% YoY pace of growth (consensus 7.5%). The electronic sub-sector grew by a robust 12.9%YoY. Non-electronics exports rose 12.2%, though this must have been mainly due to the catch-all "other" category as pharmaceuticals and petrochemicals were both quite soft.  What to look out for: BoJ meeting and US industrial production Singapore NODX (17 June) Malaysia trade (17 June) BoJ meeting (17 June) US industrial production (17 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
Japan: retail sales rise while consumer sentiment weakens

The Commodities Feed: European gas supply concerns resurface

ING Economics ING Economics 16.06.2022 23:31
Your daily roundup of commodities news and ING views Gas storage tank Energy The oil market was under pressure for much of yesterday. ICE Brent settled 2.2% lower on the day, taking it below the US$120/bbl level. The US Fed’s decision to hike rates by 75bps will not have helped, but it is unlikely to have been the main catalyst, as the market had already been pricing in more aggressive action from the Fed following the US CPI data last week. US inventory data from the EIA may have added to the pressure. US commercial crude oil inventories increased by 1.96MMbbls over the week. Although, when releases from the strategic petroleum reserve are taken into consideration, total US crude oil inventories declined by 5.76MMbbls. As for refined products, gasoline inventories fell by 710Mbbls over the week, whilst distillate fuel oil stocks grew by 725Mbbls. The more bearish numbers were related to demand. Total implied demand fell by 524Mbbls/d over the week, whilst implied gasoline demand declined by 106Mbbls/d. The IEA released its monthly oil market report yesterday, which included forecasts for 2023. The agency expects that global oil demand will grow by 2.2MMbbls/d in 2023 to reach 101.6MMbbls/d, exceeding pre-Covid levels. This growth is also stronger than the 1.8MMbbls/d demand growth expected this year. The accelerated pace of growth next year reflects expectations of a robust recovery in demand from China. As for supply, non-OPEC+ supply is expected to grow in 2022 and 2023 by 1.9MMbbls/d and 1.8MMbbls/d respectively. OPEC+ output is expected to fall next year due to sanctions against Russia. This means that potentially the global market will remain in deficit over 2023, which will tighten global inventories further. In April, OECD industry stocks are estimated to have increased by 42.5MMbbls. However, this increase would have been helped by government releases from strategic reserves. The European gas market has seen a significant amount of strength over the week. TTF has rallied by around 46% from Friday’s settlement to more than EUR120/MWh as concern over supply starts to resurface. The Nord Stream pipeline has seen flows fall significantly in recent days and Gazprom has warned that flows along the pipeline will fall further, which would see supply through the pipeline falling by 60% to just 67mcm/day. The fall is apparently due to another outage of a turbine, whilst sanctions have also made it difficult to return turbines which have been undergoing maintenance in Canada. If prolonged, this outage will have an impact on the ability of Europe to continue building inventory at the pace we have seen recently, which could leave the market more vulnerable going into the next heating season. Nord Stream is also expected to undergo its usual annual maintenance from 11-21 July, which will see flows along the pipeline come to a full stop during that period. In addition to concerns over Nord Stream flows, the LNG market is also set to be tighter in the coming months. Following a recent fire at Freeport LNG in the US, the plant is set to be offline for 90 days, compared to initial expectations of just 3 weeks. Freeport LNG makes up roughly around 17% of total US LNG exports, and so the loss of this supply will be felt in an already tight global LNG market. Metals A modest recovery in China’s industrial production numbers for May along with weakness in the dollar index helped industrial metals edge higher, with aluminium and nickel leading the gains yesterday. The latest data from the National Bureau of Statistics (NBS) shows that primary aluminium production in China rose for a second consecutive month, reaching an all-time high last month. Aluminium production jumped 3.1% YoY and 1.8% MoM to 3.4mt in May, as power constraints eased and aluminium smelters restarted operations along with the addition of new production capacity. Chinese steel production rose 4% MoM to 96.6mt in May. However, it was still down 3.5% YoY. Cumulative steel output over the first 5 months of the year was 435mt, down 8.7% YoY. As for copper, the Shanghai Metals Market (SMM) estimates that a recovery in the run rates of Chinese copper fabricators following lockdowns is slowing in the current month. SMM estimates that run rates may reach 68.2% in June, a marginal rise of 0.32% from May, and still down around 5% from levels seen last year. Agriculture The weakness in sugar continued yesterday with the No 11 sugar prompt-month contract falling by more than 1.2% to US¢18.57/lb, on the back of a healthy production outlook from India for next season. The Indian Sugar Mills Association (ISMA) estimates total sugar production (including diverted for ethanol production) to increase from around 39.4mt to 40mt. The association estimates sugar production to total around 35.5mt in 2022/23, whist sugar diversion for ethanol production could increase to around 4.5mt compared to 3.4mt this year as the government increases ethanol blending targets. ISMA estimates sugar cane acreage in major producing regions to increase by around 2-3% next year, whilst yields are also expected to be healthy. ISMA requested the government to allow 8mt of exports for next season; which would be marginally smaller than the current season’s exports (capped at around 10mt,) but will still be significantly higher than the 5-yr average. Read this article on THINK TagsRussia-Ukraine LNG IEA European gas EIA
Video market update for June 29, 2022  | InstaForex

Australia’s unemployment rate unchanged in May

ING Economics ING Economics 16.06.2022 23:29
Rising employment and falling unemployment coupled with growing wage pressures and global central bank rate hike acceleration means the Reserve Bank of Australia will need to be bold in coming meetings Source: istock 3.9% Unemployment rate Still an all-time low Higher than expected Unemployment rate didn't fall, but this was a positive labour market release The May labour market release was supposed to deliver a lower, new all-time low unemployment rate of 3.8%, but coupled with a very modest gain in total employment. It did neither. The unemployment rate remained 3.9%. Though that is still the joint-lowest ever on record, and it didn't fall mainly for positive reasons, namely a surge in the labour force participation rate (66.7% from, 66.4%) which will temporarily lift the numbers counted as unemployed while they find work. We will probably see part-time and total jobs surge in the coming months as this happens, followed by a lagged decline and drift into full-time work. All of which should see the unemployment rate continue to achieve new lows.  As for the employment numbers, full-time employment rose by 69,400, offsetting all of the modest decline in part-time working (-8,700). That is probably the main message from today's labour market figures - labour demand remains very strong.  Australian unemployment rate and forecasts Australian unemployment rate Source: CEIC, ING RBA still has its work cut out As a relative late-comer to the hiking game, the RBA will not be too comforted by today's figures. The implied strength in labour demand means that they still have a way to go to get rates out of their current accommodative setting, and labour market tightness is likely to get more, rather than less extreme as they make that transition.  Like many other central banks are finding currently, the arguments for stepping up the pace of tightening are gaining credibility. "More, sooner", may mean "less and for shorter" in total as far as rate hikes are concerned. The AUD actually fell on this data, which in our view, is not the appropriate market response and we may see some recovery once they figure it out.  Read this article on THINK TagsReserve Bank of Australia Cash rate target Australian wages Australian unemployment rate Australian employment
Will Fuel Prices Shock Again? Crude Oil Price Almost Hit $120! Will EV Become More Popular Shortly?

Bank of England resists pressure to follow the Fed into faster tightening

ING Economics ING Economics 16.06.2022 15:14
The Bank of England has stuck to its guns and hiked rates by another 25 basis points, resisting pressure to go faster. The hawkish spin in the policy statement suggests a 50bp hike is entirely possible in August. But the bigger signal here is that, by pricing a terminal rate close to 3.5% next year, markets are overestimating the tightening still to come Bank of England, in the City of London Source: Shutterstock   The Bank of England has resisted the temptation to follow the Fed and other global central banks into a more aggressive phase of tightening. Instead the Bank has opted for a fourth consecutive 25bp hike which takes Bank rate up to 1.25%. In fact, despite speculation after Wednesday’s Federal Reserve meeting, the vote split was exactly the same as in May, with three out of nine committee members preferring a more aggressive 50bp increase. But while the hawks failed to win over the rest of the committee, they have succeeded in securing a noticeably more hawkish policy statement. It speaks of UK core inflation being higher than in the US and Europe, and more importantly signals that it will act forcefully if cost pressures become more persistent. It’s pretty clear that the hawks are nervous about the 8% fall in the pound versus the dollar we've seen so far this quarter. Big picture, this is unlikely to change the inflation story dramatically, but the hawks know this is one of the few things the Bank can influence in an environment of rising dollar input prices. That means a 50bp move is still entirely possible in August. That’s what markets are pricing, and by then we’re likely to have had another 75bp hike from the Fed, both of which might just be enough to tip the balance narrowly in favour of the hawks. Markets have been pricing a 3.5% terminal rate over recent days Source: Macrobond/Bank of England, ING   But today’s decision should, we think, be read as another sign that the Bank isn’t going to tighten nearly as much as markets expect. While the Fed looks poised to take rates well above 3%, it’s harder to see the Bank of England following suit. The most recent BoE forecasts from May, which were premised on a terminal rate of 2.6%, showed inflation well below target at the end of the forecast horizon. We’ll probably get a similar result when the Bank updates its numbers in August. Meanwhile, even if the latest government support package helps insure against a technical recession, the outlook remains fragile and vulnerable to another leg higher in energy prices later this year. And while the jobs market continues to suffer from a lack of workers, the latest data hinted that shortages are no longer getting worse. We also saw the first whiff of an increase in unemployment following a prolonged downward trend. Wage pressures should cool modestly as the year goes on.  Investors have been pricing a terminal rate above 3.5% in recent days, which seems unlikely to be delivered. We imagine the committee will look to raise rates to the 2% area by the end of this year, which is probably roughly consistent with neutral. Whether that takes the form of a 50bp hike in August and follow-up 25bp in the autumn, or simply three consecutive 25bp moves, will depend more on other central banks and what the pound does between now and the next meeting. But the bottom line is that markets are still overestimating what's still to come from the Bank of England. 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
Sterling rises despite weak UK data. Let's Look At GBP/USD Chart | Oanda

Will British Pound (GBP) Hit High Levels?

ING Economics ING Economics 16.06.2022 15:13
The dollar is consolidating after yesterday's well-flagged 75bp hike from the Fed. US yields fell sharply from intra-day highs after Fed Chair Powell said that 75bp hikes would not be common. Yet the Fed wants policy rates in the 3.00/3.50% region by year-end. This should keep the dollar near the highs this summer. Look out for BoE and SNB meetings today USD: Expect dollar to remain bid on dips As James Knightley discusses in his review of the Fed meeting, the Fed looks likely to go again with a 75bp hike in July. The sharp adjustment in short-dated US yields and the dollar after Powell said that 75bp adjustments would not be common looks more a function of market positioning than any serious re-assessment of the Fed rate cycle. After all, Powell also said he wants the policy rate at 3.00-3.50% by year-end (3% is pretty high for a reserve currency) and the Fed dots tell us that the policy rate could be closer to 4.00% by the end of 2023. With inflation proving sticky this summer, there seems no reason for the Fed to back away from this hawkish messaging over coming months. That should keep the dollar supported on dips. The argument for some dollar correction comes from the pricing of the Fed terminal rate having stalled near 4.00% and peer group central banks playing catch-up. One of the biggest event risks now is tomorrow's Bank of Japan (BoJ) meeting. The BoJ's policy of trying to keep 10-year JGB yields in a +/- 25BP range around zero has been under heavy pressure this last week on the bond market sell-off. The dovish BoJ under Governor Haruhiko Kuroda may not be tempted to alter policy on market pressure, yet that would probably now send USD/JPY sharply through 135 and prompt the Japanese Ministry of Finance to order intervention. Needless to say, Japan's monetary policy is a major source of market volatility.   An additional factor favouring some dollar consolidation could be the temporary support to be found by equity markets into the end of June - as buy-side portfolio managers re-balance portfolios into equities. If that is the case, we would prefer high-beta currencies outside of Europe to perform better - e.g. the Canadian dollar and the Mexican peso, while European FX will continue to be dragged by the energy shock. For today, some softer US housing starts could drag the dollar a little lower, but a hawkish Fed should keep it bid on dips. DXY should find support around the 104.50/60 area. EUR: Gas prices prove a drag EUR/USD is consolidating above the lows of the year at 1.0350/60, but developments in European natural gas markets have probably prevented a bigger rally on the back of the softer US yield story yesterday. Here, the focus is on Russia cutting gas supplies to Germany and Italy by up to 60%, blaming maintenance issues. European natural gas jumped 30% yesterday and is a reminder of the frontline risks to Europe posed by the war in Ukraine. This came on the day the eurozone announced a record monthly trade deficit (EUR32bn in April) and references our medium-term valuation work that the terms of trade adjustment on the energy shock has damaged the euro's fair value. Our conclusion is that even at these levels, EUR/USD is not cheap. With gas prices on the move, EUR/USD may well trace out a 1.0350-1.0500 range near term and fail to benefit as much as others from any corrective rallies in equities. Additionally, news on the anti-fragmentation scheme from the ECB has not made a material benefit to the euro - serving as a reminder that the euro faces a plethora of challenges at the moment. GBP: 25bp from the BoE and no day of reckoning Our UK economist, James Smith, looks for a 25bp hike from the Bank of England (BoE) today, taking the Bank rate to 1.25%.  The market prices the Bank rate at 2.80% by the end of this year. Most of us think that at some point there will be a 'day of reckoning' for sterling when the BoE aggressively wants to correct market expectations. But we do not think that will be today. Trade-weighted sterling is some 5% weaker on a year-on-year basis (perhaps adding 0.5% to headline CPI) and with inflation expected to remain high all year, the BoE may not want to trigger a further collapse in the pound.  EUR/GBP could correct back to the low 0.85s if the BoE leaves market expectations unchanged, while GBP/USD could be a pair to recover from a temporary lift in equity markets - potentially drifting up to the 1.2250 area. CHF: Why should the SNB wait until September to hike? The Swiss National Bank (SNB) meets today to set monetary policy. The assumption from most in the market is that, given the SNB has been fighting Swiss franc strength for over a decade now, the SNB will keep rates unchanged at -0.75%. The rationale here is that the SNB will want to see what the ECB does first (a 25bp hike in July and another 25/50bp in September) before hiking at its 22 September meeting. Out of 20 economists surveyed by Bloomberg, 19 expect unchanged rates today, with one going for a 25bp hike. A counter-argument - and one we’ve heard on a recent client trip to Switzerland - is that the SNB has no option but to hike today. Its mandate is to keep inflation below 2% and inflation is now 2.9% YoY (May). The argument extends to it being insufficient for the SNB merely to highlight that rate hikes in September are possible/likely. Undoubtedly the SNB is going to have to raise its inflation forecasts today and were it to hike today, the justification would be that failing to act could see this near-term period of above-target inflation leading to second-round effects. We have recently turned more positive on the Swiss franc based on speeches in late April which suggested the SNB wanted to keep the real CHF stable. To do this - and given Switzerland’s low inflation - the nominal CHF needs to appreciate. A hike today would certainly be a big surprise and send EUR/CHF 1-2% lower. But even if the SNB does not hike today, it does have the FX firepower (like the Czech National Bank) to strengthen its domestic currency. Our call this year is that EUR/CHF upside is limited to the 1.05 area and that the SNB, one way or another, will guide EUR/CHF to the 0.98/1.00 area over the coming quarters.  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
German inflation comes down as government measures bite

What to look out for: BoE meeting | Asia Morning Bites | ING Economics

ING Economics ING Economics 16.06.2022 15:10
Post-Fed reaction, Australian labour market, Taiwan rates, and Korea policy discussion provide plenty to chew over today Source: shutterstock Macro Outlook Global: Somehow, the Fed managed to thread the needle of increased inflation fighting aggression, while not appearing to cement expectations of recession, at least not a hard one. Markets signalled their relief. That said, there’s more tightening to come, a lot more. The new dot-plot median signals a 3.4% year end-rate up from 2.8% previously, and long run rates have been nudged higher to 2.5%. But the 1.7% GDP forecasts for 4Q on 4Q GDP growth for both 2022 and 2023 of 1.7% (down from 2.8% and 2.2% respectively) are still high enough for now not to scream recession. That said, given their recent record, it is a wonder why anyone would pay any attention to their forecasts. Helping to explain all of that, and also what this means for the broader economy, FX and rates, please see this linked note from our NY colleagues. Returning to markets, the S&P500 picked back up by 1.5%,. And the NASDAQ by 2.5%, though both remain in bear-market territory. Equity futures are quite positive still this morning in Asia, but the tail-end of the trading in the US was for some failed up-moves, so it is not obvious that this is going to hold. That said, we may be in for a bit of range trading for a while until we can figure out what the next narrative is. Incidentally, I mentioned trading volumes in yesterday’s note as relevant for defining end-points in bear markets. The volumes yesterday were better than in recent weeks, but were still drifting lower from Tuesday. This probably isn’t over. The US Treasury market saw substantial upheaval, with the yield on the 2Y note dropping 23bp as Fed funds expectations were pulled back.  10Y yields dropped 18.9bp to 3.284%, allowing the yield curve to steepen slightly, though it is still less than 10bp on a 2s10s basis. European bond yields were also sharply lower, helped by ECB signals that they are working on a new tool to combat the widening in spreads seen in some economies – notably Italy, where yields across the curve fell by more than 35bp, with the steepest drop in the 5Y section of the curve.  Japan’s 10Y JGB yield briefly shot above 0.30% yesterday, ahead of tomorrow’s BoJ meeting, and there is a growing chorus calling for the yield curve control band to be widened to bring a 0.5% yield into play. That could, if entertained, provide a short term boost to the JPY, but there has been little indication that this is on the cards, though it may be worth considering. G-10 currencies have not markedly changed despite the swings in yields, probably because all yields are plunging, not just US ones. EURUSD is now 1.0447. When we wrote yesterday, it was about 1.0420 – so the USD is a bit weaker vs the EUR, but not massively so. Cable pulled itself up to 1.2161, and the AUD has clawed back to almost 0.70, while the JPY has also managed to recover to 134.08. Asian FX was split yesterday, though will likely play catch up today. THB intervention by the Thai central bank was one of the main facets of yesterday’s regional FX action, along with the no-confidence opposition motion. Until the BoT steps up with some rate increases, the THB will likely remain pressured. Australia: We also get Australian labour market data for May later this morning. We are in line with the market in looking for a modest further gain in employment, but a further 0.1pp decline in the unemployment rate. That should keep the RBA in its new-found hawkish mode and may help push the AUD more meaningfully back above 0.70. South Korea: Bank of Korea Governor, Rhee Chang-yong, and Finance Minister Choo Kyung-ho and heads of financial regulators met this morning to discuss the FOMC meeting results, major risks, and markets. In the Q&A session, Minister Choo mentioned that the government would conduct emergency bond buybacks if market volatility increased and the BoK’s direct KTB purchase option would also be on the table. Governor Rhee also said that the BoK would monitor market reactions first as the next MPC meeting (on July 13th) is 3-4 weeks away and would not consider holding an ad-hoc emergency MPC meeting. Governor Rhee stressed that the BoK will be paying more attention to overall market impacts from the Fed’s hikes, not the yield gap itself. As mentioned in the earlier notes, we are open to the possibility of a 50bp BoK hike in July, but if Korean financial markets digest the Fed’s giant step well, they probably will deliver just a 25bp hike. As inflation targeting and financial market stability are both the BoK’s mandates, from now on, how financial markets react will be key to watch. If the June CPI comes out above 6% (which is the current forecast of ING), and financial markets’ one-sided move continues, we think the possibility of 50 bp hike will rapidly increase. Korean import and export price data showed that pipeline price pressures are rising at a faster pace, supporting our view of above 6% CPI in 3Q22. Import prices rose 36.3%YoY in May (vs 35.0% in April) mainly driven by energy (93.2%) Japan: Exports rose 15.8% YoY in May (vs 12.5% in April), but lower than the market expectation of 16.1%. Imports surged 48.9% in May (vs 28.2% in April), hitting an 8 year high - mainly due to the weak JPY adding more pressure on higher energy prices. The trade deficit widened to -2.3 tillion JPY (vs -0.8 trillion in April), recording ten straight months of deficit. Taiwan: The central bank is going to hike today. The question is whether it will follow the Fed's 75 bps hike from the current 1.375%. The Taiwan economy has signs of inflation, but that has been moderate at 3.39%YoY in May, not comparable to US's CPI inflation rate of 8.6%YoY in May. A hike of 75 bps or even 50 bps could deter investment demand from manufacturers. A 75 bps hike is likely to lead to a jump in TWD against USD. What to look out for: BoE meeting Taiwan CBC meeting (16 June) New Zealand GDP (16 June) Japan trade balance (16 June) Australia employment change (16 June) BoE meeting (16 June) US initial jobless claims, building permits and housing starts (16 June) Singapore NODX (17 June) Malaysia trade (17 June) BoJ meeting (17 June) US industrial production (17 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
German inflation comes down as government measures bite

Fed hikes by 75bp with the same again for July

ING Economics ING Economics 15.06.2022 22:08
The Federal Reserve has increased rates by 75bp and has signalled a willingness to maintain this pace of tightening at the July FOMC meeting. The Fed funds rate will end the year well above 3% with the dollar set to stay strong, but moving harder and faster comes at an economic cost. Rising recession risks mean rate cuts will be on the agenda for summer 2023 US Federal Reserve building in Washington, DC 1.5-1.75% The Fed funds target range   75bp hike with much more still to come After implementing the first 50bp hike in 22 years in May, the Fed has today followed up with the first 75bp increase since 1994 as the central banks tries to dampen inflation pressures with greater vigour. Markets had been moving in the direction since the release of the May inflation data and the jump in longer-term inflation expectations reported by the University of Michigan, gathering momentum on reports the Fed was “likely” to consider more substantial policy options than the 50bp previously signaled. Only Esther George wanted to see 50bp today. The Fed’s Quantitative Tightening plans remain unchanged. The Fed’s new forecasts sees them signal that the pace of policy tightening will remain intense over the next few months. The dot plot of individual forecasts now predicts the year-end Fed funds rate at 3.4% versus 1.9% in March and 2023 at 3.8% (2.8% previous) with 2024 at 3.4% (2.8% previous) and long run at 2.5% versus 2.4%. Even the least hawkish FOMC members have the Fed funds rate ending this year above 3%. The accompanying statement underscores the shift in the Fed view with the central bank "strongly committed" to getting inflation down to 2% target and being "highly attentive" to inflation risks. fed dot plot of individual forecasts for the Fed funds rate (%) Source: Federal Reserve, ING   These hikes imply around 175bp of rate increases from here, which suggests three 50bp and a 25bp in the four meetings in the second half of the year. This more aggressive stance comes at an economic cost with the Fed revising down 4Q year-on-year 2022 GDP growth to 1.7% from 2.8% and 1.7% YoY from 2.2%YoY for 4Q 2023. Despite this the core PCE deflator, the Fed’s favoured inflation measure, is not expected to get down to 2% before 2025 with the 4Q YoY rate for 2023 still expected to be 2.3%. Another 75bp in July with rates ending the year at 3.5-3.75% We believe that the risks to the Fed’s rate hike projections are to the upside. To get inflation lower quickly we ideally need the supply side capacity of the economy to better balance with strong demand. However, the geopolitical backdrop, Covid containment measures in Asia and the lack of worker supply in the US suggests this isn’t going to happen soon. Consequently, inflation is likely to be slow and sticky on its descent, thereby putting the onus on the Fed to weaken demand via higher interest rates. Between now and the July FOMC meeting we only have one round of data. The jobs report should be pretty good (hiring intentions surveys remain strong and there are 11.4mn vacancies) while inflation is likely to remain elevated given food and energy prices – the YoY rate won't start to really drop on favourable base effects until late 1Q through 2Q 2023. Consequently we now favour the Fed to follow up today’s move with another 75bp hike in July – note Fed Chair Powell acknowledging this possibility in the press conference. Cumulative hikes and the pace of tightening in Federal Reserve rate hiking cycles Source: Macrobond, ING   We then expect 50bp moves in September and November with a 25bp hike in December. This is close to where the market is pricing, which would be the most aggressive Fed tightening path since 1988. The bank’s quantitative tightening plans will complement these actions. The faster they rise... the quicker they will fall... However, going faster and deeper into restrictive territory implies a greater risk of a hard landing. The move higher in the treasury yield curve looks set to ensure mortgage rates jump over the next couple of weeks with the typical 30Y fixed set to test the pre-Global Financial Crisis level of 6%. At the same time there is already evidence that hourly earnings growth is softening while the plunge in equity markets hurts both consumer and business sentiment with knock-on effects for spending and hiring. Consequently, the outlook for domestic demand is already weakening while the strength of the dollar is hurting international competitiveness and squeezing corporate profitability. Our best guess is that inflation can drop quickly from late 1Q through 2Q 2023 Even if recession can be avoided we expect the Fed to reverse course and move policy to a more neutral footing once it is convinced inflation is moving lower. Our best guess is that inflation can drop quickly from late 1Q through 2Q 2023 as the big increases in food and fuel prices seen in 2022 drop out of the annual comparison. We also expect to see weaker demand translate into profit margin compression while the housing market, if it does soften as we expect, can also quickly contribute to depressing annual inflation via a moderation in housing rents. As for those long-heralded supply side improvements, we remain hopeful that supply chain strains will ease over the next twelve months and energy prices with stabilize and move a little lower. We will also be closely looking to see if the plunging stock markets tempt some retired workers back to the workforce to boost the availability of labour. If supply side factors do improve we could be talking US inflation below 2.5% in the second half of 2023 and this will certainly open the door for interest rate cuts. Moreover, over the last 50 years the average length of time between the last rate hike in a cycle and the first interest rate cut was only seven months.  When inflation interest rates were more volatile in 1970-2000, as we would argue it is today, it was only three months. With the Fed being more aggressive on the upside, history suggests we should be open to the possibility of Fed rate cuts again in summer 2023. Rates on repo, reverse repo and excess reserves also up by 75bp. But SOFR continues to lag... The Fed may not like to admit it, but the issues that have plagued the front end of the market not only remain in place, but have intensified in an uncomfortable direction in the past few weeks. The volumes of cash going back to the Fed on the reverse repo facility is in the area of USD 2.25 trn, a huge number that reflects difficulty for market repo to match the 80bp on offer at the Fed. In fact Secured Overnight Financing Rate (SOFR) has just slipped to below 70bp, reflective of where market overnight repo has trended towards. The Fed has now hiked by 75bp, thus pushing the reverse repo rate to 1.55%. Based off where the repo market is currently trading, SOFR will likely have difficulty climbing above 1.5% in the coming days, as there has not been any material change in liquidity circumstances in the wake of the FOMC outcome. Other key rates also reflect the full 75bp move in the Fed funds range to 1.5%–1.75%. The rate on the standing repo facility has been hiked to 1.75% (from 1.0%), a facility that tends not to get used currently, reflecting the bias towards an excess of liquidity, that instead pushes use of the reverse repo facility. The rate on excess reserves has been hiked to 1.65% (from 90bp). Cash getting compensated in this bucket has in fact been on the decline in recent months, as bank reserves have fallen from USD 4.3trn to USD 3.3trn, reflecting a tightening in conditions at the level of commercial banks. This process is likely to continue to the extent that banks underdeliver in terms of deposit hikes, relative to what the Fed has delivered (and will deliver). The move of the 10yr Treasury yield from sub-2% to 3.5% since March has come practically entirely from higher real rates An additional factor that should not be ignored is the significant rise in real (inflation adjusted) market rates in the past few weeks, and in fact in the past number of months. The move of the 10yr Treasury yield from sub-2% to 3.5% since March has come practically entirely from higher real rates, as has the more recent spike in market rates. Inflation expectations have in fact been steady-to-falling, even in the wake of Friday’s elevated inflation number. This ongoing rise in the real rate actually takes pressure away from the Fed for the perceived need to (over) hike. That said, it appears this has not impacted to decision today for the Fed to deliver 75bp, even though they had a clear prior intention to deliver 50bp, which they could have stuck to on a higher real rate rationale (but clearly didn’t). FX: High volatility, but high short end rates to keep the dollar bid After Monday’s press reports that 75bp was possible, if not likely at today’s FOMC meeting, the Fed delivering 75bp has been well priced. What is new for the markets is the fresh take on the Dot plots. Certainly, the short end of the US yield curve has been taking close notice of these since the Fed shifted policy in June 2021. Today’s release showing a median Dot plot of 3.8% for end-year 2022 was higher than the 3.65% being priced going into today’s meeting. Short-term US rates and the dollar have consequently pushed a little further ahead on this release, but are showing lots of volatility as Powell speaks too. However, it seems too early for the markets to price a clear slowing or pause from the Fed as it seeks to ride out the hump in the inflation cycle. This should allow the dollar to continue to trade near its high for the year. Yet with a terminal rate for the Fed already priced close to 3.90/4.00% for next year – and pricing of that terminal rate having been a key driver of the dollar bull trend – the dollar does not necessarily need to advance aggressively from these elevated levels. The Fed upping the ante on the pace of rate hikes does raise the challenge for peer group central banks, however. We suspect the ECB was disappointed how the euro reacted to its hawkish June press conference as doubts emerge whether the eurozone economy can handle higher rates. The surge in European natural gas prices today and news of a record wide monthly trade deficit in April also serve as a reminder of the acute stagflationary risks in the eurozone and a reminder of our view that the fair value of the euro has fallen on the back of the energy shock. We expect EUR/USD to stay offered this summer, with potential to the 1.02/1.00 area over coming weeks and months. We expect EUR/USD to stay offered this summer, with potential to the 1.02/1.00 area over coming weeks and months Of even more interest – according to FX options markets – is Friday’s Bank of Japan (BoJ) meeting. Today’s hawkish Fed suggests USD/JPY may well be going into that meeting pressing 135. The BoJ has placed itself between a rock and hard place here, where unchanged policy could see a disorderly move through 135 and elicit FX intervention from the BoJ. No wonder one month USD/JPY implied volatility is trading near 15% and could trade higher still. Read this article on THINK TagsUSD US Treasuries Powell Federal Reserve 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
Czech National Bank preview: the end of a hawkish era

Czech National Bank preview: the end of a hawkish era

ING Economics ING Economics 15.06.2022 22:03
22 June will be the last meeting of the board in its current hawkish composition. We expect an interest rate hike of 125bp. We see risks balanced on both sides. After 1 July, the new board will change communication to rate stability and wait for a signal to cut rates. In our view, FX interventions will continue regardless of the view of the new board We believe that the depreciation pressure on the koruna will continue +125bp Change in the key rate ING forecast What to expect from the hawks at their last meeting On 22 June, the Czech National Bank (CNB) Board will hold its last meeting in its current composition. Things have changed dramatically since the May meeting, both in terms of economic conditions and at the CNB itself. From a macroeconomic perspective, 1Q GDP showed 0.9% quarter-on-quarter growth, while the central bank had expected 0.0% in its May forecast. EUR/CZK is 2.5% stronger than CNB expectations for 2Q and inflation deviation from forecast came in at 1.1pp (16% year-on-year) in May. Thus, the overall picture of the economy is better than expected while inflationary pressures are visibly rising further. The June meeting will thus, in our view, bring another 125bp hike in the key interest rate to 7.0%. We see the risks to our call balanced on both sides this time. The significant slowdown in the mortgage market in recent months (new mortgages dropped by 40% month-on-month in April) argues for a smaller move. On the other hand, given the changes in the CNB board and the last meeting with the current composition, the frontloading aspect may support a bolder move. Still, the May forecast expects interest rates to rise above 8%. And as we enter the blackout window for CNB communication, some of the last words come from board member Tomas Holub. Today he described the market pricing of a 100bp hike at the June meeting as 'rational'. What comes after 1 July? The new composition of the board seems, according to the first indications, to be a clear dovish shift in the CNB's monetary policy. In his first speech, the new governor pledged to propose interest rate stability at the first meeting under his leadership on 4 August. On the one hand, the new dovish board has good timing for its starting point, as the CNB expects inflation to peak in these months and a drop in the headline number would thus allow for an easy change in communication. On the other hand, as we mentioned before, we are increasingly skeptical about a peak in inflation due to the new announcements of energy price hikes from major suppliers in the country and the continued rise in fuel prices despite the excise tax cut since early June. Thus, given the lag in data releases, we expect that the initial dovish tone of the new board may be replaced by a wait-and-see mode later on. At the same time, however, we must keep in mind that the current forecast already implies a CNB interest rate cut this year. Inflation will one day peak and this will mean the beginning of interest rate cuts for the central bank's model. Then it will just be a question of how long the new board will delay in following the CNB staff's recommendations. Given the near-zero insight the market has into the new board members, it is impossible to draw a clear conclusion now. However, we continue to believe that the market is still underestimating the current CNB transformation to a dovish stance and that the first rate cut will come earlier than the middle of next year, as the market currently expects. For now, it seems to us that the turn of the year may be an opportunity to show the full force of this dovish shift for the first rate cut, given that the full effect of the comparative base from this year will already be showing up in inflation. Czech FRA curve expectations Source: Refinitiv, ING What to expect in FX and rates markets We expect that the June meeting may be the last signal for interest rate payers, and the first market clash with the new board in August may be a reason to reprice expectations to the downside, which will result in a steepening of the curve. On the other hand, the later peak in inflation is likely to make the road to the downside bumpy and difficult for the market to find a new direction, especially in a low summer liquidity environment.On the FX side, we expect the new CNB board to be more open to FX interventions and more market activity. However, regardless of the new board's view, we believe that the depreciation pressure on the koruna will continue. So FX interventions are inevitable if the CNB is serious about inflation targeting. Therefore, we continue to expect the koruna below EUR/CZK 25.0 and we cannot rule out that the central bank will try to move the koruna closer to EUR/CZK 24.50 due to the higher and later peak of inflation. However, we do not see much reason why the koruna should naturally appreciate given the peak in the interest rate differential.  Read this article on THINK TagsFX Czech Repulbic Czech National Bank 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
Japan: retail sales rise while consumer sentiment weakens

