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The Retail Environment Remains Very Tricky In Near Term

The Retail Environment Remains Very Tricky In Near Term

ING Economics ING Economics 05.12.2022 13:43
A weak start to the fourth quarter as the retail correction continues. Expect the trend to continue with real wage growth still negative   The declining trend in retail sales continued at the start of the fourth quarter after a brief uptick in September. The drop of 1.8% month-on-month was broad-based. We saw declines for both food and non-food retail trade with only fuel sales ticking up. We saw a broad-based decline by country, too. Germany and France both experienced drops of almost 3% while the Netherlands saw a small dip. Spain was the exception among bigger countries with an increase of 0.4%. The peak in sales was in the fourth quarter last year but we’ve seen a correction since. This is because of slowing demand related to the large purchasing power squeeze Europeans are experiencing, as well as the shift in the consumer's preference from goods to services since the economy reopened post-Covid lockdowns. The retail environment remains very tricky for the months ahead. We don’t expect an immediate recovery as real wages remain deep in negative territory. Inventories in retail were depleted in 2021 as shortages and high demand resulted in a struggle to keep the shelves filled for retailers. Now this situation is quickly reversing. Retailers have been stocking up as supply-side problems have been fading, but demand has also quickly started to fade. That has resulted in quickly filled storage sites and uncertainty about whether sales will live up to expectations in the holiday period. The number of retailers that expects to raise prices fell in November. 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
There are some factors which can help greenback in the remainder of the year. Next week BoE, Fed and ECB decide

There are some factors which can help greenback in the remainder of the year. Next week BoE, Fed and ECB decide

ING Economics ING Economics 05.12.2022 09:18
This week will prepare markets for the last key events of the year: policy meetings by the Fed, ECB and BoE on 14-15 December. It looks like the dollar's long positioning has now completely faded, and three factors - the Fed remaining hawkish, China's optimism being misplaced and energy prices rising again - could contribute to a USD re-appreciation   European Central Bank president Christine Lagarde and US Fed chair Jerome Powell USD: Balanced positioning The dollar index is now trading 8% off its early November high, and it can’t be excluded that a busy couple of weeks before the festive period will continue to put some pressure on the greenback, which is incidentally seasonally weak in December. This is, however, not our base case, as we suspect instead that the dollar correction may have run its course, and several factors should allow for some re-appreciation into year-end. First, markets have speculated about a dovish pivot from the Federal Reserve after signs of slowing inflation, but our suspicion is that the Fed will maintain its hawkish narrative for longer, implicitly or explicitly protesting against the recent drop in yields. Strong jobs numbers on Friday should offer a basis for this. After all, endorsing the market’s dovish narrative may be premature and risky for the Fed whose plan should be to let markets do the heavy lifting in tightening - and our rates team is bearish on Treasuries in the near term. A still highly inflationary global environment may struggle to live with sub-3.50% 10-year yields. Secondly, USD/CNY is trading below 7.00 for the first time since September, with the yuan following Chinese risk assets higher after the government announced an easing of Covid rules. The government’s move appears to be a direct consequence of recent demonstrations against its Covid policy, but a further untightening of restrictions may prove complicated. Many parts of the country – including Beijing – are facing a surge in cases, and the vaccination rates (especially booster doses) among the elderly still look insufficient. At the same time, the real estate and export sectors remain a key concern for the medium outlook in China, and one that may prevent the yuan from appreciating much further. Third, with Russia rejecting the cap on oil prices at $60/bbl and threatening output cuts, along with a projected drop in temperatures in many parts of Europe, the energy crisis may return and we see ample room for gas and oil prices to climb back. That would be a positive development for the dollar.   Today, the US calendar includes ISM service figures for November, while PPI and University of Michigan survey numbers are the other major releases to watch this week. There are no Fed speakers as the pre-FOMC blackout period has now started. According to our calculations based on CFTC data, the dollar’s aggregate positioning against G10 currencies is now neutral, and at the lowest levels since August 2021. With more limited room for position-squaring effects to weigh on the dollar, our view for this week is that we could see at least some stabilisation in the greenback. DXY may struggle to extend its drop below 103/103.50, and a rebound to 105.50/106.00 looks more likely in our view. Francesco Pesole EUR: Energy scares coming back? The eurozone’s calendar lacks market-moving data this week, and only includes some final releases (GDP, PMIs). However, we’ll get a chance to hear the last few comments by European Central Bank officials before the 15 December policy meeting. Markets appear to have reinforced their 50bp expectations over 75bp, especially after the latest deceleration in eurozone inflation which makes the hawkish rhetoric harder to defend. However, energy-related news should be more relevant for the euro this week, with falling temperatures in Europe and the price cap on Russian oil coming into effect today. Urals grade crude is trading around $10 below the $60/bbl cap, but Russia has already announced that it would prefer to trim production rather than sell at the embargo price. OPEC+ has held production steady and is only scheduled to meet again in February, but we continue to see risks that a tighter picture in the energy market in 2023 could lead to higher oil and gas sooner rather than later. Given the high sensitivity of EUR/USD to the eurozone’s terms of trade (which is primarily driven by energy prices), further upside risks for energy commodities equal downside risks for the euro. This week, some dollar stabilisation could make the EUR/USD rally run out of steam around the 1.0600/1.0650 area, and possibly lead to a more sustainable drop below 1.0450/1.0500. We remain bearish on the pair into year-end. Francesco Pesole GBP: Cable is still a dollar story Markets have aligned their expectations for the Fed, the ECB and Bank of England’s December rate hikes at 50bp. There is only a residual 7bp of extra tightening in the OIS curve for the 15 December BoE meeting, and our call is also for a half-point move. Rate expectations are unlikely to be stirred this week given the BoE has entered its quiet period and there are no major data releases in the UK. We struggle to see cable extend its rally to 1.25 and beyond, but it will undoubtedly be primarily a dollar/risk sentiment story driving the pair before the BoE meeting. A contraction below 1.20 seems more appropriate given global and UK macro fundamentals.   Francesco Pesole CEE: Ecofin may close the Hungarian saga This week will kick off with the release of wage growth in the Czech Republic, a key number for the Czech National Bank given that a wage-inflation spiral is a major risk for the board. The central bank forecasts 6.1% in nominal terms; we expect a number closer to 8.0% year-on-year. However, we don't believe this will be enough to trigger a hawkish reaction. On Tuesday, EU finance ministers may vote on a European Commission proposal to freeze Hungary's access to EU funds. On Wednesday, we will see industrial production results in the Czech Republic and Hungary where we expect to see slowing but still solid numbers. In Romania, a breakdown of 3Q GDP will be published and later we will see the National Bank of Poland's decision. After the publication of inflation last week, which surprised to the downside, we can expect nothing but a confirmation of the end of the hiking cycle. Then on Thursday, November inflation in Hungary will be published. We expect a further jump in YoY numbers from 21.1% to 22.4% and a similar jump in core inflation, in line with market expectations. In the FX market, the CEE region remains well supported by the external environment, despite our expectations, especially thanks to the weak US dollar, which remains a question mark for this week. At the local level, the main themes remain the same: Hungarian forint and Polish zloty. In Hungary, FX remains mainly driven by the EU story and we should see new headlines this week. However, the markets are visibly losing patience, resulting in high volatility, which we expect this week as well. Positioning in our view became more balanced last week, creating room for a new rally if we hear positive news, which is our baseline. In this case, we expect the forint to return below 405 EUR/HUF. In Poland, the main topic will of course be the NBP's meeting, which will again test the market's willingness to accept the decision to end the hiking cycle. The massive rally in rates and POLGBs last week following the release of inflation data further widened the gap between the zloty and interest rate differential. FX thus remains vulnerable, in our view. We remain bearish with expectations for the zloty to return above 4.72 EUR/PLN. Frantisek Taborsky 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 Indian Sugar Mills Association (ISMA) Shows That Domestic Sugar Production Rose

The Indian Sugar Mills Association (ISMA) Shows That Domestic Sugar Production Rose

ING Economics ING Economics 05.12.2022 09:17
The EU ban on Russian seaborne crude oil comes into force today, along with the G-7 price cap for Russian oil. Meanwhile, OPEC+ agreed to leave output targets unchanged at its meeting yesterday despite the uncertain demand outlook Source: Flickr Energy: OPEC+ policy remains unchanged The OPEC+ meeting yesterday was a fairly quick affair with the group deciding to leave output policy unchanged. As a result, the group will continue with its cuts of a little over 1MMbbls/d which were announced back in October. OPEC+ will next meet in June, although given the amount of uncertainty, one cannot rule out the potential need of calling for a meeting in the interim. EU members finally agreed on a level for the Russian oil price cap at the end of last week. The EU agreed on a cap of US$60/bbl, which is below the initial proposal of US$65-70/bbl. However, the cap is still above what Russia will be receiving for its Urals, which calls into question how effective the cap will be at the moment. The price cap comes into force today, along with the EU’s ban on Russian crude oil. The level of the cap suggests that we are unlikely to see Russia reducing output as a result. Despite no change in OPEC+ policy and the high level of the price cap, oil prices have been well supported so far in trading today. A further relaxation in China’s Covid restrictions has proven supportive for the market. The latest market positioning data shows that speculators continued to reduce their net long in ICE Brent over the last reporting week. Speculators reduced their net long by 38,837 lots to leave them with a net long of 99,211 lots as of last Tuesday. This is the smallest net long speculators have held since November 2020 and reflects growing demand concerns. Metals: Edging higher as China eases Covid restrictions Copper has continued its rally today after the latest move by Chinese authorities, which sees an easing Covid in testing requirements across major cities. Meanwhile, recent efforts by the Chinese government to revive its property sector have also supported the metals complex. The latest data from Shanghai Futures Exchange (ShFE) shows that weekly inventories for zinc dropped by 2.5kt (-12% WoW) to 17.9kt (fresh record lows) as of Friday. Among other metals, aluminium stocks fell by 14.5kt (-13% WoW) for a seventh consecutive week to 95.5kt (lowest since 2016) as of last week. According to reports, IGO has suspended production at its Nova nickel operation in Western Australia after a fire damaged its power station over the weekend. The company expects that the restoration of full power supply could take up to four weeks. Nova produced 26.7kt of nickel in the last financial year. Agriculture: Ukraine grain shipments continue to lag The latest data from Ukraine’s Agriculture Ministry shows that Ukraine has exported around 18.1mt of grains so far in the 2022/23 season, a decline of 30% from the same period last year. Total corn shipments stood at 9.7mt (+63% YoY), while wheat exports fell 53% year-on-year to 6.9mt as of 2 December. Data from the Indian Sugar Mills Association (ISMA) shows that domestic sugar production rose 1.5% YoY to 4.79mt (until 30 November) in the current 2022/23 marketing year. ISMA also reported that 434 mills were crushing sugar cane by the end of last month compared with 416 operating mills a year earlier. Read this article on THINK TagsRussian oil price cap Russian oil ban OPEC+ 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
The Indian Sugar Mills Association (ISMA) Shows That Domestic Sugar Production Rose

Global Sugar Output In The 2022/23 Marketing Year Is Expected To Hit Near Record Levels

ING Economics ING Economics 04.12.2022 10:02
The global sugar market is set to see yet another surplus, driven by expectations of stronger output from Brazil, India and Thailand. We believe the surplus environment should limit further upside in sugar prices through 2023 In this article 2022/23 global surplus CS Brazil to see larger 2023/24 crop How much will India export in 2022/23? Thai output continues its recovery EU sugar market set to tighten   Shutterstock 2022/23 global surplus Global sugar output in the 2022/23 marketing year is expected to hit around 180mt, which would leave it near record levels. Stronger output is largely due to expectations of higher output from Brazil. This production growth should mean that the global sugar market will see yet another surplus in the 2022/23 season- in the region of 4mt. This surplus should cap prices although we could see seasonally stronger prices over the CS Brazilian off-crop (1Q23). How much strength will really depend on how Indian sugar exports perform. CS Brazil to see larger 2023/24 crop The current Centre South Brazilian crop is quickly coming to an end as the region moves deeper into the rainy season. The industry is expected to crush around 530m tonnes of sugarcane (vs. 523mt last season) and with a sugar mix approaching 46%, sugar output is expected to total 32.5mt tonnes, marginally up on the 32mt produced the previous season. Changes to fuel taxes this year in Brazil (due to high prices) led to lower gasoline prices. The ethanol/gasoline parity has been above 70% for much of the current season, which saw motorists deciding to fill up with gasoline rather than hydrous ethanol this year. As a result, domestic ethanol demand in Brazil has been weak this year. The industry started the crush late this season and given the fact that the region is entering the rainy season, it's unlikely all cane will be harvested this season. Therefore, there is the potential for an early start next season, so that mills can crush this stood-over cane. An earlier start to the 2023/24 crush would be helpful to the global market as it would ease some of the seasonal tightness during the off-crop. Furthermore, harvesting stood-over cane next season suggests that we will see a larger CS Brazil crop next season. Given the more recent strength in sugar prices along with a generally weak Brazilian real, sugar returns for Brazilian mills are attractive in BRL terms. As a result, we would expect that mills increase their sugar mix for the upcoming 2023/24 season, which officially gets underway in April. However, with the change in government, we could also see some changes to the domestic fuel policy, which could have a knock-on effect on the sugar/ethanol production mix. While recent rainfall has proved disruptive for the current harvest, this rainfall is likely to prove beneficial for the 2023/24 crop. The size of the 2023/24 season will depend on how the rainy season develops but early estimates suggest that CS Brazil could crush close to 570mt of cane. A larger cane crush and expectations of a stronger sugar mix suggest the region could produce in excess of 34.5mt of sugar next season. This would be the highest output from the region since 2020/21. How much will India export in 2022/23? Following Russia’s invasion of Ukraine, India has been concerned about inflation, which saw the government take steps to try to limit domestic price increases. This has seen the government take action to restrict exports of wheat, rice and sugar. In the 2021/22 season, mills were allowed to export 11.2m tonnes of sugar. And even though India is set to produce another large crop in the 2022/23 season, the government has decided to set the quota for the current 2022/23 season at 6m tonnes. To be fair, this quota runs until the 31 May. The government will then decide on whether to issue another tranche of export quotas for the remainder of the season (June-September). There are reports suggesting that an additional 3m tonnes of quotas could be made available at a later date. This will obviously be dependent on how the 2022/23 crop develops and ultimately domestic prices. In addition, there have been reports of a small number of Indian mills defaulting on export contracts and trying to renegotiate at higher levels given the more recent strength in the world market. However for now, the tonnage of defaults appears to be marginal. India is expected to produce 36.5m tonnes of sugar, an increase of almost 2% year-on-year. As we have seen in recent years, the amount of sucrose diverted to ethanol is expected to grow. Last season, 3.4mt of sucrose was diverted to ethanol production, whilst for this season 4.5mt of sucrose is expected to be diverted. This is a trend that will only grow in the years ahead given the government’s ambitious plans to bring forward a 20% ethanol mandate from 2030 to 2025. For 2023, the government is targeting an ethanol blend of 12% in fuel. This move helps reduce India’s import needs for oil whilst also dealing with persistent domestic sugar surpluses, which are largely due to government policy of fixing sugarcane prices for farmers. Thai output continues its recovery Thailand is expected to see sugar production in the current 2022/23 season increase by 3% YoY to 10.5mt. However, output is still expected to fall well short of the record 14.7mt produced back in the 2017/18 season. Thai output in recent years has suffered due to drought conditions but is slowly recovering. Planted area is still below levels seen prior to the drought years of 2019/20 and 2020/21. Higher fertiliser prices for much of this year have pushed farmers to plant more cassava instead of sugarcane, which is less fertiliser-intensive. Tighter EU sugar market European Commission, ING ResearchNote: Output from 2020/21 onwards excludes the UK EU sugar market set to tighten The European sugar market has seen significant strength in prices so far this year. According to data from the European Commission, prices in September averaged EUR515/t. However, these prices are not a true reflection of spot prices. In fact, spot prices have been reported to be in excess of EUR1,000/t. While EU sugar production in 2021/22 saw a recovery, the hot and dry summer seen across parts of Europe will have had an impact on the 2022/23 crop. European Commission data estimates that sugar yields will be down 3.4% YoY to 11.4t/ha while area is also expected to be down 4.3% YoY to 1.34m hectares. As a result, EU sugar production this season is estimated to total a little under 15.5mt, down almost 1.2mt YoY. Assuming EU consumption in the region of 17.3mt, this does leave the region with a shortfall of a little more than 1.8mt. It is clear that the EU will need to meet this through a combination of stronger imports, weaker exports and the drawing down of inventory. The Commission estimates that stocks at the end of 2022/23 will total 1.3mt, which meets around 8% of annual demand, similar to levels that we have seen in recent seasons. Given that EU spot prices are trading well above the world market, one may think that we would see a flooding of sugar into the EU. However, import duties on world market sugars are prohibitively high, which means we are not likely to see these flows. However, there is room for increased import volumes under current import quota programmes, which should prevent the EU market from getting significantly tighter. In addition, the large premium at which Europe is trading to the world market should limit EU sugar exports. ING sugar price forecast ING research Read the article on ING Economics TagsSugar Ethanol Brazil Agriculture 2023 Commodities outlook 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
Global Wheat Production Is Still Expected To Edge Higher

Global Wheat Production Is Still Expected To Edge Higher

ING Economics ING Economics 04.12.2022 09:51
Global wheat markets are likely to tighten over the 2022/23 season. Meanwhile, there are already several supply risks building for the next marketing year, which should support prices through 2023 In this article 2022/23 balance tightens Potential for lower output from key producers in 2023/24 What does this mean for prices?   2022/23 balance tightens Despite the fact that Ukraine has produced significantly less wheat in the 2022/23 season, global wheat production is still expected to edge higher in the current season. This is predominantly driven by a recovery in Canadian output as well as Russia producing a record harvest this season in excess of 90mt. However, even with supply growth, global wheat ending stocks for 2022/23 are expected to tighten to a little less than 268mt – the lowest levels since 2016/17. Given the significant amount of inventory carried in China, ex-China stocks are significantly tighter, standing at around 123mt – the lowest level since 2007/08. It is clear that Ukrainian wheat output this season has suffered. Due to the ongoing war, not all acreage would have been harvested. Ukraine planted more than 6m hectares of winter wheat for the 2022/23 season, but only around 4.6m hectares were harvested. As a result, Ukrainian wheat output is estimated in the region of 20mt, down from 33mt in the previous season. However, clearly the issue around Ukrainian supply this season is not just about production but the ability to export. The Black Sea Grain Initiative has allowed for larger export volumes. Although, wheat exports are still down around 55% year-on-year, whilst full season exports are expected to decline by 42% YoY to a total of 11mt. While the Black Sea grain deal was recently renewed, there is still plenty of supply risk from the Black Sea. However, Russian wheat output has performed strongly this year and farmers are expected to harvest a record crop in excess of 90mt. This is a result of good growing conditions. Russian wheat exports had struggled initially in the season, but the pace appears to have picked up recently. While there are no specific sanctions against Russian food product exports, there will be a fair amount of self-sanctioning and so potentially more difficult to get financing, shipping and insurance for this trade. It is estimated that Russia could export 42mt of wheat in 2022/23, up from 33mt last season. These exports would still be below full potential and so Russia is expected to carry a larger amount of stock into next season. The United States is expected to see the total wheat output in 2022/23 remain largely unchanged from 2021/22. This is despite a strong recovery in spring wheat output. Output in 2022/23 is estimated at 1.65b bushels (44.9mt), up 0.2% YoY, although this is still below levels seen in recent years. As a result, US ending stocks for 2022/23 are expected to be the tightest they have been since 2007/08. Drier weather in Europe has weighed on wheat yields in the European Union. These lower yields have offset larger acreage in the region. As a result, total EU wheat output in 2022/23 is estimated to have fallen by almost 3% YoY to 134mt. This lower output is expected to lead to a sizeable drop in EU ending stocks.   As for India, there had been a lot of noise around the government putting in place an export ban on wheat earlier this year. This was due to concerns over a domestic heatwave along with broader concerns over rising food prices following Russia’s invasion of Ukraine. While India is a large producer of wheat (in excess of 100mt), it is a marginal exporter. Therefore, regardless of the export ban, India would have not been able to play a significant role in offsetting Ukrainian supply losses. Australia is expected to see its second-largest wheat crop on record in 2022/23, with expectations of a 34.5mt crop. The harvest is currently underway. And while heavy rainfall for much of the year has seen crop prospects grow as we have moved through the year, this rainfall will raise some concerns over quality. In addition, whilst Australia is on course to produce a second consecutive large crop, there are export capacity constraints, which will limit how much of this volume can come out in a timely manner. Global wheat ending stocks USDA, ING Research Potential for lower output from key producers in 2023/24 As things stand, risks are skewed towards a tighter wheat balance in the 2023/24 marketing year. The key uncertainty is around Ukraine, not only in terms of how much wheat is produced, but also if this supply will be able to be exported. The Black Sea Initiative has been renewed for 120 days, but clearly risks to these flows remain. In addition, weather as usual will play an important role and right now there are already concerns for the next US winter wheat crop. It is also important to bear in mind the potential for lower fertiliser usage leaving crop yields more vulnerable next year. In America, the United States Department of Agriculture (USDA) expects that plantings for 2023 wheat will increase by 3.9% YoY to 47.5m acres. The general strength that we have seen in wheat prices this year should prove supportive for plantings. However, there are already concerns over US winter wheat. Winter wheat is in the worst condition it has been for this time of year in at least 20 years – a little more than 30% of the winter wheat crop is rated good-to-excellent. The poorer condition of the crop is due to drought conditions with 75% of the winter wheat area under drought at the moment, while more than 50% of the crop area is suffering from at least severe drought. This does suggest that we could see some downside to winter wheat yields, and this is key for total US output given that winter wheat makes up, on average, around 70% of total wheat output. However, this poor crop condition does not guarantee that yields will be lower, but the risks are certainly growing for the US domestic wheat balance to tighten further next season. Ukraine would have seen lower plantings of winter wheat for the 2023/24 due to the ongoing war. According to ministry data, the winter wheat area for next season is expected to total 3.8m hectares, which is down 38% from this year. Although, not all wheat areas this season would have been harvested. If we compared the projected planting for next season to the estimated harvested area for the current season, it would be a 17% decline. So, Ukraine will see a smaller wheat crop for next season. For spring crops, there is obviously much more uncertainty as this will depend on how the war evolves over the coming months. It appears as though it will be a challenge for Russia to repeat its current record harvest. Heavy rainfall has delayed winter plantings, whilst weaker prices in Russian ruble terms and export taxes do not help. Therefore, it is likely that area will shrink next season. Early estimates suggest that Russian wheat output could shrink between 10-15% next season. What does this mean for prices? Early estimates indicate that we could see a further tightening in the 2023/24 global balance, which suggests that wheat prices are likely to remain fairly elevated and well-supported. A key downside risk to this view would be de-escalation in the Russia/Ukraine war, as this would likely remove a fairly large risk premium in the market. ING wheat price forecasts ING research TagsWheat Russia-Ukraine Grains Commodities Outlook 2023 Agriculture Read the article on 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  
Poland: A Pause In Its Rate Hiking Is Officially Declared

Poland: A Pause In Its Rate Hiking Is Officially Declared

ING Economics ING Economics 03.12.2022 12:15
Following a lower CPI reading, the Polish Monetary Policy Council officially declared a pause in its hiking cycle. So for next Wednesday, we are expecting the rate to remain at 6.75%. In Hungary, we see month-on-month headline inflation at around 1.8% and the core rate at 1.7%, due to a slowdown in both the industrial and service sectors In this article Poland: end of the cycle Turkey: risks are still on the upside Hungary: year-on-year indices of inflation rise further   Shutterstock Poland: end of the cycle NBP rate in December (6.75% - unchanged) The Polish Monetary Policy Council officially declared a pause in its rate hiking though in practice, this is the end of the cycle. With CPI inflation moderating from 17.9% year-on-year in October to 17.4% YoY in November (flash estimate) and GDP growth pointing to weak household spending and fixed investment, the Council is unlikely to tighten further anytime soon. Policymakers will wait for the impact of rate hikes delivered so far and hope that further tightening by central banks in core markets, along with a global economic slowdown, will bring Polish inflation down. However, the National Bank of Poland's target of 2.5% (+/- 1 perc. point.) is not in sight over the medium term. Turkey: risks are still on the upside In November, we expect annual inflation to change direction and drop to 84.4% (2.9% on monthly basis) from 85.5% a month ago, as base effects start to kick in. These will become more pronounced in December and early next year. Stability in the currency is another factor for some moderation in the pace of increase lately. However, the risks lie to the upside given the deterioration in pricing behaviour and still prevailing cost-push pressures. Hungary: year-on-year indices of inflation rise further October economic activity data is due next week in Hungary. We expect the retail sector to post a slowdown in sales volume, as household purchasing power is increasingly hit by rising inflation. Business survey indicators, including the PMI, suggest that we might also see a temporary slowdown in industrial production in October,  after a surprisingly strong September. The next big thing however is the November inflation print. We see food prices rising further as domestic producer prices are skyrocketing in the food industry (close to 50% YoY). Still, the strengthening of the forint may ease some pressure on imported inflation, and as aggregate demand retreats, inflation in services could also slow down. In all, we see the month-on-month headline inflation rate at around 1.8% and core inflation at 1.7%. But these rates are still higher than last year’s figures from the same month, thus the year-on-year indices are going to rise further, with the headline and core rates surpassing 22% and 23%, respectively. When it comes to the budgetary situation, unlike in the previous two months, we see a monthly deficit. This is fuelled by the extra pension adjustment by law due to high inflation. This payment triggered a significant outflow of cash in November, pushing the monthly budget balance into negative territory despite rising revenues from high inflation and windfall taxes, in our view. Key events in EMEA next week Refinitiv, ING TagsTurkey Poland MPC 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
Bank Of Canada Meeting Ahead: Whether It Will Be A 25bp Or 50bp Hike?

Bank Of Canada Meeting Ahead: Whether It Will Be A 25bp Or 50bp Hike?

ING Economics ING Economics 03.12.2022 12:09
The Bank of Canada's policy meeting will be the highlight of next week, and it's a very close call on whether to expect a 25bp or 50bp hike. For now, we favour the latter given robust third-quarter GDP data, ongoing elevated inflation readings and a tight jobs market In this article US: Recession fears remain elevated Canada: Favour 50bp however a very close call   Shutterstock US: Recession fears remain elevated We are rapidly heading towards the 14 December FOMC meeting where a 50bp interest rate hike looks likely after four consecutive 75bp moves. Nonetheless, the Federal Reserve will not be pleased with the recent sharp falls in Treasury yields and the dollar, which are loosening financial conditions and undermining the Fed’s efforts to beat inflation down. Consequently, we are likely to see strong messaging in the press conference and the accompanying forecast update that the rate rises are not finished and that the policy rate is set to stay high for a prolonged period of time. Markets are likely to remain sceptical given that recession fears remain elevated. Softening consumer confidence, weaker ISM services and a relatively subdued PPI report are unlikely to do the Fed many favours next week in this regard. Canada: Favour 50bp however a very close call In Canada, the highlight will be the central bank policy meeting for which both markets and economists are split down the middle on whether it will be a 25bp or 50bp hike. We favour the latter given a robust 3Q GDP outcome, the tight jobs market and the ongoing elevated inflation readings. But we acknowledge there are signs of softening in the economy. The housing market is looking vulnerable and Canadian households are more exposed to higher rates than elsewhere due to high borrowing levels so we recognise this is a very close call. We are getting very close to the peak though, which we think will be 4.5% in 1Q 2023. Key events in developed markets next week Refinitiv, ING This article is part of Our view on next week’s key events   View 3 articles TagsUS Canada 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
Global Wheat Production Is Still Expected To Edge Higher

Commodities Outlook: Part Of The Supply Gap In 2023 Will Remain

ING Economics ING Economics 03.12.2022 12:03
Fertiliser supply decreased in 2022 and prices rose to record highs causing a global drop in demand. High gas prices, sanctions, and export restrictions have resulted in a shift in trade which will continue into 2023. Meanwhile, the lower use of fertilisers will weigh on crop yield expectations for the upcoming season In this article High prices create ripple effects Considerable shifts in fertiliser trade Prospects for 2023 Impact on food production   High prices create ripple effects The war in Ukraine, Western sanctions on Russian and Belarussian exports, and Chinese export restrictions have created turmoil in fertiliser markets. The surge in fertiliser prices that started in 2021 led to deteriorating farmer affordability during 2022 and lower demand. Uncertainty about the amount of fertiliser that farmers are going to need for the upcoming season leads to a more muddied outlook for next year’s crop yields. This has an upward effect on commodities futures. Although the urgency of the situation for global food security is increasingly being recognised, there are reasons to be cautious about any quick improvements in the situation. History shows that unwinding sanctions often prove to be quite a sticky process against a backdrop of geopolitical tensions. Fertiliser prices are still high despite recent falls Monthly prices per metric ton Refinitiv, ING Research*DAP = Diammonium phosphate Considerable shifts in fertiliser trade Buyers have been busy this year finding alternative suppliers due to the sharp drop in fertiliser exports from Russia (nitrogen, potash), Belarus (potash), China (nitrogen, phosphate) and the EU (nitrogen). In the EU, lower local ammonia and urea production in combination with a reduced inflow of Russian products has been partially offset by imports from other countries such as Egypt and Algeria. This is also happening with potash where Belarussian exports to the EU have ceased and Russian imports dropped by more than 70% up until September. Those decreases are partially made up by a 25% increase in potash imports from Canada. In the process, European buyers are crowding out other buyers, similar to what has been happening in liquefied natural gas (LNG) markets. Meanwhile, other large importers, including Brazil, China, India and the US, have not turned away from Russian fertilisers and absorbed some of the flows that have become available, as they have generally worked out how to deal with any additional red tape. The EU is turning to other countries for ammonia imports Import volume in tonnes, 3-month average, January 2020 to September 2022 Eurostat, ING Research Prospects for 2023 High prices drive producers across the globe to ramp up production at existing sites and increase investments in new capacity which has a downward effect on prices. Still, it’s likely that part of the supply gap in 2023 will remain. Geopolitics is a major factor in how the market will evolve in 2023 as European sanctions on exports from Russia and Belarus are particularly influential. Both a de-escalation of the war in Ukraine and global pressure to reduce restrictions on fertiliser trade flows for the sake of food security could lead to a winding down in sanctions. This could, for example, result in the reopening of the Tolyatti-Odessa ammonia pipeline (output: 2.5 million tonnes, 1.5% of global production) and the release of fertiliser cargoes stuck in European ports. However, further tightening of sanctions cannot be completely ruled out in case the war in Ukraine escalates. Impact on food production In our view, the impact of the increase in fertiliser prices on crop yields has been soft this year as many farmers buy fertiliser ahead of the season and affordability was still quite favourable at the start of 2022 due to high commodity prices. But during the course of 2022 fertiliser imports in major markets such as India and Brazil have dropped below the levels of the previous year. The impact on yields could become more pronounced in 2023, especially in African and Asian countries where farmers have generally fewer means to adapt and get less government support compared to their counterparts in Europe, the US and China. Still, the process is likely to be gradual for two reasons. First, while the lower application of nitrogen fertilisers is directly affecting yields, the reduced use of phosphate and potash has a longer lag before it kicks in. Second, some of the impact can be mitigated by farmers and such mitigation can also be in the interest of food traders and manufacturers. Farmers could invest in the more precise application of (liquid) fertilisers, increase the use of organic fertilisers (like biochar) or opt to shift to crops that require less fertiliser (such as legumes or cassava). All of these have their drawbacks and limitations. Shifting to a different crop, for example, requires specific knowledge to be successful. So overall it will be hard to match the effectiveness of synthetic fertilisers. As always, favourable weather in the major growing regions during the season can ease some of the impact of under-fertilisation, while bad weather can cause more problems. TagsUS Food & Agri European Union Emerging Markets Commodities Outlook 2023 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 World Steel Association Expects Chinese Steel Demand To Fall

The World Steel Association Expects Chinese Steel Demand To Fall

ING Economics ING Economics 03.12.2022 11:56
Iron ore has been one of the worst-performing commodities this year. Concerns over Chinese macroeconomic performance and continued Covid-19-related disruptions have been key to driving prices lower. Hopes of a China recovery in the second half of 2023 should provide support in the medium term. The short-term outlook is more bearish In this article Gloomy demand outlook Demand outside of China also struggling China steel output lags China iron ore imports slow down Australian supply to edge higher, Brazilian shipments suffer Iron ore prices to ease in the short term   Shutterstock   Gloomy demand outlook Iron ore prices have roughly halved from their year-to-date high of US$171/t seen back in March to as low as $81/t recently – almost its lowest since early 2020. Futures in Singapore have fallen for seven consecutive months, the worst run since the contract debuted in 2013. China’s attempts to crush outbreaks of Covid-19 have seen tough restrictions, which have not been supportive of the country’s property market, the main driver of iron ore demand. China alone accounts for about two-thirds of seaborne iron ore demand. The sentiment has deteriorated since China’s 20th Communist Party Congress with the property sector policy tone remaining downbeat and the government continuing to maintain the principle that “housing is for living in, not for speculation”. China’s property sector accounts for almost 40% of its steel consumption. That sector has been in a steep decline for more than a year amid continued tightening of housing measures across China since March when cities began to introduce a sales ban. China’s home sales declined again in October, reflecting the difficulties facing the property market, as the slowing economy and ongoing Covid-19 outbreaks dampened homebuying demand. In the 10 months from January through October, national home sales dropped 25.6% in terms of square meters and 28.2% in terms of value, according to data from the National Bureau of Statistics. Property investment dropped 8.8% over the period, worsening from an 8% decline in the first nine months. New construction starts by property developers in the country fell 37.8% between January and October, compared with the 38% decline between January and September, with developers reluctant to start new construction. The World Steel Association expects Chinese steel demand to fall 4% for the whole year, driving a projected 2.3% drop in global demand amid surging inflation and rising interest rates. In 2023, new infrastructure projects and a mild recovery in the real estate market could prevent further contraction of steel demand. Looking forward, the outlook for iron ore is going to largely depend on how China approaches any further Covid outbreaks as well as the scale of stimulus the Chinese government unveils. Most recently, China’s regulators announced a 16-point plan to rescue the country’s property sector. The measures include encouraging banks to lend to developers and loosening down payment requirements for homebuyers. China’s GDP is expected to fall to 3.3% this year, according to forecasts by our China economist, well below the government’s 5.5% target. At the same time, global demand for steel is weakening as central banks tighten monetary policy. In 2023, the International Monetary Fund predicts China’s GDP to grow by 4.4%. Meanwhile, Chinese government advisers said they will recommend modest economic growth targets for next year ranging from 4.5% to 5.5% Demand outside of China also struggling Steel demand across the rest of the world has been weakening as well, reflecting the impact of high energy prices as well as central bank's increasing interest rates. In the EU, steel demand is expected to contract by 3.5% in 2022, according to the World Steel Association. With immediate improvement in the gas supply situation not in sight, steel demand in the EU will continue to contract in 2023 with significant downside risk in case of harsh winter weather or further disruptions to energy supplies. On the supply side, in the January-September period of this year, crude steel production within the European Union fell by 8.2% compared with the same period a year ago, to 105.8 million tonnes, based on WSA data. Japan’s production was down by 6% at 67.8mt, while South Korea’s volume decreased by 4.4% to 50.5mt. India is the only bright spot in the global steel market with the country’s output reaching 93.3mt in the January to September period, a rise of 6.4% year-on-year. Total production is forecast to grow 6.1% in 2022 and 6.7% in 2023 in line with the Indian Government’s target to double national production capacity to 300 million tonnes by 2030-2031 on the back of strong urban consumption and infrastructure spending, which will also drive demand for capital goods and automobiles. India’s growth figure is the highest among top global steel consumers. Most recently, India has unexpectedly removed export duties on a number of steel products and iron ore, which were imposed back in May. This includes iron ore lumps and fines with less than 58% iron content and iron ore pellets. Meanwhile, iron ore lumps and fines with an iron content of more than 58% will still attract a 30% duty. This will mean iron ore producers will return to the export market but the extent of imports will depend on demand from its main importer, China. Iron ore prices traded under pressure following the announcement. China steel output lags Chinese steel output has also 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. Negative steel margins have prompted mills to intensify output cuts ahead of the winter steel curbs, with around 20 shutting down blast furnaces and speeding up annual year-end maintenance, shutting off at least 100,000 tonnes of daily output. Steelmakers in China are usually ordered to decrease production during the winter months to cut back on pollution. China’s steel production is falling – in large part because of China’s property crisis. China’s total steel production from January to October came to 860.57 million tonnes, down 2.2% on the same period last year, and compared with a 3.4% year-on-year contraction in January-September, according to data from the National Bureau of Statistics. Meanwhile, China’s cap on annual steel output to limit carbon emissions paints a bleak picture for iron ore demand going forward. China monthly crude steel output (million tonnes) WSA, ING Research China iron ore imports slow down Amid lower steel output from China, iron ore imports have also been under pressure this year. The world’s top consumer brought in 94.98mt of iron ore in October, down from September’s 99.71mt, the General Administration of Customs said, while they fell 1.7% year-on-year to 917mt in the first 10 months of the year. At the same time, iron ore inventories at Chinese ports have been growing since mid-October, reaching 136mt in mid-November. China’s iron ore port inventory is a key indicator that reflects the supply and demand balance, as well as the safety net and imbalance between the iron ore supply and the steel mill demand. With the peak construction season coming to an end and with the expected demand recovery not meeting expectations, there is little upside for steel output and iron ore demand in the short to medium term. China monthly iron ore imports (million tonnes) NBS, ING Research Australian supply to edge higher, Brazilian shipments suffer The supply side has been mixed with Australian exports increasing this year due to a strong performance by majors, while supply from Brazil, the world’s second-largest exporter behind Australia, is slightly below last year’s levels with the country struggling to see iron ore shipments return to levels seen prior to the Brumadinho dam disaster in January 2019. In 2021, total Brazilian iron exports totalled 358mt, still down from the 371mt exported in 2018. Exports in 2022 have struggled as well with total shipments of iron ore from Brazil at around 154mt in the first half of 2022.   Vale’s year-to-date production fell to 227mt, which marks a 1.9% decline year on year. This is primarily due to the 6% drop in production reported in the first quarter of 2022 due to the heavy rainfall in Minas Gerais in January that halted the Southern and Southeastern Systems operations. Vale has recently cut its production guidance for 2022 to 310-320mt from 320-335mt, compared to the production of almost 316mt last year. Looking further ahead, Vale still aims to reach 400mtpa of annual capacity. Total Brazilian exports are forecast to reach 347mt in 2022, a fall of around 2.8% compared with 2021. Meanwhile, 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, could add to the downside pressure on prices. The majors have recently released third-quarter reports, with FMG reporting a 2mt YoY increase to 47.5mt, Rio Tinto adding 1mt YoY to 84mt, and BHP also contributing an additional 1.5mt YoY to 72mt. Australian iron ore export volumes were 0.9% higher year-on-year in the first half of 2022, with new greenfield supply starting to come online from major producers. Exports are forecast to increase by 3.1% in 2022-23 to reach 903mt and rise by 3.8% to 937mt in 2023-24, according to Australian trade data (Department of Industry, Science and Resources). Looking ahead, we should continue to see the ramping up of supply from new projects in Australia, along with Vale continuing to target an annual production capacity of 400mtpa. Iron ore prices to ease in the short term There is more downside ahead for iron ore as there are fears that China’s strict zero-Covid policy is here to stay in the near term, despite the recent easing of Covid restrictions and the government’s pledge to bolster vaccinations among senior citizens. We believe the Chinese government is likely to stick to its zero-Covid policy through winter. China continues to see record daily cases of Covid, which has resulted in some cities tightening mobility restrictions. Reports of Covid protests in China will also likely prove harmful to sentiment. We believe the short-term outlook remains bearish with sluggish demand from China suggesting that prices should trend lower. We expect prices to slide to $85/t in the first quarter of 2023 and hover around $90/t throughout the second and third quarters. Prices should be supported in 2H23 due to expectations of a recovery in China and easing Covid-19 restrictions, with prices moving above $95/t in 4Q. However, 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. ING forecast ING research TagsIron ore Commodities Outlook 2023 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
Central Banks Increased Their Buying Of Gold Significantly Over The Q3

Central Banks Increased Their Buying Of Gold Significantly Over The Q3

ING Economics ING Economics 03.12.2022 11:50
US dollar strength and central bank tightening have weighed heavily on the gold market in 2022. In the near term, there is room for more downside with further tightening expected. The medium-term outlook looks more constructive In this article US strength hits gold prices Record gold buying from central banks lifts global demand Chinese gold demand picks up, but Covid risks remain Gold to rebound slightly next year as Fed easing starts Shutterstock   US strength hits gold prices Spot gold is trading at its lowest levels in more than two years and has fallen more than 20% from its peak of above $2,000/oz in March as the US Federal Reserve and other central banks have raised rates to tackle inflation. The strengthening of the US dollar has hit sentiment across the commodities complex, including gold. The USD index has surged to a 20-year high. This strength is largely a result of the aggressive stance the Fed has taken in terms of monetary tightening to fight inflation. Real yields have also been climbing. Ten-year real US yields have reached their highest levels in more than a decade and are back in positive territory. Given the strong negative correlation between gold prices and real yields, gold has struggled in this rising yield environment. Higher yields increase the opportunity cost of holding gold, which appears to be turning investors off the precious metal. Record gold buying from central banks lifts global demand So far this year central banks have continued to increase gold reserves. During times of economic and geopolitical uncertainty and high inflation, banks appear to be turning to gold as a store of value.  The latest data from the World Gold Council (WGC) shows that central banks increased their buying of gold significantly over the third quarter. Central banks bought 399 tonnes in 3Q22, which is up 341% year-on-year and also a record quarterly amount. The data shows that Turkey, Uzbekistan, India and Qatar were the largest buyers of gold over the quarter, but a substantial amount of gold was also bought by central banks that did not publicly report their purchases. The WGC did not give any details on which countries these could be, although banks that do not regularly publish information about their gold stockpiles include China and Russia. The pace at which central banks have accumulated gold reserves this year has not been seen since 1967. Given the current environment is likely to persist, central banks are likely to continue to add to their gold holdings in the months ahead. The gold purchases made by central banks around the world constitute only a portion of the total demand for bullion, which also includes the consumption of jewellery, investments in gold bars, coins, exchange-traded funds (ETFs), and technology. Chinese gold demand picks up, but Covid risks remain Chinese gold demand suffered earlier in the year due to the Covid-related lockdowns, particularly over the second quarter of the year, which is when strict restrictions were in place across Shanghai and Beijing. According to WGC data, Chinese consumer demand was down 23% YoY over 1H22.  However, more recently, gold in China has been trading at a huge premium to international prices as improved demand exceeds the country’s imports, which are constrained by quotas. Only accredited banks in the country are allowed to import gold, with quantities set by the People’s Bank of China. The elevated Shanghai-London gold price spread has continued in October with the seven-day National Day holiday, a stable local price, weak renminbi and economic uncertainty supporting gold sales in Beijing and Shanghai, according to data from the WGC. However, fluctuating Covid-19 cases and subsequent lockdowns could weigh on gold sales in certain areas going forward.   For another key gold consumer, India, demand remained strong in October amid the onset of festivals and weddings season with both jewellery and bar and coin purchases boosted. Despite stronger consumer demand, gold’s price direction will continue to be driven by investment flows, for which the outlook is less constructive in the short term. Global gold ETF holdings saw their sixth consecutive monthly decline in October, standing at 3,490t (US$184bn) at the end of the month. North American funds led global outflows. In the third quarter, investment demand was down 47% year-on-year, as ETF investors responded to a challenging combination of markedly higher interest rates and a strong US dollar. Speculative positioning in COMEX gold further highlights the lack of investor interest – the latest COMEX exchange numbers showed that speculators in US gold futures were betting on lower prices, however, the number of the bets had declined. China's gold imports surge China premium/ discount to international gold ($/oz) China premium/ discount to internatational gold China's gold imports surge China non-monetary gold imports (tonnes)  China Customs, ING Research Gold to rebound slightly next year as Fed easing starts We expect gold to remain on a downward trend during the Fed’s ongoing tightening cycle. But while in the short term we see more downside for gold prices amid monetary tightening, any hints from the Fed of an easing in its aggressive hiking cycle should start to provide support to prices. For this to happen, we would likely need to see signs of a significant decline in inflation. We should see inflation coming off quite drastically over 2023 and this will then open the door for the Fed to start cutting rates over 2H23, according to our US economist.  Under the assumption that we see easing over 2H23, we expect gold prices to move higher over the course of 2023 with prices reaching $1,850/oz in 4Q23. ING forecasts ING research TagsGold Commodities Outlook 2023 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
Commodities Outlook 2023: Stainless Steel Is Still Key For Nickel Semand

Commodities Outlook 2023: Stainless Steel Is Still Key For Nickel Semand

ING Economics ING Economics 03.12.2022 11:28
Nickel has had a tumultuous year amid Russia’s invasion of Ukraine in February and March’s short squeeze, and the subsequent temporary suspension of LME nickel trade. The short-term outlook for nickel remains bearish amid a deteriorating macro picture and sustained market surplus In this article Nickel price slips on recession fears Weak stainless steel output pushes nickel to surplus Global stainless growth to fall Indonesia supply growth in focus Supply risk around Russian metal remains Prices to remain under pressure as surplus builds   Shutterstock   Nickel price slips on recession fears The metals complex has had a volatile year. Most metals performed strongly in the first quarter given the growing supply uncertainty due to Russia’s invasion of Ukraine. However, a stronger US dollar, rising rates and weaker downstream demand weighed heavily on metals markets for the remainder of the year. Nickel is the standout across the complex, managing to hold onto year-to-date gains. Still, the LME price is down significantly from its year-to-date highs in March following a short squeeze, as recession fears have undermined market sentiment. Volatility in the nickel market has become more common in recent months with reduced liquidity ever since the short squeeze seen back in March, when fears of sanctions on Norilsk Nickel coincided with a huge short bet by the world’s largest stainless steel producer, Tsingshan. This caused prices to more than double in a matter of days. The LME was forced to suspend trading for a week and cancel billions of dollars’ worth of nickel trades. The LME has subsequently imposed price limits for the first time and introduced requirements for disclosure of business done over the counter via derivatives to the exchange. LME volumes have declined since then as many traders have reduced activity or cut their exposure due to a loss of confidence in the LME and its nickel contract after its handling of the March short squeeze. Volumes on the LME three-month nickel contract since March have been 30% of levels in the six months before the market chaos following the short squeeze. These low levels of liquidity have left nickel exposed to sharp price swings – even amid small shifts in supply and demand balances. Most recently, nickel prices on the LME spiked briefly to hit the LME’s daily trading limit of 15%, reaching almost $31,000/t, on a report of an explosion at an Indonesian plant. Gains were pared after the facility’s owner denied any incident. That was followed by a 5% rise the following day after a nickel mine in New Caledonia, which supplies Tesla, cut its 4Q production forecast. In an effort to stabilise the recent volatility, the LME said it undertook “enhanced monitoring” of market participants’ trading activities and lifted initial margins for nickel trades by 28% to $6,100/t. The LME recently defended its decision in a legal filing following lawsuits from Elliott Investment Management and Jane Street, saying that the spike in nickel prices on 8 March would have led to margin calls of about $19.75 billion if the trades hadn’t been cancelled. The exchange said that subsequent analysis has shown that at least seven clearing members would have gone into default. On the morning of 8 March, six members had not paid their overnight margin payments, totalling $2 billion. The bourse said that it saw the risk of a ‘death spiral’ without nickel trade cancellations. We expect more near-term volatility to continue until the LME rebuilds trust in the benchmark nickel contract, volumes pick up again and the market’s confidence in it recovers.  Weak stainless steel output pushes nickel to surplus Continued weakness in demand from the stainless steel sector has meant that the global nickel market is expected to be in surplus this year. However, the surplus is mostly in the class 2 - ferronickel and NPI - market. The LME deliverable class 1 market has been relatively tight with LME stocks falling by around 50kt since the start of the year and recently hitting a 14-year low. The reported LME stocks are now below three weeks of consumption – another factor driving the price swings in the LME nickel contract. The International Nickel Study Group (INSG) expects nickel to record a surplus of 144kt this year and another 171kt in the next year. Historically, market surpluses have been linked to the LME deliverable class 1 nickel but in 2023 the surplus will be mainly due to class 2 and nickel chemicals – predominantly nickel sulphate, which is used in batteries, according to the INSG. The INSG has also cut its global demand forecast for this year from 8.6% in May to 4.2%, reflecting a slide in stainless steel production. Nickel supply/demand market balance (kt) INSG, ING Research Global stainless growth to fall Stainless steel is still key for nickel demand, accounting for 70% of total nickel consumption. Although demand from the battery sector is growing rapidly, making up around 5% of total demand at the moment, it isn’t enough to offset a slowdown in traditional sectors like construction. China’s strict zero-Covid policy has hurt the country’s construction sector and has weighed on demand for nickel. However, more recently, hopes have grown that fresh stimulus measures by China could boost demand for industrial metals after moves to shore up the country’s property sector and ease its Covid restrictions. China's recent relaxation of its Covid-related quarantine measures includes a reduced quarantine period for inbound travellers and close contacts of those who have tested positive while secondary contacts will no longer need to be traced. China is also pushing for greater vaccination of the elderly following protests over strict Covid curbs across the country - which are likely to weigh on sentiment further. At the same time, China’s total case count remains elevated, while Beijing has reported its first Covid deaths in six months. China’s relaxation of its Covid policy would have a significant effect on the steel market, and by extension on the nickel market. However, we believe the government is likely to stick to its zero-Covid policy through the winter and may only look to ease some of the curbs further after the National People’s Congress due to be held in March or April next year. Indonesia supply growth in focus Meanwhile, Indonesia’s production of nickel is surging to meet growing demand from the electric vehicle (EV) battery sector. The country’s output was up 41% year-on-year in the first seven months of 2022, according to INSG. Year-to-date production of 814,000 tonnes accounted for 47% of the global total, compared with 38% over the same period of 2021. Indonesia is the world’s largest nickel producer, accounting for 38% of global refined supply. The country holds a quarter of the world’s reserves of the metal with much of Indonesia’s output being of lower purity and used in stainless steel. Indonesia is expected to produce between 1.25 and 1.5 million tonnes of nickel this year, more than 40% of world mined production estimated at between 3 million to 3.2 million tonnes, according to data from USGS. We believe rising output in Indonesia will pressure nickel prices next year. Supply risk around Russian metal remains There are still plenty of supply risks around Russian metal. The LME has decided not to suspend Russian nickel but the threat of government sanctions will remain as long as the war in Ukraine rages on.   The LME was looking at potentially banning the delivery of Russian metal into its warehouses, limiting Russian flows or taking no action. The exchange said that it is likely that additional tonnages of Russian metal will, in time, if not immediately, be warranted in the LME's physical network. Russia is the third largest primary nickel producer after Indonesia and China and the largest exporter of refined nickel metal – the type deliverable on the LME. Europe is one of the key destinations for Russian metal. Everything depends on how many players choose not to take Russian metal in their 2023 supply contracts unless there are government sanctions. If we see more Russian metal being delivered into LME warehouses, it could potentially mean that LME prices trade at discounted levels to the actual market. However, the LME said that the proportion of Russian metal in LME warehouses has not changed significantly over the discussion paper period. In 2013, 65% of LME nickel inventories were of Russian origin. In more recent years, this has ranged between 0-20%. According to the latest data from the LME, only 0.5% of live nickel tonnage in its warehouses was of Russian origin. The LME said it will publish a monthly report, starting in January 2023, which will provide the percentage of live tonnage of Russian metal on-warrant in order to provide more transparency. Prices to remain under pressure as surplus builds We forecast nickel prices to remain under pressure in the short term as a surplus in the market builds, however, the tightness in the class 1 market is likely to offer some support. We see prices hovering between $20,000/t and $20,500/t over the first two quarters of 2023 before gradually increasing to $21,000/t in 3Q and $22,000/t in 4Q as the global growth outlook starts to improve. ING forecast ING research TagsNickel Commodities Outlook 2023 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
Copper: Disruptions In South America Continue To Be In The Spotlight

Copper: Disruptions In South America Continue To Be In The Spotlight

ING Economics ING Economics 03.12.2022 11:19
Copper has lost all of the gains it made this year as inflation has climbed higher, interest rates have risen, and energy costs keep surging. The short-term demand outlook for the red metal remains weak amid recession fears, China's slowdown and weakening global manufacturing activity In this article Copper fails to hold onto gains China remains the big question mark Caught between weakening demand and shrinking supply Global exchange stocks at record lows Near-term headwinds but upside risks to dominate long-term   Shutterstock Copper fails to hold onto gains LME prices are now down around 30% from their peak in February following Russia’s invasion of Ukraine when the three-month LME copper price reached $10,580/t. Despite copper’s fundamentals looking supportive, the red metal has failed to hold onto its gains, as global slowdown fears remain elevated. China remains the big question mark Covid-19 lockdowns in an already-slowing Chinese economy have continued to dampen the demand outlook for the red metal with the country’s property sector remaining a big question mark for the copper market looking ahead. For almost two decades, China’s property sector growth and the country’s rapid urbanisation have been the key driver of growth for copper demand, which represents almost a quarter of the nation’s total demand. The country’s GDP grew 3.9% year-on-year in the third quarter of 2022, faster than the consensus forecast of 3.3% YoY and 0.4% YoY in the second quarter, but real estate contracted 4.2% YoY due to uncompleted projects that almost paused activities from land bidding to housing starts in the industry. However, more recently, hopes have grown that fresh stimulus measures will boost demand for the red metal after moves to shore up the country’s property sector and ease Covid restrictions. China's relaxation of its Covid-related quarantine measures reduces the quarantine period for inbound travellers and the close contacts of those who test positive. In addition, secondary contacts will no longer need to be traced. The government also said it will bolster vaccinations among senior citizens, although it stopped short of issuing mandates to help raise inoculation rates. However, while we are seeing these changes in policy, China is also experiencing its highest numbers of daily Covid cases since April. Beijing recently saw the country’s first Covid deaths in six months with the city tightening its restrictions. Guangzhou has locked down its largest district with cases continuing to soar. Reports of Covid protests in China will also likely prove harmful for general sentiment. The latest easing in quarantine requirements is certainly a step in the right direction, but the market will likely need to see further easing if this enthusiasm is to be sustained. China has also recently implemented 16 property measures to help the weak property sector. Some of these measures include debt extensions to the industry and relaxing deposit requirements for homebuyers. These could potentially boost the usage of industrial metals, including copper. Around 23% of China’s copper end-use comes from civil and building construction. For now, the uncertainty surrounding Covid-19 restrictions in the country continues to take its toll on demand for the metal. In October, imports of both metal and ore fell to their lowest in more than a year amid slowing factory activity. We believe consumption and imports of the red metal will remain muted until the end of the year with the property market and economy set to remain weak, while concerns over China’s economy will continue to put pressure on copper until the government eases the country’s Covid-19 restrictions further. We believe the Chinese government is likely to stick to its zero-Covid policy through winter and will look at easing some of the curbs further after the National People’s Congress in March or April next year. Preferential policies on property developer financing could limit the further increase in uncompleted residential projects. We expect China to gradually improve but remain sluggish until 2H23 with its zero-Covid strategy likely to remain in place until then. China's property woes weigh heavily on copper ING Research Caught between weakening demand and shrinking supply On the supply side, disruptions in South America continue to be in the spotlight for copper. Chile's mined copper production, which accounts for about a quarter of world supply, slumped by 6% in 2022 through July, according to the most recent International Copper Study Group data, due to lacklustre ore grades, labour woes and water scarcity. Last year, Chile’s production represented a 1.84% annual decrease from 5.73 million tonnes in 2020, and the lowest since 2017. The country’s ore quality has also been steadily declining. Average copper mining grades were 1.41% in 1999 but are now around 0.60%. Codelco, the world’s biggest copper producer, has lowered its guidance for the year by 100,000 tonnes to about 1.5 million tonnes. In Peru, protests by local communities in key mining areas have also continued this year. Most recently, Las Bambas copper mine in Peru, owned by Chinese miner MMG, which accounts for 2% of the global copper supply, has started to reduce operations due to recent blockades. In August, MMG lowered its forecast for annual copper production at Las Bambas to 240,000 tonnes. Despite the high level of disruptions, mine production continued to grow strongly in the third quarter of this year. CRU is forecasting year-on-year global growth to reach 3.2% in 2022. The ramp-up of Ivanhoe Mines’ Kamoa-Kakula in the Democratic Republic of the Congo is partly responsible for the growth as well as Anglo American’s newly-commissioned Quellaveco mine in Peru, which started operating in July. CRU is forecasting the copper market will move from an almost 200,000 tonne deficit into surplus over the next three years, as additional mine supply is expected to hit the market. Meanwhile, Codelco has reported its customers are demanding longer-dated contracts because they are worried about future availability of the metal. Customers in Europe have reportedly signed three and five-year contracts rather than the usual one-year contract. There was also a sharp increase in European benchmark cathode premiums for 2023. While high energy costs have been the key driver of the increase, the rise has been partially attributed to consumers avoiding Russian metal. Aurubis and Codelco reportedly raised cathode premiums to $228/t and $234/t, respectively, for next year, a substantial increase from $123/t and $128/t for 2022 contracts. While in the short-term, macro headwinds and recession fears are likely to put downward pressure on the copper market, the long-term fundamentals are looking more supportive amid low visible stocks, supply disruptions and expectations of a China recovery. Global exchange stocks at record lows This all comes against the backdrop of low inventories. Copper stocks in LME warehouses remain low, representing just two days’ worth of global usage. Inventories on the SHFE and COMEX are also dangerously low. Between the three exchanges, the global copper inventories are now down to just a few days of consumption. At least, for now, the copper market has a bit more clarity following the LME’s decision to take no action on the delivery of Russian metals into LME warehouses after receiving a number of responses to its discussion paper. The LME was looking at potentially banning the delivery of Russian metal into its warehouses, limiting Russian flows or taking no action. In the lead-up to the decision, there were a number of producers who were quite vocal in calling for Russian metal to be banned, while consumers were keener for there to be no changes. The LME said that instead it will start regularly disclosing the origin of all metal stocks on warrant from January 2023. As of 28 October, 58.1% of copper live tonnage was of Russian origin. Russian copper is not officially sanctioned, but if we continue to see an increasing amount of self-sanctioning of Russian metals going into next year, the risk is that we see more Russian metal being delivered into LME warehouses, which could potentially mean that LME prices trade at discounted levels to actual traded prices. The LME also announced that it will restrict new deliveries of copper and zinc from Russia’s Ural Mining & Metallurgical Co. and one of its subsidiaries after the UK sanctioned the company's co-founder Iskandar Makhmudov. Starting immediately, metal from UMMC or Chelyabinsk Zinc unit can only be delivered to LME warehouses if the owner can prove to the exchange that it won’t constitute a breach of sanctions, including that it was sold before Makhmudov was sanctioned by the UK on 26 September, and that neither company has any economic interest in the metal. The LME said that UMMC copper which is currently listed in the LME warehouse system is not subject to the sanctions, and there is no zinc produced by Chelyabinsk in LME warehouses. Russia produced 920,000 tonnes of refined copper last year, about 3.5% of the world's total, according to USGS, out of which – Nornickel – produced 406,841 tonnes. Asia and Europe are the main export markets for Russian copper. Global exchange stocks are at multi-year lows ING research Near-term headwinds but upside risks to dominate long-term Recession fears, China's slowdown due to its Covid-19 restrictions, and the Fed’s interest rate hiking path will continue to drive copper’s short-term price outlook, however tightening supply should maintain the red metal’s price support above $7,500/t throughout 2023. We believe copper prices will remain under pressure until the global growth outlook starts to improve. Tight supply will then become the key focus for the market, which should support prices above $8,000/t in the last quarter of 2023. Longer-term, we believe copper demand will improve amid the accelerated move into renewables and electric vehicles (EVs). In EVs, copper is a key component used in the electric motor, batteries, and wiring, as well as in charging stations. Copper has no substitutes for its use in EVs, wind and solar energy, and its appeal to investors as a key green metal will support higher prices over the next few years.  ING forecast ING research TagsCopper prices Copper Commodities Outlook 2023   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
Middle Distillate Inventories Are Tight Around The Globe