US retailers see signs of softening demand

ING Economics ING Economics 15.06.2022 22:01
US retail sales were softer in May and there were downward revisions to April. Nonetheless, consumer spending can still grow strongly in the second quarter given a greater focus on services such as leisure and entertainment. However, the cost of living squeeze means households are running down savings and borrowing more to finance it  Autos were the main drag on the softer-than-expected May retail sales Retail sales dip in May as car sales falter US May retail sales are softer than expected, falling 0.3% month-on-month (consensus +0.1%) while April was revised down to 0.7% from 0.9%. Autos were the main drag (-3.5% MoM), which was something we already knew given the unit auto sales numbers released a couple of weeks ago. However, we also saw furniture sales fall 0.9% and electronics dropped 1.3%. These are areas that tend to be correlated with housing activity so with mortgage applications and new home sales down sharply this could be related since new home buyers tend to have to purchase new floorings and curtains and maybe a new TV. Miscellaneous (-1.1%) and non-store (-1%) were also weak with the main strength coming from gasoline (+4%) due to higher prices. Unfortunately, the overall outcome is quite a disappointing and is likely to lead to a scaling back of expectations for 2Q GDP. Level of USD retail sales versus February 2020 Source: Macrobond, ING Consumers are reorienting towards services Despite the disappointment his leaves retail sales running 27.9% above the February 2020 level, massively outperforming spending on services given the limited options available for leisure and recreation during the pandemic. Retail sales currently account for around 48% of total consumer spending, which as the chart below shows is well above typical proportion seen over the past 20 years. We expect this to shrink again over the coming year as consumers re-prioritise their spending towards services. Importantly, this means that we can see some falls in retail sales, yet broader consumer spending can still rise given a greater number of options on which to spend money. Retail sales have accounted for a greater proportion of total consumer spending (%) Source: Macrobond, ING 2H will be more challenging for consumer spending Admittedly, consumer confidence is weak as households worry about the rising cost of living, but more importantly the data shows they continue to spend. Employment is posting decent gains with wages rising in nominal terms while households seem prepared to run down some of their accumulated savings or use credit cards to maintain lifestyles. This should mean we get a respectable contribution to 2Q GDP growth from consumption with the economy expanding at close to 4% annualized rate overall, but it can’t last forever. The second half of the year is going to be more challenging. Rising borrowing costs, falling equity markets (and household wealth) and concerns about the outlook for the housing market all risk dampening spending. At the same time there is evidence that the rate of wage inflation is slowing, which will mean ongoing erosion of spending power. So, for spending to continue growing strongly we will need to see households run down their savings or accumulate debt at an even faster rate, which we increasingly doubt will happen. Read this article on THINK TagsUS Retail sales Consumer spending 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
Eurozone: A step in the right direction for peripheral bonds

Eurozone: A step in the right direction for peripheral bonds

ING Economics ING Economics 15.06.2022 19:37
The ECB is finally taking the measure of financial fragmentation risk in the eurozone. In addition to existing tools, it is working on a new instrument to prevent further widening of sovereign spreads. We'll await more details but the announcement has likely changed the trajectory of spreads. Positive implications for the euro should, however, be modest Source: Shutterstock A much needed sense of urgency The European Central Bank’s Governing Council held an emergency meeting today to discuss market developments, and in particular the widening of sovereign spreads. The gathering took place less than one week after a regular monetary policy meeting where it failed to address the financial fragmentation risk posed by its upcoming tightening cycle. The ECB finally takes the situation seriously The very unusual step to meet outside of their regular meeting cycle is an encouraging sign that the ECB finally takes the situation seriously. Unfortunately, the announcement was light on details. In a nutshell, it confirmed that it will use pandemic emergency purchase programme (PEPP) reinvestments to lean against spread widening. More importantly, it also confirmed that internal committees are working on an additional instrument. Italian spreads have widened as core yields rose Source: Refinitiv, ING Light on details but a step in the right direction In our view, PEPP reinvestments alone are insufficient to cap sovereign spread widening in a global monetary tightening cycle. In that respect, the fact that the ECB acted today ahead of a likely 75bp Fed hike is good news. Details on this new facility are still unknown but the mere fact that one is in the works is encouraging news to peripheral bond holders, and will likely slow the selling flow. Details of the facility will likely transpire in the coming days and weeks as they are being ironed out. In our view, the most important questions to answer are: Conditionality: do countries that will see their sovereign bonds purchase have to fulfil any conditions, eg, adhering to the Stability and Growth Pact. Size: what amount the ECB would be allowed to purchase via this instrument Maturity: what is the maturity of the bonds the ECB would be purchasing Purchases breakdown: will the ECB have leeway to buy bonds only in some jurisdiction We wrote recently that we expected Italy-Germany 10Y spreads to test 250bp barring an ECB intervention. They peaked at 242bp yesterday and we think today's announcement makes it less likely that these levels will be revisited any time soon. Wider sovereign spreads are consistent with other markets Source: Refinitiv, ING FX: Not a game-changer for the euro The rise in sovereign spreads in the past week was one of the reasons why the euro blatantly failed to benefit from the ECB’s hawkish tone and openness to a 50bp September hike. In this sense, the new anti-fragmentation tools by the ECB successfully are probably good news for the euro should they successfully keep spreads checked as the ECB tightens policy. However, the risks to the EUR outlook are not limited to sovereign spreads – EUR is down today despite tightening spreads – as the worsening economic outlook in the eurozone may generate a widening growth differential with the US that may negatively impact equity flows into the region. Incidentally, EUR/USD may continue to see limited upside potential on the back of dollar strength, which is being fuelled by aggressive Fed tightening, global economic woes and turbulent equity markets. Overall, the positive impact on spreads from the announcement of new tools does not change our view that EUR/USD will stay anchored around 1.0500 during the summer months. EUR/CHF would normally be a better mirror of how peripheral spreads impact the FX market. Historically, the correlation between EUR/CHF and the 10Y BTP-Bund spread tends to peak when the spread breaks the 200bp level (chart below), as markets see debt-sustainability risks rise. We have seen some stronger correlation lately but not as marked as in previous instances.   Source: ING, Refinitiv   This may be due to the quite unique situation where high inflation is pushing not only the ECB to hike rates, but also the Swiss National Bank. On this topic, it will be interesting to keep an eye on tomorrow’s (16 June) SNB meeting. None of the 20 economists surveyed by Bloomberg expect any adjustment in the SNB’s -0.75% policy rate. An early rate hike would therefore be a massive surprise and confirm that that the SNB would be conforming literally to its mandate of keeping CPI below 2% year-on-year (last 2.9%), presumably backed by a higher inflation forecast over its horizon. Whether the SNB hikes or not, we now favour EUR/CHF lower over the next year (target 1.00) as the SNB keeps the real CHF stable by engineering nominal CHF appreciation – probably at around 4% per annum to offset Switzerland’s low inflation relative to trading partners. Read this article on THINK TagsSwiss National Bank Italy bonds Euro rates ECB peripheral countries ECB 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
ECB's Marathon. Earnings Season Is Coming! What's Up Equities?

ECB reacts to recent bond spread widening

ING Economics ING Economics 15.06.2022 18:55
An ad hoc meeting less than a week after an official meeting is a strong sign of emergency at the European Central Bank. ECB members, however, were not able to agree on any tangible action but tasked the so-called committees to speed up the work on an anti-fragmentation tool   When the ECB goes into an ad hoc meeting less than a week after its last official rate-setting meeting, we know it must be an emergency. The widening in bond spreads but also the increase in funding costs has made monetary policy in the eurozone significantly more restrictive, even before the very first rate lift-off. The widening in bond spreads has immediately brought back bad memories of the euro crisis in 2010 and 2012. But we think concerns about a rerun are overdone. The eurozone is institutionally better prepared to face such a challenge; high inflation could actually benefit debt-to-GDP ratios and also bring windfall revenues, plus Italy had primary balance surpluses prior to the start of the pandemic. Still, we also know from the past how fast market speculation and gossip can become a self-fulfilling prophecy and that it is often more attractive to pre-empt the speculation than react too late. This is apparently why the ECB scheduled today’s ad hoc meeting. The just-released press statement basically repeated the message from last week that the ECB will use the reinvestment of its Pandemic Emergency Purchase Programme purchases to tackle the unwarranted widening of spreads. More importantly, the ECB announced that it tasked the “relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.” What such an instrument will eventually look like remains unclear. Experience from the past has shown that only asset purchases are really effective in controlling bond spreads. A very strong and convincing announcement could also do the trick. Remember that Mario Draghi’s 'whatever it takes' speech, followed by the Outright Monetary Transactions programme, proved to be the most efficient means to control bond yields without spending a single euro. At the same time, however, the experience of March 2020 shows that actual purchases of bonds were needed to stabilise bond spreads. To make things even more complicated, it will be hard for the ECB to present new asset purchases so soon after it announced the actual ending of existing asset purchase programmes. Consequently, the only way out seems to be a programme that is tailor-made to tackle the unwarranted widening of spreads with certain conditions attached, as was the case with the OMT. What the ECB didn’t address today, however, is the issue of forward guidance. The current problem in financial markets is not only the widening of spreads but also the more general increase in rates. And the latter is also the result of the ECB’s forward guidance from last week, opening the door to a series of rate hikes beyond the intended and expected normalisation of rates over the summer. All in all, this is not the first time that the ECB has been overtaken by market developments. The March 2020 experience should have been more prominent in the ECB’s institutional memory. Looking ahead, we still expect the ECB to hike interest rates by 25bp in July and 50bp in September with another 25bp hike in the winter. Also, the July meeting is now likely to bring more details on an anti-fragmentation programme. Read this article on THINK TagsMonetary policy Inflation Eurozone ECB
Polish industrial activity weakens; price pressures remain high

Poland: Strong inflation points to longer rate hike cycle

ING Economics ING Economics 15.06.2022 13:04
Poland's statistical office confirmed its May flash inflation estimate at 13.9% year-on-year. External factors still play important role in driving inflation, but rising core inflation is increasingly worrying as it points to strong second-round effects. The risk of double-digit rates is rising, although this is not a baseline scenario, yet Food prices continue to soar in Poland   In May, CPI inflation amounted to 13.9% YoY with prices of goods jumping by 14.9% YoY and services 10.8% higher than in May 2021. External factors continue to play a significant role in inflation. The increase in prices of food and non-alcoholic beverages (13.5% YoY), energy (31.4%YoY) and fuel (35.4%YoY) accounted for about two-thirds of the annual increase in total prices. However, a much more worrying development is the further significant increase in core inflation, which points to intensifying second-round effects. We estimate that core inflation, excluding food and energy prices, increased in May to around 8.5% YoY from 7.7% YoY in April. In a favourable economic environment (robust consumer demand), companies have no major problem in passing on higher energy, transport, material, and labour costs to the prices of their products and services. Prices of consumer goods and services, %YoY Source: GUS.   The outlook for the coming months suggests that significant risks to further strong price growth remain. In June, we may witness a double-digit increase in fuel prices on a monthly basis and continued pressure from food prices and core categories. The second half of 2022 is likely to be marked by consumer price increases of 15-20% YoY, with a peak in 4Q22. Autumn may bring renewed increases in energy prices, especially for heating fuel. In turn, at the beginning of 2023, we should expect a marked increase in regulated prices, including electricity and gas. As a result, we do not share the view of the NBP governor Adam Glapiński that we are nearing the end of the interest rate hike cycle and that the conditions for interest rate cuts may emerge towards the end of next year. Of course, the inflation outlook is subject to extremely high uncertainty, but the distribution of risks is strongly tilted towards still high inflation. Moreover, it is worth noting that the ECB is yet to start its rate hike cycle, and market expectations for terminal rates in the euro area and the US have shifted markedly upwards in recent days.    We have already been pointing out for some time that the decade of low interest rates is over, and the MPC may have to raise interest rates close to 10%. The risk has increased in recent weeks that containing inflation may require an increase in NBP rates to double-digit levels, but this is not our baseline scenario. Global inflation expectations and fears of a more decisive tightening of monetary policy by the major central banks are mounting. The policy mix continues to be a domestic factor hampering the fight against inflation. Increasingly restrictive monetary policy is accompanied by increasingly expansionary fiscal policy. Fiscal stimulation amid a significant positive output gap leads to a build-up of internal (rising inflation) and external (rising current account deficit) imbalances.  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
Technical Update - Wheat broken key support turning bearish, but indicates higher prices longer term

Reviewing USD/CAD, AUD/USD, NZD/USD, EUR/PLN And More - Precious Forex Report By ING Economics!

ING Economics ING Economics 15.06.2022 12:44
USD/CAD Loonie strength to extend into 2H22  Current spot: 1.2840 The loonie has been the best performing G10 currency in the past month (+3% vs USD), benefiting from a desirable combination of rising oil prices, limited exposure to main sources of global risks (Russia/Ukraine and China) and a hawkish domestic central bank. In our view, the USD/CAD downtrend has further to go, as the factors that have helped CAD strengthen of late should last into year-end. We target 1.22 in 4Q, with risks skewed to 1.20. However, in the shorter term, some temporary spikes back to 1.29-1.30 can’t be excluded given the unstable risk environment. Given Canada’s strong domestic economic performance and high inflation, we expect 50bp hikes by the BoC in July and September. We estimate the BoC’s terminal rate 50bp above the Fed’s. AUD/USD Still looking unattractive Current spot: 0.6994 We remain of the view that the Australian dollar is the commodity currency with the least attractive outlook for the remainder of the year. The RBA has surprised with a 50bp rate hike in June, but a) AUD has been quite detached from domestic monetary policy developments and b) markets are pricing in too much tightening (285bp in the next 12 months) considering the inflation picture in Australia is less worrying than in the US or the eurozone. External risks remain significant, especially from China’s economic slowdown and potential spill-over into the iron ore market. We see a drop below 0.70 in the near-term, and a return to 0.72 only in 4Q22. NZD/USD A safer option than AUD? Current spot: 0.6313 The Kiwi dollar is also set to be negatively impacted by the clouded outlook for the Chinese economy. However, New Zealand’s exports are not as reliant on China as Australia’s. Incidentally, inflation is higher and appears more entrenched into the NZ economy than in Australia, which suggests the RBNZ will remain more hawkish for longer. We expect the RBNZ to bring rates to 3.5% at the start of 2023, potentially earlier should housing inflation prove sticky. In our view, all this should lead AUD/NZD to slip back to 1.07-1.09 in 2H22, and NZD/USD to climb to the 0.69 mark towards the end of the year, benefiting from some potential USD weakness. Emerging markets EUR/PLN NBP hikes call for further PLN gains Current spot: 4.6252 The National Bank of Poland's policy tightening will be much stronger than either the Fed’s or the ECB’s. This justifies further appreciation of the zloty, especially as market tensions related to the war are clearly easing. Moreover, comments from the EC point to the imminent launch of the Recovery Fund (actual flows may start as soon as in September but will not be large). This will provide some support for the zloty, as EU funds will be exchanged on the open FX market, not off-market via the NBP. We expect €/PLN to reach 4.50 or slightly below by the end of the year. In 2023, the appreciation of the zloty should continue, driven by high NBP rates and inflow of EU money, even below 4.40 in 4Q23. We see the policy rate heading to 8.5% into 2023. EUR/HUF Too many burdens for the forint to shine Current spot: 397.44 The forint took a major blow after the government announced new fiscal measures and the situation was not helped by the NBH raising rates by "only" 75bp. HUF is still our least preferred currency in the CEE region, but on the other hand it still has the greatest potential for appreciation. In the short term, we see EUR/HUF around 395 with a possible quick move to 385 if any of the external factors (war, rule of law debate, etc) show early signs of improvement, which would reduce the risk premium. EUR/CZK FX intervention as new standard Current spot: 24.71 The appointment of new Czech National Bank board members has made the situation a little clearer. However, regardless of the board's view, we think that more CNB activity in the FX market is inevitable in 2H22. The CNB does not comment on FX interventions, but our estimates are that it has been more and more active recently and we continue to believe that the EUR/CZK 25 level is a key pain threshold. With inflation rising, we believe they will gradually move down to 24.70-24.90 levels. However, we do not see much reason for CZK to appreciate without CNB intervention. Therefore, we expect it to remain relatively stable. EUR/RON Business as usual still Current spot: 4.9463 The 4.95 level remains untouchable for the moment, with strong offers in the 4.9480-4.9500 range taming any upward pressure. We expect another 75bp hike from NBR in July to bring the key rate at 4.50%. Inflation continued to surprise to the upside and will most likely exceed 15.0% in June. This should be the peak but the road to lower levels will be very gradual. The liquidity shortage remained ample in May, at over RON12bn. This continues to keep market rates very much decoupled from the NBR’s key rate and even from the credit facility. We maintain our 5.50% estimate for the terminal key rate, but upside risks are building again. EUR/HRK On autopilot until 1 January 2023 Current spot: 7.5225 In the 2022 Convergence Report issued on 1 June, the European Commission and the ECB have concluded that Croatia is ready to adopt the euro on 1 January 2023. The decision was largely expected. The Convergence report shows that Croatia meets the nominal convergence criteria. The final decision on euro adoption -which at this point seems only a formal one – will be taken by the EU Council in the first half of July. The FX rate at which the euro adoption will take place will likely be very close to the 7.5345 central parity rate at which Croatia was included in the ERM-II. EUR/RSD Increased – but still limited – flexibility Current spot: 117.42 After selling EUR1.17bn in March – an historically high amount, the NBS reduced its selling to only EUR155m in April. The trend has reversed in May when the NBS intervened by buying euros. Somewhat surprisingly but fully explainable by the inflation dynamics, the NBS has allowed the dinar to appreciate mildly in May towards 117.4 area. This might signal that the FX rate could be used in-sync with the interest rates to tame inflationary pressures. The 50bp rate hike pace continued in June, bringing the key rate to 2.50%. We maintain our estimate for the key rate to reach 3.50% by the end of 2022. 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
WCU: Recession fears drive steep commodity declines

Eurozone industry improves but weakness prevails

ING Economics ING Economics 15.06.2022 11:55
The small increase in industrial production in April leaves industry vulnerable to a decline in the second quarter as supply chain problems and weakening demand become dominant themes again A factory in the Netherlands   As we await the outcome of the European Central Bank's unscheduled meeting to discuss 'current market conditions', we take in some of the latest data on the economy. The ECB has committed to hikes in July and September to stave off high inflation, but the eurozone economy itself remains weak at best at the moment. Industrial production data for April confirms this as the increase of 0.4% leaves production below the first quarter average. The small increase was driven by most of the larger countries with Germany, Spain, Italy, and the Netherlands all seeing production grow faster than average. France saw a small decline of -0.1%. Across production categories, only capital goods production shrank a little while most of the others improved. Overall, the environment for industry remains lacklustre. It is still dealing with large amounts of backlogs that guarantee production for the months ahead, but supply chain problems continue to cause delays for certain product groups. At the same time, demand is weakening as new orders are falling according to the most recent surveys on eurozone industry. Input price inflation, which is barely abating, adds to the squeeze that manufacturing businesses find themselves in for now. In addition to industry data, trade data has also just been released. The trade in goods balance dropped much more than expected to -31.7 billion on a seasonally adjusted basis. The trade balance has deteriorated quickly thanks to high energy prices due to the war and this adds to euro weakness right now. Read this article on THINK TagsGDP Eurozone 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
Japan: retail sales rise while consumer sentiment weakens

Rates Spark: What will markets make of the Fed? | ING Economics

ING Economics ING Economics 15.06.2022 10:44
The Federal Reserve typically delivers what is discounted, which makes a 75bp hike likely today. But then what? And what of the 50bp that was promised at the last FOMC? In fact a 50bp hike would inject some sense into the equation. Moreover, the rise in market rates has come from higher real rates, which tighten conditions, requiring less from the Fed Federal Reserve Source: Shutterstock Delivery of a 75bp hike should happen as that is what is discounted. But 50bp was what was promised... It is quite unusual for the Fed Chair to stand up after an FOMC meeting and explicitly signal a 50bp hike at the next one, only to then deliver something different. But that is precisely where we are as we face into today’s meeting. A 75bp hike is fully discounted, and because it is fully discounted, that is what is likely to be delivered. This is not the market forcing the hand of the Fed. The build of the market discount has, it seems, been steered by the Fed itself, as well placed soundings were placed with the press, in effect pre-warning the marketplace that a 75bp hike was in the pipes. Arguably the bigger story here is not the 75bp hike, but rather the way in which it has elbowed out the 50bp hike Arguably the bigger story here is not the 75bp hike, but rather the way in which it has elbowed out the 50bp hike that had been boldly pre-announced. If the Fed were to go ahead and deliver on that promise of a 50bp hike it would cause quite a stir, as it would deviate significantly from the market discount for a 75bp hike, and in a way that is contrary to the direction that the Fed needs to go here. If the Fed were to deviate from the market discount, logically it should then be going for a 100bp hike. All things considered, we think the Fed will deliver on the discount for 75bp. It makes forward guidance come across as no more than a hunch It leaves the market is an uncomfortable position though. If the Fed were to assert after this meeting that it intends to do another 75bp in July, the market could not rule out 100bp. Or indeed a 50bp hike. It makes forward guidance come across as no more than a hunch. Nothing particularly wrong with that, but it does reduce the value attached to such guidance. All of this has contributed to the ratchet higher in market rates, and the sense of angst in the risk asset space. A seemingly bold 75bp poses more questions than answers, and any explanation forthcoming will be open to an overlay of doubt. Higher real rates are helping the Fed in tightening financial conditions Source: Refinitiv, ING Bond market angst has mostly centred on significant rises in real rates, not inflation expectations Friday’s US inflation print has clearly been the catalyst for latest bond market angst, but in fact the big driver for higher market rates has not come from inflation expectations. They have actually eased lower in both the US and the eurozone. Rather the big push for higher market rates has come from higher real rates. This is something we were looking for anyway. The inflation print just accelerated it. And we are still not there yet. The US 10yr real rate is still below the 1% seen in 2018 (now at 80bp). And it’s still negative in Germany (-50bp). That’s a first point of warning for higher market rates. It still does not feel like market rates have yet peaked Second, the 5yr area is still cheap to the curve. Yes, the US 5/10yr has re-inverted. But the 2/5yr has not. And even if it does get forced into inversion, the curve still does not signal an imminent structural fall in market rates. Discounting a recession is still premature. Better for now to discount an uppity economy, with too much inflation and a labour market that is still far too tight. Given that, it should be no surprise that the curve is now in the 3.5% area. We had anticipated a move to the 3.25% to 3.5% area. Now that we are here, it still does not feel like market rates have yet peaked. Today's events and market view Further rises in real rates will act to slow things, and further tighten conditions, in line with wider credit spreads. This in fact takes pressure off the Fed to overdo it, and these market moves are a tightening all of their own, just as mortgage rates topping 6% do the same. A 75bp hike adds to this. But we’re not ready yet to call a peak for market rates. And the eurozone isn’t either. In fact the European Central Bank has yet to get its first hike off the ground. The 10yr Bund yield now at 1.75% paves an open space for the ECB’s refi rate to close, and can be gleaned even more clearly from the 2yr German yield now at 1.25%. Market pressure to do more than basic 25bp continues to build. In data markets will get the US retail sales releaseahead of tonight's FOMC meeting, where weaker auto sales will depress the headline figure. But decent strength in other parts should still give a positive figure overall. In the Eurozone the industrial production data will take a back seat given the busy slate of ECB speaker's scheduled for today, including PresidentChristine Lagarde and Austria's Robert Holzmann. Board member Isabel Schnabel stepped up the ECB's commitment to prevent financial fragmentation that would see borrowing rates in some countries rise faster than in others but stopped short of giving the outline of what a new facility would look like, or of saying which spread levels would warrant intervention. The ECB will be holding an emergency meeting of its governing council to discuss market conditions today. The spread between Italian and German 10Y bonds crossed 240bp yesterday, just shy of the 250bp level we identified as the next likely level to be tested absent an ECB intervention. In Eurozone government bond supply Finland will sell up to €1bn in a 20Y bond reopening.   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
FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

China: still no rate cuts even though retail sales continued to shrink in May

ING Economics ING Economics 15.06.2022 10:35
The PBoC kept the 1-year medium-term lending facility (MLF) interest rate on hold even though retail sales and industrial production data remained in contraction. The only engine of economic growth currently is infrastructure investment. Banks may lower the prime rate on 20 June as the possibility of lockdowns remains. We cannot rule out that lockdowns in China will keep happening PBoC stays put on rates - but banks may cut 5Y prime rate The PBoC has kept the 1Y Medium Lending Facility interest rate unchanged at 2.85% since February, even though China experienced a deep economic slowdown in April and May. Unlike most other economies in the region, China is not suffering from high inflation either, though gasoline prices are now going up.  But the central bank's decision does not imply there will be no change in the overall interest rate environment in China. Banks cut the 5Y Loan Prime Rate (LPR) in May by 5bps to 4.45%, and we expect the same on 20 June. Cutting the 5Y prime rate implies interest rates for mortgages and long-term loans will decline. Infrastructure projects may also benefit from lower interest costs.  Data hints at a slow recovery Activity data paints an economic recovery picture in May, but only a slow one. Retail sales were still the hardest-hit part of the economy, shrinking 6.7%YoY in May after contracting 11%YoY in April. Catering is the worst-performing industry among all retail, shrinking 21.1%YoY in May after -22.7%YoY a month ago. Non-essential items also experienced double-digit contraction. For example, clothing (-16.2%YoY), cars (-16.0%YoY) and jewellery (-15.5%YoY). Food and energy rose 12.3%YoY and 8.3%YoY respectively. This whole picture tells us that consumers are interested in necessities only in May. This paints a dim picture for retail sales. Industrial production grew at 0.7%YoY in May compared to -2.9%YoY a month ago. There was strong growth in electronics machinery and computation machinery (+7.3%YoY). Coal mining and processing experienced 8.2%YoY growth due to government efforts to guarantee an adequate supply of electricity for economic recovery.  Fixed asset investment grew 6.2%YoY YTD in May after 6.8%YoY YTD a month ago. The growth mainly came from SOEs and construction. Construction growth did not come from the property sector, which shrank 4.0%YoY YTD. Most of the construction growth must therefore be due to infrastructure projects. China retail sales affected by lockdowns Source: CEIC, ING China industrial production and PMI new orders Source: CEIC, ING Infrastructure investment is the main growth engine of the Chinese economy Source: CEIC, ING Looking forward We expect lockdowns in the coming months and quarters will be more flexible compared to those adopted in Shanghai. Beijing is now under semi-lockdown, and the lockdowns are more localised and should also be shorter compared to Shanghai's lockdown of more than 2 months. Even with a more flexible lockdown framework, people and logistics flows continue to be disrupted, albeit less so than a month ago. This disruption will continue to affect some economic activity, especially for cross-city road logistics, which are important for the delivery of materials for production and output for sales. Limited cross-city travel also affects inbound tourism activity, including retail sales and catering.  The government is likely to respond to this economic weakness by delivering more fiscal stimulus. At the same time, to avoid a rapid rise in fiscal leverage, the government may also continue to deregulate some sectors to help promote tax revenue growth and employment. We maintain our GDP forecast at -1%YoY for 2Q22 as the data just released was very close to our estimates and because we expect small lockdowns will continue to affect the economy in June.  Read this article on THINK TagsRetail sales PBoC Investments Infrastructure China 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
Chart of the Week : Housing IS the business cycle

Bank of Korea likely to turn more hawkish as inflation rises faster than expected | ING Economics

ING Economics ING Economics 15.06.2022 10:17
We are revising up Korea’s 2022 CPI forecast to 5.2% year-on-year as underlying price pressures continue to rise, resulting in 100bps hikes to be delivered by the Bank of Korea in the second half of this year Korea's housing market is cooling as mortgage rates rise Revising up the 2022 CPI from 4.9% to 5.2%, with the monthly figure possibly hitting 6% soon In the short term, we expect June CPI to show growth of 6% year-on-year as gasoline prices have hit historic highs recently and preliminary fresh food prices are also on the rise due to severe drought during the early summer harvesting season. Utility prices such as gas and electricity are also scheduled to rise in the coming months. The government’s price stabilisation efforts, such as fuel tax cuts, tariff cuts, and subsidy programmes, have been overshadowed by higher energy and imported food prices. We believe that the government will continue to make efforts to stabilise prices, but cost-push inflation is not likely to dissipate rapidly anytime soon. Globally, ING now sees oil prices peaking in 1Q23 while unfavourable weather effects will push up global food prices in 2H22. Meanwhile, on the domestic side, pent-up demand has been heating up as the government has lifted almost all social restrictions with the summer holiday season approaching. The government’s stimulus package for shopping and tourism will likely boost service prices to some extent. The weak Korean won (KRW) is also adding upside pressures to overall imported product prices. The gasoline price is hitting historical highs Source: Opinet Ongoing trucker strike is likely to push up logistics costs The trucker’s union has been on strike since 7 June. Truckers have been protesting against the sharp rise in fuel costs and the sunsetting of the government’s safe fare programme – a minimum fare guarantee for truckers – this year. We are starting to see that these strikes are disrupting production and hitting port activity. We believe that if both parties reach an agreement within a few days, then production and shipments can still catch up with the losses already sustained. Even so, logistics costs are expected to increase, which will eventually be passed on to consumer prices with a time lag. The housing market is cooling as mortgage rates rise With rapidly rising market interest rates, bank lending to households grew at a slower pace than last year. Mortgage lending in May still rose but the monthly increase is getting smaller while other loans have been on the decline for five consecutive months. Thus, from January to May, mortgage lending increased by 8.8 trillion KRW while other loans declined by -9.0 trillion KRW. Meanwhile, weekly housing market data shows that the housing and rental market index has stabilised since 4Q21, after the Bank of Korea's (BoK’s) first rate hike in August. It is still above 10% year-on-year but we believe the slowdown in the real estate market will continue in 2H22. The BoK will look at this when deciding on future rate hikes. Overall, we believe CPI will stay above 6% in 3Q22 before a slowdown to the 5% level in 4Q22, and we revise up annual CPI for 2022 from the current 4.8% to 5.2%. Housing and rental prices slowing down Source: Kookmin Bank BoK's MPC minutes support our call for 100bps hikes in 2H22 The Bank of Korea released the minutes of the Monetary Policy Committee meeting today. They illustrate the wide spectrum of the committee’s policy stance, from doves to hawks, but lean towards hawkish overall. Based on today’s release, the majority of members agree with further rate hikes but differ on the pace. One dove member said the pace of future rate hikes needs to be “carefully adjusted” to minimise growth losses. Two members – we think the more balanced ones – expressed that future rate hikes should reach a “neutral rate level” quickly, without significantly impairing economic recovery. Meanwhile, a hawk member said that it is necessary for the BoK to “respond in a preemptive manner” amid the expected steep rate hikes by major central banks. Another hawk member even argued that it is necessary to operate in the direction of “rapidly reducing the easing monetary policy”, suggesting, in our view, a 50bp hike.   Based on today’s release of the MPC minutes, we expect the BoK to raise rates by 100bps by the end of this year. While most members appear to agree with future rate hikes, as the policy rate approaches “neutral”, there will be heated debates among members. But with stickier and higher inflation pressures, the BoK will eventually cross the border. While the headline CPI will be key to watch, going forward the BoK will look at a more granular level of inflation, such as core inflation, private service prices, and wage-driven inflation, to set the terminal rate for this hiking cycle and adjust the hiking pace. Read this article on THINK TagsMonetary Policy CPI Bank of Korea 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
USD/JPY: will there be a correction and when?