Middle Distillate Inventories Are Tight Around The Globe

ING Economics ING Economics 03.12.2022 11:13
Middle distillates have been a standout among refined products. Inventories are tight in all regions and there is plenty of uncertainty over Russian flows when the EU ban comes into effect next year. While we expect middle distillate cracks to come off from the highs this year, the market is likely to still trade at elevated levels on a historical basis In this article Low middle distillate inventories What is driving this tightness and will it persist? Will there be relief in 2023?   Shutterstock Low middle distillate inventories Middle distillate inventories are tight around the globe. In the US, distillate fuel oil stocks are at their lowest levels on record for this time of year. And the tightness is even more extreme on the US East Coast. In Europe and specifically the ARA region, gasoil stocks are at their lowest levels since 2008 for this stage of the year, according to Insights Global. In Singapore, middle distillate stocks are down at levels last seen back in 2004 for this time of year. The tightness in the market has led to governments in Europe tapping into emergency diesel stockpiles in a bid to ease the tightness. Emergency inventories have fallen from more than 41m tonnes back in January 2021 to less than 36m tonnes by the end of August. In the US, there have been calls for the release of diesel from the Northeast Home Heating Oil Reserve although these reserves are fairly modest at just 1MMbbls. The US administration is concerned about tight inventories and high prices. As a result, options are being looked at to try to ease price pressures. These options include mandating producers to hold a minimum amount of fuel inventories, increasing the Northeast Home Heating Oil Reserve, and possibly limiting fuel exports. However, any step to limit fuel exports would have to be done in combination with a relaxation of the Jones Act which would make it easier to ship product from the US Gulf Coast to the US East Coast. Furthermore, increasing the size of the Northeast Home Heating Oil Reserve in the short term would only add more pressure given that this product would need to be bought from the market. Middle distillate inventories by region EIA, Insights Global, International Enterprise Singapore, ING Research What is driving this tightness and will it persist? There are multiple factors which have driven the tightness in the middle distillate market, and whilst some of the issues will likely intensify, some will ease. On balance, middle distillates are likely to remain relatively well supported.   Russia/Ukraine war - Russia is a large supplier of middle distillates and a significant portion of this goes into Europe. Prior to the war, Russia was exporting in the region of 1MMbbls/d of gasoil - almost 40% of total Russian refined product exports. While current sanctions and self-sanctioning have affected Russian flows already, the key disruption to these flows will occur once the EU ban on Russian refined products comes into force on 5 February 2023. This means Europe will need to find an alternative for the more than 500Mbbls/d it has been importing from Russia. And this is at a time when the global middle distillate market is already very tight. Whether the EU ban on refined products is manageable will depend on how quickly trade flows can adjust and whether there are willing buyers of Russian gasoil further afield. If so, this would free up alternative supplies for the EU. However, the quality of product and logistics could certainly complicate the necessary shift in trade flows.     China export quotas - China has played an important role in the tightening of the refined products market. Policy has meant that the government has reduced export quotas for refined products in recent years, which has led to a sharp fall in refined product exports, including middle distillates. In 2019, Chinese exports of gasoil averaged 1.78mt per month. So far this year, Chinese gasoil exports have averaged just 554kt per month. The reduction in export quotas has been part of China’s broader aims of reducing emissions and improving efficiency within the refining industry. However, more recently this seems to have taken a back seat, with the government more concerned about trying to prop up the economy. This is evident with the government issuing 15mt of export quotas back in September. In theory, these quotas should be used by the end of 2022, however, it appears as though refiners will be able to use these quotas through until the end of the first quarter in 2023. This should provide some relief to tight middle distillate markets in Asia. Recent trade data is already showing that Chinese gasoil exports picked up significantly in September and October. The refined product markets will have to wait and see if this policy change from China is a complete U-turn or whether in the medium to longer term the aim is still to drive consolidation within the domestic refining industry.   Reduced global refining capacity - Since the start of the Covid pandemic, we have seen a significant amount of refining capacity shut. These closures have been seen in Europe, the US and APAC. This was largely due to weak refinery margins during Covid. As a result of these closures, global refining capacity saw a net decline of 730MMbbls/d in 2021, the first net decline in 30 years. In the US, operable refining capacity has fallen by a little more than 1MMbbls/d or 5% since February 2020. These declines have been predominantly driven by PADD1 (US East Coast), where more than 400Mbbls/d refining capacity has shut - reflecting a 33% decline in capacity in the region. This reduced refining capacity helps to explain the tightness we are seeing in refined product inventories on the East Coast. Reduced capacity has meant that it has been more difficult for refiners to respond as demand has recovered. And it is unlikely that we will see large investment in refineries in Europe and North America given the uncertain demand outlook in the longer term. As a result, the oil market will have to rely on growing capacity from elsewhere. There is a fair amount of new refining capacity expected to ramp up over 2023. The 615Mbbls/d Al Zour refinery in Kuwait recently started the first phase of commercial operations and will ramp up through 2023. In Nigeria, Dangote is scheduled to start up its 650Mbbls/d refinery in the middle of 2023. And in Oman, the 230Mbbls/d Duqm refinery is expected to start operations by the end of 2023. The IEA estimates that a net of 2.7MMbbls/d of new refining capacity will start up between 4Q22 and the end of 2023. While a meaningful amount of capacity is set to start up next year, which will eventually help to offer some relief to middle distillate markets, the bulk of this new supply will only become available quite some time after the EU ban on Russian refined products comes into force.   Gas-to-oil switching - High natural gas prices through the year have led to a significant amount of demand destruction this year. This is particularly the case for industrial users in Europe and also power generators. However, where possible some have likely switched to cheaper fuels, including oil and specifically fuel oil and middle distillates. As for what lies ahead, weaker gas prices more recently have taken some pressure off the market. However, the European natural gas market is still expected to be tight next year, which suggests the potential for continued switching to other fuels like oil.    Will there be relief in 2023? The middle distillate market is likely to remain tight over 2023. There is plenty of uncertainty as we head towards the EU ban on Russian refined products. Clearly, this will see European buyers looking for supply elsewhere. Europe will likely have to rely more heavily on the Middle East for supplies, however, new refining capacity will take time to ramp up and so will not offer immediate relief to markets. In addition, expectations are that natural gas prices will remain elevated through 2023, which should support gas-to-oil switching. We should also not rule out the risk that the US takes action to alleviate tightness in the domestic market, which could have an impact on global middle distillate markets. China could help the middle distillate market if the government releases sizeable export quotas for 2023. However, this is a big unknown for markets at the moment. ING middle distillate forecasts ING Research TagsRussia-Ukraine Middle distillates Gasoil Diesel shortage 2023 Commodities outlook   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
USA: Jobs market data play in favour of Fed hawkish script. Non-farm payrolls add 263K

USA: Jobs market data play in favour of Fed hawkish script. Non-farm payrolls add 263K

ING Economics ING Economics 02.12.2022 15:10
Strong job creation and a big increase in wages underscore the Federal Reserve's argument that a lot more work needs to be done to get inflation under control. It has certainly jolted the market. But with recessionary fears lingering, market participants will remain sceptical over how long the strong performance can last US job growth was strong and wages rose in November 263,000 Number of US jobs added in November   Surging employment and wages show the economy remains strong The US economy added 263,000 jobs in November, well ahead of the 200,000 consensus estimate, even when accounting for a 23,000 downward revision to the past couple of months of data. Private payrolls rose 221,000, led by 88,000 jobs in leisure and hospitality and 82,000 in education and health. Construction was up 20,000 and manufacturing gained 14,000. However, there was weakness in trade & transport (-49,000) and retail trade (-30,000). There was more positive news for workers in the form of big wage gains of 0.6% month-on-month, double what was expected, which leaves the annual rate of wage growth at 5.1%. The unemployment rate remained at 3.7% despite the household survey showing an apparent drop of 138,000 people saying they were in work – the second consecutive decline. The unemployment rate held steady because the participation rate fell yet again as workers remain reluctant to return to the workforce. Read next: FX: Today’s US Payrolls With A Strong Bearish Rhetoric On The USD| FXMAG.COM Given the Fed’s repeated warnings that rates are likely to stay higher for longer to ensure inflation is defeated, officials will be hoping that today’s numbers will be the jolt needed to get market participants to finally believe the Fed’s intent. Payrolls growth is slowing, but not fast enough for the Fed (Jobs added per month '000s) Source: Macrobond, ING Jobs market remains far too hot for the Fed In his speech earlier this week, Fed Chair Jerome Powell discussed the prospect of declines in inflation relating to core goods and housing. His focus though was on another area, core services other than housing, where the situation is more troubling. This grouping accounts for more than half of the core PCE index, the Fed’s favoured measure of inflation. The tightness of the jobs market and the implication for wage pressures, which make up the largest cost in delivering these services, is therefore key to the outlook for interest rates. In the speech, he argued that “job growth remains far in excess of the pace needed to accommodate population growth over time—about 100,000 per month by many estimates.” Consequently, wage growth “shows only tentative signs of returning to balance”. Today’s 263,000 jobs number confirms we remain a long way off from demand balancing with supply, which would ease those labour market related inflation pressures. Adding to the Fed’s problems, monetary conditions have loosened in recent weeks as the dollar and longer-dated Treasury yields have fallen and credit spreads have narrowed. This is undoing the tightening effects of the Fed’s recent rate rises. Furthermore, the latest consumer spending numbers together with the anecdotal evidence of the Black Friday weekend sales show that the economy has not yet met the Fed’s requirements of slowing to a rate “well below its longer-run trend”. As such, the Fed has more work to do and we look for further 50bp rate hikes in December and in February, with the potential for tightening needing to go on for longer. Read this article on THINK TagsWages US Payrolls Jobs 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
Yesterday, Hang Seng and CSI 300 went up slightly. Non-farm payrolls are published later today

Yesterday, Hang Seng and CSI 300 went up slightly. Non-farm payrolls are published later today

ING Economics ING Economics 02.12.2022 10:13
US data provide fresh reasons for declines in bond yields, the USD...though payrolls later...caution warranted Source: shutterstock Macro outlook Global Markets: The run of data in the US supported some further declines in US Treasury yields yesterday (see next section for more). 2Y yields dropped by 8.3bp, while their 10Y counterparts fell 10.1bp to 3.505%. Bond yields haven’t been this low since mid-September. The Fed’s Williams was attempting a rear-guard action to try to reinstil a sense of hawkishness into market perceptions of the Fed, talking of still having “…a ways to go” before rates are high enough. Markets are not buying it. Equity markets looked to be running a little low on conviction yesterday. US stocks ended practically unchanged after a very flat session. In Asia, the Hang Seng index and CSI 300 both gained yesterday, but only 0.75% and 1.08% respectively, as investors perhaps take a more cautious outlook on Zero covid relaxation. Daily case numbers have been back above 4,000 (symptomatic) for the last two days. Nonetheless, this fizzling out of conviction hasn’t helped the USD, and EURUSD is now above 1.05 (1.0530 as of writing), the AUD back above 68 cents, Cable 1.2263 and the JPY 135.20. Asian FX gains yesterday were driven by the high beta KRW and THB as expected. They are now 1299.60 and 34.78 respectively. The CNY made further small gains to reach 7.0534. G-7 Macro: Plenty of data yesterday to get your teeth into, and most (though not all) of it pointed to weaker activity, and slowing inflation. The PCE deflator data for October had come in for a lot of scrutiny as people looked to poke holes in the recent declines in CPI. (for more, read this linked article from our US Economist) Yes, there are differences between these two series, but on the whole, they tend to move pretty closely together, and that is what happened in October. The headline PCE inflation rate fell from an upwardly revised 6.3% (was initially 6.2%) to 6.0%, while the core PCE rate, which a lot of people seem to think is the Fed’s preferred measure of inflation (maybe, but only when it suits them) fell from an (again) upwardly revised 5.2% to only 5.0% on a 0.2%MoM increase in the core price level. Further declines in core PCE inflation look probable purely on the basis that the MoM increases in November and December last year were quite high. So by the time December PCE is out, we may be much closer to 4.5%. Not so scary.  Admittedly, personal incomes and expenditures remained solid in October, and jobless claims looked fairly muted, So the story is not all one way. We also got the manufacturing ISM figures yesterday. Headline activity figures dropped into contraction territory, the employment index also moved into contraction and the prices paid index fell to a very weak-looking 43.0. Today is all about payrolls of course. The consensus forecast is 200,000 for the main figure, and for the unemployment rate to remain 3.7%, while average hourly earnings may drift slightly lower to 4.6%. Anything is possible though with this set of data, so surprises should be no surprise. South Korea: CPI inflation softened more than expected in November. The inflation rate for November fell to 5.0% YoY (vs 5.7% in October, 5.2% market consensus). The price index actually fell 0.1% MoM (nsa). The sharp slowdown in consumer price inflation in November was largely due to stable gasoline and fresh food prices, but also to a high base last year.  We believe that today's outcome was not enough to dispel concern from the Bank of Korea about price inflation, as core CPI remained high (4.8%YoY), and so we expect the BoK to maintain its hawkish tone until early next year.  What to look out for: US jobs report South Korea CPI inflation (2 December) Fed’s Evans speaks (2 December) US non-farm payrolls (2 December) 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
FX: Today’s US Payrolls With A Strong Bearish Rhetoric On The USD

FX: Today’s US Payrolls With A Strong Bearish Rhetoric On The USD

ING Economics ING Economics 02.12.2022 09:56
While macro factors continue to point at dollar resilience in our view, markets are fully buying into the Fed's pivot story, and have turned more structurally bearish on the dollar. Today's US payrolls may fall short of triggering an inversion of this trend, and USD downside risks persist. Keep an eye on Canadian numbers too ahead of next week's BoC meeting USD: Payrolls may not offer lifeline to the dollar With the DXY index correcting by more than 7% since the early November peak, and trading below 105.00 for the first time since July, it is now evident that markets have operated a structural shift towards a bearish dollar narrative. It’s also evident that such a shift is primarily due to expectations that the Fed is nearing the end of its tightening cycle. As explained by our US economist here, investors have called Fed Chair Jerome Powell’s higher-for-longer “bluff”, applying a larger weight on four indicators (CPI, PPI, import prices and yesterday’s PCE) that are pointing to abating price pressures. Fed Funds futures show peak rate expectations have dropped below 4.90%, after having priced in 5.25% less than a month ago. In our view, this radical shift in the market’s reaction function is premature, and may not be sustainable if the Fed increases the volume of its rate protest by sounding more stubbornly hawkish and the next inflation readings argue against a rapid descent in inflation. Incidentally, the global macro picture remains challenging – especially in Europe (where colder weather may push gas prices higher) and China – which also points to dollar resilience. However, we must acknowledge that markets are approaching today’s US payrolls with a strong bearish rhetoric on the dollar, and would likely jump on more risk-on (USD-negative) bets unless we see a convincingly strong payroll read. The consensus is centred around 200k, and we forecast 220k, with the unemployment rate staying at 3.7%. Those numbers would be quite respectable and indicate that the jobs market has indeed remained extremely tight, but while it may halt the dollar’s trend, it could fail to invert it. All in all, the balance of risks appears slightly tilted to the downside for the dollar today. A contraction in payrolls to 150k could generate a fresh round of large USD selling.    The yen should be exceptionally sensitive to the jobs figures today. The main risk for USD/JPY is that UST 10Y yields fail to find extra support at 3.50%: a further bond rally could force a break below the 134.50 200-d MA and unlock additional downside potential for USD/JPY. Still, markets may struggle to live with sub-3.50% rates for long in the current environment. Francesco Pesole EUR: Ignoring some warning signs EUR/USD moves should only be a function of the market’s reaction to US payrolls today. There is a non-negligible risk we explore 1.0600, with the pair not having any clear resistance levels until the 1.0780 6-month highs. We are, however, getting the feeling that markets are ignoring at least one warning sign for the euro. The recovery in business sentiment in the eurozone has undoubtedly been the result of lower gas prices, which have benefitted from mild weather in Europe. TTF contracts are trading at one-month highs now and may see further upside volatility in the near term as temperatures in northern Europe are expected to fall. A significant recovery in gas prices would likely make the recent rally in EUR/USD unsustainable. On the domestic side, we’ll see PPI numbers in the eurozone today, and hear from ECB president Christine Lagarde again. Yesterday, she sounded quite hawkish, signalling the need to keep inflation expectations anchored and implicitly leaving the door open for a 75bp move in December. Markets currently price in 55bp, and we are calling for a half-point hike. Francesco Pesole GBP: Cable nearing the peak? There are no domestic drivers for the pound today given a light data calendar and no Bank of England speakers. As discussed in the dollar section above, US payrolls may fail to invert the bearish dollar trend and GBP/USD may find a bit more support around 1.2300-1.2350. However, as for EUR/USD, cable is not factoring in the negative implications of rebounding gas prices and weak economic fundamentals. A return to 1.1500 around the turn of the year seems appropriate in our view. Francesco Pesole CAD: Jobs numbers quite key for BoC Payrolls will also be published in Canada today. We must note the employment series has been rather volatile, with the October figures coming in at a very strong 108k, which was entirely driven by full-time hiring. The consensus is centred around a very small 10k increase, and there is a high chance we could see a negative read. This would probably keep markets leaning in favour of a 25bp rate hike by the Bank of Canada next week (currently, 30bp are in the price). However, we see room for some upside surprise today in the jobs numbers and see a higher chance of another 50bp by the BoC. USD/CAD may soon re-test the 1.3290 100-d MA, but would require a more steady rebound in crude prices to keep the bearish momentum going. Francesco Pesole Read this article on THINK TagsPayrolls FX Dollar CAD 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 Breakevens Rose After Chair Jerome Powell’s Speech

Inflation Breakevens Rose After Chair Jerome Powell’s Speech

ING Economics ING Economics 02.12.2022 09:50
The US 10yr has returned to the 3.5% area, 75bp below the high hit in October. We think the 0.2% reading on core PCE helps to rationalise the move. But we need a consistent run of these, and we doubt that's in the works, at least not in the coming quarter. Given that, this move feels like a mid-cycle overshoot to the downside for yields We expect the Federal Reserve to raise rates by 75 basis points Core PCE at 0.2% month-on-month at least helps to validate the fall in market rates Yesterday's magical hit of 0.2% on core PCE for the US is enough to solidify the move lower we’ve seen in market rates. Why? The reading of 0.2% annualises to 2.7%. It's fine margins, but that's worlds apart from one notch up to 0.3%, as that annualises to 4.3%. And 0.4% gives 6%, etc. The 0.2% outcome is low enough to secure an annualised inflation reading with a 2% handle. OK, it's still closer to 3% than 2%, but it is something that the Federal Reserve would feel quite good about given where annual inflation currently is. The fall in market rates started well before we had the November 10th CPI number. That was really a base-effect impacted fall in the year-on-year CPI inflation rate, but took the 10yr yield crashing back below 4%. The subsequent core PCE month-on-month outcome is arguably more significant. The big question now is whether we see this from other inflation readings, or indeed whether we see a repeat from the core PCE number next month.  To really justify the move lower in rates, the Fed needs to be practically done in December But to really justify the move lower in rates, the Fed needs to be practically done in December. We don’t think so, and more importantly, the Fed does not think so (at least not yet anyway). But the market is looking at things through that kind of prism, pulling the terminal fund rate down to 4.9%. While 4.9% technically discounts that the Fed is not done in December and continues to hike in February, the bulk of the volumes are in the first three contracts, which brings the funds rate to 4.7% in February (and falling). US inflation break-evens rose in the wake of Powell's supposedly hawkish speech Source: Refinitiv, ING No more than a mid-cycle overshoot to the downside, pain deferred to 1Q23 Also, it must be noted that players will have a tendency to square up some of the duration and credit shorts set in 2022, in what has been the biggest bear market of modern times. This risk-on mode could sustain if the labour market cools, which is where today's payrolls come in. But it also likely pushes pain into the first quarter of 2023, the pain of resumed upward pressure on market rates and wider spreads. Anomalously, inflation breakevens actually rose after Chair Jerome Powell’s speech on Wednesday, in what is supposed to be an inflation-topping bond rally. The big move lower in rates came from a virtual collapse in real rates; from 1.5% to 1.25% in the 10yr – a massive move! That discounts macro pain ahead and suggests worries about defaults and growth ahead. That appears to be the dominant market reaction post-Powell’s speech. We doubt the 10yr gets below 3% in the rate-cutting cycle ahead The bottom line is, we think that a 0.2% outcome is significant. It brings us to 3.5% for the 10yr. Note that's a low yield level. We doubt the 10yr gets below 3% in the rate-cutting cycle ahead, so 3.5% is pricing a lot already. From here it really should drift higher, up towards 3.75%. And if it comes to pass that the 0.2% was a one-off (for now), then a return to the 4% area can't be ruled out by the first quarter of 2023. In fact, that remains our central call if the Fed goes ahead and feels the need to hike to 5% at the 1st February FOMC meeting. We need more than a single 0.2% monthly inflation print to justify Treasuries at 3.5% Source: Refinitiv, ING Today's events and market views The focus is squarely on today's US jobs data. There have been signs already of the labour market starting to cool. This week saw job openings falling, although from still very high levels, while yesterday's weaker ISM manufacturing index saw its employment component dropping 1.6 points to 48.4. There have also been announcements of substantial layoffs, particularly in the technology sector over the past months, which have added to the concerns about the resilience of the labour market. That said, the consensus is looking for a payrolls growth of 200k this month, down from last month's 261k. That may be still high enough for the Fed to see the need for further action, but low enough for markets to sustain their current risk-on mode. While a 10Y US Treasury yield arguably looks stretched already, we would be cautious to call an end to the rally in the current environment going into year-end.  Of course, further comments from Fed officials will also be followed given this is probably the last opportunity to steer expectations ahead of the pre-meeting black-out period. The Fed's Williams has been out yesterday underscoring that it will take a couple of years to get inflation back to target. Today's scheduled appearances are by the Fed's Barkin and Evans.   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
Korea: A Temporary Slowdown In CPI Inflation Would Not Change The BoK's Inflation Outlook

Korea: A Temporary Slowdown In CPI Inflation Would Not Change The BoK's Inflation Outlook

ING Economics ING Economics 02.12.2022 09:37
The sharp slowdown in consumer price growth in November was largely due to stable gasoline and fresh food prices, but also to a high base last year.  But we believe that today's outcome is not enough to dispel concern within the Bank of Korea (BoK) about inflation. And we expect the BoK to maintain its hawkish tone until early next year  Source: Shutterstock.com 5.0% Consumer price inflation YoY Lower than expected Food and energy prices were the main reasons for the decline. Consumer price inflation eased more than expected in November, with headline inflation declining to 5.0% YoY in November (vs 5.7% in October, 5.2% market consensus). The main cause of November's inflation decline was a fall in agricultural prices (-2.0%), and gasoline prices returned close to pre-Ukraine-war levels. However, service price inflation remained at an elevated level, with core inflation up 4.8%. Eating-out prices rose the most (8.6%) in November while other service prices gradually stabilized. We believe that rents will continue to slow down as market-observed rentals declined in November. Since Korea's lease contracts are usually for two-year terms, the degree to which falling rents will be reflected in the CPI is limited. However, the recent rapid decline in Jeonse prices is expected to be visible in the price index with about a 6-month time lag.  Rentals will decline gradually over the coming months Source: CEIC BoK outlook Today's lower-than-expected inflation is unlikely to change the BoK's policy stance. Governor Rhee Chang-yong had already mentioned last month that base effects leading to a temporary slowdown in CPI inflation would not change the BoK's inflation outlook. Also, core inflation is still high. Consequently, we expect the BoK to stay on a hiking path until early next year. We believe that rate increases in power and gas will follow early next year, but rent and service price growth should slow down. As a result, inflation will likely soften further throughout next year. We maintain our view that the BoK will take a pause until 2Q23 after raising 25bp in February.  Read this article on THINK TagsHousing Prices 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
The Commodities: The EU Is Looking At A Price Cap Level Of Around US$60/bbl

The Commodities: The EU Is Looking At A Price Cap Level Of Around US$60/bbl

ING Economics ING Economics 02.12.2022 09:33
OPEC+ is set to meet on Sunday to decide on output policy for 2023. While the EU still needs to come to an agreement on the G-7 price cap ahead of the EU's ban on Russian seaborne crude oil, which comes into force on 5 December Energy - OPEC output falls Preliminary OPEC production numbers for November are starting to come through and it is no surprise that the group significantly reduced output over the month due to the recently agreed production cuts. According to a Bloomberg survey, OPEC output declined by 1.05MMbbls/d MoM to 28.79MMbbls/d. Saudi Arabia led the way with their production falling by 470Mbbls/d, whilst the UAE saw their output decline by 240Mbbls/d. The reduction from the group is broadly in line with the cuts expected under the deal. This weekend we will need to see if OPEC+ stick to the current deal or announce even deeper cuts. The group meets on Sunday and given the recent price weakness, there is the potential for further cuts. EU members are still trying to agree on a level for the Russian oil price cap. They will want to come to an agreement before 5 December, which is when the EU ban on Russian seaborne crude oil kicks in. The latest reports suggest that the EU is looking at a price cap level of around US$60/bbl, which is lower than the original US$65-70/bbl suggested, however, it is still above the current levels that Russia is receiving for its crude oil. Therefore, if agreed at this level, it will have little impact on Russian oil revenues at the moment. Metals – Chinese aluminium surplus The latest forecast from Mysteel shows that the Chinese aluminium market will finish 2022 with a deficit of 340kt, while the market is expected to shift to a surplus of 580kt in 2023. Supply is expected to grow as a result of new capacity as well as production restarts. Demand is estimated to have grown by 1.6% YoY this year, despite weak demand from the property sector. For 2023, Chinese demand is forecast to rise by 2.24% YoY.  The latest reports suggest that a major copper smelter, Daye Nonferrous Metals Group Holding Co. located in Huangshi city in Hubei province started producing copper from its new smelter with an operational capacity of 400ktpa. It is estimated that the plant produced its first batch of refined copper at the end of November. Agriculture – US weekly grain shipments remain soft The latest weekly data from the USDA shows that US grain exports remained weak and came in below market expectations for the week ending on 24th November. Weekly export sales of wheat dropped to 163kt, lower than the 450kt expected. Soybean export sales fell to 694kt, also below the roughly 813kt expected, whilst corn export sales declined to 633kt, compared to expectations of around 763kt. CBOT soybean oil fell sharply yesterday with prices reaching their lowest levels in three months due to the latest proposal from the Biden administration for changes to the US biofuel mandate falling short of expectations for biodiesel quotas. As per the latest Environmental Protection Agency proposal, the agency will ask oil refineries and importers to blend 20.82 billion gallons of renewable fuel into diesel and gasoline in 2023. The agency will also keep raising the quota for biofuels until 2025. The proposal would also moderately boost quotas for biodiesel (made from soybean oil and other fats) to 2.82 billion gallons in 2023 from 2.76 billion gallons currently. The market was expecting and hoping for a higher number. Read this article on THINK TagsRussian oil price cap OPEC+ Oil Grains 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
So, may be extending Fed hiking won't be necessary...

So, may be extending Fed hiking won't be necessary...

ING Economics ING Economics 01.12.2022 15:59
With CPI, PPI, import prices and now, most significantly, the core PCE deflator pointing to weakening price pressures, the Federal Reserve's hawkish messaging is being questioned by the market. Admittedly the consumer is still spending, but it appears that pricing power is moderating and there may not be the need for a prolonged period of high rates  US inflation surprises on the downside again Federal Reserve Chair, Jerome Powell, tried his best to talk up the prospect of a higher-for-longer interest rate policy story, but the market didn’t believe him yesterday and will be even less inclined to do so after today’s personal income and spending report. The 0.2% month-on-month core Personal Consumer Expenditure deflator outcome (consensus 0.3%) is another inflation surprise with the year-on-year rate slowing to 5% from 5.2%. This is significant as it is the Fed’s favoured measure of inflation and with pipeline price pressures, such as import prices and PPI, also continuing to soften after we got the soft core CPI print, it poses real challenges to the Fed’s narrative on inflation. Read next: There are quite strong indications that Fed and ECB will go for 50bp rate hikes | FXMAG.COM In fact, the situation could get even trickier for the Fed with the chart below plotting the core PCE deflator against the National Federation of Independent Businesses price plans survey. It shows that the proportion of companies looking to raise their prices over the next three months has dropped sharply very recently, presumably reflecting some evidence of softening demand and rising inventory levels. This relationship suggests the core PCE deflator could head down to 3% by the end of 1Q, which would argue that we are getting close to the top for the Fed funds target rate. Moreover, if the economy does fall into recession as many fear, that corporate pricing power story will weaken much further and could contribute to inflation getting close to the 2% target by the end of 2023. Weakening corporate pricing power points to a sharp fall in inflation Source: Macrobond, ING Activity still holding up for now For now though, the activity side is holding up well with real consumer spending rising 0.5% MoM in October, the strongest gain since January. The news on the Black Friday/Cyber Monday retail sales has also been good and means that real consumer spending is on track to rise at a 4% annualised rate in the current quarter. We also expect to see a strong jobs number tomorrow given that job vacancies exceed the total number of unemployed Americans by a factor of almost two. The Fed will likely point to these factors as justifying an ongoing hawkish position insofar as demand exceeding supply will keep the inflation threat alive. A 50bp interest rate hike for December still looks a certainty and we continue to expect a final 50bp hike in February. For any more hikes we are going to need to see strong demand continue, but with US CEO confidence at the lowest level since the Global Financial Crisis and the housing market deteriorating rapidly, it is not our base case. Read this article on THINK TagsUS Inflation 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
China: Caixin manufacturing PMI reaches 49.4, a bit more than in October. ING talks possible reduced impact of COVID on the country's economy

China: Caixin manufacturing PMI reaches 49.4, a bit more than in October. ING talks possible reduced impact of COVID on the country's economy

ING Economics ING Economics 01.12.2022 15:41
Chinese manufacturing activity contracted further in November. The future depends on the implementation of Covid measures and external demand Conditions for international trade remain very tough The detail reveals a picture that is weaker than the headline numbers suggest China's Caixin manufacturing PMI surprised on the upside at 49.4 in November compared to 49.2 in October. It appears as though smaller manufacturers did not suffer as badly as had been expected by the consensus, which had forecast an index of 48.9. But looking at the details of the sub-indices, it looks like manufacturing activity actually deteriorated faster in November.  Read next: There are quite strong indications that Fed and ECB will go for 50bp rate hikes | FXMAG.COM The employment sub-index was the lowest it has been since March 2020. In contrast, the input price sub-index has been above 50 for the last two months due to high crude oil and metals prices. And even though the two sub-indices diverged, they point to slower sales growth and slimmer profit margins for smaller manufacturers, which is a more downbeat story than that suggested by the headline numbers. Future depends on implementation of existing Covid measures Weaker external demand is another headache for Chinese exporters. With even weaker external economic growth projected for 2023, it seems that there will be no immediate reversal of the weak trend for Chinese exporters any time soon. One possible positive note is that although Covid cases in China continue to run high, Vice Premier Sun has stated that "...with the weakening of the pathogenicity of the Omicron virus, the popularisation of vaccination and the accumulation of experience in prevention and control, China is facing a new situation and new tasks in the prevention and control of the epidemic".This hints that local government officials will likely exercise Covid measures with an intent to reduce their impact on the economy even if there are no further imminent changes in the overall Covid rules.  Read this article on THINK TagsPMI Covid China Caixin PMI 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 latest dollar selloff is a hint that the US dollar has certainly peaked this year, and next year will be, (...) , a year of softening for the greenback

There are quite strong indications that Fed and ECB will go for 50bp rate hikes

ING Economics ING Economics 01.12.2022 15:16
Fed Chair Powell has a clear ambition to hike by 50bp in December, and likely the same in February 2023, and maybe more. Given that, and a likely terminal funds rate of at least 5%, the drift lower in the US 10yr yield looks anomalous. Then again, year end can be like that. A move back above 4% still looks probable – it just might take a bit longer to achieve A hawkish hike (even if smaller) now needed to help re-tighten conditions If Chair Powell wanted to use yesterday’s speech to help re-tighten financial conditions, then he won’t be very happy with the impact market reaction. Market rates have fallen, credit spreads are tighter and effectively we’ve gone “risk on”. Financial conditions started out at about 0.6 of a standard deviation tight versus normal pre-Powell. They are now at closer to 0.5 of a standard deviation tight. We think it needs to be a full standard deviation tight, to be at least somewhat statistically meaningful. The reason we are not tighter is (mostly) lower market rates and tighter credit spreads. The US 10yr is now down to 3.7%, more than 50bp below the peak seen at end-October / early-November. Some 8bp of that has come in the wake of Chair Powell’s speech today. At 3.7%, the 10yr yield is some 130bp below the discounted terminal rate of 5%. That’s quite a spread. We think it’s far too wide. It’s telling us one of two things: (1) If the Fed hits 5%, then it’s not sustainable and a cut is coming really soon after that, or (2) The Fed will in fact not hit 5% at all, and they are done in December. The flip from 22 to 23 does not magically rid us of inflation risks Our view? We think the Fed does hit 5% (in February), and that the 10yr should be comfortably back above 4% in anticipation of that. This can happen soon, but could also morph into a turn of the year call, as we're now in this weird end of year swing where anything can happen. There can be some net buying going on as investors square books into year end, often buying back duration that had been shorted during the year. The first quarter of 2023 will bring the realization that the flip from 22 to 23 does not magically rid us of inflation risks that the Fed will feel emboldened to continue to address. Market rates are not fully reflecting this; but they will. Real Treasury yields are positive across the curve, the Fed will want to avoid an early drop Source: Refinitiv, ING EUR inflation solidifies expectations for a 50bp hike The eurozone flash CPI sees inflation having decelerated to 10% in November versus expectations of only a moderate slowing to 10.4% had surprisingly little effect on the market. Our economists also see this report having strengthened the case for a 50bp hike in December after the series of 75bp over the past meetings, but the market has been leaning to a slowed pace already in the wake of the first country readings at the start of the week, reducing the discount to only slightly more than 20% for still another larger 75bp hike after around 50% previously. The more relevant core measure of inflation remains at a painfully elevated 5% Yet away from the energy price-induced, headline-grabbing drop to 10%, the more relevant core measure of inflation has not budged and remains at a painfully elevated 5% year over year, in line with the consensus. The European Central Bank has rightly shifted the focus of the policy debate to underlying inflation and its persistence, being well aware that drops in the volatile headline can lead to false dawns. The bond rally has limited - but not reversed - ECB and Fed hike expectations Source: Refinitiv, ING   The ECB’s Isabel Schnabel has been the most vocal about still worrying underlying trends in her latest speech last week. Chief Economist Lane has employed a more measured tone in his latest expansive blog, though, warning not to read too much into current measures of underlying inflation. In particular he cautioned that the staggered adjustment of wages to the increase in the cost of living can play out over several years, but shouldn’t automatically signal a change in overall wage dynamics, i.e. the onset of a much feared wage-price spiral. The ECB should still have qualms about letting financial conditions ease too much, too early That the ECB isn’t done raising rates is clear. While it is widely accepted that the ECB will have to move into restrictive territory is also widely accepted, the latest inflation data has taken the edge off calls for more larger pre-emptive hiking. This also means that the tailwind for a further curve flattening dynamic is fading, but it should not distract from the prospect of rates possibly staying higher for longer. Similar to the Fed, the ECB should still have qualms about letting financial conditions ease too much, too early in its battle with inflation.   Today's events and market view US rates should remain in the driving seat given the busy data slate and the mixed signals that come from them. Yesterday's US GDP revisions for instance have pointed to a more resilient underlying demand, while last night’s Fed Beige Book hinted at slowing price pressures. Prices will remain in focus with today’s PCE deflator. That could be interesting as it is the Fed’s preferred inflation measure and does not always match what happens in core CPI. Today’s ISM manufacturing could drift just below the break-even 50 level, while the employment component, which markets will draw on ahead of tomorrow’s jobs data, is seen stable at 50. Even after Fed Chair Powell’s speech yesterday, some attention should still fall on Fed speakers in the final days ahead of the pre-meeting black out period. Today will see appearances of the Fed’s Logan, Bowman and Barr.   In secondary markets France and Spain will auction their final bonds for the year. 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
Indonesia: inflation reaches 5.4% year-on-year, 0.3% less than in October

Indonesia: inflation reaches 5.4% year-on-year, 0.3% less than in October

ING Economics ING Economics 01.12.2022 14:10
November inflation slipped to 5.4% year-on-year, slightly below market expectations Source: Stenly Lam 5.4% November headline inflation (year-on-year) Lower than expected Headline inflation dips to 5.4% November inflation edged lower to 5.4% year-on-year, down from the previous month’s reading of 5.7% and slightly slower than market expectations. Meanwhile, core inflation was steady at 3.3% when market participants expected a slight pickup to 3.4%. Slower inflation was noted for the heavyweight food and tobacco subsector, which was up 5.9% (6.8% previous), utilities 3.2% (3.3% previous), household equipment 5.0% (5.1% previous) and restaurants 4.6% (4.7% previous).  We had expected price pressures to experience a more pronounced acceleration due to second-round effects from the recent price hike for subsidised fuel but the dip in food prices was enough to weigh on the headline number.  Indonesia inflation slips below expectations but don't expect BI to pause just yet Source: Badan Pusat Statistik BI likely still hawkish to close out the year Bank Indonesia (BI) will still likely retain its hawkish leaning despite the lower-than-expected inflation reading for November. Core inflation was tagged as one of the main factors that would drive any BI policy adjustment and we will need to see this head much lower before BI considers reversing its current hawkish stance.  Read next: Hungary: GDP declines by 0.4% in the third quarter. What's behind the drop?| FXMAG.COM One other factor that could keep BI on the hiking path would be the Indonesian rupiah, which is still down 8.8% for the year and at the weakest level since 1Q 2020. We expect BI to follow through with a rate hike in December although we could see BI slow its pace of tightening as early as next year.       Read this article on THINK TagsIndonesian CPI IDR 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
"A notable risk facing credit markets next year is the potential for the European Central Bank (ECB) to reduce the size of its balance sheet via the tapering of the asset purchase programme"

"A notable risk facing credit markets next year is the potential for the European Central Bank (ECB) to reduce the size of its balance sheet via the tapering of the asset purchase programme"

ING Economics ING Economics 01.12.2022 14:06
Tapering of the corporate sector purchase programme (CSPP) and the third covered bond purchase programme (CBPP3) is on the cards for 2023 and will likely be discussed at the ECB's December meeting. Naturally, this is a negative driver for credit, specifically the corporate credit and covered bond markets A notable risk facing credit markets next year is the potential for the European Central Bank (ECB) to reduce the size of its balance sheet via the tapering of the asset purchase programme (APP). This will have rather significant negative effects on the corporate bond and covered bond markets. Our economists expect the ECB to announce a gradual reduction of the reinvestments of its bond holdings under APP at the December meeting, with the aim of stopping the reinvestments by the end of 2023, as highlighted in the report: ECB minutes show tentatively growing recession concerns. This could potentially be in the form of: 1Q - 80% of reinvestments. 2Q - 60% of reinvestments. 3Q - 40% of reinvestments. 4Q - 20% of reinvestments. In addition, pandemic emergency purchase programme (PEPP) reinvestments are set to continue until the end of 2024 but it is possible that in the course of 2023, the ECB will announce a similar quantitative tightening for PEPP as well, starting in early 2024. An abrupt stop or actual bond selling of APP (or PEPP) are risk scenarios but are highly unlikely at this point in time. Corporate bonds and covered bonds will be worse off in the case of tapering If tapering were to happen, this would be a negative driver for corporate bonds, but with many other drivers in the market, it won't move the needle substantially. Covered bonds may be under more pressure from this tapering, as they are already seeing little positivity. Of course, in the case of quicker tapering or an earlier stop to the programme, the effect will be much more severe in both markets. Read next: Hungary: GDP declines by 0.4% in the third quarter. What's behind the drop?| FXMAG.COM The continuation of PEPP reinvestments means relatively little for corporates and covered bonds compared to public debt. CSPP accounts for around 11% of the total APP and CBPP3 accounts for 9%. Meanwhile, corporate bonds account for just 3% of PEPP and covered bonds account for less than half a percent of PEPP. Thus, with a tapering of APP, public debt will be more supported by PEPP, but private debt will see much less support and will subsequently underperform. Corporate bonds – another ingredient in the cocktail of negative drivers Tapering CSPP can be added to the list of risks and drivers of increased volatility in credit, alongside the recessionary environment, high inflation, the Russia/Ukraine war, the energy crisis and supply chain shortages. We foresee the following: The lower level of support will add to the turbulence and increase volatility, but will not necessarily move markets wider. Although this does add to the expectation of further turbulence and increased volatility. More pressure and spread widening in the case of a faster tapering or an abrupt stop as the market becomes more exposed, with a large participant no longer active at all (we see this as less likely). Based on current oversubscription levels, deals can still get done even with lower CSPP participation. Thus, primary market activity shouldn’t struggle to price, meaning less pressure on spread widening. An indirect implication may be supply indigestion, as many corporates may push to issue earlier in the year for a better chance of having the ECB involved in the deal (this may mostly be seen in January). This will add some extra volatility and perhaps underperformance. The tapering of CSPP would strengthen our call for financials over corporates. However, for 2023 we find the call between corporates and financials a hard one to make. For 2022 we saw more value in corporates due to the stronger technical, particularly driven by CSPP. For 2023, we have the following considerations: CSPP reinvestments offer more support for corporates but the tapering of reinvestments is on the cards for 2023. This may lead to some supply indigestion for corporates as many issuers may fund sooner (in the first quarter) if they pre-empt a tapering or stop to reinvestments. The net supply story is more positive for corporates with expected net negative supply, whilst financials will see almost €100bn in positive supply. The duration of non-financial corporate sectors is higher than for the financials, which is in line with our call that 2023 will see longer duration credit show additional relative value. However, looking at the trading ranges, we see that financials have underperformed and are trading at or even above our defined recessionary spread range. There is more value in financials currently. In general, higher interest rates are set to be good for bank earnings. Having said all that, it will be a close call between financials and corporates next year as it’s all about Alpha in 2023 and the external factors that will contribute to earnings sensitivity such as energy usage, supply chain risks, cyclicality, and even geography. Whether it's financial or corporate, doing the credit work and avoiding too much volatility in margins/earnings will drive performance. But with lower reinvestments, we see an additional positive driver for potential being titled towards financials for 2023. In the case of tapering in the potential form as stated above, the below chart illustrates how low reinvestments would be. Initially, reinvestments would pick up in 2023 and support with between €2-4bn per month. Now reinvestments will be notably lower between €1-2bn per month, offering very little support from August onwards.   Full and tapered CSPP reinvestments per month Source: ING, ECB In addition, as we have previously mentioned in our report Decarbonising Corporate Sector Purchase Programme credit: Our take, the ECB has just begun to incorporate climate change considerations into corporate bond purchases, via reinvestments. In the case of tapering reinvestments and an ultimate end to the programme, decarbonising becomes somewhat redundant. This is of course not good news for the environmental, social, and corporate governance (ESG) angle, but we expect ESG credit will outperform nonetheless, albeit perhaps to a lesser extent. Moreover, the effects of decarbonising and focussing on ESG have been rather limited so far. Both corporate ESG and covered bond ESG have not seen any outperformance this year, while the ineligible financials have seen ESG outperformance, particularly in the primary market. Thus relative to holdings, it suggests the ECB has not been a strong catalyst for ESG outperformance. Demand from investors seems to be the larger driver, as illustrated by the substantial inflows into ESG funds.  Covered bonds – a bearish view The scenario plotted here towards the end of the reinvestments of redemptions under the APP is faster than the one assumed in our Covered Bonds Outlook 2023. It means that CBPP3 reinvestments will fall from €36bn to €21bn instead of €28bn in 2023. Reinvestments of 80% in 1Q23 will represent just 26% of the €50bn eurozone-covered bond supply in the first quarter instead of 33%. On the assumption that the ECB reinvests 40% through the primary market and order books will be at least 1.5x, this would mean that primary order sizes from the CBPP3 will likely fall to 15% from 20% in the first quarter of the year. It will likely decline further to 10% in the second quarter and 5% towards year-end under our supply estimate for 2023. Covered bonds will be under more pressure in the case of faster tapering or an abrupt stop to reinvestments. A more rafpid tapering will likely not only have a negative impact on new issue premia against the backdrop of the anticipated heavy supply, but also limit the subsequent secondary performance potential of these transactions. This adds to our already bearish view on covered bonds, which we believe to be expensive in comparison to bank bond instruments further down the liability structure. A quicker-than-anticipated tapering increases the odds that spreads will widen more than anticipated in the first half of the year. We still believe, however, that the impact of tapering on sovereign and SSA spread levels will have the strongest impact on covered bond spreads, more so than the more moderate outright purchases of covered bonds by the CBPP3. Reinvestments by the CBPP3 will be €15bn lower under the 1Q-4Q 2023 tapering scenario Source: ING Read this article on THINK TagsECB Tapering ECB CSPP Credit CBPP 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
Hungary: GDP declines by 0.4% in the third quarter. What's behind the drop?

Hungary: GDP declines by 0.4% in the third quarter. What's behind the drop?

ING Economics ING Economics 01.12.2022 13:45
The Statistical Office has confirmed a 0.4% quarterly drop in Hungarian GDP in the third quarter. Knowing what is driving the economic downturn has bolstered our view about the incoming technical recession Hungary is facing an increasingly gloomy economic picture -0.4% GDP growth (QoQ, swda) 3Q22 Hungary's real GDP drops on agriculture and services When the Hungarian Central Statistical Office released its estimate of the country’s third-quarter performance on 15 November, it was worse than the market consensus. Looking at the actual data today, it is clear to see why there has been a decline. Hungary's real GDP growth Source: HCSO, ING Let’s start with the production side, where we find the main culprit of the downturn: agriculture. After the extremely negative performance in the second quarter (-32.4% quarter-on-quarter) the volume of value-added in agriculture shrank in the third quarter as well by around 5% on a quarterly basis. It is also a major blow to economic activity that the volume of value-added in the services sector decreased on a quarterly basis in the third quarter. This is the first time since the height of the Covid-19 pandemic that there has been such a drop. The 0.7% quarter-on-quarter fall is a good indication that the combination of rising inflation, which is crippling the purchasing power of households, and supply-side price shocks for service providers has already started to reduce interest in services. This will only get worst in the fourth quarter. The stagnation of the construction industry on a quarterly basis was a minor positive based on the monthly output of the sector. But in general, this didn't create a significant contribution to the yearly GDP growth. In contrast with construction, industry delivered a good performance, being the silver lining in economic activity in the period of July-September. Contributions to GDP growth – production side (% YoY) Source: HCSO, ING Looking at the expenditure side of GDP, the consumption of households shrank by 0.1% on a quarterly basis in 3Q22. Except for the two Covid-19 lockdown periods, the last time such a drop in consumption took place was in 2012-13. That was the last time Hungary went through a technical recession. Another sign that a technical recession is coming is that the negative real wage shock is likely to fully hit consumption in the fourth quarter. Investment performance has also weakened, and although expansion is still visible on a quarterly basis, the 0.6% increase indicates that positive momentum is fading here as well. This is due to the uncertain economic outlook, the rising interest rate environment, and the depleted options of subsidised lending. Unsurprisingly, the contraction of the economy on a quarterly basis and the slowdown of growth on an annual basis in the third quarter were caused by the reduction in domestic demand. The good performance of industry, on the other hand, significantly helped net exports. That explains why 2.5 percentage points of the 4% year-on-year growth comes from net exports, while 1.5 percentage points came from domestic drivers. The last time net exports were a bigger contributor to GDP growth than domestic demand was around 2015-16 (not including the Covid-19 bottom and recovery period). At that time, the economy went through a significant slowdown. Contributions to GDP growth – expenditure side (% YoY) Source: HCSO, ING The looming technical recession will be evident in the 2023 GDP figure The detailed data, therefore, confirms our view that the domestic developments will translate into a technical recession in Hungary, as we see a continued drop in real GDP on a quarterly basis in the fourth quarter. At the same time, the combination of the good first half of the year, and the bad second half – which was marked by a technical recession – will keep the average GDP growth around 4.8% in 2022. As for 2023, the picture is much gloomier. This year's expected ugly end creates a negative carry-over effect for next year, and Hungary is probably facing another quarter of GDP contraction in the early stages of 2023. Against this backdrop, we expect economic performance to be close to stagnation, perhaps posting a marginal growth of 0.1% year-on-year in 2023 as a whole. Read this article on THINK TagsOutlook Hungary GDP Economy Economic activity 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
Cities In China Announced To Ease Pandemic Control Restrictions | OPEC Is Keeping The Current Production Levels Unchangeded

Next week in Asia: Japan's revised GDP, Singapore retail sales, China and Taiwan trading data

ING Economics ING Economics 01.12.2022 12:28
Global trade may be slowing and it's hitting both China and Taiwan’s export sectors Source: Shutterstock Slowing global trade weighing on China and Taiwan Export data for China and Taiwan should show a deeper yearly contraction, which reflects high inflation in the US and Europe. As domestic demand and export demand have been weak, PPI in China continues to shrink year-on-year, with CPI stabilising just slightly above 2%. Singapore retail sales supported by tourist arrivals? Singapore retail sales will be out next week. We had expected a slowdown in retail sales due to elevated inflation, but retail sales managed to hold relatively firm, possibly supported by the influx of foreign visitors. We expect October retail sales to remain in expansion although the pace of growth may slow somewhat as higher prices finally bite.  Read next: Spain: Manufacturing Purchasing Managers' Index hit 45.7, a point more than in October. Spanish economy will contract in the fourth quarter says ING| FXMAG.COM Philippine inflation could hit 8% Meanwhile, Philippine inflation is scheduled for release on 6 December. Headline inflation could hit 8.2%YoY, driven largely by higher food prices resulting from extensive crop damage due to typhoons. Bangko Sentral ng Pilipinas is likely to retain its hawkish bias to close out the year although governor Felipe Medalla has recently hinted that a pause may be in the cards as early as the first quarter of 2023. Other data releases next week Japan’s third-quarter GDP reading will be out next week but we expect no change from its initial forecast. We expect the -0.3% quarter-on-quarter seasonally-adjusted preliminary forecast to hold. Asia Economic Calendar Source: Refinitiv, ING Read this article on THINK TagsAsia week ahead 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
Spain: Manufacturing Purchasing Managers' Index hit 45.7, a point more than in October. Spanish economy will contract in the fourth quarter says ING

Spain: Manufacturing Purchasing Managers' Index hit 45.7, a point more than in October. Spanish economy will contract in the fourth quarter says ING

ING Economics ING Economics 01.12.2022 12:16
Spain's November manufacturing PMI remains deep in contraction territory. The only positive news is that the rate of deterioration has slowed slightly The manufacturing sector in Spain continues to contract Manufacturing sector shrinks for fifth month in a row The manufacturing PMI slightly improved in November, standing at 45.7, up from 44.7 in October, but remains well below its neutral level of 50. Both current output and new orders fell sharply again. Although inflation fell in November for the fourth consecutive month, the current inflationary environment continues to put pressure on demand. The positive news is that the rise in input costs has been the slowest in two years. Price pressure higher up the production chain is starting to ease. Both commodity prices and freight costs for transport and factory prices are starting to fall sharply from their recent peak levels. Last Friday, Spain's statistics office INE announced that producer prices fell again in October. While producer price inflation was still 42.9% in August, it fell to 26.1% in October, its lowest level since September 2021. Read next: Eurozone: Unemployment rate decreases to 6.5%. What may it mean for ECB| FXMAG.COM Spanish manufacturing PMI remains firmly in negative territory Source: S&P Global Despite the recent fall, inflation continues to weigh on the outlook After a sharp slowdown in Spanish economic growth in the third quarter, these figures confirm our belief that the Spanish economy will contract in the fourth quarter. Also, consumer confidence, published yesterday, is still at a very low level, despite the slight improvement in November. The negative impact of inflation remains in place both for consumers and businesses and we suspect that the government measures will not be enough to prevent a GDP contraction in the fourth quarter of this year. Nevertheless, the slight improvement in figures shows that at least the situation is not deteriorating further. Thanks to the strong first half of the year, GDP growth will still come in at 4.3% in 2022, but for 2023 we expect the Spanish economy to grow by less than 1%. Read this article on THINK TagsSpain PMI Manufacturing PMI GDP 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
Eurozone: Unemployment rate decreases to 6.5%. What may it mean for ECB

Eurozone: Unemployment rate decreases to 6.5%. What may it mean for ECB

ING Economics ING Economics 01.12.2022 11:27
The unemployment rate dropped from 6.6% to 6.5% in October, showing that the labour market remains resilient despite the slowing economy. This will keep the European Central Bank on high alert in its fight against inflation Unemployment in the eurozone is at a record low Another upside surprise from the labour market. Despite an economy moving into recession, unemployment continues to trend down to new records. While German unemployment seems to have bottomed, southern Europe is still experiencing declining unemployment. Spain, Greece and Italy all saw the rate drop in October. The current rate of 6.5% is a new historic low since the series began in 1998 and is consistent with rising nominal wages. From here on, the labour market is set for a slowdown given our expectations of a winter recession. Surveys indeed suggest that the pace of hiring is slowing at the moment, which is set to come with a modest runup in unemployment. Given labour shortages, however, we don’t expect unemployment to increase much. Read next: Poland: Purchasing Managers' Index reached 43.4. The coming months will see a marked slowdown in industrial production growth says ING| FXMAG.COM When we hear ECB president Christine Lagarde say that a mild recession will not be enough to sustainably bring inflation down, this is likely a large part of the mechanism she is referring to. The question is whether that is the case when many supply-side factors are turning disinflationary – but that’s another matter. Expect the ECB to remain on high alert in its fight against inflation, although we do believe that it will opt for a slower pace of rate hikes in the coming months: we're expecting a 50 basis point rise for December. 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
Poland: A Pause In Its Rate Hiking Is Officially Declared

Poland: Purchasing Managers' Index reached 43.4. The coming months will see a marked slowdown in industrial production growth says ING

ING Economics ING Economics 01.12.2022 11:13
Poland’s manufacturing PMI went up to 43.4pts in November, but we are still seeing rapidly deteriorating conditions in industry. Output and new orders continued to decline, albeit at a slower pace. Further improvement in supply chains was reported, but prices are still rising. Much softer industrial output readings are expected in the coming months The Polish manufacturing PMI index rose to 43.4pts in November from 42.0pts in October (consensus: 42.8pts). Despite the slight improvement, the PMI index still indicates a sharp contraction in industrial activity. Production and new orders fell again, albeit at a slightly lower rate than previously. Businesses complain about the unfavourable macroeconomic environment. Purchasing managers reported a decline in inventories, lower purchases, and employment reductions. PMI slightly up but still deeply in negative territory Poland's manufacturing PMI, pts. Source: S&P Global. Export orders declined for the ninth consecutive month, particularly to key European markets. Production backlogs are falling at a rapid pace and purchasing activity declined at the fastest rate since April 2020. Fewer problems with sourcing materials and the functioning of supply chains are supporting the Polish and European industry, allowing backlog orders to be fulfilled. This also translated into reduced upward cost pressures, which were the weakest in more than two years. Despite this, costs continued to rise (mainly due to more expensive gas and electricity), resulting in a sharp increase in output prices. The coming months will see a marked slowdown in industrial production growth. On the one hand we are dealing with deteriorating foreign demand, and on the other we have a high reference base from last year, when an impressive and hard-to-explain increase in energy production was reported. The usefulness of the PMI in predicting changes in production has been limited in recent months. The slump in purchasing managers’ assessments has been accompanied by the solid health of domestic manufacturing. This does not change the fact that the long-painted pessimistic picture of Polish manufacturing by manufacturers is now becoming a reality and will be reflected in hard data. Read this article on THINK TagsPoland PMI 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 Bank Of Korea Will Likely Consider Easing Policies

The Bank Of Korea Will Likely Consider Easing Policies

ING Economics ING Economics 01.12.2022 10:16
Due to a weaker-than-expected export outcome in November, the downside risks to GDP this quarter have increased. The Bank of Korea (BoK) is likely to slow down its hiking pace next year due to the sharp deterioration of real activity data   -14.0 Exports % YoY  Lower Trade deficit widened again due to soft exports in November Exports fell for a second consecutive month (-14.0% YoY in November vs -5.7% in October), and were weaker than the market consensus of -11.2%. By export items, automobiles (31.0%), petroleum (26.0%), and batteries (0.5%) grew, while semiconductors (-29.8%), and petrochemicals (-26.5%) dropped sharply. By destination, exports to the US (8.0%), the Middle East (4.5%), and the EU (0.1%) continued to increase. Yet, inter-regional exports continued to decline, with exports to China (-25.5%) and ASEAN (-13.9%) down. We believe that catch-up demand in the auto sector will persist for a while with lifting supply constraints. However, the outlook for IT investment and consumption is cloudy. We interpret the sluggish exports to China and ASEAN as being more strongly related to global IT demand rather than necessarily to regional demand. China's lockdown itself should work against Korea's exports, but what's more worrisome is that the final demand for IT seems to be falling very quickly.  Meanwhile, imports rose 2.7% YoY in November (vs 9.9% in October) with continued increases in commodities (27.1%). As a result, the trade deficit widened to -USD7.0bn in November (vs -USD6.7bn in October).  Exports contracted for a second straight month in November CEIC November manufacturing PMI rebounded but remains below the neutral level November's manufacturing PMI improved to 49.0 (vs 48.2 in October), but stayed in the contraction zone for a fifth consecutive month. Sluggish semiconductor performance appears to be driving weak output and orders, which means that semiconductor activity is likely to remain sluggish in the near future.   Manufacturing PMI suggests soft manufacturing activity ahead CEIC GDP outlook The Bank of Korea released its revised report on 3QGDP this morning as well. Headline growth of 0.3%QoQ was unchanged from the advance estimate, but the details have changed slightly. By expenditure, private consumption (1.7% vs 1.9% advance) and construction (-0.2% vs 0.4% advance) were lowered, while facility investment was revised up to 7.9% (vs 5.0% advance) as machinery and transportation investment increased. 3QGDP growth was mainly led by domestic demand components, but consumption and facility investment are likely to weaken due to interest rate hikes. Construction, which already contracted last quarter, is struggling with the ongoing tight financial conditions and sluggish real estate market. Meanwhile, China's weak PMI (48.0 official manufacturing) and strict corona policy mean that Korea's exports will face strong headwinds in the coming months. Making things worse, the nationwide truckers' strike is adding an additional burden on the economy. Considering the sluggish October IP outcomes yesterday and dismal exports this morning, the downside risk for the current quarter’s GDP forecast (-0.1% QoQ) has substantially increased. GDP outlook is likely to be revised down Bank of Korea, INGBank of Korea releases bi-annual %YoY growth forecasts. ING estimated the quarterly growth figures based on the bi-annual forecasts. The Bank of Korea will slow down its hiking pace next year Consumer price index (CPI) inflation data for November will be released tomorrow. We expect inflation to decelerate to 5.1% YoY (vs 5.7% in October) mainly due to falling gasoline and fresh food prices. Although base effects will also work to calm inflation in the coming months, we see additional signs of inflation slowing further. The recently released data signals a sharp deterioration in the economy in the current and subsequent quarters. We, therefore, expect the BoK to deliver its last hike this cycle in February. Beyond the first quarter, the BoK will likely adopt a wait-and-see stance, together with hawkish comments. But if we are right about contracting growth and inflation falling to around 3% in 1H23, then the BoK will likely consider easing policies in 2H23. Financial market updates Korea's equity market and the Korean won are rallying on the back of relatively dovish remarks from Jerome Powell last night. The KRW recorded its best performance in the region for a month. We think that the KRW will likely strengthen further by the year-end, but we still have to be cautious in the next quarter. We expect further widening of the yield gap between the US and Korea and uncertainties in China to extend into the next quarter, which together with a weak trade performance, could adversely affect the won.  TagsKorean trade GDP Exports 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
FX: The Gap Versus The FX spot Rate In Poland Is Already The Largest In The CEE Region

FX: The Gap Versus The FX spot Rate In Poland Is Already The Largest In The CEE Region

ING Economics ING Economics 01.12.2022 10:02
The dollar is around 1% lower across the board after what was seen as a less hawkish speech from Fed Chair Powell softened US interest rates. A softening of China’s Covid policy is also helping emerging market currencies today. The relatively large adjustment in US rates and the dollar on Powell’s speech probably says a lot about positioning In this article USD: Overreaction? EUR: 1.05/1.06 is the risk for EUR/USD GBP: 1.22/1.23 for cable CEE: Hard to be positive on the zloty   Federal Reserve Chair Jerome Powell speaking at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institute, in Washington USD: Overreaction? The dollar came off sharply late yesterday on comments from Federal Reserve Chairman Jerome Powell which signalled that December would probably be the occasion to shift to a slower pace of rate hikes. The market has been expecting the shift to a 50bp versus 75bp rate hike for a while, although it felt the need to price the terminal rate next summer some 10bp lower at 4.90%. Indeed, US yields came off quite a sharp 20bp across the curve. We are tempted to say that looks an overreaction in that while Chair Powell did acknowledge the slowing in the pace of hikes, his core message was one of stubbornly high core inflation, particularly in the core services ex-housing category. This category is largely driven by wages and an area where the Fed struggles to see labour supply improving anytime soon. Inputs into this story will come today and tomorrow in the form of the October core PCE deflator and the November jobs report, respectively. On the former, consensus expects October core PCE to decelerate to 0.3% month-on-month from 0.5%. This basket is different from the national CPI basket, where the 0.3% MoM release on 11 November triggered a huge drop in the dollar and rally in risk assets. Any upside surprise in today’s core PCE reading could see the dollar reverse overnight losses. In the bigger picture, we continue to take the view that a trade-weighted measure like DXY can hold support levels around the 105 area (or at least will not sustain any break under it). One challenge, though, is the EM picture. If we are seeing a sea-change in China’s Covid stance – e.g., a shift to home quarantine from city lockdowns, EM currencies may be due a re-rating. On the day then, the core PCE inflation data is the biggest input, and we prefer DXY to find support near 105.00. Chris Turner EUR: 1.05/1.06 is the risk for EUR/USD EUR/USD weakness in late Europe yesterday looked a function of end-month portfolio rebalancing (European equities had vastly outperformed) and it is no surprise to now see EUR/USD well above 1.04 on the sharp drop in US yields. Resistance is clearly set at the 1.0480/1.0500 area, above which we could see a spike to the 1.0600/0620 area. That is not our preferred view, but thinning December markets and seasonal dollar weakness mean that such a scenario cannot be ruled out. Bigger picture, however, weak global demand (note Korea’s poor November export data overnight) is not a good story for the pro-cyclical euro. Additionally, colder weather coming to northern Europe is starting to push gas prices higher again and keep the eurozone trade balance under pressure. We would like to think that 1.05/1.06 is as good as it gets for EUR/USD in December. Elsewhere, look out for Swiss November CPI today. We have been bearish EUR/CHF on the view that the Swiss National Bank wants a stronger nominal Swiss franc to fight inflation. That view will be challenged, of course, should inflation surprise on the downside.  Please also see Francesco Pesole’s article on the Norwegian krone. Yesterday, Norway’s central bank announced it will trim daily FX purchases from NOK 3.7bn to 1.9bn, which sent NOK rallying across the board. As discussed in the article, we see the two consecutive cuts in FX purchases as an indication of higher appetite for a stronger krone, which would help combat inflation at a time when economic woes and property market fragility may curb the appetite for monetary tightening. Chris Turner GBP: 1.22/1.23 for cable The softer dollar environment is giving cable another lift. This rally could extend to the 1.22/23 area unless either today’s US core PCE data or tomorrow’s US jobs data can put a floor back under US yields. EUR/GBP continues to hold support near 0.86 and that may well be the case into year-end. Both the Bank of England (BoE) and the European Central Bank (ECB) should be hiking by 50bp in December. But we are taking the view that risk assets will come under more pressure over coming months – which will lead to renewed – if mild – sterling underperformance. Chris Turner   CEE: Hard to be positive on the zloty Today, we will see PMI numbers across the region. We expect a rebound from lows in Poland from 42.0 to 42.6 and in the Czech Republic from 41.7 to 42.7, following the trend in Germany. On the other hand, in Hungary we forecast a drop below the 50-point level. As in Poland yesterday, the GDP breakdown for the third quarter will be published today in Hungary, which was the only country in the region to surprise negatively in the flash reading (-0.4% quarter-on-quarter) a few weeks ago. Later today, the Czech Republic's state budget result for November will be published. Given the recent increase in the deficit for this year and the question marks over funding, the number will get more attention than usual. However, the start of pre-funding needs for next year through CZGBs switches in recent days indicates a better-than-expected MinFin situation. On the FX front, two main topics remain on the table in the region: the Polish zloty and the Hungarian forint. Yesterday's downside inflation surprise pushed down the interest rate differential in Poland by around 25bp, further widening the gap versus the FX spot rate, which is already the largest in the CEE region in our view. So, it is hard to be positive on the zloty, but for now, apart from any rally in the US dollar, we don't see a trigger for a correction. Until then, the zloty is likely to remain below 4.70 EUR/PLN. Meanwhile, the market seems to be running out of patience in Hungary and the normalisation of relations with the EU is not progressing as fast as expected. Although yesterday's news did not bring anything really new in our view, the forint returned to the 410 EUR/HUF range, which probably cleared the long positioning built up in recent weeks. Thus, in our view, it is still worth waiting for the final decision of the European Council in December and we expect the forint back to stronger levels. Frantisek Taborsky 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 Events In China May Help Financial Markets And The Global Economy

Asia Marekt: Bank Indonesia Will Remain Hawkish Due To Rise In Core Inflation

ING Economics ING Economics 01.12.2022 09:28
Asian markets rally on China re-opening hopes and dovish Powell speech. Indian 3Q22 GDP better-than-expected, but Korean trade data was very weak and further weakness is expected from China's Caixin indices  In this article Macro outlook What to look out for: Fed speakers and US jobs report   shutterstock Macro outlook Global Markets: It looks as if Fed Chair Powell didn’t get the memo to push back against pivot hopes and keep financial conditions tight before he went to give his speech at the Brookings Institution yesterday. It was at best a neutral speech, acknowledging that rate hikes might be reduced in magnitude as early as the December meeting, but on the other hand, noting that there was still work to be done. But it also threw in a couple of what can only be described as dovish remarks  - namely that the Fed didn’t want to overtighten (no, but don’t tell the market that!). And also that he thought the economy could achieve a “soft landing”. Yes, that would be nice, but wouldn’t it have been better not to cloud the message with growth aspirations that possibly undermine the Fed’s single-mindedness to bring down inflation? It is going to be very hard now for the Fed to push back at market pivot hopes. So let’s hope that inflation does keep on falling, or this may look like a missed opportunity. Equities rallied hard following Powell’s speech. That’s not the direction we would have expected from the speech we think the market needed to hear. The S&P500 rose 3.09% and the NASDAQ rose 4.41%. Chinese stocks yesterday were also strong as re-opening hopes continue to provide support. The key to the “success” or otherwise of Powell’s speech yesterday, though, probably lies more in the US Treasury response. 2Y US Treasury yields fell 16.3bp to only 4.31%. 10Y US Treasury yields fell 13.9bp to 3.605%. The May 2023 implied rate from Fed funds futures has dropped all the way back to 4.925%. A couple of days ago, it was almost 5.0%. It’s no surprise, given all of this, to see the EURUSD exchange rate back above 1.04. The AUD has surged almost all the way back to 0.68, Cable is back up to 1.2069 and the JPY is looking stronger than for some time at 137.83. Asian FX was pretty strong yesterday, led from the front by the CNY which is still betting on re-opening, and by the high beta currencies, KRW and THB. More of the same seems likely today. US financial conditions look well and truly eased. G-7 Macro: For those who like backwards-looking employment data, yesterday’s October JOLTS survey showed a further small decline in job openings, though the measure did not fall as much as had been expected, not that we think the markets would have paid much heed even if it had. More importantly, the ADP survey came in much weaker at 127,000, down from last month’s 239,000.  If we got a figure like that for tomorrow’s US non-farm payrolls (expected 200,000), then that really would be grounds for further declines in bond yields, dollar weakness and equity gains. Though we would caution that payrolls rarely move in lock step with its monthly indicators, and nothing is certain until the data is printed. Today, the main market risk comes from the PCE deflator figures for October. A lot of attention has been placed on whether the core PCE rate will decline or not, given the differences in the scope of PCE compared to CPI and their different weightings. The market is betting on a very small decline in the core PCE inflation rate to 5.0%YoY from 5.1%. And while we don’t disagree, the risk is probably skewed to a higher figure, and perhaps no change in the inflation rate. Maybe after the big market swings yesterday, that would be a better way to be positioned. The US manufacturing ISM index completes the data for today. China: The Caixin manufacturing PMI should indicate that the activity of smaller manufacturers contracted further in November compared to a month ago. Rising Covid cases, together with shrinking exports, added pressure on exporters. Local government officials will likely exercise Covid measures with an intent to reduce their impact on the economy even if there are no further imminent changes in the overall Covid rules. South Korea: Preliminary GDP rose 0.3%QoQ sa in the third quarter, the same as the advanced estimate. However, the details have changed slightly. By expenditure, private consumption (1.7% vs 1.9% advanced) and construction (-0.2% vs 0.4% advanced) were lowered, while facility investment was revised up to 7.9% (vs 5.0% advanced) as machinery and transportation investment increased. Meanwhile, exports continued to fall -14.0% YoY in November (vs -5.7% in October, -11.2% market consensus) for the second straight month. Imports continued to rise, but at a slower pace, only 2.7% in November (vs 9.9% in October, 0.5% market consensus), resulting in the trade deficit widening to -7.0bn USD (vs -6.7bn in October). Semiconductor exports (-29.8%) and exports to China (-25.5%) were particularly weak.  The nationwide truckers’ strike is adding more burden on manufacturing and exports. Considering the sluggish October IP outcomes from yesterday and sluggish exports this morning, the downside risk for the current quarter’s GDP forecast (-0.1% QoQ) has increased. Japan: 3Q capital spending rose 9.8% YoY (vs 4.6% in 2Q, 6.4% market consensus), which is not in line with 3QGDP results. And based on today’s stronger-than-expected capital spending, Japan’s revised 3QGDP is likely to improve from the advance figure which showed a 0.3% QoQ sa contraction. Indonesia:  November inflation will be reported today.  Market consensus points to a softening in headline inflation to 5.5%YoY (from 5.7%) but core inflation may pick up to 3.4%.  The steady rise in core inflation should be enough to keep Bank Indonesia hawkish with Governor Warjiyo likely following through with a rate hike to close out the year.   India: Yesterday evening, India published 3Q22 GDP data. Please read our short snap for more detail. The short version is that at 6.3%YoY, growth exceeded expectations and apart from an outsize drag from imports, there was nothing in the 3Q data to set off alarm bells for the 4Q figure. As such, it will only take a very moderate further growth to ensure that at least a 6% GDP growth rate is achieved for the calendar year 2022.  If so, that would be one of the fastest growth rates in Asia. Fiscal deficit figures yesterday were a little less encouraging, with a big year-over-year jump which if repeated next month, could threaten the government’s fiscal deficit target for FY 2022/23 of 6.4%. What to look out for: Fed speakers and US jobs report South Korea 3Q GDP and trade (1 December) Regional PMI (1 December) China Caixin PMI (1 December) Indonesia CPI inflation (1 December) US personal spending, PCE core deflator, initial jobless claims and ISM manufacturing (1 December) Fed’s Cook, Bowman, Logan, Barr and Powell speak (1 December) South Korea CPI inflation (2 December) Fed’s Evans speaks (2 December) US non-farm payrolls (2 December) 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
The World Steel Association Expects Chinese Steel Demand To Fall

The Commodities: Aluminium Production Is Estimated To Rise

ING Economics ING Economics 01.12.2022 09:20
Commodities received a boost along with other risk assets after some mildly dovish comments from the US Fed chairman. No surprise that this led to USD weakness, providing further support to the complex In this article Energy - US crude oil inventories plunge Metals – Copper output recovers in Chile   Energy - US crude oil inventories plunge The oil market received a boost yesterday from multiple factors. ICE Brent managed to settle more than 3.2% higher on the day. Most risk assets rallied on the back of the US Fed chairman signalling smaller rate hikes as soon as December, while hopes of an easing in China’s covid policy also proved supportive. In addition, noise in the oil market continues to build ahead of the OPEC+ meeting this weekend. It is still not exactly clear what action if any, the group will take. The weakness in the market over the last several weeks means that further supply cuts cannot be ruled out. The EIA’s weekly inventory report was also bullish for the market yesterday. The latest data shows that US commercial crude oil inventories fell by 12.58MMbbls over the week - the largest weekly decline since June 2019. When taking into consideration SPR releases, total US crude oil inventories fell by 13.98MMbbls. Trade played a large role in the significant inventory draws with crude oil imports falling by 1.03MMbbls/d over the week and exports rising by 706Mbbls/d. Refiners also increased their utilisation rates by 1.3pp to 95.2% - the highest levels since August 2019. As a result of stronger refinery throughput, gasoline and distillate fuel oil inventories increased by 2.77MMbbls and 3.55MMbbls respectively. Metals – Copper output recovers in Chile Chile, which accounts for about a quarter of the world supply of copper, just registered its first year-on-year output increase since July 2021. October production edged up 2.2% from the same month last year, according to data from the National Statistics Institute. Month-on-month output jumped 11%. Chile’s copper production has struggled for much of this year amid lacklustre ore grades, labour woes and water scarcity. Rio Tinto expects its iron ore production to remain roughly in line with 2022 and forecasts to ship between 320-335mt of iron ore in 2023 from its Pilbara project in Australia, unchanged from its previous guidance. The group expects medium-term iron ore production capacity to remain between 345mt-360mt. Meanwhile, aluminium production is estimated to rise to 3.1mt-3.2mt in 2023, compared to an estimated 3mt-3.1mt for 2022. TagsOPEC+ Iron ore Federal Reseve EIA 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
India: Trouble Has Been Stored Up For The Final Quarter Of The Year

India: Trouble Has Been Stored Up For The Final Quarter Of The Year

ING Economics ING Economics 01.12.2022 09:13
3Q22 GDP rose at a 6.3%YoY pace, slightly exceeding market expectations and keeping growth for the full year on track to exceed 6%, which would make India one of the fastest-growing economies in Asia  Shutterstock 6.3%YoY 3Q22 GDP 6.2% expected  Higher 2022 growth on track to exceed 6% Although down from the 13.5%YoY growth rate achieved in 2Q22, that growth rate had been achieved almost entirely through base effects. The 6.3%YoY growth achieved in 3Q22 had a much stronger provenance, deriving from a solid 3.5%QoQ gain from the previous quarter. This means that with only very conservative growth assumptions for the final quarter of this calendar year, India should be on track to exceed 6% growth for the year as a whole and possibly for the fiscal year too.  India GDP by expenditure (YoY%) CEIC, ING Outperforming its peers India is well placed to outperform many of its Asian peers in the short term, given its very low trade dependency on China compared to the rest of the region. It may also be capitalising on some of China's current problems, offering an alternative destination for foreign investment as multinational firms look to spread their supply chain risks while remaining in the region.  Would do even better with broader based industrial growth The breakdown of GDP by expenditure components shows strength across the board in the main domestic demand components. Consumer spending and capital investment both grew at more than a 10%YoY pace, with only government spending spoiling the picture. Though that in itself may be no bad thing considering the October fiscal deficit figures, which were considerably higher than the same period last year. This suggests that a little government restraint over the end of the year might well be warranted. Export growth was also strong, though overall GDP was pulled down by a large drag from imports, and the net trade contribution dragged the overall GDP growth total down by a massive 4.3 percentage points.  Still, there is little in this GDP breakdown that suggests trouble has been stored up for the final quarter of the year, so we remain optimistic about the eventual tally. About the only cause for complaint with the 3Q22 GDP print was that on a gross value-added basis, the contribution remains heavily concentrated on the service sector, with a small contribution from agriculture, but a drag from industry. India could do with broadening its economic base, as this will also likely lessen the drag from net exports and allow for an even faster rate of growth in the future.        Policy and market implications There are two main policy implications from this: The first is that with growth holding up well, this provides the Reserve Bank of India more room to manoeuvre to raise policy rates and control inflation. That said, rates have already risen a long way, and inflation shows signs of turning lower, so this is probably a benefit that isn't actually needed.  On the fiscal front, today's October fiscal deficit figures do suggest that fiscal policy might be an area to finesse a little over the turn of the year, and in doing so, might help lessen the inflow of imports too, which could help prop up the INR  - though the rupee has had quite a decent day today, declining to 81.43 against the USD.  In short, there is nothing much wrong with Indian GDP growth, and still scope for further improvement with well-targeted policy measures.  TagsRBI policy rates India GDP India economy 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
Norway: Norges bank announced lower-than-expected Forex purchases. According to ING authorities may want to support NOK

Norway: Norges bank announced lower-than-expected Forex purchases. According to ING authorities may want to support NOK

ING Economics ING Economics 30.11.2022 19:27
For the second consecutive month, Norges Bank announced lower-than-expected daily FX purchases (NOK1.9bn) for the month ahead. This may at least partly denote appetite for a stronger domestic currency, which would help fight inflation as Norges Bank’s room for tightening may be restrained by Norway’s economic woes and vulnerable property market December FX purchases trimmed to NOK1.9bn Norges Bank (NB) announced daily FX purchases data for the month of December today, and for the second consecutive month, surprised on the downside. Daily purchases were trimmed from NOK4.3bn to NOK3.7bn in November, and will be further cut to NOK1.9bn next month. December’s FX operations will be carried out only until the 16th. For context, Norges Bank conducts FX operations on behalf of the Ministry of Finance, converting NOK excess petroleum revenues (after financing the budget deficit) into foreign currency holdings, which are then saved in the Government Pension Fund Global (GPFG). In practice, NB is selling NOK in the market, primarily against USD and EUR. Assessing the FX impact The lower announced FX purchases are probably related to the recent drop in energy prices. However, the reduction in purchases for December was both unexpected and very sizeable, and followed another surprise decrease in November. We think there may be an ulterior motive behind the Finance Ministry and Norges Bank’s move: offering some support to the krone. NOK is the least liquid currency in G10 (left-hand chart below), which means it is extremely sensitive to global risk dynamics and financial conditions. While the deteriorating liquidity and risk environment in 2022 was the primary driver of NOK weakness, Norges Bank’s acceleration in FX purchases in September and October may well have added pressure on the krone. NOK is the best performing currency in G10 today, trading 1.10% higher against the USD and 0.7% against the euro thanks to Norges Bank’s announcement. NOK driven by liquidity and NB purchases Source: BIS, Norges Bank, ING Stronger NOK welcome given limited tightening room In our view, a stronger domestic currency would be welcome in Norway as it would help fight elevated inflation. The most recent CPI reading surprised to the upside once more, revealing an increase in prices to 7.5% in October, significantly higher than the 5.4% average fourth quarter Norges Bank estimates (published in September). As a result of growing economic downside risks, NB has slowed the rate of tightening, raising it only 25bp to 2.50% on November 3rd. Most importantly, its current rate projections only indicate 60bp of additional tightening, which might prove insufficient to bring inflation sustainably lower. However – along with general concerns about the slowdown in the economy – hawks at the NB may be discouraged by the vulnerability of the Norwegian housing market. As shown below, Norway has the largest share (nearly 96%) of variable rates in G10, which is unquestionably an element of concern given rapidly rising rates. Too much tightening risks causing an undesirably rapid contraction in house prices. Norway's property market looks vulnerable Source: OECD, ING In conclusion, Norges Bank and the Finance Ministry may want to offer some support to NOK via lower FX purchases, with the aim of reducing the need for direct monetary policy action (rate hikes) to fight inflation. We could see Norwegian authorities keep FX purchases lower throughout 2023 for this reason, which would be a positive development for NOK. However, FX operations are one variable in the NOK equation, and crucially one with a lower weight compared to external factors that are well beyond Norges Bank’s control: global risk appetite and financial conditions. As discussed in our 2023 FX Outlook, worsening liquidity conditions are likely to pose a challenge to high-beta currencies such as NOK. Our base case is for NOK to appreciate to 9.60 against both EUR and USD by end-2023, but we doubt it will be a smooth ride for the krone. 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: The Gap Versus The FX spot Rate In Poland Is Already The Largest In The CEE Region

Poland: CPI inflation hits 17.4%, less than in October. Food prices go up by over 1.5% month-on-month

ING Economics ING Economics 30.11.2022 19:15
The CPI peak is still ahead but inflation should decline in 2023 on base effects, albeit with persistently high core inflation Lower CPI inflation in Poland is due to falling energy prices; food and core show fast growth November CPI inflation slowed down to 17.4% year-on-year in November from 17.9% in October versus the expected 17.9-18% YoY. The reason for the surprise is the 0.1% month-on-month drop in energy prices (lots of foreign coal was delivered and the government subsidies are working). However, the other components of inflation are still recording large increases. Food prices jumped by 1.6% MoM in November, thanks in part to earlier increases in energy prices. Core inflation is still rising fast at 0.6% MoM (after seasonal smoothing this is still high). This brings the core’s annual rate up to 11.3% YoY in November from 11.0% a month before. CPI peak still ahead but inflation should decline in 2023, albeit with high core inflation This inflation picture is far from optimistic. The peak in CPI is still ahead of us and will probably be reached in February at around 20% YoY. In 2023, we have an inflationary overhang to 'unload' due to the anti-inflation shields introduced earlier. There will be an increase in VAT on electricity, gas and heating in January, which will bump up CPI by around 2.5-3pp. Keeping 0% VAT on food is still uncertain. We heard yesterday from PM Mateusz Morawiecki that the reduction will only be in place in the first half of next year, but we assume it will be extended until at least the third quarter of 2023. Overall, average inflation next year will be around 14% YoY. The underlying theme in 2023 will be a large fall in CPI, from around 20% to around 10% by the end of the year. We note that statistical base effects will play a strong role in this slide. The core CPI should stay persistently high, at around 10% through most of the year. This will complicate the conduct of monetary policy. The 3Q22 GDP data released today shows a major slowdown in consumption, which should slow the process of high costs being passed onto retail prices. However, 2023 is an election year which usually brings new spending and it is just a matter of time before this appears. Lower energy prices reduce headline inflation in Europe, other risks remain in place After the November readings, the inflation landscape in Poland and Europe is similar. The latest data surprised on the low side, but mainly through softer energy prices, resulting from policy intervention. Globally, we are also seeing the first signs of improving inflationary pressures, i.e. softening disruptions in supply chains, falling freight prices and declines in commodity prices (including the all-important gas for Europe). But central banks, e.g. the European Central Bank and tonight the Federal Reserve, will try to calm the over-optimism. The reasons for the banks' caution are (1) stubbornly high core inflation in 2023 (especially in Poland and Euroland); (2) large fiscal stimulus in Europe/Poland, but not the US; (3) the consensus and projections from the National Bank of Poland assume a gradual normalisation of commodity prices in 2023, but we fear that when the global and Chinese economies rebound, the problem of high prices may return. NBP has definitely ended the tightening cycle The NBP has effectively ended the rate hiking cycle and today's CPI reading should be very welcome by the MPC's doves. However, cuts are unlikely next year. The problem is the persistence of core inflation in Poland, the inflationary overhang created by the large inflationary shields, and our concerns about renewed commodity price rises in 2023. There is limited capacity growth in the major producers of energy commodities or industrial metals. This could manifest in a renewed spike in prices, as Europe looks to fill gas storage for the winter of 2023-24. Also, a rebound in the global and Chinese economies could lift precious metals prices. Read next: The Global Oil Market Is Expected To Tighten Over 2023| FXMAG.COM In our view, the MPC will not change rates over the coming year. The current green shoots of global disinflation should support the POLGBs market. However, the problem of high inflation will not end with headline CPI falling to around 10% YoY at the end of 2023. The CPI drop in 2023, but with persistently high core inflation CPI (%YoY) and contributions Source: ING, GUS 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
Poland: Economy growth contracts to 3.6% year-on-year

Poland: Economy growth contracts to 3.6% year-on-year

ING Economics ING Economics 30.11.2022 16:46
In 3Q, Poland's GDP slowed to 3.6% YoY after a very solid first half. This was the result of a significantly lower contribution from private consumption. In contrast, the contribution from inventory changes was unexpectedly high. This could mean that companies were taken by surprise by low demand, or increased inventories as a precautionary measure A shopping mall in Warsaw, Poland The third quarter contribution from private consumption came in at just 0.5pp vs. 3.6pp in the second quarter. In year-on-year terms, private consumption growth declined from 6.4% in 2Q22 to just 0.9% in 3Q22. The reason is high inflation growth, which has almost continuously outpaced wage growth since May. This will not change in 1H23 and is one of the main reasons for the slowdown we expect for next year. Adding to this is generally worse household sentiment, which is curbing demand for durable goods. Perhaps this is a delayed impact of the outbreak of the war, as 2Q22 consumption was relatively strong. GDP structure in Poland A significant deterioration in consumption in 3Q22; inventories are still quite strong The contribution from inventories was even higher than in 2Q22 (2.2pp vs. 1.8pp). This could mean that (a) companies were taken by surprise by low demand and were unable to adjust production in time, or (b) as a precautionary measure, they increased inventories in the face of supply shortages and accelerating inflation. However, investment performed relatively poorly (adding only 0.3pp to GDP growth, down from 1pp a quarter earlier). This is partly due to the difficult situation facing the construction industry. Infrastructure investment work has been hurt either by a lack of access to the Recovery Fund, or a strong increase in the cost of work, which has prompted companies to walk off construction sites and made it difficult to award tenders. Residential construction, meanwhile, is facing a slump in demand, due to high interest rates and a collapse in mortgage lending, among other factors. In YoY terms, investment growth fell from 6.6% to 2%. Read next: The Global Oil Market Is Expected To Tighten Over 2023| FXMAG.COM As expected, the contribution of net exports to GDP improved (from -0.7pp to +0.6pp). At the turn of the year, companies tried hard to increase inventories, fearing renewed disruptions in global supply chains. Import growth has been slowing for several quarters, while exports have begun to accelerate since 2Q22 amid softening domestic demand and the weakening zloty. The overall economic picture in 3Q22 is lacklustre, despite the fairly strong YoY headline GDP growth and an acceleration in seasonally-adjusted GDP growth to 1% QoQ in 3Q22. We view this acceleration as a rebound after a strong 2.3% quarter-on-quarter decline in 2Q22. Significant weakness in consumer demand bodes poorly for the turn of the year, with companies more likely to look to adjust inventories as price increases slow down. We still think GDP growth should be close to 5% YoY this year (mainly due to strong 1H22), with GDP slowing to around 1% YoY in 2023. Read this article on THINK
The World Steel Association Expects Chinese Steel Demand To Fall

The Aluminium Market Will Significantly Reduce Its Global Deficit

ING Economics ING Economics 30.11.2022 14:25
Negative macro sentiment will continue to put downward pressure on aluminium, with a worsening demand outlook being balanced against tight physical supply In this article Volatility reigns in 2022 High energy costs remain a threat to supply Demand woes take centre stage Russian metal remains the biggest uncertainty Prices to slide in early 2023 on poor near-term economic outlooks   Shutterstock   Volatility reigns in 2022 Aluminium prices have been highly volatile in 2022 due to the Russia-Ukraine war, logistical issues, increasing recessionary fears and the Covid-19 pandemic. LME prices reached a peak of $3,849/t in March but have now declined more than 40% from their post-invasion peaks. LME prices are down more than 40% since March peak LME, ING Research High energy costs remain a threat to supply Soaring energy costs following Russia’s invasion of Ukraine have squeezed producers’ margins, with energy-intensive metals having been particularly affected. Aluminium, the most energy-intensive base metal to produce, requires about 40 times more energy to make than copper. Several output cuts have already taken place since December 2021 at key European smelters, including Alcoa’s San Ciprian smelter and Hydro’s plant in Slovakia. As of mid-October, Europe and the US combined have cut around 1.7 million tonnes of capacity – 25% of European output and 2.1% of the global total – from the second half of 2021. Production cuts in Europe account for around 1.4 million tonnes of capacity. In the US, more than 300,000 tonnes of capacity have been cut, including Alcoa’s Warrick and Century Aluminium’s Hawesville plants. Despite the recent weakness in energy prices, we do not expect capacity to come back online in the short term with Europe heading into the winter months and the war with Russia raging on. Further smelter closures and curtailments in production are highly likely given the uncertainty over energy prices through next year. Any announcement of further closures could see aluminium prices spike but any potential rallies are likely to be unsustainable. We don’t anticipate European smelters restarting before 2024. Although production continues to be cut in Europe and in the US, global primary aluminium output in October rose 3.1% year-on-year to 5.85 million tonnes, according to data from the International Aluminium Institute (IAI). Estimated Chinese production was 3.475 million tonnes, according to the IAI. Total worldwide production on an annualised basis came in at 68.9 Mt, according to the IAI. For Chinese production, the IAI estimated the annualised October output at 40.9 Mt. China’s aluminium smelters are facing constraints, too. In the drought-hit hydro province of Yunnan, which accounts for 11% of China’s aluminium output, aluminium smelters have been required by the government to reduce their operating rates from mid-September. The smelters in Yunnan have cut around 20% of operating capacity, around 1.1 M t/y. It is unlikely that any idled capacity will resume by the end of this year due to current energy issues, with restarts forecast for 2Q 2023 once hydro-reservoir levels have stabilised. This was the second consecutive year that Yunnan cut primary aluminium production. In 2021, smelters in Yunnan experienced three rounds of major curtailments amid power supply shortages, with cuts accounting to 1.74 M t/y of aluminium smelting capacity on an annualised base. The output reductions in Yunnan came after Sichuan smelters cut 920,000 tonnes of capacity in August, accounting for 2% of China’s total. Most smelters in Sichuan have now restarted the idled capacity. More recently, some smelters in Henan province were planning to cut around 10% of their capacity due to a combination of winter season-related cuts and operational losses, which could account for an additional 50,000-100,000 t/y. Still, China’s aluminium output has held up despite the energy crunch. For the first 10 months of the year, China produced 33.33 million tonnes, up 3.3% from the corresponding period in 2021, data from the National Bureau of Statistics showed. In the longer term, as China continues to decarbonise its aluminium industry and increases its share of power generated by green energy, and as capacity shifts from coal power-dominated Shandong province to hydro power-dominated Yunnan, the industry is vulnerable to further disruptions with green energy heavily relying on seasonality and general weather conditions.  China's aluminium capacity breakdown by province National Bureau of Statistics, ING Research Demand woes take centre stage The rise in global aluminium output comes against weakening demand amid global economic gloom. The aluminium market’s focus has shifted to demand woes due to European recession fears amid high power prices, central banks’ monetary tightening and China’s continued Covid-19 restrictions. Industrial metals prices have been battered by fears of weakening global demand, as well as a stronger dollar. Growing recession risks in the US and Europe and an uncertain recovery in China will likely continue to pose downside risks to the demand outlook. In its latest World Economic Outlook, the International Monetary Fund cut its forecast for global growth next year to 2.7% from 2.9% seen in July and 3.8% in January, adding that it sees a 25% probability that growth will slow to less than 2%. About one-third of the global economy risks contracting next year, with the US, the EU and China all continuing to stall. Excluding the unprecedented slowdown of 2020 because of the coronavirus pandemic, next year’s performance would be the weakest since 2009, in the wake of the global financial crisis.  Aluminium consumption has been hit by the bleak global growth outlook, with primary aluminium demand in the world excluding China expected to grow 0.4% YoY in 2022, according to CRU. No dramatic recovery is expected in 2023, as many economies will battle with recession, with demand expected to grow by just 1.8% YoY in 2023 at 28.9 Mt, according to CRU. European demand has been hit the most in 2022 and is expected to be the major reason for weak growth in 2023. In China, demand has stalled in 2022 amid zero-Covid policies and lockdowns, with CRU expecting demand to grow just 0.1% YoY in 2022, at 40Mt, while the recovery in 2023 is expected to be sluggish given a slowdown in the construction sector. Russian metal remains the biggest uncertainty One potential source of price volatility would be sanctions on the Russian material either by the US or the EU. Metals have been mostly spared in the rounds of sanctions imposed on Russia that followed its invasion of Ukraine on 24 February, but it has been reported that the US is considering an effective ban on Russian imports of the metal. The Biden administration is reportedly weighing three potential measures: a complete ban on Russian aluminium, increasing tariffs to levels that would effectively act as a ban and sanctioning the company that produces Russian aluminium, Rusal. The only government to take direct action against Russia’s aluminium sector so far has been Australia, when in March it banned the export of bauxite and alumina into the country, effectively freezing Rusal’s off-take flow from the Queensland Alumina joint venture. In Russia’s other top raw material supplier, Ukraine, the war has closed Rusal’s Nikolaev refinery. The alumina gap has been filled by Chinese producers, which have been increasing their exports to Russia. However, if the US decides to sanction Rusal, the impact could be severe, bearing in mind the market’s reaction to the sanctions in 2018 when the LME prices jumped to $2,718/t, at the time the highest since 2011 before gradually falling in the following weeks and months. Sanctions were then lifted in January 2019. If the US decides to go ahead, the move could freeze the Russian producer out of Western markets, depending on the severity of sanctions, which would boost global prices for the metal and distort global aluminium trade flows. Meanwhile, at least for now, the aluminium market has a bit more clarity following the LME’s decision to take no action on the delivery of Russian metals into LME warehouses, as a significant portion of the market was still planning to buy it next year. The LME was looking at potentially banning the delivery of Russian metal into its warehouses, limiting Russian flows or taking no action. Instead, the exchange said it will publish regular reports from January 2023 detailing the percentage of Russian metal stored under warrant in LME warehouses to provide more transparency. In a response to the LME’s proposal, Rusal has called for the exchange to start disclosing the origin of all metal stocks on warrant rather than singling out Russia as proposed. Alcoa was also supportive of the idea of providing more details about the origin of the material in LME warehouses. If we continue to see an increasing amount of self-sanctioning of Russian metals, the risk is that we see more Russian metal being delivered into LME warehouses, which could potentially mean that LME prices trade at discounted levels to actual traded prices. However, the LME believes we would have seen higher inflows of metals into warehouses regardless, given the depressed global outlook. The LME’s decision to continue to allow Russian metal to be delivered into its warehouses put some downward pressure on aluminium prices, easing fears of supply shortages. How much further pressure we will see on aluminium prices going forward will depend on whether we see a significant inflow of Russian metals into LME warehouses in the weeks and months ahead. While the LME accepts that LME prices may start to increasingly reflect the price of Russian metal if we see large inflows into LME warehouses, they believe that premia will play an important role, with this likely reflecting a larger proportion of the all-in cost, so that non-Russian metal producers continue to receive fair value for their metal. Russia accounts for about 6% of global aluminium output estimated at 70 million tonnes this year. Russian aluminium has accounted for as much as three quarters of LME stockpiles over the past decade, according to the exchange. The LME has reported that the proportion of Russian metal in LME warehouses has not changed significantly over the discussion paper period, with the percentage of live tonnage of Russian aluminium on warrant standing at 17.7% on 28 October, compared to 17% on 6 October when the LME launched the discussion paper. At the same time, the flow of Russian metal into Western markets was strong in the first half of the year. European average monthly imports were up by 13% year-on-year in March through June, while the US increased its Russian imports by 21% in the same period. Most Rusal customers have been accepting deliveries under existing contracts, however, that is likely to change next year. Self-sanctioning is likely to disrupt trade flows with the possibility of Russian metal flowing to the market of last resort – the LME.  Novelis, a division of Hindalco Industries and Norsk Hydro's extrusions unit have already said they will not enter into new Russian purchase contracts for 2023. Rusal has recently said that its sales picked up after the LME’s decision, exceeding 76% of its primary aluminium production and value-added production for 2023. Prices to slide in early 2023 on poor near-term economic outlooks Looking ahead to 1Q 2023, the risk for aluminium prices will be mainly to the downside, with the prolonged war in Ukraine, rising energy prices, low gas availability, high inflation and weakening downstream demand all adding to the bearish outlook for the lightweight metal.  The aluminium market will significantly reduce its global deficit in 2022 and move into surplus in 2023, according to CRU, with an estimated market deficit of 300kt in 2022, down from 1.6Mt in 2021. Given the production cuts, CRU is expecting only a modest surplus next year of 300kt tonnes. This is driven by demand destruction in the world ex-China in 2022 and 2023 and a higher rate of production inside China compared to 2021. The projected surplus in the world ex. China is only 71,000 tonnes. Demand destruction will offset the impact of smelter closures seen in recent months. In the short-term, the market’s focus will remain on the bigger macro-economic and demand-side problems, with prices expected to fall further to $2,150/t in 1Q 2023. We believe a recovery in price should start in 2Q 2023, although any recovery is likely to be slow. ING forecasts ING research TagsCommodities Outlook 2023 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 Analysis Of The Crude Oil Futures Markets

The Global Oil Market Is Expected To Tighten Over 2023

ING Economics ING Economics 30.11.2022 14:15
Oil prices have seen a fair amount of weakness as we approach the end of 2022. Demand concerns are weighing heavily on sentiment. However, the market is expected to tighten during 2023 as the EU ban on Russian crude and products is implemented, along with OPEC+ supply cuts. We see higher prices next year In this article Russian supply set to fall OPEC+ sticks to its guns Could Iran and Venezuela make a comeback? US not there to fill the gap Demand weaker than expected Tighter market in 2023   Russian supply set to fall The key supply uncertainty for the oil market this year has been how well Russian supply would hold up following a number of countries banning Russian oil, along with an increased amount of self-sanctioning. Russian supply has held up better than many were expecting, with India, China and a handful of other smaller buyers increasing their purchases of Russian crude oil, given the steep discounts available as other buyers have pulled back. As a result, exports in October were 7.7MMbbls/d, down just 100Mbbls/d year-on-year. However, the biggest disruption to the crude oil market still lies ahead of us. The EU ban on Russian seaborne crude oil comes into effect on 5 December, which will be followed by a refined products ban on 5 February. The key question is whether India and China can buy even larger volumes of Russian oil. Their ability to do so is likely limited. Russia has already become India’s largest supplier, making up around 20% of total supply, and since the war, Russian barrels make up a little more than 18% of total Chinese imports, making Russia a marginally larger supplier of crude to China than Saudi Arabia. We expect that Russian supply will have to fall once the ban comes into full force and are assuming that supply in the first quarter of 2023 declines in the region of 1.6-1.8MMbbls/d YoY. The other uncertainty around Russian supply is the full impact of the G7 price cap. While the aim of the cap is to ensure Russian oil flows continue but Russian oil revenues are limited, it is still yet to be seen if Russia responds by lowering output. On several occasions, Russia has threatened to cut the supply of crude oil or refined products to any country that follows the G7 price cap. How the Russia/Ukraine war evolves will be important for oil markets in 2023. While a de-escalation might not lead to the return of pre-war oil trade flows, it would remove a lot of supply risk from the market. OPEC+ sticks to its guns OPEC+ has clearly not read the book How to win friends and influence people. The group has largely ignored calls from the US and other key consumers to increase oil supply more aggressively this year amid higher prices and supply concerns. And the group’s decision to reduce output targets by 2MMbbls/d from November 2022 until the end of 2023 has been criticised, particularly by the US. Although, to be fair, with hindsight the decision by OPEC+ appears to be the right one, at least in the near term with it offering stability to the market. Given that the bulk of members are producing well below their production targets, OPEC+ supply cuts work out to an effective cut of around 1.1MMbbls/d. In aggregate, OPEC+ production was 3.22MMbbls/d below target levels in October 2022. However, the cuts may prove to be more destabilising in the medium term, given the expectation of a tighter market through 2023. In addition, we should not rule out the potential for OPEC+ to change policy over the coming months. Intensifying demand concerns could push the group to cut supply further, while significant Russian losses could see a relaxation in cuts. However, to see an easing in cuts, the group would want full clarity on the impact of the ban on Russian oil. Could Iran and Venezuela make a comeback? US sanctions have prevented Iran and Venezuela from fully benefitting from the higher price environment this year. Iranian nuclear talks have failed multiple times over the last year, and it is looking increasingly unlikely that we will see US sanctions lifted anytime soon, particularly given Iranian developments both internally and externally. If sanctions were lifted, Iran could increase supply by around 1.3MMbbls/d over time. However, we are assuming that the Iranian supply remains at current levels through 2023. The potential additional supply from Venezuela is more limited (relative to Iran) if the US were to lift sanctions. However, the likelihood of an easing in these sanctions is probably higher at the moment. We have recently seen some softening in these sanctions already. An easing in sanctions would mean that US Gulf refiners would be able to process the heavy crude that Venezuela produces and replace a large amount of Russian residual fuel that was processed prior to the US-Russian oil ban. The potential for higher Venezuelan supply does not change the global balance significantly.  US not there to fill the gap The response from US producers to the higher price environment this year has been anything but impressive. And this appears to have also given OPEC+ confidence to cut supply without the risk of losing market share. US crude oil supply is forecast to grow by less than 600Mbbls/d to average around 11.8MMbbls/d in 2022. While for 2023 supply is forecast to grow by less than 500Mbbls/d to around 12.3MMbbls/d. This growth is much more modest than the supply growth seen in previous upcycles. For example, in 2018 US crude oil output grew by around 1.6MMbbls/d YoY, after WTI traded from US$42/bbl in June 2017 to as high as US$76/bbl in October 2018. This year, WTI has averaged a little over US$95/bbl, whilst the forward curve has been trading above US$70/bbl all the way through to the end of 2024 for much of the year. The mentality of US producers has changed significantly from producing as much as possible to focusing on shareholder returns, and as a result continuing to show discipline when it comes to capital spending. In addition to showing more restraint with capital spending, supply chain issues, labour shortages and rising costs have also played a role in the more modest supply growth expected over the next year. Demand weaker than expected A key drag on the oil market more recently has been the demand picture. High energy prices, a gloomier macro outlook and China’s zero-Covid policy have all weighed on oil demand this year. At the beginning of 2022, global oil demand was expected to grow by more than 3MMbbls/d YoY and hit pre-Covid levels. However, demand is estimated to grow at a more modest 2MMbbls/d this year, leaving it below pre-Covid levels. While for 2023, demand is expected to grow in the region of 1.7MMbbls/d. Almost 50% of this growth is expected to come from China with the expectation of an economic recovery. Clearly, this is a risk if China’s zero-Covid policy proves to be as disruptive as it has been this year. Global oil balance (MMbbls/d) IEA, EIA, OPEC, ING Research Tighter market in 2023 A combination of lower Russian oil supply and OPEC+ supply cuts means that the global oil market is expected to tighten over 2023. We expect a growing deficit over the course of the year, which suggests that oil prices should trade higher from current levels. We currently forecast ICE Brent to average US$104/bbl over 2023. Clearly, demand is a risk to this view, while if we were to see a de-escalation in the Russia-Ukraine war, a large supply risk would disappear even though we are unlikely to see a return to pre-war oil trade flows. Meanwhile, the potential for the US to refill its strategic petroleum reserves should WTI fall towards US$70/bbl is likely to provide a strong floor to the market.   ING oil price forecasts ING research Tags Russian oil price cap Russia-Ukraine OPEC+ Crude oil 2023 Commodities outlook 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
Europe Is Likely To Go Into The 2023/24 Winter With Tight Storage

Europe Is Likely To Go Into The 2023/24 Winter With Tight Storage

ING Economics ING Economics 30.11.2022 14:09
The collapse in European natural gas prices in recent months has created a false sense of security. While the current winter appears to be more manageable, the region will find it more difficult to build adequate storage for the 2023/24 winter. We see higher prices next year In this article European storage is full European demand has responded to higher prices Russian natural gas flows remain a risk Limited LNG supply growth 2023 will be tight for Europe EU intervention will not solve the underlying issues US natural gas market more comfortable     European storage is full Given the circumstances, Europe could not have hoped for a better situation heading into this winter. Demand destruction and milder-than-usual weather in the early part of the heating season have ensured that the region has continued to build storage deeper into winter – about two weeks longer compared to the five-year average. EU storage continued to grow until mid-November with it reaching nearly 96% full. This is well above the five-year average of almost 88% for mid-November. Given the bloated storage, day-ahead TTF prices have fallen as much as 93% from the peak in August. This leaves Europe in a better-than-expected position for this winter. The next few months should be more manageable. However, it is still vital that the region is cautious through this winter, as Europe needs to try to end the current heating season with storage as high as possible given the expectation of a further reduction in gas flows to the region next year. European demand has responded to higher prices Higher prices through much of this year have ensured a significant amount of demand destruction, and as a result the European Commission has been able to stick to its voluntary demand cut of 15% between August and the end of March, rather than imposing a mandatory 15% cut. Eurostat data shows that in August, EU natural gas demand was 15% below the five-year average, hitting the target set by the Commission. Numbers from third-party consultants suggest that in the months since, demand reductions have exceeded the 15% target. However, the risk is that with the more recent weakness in prices, we see demand starting to edge higher once again, which would only add to the tough task that the EU faces next year. Europe will need to see continued demand destruction through 2023 to ensure adequate supply for the 2023/24 winter. This is particularly the case given the risk that we see further declines in Russian gas supply to the EU. Russian natural gas flows remain a risk Russian pipeline gas flows have fallen significantly this year. The latest data shows that year-to-date pipeline flows from Russia to Europe have fallen by around 50% year-on-year to roughly 58bcm. And, obviously, these flows have declined progressively as we have moved through the year with reduced flows via Ukraine and Nord Stream. Daily Russian gas flows to the EU are down around 80% YoY at the moment. Therefore, if we assume that Russian gas flows remain at current levels through 2023 (via Ukraine and TurkStream only), annual Russian pipeline gas to the EU could fall by a further 60% YoY to around 23bcm in 2023. And clearly, there is a very real risk that the remaining flows via Ukraine and TurkStream are halted. In the current environment it is difficult to see a recovery in Russian pipeline flows to Europe. Even if there was the will of both Russia and the EU to restore flows, operationally it would be difficult to see flows return to pre-war levels given the damage to Nord Stream 1. The only route where we could see a return of flows is the 33bcm Yamal-Europe pipeline and increased flows through Ukraine. However, for now, we are assuming no improvement in supply, if anything risks are likely skewed to more supply disruptions. Russian pipeline flows to the EU (bcm) ENTSO-G, European Commission, ING Research Limited LNG supply growth The liquefied natural gas (LNG) market has helped Europe significantly this year. LNG imports into the EU over October grew by almost 70% YoY, with volumes exceeding 9bcm. However, there are constraints to how much more LNG Europe can import. There are reports that LNG carriers are queuing for spots at regasification units. This highlights the lack of regas capacity in Europe at the moment. This queue of LNG carriers could also be partly due to market players wanting to take advantage of the significant contango in the front end of the TTF curve. The EU has seen the start-up of a fair amount of regasification capacity in the form of floating storage regasification units (FSRUs) over the second half of this year. The Netherlands, Germany, Finland/Estonia have or are in the process of starting up operations at these FSRUs with a combined capacity in the region of 23-27bcm. Germany is expected to bring a further 15bcm of regas capacity online early next year. This will help with some of the infrastructure constraints Europe is facing, but the issue is also around global LNG supply and the limited capacity which is expected to start next year. Global LNG export capacity was set to grow by around 19bcm in 2023, driven by the US, Russia and Mauritania. However, following Russia’s invasion of Ukraine and the sanctions which have followed, it is likely that the start-up of Russian capacity is likely to be delayed. Russian capacity makes up for 46% of the total new capacity expected next year. Therefore, we could see just 10.5bcm of new supply capacity. The other issue for the EU is competition for LNG. This year, weak Chinese LNG demand has been a blessing for Europe. LNG imports from the world’s largest buyer were down 22% YoY over the first 10 months of the year. This would have been due to the higher price environment as well as the demand impact from Covid-related lockdowns throughout the year. However, if we see a recovery in Chinese demand next year, Europe will have to compete more aggressively for supply. 2023 will be tight for Europe The pace of inventory builds during the 2023 injection season will be much more modest compared to what we have seen this year, given the reductions in Russian supply. The ability of the EU to completely turn to other sources is just not possible. Therefore, Europe is likely to go into the 2023/24 winter with tight storage, which will leave the region vulnerable next winter.  In order to get through the 2023/24 winter comfortably, we will have to see continued demand destruction once again. This will have to be either a result of market forces (prices needing to trade higher to reduce demand) or EU-mandated demand cuts (the 15% voluntary demand cut at the moment ends in March 2023). While Europe should be able to scrape through the 2023/24 winter if current Russian gas flows continue, it is much more challenging if remaining Russian gas flows come to a full stop. Therefore, we believe that there is an upside to current 2023 forward values, particularly those towards the end of 2023. Although much will depend on how much storage the EU draws down this winter, which obviously will depend on heating demand through the peak of winter. EU intervention will not solve the underlying issues EU member countries have been working on policies to try to soften the hit from higher natural gas prices. These include joint gas purchases, temporarily capping the TTF natural gas benchmark, and the setting up of a new LNG benchmark, which the Commission believes will be a better reflection of actual prices. However, how effective these measures will be is still questionable. Capping the TTF benchmark increases the risk that we see more of the trade moving to the over-the-counter market, which will be excluded from the cap. This in turn would reduce liquidity on European natural gas exchanges and also reduce transparency in these markets. It appears as though the Commission will set this cap well above the market, which suggests that they only want to cap prices in an extreme situation, where high prices (similar to levels seen in August) are sustained. Furthermore, the longer-term goal of setting up a new benchmark is not going to solve the issue of bottlenecks in European gas infrastructure. TTF is trading at a premium to LNG prices because of the bottlenecks in LNG regasification capacity and pipeline infrastructure. At the end of the day, the only viable long-term solution for Europe is increasing supply and removing some of the bottlenecks facing the industry. US natural gas market more comfortable The US natural gas market this year has also seen significant strength, trading to multi-year highs. Strong global LNG prices, stronger demand from the power sector and below-average inventories have all proved bullish for Henry Hub. However, the outlook for US gas prices is more bearish. US dry gas production is expected to hit record levels next year, growing by a little more than 1.6bcf/d to average almost 99.7bcf/day over 2023, whilst finishing 2023 with output in excess of 100bcf/day. In addition, this year saw stronger demand from the power sector over the summer, which pushed overall gas demand higher this year. Expectations are that domestic demand will fall back towards more normal levels. Meanwhile, on the export side, whilst there is more LNG capacity set to start up over the course of the year, this is fairly limited. LNG exports are expected to average a little over 12.3bcf/day in 2023, up from an estimated 10.8bcf/day in 2022. As a result, over the course of 2023, we should see US natural gas inventories moving from below their five-year average to above it ahead of the next heating season. In fact, the US could go into the 2023/24 winter with storage at its highest levels since 2020. Therefore, we expect Henry Hub to trade lower in 2023 relative to 2022. ING natural gas price forecasts ING research TagsRussia-Ukraine Natural gas Henry Hub European energy Energy crisis
Agricultural Commodities Markets Are Going To Remain Sensitive To Developments In The Russia-Ukraine War

Agricultural Commodities Markets Are Going To Remain Sensitive To Developments In The Russia-Ukraine War

ING Economics ING Economics 30.11.2022 14:04
2022 has been an extraordinary year for commodity markets. Supply risks led to increased volatility and elevated prices. However, demand concerns have taken the driving seat as we approach year-end. 2023 is set to be yet another year of uncertainty, with plenty of volatility Shutterstock   Russia’s devastating invasion of Ukraine has been a key driver for commodity prices this year. Russia’s willingness to use energy as a weapon and retaliatory sanctions on Russia from the West have had an impact not just on the commodities complex, but the broader global economy. As a result, what started out as concern over supply has now moved more towards growing demand risks as central banks around the world tighten monetary policy in a bid to rein in rampant inflation. Clearly, the longer and more restrictive policy is from central banks, the more downside there is to demand. In addition, whilst much of the world has finally moved on from Covid, key commodity consumer, China, continues to follow a zero-Covid policy. While the government eased quarantine restrictions in recent months, China is facing its largest outbreak of Covid since the start of the pandemic, which clearly does not help the demand picture. In addition to the impact of Covid restrictions, the metal-intensive property market in China remains very weak. Up until now, support from the government has had little impact. It is yet to be seen how helpful the latest measures from the government will be. We will be entering 2023 with markets trying to gauge the demand impact from slowing global growth. It is clear that a number of key economies will enter recession, the big question is how severe. When you couple these concerns with the ongoing weakness in China it is likely that demand will continue to dictate price direction through the early part of 2023. A turning point for the complex would likely be when we see the US Federal Reserve pivoting towards a more accommodative policy (which would also suggest we have seen the peak in the US dollar), but for that to happen, we need to see some clear evidence of a significant fall in inflation. While demand risks are in the driving seat for now, supply risks have certainly not disappeared. In fact, these risks are growing for 2023, particularly when it comes to energy. For oil, the global market will need to see a further change in trade flows as the EU ban on Russian crude oil and refined products comes into force. While other buyers will be keen to pick up discounted Russian oil, their ability to do so is likely limited, which suggests that we see Russian oil supply falling over the course of 2023. This coupled with OPEC+ supply cuts suggest a tighter oil market. Therefore, prices should strengthen over the course of the year. The European natural gas market has seen a massive amount of disruption this year, as Russia cut off the bulk of supply to the region, leading to significant volatility and record-high prices. Demand destruction along with increased LNG imports have helped offset Russian supply losses. For 2023, the EU will likely find it much more difficult to refill storage to adequate levels ahead of the 2023/24 winter. Russian supply losses will be more pronounced and there are limits to how much more LNG Europe can import. Therefore, we will need to see continued demand destruction through 2023. In order to see this demand destruction, prices will have to remain at elevated levels. Tightness in the market also means that volatility is not going to disappear anytime soon.  Metal balances are looking more comfortable for 2023. Supply growth and demand weakness should ensure this. These more comfortable supply and demand balances along with poor sentiment suggest that most metal prices will remain under pressure in the early part of 2023. We are more constructive as the year progresses though on the back of low inventories for a number of metals, expectations that we start to see monetary loosening and a modest recovery from China. Furthermore, there are still clear supply risks for a number of base metals. Up until now, Russian metals have avoided sanctions but clearly, there is always the risk that these are targeted at a later stage.  As for gold, the outlook is fairly constructive. We believe that as soon as we see any signs from the US Federal Reserve of a pivot, that this will provide solid support to prices. Agricultural commodities have also seen significant strength this year, particularly grains, due to the disruption in Ukrainian exports along with poorer weather in a number of key growing regions. These markets are going to remain sensitive to developments in the Russia/Ukraine war. However for now, we believe risks are skewed to the upside. There are some early signs that the winter wheat crop in some key growing regions will be smaller next season, whilst clearly for agri crops in general, yields could suffer due to less application of fertilisers, given the strength in the market this year. Overall, we believe in the short term that there is further downside for commodity markets. However, as we move towards the middle of the year, and once the worst of the demand worries are behind us, supply concerns are likely to take centre stage once again, which should push prices higher.   TagsRussia-Ukraine Metals Energy Commodities Outlook 2023 Agriculture 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
Italy: Consumer headline inflation hits 11.8% year-on-year amounting to October print

Italy: Consumer headline inflation hits 11.8% year-on-year amounting to October print

ING Economics ING Economics 30.11.2022 13:16
Headline inflation in Italy stabilised in November, still very much driven by goods, with the energy component starting to reflect an improving base effect. Beware core inflation, though, as its persistence will likely slow down the decline in headline inflation over the first part of 2023 Consumer headline inflation came in at 11.8% year-on-year in November, unchanged from October, and in line with our forecasts. This results from a decline in the non-regulated energy component, of fresh food and transport services, and an acceleration of regulated energy goods, transformed food, other goods and recreational and cultural services. The wide gap between goods inflation (at 17.5% YoY) and services inflation (at 3.8% YoY) remains stable from October. The harmonised HICP measure was also stable at 12.5% YoY. Favourable base effects in energy, but the core measure continues to inch up We are at a time of the year when the base effect starts to be favourable. This was the case with aggregated energy goods, where inflation declined to 67.3% in November from 71.1% in October. However, this is not the case with underlying inflation, which accelerated to 5.7% (from 5.3% in October) signalling that the pass-through of past energy inflation pressures is not over yet. As wage dynamics have so far remained almost unaffected (1.2% YoY in September is the latest reading), risks of further gains in the core component over the next few months should not be dismissed. Peak possibly close, but pace of decline still uncertain Looking ahead, we suspect that the energy component might have reached its peak, but will remain exposed to the vagaries of administrative decisions. For instance, the current €0.30 rebate on fuels will be reduced to €0.18 from December, which will have an impact on the headline measure. More encouragingly, in October producer price inflation recorded a clear deceleration to 28% YoY from 41.7% in September, suggesting that price pressures in the pipeline started to finally cool down. November business surveys seem to confirm this, with the selling price component (over the next three months) declining both in manufacturing and services. This does not mean that the headline peak has now passed. We currently project inflation to remain at the current level into December, and to start a gradual decline thereafter as the deceleration in the energy component should outweigh the inertia in the core measure. For the time being, we are sticking with our average yearly inflation forecast at 8.2% in 2022 and 6.7% in 2023.   Read this article on THINK TagsItaly 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 Opportunity Has Opened Up For Traders In The Oil Market

The Commodities Feed: WTI Crude Relatively Outperformed Brent

ING Economics ING Economics 30.11.2022 12:17
Sentiment in commodities markets improved after China refined its approach to dealing with Covid-19 and the government said it will bolster vaccinations among senior citizens. The move comes just days after demonstrations against strict Covid curbs across the country In this article Energy – US inventory draw supports crude Metals – Market shifts to risk-on mode Agriculture – US winter-wheat crop rating remains low     Energy – US inventory draw supports crude Crude oil has been supported this morning after the US reported a bigger crude oil inventory draw over the last week, helping offset the broader negative sentiment prevailing over the past few weeks. WTI crude relatively outperformed Brent this week with the ICE Brent/NYMEX WTI prompt-month spread falling to a six-month low of US$4.9/bbl currently. The weekly inventory report from the API was overall constructive for the oil market. The API reported that US crude oil inventories dropped by 7.85MMbbls over the last week, compared to market expectations of a roughly 2.5MMbbls draw. However, the API reported that gasoline and distillate fuel oil stocks increased by 2.9MMbbls and 4MMbbls, respectively, over the week. The official EIA report will be released later today. OPEC and its allies, including Russia, are scheduled to meet virtually on 4 December to decide on output agreements. Some market reports suggest that the group could discuss the possibilities of further output cuts in addition to the 2MMbbls/d of cuts already announced during its October meeting, as the demand slowdown from China continues to weigh on the market balance. A weaker manufacturing PMI report from China has further weakened demand expectations for the rest of the year as Beijing adopted tight measures to control the resurgence of Covid. In refined products, the ICE Gasoil forward curve eased over the last few sessions with the Dec22/Jan23 spread falling to a negative US$4.25/t (contango) yesterday compared to a backwardation of around US$32/t at the end of October 2022. December is the last month when the Russian diesel cargoes can be delivered at ARA storage tanks against ICE future contracts and that appears to have increased the overall availability of diesel cargoes in the spot market. ICE diesel Jan/Feb spread still trades at a backwardation of around US$13/t; although this has also dropped from a high of around US$29/t earlier in the month. In LNG, Qatar agreed to supply Germany with LNG under a long-term deal as it seeks to secure energy options and replace piped flows from Russia. State-owned Qatar Energy and ConocoPhillips signed a deal that will see Qatar send up to 2 million tonnes of LNG a year to Germany from 2026. The deal will last at least 15 years and equates to about 6% of the volumes of Russian gas that Germany imported in 2021. Russian gas accounted for more than half of Germany’s total supplies before the invasion. The gas will come from ConocoPhillips’ joint ventures in Qatar and will be delivered to the Brunsbuttel floating import terminal that is under construction. It is the first long-term agreement for LNG supplies to an EU country since Russia’s invasion of Ukraine in February. Metals – Market shifts to risk-on mode Speculation over the loosening of some of the Covid curbs in China along with a weaker dollar improved sentiment in the metals complex yesterday, with prices of all major metals (with the exception of zinc) trading in the green. However, China released its manufacturing PMI numbers this morning, and at 48 for November (once again below market expectations of 49), this indicates how the newly imposed virus curbs have dampened economic activity in the nation. LME copper 3M prices rose as much as 2% DoD yesterday following the outflows reported in the LME on-warrant inventories. The latest data from the LME shows that on-warrant stocks for copper declined by 4.89kt (biggest daily decline since 9 November) for a second consecutive day to 71.8kt as of yesterday. The majority of the outflows were reported from Busan, South Korea and New Orleans warehouses. Meanwhile, the cash/3m spread for copper jumped by US$22.3/t and reached a contango of US$1.5/t as of yesterday, when compared to a contango of US$23.75/t a day earlier and a contango of US$42.75/t in the previous week. The latest CFTC data shows that speculators decreased their bearish bets in COMEX copper by 11,653 lots over the last reporting week (after four weeks of consecutive gains) leaving them with a net long position of 13,727 lots as of last Tuesday. In precious metals, speculators decreased their bullish bets in COMEX gold by 8,807, to leave them with a net long of 31,919 lots as of the last reporting week. Money managers also lowered their net bullish bets in silver by 3,268 lots as of last Tuesday. Agriculture – US winter-wheat crop rating remains low The final crop progress report from the USDA rated around 34% of the winter wheat crop to be in good-to-excellent condition compared to 32% a week ago and around 44% at this stage in the season last year. The current wheat crop rating is the lowest crop rating in over nine years as the dry conditions in wheat-growing regions weigh on crop development. Meanwhile, the report also shows that the US winter wheat crop is now 91% emerged, compared to around 90% a year ago. Weekly data from the European Commission shows that soft wheat shipments from the EU reached 13.9mt as of 27 November, up from 13.5mt for the same period last year. Algeria, Morocco and Egypt were the top destinations for these shipments. Meanwhile, given lower domestic output, EU corn imports stand at 12.1mt, compared to 5.3mt 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
The EUR/USD Pair Is Preparing To Turn Lower

European inflation shrank by 0.6%. ING hints at a 50bp rate hike in December

ING Economics ING Economics 30.11.2022 11:59
Inflation dropped more than expected from 10.6 to 10% in November, mainly on energy price developments. Core inflation remained stable at 5% though. While we’re far from out of the woods yet, it does look like the current economic environment could push the European Central Bank to a smaller 50bp hike next month We were due some good news. The eurozone inflation rate ticked down after a few nasty upside surprises. Energy inflation has been the most important driver of the decline going from 41.5 to 34.9%. Food inflation continues to trend up, while core inflation was stable at 5%. This is still far too high, but tentative signs that we’re at or close to a peak are increasing. Read next: Forex Market: The Inflation Print Will Be Key For The Polish Zloty (PLN)| FXMAG.COM Whether this is the peak in inflation remains to be seen. Another episode in the energy crisis could easily push inflation back up again and core inflation usually proves to be sticky after a supply shock. The question is how relevant the talk about a peak in annual inflation actually is. We think it is far more relevant to focus on month-on-month developments as base effects will become significant in the coming months. Using our own seasonal adjustment, we see that monthly inflation was slightly negative for the first time since April and that food inflation is the largest contributor to monthly headline inflation at the moment. We also think the focus should be more on what level inflation will trend down to, as opposed to whether this is the peak or not. The big question, therefore, is how core inflation is going to move in the coming months. Don’t expect a miracle just yet, core inflation tends to adjust slowly to energy shocks and a lot of the higher costs have not yet been priced through to the consumer. The tricky thing here is that the effects of the previous supply shock – the pandemic – are also still playing into the numbers. Large inventory increases at retail stores are the result of falling demand for goods and restocking as supply problems improved. That adds some disinflationary pressures for the months ahead. Overall, more volatility in core inflation can be expected as the effects of two massive supply shocks play out but we don’t expect a quick drop in core inflation anytime soon. For the ECB though, tentative signs of inflation peaking are mounting, evidence of a wage-price spiral continues to remain absent and the environment is turning recessionary. In our view, that is likely to sway the ECB from 75 basis point hikes to a smaller hike of 50 basis point move in December. Read this article on THINK
Spaniards Are Looking To Save On Energy Consumption

Spaniards Are Looking To Save On Energy Consumption

ING Economics ING Economics 30.11.2022 10:33
Falling inflationary pressures and energy prices that are well below their peak levels led to a cautious rise in consumer confidence in November. However, this is not enough to prevent a contraction in the fourth quarter Inflation and high energy prices are forcing 40% of Spaniards to cut their daily expenses Spanish consumers slightly more upbeat, but still at depressed levels Spanish consumer confidence rose to -28.7 in November, from -31.6 in October, as published by the Ministry of the Economy and Finance this morning. A faster-than-expected fall in inflation and energy prices that are well below their peak levels is providing some relief for consumers. As reported yesterday, the Spanish inflation rate fell in November for the fourth month in a row and is now already four percentage points below its July peak level. The fall is likely to continue as price pressures higher up the production chain are starting to ease. Both commodity prices, freight costs for transport, and factory prices have already decreased considerably. Energy prices have also moderated somewhat since the end of the summer. Despite this, the index remains at recessionary levels. Inflation and energy prices force four in ten Spaniards to cut daily expenses Despite the improvement, the negative economic impact of high inflation and energy prices remains in place. A new ING survey on a representative panel conducted by IPSOS in early November shows that almost four in ten Spaniards are saving on daily expenses, like fresh food and groceries. More than half of Spaniards are also cutting back on restaurant visits, travel, and leisure activities to cope with the rising cost of living. With high energy prices, Spaniards are also looking to save on energy consumption. Almost half of the respondents say they are more economical with the use of electrical appliances, such as dishwashers, while a third say they are cutting back on heating. Many Spaniards are cutting back on their spending Due to rising prices, I try to save on... (% of respondents) ING consumer survey November 2022 Not out of the danger zone yet The Spanish economy has already slowed significantly in the third quarter and is likely to contract in the fourth quarter. The cost-of-living crisis leads households to consume less, which slows down economic activity. The less tight energy markets and a faster-than-expected drop in inflationary pressures are likely to ease the winter contraction, allowing Spain to narrowly avoid a recession. However, the overall outlook for next year remains subdued. Some favourable factors, such as mild weather and lower liquefied natural gas (LNG) demand from China, have brought some relief this year, but the situation remains very precarious. Next year will be a lot harder to replenish gas supplies, given the reduction in Russian supply. A strong recovery in China is also likely to put strong pressure on the oil and gas market, which could cause another jump in energy prices. The resulting loss of competitiveness of European businesses, together with ECB interest rate hikes that will not take full effect until 2023, will limit Spain’s growth potential next year. Therefore, we expect the Spanish economy to grow by less than 1% next year. TagsSpain GDP Eurozone Consumption Consumer 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
France: Stabilisation Of Inflation Can Be Seen As Good News

France: Stabilisation Of Inflation Can Be Seen As Good News

ING Economics ING Economics 30.11.2022 10:26
Inflation stabilised at 6.2% in France in November, but it has not reached its peak. Inflationary pressures are likely to intensify further in 2023 We expect French inflation to be around 5% for the whole of 2023   Consumer price inflation stood at 6.2% in France in November, unchanged from October. The monthly variation in prices was +0.4% against +1% in October. The less dynamic evolution of the price of petroleum products, after October was marked by fuel shortages, made it possible to compensate for the drop in the fuel rebate, which went from €0.30/litre to €0.15/litre in mid-November. As a result, energy inflation stood at 18.5% compared to 19.1% in October. A considerable level, but still much lower than in other European countries. The various measures taken by the government, including the tariff shield on the price of gas and electricity, have removed 2.5 points from inflation. In addition, food prices continue to accelerate, by 12.2% over one year, against 12% in October, as do those of manufactured goods (4.4% against 4.2% the previous month). Services inflation is stable, and comparatively low, at 3%. The harmonised index, important for the European Central Bank (ECB), remained stable at 7.1%. Overall, while this stabilisation of inflation can be seen as good news, it does not mean that inflation has peaked. On the contrary, the peak of inflation in France is still to come. A further acceleration of prices for December It is likely that inflation will rise again in December, probably reaching 6.5%. Indeed, the fuel rebate will be less important during the whole month of December than it was on average in November. In addition, past sharp increases in producer prices will continue to be passed on to consumer prices for manufactured goods and food. According to statistics published today by INSEE, the national statistics bureau of France, producer prices rose at a slower pace in October, with an annual increase of 21.4% compared to 26% in September. Although producer prices appear to have peaked, producer price inflation remains historically high, and this should continue to be reflected in the consumer price index in the coming months. Inflationary pressures will intensify further in 2023 Inflation in France is expected to rise further in early 2023. Indeed, due to regulations and contracts, many price revisions can only take place once a year, usually at the beginning of the year. This is particularly the case in the transport sector. These price revisions will significantly boost inflation in the first quarter of 2023. Moreover, companies seem confident in their ability to pass on past cost increases to their prices. In November, according to the European Commission's survey, companies' expectations regarding selling prices rose again, both in industry and in the services sector, despite the context of slowing demand. Strong inflationary pressures therefore still seem to be on the cards and core inflation is likely to rise further in early 2023. Furthermore, the energy inflation faced by households in 2023 will be influenced by the tariff shield, which foresees a 15% increase in the price cap for gas and electricity (compared to a 4% increase in 2022). The revision of the cap and the end of fuel rebates could add up to one percentage point to French inflation from January. As a result, energy inflation in France will continue to rise sharply next year, while it will start to fall in other European countries due to more favourable base effects. The peak of inflation in France should therefore only be reached later in 2023, and French inflation will fall much less rapidly than in neighbouring countries. The "delayed" peak in French inflation is bad news for the ECB, as average inflation in the euro area is likely to fall less quickly than expected. We expect French inflation to be around 5% for the whole of 2023, after 5.3% in 2022.  TagsInflation France 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
Forex Market: The Inflation Print Will Be Key For The Polish Zloty (PLN)