(JPY): What's Ahead Of Japanese Yen? | Japan: core machinery orders rose unexpectedly in April | ING Economics

ING Economics ING Economics 15.06.2022 10:13
A surge in machinery orders is a positive sign for future business spending, despite mounting uncertainties Core machinery orders grew to 10.8% month-on-month in April 10.8% Core machinery orders (%MoM, seasonally-adjusted) Better than expected Core machinery orders gained for two consecutive months The seasonally-adjusted core machinery orders growth accelerated to 10.8% month-on-month in April, from 7.1% in March. The April outcome was surprisingly higher than the market consensus of a -1.3% decline, suggesting that businesses are continuing to increase investment in the face of accelerating inflation and the recent sharp depreciation in the Japanese yen (JPY). Smoothing the volatility in monthly data, the sequential three-month over three-month trend bottomed out from -3.6% in March to -2.3% in April, and we expect the upward trend will continue for a while. In the manufacturing sector, electrical machinery, information technology and auto sectors rose firmly suggesting that global IT demand (including semiconductors) remained solid while the prolonged global supply chain disruption in the auto sector appeared to improve. In the service sector, the gain was mainly driven by transportation, finance, and whole/retail sales as reopening is expected to boost activities in those sectors. Meanwhile, overseas orders jumped 52.1% (vs 7.8% in domestic demand), recording the fastest growth since February 2021. A weak JPY may have given Japanese companies a competitive edge, but it is too early to draw conclusions. The tertiary industry index in April rose 0.7% month-on-month seasonally-adjusted, slightly missing the market consensus of 0.8%, but the March outcome was revised up from 1.3% to 1.7%. Summing up today’s data releases, the Japanese economy is recovering from the contraction in the first quarter, and companies are expected to increase investment in the near future.   Core machinery orders bottoming out Source: CEIC Bank of Japan meeting preview The turmoil in the financial market will continue to put a strain on the monetary policy of the Bank of Japan (BoJ), but the real economy does appear to be recovering from the recent contraction. The BoJ recently purchased Japanese government bonds (JGBs) to maintain the yield cap, while some market participants expect policy adjustments in the near future. Markets are looking for signs of currency market intervention after the BoJ and the government issued a joint statement last week expressing concerns about the sharp JPY movement. There have been occasions in the past when Japan has intervened to support the yen, typically during large capital outflows or financial crises. It is true that the BoJ is in a corner, but we are not sure the recent market environment is considered an extraordinary time. We expect the BoJ to keep its current policy stance unchanged at this week’s meeting, but if the sharp JPY devaluation continues, it could increase the likelihood of raising the ceiling on 10Y JGB in the future. Read this article on THINK TagsInvestment Core machine orders 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
Warning signals are flashing out of South Korea | Saxo Bank

Korea: May unemployment rate rises, but labour market conditions appear healthy.

ING Economics ING Economics 15.06.2022 10:04
Labour market conditions held up relatively well in May despite rising inflation and the rising interest rate environment. 2.8% Unemployment rate Seasonally adjusted Higher than expected Unemployment rate rose mainly due to rise in labour participation The seasonally adjusted unemployment rate ticked up to 2.8% in May (vs. 2.7% market consensus and April), while the labour participation rate rose to 64.2% (vs. 63.8% in April), suggesting that employment recovery momentum has continued. Reopening appeared to have a positive impact on the service sector as employment in hospitality and leisure services rose. Temporary employment related to the June local elections also added jobs for "other private services". Labour market continued to recover Source: CEIC Looking ahead, some temporary factors will push up unemployment We expect employment growth to slow after June. The on-going truckers’ strikes are expected to negatively impact transportation and storage and, if extended beyond two weeks, could have negative spillover effects in construction and other sectors. Also, some public employment programs are due to end in the coming months. However, while unemployment will rise, overall labour market conditions will continue to recover as key drivers of employment shift from the public to the private sector and labour participation expands. Meanwhile, the Ministry of Employment and Labor will expedite the entry of foreign workers and the issuance of work visas. In the aftermath of the COVID-19 pandemic, entry into Korea for a significant number of foreign workers has been restricted for the past two years. We think the issuance of work visas will help solve some of the labour shortages in agriculture and SMEs. Employment gain accelerating in service sector Source: KOSTAT Implication for the Bank of Korea The Bank of Korea will closely monitor labour market conditions given the tightness in the labour market and the potential for more rapid wage increases putting upward pressure on inflation. Concern over wage-spiral inflation was addressed multiple times by several committee members in the minutes of the May MPC meeting released yesterday. Today’s labour market data should give the Bank of Korea some reassurance as there are still no significant signs that the current macro environment has yet had a negative impact on the labour market. Read this article on THINK TagsKorea unemployment rate BoK rate policy Bank of Korea 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
Oil stocks charge again, are US equities on the brink of a huge disappointment and BHP attempts to rise out of bear market

FX Daily: The moment of truth | ING Economics

ING Economics ING Economics 15.06.2022 09:11
The Fed may well match market expectations and hike by 75bp today. We cannot exclude some "sell-the-fact" reaction in the dollar, but any correction should be very short-lived, and the overall outcome should be USD-positive beyond the very short term. Elsewhere, markets are awaiting headlines from the ECB's ad-hoc meeting about fragmentation. USD: 75bp by the Fed today We approach FOMC day with a deeply changed picture in global markets and rate expectations compared to a week ago. Investors have now fully aligned with the view that the Fed will hike by 75bp today, following the unexpected acceleration in CPI and inflation expectations in May and media reports suggesting the option was being discussed by policymakers. While a 75bp move is not certain, we doubt such potential “leaks” to the media are a coincidence, and they do appear to us as a (successful) attempt to adjust expectations during the blackout period and prepare markets for the larger increase. Accordingly, our base case scenario is a 75bp hike today. Markets are fully pricing in such a scenario, and the updated set of projections – in particular the dot plots – will be key in driving the market reaction. From an FX perspective, we expect the outcome of today’s meeting to be overall positive for the dollar's short-term outlook. This is not to say that the dollar’s immediate reaction will necessarily be positive today, as there are indeed multiple scenarios where the Fed may fall short of expectations (the market-implied terminal rate is above 4% after all); by all means, some “sell-the-fact” dollar correction today after a big rally is possible. However, we think any dollar correction will be quite short-lived, as we deem it unlikely that investors will turn materially less bullish on USD in an environment of accelerating Fed tightening, sharply rising Treasury yields (and inverted yield curve), the prospect of a global slowdown and equities in bear-market territory. We think DXY may have found a floor around 104.00, and any drop beyond that point may see increasing buying pressure. The data calendar includes the Empire Manufacturing index and May’s retail sales. The former should rebound and the latter should slow down, but the impact will likely be negligible given the proximity to the Fed risk event. EUR: ECB stepping in on fragmentation? The European Central Bank's Governing Council has announced it will hold an ad-hoc meeting today “to discuss current market conditions”. Since most of the price action in the eurozone’s bond market since last Thursday’s ECB meeting has been about fragmentation, markets are likely making the association that the meeting will aim to actively discuss an anti-spread tool which was expected to be announced at the July meeting. The move to call an ad-hoc meeting appears to be in contrast with what we heard from Isabel Schnabel yesterday, who appeared to see no urgency to pre-announce any measure to reduce bond-market fragmentation. The 10-year BTP-Bund spread has returned to the centre of market focus, having widened around 40bp in a week and now approaching the levels last seen at the peak of the pandemic-induced market turmoil in 2020. Futures point to a 20bp rally in Italian yields after this morning’s ECB headline. Markets will now await some ECB headlines sometime today, and all this should make the long list of ECB speakers even more interesting to watch. The main speech will come from Christine Lagarde this afternoon, but we’ll also hear from three hawks this morning – Robert Holtzmann, Joachim Nagel and Georg Muller – and another one – Klaas Knot - later in the day. On the more dovish front, we’ll hear from Pablo Hernández De Cos, Fabio Panetta and Mario Centeno. So, we could indeed see some action in EUR/USD – which has risen to 1.0450 after the ad-hoc meeting news – before the Fed meeting, which will later drive nearly all market moves. As highlighted above, there are some risks of a small correction in the dollar today, and if this combines ECB steps with some reassurance for Italian bonds, we might see a mini-rally in EUR/USD today to the 1.0520-1.0550 mark today. However, as we see any dollar correction as short-lived, our base case remains a return to sub-1.0500 levels in the coming days. GBP: Negatives piling up The pound briefly traded below 1.2000 at the end of yesterday’s session, having fallen to the March 2020 lows. It does appear to us that a lot of negatives regarding a slowdown in the UK economy are in the price, but there is still some downside risk related to a potential re-pricing in the Bank of England rate expectations, which continue to be overly hawkish (more than seven rate hikes expected by year-end), in our view.   As discussed here, we expect a 25bp rate hike by the BoE tomorrow, with a three-way split decision (some members voting for no change) which may well force markets to scale down their hawkish bets. For today, EUR/GBP should be a function of ECB-related news, and we could see some support above 0.8700. Cable will largely be a function of the FOMC meeting and some support around 1.2000 is possible today, even though risks remain skewed to the 1.17-1.18 area in the short-term, with more Brexit and Scottish referendum news potentially adding fuel to the fire. AUD: Jobs numbers no game changer Australian jobs numbers for the month of May will be released overnight, and markets are expecting quite a solid headline reading (around +25k) as well as another contraction in the unemployment rate (from 3.9% to 3.8%). While jobs markets tended to have a key role in driving rate expectations, we believe that today’s actions by the Fed will have a bigger impact on the Reserve Bank of Australia rate expectations and on the Aussie dollar. Anyway, AUD and RBA dynamics have not moved too much in tandem and we continue to see AUD/USD as mostly a USD and external drivers’ story. With more USD support ahead, we think the pair will struggle to climb back above 0.7000 before the end of the summer. 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
Warning signals are flashing out of South Korea | Saxo Bank

Asia Morning Bites - 15/06/22 | ING Economics

ING Economics ING Economics 15.06.2022 09:09
Jitters to dominate in Asia ahead of tonight's FOMC Source: shutterstock Macro outlook: Global: The equity rout has stopped, or at least paused, or maybe just slowed. The S&P500 fell only a further 0.38% yesterday, while the NASDAQ managed to achieve a minuscule gain. But we have the Fed rates meeting in the early hours of tomorrow morning (02:00 SGT) and there may be some jitters ahead of that meeting during trading today. Put it this way, what is the message that the Fed can deliver that says both “We’re on top of inflation” and “We’re not going to tip the economy into recession”? I’m not sure I know how they could do that, as the answers are almost mutually incompatible. It’s worth watching the volume trading figures though, which have crept up above their recent average. We may be getting closer to a deciding move, though it doesn’t feel like we are there just yet. US Treasury yields at the front end of the curve continue to power higher. 2Y US Treasury yields increased 7.3bp yesterday and now stand at 3.427%. 10Y Treasury yields pushed up another 11.3bp to 3.473%. The yield curve is very flat, but markets may be hedging their bets on recession for now. G-10 currencies had a choppy day. EURUSD is more or less unchanged from a day ago at 1.0431, but did have a couple of forays towards the 1.05 level, failing each time. Cable just looks outright weak. At 1.2007, politics surrounding the UK government’s plans to overhaul the Brexit bill aren’t going down well with markets. And the AUD is also struggling still, at 0.6881, meeting our end of 2Q22 forecast a couple of weeks early. No one is more surprised than us! The slightly better risk sentiment has allowed fundamentals to dominate the JPY in the last 24 hours, and it has resumed its weakening trend, pushing above USDJPY 135.  Aside from the JPY, Asian FX hasn’t done too much more after Monday’s slide, though the THB has lost some more ground, coming within spitting distance of USDTHB 35. As the Thai central bank sits on its hands, this and higher exchange rates are probably only a matter of time.    As well as tonight’s FOMC meeting, today’s G-7 calendar includes European industrial production and trade figures for April. In the US, the May retail sales release is the main pre-FOMC interest. Consumer sentiment has slumped, but as James Knightley points out, this isn’t a great predictor of consumer spending these days.   In terms of the FOMC meeting itself, the accompanying support materials will be of some interest – dot plots, inflation and GDP projections. But surely we know enough not to place any weight on central bank forward guidance now? China: Retail sales, industrial production, and fixed asset investment, as well as surveyed jobless rate data, will all be released this morning. We expect a YoY drop in retail sales in May as Shanghai was under lockdown and Beijing was in semi-lockdown. We also expect a slight YoY drop in industrial production as logistics around Shanghai were disrupted and should affect materials delivery for production. Fixed asset investment should continue to record single-digit growth, mainly due to infrastructure projects offsetting the negative growth in property investment. Overall, we still expect a -1%YoY GDP contraction in 2Q22 as more restrictions on people and transport flows in Beijing were imposed. It is very difficult to achieve positive growth this quarter. Following all this weak data, we should expect the government to respond with more fiscal stimulus and also some monetary easing, which could put depreciation pressure back on the CNY against the USD. South Korea: The seasonally adjusted unemployment rate ticked up to 2.8% in May (vs. 2.7% in April), but the labour participation rate rose to 64.2% (vs. 63.8% in April), suggesting that employment recovery momentum has continued. Reopening appears to have had a positive impact on the service sector as hospitality and leisure services gained employment while manufacturing lost some jobs. We think the unemployment rate will continue to rise gradually, but not as a particularly negative signal for labour market conditions, but mainly because of an expanding labour market. Japan: In April, core machinery orders increased surprisingly by 10.8% MoM (vs -1.3% market consensus, and 7.1% in March). This continues the upward trend for a second month. Overseas orders rebounded more than domestic orders. Although this data tends to be volatile, the sequential series is on the rise, which is a positive signal for investment in 2H22. Indonesia: May trade data is scheduled for release today.  Recent trends in trade data are likely to extend for another month as surging commodity prices pad Indonesia’s exports.  Imports are also likely to post substantial double-digit gains as Indonesia imports pricier fuel and foodstuffs.  The overall trade balance will likely stay in a healthy surplus but the recent palm oil export ban may lead to a narrowing of the surplus.  Record high trade surpluses have helped support IDR and the currency should face additional depreciation pressure if this key support fades. Philippines: April overseas remittance data will be reported today and the market consensus expects a 3.6% gain.  Remittance flows have proved to be extremely resilient, even at the height of the Covid-19 pandemic in 2020.  Remittances provide important support for the PHP on top of a boost to household consumption.  Despite this consistent source of foreign currency, the pace of remittance growth may only partially offset the stark widening of the trade deficit, with the Philippines now running a consistent current account deficit.  Today’s remittance report may provide some relief to the peso but don’t expect it to reverse the current depreciation trend.    What to look out for: FOMC meeting Japan core machine orders (15 June) Australia consumer confidence (15 June) China 1-year medium term lending, activity data (15 June) Indonesia trade balance (15 June) US retail sales (15 June) FOMC meeting (16 June) Taiwan CBC meeting (16 June) New Zealand GDP (16 June) Japan trade balance (16 June) Australia employment change (16 June) BoE meeting (16 June) US initial jobless claims, building permits and housing starts (16 June) Singapore NODX (17 June) Malaysia trade (17 June) BoJ meeting (17 June) US industrial production (17 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
EUR/JPY - Is Euro Strong As US Dollar (USD)? FX: EUR/GBP – Is Is A Correction? Will EUR/CHF Reach 1.00!? | ING Economics

EUR/JPY - Is Euro Strong As US Dollar (USD)? FX: EUR/GBP – Is Is A Correction? Will EUR/CHF Reach 1.00!? | ING Economics

ING Economics ING Economics 14.06.2022 11:18
EUR/JPY Don’t chase EUR/JPY strength Current spot: 140.83 High energy prices and a hawkish ECB have seen the EUR/JPY rally extend. The ECB has now pre-committed to a 25bp hike in July and at least another 25bp hike in September. The BoJ remains resolutely dovish. Japanese officials would like to slow JPY depreciation through means of intervention – though EUR/JPY may have to be closer to 150 for intervention to be seen. The reason we do not like forecasting a much higher EUR/JPY is the risk environment. Higher real rates around the world will challenge equities and could generate some JPY outperformance. How ECB copes with fragmentation risks (eg, BTP-Bund spread moving to 250bp) remains to be seen – and may weigh on EUR. EUR/GBP We are not in the ‘end of days’ camp for sterling Current spot: 0.8567 There has been a lot written recently about sterling being a terrible currency. Yes, it has weakened about 4% this year on a trade-weighted basis, but that is partly down to a very strong dollar. We are not as bearish as some and do not expect the political noise of the current Tory government to do much damage – largely since the Tories have a large majority. And the euro does not look particularly attractive either at the minute – both currencies under pressure based on their growth credentials and stagflationary challenges. But the re-assessment of the BoE cycle looks a clear risk. EUR/GBP resistance at 0.8600 will come under increasing pressure. EUR/CHF We are changing our forecast Current spot: 1.0380 For many years the Swiss National Bank has fought CHF strength and, in the process, acquired about CHF800bn in FX reserves. But this was in a deflationary environment. The SNB has been sounding more hawkish recently and spelled out that it needs to keep the real exchange rate stable to fight inflation. Given low inflation in Switzerland, a stable real CHF requires nominal CHF appreciation of roughly 4% per annum. With massive FX reserves, the SNB certainly has the firepower to keep a lid on EUR/CHF (near 1.05) and engineer it towards 1.00. Of course, the risk is of us being whip-sawed with views here, but stagflation in Europe doesn’t bode well for the euro either. EUR/NOK More room to benefit from oil’s rally Current spot: 10.29 The short-term outlook for the krone remains tied to global market volatility, as NOK is the least liquid currency in G10 and suffers from market turmoil more than its peers, especially if that is linked with a global tightening of financial conditions. At the same time, the EU-Russia standoff on oil trade and higher crude prices means more long-term benefits for the Norwegian economy. We think the commodity factor will prevail beyond the short-term and drive NOK higher in the remainder of the year. Norges Bank recently hinted at an acceleration in monetary tightening; we expect it to bring the policy rate to the 2.00% mark by the end of the year, which should also help to lift NOK. EUR/SEK We expect a 50bp hike in June by the Riksbank Current spot: 10.60 We have updated our Riksbank call and now expect a 50bp hike in June, followed by two 25bp hikes in September and November. This is largely in line with market expectations, which however appear too hawkish on the terminal rate side. We expect a faster QT to start doing the heavy lifting later in the tightening cycle, and the policy rate to peak at 1.75-2.0%, but any dovish re-pricing may only be a concern for SEK in early ’23. The short-term rate differential should reconnect with FX in 2H22, in our view, driving EUR/SEK depreciation. In the coming weeks, risk sentiment and incoming European data will remain the key drivers of SEK. Surely, short-term downside risks for SEK persist. EUR/DKK DN and ECB likely to move in tandem Current spot: 7.4386 Danmarks Nationalbank stuck with zero FX interventions in May, as EUR/DKK has appeared quite solidly anchored to the 7.4400 mark recently. The focus is shifting to the timing of rate hikes in Denmark. We see no reasons for now to expect a diverging tightening path between the DN and the ECB. After all, the October 2021 cut in the Danish repo rate has created a safety cushion between DKK and EUR rates that should keep limiting EUR/DKK downside. Should the pair face fresh pressure, we still think FX interventions will remain the preferred tool rather than opting for a less dovish policy compared to the ECB. We target 7.45 in 4Q22. 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
Markets are betting the Fed has it wrong again

Will Fed Choose 100bp Rate Hike!? How Will Interest Rate Decision And ZEW Affect USD/JPY And EUR/USD? What About GBP/USD?

ING Economics ING Economics 14.06.2022 10:47
Markets are fully pricing in a 75bp rate hike by the Fed tomorrow, and we acknowledge this is looking to be an increasingly likely scenario. At this stage, we cannot exclude the implied probability of a 100bp move to start rising, too. All this should limit the size of any dollar correction today if market sentiment shows some recovery   We have published our monthly FX update for June. More details in "FX Talking: Summer of discontent keeps dollar in demand". USD: 75bp in the bank, now 100bp? Inflation fears continued to rock equities yesterday, sending the S&P 500 into bear market territory and generating another flight to safety in global markets. This morning, European and US stock futures are trading in the green, signalling a potential pause in the sell-off after three terrible days for risk assets. In FX, the dollar has emerged as the clear winner in the current environment, trading somewhere between 2.1% and 4.7% higher against G10 currencies compared to last Tuesday. In periods of rapidly deteriorating market sentiment, G10 FX performance tends to be increasingly correlated with the liquidity conditions of each currency. It is something that became evident during the spring 2020 downturn, and more recently during the April/May equity correction. The least liquid currency in the G10 is Norway's krone, which tends to be the worst performer during market turmoil. Canada's dollar, meanwhile, has better liquidity conditions than other pro-cyclical currencies and has indeed performed less poorly than other commodity currencies in the past week. Needless to say, the dollar is by far the most liquid currency in the world, and in a fully-fledged flight to safety, it emerges as a more attractive defensive trade than other safe-havens like the Japanese yen and Swiss franc. And even more so at the current juncture, when the equity sell-off is being accompanied by a bond sell-off, which would generally have a negative impact on low-yielding currencies. The yen is also facing the FX intervention dilemma and a central bank that is struggling to keep domestic rates in line with its yield curve control target. We discuss more in the JPY section below. At the same time, the dollar strength continues to be fuelled by a re-pricing higher in Fed rate expectations. Markets have rushed to rapidly price in a 75bp rate hike by the Fed tomorrow, now attaching a nearly 100% implied probability to this scenario. We acknowledge 75bp is looking increasingly likely and at this stage, it is not to be excluded that investors will continue to push their expectations even higher, and start considering a 100bp hike. The market-implied terminal rate for mid-2023 is now some 10-15bp above 4.0%, having risen around 70bp since last Thursday (before the US CPI report). All this surely paves the way for a dollar correction tomorrow if the Fed sticks to its plan to hike by 50bp, but also shows that markets are increasingly comfortable with very hawkish Fed pricing, and evidence of sticky inflation over the coming months may well keep such hawkish pricing – and by extension, the dollar – well supported even if equities start to recover. There’s only the NFIB small business sentiment and PPI figures to keep an eye on today: expect little market impact. We think the dollar may well face a mini-correction today if indeed the risk slump pauses, but the underlying narrative of hawkish re-pricing in Fed rate expectations should limit the magnitude of such a correction. DXY should hold above 104.00 into the FOMC meeting tomorrow. EUR: All eyes on the ZEW The euro is the second most liquid currency in the G10, which makes it somewhat less vulnerable than other pro-growth currencies to the current slump in global risk assets. That said, we think that markets will remain reluctant to re-enter bullish EUR/USD positions en masse despite the seemingly attractive levels given: a) the support to the dollar offered by the sharply rising hawkish bets on Fed tightening and b) the significant widening in the eurozone’s peripheral spreads. Yesterday, the 10-year BTP-Bund spread touched 240bp (nearly 40bp wider than a week ago) as Italian yields broke above 4.0% for the first time since 2014. Today, the German ZEW will be watched closely as the consensus expects some improvement in both the expectations and current situation surveys. This is unlikely to materially mitigate the market’s concerns about the upcoming slowdown in the eurozone economy, but may help EUR/USD climb back to 1.0500 if risk sentiment stabilises. On the European Central Bank side, we’ll hear from Isabel Schnabel, one of the central bank’s most hawkish members. Still, it will mostly be down to global sentiment to drive EUR/USD moves today. Elsewhere in Europe, Swedish inflation data surprised on the upside, with CPIF jumping 7.2% year-on-year and CPIF excluding energy up 5.4% YoY. We believe this materially increases the risk of a 50bp rate hike by the Riksbank at the 30 June meeting. GBP: Not much impact from Brexit headlines The Brexit factor is about to re-emerge for sterling, as PM Boris Johnson published a plan yesterday to give ministers the power to unilaterally suspend parts of the Northern Ireland Protocol between the UK and the EU. Such a move would most likely trigger an automatic retaliation by the EU in the form of tariffs and other export duties. This is surely a thread to keep an eye on as it might exacerbate the ongoing bad momentum for sterling. However, global market conditions are likely to overshadow the Brexit factor for now, and cable may correct slightly higher (to the 1.2250-1.2300 area) today if risk sentiment takes a breather. On the data side, UK jobs data showed a slight increase in the unemployment rate and a flattening of wage growth. We can't read too much into the data at this stage, as the UK labour market undoubtedly remains tight. However, such tightness is not enough to justify the more than seven BoE rate hikes priced in by the market. We see predominantly downside risks for GBP as the BoE announces policy on Thursday. JPY: BoJ under attack The Bank of Japan continued to intervene in the bond market as speculative bets tested the Bank’s tolerance. This time, the BoJ stepped into super-long maturities as well, which are a more vulnerable part of the yield curve as they are not “protected” by an official YCC target like the 10-year tenor. With the Fed now looking more likely to hike by 75bp than 50bp at tomorrow’s meeting, it is surely possible to see additional pressure on JGBs and indirectly on the BoJ to start unwinding its huge monetary stimulus.   A hawkish shift would also help stabilise the yen, but the central bank has so far reiterated its ultra-dovish commitment. This means that the yen remains vulnerable, especially if some stabilisation in risk sentiment lifts safe-haven support to the currency and leaves it exposed to the evidence of sharply rising yields and hawkish Fed tightening. We continue to flag the elevated risk of USD/JPY breaking significantly above 135.00 in the coming days unless Japanese authorities step in with FX intervention. 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
Rates Spark: The hawks are circling | ING Economics

Rates Spark: Higher still

ING Economics ING Economics 14.06.2022 10:43
The upward pressure on rates is relentless as central banks are seen to act more aggressively. The trade-off for risk assets and spreads is clear, but for now tackling inflation takes precedence. Whether all priced tightening will be realized is a question for later and curves can flatten further   Last week’s US inflation print showed that there is no let up for central banks. For tomorrow’s Fed meeting markets are now contemplating a high probability of a 75bp move. While it is the front end that has led the way higher, the 10Y US Treasury yield still rose by almost 20bp at the start of this week – pushing it towards 3.40% and thus its highest level since 2011.   The European Central Bank had turned more hawkish last week, and market pricing suggests it is viewing the ECB as finally moving in the right direction to get on top of the inflation problem. The pricing of rate hikes is turning more aggressive with a cumulative rate increase of more than 165bp by the end of the year. Markets see a high probability for a 50bp hike not only in September, but also in October. EUR long end rates get dragged higher as well with the 10Y Bund yield surpassing 1.6% yesterday. The trade off of central bank tightening EUR money markets curves establish a more noticeable hump Obviously tighter monetary policies does not come without cost. Concerns over the longer term economic outlook increase and risk assets come under rising pressure. As rates shift higher this is reflected in the significant flattening of yield curves, though not yet in outright flight to safety. The 2Y-10Y US Treasury yield curve has inverted which many see a signalling a recession further down the road. In EUR we have seen the money markets curves establish a more noticeable 'hump' around late 2023 to early 2024 in its ECB rate expectations. This expected topping out of the tightening cycle, in EUR now at just below 2.50%, then followed by the emergence of rate cut speculation is something we had thus far only seen in the pricing for the Fed and Bank of England.  Tackling inflation takes precedence over sovereign spreads A trade-off that is of particular concern in the eurozone is that of widening peripheral bond spreads. The key spread between 10Y Italian and German government bonds has widened from 220bp towards 240bp in tandem with the overall rise in interest rates over the past three sessions. This mode may well continue as long as the ECB refrains from providing more detail on how it intends to tackle the risks of fragmentation in eurozone bond markets. In the past the ECB has shown some discomfort when the spread rose past 250bp. But it is also a matter of how we get to that level – sharp increases are certainly more worrisome than a steady widening. The past three sessions saw a widening of 40bp in total. Still, the ECB’s Simkus yesterday basically confirmed the central bank's stance that tackling inflation takes precedence over sovereign spreads. According to a sources story published later yesterday it is a braoder view of the Council that there is no benefit of preemptively revealing details of their anti-fragementation plans. Will the priced tightening come to pass? Of course more signs of a deteriorating growth outlook would mean not only that the window to deliver on the priced tightening cycle in full will close, but also that central banks will then have to tread more carefully. Markets' aggressive pricing and the widening spreads is doing part of the central banks’ job Markets' aggressive pricing and the widening spreads is doing part of the central banks’ job as financial conditions are already tightening considerably. This also means that central banks may eventually not have to do as much as is priced. Our own economists for instance still see the ECB hiking by only 100bp through early 2023. But near term, central banks may show little desire to turn more dovish just yet. Quite the opposite, as long as inflation remains their primary concern. While the front end of yield curves remain susceptible to ever more aggressive pricing of central bank tightening, it puts the back part of yield curves in the position to express fears over the economic outlook for now. Today's events and market view As markets brace for rates increases from the Fed and BoE later this week, the trend towards higher yields may still extend. Supply may add to the pressure near term. Germany will sell €5.5bn in its 2Y benchmark, but especially the Netherlands’ taps of the 20Y Green bond today for up to €5bn and also the mandated new EFSF 10Y bond could weigh on the market.    Italy will auction 3Y, 7Y and 30Y bonds today for a total of up to €6bn. To the extent that this supply may have also weighed on the market we could see some recovery in spreads after the auction, but the overall issue remains the ECB’s reluctance to address the fragmentation with more than just words. The market should continue to test the ECB’s pain threshold on the matter and will scrutinize ECB officials’ comments for signs of changing strategy. In data Germany will see the release of the ZEW which is seen improving somewhat. In the US the main focus should be on the NFIB small business optimism survey as well as the US PPI release.   Read this article on THINK TagsRates Daily
FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

Asia Morning Bites - 14/06/22 | ING Economics

ING Economics ING Economics 14.06.2022 10:41
Markets embrace the recession narrative Source: shutterstock Macro outlook Global: Another day to digest the recent US inflation data, and another day closer to the June FOMC meeting, and global markets, we well as those here in Asia have been demonstrating that they don’t like where the global economy sits right now. The asset class in the driving seat is most likely US Treasuries. After their 25bp rise in yield on Friday, 2Y UST yields rose another 29bp  yesterday. US 10Y yields rose a further 20.4bp, taking them to their highest level this year at 3.36%. Though with the 2Y yield now at 3.35%, this is as close to inversion as is needed to get the signal that markets now expect recession. It was only a matter of time. It’s also increasingly hard to see how the Fed will be able to avoid hiking at least 75bp at this week’s meeting (which markets are almost fully pricing in now), without causing another sell-off. And it makes the forthcoming dot plot and forecast projections even more of a minefield than usual. Not surprisingly, stocks are taking a battering as optimistic forward earnings estimates get re-worked against a recession background, and the risk-free discount rate gets ramped up.  A 3.88% fall in the S&P500 takes it into a bear market for the first time this year (-21.33% ytd) after a couple of close runs. The NASDAQ fell even harder, dropping 4.68% on the day. If you want a crumb of comfort, it is that the drops have come on increased volumes, though we have yet to have the sort of capitulation trade that would help signal we have touched bottom. Currencies behaved predictably. Within the G-10 bloc, the EURUSD is now down to 1.0458, from just under 1.05 this time yesterday. Cable is at its weakest since June 2020 at 1.2187, and the AUD is weaker again at 0.6936. The JPY has been a touch steadier again, remaining around 134. But the BoJ is fighting a losing battle trying to keep the 10Y JGB within its target range, The current yield is 0.257%. The end-of-week BoJ meeting could see the JPY back under selling pressure if there is no hint of any policy change, and we don’t think we will get one. Asian FX was again weaker, and once again, the sell-off was led by the KRW, which is now 1284 against the USD. The CNY also lost ground to the USD yesterday, rising to 6.7546 as of writing. The IDR also seems to have lost its stability from earlier this year, and surged to 14681 yesterday, within sight of its 14,738 intraday May high. It’s another relatively quiet day on the G-7 macro calendar, with Germany’s ZEW forecast to show a very slight improvement from very low levels, the US NFIB Survey to cast light on corporate pricing intentions and labour market tightness, and the forecast of a slight decline in May US  PPI inflation looking rather optimistic after the recent CPI release. India: Indian CPI inflation for May came in at 7.04%YoY (INGf 7.0%, Consensus 7.1%). This is down from the 7.8% April figure but is due almost entirely to administered excise duty cuts in May weighing on transport inflation and utilities. The overall CPI index rose 0.9% from the previous month. There was not much sign of moderating price pressures across other groups in the price index such as services, food and clothing. Such cuts in excise duty have a direct bearing on India's fiscal position. And with the projected deficit reduction this year starting from an unambitious starting point, credit rating agencies will be watching the impacts carefully.  China: A bipartisan proposal in the US to limit US firms’ investment in China is gaining ground.  The proposal is part of a $52bn bill to boost US competitiveness with China and to expand chipmakers' US-based production. The limit on investment is likely to include Chinese semiconductor and advanced machinery manufacturers. China has purchased more semiconductor machinery since last year. But in the future, it is likely to face steeper hurdles to buying machines needed for semiconductor production. This will push China to strive for even more self-dependence in this sector. However, without advanced machinery, it will be even more difficult to achieve this goal. This sector is likely to come under selling pressure today. South Korea: The South Korean truckers strike is entering its 8th day today. Truckers have been protesting against a sharp rise in fuel costs and the sunsetting of the government safe fare program. As these lockdowns have been going on for more than a week, we are starting to see that these strikes are disrupting production and affecting port activity as well.  We believe that if both parties reach an agreement within a few days, then production and shipments can still catch up with the losses already sustained. Even so, logistics costs are expected to increase, which will eventually be passed on to consumer prices with a lag. Also, if the strike continues for more than a week, then it will hurt production activity, including construction, and we will then have to revise down our 2QGDP forecasts. In terms of inflation, we expect June CPI to show growth of 6%YoY, as gasoline prices reached a historical high last week and preliminary fresh food prices are also on the rise due to severe drought during the early summer harvesting season. Also, utility prices are scheduled to rise in the coming months. We expect CPI inflation to stay above 6% in 3Q22.   Japan industrial production (14 June) India trade balance (14 June) US PPI inflation (14 June) South Korea unemployment (15 June) Philippines remittances (15 June) Japan core machine orders (15 June) Australia consumer confidence (15 June) China 1-year medium term lending (15 June) US retail sales (15 June) FOMC meeting (16 June) Taiwan CBC meeting (16 June) New Zealand GDP (16 June) Japan trade balance (16 June) Australia employment change (16 June) BoE meeting (16 June) US initial jobless claims, building permits and housing starts (16 June) Singapore NODX (17 June) Malaysia trade (17 June) BoJ meeting (17 June) US industrial production (17 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics
Back to black: the countries best positioned to replace Russian gas with coal