Forex Market: The Inflation Print Will Be Key For The Polish Zloty (PLN)

ING Economics ING Economics 30.11.2022 09:20
Fed Chair Jerome Powell will remind the market of the central bank's hawkish determination today, supporting the dollar. Meanwhile, softer inflation is trimming expectations in the eurozone. Polish inflation will test the central bank's decision not to raise rates. And the EC will publish a statement on Hungary and its rule-of-law progress In this article USD: Holding pattern EUR: Inflation plays second fiddle to Powell GBP: Lack of domestic drivers CEE: Polish inflation will test central bank dovish camp   Federal Reserve USD: Holding pattern Despite geopolitical challenges to the East, it has been a quiet start to the week for FX markets. The trade-weighted dollar index DXY is tracing out a relatively narrow range in the 105.30 to 108.00 area. The next clear catalyst on the agenda is a speech by Fed Chair Powell tonight at 1930CET discussing the economy and the labour market. This comes at a time when the buy-side report two of their top three tail risks as: i) inflation staying high and ii) central banks staying hawkish. (The third being geopolitics.) We would say that Chair Powell has recently shown to be at the more hawkish end of the spectrum and that tonight’s event risk is a positive one for the dollar. Dollar price action after Chair Powell’s speech should also tell us something about FX positioning. If the dollar fails to rally on a hawkish speech it may continue to tell us that the market is caught long dollars at higher levels and that some further consolidation may be due into December. For the time being, however, we think the macro environment continues to favour the dollar and see Powell’s speech, the October PCE price data (Thursday) and November jobs data (Friday) as upside risks to the dollar. Chris Turner EUR: Inflation plays second fiddle to Powell Spanish and German inflation came in lower than expected yesterday. The German CPI fell 0.5% to 10.0% in November, thanks primarily to the energy base effect and lower prices for leisure and entertainment following the autumn holiday period, while food prices continued to rise. Our economics team remains sceptical that this is the series' peak, and we expect inflation to accelerate again in December. Yesterday’s numbers mean that markets are expecting a lower reading in the eurozone-wide CPI today. However, some impact on European Central Bank rate expectations has already occurred, as markets have trimmed around 7bp from December pricing, which is now at 54bp. President Christine Lagarde is scheduled to speak at least twice more before the 15 December policy announcement, but she may not change markets' expectations of a 50bp hike. The impact of the inflation story on the EUR/USD has been, predictably, limited. External factors and dollar dynamics continue to drive the pair's performance, and we see downside risks today given that Fed Chair Powell is scheduled to speak later. A break below 1.0300 could fuel more bearish momentum, bringing EUR/USD back to the 1.0200/1.0250 levels seen earlier this week. This morning, Norges Bank will publish daily FX sales for the month of December. Higher-than-expected NOK sales in 3Q22 contributed to NOK weakness, but the Bank unexpectedly reduced them in November from NOK 4.3 billion to 3.7 billion. Any further reductions may support the currency today. Francesco Pesole GBP: Lack of domestic drivers Yesterday’s testimony by Bank of England Governor Andrew Bailey did not yield any market-moving headlines. Today we’ll hear from Chief Economist Huw Pill, who recently pushed back against a 75bp hike and may therefore keep BoE rate expectations in check. Cable to test 1.1800 as Powell’s speech may support the dollar today. Francesco Pesole CEE: Polish inflation will test central bank dovish camp Today's calendar offers November inflation in Poland, the first print in the CEE region. We expect inflation to be unchanged at 17.9% year-on-year, close to market expectations. However, as usual, the range of surveys is wide, and in addition, Polish inflation has by far posted the biggest surprise in the region over the past three months. Given the pause in the National Bank of Poland's hiking cycle, we can expect a lot of market attention. We will also see the second release of Poland's 3Q GDP, which surprised positively in the flash reading (0.0% vs 0.9% quarter-on-quarter) a few weeks ago. In Hungary, PPI for October will be published and later today the European Commission is expected to release a statement on the progress made in the rule of law dispute and Hungary's access to EU funds. The statement should have been published last week; however, the EC requested more time. Reports from journalists suggest that the EC will recommend freezing part of the cohesion funds with conditions to be met by Hungary but will also recommend approval of the Recovery Plan. Yesterday's reports also suggest that the Ecofin decision will be postponed from 6 December to 12 December, but Hungarian officials remain optimistic about the final decision. In the Czech Republic, the Czech National Bank will publish its semi-annual Financial Stability Report including possible changes to macroprudential tools. We do not expect significant changes to the current mortgage rules or capital requirements for the banking sector, but we will see a press conference later today, which should be attended by the governor, who has not been seen in public very often in recent months. In the FX market, the inflation print will be key for the Polish zloty, which could revive market expectations and support the zloty in the short term. However, unchanged inflation would leave the zloty under pressure from a stronger dollar, moving back above 4.70 per euro, in our view. The Hungarian forint should benefit from the normalisation of EU relations and the end of the risk of a permanent loss of EU money. This should help the forint below 405 per euro. Frantisek Taborsky 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
Drop In Inflation Vindicates The Reserve Bank Of Australia's (RBA) Dovish Pivot

Drop In Inflation Vindicates The Reserve Bank Of Australia's (RBA) Dovish Pivot

ING Economics ING Economics 30.11.2022 08:49
Monthly inflation data not only provides a more timely look at Australia's inflation than the old quarterly series, it has also ushered in some welcome lower numbers 6.9% October inflation (year-on-year) Back to school effect?  Lower Both headline inflation and core rates fall in October Against expectations for an increase, both headline and core inflation rates for Australia's monthly inflation series fell in October. The headline inflation rate fell from 7.3% year-on-year in September to only 6.9% YoY in October. The monthly trimmed mean index inflation rate also fell slightly, to 5.3%YoY from 5.4%.  When we examine the components of the index, we can see that most of the current rate of inflation is being driven by housing components (in particular house purchase costs), food and beverages, and transport. However, this month, it was smaller increases in recreation as well as some moderation in the high rates of food price inflation that led to the lower-than-expected figure for October.  The particular recreation sub-component that provided the biggest impact to the headline rate was holiday accommodation and travel. The Australian Bureau of Statistics (ABS) says of this component "The monthly fall in holiday travel and accommodation was driven by the conclusion of the school holiday period and the end of the peak tourist season for travel to Europe and America".  Contributions to year-on-year inflation rate (pp) CEIC, ING What now for the Reserve Bank of Australia? This drop in inflation vindicates the Reserve Bank of Australia's (RBA) dovish pivot some months ago when it decided to only increase rates at a 25bp per meeting pace. At 6.9%, inflation is still way too high for comfort, but we believe that the RBA will see this as confirmation that it is on the right track, and that further declines could lead them to entertain thoughts of a pause in rates.  We are currently forecasting a fairly low peak in the cash rate target at only 3.6% in 1Q23 next year. But while there remains considerable uncertainty about the future path of both inflation and rates, today's numbers provide us with some encouragement that we are not too far off the right track.  TagsRBA rate policy Australia inflation Australia economy 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: Market Participants Await Nervously Powell’s Speech (Fed) This Evening

Rates Spark: Market Participants Await Nervously Powell’s Speech (Fed) This Evening

ING Economics ING Economics 30.11.2022 08:25
Back in August, the Fed pushed back against an easing of financial conditions and triggered a sizeable sell-off in Treasuries. Markets will be wary of a repeat of this pushback in today’s speech by Fed Chair Powell In this article The Treasury market is nervous about a repeat of the August hawkish Fed pushback Closer to the end of this cycle but the 5Y is most at risk of cheapening today Today’s events and market views   The Treasury market is nervous about a repeat of the August hawkish Fed pushback Market participants await nervously Powell’s speech this evening after the October CPI report sent bond yields lower and riskier asset prices higher. Even if the surprise slowdown in inflation is good news, it is only the first in a long series of conditions the Fed needs to see before it pauses its hiking cycle. Longer-term, the direction of travel is indeed towards lower inflation and an end to this tightening cycle but we expect the Fed to take Fed Funds rates some 100bp higher than currently, just under 5%, before this is the case. The Fed will be wary of markets undoing some of the painstakingly-delivered tightening of financial conditions There is just over two months to go before the last hike in this cycle in our view. In the meantime, the Fed will be wary of markets undoing some of the painstakingly-delivered tightening of financial conditions. There is a precedent. In June to August of this year, 10Y Treasuries rallied 90bp peak to trough, helped by a lower-than- expected inflation report. This prompted a strong pushback from Fed officials in August, culminating in Powell’s Jackson Hole speech. Treasuries went on to sell off 167bp. The drop in nominal and real Treasury yields prompted a pushback by the Fed Refinitiv, ING Closer to the end of this cycle but the 5Y is most at risk of cheapening today Where this phase is different is that the Fed is having a harder time delivering its hawkish message as it signalled in no uncertain terms that the pace of hikes will soon reduce from 75bp to 50bp per meeting. There is still one employment and one inflation report before the December 14th meeting, but the burden of the proof is on those calling for another 75bp hike. Still, the 50bp drop in nominal 10Y Treasury yields, and 26bp in real yields, is a headache for the Fed. So is the aggressive flattening of the term structure, meaning that even if markets continue to expect the Fed to deliver hikes, the effect of these hikes do not feed through to longer borrowing costs. With Treasury yields over 100bp below where we expect the Fed funds rate to peak, we think the market is vulnerable to a sell-off around Powell’s speech. The 50bp drop in nominal 10Y Treasury yields, and 26bp in real yields, is a headache for the Fed Curve flattening is an inevitable effect of markets seeing the end of the Fed’s cycle, but we think this makes the sectors that rallied the most into today’s speech most at risk of a retracement. Rather counter-intuitively, this should mean a re-steepening of the 2s10s slope on the Treasury curve. If Powell is successful in delivering his hawkish message, the 5Y point on the curve should retrace its recent outperformance, which will be visible in a richening of the 2s5s10s butterfly. The curve flattening and richening of the 5Y point are at risk of retracing around Powell's speech Refinitiv, ING Today’s events and market views The eurozone HICP inflation looms large on today’s agenda. Spanish and German releases yesterday came on the low side of expectations, although this was less visible in the EU-harmonised measure that is most relevant for today’s HICP print. Still, a confirmation that other member states are also seeing inflation ease off, however slightly, is welcome news for markets that looked overstretched after their November rally. German unemployment figures complete the list of European releases. In bond supply, Germany will auction 10Y debt. Fed Chair Jerome Powell is due to speak this evening. We expect him to push back against the tightening of financial conditions that occurred in the wake of the lower- than-expected CPI report. US releases feature the second reading of US third quarter GDP, including core PCE. This will complete the ADP employment report, Chicago PMI, job openings, and pending home sales. 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 RBA Expected To Make Its 3rd Consecutive Quarter-Point Hike

Asia: October CPI Data For Australia Surprised

ING Economics ING Economics 30.11.2022 08:13
China stocks bouyed by more thoughtful approach to zero Covid; production data from Korea and Japan disappoint; Australian inflation data surprises on the downside; Powell tonight!  In this article Macro Outlook What to look out for: Fed Speakers and US jobs report   shutterstock Macro Outlook Global markets: Chinese stocks made strong gains yesterday as a scheduled announcement on the recent Zero-Covid measures promised a less draconian approach in the future. Among the various measures noted, one was more pressure on the elderly to get vaccinated, which could be one route out of Zero-Covid, though there is a long way to go yet before this happens. The Hang Seng Index gained 5.24%, and the CSI 300 rose 3.09%. Daily symptomatic case numbers are currently hovering at a little under 4,000, where they have been since recording 4,010 on 23 November. US stocks were less upbeat. Both the NASDAQ and S&P500 made small losses on the day, perhaps taking defensive positions ahead of today’s speech by Fed chair, Jerome Powell, which we expect will be one of the more hawkish speeches to date. US equity futures also look slightly jittery.  US Treasury yields are edging higher too. The 2Y Treasury yield is up 3.5bp over the last 24 hours and there was a bigger 6.3bp rise from the 10Y bond which now yields 3.744%. European bond yields fell yesterday by about 6bp on average, probably helped by some lower inflation numbers. The EURUSD exchange rate pulled back a little further to 1.0323 on the combination of slightly higher risk aversion and yield differential swings. The AUD is actually slightly stronger than this time yesterday at 0.6674, but recent direction has been weaker after a big upswing. Cable performed much the same bi-directional move and is little changed in net terms at 1.1944 from a day ago, and the same goes for USDJPY which is currently trading at 138.75.  Asian currencies had a mixed performance in the last 24 hours. The CNH and CNY have both strengthened following the reassurances given on Zero-Covid policies, and that probably helped drag along the THB and TWD for smaller gains. The MYR held up the bottom of the table, variously blamed by newswires on profit taking and lower crude oil prices.   G-7 Macro: Germany’s inflation rate for November, fell to 10.0% from 10.4% in October (11.3% from 11.6% on a harmonised basis). Though as the linked note here suggests, inflation may not yet have peaked in Germany, so the drop in yields may prove short-lived.  Eurozone November inflation data is released later today and the harmonised inflation rate is due to decline to 11.3% YoY from 11.8%. In the US, the ADP survey provides the first and least unreliable indicator for Friday’s payrolls release. JOLTS job openings and layoffs data adds some nuance to last month’s employment numbers, but don’t actually tell us much new, and are unlikely to be market moving. The same goes for the second release of US 3Q22 GDP data. Industrial Production in October from South Korea and Japan were weaker than expected, reflecting signs of a global demand slowdown. Korea: Industrial production (IP) plunged -3.5% MoM sa in October, lower than the market expectation of -1.0% (vs a revised -1.9% in September).  All industry IP dropped -1.5% MoM sa in October, falling for the fourth consecutive month, and the contraction even intensified in October.  Meanwhile, retail sales (-0.2%) and facility investment (0.0%) outcomes were also sluggish as interest rate hikes and the gloomy outlook for the overall economy weighed on activity. Today’s weak outcomes support our view that GDP in the current quarter will contract, and that the ongoing trucker strike will put more strain on economic activity, at least in the current quarter. In addition, as the effect of the rate hikes to date have begun to have a more full-fledged impact on economic activity along with weak external demand conditions, the Bank of Korea probably only has limited room for further rate hikes. Japan: Industrial production fell -2.6% MoM sa in October (vs -1.7% in September, market consensus: -1.8%), recording a second monthly drop.  After the economy contracted in the third quarter, this weak start to the current quarter signals a cloudy outlook. Australia: Monthly October CPI data for Australia surprised with a much lower rate of inflation than the market had been expecting (Consensus 7.6%, ING f 7.8%). Headline inflation in October dropped back from 7.3% in September to only 6.9%YoY. The core trimmed mean inflation rate also edged slightly lower to 5.3% YoY from 5.4%, and against expectations for further increases. Lower-than-expected food prices were responsible for about 0.1pp of the decline. But the bigger share was attributable to a drop in the prices for holiday travel and accommodation. We don’t believe these lower inflation figures have any substantial ramifications for Reserve Bank (RBA) policy, which we believe will continue to increase at a 25bp per meeting pace into next year. But it does make us more comfortable with our 3.6% cash rate peak call. India: 3Q22 GDP data for India is out later today. We don’t disagree with the consensus 6.2%YoY figure, which is a sharp drop back from the 13.5%YoY base-effect driven 2Q number, with the latest number being a much better reflection of underlying economic growth. We still look for India to grow by about 6.3%YoY for the full calendar year 2022, but may have to adjust this view in the light of any surprises from today’s data.   What to look out for: Fed Speakers and US jobs report US Conference board consumer confidence (29 November) South Korea industrial production (29 November) Japan industrial production (29 November) Fed’s Williams and Bullard speak (29 November) China PMI manufacturing and non-manufacturing (30 November) Bank of Thailand policy meeting and trade (30 November) India GDP (30 November) US ADP employment and pending home sales (30 November) Fed’s Bowman speaks (30 November) South Korea 3Q GDP and trade (1 December) Regional PMI (1 December) China Caixin PMI (1 December) Indonesia CPI inflation (1 December) US personal spending, initial jobless claims and ISM manufacturing (1 December) Fed’s Cook, Bowman, Logan, Barr and Powell speak (1 December) South Korea CPI inflation (2 December) Fed’s Evans speaks (2 December) US non-farm payrolls (2 December) 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
Germany: Headline inflation reached 10% year-on-year, this print accompanied by also reduced Spanish equivalent, may lead to a smaller rate hike

Germany: Headline inflation reached 10% year-on-year, this print accompanied by also reduced Spanish equivalent, may lead to a smaller rate hike

ING Economics ING Economics 29.11.2022 16:12
German inflation came down somewhat in November, on the back of energy base effects. However, the ongoing pass-through of high wholesale gas prices as well as additional pipeline pressure still make likely another rebound before reaching the final inflation peak. Inflation in Germany could reach 10% A very small breather for German inflation. Headline inflation came in at 10% year-on-year in November, from 10.4% in October. The monthly drop in consumer prices (by 0.5%) was the largest since early 2020. The HICP measure also fell, to 11.3% YoY, from 11.6% YoY in October. Peak still not reached Available regional data suggest that the drop in headline inflation was mainly driven by energy base effects and a drop in prices for leisure and entertainment after the Fall vacation period. Food price inflation still increased. Looking ahead, the November inflation number might not yet be the peak of German inflation. We rather expect headline inflation to rebound in December, before finally reaching a more structural peak in the first quarter. Most importantly, the pass-through of higher wholesale gas prices is still in full swing. Many households will see the first price increase only as of 1 January. Also, even though corporate selling price expectations have started to come down somewhat in the last two months, there is still a lot of inflationary pressure in the pipeline. Don’t forget that during previous episodes of supply-side driven inflation shocks, headline inflation started to come down as the pure result of base effects, while core inflation continued to go up for a while. Needless to say that any forecast for headline inflation is still hugely affected by developments in energy and commodity markets. Read next: Steen Jakobsen: ECB strategy is praying, hoping and waiting... not exactly action which gives hope for real economy| FXMAG.COM According to the German Bundesbank, the recently-announced gas price cap could bring down headline inflation by one percentage point next year. However, the price cap will only become effective in March next year and it is questionable whether the suggested retrospective implementation for January and February will show in the official inflation statistics. In any case, the agreed compensation of one month energy downpayment for December will not have any impact on headline inflation. In general, this is an important distinction to be made: government support schemes that come as compensation for households and companies to offset higher energy costs do not bring down headline inflation but cushion the negative price impact in the short run, while also prolonging inflationary pressure. Direct price caps can immediately bring down headline inflation but open the door for limitless government support measures. All in all, we remain cautious and don't call today's numbers the peak in German inflation, yet. The pass-through of wholesale gas prices as well as still high selling price expectations suggest that there could first be a rebound before the final peak will really be reached. For the ECB, however, today’s German inflation number as well as the sharp drop in Spanish inflation could be reason enough to go for a 50bp rate hike and not another jumbo rate hike by 75bp at the December meeting. Even though, ECB Executive Board member Isabel Schnabel last week said that there was only limited room to slow down the pace of rate hikes. The fact that the rate hikes up to now still need to fully reach the real economy, the uncertainty surrounding the looming recession and the upcoming further shrinking of the ECB's balance sheet all argue in favour of slowing down the rate hike cycle and to eventually shift from policy rates to the size of the balance sheet as the ECB's main instrument to fight inflation.  Read this article on THINK TagsInflation 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
Available Global SAF Capacity Will Increase Fivefold In 2023

Available Global SAF Capacity Will Increase Fivefold In 2023

ING Economics ING Economics 29.11.2022 14:32
Blending sustainable aviation fuels (SAFs) needs to grow massively to meet ambitions for 2030 and beyond. Demand is there, but supply is limiting uptake. Ramping up capacity investments is critical to meet the aspired goals. Airlines (purchase grants) and suppliers (production, delivery) have a joint role here, but more policy support will help In this article SAF supply is the critical factor to reach the targets Not on track yet – blending goals require much more SAF-production locations The US is taking the lead in developing SAF production capacity SAFs gain from scaling, but will continue to trade at a premium Using SAF will eventually push up airline ticket prices Increased climate awareness leads to scrutiny of SAF feedstocks Synthetic SAF is expected to be the accelerator from 2030 onward       Ambitions and goal-setting for using sustainable aviation fuel (SAF) by authorities and governments, as well as airlines and corporates, have gained traction over the last two years. This created the conditions for the take-off of SAFs from the demand side. But what is the current state of play in supply? What are the critical factors and what is expected in terms of growth?   Global jet fuel demand expected to recover and continue to increase The global consumption of conventional jet fuel by commercial airlines totalled 360 billion litres in 2019, according to the trade association IATA. Consumption dropped following the Covid-19 pandemic, but airline activity is expected to recover and fuel burn is bound to exceed pre-pandemic consumption levels again by 2025. Over the following decades, an average annual global growth of passenger aviation (RPK) of around 3-3.5% is estimated. Operational efficiency measures (such as in taxiing, flight and arrival optimalisation) and aircraft replacements are likely to offset a significant part of the additional fuel consumption, but not all. So annual jet fuel consumption is expected to continue increasing. Given the lack of mature and commercially viable low-carbon technologies, this means aviation will rely heavily on SAFs to pave the way for decarbonisation over the next two decades. SAF production and delivery on the brink of acceleration SAF production capacity per year in billion litres based on publicly-announced intentions BNEF, ING Research   SAF production to reach 1% of jet fuel consumption in 2023 and almost 3% in 2026 The usage of SAFs has been under discussion for quite a while, but on a global scale production hasn’t made a large difference yet. That’s about to change, though. If all publicly-announced initiatives to start and expand production by the summer of 2022 come to fruition, available global SAF capacity will increase fivefold in 2023 and continue to rise in the years after. Production capacity could reach a 1% share of global consumption in 2023, more than 2% in 2025 and nearly 3% by 2026. SAF supply is the critical factor to reach the targets Despite the higher costs of SAF, supply is currently still the most critical factor to secure further uptake. The investment case requires long-term cooperation and commitment between airlines, manufacturers (like Neste, Gevo and World Energy) and distributors (like SKY-NRG – which also develops production partnerships – and World fuel services). Planning and development of production facilities can easily take several years before delivery starts off. This means 2030 targets are already around the corner. Much more production is required to reach ambitious targets for 2030 Development global SAF capacity based on publicly-announced intentions and future blend ambitions Not on track yet – blending goals require much more SAF-production locations Although SAF production is about to accelerate, 2030 targets from IATA (6%) and the corporate initiatives Clean skies for tomorrow and One world group (10%) require more progress, especially when taking into account the expansion risks, such as project delays. The industry targets require strong growth, but they still fall short of what IEA deems necessary for a global net-zero scenario pathway. This implies we’re just at the start of the required surge and we face a long haul to push growth. Market analysts estimate that ultimately 5,000-7,000 SAF facilities may be required to achieve the global SAF blending goals of the aviation industry by 2050 (ATAG/ICF).   Global challenge is also a regional challenge – locations availability at airports is key There’s also a regional puzzle of supply and demand as airlines are dependent on available SAFs at local airports. This means supply networks will need to be unrolled and developed. Currently, SAF supply in the US is concentrated in San Francisco and Los Angeles, and in Europe it is mostly at Amsterdam-Schiphol, London Heathrow, as well as Scandinavian airports, whereas supply at the Asian hubs Singapore and Hong Kong is expected shortly. Local production and diversification are obviously crucial to fueling airline aircraft with more SAF and avoiding long lead times. Europe and US take the lead in SAF production capacity, Asia follows SAF capacity per year in billion litres per region based on publicly-announced intentions BNEF, ING Research The US is taking the lead in developing SAF production capacity European market players seemed to be most ambitious in developing SAFs, but the US now leads the way thanks to efforts made by the Biden administration in the US. America has adopted a different approach to Europe’s demand targeting by subsidising $1.25-1.75 per gallon of bioSAF ($0.33-0.46 per litre) and stimulating supply. Production capacity in the US is expected to surpass Europe’s potential in 2023 or 2024. Examples of recent agreements include Aemetis's delivery to eight members of the One World group at San Francisco Airport. The Asian-Pacific region falls behind despite air travel in Asia expanding at the highest pace over the last decade, and it will continue to do so post-pandemic.    SAFs gain from scaling, but will continue to trade at a premium SAFs production entails significantly higher costs than conventional jet fuel. Based on WEF figures and a fixed production cost of $600 per MT (which is relatively low but still provides a relevant comparison), we have detailed the relative cost ranges for the four distinguished eligible SAF production pathways over time. As a result of economies of scale, production costs are expected to come down significantly in the following decades. But they are unlikely to drop below conventional jet fuel before 2050. This means SAFs will keep trading at a premium, leading to higher fuel costs for flights fueled by SAF blends, as well as higher ticket prices.    HEFA is the cheapest production option, but ultimately synthetic SAF is expected to be most competitive Development of production costs per SAF route (upper and lower boundary) as multiple of jet fuel WEF, ING Research   HEFA is most competitive, but ultimately synthetic SAF is expected to be the most cost-efficient The HEFA production route which has bio-oils and recycled fats as feedstocks (bioSAF) is the most mature and most competitive, with an estimated price range of 1.8-2.7 the cost of conventional jet fuel. The other biogenetic pathways are still significantly more costly at this point. Synthetic SAF currently has the largest cost range, depending on the production costs of hydrogen and the origin of carbon (waste sources, direct carbon capture). With the expected global surge in green energy supply, the costs are expected to drop below the bioSAF in the long run. Most cost efficient HEFA is dominant, but other SAFs are increasingly needed as well to supply sufficient SAF Forecasted SAF capacity per year in billion litres per technology based on publicly-announced intentions BNEF, ING Research   HEFA dominates, while the development of other SAF pathways is also needed to meet future demand HEFA is the cheapest pathway for SAF and is also expected to represent the vast majority of global production this decade. Availability of feedstocks enables HEFA production to expand towards 2030, but expanding bioSAF will increasingly need to be accommodated by alternative feedstocks like cellulosic (paper) and municipal waste (MSW). For the US, feedstock from fats and oils (HEFA) won’t be enough to meet SAF demand. Other production methods are technically feasible but more expensive. Nevertheless, feedstock availability, increasingly stringent requirements, as well as regional differences leave little choice. Development and upscaling of Alcohol to Jet (AtJ), Gassification+FT as well as synthetic SAF are also required to meet future demand. Using SAF will eventually push up airline ticket prices The fuel cost for airlines usually varies between 15-30% of operating costs. Assuming a 25% fuel cost share, an average SAF blend of 10% in 2030 would push total operational costs up by 2.5-5%. For a ticket from London to New York, this initially means an increase of some €15-25. After 2030, the step up in blending rates will push fuel costs up further, despite the expected price decrease. In the low margins airline industry, this will quickly be reflected in higher ticket prices.  Increased climate awareness leads to scrutiny of SAF feedstocks With respect to decarbonisation efforts, corporate sustainability actions are increasingly under scrutiny. The Science Based Target Initiative (SBTI) approach is also increasingly used as a reference. This may not only lead to a shift away from carbon offsets but also encourage the shift to more advanced SAF feedstocks. Sustainability-linked loans with SAF targets have also been introduced. Palm oil blends are already controversial because of deforestation, but the use of (by)products of food crops like corn for SAF (alcohol to jet fuel) will have adverse effects on food or feed supply chains and this might also push up food prices. In the EU, there’s a push for the use of advanced feedstocks and the European Commission also considers a cap on waste oil feedstocks and focuses on more advanced waste and residual sources. But limited availability also leads to tensions. In the US, corn is still seen as an important source for bioSAF going forward.   CO2 reduction potential ranges of the SAF pathways ING Research   Large contribution from synthetic SAF needed to maximise decarbonisation The aviation sector is expected to require hundreds of billions of litres of SAF in 2050. At the same time, demand for biofuels and bio feedstocks from sectors including road transport, shipping and the chemical industry is also increasing. On a global level, an estimated 41-55% of SAF could potentially be provided from biogenic origin. In Europe, bio feedstock supply for SAF is expected to lack ambitions from 2035 onward. This means the remainder should eventually be provided by synthetic fuels. Synthetic SAFs also have the highest potential for decarbonisation when using (almost) 100% green electricity. However, producing synthetic SAFs is energy-intensive and requires more electricity than it contains. It requires large areas of land or sea to produce and intensified competition with other sectors is expected. Consequently, synthetic SAF will depend on the availability of sufficient green energy to convert into the required green hydrogen. Synthetic SAF is expected to be the accelerator from 2030 onward In Europe, several low-volume production facilities for synthetic SAFs (including in the Netherlands and Sweden) are planned to come online between 2025 and 2030. The EU already includes a sub-mandate for synthetic SAFs as part of general targets, which starts at 0.7% of total fuel consumption in 2030, increasing to 28% in 2050. In the US, the introduced production subsidies currently only apply to bioSAFs.   Generally, the rise of synthetic SAF requires a significant reduction in the three cost drivers: green energy, electrolyser technology and direct air capture – and this takes time. Once the global availability of green energy has expanded significantly and the production of synthetic SAF can be scaled, the production costs of synthetic SAF are expected to come down. Eventually (in 2050) synthetic SAF is also expected to be the cheapest option.   Some regions have a competitive edge in producing synthetic SAFs The success of SAFs also has a regional element to it, as previously explained. Countries with an abundance of solar energy and space such as Australia, and Saharan countries, as well as European countries like Spain, could benefit from a competitive advantage as locations for the future production of synthetic SAF as low renewable energy costs are a critical pillar of the business case.   Corporate cooperation required to accelerate SAF supply, more policy support would help SAFs have higher production costs and trade at a premium. Imposing mandatory global blending rates enforced by ICAO would probably be most effective to ramp up supply, although that's not easy to achieve. From a market perspective, subsidies for scaling up production, such as in the US, could improve the business case and push up investments in global supply in the short run. Pricing emissions on a global scale can generally be an efficient measure to structurally improve the market position of SAFs, especially if revenues are (partially) redistributed for decarbonisation. ICAO's CORSIA programme takes a start by increasing obligations for carbon offsets, but only from 2027 and it’s not yet clear how this will eventually play out for the SAF market. In Europe, continental flights are already subject to the European emission trading scheme (ETS), but due to free allowances the impact is currently still limited. Thus, policy changes to support and speed up SAF supply are possible. Demand for SAFs is already there, but supply needs to catch up with the blend ambitions in the coming years. Viable alternative technologies in commercial aviation are still a long way off and SAFs, therefore, have a critical role in emission reductions. Manufacturers, distributors, airlines and corporate users are challenged to team up to develop and secure even more SAF supplies and more policy support can be helpful. TagsSustainability Fuel Air travel 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
Time For Sustainable Aviation Fuels (SAFs)

Time For Sustainable Aviation Fuels (SAFs)

ING Economics ING Economics 29.11.2022 14:22
It’s a pivotal time for sustainable aviation fuels (SAFs). Demand depends heavily on regulation and airline commitments, and blending is just starting off. But on the back of progressive target-setting for 2030, demand is about to accelerate. And this is necessary to curb and reduce net emissions, with airline traffic rebounding post-Covid In this article Drop-in fuels with four main production routes and multiple feed stocks Zero-emission aircraft not yet on the horizon in commercial aviation Multiple reasons why the aviation sector can’t wait for new zero-emission aircraft technology and need SAFs Emissions from long haul flights and short term progression make SAFs crucial for decarbonisation Global and government targets drive the uptake of SAFs ICAO net-zero aspiration promising for pushing decarbonisation and SAF Governments pursue a green recovery with setting blend targets for 2030 National targets of several European countries exceed the EU’s goals US might take-over the lead from Europe in pushing SAFs Sector initiatives set a voluntary standard, but show strategic commitment Corporate clients’ climate commitments increasingly makes sense as the green premium needs to be paid       SAFs may only seem a bridge solution for reducing net carbon emissions in aviation, but aviation is one of the hardest to abate sectors and new technologies won’t be mature anytime soon. SAFs offer the opportunity to reduce net emissions significantly and can ultimately be produced synthetically and almost free of emissions. Public authorities, airlines, and corporate customers increasingly push for SAFs, and they are approved as fuel under the global carbon offset and reduction scheme CORSIA. Global blending is still fractional at less than 0.1%, but acceleration is in progress and ambitions push for upscaling in the coming years, with the first target in Europe for 2025. SAFs are still significantly more expensive. The US now provides incentives to drive production higher as part of the inflation reduction act. Incentives in other regions, as well as commitments to set in stone SAF targets from the global authority, the International Civil Aviation Organization (ICAO), could help support uptake.        Four main production routes of SAFs with net CO2 reductions from 70% to nearly 100% ING Research based on multiple sources Drop-in fuels with four main production routes and multiple feed stocks Sustainable aviation fuel is jet fuel from a qualified renewable source which can be used by blending it into conventional jet fuel. SAFs require certification to be blended. The current maximum certified blend is 50%, but trials have been executed with a 100% usage of SAF, which is expected to be authorised in due course. Of the four main production routes we distinguish, three are bioSAFS and one is synthetic (in this report we exclude direct combustion of liquid hydrogen). The extent to which a SAF reduces emissions depends on the lifecycle emissions profile of feedstock, considering production, transportation, and combustion. CO2 emissions of global aviation have continued to grow over the last decade CO2 emissions of global aviation in MT IEA, ING Research   The aviation sector is responsible for 2% of global greenhouse gas (GHG) emissions, but emissions have grown rapidly, and aviation is one of the hardest to abate sectors because of the required propulsion power and the importance of weight. The real climate impact (based on effective radiative forcing) could be larger due to emissions high in the atmosphere. The pandemic led to a temporary drop in emissions, but global airline demand is expected to recover from the pandemic before 2025 and will continue to grow at an annual pace of around 3-3.5% over the next few decades[1]. Consequently, emissions will barely come down. Despite efforts by the sector, the share of aviation’s CO2 emissions in the International Energy Agency's (IEA’s) net-zero emission scenario is expected to exceed 8% by 2040. This emphasises that change is required, in the short and long run. [1] Based on multiple sources including: IEA, IATA, ICCT Aviation's share of global emissions will rise significantly, even when including SAF blending CO2 emissions of global aviation as % of (expected) global total emissions in the IEA's net-zero emission scenario (including an increasing blend of SAF) IEA, ING Research Zero-emission aircraft not yet on the horizon in commercial aviation Many articles and reports have been published about the future of flying, often suggesting that electric propulsion is already within reach. On the other hand, Airbus has explored direct hydrogen propulsion and announced plans to bring this aircraft concept for commercial purposes to the market in 2035. But technical ability doesn’t automatically mean the concept will be scalable and feasible to replace current commercial aircraft operations in the short run. The energy density of batteries and hydrogen, possible lower expected speed, required spare capacity and not least extremely high specific safety standards pose a real challenge. "Zero-emission" flights powered by batteries or pure hydrogen might eventually be able to execute short-haul (regional) flights over the course of the next decade, but an efficient and commercially-viable zero-carbon alternative for current long-haul flights is not yet on the horizon. This builds the case for using SAFs and there are more reasons.  Multiple reasons why the aviation sector can’t wait for new zero-emission aircraft technology and need SAFs The largest part of total GHG emissions in aviation comes from long-haul flights, with hardly any alternatives. Safety always comes first in aviation. Together with technological complexity, this means future generation "zero-emission" aircraft will require billions in research and development and a long and time-consuming certification process with many years of preparatory testing.   Airbus and Boeing have introduced a range of new-generation aircraft over the last decade and research and development cycles easily exceed a 10-year timeframe. Moreover, manufacturers still have extensive order books, with production backlogs running up to seven to eight years. The aircraft market is an oligopoly with Boeing and Airbus as dominant manufacturers. Challengers may disrupt the market, but given their power it’s likely that the incumbents will retain a dominant influence. An important point in this regard is that the development and ultimately successful introduction of a new commercial aircraft requires massive capital investments.     Fleet replacement is slow and manufacturers currently face production constraints. Most of the current installed fleet will still be in operation in the 2030s. The aviation sector needs a solution that enables the current fleet to operate with lower net emissions and SAFs used as a drop-in fuel. Extra storage facilities at airports may be required, but regular infrastructure and current aircraft can be used, which is a major advantage that avoids massive capital loss. Emissions from long haul flights and short term progression make SAFs crucial for decarbonisation In practice, around 80% of global CO2 emissions emerge from flights travelling more than 1,500km, and in Europe around 50% of CO2 emissions are represented by long-haul flights of more than 4,000km (EASA). In several parts of the world including the US and Australia, these long-haul flights are even more important. For physical, security and economic reasons, a technology switch in commercial aviation is not within reach and this bolsters the case for sustainable aviation fuel. The three main short-term directions to decarbonise aviation are: 1. Fleet renewal/replacement by new generation aircraft. 2. More efficient operations. 3. Blending SAFs. Fleet renewal and efficiency gains can contribute significantly to emission reductions, but SAFs are supposed to make the most difference in the medium term.  Global and government targets drive the uptake of SAFs The production of SAFs is still 1.75-4.5 times as expensive as conventional jet fuel, depending on the type of SAF (REfuel aviation, EC). In most cases, customers are not willing to pay the (full) green premium on a voluntary basis. Research by ACM in The Netherlands showed that just over a third of customers are willing to pay for lower net CO2 emissions and just 10% have done so previously. Early-moving airlines take on responsibility, but a level playing field is required to push up consumption of SAFs and create economies of scale in production to bring down prices. Therefore, regulation is a critical support factor. This can either be done by taxing conventional kerosene (and redistributing the gains for decarbonisation) or subsidising SAFs. Drivers of blending sustainable aviation fuel (SAF) – ambition framework 1ICAO net-zero aspiration promising for pushing decarbonisation and SAF Aviation is a sector with a global level playing field, therefore compelling policies ideally have a global scope. Due to regional differences and varying interests, ICAO struggled for a long time to agree upon climate targets aligning with the Paris agreement. After years of deliberation, in October of this year, ICAO finally succeed in adopting a net-zero emission target by 2050. This was a milestone achievement which shows support for increased production and blending of SAFs. The general ICAO goal is aspirational, and the decarbonisation pathways and solutions are still to be developed, but it’s a signal and call to action. ICAO backs SAF and it seems reasonable to align with the ambitions of the airline association IATA. Implementation of ambitious global targets by ICAO would be most effective to push up SAF consumption.  Governments and sector representatives posed ambitious SAF blend targets for 2030 SAF blend mandates and targets for 2030 in % of total jet fuel consumption Multiple sources, ING Research 2Governments pursue a green recovery with setting blend targets for 2030 Government policies are the most direct regulatory drivers of SAFs. The past two years have been pivotal for increased urgency and ambitions, which led to pledges. Although the aviation sector went through an unprecedented crisis with steeply dropping passenger volumes over the pandemic, it has also been a catalyst for attempts to "build back greener" as the UK government called it. The EU already wants the blend to reach a level of 2% in 2025, which means consumption volumes will have to increase considerably in the years to come. Governments of larger advanced economies set targets to blend 5-15% of SAFs by 2030. National targets of several European countries exceed the EU’s goals The European Commission still takes a relatively conservative approach in setting its SAF targets. Several other European countries have already established goals that are more ambitious than the EU’s 5% mandate for 2030, although European Parliament seeks to raise this target to 8%. Several member states including The Netherlands, Sweden and Finland also adopted a more aggressive approach for this decade by aiming for 14-30%. The UK aims for a 10% blend of SAFs by 2030 and Norway aims for 30%. US might take-over the lead from Europe in pushing SAFs The US has also introduced its SAF strategy as part of its inflation-busting act, with an absolute production target of three billion gallons of SAF in 2030. Based on expected jet fuel consumption, this comes down to some 15% of total usage, and the ultimate goal is to replace the full 100% of future jet fuel consumption with SAFs. The US targets surpass the European ambitions in the medium term, as the EU forecasts a 2% blend in 2025 based on its REfuel Aviation plan, but a less aggressive path afterwards. However, the European ambitions also included a sub-target for synthetic fuels[2]. In addition, the US is offering a tax incentive of $1.25-1.75 per gallon of SAFs to push up production, which is critical for the fuels’ uptake. While Europe is generally leading in climate regulation, and may still choose to impose accompanying support or taxation measures and raise its targets later on, SAF production could grow at a faster pace in the US, at least this decade. [2] As part of the general targets, Europe seeks to stimulate the development of synthetic SAF by setting sub-targets for the blend composition from 2030 (0.7%, increasing to 28% of the total blend – some 45% – by 2050). Decarbonisation ambitions also rely on massive future growth of SAFs SAF blend target development per stakeholder in % of total jet fuel consumption EC, US Gov, IATA, ING Research 3Sector initiatives set a voluntary standard, but show strategic commitment Sustainability targets from airlines are an additional driving force from the private side. Global branch IATA adopted its net-zero 2050 target in 2021 and published its SAF strategy which aims for a 6% blend by 2030 and a 65% blend by 2050. Within the World Economic Forum, a significant number of airlines, airports, producers, original equipment manufacturers (OEMs) and corporate buyers teamed up in the "Clean skies for tomorrow" initiative in 2021, which focuses on accelerating SAF development in order to reach a 10% blend by 2030. In 2020, a group of airlines joined forces in the One World group to develop a SAF supply network. The largest European airline in passenger numbers – Ryanair – didn’t sign up for the collective initiative, but nevertheless aims for a 12.5% SAF blend by 2030. Altogether, the number of airlines to adopt SAF targets has grown from just one (KLM) in early 2020 to more than 30 airlines in 2022, which shows a major acceleration in commitment. 4Corporate clients’ climate commitments increasingly makes sense as the green premium needs to be paid {content} TagsNet zero Fuel Emissions Air travel 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 ECB Members Also Remain Broadly Hawkish | US Payrolls Rose This Month

Eurozone: The Recession Is Becoming More Apparent

ING Economics ING Economics 29.11.2022 12:26
The economic sentiment indicator increased slightly in November from 92.7 to 93.7, mainly due to a consumer rebound. The overall picture continues to show a mild recession, but also more signs of slowly fading inflation pressures The service sector saw the indicator for recent demand deteriorate further in November     The eurozone economy continues to show clear signs of recession. While consumers became slightly more upbeat – but still at depressed levels – in November, industry and services still showed signs of contracting activity. Industry sentiment decreased from -1.2 to -2 in November, the lowest reading since January last year. Businesses reported a sharp decline in recent production trends as new orders continue to drop. Production expectations slightly improved, perhaps as supply chain problems are easing. Nevertheless, with orders still in decline, it is hard to predict a swift turnaround in production. The service sector also saw the indicator for recent demand deteriorate further in November, although modestly. The retail sector noticed a slight improvement in recent demand and overall we see that the service sector has become slightly more upbeat about the months ahead. Overall, it looks like the current environment is one that is in line with a mild recession occurring. We often hear from the European Central Bank (ECB) that a mild recession is not enough to bring inflation down sustainably, but it is important to take this together with the easing supply side problems that the economy has faced recently. Signs of a changing inflation picture are slowly becoming more apparent. Energy prices have moderated somewhat, which is helping headline inflation readings for November stay on the low side. But easing supply-side pressures, lower wholesale energy prices, weakening demand and higher volumes of stock are also causing businesses to become somewhat less keen to increase prices, according to this survey. In industry and retail, in particular, we clearly see a lower number of businesses that are keen to increase selling prices in November. While these are only the first signs that inflation is set to moderate, they are very important to the ECB. We think the ECB will opt for a 50bp rate hike in December as the recession is becoming more apparent and inflationary pressures are cautiously easing. 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
Spain: Price Pressures Higher Up The Production Chain Are Starting To Ease

Spain: Price Pressures Higher Up The Production Chain Are Starting To Ease

ING Economics ING Economics 29.11.2022 11:32
Spain's inflation figure fell again sharply in November and is now already four percentage points below its peak level in July. The decline will continue in the coming months In this article Spanish inflation falls for the fourth month in a row Spanish inflation now significantly below eurozone average The light at the end of the inflation tunnel is getting brighter     Spanish inflation falls for the fourth month in a row Spanish inflation was 6.8% year-on-year in November, down from 7.3% in October. Over the month, consumer prices fell by 0.1%. The harmonised index was 6.6%, down from 7.3% in October. This development was mainly due to a fall in fuel prices last month, while they rose in November last year. Also, price increases for clothing and footwear were more moderate last month than in November 2021. Spanish inflation now significantly below eurozone average Spanish inflation has generally been above the eurozone average since the beginning of the year, but has fallen sharply since peaking at 10.7% in July. The weight of food in Spain is much higher than the eurozone average, which turbocharged the sharp price increases within this component. Hospitality also contributed more to price increases than the eurozone average, through a combination of faster rising prices but also a greater weight in the inflation basket. After its peak level, Spanish inflation has fallen sharply, making it unique in the euro area. Energy inflation has fallen sharply and is well below the eurozone average. Energy prices in Spain rose sharply in autumn 2021, making the year-on-year comparison much weaker this year.  Also the VAT cut on gas and electricity eased energy inflation. Details by component for November are not yet available, but October data showed that electricity inflation already turned negative last month (-15.4%) while also gas inflation fell sharply to 13.3% in October from 24.3% a month earlier. This decline will manifest itself further in the coming months. Spain’s inflation slowdown has set in earlier INE, Eurostat The light at the end of the inflation tunnel is getting brighter Price pressures higher up the production chain are starting to ease. Both commodity prices, freight costs for transport and factory prices are starting to fall sharply from their recent peak levels. Last Friday, Spain's statistics office INE announced that producer prices fell again in October. While producer price inflation was still 42.9% in August, it fell to 26.1% in October, its lowest level since September 2021. Moreover, it is also becoming increasingly difficult for companies to implement new price increases as demand has fallen and inventories have risen sharply. Inflation will gradually continue to normalise in 2023, but it will probably take until 2024 before inflation hovers around 2% again, the ECB's target. The development next year will depend on several factors, such as the prices of energy and other inputs on international markets, the fall in demand, the euro-dollar exchange rate and the speed at which falling prices higher up the production chain lead to lower prices for consumers. We expect inflation to reach 4.4% on average next year. TagsSpain Inflation 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
Belgians Are Looking For Savings To Cope With The Rising Cost Of Living

Belgians Are Looking For Savings To Cope With The Rising Cost Of Living

ING Economics ING Economics 29.11.2022 11:27
A new ING survey on a representative panel shows that nine in ten Belgians are reducing their energy consumption and six in ten are even saving on daily expenses. Over the next six months, they plan to step up their efforts. Online spending is also under pressure, even more so than in other countries. This will adversely impact economic activity In this article High inflation prompts six in ten Belgians to save on daily expenses Four in ten Belgians see energy bill more than doubling in last six months Decline in online purchases for all spending categories Belgians are much more cautious than their neighbours when it comes to budgeting Belgian economy dives into the red     High inflation prompts six in ten Belgians to save on daily expenses Belgians are looking for savings to cope with the rising cost of living. An international ING survey, conducted in early November in Belgium, the Netherlands, Germany, Romania, Poland, Turkey and Spain, shows that almost six in ten Belgians are saving on fresh food and groceries (see chart 1). A slight majority of Belgians also cut their clothing expenses. The Belgian urge to save is also slightly higher than in Germany for most product categories. While in Belgium, 58% already save on daily expenses, in Germany this is 'only' 50%. Remarkably, about half of Belgians also cut back on their spending on catering, travel and leisure activities, sectors that benefited greatly from the end of the pandemic. Compared to the results of the same survey in March 2022, the number of households cutting back on their consumption has risen sharply. In addition, many households plan to reduce their spending further in the coming months. While this was only 44% in March, 57% of Belgians say they are already saving on daily expenses and 60% expect to do so in the next six months. More and more Belgians are cutting back on their spending Due to rising prices, I try to save on... (% of respondents) ING consumer survey November 2022 Four in ten Belgians see energy bill more than doubling in last six months The extreme caution of households is obviously due to the energy crisis. According to the survey, the energy bill has more than doubled for four out of ten Belgians over the last six months. For almost one in ten, it has increased more than fivefold. In this context, the number of households taking measures to save energy and try to reduce the impact of the price increase has risen sharply, from 77% in March to 86% today. More than six out of ten Belgians say they are cutting back on heating, while four out of ten respondents say they are more economical with the use of electrical appliances, such as dishwashers (see chart 2). Six in ten Belgians turn down heating In what ways do you try to reduce your energy bills? (% of respondents) ING consumer survey November 2022 Decline in online purchases for all spending categories During the pandemic, Belgians appeared to be very active online shoppers, but the unusually sharp increase during the pandemic seems to be normalising somewhat. Almost a quarter (23%) of respondents say they have been buying online less often since the end of the pandemic, compared to only 15% who say they are buying online more often. When asked whether they expect to spend more online during the holidays than last year, one in four Belgians (25%) said they would spend less. The survey results show that the decline is mainly due to a general deterioration in the economic climate and not to consumers buying more in physical shops since the relaxation of health restrictions. Indeed, the percentage of respondents saying they spend relatively more in physical shops than online (21%) is balanced by the percentage saying they buy relatively more online than in physical shops (23%). Moreover, a significant proportion of the households also say they plan to further reduce their online purchases in the coming year. For instance, only 9% of respondents plan to buy more clothes online in the coming year, while 28% plan to buy less (see chart 3). Although the decline seems stronger for electronics and clothing, the trend is clearly felt across all product categories. It is therefore likely that the decline in online spending will be widespread in the coming months. No sector seems to be able to escape the economic downturn. Lots of families plan to further cut online budgets next year Do you plan to purchase more online in the coming months (% of respondents)? ING Consumer Survey November 2022 Belgians are much more cautious than their neighbours when it comes to budgeting The share of households planning to reduce their online spending is significantly higher in Belgium than in the Netherlands and Germany, and this is true for almost all product categories (see chart 4). While, for example, 28% of Belgian respondents said they would like to buy fewer clothes and shoes online, this is only 14% in the Netherlands and 23% in Germany. Although Belgians' purchasing power is much better protected compared to other eurozone countries thanks to the automatic indexation of wages, the crisis seems to have a greater impact on consumption patterns in Belgium than in other countries. Belgians seem much more cautious and willing to economise more to get through this difficult period. More Belgians cut online budget than neighbouring countries Do you plan to buy less online in the coming months (% of respondents)? ING Consumer Survey November 2022 Belgian economy dives into the red Belgians are massively looking to save money to cope with the rising cost of living. This will have an impact on economic growth in Belgium. The Belgian economy has already contracted slightly (-0.1%) in the third quarter, and this is expected to continue in the coming quarters. We expect economic growth to be negative in 2023. The full study is available in Dutch and French. TagsGDP Eurozone Energy crisis Consumption Belgium 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 Is Fighting Hard To Prevent Markets From Undoing The Tightening Of Financial Conditions

ECB Is Fighting Hard To Prevent Markets From Undoing The Tightening Of Financial Conditions

ING Economics ING Economics 29.11.2022 11:17
Lagarde is the latest of a string of central bankers warning against drawing too many conclusions from a single inflation reading. Her warnings, and those of her peers, would make higher eurozone inflation readings today and tomorrow a more market-moving event than a lower print In this article Don’t read too much into a single inflation print Robust control suggests the ECB should err on the hawkish side Today’s events and market view     Don’t read too much into a single inflation print The European Central Bank is fighting hard to prevent markets from undoing the tightening of financial conditions that has been achieved this year. Even once inflation is on a downward trajectory, and once the eurozone is in a recession, any central bank would be loath to let market interest rates dip too quickly, lest inflation fails to fully converge with its 2% inflation target. But this is a consideration for once inflation is already on a downward trajectory. The November inflation readings (Spain and Germany today, the eurozone tomorrow) could bring a down tick but might not be enough to conclude that inflation has peaked. November inflation readings might not be enough to conclude that inflation has peaked This, at least, was the view expressed by ECB President Christine Lagarde in her testimony in front of the European parliament. The core of her message is not new: the ECB will continue tightening policy even as the economy weakens into 2023. This may require taking rates into restrictive territory. This is a vague concept but that is widely understood to mean the deposit rate rising above 2%. Between the lines, it seems the central bank’s communication is increasingly preparing markets for a recession, and for the risk that hikes have to continue regardless. Even after inflation has peaked, the ECB faces an uphill battle to keep real rates positive Refinitiv, ING Robust control suggests the ECB should err on the hawkish side That rates ‘may’ have to rise above 2% may come across as a quite moderate stance when compared to the Fed’s relentless insistence that over-tightening presents less risks than under-tightening. There is also a growing contingent of hawks who argue for forceful action in fighting inflation, illustrated by Isabel Schnabel advocating a ‘robust control’ approach to monetary policy where the ECB would minimise the risk of even more drastic action in the future if inflation fails to quickly converge to target. The likelihood of a further 75bp hike has crept up with the curve now attributing it a 50% chance Until recently, this was not seen as a contradiction with the ECB hiking 50bp at the December meeting, after a cumulative 200bp of tightening since July. The likelihood of a further 75bp hike has crept up with the curve now attributing it a 50% chance. We still think a smaller move is most likely but CPI prints today and tomorrow could make 75bp a clearer market favourite outcome. The result would be a further flattening of the EUR curve relative to its USD equivalent, and also an unwind of the rally in risk assets that last week took Italy-Germany 10Y spreads to their tightest level since the spring. A high inflation print today would flatten the EUR curve further Refinitiv, ING Today’s events and market view Today’s batch of Spanish and German inflation data are a prelude to the release of the eurozone-wide indicator tomorrow. Both EU-harmonised measures are expected to tick down compared to the previous months. The European data docket also features EU confidence indicators, including consumer confidence which is a final release. Given the scale of the rally in bonds and risk assets into this week’s inflation print, we think the most impactful outcome would be an upside inflation surprise. Combined with repeated hawkish ECB and Fed warnings, we expect rates to be skewed upwards today and for the rest of the week. Supply takes the form of the Netherlands selling an 8Y bond and Italy 10Y and floating rates notes. Conference board consumer confidence is the main US release today, alongside mortgage applications and house prices. 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 Asia Forex Market Pack Were Broadly Weaker Vs The USD

The Asia Forex Market Pack Were Broadly Weaker Vs The USD

ING Economics ING Economics 29.11.2022 10:27
Fed speakers dial up hawkishness ahead of Powell on Wednesday  In this article Macro outlook What to look out for: Fed speakers and US jobs report   shutterstock   Macro outlook Global Markets: Fed speakers were turning up the hawkish dial on Monday ahead of Fed Chair Powell’s speech on Wednesday, at which there is a good chance he will dial it up to 11. John Williams told reporters he was raising his expectations for rates. James Bullard, who has already gone on record as saying that rates could go up to 7%, said he thinks markets are underpricing the risks of a more aggressive Fed. Loretta Mester added that the Fed was nowhere near a pause in their rate-hike campaign, and Lael Brainard said that the Fed needed to lean against the risk of inflation expectations becoming unanchored. Coupled with protests in China over the zero-Covid policy and the prospects for this and rising Chinese Covid cases and lockdowns resulting in probable further supply constraints, and it is no wonder US stocks fell by a about 1.5% yesterday. Bond markets, which tend to be a bit more cerebral and a bit less emotive, are not buying into this hawkishness just yet though. 2Y US Treasury yields dropped 1.4bp and the 10Y yield remained roughly unchanged at  3.681%. EURUSD went on a roller coaster ride yesterday, and came close to 1.05, before retreating to 1.0345, a little lower over the whole 24 hour period. It was more of a straight line slide for the AUD, which is now back to 0.6654, and the GBP also dropped precipitously to 1.1964. The JPY followed the EUR’s moves, dropping at one point to 137.50 before rising back to 138.75, though remains a little stronger than a day ago. The Asia FX pack were broadly weaker vs the USD yesterday. The CNY recovered slightly after its very weak start to end at 7.2069. while the KRW gapped up to 1340 from 1325. G-7 Macro:  Preliminary German inflation data for November is due out today, and could show a slight decline from the October harmonized index rate of 11.6%YoY. That said, ECB President, Christine Lagarde, is adopting the same playbook as the Fed right now, saying that she would be surprised if Eurozone inflation had peaked. Her comments were echoed by Governing Council member, Klaas Knot, who said that the risks to inflation were entirely skewed to the upside. Other releases today include 3Q22 Canadian GDP and September US house price data. What to look out for: Fed speakers and US jobs report Japan labour data and retail sales (29 November) Taiwan GDP (29 November) US Conference board consumer confidence (29 November) South Korea industrial production (29 November) Japan industrial production (29 November) Fed’s Williams and Bullard speak (29 November) China PMI manufacturing and non-manufacturing (30 November) Bank of Thailand policy meeting and trade (30 November) India GDP (30 November) US ADP employment and pending home sales (30 November) Fed’s Bowman speaks (30 November) South Korea 3Q GDP and trade (1 December) Regional PMI (1 December) China Caixin PMI (1 December) Indonesia CPI inflation (1 December) US personal spending, initial jobless claims and ISM manufacturing (1 December) Fed’s Cook, Bowman, Logan, Barr and Powell speak (1 December) South Korea CPI inflation (2 December) Fed’s Evans speaks (2 December) US non-farm payrolls (2 December) 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  
The Bank Of Japan Will Likely Stick To Its Policy Stance

The Bank Of Japan Will Likely Stick To Its Policy Stance

ING Economics ING Economics 29.11.2022 10:19
Labour market conditions tightened further last month, but we don't see any signs of wage growth yet. Meanwhile, goods consumption is weakening. Thus, the Bank of Japan will likely stick to its policy stance at its December meeting, despite expectations of higher inflation over the next few months   2.6 Jobless rate    Higher Labour market conditions remain solid, but there are still no imminent signs of wage growth The unemployment rate in Japan stayed at 2.6% in October for the second consecutive month, slightly above the market consensus of 2.5%, but the job-to-application ratio edged up to 1.35 as expected. We believe that the labour market will continue to recover over the next few months. Hospitality service jobs are likely to grow as the number of international and domestic tourists rise, while manufacturing employment will likely turn weak due to the weak manufacturing outlook suggested by muted PMI and export data. Wages in services tend to be lower than in manufacturing, so the unemployment rate is likely to fall, but we do not expect overall wage growth.  The jobless rate remained low in October CEIC Retail sales rose marginally Retail sales grew 0.2% month-on-month seasonally adjusted in October (vs a revised 1.5% in September) but fell short of the market consensus of 1.0%. Looking at the details, apparel sales rose the most (3.9%) and food/beverage sales also rose solidly (1.8%). However, durable goods, such as motor vehicles (-6.8%) and household machines (-0.4%), and fuel (-0.7%) declined, probably due to higher prices. Retail sales have been solid in recent months, mainly due to the easing of Covid restrictions and supply constraints on car production. However, we believe that goods consumption will likely turn weak over the next few months due to a rapid rise in prices, while services consumption boosted by tourism is likely to continue its recovery.  Retail sales growth slowed in October CEIC The Bank of Japan will stay pat at its December meeting In Japan, forward-looking price indicators suggest a further rise in inflation as we approach the end of the year, but the stabilised Japanese yen and global commodity prices will likely lighten the burden on inflation next year. The recent sharp rise in inflation is mainly driven by supply-side factors, so it won't change the policy stance of the Bank of Japan. TagsRetail sales Labour market 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  
FX: A US Dollar Recovery May Be On The Cards This Week

FX: A US Dollar Recovery May Be On The Cards This Week

ING Economics ING Economics 29.11.2022 10:12
Markets are keeping an eye on developments in China with some concern as they prepare for two key risk events – Jerome Powell's speech tomorrow and payrolls on Friday – which look more likely to push rate expectations higher rather than endorsing dovish speculation. When adding the very inverted US yield curve, a dollar recovery may be on the cards this week In this article USD: Bracing for a hawkish Powell EUR: Few signs of abating inflation GBP: Bailey's testimony in focus CAD: Growth figures should allow 50bp hike next week   Markets are bracing for tomorrow’s speech by Fed Chair Jerome Powell, where he is expected to sound hawkish USD: Bracing for a hawkish Powell Risk assets underperformed at the start of this week, with two major variables affecting global sentiment. First, social unrest in China. Investors appear to be gravitating towards the risk-negative narrative of possible instability in the country, despite the fact that this may prompt China to expedite its exit from Covid restrictions – likely a risk-on development. The second element relates to concerns that this week's events, which include tomorrow’s speech by Fed Chair Jerome Powell (where we see a higher likelihood that he will sound hawkish) and US jobs data (which could stay strong), may cause the Fed's communicated and perceived narrative to drift away from dovish pivot expectations. As mentioned in yesterday’s daily, a 2Y10Y UST curve displaying a 75/80bp inversion is indicating a common perception that the Fed will push forward with tightening into a recession. This should be a dollar-positive combination. Today's US calendar includes some housing data as well as the Conference Board Consumer Confidence Index, which is expected to have dropped further in November. There are no scheduled Fed speakers after hawkish comments by John Williams and James Bullard yesterday. We believe the dollar can find some further support today as markets favour defensive trades ahead of key events later this week. Prior to Powell's speech, a return to 107.00/107.50 levels in DXY is possible. Francesco Pesole EUR: Few signs of abating inflation EUR/USD failed to break the 1.0500 threshold yesterday and has dropped back to the 1.0350/1.0400 area after a widespread recovery in the dollar. The eurozone's exposure to China is one key driver to watch for the euro, and it could easily outweigh the benefits of lower energy prices. Today, however, the domestic story will receive a lot of attention. Inflation readings in Germany and Spain will provide hints about eurozone-wide data due tomorrow. The consensus is for German headline inflation to stabilise at 10.4% and eurozone figures to slow slightly tomorrow. It's difficult to see this significantly altering the ECB's narrative, but an above-consensus print may prompt markets to seriously consider a 75bp hike in December (61bp are currently priced). Still, hawkish ECB expectations have not often translated into a stronger euro, and we continue to see the dollar doing the heavy lifting in driving EUR/USD moves. At this point, we believe a drop below 1.0300 is more likely than a rebound to 1.0500. Elsewhere in Europe, Sweden’s GDP numbers have just been published, disappointing on the downside with 2.5% year-on-year growth for the third quarter. Retail sales for October also came in weaker. The next Riksbank meeting is far out (early February), but a softening in data could favour a 25bp hike after last week’s 75bp move. We expect EUR/SEK to end the year around 10.85/10.95. GDP figures will also be released in Switzerland this morning, and a deceleration to 1.0% YoY in growth is expected for 3Q.  Francesco Pesole GBP: Bailey's testimony in focus Today's UK calendar is light on data, but there is one event to keep an eye on: Bank of England Governor Andre Bailey's testimony to the House of Lords. A significant shift in Bailey's policy rhetoric two weeks before the BoE meeting appears unlikely, but the proximity to the meeting also means that markets tend to over-interpret MPC members' comments. In our opinion, the most likely scenario for the December announcement is a 50bp increase; markets are currently pricing in 57bp. Cable has fallen back below 1.2000 as the dollar regained some ground, and we see room for further depreciation into the end of the year as the greenback finds more support and the pound suffers from a bleak UK economic outlook. Francesco Pesole CAD: Growth figures should allow 50bp hike next week As the dollar corrected lower during the past month, the Canadian dollar has lagged behind its G10 counterparts. The decline in crude prices, which have returned to the trading range observed before Russia's invasion of Ukraine, has been the main factor holding back the loonie's recovery. Our commodities team continues to see the upside risks for oil prices into the new year, and CAD’s limited exposure to China/Ukraine and superior liquidity are good arguments to expect CAD to outperform other procyclical currencies in 2023, should risk sentiment stabilise. Today, Canada’s third-quarter growth data will be published, and expectations are for a 1.5% annualised read. This should enable the Bank of Canada to hike by 50bp next week. Francesco Pesole TagsFX Dollar CAD 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: The Digitisation Of Industry Provides An Opportunity For Growth