The Commodities Feed: Crude holds firm | ING Economics

ING Economics ING Economics 14.06.2022 10:37
Your daily roundup of commodities news and ING views Source: Shutterstock Energy The oil market managed to weather the broader sell-off across financial markets better than the rest of the commodities complex. Having traded lower for much of the day, ICE Brent still managed to finish the day marginally higher. The stubbornness of crude to sell off in the current environment shows how concerned the market is about tightness. These concerns are unlikely to ease anytime soon, given uncertainty over how Russian oil supply will evolve, the limited capability of OPEC to increase output significantly and the tight refined products market as we head deeper into summer. Brent timespreads continue to strengthen, reflecting tightness in the market. The Aug/Sep spread is trading at around US$3.20/bbl, up from around US$2.50/bbl a week ago.  The easing of Covid-related restrictions in China should have provided a further boost to sentiment in the market.  However, a flare-up of cases in Beijing and Shanghai more recently has seen authorities tighten restrictions once again. China’s covid zero policy remains a downside risk for the market. Libya continues to suffer from supply disruptions, which will provide further support to an already tight market. The Libyan oil minister has said that output has fallen by around 1.1MMbbls/d, with ongoing protests forcing production to be halted. Given that Libya produced a little over 1.2MMbbls/d in 2021, output has almost come to a full standstill. Metals Risk-off sentiment dominated metals markets yesterday. Fears about more aggressive tightening from the Fed saw gold slide, whilst base metals were heavily sold off amid rising US Treasury yields and a firmer dollar. LME aluminium 3M prices tumbled by almost 2% and reached their lowest levels in six months. A fresh Covid outbreak in China, which has seen restrictions tightened once again, would have weighed on sentiment as well. South Korean steel producer, Posco said that the output of some steel products has been affected by a prolonged trucker strike, adding more chaos to global supply chains. The producer has stopped production at its four wire-rod factories and one cold-rolled steel plant as of yesterday. The move is expected to reduce the daily output of wire rod by about 7.5kt, and cold-rolled steel by 4.5kt. The ongoing strike, which has entered its eighth day, has also delayed the scheduled delivery of automobiles, fuel, steel and materials for semiconductor chips. Agriculture Indonesia has issued export permits to ship around 1.16mt of crude palm oil, RBD palm oil and RBD palm olein under its accelerated export program. The export permits under the accelerated export program are in addition to the export allowances granted under the domestic sale obligation (DSO) program. To support exports further, the maximum export levy on palm oil has been lowered from US$375/t to US$200/t. Higher palm oil shipments should ease some of the pressure on edible oil supply in the immediate term, especially in Asian markets. Read this article on THINK TagsSupply chains Palm oil Oil Libya China Covid
FX Talking - Summer of discontent keeps dollar in demand | EUR/USD | USD/JPY | GBP/USD | ING Economics

FX Talking - Summer of discontent keeps dollar in demand | EUR/USD | USD/JPY | GBP/USD | ING Economics

ING Economics ING Economics 14.06.2022 10:04
The global economy can now be characterised as one in which many central bankers are poised to hike rates more forcefully, even as growth prospects are being revised lower. Investors are now having to ask which economies can best withstand these tighter monetary conditions and which currency to back? During this summer of discontent the answer to these questions largely remains the US economy and the dollar. Unlike the supply-driven inflation suffered in Europe, price rises in the US are far more a function of demand-side factors and suggest stagflation is less of a likelihood in the US than in Europe. And with no end in sight to tight energy markets, the US remains better positioned here too. We expect the Fed to deliver at least another 175bp of hikes this year as the Fed drives real US interest rates into restrictive territory. This is not good news for global growth – but that is the point, the Fed needs to slow demand. Flatter yield curves consistent with the latter stages of the US business cycle are normally good news for the dollar. In all this means that the dollar should stay bid this summer (1.00/1.02 is possible in EUR/USD), while USD/JPY in the 135/140 region looks ready to trigger Japanese intervention. GBP/USD can move to the low 1.20s as the BoE cycle is repriced lower and the CHF should start to outperform in Europe as the SNB guides it higher. CEE FX has become more mixed. We still favour the PLN, but HUF and now CZK look more vulnerable. This will be a fragile environment for most EMFX – especially those most exposed to China. Here USD/CNY can still push higher taking most of $/Asia with it. Developed markets EUR/USD A long, hot summer for the euro Current spot: 1.0476 Both the Fed and the ECB are in hawkish mode – both battling inflation near 8%. Both are probably happy with stronger currencies. The difference is the stagflationary shock from the war in Ukraine which makes the ECB unlikely to deliver on the 150bp of tightening priced in. There is also the issue of growth differentials and what they mean for international equity flows. These could start generating some euro under-performance. EUR/USD looks biased towards the lower end of a 1.02-1.08 range this summer. It looks far too early to pick the top in the Fed cycle. Higher US real rates also spell trouble for risk assets, including EM in general. This will also lend further support to the dollar USD/JPY Official concern and stretched valuations may help JPY Current spot: 134.43 The combination of aggressive Fed tightening (we look for at least another 175bp of Fed rate hikes this year), high energy prices and BoJ dovishness has sent USD/JPY to 135. Japanese officials are now officially unhappy with the rapid pace of JPY weakness. Sensible arguments go that the BoJ cannot intervene to sell $/JPY since: a) markets are not disorderly and b) BoJ is still printing money with QQE. Yet intervention is political & one never knows whether deals get cut behind the scenes We cannot rule out USD/JPY marching towards 140 given that this is a fundamentally driven, but intervention signals are flashing amber/red. Traded USD/JPY volatility can rise further. GBP/USD Bank of England tightening expectations are extreme Current spot: 134.43 GBP/USD looks as though it can trade back down to the 1.21/22 levels – largely on the back of dollar strength. But certainly an Unexploded Bomb (UXB) for sterling is the incredibly aggressive 175bp of tightening priced into the BoE cycle for year-end. This seems very extreme given that not all the MPC were on board with May’s 25bp hike. The 16 June BoE meeting is an event risk. UK growth will struggle in 2Q, although there is increasing speculation over tax cuts coming through this Autumn – in a bid to shore up Conservative support ahead of a possible ‘23 election. We doubt a Tory leadership change or Brexit tension has too much impact on sterling – a lot of bad news is already priced. 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 This article is a part of the report by ING: Source
1 GBP Price To Increase!? Is British Pound Going To Rally!? How Has USDCHF Changed After SNB Meeting? | Saxo Bank

What's Ahead Of British Pound (GBP)? UK jobs market tight despite surprise rise in unemployment rate | ING Economics

ING Economics ING Economics 14.06.2022 09:24
We can tentatively say that UK worker shortages have stopped getting worse, but high levels of sickness and lower inward migration mean they are unlikely to improve dramatically in the near term. This is further ammunition for Bank of England hawks this Thursday, though we still suspect the overall committee will favour another 25bp hike over a 50bp move The UK's unemployment rate rose in the three months to April   The UK’s unemployment rate surprisingly increased in the three months to April, bucking more than a year’s trend of repeated decline. But big picture, the story is essentially the same as it has been for months. While the unemployment rate is at 3.8%, which still equates to pre-Covid lows despite the latest increase, total employment is still down by roughly a third of a million people – though that deficit has narrowed this year. The number of people inactive – that is neither in employment nor actively seeking it – is up by a similar amount. The result is that there is still more than one worker for every unfilled role, albeit the sharp rise in vacancies we saw through the second half of last year does appear to be levelling out. We can tentatively say that worker shortages are no longer actively getting worse. That said, long-term sickness rates are still the overwhelming reason behind lower participation rates. While the underlying drivers of this trend are not fully clear – it doesn’t appear to be entirely a Covid story, for instance – we can probably say that it’s unlikely to improve dramatically in the near term. Lower inward migration from the EU has also exacerbated the problems with sourcing labour, and again this is a trend that's unlikely to change quickly. Long-term sickness has driven up inactivity levels through the pandemic Source: ONS   Assuming these shortages persist, at least for certain sectors, then firms have a strong incentive to retain staff as much as possible even if economic demand slows considerably later this year, amid concerns about rehiring when conditions improve. With margins under pressure, we suspect firms are more likely to reduce individual worker hours in periods where demand slows, rather than reducing the size of the workforce. All of this provides ammunition for the Bank of England’s hawks to continue arguing for a 50bp hike this week. The ball is undoubtedly in their court, with an increasing number of global central banks considering more aggressive rate rises. But the Bank of England’s forecasts from May showed that, based on market interest rate expectations from the time, inflation would undershoot target in 2024 – a not-so-subtle way of saying that policymakers thought investors were pricing in too much. A 50bp hike risks adding further fuel to that fire, so we still suspect the committee as a whole will come down in favour of another 25bp hike this week. But as was the case in May, we’re likely to get a split vote with at least three officials voting for a faster move. Click here to read our full BoE preview Read this article on THINK TagsUnemployment rate 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
FX: Analysis and trading tips for GBP/USD on June 29

Bank of England set to resist temptation of a 50 basis-point rate hike

ING Economics ING Economics 14.06.2022 09:21
Expect another 25 basis-point hike from the Bank of England this Thursday as policymakers continue to balance the risk of persistently high inflation against an uncertain growth backdrop. Markets, which are now pricing a terminal rate close to 3.5% next year, seem to be considerably overestimating the pace of future tightening Markets are pricing more and more from the Bank of England That the Bank of England will hike rates again this week, there seems no question. And more importantly, markets expect plenty more over coming months. The combination of Friday’s US inflation surprise and a hawkish European Central Bank mean investors now expect 75 basis points worth of rate hikes to be delivered across the next two meetings, and see Bank rate hitting almost 3.5% by this time next year. This, despite the Bank signalling at its last meeting in May that market expectations were overdone. Official forecasts, which were based on the market-implied path of interest rates at the time, showed inflation well below target in 2024. The additional tightening that has since been priced into financial markets presumably would result in an even lower inflation forecast if those numbers were run again now. That makes it hard to see the committee as a whole coming down in favour of a 50bp hike this week. Such a move, which would still be a surprise for markets, risks fuelling the rise in tightening expectations yet further, something we aren’t convinced policymakers are keen on doing. We therefore expect another 25bp hike, which would be the fourth consecutive move of that magnitude. However we should still expect a split vote. Three officials voted for a 50bp hike at the May meeting, and it’s possible we see a fourth – perhaps Dave Ramsden – join their ranks. The hawks are clearly nervous about the tight jobs market and the risk of sustained, above-target wage growth. The root cause of worker shortages (lower migration and higher long-term sickness) are unlikely to be resolved quickly. Markets have ramped up their BoE tightening expectations Source: Macrobond (Bank of England data), ING Cracks are forming in the Bank's resolve on tightening But the doves are also slowly becoming more vocal. May’s meeting minutes not only revealed that some members were more nervous about accelerating the pace of hikes, but actually wanted to scrap the Bank's forward guidance that additional, future rate hikes would be needed. The wild card scenario for Thursday is therefore that we get a three-way vote split – that is some officials opting for no change, some for 50bp, and an overall majority in favour of 25bp. This would be unusual, and a three-way vote has only happened six times since 1997 and not since the financial crisis. In practice, the recent announcement of extra government support for consumers will probably convince the doves to continue backing rate rises this week. Another 6-3 vote in favour of a 25bp hike therefore seems the most likely outcome. But these cracks in the MPC’s resolve on tightening will probably continue to form. And that makes it hard to see investors' tightening expectations being realised. UK consumer confidence is at an all-time low Source: Macrobond, ING We expect three more rate hikes, including this week's The situation in the jobs market, alongside the £15bn extra government stimulus is probably enough to convince the committee to hike in June, August and September. That stimulus, which is targeted at those most affected by higher fuel bills, will lift GDP by perhaps a half a percentage point, with most of the impact in the second half of the year. That will help mitigate against the risk of a technical recession. But consumer confidence remains at an all-time low, while the latest PMIs pointed to a sharp slowdown in business activity. Economic growth looks set to come in comfortably negative for the second quarter, and below the Bank of England's forecasts. While the UK bears some similarity to the US inflation story, the growth backdrop looks much more similar to that of the eurozone. After three more hikes, which would take Bank rate to a level that more closely resembles a neutral setting, we expect the Bank of England to press pause on its hiking cycle. 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
Polish industrial activity weakens; price pressures remain high

Poland’s April 12-month current account deficit above 3% of GDP

ING Economics ING Economics 14.06.2022 09:10
The deterioration of Poland’s external balance indicators continues very quickly, although it is mainly due to external factors – the pandemic and the war in Ukraine Poland's current account deficit continues to deteriorate, mostly due to external factors   The current account deficit was €3.9bn in April (consensus €2.3bn, our forecast €3.2bn), following a €3.0bn deficit in March. We estimate that on a 12-month basis the balance deteriorated from -2.2% of GDP to -3.0% of GDP (the largest 12-month deficit since April 2013). The merchandise trade deficit was €2.5bn in April after €3.3bn in March. On a cumulative 12-month basis, this represents an increase in the deficit from around 1.7% of GDP to 2.2% of GDP. A surplus in services balance of €2.2m did not offset high deficits: in primary income (€2.8m) and secondary income (€0.9m). Foreign trade performance in April 2022 reflects the impact of the war in Ukraine: an increase in fuel import bills and a collapse in trade with Russia. The annual dynamics of imports of goods, expressed in euro (22.6% year-on-year) clearly exceeded the dynamics of exports (6.7%). The National Bank of Poland communiqué indicates a significant influence of the disturbances in global supply chains and the war in Ukraine on Polish foreign trade. Global disruptions contributed to a decline in exports of automotive parts, TV sets and household appliances. A deep decline in sales to Russia also translated into a decline in export dynamics – Russia fell to 23rd place among Poland's largest export partners in April 2022 from 7th place a year ago. The high import dynamics was driven by 75% higher crude oil prices than a year ago, as well as record high prices of natural gas and coal. Russia was no longer the most important import destination for coal and refined oil products in April, replaced by Australia and Germany respectively. – China's Zero-Covid policy and local lockdowns in Shanghai make it difficult to defuse tensions in global supply chains. We write about the reaction of Polish companies to disruptions in international trade in our report Poland in Global Supply Chains during Pandemic and War (link: https://ing-ekonomiczny.pl/publikacja/739803). [The report is in Polish, its English version will be available late this week]. Today's data are slightly negative for the zloty, as the deterioration of the external balance indicators continues very quickly, although it is mainly due to external factors – the pandemic and the war. The exchange rate of the zloty remains under the influence of the war in Ukraine and expectations of further NBP interest rate hikes, as well as expectations of an inflow of EU funds from the National Recovery Plan. In the coming months, we expect the current account deficit to widen further to around 5% of GDP by year-end. Poland's current account and marchandise trade balances, 12-month cumulative, % of GDP Source: ING estimates based on NBP data. Read this article on THINK TagsPoland zloty Poland current account 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
Rates Spark: The hawks are circling | ING Economics

FX Daily: Navigating the perfect storm ahead of the Fed

ING Economics ING Economics 13.06.2022 11:00
Global risk assets have remained vulnerable at the start of this week, and safe-haven bets have continued to fuel the dollar rally. We think more support to the dollar may come on Wednesday as the FOMC hikes by 50bp and upgrades its dot plots. This bodes ill for the battered yen, and raises the probability of an imminent round of FX intervention from Japan USD: Waiting for a hawkish Fed on Wednesday The above-consensus acceleration in US inflation on Friday left a deep mark on global market sentiment, and equities look set to remain under pressure today. The combination of market turmoil and the prospect of aggressive Fed tightening is proving to be an ideal combination for the dollar. Some rebound in risk assets over the coming days is possible given how fast risk assets have dropped in the past few sessions, and the dollar might face a correction soon, but at the same time, we think the FOMC rate announcement on Wednesday will prove mostly supportive for the greenback. As discussed in our June FOMC preview, a 50bp rate hike this week is a done deal, and the pre-commitment to a 50bp move in July appears highly likely. The market's reaction will be primarily driven by any clues about a potential deceleration in tightening in September, both through the updated dot plot projections and in Chair Jerome Powell’s press conference. When it comes to the dot plots, we expect the median projection to fall around to 2.60% for 2022 and to 3.0% for 2023. While market expectations are more hawkish than these projections, we suspect that some degree of re-alignment of the dot plots with rate expectations will be enough to prevent any material dovish re-pricing and keep market bets in more hawkish territory than what the Fed is currently signalling. Ultimately, this should put a floor under the dollar, mostly to the detriment of pro-growth currencies and especially those that are more vulnerable to the energy story. Supported rates after the FOMC would also imply additional pressure on the yen: we discuss the possibility of FX intervention in Japan in the JPY section below. We think a break above the 105.00 mark (where the May rally halted) in DXY in the short-term is a tangible possibility. On the data side, markets will keep an eye on the NFIB Small Business Sentiment indicator and PPI numbers out of the US today, which should however have a limited market impact. EUR: Heading to the bottom of the range The euro has been under a lot of pressure since the European Central Bank meeting, as higher rates in the eurozone following President Christine Lagarde’s hawkish press conference appeared to do more harm than good to the common currency and deteriorating risk sentiment lifted the dollar. We discuss the euro’s odd reaction to the ECB in this article, where we highlight the rising importance of the eurozone’s peripheral spreads for the common currency. These spreads may continue to face widening pressure in the coming days given the unstable risk environment: expect this to be mirrored in some pressure in EUR/USD and even more in EUR/CHF. The eurozone’s data calendar this week is quite light, with some focus only on the ZEW survey in Germany tomorrow. We do have, however, a long list of ECB speakers, which are expected to refine the message by the Governing Council and Christine Lagarde last week. Today we’ll hear from Robert Holtzmann, Gediminas Simkus, and Luis de Guindos, while Lagarde herself is scheduled to speak later this week. Given the adverse reaction in peripheral spreads, there is the risk of some less dovish comments by some ECB members over the coming days. If it’s true that the euro-eurozone yield relationship is currently “inverted”, this might not be terrible news for the euro, although we simply think that external and equity-related drivers are playing a bigger role in driving EUR/USD at the moment, and the risk of a move to the bottom of the 1.02/1.08 trading range on the back of unstable risk sentiment and a hawkish Fed are quite elevated now. GBP: Don't read too much into bad GDP numbers UK’s April GDP numbers showed a second consecutive month-on-month contraction (-0.3%), below market expectations. It must be noted that almost all of the contraction is down to the ending of the free Covid testing at the end of March, which shaved off 0.5% of GDP. Still, these numbers are paving the way for a negative  2Q growth figure, as the extra bank holiday in May also had a dampening effect. We doubt all this comes as a major surprise to markets or to the Bank of England at this stage, and most focus should now be – instead – on how much the government’s stimulus measures will be able to support the economy. This week, the Bank of England meeting is the big highlight for the GBP market. We expect to see a marked divergence within the MPC at this meeting, as we forecast a three-way vote split: some members voting for no change, some for a 50bp hike, and the overall majority for a 25bp move. With markets currently pricing in seven 25bp rate hikes by year-end, we think the risk of a dovish repricing in the GBP curve after this week’s meeting is high, and we expect more weakness in the pound after the announcement. Unless global sentiment rebounds, a move to the 1.20-1.21 area in cable appears to be on the cards, while EUR/GBP may test 0.8600. JPY: FX intervention appears to be the only solution The Bank of Japan announced the buying of an additional JPY 500bn of government bonds to defend the 0.25% yield curve control target on the 10-year bond after the yield rose to 0.254% this morning. In a way, the fierce bond-market intervention by the BoJ signals a renewed commitment to maintaining loose monetary policy, which remains a priority over the depreciating yen. At the same time, Governor Haruiko Kuroda was quite vocal this morning in discussing how a sharply depreciating yen is “negative and undesirable” for the Japanese economy. At this stage, with no signs that the BoJ is deviating from its ultra-loose policy but with a growing desire to stabilise the yen, FX intervention really does appear to be the only solution, unless Japanese authorities are betting on market dynamics (i.e. a correction in US yields) to drive USD/JPY back lower. The prospect of a hawkish Fed on Wednesday does not bode well for such a bet. Should Japan go ahead with FX intervention, expect it to be deployed around the European or US open, when markets are more liquid. We believe markets are starting to price in intervention and that might limit USD/JPY for now, although few tangible indications that such a tool is about to be deployed may trigger USD/JPY appreciation well beyond the 135.00 mark. 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
"EURGBP, GBPUSD – the Bank of England is seen hiking rates at this Thursday’s meeting (...) " | Saxo Bank

UK’s surprise GDP contraction not quite as bad as it looks | ING Economics

ING Economics ING Economics 13.06.2022 09:44
Unsurprisingly, the ending of free Covid testing in March means April's UK GDP figures look worse than they are. The Bank of England will be focusing more on how bad the consumer story could get in coming months, but the recent announcement of extra government support should help insure against a consumer-led recession   April’s UK GDP figures were always going to look worse than reality. Free Covid-19 testing stopped the previous month and according to the ONS that meant there was a 70% fall in test and trace activity. Pandemic-related health spending shaved a full 0.5 percentage points off GDP growth in April. And if we strip that out, the headline 0.3% decline in monthly GDP should actually have been marginally into growth territory. In short, just as health-related spending gave the level of GDP an artificial boost last year, helping the economy appear to recover to pre-virus levels more quickly than it actually had, these categories are now making the picture look superficially worse. UK monthly GDP has been virtually flat once volatile health spending stripped out Source: Macrobond, ING   Elsewhere, the story is mixed – a rise in new car registrations was offset by falls in manufacturing and construction, and in the case of the former, this was the third consecutive month-on-month fall. When you throw in the impact of the extra bank holiday a couple of weeks ago,  we’re likely to get a negative growth figure for the second quarter overall, probably in the region of -0.5%. That’s a fair bit below the Bank of England’s 2Q forecast, though given the highly artificial nature of the undershoot, it’s questionable how fazed policymakers will actually be. The bigger question in their minds will be how bad the consumer situation is likely to be through the rest of the year. Confidence is at all-time lows, and we’re starting to see an impact in the retail figures. Then again, the jobs market remains tight and given the widespread labour shortages, we think the bar for firms to make widespread redundancies in the face of lower demand is higher than usual. Assuming employment remains solid, and factoring in the recent government support package, we think a consumer-led recession may be avoided – though ultimately a lot depends on whether we get another leg higher in wholesale energy prices this autumn. The arrival of extra government support probably means the Bank of England will again unanimously vote to hike rates again this Thursday, though we think the committee overall will come down in favour of another 25bp hike over a faster 50bp move. 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
Rates Spark: taking the inflation blinkers off

WASDE update: Higher corn output from Ukraine

ING Economics ING Economics 13.06.2022 09:35
The latest WASDE report was a non-event with corn, wheat and soybean balance sheets left largely unchanged for both the US and global markets. We will likely have to wait for the USDA’s US acreage report before more significant changes are seen Higher global corn inventory does not mean higher availability The USDA revised higher its estimate for US corn ending stocks for 2022/23 to 1.4b bushels, compared to a previous estimate of 1.36b bushels. This was on the back of an upward revision of around 45m bushels in beginning stocks. The market was looking for a number closer to 1.34b bushels. The agency left its production estimates unchanged at 14.5b bushels. Domestic consumption was revised marginally higher, by around 5m bushels to 12.2b bushels, whilst export estimates were left unchanged at 2.4b bushels. On the surface, the report was mildly bearish for the global market, with total production forecasts increased by around 5.1mt to 1,185.8mt. This was due to Ukrainian output estimates being revised up by around 5.5mt to 25mt, on the back of higher acreage. However, for now this increased output does not translate into higher export supply (Ukrainian exports were left unchanged at 9mt), due to the ongoing war. Instead, this higher output will see domestic stocks edging higher.   Higher production estimates mean that global ending stocks for 2022/23 increased from 305.1mt to 310.5mt. But this increase is driven predominantly by Ukraine, and this supply is unlikely to make its way to the global  market, unless we see an improvement in the domestic situation. The market was expecting a global inventory number of around 305mt. Corn supply/demand balance Source: USDA Little change for soybeans There were marginal changes in the US soybean balance sheet for 2022/23. Production, demand and export estimates were left unchanged at 4.64b bushels, 2.38b bushels and 2.2b bushels respectively. Ending stocks for 2022/23 were revised down by around 30m bushels to 280m bushels due to a revision lower in beginning stocks. This is lower than the roughly 295m bushels the market was expecting. The global balance for 2022/23 was left largely untouched as well. Global production and demand were revised higher by around 0.7mt and 0.4mt respectively. Global ending stocks for 2022/23 were increased by around 0.9mt to 100.5mt due to larger beginning stocks. The market was expecting ending stocks to be largely unchanged. Soybean supply/demand balance Source: USDA No surprises for wheat The USDA increased its US wheat production estimate by around 8m bushels for 2022/23 to 1.74b bushels, on the back of a marginal increase in yield estimates. Domestic demand and export estimates were left unchanged at around 1.11b bushels and 775m bushels respectively. As a result, ending stocks were increased by around 8m bushels to 627m bushels; largely in line with market expectations of around 622m bushels. The global balance saw the USDA revise down production and demand by around 1.4mt and 1.5mt respectively for 2022/23. India’s wheat output was revised lower by 2.5mt as the ongoing heatwave affects yields, with export estimates revised down by around 2mt to 6.5mt. Global inventory estimates at the end of 2022/23 were revised down by around 0.2mt to 266.9mt, not too different from the 267.3mt the market was expecting. Wheat supply/demand balance Source: USDA Read this article on THINK TagsWheat WASDE USDA Ukraine Corn 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
Asian equities move higher | Oanda

Asia Morning Bites - 13/06-17/06

ING Economics ING Economics 13.06.2022 09:04
Asian markets respond to thoughts of more and quicker rate hikes from the Fed ahead of this week's meeting Source: shutterstock Macro outlook Global: Risk assets didn’t respond favourably to the surprisingly high US May CPI release, which showed inflation accelerating to 8.6%YoY, above its previous high, and against expectations for a small decline.  The S&P500 fell by close to 3% on Friday, the NASDAQ fell more than 3.5%. This now puts the S&P500 within one bad day’s move of a bear market, and equity futures suggest that we haven’t seen all the negative sentiment expressed yet. The higher inflation rates (core was also higher than expected at 6.0%) have caused a substantial rethink of the Fed. The Market now expects not just more front loading of rates, but a higher peak too. Peak Fed funds now comes in at about 3.79% by mid-2023, and by the end of the year, Fed funds futures contracts imply a rate of about 3.17%, up from about 2.78% on Friday before the inflation figures. The upshot of this is that 2Y US Treasury yields have surged by more than 25bp to 3.063%, while the 10Y rate rose only 11.4bp to 3.156%.  For those worried about recession, the 2s10s spread is now less than 10bp, too close for comfort. For those who claim that the 3m10Y spread is the better measure of recession risks, that gap is still wide, but then you don’t have to be a rocket scientist to see where 3m rates will be by year-end if the Fed funds rate ends at 3.17% as is currently priced by markets. Even without adding a term premium to the Fed funds rate, we are effectively pricing in curve inversion now.  Not surprisingly, the slump in market risk appetite has buoyed the USD, and the rise in yields probably also helped. EURUSD is now back below 1.05, down from its Friday open of 1.0729. The AUD has also taken a beating, and is now down to 0.7030, while the JPY has been steadier, and remains in the mid-134s. We probably haven’t seen the full extent of passthrough to the Asian FX basket yet. Friday's price action was negative, except for the IDR, which eked out a small gain. Otherwise, losses were led by the KRW and THB, with USDCNY also pushing back above 6.70. Potentially adding to the negative sentiment today, a resumption of mass testing in Shanghai and Beijing in the face of some new Covid cases has sparked fears of a return to lockdown. There is little of interest in today’s G-7 macro calendar.   China: Loans tripled in May to CNY1890 bn from 645 bn in April. Aggregate finance also tripled. This mainly comes from the government's urge to banks to increase loan growth to support the economy. Most of the loan growth came from corporates. The increase in aggregate finance came from bank loans and central and local government bond issuance. There was a jump in bill-financing and increased loans and deposits from corporates. Overall, the data implies that the increase in credit will be used on infrastructure spending and SOEs. Regarding the 1Y Medium Lending Facility rate (to be released between 13th to 16th June), we expect no change from the current rate of 2.85% for this month as the central bank will use more targeted instruments like re-lending facilities to help SMEs to recover from the lockdowns.   What to look out for: FOMC meeting India CPI inflation (13 June) Japan industrial production (14 June) India trade balance (14 June) Philippines remittances (14 June) US PPI inflation (14 June) South Korea unemployment (15 June) Japan core machine orders (15 June)Australia consumer confidence (15 June) China 1-year medium term lending (15 June) US retail sales (15 June) FOMC meeting (16 June) Taiwan CBC meeting (16 June) New Zealand GDP (16 June) Japan trade balance (16 June) Australia employment change (16 June) BoE meeting (16 June) US initial jobless claims, building permits and housing starts (16 June) Singapore NODX (17 June) Malaysia trade (17 June) BoJ meeting (17 June) US industrial production (17 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
Crude Oil Higher, Gold Price Slips, Crypto: Bitcoin (BTC/USD) Vulnerable

US sentiment slump suggests stagflation, but saying and doing are different things | ING Economics

ING Economics ING Economics 13.06.2022 08:25
The University of Michigan sentiment index has plunged to record lows as inflation fears hit new highs. However, the Conference Board measure paints a very different picture – what you ask and how you weight responses can yield very different responses and it is important to remember that what people say and what people do can be very different  Sentiment plunge highlights the fears of stagflation We have had an absolutely awful University of Michigan sentiment index. The overall balance in June dropped to a record low of 50.2 from 58.4 rather than dip to 58.1 as the market had been expecting. Both the expectations index (46.8 from 55.2) and the current conditions (55.4 from 63.3) plunged while the 1Y inflation expectations ticked up from 5.3% to 5.4% and 5-10Y inflation expectations jumped from 3% to 3.3%. On the face of it this is the worst possible combination for the Federal Reserve as it suggests households are really fearing stagflation. The damage was done in the household finances due to the squeeze on spending power from higher inflation – just 30.8% of households think income growth will outpace inflation over the next five years. There is a growing pessimism about people's expectations for how comfortable their retirement will be as well – presumably reflecting the poor equity market performance year to date. Interestingly, the survey suggests people are not especially worried by higher interest rates. It is the higher gasoline price story that is doing the real damage. Sentiment surveys don't always align Source: Macrobond, ING What you ask and how you weight responses plays an important part We wouldn’t get worried about this index though. The chart above shows the divergence between the University of Michigan sentiment index (dreadful) and the Conference Board measure (not too bad). It is important to remember that what you ask and how you weight the response can alter the picture. The University of Michigan arguably focuses more on the inflation/cost of living dynamics, whereas the Conference board measure appears to place greater emphasis on how people see the jobs market and nominal incomes – hence the divide in the indices. Politics plays a part in sentiment and can distort people's views on the economy Source: Macrobond, ING Saying and doing can be very different... One crumb of comfort – neither survey has a great relationship with consumer spending with consumption set to surge in 2Q based on April data already published and ongoing strong people mobility data around retail and recreation in May and early June. Politics may be an important reason for this with perceptions on where the country is heading influencing sentiment, but not necessarily spending. Republican supporters are feeling the most negative ever and independents aren't exactly happy. Conversely Democrats are feeling pretty much in line as they have for the past 15 years. This could quickly reverse come the mid-term elections... Read this article on THINK TagsUS Spending Sentiment Confidence 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
Key events in developed markets next week | ING Economics - 10.06.2022

GBP, USD & EUR - Will Forex Pairs With These Currencies Fluctuate In The Following Week!? | ING Economics - 10.06.2022

ING Economics ING Economics 10.06.2022 16:37
The Federal Reserve is likely to raise interest rates by 50bp next week amid more evidence that the economy is running hot. Another rate hike is also expected from the Bank of England though the situation here is a little more complicated...  In this article US: Strong sales and production figures cement 50bp hikes Bank of England set to resist temptation of a 50bp hike   Source: Shutterstock   US: Strong sales and production figures cement 50bp hikes The Federal Reserve is widely expected to raise interest rates by 50bp at the forthcoming FOMC meeting and confirm that a further 50bp hike in July is the most likely path ahead. The near-term growth story is looking good. While household incomes are failing to keep pace with the increasing cost of living, consumers appear willing to run down some of their accumulated savings to maintain their lifestyles. The investment backdrop is also good while net trade is set to make a positive contribution to 2Q GDP growth, with a 4-4.5% annualised expansion firmly on the cards. At the same time, inflation is well above target and the Fed feels the need to get a grip on the situation, hence the prospect of 100bp of rate hikes over the next couple of months. However, there is a debate as to what happens after July. Some officials want the Fed to continue with 50bp hikes to ensure inflation is brought under control, but this risks moving policy deeply into restrictive territory and heightening the chances of a recession. Others argue that there is already evidence of the growth outlook weakening and inflation pressures tentatively softening, which could justify a pause in September. Given this growing debate, we expect to see only modest changes to the Fed's forecast profile for growth, inflation, and rates. We remain optimistic about near-term growth and we also think inflation will be sticky given ongoing geopolitical strife, supply chain issues, and labour market shortages. As such, a September hike is still our base case, but there is a growing chance the Bank switches to 25bp moves at that meeting and beyond. We expect the Fed funds rate to peak at around 3% in early 2023. In terms of the data, the US highlights will be retail sales and industrial production. Retail sales headline growth will be depressed by weaker auto sales in May, but there should be decent strength in other parts of the report given strong readings for people movement and firm chain store sales numbers that leave us with a positive figure overall. Industrial production should also be firm with increasing oil and gas drilling adding to a strong manufacturing sector performance. Bank of England set to resist temptation of a 50bp hike The Bank of England will almost certainly hike rates again on Thursday, in what would be the fifth consecutive rate rise since December. But despite a growing number of global central banks opting for more aggressive rate hikes, we expect the committee as a whole to vote in favour of a more gradual 25bp move. Admittedly, we are likely to see at least three, possibly four, officials vote for a 50bp move, as was the case in May. But the committee is clearly divided, and we know that some members not only were nervous about faster rate hikes, but actually proposed scrapping the forward guidance that more rate hikes will be needed. The wild card scenario for Thursday is therefore that we get a three-way vote split – that is some officials opting for no change, some for 50bp, and an overall majority in favour of 25bp. This would be unusual, and a three-way vote has only happened six times since 1997 and not since the financial crisis. We also suspect the announcement of a new government spending package since the May meeting will probably tempt those wavering committee members to continue backing a rate hike for the time being. But at some point, we are likely to see further cracks in the MPC’s resolve on tightening. We expect three more hikes in quick succession, taking Bank Rate to 1.75% in the autumn. But markets, which are now pricing a terminal rate above 3% next summer, are still likely overestimating the pace of hikes. It’s also a busy week for UK data, starting with April GDP which we think was probably flat on the month. The ending of free Covid testing will have weighed heavily on health output, though this will probably be largely offset by gains elsewhere. We still expect overall second-quarter growth to come in negative, largely because of an extra Bank holiday last week, but also because of a reduction in consumer spending. Expect to see more signs of that in Friday’s retail sales figures, which are also being hit by the rebalancing of spending away from goods and back towards services, which are out of scope of the retail numbers. Tuesday’s jobs numbers will highlight the issue of worker shortages, which have helped lift wage growth. Developed Markets Economic Calendar Source: Refinitiv, ING, *GMT Source: Key events in developed markets next week | Article | ING 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
China’s economic outlook for the second half of 2022

US inflation surprise heaps pressure on the Fed to do more

ING Economics ING Economics 10.06.2022 15:37
US headline inflation accelerated in May while the core rate failed to drop back below 6%. Demand continues to outpace the supply capacity of the US economy and with supply factors showing little sign of near-term improvement, the onus is on the Fed to dampen the demand side of the equation with ongoing rate hikes High gasoline prices are keeping inflation elevated 8.6% Highest US inflation rate since December 1981   Inflation hits new cycle high As we feared, the risk that inflation may not fall as much as hoped materialised. Headline has actually accelerated, rising 1% month-on-month which takes the year-on-year rate to 8.6% rather than the 8.3% consensus forecast. Food rose 1.2% and gasoline rose 4.1%, but even excluding food and energy the core rate came in above expectations, rising 0.6%MoM/6%YoY, rather than the 5.9% outcome expected. US annual inflation rates (YoY%) Source: Macrobond, ING Core goods are becoming a less important inflation driver, but service price pressures are rising Here, there was another solid reading for shelter of 0.6% with the housing components (primary and owners’ equivalent rent) lagging the surge in house prices by around 14 months. Airline fares were up another 12.6% – the third double digit rate increase in a row – as business travel returns and people movement continues to increase in a sector that has experienced significant supply constraints due to the legacy of the pandemic. Meanwhile, new and used cars rose more than 1% despite signs of improved auto production capabilities. The chart below shows that the service sector is the key area generating inflation right now. People are seemingly wanting “experiences” that they missed during the pandemic and are clearly prepared to pay to do it, almost whatever the cost! Composition of contributions to inflation (YoY%) Source: Macrobond, ING Demand is still exceeding the supply capacity of the economy Nonetheless, we are hopeful that this marks the peak for headline inflation, but it is a low conviction call. The breadth of inflation pressures in the economy should alarm the Fed and will certainly keep the hawks in the ascendancy and weaken the case for those arguing for a potential pause in the Fed hiking path in September. To get inflation meaningfully lower quickly we need demand to move into better balance with the supply capacity of the economy. On the supply side we would ideally like to see three things. Firstly, reduced geopolitical risk to get energy prices lower.  Secondly, supply chains easing to improve flows of inputs and lessen pricing power and thirdly, more labour supply to fill the vacancies in the US and again take a bit more steam out of the employment cost story. The onus is on the Fed to dampen demand with ongoing rate hikes Unfortunately, none of these are likely to improve soon. Russia shows no sign of back tracking in its assault on Ukraine, China lockdowns have eased, but could come back any day given its zero-Covid strategy and US labour participation remains stubbornly low by historical standards despite a sharp pick-up in wage growth. Consequently, to get demand into better balance with the supply the onus is on the Federal Reserve to do the heavy lifting. Hence 50bp rate hikes in June and July with more rate hikes to come to damp down the demand side of the equation. Read this article on THINK TagsUS Inflation Federal Reserve
China: Iron Ore Prices Went Down. What About Australia And Brazil?

Italian industrial production surprisingly strong in April

ING Economics ING Economics 10.06.2022 14:53
Production was strong in April, widening the gap with other big eurozone countries. Decelerating orders and persistent supply bottlenecks suggest that production might soften over the summer months Source: Shutterstock Another positive surprise for industrial production Italian industrial production data in April, released earlier today by Istat, continues to point to unexpectedly strong resilience in the country. The seasonally-adjusted production came in at +1.6% month-on-month, after an upwardly revised 0.2% MoM reading in March. The working-day adjusted measure was up 4.2% YoY. In January 2022, Italian data recorded a sharp monthly decline hinting at a re-alignment with other major eurozone countries. It has re-widened ever since, suggesting that a less pronounced concentration in the transport equipment sector, which is more vulnerable to persistent supply chain disruptions, remains a comparative advantage at the current juncture. Some reopening and re-stocking effects possibly at work Looking at the sector breakdown of the release, we get an indirect confirmation of this. Production expanded evenly across big aggregates, with the exception of durable goods, which contracted on the month. Interestingly, the fastest-growing sector was textile and apparel, typically considered one of the proxies of “reopening” activities. The reopening effect is likely temporarily providing support, notwithstanding the deep erosion of real disposable income resulting from the combination of accelerating inflation with slowly growing hourly wages. Production might soon slow down, but risks to our quarterly GDP forecast now seem to tilt to the upside Looking forward, we believe that this pace of expansion will not be sustainable. The order sub-component of business confidence declined in May when inflation accelerated again, with a possible negative bearing also on the supply side. To be sure, April production data marked an unexpectedly strong start to the quarter: the statistical carryover for production in 2Q22 is now a strong 4%, which increases the chances of industry turning out to be a growth driver in the quarter. We still believe that consumption will act as a drag, as inflation pressures will combine with employment topping out, but acknowledge that risks to our forecast of a 0.3% quarterly GDP decline now lie to the upside. We are currently projecting average Italian GDP growth for 2022 at 2.6%. 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
Bank Pulse: Value in selected Tier 2 debt

Bank Pulse: Value in selected Tier 2 debt

ING Economics ING Economics 10.06.2022 14:45
European bank Tier 2 debt has widened this year amid geopolitical concerns and questions over economic growth. Callable Tier 2 paper has particularly underperformed. While the market's prospects may remain challenging for now, we see value in selected Tier 2 debt of stronger-rated European banks Bank subordinated bond spread performance has suffered from the uncertain outlook Banking sector spreads have suffered amid growing concern about the outlook for economic growth and inflation following Russia's invasion of Ukraine. Tighter monetary policy  - while supporting bank net interest income - may pressure bank loan quality. These worries have been particularly evident in subordinated spreads, with spreads for the European bank Tier 2 debt in our bank universe over 110bp wider on a year-to-date basis. The performance has been very mixed, however, both across issuers and especially across Tier 2 bond types. Bonds issued by banks exposed to Russia or Ukraine or with lower bond ratings have underperformed, in particular. In an uncertain economic environment, we would prefer taking subordinated exposure in banks with stronger pre-provision profit profitability and capital metrics, as these banks have a better capacity to absorb any weakening in loan quality and thus higher loan loss provisions with both their earnings generation and existing capital buffers. Callable Tier 2 debt has underperformed against bullet Tier 2 debt We have seen callable Tier 2 paper underperform in particular, while the bullet structured bonds have shown relatively better resilience. The underperformance of callable debt means that markets are having second thoughts about the likelihood of banks calling their bonds at the first opportunity. The uncertainty on the economic outlook has resulted in volatile market conditions, which means that it may be more difficult, especially for some lower-rated issuers to access debt markets to refinance their subordinated debt at sustainable levels. Furthermore, the wider spread levels also play into the calculation of the economic basis for a call or non-call. Calling a particular subordinated bond may look less appealing than issuing a new bond if the spread of issuing a new bond is likely to be fixed at a markedly wider level than where the reset level of the existing bond is. We would still expect stronger-rated banks to call their bonds at the first opportunity despite the economic optics. That being said, we would remain more careful with callable paper issued by lower-rated banks and especially with those bonds with lower coupon reset levels. Value in selected Tier 2 debt after the recent underperformance After the recent underperformance, callable Tier 2 paper offers a substantial pick-up versus bullet T2 debt in most countries. In callable paper, we have a preference for stronger bank names in France and certain Nordic or Spanish names. Bullet Dutch Tier 2 debt trades at very tight levels due to a combination of scarcity and short maturities. While callable Tier 2 debt offers more interesting spread levels, we do note that in times of market stress, bullet Tier 2 debt is likely to continue to show better resilience. Subordinated bank bond performance Source: ING, IHS Markit, rating agencies 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
Ichimoku cloud indicator analysis on Gold for Tuesday June 28th, 2022.

What to expect at the June FOMC meeting

ING Economics ING Economics 10.06.2022 14:05
With the near-term growth story looking robust and inflation remaining well above target, the Federal Reserve is set to hike by another 50bp and confirm that a further 50bp move in July remains on the cards. Another hawkish set of Fed dot plots should keep the dollar supported near the highs of the year 50,50,50 The Federal Reserve is widely expected to follow up May’s 50bp interest rate increase with another 50bp hike at the forthcoming FOMC meeting, taking the Fed funds target range to 1.25%-1.5%. During the press conference, Fed Chair Jerome Powell is set to confirm that a third consecutive 50bp hike in July is the most likely path ahead. The Fed is also expected to continue to allow $30bn of Treasury securities and $17.5bn of agency mortgage-backed securities to mature and roll off the balance sheet, increasing to $60bn of Treasuries and $35bn of MBS by September. The market is pricing little prospect of a surprise given officials have made it clear that fighting inflation is the Fed’s focus and the near-term growth story remains in decent shape. While household incomes are failing to keep pace with the increasing cost of living, consumers appear willing to run down some of their accumulated savings to maintain their lifestyles. The investment backdrop is also good while net trade is set to make a positive contribution to 2Q GDP growth with a 4% annualised expansion on the cards. At the same time, inflation is well above target and the Fed has acknowledged the need to get a firm grip on the situation, hence the guidance - set to be repeated - about the strong prospect of another 50bp move in July. Current Fed cycle is not particularly severe Source: US Federal Reserve But September is much less clear cut However, there is a debate as to what happens thereafter. Some officials want the Fed to continue with 50bp hikes to ensure inflation is brought under control, but this risks moving policy deeply into restrictive territory and heightening the chances of a recession. Others argue that there is already evidence of the growth outlook weakening and inflation pressures tentatively softening, which could justify a pause in September. Consequently, we will be keeping a close eye on the Fed’s updated forecasts and their “dot plot” diagram, which neatly illustrates the dispersion of views around the central tendency forecast for the mid-point of the target range. In March, this was for the Fed funds rate to end the year at 1.9% before reaching 2.8% for end-2023 and end-2024. It was then expected to drop back to 2.4% over the longer run. Despite some talk of a pause (most notably from Raphael Bostic of the Atlanta Fed) we feel the growth, jobs and inflation backdrop will keep the hawks in the ascendency, though at the same time, the conviction of ongoing 50bp is not strong. Housing numbers are softening, the wage figures have not been as inflationary as many thought and the strong dollar and higher longer-dated Treasury yields are also helping to tighten financial conditions. The end-2022 Fed funds prediction will inevitably rise given the Fed’s more hawkish shift since March – remember back then the Russian invasion of Ukraine had led them to tread cautiously with a 25bp initial rate hike. We expect the central projection to rise to a minimum of 2.6% given the market is already pricing 2.75-3%. We strongly suspect the end-2023 number will get up to 3%, and the long run may be raised marginally to 2.5%. What to expect from the new set of FOMC forecasts Source: US Federal Reserve, ING forecasts All set for 3%, but it may not last long Our view is that the Fed will hike rates by 50bp in July, but switch to 25bp increments thereafter given the prospect of slower growth, moderating inflation (albeit slowly), and the fact the Fed’s balance sheet reduction will also be doing some of the work to tighten monetary policy. We look for the peak at 3% in 1Q 2023. Looking further ahead, we have to remember that the Fed doesn’t leave policy in “restrictive” territory for very long – the average period between the last rate hike in a cycle and the first interest rate cut has only averaged around seven months over the past 50 years. If we are right, the combination of the Fed stepping on the brakes and cooling demand, coupled with supply-side improvements in the form of healing supply chains and increased worker supply should help to get inflation moving meaningfully towards the 2% target through the second half of 2023. This could pave the way for the Fed to consider moving policy to a more neutral footing in late 2023. Hawkish FOMC to keep the dollar bid The dollar heads into Wednesday’s FOMC meeting at just off 1% from its highs of the year. May’s soft patch for both short-term US interest rates and the dollar is quickly fading into the past and a hawkish FOMC meeting should keep the dollar supported near the highs. Recall that the turnaround in the weak dollar trend really started in June 2021 when the Fed dot plots suggested the Fed was ready to normalise policy and ditch Average Inflation Targeting. Upward revisions to dot plots on Wednesday should again remind us that the Fed is in the early to middle stages of its tightening cycle. And looking around the world, one can argue that the Fed would still be closer to the camp looking to take rates into restrictive territory rather than the likes of Brazil and somewhat surprisingly Poland, which are telling us that they are in the late stages of their tightening cycles. A Fed focused on driving US real rates higher should be positive for the dollar and negative for growth-sensitive currencies and especially those on the wrong side of the energy ledger. The weak performance of the euro after a hawkish European Central Bank meeting warns that growth differentials could be starting to play a role in FX pricing. A strong dollar this summer could see EUR/USD lurch towards the lower end of something like a 1.02-1.08 trading range. USD/JPY should stay bid near 135, but we are certainly getting closer to Japanese unilateral intervention to support the yen. Cable could easily trade back to 1.22 given that the Bank of England cycle looks far too aggressively priced. Higher US real rates will create headwinds for emerging market currencies – even those back by commodity exports. We continue to favour outperformance by the Mexican peso as Banxico tightens rates ‘more forcefully'. The stronger dollar will also ask more questions of the beleaguered Chinese renminbi. We favour USD/CNY exiting its 6.65-6.80 range to the upside over the coming months.  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
Rates Spark: Some two-way risk in rates

FX: Euro (EUR) Hasn't Reacted To ECB's Rhetoric The Way ECB Would Probably Like The Most, USD (US Dollar) Awaits US CPI. What About GBP/USD?

ING Economics ING Economics 10.06.2022 09:13
A phrase starting to be used more broadly amongst the central bank community is the need for 'more forceful' monetary tightening to address inflation. Central bankers driving real interest rates higher will be a continued headwind for risk assets and for pro-cyclical currencies (especially energy importers). This is a dollar positive environment USD: So much for the Fed pause As above, one is starting to hear of the need for 'more forceful' monetary tightening around the world now. Banxico used this phrase in May as it prepares to shift to 75bp from 50bp increment in rate hikes. The Reserve Bank of New Zealand has used the same phrase this week and the Bank of Canada governor expressed the same sentiment yesterday. We have not heard from the Federal Reserve recently because of the blackout period ahead of next week's FOMC meeting, but one suspects they would err towards this camp as opposed to a September pause. Feeding into this investment theme will be today's US May CPI number. The White House has warned this will be a high number and consensus expects the headline reading to remain at 8.3% year-on-year, while the core rate should dip to 5.9% YoY from 6.2% YoY. We see inflation staying sticky. Any upside surprise to the monthly core rate (expected at 0.5%) will likely drive short-term US rates and the dollar higher. That would be our bias today and we doubt investors will care to run short dollar positions into what should be a hawkish FOMC next Wednesday. The overriding need to fight inflation with higher real interest rates remains a headwind for risk assets, where equities suffered on both sides of the Atlantic yesterday. This cautious risk environment should continue to favour the dollar and provide a little more relative support to the Swiss franc and the Japanese yen. On the subject of the yen, we note that the Bank of Japan and Japan's Ministry of Finance have a meeting today to discuss financial markets. Intervening to sell USD/JPY under the auspices of disorderly markets is a difficult one to sell to the US Treasury - but were intervention to occur it should be expected at either the European or US open. Large-scale FX intervention normally triggers a spike in traded volatility prices and that may be another reason why one month USD/JPY implied volatility is trading back above 12% - and could go a lot higher were intervention to be seen. DXY remains well supported at 103 and should remain bid as the US inflation/Fed narrative returns to dominate markets.   EUR: Rates up, currency down We think the European Central Bank (ECB) will be disappointed by the euro's reaction yesterday. We had felt that the hawkishness seen since late April had been an effort to narrow rate differentials with the US and to get EUR/USD higher. The ECB delivered a hawkish update yesterday, eurozone interest rates rose - yet the euro fell. As Francesco Pesole wrote at the time, the weak link was peripheral debt markets being left unprotected without sufficient news on anti-fragmentation support packages. But one also sensed that, as a pro-cyclical currency, the euro may not appreciate rate hikes as growth forecasts are cut. This means we may start to hear more about growth differentials and what they mean for international equity flows. There also seems to be the start of a risk premium being built into the euro now - i.e. EUR/USD is trading some 1.5/2.0% lower than where short-term fair value models suggest. For today, a firm US CPI print and higher short-term US rates could break EUR/USD below 1.0600 in a move to the 1.0500/0520 area. We also favour EUR/CHF lower from these levels. Elsewhere, yesterday's National Bank of Poland (NBP) press conference brought a surprisingly dovish tone to the market. Governor Adam Glapinski mentioned the impending peak in rate hikes and the indication of rate cuts next year without any sign of an easing in inflationary pressures. One reason behind this tone, in our view, may be the recent weaker PMI and the outlook for a slowdown in GDP. However, even so, in our view, this will not stop inflation from rising further and yesterday's press conference did not convince us that the NBP is changing course. We continue to believe the terminal rate will reach 8.5%, but it will be a difficult road up for markets. After yesterday's press conference we find Polish rates at the short end of the curve lower despite very strong support from core rates. The differential against the euro has thus moved down by around 20bp. The zloty reacted by weakening, which was corrected towards the end of the press conference. However, in our view, the return of the interest rate differential to mid-May levels has left the zloty unprotected and we could see further PLN weakening above EUR/PLN 4.62 in the coming days. However, in the longer term, we believe that further data from the economy, led by inflation prints, will keep the hiking machine running and nothing will change in the tightening story. And finally, in continental Europe, we have a Central Bank of Russia (CBR) rate meeting today. Consensus expects a 100bp rate cut to 10%. The rouble has been exceptionally strong given that current account flows now dominate what is left of USD/RUB trading - the current account surplus being worth US$110bn in the January-May period. Not until foreign energy purchases really start to slow (later this year) should we expect much of a decline in the rouble.  GBP: Seven BoE hikes priced by year-end! The fact that sterling money markets still price a further 175bp of Bank of England (BoE) tightening by year-end goes to show that investors struggle to buy into the idea of a pause anywhere. We have heard very little from the BoE over recent weeks, questioning whether there is to be a rude awakening on the BoE rate profile when the Bank announces rates next Thursday. GBP/USD one-month volatility is trading at 9.4% - not too far away from one-month realised volatility - and we could easily see traded volatility rising back to 11-12% levels given huge uncertainty over coming weeks. Right now we would favour the dollar over sterling and could see GBP/USD breaking down to 1.2350 next week.  CAD: Jobs data to support good momentum Jobs data for the month of May will be released today, and we expect a stronger headline figure than the 15k increase in April, fuelled by a rebound in full-time employment, as well as some further acceleration in wage growth. The notion of a tight market has been central in allowing the Bank of Canada to push forward with 50bp rate increases, and we think today’s release will continue to endorse a fast-paced tightening cycle. With rate expectations supported and crude prices enjoying good momentum, we think the Canadian dollar can stay on an appreciating path. We think a break below 1.2500 is likely in the coming days, and we expect sub-1.2500 levels to be the norm for the second half of the year. 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
Eurozone: A step in the right direction for peripheral bonds

Rates Spark: ECB gets ahead of the curve

ING Economics ING Economics 10.06.2022 08:23
Despite already aggressive pricing the ECB's hawkishness pushed rates higher still. Periphery spreads widened with no further details on any tool to deal with fragmentation. Today's US CPI is set to remain high enough to keep the Fed in tightening mode.    The market thinks the ECB is getting on top of the inflation problem The ECB has managed a hawkish twist that pushed EUR rates higher, with the front-end 2Y swap rate up by more than 10bp, and the 10Y rate was still up by 7bp. It should be seen as an encouraging sign that the curve bear flattened as it suggests that the market starts to think that the ECB is finally getting on top of the inflation problem. Further EUR 2s10s flattening is a sign of more credible ECB action on inflation Source: Refinitiv, ING The ECB signals hiking cycle ahead, but gives no details on tackling fragmentation As expected the ECB announced that net asset purchases will end on 1 July. The wording on Asset Purchase Programme (APP) reinvestments saw a subtle change. The targeted liquidity conditions moved from “favourable” to “ample” and the aim to maintain an “ample degree of monetary accommodation” has scaled back to an “appropriate monetary policy stance”. While Pandemic Emergency Purchase Programme (PEPP) reinvestments will still be kept “until at least the end of 2024”, APP reinvestments could see a sooner end on the face of it. Ending net purchases makes room to embark on a proper rate hike cycle at the next meeting. The ECB intends to hike by 25bp in July and deliver a further hike in September that could turn out to be a larger 50bp move if the medium-term inflation outlook does not improve. The rates corridor would not be changed at first, but it will be debated in September whether to return to a more symmetrical corridor. Beyond September the ECB signaled a “gradual but sustained path of further increases”. The wording suggests a more set trajectory and notably it is not tied to the neutral rate which Lagarde had still included as a target in her blog post. Indeed, our economists have argued that it is not only a fuzzy but also moving target – very likely lower. After a 25bp hike in September our economists forecast another 25bp hike in December and one more in 1Q23. For now the market is likely to run with the ECB’s hawkishness and even price in the possibility on further 50bp hikes. The level of the overnight rates is seen more than 140bp higher by year end with only four meetings to go. The ECB refrained from becoming more specific on how it intends to deal with the threat of fragmentation. Lagarde reiterated the commitment to prevent fragmentation as the first line of defense remains the existing reinvestments of the PEPP portfolio, but also said there were no particular thresholds that would trigger intervention. As of now the widening of the 10Y Italy/Bund spread, which extended with yesterday’s decision, remains orderly in the sense that it is in line with the general increase in rates levels. We still see the risk of the spread testing 250bp. A more hawkish ECB with no tool to soften the widening impact on sovereign spreads Source: Refinitiv, ING Today's events and market view Today’s US CPI release means the focus will turn to next week’s FOMC meeting. The annual rate of inflation should remain above 8%. Core inflation may slow marginally but should remain close to 6%. This will keep the Fed in tightening mode for the upcoming two meetings, but the debate on a possible pause in September may linger. Still, yesterday’s move higher also in US rates alongside the ECB meeting shows that markets may remain susceptible to the Fed refraining from signaling any notion of a pause just yet. US rates may not have seen their peak even as EUR rates should remain in the lead amid the latest leg higher.   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
Polish industrial activity weakens; price pressures remain high

National Bank of Poland governor turns dovish | ING Economics

ING Economics ING Economics 09.06.2022 21:03
We see the softening of the NBP governor's tone as premature among elevated risks and worries about the persistence of inflation Bank of Poland governor, Adam Glapinski Source: Narodowy Bank Polski   During the June press conference, the NBP governor significantly softened his bias. Professor Glapiński talked about being close to the end of the tightening cycle and reiterated possible rate cuts in 4Q23 or when CPI inflation starts to decline. This is a worrying turnaround, given that there are not any improvements in inflationary risks: we see rather high inflation expectations, accelerating core inflation and strong second-round effects, which all point to the persistence of inflation. In our opinion, the only positive inflationary effect is the seasonal, summer slowdown in food prices, which we will see in June. The second element behind this significant easing of Glapiński's bias is the expected slowdown in GDP. In our opinion, GDP will slow down below 2% year-on-year in 4Q22, but the output gap will change from very positive to neutral. This will not help prevent inflation persistence. We see important inconsistencies which contrast with the governor's dovish rhetoric. Adam Glapiński said that demand is strong and allows companies to pass costs on to retail prices. Also, the wage pressure is high while companies bargaining power is weak. He added that he has seen hardly any factors that could improve the current outlook. Despite this, Glapiński stressed several times that the Monetary Policy Council is closer to the end than the beginning of the monetary policy tightening cycle. In the opinion of the MPC chairman, inflation will stabilise in the summer and then it will slowly start to decline, only to fall to c.6% next year. He also stressed that the inflation prospects were subject to very high uncertainty. We assume a different course of inflation in 2H22. We expect the CPI peak to fall in 4Q22 to between 15-20% YoY, not in the summer as the NBP governor said. We see a seasonal slowdown in food prices during the summer (this is seen in wholesale food markets), but this would only cause a temporary stabilisation of the CPI. In 2023, we assume an average CPI level of over 10% YoY. In our opinion, the softening of the rhetoric is premature. We rather observe accelerating core inflation, intensifying second-round effects and rising inflation expectations. The expected downturn in the economy is not enough in itself to contain inflation. We assume that further rate hikes are ahead of us, and possible cuts are still a distant prospect. This softening of rhetoric amidst still very high inflationary risk may be negative for the zloty Polish government bonds. We maintain our expectations that the target rate is 8.5%, but it may take longer to reach this level. 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
FX: Analysis and trading tips for GBP/USD on June 28

End Of CSPP Announced By European Central Bank (ECB)! | ING Economics

ING Economics ING Economics 09.06.2022 20:14
The ECB announced the end of CSPP on 1 July, alongside a rate hike of 25bp in July and another in September. Gross purchases fall off the edge of a cliff as reinvestments are low for the second half of this year. A different phase for credit has begun with a changing underlying rates environment and looming negative factors and risks, with no ECB to offer support  The end date of CSPP is set: 1st July In addition, there will be a rate hike of 25bp in July, and another hike in September. It is also likely we will see another hike in December and in 1Q23. The backdrop for credit has changed as we now enter a different phase with a changing underlying rates environment. Peripheral spreads will be under pressure as the BTP-to-bund spread has already widened. Generally Italian corporates tend to be highly correlated with BTP, thus we would be cautious on Italian names.   The ending of the corporate sector purchase programme (CSPP) weakens the technical picture for credit in the second half of this year. Reinvestments are rather low in the coming six months, at an average of just €1bn per month. This means gross purchases fall off the edge of a cliff, from an average of €8bn per month down to €1bn. This leaves credit unsupported and thus will add flames to the fire in times of volatility or widening. Gross CSPP purchases will fall off the edge of a cliff Source: ING, ECB   We still foresee three potential scenarios playing out Inflation persists resulting in further tapering and rising rates Inflation remains high while growth is under a lot of pressure, causing default rates top rise and earnings/ fundamentals weaken A soft landing, where inflation comes down without substantial pressure on growth. The first two scenarios are indeed rather bearish for credit, and as such the lack of European Credit Bank support will likely increase volatility and increase the severity of any widening. The primary markets will of course be under the most pressure as CSPP ends. Already, issuers bringing a bond to the market need to pay a significant new issue premium (NIP). Furthermore, new issues have not seen any performance after issuance, and at times the secondary curve is actually widening out to meet the new issue, as opposed to the new issue tightening down to the secondary curve. This is a clear indication of a bear market. As a result, we would be cautious towards secondary market exposure to corporates that are potentially bringing new bonds to the market. We do see opportunity in new issues that are offering decent NIP, and in the widened out secondary curve. In terms of supply, there will likely be a last dash to come to market before the programme fully ends on 1 July. Already the pipeline is looking decent. Although most issuers have already pre-funded. Supply should therefore be manageable in the coming weeks. Back in April the ECB reduced their order in books down to 30% from 40%, and now again have dropped down to 20%. We may see some supply indigestion in September, October and November as the market will miss the big buyer. But overall, we expect relatively light supply, with a forecast of between €250-290bn. We currently sit at €145bn YTD.   Reinvestments pick up in January 2023 onwards with an average of €2-3bn per month. This of course will give credit an extra bid throughout the year. But until then, we now prefer ineligible debt over eligible. We also favour names and sectors that the ECB does not hold a lot of. Higher beta sectors such as construction, retail, real estate, autos, travel, oil & gas and industrials have been favoured by the ECB. The end of CSPP will leave these sectors rather vulnerable as they rely more heavily on the big buyer. We expect these sectors to underperform. The ECB is also holding a significant amount of utilities bonds. Normally this sector would be rather defensive and lower beta. However, at the moment the utilities sector has a question mark around it due to increased energy prices. We are more comfortable with defensive lower beta sectors in these uncertain times. We would be cautious when it comes to sectors that are favoured by the ECB for purchasing. Amount held under CSPP as a percentage of the amount of bonds in iBoxx per sector Source: ING, ECB Read this article on THINK TagsRate hikes Ecb Credit App APP 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
ECB demonstrates hawkishness