China: The Digitisation Of Industry Provides An Opportunity For Growth

ING Economics ING Economics 28.11.2022 12:42
Increased regulation of China's consumer tech industry has seriously dented company revenues, with widespread implications. But the digitisation of industry - supported by government policies - provides an opportunity for growth, which could help the overall digital economy grow by an average of 16% per year over the next decade In this article Introduction Data and methodology The size of the industry in China From few to many regulations Intense regulation started with anti-monopoly Fines and penalties on the industry Quantifying long term consequences A. Estimated reduction in app revenue into 2030 B. Estimated reduction in e-commerce sales affected by tax evasion cases New areas for growth Potential value of the digital economy in China by 2030 Summary   Introduction In this note, we aim to provide a top-down view of the economic impact of internet policies in China. In our view, the Chinese government has begun to soften its stance on heavy regulation in the digital consumer market in the past few years. At the same time, there is policy support for digitising industry. We will try to quantify the loss of revenue from regulation in the digital consumer market as well as the potential gains from policy support within the digital industrial market. This should give us some idea about the outlook for the overall digital economy. Data and methodology The digital economy, also known as the new economy or cyber economy, is intended to make traditional economic activity more efficient through the use of information and communication technology (ICT). It also creates new activity. We differentiate between the consumer and business side of the digital economy and the industrial side. This is because China has imposed more regulations on consumer-related internet activities. In contrast, the digital industrial economy benefits from 20th Party Congress' plans to advance technologies. The size of the industry in China China’s digital economy grew rapidly before 2020 when intensive regulations started to be imposed. The digital economy first developed in social media and search engines before expanding to online shopping, payment and fintech. It then expanded further to maps, ride-hailing apps and delivery services, and then into online games and streaming. This industry is a source of significant data, and Artificial Intelligence has been developed to collect, analyse and apply that data. For now, the mainstream focus is largely on digital activity at the consumer and business level. Digitising the industrial economy is still at an early stage. According to a white paper issued by the China Academy of Information and Communications Technology (CAICT), the overall digital economy was valued at CNY45.5 trillion in China, ranking second after the US, in 2021. The industry’s value to GDP has doubled in 10 years to nearly 40%. Timeline of internet policies in China ING From few to many regulations Big companies in China’s digital economy have developed their own market with few overlaps. For example, Baidu focuses on search engines, maps and cloud storage, Alibaba on shopping, payment and fintech, and Tencent on social media, payments within its app and online games, and public services. After Alibaba’s Jack Ma commented that regulation was essentially absent in China’s financial system in October 2020, his Ant IPO was deferred, and there have been 12 new cyberspace regulations as of June 2022. Intense regulation started with anti-monopoly Regulations began with the implementation of anti-monopoly laws. The government stated that tech companies had abused monopolistic power, massively collecting personal data and abusing its access, and recklessly developing fintech. Against such a background, the government rolled out a bundle of new laws and regulations targeting various aspects of the consumer-based digital economy. Investigations into Alibaba by the State Administration for Market Regulation (SAMR) resulted in fines on the company in 2022. Fines and penalties on the industry In this section, we look at penalties and fines to evaluate the monetary impact of intensive regulation on the industry. Fines and penalties amounted to CNY303.5 billion between November 2020 and July 2022 from 143 cases. This includes the IPO deferral of Ant Group, which had an estimated value of $34 billion. This looks like a small amount as it was less than 1% of the size of the industry in 2021. But it has serious consequences that we will discuss in the latter part of the note. Among those cases, 140 of them were related to anti-monopoly regulations, two were related to data security and one was related to consumer lending. Companies charged with violating anti-monopoly regulations were fined just CNY500,00 in each incident. These fines are relatively small for the companies involved. The regulator fined Alibaba CNY18.2 billion for breaching competition law in April 2022 but the size of the penalty was an outlier. It was based on 4% of Alibaba’s 2019 domestic revenue though the upper bound is 10% of revenue. Quantifying long term consequences Still, the economic loss is not just confined to fines and penalties. We will focus on two sub-sectors of the digital consumer economy that have incurred the most serious consequences from regulation. One is mobile apps, the other is real-time webcasting online sales. A. Estimated reduction in app revenue into 2030 There have been two regulatory incidents that have affected app revenue. The first is that China banned some apps from being freshly downloaded due to data privacy and security violations. Since November 2021, regulators have started to monitor apps and have ordered app stores to ban downloads of 106 mobile applications due to data privacy violations. This included Didi, the ride-hailing app, although users who have downloaded the app are not affected and can continue to use it; the ban only applies to new downloads. The cost to app developers will come from aligning apps with tighter regulations, which directly reduce data collection, and analysis that could enhance and create new functions to attract more businesses. This could also affect advertising revenue. We think the cost of app bans is more about future business development than existing business. The second regulatory incident is that regulators have imposed a limitation on the time children can spend playing games online, including mobile gaming apps. China made up 40% of the CNY1190 billion ($170 billion) global app spending in 2021, which was up 19% from 2020. Of this CNY1190 billion, 68% came from mobile games. Growth in mobile gaming revenue grew 15% from 2020, slower than the overall app spending growth of 19%, due to the restrictions on the time children can spend playing games online in China. When estimating the cost to the industry, we add a “slow growth” parameter in our calculation. The ban on new apps and regulations on online games have reduced revenue growth from 2022 to 2024. Growth should pick up after companies adjust to the regulations but the rate of growth will be fairly slow compared to the pre-regulation period. We estimate that app spending in China under the current regulatory environment should grow 23% between 2021-2030. Under a hypothetical assumption, if there were no such restrictive environment, the growth rate would be 64%. That is equivalent to a reduction of CNY1544 billion in revenue between 2021-2030. App downloads in China Statista, ING B. Estimated reduction in e-commerce sales affected by tax evasion cases Realtime webcast marketing, a facilitator of sales in e-commerce platforms, has also been on the regulatory radar. Realtime webcast sales were CNY2.27 trillion in 2021, contributing 21% of online sales. Online sales contributed 24.5% of retail sales in China, with the share doubling from 2014. Retail sales in China hit CNY44 trillion in 2021. Since early 2022, regulators have started to audit this subsector, finding that sales were over-reported during webcasts with the aim of luring in more customers. They also found that webcast anchors might not have correctly reported their income. Some webcast anchors were prevented from appearing in real-time sales activities. This led to a substantial fall in sales on e-commerce platforms in China. We estimate that sales from real-time webcasting fell around 75% in 2022 but should recover in 2023 as some real-time sales anchors have resumed work after paying taxes. This segment should recover partially after complying with regulatory requirements. From our calculations, the loss of revenue from real-time webcast sales could be CNY19.0 trillion between 2022-2030 if there are no tax evasion cases. There are other subsectors within China’s internet industry that have been transformed due to intensive regulation in the past three years. We have only uncovered part of it due to limits on data availability. The impact from the penalties and fines alone was less than 1% of the size of the industry in China. But the consequences are substantial as shown in the potential reduction in revenue from regulations. Ultimately, the industry needs to change the way it operates and its business model to fulfil regulatory requirements. This implies that business growth could be challenging in the coming years, before we even consider the economic slowdown from Covid and other challenges. Estimated revenue loss in the digital consumer economy ING New areas for growth One area for growth lies in the digitisation of manufacturing and industry. The consumer-based cyberspace has been developed to a more advanced level compared to that seen in industry. The 14th Five-Year Plan highlights the need for automation, the application of robots, algorithms and blockchain applications for industrial use. And the more recent 20th Party Congress highlighted advanced technology as one of the pillars for future growth. These policies should steer the future of cyberspace in a new direction, giving existing internet companies an opportunity to create growth. The main benefits will come from an increase in the efficiency of production. Big data will play an important role just as it does in consumer cyberspace. Deficiencies in production and streamlining production operations are the two areas where big data could shorten production time and improve quality.   In 2019, the digital industrial economy was CNY7.1 trillion, having grown 11.1% year-on-year. That was slower than the 14.8% growth of the tertiary industry (mainly consumer-based). We estimate that the value of the digital industrial economy was CNY11 trillion in 2021. Even with strong growth in the past few years, this value is still small relative to China's digital economy of CNY45.5 trillion in that year. But the trend is going to change. China has begun to specialise more in higher value-add production, big data and AI. This implies the internet of things could be widely applied. This trend is also partly forced by the ageing workforce. More importantly, the 20th Party Congress highlights the need to advance technology for the economy’s future development, which should result in a boom in R&D for industrial technology, mainly in 2024-2027. We assume no big breakthroughs in industrial technology from the R&D spending, e.g. breakthroughs in advanced semiconductor chips. But some R&D results could benefit industrial activity, e.g. further robotisation and a more comprehensive internet of things. We estimate that the value of industrial cyberspace could reach CNY80 trillion in 2030 in real terms, and would contribute 40% to the overall digital economy in China by 2030. This estimate means the digital industrial economy could grow ninefold over the coming decade. Fast growth in this area could mean that the overall digital economy would be more balanced, with contributions of 60% from the consumer segment and 40% from the industrial segment by 2030, compared to the ratio of 81% to 19% in 2020. Potential value of the digital economy in China by 2030 Combining the consumer and industrial aspects, the overall digital economy could be valued at CNY99 trillion by 2030 with an average annual growth rate of 16%, driven mainly by the digital industrial economy. Estimated value of China's digital economy by 2030 ING Summary This note has found that intensive regulation of the internet sector in China has more serious consequences than just the fines and penalties imposed so far. Most of the regulations affect sub-sectors of the digital consumer economy. The potential loss in value could be close to CNY21 trillion between 2021-2030, which is a lot bigger than the fines and penalties of CNY303.5 billion in 2020-2022. This loss of revenue could be reflected in less innovation and creative business ideas. At the same time, the digital industrial economy could grow very fast, mainly from policy support. The 20th Party Congress highlighted an objective to build advanced technology by Chinese companies. This self-sustained intention could push the value of the digital industrial economy to CNY80 trillion by 2030 from CNY7.1 trillion in 2019. For the digital economy, the main challenge remains the uncertainty of new and tighter regulations from the Chinese government on both sub-sectors of the consumer and industrial digital economy. There could also be challenges from global regulations on the sector. TagsInternet of things Digital economy China Big Data AI   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
Commodities: EU Members Manage To Agree On Price Caps For Russian Oil

Commodities: EU Members Manage To Agree On Price Caps For Russian Oil

ING Economics ING Economics 28.11.2022 09:16
Sentiment in markets remains negative given the latest Covid developments in China. Meanwhile, energy markets will be keeping an eye on whether EU members manage to agree on price caps for Russian oil and TTF natural gas futures In this article Energy - price cap decisions Metals – Aluminum stocks decline in China Agriculture – Downside to Argentine wheat output   Shutterstock Energy - price cap decisions Sentiment in the oil market remains negative, and developments over the weekend in China will certainly not help. China continues to see record daily cases of Covid, which has resulted in some cities tightening mobility restrictions. Reports of Covid protests in China will also likely prove harmful for sentiment. Unsurprisingly, investor appetite has taken a hit in recent weeks - one only needs to look at the price action to see this. Positioning data adds confirmation to this thesis. The latest exchange data shows that speculators reduced their net longs in ICE Brent by 70,502 lots over the last reporting week, leaving them with a net long of 138,048 lots as of last Tuesday. This is the smallest position held since August. The market appears not to be concerned about the ongoing uncertainty over Russian supply. Instead, attention seems fully focused on the demand story.    Over the weekend the US government relaxed oil sanctions against Venezuela by allowing Chevron to restart oil production at some of its joint ventures in the country. The easing in sanctions will have a limited impact on the market, given that volumes will be relatively small. The easing also appears to allow the export of this crude to the US. This will be helpful for US refiners on the hunt for heavier grades of feedstock. As for the week ahead, we should start to get some preliminary production numbers for OPEC members for November. This will obviously give a good insight into which members have reduced their output in accordance with the latest OPEC+ supply cuts. OPEC+ agreed back in October to reduce their production targets by 2MMbbls/d from November. However, the market will likely be closely watching price cap developments this week. EU members failed last week to agree on a level for the price cap for Russian oil. The EU and G-7 will want to come to an agreement this week, before the EU ban on Russian seaborne crude oil kicks in on 5 December. EU members will also have to agree on the proposed price cap on TTF gas futures with the Commission last week suggesting setting the cap at EUR275/MWh, which some members believe is too high. Metals – Aluminum stocks decline in China The latest data from the Shanghai Metals Market (SMM) shows that inventories of aluminium ingots have dropped 10% in the last two weeks and currently stand at 51.8kt (the lowest in almost six years) as of Friday. SMM also said that smelters in northern China are reducing output during the winter months to reduce emissions, while a resumption of plants in the southwest (that were forced to halt production due to power shortages) has been slower than expected. Meanwhile, the latest data from the Shanghai Futures Exchange (ShFE) shows that aluminium inventories on exchange dropped by 15kt (-12% WoW) to 110kt - the lowest since 2017. US miner Freeport-McMoRan agreed with the Chinese copper smelters (Tongling Nonferrous Metals Group Co. and Jiangxi Copper Co.) to set treatment charges at US$88/t (+35% YoY) for copper concentrate supply agreements for 2023. The higher treatment charges indicate expectations of rising mine supply relative to smelting capacity.  There are suggestions that two big mines - Quellaveco in Peru and the Quebrada Blanca 2 project in Chile, will roughly add 616kt of copper to the market once ramped up. The latest monthly update from the International Copper and Study Group shows that the supply deficit for copper stood at 10kt in September, compared to a deficit of 13kt in the previous month. Over the first nine months of the year, the copper market encountered a deficit of 295kt, compared to a deficit of 233kt during the same period last year. Global mine and refined copper production increased by 3.5% YoY and 2.3% YoY respectively, whilst overall apparent refined demand grew 2.6% YoY for January-September 2022. Agriculture – Downside to Argentine wheat output The latest data from a crop tour organized by the Bahia Blanca Grain Exchange shows that wheat production in the southern Buenos Aires and La Pampa provinces in Argentina is set to decline by 31% YoY following drought and frost conditions. The survey estimates for the wheat harvest (which starts next month in the region) is around 3.7mt, compared to 5.3mt last season. Meanwhile, barley production in the region is expected to drop by 20% YoY to 2.3mt. TagsSanctions Russian oil price cap OPEC+ Natural gas 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
The US Dollar (USD) Is Rising Right And Market Is Awaiting For Fed President Jerome Powell's Speech

FX: Data In The US This Week May Deliver A Little Support To The US Dollar (USD)

ING Economics ING Economics 28.11.2022 09:09
A very inverted US yield curve and Brent crude trading down near $80/bbl tell us that markets are growing more concerned about global demand trends. And uncertainty in China does not help either. We feel scheduled events and data in the US this week may also deliver a little support to the dollar. In general, we favour defensive positions in FX this week In this article USD: Fed-speak, prices and employment to dominate EUR: Waiting for the next inflation print GBP: Settling down CEE: Hungary remains topic number one     USD: Fed-speak, prices and employment to dominate The week starts with a focus on events in China as local authorities struggle to battle rising daily case numbers and enforce lockdowns. While a disorderly exit from China's Covid Zero policy could ultimately prove a positive for global demand, getting to that point will be an exceptionally bumpy ride for the world's financial markets. As it stands currently, events in China are being read negatively for demand trends, where for example Brent crude and industrial metal prices are under pressure. Brent at $80/bbl is a little surprising given what should be the 2mn barrel per day production cut undertaken by OPEC+ this month.  Another big read for global demand trends is the shape of the US Treasury yield curve. The current 2-10 year inversion of the curve to -80bp is exceptional and aptly reflects investors' views that recession is coming but the Fed will not be cutting rates anytime soon. On the subject of the Fed, the week ahead sees Federal Reserve Chair Jerome Powell speaking on Wednesday evening (hawks James Bullard and John Williams speak tonight also). Currently, we would pin Chair Powell to the hawkish end of the Fed spectrum and our colleague, James Knightley, thinks Chair Powell this week could push back against the recent (and perhaps premature in the Fed's mind) easing of financial conditions.  In addition to Fed-speak, the US data calendar picks up again this week, with readings on house prices, confidence, PCE inflation and Friday's release of the November jobs report. The more important data releases come on Thursday and Friday, where any uptick in the core PCE price data or strong job numbers could support potentially hawkish rhetoric from Chair Powell and send US yields and the dollar higher again. As we outlined in our 2023 FX Outlook, we just do not see conditions in place for a benign dollar bear trend - even though the buy-side is desperate to put money to work away from the dollar. Seasonally, the dollar is weak in December, but our call is that this year, the dollar can strengthen into year-end. We continue with the view that any weakness in DXY towards the 105.00 area this week (DXY now 106.18) will prove short-lived and favour a return to 108-110 into year-end. Chris Turner EUR: Waiting for the next inflation print The highlight of the eurozone data calendar this week will be November price data - released for Germany tomorrow and for the eurozone on Wednesday. The question is whether inflation will fall back from the highs (not far from 11% year-on-year) and allow the European Central Bank to potentially soften its hawkish rhetoric a little. Currently, the market prices a 62bp rate hike on 15 December.  EUR/USD is consolidating at higher levels - having been buoyed by the 20% recovery in European equity markets amidst declining energy prices. Equally, business confidence has been holding up a little better than expected. We cannot rule out EUR/USD trading back up to the 1.0480/1.0500 area again (though the reasons for that are far from obvious) but reiterate that the second half of the week could potentially push EUR/USD back to the 1.02 area. Chris Turner GBP: Settling down Three-month GBP/USD traded volatility prices are now under 12% having been near 19% in late September. Clearly, sterling trading conditions have settled down even as recession expectations solidify. Our view is that these GBP/USD gains will not last and we would not be surprised to see fresh selling interest emerging near the 200-day moving average at 1.2177 or at best the 50% retracement of the 2021-22 drop - at 1.2300.  The current inversion in yield curves around the world does, for a change, look to be a likely harbinger of recession. And with its large current account deficit, sterling should be expected to remain vulnerable. The UK data calendar is light this week, but there are a few Bank of England (BoE) speakers who may reiterate hawkish leanings. The market currently prices a 52bp BoE rate hike on 15 December. Chris Turner CEE: Hungary remains topic number one The Central and Eastern Europe (CEE) region will become more interesting in the second half of the week, while today and tomorrow will be more about global numbers. On Wednesday, Poland will see the release of inflation for November and a detailed breakdown of 3Q GDP, which positively surprised a couple of weeks ago in the flash estimate (0.9% quarter-on-quarter). Of course, given the pause in the central bank hiking cycle, the CPI print will get a lot of market attention. We expect an unchanged 17.9% YoY reading, more or less in line with market estimates. On Wednesday, we could hear something new from the European Commission (EC) on Hungary, progress with the rule-of-law and access to EU funds. Thursday will see the release of PMI indicators across the region. While we expect a rebound from the lows in Poland and the Czech Republic, we forecast a drop below the 50-point level in Hungary. Also on Thursday, the 3Q GDP breakdown will be published in Hungary, which was the only country in the region to surprise negatively in the flash reading (-0.4% QoQ). On Friday, the Czech Republic will also release the detail of 3Q GDP, which was -0.4% QoQ in the first estimate as the market expected.  In the FX market, conditions for the CEE region improved again last week. The dollar index touched new lows and sentiment improved again in Europe. On the other hand, local conditions remain negative. Interest rate differentials across the region have reached new lows again in recent days. This week, we see a chance for a reversal in the US dollar and a reality check inflation story at the global and regional level, resulting in negative pressure on the region. The European Commission decision will be a key market mover for the Hungarian forint. Although last week's news was mixed, we see it as rather positive. Thus, confirmation that Hungary no longer faces a permanent loss of EU funds should help the forint move back closer to 405 EUR/HUF. Inflation in Poland will be key for the zloty and the possibility for the market to reassess the priced-in cuts next year, which could add short-term support for the zloty. However, we see the zloty as the most vulnerable to the global story at the moment, so we remain bearish. Frantisek Taborsky 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
Next Week: Industrial Production In Hungary May Show A Better-Than-Expected Performance

Next Week: Industrial Production In Hungary May Show A Better-Than-Expected Performance

ING Economics ING Economics 25.11.2022 14:16
The market is firmly backing a 50bp hike from the Fed in December, and with US economic data so far proving to be resilient, all eyes are on next Friday's jobs report and the core personal consumer expenditure deflator. We expect the number of vacancies to exceed unemployed people by a ratio of 1.9:1 and for the PCE price index to be at 0.3% month-on-month In this article US: Fed may need to toughen its stance Eurozone: All eyes on inflation Hungary: Third-quarter GDP supported by industrial and services sectors   Shutterstock   US: Fed may need to toughen its stance The market remains firmly behind the view that the Federal Reserve will raise interest rates by 50bp on 14 December given Fed speakers have indicated the likelihood of less aggressive step increases in interest rates after four consecutive 75bp hikes. However, the economic data is proving to be pretty resilient and we are a little nervous that a 7% fall in the US dollar against the currencies of its main trading partners, and the 45bp drop in the 10Y Treasury yield, is leading to a significant loosening of financial conditions – the exact opposite of what the Fed wants to see as it battles inflation. Consequently, we wouldn't be surprised to see the Fed language become more aggressive over the coming week, talking about higher terminal interest rates – with some of the more hawkish members perhaps even opening the door to a potential fifth consecutive 75bp hike in December (although we don’t think they would actually do it) to ensure the market gets the message. Currently, only three officials are scheduled to speak, but we wouldn’t be surprised to see more make sudden appearances in the media.  Data-wise, the jobs report on Friday will be the focus, but there will also be interest in the ISM manufacturing index and the Fed’s favoured measure of inflation – the core personal consumer expenditure deflator – both of which are published on Thursday. The ISM is likely to drift just below the break-even 50 level given the softening trend seen in regional manufacturing indicators. The PCE deflator could be interesting too since it doesn’t always match what happens in core CPI. If you remember, that rose “only” 0.3% month-on-month versus expectations of a 0.5% increase and was the catalyst for the recent drop in Treasury yields, as expectations for Fed rate hikes were scaled back. A 0.4%+ print for MoM core PCE deflator could generate quite a sizeable reverse reaction. Meanwhile, the jobs numbers should hold around 200,000 given the number of vacancies continues to exceed the number of unemployed people by a ratio of 1.9:1. Nonetheless, there are more firings going on in the tech sector and the increase in initial claims also points to softer employment growth in the coming months. Eurozone: All eyes on inflation Has a eurozone inflation figure ever been more important than the November reading that is due out on Wednesday? With the ECB focusing more on current inflation developments for determining when to move to smaller rate hikes, the November inflation figure will be very relevant for the December rate hike decision. While energy prices have been moderating and other supply shocks are fading, the question is how quickly this impacts consumer prices. Also keep an eye out for unemployment on Thursday. Any sign of the labour market slowing will also be taken into account at the next policy meeting. Hungary: Third-quarter GDP supported by industrial and services sectors Next week’s events calendar for Hungary is focused on one day. On the first day of December, we are going to see detailed GDP data from the third quarter. Here we expect that industrial production will show a better-than-expected performance, giving support to the net export which has suffered under the pressure of the energy crisis. Along with industry, the services sector is expected to be a key driver, which was able to limit the quarter-on-quarter drop in GDP. The manufacturing PMI has shown significant monthly volatility recently thus we see a down month in November after a significant upside surprise in October. Key events in developed markets next week Refinitiv, ING Key events in EMEA next week Refinitiv, ING TagsUS Inflation Eurozone 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
Italy: Consumer headline inflation hits 11.8% year-on-year amounting to October print

In Italy Consumer Confidence Gained Eight Points

ING Economics ING Economics 25.11.2022 14:07
In Italy, business and consumer confidence rebounded in November. The scope of the rebound comes as a surprise, given the high inflation and geopolitical backdrop. This suggests that the GDP contraction, which we still pencil in for the fourth quarter, might be very small Giorgia Meloni, the new prime minister of Italy, has boosted consumer confidence by announcing continued energy support for households     November confidence data marks a widespread improvement both among consumers and businesses, interrupting a decline that started in July. We remain extremely cautious in interpreting the November reading as a sign of reversal, but it shows that the deceleration brought about mostly by the impact of higher inflation might turn out – for the time being – to be a soft one. Consumer confidence gained eight points in November, reaching back to August levels. Interestingly, the main driver of the rebound was a big improvement in the future climate component. Consumers seem to expect an improvement in Italy’s economic conditions, with a positive bearing on future unemployment. Looking at the current environment, with inflation still on the increase and subdued wage dynamics, it is not easy to justify such a reversal. A possible explanation could be post-election relief, as the new Meloni government has announced its continued support to households to compensate for the negative consequences of the energy shock on disposable income. In the business domain, the scope of the rebound in confidence has been widespread, with the exception of construction, where confidence continued its downward trend from historic highs. As with consumers, there seems to be a clear distinction between the present state of business and expectations about it. Taking manufacturers as an example, they see orders deteriorating and highlight an increase in stocks of finished goods, implicitly signalling soft current demand, but at the same time signalling a strong increase in expected production. When looking at services, what stands out is the driving role of tourism. After declining sharply in both September and October, confidence in the tourism sector has rebounded strongly, reaching back to August levels. Interestingly, the improvement is propelled by both current and expected orders, which both post similar substantial gains. On the back of previous confidence data we had anticipated the disappearance of tourism over the fourth quarter; November data seems to suggest that inertia in the sector is strong and that the expected drag on growth might consequently be smaller. All in all, notwithstanding today’s surprisingly strong confidence data, we do not believe an economic turnaround is in the making, as yet. The negative impact of inflation remains in place both for consumers and businesses and we suspect that the refinanced compensation measures will not be enough to prevent a GDP contraction in the fourth quarter of this year. But this will likely be a very small contraction, adding upside risks to our current forecast of a 3.6% GDP growth in 2022.    TagsItaly   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 Signals Coming From China Look Very Positive

Expectations That The PBoC Will Exercise Some Form Of Unconventional Monetary Policy

ING Economics ING Economics 25.11.2022 14:01
The People's Bank of China cut the required reserve ratio by 0.25 percentage points to support economic growth, as the economy continues to be dragged down by the rising number of Covid cases and real estate crisis Leading members of the People's Bank of China, including Governor, Yi Gang (waving)   China's central bank to cut RRR by 0.25 percentage points from 5 December China's central bank, the PBoC, is going to cut its required reserve ratio (RRR) by 0.25 percentage points from 5 December, for all banks except those already charging a 5% RRR. This should release CNY500 billion of liquidity for banks to lend out. The last time the PBoC cut the RRR was in April. How can the PBoC get the most out of this RRR cut? Our view is that if the RRR cut is the only monetary policy tool that the PBoC is going to implement, it may not lead to a significant increase in bank lending. This is especially the case when it comes to lending to SMEs. This is because credit quality of smaller companies deteriorates faster than it does for big corporates when the economic environment worsens. Companies are currently facing weaker retail sales from a higher number of Covid cases and falling home prices from unfinished home projects. What I expect is that the PBoC will exercise some form of unconventional monetary policy to increase the effectiveness of this RRR cut. This unconventional monetary policy could include raising the quota of re-lending programmes for SMEs, increasing matching loans for the construction of unfinished residential projects, and it could also be possible that there will be some guidance to commercial banks to increase loan growth. If there are accompanying policies to increase bank lending other than just cutting the RRR, job losses in December could be stable. Otherwise, we might see another increase in job losses, and retail spending will fall further. TagsRRR Real estate PBoC Covid China's weak economy 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: The US Dollar (USD) Is Getting Close To Some Decent Support Levels

FX: The US Dollar (USD) Is Getting Close To Some Decent Support Levels

ING Economics ING Economics 25.11.2022 10:33
FX markets are becalmed by holiday trading conditions in the US and a very light data calendar. A further unwinding of long dollar positioning remains the risk, but we think the dollar is getting close to some decent support levels. Elsewhere, 75bp rate hikes are still going through in the likes of Sweden and South Africa In this article USD: Focus on 'Cyber Five' retail sales EUR: A little less pessimism GBP: BoE stays hawkish JPY: Set for out-performance into 2023   US retailers have come up with the 'Cyber Five' sales promotion campaign which should boost retail sales    USD: Focus on 'Cyber Five' retail sales Today sees another holiday-shortened US session following the Thanksgiving public holiday. Innovative US retailers have come up with the 'Cyber Five' sales promotion campaign which stretches from Thursday's Thanksgiving all the way through to Monday. Expect to hear reports as to how this has gone, although high levels of employment and lower levels of petrol prices (now $4.30/gallon versus a high of $5.50 in June) suggest retail sales may hold up despite talk of the looming 2023 recession. FX markets are becalmed and the only stand-outs yesterday were the large 75bp rate hikes in Sweden and South Africa, plus the 150bp rate cut in Turkey in preparation for elections next year. We also note the further legacy of this year's rise in dollar and US yields, where Ghana looks set to impose a 30% haircut on Eurobond holders as it seeks a deal with the International Monetary Fund (IMF). Back to the dollar – buy-side surveys taken right before the big sell-off on 10/11 November still had long dollar positions as 'the most crowded trade' and saw the dollar as the most over-valued on record. We doubt those views will have changed that much and the buy-side will now be eager to sell any dollar rallies, believing the dollar may well have peaked. That may be the case, but as we discuss in our 2023 FX outlook, we doubt conditions will be in place for a major dollar bear trend.  We mentioned earlier that the dollar may be nearing some decent support levels. We think DXY has strong support near 105.00, marking the 200-day moving average, important lows in early August and a big 38.2% retracement level of the whole rally from summer 2021 (when the Fed started this dollar rally with its more hawkish Dot Plots). For those needing to buy dollars, DXY levels near 105 may be as good as any. Chris Turner  EUR: A little less pessimism Business surveys in Germany and France released yesterday showed a little less pessimism. And increasingly there is a view that the forthcoming downturn will be mild because of issues like a) strong employment b) large government support and c) strong household savings. Our eurozone team, however, are a bit more pessimistic. Certainly, Europe's large exposure to the manufacturing cycle and what should be weaker export markets make us sub-consensus on European growth prospects.  Despite the looming eurozone recession, ECB hawks such as Isabel Schnabel suggest it may be premature to scale back rate increases. Currently, the market prices 61bp of hikes on 15 December (we expect 50bp). Clearly, the 50bp versus 75bp debate will continue to run. For EUR/USD, it still looks like the big dollar story is dominating. We cannot rule out a further correction into the 1.05-1.06 region but would see these as the best levels before year-end. These levels could be seen next week should Fed speakers or November US jobs data prove the catalyst. Chris Turner GBP: BoE stays hawkish Recent speeches have seen the Bank of England (BoE) staying pretty hawkish despite the fiscally tight budget and broadening consensus of recession. We think positioning has played a major role in this sterling recovery and GBP/USD could see some further, temporary gains to the 1.22/23 area – which we would again see as the best levels before year-end.  Equally, EUR/GBP has good support in the 0.8550/8600 area, and given our view of a difficult risk environment into year-end and early 2023 as central banks raise rates into recessions, sterling should remain vulnerable. Chris Turner  JPY: Set for out-performance into 2023 Probably the best chance of the dollar having peaked is against the Japanese yen (JPY). USD/JPY is now nearly 10% off its high near 152 in late October. Next week we will find out whether Japanese authorities sold FX in November – having sold a combined $70bn in September and October. So far intervention can be considered to be exceptionally well-timed and effective.   If the dollar is to move lower in 2023, USD/JPY would be the best vehicle to express the view, in our opinion. This is based on the view that the positive correlation between bonds and equities can break down – bonds rally, equities stay soft – and that the US 10-year Treasury yield ends 2023 at around 2.75%. USD/JPY could be trading at 125-130 under that scenario. We now suspect that any dollar rally between now and year-end stalls at 142/145. In addition, USD/JPY will be facing a change in the ultra-dovish Bank of Japan governor next April – a big event risk for local and global asset markets. Chris Turner TagsYen FX Dollar   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 ECB Has Started To Shift The Focus Of The Discourse To Underlying Inflation Pressures

The ECB Has Started To Shift The Focus Of The Discourse To Underlying Inflation Pressures

ING Economics ING Economics 25.11.2022 10:29
The loosening in financial conditions is not going unnoticed with central banks. Their pushback is becoming more vocal. Next week's events will be a crucial test for the sustainability of the rally in rates, which looks to have its roots not just in markets' fundamental reassements but is also seeing technical factors at play    In this article Explicit pushback against the market rally from ECB's Schnabel The interdependence between TLTROs, QT and rate hikes Next week's events provide a crucial test to the market rally Today’s events and market view Shutterstock   Explicit pushback against the market rally from ECB's Schnabel ECB’s Schnabel remained true to her role as prominent hawk. Her speech was a clear pushback against any notion of the ECB materially slowing its tightening process. She could hardly have become more explicit in her disapproval of current market developments, saying “market expectations of a pivot have worked against [the ECB’s] efforts to withdraw policy accommodation.” She highlighted that policy is likely too accommodative, with real rates still in negative territory for most tenors. That said, she is but one voice on the ECB, even if an important one. Policy is likely too accommodative, with real rates still in negative territory for most tenors The market’s pricing of the December ECB meeting remains little changed at close to 60bp and also the terminal rate continues to hover just below 3%. The ECB minutes of the October meeting itself did not bring about anything surprisingly new, but served as a confirmation of media reports that already suggested the momentum for another 75bp hike in December was lower. Next week will see the release of the November inflation data, which in the end could tip the balance in the ECB’s decision. However, the ECB has started to shift the focus of the discourse to underlying inflation pressures. This included Schnabel yesterday - stressing that these showed little sign of subsiding just yet.   Negative real rates on much of the EUR curve show policy is still accomodative Refinitiv, ING The interdependence between TLTROs, QT and rate hikes The ECB minutes provided some insight into the ECB’s thinking on how the TLTRO changes fit into the broader balance sheet strategy. Reducing the TLTROs was seen as a necessary first step before considering the reduction of bond holdings. An assessment of the repayments after the adjustments of the TLTROs and impact of financing conditions would also inform the discussion to be had on reducing the reinvestments of the bond portfolio in December. Reducing the TLTROs was seen as a necessary first step before considering the reduction of bond holdings Clearly there is some interdependence between the TLTROs, QT and even rate hikes in the minds of the ECB. According to the minutes the Council deemed the TLTRO recalibration “more efficient” than trying  to achieve the same objective through an earlier start of QT or more aggressive interest rate hikes. Clearly, the first voluntary repayment in November of €296bn was on the low end of expectations and had also limited market impact. Ahead of the December meeting there will be one more repayment opportunity to consider. That amount will be closely watched as it could also be part of the bargaining process between hawks and doves when they decide on the pace of further hikes.     Curve flattening is not a typical reaction to more dovish central bank expectations Refinitiv, ING Next week's events provide a crucial test to the market rally Global rates have seen a significant rally over the past weeks, EUR 10y swap rates alone have pulled back 75bp from their peak in early October. The extent of the long-end rally seems to be more than just hopes for a pivot, noting also that front end rates have proven more stable, helping the strong curve flattening. A more technical component, where extensive short positioning has been reduced amid thin liquidity going into the Thanksgiving holidays and year-end, appears to be at play as well. The extent of the long-end rally seems to be more than just hopes for a pivot The events lined up for next week will this provide a crucial test for the sustainability of the rally lower in rates. In the US all eyes will turn to Fed Chair Powell’s speech on Wednesday. Of late he has taken a more hawkish line than the majority of the FOMC, as evidenced by his last press conference when compared to the subsequent FOMC minutes. On Friday the job market data will speak to the resilience of the economy, with expectations for a 200k increase in payrolls. In the euro area ECB president Lagarde will be speaking to parliament on Monday. More important will the release of the preliminary inflation data, starting with first country readings on Tuesday and the Eurozone-wide measure in Wednesday. Today’s events and market view Market liquidity should remain subdued, with the US only returning for a shortened session in between yesterday's holiday and the weekend. There is little in terms of data to change the course of markets today, with only public appearances of the ECB’s Muller and Visco being of note. But looking ahead that will change - with the crucial events lined up for next week. We have seen a remarkable rally in rates, which has likely been underpinned by market conditions surrounding the Thanksgiving holiday and the nearing year-end. Given the technical facors at play we have already earlier expressed our doubts about the sustainability of this rally and believe that it could be put to the test next week by the Fed's Powell and in the eurozone by the release of the inflation data for November. 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
Steen Jakobsen: ECB strategy is praying, hoping and waiting... not exactly action which gives hope for real economy

European Central Bank's meeting minutes point to recession fears to some extent. ING says a pause can happen

ING Economics ING Economics 24.11.2022 16:05
At first glance, the minutes of the European Central Bank's October meeting do not point to a pivot any time soon. However, reading between the lines, there seem to be growing recession concerns, at least with some members, which could lead to a pause in the hiking cycle in the coming months   The just-released minutes of the ECB’s October meeting underline the ECB’s determination to continue hiking interest rates, while at the same time coping with high uncertainty and growing concerns about the severity of the looming recession. Here are the main takeaways from the minutes: Shallow recession not enough to bring down inflation. There was a discussion on the potential severity of a looming recession, with a common view that a shallow recession would not be enough to bring down inflation. The ECB discussed possible channels through which a shallow recession could become a deeper and longer recession. Interestingly, and despite earlier credit crunches, the ECB did not see the banking sector as a potential channel but rather the housing market and eventually the labour market. “It was argued that, in the event of a shallow recession, the Governing Council should continue normalising and tightening monetary policy, whereas it might want to pause if there was a prolonged and deep recession, which would be likely to curb inflation to a larger extent.” Fiscal policy. The ECB’s view on fiscal stimulus and its impact on the economy was a bit ambiguous, seeing “a risk that fiscal compensation packages would turn out to be bigger than warranted”. Longer-term inflation. Remarkably, there was a common view that most measures of longer-term inflation expectations stood at around 2%. Remarkable as this would take away the necessity to move monetary policy into restrictive territory. Debate on neutral level of policy rate. It remains unclear what the ECB has in mind as a neutral level for interest rates. In some paragraphs, it is said that a “neutral level” should be reached swiftly, while in other paragraphs, the entire concept of a neutral or terminal interest rate is debunked. On the size of the rate hike. Some ECB members argued in favour of a 50bp rate hike but the large majority favoured the 75bp option. Tail wagging the dog? One argument to go for a 75bp rate hike was the fact that financial market participants had also priced in such a hike. “It was argued that falling short of these market expectations would imply an unwelcome loosening impulse, potentially undermining confidence in the Governing Council’s commitment to price stability.” Nothing on pivot. At least according to the minutes, there hadn’t been a discussion on potentially slowing down the pace of rate hikes or starting quantitative easing. All in all, there were only some signs between the lines that the ECB could slow down the pace of rate hikes at the December meeting. What's next for the ECB? While the October decision was very uncontroversial and supported by a large majority, recent comments by ECB officials suggest that the discussion at the December meeting will be much more heated and controversial. In fact, the voices of the doves have again become louder, while the hawks seem to be prepared to slow down the pace of rate hikes. Data releases and the forecasts presented at the December meeting will have something for both: a further increase in headline inflation and no further weakening of the economy but also very likely inflation coming down significantly in 2024 and 2025. As a consequence, we currently expect the ECB to hike rates by 50bp in December and by another 25bp in February. The big question and probably also the big bargain between doves and hawks will be around quantitative tightening (QT) or in other words, the shrinking of the ECB’s balance sheet. Earlier and more significant QT could be the bargaining chip for an end to rate hikes. We expect the ECB to announce a gradual reduction of the reinvestments of its bond holdings under the Asset Purchase Programme (APP) at the December meeting, with the aim to stop the reinvestments by end-2023. The minutes of the ECB's October meeting have some tentative signs that concerns of a more severe recession are growing, at least with some ECB members. This note of caution combined with long-term inflation expectations that are still close to 2% could allow the ECB to at least move towards a pause in its rate hike cycle soon. 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
Cities In China Announced To Ease Pandemic Control Restrictions | OPEC Is Keeping The Current Production Levels Unchangeded

Asia Market: Inflation Reports Will Be The Highlight

ING Economics ING Economics 24.11.2022 13:29
Regional PMI readings and inflation reports will be the highlight for the coming week In this article Regional PMIs Inflation from Australia, Indonesia and South Korea Growth numbers from India Other key data releases   Shutterstock   Regional PMIs Both official manufacturing and non-manufacturing PMIs for China should be in deeper contraction in October as the number of Covid cases increased, affecting both factory and retail activities. This should also be reflected in the Caixin manufacturing PMI numbers which could show a bigger contraction, as smaller factories are more adversely affected given the challenging logistical situation.  Meanwhile, PMI indices for both South Korea and Taiwan should edge lower due to stalling demand for semiconductors from the US, Europe and China. Inflation from Australia, Indonesia and South Korea Next week we have Australia's October CPI inflation. Inflation data has typically only been released quarterly so this provides us with much more insight into the evolution of prices and provides much more timely updates than we have been used to. We think the outcome will probably be close to the recent month-on-month rate of increase, which would keep it roughly in line with the same period last year and leave inflation at about 7.3%. That could be interpreted as the peak, so markets may respond positively to that. Inflation in Indonesia will likely pick up further, with core inflation likely accelerating to 3.5% year-on-year while headline inflation should settle at 5.9% YoY.  Elevated price pressures have kept Bank Indonesia busy lately with the central bank recently tightening by 50bp. We expect inflation to inch higher in the coming months which could ensure that BI will stay hawkish going into 2023.  Meanwhile, inflation in Korea is expected to decelerate quite sharply to 5.1% YoY, mainly due to base effects. Fresh food and gasoline prices stabilised during the month while pipeline prices suggest a further deceleration in the coming months. Growth numbers from India India releases 3Q22 GDP data next week. The 2Q figure was buoyed by base effects and came in at 13.51%, which although admittedly very high, was a disappointment, and led us to downgrade our GDP forecasts. We have 6.3% YoY pencilled in for the third quarter, as well as for the full calendar year 2023. Deficit data for October is also due, and will likely show that a modest improvement in India’s debt to GDP in 2022/23 remains on track. Something in the region of INR40,000 crore would be in line with recent deficit trends. Other key data releases In Korea, November exports will likely be disappointing as suggested by preliminary data reports. We expect a contraction of 10.5% YoY in November as semiconductor exports and exports to China remain sluggish. Slowing export activity should translate to industrial production contracting for a fourth straight month. Semiconductor and steel production will likely be a drag, but auto production should rebound. In Japan, the jobless rate may edge up to 2.7% (vs 2.6% in September), but overall labour market conditions remain healthy. However, given the disappointing 3Q GDP report, September industrial production is expected to drop 1.0% MoM, seasonally adjusted, with weak external demand pressuring manufacturing activity. TagsAsia week ahead 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
South Korea Hopes To Achieve Carbon Neutrality By 2050

South Korea Hopes To Achieve Carbon Neutrality By 2050

ING Economics ING Economics 24.11.2022 12:19
South Korea hopes to achieve carbon neutrality by 2050 by expanding its renewable energy sources, namely nuclear power. In this article, our senior economist in Seoul looks at South Korea's journey to net-zero, and how this has been impacted by the war in Ukraine In this article Korea's electricity supply and demand South Korea’s efforts to achieve its net-zero 2050 target The Transition Committee’s five policy guidelines How has the war impacted the energy market? The Kori nuclear power plant in South Korea is the world's largest fully operational nuclear generating station    Korea's electricity supply and demand South Korea wants to pursue reliable and cheaper energy sources. In the following charts, we look at the reliability of South Korea's current energy supply. Industry (manufacturing) consumes more than half of electricity/energy Industry depends on more reliable and cheaper energy sources IEA, Kepco (LHS). KEEI as of 2020 (RHS)World as of 2019, Korea as of 2020 (LHS) This is to do with the structure of the Korean economy/industry Top electricity consumer shifted from Heavy Industry to IT. Both require a steady/reliable supply of electricity KEPCO Thus, Korea has been highly dependent on 'reliable' conventional energy Electricity generation heavily depend on coal, LNG, and nuclear Renewable facilities have grown fast to 14.5%. Power generation accounted 6% as of 2020 KEPCO   In the next set of charts, we look at how inexpensive power is in Korea. Inexpensive power: electricity consumption per capita ranked 13th Electricity is an important factor in the Korean economy, supporting the activities of industry and households BP statistical review of World Energy 2021 Almost 100% overseas dependence & isolated national power grid system The economy heavily depends on energy imports and households are more sensitive to energy prices KEEI and CEIC Higher energy prices affect Korea’s macro economy: inflation Households are more sensitive to energy prices and pay for electricity on a progressive rate KEEI, CEIC Higher energy prices affect Korea’s macro economy: trade balance CEIC Production of renewable energy (calorific unit) Renewable production increased steadily Korea Energy Agency, as of 2020Non-renewable waste data has been excluded since 4Q19 Inexpensive power: power purchasing unit cost by energy source Unit cost of renewable has lowered and has reached comparable levels for coal and hydro (if excluding RPS) KEPCOFore renewable, excluding RPS (Renewable Portfolio Standard) South Korea’s efforts to achieve its net-zero 2050 target Where does it want to be? South Korea has become the 14th country in the world to legislate a carbon target, aiming for a 40% reduction in emissions from 2018 levels by 2030 to achieve carbon neutrality by 2050 What has it been doing to get there? Since its formation in May 2021, the 2050 Carbon Neutrality and Green Growth Commission has implemented several measures in an effort to gradually move towards total carbon neutrality. The Carbon Neutrality Act, for example, became effective in March 2022 and aims to facilitate the transition to a carbon-neutral society and increased green growth. Alongside legislative changes, the government has also increased its 2022 carbon neutrality budget to KRW 12 trillion from the previous year’s KRW 7.3 trillion, with a newly established KRW 2.5 trillion climate fund. Following a change of government in early 2022, progress on energy policy has come to a halt. Although the previous administration was criticised for setting overly ambitious goals and disregarding corporate voices, the new government has confirmed that it intends to stick to the original plans, with details set to be reviewed more closely moving forward. The Ministry of Trade, Industry and Energy (MTIE) announced on 5 July that the government will resume the construction of Shin Hanul Units 3 and 4 nuclear reactors and maintain the current level of reactor capacity if safety is ensured. As a result, nuclear will be responsible for more than 30% of power by 2030, up from 27.4% last year. In addition, the Korean government plans to create a new law for disposing of high-level radioactive waste in order to reduce potential hazards, organising a team exclusively for nuclear waste management. The revised outline, including the target for renewables, will be detailed in the 10th Basic Plan on Electricity Demand and Supply due in the fourth quarter of 2022. The Transition Committee’s five policy guidelines 1. Feasible Carbon Neutrality Plan and energy mix No change for the internationally committed carbon neutrality objectives, but the implementation plans should be amended by embracing nuclear energy in its decarbonisation efforts. 2. Market-Based demand efficiency A market-based initiative to promote energy demand efficiency, and foster market principles and market competition. 3. Energy policy as a new growth engine Invest in nuclear power technology and export the K-nuclear plants. as well as foster renewable technologies such as solar, wind, and hydrogen as new growth engines 4. Strengthen resource security Secure a reliable supply chain of energy and core minerals and reinforce resource security. 5. Strengthen energy welfare policy Provide energy welfare policies for low-income households and reduce coal power generation, under the consideration of jobs and the local economy. How has the war impacted the energy market? Similar to other energy importers, South Korea is suffering from the ongoing war due to high inflation and worsening trade conditions. However, as a major refining/petrochemical exporter, South Korea has significantly reduced its oil imports from Russia and this trend is likely to continue. Meanwhile, LNG and coal imports have fallen but at a slower pace due to the high dependence on power generated by fossil fuels. South Korea plans to expand its renewable energy sources, with the anticipated gap likely to be filled by nuclear power. Given its value as a reliable and affordable renewable energy source, nuclear power is expected to become an increasingly critical point of focus for the government moving forward. What’s happened since the Ukraine war? South Korea’s imports of oil, coal, and LNG (in volume terms) CEIC Oil has seen the most dramatic change KITA (Korea International Trade Association) LNG: total imports volume declined -2.6% YoY due to high price Russia’s LNG import share significantly declined in 2022 and diversified imports sources 80% of LNG is provided under long-term contract KITA (Korea International Trade Association) Coal: Russian import share actually increased in 2022 KITA (Korea International Trade Association) TagsHydrogen Energy crisis 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
Prices Of Natural Gas Dropped And Open Interest Extended The Uptrend

Gas And Power Prices Need To Normalise For The Production Of Synthetic Fuels To Take Off

ING Economics ING Economics 24.11.2022 12:13
Corporate leaders are looking at how synthetic fuels can set their companies on a path to net zero emissions. This is far from easy as they are faced with economic and environmental trade-offs. That’s why we have presented eight insights to help them get it right. Hydrogen's exposure to the energy crisis and the 'greenness' of hydrogen are big challenges In this article Eight insights for corporate decision-makers Synthetic fuels offer a key pathway to a net zero economy Synthetic fuels provide corporate decision-makers with a tool to go beyond carbon offsetting Hydrogen production has not been immune to the energy crisis At current carbon prices green hydrogen is not cost competitive with grey and blue hydrogen Green hydrogen is currently also more expensive than fossil fuels It is not economical to produce green hydrogen only at times when solar and wind power are in abundance Green hydrogen produced with electrolysers is not necessarily green(er) A future for hydrogen: technological progress helps, but gas and power prices need to come down first Conclusion   Eight insights for corporate decision-makers Despite all the buzz around synthetic fuels and government support for it (for example in the US and the Netherlands) the economics are far from easy. High gas and power prices have worsened the business case lately, especially in continental Europe. At the same time, synthetic fuels are positioned as a way to replace Europe’s gas and oil dependency in the future and as a means to radically reduce emissions.   In this article, we analyse the role of synthetic fuels in a net zero economy and unravel the economic value drivers of the hydrogen business case, which is the most promising and best-known fuel. We take a European perspective. In doing so, we present eight key insights for corporate decision-makers in energy-intensive companies that can help them build the case for synthetic fuels. But first things first; what are synthetic fuels?   What are synthetic fuels? Synthetic fuels are liquid fuels that have the same properties as fossil fuels but are produced artificially in a non-fossil way. Synthetic fuels are entirely produced in a factory or chemical plant environment, rather than extracted from the earth and therefore, ideally, do not involve oil, coal or gas mining. So while hydrogen can be produced from natural gas (which is extracted), it can also be produced by splitting water with an electrical current (which is a chemical process called electrolysis). Both types of hydrogen share the same features and applications, but the one that splits water into hydrogen and oxygen is entirely free of fossil fuels if it is produced fully with renewable power. If so, its use does not create carbon emissions. Synthetic fuels can also be made from syngas, which is a combination of carbon oxide (CO) and hydrogen (H₂). Reacting these two substances under specific conditions (temperature, pressure and catalyst) results in synthetic fuels such as gasoline, diesel, gas, or even kerosene. Electrolysis and syngas reactions are both chemical processes that yield synthetically produced fuels instead of fossil fuels that are extracted from the earth. 1Synthetic fuels offer a key pathway to a net zero economy Corporate decision-makers around the world have been encouraged by government pledges to reduce greenhouse gas emissions to net zero by mid-century and the financial incentives that come with it (think of hydrogen subsidies and infrastructure). According to the International Energy Agency (IEA) around 70% of global carbon emissions are now covered by net zero pledges. As a consequence, the use of synthetic fuel needs to increase in energy-intensive sectors towards 2050, particularly in transportation. Synthetic fuels are likely to grow towards 2050, particularly in transportation Share of synthetic fuels in the global sector energy mix in the IEA Net Zero Scenario ING Research based on International Energy Agency   According to the IEA, synthetic fuels are not the holy grail to decarbonising energy-intensive sectors in the sense that they alone will fully substitute fossil fuels and reduce emissions. Other technologies such as electrification, bioenergy and carbon capture and storage also play an important role. But, synthetic fuels certainly add to the solution, especially in transportation sectors like aviation and shipping. They can become one of the many building blocks of a net zero economy, provided that corporate leaders, politicians and scientists get the business case and technologies right. That’s why this article unravels the economic drivers of the business case. 2Synthetic fuels provide corporate decision-makers with a tool to go beyond carbon offsetting The climate strategies of carbon-intensive companies often rely heavily on carbon offsetting strategies. But these come with many drawbacks and enable companies to continue to emit vast amounts of emissions as long as they pay someone else around the globe to make up for it, for example, by planting trees or preserving existing forests. A growing number of corporate leaders are now fundamentally rethinking their climate strategies and aiming to become net zero emitters by 2050, according to the Science Based Target Initiative. The key is to radically reduce the company’s carbon emissions, even if this requires a fundamental change to the way they do business. Synthetic fuels are an example of fundamental change, as these can be used in many sectors without creating local emissions. For example, only water vapour is emitted by burning hydrogen in ships, aeroplanes, trucks or cars. The same applies to burning hydrogen in factories and houses to generate heat. So as long as the production of hydrogen is low in emissions (think of green hydrogen production with electricity from wind, solar, hydro or nuclear plants), the lifecycle emissions of hydrogen are much lower than fossil fuels. Synthetic fuels, like hydrogen, have gained a cult status among many industry leaders and politicians as a result. In the remainder of this article, we focus on hydrogen as it is the best-known synthetic fuel and can be applied in many sectors. Hydrogen is the best known synthetic fuel and can be used in many sectors Potential use of different synthetic fuels in sectors ING Research 3Hydrogen production has not been immune to the energy crisis Hydrogen production comes in three forms with a colour attached to each of one. Grey hydrogen is produced from natural gas and the emissions are not captured and stored. Hence the gas and carbon price are the main value drivers of the business case. That is also the case for blue hydrogen where most emissions are captured and stored. As a result, the business case of blue hydrogen is less impacted by the carbon price. Finally, green hydrogen is made with electrolysers that run on electricity. Therefore, the power price is the major value driver of the business case for green hydrogen. To sum up, hydrogen is made with natural gas or electricity where prices change over time, particularly during an energy crisis such as the one seen in Europe this year. Cost of hydrogen production depends on gas and power prices Indicative unsubsidised cost of hydrogen in Europe per kilogram at a carbon price of 75 €/ton ING Research   The energy crisis has had a severe impact on hydrogen production costs through higher natural gas and power prices, particularly in Europe. In the Netherlands and Germany for example, the cost of hydrogen production has skyrocketed as gas prices went from an average 20 €/MWh in the years before the crisis to a peak of 350 €/MWh this summer. Power prices increased from 40 €/MWh to a peak of 700 €/MWh in the Netherlands and even 1,000 €/MWh in France. The cost to produce hydrogen reached record levels on the back of skyrocketing energy prices and hydrogen production was scaled down as a result. For example, Yara produces hydrogen out of natural gas for its ammonia and fertiliser production and curtailed production at its Ferrara (Italy) and Le Havre (France) plants. Energy crisis pushes hydrogen production costs higher Indicative cost of hydrogen production in Europe in €/kg at realised TTF-gas and APX-power prices ING Research based on energy prices from Refinitiv   Both gas and power prices have fallen rapidly recently. Ample LNG supply could not be stored as gas storage facilities in Europe are almost completely filled. On the demand side, the heating season has not kicked in as weather temperatures have been unusually high for this time in the season. This combination of lower-than-expected demand and ample supply caused gas process to fall below 50 €/MWh and power prices below 100 €/MWh. Still, the market expects this to be short-lived. The futures markets indicate gas prices of around 125 €/MWh throughout the winter and power prices of over 300 €/MWh depending on the month of delivery. Hydrogen production costs will move again towards 5-6 €/kg for grey and blue hydrogen and around 15 €/kg for green hydrogen if these expectations materialise.   Although hydrogen is often touted as a solution to becoming less dependent on fossil fuels, the economics are still driven by the gas market. This also holds for green hydrogen as gas is likely to remain the price-setting technology in many power markets in the coming years. 4At current carbon prices green hydrogen is not cost competitive with grey and blue hydrogen In Europe, carbon prices are the main mechanism that drives the environmental competitiveness of the three types of hydrogen. Before the energy crisis, blue hydrogen in general was cost competitive with grey hydrogen at a carbon price above 60 euro per ton CO2. That provided hydrogen producers with an incentive to apply carbon capture and storage (CCS) to hydrogen production and it was expected that they would switch from grey to blue hydrogen production once CCS infrastructure was in place. That no longer holds for current gas and power prices. In fact, grey hydrogen is currently the cheapest form of hydrogen at any carbon price below 150 euro per ton CO2. And green hydrogen is almost three times as expensive as grey and blue hydrogen at the current carbon price and state of technology. Despite initiatives to strengthen the European carbon market, fears of a recession are likely to continue to weigh on carbon prices. With high energy prices, the carbon market won’t offer a decisive push towards less polluting blue and green hydrogen. Grey hydrogen is the cheapest form of hydrogen production at current carbon prices Indicative unsubsidised production costs* of hydrogen in Europe in €/kg for different carbon prices   The public debate for a net zero economy often assumes that hydrogen production will be green, both explicitly and implicitly. Governments also tend to focus on green hydrogen in their vision for a hydrogen economy or net zero pathway. But production of green hydrogen in Europe cannot compete with blue and grey hydrogen at current energy and carbon prices. 5Green hydrogen is currently also more expensive than fossil fuels At current market prices, green hydrogen is also not cost competitive with fossil fuels. Based on the energy content of fuels, green hydrogen is more than twice as expensive as coal and gas and almost seven times as expensive as oil. Fossil fuels are not only cheaper, they are also performing better on important chemical characteristics, such as voluminous energy density. Many synthetic fuels, like hydrogen, are very light and voluminous substances, so they require a lot more space to store and use. That puts them at a disadvantage over fossil fuels when used in aviation, shipping, trucking and cars when it comes to the adjustments of the vehicles (large storage tanks) and the infrastructure required to run on these alternative fuels. Fossil fuels are still cheaper, particularly compared to green hydrogen Indicative unsubsidised production cost* of energy carrier in Europe in euro per GigaJoule ING Research based on energy prices from Refinitiv   Corporate decision-makers in energy-intensive companies are exploring the option of synthetic fuel to reduce emissions and get to net zero. This does not mean green hydrogen will win out, however, as companies have to manage costs, too. In practice, green hydrogen will be in competition with other fuels. Fossil fuels are considerably cheaper and even within the hydrogen space, grey and blue hydrogen are cheaper. The adaptation of green hydrogen in the coming years will largely depend on the extent that governments are inclined to subsidise the price gap to help the industry scale. 6It is not economical to produce green hydrogen only at times when solar and wind power are in abundance Solar panels and wind turbines are perceived as the pillars of the electricity mix in a net zero economy. Green hydrogen production is often presented as a solution to absorb an oversupply of solar and wind power on windy and sunny days when power prices are low. That could well be the case from a technical point of view. However, from an economic perspective electrolysers need to run all year round, 24/7, in order to reduce hydrogen costs. Moments of surplus wind and solar power are still quite rare, even in power systems dominated by solar panels and wind power. Experts indicate that it is limited to 5% in 2030 and 20% of the time in 2050. If one runs electrolysers only in times of surplus solar and wind power, hydrogen production costs would increase by 2 €/kg (+17%) in the current market environment with high power prices. The economics and runtime of electrolysers are even more important in normal market conditions. At historic power prices of 40 €/MWh, an electrolyser that operates on low runtimes (around 20%) produces hydrogen that is twice the cost (+100%) when the electrolyser runs all year round (95% runtime). Higher electrolyser load factors lower hydrogen costs Indicative unsubsidised production cost* of green hydrogen production in Europe for different runtimes of an electrolyser (load factor) in €/kg/H2 ING research   There is another reason why solar panels and wind turbines are mentioned a lot with respect to green hydrogen. Why would one pay high market power prices of 300 €/MWh or more, when the life cycle cost of electricity from renewable assets is often well below 100 €/MWh? The power costs are much lower if an owner of an electrolyser invests in solar panels or wind turbines to directly power the electrolyser. And this is a valid question too if one buys electricity from the power markets, now that the European Commission has capped the power price from renewables at 180 euro/MWh in the day ahead market. Renewables offer a way of becoming less dependent on high market power prices. But, capitalising on lower power prices from renewables is difficult for three reasons; Increasing the runtime of electrolysers often also requires the use of grey power from the grid (see above). The proposed price cap only applies to the day-ahead market on which approximately 20-30% of the power is traded. So, most of the power is not subject to the price cap. European power generators, also the ones with solar and wind assets, tend to pre-sell about 80% of their future power production in one-year ahead futures contracts or through Power Purchase Agreements (PPAs). PPAs are designed to buy green power at fixed prices for longer periods, so hydrogen producers can use PPAs to lower power costs. That works in theory. In practice, PPAs are often linked to a power price index, so power prices from renewables still go up in times of crisis. And the length of PPAs is typically only a couple of years, so it is hard to fix the power price at the levelised cost over the entire lifecycle of the electrolyser, which lasts about 20 years. Clean power is much cheaper compared to current market prices, also because some of it is capped by the EU Indicative unsubsidised cost* of low carbon power sources in Europe in €/MWh ING Research based on Bloomberg New Energy Finance (BNEF)   Corporate decision-makers face a trade-off in the economics of electrolysers between high fixed costs at low load factors and higher electricity costs at high run times. Ideally, one would like to run electrolysers on clean power from solar panels and wind turbines at all times. But an electrolyser that only runs on cheap power from renewables is simply not economical as it cannot recoup the high capital costs. The economics of an electrolyser incentivise corporate decision-makers to maximise the run time of an electrolyser to lower the cost of green hydrogen. This often requires that electrolysers are also run by power from the grid, that at times may not be so green and powered by gas or coal-fired power plants. Sourcing renewable power through Purchasing Power Agreements in practice is only a partial solution. 7Green hydrogen produced with electrolysers is not necessarily green(er) Powering electrolysers to produce hydrogen requires a great amount of electricity. As aforementioned, electrolysers must run constantly in order to lower production hydrogen costs. In practice, this means that electrolysers run on power from the grid too, especially at times when the sun is not shining and the wind is not blowing. This could come with the downside of higher emissions, as power from the grid can be generated from coal or gas-fired power plants. Grey hydrogen emits approximately 8.1 kilograms of CO2 per kilogram of hydrogen. When corporate decision-makers decide to use green hydrogen instead, they must carefully analyse whether this will lead to a decrease in the company's emissions. This is not an issue if one uses nuclear or hydropower (think of connecting an electrolyser to the grid in France or Norway). Green hydrogen will have lower emissions compared to grey hydrogen, even if the electrolyser is fully powered by the grid. However, in countries with a lot of coal-fired power plants (like Poland), green hydrogen only comes with lower emissions if more than 85% of the power comes from renewables, which is unrealistically high. In countries with a lot of gas-fired power plants (like the Netherlands) hydrogen produced with electrolysers only comes with lower emissions compared to grey hydrogen if approximately 60% or more power comes from renewables. A countries’ power mix determines whether green hydrogen comes with lower emissions than grey hydrogen Indicative emission intensity in kgCO2/kgH2 for hydrogen produced with electrolysers in Europe for different amounts of power they take from the grid ING Research   So in order for green hydrogen to be truly green, a vast amount of renewable power is needed. It is estimated that global hydrogen production by 2050 would require 18 times the amount of current solar power and eight times the amount of current global wind power.   Corporate decision-makers face an incentive to run electrolysers 24/7 year-round to minimise the cost of hydrogen. That requires the use of grid power which could make green hydrogen more polluting than grey hydrogen. Sourcing green power from an energy company looks good on paper, but still requires the electrolyser to run on ‘dirty’ grid power at times when the sun is not shining and the wind is not blowing. In practice, the emissions level of green hydrogen changes continuously based on the type of electricity that is used. A company’s decision to use green hydrogen should always be accompanied by decisions about a company’s power mix in order to guarantee a positive climate impact. In other words: company leaders have to tackle hydrogen emissions before they can position hydrogen as a viable net zero solution. This is the reason why the European Commission is setting standards and labels for green hydrogen. 8A future for hydrogen: technological progress helps, but gas and power prices need to come down first While hydrogen is currently very expensive, especially in Europe, there are two main drivers that are likely to significantly reduce the cost towards 2050. Like every crisis, the current energy crisis won’t last forever. Experts from Bloomberg New Energy Finance and Aurora Energy Research expect European gas and power prices to find lower equilibrium levels from 2025 onwards. That’s well before 2030, the year that many government policies target the hydrogen economy to really take off. The energy crisis does have a long-lasting impact though as long-term gas and power prices are expected to be 75% higher compared to past averages. Technological progress will reduce the cost of electrolysers and increase electrolyser efficiency. According to Bloomberg New Energy Finance, investment costs for PEM electrolysers will drop by over 90% towards 2050, from 1200 €/kW today to just 95 €/kW by 2050. Also, electrolyser efficiency is expected to increase from an average of 70% today to 80% by 2050. Electrolysers will use less power to produce a kilogram of hydrogen in the future as a result. Electrolyser technology is still in its infancy but is expected to see similar cost declines as solar panels and wind turbines have shown in the past. Lower gas and power prices are the main source of declining hydrogen costs Indicative unsubsidised levelised cost of hydrogen in €/kg (real prices) ING Research based on Refinitiv, IEA, BNEF and Aurora   Before the energy crisis, IRENA estimated that by 2050, hydrogen production costs in the northwest European region would be around €1.0-€2.0/kg. That seems no longer the case if the current energy crisis has a long-lasting impact on energy prices. According to Bloomberg New Energy Finance and Aurora, new equilibrium levels for gas and power prices are likely to be 75% higher compared to pre-crisis levels. In such a world, hydrogen production costs will be more in the range of 2.5-€3.0/kg, with green hydrogen still being the most expensive option. But predicting gas and power prices is notoriously difficult. The energy crisis might also speed up the energy transition and phase out fossil fuels much faster, which might lower long-term gas and power prices. The IEA hints in that direction in its 2022 World Energy Outlook. That’s why we will monitor energy markets closely in the years ahead and continue to assess the impact on the economics of synthetic fuels.   Before the start of the energy crisis, innovation was considered the biggest driver of lower hydrogen costs towards 2050. It still has a role to play, but lower gas and power prices have a much bigger impact now that Europe is facing an unprecedented energy crisis. Conclusion Currently, the production and use of synthetic fuels like hydrogen are often done by one company or within a specific cluster of companies in the chemical sector. Unfortunately, this is far from easy as producers are faced with many economic and environmental trade-offs, such as high energy prices, high technology costs and a shortage of renewable power. That’s why we’ve presented eight insights that corporate decision-makers need to know about synthetic fuels, so they can make them work. Our analysis shows that gas and power prices need to normalise for the production of synthetic fuels to take off. Now corporate leaders in many other sectors are looking at how synthetic fuels can set their companies on a pathway to net zero emissions by 2050. The use of synthetic fuels: holds the potential to fundamentally change the business towards net zero emissions; provides energy-intensive businesses a license to operate in a low-carbon world and gain support from society could reduce fossil fuel dependency and supply chain disruptions. In future articles, we will shift the focus from the production side of synthetic fuels towards the use case of synthetic fuels in transportation, manufacturing and buildings.
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Expectations That The German Economy To Return To Average Quarterly Growth Rates