ECB demonstrates hawkishness

ING Economics ING Economics 09.06.2022 16:42
At the press conference today, the European Central Bank tried to demonstrate a gradually accelerating hawkishness, keeping the door open to a series of rate hikes. With a chance that the ECB’s own growth forecasts are too optimistic, today’s hawkishness might soon turn out to have been premature Christine Lagarde, president of the European Central Bank   The facts are clear: the ECB today finally put an official end to its long era of unconventional monetary policy measures. Net asset purchases will be ended by 1 July and negative interest rates will be history before the end of the summer. However, whether the ECB is now fully determined to bring inflation back to 2% as soon as possible or whether it will be a gradual process of policy normalisation remains unclear. What did the ECB decide? Net asset purchases will end as of 1 July. Reinvestments of the Pandemic Emergency Purchase Programme will continue at least until the end of 2024 and will remain the main instrument against a widening of yield spreads. The policy rate remains unchanged, but the ECB announced it ‘intends’ to hike rates by 25bp in July and 'expects to raise' rates probably by 25bp in September. The door to a rate hike of 50bp in September is wide open as the statement says, “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” The door to a tightening cycle was left open as the ECB also said that “a gradual but sustained path of further increases in interest rates will be appropriate” beyond September. The macro-economic backdrop of today’s decision has stagflation written all over it. The latest projections of the Eurosystem estimate inflation will come in at 6.8% in 2022, 3.5% in 2023, and 2.1% in 2024. GDP growth is expected to come in at 2.8% in 2022, 2.1% in 2023, and 2.1% in 2024. Interestingly, the staff projections show that inflation will return to 2.0% in the second half of 2024. It is also noteworthy that the technical asusmptions have the 3m Euribor interest rate at 1.3% in 2023 and 1.6% in 2024. In combination with inflation returning to 2%, this gives a very good proxy of where the neutral interest rate could be, without talking about such a concept. Finally, given that oil prices have increased again since the cut-off date of these forecasts, we expect further upward revisions to these inflation forecasts and downward revisions to the growth forecasts. More hawkishness during the press conference During the press conference, ECB President Christine Lagarde said that today’s decision was taken unanimously and that the discussion at today’s meeting mainly focused on the challenge of high inflation and how to tackle it. She emphasised that the ECB was on a journey of normalisation which would not stop in September and that the ECB was also determined to bring down inflation as quickly as possible. A clear hawkish message. At the same time, however, Lagarde stressed the graduality of this normalisation process and the full awareness for potential fragmentation and widening bond yields. With inflation running red hot but at the same time the eurozone economy slowing down and facing stagnation or even recession, the ECB’s window to normalise monetary policy has been narrowing almost by the day. Today’s decision shows it's managed to find a compromise between the doves and the hawks. A 50bp rate hike in July seemed to be fended off by opening the door to a 50bp move in September. The era of net asset purchases will come to an end in three weeks, and the era of negative interest rates will come to an end before the autumn. Simply put, the ECB just announced the end of a long era of unconventional monetary policy and this is not where the ECB wants it to stop. Given Lagarde’s tone at the press conference, the ECB seems to be determined to engage in further rate hikes beyond September. How far this tightening cycle could go, however, is still far from certain. But is this really the time for a hiking cycle? Inflation is still mainly driven by higher energy and commodity prices. The pass-through of higher producer prices will continue but there is a high likelihood that inflation will come down significantly in the course of 2023. Also, there is very little that ECB normalisation can currently do to bring down supply-driven inflation. Today’s decision illustrates that the ECB is willing to engage in a series of rate hikes. Given that the ECB’s own growth forecasts currently look very optimistic, there  is, however, a high risk that there will be far fewer rate hikes beyond September than today’s ECB meeting suggested. The ECB clearly wants to go beyond ‘just’ ending unconventional measures but whether it will really get there is far from certain. The journey Lagarde talked about today could be much shorter than the ECB thinks. Read this article on THINK TagsMonetary policy Inflation Eurozone ECB 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
ECB hawkishness not enough to lift the euro right now

ECB hawkishness not enough to lift the euro right now

ING Economics ING Economics 09.06.2022 16:29
The implicit openness to a 50bp hike in September by the European Central Bank today generated only a short-lived bounce in EUR/USD. We think that rising peripheral spreads and a grim growth outlook in the eurozone are keeping the euro at check, and that a return to 1.0500 remains likely Christine Lagarde, president of the European Central Bank   The positive reaction in EUR/USD after the ECB signalled openness to a 50bp rate hike in September (while formally announcing a 25bp one in July) was exceptionally short-lived. Probably, a key reason behind the reversal of the EUR/USD spike during President Lagarde’s press conference has been the underperformance of other assets the EUR tends to be linked to in the short term. The 10-year BTP-Bund spread has widened by approximately 15bp since the announcement, and eurozone equities are underperforming US ones by around 1.20% today. Incidentally, the market’s general sentiment today has leaned towards risk aversion, which is keeping most pro-cyclical pairs under some pressure. 10Y BTP-Bund highest since 2020 Source: Refinitiv, ING   Unsurprisingly, EUR/CHF has come under pressure (broke below 1.0400) as peripheral spreads widened. As we discussed a few weeks ago in this article, the correlation between EUR/CHF and the BTP-Bund spread tends to pick up when the spread reaches levels above 200bp. Further distress in the Italian bond market can surely keep EUR/CHF upside capped in the coming quarters.   Today’s price action has endorsed what our fair value model is suggesting: that equity dynamics and external risks are currently playing a bigger role in driving short-term EUR/USD moves compared to front-end rate differentials. Considering the lingering downside risks for the eurozone economy from the fall-out of the Ukraine conflict and high energy prices, a rebound in equity flows into the eurozone appears unlikely in the short term. Should short-term rate differentials regain the role as major drivers of EUR/USD moves, the implications wouldn’t necessarily be positive for EUR/USD. Markets are fully pricing in a 50bp hike in September, which is surely not a done deal, and a total of 220bp of tightening in the next year. This means that a good deal of tightening is already in the price and the room for further hawkish re-pricing is somewhat limited.   Our view remains that in the current unstable environment for global sentiment and as the Fed pushes through with 50bp rate hikes during the summer, the dollar should remain supported. As we don’t see markets having a solid basis for turning substantially bullish on the euro and given the non-negligible downside risks to the eurozone’s outlook, we continue to see a return to 1.0500 as the most likely scenario over the summer and into 3Q22. Read this article on THINK TagsEuro and ecb Euro 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
Markets are betting the Fed has it wrong again

Inflation to push Czech rates to their peak | ING Economics

ING Economics ING Economics 09.06.2022 15:35
Energy prices continue to help push Czech inflation higher, and we're not sure we've reached the top. But we do think the market is underestimating the central bank's willingness to cut rates when price pressures start to ease The Czech National Bank's headquarters in Prague Widening CPI deviation from the CNB forecast may bring a bigger rate hike We're expecting inflation in the Czech Republic to rise only slightly above market expectations from 14.2% to 15.6% YoY when we get the figures tomorrow. Food prices are continuing to rise similarly to previous months. Fuel prices resumed their rise in May (2% MoM), and energy prices remain the main upside risk as usual. A 30% average increase in gas prices was announced for May by a major supplier in the country. Therefore, we expect energy prices to rise more than in February (1.4%) and March (1.5%) but less than in April (2.3%). Our current forecast is for inflation to peak at 15.9% in June, but recent reports suggest this level may be higher. The fuel tax cut that took effect at the beginning of the month has not had much effect on prices, and fuel costs have instead continued to rise. In addition, the recent announcement by the largest energy supplier to raise prices from July has started another round of price hikes for consumers; we expect to see further announcements from other energy suppliers in the coming weeks. This extra effect is being written into the CPI with a lag due to the contract fixing of some customers. Thus, we cannot expect the pressure on headline CPI to ease on this account. Upside risks are also heightened by recent inflation surprises in the region, which have been working well as a leading indicator in the past few months. In both Poland and Hungary, inflation surprised 0.3pp higher than market expectations. The Czech National Bank expects a 14.9% YoY number for May. April's inflation print delivered a 0.3pp deviation from the forecast. Very likely, this deviation will widen significantly in May, which we believe will be the determining factor for the size of the June rate hike. Our forecast is "at least 100bps", but a higher CPI print tomorrow, and yesterday's announcement of changes in the makeup of the CNB's board, may result in a higher move of 125bps or more. Regardless of the outcome, tomorrow's inflation would thus be an opportunity to complete the puzzle for the June CNB meeting. What to expect in markets Over the past week, rates have increased considerably, closing the gap between our forecast and the market's view. The market is now fully expecting a 100bp rate hike in June and the odds perhaps suggest an even bolder move. Tomorrow's inflation numbers and the June CNB meeting may be the last trigger for payers before the new CNB board starts on July 1. On the other hand, we believe the market is still underestimating the CNB dovish shift, and the market's first clash with the new board may be a reason for it to reassess its expectations. Although we are sceptical about a slowdown in inflation in the second half of the year compared to the CNB's forecast, the delay in data releases may bring dovish summer months. And once we do see that inflation has peaked, we would expect an immediate rate cut as per the CNB model, similar to what we see in its current forecast. This should make it easier for the doves coming to the board to change rates' direction. This means that the first rate cut may come sooner than the market currently thinks, namely before the middle of next year. 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
US Dollar Credit Supply

US Dollar Credit Supply

ING Economics ING Economics 09.06.2022 14:45
Supply in May was relatively low Corporate supply significantly lower than previous years, but in line with 2018 • Corporate supply amounted to US$41bn in May, rather low when compared to the US$75-80bn average of the past few years. Redemptions for the month of May were pencilled in at US$54bn, thus net supply was negative at -US$13bn. Supply on a YTD basis is now sitting at US$287bn, running substantially behind most previous years (last year pencilled in US$363bn YTD), although it is much in line with supply seen in 2018 YTD – US$289bn. • The Utility sector has been most active with supply of US$12bn last month, followed by US$7bn from both TMT and Healthcare. Autos saw US$3bn in supply in May and remains the only sector with a notable increase YoY, currently sitting at US$18bn YTD versus US$10bn last year YTD. • The belly of the curve and the very long end of the curve seem to be the preferred maturity for supply this year. The 6-9yr bucket is currently sitting at US$84bn YTD, while the 17yr+ area has seen US$93bn supplied. • Reverse Yankee supply was rather low in May at just €3bn for corporates, meanwhile financials saw €7bn in Reverse Yankee supply. Corporate Reverse Yankee supply is sitting rather low on a YTD basis, at just €15bn, running behind the €26bn supplied by this time last year. Bank senior supply running ahead of last year • Financials supply totalled US$45bn in May, lower than the two years previous which pencilled in US$55bn in 2021 and US$72bn in 2020, although it is more in line with the US$48bn and US$34bn seen in 2018 and 2019 respectively. Redemptions in May were relatively high at US$29bn. Therefore, net supply was pencilled in at US$16bn for the month of May. • Bank senior supply totalled US$27bn in May, in line with May last year. On a YTD basis, Bank senior supply has accumulated up to US$178bn, higher than the US$157bn supplied last year YTD. On the other hand, Bank capital has only supplied US$25bn YTD, down on the US$46bn supplied by this time last year. 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
Eurozone economy: unsure about current strength but weakness ahead confirmed

ECB officially ends its long era of unconventional monetary policy

ING Economics ING Economics 09.06.2022 14:21
The European Central Bank has just announced its stopping net asset purchases by the end of the month and pre-announced two rate hikes of 25bp each in July and September. The door for 50bp in September is set wide open ECB President, Christine Lagarde and President of De Nederlandsche Bank, Klaas Knot in Amsterdam   The ECB definitely pre-commits. In its just-announced policy decisions, the European Central Bank has not only made the upcoming 2.30 pm CET press conference less interesting but also laid out a clear path for the normalisation of monetary policy in the eurozone. The only open question is actually why the ECB hasn't already hiked interest rates today but intends to wait for lift-off until the next meeting on 21 July. The ECB's press release also includes the latest staff projections, showing that inflation is now expected to come in at 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024. GDP growth is expected to come in at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Stagflation is the word in the eurozone. What did the ECB decide? Net asset purchases will end as of 1 July Reinvestments of the Pandemic Emergency Purchase Programme will continue at least until the end of 2024 and will remain the main instrument against a widening of yield spreads The policy rate remains unchanged, but the ECB announced it ‘intends’ to hike rates by 25bp in July and 25bp in September. The door for a rate hike of 50bp in September is wide open as the statement says, “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” Door open for 50bp in September With inflation running red hot but at the same time the eurozone economy slowing down and facing stagnation or even recession, the ECB’s window to normalise monetary policy has been narrowing almost by the day. Today’s decision shows it's managed to find a compromise between the doves and the hawks. A 50bp rate hike in July seemed to be fended off by opening the door for 50bp in September. The era of net asset purchases will come to an end in three weeks, and the era of negative interest rates will come to an end before the autumn. Simply put, the ECB just announced the end of a long era. Whether this will also be the start of a new era of continuously rising interest rates, however, is still far from certain. Read this article on THINK TagsMonetary policy Inflation Eurozone ECB 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
Energy price caps could be a game changer for European utilities | Part II | ING Economics

Energy price caps could be a game changer for European utilities | Part II | ING Economics

ING Economics ING Economics 09.06.2022 12:47
European governments take action Soaring energy prices and overall inflation pushed European governments to react. This was facilitated by the European Commission with the Energy Price Toolbox, that ‘allowed’ local governments to provide income support or lower energy taxes. The protection of consumers against the soaring cost of living led to specific support packages. In 2021, the French government introduced a yearly “chèque énergie” worth between €48 and €277, for eligible households, according to their income and size of the household. The cheque can be directly used to pay electricity and gas bills or other related energy services such as energy-saving work. In the Netherlands, the average yearly energy bill for households was expected to increase by €1,264 due to higher energy prices, according to the Dutch statistics bureau. As a result, the Dutch government introduced several support measures for all households, such as lower energy taxes and an increase in the lump sum discount on energy bill taxes. These measures amount to €565 for a household with average energy use (1,170 m3 gas and 2,384 kWh). On top of that, low-income households get an additional €800 of support through the municipality. As the energy crisis deepened, the British government announced a support package in February 2022 to help households cope with the soaring cost of living. It is providing a £15 billion energy bill rebate package, worth up to £550 each for around 28 million households. All domestic energy customers in Great Britain will receive a £400 grant to help with the cost of their energy bills through the Energy Bill Support Scheme. This money will not need to be paid back. Households liable for council tax in Bands A-D in England will also receive a £150 council tax rebate (which has already started to be paid out) to help with the rising cost of bills. This support will apply directly to households in England, Scotland, and Wales.  Tax on windfall profits to finance support schemes On the European utilities’ side, direct governmental support to consumers has been the preferred option. There was no attempt to intervene directly or disrupt energy markets or to interfere with business models and profits. In September 2021, the Spanish government said it would retain €2.6bn of utilities' profits from generating electricity from renewables and hydropower. Such assets are said to generate windfall profits given the lower cost of these technologies and high energy prices. After having spent c.€16bn on energy measures, Italy proposed in May 2022 a retroactive tax of 10% on energy companies’ windfall profits between October 2021 and March 2022. The tax is expected to help finance new sets of measures worth €4.4bn. Although not concerning utilities, the UK government is considering the introduction of a 25% windfall tax on North Sea oil & gas producers. This new measure, announced at the end of May 2022, is designed to partly fund the cost of living support package for UK households. At the same time, the measure includes tax relief on new investment in oil and gas extraction, which could soften the impact of the windfall tax for the players' frontloading investments.   While taxes on windfall profits tend to reduce corporates’ bottom line and impact the companies’ equity valuation, energy price caps are probably the most dreaded tools that governments can impose on utilities to shield consumers from skyrocketing prices. Some countries, such as Romania, Hungary, France and the UK have implemented either retail or wholesale price caps. We look at some of these examples and potential consequences below. Spain and Portugal cap wholesale gas price reference for power plant use In March 2022, Spain and Portugal searched for additional solutions to limit the rise in energy prices. Both obtained the European Commission’s agreement to impose a wholesale price cap reference for natural gas used for power generation. Both countries are finalising details before implementing the plan. The price of reference for wholesale natural gas used to generate electricity would be set at €40/MWh for a period of six months. After that period, the reference price would gradually increase to reach a maximum of €70/MWh after 12 months. The Spanish government believes the measure will avoid the tremendous retail electricity price spikes seen in the last 12 months when gas power plants set the marginal market cost. The plan would also reduce by 37% the electricity bills of residential consumers, and industrial customers could see savings of up to 70%. By containing wholesale power prices around €130/MWh on average, utilities benefiting from low marginal cost technologies (onshore wind, solar, and hydropower) will see their profits limited. Retail price cap: the UK example proves the limits Put in place years before the energy crisis that started with the Covid-19 pandemic, the UK regulator OFGEM imposed a price cap in the form of a yearly maximum power and gas amount that can be charged to residential customers. For a household with typical energy use, the cap was set at £1,277 on 1 October 2021. Although £139 higher than the previous price cap, the scheme resulted in many utilities selling power and gas to residential customers at very low margins and sometimes at a loss. The UK price cap led to multiple bankruptcies The price cap, along with the fragile business model of some energy suppliers, was the cause of multiple bankruptcies across the UK energy supplier market. In reaction to the market turmoil, the price cap for some 22 million UK customers was revised upwards for the period April-September 2022, with a £693 increase for the average household to £1,971 per annum. As natural gas and electricity wholesale prices continue their ascent, the maximum household bill is now expected to be capped at around £2,800 for the period October 2022-March 2023. France: volume and wholesale price cap leads to extreme consequences The French power market is dominated by nuclear power plants that can provide up to 80% of the country’s electricity needs when availability is at its maximum. The incumbent, EDF, majority-owned by the French State, operates all nuclear power plants in the country. Under the AREHN regulation, EDF has had to provide a part of its nuclear power production to alternative players at a determined wholesale price. In order to contain power price inflation, the French regulator has imposed a larger wholesale volume to EDF. From the usual 100TWh, EDF needs to sell 120TWh to competitors in 2022 at a price of €46.20/MWh (up from €42/MWh previously). The French utility still hopes to reverse the decision but recently, the regulator made a proposal to increase the volume in 2023 to 130TWh at a price capped at €49.50/MWh. The increase in price sounds positive, but this is without taking into account the current market wholesale price that has traded at an average of €200/MWh since the beginning of the year. The second, and most important element, is the fact that half of EDF’s 56 nuclear reactors have been halted for technical issues as well as planned maintenance. With extremely reduced power output, EDF needs to find electricity on the markets at very high prices while selling about 40% of its current production to alternative players at a discounted wholesale price. The latest estimate for buying the missing power output on the markets was valued by EDF at €10bn. With average earnings before interest and depreciation of about €15bn in the last years, the measure to contain power prices will dramatically reduce the company’s earnings when investment in its nuclear fleet and renewables are at the highest.   Energy transition investment at stake With a planned Russian coal, oil and gas phase-out, the European Union reiterated its ambition to develop renewable energy further. The REPowerEU package proposes to enhance long-term energy efficiency measures, diversify energy supplies, purchase energy with joint efforts, and to massively scale and speed-up renewable energy in power generation. While these ambitions are laudable, it remains questionable to what extent companies can deliver. Between 2017 and 2021, the European utility sector has increased investment by an average of 8% per annum. In 2022, investment is expected to surge by 12% compared to 2021. The top 40 European utilities will together spend more than €100bn in 2022. Utilities’ business plans show that the coming years include heavy capital expenditure rollouts, with yearly progressions of around 8%. About 75% of these investments fall under the energy transition theme with projects in renewable energy as well extension and digitalisation of networks. The recently revised European Union’s green energy ambitions could mean an even larger escalation in investment. Top 40 European utilities: investments 2017-2023F In € billion  Source: Company data, ING   European utilities’ reactions to higher taxes and announced price caps have been threats to the level of investment they will roll out in Europe in the short and medium-term. Following the price caps imposed on grids and energy bills in Romania and Hungary, German utilities operating in the countries communicated their intention to revise capital expenditure downward. The utilities could even consider exiting these markets as earnings are severely hit due to price cap customer support schemes. The windfall tax on profits could limit future investment plans The initially proposed tax in Spain, expected to have a significant impact on net profits, was softened by the regulator when Spanish utilities threatened to reduce capital expenditure. Recently, similar noises could be heard from the oil & gas companies operating in the North Sea. The windfall tax on profits could limit investment plans, including in green energy. European oil & gas majors have also become important players in the energy transition plans with, for some of them, strong ambitions in renewables, hydrogen, and biofuels. Capping energy prices eats into the profits of utilities. As such, it can be a real game-changer for utilities. Hence it needs to be done wisely as utilities can only live up to growing investment ambitions with solid profit margins. Losses or bankruptcies among the larger utilities must be prevented as they are likely to add to market turmoil and backfire on the ambitions of the EC to speed up the transition to a net-zero economy. Read this article on THINK TagsUtilities Gas prices Energy Transition Energy market 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
Trading plan for Natural Gas on June 24, 2022

Energy price caps could be a game changer for European utilities | Part I | ING Economics

ING Economics ING Economics 09.06.2022 12:44
Despite turmoil in the gas and power markets, most European utilities have performed well financially. The surge in energy prices has pushed European governments to take action to protect consumers. Among those plans, price caps could be a game changer for the sector The main driver of the increase in inflation was energy prices Elevated natural gas prices expected to last another two years The post Covid-19 economic recovery resulted in higher energy demand at a time when the global natural gas supply was already tight. The Russia-Ukraine conflict has aggravated the situation with various energy sanctions on Russia, a major supplier of oil, gas, and coal for Europe. Recently, Gazprom announced the stoppage of its gas deliveries to Poland, Finland, the Netherlands, and Denmark for not honouring the contracts using the rouble. Energy suppliers consider the decision to be a breach of contract given that the euro is the currency agreed upon in the contracts signed with Gazprom. Total Russian supply cuts to the EU now amount to around 23bcm, which is about 15% of the total Russian supply to the EU. These losses are still considered to be manageable given the strong LNG inflows we are seeing. According to Gazprom, they do not expect further supply cuts to any other EU buyers, given that those buyers have either paid or have already been informed that flows to them will be stopped. But as the geopolitical situation escalates further, additional countries/suppliers may experience gas stoppages from Russia. The current market situation is expected to keep natural gas prices at high levels for at least another two years. Dutch TTF gas forward contracts EUR/MWh equivalent Source: Eikon, ING Power prices have skyrocketed due to several factors Natural gas is used by households, corporates, and industry. It is also used by utilities to operate their natural gas power plants to produce electricity. Across Western Europe, natural gas represented 17% of the energy used by utilities to produce power in 2021. The share of natural gas for power production ranges between 25% and 15%, depending on the profitability of the technology. Soaring natural gas tariffs have pushed wholesale and retail power prices up considerably since the beginning of 2021. Other elements have also played a crucial role, including high carbon prices, the decommissioning of coal power plants, and the reduced availability of nuclear power plants, which also explain high energy prices overall. 1-Year baseload power forward wholesale contract EUR/MWh Source: Eikon, ING The majority of European utilities are well positioned to face the turmoil In the United Kingdom, about 30 gas and power suppliers have gone bankrupt since the beginning of 2021. These players, mostly pure retailers with a business model based on energy supply and contracting new customers on low tariffs in order to gain market share, suffered from a price squeeze amid surging wholesale prices. Some 2.6 million households, about 9% of the UK total, had to be allocated to a different utility. Utilities differ in their business models. Integrated utilities generally operate along the value chain, profiting from four main revenue streams. The four main revenue streams for European integrated utilities Source: ING   While some European suppliers did not survive the turmoil due to their specific business models, most large European utilities, representing between 80% and 90% of domestic market share, are well protected. Large European utilities have benefited from soaring power prices In 2021 and the first quarter of 2022, results showed that large European utilities have benefited from soaring power prices overall, with earnings up from 2020. Depending on the specific utility, 2022 guidance is either stable or stronger than the previous year. The few utilities that have suffered financially, although far away from the threat of bankruptcy, are suppliers with a large energy trading department that were wrongly positioned in regard to hedging strategies. 2022 will also see large asset impairments for the Nordic and German utilities particularly active in Russia. Furthermore, the majority of the large European gas and power suppliers have a very diverse business profile with multiple revenue streams, allowing them to face headwinds without serious damage. Most of them are geographically diversified, too. For instance, Southern European utilities have a strong presence in North and Latin America, where the markets offer different dynamics and regulations. German utilities operate across Western and Eastern Europe as well as in the United Kingdom. Some utilities have both a European and a worldwide geographical footprint. The business mix of European utilities also offers an advantage. Integrated utilities benefit from activities across the value chain with power and gas networks offering stable cash flows determined by regulatory packages. These utilities are also diversified in terms of power generation assets with a share of renewables that keep growing and that run at a low marginal cost. Read this article on THINK TagsUtilities Gas prices Energy Transition Energy market 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
Asia week ahead: Japan and Korea data plus regional manufacturing readings - 24.06.2022

Asia week ahead: Busy week for central banks

ING Economics ING Economics 09.06.2022 10:56
Look out for central bank meetings, China activity data, Indian inflation, an Australian labour report, and Indonesian trade figures Source: Shutterstock Lots of central bank activity in the coming week The Bank of Japan (BoJ) is scheduled to hold a rate decision meeting next Friday, and no change is expected. Governor Kuroda and other members have publicly stated on several occasions that the BoJ will retain its current accommodative monetary policy stance, as the recent cost-push inflation will be temporary and that a weak yen benefits the economy as a whole. The European Central Bank is getting closer to hiking rates and the Federal Reserve will likely be hiking another 50bp just before the BoJ meeting. The current JPY weakness is expected to deepen with rate differentials widening. Taiwan's central bank (CBC) will also meet next week and is expected to raise interest rates by 12.5bps. While a 25bp hike is possible, an aggressive move could dampen growth as new Covid cases are still high and power outages are still a possibility due to the hot summer. Also, China will report its 1-year medium-term lending facility rate. We expect this to remain unchanged as the central bank is looking more towards policies focused on helping SMEs following the Shanghai lockdown. Meanwhile, the Bank of Korea will release its May MPC meeting minutes on Thursday, which will show how hawkish the committee is, predicting the path of rate hikes in the third quarter. We'll be watching closely. China activity data The coming week also features China retail sales, which should continue to contract on a year-on-year basis in May due to the lockdowns. Industrial production should also contract slightly in May for the same reason. We expect fixed-asset investment to exceed last month's amount as more local governments have increased infrastructure spending to support economic growth. Indian inflation India releases CPI inflation for May, and this should dip from 7.8% in April to about 7.0% in May thanks to a cut in fuel excise duties. This will be partially offset by higher food prices. Agricultural prices have risen across the board, though encouraging signs of a normal monsoon could help turn this around in the coming months. Australia labour report Following its latest rate hike, the Reserve Bank of Australia (RBA) made it clear that policymakers would be watching the labour market closely for signs of additional inflationary pressure. The surge in full-time employment last month and dive in part-time employment should give way to flatter figures for both in May. But there is still a good chance that the unemployment rate will fall to a new all-time low. And that could raise speculation about more RBA hiking in the near term. Indonesia trade balance Indonesia’s trade data should show import growth sustaining its double-digit pace as the economy reopens. Meanwhile, exports will likely remain in expansion mode, but the recent palm oil export ban could cap the pace of growth. The overall trade balance should stay in surplus, but we can expect a narrower surplus given our outlook for exports. Read this article on THINK TagsEmerging Markets Asia week ahead Asia Markets Asia Economics 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
Oil gains ground, gold fades

Rates Spark: Aggressive market pricing and ECB caution can coexist

ING Economics ING Economics 09.06.2022 09:33
The European Central Bank takes centre stage today. Given how far market pricing has evolved, it will be difficult for President Lagarde to sound hawkish. Still, we expect any rally in rates to be short-lived as inflation worries remain  European Central Bank building and the Frankfurt skyline Aggressive market pricing and ECB caution can continue to coexist for now As the ECB meeting takes the spotlight today, the main question will be whether President Lagarde can live up to the hawkish expectations of the market. Money market pricing implies the expectation that the ECB will raise its key rate cumulatively by more than 130bp this year alone. Given that after today there are just four rate setting meetings until the end of the year, that would mean at least one 50bp hike. As it currently stands markets are homing in on September as the most likely date for a larger move by the ECB. Aggressive market pricing stands in contrast to still cautious ECB undertones Aggressive market pricing stands in contrast to still cautious ECB undertones, prevalent also in President Lagarde’s blog post two weeks ago when she set out a roadmap with 25bp hikes in July and September – as a “benchmark case” as later specified by Chief Economist Lane. Gradualism, optionality and flexibility still have their right to exist amid an environment marked by high uncertainty, not only given the ongoing war in the Ukraine, but also surrounding the prospective neutral level. Equally markets have their right to diverge from the benchmark case, especially following the upward surprises to inflation data. Looking ahead the peak in inflation may not have been passed just yet. And should any hints of inflation expectations becoming unanchored emerge, then gradualism is likely to be the first thing the ECB will abandon – any unanchoring would have to be nipped in the bud to avoid even more painful adjustments further down the road. The swap curve implies a 50bp hike in July or in September Source: Refinitiv, ING What to look out for today The ECB will have an updated set of forecasts at its hands. It should show upwards revisions to the 2022 and 2023 inflation forecasts and lower growth for the same periods. Overall though they should show that all previously stated conditions to begin raising rates are now met. The pledge to stick to the sequenced normalisation process is probably the only thing keeping them from hiking already today. All key rates expected to be left unchanged today. The 2bp higher average for the overnight rate priced for the upcoming reserve period may also account for uncertainty with regards to the looming targeted longer-term refinancing operations repayment date. More important for the pricing of the money market curve is how President Lagarde phrases the risk surrounding her roadmap that outlined 25bp hikes in July and September. The possibility of 50bp hikes is unlikely to be taken off the table. The ECB is set to announce the end of net asset purchases. Whether the exact end date is with the end of June or early in July should have little implication in theory, though the earlier date could add a hawkish twist. The fate of bond spreads will be more dependent on whether there is a stronger and detailed commitment deal with any unwarranted widening of Eurozone government bond spreads. While an FT report suggested the promise to create a new spread management tool if needed could make its way into the press statement, it is widely expected that the ECB will stick to its approach of constructive ambiguity, sparing any details of how such tool could actually look like. As of now the widening in spreads has been rather mechanical alongside the rise in rates. In the best case, this will be the mode going forward. But we fear that markets will eventually test the ECB’s resolve. Today's events and market view All eyes are on today's ECB meeting. President Lagarde sticking to her plan of 25bp hikes in July and September would look dovish set against the aggressive pricing of policy tightening that markets have started to incorporate. We would thus not exclude markets rallying with the ECB decisions today, but we would expect this to be short-lived. In data the only notable release are the US initial jobless claims. More relevant for the direction of long end rates should be supply as the US Treasury sell US$19bn in 30Y bonds later today. 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
Energy price caps could be a game changer for European utilities | Part II | ING Economics

The Commodities Feed: LNG supply disruption

ING Economics ING Economics 09.06.2022 09:23
Your daily roundup of commodities news and ING views Energy The oil market continued its move higher yesterday, after a fairly constructive inventory report from the EIA. While US commercial crude oil inventories increased by 2.03MMbbls over the last week, when taking into account releases from the strategic petroleum reserve total US crude inventories declined by 5.24MMbbls. Given the strength in the refined products market, it is no surprise that refiners ramped up run rates by 1.6 percentage points to 94.2%, their highest levels since 2019. Despite this increase in run rates, gasoline inventories still declined over the week by 812Mbbls. This leaves US gasoline inventories at a little over 218MMbbls, closer to levels we usually see at the end of driving season, not at the beginning. Strong demand over the week contributed to the stock decline, with implied gasoline demand increasing by 222Mbbls/d. As for distillates, stronger refinery activity and weaker implied demand saw stocks grow by 2.59MMbbls, the largest weekly increase since December 2021. Comments from the UAE energy minister would have also provided some support to the market, with the minister pointing out the struggle that OPEC+ is facing in boosting output and hitting its production targets under the OPEC+ deal. In addition, the minister noted the recovery in Chinese consumption following an easing in Covid related lockdowns, suggesting that there is further upside to prices. Latest trade data released from China this morning shows that crude oil imports in May averaged around 10.9MMbbls/d, up around 13% YoY and almost 4% higher MoM.  Cumulative imports over the first 5 months of the year still lag last year, by 1.7%. A fire at the Freeport LNG export facility in the US has led to a stoppage in operations and it is reported that the plant could be down for at least three weeks. The Freeport LNG facility has a capacity of 15mtpta (around 20bcm), which makes up around 17% of total US liquefaction capacity. The impact on US gas prices has been bearish, given that this will weigh on LNG exports and leave more gas in the domestic market. However, this should prove supportive for European hub prices as well as spot Asian LNG prices, given that the LNG market is already tight, with Europe increasingly turning to LNG as it tries to reduce its dependency on Russian gas.   Agriculture Brazil’s agriculture agency, CONAB, has increased its soybean and corn production estimates for 2021/22 on the back of stronger yields. In its latest estimates, CONAB estimates Brazil’s soybean production to increase to 124.3mt compared to 123.8mt previously. CONAB has revised down soybean export estimates to 75.2mt, from a previous estimate of 77mt as higher crushing margins were seen to be boosting domestic demand for soybeans. Corn production estimates were revised up to 115.2mt, from previous expectations of 114.6mt. The Indian Sugar Mills Association has increased its estimates for domestic sugar production from 35mt to 36mt for the current marketing year that ends in September 2022. The association reported that sugar production has already reached around 35mt in the season so far. India has exported around 8.6mt of sugar this season through until the end of May, with another 0.8-0.9mt of sugar exports already contracted. Recently India capped sugar exports at around 10mt for the season, to ensure sufficient supply for the domestic market. Read this article on THINK TagsSugar LNG Gasoline shortage EIA China Trade 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
FX: It's Time To Recover (CNY) Chinese Yuan! ING Forecasts - USD/CNY, USD/INR, USD/IDR

China’s exports jump on port recovery

ING Economics ING Economics 09.06.2022 09:17
China's trade data was better than expected in May. This results from the resumption of operations at Shanghai's ports in the last week of May. We believe this recovery can continue if there are no further lockdowns. Tariffs will be a talking point again, but changes probably won't happen soon Chinese container ship China's exports jump Exports rose 16.9% year-on-year in May, rebounding from only 3.9% year-on-year in April. Imports rose 4.1% year-on-year in May, up from 0% the previous month. The increase in both exports and imports was mainly due to the reopening of the port of Shanghai, China's largest port, in the last week of May. The trend of 10-20% annual growth should continue As the rebound came mainly from the reopening of Shanghai's port facilities, we see the May figures as a continuation of the 14.7% year-on-year export growth in March. If China's future lockdowns follow Beijing's model, they should be more flexible, shorter in duration and should put less pressure on the economy. Markets to focus again on tariffs As the US is considering "reconfiguring" tariffs on imports from China, this will be a focus of discussion in the markets. However, we believe that the discussion in the US on this topic is likely to be drawn out as this is an issue of both economic and political policies towards China. The lifting of tariffs may not happen until the third quarter of 2022. However, even without the removal of tariffs, if global demand continues to be as strong as it has been since 2021, China's exports should maintain an average annual growth rate of 15%, at least through 3Q22. Read this article on THINK TagsChina trade China tariffs China imports China exports 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
FX Daily: Talking up the euro