ING Economics ING Economics 24.11.2022 12:01
The strong improvement of the Ifo index adds to recent glimmers of hope. However, this simply reflects a stabilisation at low levels and there is no reason to change the recession call, yet. The sheer fact that things are no longer getting worse doesn't mean that improvement is around the corner iStock     Germany’s most prominent leading indicator, the Ifo index, staged a strong rebound, increasing to 86.3 in November, from 84.5 in October. While the current assessment component continued to weaken, expectations improved significantly to 80.0, from 75.9 in October. This Ifo index reading shows that hope is back, even if the current situation is deteriorating further. Glimmer of hopes come too early Today's Ifo index adds to recent glimmers of hope that the German economy might avoid a winter recession. These hopes are built on the back of several government stimulus packages, filled national gas reserves, a better and faster adaption of businesses and households to reduce gas consumption, and hopes that consumers will simply spend away the energy crisis. However, the downsides still outweigh the upsides: new orders have dropped since February and inventories have started to increase again, a combination that never bodes well for future industrial production. Despite some relief in global supply chain frictions, early leading indicators from Taiwan and Korea point to a weakening of global trade in the winter. High energy prices are gradually being passed through to consumers, therefore gradually weighing on private consumption.   The government’s fiscal stimulus, currently amounting to some 2% of GDP, will come too late to prevent the economy from contracting in the fourth quarter. However, it is substantial enough to cushion the contraction and to turn a severe winter recession into a shallow one. The next question will be whether the economy can actually avoid a double dip in the winter of 2023/24. Currently, many official forecasts expect the German economy to return to average quarterly growth rates by mid-2023. We are more cautious and think that the series of structural changes and adjustments will keep the recovery subdued, with a high risk of a double dip. For now, the winter of 2023/24 is still far away. This year’s winter has just started, and a few warm November weeks do not automatically make for a warm season. Today’s Ifo index gives hope for some stabilisation, nothing more, nothing less. Stabilisation is clearly not the same as a significant improvement. Returning to recent optimism, it is tempting to revive soccernomics: a 1-0 lead and a decent performance for 65 minutes can unfortunately still end in a 1-2 defeat. Not all optimism leads to success. At the current juncture and despite today's encouraging Ifo index reading, the question is what is more likely: the German economy avoiding recession or the German national football team still making it into the next round. We wouldn’t put much money on either of the two. 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
France: Stabilisation Of Inflation Can Be Seen As Good News

France: The Economic Picture Is Deteriorating

ING Economics ING Economics 24.11.2022 11:59
In November, the French business climate remained stable and above its long-term average, depicting a very different situation than the PMI indicators. We continue to believe that the economic picture is deteriorating Business climate and PMI moving in opposite directions The business climate in France remained stable in November at 102, above its long-term average. The economic situation deteriorated somewhat in industry, construction and services, but improved in wholesale trade. Industrial order books and the expected demand in services are deteriorating, while inflationary pressures seem to be building up. The data is surprising as it contrasts sharply with the PMI indices for November, released yesterday. The composite PMI for France fell below the 50 threshold for the first time since February 2021, which is synonymous with a contraction in economic activity, standing at 48.8. While the index for the manufacturing sector continued the descent that began in June, reaching 49.1, it is the evolution in the services sector that is noteworthy: for the first time in 20 months, the index fell into contraction territory, to 49.4. The PMI thus indicates that high inflation and reduced purchasing power have put an end to the growth in the services sector that had been made possible by the lifting of Covid-19 restrictions. This marks the end of the support of services to French economic growth, which should lead to a contraction of GDP in the fourth quarter. In terms of inflation, the situation portrayed by the PMI indices is also fundamentally different from that which has emerged from the business climate indicator: according to the PMI indices, inflation in purchase prices and in prices paid has fallen to its lowest point in nine months, although still well above its long-term average. The decline is even more marked in the manufacturing sector. Although still very high, inflationary pressures seem to be reducing. Uncertain outlook With two indicators that are supposed to depict the same situation evolving in such different ways, it is difficult to draw clear conclusions in terms of forecasts for the French economy. While the more optimistic will probably prefer to believe in the business climate, the PMI indices seem to have been better at predicting French economic activity in recent months. We continue to believe that the French economic outlook is marked by weakening domestic and foreign demand, declining new businesses and uncertainty. The momentum in activity provided by the services sector seems to have ended and industry does not seem ready to become the new engine of growth. The labour market is beginning to show the first signs of weakness, which should result in slower employment growth. As a result, GDP growth is expected to be weaker in the fourth quarter than it was in the third. For 2023, we still fear a small GDP contraction for the year as a whole. TagsPMI 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
Rates Spark: Market Participants Await Nervously Powell’s Speech (Fed) This Evening

FX: The Fed Minutes Surprised On The Dovish Side

ING Economics ING Economics 24.11.2022 11:55
The Fed minutes surprised on the dovish side, signalling strong support for slower rate hikes and weaker support for Powell's higher-for-longer rhetoric. The dollar could stay pressured for a bit longer, but it's probably embedding a good deal of Fed-related negatives now. US markets are closed for Thanksgiving. Elsewhere, expect a 75bp hike in Sweden In this article USD: Dovish feeling EUR: Enjoying an ideal mix for now SEK: Riksbank to hike by 75bp CEE: Consumer confidence at freezing point   USD: Dovish feeling If the November FOMC event failed to convincingly signal a dovish shift, the minutes of that meeting – released yesterday – were surely more effective in that direction. There are two key points in the minutes that markets are interpreting as dovish statements: 1. “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate”. 2. “Various participants noted that […] their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee's goals was somewhat higher than they had previously expected”. Point one simply indicates that there is a larger-than-expected (“substantial”) majority of the Committee that is backing a slower pace of tightening. When adding the lower-than-expected October CPI reading to the equation, expecting more than 50bp in December would look quite counterintuitive now, and a switch to 25bp increases from the January meeting appears increasingly likely. In point two, markets may have focused on the term “various”, which indicates a rather vague consensus backing Chair Jerome Powell’s post-meeting “higher-for-longer” statement. This is very relevant, as Powell pushing longer-term rate expectations higher in the November press conference was the main counterargument to the “dovish pivot” narrative: now, it looks like his approach might not have had much backing from other FOMC members. The market reaction has been quite straightforward: risk-on, dollar-off. As we had signalled in recent commentaries, the minutes were set to be a key risk event for the dollar, and we are not surprised to see another leg lower in the greenback in an environment where markets are already shifting away from a longer-term structural long-dollar positioning. Fed funds futures are currently embedding a peak rate at 5.0%, but it might prove harder to see further re-pricing higher in rate expectations after the dovish minutes. At the same time, the degree of cautiousness manifested by Fed officials after the softer CPI figures means that markets may be reluctant to further revise their peak rate bets lower in the near term. This means that one-way traffic in FX, with the dollar staying on a downtrend for longer, still appears unlikely. The greenback has now absorbed a good deal of negatives when it comes to the Fed story, and in our view can still benefit from the deteriorating outlook outside of the US (especially in Europe and China) in the coming months. While we don’t exclude the dollar contraction to take DXY below 105.00, we struggle to see sub-105 levels holding for very long. US markets are closed for Thanksgiving today, and will be open for only half a day tomorrow. There are no data releases or Fed speakers until Monday. Expect a significant drop in liquidity into the weekend. Francesco Pesole EUR: Enjoying an ideal mix for now European currencies are enjoying a strong rally, as lower energy prices (crude was hit by the EU oil price cap proposal) and higher-than-expected PMIs yesterday had already offered some support to European sentiment before the Fed delivered some dovish minutes. We remain doubtful that it will be a smooth ride to recovery for European currencies, and our commodities team continues to see upside risks for energy prices into the new year despite recent developments. EUR/USD has broken above 1.0400 and may extend its rally to 1.0500/1.0550 in the near term, but we suspect the bullish trend may start to run out of steam as we approach year-end. A return towards parity remains our base case for December. Today, the Ifo numbers will be watched in the eurozone, as investors will scan for further evidence of slight improvements in the business outlook. European Central Bank member Isabel Schnabel will speak at a Bank of England event today, where the BoE’s Dave Ramsden, Huw Pill and Catherine Mann will also deliver remarks. Francesco Pesole SEK: Riksbank to hike by 75bp Scandinavian currencies have been the best G10 performers since yesterday, due to the Swedish krona's high sensitivity to EU sentiment and the Norwegian krone's high sensitivity to global liquidity conditions.   SEK is facing an important risk event today, as the Riksbank is set to deliver another rate hike at 0830 GMT. As per our meeting preview, we expect a 75bp hike, which appears to be very much a consensus call. We did see the RB surprise with a 100bp move earlier this year, but that would likely be a risky move given the strains in the Swedish housing market. From an FX perspective, we don’t expect major and long-lasting implications from today’s policy decision for the krona, which is currently enjoying a rather unique combination of positive factors (on the European and global risk sentiment side). We could see a further leg higher in SEK in the coming days, but our longer-term view remains that the krona will underperform as the eurozone enters a prolonged recession in 2023. We forecast a sustained return to levels below 10.50 in EUR/SEK only in the second half of next year. Francesco Pesole CEE: Consumer confidence at freezing point On the calendar today, we have a series of second-tier data prints from the region. Consumer confidence will be published in the Czech Republic and Poland. In both cases, the indicators are currently at record low levels, well below the pandemic years. However, no significant improvement can be expected for November either, given persistent inflation and energy prices. In Hungary, labour market data for September will be published. We expect wage growth of 16.7% YoY, basically the same pace as in August, slightly above market expectations. On the political front, the main focus remains on Hungary. Yesterday, we heard unofficial reports from journalists that the European Commission will recommend freezing part of the cohesion funds with the condition of further reforms, but will also recommend adopting the Hungarian RRF plan. In the end, this gives more flexibility in further negotiations, but the key will be the Ecofin meeting in two weeks' time. Today the saga will continue in the European Parliament, which has on its agenda a vote on Hungary's rule-of-law progress, which, although non-binding, could make a lot of noise in the markets. There is also a V4 meeting scheduled in Slovakia, which the Hungarian PM is expected to attend. The forint jumped up to 410 EUR/HUF after yesterday's news, which the market initially assessed as negative. But in our view, it mitigates the risk that Hungary could lose some money and opens up room for longer negotiations. Hence, we expect the forint to correct down again today closer to 400 EUR/HUF. The potential headlines from the EP meeting, which already caused considerable pain in the FX market last week, are a risk. Frantisek Taborsky 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
Korea: A Temporary Slowdown In CPI Inflation Would Not Change The BoK's Inflation Outlook

The Bank Of Korea Is Close To Its Final Destination In Raising Interest Rates

ING Economics ING Economics 24.11.2022 11:49
The Bank of Korea raised its policy rate by 25bp today with a hawkish tilt, expecting inflation to remain higher than its target of 2% throughout next year. But, given the falling pipeline prices and growing concerns over growth, we believe that the BoK is close to its final destination in raising interest rates Source: Shutterstock   3.25% BoK's 7-Day Repo Rate    As expected Terminal rate debate will be continued The Monetary Policy Board unanimously decided to raise rates by 25bp today. Compared to the previous month, volatility in the FX market has calmed significantly and the credit squeeze in the short-term money market has worsened, thus the BoK returned to a normal rate hike pace. However, the board seems to have quite different views on the terminal rate - one for 3.25%, three for 3.5%, and two for 3.5%-3.75%, not including Governor Rhee Chang-yong's own opinions. Regarding future policy decisions, Governor Rhee mentioned that as CPI inflation over the next two months is expected to fall due to the high base last year, the BoK will be cautious about reading into those figures and will wait to see whether inflation rebounds again in January and February. Also, the Korean won has appreciated meaningfully but external factors such as the Federal Reserve's December rate hike and China's Covid policy stance are uncertain, so FX moves in the coming months are another factor to consider in future policy decisions.  We are maintaining our call for a 25bp increase in 1Q23, and now see a better chance of a rate hike in February rather than January unless the Fed surprises the market with another large step in December. As inflation is expected to slow in the future, we believe that financial market stability and growth should be the focus of the BoK from now on. Also, the BoK is expected to adjust its hiking pace as there is limited room for further rate hikes.    The BoK has downgraded its 2023 GDP and CPI inflation forecasts The BoK revised down quite meaningfully its GDP forecast for 2023 from 2.1% to 1.7%. Most of the downward adjustments come from the external demand component, with growth in major trading partners such as the US (0.3%), the EU (-0.2%) and China (4.5%) expected to slow down in 2023.  Meanwhile, the BoK forecast that next year's inflation would be only marginally lower, at 3.6% from 3.7%. The accumulated pressure to raise prices is expected to continue until next year, offsetting much of the weakening pressure on the demand side due to the economic slowdown. For the next couple of months, base effects will play a major role in inflation thus CPI inflation is expected to fall to the 4% level temporarily but rebound to the 5% level in January. The BoK expects prices for gas, electricity, and manufactured food to rise further early next year, thus headline inflation is expected to stay above 4% in the first half of next year. What we see similarly to BoK's outlook First, Korea's growth is largely dependent on the external demand condition. Both ING and BoK have a cloudy global outlook, which is expected to negatively affect Korea's growth next year.  Second, the semiconductor cycle is expected to bottom out in the second half of next year. The recent slump in exports is mainly driven by sluggish semiconductor exports, but exports should rebound in the second half of next year.  Third, investment is expected to fall due to tight financial conditions and the bleak outlook for the construction sector. Fourth, although credit tightening in the short-term money market and some market jitters will likely continue, this shouldn't threaten the overall financial system. We think some losses are expected in the Project Financing and construction industry, but the shock is expected to be contained within the sector. (Please see "South Korea: corporate debt is a concern for the economy). What we see differently to the BoK's outlook First of all, ING's 2023 GDP forecasts for the US and the EU are -0.4% and -0.7% year-on-year, respectively, which is weak compared to the BoK's own forecasts of 0.3% in the US and -0.2% in the EU. As mentioned earlier, considering Korea's high dependency on external demand, we see a bigger negative impact on Korea's exports and overall growth.   Second, private consumption is expected to shrink in the first half of next year as the debt service burden increases, while the BoK expects consumption to continue to recover. More than 70% of household debt is based on floating interest rates and more than 65% of households are indebted. We have been seeing the deleveraging of household debt mostly in personal loans for several months which is a good sign for long-term growth but, in the short term, the propensity of households to spend should weaken. In addition, the wealth effect of Korean households is expected to weaken as real estate prices will likely continue to adjust further. These are the reasons that we foresee sluggish private consumption in 1H23. Third, we believe that inflation will decline faster than the BoK's forecast. It is true that there have been accumulated price pressures in utilities and other service prices and Korea's CPI is more sensitive to supply-side inflation factors. But, we think the price declines in rent and housing should have a bigger impact in leading to a sharp decline while price hikes from reopening will likely dissipate as well.  ING vs BoK's outlook BoK, INGBoK releases bi-annual %YoY forecasts only. ING estimates quarterly growth based on the BoK's bi-annual numbers Forward-looking price components point to further deceleration in coming months In a separate report, the BoK announced its Producer Price Index for October. Headline PPI inflation slowed to 7.3% YoY in October (vs 7.9% in September) with goods prices down the most. Goods prices such as fresh food (4.1% vs 7.1% Sept) and industrial products (7.7% vs 9.6% Sept) all declined due to good harvesting of winter vegetables and the drop in gasoline prices. Meanwhile, utility (32.4% vs 25.2% Sept) and services prices (3.4% vs 3.3% Sept) continued to rise, reflecting the recent gas/electricity rates hike. The utility rate hike will have some lingering effects, pushing up service prices in a few months, but we believe that headline prices will continue to decelerate as demand-side pressures are expected to turn weak with higher interest rates.  We expect CPI inflation to decline quite sharply to 5.1% YoY in November (vs 5.7% in October) for the following reasons. The Korean won significantly stabilised compared to October, gasoline prices continued to decline, and fresh vegetable prices came down meaningfully during the month. Also, we believe that inflation will likely decelerate to the 4% level in 1Q23 although there will be additional utility rate hikes next year. Pipeline prices continued to drop since early summer CEIC TagsMonetary Policy GDP CPI inflation 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
Saxo Bank Podcast: Key Economic Indicators Point To An Incoming Recession In Europe

Rates: In 2023 Smaller Hikes Are Very Likely In Eurozone

ING Economics ING Economics 24.11.2022 08:53
The Fed minutes have allowed rates markets to rally further, ahead of the US holiday. The focus now shifts to the European Central Bank minutes, which could also deliver dovish headlines   In this article Dovish Fed minutes extend market rally, likely to the dismay of officials More dovish headline risks from the ECB minutes Today's events and market views We think EUR rates hold the most upside in the near term Dovish Fed minutes extend market rally, likely to the dismay of officials Markets got the dovish headlines out of the Federal Open Market Committee minutes they needed to rally further –  a “substantial majority” judged that slowing the pace of hikes “would soon be appropriate”. Together with the dismal PMI readings earlier in the session this has helped put a brake to the curve flattening, though, as the front to intermediate maturities caught up. The overall takeaway looks more nuanced, and not too different than what could be gleaned from recent official statements about the general rate trajectory – “various” Fed officials did see rates peaking at a higher level than previously thought. In their discussion officials also noted that the full effect of tightening financial conditions would take longer to feed through to inflation, though there was great uncertainty about the lags. That itself could well be seen as justifying a slowing pace of further policy tightening after what has been delivered already.  Financial conditions have already started to loosen again However to the degree that markets are running ahead of themselves and financial conditions have already started to loosen again, it is unlikely this is the broader message the Fed wants to send just yet. While the meeting pre-dates the latest positive surprise in the inflation data, officials since then were quick to note that one CPI reading alone is not yet a trend. Yes the PMIs were bad, but other data is showing more resilience with a clear focus near term on next week's job market data. Fed hike discount for 2022 and 2023 has remained stable but more 2024 cuts are now anticipated Refinitiv, ING More dovish headline risks from the ECB minutes The ECB minutes of the October meeting follow hot on the heels of last night's Fed minutes. Here as well the market's main focus is on the pace of rate hikes going forward. The ECB still hiked rates by 75bp last month, but subtle tweaks to the wording of the press statement were already interpreted as a dovish sign. Later background reporting confirmed that the Council was not unanimous on the size of its last hike with three members calling for a smaller hike.  While it was also reported that the Council did not intend to send any specific signal for the size of future rate hikes back then, we could still see some dovish headlines out of the minutes with regards to differing views on the appropriate size of the rate hike. There should also be a more thorough discussion of recessionary risks, even if they should also be balanced by inflationary risks “clearly” on the upside, as Lagarde put it in October’s press briefing. The lack of QT discussion at the October ECB meeting helped to set off a fixed income rally Refinitiv, ING   Market OIS forwards are pricing c.60bp higher rates for December. This suggests expectations leaning towards a smaller 50bp hike, but the signal is less clear than only a couple of days ago, helped also by less gloomy PMIs just yesterday. Some ECB officials have since suggested there was scope for less aggressive action, such as Italy’s Visco, who is known to lean more dovish. Even some of the better known ECB’s hawks have been less clear on their preference, and their choice between a 50bp or 75bp hike is apparently dependent on the upcoming inflation data, at least Austria’s Holzmann has suggested as much. Only Slovenia’s Vasle was still explicit in saying that the current pace was adequate and would be maintained in December. Smaller hikes are very likely, but the question is for how long However, it remains clear that the ECB is not done hiking. It is this also important to consider what happens beyond December. Smaller hikes are very likely, but the question is for how long. We make out some effort by Chief Economist Lane to direct the discussion away from potentially peaking headline inflation to the more persistent elevation of core inflation. He later also stressed that one should not interconnect quantitative tightening and rate hikes too much, though other officials have strengthened the market’s notion that there could very well be a bargain to be made between the ECB’s hawks and doves, for instance an earlier start to quantitative tightening in return for slower hikes. Going back to the issue at hand – today’s ECB minutes – recall that the clearest dovish signal out of October ECB meeting was actually the absence of a further discussion on QT. Today's events and market views Markets will be more eurocentric with US markets heading into today's Thanksgiving holiday and followed by a shortened trading day on Friday. It also means that market liquidity is about to become even thinner than already is. In any case, today's ECB accounts of the October meeting could add to the dovish central bank headlines that have extended the rally in rates yesterday, though less likely the curve flattening we have witnessed until now. In data the German Ifo index follows on the not-as-gloomy-as-expected flash PMI's released yesterday. If one looks for hawkish risks, then the focus should be on today's ECB speakers, who may well use the opportunity to clarify the message coming out of the ECB accounts. With the ECB's Schnabel we have one of the more influential ECB officials delivering a keynote speech at the Bank of England's watchers conference. That same event has of course also prominent BoE speakers lined up with Ramsden, Hill and Mann.   In secondary markets Italy will reopen two shorter dated bonds for up to €2.75bn. 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 Bank Of Korea Will Likely Consider Easing Policies

Asia Market: The Bank Of Korea Has Delivered A 25bp Hike

ING Economics ING Economics 24.11.2022 08:45
Markets react positively to Fed minutes - a bit of an overreaction? Covid cases and movement restrictions rise in China, Japan's PMI contracts and Bank of Korea hikes rates 25bp In this article Macro outlook What to look out for: Bank of Korea policy meeting   Source: shutterstock Macro outlook Global markets: The relevant sentence in the minutes of the Fed’s November 1-2 meeting, as far as financial markets need to be concerned is this, “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate”. Yes, there was lots of talk about how committed everyone was to achieving the 2% target (though none about whether that target was in fact appropriate), and for the hawks, there is this, “…with inflation showing little sign thus far of abating, and with supply and demand imbalances in the economy persisting, their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee’s goals was somewhat higher than they had previously expected”, which nods in the direction of James Bullard’s concerns that rates may have to rise considerably above the market’s peak Fed funds assumption of 5%. However, the balance of opinion seems to have been with the more dovish comments, and US equities staged a modest further rally - the S&P500 rising 0.59% and the NASDAQ rising 0.99%.  Equity futures are also indicating a slight further gain at today’s open. 2Y US Treasury yields dropped back 3.7bp and the 10Y yield declined 6.3bp to 3.693%. All of which left the way open for the USD to retreat considerably. EURUSD is now back to 1.0418 after a day of steady increases and is looking to continue those in early Asian trading. The AUD has risen about a full big figure to 0.6743, Cable has reattained the 1.20 level and is now 1.2072, while the JPY has fallen back below 140 again and is now 139.30. Asian FX was mixed yesterday, with the THB down 0.47% and CNY soft again (7.1605) but today will likely see currency pairs clawing back losses against the USD to keep track with moves in the G-10. A final thought: Are today’s moves excessive? To be honest, they do feel a bit much given the fairly even-handed nature of the Fed minutes -  there wasn’t all that much else going on, so it may be an idea to fade this move today. See also this from James Knightley on how the recent market moves will not be what the Fed wants to see. G-7 Macro: Besides the Fed minutes, yesterday’s releases centred on the November purchasing manager indices, which for Europe at least, remained solidly in contraction territory. The US indices were no better, and do indicate that the US economy is beginning to slow down. University of Michigan consumer sentiment showed a slight improvement, but the 1Y ahead inflation expectations figure dropped to 4.9% from 5.1%. October new home sales were surprisingly perky, rising at a 632,000 annual pace, up from 588,000. It’s Thanksgiving today in the US and so there is no data out of the US. In the rest of the non-Thanksgiving G-7, Germany’s Ifo survey marks the most interesting release. Trading will likely be light heading into the weekend. China: Covid cases continue to rise across much of the country, and mobility restrictions (lockdowns in all but name) are increasing. This is bound to have an impact on the fourth quarter GDP result, and as a result, could impact the outlook for 2023 GDP estimates which could be adversely affected by a year-end dip like this. Contemporaneous indicators for 4QGDP in China are looking quite bad right now. And it is probably with this in mind that the State Council was reported by CCTV yesterday as looking to get the PBoC to implement another RRR cut “in a timely and appropriate manner”. That suggests quite soon – maybe in the next few days. South Korea: The Bank of Korea has met for its policy decision meeting this morning and has delivered a 25bp hike (7-day repo rate now 3.25%) in line with market expectations. Recently released data suggest that the economy is headed for a contraction, while forward-looking price indicators suggest that inflation will slow further in the coming months. Today’s PPI inflation decelerated to 7.3% YoY in October (vs a revised 7.9% in September). The Bank of Korea is also due to release an updated forecast report, with GDP expected to be revised down to around 1.7% (from Aug forecast of 2.1%) and inflation to around 3.3% (from Aug forecast of 3.7%). What to look out for: Bank of Korea policy meeting Japan PMI (24 November) Korea BoK policy meeting (24 November) Japan Tokyo CPI inflation (25 November) Malaysia CPI inflation (25 November) 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
The Crude Oil Market Came Under Further Pressure Yet Again

The Crude Oil Market Came Under Further Pressure Yet Again

ING Economics ING Economics 24.11.2022 08:40
EU discussions on the proposed level for the G-7 Russian oil price cap put pressure on the oil market with the suggested level higher than many were expecting. Talks on the cap are expected to continue today In this article Energy- oil price cap talks Metals – China Covid concerns weigh on metals Agriculture – Ukrainian wheat exports   Tank farm for storage of petroleum products in Volgograd, Russia   Energy- oil price cap talks The oil market came under further pressure yet again yesterday. ICE Brent settled more than 3.3% lower on the day to close just above US$85/bbl. The key catalyst for this move was a report that EU members were looking at setting the price cap on Russian crude oil at somewhere between US$65-70/bbl. This is above previous reports of around US$60/bbl. Importantly, this is also around price levels that Russia was already receiving, given the discount with which Urals trade to Brent. Therefore, if we do see the cap set within this range, it would be less likely that Russia reduces supply as a result. At this level, the cap would achieve one of the two objectives - it would likely keep Russian oil flowing. As for the other objective of trying to cap Russian oil revenues, some may question how aggressive this level actually is. EU members failed to agree yesterday on the cap level, and we expect discussions to continue today. Weekly EIA data shows that US commercial crude oil inventories fell by 3.69MMbbls over the last week. However, when taking into account SPR releases of around 1.6MMbbls, total US crude oil inventories fell by 5.29MMbbls over the week. This crude draw occurred despite crude oil imports increasing by around 1.5MMbbls/d over the week, hitting their highest levels since the end of July. A pick-up in refinery activity would have helped with the crude draw. Higher refinery runs over the week, along with weaker implied demand for products meant that large builds were seen on the refined product side. Gasoline inventories increased by 3.1MMbbls, while distillate fuel oil stocks grew by 1.72MMbbls.   Metals – China Covid concerns weigh on metals LME aluminium and other major metals, traded lower yesterday as returning lockdowns and covid-related restrictions in China (just weeks after some restrictions were eased) dashed hopes for a demand revival in metals. The latest reports suggest that the ongoing virus controls are affecting operating rates at aluminium fabricators in Guangdong province. Aluminium rod inventories are building up, and demand in the copper market is also softening. Agriculture – Ukrainian wheat exports The Ukrainian grain traders union expects Ukraine to export 13mt of wheat and 20mt of corn in the 2022/23 season. This compares to wheat and corn exports of around 19mt and 27mt respectively in the previous season. The most recent data shows that Ukraine has exported around 6.3mt of wheat so far in the current season, compared to exports of 14mt during the same period in 2021/2022. TagsUkraine Russian oil price cap G-7 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  
Fed is expected to hike the rate by 50bp, but weaker greenback and Treasury yields don't play in favour of the bank

Fed is expected to hike the rate by 50bp, but weaker greenback and Treasury yields don't play in favour of the bank

ING Economics ING Economics 23.11.2022 23:21
The market is firmly backing a 50bp hike from the Federal Reserve in December, but the 7% drop in the dollar against major currencies and the plunge in Treasury yields is the exact opposite of what the Fed wants to see as it battles inflation. With US data proving to be pretty resilient the Fed's rhetoric may need to toughen even more Investment holding up better than expected This morning's US data is a little mixed. The good news is that the durable goods report is solid and points to business capex holding up well in the fourth quarter. We always ignore the headline number, which rose 1% month-on-month versus the 0.4% consensus expectation as it gets buffeted around by Boeing aircraft orders, which were decent at 122 planes versus 96 in September. The Fed tends to look more at the non-defense capital goods orders ex aircraft as a cleaner measure of what is happening in the corporate sector. It rose 0.7% MoM versus expectations of 0.0%. Admittedly the September number was revised a little lower to -0.8% from -0.4% and, as the chart below shows, it is trending towards slower growth, but it is not suggesting companies are looking to retrench imminently. US core durable goods orders and business investment Source: Macrobond, ING Jobs story looking potentially troubling As for mortgage applications, they rose given the typical 30Y mortgage rate has followed Treasury yields lower to 6.67% as of last week versus 7.16% four weeks ago. The result is that mortgage applications for home purchases rose for the third consecutive week. The not-so-good story was the rise in initial jobless claims to 240k from 223k (consensus 225k) while continuing claims rose from 1503k to 1551k, suggesting that there is evidence of a cooling in the US labour market. This has certainly been the case in the tech sector, but more broadly the job openings data suggests there are still 1.9 job vacancies to every single unemployed American, i.e. demand is vastly outstripping supply of workers. The consensus for next Friday’s payrolls number is for a 200k jobs gain and we doubt expectations will shift much for that, but the rising lay-off story is something we will be closely following and could hint of early signs that the jobs numbers in early 2023 being softer. Fed may need to toughen its stance All in this week’s data probably doesn't mean much for the Federal Reserve policy meeting on December 14th. Instead, all eyes will be on next Friday's jobs report and the December 13th release of November CPI. The market is firmly behind a 50bp hike call given Fed speakers have indicated the likelihood of less aggressive step increases in interest rates after four consecutive 75bp hikes. However, we are a little nervous that the 7% fall in the dollar against the currencies of its main trading partners and the 45bp drop in the 10Y Treasury yield is leading to a significant loosening of financial conditions – the exact opposite of what the Fed wants to see as it battles inflation. Consequently, we wouldn't be surprised to see the Fed language become even more aggressive over the coming week, talking about a higher terminal interest rates – with some of the more hawkish members perhaps even opening the door to a potential fifth consecutive 75bp hike in December to ensure the market gets the message. Read this article on THINK TagsUS Investment Interest rates 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
The UK’s Transition To Net Zero And Sustainability

The UK’s Transition To Net Zero And Sustainability

ING Economics ING Economics 23.11.2022 13:39
In an era of looming public spending restraint, the UK risks lagging behind in key areas of its net-zero strategy. We look at what the recent Autumn Statement means for the electric vehicle transition, energy efficiency and investment in green electricity In this article UK budget leaves net-zero plans at risk of slipping behind Electricity generation Transport Buildings   Buildings and manufacturing/construction are areas where climate plans are most lacking UK budget leaves net-zero plans at risk of slipping behind There was plenty to chew on in last week's UK Budget, not least that much of the anticipated fiscal pain has been pushed back until after the next election. Chancellor Jeremy Hunt had calculated that calmer financial markets and the announcement of certain tax rises means he can push back some tough spending decisions. But the Budget also raised interesting questions about the UK’s transition to net zero and sustainability. Climate change received several mentions in the Chancellor’s statement, which came against the backdrop of the COP27 conference. However, in an era of ever-increasing spending restraint, the UK risks lagging behind in several areas of its net-zero strategy, outlined last year. The government’s independent net-zero advisor, the Climate Change Committee (CCC), found earlier this year that the majority of the government’s carbon reductions carry at least some risks – and in many cases they are significant. Here, we delve into three areas where the Autumn Statement was relevant to Britain's net-zero ambitions. Read our initial reaction to the UK's Autumn Statement How the Climate Change Committee grades the UK's progress on its net-zero strategy Climate Change Committee Buildings and manufacturing/construction are areas where plans are most lacking Climate Change Committee, ING calculations 1 Electricity generation The existing energy profits levy (windfall tax) covering oil and gas companies will increase from 25% to 35% and is being extended by three years to 2028. It will be expanded to cover renewables generators, who will see a 45% tax on profits when wholesale electricity prices are above £75/MWh. Household energy support will be made less generous, with the average household set to pay £3,000 a year from April. That's slightly below what's implied by current market prices over a 12 mo12-monthzon. Previously, the average household – not on means-tested benefits – was set to pay £2,500 a year until the third quarter of 2024, with a £400 discount between October and April. The government reaffirmed its commitment to nuclear and reiterated plans to go ahead with the Sizewell C project.   Since the summer, we've argued that a broader windfall tax, especially one covering renewables, looked inevitable. Amid concerns about public finances, this measure had the rare attribute of both being politically popular and a decent revenue generator. The latter is less true now given the recent collapse in gas prices. But remember the UK has – in effect – an open-ended liability to gas prices via its household/business energy cap. These latest tax measures, to some extent, provide a natural hedge against future spikes in prices (our house view is that European gas prices could end up higher next winter than in the current one). But how will this affect the UK's transition to greener energy? Our team wrote in detail about some of the risks associated with a similar scheme mooted by the EU earlier this year. The UK has been a relative success story in recent years, in that emissions associated with electricity generation have already fallen by half of what is needed by 2050 to be consistent with net zero, according to the CCC. Offshore wind is still favoured over onshore by the government, and most development is now achieved via Contract for Difference (CFD) auctions. These set a pre-agreed "strike" price for future energy produced and consequently mean producers are obliged to return excess revenues when wholesale prices are higher. As you'd expect, the new tax won't apply to electricity producers with CFD agreements. Given that this is now the primary means of allocating new wind investment, the new tax decisions should have a less obvious adverse effect on the ability to attract new capital. 2 Transport For the first time, fully electric vehicles (EVs) will be subject to Vehicle Excise Duty (VED) from 2025. Existing EV road users will pay the standard rate, currently £165 a year. Battery-electric vehicles (BEV) are currently exempt, and plugin-hybrids (PHEV) pay a lower rate.   Away from energy support, the landmark decision to begin taxing electric vehicles was perhaps the most interesting sustainability-linked decision taken in the Autumn Statement. The incentive for change is obvious. Fuel duty makes up roughly 3% of government receipts (or £30bn annually), and that proportion will gradually fall as the prevalence of EVs increases. Still, that makes the UK among the first in Europe to start tackling the issue of how EVs should be taxed. And it shines a spotlight on whether the government needs to do more to keep the pace of EV adoption on track. There’s no doubt that government intervention here is less essential than it once was. The proportion of battery EVs relative to overall sales has continually increased and made up 15% of new car purchases in the third quarter. The result is that "surface transport" now looks like one of the easier areas of transition for the UK – the technology is well developed, unlike some other net-zero areas, and consumer appetite appears strong. Fully electric cars made up 15% of total sales in the third quarter ACEA, ING Research   That said, battery EVs only make up around 1% of the total fleet, and the government’s ambition to end petrol/diesel car sales by 2030 is premised on the assumption that EV costs will continue to tumble. Rising input costs and ongoing supply issues – particularly for batteries/battery metals – are a clear challenge to that logic. So too are higher electricity prices, which have reduced the operational savings versus conventional vehicles (albeit that's partly offset by improvements in mileage). There’s also a mounting risk that existing demand for EVs will outpace the growth of charging infrastructure. While growth in public chargers is averaging 8% a quarter, more will need to be done for dense residential areas. Half of UK properties are either flats or terraced houses, making it harder for households to charge vehicles without some form of public infrastructure. Public funding here is currently fairly limited.    So should the government be doing more, not less, to incentivise EV adoption? It’s debatable whether the introduction of vehicle duty for EVs materially shifts the incentives to buy. But UK consumers, unlike those in France and Germany, are largely no longer eligible for government EV grant payments. The UK has also opted against German-style support for lowering the cost of public transport in recent months, making car travel less desirable. The lesson here is that the government’s announcement on EV duty is probably only the first step. Ultimately there’s going to be pressure to increase the tax burden for emissions-generating vehicles, but that’ll be challenging without disproportionately affecting lower-income households. Vehicle taxation may inevitably need to be coupled with a form of road pricing to counter the expected increase in congestion, as well as larger incentives for consumers to switch to public transport. 3 Buildings An additional £6bn of funding from 2025 for energy efficiency projects, in addition to £6.6bn in the current parliamentary period. Introducing new 'Energy Efficiency Taskforce' to aid delivery.   This is arguably the area where government intervention is most lacking. Our previous analysis suggests that reducing UK emissions from buildings will require greater public investment by 2025 than transport or electricity generation, where private funds are set to play a larger role. The CCC found earlier this year that ministers’ plans in this area were overwhelmingly insufficient or carry significant risk. This is undoubtedly a challenging area. The UK’s housing stock is ageing, with more than a third of properties built before 1945, the highest proportion in Europe. Britain also stands out for its reliance on gas as a source of domestic heating. Less than half of homes are rated EPC C or higher (the level generally seen as the minimum acceptable energy efficiency). Even so, in some key respects, the UK has gone backwards. Unlike other major European economies, Britain closed its flagship energy efficiency grant scheme and hasn’t yet introduced a replacement. The result was that by 2021, the number of annual home insulation installations delivered under government-linked schemes had fallen by 90% from a peak of more than two million in 2012. While that doesn’t capture renovations outside of official schemes, there’s been little discernible improvement in building energy efficiency ratings over the past decade, suggesting privately-funded measures haven’t adequately filled the gap. In areas where recent government funding has been available, uptake has been fairly steady. The government introduced a £5,000 grant for heat pump installations earlier this year, but so far has only been redeemed 3200 times (roughly 0.2% of total gas boilers sold in 2019). UK has gone backwards on publicly-sponsored home insulation installs Climate Change Committee   Without additional funding commitments, achieving the targeted 15% reduction in buildings/industrial emissions by 2030 will be a challenge. There will also be pressure for ministers to look at other means of incentivising private investment by households. Government-guaranteed loans/mortgages for renovations, with reduced interest rates, is one possible option. Beyond financing, the other major obstacle to achieving these targets lies in worker shortages. While data is hard to come by, the CCC estimates that 200,000 extra hires will be needed by the mid-2020s to achieve the necessary pace of building improvements. But staff shortages are a key restraint on UK economic activity, and have been exacerbated by poor health and lower inward EU migration. With the exception of additional funding for the health service/education over the next couple of years, there was little in the Autumn Budget that is likely to materially change (an admittedly complex) issue. Alongside buildings, manufacturing/construction stand-outs as another area where progress was judged to be limited by the CCC. This received little attention in the Autumn Statement, but the government has been making some progress on establishing initial Carbon Capture and Storage "clusters". Our team wrote more on this topic earlier this year. TagsNet zero Climate Policy 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: The Gap Versus The FX spot Rate In Poland Is Already The Largest In The CEE Region

Poland: Slowing Retail Sales And Deteriorating GDP Growth Are Connected

ING Economics ING Economics 23.11.2022 12:41
Retail sales slowed visibly at the beginning of 4Q fitting into the broad picture of a slowing economy. High inflation is undermining real disposable income despite one off pension payments and tax cuts as wage growth fails to keep pace with price growth. In the face of deteriorating GDP growth, the MPC is unlikely to resume its hiking cycle anytime soon   Retail sales of goods rose by just 0.7% year-on-year in October (ING: 3.8%; consensus: 3.2%), following a 4.1% YoY increase the month before. The weakness in sales was broad-based last month. The steepest declines were reported in fuel (-20.5% YoY), while the largest increase was in clothing and footwear (14.3% YoY). Growth in food sales (2.4% YoY) was also lower than in previous months.   Since May this year, wage growth in the corporate sector has been failing to keep pace with retail price growth (the exception being July, when high one off payouts in mining and energy temporarily boosted earnings). With relatively stable employment growth, this is translating into declines in the real wage fund. This is generating pressure on consumer spending as the resulting gap in real incomes cannot be offset by one off pension benefits and tax cuts. At the same time, households have largely consumed the savings accumulated during the pandemic. Falling real wages translate into weaker demand Retail sales of goods (real) and real wage bill in enterprise sector, % YoY Source: GUS, ING.   The beginning of 4Q22 signalled a further downturn in the Polish economy. We have seen slower industrial production growth and weak retail trade data. The fact that construction continued to expand and was hardly hit by higher costs and a collapse in mortgage loans, is of little consolation given the fact that it was boosted by favourable weather conditions in October this year. In annual terms, GDP growth in 4Q22 will be lower than in 3Q22, and we expect a decline in 1Q23.   Given that a significant part of current inflation was driven by rising costs, the emergence of a negative output gap will have a limited impact on the pace of price growth. In 2023, we expect still high core inflation and double-digit growth in consumer prices (CPI). Given the MPC's sensitivity to developments in the real economy, the likelihood that it will resume its tightening cycle (which has been 'paused') is negligible in the coming months. 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: A Pause In Its Rate Hiking Is Officially Declared

Poland: Civil Engineering Construction Was Unchanged

ING Economics ING Economics 23.11.2022 12:04
Construction output increased by 3.9% year-on-year in October, against a consensus of 0.9% and a 0.3% increase in September. The improvement was mainly due to better activity in industries related to infrastructure investment, likely benefiting from the relatively warm weather     Civil engineering construction was unchanged on an annual basis vs. a 2.3% YoY decline a month earlier while specialised works increased 5.1% YoY, following a 4.9% YoY decline in September. The main component, building construction, was almost unchanged in annual terms (8.9% in October vs. 8.7% in September). The rebound in production may be the result of a relatively warm October, which made it easier to carry out work. The good weather has so far continued into November as well. Thus, it can be assumed that works related to infrastructure projects will perform quite well this month. However, the lack of funds from the Recovery Fund, and the high cost of work, which make it difficult to put out tenders, suggest that when the positive weather effects end, infrastructure investment will slow down again. Construction output, however, will be determined mainly by activity in building construction. In October, growth in this category remained quite strong, though much slower than in the previous months of 2022 (around 27% YoY on average). Real estate developers are likely finishing previously started projects but are not beginning new ones. Companies are being hit by high costs while demand for real estate has collapsed due to rising borrowing costs and deteriorating household sentiment. Therefore, we continue to believe that construction output may turn out to be one of the weakest elements of the domestic economy, although the decline in its annual growth rate to negative levels may be delayed until early next year. TagsPoland construction 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: November CPI Fell Sharply To 10.0%

Eurozone: Inflation Pressures Are Fading On The Back Of Easing Supply Problems

ING Economics ING Economics 23.11.2022 11:48
The eurozone composite PMI came in at 47.8 in November, slightly better than in October but nonetheless confirms a contraction in the business economy. The good news is that inflation pressures are fading on the back of easing supply problems and the imminent recession The slight increase in the November PMI was mainly driven by the manufacturing PMI     American economist Robert Solow famously said that the computer age was everywhere but in the productivity statistics. At the moment, we can say that the recession is everywhere except for in the GDP statistics. While the eurozone economy still eked out positive growth in the third quarter, it seems inevitable that a recession has started in the current quarter and today’s PMI figures confirm that. The slight increase in the PMI was mainly driven by the manufacturing PMI, which saw an uptick from 43.8 to 45.7. This is still showing a sharp contraction, but slightly less than last month. New orders continue to decline, meaning that current production is coming from a lot of previously built-up backlogs. The pace of decline in services was similar to October and fierce by historical standards. New orders continue to decline here too, and businesses are becoming increasingly reluctant to hire on the back of sluggish economic activity. The upside to the clearly recessionary environment is that inflationary pressures are fading. Weaker demand, lower energy prices than in August, and easing supply-side problems are all contributing to a softening of price pressures. While energy prices remain volatile and businesses are likely to still price through some of the higher costs incurred, these factors do point to a turning point in the inflation rate around the turn of the year. TagsInflation GDP 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
Hungary: GDP declines by 0.4% in the third quarter. What's behind the drop?

FX Daily: In Hungary, The Central Bank Left Rates Unchanged

ING Economics ING Economics 23.11.2022 10:11
Risk sentiment is still being driven by news from China, with markets now turning a blind eye to Covid restrictions and instead speculating about an easing in tech regulation. Today, it's all about the Fed minutes, as bulls hope to find signs that Powell's hawkishness was conditional on a strong CPI reading. The USD correction may be nearing its bottom In this article USD: Ready to scan the Fed minutes EUR: Only a dollar function GBP: Hunt to testify CEE: The region remains quiet Source: Shutterstock   USD: Ready to scan the Fed minutes Global risk sentiment has rebounded after absorbing the news about China’s new Covid wave. One factor driving the rally has been increasing speculation that China is loosening its regulatory grip on the tech sector, essentially offering a lifeline to tech shares which have gone through some rough months. This sharp recovery in sentiment appears a bit premature in our view. While there is no clear evidence that the regulatory crackdown has taken a decisive turn (only yesterday, it was reported that China will fine Ant Group $1bn), there is plenty of evidence that Covid restrictions are rapidly being reintroduced into many parts of the country, including Shanghai. But today, all eyes are on the FOMC minutes, the big risk event before a quieter rest of the week as the US enters the Thanksgiving holiday break. Investors will scan the minutes for indications that the “higher for longer” plan is linked to short-term dynamics in CPI releases. Expect another rally in risk assets should the minutes provide hints of conditionality of Powell’s post-meeting hawkishness to a prolonged stickiness in inflation readings, which markets are now more convinced will not materialise after the latest CPI reading. In the absence of such hints, there may not be much for risk bulls to cling on to, given that the November meeting was still a largely hawkish one and the post-meeting (and also post-CPI) Fedspeak has been rather cautious on a dovish pivot. In FX, the dollar has faced a new round of selling. We don’t exclude that this correction will run a little further, but we continue to expect a rather radical inversion in the bearish dollar trend in December as the Fed remains broadly hawkish, energy prices rise again and the global economy slows. Elsewhere in the G10, the Kiwi dollar was stronger after a 75bp rate hike by the Reserve Bank of New Zealand overnight. Policymakers signalled they will take rates to 5.5% in 3Q22, that the economy will enter a recession and that the housing market will contract by 20% (more than previously expected) from its 2021 peak. We remain doubtful that the RBNZ will ultimately deliver this much tightening and tolerate such a sharp house market contraction, but for now, it remains a clear hawkish standout in the developed market. Francesco Pesole EUR: Only a dollar function The risk rally sent EUR/USD back above 1.0300. Indeed, some improvement in China-related sentiment is a positive development for eurozone assets and the euro, but swings in the pair remain primarily a function of broader dollar moves. The eurozone’s calendar includes November’s PMI numbers today. Which are expected to remain rather depressed despite the easing in energy prices. Barring a major upside surprise, it appears unlikely that the release will generate a strong market reaction. The same should be true for ECB speakers (Luis De Guindos, Pablo Hernandez De Cos, and Mario Centeno) today. The Fed minutes are the most important event for EUR/USD today, along with further changes in the market's sentiment on China. An extension of the rally to 1.0400/1.0450 is surely possible in the coming days, but a return to parity in the next few weeks remains our base case as we enter a challenging winter for the eurozone economy. Francesco Pesole GBP: Hunt to testify PMIs will be released in the UK today, and the consensus is looking for a further deterioration in both the manufacturing and composite gauges, possibly due to the prospect of austerity measures by the new UK government. On this topic, Chancellor Jeremy Hunt will testify before the Treasury Committee about his Autumn Statement this afternoon. The extended correction in the dollar is now pushing cable towards the 1.2000 gravity line. Expect some resistance around that level given the lack of strong domestic bullish drivers for the pound though. GBP’s greater sensitivity to risk sentiment compared to the euro means that further improvements in global risk sentiment can push EUR/GBP to test 0.8600 in the coming days. Francesco Pesole CEE: The region remains quiet Today, we expect a second round of monthly data from Poland, led by retail sales. Yesterday's data showed rather softer numbers. In our view, retail sales growth has slowed to low single-digit growth as wages are no longer keeping up with rising prices. We forecast growth of 3.8% year-on-year as high inflation is undermining consumers' purchasing power to such an extent that they are more cautious in their purchasing decisions. However, the attention grabber will be the POLGBs auction. Yields have moved down massively over the past month, completely changing the market picture. In the Czech Republic, we will see the Czech National Bank conference, including an opening speech by the governor, who rarely appears in public. In Hungary, the central bank left rates unchanged yesterday as expected. The National Bank of Hungary repeated its "whatever it takes" stance and the short-term focus remains on market stability until an improvement in risk perception occurs. The Hungarian forint ended slightly stronger after the press conference, but the EU story holds the main role here. Thus, we continue to wait for the European Commission's decision, which should have a positive impact on the market and move the forint closer to 400 EUR/HUF. Elsewhere, this week is more the domain of the rates market and FX remains without much enthusiasm. Impulses for bigger moves are hard to find both on the domestic and foreign side. Thus, our view hasn't changed much since Monday, and we can't expect much momentum from the region today either. The focus will thus be on the global story. Frantisek Taborsky 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
Singapore Inflation Dipped Below Expectations

Singapore Inflation Dipped Below Expectations

ING Economics ING Economics 23.11.2022 09:00
Inflation dipped below expectations after global crude oil prices slipped in September  Source: Shutterstock   5.1% Core inflation for October (year-on-year)  Lower Core inflation dips to 5.1% Price pressures eased slightly in October with both headline and core inflation slipping below market consensus. Headline inflation dipped to 6.7% YoY, down from 7.5% and much lower than expectations for a 7.0% increase. Core inflation was also lower than consensus, settling at 5.1% YoY from 5.3%. The downside surprise for inflation was traced to slower price gains for utilities and transport, both moderating as global crude oil prices edged lower in September.  Slower inflation was also recorded for clothing & footwear and recreation & culture, possibly as consumers adjust to tighter liquidity conditions and elevated prices. Food inflation, however, was higher at 7.1% YoY compared to the previous month’s 6.9%.  Start of the turn? MAS monitors impact of recent aggressive tightening Source: Singapore Department of Statistics Some breathing room but MAS likely to remain hawkish Today’s lower-than-expected inflation report gives the Monetary Authority of Singapore (MAS) some breathing room after core inflation finally eased after seven months of acceleration. The inflation reading also validates MAS’s view that the recent string of aggressive tightening would feed through the economy and lower price pressures over the next few months. Despite the apparent turn in inflation, MAS will likely remain vigilant, maintaining its hawkish tone while monitoring the trajectory of core inflation.    TagsSingapore inflation Monetary Authority of Singapore   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 ECB Has Started To Shift The Focus Of The Discourse To Underlying Inflation Pressures

Euro: Financial Institutions' ESG Bond Supply Will Lose Some Steam

ING Economics ING Economics 23.11.2022 08:55
Euro sustainable bond issuance in 2023 is not likely to repeat the growth rates seen in the last few years. While governments and agencies could slightly accelerate ESG issuance in 2023, financial institutions' ESG bond supply will lose some steam. Corporates are expected to remain active with sustainable bonds representing 40% of their total issuance In this article Government and agencies' sustainable bond issuance to report moderate growth in 2023 Financial institutions' ESG bond issuance to lose some steam Corporate issuers will remain very active on the sustainable bond markets   2022 sustainable bonds issued in the € currency will exceed 2021 but will end up short of our initial higher expectations. We forecast 2023 total Environmental, Social, and Governance (ESG) bond issuance to be stable compared with 2022 at €355m. A strained geopolitical environment and tougher credit market conditions make bond issuance more pricey. €355bn total sustainable bond supply in 2023 in € credit markets   Government and agencies' sustainable bond issuance to report moderate growth in 2023 After an issuance volume nearing €180bn this year we expect only very moderate growth next year towards €195bn. Sovereign issuers have seen all of the main issuers enter the market, and it is now smaller issuers such as Greece that are contemplating inaugural green bonds in 2023. That also means that an additional growth push out of that direction looks unlikely. For SSAs (Sub-sovereign organisations and agencies), the EU will continue to play a dominant role as the plans remain in place to raise 30% of the Next Generation EU fund via green bonds. The Next Generation EU fund, also called the Recovery Fund, may contribute up to €30bn to EUR SSA green bond issuance. €195bn expected sustainable € bonds by governments and agencies in 2023     SSA social issuance, which has made up around a quarter of the overall SSA ESG supply, is currently dominated by the two French agencies CADES and UNEDIC followed by the Dutch BNG and NEDWBK. The EU only issued slightly more than €2bn in social bonds under the SURE programme in 2022. We would expect that situation to persist in 2023, but would not exclude the off chance that the EU’s social issuance could see a revival amid a prolonged energy crisis and recessionary environment.  Sustainability linked issuance (SLB) continues to play a very niche role among sovereigns, seeing only dollar-denominated issues from two South American countries. In EUR the Dutch state treasury has indicated that such issuance could become part of the funding mix, yet not in the short term as they would have to be part of a political process.    Financial institutions' ESG bond issuance to lose some steam The integration of environmental and social sustainability aspects into the business operations of banks has strongly accelerated in recent years. This has not only been driven by regulation but also by the wider societal sense of urgency to combat climate change and protect the environment. ESG is a top priority for banks, including in their capital markets presence   Banks have become more vocal and transparent about their environmental and social strategies and targets. These not only comprise actions taken to reduce their own climate footprint, but also involve actively engaging with clients to support them in improving their environmental footprint, or distancing themselves from sectors deemed highly polluting, such as fossil fuels. They develop dedicated lending products at attractive terms, such as green mortgage loans, for the financing of environmentally sustainable projects or assets. Green and/or social bonds have become increasingly popular as a source of funding for banks in recent years. In 2021, banks issued a record €64bn in euro sustainable bonds through different types of instruments, ranging from covered bonds to subordinated bonds. This was more than double the supply seen in previous years. Banks are well on their way to breaking this record in 2022. Sustainable bank bond supply (in €bn) Source: Refinitiv, ING   During the first ten months of this year, banks issued €58bn in sustainable bonds, of which €17bn were in covered bonds, €19bn in preferred senior, €20bn in bail-in senior and €2bn in subordinated paper. This is up from €54bn over the same period last year. While green issuance is more than €10bn higher than last year, social and sustainability supply falls €7bn short of the first ten months of 2021. This largely reflects the lower refinancing of Covid-19-related small and medium-sized enterprises (SME) and/or healthcare loans through social bonds. €60bn New sustainable supply in € by banks in 2023     For 2023, we expect less issuance in sustainable bank bonds (€60bn) despite the high refinancing need of banks due to the targeted longer-term refinancing operation (TLTRO)-III expirations. The major reason is the anticipated slower lending growth. This will mitigate the ability of banks to naturally expand their green and social loan books. Meanwhile, the growth potential for supply via new sustainable bond issuers will at some point reach its limit. That said, demand for sustainable investment alternatives will remain disproportionally high. This will incentivise banks to continue to look for possibilities to grow their green and social loan portfolios, including through the identification of new types of sustainable assets. Regulatory disclosure requirements, including those related to the EU Taxonomy, will support banks in the further identification of environmentally and/or socially sustainable assets on their balance sheet. Sustainability-linked bonds (SLBs) are still shunned by banks   The issuance of sustainability-linked bonds is still not really taking off in the banking segment. Thus far only one bank printed a EUR sustainability-linked preferred senior unsecured note, with a reduction of the carbon intensity of the bank’s loan portfolio as a sustainability performance target. This contrasts sharply with the corporates segment, where nowadays about a third of the sustainable bond supply is in the SLB format. The proceeds of sustainability-linked bonds are used by issuers for general purposes, but the characteristics of the bond (such as the coupon) can vary depending on whether the issuer meets its predefined ESG performance targets. However, coupon step-up features may be seen as an incentive to redeem the bond early. This makes it difficult to issue senior unsecured or subordinated bonds in SLB format eligible for a bank’s minimum requirement for own funds and eligible liabilities (MREL). Corporate issuers will remain very active on the sustainable bond markets Corporate issuers and investors alike are embracing ESG as core financing or investment philosophies. As the pressure from societies, governments, activists and regulations accelerate, there is a bigger push for ESG issuance – particularly now with the European Central Bank favouring ESG debt for their reinvestments. This expected shift will only make ESG bonds more interesting to issue in the future.   €100bn corporate ESG bonds in € currency in 2023     We forecast a total corporate € bond issuance around €270bn in 2023, up from c.€230bn in 2022. The percentage of ESG bond supply relative to overall € corporate supply is growing year on year. We expect this to jump up to 40% in 2023, up from 35% in 2022. We expect the industrial sector to lead issuance with c.€45bn of ESG bonds next year. Utilities could print up to €40bn of SDG bonds, representing between 75% and 80% of the sector’s total supply in 2023. Total corporate ESG bonds (in €bn) and share in total issuance (%) Source: Refinitiv, ING For corporates, green bonds will remain the dominant format   We believe that green bonds will remain the preferred format representing more than half of ESG corporate issuance, but we assume sustainability-linked bonds will continue their ascension with about €32bn issued out of the €100bn we forcast for next year. Social bonds have been absent from corporate issuance, except for one social bond issued by the French utility EDF in 2021. Sustainability bond issuance by type (in €bn) Source: Refinitiv, ING TagsSustainability Green Bonds   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: The European Gas Market Strengthened

The Commodities: The European Gas Market Strengthened

ING Economics ING Economics 23.11.2022 08:49
The European gas market strengthened yesterday after growing supply risks with Russian flows via Ukraine. Meanwhile, the European Commission has finally proposed the level at which they want to set the price cap for TTF futures In this article Energy - European Commission proposes TTF cap level Metals – Platinum to shift to deficit for the first time since 2020 Source: Shutterstock Energy - European Commission proposes TTF cap level The oil market benefited from a broader rally of risk assets yesterday with ICE Brent settling more than 1% higher. The market would also have taken comfort from other OPEC+ members also denying reports that the group was looking to increase supply at its next meeting on 4 December. The market is trading firmer in early morning trading in Asia after API data released overnight showed that US crude oil inventories fell by 4.8MMbbls, which was more than the roughly 2.6MMbbls draw the market was expecting. In addition, gasoline inventories are reported to have declined by 400Mbbls, whilst distillate stocks increased by 1.1MMbbls over the week. Expectations are that the G-7 will soon announce the level at which they intend to set the price cap on Russian oil. There are reports suggesting that the cap could be set at around US$60/bbl. This would not be too far away from the current price that Russia is receiving when taking into consideration the discount that Urals currently trades to Brent. The European gas market strengthened yesterday with TTF settling a little more than 3% higher on the day. This strength is due to growing supply risks, since Gazprom has threatened to reduce gas flows via Ukraine. However, for now, this is an issue between Russia, Ukraine and Moldova. Gazprom is claiming that Ukraine is keeping gas which is meant to go to Moldova and so is threatening to reduce flows by an amount that corresponds to the volume they believe Ukraine is keeping. Therefore, this shouldn’t have an impact on flows via Ukraine to the EU. However, there is always the risk that the situation escalates, which could have an impact on a larger share of gas flows that go through Ukraine. The European Commission yesterday proposed the levels at which they want to cap TTF gas futures and the conditions which would need to be met in order to do so. The Commission has proposed setting the cap for TTF at EUR275/MWh, which is above the current price of EUR120/MWh, but still below the highs seen back in August. In order for the cap to be triggered, front-month TTF futures need to trade above EUR275/MWh for two weeks and TTF prices need to be more than EUR58/MWh above the LNG market for 10 consecutive days in this 2-week period. Obviously, the higher the cap the smaller the impact this intervention will have on the European gas market. The risk has been that the price cap could see the trade moving from the exchange to the over-the-counter market, given that the latter would be excluded from the cap. This would not only mean lower liquidity in the market but also less transparency. Metals – Platinum to shift to deficit for the first time since 2020 The latest data from World Steel Association shows that global steel output remained unchanged YoY at 147.3mt in October, as production gains from Asia and the Middle East were offset by output losses from Europe, Russia and Ukraine. Cumulatively, total output fell 4% YoY to 1,553mt in the first ten months of the year. Meanwhile, Chinese steel production gained 11% YoY to 79.8mt in October, despite efforts by local authorities to curb output. However, from Jan’22-Oct’22, steel output in China declined 2.2% YoY to 861mt. Among other Asian nations, India’s steel output rose 2.7% YoY to 10.5mt last month, while YTD production also increased 6.1% YoY to 103.8mt in the first ten months of the year. The World Platinum Investment Council forecasts the global platinum market to shift to a deficit of 303koz (for the first time since 2020) in 2023 following higher demand from the automotive industry. This compares to an estimated supply surplus of 804koz for the current year. Total consumption is expected to rise by 19% YoY to 7.8moz, whilst global supply is forecast to increase only by 2% YoY to 7.5moz in 2023. The group forecasts automotive demand for platinum to rise by 3.3% YoY to 3.3mt, whilst jewellery demand should remain flat at 2mt next year. Industrial demand is expected to rise by 10% YoY to 2.3mt while ETF demand will continue to remain weak next year. TagsTTF Steel Russian oil price cap Russia-Ukraine European 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
The Asia-Pacific Region Is Facing Immense Heat

Singapore October Inflation Data And The RBNZ's Decision Will Arrive Today

ING Economics ING Economics 23.11.2022 08:41
Korean business sentiment slides further, Singapore 3Q22 GDP revised lower, Taiwan exports likely to contract  In this article Macro outlook What to look out for: Fed minutes and US data dump Source: shutterstock   Macro outlook Global Markets: Despite yet another barrage of Fed comments that fit into the “higher-for-longer” category, equity markets re-found their mojo on Tuesday. Both Esther George and Loretta Mester gave fairly mainstream speeches highlighting the Fed’s commitment to curbing inflation, with George noting that the relatively high level of US household savings meant that the Fed may have to raise rates more than otherwise. That didn’t stop the S&P500 and NASDAQ both gaining 1.36% on the day, though equity futures are suggesting that this might be enough for now, with small losses indicated at the opening. Some small declines in bond yields won’t have hurt risk-market sentiment. 2Y US Treasury yields edged down 1.7bp while the 10Y dropped 7.1bp taking it back down to 3.756%. Nor at all surprisingly given all the above, the USD has lost ground to the G-10 currencies. EURUSD is back above 1.03, the AUD is up to 0.6645, Cable is higher at 1.1884, and the JPY has pulled back to 141.22. Asian FX has mostly followed suit, led by the THB (36.1145) and CNY (back down to 7.1399). Catch-up for some of the laggards is probable this morning. G-7 Macro: Today we get a slew of purchasing manager data from Eurozone countries as well as the US, and also the University of Michigan consumer sentiment survey for November, complete with inflation expectations and then new home sales.  In the early hours of tomorrow morning Asia time, we get the minutes of the November FOMC meeting. Taiwan: Industrial production for October will probably contract on a year-on-year basis. This is due to weak demand for semiconductors, which these days are an early indicator of demand for goods in general. Our estimate is -8.5%YoY, vs the consensus of -2.75%YoY. Export orders have been in contraction for two consecutive months. Industrial production in the coming months should remain in contraction as we expect the US and Europe to slow further, while the Chinese economy still needs time to recover. South Korea: Business sentiment for manufacturers hit a two-year low in December, with the Bank of Korea’s (BoK) survey index falling to 69 (vs 73 for November), while sentiment for services also declined slightly, down by 1pt to 77 (vs 78 for November).  Small/medium-sized companies and exporters have a darker business outlook compared to large companies and domestic demand-focused companies. Recently-released data taken together (weak early November export data, weak consumer and business sentiment and slowing inflation expectations) support our call for only a 25bp hike by the BoK tomorrow and a contraction in GDP this quarter. Singapore:  October inflation data is set for release today.  The market consensus points to core inflation staying flat at 5.3%YoY although the headline number could soften to 7%YoY (from 7.5%) as base effects kick in.  Despite the dip in the year-over-year number, prices may have picked up by 0.2% from the previous month suggesting that price pressures remain persistent.  Elevated core inflation should keep the Monetary Authority of Singapore (MAS) hawkish while the MAS monitors the impact of its recent string of tightening.  Meanwhile, 3Q GDP was revised down to 4.1% from the initial estimate of 4.4%YoY.  The downward revision reflects softer global trade activity and the negative impact of high inflation. Australia: The Preliminary November PMI indices have all weakened. The manufacturing index is down from 52.7 to 51.5, but more importantly, the service sector PMI, which had just drifted below the threshold 50 mark to register 49.8 in October, has fallen further to a weak-looking 47.2. This results in a composite PMI for November of 47.7. It looks as if the Australian economy is finally slowing in response to the Reserve Bank of Australia’s (RBA) tightening.    New Zealand: The Reserve Bank of New Zealand (RBNZ) meeting due at 0900 SGT/HKT is widely expected to deliver a 75bp increase to the cash rate, taking the target rate to 4.25%. CPI inflation is currently 7.2%YoY (3Q22). What to look out for: Fed minutes and US data dump RBNZ cash rate (23 November) Singapore 3Q GDP final and core inflation (23 November) Thailand trade balance (23 November) US durables goods orders, new home sales, University of Michigan sentiment and initial jobless claims (23 November) Fed meeting minutes (24 November) Japan PMI (24 November) Korea BoK policy meeting (24 November) Japan Tokyo CPI inflation (25 November) Malaysia CPI inflation (25 November) 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: Economy growth contracts to 3.6% year-on-year

Poland: industrial production soars 6.8% year-on-year, significantly less than market expected

ING Economics ING Economics 22.11.2022 21:59
Industrial output growth moderated in October amid declines in energy production, but manufacturing continued to expand at a solid pace. PPI inflation, which we believe has now peaked, slowed further. The coming months will bring a further deterioration in industry, including in manufacturing, and the downward trend in PPI growth should continue Opel factory in Gliwice, Poland Softer energy production pulling down industrial output growth Industrial production rose by 6.8% year-on-year in October falling short of our estimates and market expectations (ING: 8.8% YoY; consensus: 8.1% YoY), after an increase of 9.8% YoY in September. Seasonally-adjusted output contracted by 0.3% month-on-month. Output growth in manufacturing remained solid (9.3% YoY vs. 11.0% YoY in September), but energy production slowed markedly (-16.2% YoY). Signs of weakening are also slowly becoming apparent in manufacturing as well, though. The positive effect of improving global supply chains, which reduced the backlog of work, is beginning to fade. Manufacturing is starting to experience softer demand (decline in new orders). In other words, the negative demand effect is starting to dominate the temporary positive supply impulse. Production growth in the automotive industry went up by  41.6% YoY vs. 46.5% YoY in September and was 5.2% lower than in the previous month. Energy output declines from high reference base Electricity, gas, steam and air conditioning supply, % YoY Source: GUS. In the short term manufacturing growth also expected to moderate Poland’s industry was quite robust in 3Q22, driven by an improvement in global supply chains, but October might have been the last month of significant annual output growth. In the coming months, overall production is expected to suffer from a high base from last year's impressive (and hard-to-explain) output growth in the energy production section. Also, manufacturing should slow as orders have weakened, so the turn of 2022 and 2023 should be weak. However, 2023 should not be as dire as the most pessimistic expectations indicate. There is a certain breath of optimism in the economies of our trading partners thanks to the fall in gas prices and significant fiscal stimulus in Western Europe, and perhaps Poland. Producer price growth slowing down Producer prices (PPI) rose by 22.9% YoY last month (ING and consensus at 23.5% YoY) following a 24.6 YoY increase in September. Prices in manufacturing rose by 1.4% on a monthly basis, while there was a marked decline (4.5% MoM) in the energy generation section (for the second month in a row). The peak of PPI inflation is probably behind us, due to declines in commodity and energy prices and the high reference base. But the process of passing on higher costs to the customer is far from over and should be continued for some time. Producer price inflation has turned around PPI, % YoY Source: GUS. The Polish PPI shows the green shoots of global disinflation. However, central banks in developed markets say it would be premature to declare victory over surging inflation. The economic situation in the US and Europe is not weak enough, labour markets are strong and policymakers are willing to continue hiking rates, albeit in lower increments. Outlook for economic growth rather poor In 3Q22, GDP growth was in line with our forecast (3.5% YoY) and we are on course to reach around 5% growth in 2022 as a whole. It should be noted that while growth exceeded 8% YoY at the beginning of the year, it slowed to around 3% in the second half of the year. The inventory cycle played a large role in this. We expect visibly slower annual growth figures with respect to household consumption and fixed investment in the second half of 2022. High prices, rising interest rates, elevated geopolitical uncertainty and deteriorating external demand also contributed to the GDP slowdown in Poland. In 2023, we will see economic growth slowing down to around 1%. Theoretically, the weaker economy will be conducive to disinflation, but we forecast that average annual price growth next year will still remain in double digits. Persistently high core inflation is particularly worrying and indicates that the 2021-22 increase in energy prices will still translate strongly into growth in retail prices. Interest rates to remain unchanged in the short term The MPC has completed the current cycle of hikes and further increases are unlikely until late 2023 when we see the NBP resuming its tightening cycle. Should the pace of disinflation turn out to be slower than envisaged in the November NBP projection, or new forecasts point to stubbornly high inflation in 2024, policymakers could decide to tighten monetary policy even more. 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
Next Week: Industrial Production In Hungary May Show A Better-Than-Expected Performance

Hungary: as you probably predicted, interest rate remains unchanged

ING Economics ING Economics 22.11.2022 20:32
The National Bank of Hungary repeated its “whatever it takes” stance at its November rate setting meeting. Interest rates remained unchanged. The short-term focus remains on market stability until a trend improvement in risk perception occurs. Asset prices remain in the grip of non-monetary decisions, but we remain constructive in our views The National Bank of Hungary in Budapest Central bank maintains its "whatever it takes" stance Similar to the late October rate setting meeting, the widespread market expectation has been met. This means no change in the monetary policy set-up. The central bank did not touch the interest rates in late November. This leaves the regular overnight deposit rate at 12.50%, the base rate at 13% and the overnight repo rate at 25%. According to the Monetary Council’s assessment, maintaining the current level of the base rate for a prolonged period is consistent with the achievement of the price stability objective over the monetary policy horizon. As a second layer to the monetary policy, the central bank continues to use its tools to tighten the liquidity conditions. In line with that, the NBH decided to hold yet another 2-month deposit tender on 30 November. This shouldn’t come as a surprise with the previous long-term deposits (worth HUF2.6tn) maturing on 1 December. Moreover, during the last month of the year, the NBH will again hold FX swap tenders providing euro liquidity and discount bill auctions with maturities extending beyond the end of the year. For the latter, the central bank will use a fine-tuned framework, possibly raising the demand in those central bank bills, draining more liquidity. The third layer of the monetary policy mix is provided by the temporary targeted measures introduced in mid-October. We don’t expect any change in this framework in the remainder of the year. The Monetary Council still sees several external risks (war, global monetary policy, energy crisis, general investor sentiment) and internal risks (Rule-of-Law procedure, current account imbalance), which warrant the prolonged use of this new, highly flexible monetary policy set-up. The forward guidance was updated in a way in that it reflects a possible trigger regarding the implementation of the exit strategy from this third phase. The NBH focuses on sustained shifts in financial market conditions, and it will use its instruments introduced in mid-October until a trend improvement in risk perceptions occurs. In our view, this means that the central bank will take its time to assess the market outcome of a possible positive end to the Rule-of-Law debate and won’t immediately react with its monetary policy set-up. Regarding the state of the economy, the Monetary Council noted the negative quarter-on-quarter GDP growth in the third quarter and expressed its view about a further slowdown ahead. When it comes to the inflation, we agree with the central bank’s view here as well, that inflation is expected to peak in the coming months, but the normalisation of price pressure will be a slow process. FX and rates markets reaction The Hungarian IRS curve normalised significantly since the last emergency rate hike in mid-October, in line with our steepening view and our intention is to maintain this view. Looking at the 2-10y spread, the short-end leg has fallen from levels above 16% to below 12% and we should see further normalisation if the forint remains under control, but of course the scope to go lower is already limited for the weeks ahead. On the other hand, the long-end leg is being dragged down largely by the global rally which we believe is only temporary in nature and expect a correction soon. Thus, overall we maintain a steepening bias with an eye on the forint and global conditions. On the Hungarian Government Bond (HGB) side, the Ministry of Finance and Debt Management Agency are in a very comfortable position at the moment with essentially a done issuance for this year and enough cash buffer to allow it to avoid adverse market conditions. We expect fiscal policy to consolidate next year, which, while not wowing the crowds, still paints the best picture in the CEE. But for now, we see that the EU story is more about FX trades and the FI market is still struggling with liquidity issues and high volatility. Therefore, we see better value in other countries in the region for now, but believe HGB's time will come next year and we remain constructive in our views. When it comes to the Hungarian forint, we see it to rather moved by non-monetary events and shocks in the short run. The next milestone is the upcoming Ecofin meeting on 6 December, when – based on the already published agenda – we expect a positive outcome. This means a reduced temporary freeze of Cohesion Funds and a signed RRF Plan, in our view. The latter would mean that Hungary will be able to avoid the worst-case scenario, losing access to €4.6bn in grants from the RRF (the funds can be used until 2026). This clearly positive outcome might free up the potential in HUF as it will clear some grey clouds regarding net external financing of the country. However, the market reaction to the latest cap measure remains to be seen. The government rolled out a deposit rate cap for institutional investors, which is a wild card for the markets. This could raise some questions about the general tightness of monetary conditions, limiting somewhat the upside potential in HUF. Nevertheless, we still see EUR/HUF at around 400 by the end of the year. Read this article on THINK TagsReview NBH 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
FX: The Gap Versus The FX spot Rate In Poland Is Already The Largest In The CEE Region

Poland: business employment rose 2.4% year-on-year

ING Economics ING Economics 22.11.2022 19:57
In October, employment in the business sector grew by 2.4% YoY, beating both expectations and the previous print (2.2%). Wage growth came in below expectations (13% vs 14.2% YoY), as companies prepare for economic slowdown and a strong hike in the minimum wage next year. Given the labour shortage, markets should adjust more via wages than via employment   Labor demand remains strong despite signs of a slowdown in some sectors, such as construction. Adding to this is the large number (approximately 400,000) of refugees from Ukraine who have found work in Poland since the war broke out and are likely to be largely unaccounted for in the CSO's employment data. Combined with the demographics, this suggests a continued tight labor market and little room for unemployment to rise despite the economic slowdown that Poland is facing in 2023. However, after a very successful start to the year, a slowdown in demand for jobs is evident in many areas of the economy. This is primarily seen in manufacturing, where 7,000 full-time jobs have been lost since January. Information and communications is still doing very well (14,000 jobs gained), which may be related to the relocation of some companies to Poland from the East after the start of the Russian aggression. Employment in retail, among others, is also growing, which is probably related to the influx of refugees into the country. On the other hand, wage growth was weaker than expected - its rate slowed from 14% to 13% YoY, below consensus (14.2% YoY). Given how strong labor demand is, we can assume that the lower propensity of companies to raise wages is due to preparation for the economic slowdown, but also to prepare company budgets for a large increase in the minimum wage in 2023. It should be noted here that in real terms, wages have been falling almost continuously since April, and this is unlikely to change in 2023 as well. The trend is already resulting in weaker consumer demand, especially for durable goods. This is one of the key reasons for the slowdown in GDP growth we expect next year. So far, everything indicates that the condition of the labor market, for both employment and wages, will be better than that assumed in the latest NBP inflation projection. This is one of the reasons why we believe that the return of CPI to the NBP's target may prove to be for longer than the projection assumes. This will be reflected primarily in stubbornly high core inflation. Also we point out that with the structural labour shortage, the labour market should adjust via slower wage dynamics than employment cuts. Companies prefer to hoard labour when any slowdown is seen as temporary and to rather adjust wages - this time however even a wages slowdown may be shallower due to the strong countercyclical hike in the minimum wage planned for 2023 (by 19.6%). 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
The Nasdaq 100 Index Has The Potential To Appreciate Upwards

Rates Spark: Reasons For The Bond Rally To Extend In The Near Term

ING Economics ING Economics 22.11.2022 09:34
We see a case for the bond rally to extend in the near term but we expect the move to run our of steam ahead of the next weeks’ inflation and employment data In this article Drift lower in yields to continue for a few days but is increasingly running on fumes Today’s events and market view   Drift lower in yields to continue for a few days but is increasingly running on fumes We didn’t have a potential OPEC output increase on our list of reasons why bonds should continue to rally this week but it clearly doesn’t hurt. Our reasoning had more to do with classic bond fundamentals. Even if winter has proved mild so far, and this may well change, we expect PMIs’ gradual slide lower to drive home the message that Europe is headed for a recession. What’s more, the Federal Open Market Committee minutes to be released tomorrow night are likely to paint a less hawkish picture than Powell’s press conference did after the meeting. Both would be supportive for bonds, and help them extend their already impressive rally. The odds of a snapback higher in yields are rising There is one problem, however. We think this is the wrong macro move and the odds of a snapback higher in yields are rising. For one thing, the all-important batch of employment and inflation releases that starts next week could well  trigger a wave of position-squaring from short-term longs. More importantly, volatility in economic releases, and the solid performance of US employment data so far in this cycle, means the bar for a further bond rally is higher and less likely to be met. Finally, as bond real rates drop, the odds of a pushback from central banks increases. In the case of 10Y German Bund, this means any dip below 2% in yields is unlikely to last past the end of this week in our view. In the case of US Treasuries, any test of 3.75% to the downside is likely to set up another jump back towards 4%. The drop in real rates is a headache for central banks fighting inflation Source: Refinitiv, ING Today’s events and market view Today’s European economic releases consist of the eurozone current account figures, as well as consumer confidence. The latter is expected to edge up slightly after its spectacular fall earlier this year. The UK Office for Budget Responsibility (OBR) testimony will also be closely watched by sterling investors given the controversy surrounding the government’s budget and economic forecasts. The European Central Bank speakers list features Robert Holzmann, Olli Rehn, and Joachim Nagel. Germany will make up today’s supply slate with a €3bn 5Y sale. The US Treasury will sell $35bn 7Y T-notes. The UK will sell 50Y inflation-linked gilts. The US economic calendar brings an update to the Richmond Fed manufacturing index. Fed speakers are likely to have a hawkish tone thanks to Loretta Mester, Esther George, and James Bullard all due to make public comments. 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
Saxo Bank Podcast: Key Economic Indicators Point To An Incoming Recession In Europe

The Positive Sides Of Lower Energy Prices In Europe Are Overshadowed By The Covid Situation In China And The War In Ukraine

ING Economics ING Economics 22.11.2022 09:13
Despite a goal-rich start at the World Cup in Qatar, markets are all about defense right now. New Covid restrictions in China are fuelling a return to the safe-haven dollar while investors wait for tomorrow's FOMC minutes. This may be laying the groundwork for a broader USD recovery into year-end. Elsewhere, we expect a 50bp rate hike by the RBNZ In this article USD: Recovery mode EUR: Preparing for a longer downtrend NZD: We expect a 50bp hike by the RBNZ CEE: EU disputes turn the spotlight from Hungary's central bank   USD: Recovery mode China’s Covid situation has suddenly returned as a very central driver for global markets this week. Over 27,000 cases were reported today, with the city of Guangzhou being the new epicentre of the outbreak, and local authorities are reportedly scrambling to impose those same restrictive measures that appeared a thing of the past after recent signals from the central government that the zero-Covid policy would be gradually abandoned. In FX, this has fuelled a return to the dollar. After all, optimism on China’s outlook was one of the two key forces - along with speculation about a dovish pivot by the Fed – behind the sharp dollar correction earlier this month. On the Fed side, tomorrow’s minutes will be important to watch, but the recent Fedspeak has undoubtedly added a layer of caution to the dovish pivot enthusiasm, which could mean investors may also be more reluctant to overinterpret dovish signals from the minutes. We have a few speakers to monitor today amid a very light data calendar in the US: Loretta Mester, James Bullard (both hawks) and Esther George (more neutral). Another theme to watch today will be the reported OPEC+ plans to increase output. The news caused an acceleration in the crude sell-off yesterday, with Brent trading below $85/bbl before recovering after the Saudis denied the reports. Should output hike speculation mount again, expect some pain for commodity currencies, as the combination with resurging Covid restrictions in China could prove quite toxic. We continue to see the dollar at risk of new brief bearish waves this week, but we note that the environment has now turned more benign for the greenback, and this may be laying the groundwork for a re-appreciation into year-end, which is our baseline scenario. We could see some consolidation around 107.50/108.00 in DXY today. Remember that liquidity will run significantly thinner in the second half of the week as the US enters the Thanksgiving holiday period. Francesco Pesole EUR: Preparing for a longer downtrend EUR/USD plunged back to the 1.0250 area as markets jumped back into defensive dollar trades yesterday. Indeed, the negative impact of China’s new Covid wave on the rather exposed eurozone economy and of an ever-concerning situation in Ukraine are overshadowing the positives of lower energy prices. We see further room for a contraction in EUR/USD this winter and continue to target sub-parity levels into the new year, as discussed in our 2023 FX Outlook. The eurozone calendar includes consumer confidence data (which is expected to have marginally recovered) and speeches by the European Central Bank's Robert Holzmann, Olli Rehn and Joachim Nagel. Expect some support at 1.0200 in EUR/USD: a decisive break below that level could underpin the return to a bullish dollar narrative and unlock more downside risks. Francesco Pesole NZD: We expect a 50bp hike by the RBNZ The Reserve Bank of New Zealand will announce monetary policy at 0100 GMT tomorrow, and it is a close call between a 50bp and a 75bp hike. As discussed in our meeting preview, we see 50bp as more likely, as signs of an accelerating housing market contraction warn against an overly aggressive approach. Markets (66bp in the price) and the majority of economists are, however, leaning in favour of a 75bp move. New rate and economic projections will also be released, and there are some key questions to be answered. The first of these is where the RBNZ will place the peak rate, which is currently at an unrealistic 4.10% (rates are at 3.50% now), so should be revised to 5.0% or higher, and how many cuts will be included in the profile. The second is how much more pain will be included in the forecasts for the housing market. Third is how fast inflation is projected to drop given the higher CPI readings for 3Q but more aggressive tightening. A half-point hike would likely be seen as a dovish surprise by markets at this point, but a significant revision higher in rate projections could mitigate any negative impact on the New Zealand dollar. Either way, expect any post-meeting NZD moves to be short-lived, as global risk dynamics and China news will soon be back in the driver’s seat for the currency. NZD/USD is at risk of falling back below 0.60 before the end of this year, while we target a gradual recovery to 0.64 throughout the whole of 2023. Francesco Pesole CEE: EU disputes turn the spotlight from Hungary's central bank Today is the busiest day in CEE this week. In the morning we start with the monthly indicators in Poland. The main focus will be industrial production for October, as a leading indicator for the rest of the region. Polish industrial production is benefiting from an improvement in supply chain functioning, which supports export-oriented industries, including automotive and electrical products. We expect only a slight slowdown from 9.8% to 8.8% year-on-year, above market expectations. Labour market numbers should confirm the still tight conditions with wage growth of 13.8% YoY. PPI will confirm continued price pressures in the economy with the YoY number accelerating from 0.2% to 1.1% in October. From a market perspective, today's numbers may be perceived as having implications for the National Bank of Poland's economic outlook and monetary policy. After all, it is wage growth that has been the biggest surprise to the central bank's forecast in the past. Thus, today's numbers may revive market hopes for an additional rate hike and support the zloty in the short term. However, we remain bearish in the medium term with a forecast of 4.90 EUR/PLN at the end of this year. Later today we will see the National Bank of Hungary (NBH) meeting. We do not expect any fireworks at this rate-setting meeting. The latest data regarding inflation and GDP were broadly in line with the central bank's expectations and the next staff projection update is only due in December. Against this backdrop, we don't see any game-changing moves. When it comes to the risk environment, we haven't seen a material improvement in domestic or external risk factors, which were flagged by the central bank as triggers to consider changes in its monetary stance. The Hungarian forint has been hovering in the 400-415 EUR/HUF range for the past few weeks, far from the NBH's pain threshold. The market is pausing in place, awaiting news from the Hungarian government's negotiations with the European Commission. These could theoretically come today, which would overlay today's NBH meeting. However, from last week's hints, it is likely that we will hear more bad news before any good news comes, which may cause further volatility in the FX market. However, a happy ending to this saga should see the forint below 400 EUR/HUF in our view. Frantisek Taborsky 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 Events In China May Help Financial Markets And The Global Economy

The China’s Central Bank (PBoC) Is Going To Provide Interest-Free Matching Loans To Commercial Bank Lending

ING Economics ING Economics 22.11.2022 08:49
China boosts lending to the property sector as rising Covid cases take their toll on the CNY  In this article Macro outlook What to look out for: Fed speakers   Source: shutterstock   Macro outlook Global Markets: After treading water on Friday last week, US stocks resumed their decline on Monday. In terms of catalysts for the down move – possibly Dell’s projections of weak earnings in the current quarter may have played a part. The S&P500 drifted 0.39% lower, while the NASDAQ fell 1.09%. Recent increases in bond yields may also be beginning to take their toll, though Monday saw only a further small rise in the 2Y US Treasury (+1.9bp) and the 10Y yield was virtually unchanged (-0.2bp) at 3.827%. EURUSD has dropped to 1.0241 from about 1.0330 yesterday, which you could put down to a slight increase in benchmark natural gas prices in Europe, though it was also spread widely across the G-10 FX space, so more likely just reflects a swing back behind the USD. The AUD has dropped back to just over 66 cents, Cable is back down to the low 1.18s and the JPY has increased to over 142.  Asian FX has tumbled across the board, led as usual by the region’s high-beta currencies, the THB and KRW. The CNY has moved back up to 7.1653 up from 7.12. Fed comments remained in line with the recent slant of rhetoric, with Mary Daly’s the most notable, talking about being mindful of the lags of policy, the possibility of a slowdown in the pace of tightening, and 5% as a good place to start thinking about peak Fed funds, though with upside risk.    G-7 Macro: Yesterday was slim pickings in terms of G-7 Macro releases. The US Chicago Fed national activity index recorded a figure consistent with slightly sub-trend US growth, though to be fair, the index was weaker in May and June of this year. The OECD Economic Outlook is published today, which will probably get some headlines for their latest, and presumably downgraded growth forecasts. The US releases the November Richmond Fed manufacturing survey. Nothing to get excited about. A good day to update charts and finish off reports.   China: Mainland China’s Central Bank, the PBoC, is going to provide interest-free matching loans to commercial bank lending for the purpose of finishing uncompleted residential property projects. The amount could be around CNY200 billion. The main point is that this is a matching loan for a specific purpose. This is a follow-up policy after PBoC allowed banks to lend to "good quality" property developers recently, and should provide funding for construction activity on uncompleted residential property projects. Another similar policy is that on 8th Nov, the government allowed credit-enhancing tools (standby letter of credit is one of the tools) for privately owned property developers to raise funds in the bond market. The market expects that this policy will help property developers to raise CNY250bn.  The sum of both policies is small relative to the remaining construction of the uncompleted projects. The main purpose of these policies is to stabilize confidence by finishing some key projects. Then credit risk should fall, and the industry could begin to operate without depending on such supportive measures. Nevertheless, we expect that the turnaround of credit risks in the industry will only happen around 2H23 to 1H24.   China: Beijing’s Covid cases have climbed, although the government still labels Chaoyang district, the business centre, a low-risk area. Most Beijing residents have apparently still been staying at home. The central government will be closely monitoring how much pressure the relaxed Covid measures are putting on the healthcare system before responding. The mortality figures are another indicator that the central government is concerned about. We expect that the economic impact of the current situation will still reflect the higher Covid cases even under the new “relaxed” Covid measures. What to look out for: Fed speakers South Korea consumer confidence (22 November) Taiwan unemployment (22 November) US Richmond Fed manufacturing index (22 November) Fed’s Mester, George and Bullard speak (23 November) RBNZ cash rate (23 November) Singapore 3Q GDP final and core inflation (23 November) Thailand trade balance (23 November) US durables goods orders, new home sales, University of Michigan sentiment and initial jobless claims (23 November) Fed meeting minutes (24 November) Japan PMI (24 November) Korea BoK policy meeting (24 November) Japan Tokyo CPI inflation (25 November) Malaysia CPI inflation (25 November) 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 market affected by news that OPEC+ will enlarge output

Crude oil market affected by news that OPEC+ will enlarge output

ING Economics ING Economics 22.11.2022 07:21
A stronger USD weighed on most of the commodities complex yesterday. The oil market also saw significant volatility after reports that OPEC+ is looking to increase supply at its next meeting. These reports were later denied by Saudi Arabia Source: Shutterstock Energy - OPEC+ noise starts already Oil prices were whipsawed yesterday with ICE Brent trading in almost a US$6/bbl range. The catalyst for the increased volatility was a report from the WSJ suggesting that OPEC+ is looking to possibly increase output by as much as 500Mbbls/d when the group next meets on 4 December. However, this report was quickly denied by the Saudis, and this led the market to recoup most of its losses. It would be an odd move from OPEC+ to increase supply when there is still so much demand uncertainty, and while there is still so little clarity on what the full impact of the EU ban on Russian oil will be. We believe it is unlikely that the group makes any further changes to its deal after reducing production targets by 2MMbbls/d at their meeting in October. If we are to see changes, this would likely only be next year when there is more clarity on Russian supply. Russia’s Deputy Prime Minister, Alexander Novak, has once again made it clear that Russia will not supply crude oil or refined products to countries which follow the G-7 price cap. Instead, oil will either be redirected to those nations who choose to ignore the price cap or Russian output will be reduced. It is expected that the market will receive more clarity on the G-7 price cap this week, including the level at which the group plans to set the cap.   Metals – China Covid concerns push metals lower LME metal prices fell on Monday as concern over China’s potential reopening amid a rise in Covid-19 cases weighed on sentiment. Beijing reported three Covid deaths over the weekend as cases rose, fuelling concerns that tougher restrictions in the capital might return once again. A stronger dollar added to the downbeat mood. LME copper prices dropped by around 2.4%, while LME aluminium prices were also down by around 2.1%. A monthly survey from Mysteel showed that Chinese stainless steel production could drop by around 5% MoM in November as higher nickel prices weigh on the profitability of mills. While LME nickel prices have increased by around 15% in the current month, China’s stainless steel prices have been largely flat due to soft demand for end-products. Rising Covid-19 cases and threats of lockdowns are likely to further weigh on operating rates over the coming weeks and keep nickel demand under pressure.      Read this article on THINK TagsSaudi Arabia Russian oil price cap Russian oil ban OPEC+ Covid-19 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
New-home sales are likely to continue to fall - and there is no game changer here for the Fed

USA: Energy transition is a quite complex process. ING Economics talks a lot of related threads

ING Economics ING Economics 21.11.2022 23:11
The Biden administration’s 100% clean power by 2035 target needs a huge increase in renewable energy use. But challenges around transmission lines, extreme weather events, supply chains and batteries hinder a faster deployment. Federal and state policies are crucial to address these challenges; corporate purchases are also key to speed up the shift As part of its climate ambition, the Biden administration is targeting to transition the US to reach 100% clean electricity generation by 2035. This requires a comprehensive decarbonization process of the US power sector, which includes decreasing the use of coal and especially unabated coal, maintaining an adequate role of nuclear, and albeit not a popular choice today, exploring the use carbon capture and storage to reduce emissions from coal- and gas-fired plants. But the most important driver to decarbonize the power sector is to substantially deploy renewable energy, in particular solar and wind, which is the focus of this article. With continuing cost declines, electricity generation from renewable sources in the US jumped from 430 gigawatthours (GWh) in 2010 to over roughly 880 GWh in 2021. However, the percentage of electricity generation from renewables is at 21-23% today, and there is still a long way to go to help the US realize the 100% clean electricity target. Insufficient transmission lines and storage capacity will add difficulties for deploying renewable electricity; climate change induced severe weather conditions will disrupt grid stability; and the energy transition – such as the development of electric vehicles (EVs) – will add pressure to the grid. As such, federal legislation as well as state-level targets and incentives, will be crucial in improving needed infrastructure, facilitating coordination among grid operators, and preparing the grid for a smoother transition process. Meanwhile, corporate power purchase agreements have become an increasingly important factor to drive up the demand for renewable energy. Electricity generation in the US Source: US Energy Information Administration Insufficient infrastructure and interconnection difficulties hinder a faster development of renewables The cost of renewable energy has plunged over the past decade. Global levelized cost of electricity (LCOE) of solar PV in the US decreased from more than $300/MWh in 2009 to $32-41/MWh in 2021, and the LCOE of wind fell from over $100/MWh to around $38/MWh during the same period. This has put the LCOE of renewable energy on similar levels with those of coal and natural gas.   Yet despite the drop in cost, wind and solar have not seen a rapid-enough deployment rate that many hope to see. So, what are the challenges to deploying renewable energy faster and effectively managing the grid in the US? The first is the insufficient transmission infrastructure. Currently, there is a mismatch between high generation regions (e.g. the Midwest and Southwest) and the regions with denser populations and higher demand (e.g. the Northeast). And because wind and solar plants require large land areas to be built, these plants are in general located far away from cities where demand is. Therefore, a lot more transmission lines will be required to unlock the infrastructure bottleneck. A Princeton University study concludes that the transmission system in the US needs to triple to achieve 100% power sector decarbonization – that is roughly 400,000 miles of new lines. This equals about 30,000 miles of new transmission lines per year if the US is to reach 100% clean electricity by 2035, but in reality, only 1,800 miles were constructed per year in the past decade. A lot more transmission lines will be required to unlock the infrastructure bottleneck. Moreover, the regulatory design of the grid has made it harder for power projects – which are increasingly renewable – to be connected to the grid. When a project applies to be connected, the responsible regional transmission organization needs to study its impact on the grid and will the project owner bear the cost of network upgrades, which can be substantial. The fundamental problems are that first, the permitting process and staffing levels were designed to serve fewer larger developers as opposed to a large number of small renewable developers. Second, the cost for network upgrades can result in marginally profitable projects being shelfed rather than built. Consequently, there has been a backlog of proposed renewable projects in the interconnection queues of regional transmission system operators. It is estimated by Lawrence Berkeley National Lab that there were over 8,100 projects applying to be connected to grid interconnections by the end of 2021. This translates into to 1,443 GW of generation capacity and 462 GW of storage capacity that is waiting for feedback on interconnection feasibility and potential network upgrade costs. The time a proposed project needs to get to commercial operation went up from 2.1 years for 2000-2010 to 3.7 years between 2011-2021, and historically only about 23% of the projects actually get built. These challenges have hampered the construction of renewable projects and are expected to cause substantial delays in decarbonizing the power sector. Generation, storage, and hybrid capacity in interconnection queues Source: Lawrence Berkeley National Lab Battery capacity buildup provides additional flexibility to the grid but still faces challenges As the deployment of solar and wind picks up, it has become more important to build more batteries that can store electricity and serve at peak demand hours, especially in markets with high renewable penetration. Utility-scale battery storage capacity in the US tripled to reach to 4.6 GW in 2021, from 1.4 GW in 2020 and less than 500 MW in 2016, thanks to a plunge in the cost of production. Over 66% of the added storage capacity in 2021 was co-located with solar projects, which allowed owners to take advantage of federal tax credits and increase expected returns on their investment. In California, batteries have been playing a sizable role in shifting renewable electricity produced in the afternoon to meet peak demand in the evening. This has helped prevent rolling blackouts during summer heat waves. However, 10% of California’s battery fleet experienced outages during daytime, compared to an average of 4% of outages in the state’s gas fleet. While 10% is a decent number, there is still a large gap to bridge. The much bigger challenge with batteries is the limited duration. Moreover, the capacity that utility-scale batteries can provide is still a fraction of the total renewable capacity in the country, at 3-4% today. The much bigger challenge with batteries is the limited duration (max. 4 hours), which does not allow for full replacement of traditional dispatchable generation such as gas plants. What is needed are long duration batteries (8 hours) to fully replace gas plants. This technology needs to be developed, commercially proven, manufactured on a large scale, and then deployed in large quantities. Supply chain uncertainty and bottlenecks can raise costs and delay deployment Another headwind to stay is supply chain costs, which have been on the rise over the past two years because of geopolitics- and macroeconomics-induced disruptions and bottlenecks. China dominates the global renewable energy supply chain, manufacturing 80% of the world’s key solar panels components and almost 60% of nacelle, an important input for wind turbines. Since late 2020, the cost of solar components has jumped in the US, due to reasons such as tariffs imposed on materials of Chinese origin, certain restrictions on importing from China, as well as investigations on several Southeast Asian countries which allegedly export solar panel materials using Chinese inputs. What added to the supply chain disruption is the elevated shipping costs due to pandemic-related shipping bottlenecks between mid-2021 and the beginning of 2022. Shipping costs have largely fallen, but can easily go up again in case of future disruptive events. Several recently passed federal legislations aim at domesticating clean energy supply chains. These measures will in the long run decrease dependence on China, but will in the short to medium term lead to considerable cost increases as the US does not currently have established manufacturing capacity to produce needed components. It is estimated that it would likely cost the US approximately $113bn to build the factories required for PV, battery, and electrolyzer plants to meet demand in 2030. This could hinder the speed of renewable development. Climate change and electrification add further pressure to the grid In addition, there are also exogenous, intensifying factors that are raising the hurdles for the power sector to be decarbonized on time. Two factors stand out: climate change and surging power demand from transport sector electrification. Extreme weather conditions are making the grid more vulnerable. Extreme weather conditions are making the grid more vulnerable. In early September, a record heatwave in the west coast triggered soaring demand for power and almost led to grid operators implementing outage rotations. This was the second power outage threat in the state since August 2020. And California is not the only case. In February 2021, Texas suffered from a two-week cold snap that resulted in massive blackouts; the state also experienced the hottest July in the last 128 years of record keeping. The transmission network in the US has failed far more often in recent years, increasingly driven by severe weather conditions. According to the US Energy Information Administration, since 2013, the average of duration of power interruptions per year without major events has stayed flat at around two hours per customer, but power interruptions caused by major events have substantially risen from less than two hours in 2013 to more than five hours in 2021. The second potentially disruptive factor is the need to support electrification targets. It is estimated that in the US, electricity generation will have to double by 2050 if two-thirds of the light duty vehicle fleet are electrified. This means that transmission owners will need to invest billions of dollars to upgrade the grid (substations, transformers, grid feeders, lines), with electric cars becoming an important part of managing reliability and supply in electric grid. For California, the state’s aggressive climate plan would increase electricity consumption by 68% by 2045, bringing enormous pressure for the grid to be modernized and capable of integrating electric vehicles. Federal-level policy to address key challenges and spur more renewable energy deployment The above-mentioned bottlenecks call for stronger federal policies to incentivize renewable energy development. This is partly what the recently signed Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) are designed to do and will hopefully tackle some of the challenges. The IIJA plans to spend $73bn on updating and expanding the US power infrastructure, which is urgently needed for the renewable projects to move forward. The IIJA is also targeting power grid-related research and development. Moreover, the government is investing $47.2bn in addressing extreme weather events. The amount of investment is likely not enough but is important in getting the snowball rolling. The landmark Inflation Reduction Act, which contains roughly $370bn of clean energy investment, extends current incentives for wind and solar projects for at least 10 years. The IRA has also created two new sets of tax credits for projects that are ‘technology-neutral’ – eligible power generation facilities will need to have net-zero emissions. The IRA also makes investment tax credits available for grid-connected stand-alone batteries – previously batteries needed to be coupled with renewable energy to qualify for federal tax credits. All these would help drive new renewable installations and further drive down cost. Bloomberg New Energy Finance – whose analysis is generally on the more bullish side – estimates that cumulative solar and wind capacity will reach 757 GW by 2030, up from its pre-IRA forecast of 650 GW by 2030. The IRA is also expected to boost storage capacity by 30 GW, hitting 110 GW by the end of the decade. Estimated 2022-31 tax credits and incentives in the Inflation Reduction Act Source: ING Research Cumulative renewable and storage capacity Source: Bloomberg New Energy Finance   The midterm elections, where Republicans have regained control of the House, will to some extent frustrate the Biden administration’s climate agenda. While the IRA is unlikely to be repealed, a Republican-controlled House will add difficulties to the execution of clean energy tax incentives and funding under the IRA. Indeed, Republicans have already indicated they would strictly oversee the spending allocation process.   Besides legislation, the Department of Energy announced in October to have launched the Interconnection Innovation e-Exchange in partnership with several research laboratories. The initiative aims to improve clean energy interconnection through establishing a stakeholder engagement platform, providing data collection and analysis, as well as offering technical assistance to develop region- and state-specific solutions. Supreme Court decision casts doubts on power sector emissions regulation At the end of June, the Supreme Court ruled that the Environmental Protection Agency (EPA) does not have authority to put a limit on greenhouse gas emissions from power plants. The ruling was based on the "major questions" legal doctrine that requires explicit congressional authorization for action on issues of broad importance and societal impact. This decision dealt a blow to the Biden administration’s climate agenda by weakening the EPA’s power to issue sweeping regulations from the federal level to curb power sector emissions. Nevertheless, the EPA is still in possession of power to limit emissions of pollutants such as carbon monoxide, lead, sulfur dioxide, etc.; it can also impose energy efficiency standards to be met by power plants. These measures will not be as effective as the EPA being able to directly regulate carbon dioxide and other greenhouse gas emissions, but it would still be useful in indirectly making it more expensive for coal-fired power plants to operate. State-level efforts are crucial to renewables deployment and grid improvement With insufficient federal regulation and a power stalemate in Washington DC, state governments and regulators need to ramp up efforts to decarbonize power plants. Two popular policies are renewable portfolio standards (RPS), which require utilities operating in a state to procure a certain percentage of renewable electricity, and clean energy standards (CES) in the supply of electricity to customers in their service territory. Compliance with the RPS is evidenced through renewable energy credits (REC) which are generated with renewable energy (e.g. 1 MWh of wind powered electricity produces 1 REC). By the end of 2021, 31 states plus the District of Columbia have adopted an RPS or a CES. Some states have also paired their requirements with cost caps to prevent huge increases in customer electricity bills. Bloomberg New Energy Finance estimates that if all current standards are met, renewable energy generation in the US would grow by 82%. However, these requirements in general are not aligned with the aggressiveness of the Biden administration’s goal. Of the states with an RPS/CES, 22 of them have a 100% clean/renewable electricity goal, but most of these goals are set for around 2050, more than a decade later than the Biden administration’s 2035 target. Moreover, Texas has already achieved its Renewable Generation Requirement established in 1999, and there has not been an updated one. This misalignment means that state-level support is there and will push for more renewable deployment, but are not enough just yet to fill the void of federal policy. Much effort, such as demand management and weather preparedness, are being made by state entities to improve grid flexibility and stability. Yet still, much effort, such as demand management and weather preparedness, are being made by state entities to improve grid flexibility and stability. For demand management, one common approach is to enhance reliance on variable retail tariff design and attract demand during non-peak hours. Another emerging approach is for utilities or demand service providers to manage residential load on behalf of customers and be compensated based on avoided costs. Moreover, regulators are experimenting imposing requirements that can facilitate the process. New York State’s Public Utility Commission requires utilities that are exploring transmission upgrades also consider demand management. On adapting to climate change, California is one of the states that have begun to improve its power system to be better prepared for extreme weather events. After the 2020 heat wave, California has been building backup generation sites, connecting more storage facilities to the grid, and improving coordination mechanisms during emergencies. Admittedly, the state has also extended the life of certain thermal plants, which is evidence that climate concerns will make the power decarbonization path a lot bumpier. Corporate ESG practices can further drive the demand for renewable energy As more corporates announce sustainability targets and actions, Scope 2 emissions, or emissions from an entity’s purchased power and heat, have become a focus for companies to decarbonize their businesses. Most companies reduce their Scope 2 emissions through corporate power purchase agreements (PPAs), a long-term contract under which a corporate agrees to buy electricity and the associated RECs from a renewable energy project. The US has seen tremendous growth of corporate PPAs in recent years: renewable capacity contracted by companies soared from a little over 3 GW in 2017 to 17 GW in 2021, with solar dominating the purchasing portfolio. Such a growth has largely been supported by purchases by tech companies, who are committed to decarbonize their data centers and other operations. While 2022 is likely to see a slowdown in total corporate PPA purchase, there has been a continuing diversification of top buyers, including telecom company Comcast and chemical companies LyondellBasell and BASF. And there is a strong favour for virtual PPAs over physical PPAs, as the former allow the buyer to be in a different electricity market than the renewable project. The share of virtual PPAs of all deals in the US went up from 70% in 2021 to 95% from January-July 2022. Admittedly, there are challenges for the corporate PPA market. For virtual PPAs, for instance, fixed PPA prices need to be competitive with wholesale market prices for the corporate PPA market to be sustainable, which is not the case all the time. Nevertheless, because of growing corporate sustainability practices, corporate PPAs will continue to play a key role in the long term in driving renewable energy demand in the US. US PPAs by technology Source: Bloomberg New Energy Finance; *2022 numbers are from Jan-Oct Top buyers of clean energy in the US in 2022 (Jan-Jul) Source: Bloomberg New Energy Finance 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
Riksbank Monetary Policy Decision Ahead

2023 FX Outlook: Swedish Krona (SEK) Remain Vulnerable On The Back Of European And Global Risk Factors

ING Economics ING Economics 21.11.2022 14:22
For now, higher-than-expected inflation data trumps the mounting concerns about the housing market for the Riksbank. A 75bp rate hike looks likely on Thursday, and we expect one final 50bp increase in February In this article The Riksbank is likely to hike faster than signalled in September Riksbank is keen to stay ahead of the ECB, but housing is a risk A stronger SEK still unlikely in the near term The Riksbank is likely to hike faster than signalled in September When the Riksbank hiked its policy rate by a full percentage point back in September, it was coupled with a message that this was unlikely to happen a second time. The bank’s forecasts pointed to a peak policy rate of 2.5% in April, effectively setting the stage for a 50bp hike this week. But in what has become a familiar tale for central banks, core inflation has since come in higher than the Riksbank had anticipated, and a more aggressive move now looks likely. The Riksbank's September rate hike projection Source: Riksbank, ING   At 7.9%, core CPIF is half a percentage point above the central bank’s September forecast. The jobs market still looks strong, too, even if we saw an unexpected rise in the unemployment rate in the latest set of data (these numbers are fairly volatile). Together with the weak krona, it looks like policymakers will opt for a 75bp rate rise on Thursday. We’re forecasting that rates peak at 3% in February. Core inflation rose from 7.4% to 7.9% in October Source: Riksbank, ING Riksbank is keen to stay ahead of the ECB, but housing is a risk All of this is reinforced by the recent messaging we’ve had from Swedish policymakers. Among the Riksbank’s hawks, Governor Stefan Ingves has stressed the importance of staying a “comfortable distance” ahead of the European Central Bank. Don’t forget that Thursday’s meeting is the last before February, and the ECB will meet – and presumably hike rates – twice before then. Ingves said in the last set of meeting minutes that the Riksbank would need to “follow along upwards at the same pace” at the very least. However, there are good reasons to think the Riksbank is not very far away from the end of its tightening cycle, and the most obvious of these is the housing market. It’s no secret that Sweden’s economy is among the more interest-rate sensitive, and there are already signs that tighter policy is weighing on the housing market. Transaction volumes have fallen sharply, and by some measures, property prices have already started to fall. The headline Valueguard HOX housing index fell a further 3% in October alone, and the Riksbank has projected more declines to come. Much of Sweden’s mortgage market is either fixed for short periods or not at all. Housing market is declining at a faster pace than expected Source: Macrobond, ING   In short, there’s a growing trade-off for the Riksbank between taming inflation and exposing debt fragilities – a challenge that’s far from unique to Sweden. We expect the Riksbank’s new rate projections to factor in a further 25-50bp of tightening next year, and much will depend on the outcome of wage negotiations in the spring. A stronger SEK still unlikely in the near term The SEK OIS curve is embedding around 60bp of tightening this week, so a 75bp move would likely come as a hawkish surprise. However, we believe a greater focus will be on the new rate projections, which are (unlike in Norway) hardly ever followed to the letter by investors, but will provide an indication of how much appetite there is for further tightening. Implicitly, the projections will also show how much the focus is shifting from the mere inflation-fighting exercise to domestic concerns – in particular on housing. This is important because it will shape how SEK rates react to future data releases. On the FX side, despite the Riksbank’s constant protests against a weak krona, the implications of monetary policy remain rather limited for the near term, where we see EUR/SEK trading around 11.00 and facing upside risks. The RB’s hawkishness has been ineffective at lifting SEK in an unstable risk environment, especially in Europe, and we doubt this will change any time soon. The actual implications may emerge in the longer run. If the RB ends up hiking substantially more than the ECB by the time both central banks’ tightening cycles come to an end, then EUR/SEK may face some downward pressure next year, but only under the condition that risk sentiment stabilises. As discussed in our 2023 FX Outlook, we expect SEK to remain vulnerable on the back of European and global risk factors, and only expect limited downside risks for EUR/SEK into end-2023 despite a widening in the Riksbank-ECB rate differential. We currently forecast 10.40/50 for the pair in 2H23. TagsSwedish krona Sweden 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 Malaysian Ringgit (MYR Is Currently Being Sold On Concerns About A Lack Of Stable Government

The Malaysian Ringgit (MYR) Is Currently Being Sold On Concerns About A Lack Of Stable Government

ING Economics ING Economics 21.11.2022 09:21
Malaysia to try to form a coalition government after the General Election results in a hung parliament  In this article Macro outlook: What to look out for: Chicago Fed national activity indicator and South Korea's trade balance Source: shutterstock Macro outlook: Global Markets: Friday did not mark a convincing spell for US equities, and although bourses opened up, they quickly lost ground, before staging a turnaround which left the S&P500 up by less than 0.5%, and the NASDAQ virtually unchanged. Equity futures are similarly lacking in a convincing directional steer today. US Treasury yields were more emphatic, with sizeable increases in yields across the curve, which may in time become the driver for a new down-leg in risk assets. 2Y Treasury yields gained 8.1bp while the 10Y rose 6.3bp to 3.829%. It’s not clear what if anything is driving this latest pick-up in yields. The main quoted Fed speaker over the latest period was Raphael Bostic, whose thoughts of a slower pace of tightening ahead and peak Fed funds rate of 4.75%-5% is hardly game-changing. G-10 currencies are a mixed bag. The EUR lost a little ground to the USD in the face of these higher bond yields and Fed rate hike expectations. EURUSD is now 1.0327, down from about 1.0360 this time Friday. The AUD is only slightly weaker, at 0.6679, while Cable has picked up slightly to 1.1886 though the JPY has weakened back above 140 and is now 140.31. Asian FX rates haven't done a lot. The CNY is a bit stronger against the USD following Friday’s moves which have brought it back down to 7.1198, and that has probably helped pull along the THB for the ride, which is now 35.814. G-7 Macro: It was a quiet end to the week for G-7 Macro, and the existing home sales figures for the US showed further declines, but were roughly in line with expectations, so didn't change the story much.  Today is equally devoid of macro interest, with a quick glance only merited for the Chicago Fed national activity index, which is likely to signal a slightly sub-trend growth reading. China: We expect banks in China to keep the 1Y and 5Y Loan Prime Rates (LPR) unchanged at 3.65% and 4.30%, respectively, given that the PBoC stayed put on the 1Y Medium-term Lending Facility (MLF) rate at 2.75% a week ago. Covid cases have climbed again. This increases the risk of more localised lockdowns even though Covid measures have been eased. This is because quarantine still depends on the number of positive Covid cases. With more relaxed Covid measures it is not surprising to see the number of cases increase. However, this should not trigger a reversal of the policy direction towards further easing of Covid policies in 2023. Taiwan: Export orders should remain in year-on-year contraction as demand for semiconductors reflects softer demand in the US and Europe and uncertainty in China. South Korea: Preliminary (first 20-day) export data has shown exports falling to their weakest since the April 2020 pandemic-induced slump. 20day November exports were 16.7% lower than a year ago, reflecting the weakness of demand in China, Europe, and to some extent the US, as well as the downturn in global semiconductor demand. Imports also fell by 5.5%YoY, which sends a downbeat message about the state of domestic demand, which could yet influence the BoK’s rate-setting intentions. Malaysia: The General Election has not resulted in a clear majority for any party, and today, we will see if talks between former Prime Minister Muhyiddin Yassin’s Perikatan Nasional (PN) Party, which came in second place, and a number of other smaller parties, will be enough to form a coalition government, or whether Anwar Ibrahim’s Pakatan Harapan (PH) coalition, which gained the most seats, can draw in enough support to form a government. Newswires expect a decision later today. The MYR is currently being sold on concerns about a lack of stable government.  What to look out for: Chicago Fed national activity indicator and South Korea's trade balance South Korea advance trade balance (21 November) China loan prime rate (21 November) Thailand GDP (21 November) Taiwan export orders (21 November) South Korea consumer confidence (22 November) Taiwan unemployment (22 November) US Richmond Fed manufacturing index (22 November) Singapore 3Q GDP final and core inflation (23 November) Thailand trade balance (23 November) US durables goods orders, new home sales, University of Michigan sentiment and initial jobless claims (23 November) Japan PMI (24 November) Korea BoK policy meeting (24 November) Japan Tokyo CPI inflation (25 November) Malaysia CPI inflation (25 November) 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
Euro feels a bit better after the release of European inflation data

CEE FX Will Remain On The Stronger Side This Week

ING Economics ING Economics 21.11.2022 09:16
FX markets start a holiday-shortened week quietly, as the forces that drove the recent dollar correction continue to fade. In China, sentiment is softening as the Covid situation deteriorates again. For the Fed, the market is again pricing 5% rates next year. This week the highlight will be FOMC minutes, European PMIs and a few monetary policy meetings In this article USD: FOMC minutes in focus this week EUR: PMIs in focus this week GBP: Sterling could take a welcome back seat CEE: All eyes on Hungary, again USD: FOMC minutes in focus this week The dollar is continuing to crawl higher after its sharp sell-off earlier this month. Driving that sharp sell-off had been a combination of softer US CPI data and some optimism emerging from China regarding Beijing's stance on Covid Zero and the property market. On the latter, it seems that the recent outbreak of Covid in some Chinese cities is still prompting similarly restrictive measures and that the Covid Zero policy has yet to undergo wholesale changes. Additionally, regulatory forbearance on the Chinese property development sector will not turn the economy around. Here our colleague, Iris Pang, remains concerned over China's export sector into 2023. For reference, Korean trade data for the first 20 days of November released overnight was pretty poor - exports falling 17% year-on-year. USD/CNH has comfortably turned higher from the recent low near 7.00. For the Federal Reserve story, Wednesday will see the release of the minutes of the 2 November FOMC meeting. At the time, we felt that it was still a reasonably hawkish meeting - although the Fed clearly wanted to shift the narrative from the size of rate hikes to the terminal rate. The minutes could pose a risk that the current dollar correction extends - especially since we will be faced with thin markets later this week as the US celebrates the Thanksgiving public holiday on Thursday. But assuming there are no big surprises - e.g. 'many participants wanting to take stock of the tightening undertaken so far', we would expect the dollar to find support on dips. Today's session should be reasonably quiet, too. DXY probably trades a 107.00-107.50 range. Upside risks could emerge from rising US Treasury yields were this week's $120bn of US Treasury issuance to demand concessionary pricing. And for those who missed it last week, please see our 2023 FX Outlook: The dollar's high wire act. Chris Turner EUR: PMIs in focus this week EUR/USD continues to edge lower in quiet markets. The recent outperformance in eurozone equity indices is no longer providing a boost. In addition to the continued wall of European Central Bank speakers, this week will see the advanced November PMIs for the eurozone, Germany and France.  The composite PMIs are expected to be in contraction territory for all three and be a reminder that at some point the ECB will probably call time on its tightening cycle. Our team's view is that the ECB hikes 50bp on 15 December (59bp priced in the markets) and then finishes the cycle with a 25bp hike in February. In other words, we look for the cycle to conclude at 2.25% rather than the 2.90% area priced for the markets in late summer. In the short term, EUR/USD has just sunk below support at 1.0270 and we would not rule out it drifting towards the 1.0200 area near term.  Elsewhere, we note that Swedish house prices dropped 3% month-on-month in October. The Riksbank's recent release of its financial stability report warned about the heavy lending to the property sector (42% of GDP) and potential problems with a housing market downturn. Our team still expects the Riksbank to hike rates 75bp to 2.50% this Thursday - but the housing sector is certainly one of the factors which can see the Swedish krona underperform in early 2023 and EUR/SEK retesting the October 11.10 high seems likely. Chris Turner GBP: Sterling could take a welcome back seat After a wild ride since the late summer, sterling could now begin to take less of the limelight. The chancellor has delivered the autumn statement and we are now left to examine how quickly growth softens and how aggressively the Bank of England will tighten when it next meets on 15 December. On the subject of growth, the next input here will be Wednesday's release of the November PMI, where the composite indicator is expected to remain below 50 - for the fourth month in a row. EUR/GBP is softening as the euro seems to be taking the larger strain of the softer China view.  However, 0.8665 should be good intra-day support. We are more bearish on GBP/USD. And unless Wednesday's FOMC minutes throw up some dovish surprises, GBP/USD could drift back to the 1.1700/1710 area this week. Our year-end GBP/USD target remains a reasonably aggressive 1.10 - largely on the back of renewed dollar strength. Chris Turner CEE: All eyes on Hungary, again Last week, we saw the third quarter GDP results across the region, and with the exception of Hungary, we saw rather positive surprises. This week we will see a number of monthly indicators from Poland, including industrial production and labour market data, and the National Bank of Hungary meeting on Tuesday. We do not expect any fireworks from the central bankers at the November rate-setting meeting. The latest data regarding inflation and GDP were broadly in line with the central bank's expectations and the next staff projection update is only due in December. But Hungary will also be in the spotlight at the government level this week. A decision on Hungary's access to the recovery plan is expected to be taken by the European Commission on Tuesday. However, reports last week suggested that the decision could be delayed, which would be a problem for the EU finance ministers' meeting scheduled for 6 December, when a final decision on the matter is due. We expect Hungary to find a deal with the EU, but given the timing constraints, it could be a bumpy road.  In the FX market, conditions were almost unchanged for the CEE region over the past week. While global conditions remain strongly positive for the region, domestic conditions still remain on the negative side in our view though slightly better than they were. The dollar index remains near its lowest levels since mid-August, sentiment in Europe has improved slightly again, and the CEE region continues to unwind its relationship with gas prices as issues are resolved for this winter. On the other hand, local rates remain volatile and interest rate differentials are unchanged or only slightly higher.   Thus, we expect CEE FX to remain on the stronger side this week, but the situation remains fragile. Of course, the main focus will be on the Hungarian forint, which will be driven purely by incoming headlines, and given last week's indications, we can expect moves in both directions before a deal with the EU is agreed upon and the forint heads below 400 EUR/HUF. The Polish zloty maintains the largest gap against the interest rate differential and has also leveraged the most improvement in global conditions in recent weeks. Therefore, we see a move up to 4.72 EUR/PLN.   Frantisek Taborsky  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
GBP/USD Pair: The Pace Of Growth Will Likely Slow Down

The British Pound (GBP) May Resume Its Bullish Cycle

ING Economics ING Economics 20.11.2022 12:41
Early in the American session, the British pound (GBP/USD) is trading around 1.1901, above the 21 SMA and below the strong resistance of 1.1962 (+1/8 Murray). According to the 4-hour chart, the latest candlesticks show that the pound is showing some exhaustion of the bullish force and a technical correction could follow if GBP/USD breaks and consolidates below 1.1873. On the other hand, the pound is likely to consolidate below 1.1962-1.1880 in the next few hours. If the price manages to break below the 21 SMA (1.1873), this level could give an opportunity to continue selling with targets at 1.18 and 1.1718 (8/8 Murray). This level coincides with the bottom of the uptrend channel and could offer a technical bounce. Additionally, a sharp break below the 8/8 Murray and the uptrend channel formed since the beginning of November could mean a change in trend and the pound could fall rapidly towards the psychological level of 1.15 and even towards the area of 7/ 8 Murray located at 1.1473. On the other hand, for the pound to resume its bullish cycle, we should expect a daily close above 1.1970. Above this level, we could expect the pound to reach the psychological level of 1.20 and even +2/8 Murray located at 1.2207. The eagle indicator is at a turning point. It remains above an uptrend line, which gives us a positive signal. On the contrary, in case the moving average of the indicator breaks this support, we could expect a pound to fall towards the zone of 1.1718 in the coming days.     Relevance up to 16:00 2022-11-23 UTC+1 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade. Read more: https://www.instaforex.eu/forex_analysis/301662
Latam FX Outlook 2023: Brazil's Local Currency Bonds Can Be Very Attractive