FX Daily: Talking up the euro

ING Economics ING Economics 09.06.2022 09:03
The highlight of today's European FX session will be the ECB meeting. The ECB will welcome the 2% recovery in the trade-weighted euro over the last month and will no doubt look to keep its options open on the speed of the tightening cycle. Yet further euro gains will be hard-won against the strong dollar and we doubt any EUR/USD spike above 1.08 is sustainable USD: Biding its time near the highs There is a complex layer of stories at play in FX markets at present. Risk assets have temporarily stabilised and US activity data is holding up such that investors remain happy to price a Fed terminal rate up at 3.25% next year. This is keeping the dollar generally strong. Yet, the hawkish turn from the European Central Bank and others over the last month has provided some support to European currencies - even though those currencies are challenged by surging energy prices on the planned Russian oil embargo. Higher energy prices are also taking their toll on the currencies of the big energy importers of Japan and Turkey. At the same time, some high-yielding emerging currencies such as the Mexican peso and South African rand are performing well - again probably buoyed by high commodity prices. In all, we would probably expect continued outperformance of the North American currencies, since it seems that US consumption is holding up and it looks far too early to call time on the Fed tightening cycle. Next week's FOMC meeting will provide an update on the Dot Plots and we will get to see how much the median dot pushes above 3.00% for end-2023 expectations of the Fed policy rate. (In March, that median expectation for end-23 was at 2.8%).   There is little US data today and the next big input will be tomorrow's US May CPI - where the White House is already warning of a high number. With that in mind, we expect the dollar to continue consolidating near the highs and DXY to trade in a 102-103 range. As to USD/JPY which got close to 135 yesterday, there seems no reason to try and pick a top. Despite one-month traded USD/JPY volatility being back above 12% it seems hard to describe conditions as disorderly. And so far, the BoJ does not seem particularly concerned by weakness in the yen.   EUR: A lot of tightening priced in ECB day will see a policy announcement at 13:45CET and the press conference at 14:30CET. As Francesco Pesole discusses here , we think an independent 20bp move in two-year EUR swap rates may be worth a 1.2% adjustment in EUR/USD. That swap rate is currently 1.35%. Can that spike above 1.50% today, taking EUR/USD up to the 1.0850 area? That is not impossible, but we would say that eurozone money markets price quite an aggressive ECB cycle already. In particular, they price five 25bp hikes for four live (July, September, October, December) ECB meetings this year. We doubt the ECB will want to pour cold water on this pricing since its hawkish turn over the last month has managed to lift the trade-weighted euro some 2% off its lows seen in early May. One can see then why the euro has remained quite resilient this week. Ultimately, however, we do not think any EUR/USD spike above 1.08 will last too long given that we like the dollar story this summer and Europe is sadly on the front line of the stagflationary shock of the war in Ukraine. Please see our full ECB preview here for all the details of today's meeting including the fresh round of forecasts and speculation on the new anti-fragmentation scheme that will allow the ECB to hike without destroying the sovereign bond markets of southern Europe. Elsewhere, there should be continued focus on the CE3 currencies. The National Bank of Poland will hold a press conference after yesterday's 75bp hike. We think the market still under-prices the size and duration of the tightening cycle and we continue to favour the Polish zloty. In the Czech Republic, the Czech National Bank (CNB) board did change in line with yesterday's rumours and investors will be pricing a more dovish CNB going forward - though the CNB may continue to intervene to keep EUR/CZK below 24.70/25.00 for the near term. And in Hungary, the soft forint will again see the market focus on whether the National Bank of Hungary feels the need to adjust its 6.75% one-week deposit rate. Unlikely, but any ECB hawkishness could see EUR/HUF pressing 400 again.   GBP: Bracing for the ECB The run-up in EUR/GBP to the 0.8560 region looks a function of positioning for the ECB rather than any negative re-assessment of sterling, per se. As above, we cannot rule out a temporary spike higher in the euro today, although we doubt EUR/GBP sustains any move above 0.8600. After all, the eurozone faces many of the same challenges faced by the UK and it may be a little too early for the Bank of England (BoE) to pour cold water on market expectations of an aggressive tightening cycle.  BoE/Ipsos inflation expectations released tomorrow may be the next important input here.  ZAR: Resilient The South African rand has certainly been more resilient than we had expected -  making a very impressive recovery from above 16/USD in early May. The move is all the more impressive since the jury remains very much out on the Chinese growth story (no clear signs of a major turnaround here).  We still have our doubts about the longevity of this recovery in the rand. We would still much more prefer the Mexican peso in the emerging market high yield space. For today, look out for the South African 1Q22 current account release at 11CET. This is expected at a 1.5% of GDP surplus. Commodity price gains have certainly improved South Africa's external position, but with US real rates set to go higher this summer, we suspect USD/ZAR will likely end up closer to 16 than 15 over the next one to two months.  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
Technical Update- AUDJPY, AUDUSD, AUDEUR, EURUSD, GBPUSD, USDJPY & USDCHF

Asia Morning Bites | ING Economics - 09.06.2022

ING Economics ING Economics 09.06.2022 08:42
Markets continue to trade in tight ranges ahead of potential catalysts for a break-out - ECB and US CPI.  Source: shutterstock Macro outlook Global: The tedious up, down, up etc. trade in US equities continues. Yesterday, the S&P500 fell about one per cent, the NASDAQ fell a bit less. But over the last two weeks, trading has been in a very narrow range and also based on very low volumes. Previous instances of this range trading on low volumes have usually preceded a sharp down-shift. Catalysts for a more bearish outlook include today’s ECB meeting and Friday’s US CPI release. Despite the equity sell-off, EURUSD eked out some small gains, taking it to about 1.0718 from about 1.0707 yesterday at the same time. A couple of attempts to push higher came to nothing. The AUD hasn’t fared so well and is back under 0.72 after also having a couple of abortive attempts to break higher. But most eyes in the APAC region and elsewhere will be on the JPY, which blasted up through 133 yesterday to sit at 134.47 now. Growing chatter about the currency being oversold and correcting sharply are interesting, though the JPY has been more oversold a couple of times since March, so while a painful correction could well be on the cards imminently, there may still be some more to come from the current move. The rest of the Asia pack’s FX movements were fairly mundane in comparison to the JPY. Treasuries continue to sell off ahead of Friday’s CPI. Both 2s and 10Y US Treasury yields rose about 5-6 bp yesterday. The 10Y is back above 3% again. Will it last? Will it make a new high beating the previous intraday peak of 3.20%? Or will it be caught up in a new equity rout and head back to 2.7% or lower. At this stage, it feels like almost anything is possible. European bond yields are possibly a more interesting story. 10Y German bund yields rose more than US Treasuries yesterday, and their year-to-date increase is more than 150bp. `         As mentioned, today’s macro newsflow is going to be all about the ECB. Here is our European economists’ take on that. And also what our FX strategists believe it all means. Basically, if Lagarde doesn’t open the door to a 50bp move in July, the EUR is heading back towards 1.05. Maybe this is the nudge that will push other markets out of their boring trading ranges? China: Trade data to be released today should bolster optimistic market sentiment as we expect both export and import growth in May to rebound from last month as the Port of Shanghai increased capacity to 90% in the last week of May. Philippines:  Trade data is out today and we expect recent trends to hold.  Exports will rise modestly, led by the semiconductor subsector, while imports are likely to sustain their double-digit pace of growth.  Overall, the trade balance is expected to stay deep in a deficit of close to $5bn.  The wide trade deficit will also keep the current account in deficit, and is one reason why the PHP will likely face depreciation pressure in the near term.    Philippines trade balance (9 June) China trade balance (9 June) ECB policy meeting (9 June) US initial jobless claims (9 June) China CPI and PPI inflation (10 June) Malaysia industrial production (10 June) US CPI inflation and University of Michigan sentiment (10 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia economics 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
Poland’s central bank raises rates by another 75 basis points

Poland’s central bank raises rates by another 75 basis points

ING Economics ING Economics 09.06.2022 00:03
The National Bank of Poland has hiked rates by another 75bp (ING: +100bp; consensus: +75bp) lifting the reference rate to 6%. It was the ninth rate hike of the current cycle which is likely to continue until we hit a target rate of 8.5%    Despite a further increase in inflation, the NBP's Monetary Policy Committee decided not to increase the scale of monetary tightening, which could have resulted from a marked deterioration in industrial sentiment (PMI in May fell below the 50-point threshold separating the recovery phase from the economic slowdown). Nevertheless, the cycle of rate increases remains aggressive. In the post-meeting press release, the Council admitted for the first time that price increases in Poland are being driven by continuing high demand, allowing companies to pass on cost increases to consumers. Policymakers are starting to recognise that domestic factors are also playing their part in elevated inflation.    In our view, one of the main reasons for significant interest rate increases is not only the high level of CPI inflation (according to flash estimates, it came to 13.9% YoY in May) but also increasingly clear signals of mounting secondary effects - rapidly rising core inflation - and a price-wage spiral (wage growth accelerated to 14.1%YoY in May). Concerns about the de-anchoring of inflation expectations are also intensifying. The increase in producer prices in April reached 23.3%YoY, so there is ample room for the mentioned pass-through of rising costs to final prices. Inflation and the NBP rate Source: GUS, NBP.   We estimate that the coming months will bring further increases in core inflation, with CPI reaching a local peak in the 15-20% range in the fourth quarter of the year. The macroeconomic environment remains conducive to sustained elevated inflation. Past increases in energy, transport, material and labour costs are spilling over into the final prices of an increasing number of goods and services. This is supported by still robust demand, driven by rising incomes due to the tight labour market and fiscal expansion. An important risk to inflation's path in 2023 is the scale of future increases in administered prices and decisions regarding the Anti-Inflation Shield. Price growth as high as it is now is starting to become self-reinforcing. Containing it requires a decisive tightening of monetary policy, especially as the expansionary fiscal policy limits the restrictiveness of the policy mix. We expect further decisive moves from the MPC in the coming months and maintain our scenario of an increase in the reference rate in the current cycle to 8.5%. The next rate hike will come in July, when we will also learn about the latest NBP projections. 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
Christine Lagarde (ECB) Speaks Today! FX Pairs With Euro (EUR/USD) And (EUR/GBP) May Be Affected!

Eurozone May Experience Slowdown In Growth, But FX Pairs With EUR (EUR/USD, EUR/GBP) And Inflation Definitely Needs A Solution

ING Economics ING Economics 08.06.2022 16:12
Persistent headwinds are pushing the eurozone into a 'muddling through' scenario, and there is a high probability that the region will see one quarter of negative growth this year. But sticky inflation and higher inflation expectations will force the European Central Bank to abandon negative interest rates in the third quarter Muddling through? President of EU Commission Ursula von der Leyen and European Council President Charles Michel at a summit this week in Brussels Content Farewell to negative interest rates Mixed feelings Not exactly the roaring twenties Higher inflation expectations Farewell to negative interest rates In a blog on the ECB’s website, President Christine Lagarde brought forward the growing consensus that has been building within the governing council, namely that stickier-thanexpected inflation requires the quick removal of non-conventional policy measures. A first rate hike in July looks like a near certainty and a 50bp increase cannot be excluded, especially if core inflation comes in higher than expected in the run-up to the July meeting. In any case, negative rates will have disappeared come September. It now seems that the ECB wants to seize the window of opportunity to normalise monetary policy. This requires policymakers to walk a fine line between the rising inflation expectations and economic headwinds. Sentiment divergence between consumers and businesses Source: Refinitiv Datastream Mixed feelings The first quarter showed an upwardly revised 0.3% quarter-on-quarter growth rate, but the second quarter looks more of a conundrum. There is no hard data yet and the sentiment data has been rather inconsistent. Since the start of the war in Ukraine, consumer confidence has dropped to recessionary levels, with the May reading showing hardly any improvement. However, business confidence figures have held up better while still declining. The flash eurozone PMI composite index came in at 54.9, firmly above the boom-or-bust 50 level. This is largely on the back of a strong services sector, which seems to be benefiting from some post-pandemic catch-up demand. Indeed, holiday reservations are back or even above pre-pandemic levels. In the manufacturing sector, the deceleration is more obvious on the back of renewed supply chain problems, higher input prices, and falling orders. Not exactly the roaring twenties There is no clear weakening yet in the labour market, but wages, although rising a bit more rapidly now, are definitely not keeping pace with inflation. At the same time, oil prices are climbing on the back of a (partial) European boycott of Russian oil, further sapping households’ purchasing power. As such, we don’t think that consumption will be a strong growth driver in the coming quarters. And businesses might also become more cautious in their investment plans. That said, there still seems to be a willingness among governments to support the weakest households with fiscal measures. And as the European Commission has proposed extending the escape clause for the Stability and Growth Pact into 2023, not a lot of fiscal tightening should be expected for the time being. We still believe the second or the third quarter of this year might see negative growth. Thereafter, we think the growth pattern will be pretty much in 'muddlingthrough' mode. That should still result in 2.3% GDP growth in 2022 and 1.6% in 2023. Not a recession, but not exactly the roaring twenties either. And downside risk prevails. Both headline and core inflation continue to surpass expectations Source: Refinitiv Datastream Higher inflation expectations Barring a strong increase in natural gas prices amid fewer imports (or a stoppage of supply) from Russia, inflation is probably close to its peak. In May, headline inflation rose to 8.1%, with core inflation at 3.8%. We expect the decrease to be very gradual and it might take until the second half of 2023 before headline inflation falls back below 2%. At the same time, longerterm consumer inflation expectations have now seen an upward shift to 3% in the most recent survey, which explains why the ECB wants to get rates out of negative territory pretty soon. In an interview in Cinco Días, Philip Lane, the ECB’s chief economist, made it very clear that this should be a done deal by September. What happens afterwards will be data-dependent. We don’t think a wage-price spiral will develop, as in the most recent wage agreements the increase foreseen for 2023 is only 2.4%, below the 3% the ECB considers consistent with its 2% inflation objective. That said, we can imagine that the ECB will want to get a bit closer to the elusive “neutral interest rate”. Therefore we think the deposit rate will be raised to 0.25% by year-end, moving to 0.50% in 1Q 2023. Thereafter, a long period of 'wait-and-see' might follow. Source: The eurozone’s muddling through at best | Article | ING Think TagsInflation GDP Eurozone ECB 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
Inflation: the word on all central bankers’ lips

Inflation: the word on all central bankers’ lips

ING Economics ING Economics 08.06.2022 16:08
  Inflation is on the lips of every central banker. What can they do to curb surging inflation and will it be enough? Source: Shutterstock Content Record high inflation persists Our key calls this month Inflation remains one of the hottest economic topics of the moment, affecting households and companies and giving central bankers a very hard time. For a long while, central bankers had labelled accelerating inflation as ‘transitory’, attributing the rise to reopening effects after Covid lockdowns. With inflation surging for the second year in a row, inflation could still be labelled as ‘transitory’ in the sense that it is mainly driven by global factors like the reopening of economies, supply chain frictions, and the war in Ukraine and its impact on energy and commodity prices. However, it is definitely not ‘transitory’ in the sense of being temporary. In the Western world, in particular, high inflation has become an enormous concern. Headline inflation rates as seen in the 1970s will most likely be transitory, higher prices won’t. Record high inflation persists Carsten: Searching for a silver lining The global economy has clearly seen better days. As attention shifts to the role of central banks, ING's Carsten Brzeski raises the question: how far can they actually go? Watch video Our key calls this month Oil prices should remain supported through the second half of the year as the market remains in deficit. Expect Brent to average $125/bbl in 4Q. Inflation will remain elevated for the remainder of 2022 but a gradual fall in energy prices should see headline CPI rates begin to ease back in 2023. Despite talk of a pause, we expect the US Federal Reserve to continue hiking with 50bp hikes in both June and July, followed by a series of 25bp moves that take the funds rate to 3% around the turn of the year. Second-quarter US GDP is set to rebound sharply. The European Central Bank has effectively pre-announced two, 25bp rate hikes in July and September. But concerns about rising inflation mean a faster, 50bp move remains on the table. We now expect three further Bank of England rate hikes, up from two, on the back of new government support targeted at low-income consumers. We’ve kept our China GDP forecast at 3.6% for 2022, despite further stimulus from the government. The dollar correction may have come far enough and we still think a 1.00-1.10 trading range for EUR/USD feels about right. We continue to expect US 10-year yields to peak in the 3.25% area in the third quarter. Despite pockets of lower goods demand, current backlogs mean that supply chain disruptions are unlikely to ease substantially this year. TagsInflation Federal Reserve ECB 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
EUR & ECB preview: No hawkish surprise unless Lagarde hints at 50bp hike

EUR & ECB preview: No hawkish surprise unless Lagarde hints at 50bp hike

ING Economics ING Economics 08.06.2022 14:01
EUR & ECB preview: No hawkish surprise unless Lagarde hints at 50bp hike Thursday's European Central Bank meeting will raise the question of why it's delayed tightening and whether a 25bp rate rise in July is a done deal or if there's room for more. Any message that does not signal an openness to a 50bp hike in July would likely fall short of the market’s hawkish expectations and push EUR/USD closer to 1.0500 ECB President, Christine Lagarde, speaking at the World Economic Forum in Davos last month   Read our June ECB preview here What to watch at the June ECB meeting As we've already discussed in our ECB preview article above, it's unlikely that the Governing Council will surprise with a rate hike on Thursday, and markets will instead focus on: New staff projections, especially the 2024 inflation figures Any hint that the ECB may hike more than the 25bp in July and September signalled by President Christine Lagarde and Chief Economist Philip Lane How Lagarde will address the “sequencing” topic and how she'll answer questions about delaying tightening until July. Bar for a hawkish surprise set relatively high Market expectations for a rate hike this week are close to zero, while 25bp increases in July and September are fully in the price, in line with recent ECB communication. However, markets are pricing in a total of 130bp of tightening by year-end, which would imply a 50bp hike at one of the four remaining meetings - after the June one - this year, as you can see in the chart below.   Source: Refinitiv, ING   Given the market’s aggressive expectations on tightening, we think it will take some clear openness by the Governing Council to a 50bp rate hike in July to surprise to the hawkish side this week. Our estimates on EUR/USD reaction Should President Lagarde merely reiterate the previously outlined plans for 25bp hikes in July and September, the market may well be tempted to price some tightening out of the curve for later in 2022 and 2023. In the table below, we estimate how a change in rate expectations – measured by the EUR 2-year swap rate - would impact EUR/USD. The calculations are based on our short-term fair value model and assume that all the other variables (the USD 2-year swap rate, relative equity performance and global risk sentiment) remain unchanged and are based on the current EUR/USD spot: 1.0700. Change in rate expectations and subsequent impact on EUR/USD Source: ING   While we cannot exclude a hawkish surprise, we see a greater risk that President Lagarde will stick to her recently outlined plan for 25bp hikes in July and September, ultimately raising the risk of some dovish repricing across the EUR swap curve; for EUR/USD this means that the balance of risks appears slightly skewed to the downside. A return to 1.0500 in the coming weeks remains our base-case scenario. 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
FX: GBP/USD: plan for the US session on June 27 (analysis of morning deals). The sellers of the pound are back in business.

Changing trade flows for coking coal | Part II | ING Economics

ING Economics ING Economics 08.06.2022 10:13
Australian coking coal exports lagging Source: Australian Bureau of Statistics, ING Research Chinese imports still struggling to get back to pre-2020 levels Since the unofficial ban on Australian coal, China's coking coal imports have struggled to reach pre-ban levels. This is despite China importing larger volumes from Russia in recent months. Given the prospect of several countries increasingly shunning Russian coal, we could very well see Russian volumes to China continue to grow. But up until now, clearly no other origin has been able to make up the shortfall from Australia. Reduced flows from Mongolia due to Covid-19 restrictions have also had an impact on overall imports. The only period that we saw Chinese coking coal imports go back towards pre-ban levels was when the government agreed to clear a lot of the stranded Australian coal cargoes at Chinese ports towards the end of last year and early this year. China coking coal imports by origin (m tonnes) Source: NBS, ING Research   Despite lower Chinese imports, the spread between Chinese domestic futures and Australian coking coal has narrowed from the US$200 plus levels seen in 2021. In fact, we have seen periods this year when Chinese domestic coking coal futures have traded at a discount to Australian coking coal. There are a number of reasons behind the weakening in the spread. In China, domestic coal output has ramped up given concerns over domestic energy supply. In addition, demand has been under pressure. Policy to cap steel output should weigh on demand. China aims to reduce steel output further this year after seeing a decline in output in 2021 for the first time since 2015. In addition, Covid-related restrictions this year have hit demand although the Covid impact should start to subside as restrictions are gradually eased. If China continues with its zero-Covid policy, however, this will remain a downside risk for demand. These more bearish developments in the Chinese market have come at a time when Australian exports have been under pressure whilst there has been a fair amount of support due to bans and self-sanctioning of Russian coal. China coal output surges, whilst steel output lags last year Source: NBS, WSA, ING Research Read this article on THINK TagsSteel Russia-Ukraine Met coal Coal Australia 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
EUR/USD: plan for the American session on June 27 (analysis of morning deals). The euro again fell short of 1.0603  Read more: https://www.instaforex.eu/forex_analysis/314608

Changing trade flows for coking coal Part I

ING Economics ING Economics 08.06.2022 10:06
Coking coal has had a volatile year so far. Russia’s invasion of Ukraine has led to supply concerns as buyers shun Russian coal. This comes at a time when Australian coking coal exports have suffered due to bad weather. However, prices should edge lower as supply prospects improve China coal Record prices due to supply tightness Australian coking coal prices have traded to record levels this year. Prices broke above US$600/t at one stage in March, a period when there was plenty of uncertainty over Russian coal supply due to the war. Rainfall and floods in Australia also tightened up the supply side. The market has given back a lot of these gains as trade flows slowly adjust, and amid worries over Chinese demand and the expectation that Australian flows will recover as we head into the dry season. However, the market is still up more than 20% year-to-date. Russian coal flows Russia is a fairly large exporter of coking coal, making up around 9% of global export volumes, leaving it in a tied third position with Canada among the largest exporters. Therefore the bans we have seen imposed by some countries, along with self-sanctioning, have had an impact on the market. This impact is already evident in Russian coal flows. EU imports of Russian coking coal in March (latest available data from Eurostat) have fallen by around 35% year-on-year, and given the EU ban on Russian coal, these volumes will only continue to trend lower. Japan and South Korea have also reduced volumes, with imports falling 45% and 38% YoY, respectively, in April. However, these reductions have been more than offset by China, which increased Russian coking coal imports in April by 124% YoY. We also suspect that India will look to pick up a larger share of discounted Russian coking coal, which would free up alternative supplies (Australian) for those buyers who are avoiding Russian coal. We have seen India taking similar action when it comes to oil imports. Coking coal imports from Russia-k tonnes (Apr 22 vs. Apr 21) Note: Latest EU data is for March. Therefore, Mar'22 compared to Mar'21 for the EU Source: NBS, Ministry of Finance Japan, KITA, Eurostat, ING Research Australian exports struggling at a time of need While the Russian sanctions have raised supply concerns, Australia has struggled to help the market out with stronger export flows. Instead, exports have been under pressure for much of the year due to heavy rainfall in both Queensland and New South Wales. And this follows weaker exports over 2021, with a little over 167mt shipped last year- the weakest volumes since 2012. The latest data from the Australian Bureau of Statistics shows that exports over the first four months of the year totalled 51.8mt, down 7% YoY. This is the slowest pace of exports since 2017 when we saw cyclone Debbie. However, given that Australia is moving further into the dry season, we should see a recovery in coking coal exports. Demand for Australian coal should also be robust given that many buyers will be looking for alternatives to Russian supply. Trade data is yet to reflect any significant changes in Australian trade flows. In April, 32% of Australian coking coal went to India, compared to 34% in April 2021. It may still be too soon to see India shifting to discounted Russian coal, or at least for it to be reflected in trade data. Also, given the wind-down period in Russian coal flows to the EU, it will likely take some time for this share to grow. There have been reports of increased interest from EU buyers for Australian coking coal. Read this article on THINK TagsSteel Russia-Ukraine Met coal Coal Australia
Indian Rupee: How Will 1 USD To INR Change In The Near Future? Reserve Bank Of India Hiked The Interest Rate!

Indian Rupee: How Will 1 USD To INR Change In The Near Future? Reserve Bank Of India Hiked The Interest Rate!

ING Economics ING Economics 08.06.2022 09:45
A pick up in the pace of tightening by India's Reserve Bank indicates that the inflation threat is being taken seriously Reserve Bank of India Governor Shaktikanta Das 4.90% Repurchase rate   Higher than expected 50bp, the mode not the median While more forecasters were expecting the RBI to hike by 50bp today than by any other number, the median, which is what is usually referred to as the consensus expectation, was for a hike of only 40bp. Even so, the market response has been relatively muted. USD/INR started today trading at about 77.69, slightly stronger than at the end of trading yesterday, but it weakened throughout the day and experienced only the most fleeting of rallies on the announcement.  India inflation and policy rates india inflation Source: CEIC, ING Governor's statement indicates more to come The governor's statement is well worth a read and contains a number of useful pointers about the path ahead. Here are some of the highlights we note, together with our interpretation:  "The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. It may be noted in this context that the repo rate still remains below its pre-pandemic level". The pre-pandemic repo rate was 5.15%, so today's hike still leaves it 25bp lower than it was then. At a minimum, there is this much more tightening to come.  "There are growing signs of a higher pass-through of input costs to selling prices. The MPC noted that inflation is likely to remain above the upper tolerance band of 6 per cent through the first three quarters of 2022-23". We are likely to see policy being moved steadily towards a much less accommodative setting over the remainder of the year, but rates could start to come down in 2023.  "Available information for April and May 2022 indicates that the recovery in domestic economic activity remains firm, with growth impulses getting increasingly broad based." The economy is resilient, and can weather tighter monetary policy. Where will this end? Figuring out where and when all this will end is something of a wet-finger waving exercise. But at a very simplistic level, we would expect policy interest rates to rise to a point where by the end of the year, they are at or slightly higher than the inflation rate, so delivering a modestly positive real rate. We currently have rates peaking at 5.80 in 1Q23, though it would probably make sense to bring that forward to 4Q22. That in no way would mark a restrictive policy rate, but would remove much of the extraordinary accommodation that is still present today. It is of course subject to considerable uncertainty - the path of the Russia-Ukraine war and its ongoing impact on global commodity prices, China's on-off lockdowns, as well as the impact of international interest rates on the global economy (growing recession concerns).  Read this article on THINK  
EURUSD rejected at Kumo (cloud) resistance

Important Events Take Place In Europe Today! It's Good To Watch CZK, USD/PLN And EUR/PLN! Will The Rest Of FX Pairs Strengthen Ahead Of ECB (European Central Bank Meeting)? How Much Boost Will EUR Receive?

ING Economics ING Economics 08.06.2022 09:39
FX markets are in a consolidatory mood ahead of tomorrow's ECB meeting. The continued rise in energy prices is leaving the currencies of the big energy importers, Japan and Turkey, under pressure. For today, the European highlight will be the size of the rate hike in Poland and the choice of candidates for the new term of the Czech National Bank board Source: Shutterstock USD: Dollar treads water Trade-weighted measures of the dollar are steady, off about 2% from the highs of the year seen in May. The wobble in equity markets last month had thrown into question whether the Fed would be taking rates as high as 3.25% after all, but recent equity stability and encouraging US data (including strong April consumer credit released last night) support the view that Fed tightening remains at full throttle. With energy prices continuing to push higher, those currencies most under pressure are now the likes of the Japanese yen (JPY) and Turkish lira (TRY) - both large energy importers and both suffering even more negative real interest rates, as neither central bank is prepared to tighten policy. This has been quite a quarter for USD/JPY and even though we think it is starting to look expensive on a medium-term fundamental basis, there seems no reason to fight the trend. The next stop here may well be the highs seen just above 135 all the way back in 2002. Given that Fed policy has been such a crucial driver of the dollar's turnaround over the last 12 months, we expect the dollar to remain broadly supported into next week's FOMC meeting. Here, a new set of Dot Plots will be released, which can support expectations of 3%+ policy rates into 2023. For today, there is no US data of note and no sign that high oil prices (a dollar positive) are set to turn. DXY to trade well within a 102.00-103.00 range.  EUR: Euro stays supported into tomorrow's ECB meeting EUR/USD has held up quite well in the face of this week's dollar strength. Supporting the euro is the prospect of a hawkish European Central Bank meeting tomorrow. While it looks far too early to expect a rate hike, which as Carsten Brzeski writes would damage the bank's credibility, the prospect of a hawkish meeting is lending the euro some support. At least the ECB looks to have taken the decision to get real interest rates higher - unlike its counterparts in Japan. On that subject, money markets only seem to be pricing the 25bp hike scenario for the ECB on 21 July. That could easily edge some way towards the 50bp scenario over coming weeks and could nudge EUR/USD back above 1.07 later this week. For the time being, however, we're happy with a 1.05 end-June forecast for EUR/USD on the back of persistent Fed hawkishness. Elsewhere in Europe today, the focus will be on Poland. Here, our team looks for an above-consensus 100bp National Bank of Poland (NBP) rate hike. This will take the policy rate to 6.25%. Continued hawkishness from the NBP (we see rates close to 8.5% by year-end) and the prospect of Poland exchanging EU funds on the open FX market should keep the zloty supported. 4.50 looks the direction of travel for EUR/PLN. GBP: Pound ignores Tories internecine conflict The pound seems to be shrugging off speculation over Prime Minister Boris Johnson's future, where EUR/GBP is now around 1% off its recent highs. Sterling will face more volatility around two UK by-elections to be held on 23 June - both of which the Conservatives stand a real risk of losing. Yet the Conservatives still retain a substantial majority in the Commons and if anything, pressure at the polls could translate into earlier tax cuts to appeal to the base. We continue to favour EUR/GBP trading near 0.8500 over coming months and edging to 0.86 by year-end should the Bank of England not deliver on the astonishing six rate hikes now pencilled in by the markets. Were talk of tax cuts to gain traction, sterling could actually hold onto recent gains. CZK: President appoints new CNB board members confirming dovish shift The President will announce the appointment of the new members of the Czech National Bank (CNB) Board at 2 pm local time today. Official reports are not very specific, but local journalists mention that current members Tomas Nidetzky and Vojtech Benda were not invited to today's appointment. At the same time, journalists have come up with a trio of names to complete the current board: Jan Frait (CNB Head of Financial Stability Department), Eva Zamrazilova (Head of Fiscal Council), and Karina Kubelkova (Chamber of Commerce economist). The first two are former CNB board members (2000-2006 and 2008-2014) and their appointment would be their second and last six-year term. This gives us a picture of their vision for monetary policy. Jan Frait was one of the doves during his first term on the board, but as head of financial stability, he was instead opposed to zero interest rates and supported raising rates as soon as possible. Eva Zamrazilova was one of the three board members who opposed the FX floor in 2013 and has been cautiously critical of recent interest rate hikes in recent comments. Karina Kubelkova's views are not widely known, but from what we do know, let us assume she prefers a more cautious approach. All three names are familiar with how the CNB operates, but we expect a rather dovish approach. The key point is that such a board composition does not imply a clear camp of opinion close to the new CNB governor and, as we mentioned, it may be difficult to find consensus. Our view does not change much for now. We expect the CNB to deliver the last rate hike in June and the new board to be more willing to cut rates sooner, which is already implied by the CNB's forecast. For the koruna, this means the loss of major support in the form of an all-time high interest rate differential. The latest banking liquidity data suggests that the CNB may have intervened in favour of the koruna again last week. Regardless of the new board's view, we believe that the market will still eventually force the central bank to intervene significantly more in the second half of the year. 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
Crude Oil Higher, Gold Price Slips, Crypto: Bitcoin (BTC/USD) Vulnerable

Asia Morning Bites | ING Economics - 08.06.2022

ING Economics ING Economics 08.06.2022 09:25
GDP revisions in Japan and Korea out ahead of today's main event - the RBI rate decision. Will it be 40bp or more? (We think more)  Source: shutterstock Macro outlook Global: Yesterday marked another positive day for US stocks, with both NASDAQ and S&P500 rising a little under 1% after opening down. Equity futures are pointing lower, however, so any positive tone in Asia in early trading may quickly run out of steam without much directional steer to go on. US stocks have been very range-bound in the last week and a half, and usually, such trading patterns break out in one direction or the other. After failing to push convincingly higher, we may see a correction lower in the coming days/weeks. That would also likely lift the USD against other currencies and see bond yields declining again. We’re not there yet though, and the improved sentiment yesterday coincided with weak USD appetite in G-10 currencies. EURUSD rose back above 1.07, and the AUD, which did not hold on to gains following the bigger than expected 50bp RBA hike yesterday rallied in late trading. The JPY on the other hand looks headed up to 133, if not higher near term. Asian FX was broadly-offered yesterday, led by losses in the JPY and KRW, though might claw back some of that today. US Treasuries were flat at the front end of the yield curve, where 2Y UST yields remained about 2.72/2.73%. 10Y yields came back a bit less than 7bp, taking yields back below 3% to 2.97%. G-7 Macro is mainly GDP revisions today, with Japan (see also below) and the Eurozone both publishing data. However, ahead of tomorrow’s ECB meeting, at which we expect to see a clearer path to tightening outlined by Christine Lagarde, markets will probably ignore historical GDP data revisions. India: Time to remember some of your elementary statistics today, as the median forecast for the Reserve Bank of India’s rate meeting today is for a 40bp hike, while the mode (the number most people are forecasting) expects 50bp. We side with the mode. The INR has been kept very steady in recent weeks by RBI action, but FX reserves have been dipping, and this won’t last forever. The risk to the INR is for further weakness. A 50bp hike may buy the RBI a little time. A 40bp hike could put the INR back under selling pressure. Japan: Japan’s real gross domestic product delivered a small upside surprise. First-quarter GDP was revised up to -0.1%q/q (vs -0.2% preliminary, -0.3% market consensus). The upside surprise mostly came from private consumption (0.1%) and inventory contributions (0.5%). Looking ahead, we expect GDP to rebound in 2Q mainly due to better private consumption, yet higher inflation on commodities will likely limit the gains in real terms. Meanwhile, the seasonally adjusted current account surplus narrowed to JPY 511.1 bn in April (vs 1555.9 bn in March) but was better than the market consensus of JPY399.2 bn. Today’s better than expected data releases won’t stop JPY weakness as the market mostly focuses on yield differentials.  South Korea: Korea’s first-quarter GDP was revised down marginally to a seasonally adjusted 0.6%QoQ  (0.7% advance estimate & market consensus), reflecting revised data on industrial output and other economic indicators. Domestic components were weak with private consumption (-0.5%), construction (-3.9%), and facilities investment (-3.9%) showing contractions. Robust exports led first-quarter growth and increased by 3.6% while imports recorded a 0.6% drop as capital goods imports, such as machinery and equipment, fell due to weak investment.  We expect GDP to continue to decelerate in the second quarter. Exports are expected to grow at a slower pace in line with a weakening of global demand. But this should be partially offset by a rebound in private consumption and investment spending as the government lifted almost all Covid restrictions recently. We expect the KRW to stay range-bound at current levels, calming recent volatility led by the US Treasury movements. Today’s GDP revision will not have a significant impact on the KRW. But, amid escalating geopolitical issues, the US has warned that it will take strict measures if North Korea resumes its nuclear tests soon. This could lead to short-term KRW volatility in the near future. Taiwan: Despite the Shanghai lockdown, Taiwan’s trade figures for May (released later today) should show continued high growth of both exports and imports, due to the continued strong demand for electronic goods from the US and Europe. Demand from these economies has partially offset the fall in demand from Mainland China which has softened as the unemployment rate has climbed. We believe that even if demand for electronics in US and Europe falls in the future, this decline will be gradual, so Taiwanese trade should continue to grow in the coming months. Philippines: Incoming Bangko Sentral ng Pilipinas (BSP) Governor Medalla turned hawkish, signalling rate hikes at the next two meetings while leaving the door open for further rate hikes for the rest of the year.  Governor Medalla also outlined his plans for reserve requirements, which he plans to lower by 200 bps later on in the year should inflation decelerate.  Despite guidance for additional BSP rate hikes, we expect the PHP to remain pressured until the central bank whips out more potent 50 bps rate hikes to get ahead of the curve. What to look out for: RBI and ECB meetings South Korea GDP (8 June) Japan GDP (8 June) India RBI repurchase rate (8 June) Taiwan trade balance (8 June) Philippines trade balance (9 June) China trade balance (9 June) ECB policy meeting (9 June) US initial jobless claims (9 June) China CPI and PPI inflation (10 June) Malaysia industrial production (10 June) US CPI inflation and University of Michigan sentiment (10 June) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics 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
G7: Russian Crude Oil Seems To Be A Leitmotif. What Will OPEC And OPEC+ Bring?

The Commodities Feed: Stronger US output growth in 2023 | ING Economics

ING Economics ING Economics 08.06.2022 09:22
Your daily roundup of commodities news and ING views Source: Shutterstock Energy ICE Brent managed to edge higher yesterday, settling above US$120/bbl. Underlying fundamentals remain constructive for the market, particularly as we enter the stronger demand period over the summer, although API numbers released overnight show inventory builds for both US crude and products. Crude oil inventories increased by 1.85MMbbls over the week, whilst gasoline and distillate stocks increased by 1.82MMbbls and 3.38MMbbls respectively. These product builds should offer some relief to the market in the very short term, given concerns over tightening product markets. The more widely followed  EIA report will be released later today, and similar numbers to the API would mean bigger stock builds than the market was expecting. The EIA released its monthly Short Term Energy Outlook yesterday, in which US crude oil production for 2022 is forecast to grow by 740Mbbls/d YoY to average 11.92MMbbls/d, marginally higher than forecasts from last month. However, for 2023, the EIA made larger revisions, expecting output to grow by 1.05MMbbls/d YoY to average 12.97MMbbls/d, up from a previous forecast of 12.85MMbbls/d. Looking at the EIA’s global balance, they expect Russian liquids production in 2022 to fall by 3.3% YoY to 10.42MMbbls/d. A more meaningful decline is expected in 2023 given the EU oil ban, with Russian liquids output expected to fall by 8.6% YoY to 9.52MMbbls/d. Although, interestingly these production numbers are somewhat larger than the EIA was forecasting last month. This could reflect the fact that the EU ban only applies to seaborne oil, rather than all oil as initially proposed. Metals Focus in the metals markets appears to have turned to tighter monetary policy from the US and EU, which has overshadowed hopes of a demand revival from China as Covid related restrictions continue to be eased. LME copper 3M futures declined from their highest level since 27 April. Prices largely ignored the steep decline reported in exchange stocks yesterday. The latest LME data show that exchange inventories for copper extended declines for a twelfth consecutive day, falling by 20.2kt (largest daily decline since 2002) to a little over 120kt as of yesterday. The majority of outflows were from Busan warehouses. The most active iron ore contract on SGX extended gains for a fifth consecutive session with prices reaching an intra-day high of almost US$147/t (highest since May) yesterday, following hopes of a demand recovery from China. The latest market reports suggest that China’s move to relax Covid restrictions has resulted in an easing in port delays and truck shortages, while Beijing has also moved quite close to reporting nil Covid-19 cases. The latest survey from China Iron and Steel Association (CISA) shows that inventory levels at major steel mills in China dropped by 10.2% to 17.9mt (after reaching its highest level in two years) between 21-31 May. The group also reported that daily crude steel production at major Chinese steelmakers rose 0.9% in the 21-31 May period, from the second third of last month. Output stood at 2.3mt per day, up 1.5% YoY. Read this article on THINK TagsUS shale Russia-Ukraine Iron ore EIA API 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
FX: Analysis and trading tips for GBP/USD on June 28

(EUR) Euro Credit Supply Amid Inflation And Monetary Policies - A Report By ING Economics

ING Economics ING Economics 07.06.2022 21:13
Decent supply in May despite volatility Supply in May in line with previous years, but NIP remains high • Corporate supply totalled €32bn in May, in line with the usual €30-35bn for the month. This is a notable increase on the small €9bn supplied in April. This decent supply in May comes despite the changing funding environment. Rates continue to rise, and spreads are currently sitting at the high end of the trading range. Furthermore, primary markets will be under the most pressure as CSPP ends. Already, issuers bringing a bond to the market need to pay a significant new issue premium (NIP), and the ECB are reducing their orders down from 30% to 20%. In fact, due to the recent rise in rates and widening of spreads, many issuers were forced to actually pull their deals and not come to the market as volatility peaked earlier in the month.   • Furthermore, new issues have not seen any performance after issuance, and in general, the rule of thumb is that the secondary curve widens out to meet the new issue, as opposed to the new issue tightening down to the secondary curve. This is a clear indication of a bear market. As a result, we would be cautious towards secondary market exposure to corporates that are potentially bringing new bonds to the market. We do see opportunity in new issues that are offering decent NIP, and in the widened out secondary curve.   • Supply on a YTD basis is now sitting at €141bn, running behind the previous three years. The majority of supply this year has been concentrated in the belly of the curve, namely in the 6-9yr area, which has pencilled in €40bn. The Utility sector has been most active with supply of €12bn last month. Utility supply is now running ahead of last year on a YTD basis, pencilled in at €29bn, versus €24bn last year. Corporate hybrids supply remains low with no additional bonds issued in May. Thus, hybrid supply remains at €8bn for 2022 thus far. Substantial financial supply as Bank senior and covered bonds supply increase • Financial supply in May amounted to €31bn, up on the previous years. On a year-todate basis, financial supply (excluding covered bonds) are now pencilled in at €144bn, running ahead of the past five years. The increase in supply has been seen in Bank senior supply, now sitting at €98bn YTD, up on €80bn last year YTD. Financial supply has been shorter on the curve compared to corporates, concentrated around the 3-6yr area of the curve. In addition, covered bonds remain an issuer favourite, with €23bn issued in May, up on €8bn supplied in May last year. Covered bond supply is now sitting a €115bn YTD, already above the full year amounts seen in 2020 and 2021.
Upside risks remain for the commodities complex

Upside risks remain for the commodities complex

ING Economics ING Economics 07.06.2022 20:38
Commodity markets remain vulnerable to Russia-Ukraine developments. Tightness in several commodities means that markets are likely to be more sensitive to any supply shocks. Tightness in energy and some agricultural commodities is set to persist for the foreseeable future Russia’s invasion of Ukraine has sparked concerns over food security. Malaysia recently banned the export of chicken Content  EU leaders agree on a Russian oil ban Natural gas looking more comfortable, but still plenty of uncertainty Ukrainian supply hit and protectionist measures in agricultural markets EU leaders agree on a Russian oil ban EU leaders have finally agreed on a watered-down ban on Russian oil and refined products . The ban will only apply to seaborne crude oil imports, which will be phased out over the next six months, and refined products, which will be wound down over the next eight months. From the 2.3MMbbls/d of Russian crude oil that the EU imports, around two-thirds are seaborne imports. However, we believe the EU will reduce flows by more than this, given that Germany and Poland (which are the largest receivers of oil via the Druzhba pipeline) have signalled that they will work towards reducing Russian imports to zero. This means that around 90% of Russian oil flows to the EU could be affected. Given the gradual phasing out of Russian oil under the ban, the impact on the market should be much more limited than if we were to see an overnight ban. Instead, buyers in the EU will have time to source other supplies, which should allow for a more orderly shift in trade flows. Russian oil flows to the EU Seaborne vs. Druzhba pipeline (Mbbls/d) Source: Eurostat, IHS Markit, ING Research How easy it will be to shift trade flows depends on the appetite for key importers outside of the EU to increase their share of Russian oil purchases. Given the significant discount available for Russian Urals, we suspect the likes of India and China will increase the amount of Russian oil they import. This should in theory free up supply from other origins for EU buyers. Whilst OPEC is sitting on enough spare capacity to meet the EU shortfall, the group has been reluctant to increase output more aggressively than it currently is. OPEC continues to hold the view that the market is balanced and that the volatility in the market is due to geopolitical risks. In addition, it is important to remember that Russia is part of the OPEC+ alliance, and so will have some influence on what the group decides when it comes to output policy. We do not think OPEC will tap more aggressively into its limited spare capacity, which suggests that the oil market will be in deficit over 2H22, which should see prices edge higher (Brent at $125/bbl over 4Q22). Demand destruction has helped to ease some of the tightness in the market although clearly not enough to fully offset the Russian supply losses we expect as we move through the year. There are clear risks to our view. To the upside, the biggest risk would be if we were to see secondary sanctions placed on Russian oil. This would make it much more difficult for Russia to sell into markets like India and China, which would mean that the global market would be even tighter than we expect. We also assume that Iranian oil supply will grow over 2023. If this fails to materialise, it will leave the market tighter than we are currently predicting for next year. On the downside, the potential for further Covid-related lockdowns in China over the course of the year could weigh on oil demand. However, the bigger downside risk is if we see a de-escalation in the war or even an end to it (hopefully). This would likely see a significant amount of risk premium given back. Given the steps already taken by the EU, we do not believe that the EU would revert to its old ways and be highly dependent on Russia. However, de-escalation in the war could at least slow the process of moving away from Russian oil. TagsWheat Russian oil ban Russia-Ukraine Natural gas Food inflation 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
Natural gas looking more comfortable, but still plenty of uncertainty

Natural gas looking more comfortable, but still plenty of uncertainty

ING Economics ING Economics 07.06.2022 19:53
European natural gas prices have eased significantly over the last month. In fact, prices are at their lowest levels since the start of the war. This is despite Russia having stopped gas supplies to Bulgaria, Finland, Poland, and more recently the Netherlands. These four countries made up roughly 13% of Russian flows to the EU in 2021. These buyers refused to agree to a new payment mechanism where they open a Gazprombank account to pay euros or dollars, which would then be converted to roubles. This is despite the European Commission suggesting that paying into a Gazprombank account should still be allowed, as long as the transaction is complete once euros or dollars are paid into the Gazprombank account, rather than after the conversion to roubles. Fundamentally, the European gas market is in a more comfortable state. European gas inventories are 46% full compared to the five-year average of 49%, and above the 37% seen at this stage last year. Strong LNG imports have helped to improve the supply situation in Europe. And if we do not see any disruption to Russian gas flows this summer, European gas inventories should be more than comfortable going into the next heating season. However, no disruption to Russian gas flows is a big assumption to make. Additional buyers could refuse to accept Russia's new payment terms, which would see further gas flows from Russia cut. There is also the potential that Russia retaliates to the EU oil ban by stopping or significantly reducing gas flows. It is due to this uncertainty that we believe European gas prices will remain well supported as we head into the next heating season. European gas inventories (% full) Source: GIE, ING Research Ukrainian supply hit and protectionist measures in agricultural markets Disruption to Ukrainian agricultural exports remains a concern for global markets. Grain exports from Ukraine remain significantly affected. Exports are not possible through ports, so instead, we are seeing volumes transported via neighbouring countries. However, capacity constraints mean the volumes are significantly lower than what can be shipped via Black Sea ports. Over the first 19 days of May, Ukraine managed to export 643kt of grains (of which 96% was corn), compared to a little over 1.8mt in May 2021. There are efforts to remove blockades of Ukrainian ports. However, this will likely be difficult given that Russia will want some concessions to be made before doing so. The impact of the war has not only had an effect on 2021/22 shipments, but it will also have longer-term effects, specifically on 2022/23 output. Ukrainian corn and sunflower seed production are expected to be down 54% and 37% respectively due to lower plantings, whilst wheat (of which most would have been in the ground prior to the war) is also likely to suffer in the 2022/23 season, with output expected to fall by 35% year-on-year. The expected decline in Ukrainian wheat supply, along with some declines from other regions, means that global wheat stocks are expected to decline to their lowest levels since 2016/17. However, more than 50% of global wheat stocks are estimated to sit in China (and are unlikely to ever be exported). Looking at ex-China stocks gives better insight into how tight the market is. Ex-China wheat stocks are forecast to finish 2022/23 at their lowest levels since 2008/09, which suggests that wheat prices will continue to trade at elevated levels. Global wheat market to continue tightening Source: USDA, ING Research It is very clear that Russia’s invasion of Ukraine has sparked concerns over food security. There is the direct impact in the form of lost Ukrainian supply, whilst there is also the indirect impact where higher fertiliser prices potentially have an impact on global agricultural yields. Governments will want to avoid a repeat of the Arab Spring that we saw a little more than a decade ago. For some, it is too late. Sri Lanka is a good example of how food shortages have already contributed to unrest. There will be a push by governments to ensure adequate food supply and attempts to rein in domestic inflation, particularly in some emerging markets. Recently, we saw Indonesia briefly ban palm oil exports, India surprised the market by banning wheat exports, which was then followed by the Indian government also imposing a 10mt export limit for sugar this season, and finally, Malaysia has banned the export of chicken. As concerns continue to grow, we could very well see this protectionist stance spread. This leaves a scenario where key importers scramble to boost stockpiles, whilst some exporters limit flows. Overall, this would be a bullish scenario for agricultural commodity prices. TagsWheat Russian oil ban Russia-Ukraine Natural gas Food inflation 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
Three scenarios for inflation and central banks | Part Two | ING Economics

Three scenarios for inflation and central banks | Part Two | ING Economics

ING Economics ING Economics 07.06.2022 19:40
  2  High inflation scenario There are several factors that could keep inflation higher for longer, and in this scenario we're assuming: The Russia-Ukraine war drags on for years, and Europe has to make the transition completely away from Russian energy and commodities. Oil prices end the year at $150/bbl if secondary sanctions are introduced on Russian crude. Gas prices for next winter go much higher if flows from Russia into Europe are significantly disrupted. But assuming energy prices don't continue to ratchet higher in subsequent years, at least not at the same pace, then we're still likely to get negative inflation base effects from oil/gas, albeit later than in our base case. China’s zero-Covid strategy continues for the foreseeable future, putting more pressure on supply chains, while the West is increasingly worried about a China-Russia axis. Consequently, Western economies try to re-shore more production to “home” markets. Labour market rigidities become more structural and with hostility to immigration, supply problems persist and workers develop an appetite for wage increases with more unionisation. Fiscal policy remains highly supportive, offsetting the impact of higher prices on disposable incomes. Central banks, especially the Fed, will hike more aggressively this year but inflation fails to come down even with a bit of a slowdown/recession in 2023 (albeit one which doesn’t generate a pronounced increase in unemployment). That results in even more aggressive rate hikes, in a not-so-subtle attempt to bring about a sharp downturn – essentially a modern-day Volcker moment. Inflation is eventually lower, though not before 2024. 3 Low inflation scenario Here, a significant de-escalation in the war facilitates a reopening between Russia and the West. Energy and commodity prices drop significantly. China loosens its zero-Covid strategy more quickly than expected, while also adopting Western vaccines to help insulate against future waves of infection. Supply chain frictions ease, particularly when combined with a swift reduction in durable goods demand as consumers rebalance towards services. Goods that saw swift price rises through 2021 see outright price falls, with some retailers grappling with excess inventory as delayed shipments arrive. Meanwhile, the shortage of skilled workers is solved by increasing the participation rate in labour markets, which could reduce wage pressures. Central banks have overreacted in their policy normalisation, pushing many economies to the brink of recession by the turn of the year and fiscal policy turns restrictive again. In this scenario, central banks implement the same normalisation as in the base case scenario, stopping rate hikes somewhat earlier and actually starting to cut rates again in the second half of 2023. Three scenarios for inflation and policy rates Source: Macrobond, ING Longer-term inflation outlook Over the last few decades, central bank credibility, new inflation targets and several global factors had brought inflation structurally down. In particular, globalisation and digitalisation were two enormous drivers of deflation or disinflation. Just looking at these structural trends, we think that the coming years will bring more upward pressure on prices. This is what we call 3D inflation, ie, inflation structurally driven by decarbonisation, deglobalisation and demographics. Decarbonisation: The war in Ukraine will speed up the green transition in Europe and this decarbonisation is likely to be inflationary, at least in the initial stages. Investment in renewable energies will first bring additional demand for fossil fuels and commodities. The transition toward renewable energies is likely to push up prices initially before renewables and energy autonomy leads to much lower prices. Also, as we try to move towards net-zero we are likely to see European governments incentivise action by raising and implementing carbon taxes, which could limit the scope for significant falls in energy prices. This is less likely to be a route in the US with the prospect of Republicans regaining control of Congress. At the same time, the move to renewables will significantly boost demand for key industrial and rare earth metals used to generate renewable energy and for battery storage, adding to costs and inflation pressures. Consequently, this is likely to argue for higher inflation in the near term, especially in Europe. The hope is this will mean greater energy security, at least in the shorter term, and fewer fluctuations in global energy prices, which should help to depress inflation pressures. Deglobalisation: Businesses may look to re-shore activity as a combination of the pandemic and Russia’s invasion of Ukraine has highlighted major issues over the durability of supply chains. The purpose of offshoring was to reduce labour costs and allow economies of scale to drive down input costs. Ensuring security and stability of supplies over and above keeping costs low will mean price levels and inflation are likely to be higher and consequently lead to higher wages. Demographics: This can affect inflation trends in a number of ways. Fast-growing populations mean the demand for food, housing, entertainment, and so on, is going to be growing more quickly, which could generate higher inflation. However, the composition of the population growth is also important. If it is via high childbirth rates this means more mouths to feed, but there won’t be an immediate positive impact on the supply capacity of the economy versus, say if population growth was primarily due to immigrant workers in their twenties and thirties. Another way demographics impact inflation is that as people move through middle age and head toward retirement they tend to earn and spend less. One conclusion is that countries with faster-growing, younger populations are going to see more economic demand and greater inflation pressures than countries with slower population growth and rapid ageing of the population. Data shows that the US has a younger population than Europe with a median age of 38.4 years versus 47.8 in Germany, 41.7 in France and 40.6 in the UK. In fact, Ireland is the only European country with a lower median age (37.8 years). At the same time, the US is experiencing more rapid population growth of 1% per year versus 0.1% in Germany, 0.2% in France and 0.6% in the UK. Ageing economies are increasingly experiencing labour shortages, which in turn could lead to higher wages. Will structurally higher inflation lead to structurally higher interest rates? Even if the current high headline inflation rates are not sustainable and will come down, the era of disinflation or deflation is clearly over. In the coming year, central banks will be facing structurally higher inflation rates than over the last two decades. The question will then be whether Western central banks will try to fight this structurally higher inflation with the same determination that they fought disinflation, knowing that their success could be as disappointing as over the last two decades. This time around, the impact on the real economy from tightening monetary policy too much could be much more adverse than it was in the fight against disinflation. Our three inflation scenarios in full Source: ING TagsInflation Federal reserve Eurozone ECB 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
Three scenarios for inflation and central banks | ING Economics

Three scenarios for inflation and central banks | ING Economics

ING Economics ING Economics 07.06.2022 18:23
  Inflation is uncomfortably high and in the near term, there's unlikely to be much respite for central banks. But the outlook for 2023 and 2024 is shrouded in uncertainty, and inflation will hinge not just on energy prices but on shortterm factors like supply chain disruption, as well as the longer-term forces of deglobalisation and demographics Source: Shutterstock Content Our base case High inflation scenario Low inflation scenario Longer-term inflation outlook Will structurally higher inflation lead to structurally higher interest rates? Inflation remains one of the hottest economic topics of the moment, affecting households and companies and giving central bankers a very hard time. For a long time, central bankers had labelled accelerating inflation as ‘transitory’, attributing the rise to the reopening effects after Covid lockdowns. With inflation surging for the second year in a row, inflation could still be labelled as ‘transitory’ in the sense that it is mainly driven by global factors like the reopening of economies, supply chain frictions, and the war in Ukraine and its impact on energy and commodity prices. However, it is definitely not ‘transitory’ in the sense of being temporary. In the Western world, in particular, high inflation has become an enormous concern. Headline inflation rates like those seen in the 1970s will most likely be transitory, higher prices won’t. Most central banks and many private sector forecasters have had their respective inflation forecasts wrong for a long time. The main reason for these forecasting errors has been energy and commodity prices, which have surged over the last year. However, forecasting errors were also related to the underestimation of pass-through effects, ie, the willingness and ability of companies to actually charge higher prices. In the past, companies often had to squeeze their profit margins in order to maintain market share when faced with higher costs. Strong demand from consumers, higher savings, and relatively stable income developments, however, have given companies huge pricing power. Additionally, the astonishing surge in American home prices and the rapid feed-through into rents, which carry a one-third weighting in the US CPI basket, has provided additional upside impetus. Looking ahead, the shorter-term path for inflation will be highly dependent on energy and commodity price developments, pass-through effects, and wage developments. Over the longer term, however, other factors will be more important in shaping the inflation outlook. Just think of the peak in globalisation (ie, less global trade, less downward pressure on global goods prices, reshoring or friendshoring), demographics and decarbonisation. We think that all these structural factors will push up inflation globally to higher levels than in the past decade. Higher wage growth in the near term will also add to inflation momentum. While it is always tough to make predictions, we have developed three scenarios for inflation developments in the coming two years. 1 Our base case In our base case, we're assuming that energy prices stay supported through 2022 but begin to ease through 2023, perhaps linked to a gradual de-escalation in the Russia-Ukraine war. As our chart below shows in year-on-year terms, energy prices will begin to exert a negative base effect on headline inflation from late this year. Still, there are plenty of pipeline pressures and pass-through effects should keep core inflation elevated through the remainder of this year. Worker shortages in the US mean there are now almost two vacancies for every unemployed worker, and the resulting wage pressure will mean services inflation remains sticky. Rising house prices have also lifted US core inflation, but Federal Reserve rate hikes should begin to cool the housing market and demand for consumer loans. Weaker house price inflation (and even outright price falls) will begin to pull the rental components within CPI sharply downwards through 2023. Meanwhile, improving supply chains should bring down new car prices in 2023 and 2024, and there are already signs that used car prices have topped out. Reduced consumer demand for goods, now services have reopened, will also help alleviate one source of last year's supply pressure. That, combined with weaker private consumption in the eurozone given higher energy/commodity prices, will reduce companies' ability to pass on higher costs. Demands for higher wages in Europe will only be partially met, keeping wage growth between 2% and 3% year-on-year. The Fed takes rates slightly beyond neutral, but the European Central Bank proceeds more cautiously. In both cases, the normalisation process should end around the turn of the year and keep central banks in a 'wait-and-see' mode throughout most of 2023. Three energy price scenarios and their resulting base effects Source: Macrobond, ING TagsInflation Federal reserve Eurozone ECB 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
Technical Update - Wheat broken key support turning bearish, but indicates higher prices longer term

It's Almost Sure "Hawk Mode" Will Be Turned On By ECB... The Question Is Where Is The Limit And How Will EUR/USD Look Like?

ING Economics ING Economics 07.06.2022 12:24
For the European Central Bank, the question is no longer if but when and by how much it will hike interest rates this summer. Once the rate lift-off has started, the next question will be how far the ECB can go We are starting to see North-South differences in terms of eurozone bank lending   The debate about neutral interest rates has gained momentum. More often now, ECB speakers cite this theoretical level in reference to how far rates will have to increase to fight inflation effectively. That makes it worthwhile to spend some time on getting a good sense of where the current sweet spot of neutral monetary policy could be. We argued in this piece last week that an invisible and moving target is hard to shoot for and that it is better for the ECB to continuously assess how the economy responds to higher rates to see how close it is to an economy that sees inflation revert to 2% in the medium-term. We still prefer the broader concept of financing conditions over any theoretical construction of a neutral interest rate (range). In this piece, we will assess how the economy has responded so far to the reduction of net asset purchases and expectations of rate hikes to get a sense of how far the ECB is likely to increase its policy rate. At this point, we don’t expect the ECB to hike as much as the market does as signs of slowing in the economy and tighter financial conditions suggest that neutral may be reached a lot sooner than many market participants think. So how loose is policy at this point? Monetary policy has been ultraloose in the eurozone for a long time and especially in recent months. As inflation has shot up, real interest rates have been plummeting. In combination with a weakening euro, this has resulted in the loosest environment since the start of the Monetary Conditions Index created by the European Commission – chart 1. Adjusted Taylor rates – although we’re not big fans of these either - have also turned positive again and are approaching 2018/19 levels. All indicators from the monetary side confirm that it is indeed time to increase rates for the first time since 2011. And most would suggest that substantial rate increases are on the cards. But the reality is not that simple. These rule-of-thumb indicators help to assess the stance of monetary policy from a historic perspective but are flawed as a basis for setting policy – just like neutral rates. Monetary policy is ultra loose, suggesting it's time for lift off Source: European Commission, Macrobond, Refinitiv, ING Research calculations How is the economy responding to higher long-term interest rates? Despite the picture of ultra-loose monetary policy that the above indicators paint, let’s not forget that some tightening has already occurred recently. The ECB has ended net purchases under its Pandemic Emergency Purchase Programme and is about to do the same to the Asset Purchase Programme. This, among other drivers, has had an upward effect on long-term yields, which have been on the rise significantly. With higher long-term interest rates comes financial tightening. At this point, the increase in German 10-year yields has been more than 1.5ppt since December last year, which means that the economy is not just cooling because of the effects of the war, but that higher yields are having a tightening impact, too. Looking at it more granularly, we see that the ECB's bank lending survey suggests that banks have tightened credit standards substantially this quarter. This means that it is becoming harder for businesses and households to borrow, not just from a cost perspective, but from the perspective of eligibility as well. In April, businesses – mainly in the service sector – were already indicating that financial factors were starting to limit production again (albeit at relatively low levels). Credit spreads have also been on the rise, meaning that larger businesses that borrow in the market are paying more to borrow. Financial conditions have been tightening more quickly than monetary conditions so far, which means that the market is doing some of the heavy lifting for the ECB already. Net asset purchases are ending and long-term yields have shot up in recent months Source: Macrobond, ECB, ING Research A cooling economy brings us closer to neutral as well Still, it’s hard to disentangle the effects of higher interest rates from other factors influencing growth. Uncertainty from the war, high inflation itself, and a cooling global economy are just a few factors impacting the consumption and investment channel at the moment. With consumer confidence at recessionary levels – probably in response to war uncertainty and the record drop in real wages – it is likely that consumption will cool further in the months ahead. Industry is in a worse position still. With supply chain problems resurfacing and new orders weakening, the sector is set to underperform. Investment appetite has also been waning, according to the ECB. This means that the eurozone economy is set to flirt with recession in the coming quarters. Some ECB policymakers might be tempted to hike interest rates in a technical recession. However, we wonder whether there is really a majority at the ECB which favours rate hikes going significantly beyond the end of net asset purchases and negative deposit rates if the eurozone economy were to enter a recession. Neutral may be closer than most of us seem to think There is no doubt that the ECB must start hiking interest rates. Ending net asset purchases and negative deposit rates stands high on the agenda. However, let’s not forget that inflation is still dominantly a supply-side issue and that the normalising of ECB policy will mainly affect the demand side of the economy. In other words, if the ECB really wants to bring down inflation, it has to weaken the entire demand side of a still weak eurozone economy, faced with high uncertainty and enormous structural changes. To us, this limits the scope for an ECB tightening cycle. Early signs of tightening at the long end of the curve suggest to us that neutral may be at the lower bound of what’s currently being estimated, and the slowing economy may bring that down even further. Consequently, we expect the ECB to hike by 100 basis points between July and 1Q 2023 before taking a pause to see what effect this has had so far. The largest chunk of these hikes will probably be done over the summer. The main risk to this call is that no single ECB decision-maker has any experience with normalising monetary policy. This is why policy mistakes - in an attempt to crush the potential de-anchoring of inflation expectations - cannot be excluded entirely. Read this article on THINK TagsInflation GDP Eurozone ECB 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
Record low consumer sentiment and lower stock prices

Is Rare FX Pair - USD/TWD Going To Change? As Energy Prices Go Up, Taiwan Is Expected To Fight With Inflation

ING Economics ING Economics 07.06.2022 11:57
Inflation in Taiwan increased slightly on a yearly basis. Higher energy prices persist and could be a good reason for the central bank to hike again on 16 June The Taiwan central bank has raised its policy rate by 25bps Higher inflation increases the likelihood of another rate hike in June The CPI rose by 3.39% year-on-year in May after a 3.38% increase in April, while the WPI rose by 16.62% YoY in May after a 15.07% increase a month earlier. The increase in the CPI was mainly due to the sharp rise in fruit and vegetable prices and energy prices. The increase in the WPI, on the other hand, was mainly due to the rise in energy prices. The likelihood of another interest rate hike on 16 June has risen as the central bank may take into account the continued high energy prices. The last rate hike cycle - between March 2010 and June 2011 - resulted in five rate increases of 12.5bp each. The CPI at that time was between 1.34% and 1.94%. 12.5bp or 25bp interest rate hike? The central bank raised the discount rate by 25bp in March this year. It was quite surprising at the time due to the fact that most of the previous moves have been in 12.5bp increments. As inflation rose by only 0.01bp in May, the central bank may choose to raise the discount rate by 12.5bp on 16 June. If the rate is raised by 25bp, then the USD/TWD should move lower to around 28.00 from the current level of 29.51. We will also be looking closely at the wording of the central bank's statement in June to see if the central bank will continue to raise interest rates. Read this article on THINK TagsTaiwan Policy rate Inflation Central bank 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