Latam FX Outlook 2023: Brazil's Local Currency Bonds Can Be Very Attractive

ING Economics ING Economics 20.11.2022 12:24
When putting together our Latam FX outlook this time last year, we speculated on the ‘Return of the Pink Tide’ or a leftward shift in local politics. That has indeed materialised in presidential elections in Colombia, Chile and Brazil. We think 2023 will be another tricky year for Latam and continue to favour Mexican peso outperformance Source: Shutterstock Real rates in focus in Brazil The leftward shift in Latin politics in 2022 has had a mixed effect on local currency markets. The election of left-leaning presidents in both Colombia and Chile has, rightly or wrongly, been associated with heavy currency falls. The pesos of Colombia and Chile are down 15% and 5% year-to-date against the dollar. The Brazilian real on the other hand has until very recently been the darling of the EM FX world, delivering 5% nominal gains and much more when taking Brazil’s attractive carry into account. The Mexican peso has also done well with a 5% year-to-date gain. Turning first to Brazil. The independent central bank moved early and aggressively with tighter policy to contain inflation. The policy rate is now 13.75% and headline inflation has already corrected to 7% from 12% – leaving Brazil with very attractive real interest rates. The market is starting to price a 200bp easing cycle for the second half of 2023, which in theory could make Brazil's local currency bonds very attractive. Our concern for the real, however, is that former President Lula has been re-elected on a ticket of welfare spending. Brazilian growth may sink from near-3% this year to close to zero next year. And in a difficult international environment for bond markets, fiscal pressure could see the real ending the year much weaker than the 5.15 USD/BRL levels expected by the consensus. Chile’s Achilles' heel is its large current account deficit – worth 8% of GDP this year and only expected to narrow to a 5% deficit next year. Sizable current account deficits are a distinct disadvantage at a time when core rates are rising and abundant liquidity is being withdrawn. USD/CLP will likely make another run at 1000 and despite securing an IMF Flexible Credit Line, we expect the peso to remain vulnerable – especially in early 2023 when China remains weak and the dollar strong. Interestingly, the IMF recommends that Chile substantially restore its FX reserves – arguing that even in the good times, USD/CLP will not spend too much time below 900. Turning finally to Mexico, we feel the peso has a lot going for it. Banxico’s efforts to effectively manage USD/MXN near 20 stand to create the virtuous cycle of lower volatility and higher risk-adjusted returns. We much prefer the Mexican peso to Brazilian real exposure, given that the real trades on nearly twice the volatility as the peso. Mexico also looks much better placed in terms of debt, and its higher sovereign rating should provide some protection in the face of deteriorating external conditions. Finally, Mexico could become a major beneficiary of ‘nearshoring’ following recent supply chain challenges over the past three years – suggesting Foreign Direct Investment trends should be monitored carefully in 2023. Real interest rates in Latam seem attractive... Source: Refinitiv, ING USD/BRL: Fiscal challenges   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/BRL 5.30 Bullish 5.50 5.75 5.80 5.90 6.00 How fiscally aggressive can Lula be? A ‘resurrection’ is how President-elect Lula describes his return to office after narrowly beating the incumbent Bolsonaro in a second-round run-off. His pitch for a return to office was very much one based on welfare support and also a complete reversal of Bolsonaro’s free-market approach to the Amazon. Brazilian assets initially responded positively to Lula’s win in that he may be fiscally limited due to right-wing politicians having done well in congressional elections. Hence, Congress could prevent fears of unfunded social giveaways exacerbating what is likely to be an annual budget deficit of 7% of GDP and debt to GDP heading towards 90% next year. Why we are more bearish on BRL: Consensus expects USD/BRL to head back down to the 5.15 area by the end of 2023. The view here is that inflation has topped and that Brazil’s central bank can embark on a 200bp easing cycle in the second half of 2023, which should be good for the local currency bond market. We are a little more concerned that the legacy of a near 14% policy rate will be much weaker growth in Brazil next year, which will bring fiscal pressure to the fore in what will still be a challenging year for bond markets. After all, Brazil’s five-year sovereign CDS trades near 280bp for a reason. Any changes in the fiscal rules would be negative. Greater links with China?: The return of President Lula could also re-invigorate the BRICS geopolitical grouping. Where that goes in 2023 remains to be seen, although there was at some stage a suggestion of working towards some kind of BRICS currency arrangement. We doubt that Brazil would want to get entangled with such a venture, but any higher profile of the BRICS would serve as a reminder of Brazil’s heavy trade links with China – 31% of Brazil’s exports went to China in 2021. Sluggish Chinese growth could prove a headwind to Brazilian exports and push Brazil’s current account deficit towards 2% of GDP next year. USD/MXN: Peso enjoys high, risk-adjusted yield   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/MXN 19.40 Neutral 20.00 20.00 19.50 19.25 19.00 High yields, less volatility: In tracking Fed tightening this year, Banxico deserves a lot of credit for keeping USD/MXN stable. Here, three-month realised volatility is just 9.9% compared to 19.3% for USD/BRL. In response, expected volatility is substantially lower for USD/MXN as well. This has implications for the ‘carry-to-risk ratio’ – or risk-adjusted yield which is now 50% higher for the Mexican peso versus the Brazilian real. Barring Banxico ending its tightening cycle well ahead of the Fed, we expect USD/MXN to remain relatively well-contained near or under 20.00 over the next three-to-six months even as external market conditions deteriorate. Mexico well-placed for nearshoring: Disruptions to global supply chains from the pandemic and this year’s Russian invasion of Ukraine have questioned globalisation and raised the prospects of ‘friendshoring’ or ‘nearshoring’ – i.e. moving supply chains closer to home. Mexico stands to benefit from US nearshoring, sharing as it does a land border with the US and now engaged in a new USMCA trade deal. Mexico features prominently in the White House’s supply chain resilience plan, focusing on semiconductors, batteries, critical minerals, and pharmaceuticals. At $3.50/hour, Mexico’s average manufacturing industry wage compares very favourably with the US ($30/hr), but also with Latin America, e.g. Brazil and Chile at $4.71 and $5.74/hr, respectively.   Remittances still rising: Remittances back to Mexico from the US are still rising and are currently worth $5bn per month. Presumably these slow at some stage when US unemployment turns higher, but they have proved remarkably resilient so far. Mexico also has a relatively modest current account deficit of less than 1% of GDP – making remittances quite meaningful. In terms of politics, it is not clear how much President Andres Manuel Lopez Obrador can get done before elections in the summer of 2024, but his fiscal rectitude during the pandemic certainly provides insulation as global borrowing costs continue to rise. Investors continue to see Mexico as a good quality credit, trading its five-year sovereign CDS at around 140bp, compared to 280bp for Brazil.  USD/CLP: Growing pains   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/CLP 885.00 Neutral 950.00 1000.00 950.00 925.00 900.00 Controlling social tension in a recession: Left-wing President Gabriel Boric was voted into office in March 2022 on a ticket for social reform. This followed the widespread social uprising in 2019. President Boric has struggled to make progress here, with his constitutional reform package widely rejected in September – providing somewhat of a reprieve to the mining industry. 2023 stands to prove a difficult year for Chile. The IMF projects the economy will contract 1.3% next year and unemployment will rise. Balancing how to advance social reform, while keeping the mining industry onside – softening mining taxes being a recent example – will be a major challenge.   Where’s copper heading? As the largest copper producer in the world, the Chilean peso is very much driven by these prices. USD/CLP hit 1050 in July and had to seek IMF support when copper fell 25%. Our commodities team believes copper will struggle over the next six months. Incidentally, participants at the recent London Metal Exchange (LME) gathering were quite split on copper’s path. Our house view is that the continued weakness in China’s construction sector amidst the over-supply in the residential sector will keep copper on the back foot for the next three-to-six months. Equally, widespread labour unrest in the industry is hitting Chile’s copper production, recently running at a 16-year low. Limited scope for FX intervention: The exchange rate has proved a useful shock absorber for Chile’s economy. The macro imbalances created by strong consumption during the pandemic – leaving Chile with an 8% of GDP current account deficit – make the peso vulnerable to the international environment. Chile has lost 17% of its FX reserves in defence of the peso this year. And whilst it does have the precautionary support of an $18bn IMF Flexible Credit Line, it will not want to use it. A strong dollar environment into year-end and potentially through 1Q23 can see USD/CLP head back to 1000 and perhaps also drag the local central bank into some further tightening. Interestingly, the IMF has also said that Chile needs to rebuild FX reserves, suggesting USD/CLP struggles to trade under 900 on a sustained basis over the next couple of years. 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 Asia Forex Market Pack Were Broadly Weaker Vs The USD

Asia Forex Market: This Year Has Been Tough For Asian Currencies

ING Economics ING Economics 20.11.2022 12:04
This year has been tough for Asian currencies – hit by surging energy prices, the strong dollar, and in some cases central banks being a little slow to react. Their course in 2023 will again be determined by the dollar trend and also diverse local stories. We see 3-5% gains in Asian FX against the dollar in 2023, with the Korean won outperforming In this article Local and international factors are still uncertain Source: Shutterstock Local and international factors are still uncertain For all the effort that goes into forecasting Asian exchange rates, the last year has shown that apart from some short-lived deviations, dollar strength was the principal driving factor and EUR/USD provided perhaps the best clue as to both direction and magnitude. Within this period, there were times when other drivers took over – energy dependence was pivotal during the period immediately following the Russian invasion of Ukraine with the Indian rupee (INR) and Thai baht (THB) suffering badly while the Indonesian rupiah (IDR), Malaysian ringgit (MYR), and Australian dollar (AUD) outperformed. Then the differing inflation experiences, coupled with how much the respective central banks leaned against it, also held sway for a time. This saw the more interventionist economies (IDR, INR, PHP [Philippine peso]) which absorbed price pressures through fiscal buffers doing better at times compared to more market-oriented economies – such as the Korean won (KRW) – though this usually didn’t last. Then there were occasions when the more managed benchmark exchange rates of the region – chiefly the Chinese yuan (CNY) – would “reset” in response to local economic conditions and drag "satellite" currencies in north Asia along with it. In the end, though, perfect foresight of where EUR/USD was going would probably have been a better indicator than a full understanding of any of these other factors, and looking forward to 2023 we see few reasons why this should be much different over the coming 12 months. Asian Current a/c (% GDP) Refinitiv, ING   Our house view for EUR/USD still sees some near-term dollar strength, and for this reason, we anticipate there still being some more mileage in the weaker Asian FX story. But both the scale and duration of this residual USD-driven leg remain the subject of much debate. Any further aggressive USD appreciation could see the current account surplus economies of the region outperforming their peers (see chart). External balances across the region have been damaged by this year’s energy price spikes, although compared to the Asian Financial crisis in 1997, the region as a whole is still in a much healthier position with respect to external balances, FX reserves, and import cover (see also here).  At some point though, and possibly after some further Asian FX weakness, a number of factors will start to swing in the opposite direction. Local factors include: While still somewhat subdued, China’s economy will be in better shape in 2023 than it was in 2022. There are some tentative indications of a more nuanced approach to zero-Covid, and this may be amended further following the two sessions in March. The property development sector will still likely be a shambles, but its drag on the economy will be trending towards zero or small positives from the substantial negative in 2022. Either of the factors above may free up more fiscal resources at the local government level to push growth along. Across the rest of Asia, without a renewed energy price spike, local inflation rates should begin to moderate, allowing for some easing of policy rates and recovery of demand. Inflation already looks to be peaking in some economies and this trend is likely to spread. And while it may mean that policy rates can begin to be cut, the currency-relevant fact will be that negative real policy rates will shrink, and that could allow for some further currency strength. However, when the turn comes, how much further it has gone before this occurs, and how rapidly it reverses course, will be determined by a wide range of local and international factors, and remains the subject of considerable speculation. USD/CNY: Liquidity to remain ample   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/CNY 7.05 Neutral 7.22 7.35 7.25 7.18 7.13 Capital flows: Even though the yuan has been weak against the dollar, we have not seen net capital outflows reflected in the data. There are several possible reasons for this. More global asset indices include China's onshore assets in their portfolios. This can smooth out volatility as the Chinese market often has low correlations with other markets. Another more likely factor is that offshore Chinese entities could be remitting dollars to their onshore counterparts and then converting them to yuan. There has also been a higher trade surplus every month so far this year. All of this adds up to a strange pattern of weak yuan mapping with net capital inflows. This pattern could continue until the People's Bank of China (PBoC) believes that there is no more risk of quick and massive capital outflows. Macro backdrop: The Chinese economy has not been doing well in 2022 due to Covid measures, the real estate crisis, and recently, the slowdown in export demand from the US and Europe. Our GDP forecast for 2022 is only 3.3%. We believe that the Chinese government is gauging the risk to the healthcare system from re-opening by holding big events like the Beijing Marathon and Shanghai Expo. We may see some slightly more flexibility on Covid measures, but we believe that any important official announcement of Covid measures is more likely during the Two Sessions in March 2023. On real estate, more funding for local governments' 2023 budgets will be available by the end of 2022 via special bond sales. This should help local governments finish uncompleted homes faster. As such, there should be more construction activity in the first half of 2023 compared to the second half of 2022. But the risk of recession in the US and Europe will weigh on Chinese exporters and manufacturers, and therefore the jobs market. Due to the weakness of the economy, there is no inflation pressure and slight PPI deflation pressure in 2022. It is unlikely that high inflation will occur in China in 2023 given the weak economic prospects. With a low base effect and some improvements domestically, our GDP forecast for 2023 is 5.3%. PBoC and rates: The PBoC has not changed policy interest rates since August 2022, and the time before that was in January 2022. We believe that conventional monetary policy tools, that is, policy interest rates and required reserve ratio adjustments (RRR), are not efficient to tackle existing economic conditions from Covid measures and the real estate crisis. The PBoC has turned to lending to domestic development banks that in turn lend to local governments. This gives some breathing room on fiscal pressures. And this is more efficient as there is no lag time to get funding compared to commercial loan and bond channels. It is possible that the current practice will continue until some uncompleted homes are finished and Covid measures become more flexible. Consequently, we do not expect any change in policy interest rates in 2023. USD/INR: Real rates turn less negative   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/INR 81.10 Neutral 83.00 84.00 83.00 82.00 82.00 Capital flows: One of the factors providing support to the INR during the past year has been the expectation that Indian Government Securities (G-Secs) would be included in one or more of the global bond indices. That expectation got knocked back in early October this year, mainly on disagreements between JP Morgan and India’s Finance Ministry on settlement issues (India wants bond trades settled locally, not at Euroclear) and taxation (India is unwilling to treat foreign bond investors differently to local investors for the purposes of capital gains). There is still some scope for inclusion in 2023, but it doesn’t sound as if India’s government is all that willing to make concessions. There may be more scope for equities to draw in capital in the second half of fiscal 2023, as the dry spell in IPOs is thought likely to end with around INR10.5tr reported of approved capital raising and a further INR7tr awaiting approval. Macro backdrop: The Indian economy has not been immune to the global headwinds following Russia’s invasion of Ukraine and is particularly exposed to high energy prices given its large net importer position. Despite taking advantage of some cheaper Russian crude supplies and absorbing some price pressures through margins at state-owned petroleum companies and reduced import excise duties, inflation has still risen above 7%, and this has taken its toll on the growth outlook, with third-quarter 2022 GDP coming in slower than expected, and putting previous expectations of a 7% growth rate for 2022 out of reach. We now look for growth of 6.3% in the calendar year 2022. This is still one of the highest rates of growth in Asia, and there is scope for some firming of the growth environment next year if there are no further price shocks.   RBI and rates: After abandoning its awkward dance of trying to support both growth and leaning against rising prices in early April this year, the Reserve Bank of India (RBI) has taken a steadfast and convincing stance against inflation, taking the repo rate from its low of 4.0% up to 5.9% currently. We look for a further 25bp of rate increases in December, and perhaps another 25bp in February, taking rates to 6.4%. But by then, we may well see inflation coming off its highs, which could leave the real (adjusted for actual inflation) policy rate close to zero, rather than its current strong negative rate. This could mark the peak for the RBI, as inflation should fall further from this point, enabling real policy rates to float back into positive space. USD/IDR: Bank Indonesia to step up rate hikes   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/IDR 15540.00 Neutral 15850.00 15950.00 15800.00 15700.00 15600.00 Trade balance support could fade: The IDR was well supported by inflows related to trade for the most part of 2022. Exports managed to easily outpace imports this year as the export sector benefited from the surge in global commodity prices. Trade surpluses hit a record high in April ($7.5bn) but have since narrowed with the latest surplus down to $4.9bn. Slowing global trade and a dip in coal prices point to a further narrowing of the trade surplus which would impact Indonesia’s current account balance. Bank Indonesia (BI) expects the current account to settle between 0.4-1.2% of GDP for 2022 but revert to a deficit in 2023. This suggests that key support for the IDR in 2022 will not be around next year resulting in sustained pressure on the currency.   Macro backdrop: Indonesia has strung together six quarters of positive growth, rebounding quickly from the pandemic-induced recession in 2021. Growth got a boost from exports, which in turn helped support the recovery of the manufacturing sector. Meanwhile, relatively subdued inflation in the first half of 2022 helped support domestic consumption with retail sales benefiting from increased mobility. Inflation, however, has finally picked up in recent months and is likely to accelerate further after the government increased the price of subsidised fuel. The recent weakness experienced by the IDR has also contributed to higher inflation, a trend that should extend to 2023. Accelerating inflation is likely to cap consumption growth in the coming quarters while expectations for slower global trade suggest that exports will be subdued going into 2023. With the projected slowdown in the second half of 2022, we expect full-year growth to settle at 5.2% year-on-year in 2022 while 2023 growth could slip to 4.4%.  Central bank to stay hawkish: Bank Indonesia was a latecomer in terms of rate hikes in 2022 as inflation stayed relatively subdued for the first half of the year. Faster inflation by the second half of the year prodded the previously reluctant central bank to finally increase policy rates in a surprise move in August. BI has since been actively tightening, increasing rates by 75bp so far, and will likely need to continue tightening to support the IDR well into 2023. BI Governor Perry Warjiyo previously highlighted his preference for a stable currency, and we expect BI to hike rates by at least 100bp to help steady the IDR. USD/KRW: Second half of 2023 to be better for Korea and the won   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/KRW 1320.00 Mildly Bearish 1350.00 1400.00 1350.00 1300.00 1250.00 Capital flows: Foreigners have been net sellers of the Korea Composite Stock Price Index (KOSPI) until recently, but we see foreign investors coming back to the Korean equity market, as the sharp outflows have stagnated over the past few months. We believe that the KOSPI will benefit from an asset allocation perspective as the China-US conflict intensifies, and thus decoupling with the Chinese market is expected to some extent. On the bond side, Korea has been added to the watch list for World Government Bond Index (WGBI) inclusion and it is possible to join the WGBI next year at the earliest. This is a positive factor providing support for the Korean won and Korean authorities appear to believe inclusion is very promising. Several new initiatives including the exemption of the withholding tax, reforms to improve accessibility to the KRW market, and Korean treasury bond (KTB) trading via ICSD (International Central Securities Depositories) were proposed to improve the structure and accessibility of its capital market for investors. Macro backdrop: The Korean economy is heavily dependent on exports and is a net energy importer. The trade deficit will continue for some time as semiconductor exports continue to struggle while energy prices remain high. We expect the current account to be in a surplus, but weak trade performance will weigh on the currency markets.   BoK and rates: The Bank of Korea (BoK) has been one of the fastest-moving central banks in the race to raise rates since last year and is expected to become one of the fastest-moving to cut rates next year. We expect a 25bp hike in November, and perhaps another 25bp in January, taking rates to 3.50%. But the BoK is likely to go into a wait-and-see mode afterwards, as inflation is expected to slow to below 4% and fall further. To lighten the burden for businesses and households, the BoK will likely enter into an easing mode from the second half of next year. USD/PHP: How much longer can BSP hold the line?   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/PHP 57.20 Neutral 58.75 59.00 58.50 58.00 57.50 Current account woes to persist: The Philippines is highly dependent on imported food and energy items and has traditionally run trade deficits. Elevated global commodity prices bloated the import bill resulting in a record-wide trade shortfall. Contributing to the stark widening of the trade deficit was the economic reopening after mobility restrictions were finally relaxed in the first half of the year. Resurgent domestic demand also resulted in increased capital and consumer goods imports which were enough to push the current account into a deficit. The trade balance and current account are likely to remain in deficit in 2023, especially if commodity prices stay elevated. The central bank expects the current account deficit to widen to roughly $19bn in 2022 and $20bn in 2023, suggesting that pressure on the PHP will persist next year.    Macro backdrop: The Philippines posted solid growth numbers in the first half of 2022 after the national government relaxed mobility restrictions after improvements in Covid-19 containment. The reopening of the economy helped along by election-related spending powered strong growth for the first half of the year (7.7%). The second half of the year, however, presents a much more challenging landscape, which also marks a change in leadership after Ferdinand Marcos Jr. won the presidential election in May. Surging inflation on top of rising borrowing costs is likely to translate to a significant slowdown in growth for the second half of 2022 and the whole of 2023. We expect inflation to hit 5.6% year-on-year in 2022 and stay elevated at 5.0% in 2023, which would translate to 5.9% YoY growth in 2022 and 4.4% in 2023. Busy year for BSP: It has been a busy year for the Bangko Sentral ng Pilipinas (BSP). The central bank faced a quick acceleration in price pressures as well as a change in leadership after the presidential election. Given the country’s dependence on imported energy and food, price pressures rose quickly to drive inflation well-past target (currently at 7.7% YoY). Several deadly typhoons also pushed up food prices after the storms caused significant crop damage. The BSP responded with several rate increases, even resorting to an off-cycle decision in July as well as a pre-announced rate increase which will take the policy rate to 5% by November. BSP Governor Felipe Medalla, who assumed his post in July, vowed to match any move by the Federal Reserve in the coming months and maintain a 100bp differential with the Fed funds target rate. We expect BSP to take the policy rate to 5.5% by year-end with at least an additional 50bp worth of rate hikes in 2023 should the Fed continue to raise rates.    USD/SGD: MAS waits for recent tightening to take hold   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/SGD 1.37 Neutral 1.39 1.40 1.38 1.375 1.37 Growth outlook: Singapore has managed to post decent growth in 2022 despite the increasingly challenging global backdrop. Relatively robust trade activity in the first part of 2022 has helped support growth momentum although we have noted a slight deceleration of late. Meanwhile, retail sales recorded a steady pace of expansion despite the sharp uptick in prices. One possible development that could be supporting retail sales is the sustained influx of foreign visitors which may be driving the consistent growth of sales for department stores and recreational goods. Retail sales growth could help offset the projected slowdown in global trade somewhat and we expect Singapore growth to settle at 3.5% YoY in 2023.        GST to add to inflation pressure in 2023: Surging global commodity prices and robust domestic demand resulted in faster price increases for Singapore with core inflation rising 5.3% YoY as of September. The Monetary Authority of Singapore (MAS) now expects headline inflation to settle at 6% YoY for 2022 and between 5.5-6.5% in 2023 given current developments and the scheduled increase in the Goods and Services Tax (GST) from 7% to 8% next year. Risks to the inflation outlook remain skewed to the upside, especially if commodity prices stay elevated in 2023. A prolonged period of high commodity prices should eventually evolve into additional second-round effects that would fan both headline and core inflation.             MAS tightens aggressively: The MAS has been busy over the past few months, surprising market participants by tightening unexpectedly in October 2021, the first of five separate moves to tighten monetary policy. Given surging core inflation, MAS needed to tighten policy aggressively with two of the moves carried outside of scheduled meetings. The MAS is likely to remain hawkish given expectations that core inflation will average 3.5-4.5% YoY in 2023 and stay elevated until the second half of next year. We believe, however, that the MAS would be less aggressive in tightening should it need to act as it monitors the impact of its aggressive tightening moves. USD/TWD: Wider differentials weigh on TWD   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/TWD 31.00 Neutral 32.40 33.00 32.00 31.70 31.40 Capital flows: The weakness of the New Taiwan dollar (TWD) in 2022 mainly comes from net capital outflows of foreign investments in Taiwan’s equity market. The net outflows year-to-date amounted to $48.2bn as of 7 November. This is a lot compared to historical data of the next biggest outflows at $15.6bn in 2021, which was itself bigger than the outflows of $15.5bn in 2008. Capital outflows from the equity market have led to a fall in foreign exchange reserves of $5.62bn. Offloading of Taiwan equities should continue in 2023 as semiconductor sales should fall further as a result of the expected recession in the US and Europe and weak demand in China. Macro backdrop: Taiwan enjoyed strong semiconductor sales in the first half of 2022, but after this the economy turned sour when Covid hit, and then weakened further when weak demand in China led to a fall in semiconductor sales. Adding to this pressure is softer demand for smart devices in 2022. As the Taiwan economy specialises in semiconductor manufacturing and sales, it is prone to external economic conditions. Taiwan did experience some higher-than-normal inflation of around 3.5% YoY in the first half of 2022. But this was then followed by softer inflation pressure in the second half of 2022 as the economy slowed. For 2023, we believe that semiconductor sales will continue to fall as a recession in the US and Europe is likely in the first half of 2023, and China’s consumption demand will remain weak due to Covid measures and the ongoing real estate crisis. Taiwan's central bank and rates: As Taiwan has not encountered as high inflation as the US, Taiwan’s central bank has raised interest rates at a much slower incremental pace than the Fed. As of November 2022, Taiwan’s central bank had raised rates by just 0.5 percentage points in 2022, which is much smaller than the Fed’s 3.75 percentage points. This is one of the reasons why TWD has fallen over 15% so far in 2022. If the Fed pauses its hiking in 2023, the interest rate differential should stop widening. TagsFX Outlook FX Currencies 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  
CEEMEA FX Outlook 2023: The Situation Remains Fragile

CEEMEA FX Outlook 2023: The Situation Remains Fragile

ING Economics ING Economics 20.11.2022 11:51
The geographic and geopolitical situation has made this a difficult period for the region. However, things should normalise in the coming year. We expect global pressures to ease and central banks to drop their FX intervention approach. Nevertheless, the situation remains fragile and we remain vigilant Source: Shutterstock Make the FX market normal again Although it can be said globally that the last few months have been very complicated, the CEEMEA region and in particular the CEE4 have been clearly leading the way in this mess. The Covid years forced central banks in Central and Eastern Europe to start a global hiking cycle, and this year's events have compounded the burden on the region. In our view, the main shock is already over, but we are far from out of the woods and are only moving into the second stage – the aftermath. In addition to the standard drivers of FX, such as rate differentials and EUR/USD, the price of natural gas has now become a central theme for the CEE4 region. The coming winter will test the unity of the European Union with a shallow recession and central bank efforts to end record hiking cycles bringing further pain to FX. Moreover, twin deficits, which will remain with us for a longer period, do not play in the region's favour. Central banks have been forced to do more than just hike rates to ensure price stability and the CEE4 region has split into two camps: full FX intervention regimes (Romania and the Czech Republic) and hybrid defence (Poland and Hungary). To make matters worse, politics has also come into play, and in particular, the dispute between Hungary and Poland with the EU has weighed heavily on the forint and the zloty. As you can see, the cards are heavily stacked against the CEE region, and we carry all these themes into the next year. However, we believe that these issues will be addressed in 2023 and market conditions will begin to normalise. By far the biggest potential, in our view, is the Hungarian forint, which has suffered badly from the government's uncertain access to EU funds, full dependence on Russian energy, and the greatest sensitivity to a global sell-off. Therefore, with the calming of these issues, which we believe is only a matter of time, the hidden potential of the forint could be unlocked, outperforming its CEE peers. We see a similar story on a smaller scale in Poland. On the other hand, the Czech National Bank and National Bank of Romania have taken the path of keeping FX under control, leading to artificial overvaluation. In both cases, we expect a loosening of the central banks' approach in the first half of next year, which should lead to significant depreciation. Among the high-yielders, Turkish policymakers have used an array of unorthodox policy measures to limit weakness in the Turkish lira. The Turkish election in June will be a pivotal period for financial markets, and investors will remain wary that unchecked inflation could put pressure on the lira. In South Africa, the rand looks to have found some good buyers near the 18.50 area in USD/ZAR. Those levels could be tested again early next year should the Federal Reserve push real interest rates higher again, but as pessimism in the Chinese economy starts to fade in the second half of 2023, (the rand is very much driven by commodity prices and China’s performance) USD/ZAR could be trading well below 17.00. Finally, USD/ILS normally proves a good bellwether for the broad dollar trend. And the Bank of Israel might be slightly more tolerant of shekel strength in 2023. We target 3.00 for USD/ILS. Twin deficits - the new standard in the region Source: ING forecast EUR/PLN: Conditions to improve, zloty remains at risk   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/PLN 4.70 Neutral 4.90 4.85 4.74 4.66 4.70 Valuation: Our relative value EUR/PLN model (gauging the exchange rate against other market variables, such as swap spreads, option volatility, etc) continues to point to the zloty still being some 3% undervalued against the euro. We attribute this to a mix of risks, both external, particularly the war in Ukraine and its economic fallout, and internal, specifically, tensions with the EU, elevated CPI risk and expansionary fiscal policy undermining the local currency bond market – Polish government bonds (POLGBs). Many analysts suggest another major Russian offensive may be due in the spring. If Russia simultaneously attempts to put economic pressure on the EU, this could again sour sentiment towards the CEE region. The prospect of the conflict coming to an end is a major unknown, but investors should at least become increasingly resilient to news about the war. External position: Fundamental backing behind the zloty should improve next year, but risks behind the local policy mix will rise. We expect the current account deficit to tighten from €35bn to €26bn, owing to e.g. a more favourable terms of trade. Poland is also likely to draw some €20bn from the 'old' EU budget. Moreover, the government finally decided to lean towards hard currency funding. All of this is likely to be converted via the market under the current Ministry of Finance's FX strategy – balancing the current account deficit. Also, FDI inflows should remain solid, already standing at a net €16bn in the first half of 2022. Year-end 2022 may prove more difficult, as refilling natural gas reserves may again prove costly. Politics: Domestic politics is a major unknown in 2023. The proximity of the October elections is a key risk for the fiscal consolidation the government recently unveiled to curtail weak POLGBs. The government is also attempting to reset relations with the EU – possibly encouraged by Hungary’s pro-EU turn. While reaching an actual compromise will take time (and may prove impossible ahead of the general elections), it is at least a move in the right direction and likely to improve the market perception of Poland. Moreover, opinion polls show increasing support for the EU-orientated opposition. A victory for them could prove supportive to the zloty, as investors would bet on swift access to the 'new' EU budget. EUR/HUF: Waiting for a forint breakout   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/HUF 405.00 Bearish 400.00 390.00 380.00 385.00 390.00 Inflation: The forint's (HUF) underperformance is largely related to price pressures. Despite the anti-inflationary measures provided by the Hungarian government via price caps in basic food, fuel, and utilities, core inflation is the highest in the EU. However, we believe that the peak is close. Real wage growth dropped into negative territory from September, consumer confidence is close to a record low and a higher share of companies are complaining about a lack of demand rather than a lack of labour. These factors should tame the pricing power of companies. Thus, we see headline and core inflation peaking around the end of 2022 or early 2023. As soon as inflation starts to ease, inflation expectations will come down, so a forward-looking positive real interest rate will spur interest in the HUF. Monetary policy: The central bank stepped into Phase 3 of its tightening cycle in mid-October with an emergency move. New temporary targeted measures were introduced to maintain financial stability alongside the main goal of price stability. The effective rate is now defined by the one-day deposit quick tender, sitting at 18%. With further fine-tuning in the system, we see monetary transmission improving, with short-end rates rising further. In parallel, tightening via the squeezing of liquidity will continue. The exit strategy from the 'whatever it takes' stance will be triggered by materially improved risk sentiment (see next bullet). We think this could translate into a gradual convergence of the effective rate to the base rate, starting as soon as late December. Internal risks: As this policy turnaround will be triggered by a materially improved risk environment, we see a potential relief rally in the forint, despite some normalisation in interest rates. The two key elements of internal risks are the Rule-of-Law procedure and the current account imbalance. Regarding the former, we expect Hungary to settle the dispute with the EU, opening the door for EU transfers as soon as mid-December. This will eliminate a key barrier to HUF strengthening. We expect the country’s external balance to improve in the coming months as the recession and coming winter will dampen the country’s import needs, easing the systemic pressure on the forint. In our view, this could result in a 5% strengthening of the forint over the next six months. EUR/CZK: Koruna under CNB control   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/CZK 24.30 Neutral 24.50 24.50 25.00 25.00 24.50 Monetary policy: The Czech National Bank left interest rates unchanged at 7.0% for the third consecutive meeting and we think the Bank has now ended its hiking cycle – the first central bank in the region to do so. The economy already posted a decline in the third quarter of 2022 and we believe it is heading into a shallow recession. Wage growth remains high but inflation below the CNB's forecast suggests a hawkish surprise is unlikely, in our view. The current account has plunged into a record deficit and, in relative terms, we forecast it will reach the largest deficit since 2003. Moreover, fiscal policy shows only marginal signs of consolidation, and so the Czech Republic joins the twin deficit club within the CEEMEA region. FX Interventions: The main topic for the Czech koruna in the coming months is the fate of the CNB's FX intervention regime. According to the central bank's figures, it has so far spent 16% of FX reserves from mid-May to the end of September. In our view, the CNB's activity in the markets has been zero in recent weeks, as confirmed by the Bank's board member Oldrich Dedek in a recent interview. Therefore, we see the CNB in a comfortable position and expect FX intervention to continue at least until the end of the first quarter next year with a line in the sand at 24.60-24.70 EUR/CZK. What next? For now, the koruna is clearly capped on the upside due to the presence of the CNB in the market, while we also see the pressure on the CZK from the global environment as gradually easing. Moreover, within CEE, markets see more interesting themes in Poland and Hungary and several CZK short squeezes have discouraged bets against the end of CNB FX intervention. Therefore, we expect EUR/CZK to trade slightly below the CNB's unofficial line and the koruna will return to the market's attention in the second quarter of 2023 when we think the topic of the CNB's exit strategy will return. EUR/RON: Focus on the 'managed' in managed float   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/RON 4.91 Mildly Bullish 4.94 4.95 5.10 5.10 5.10 Hiking cycle: Having reached a key rate of 6.75% in November, the National Bank of Romania is either at or very close to the end of the hiking cycle. We narrowly favour no more hikes in 2023, though we admit that chances are high for another 25bp increase in January. The NBR’s commitment to firm liquidity management will likely – on average – keep carry rates above the policy rate. However, we see a good chance for the liquidity situation to improve substantially into year-end on the back of accelerated spending by the Treasury. Mopping up this liquidity is likely to take a good couple of months. Twin deficits: While on the budget deficit side, policymakers seem committed to reaching the 3.00% of GDP target in 2024 (with a 4.4% target for 2023), developments on the current account side are not encouraging. Due to unfavourable price developments in external markets (including the energy sector) but also on the back of robust GDP growth in the first half of 2022, the trade balance deficit will close well within double digits in 2022, possibly flirting with levels last touched in 2008 when it surpassed 16.0% of GDP. This represents a significant structural weakness that will keep pressure on the leu and require constant FX intervention from the central bank. Strong EU funds absorption will be key to balancing this imbalanced picture. Politics: The relatively eventless political scene in 2022 has been rather remarkable after years of political turmoil. As per the current coalition agreement, the PNL prime minister will resign in May 2023 and a PSD prime minister should be voted in by the same coalition. While there are no real signs of trouble currently, the impending 2024 electoral year still makes it somewhat hard to picture a completely serene change of power in May-June 2023. EUR/RSD: IMF acts as an anchor of stability   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/RSD 117.30 Neutral 117.30 117.30 117.35 117.40 117.40 IMF: On 2 November, the IMF announced that a EUR2.4 billion 24-month Stand-By Arrangement (SBA) will replace the current Policy Coordination Instrument (PCI), subject to IMF Board approval in December 2022. The agreement will help to address “emerging external and fiscal financing needs”. On the external front, the IMF estimates the current account deficit to reach 9.0% of GDP in both 2022 and 2023 due to “sharply higher energy import costs along with shortfalls in domestic electricity production, as well as weakening external demand”. On the fiscal side, the initial 3.0% of GDP budget deficit target will be exceeded, most likely ending up around 4.0% of GDP. Summing up, the country needs financing, and the current choppy markets have made the IMF SBA look more appealing despite the strings attached. Monetary policy: Beyond the proposed reforms on the fiscal side, the SBA will undoubtedly shape monetary policy as well. The 2 November press release specifically mentions that “the macroeconomic policy mix should be tight to contain high inflation and support exchange rate stability” and “the ongoing monetary tightening is crucial to ensure that inflation does not become entrenched”. Essentially, we read this as a signal that the IMF is relatively comfortable with the current FX stability policy but that interest rates should continue to be increased. We revise our terminal key rate forecast from 4.50% to 5.75%, which should be reached in the first quarter of 2023. (Geo)Politics: While on the internal front, the April 2022 elections have settled things for some time, the regional developments – be it the war in Ukraine or the Kosovo car plates dispute – are making it more and more difficult for the country to sustain the ambivalent stance it has so far maintained. Absent more clarity, Serbia’s progress as a candidate country for EU accession might see little improvement in the short to medium term, which could dent its efforts to achieve the long-awaited investment grade status. USD/KZT: A defensive play on local fundamentals   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/KZT 460.00 Mildly Bullish 480.00 480.00 470.00 470.00 470.00 Scope for higher exports: The Kazakh tenge (KZT) depreciated 6% in the first 10 months of 2022, which is defensive given the geopolitics in the region and the 10-15% US dollar appreciation against major currencies. This is attributable to Kazakhstan’s stronger trade. Exports grew 48% year-on-year in the first nine months of 2022, and the current account is back to a $7.9bn surplus vs. a $5.6bn deficit in the first nine months of 2021. Oil production of 1.5m barrels per day is below the OPEC+ quota of 1.6m bpd, and the official target of 1.9-2.0m bpd, meaning there is scope for an increase in exports in 2023, assuming stable oil prices. Meanwhile, oilfield maintenance and an 85% dependence on Russian pipeline infrastructure are downside risk factors. The government is looking to reduce involvement in the FX market: The government is planning fiscal consolidation to reduce the breakeven oil price from a high $110-140 in 2021-2022 to a more comfortable $55-76/bbl to 2023-25. As a result, more FX oil revenues could be saved, reducing the gross spending of the sovereign fund to $7bn in 2023 from $9-11bn in 2021-22. However, the planned 3% GDP increase in non-oil revenues appears ambitious, and the actual conversion of FX oil revenues into KZT for state spending could be higher than officially planned in the event of non-oil revenue under-collection and higher than expected spending. Private capital flows remain uncertain: While the state capital flows, including the sovereign fund and foreign debt, are normally a mirror image of the current account, the private sector’s capital flows are subject to uncertainty. In the first nine months of 2022, private outflows (including unidentified operations) narrowed to $0.3bn vs. $3.8bn in 2021, in line with our expectations, due to the post-Covid recovery in corporate borrowing and the government’s capital repatriation measures. Continued capital inflows will require further progress in structural reforms, improvement in the global/regional risk appetite, and signs of a reversal in the nominal key rate trend, which is so far heading higher. USD/UAH: Central bank allows further depreciation   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/UAH 36.80 Neutral 40.00 40.00 38.50 37.70 37.00 Central bank: 2023 prospects for the hryvnia remain concerning. Analysts warn that the recent Russian mobilisation may prolong the conflict by at least several months. Moreover, the Ukrainian military progress may slow this winter after recent successes. This leaves the economy struggling with a massive trade deficit (US$5.4bn during the first eight months of 2023), largely reliant on international aid to shore up its FX reserves, currently at $25.2bn owing to a massive injection. However, while the scale of FX intervention has decreased markedly since its peak in July ($4bn), it remains considerable ($2bn in October). The very likely intensification of fighting in early 2023 may again push up the scale of FX intervention required to stabilise the currency. That is why we expect the central bank to allow for further depreciation of the hryvnia, possibly in the first half of 2023. Long-term view: The prospects for the Ukrainian currency largely hinge on the timing of an end to the conflict and the ensuing inflow of reconstruction aid. Various estimates indicate that the restoration may cost up to $750bn (or nearly four times the 2021 Ukrainian GDP). A fraction of this should suffice to drive USD/UAH lower, considering the costs of Ukraine’s FX intervention so far. New normal: Returning to pre-war USD/UAH levels is impossible, though. Given the massive damage to Ukraine’s infrastructure and means of production, the economy will for years remain dependent on investment-related imports. Even if those could theoretically be covered by inflows of foreign aid, the country will likely aim at maintaining a weaker hryvnia in order to support exports. USD/TRY: No relief in sight for TRY   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/TRY 18.60 Bullish 19.50 21.20 22.40 23.30 24.00 Central bank focus to keep financial conditions supportive: The Central Bank of Turkey (CBT) has delivered 350bp in cuts since August, pushing rates to 10.50%, while also signalling that the rate-cutting cycle will end in November at 9%. The reasoning behind the extension of the rate-cutting cycle at an accelerated pace remains the same. The CBT has cited the need for supportive financial conditions so as to preserve the growth momentum in industrial production and the positive trend in employment. Further signs of a slowdown in economic activity and the recovery in FX reserves since late July are likely factors for the cutting cycle. However, given tighter regulations on the asset side which selectively limit loan growth, cuts are not easing financial conditions quickly. Supportive fiscal stance and continuation of selective credit policy: The timing of the recently announced Credit Guarantee Fund package (reportedly at least TRY50bn) and any possible easing in macro-prudential regulations could reverse the recent momentum loss in lending ahead of elections, with the objective of further supporting domestic demand. Policymakers are also leaning towards a more expansionary stance on the fiscal side as the budget deficit, estimated in the Medium Term Program at 3.4% of GDP in 2022, has been rapidly increasing from c.1.4% in September. The budget deficit forecast for 2023 is 43% higher than this year's forecast. And we should not rule out a breach of this target as the elections approach – scheduled for June 2023. Inflation and external imbalances remain as major concerns: While the policy mix has tilted to a more supportive stance lately, sustained disinflation is not likely unless real rates are normalised. The recent steps are not sufficient to facilitate an external rebalancing which will be determined by the evolution of energy and gold imports. In this environment, TRY is likely to remain under pressure not only because of macro fundamentals but also because of the current unsupportive global backdrop. A recovery in FX reserves will be more challenging in this environment. USD/ZAR: Surprise fiscal outperformance   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/ZAR 17.20 Mildly Bearish 18.00 17.50 17.25 17.00 16.50 Some good fiscal news: For many years, the fiscal position has been the rand’s Achilles' heel, including the high-profile downgrade to junk status of its sovereign bonds in 2017 and their removal from key bond indices in the 2017-20 period. However, the October budgetary statement in parliament projected South Africa running a fiscal surplus next year and the country’s gross debt-to-GDP stabilising at lower and earlier-than-predicted levels. This has helped the sovereign five-year CDS retrace from the 360bp levels seen in late September. This suggests that if external conditions improve, the rand would be rewarded. Terms of trade will be key: As a high beta, EM commodity exporter, the rand is also very much driven by both commodity prices and China’s performance. Commodity prices and weak imports had helped South Africa’s current account position switch to a strong surplus in 2021 and early 2022. Into 2023, however, the South African Reserve Bank (SARB) forecasts the terms of trade declining 17% and the current account moving back into deficit. South Africa will also be playing its part in the energy transition as it switches from coal and the hope is that the nation’s electricity provider, Eskom, can find some stability if the sovereign assumes a big chunk of its debt. The profile: It seems as though international investors have started to find value in the rand when USD/ZAR trades at 18.50. We think it could trade there again into early next year if the Fed tightens US real rates still further. Yet the global stagflation story is well flagged and into 2023 we think investors could switch to a more reflationary mindset if it looks like the Fed is preparing to cut rates later in the year. Equally, it is hard to see investors remaining as pessimistic on China for the entirety of 2023. We therefore see USD/ZAR trading back to 17.00 and possibly even 16.00 as 2023 progresses. USD/ILS: Shekel well positioned when equities turn   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/ILS 3.40 Bearish 3.50 3.40 3.25 3.10 3.00 Equities a key driver: 2022 has proved a strange year for the shekel in that when the Bank of Israel (BoI) finally turned hawkish, and with good reason, the shekel sold off along with the rest of the EMFX complex. Recall that for many years the BoI had been battling shekel strength with a large FX intervention campaign. Apart from widespread dollar strength, it also does seem that the shekel is very much driven by equities. Here, declines in overseas (mainly US) equities markets drive margin calls to Israeli buy-side investors and generate shekel weakness. We tentatively expect this dynamic to reverse in the second quarter of 2023. Strong economy: The Israeli economy is expected to grow around 6% this year and 3% next year – even when the US and Europe are likely to be in a recession. Perhaps Israel should be warier of second-round inflation effects than most since the economy is operating above capacity and at full employment. However, the BoI hints that its tightening cycle might end around the 3% area and that inflation should come back into the BoI’s 1-3% target range by the end of 2023. The risks would seem to be skewed towards the BoI needing to tighten further. Why we like the shekel: Israel runs a 3%+ of GDP current account surplus, has strong domestic growth and a central bank not afraid to get involved in FX markets – meaning that shekel weakness will not be particularly welcome. In our experience, USD/ILS is always at the forefront of the dollar trend and if the dollar does turn in the first half of 2023 as we expect, USD/ILS should come a lot lower. Less concern over deflation by the BoI should mean that it will be more tolerant of USD/ILS breaking below 3.00 towards the end of 2023 – which could be the surprise. 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  
Decline In Market Volumes Will Lead To A Strong Increase In Volatility

G10 Forex Market in 2023 To Be Characterised By More Volatility

ING Economics ING Economics 20.11.2022 11:30
After an 18-month bull trend in the dollar, the FX outlook has become less clear. Further position adjustment could prompt a little more short-term dollar weakness, but we do not believe the conditions are in place for a major dollar bear trend just yet. Instead, we expect FX markets in 2023 to be characterised by less trend and more volatility. Source: Shutterstock G10: Less trend, more volatility The final quarter of 2022 has seen a breakdown in the otherwise orderly dollar bull trend – a trend which had been worth 5% per quarter over the first nine months of the year. That dollar rally had largely been driven by a Federal Reserve wanting to take policy into restrictive territory – a trend only exacerbated by the war in Ukraine. For all the current discussions about peak dollar and peak macro pessimism, we think it is still worth examining whether the conditions will be in place to deliver an orderly dollar bear trend in 2023. We think not and here are three reasons why: Driving the dollar bull trend since summer 2021 has been a Fed at first abandoning Average Inflation Targeting and then trying to get ahead of the inflation surge. A call on a benign dollar decline in 2023 requires the Fed to be taking a back seat. That seems unlikely. The stark message from both the Fed’s Jackson Hole symposium and the IMF autumn meetings was that central banks should avoid relaxing too early in their inflation battle – a move which would deliver the pain of recession without any of the sustained gains on inflation. We suspect it will be too early for the Fed to sound relaxed at its 14 December meeting and March 2023 may be the first opportunity for a decisive turn in Fed rhetoric. While a softer Fed profile may be a necessary condition for a turn in the dollar, a sufficient condition requires a global economic environment attractive enough to draw funds out of the dollar. 2023 global growth forecasts are still being cut – dragged lower especially by recession in Europe. ING forecasts merchandise world trade growth below 2% in 2023 – not a particularly attractive story for the trade-sensitive currencies in Europe and emerging markets. A liquidity premium will be required of non-dollar currencies. 2023 will be a year when central banks are initially still hiking into a recession and shrinking balance sheets. The Fed will reduce its balance sheet by a further $1.1tn in 2023 and the European Central Bank will be looking at quantitative tightening, too. Lower excess reserves will tighten liquidity conditions still further and raise FX volatility levels. Again, the bar not to invest in dollar deposits remains high – especially when those dollar deposits start to pay 5% and the dollar retains its crown as the most liquid currency on the planet. What do these trends mean for G10 FX markets? This probably means that the dollar can bounce around near the highs rather than embark on a clean bear trend in 2023. If the dollar is to turn substantially lower, we would favour the defensive currencies such as the Japanese yen and Swiss franc outperforming. Here, the positive correlation between bonds and equity markets may well break down via the bond market rallying on the back of a US recession and easier Fed policy. ING forecasts US 10-year Treasury yields ending 2023 at 2.75% - USD/JPY could be trading at 130 under that scenario.  Recession in Europe means that EUR/USD could be trading in a 0.95-1.05 range for most of the year, where fears of another energy crisis in the winter of 2023 and uncertainty in Ukraine will hold the euro back. Sterling should also stay fragile as the new government attempts to restore fiscal credibility with Austerity 2.0. We cannot see sterling being rewarded much more on austerity and suspect that GBP/USD struggles to hold gains over 1.20.  Elsewhere in Europe, some differentiation could emerge between the Scandinavian currencies. The Swedish krona may struggle to enter a sustained uptrend next year given its elevated exposure to the eurozone’s growth story, while the Norwegian krone could benefit from its attractive commodity exposure. However, NOK is an illiquid and more volatile currency, and would therefore face a bigger downside in a risk-off scenario. As shown in the chart below, commodity currencies look undervalued versus the dollar on a fundamental basis. However, a stabilisation in risk sentiment is a necessary condition to close the misvaluation gap. For the Australian and New Zealand dollars, an improvement in China’s medium-term outlook is also essential, so the Canadian dollar may emerge as a more attractive pro-cyclical bet given low exposure to the economic woes of Europe and China. Another factor to consider is the depth of the forthcoming house price contraction. We think central banks will increasingly take this into consideration and will try to avert an uncontrolled fall in the housing sector. However, this is potentially a very sizeable downside risk, especially for the currencies of commodity-exporting countries, which generally display the most overvalued property markets in the G10. To conclude, we think FX trends will become less clear in 2023 and volatility will continue to rise. FX option volatility may seem expensive relative to historical levels, but not at all when compared to the volatility FX pairs are actually delivering. We suspect risk management through FX options may become even more popular in 2023.   Valuation, volatility and liquidity in G10 Source: ING, Refinitiv EUR/USD: Dollar bromance will take some breaking   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/USD 1.035 Bearish 0.98 0.95 0.98 1.00 1.00 Bullish leap of faith is too dangerous: We are bearish on EUR/USD into the end of the first quarter of 2023. Key factors which have driven EUR/USD lower this year will remain largely in place. The softish US October CPI print may give the Fed some pause for thought, but should not be enough to derail it from some further tightening – taking the policy rate close to 5.00% in the first quarter of 2023. Another key factor for EUR/USD this year has been energy. Here, our team sees prices for both natural gas and oil rising from current levels through 2023. A difficult 2023 European winter for energy may well restrain the EUR/USD recovery later in the year, continuing to depress the eurozone’s traditionally large current account surplus.   Necessary but not sufficient: Tighter Fed policy has been at the forefront of this year’s dollar rally and a shift in the Fed tone (more likely in March 2023 than December 2022) will be necessary to see the short end of the US yield curve soften appreciably and the dollar weaken. But the sufficient condition for a EUR/USD turnaround is the state of affairs amongst trading partners. Are they attractive enough to draw funds away from USD cash deposits potentially paying 5%? That is a high bar and why we would favour the EUR/USD 2023 recovery being very modest, rather than the ‘V’ shape some are talking about. ECB will blink first: The case for a central bank pivot is stronger for the ECB than the Fed. The German economy looks set to contract 1.5% next year and at its 15 December meeting, the ECB may well use its 2025 forecast round to show inflation back on target. We see the ECB tightening cycle stalling at 2.25% in February versus the near 3% currently priced by the market for 2023. This all assumes a seamless ECB introduction of quantitative tightening and one that does not upset peripheral bond markets. Add in global merchandise trade barely growing above 1% next year (recall how the 2017-19 trade wars weighed on the euro) plus the risk of tighter liquidity spilling into financial stability – all suggest the market’s bromance with the dollar will continue for a while yet.  USD/JPY: 1Q23 will be a crucial quarter   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/JPY 140.00 Bearish 145.00 145.00 140.00 135.00 130.00 Clash of the titans: The stark divergence in monetary policy between the Fed and the Bank of Japan has been the primary driver of this year’s 15%+ rally in USD/JPY. In 2023, investors may question whether the BoJ is ready to tighten. The default view is that the perma-dovish BoJ Governor, Haruhiko Kuroda, will not be moved. However, the end of Governor Kuroda’s term on 8 April 2023 will no doubt lead to frenzied speculation on his replacement and whether a less dovish candidate emerges. Interest rate markets are starting to price a change – e.g. the BoJ’s 10-year target sovereign yield of 0.25% is priced at 0.50% in six months’ time. March 2023 will be especially volatile: The first quarter of 2023 will also see huge focus on the Japanese wage round, where a rise in wages is a prerequisite for the BoJ to tighten policy. Japanese politicians have been encouraging business leaders to raise wages, while at the same time, the government has been quite aggressive with fiscal stimulus to offset the cost-of-living shock. This period will also see the Fed release its dot plots (22 March), which may be the first real chance for the Fed to acknowledge a turn in the inflation profile. As such, this period (March/April) could see a big reversal lower in USD/JPY. FX Intervention slows the move: Most agree that USD/JPY is higher for good reasons (including the energy crisis) and that Japanese FX intervention can only slow, not reverse the move. The Japanese have already spent around $70bn in FX intervention between the 146 and 151 region in USD/JPY and will likely be called into further action based on our view of a stronger dollar over coming months. FX reserves are not limitless, of course, but Japan’s large stockpile of $1.1tn means that this campaign can continue for several more months. The purpose here is to buy time before the Fed cycle turns. Unless we end up with 6%+ policy rates in the US next year, we would expect USD/JPY to be ending 2023 nearer 130. GBP/USD: Running repairs   Spot Year ahead bias4Q221Q232Q233Q234Q23 GBP/USD 1.19 Mildly Bearish 1.10 1.07 1.11 1.14 1.14 Fiscal rescue plan: After September’s government-inflicted flash crash, GBP/USD is now recovering on the expectation of more credible UK fiscal plans and the softer dollar. As above, we doubt 2023 will prove the year of a benign dollar decline. And the risk is that the Fed keeps rates at elevated levels for longer. Given sterling’s large current account deficit and its transition to high beta on the external environment, we think it is too early to be expecting a sustained recovery here. Instead, we favour a return to the 1.10 area into year-end as the government introduces Austerity 2.0 and the Bank of England cycle is repriced lower. Tighter fiscal/looser monetary mix: At its meeting in early November, the BoE pushed back against the market pricing of the rate cycle – arguing that hikes close to 5% would see the UK economy contract 5%. Our call is that the BoE terminal rate will be closer to the 3.75% area than the 4.50% that the market prices today. As the BoE assesses the degree of tightening needed to curtail inflation, the government is discussing ways to fill around a £60bn hole in the budget. The plan will be revealed on 17 November, probably in a roughly 50:50 split between tax hikes and real terms spending cuts. We look for the UK economy to contract every quarter in 2023 – making it a very difficult environment for sterling. Sterling suffers from liquidity outages: This year’s BIS triennial FX survey saw sterling retain its position as the fourth most traded currency pair. Despite this, sterling does occasionally suffer from flash crashes. We think liquidity will be at a premium in 2023 and that a Fed taking real rates even higher as economies head into recession is a dangerous combination for sterling – where financial services make up a large section of the economy. GBP/USD realised volatility is now back to levels seen during Brexit and our market call for 2023 is that these types of levels will become more, not less, common. EUR/JPY: A turn in the cycle   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/JPY 144.50 Bearish 142.00 138.00 137.00 135.00 130.00 Downside risks into 1Q23: EUR/JPY has defied typical relationships with risk assets by gently rallying all year even as both bond and equity benchmarks sold off 20%. Driving that JPY underperformance has probably been BoJ policy and USD/JPY’s strong relationship with US 10-year yields. Both the eurozone and Japan have been hit by the energy shock, where external surpluses have quickly dwindled. As above, we tend to think there are downside risks to EUR/JPY in the first quarter of 2023 as speculation mounts over BoJ Kuroda's successor as well as the ECB potentially calling time on their tightening cycle at the February meeting. US10yr can drag EUR/JPY to 130 in 2H23: A large part of the JPY underperformance during 2022 has been driven by developments in the US bond market. USD/JPY consistently shows the most positive correlation to US 10-year Treasury yields of any of the G10 FX pairs – and far higher than EUR/USD. Consistent with ING’s view on the Fed cutting rates in the third quarter of 2023, our debt strategy team sees US 10-year yields starting to edge lower in the second quarter of 2023, and then falling 100bp in the second half of 2023. In theory, this should heavily pressure EUR/JPY into the end of the year. Financial stability risks increase: Lower growth and tighter liquidity conditions – at least through the early part of 2023 – increase the prospect of financial stability risks. Recall the Fed will be shrinking its balance sheet by $1.1tn in 2023 even as liquidity and bid-offer spreads continue to create difficult market conditions. The yen lost its shine as a safe-haven currency in 2022, but we suspect relative to the euro, some of that shine can be regained in a softer US rate environment. The EUR/JPY cycle should also turn if the ECB calls time on its tightening cycle at the 2 February meeting. EUR/GBP: Listless in London   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/GBP 0.87 Neutral 0.89 0.89 0.88 0.88 0.88 In the same macro boat: Both the eurozone and UK economies have been hit hard by the war in Ukraine and the surge in energy prices. Both saw sharp terms of trade declines into August and then a sharp reversal as natural gas prices dipped into the warm winter. There is not a substantial amount of difference between our German and UK quarterly growth profiles for 2023 – both contracting every quarter of the year. Perhaps one could argue that the UK is more exposed to higher mortgage rates given the shorter duration of fixed-rate mortgages in the UK. This could all make for a trendless EUR/GBP environment. Energy price guarantees could differentiate: One important determinant for UK growth in 2023 will be how the new government handles the Energy Price Guarantee. Former UK Prime Minister, Liz Truss, offered a two-year programme – subsequently cut back to six months after the UK fiscal crisis. How the UK consumer copes with having to pay market prices for energy will be key to the UK story in 2023 as well as how the EU as a whole copes with similar challenges. Currently, it seems that the ECB is concerned that the fiscal programmes in Europe are too generous and not particularly targeted – adding to the inflation challenge.    Political wild cards: To pick out a few political wild cards, the first is a re-run of the Scottish independence referendum. The Scottish National Party (SNP) has picked 19 October 2023 as the date – although such an exercise would likely have to be approved by the UK parliament. Currently, the SNP is pursuing an action through the Supreme Court to see whether London can indeed still veto the referendum. In Europe, the focus will probably be on the fiscal path taken by the new right-wing Meloni government and also the reform of the Stability and Growth Pact. Budgets submitted in late 2023 could become an issue were the rules to be tightened again.   EUR/CHF: Swiss National Bank to guide it lower   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/CHF 0.98 Bearish 0.95 0.93 0.90 0.90 0.92 Does the SNB want a stronger Swiss franc?: The Swiss National Bank this year said it made a conscious decision to allow nominal Swiss franc appreciation in light of the inflation environment. The three-month policy rate has been raised 125bp to 0.50% and the SNB says it wants to keep the real exchange rate stable. With inflation running at 3% in Switzerland versus 10% in its largest trading partner, the eurozone, the SNB in theory should be happy with something like 5-7% per annum nominal appreciation in the Swiss franc. That certainly was the story into the end of September but does not quite explain the Swiss franc's weakness over the last six weeks. Two-sided intervention: When hiking rates earlier this year the SNB also said it would be engaging in two-sided FX intervention. Ever since the start of the financial crisis in 2008, the SNB has been more familiar as a seller of the Swiss franc – including its 1.20 floor in 2011-2015. Now its strategy is changing and we read that as an objective to potentially manage the Swiss franc stronger in line with its ambitions to tighten monetary conditions. Earlier this year, we estimated that the SNB could possibly drive EUR/CHF to the 0.90 area in summer 2023 based on expected inflation differentials and the need for a stable real exchange rate. The risk environment should favour the franc: Central banks are communicating that they need to tighten rates into recession and remove the excess liquidity poured out during a series of monetary bailouts. Tighter monetary and financial conditions typically spell stormy waters for risk assets. With its still sizable current account surplus (worth 8% of GDP in the second quarter of 2022) the Swiss franc should perform well during this stage of the global economic cycle. Closer to home, the European economic cycle and the ECB discussing quantitative tightening into early 2023 will prove a challenge to peripheral eurozone debt markets and likely reinforce the franc as a eurozone hedge. EUR/NOK: Not for the faint of heart   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/NOK 10.33 Bearish 10.30 10.15 9.95 9.70 9.60 Risk sentiment remains key: The krone is not a currency for the faint of heart. It is the least liquid currency in the G10 space, making it considerably exposed to negative shifts in global risk sentiment and equity market turmoil. It is, at this stage, way too early to call for a turn in equities, and a hawkish Fed into the new year may actually mean more pain for risk assets, at least in the near term. A recovery in global sentiment should offer support to NOK in the second half of next year, but restoring market confidence in a very high-beta currency is no easy feat. Norges Bank policy: The krone’s underperformance in 2022 was exacerbated by Norges Bank effectively sterilising oil and gas profits via a large increase in daily NOK sales. In November, FX daily sales have been scaled back from NOK4.3bn to NOK3.7bn, and we think there could be some interest by NB to further ease the pressure on the currency via smaller FX sales. With recent dovish hints suggesting that the NB hiking cycle may peak at 3.0% (with most of the country on variable mortgage rates, many more rate hikes could be difficult to tolerate), allowing a stronger currency to do some inflation-fighting sounds reasonable.  Energy prices: If indeed markets enjoy a calmer environment in 2023 and NB favours a stronger currency, then NOK is left with considerable room to benefit from a still strong energy market picture for Norway. There is probably an optimal range for oil and – above all – gas prices to trade at elevated levels but not such high levels that would significantly hit risk sentiment. For TTF, this could be somewhere around 150-200 €/MWh. This a plausible forecast for next year, but the margin for error can be very large. We see EUR/NOK at 10.50 in the fourth quarter of 2023, but NOK hiccups along the way are highly likely. EUR/SEK: Eurozone exposure a drag on SEK   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/SEK 10.80 Neutral 10.85 10.70 10.60 10.40 10.50 Riksbank’s policy: The Riksbank delivered more than one hawkish surprise in 2022, including a 100bp rate hike. This appeared to be part of a front-loading operation where lifting the krona was seen as a welcome side effect. In practice, and like in many other instances in the G10, the high volatility environment meant that short-term rate differentials played a negligible role in FX. So, despite a wide EUR-SEK negative rate differential throughout 2022, SEK was unable to draw any real benefit. That differential has now evaporated, but we expect 125bp of tightening (rates at 3.0%) in Sweden versus 75bp in the eurozone, which could suggest some EUR/SEK downside room in a more stable market environment. Also, a slowdown in FX purchases by the RB, now that reserves are back to the 1H19 levels, should remove some of the pressure on SEK. European picture: Sweden is a very open economy with more than half of its exports heading to other EU countries. Our expectations are that 2023 will see a rather pronounced eurozone recession and that the energy crisis will extend into the end of next year. Barring a prolonged period of low energy prices (and essentially an improvement in the geopolitical picture) in Europe, we doubt SEK will be able to enter a sustainable appreciation trend in 2023 as sentiment in the eurozone should remain depressed. Valuation: We are not fans of the euro in 2023, which means that our EUR-crosses forecasts reflect the weaker EUR profile. We see some room for EUR/SEK to move lower throughout the year – also considering that we estimate the pair to be around 9.0% overvalued. However, the high risk of a prolonged energy crisis in the eurozone means that SEK is significantly less attractive than other pro-cyclical currencies next year. Incidentally, SEK is highly correlated to the US tech stock market, which looks particularly vulnerable at the moment. A return to 10.00 or below would likely require a significant improvement in European sentiment. USD/CAD: Loonie is an attractive pro-cyclical bet   Spot Year ahead bias4Q221Q232Q233Q234Q23 USD/CAD 1.33 Bearish 1.34 1.32 1.30 1.26 1.24 Commodities and external factors: Our commodities team expects Brent to average slightly above $100/bbl next year, and Western Canadian Select around $85/bbl. Along with our expectations for higher gas prices, the overall commodity picture should prove rather supportive for the Canadian dollar in 2023. In our base-case scenario, where global risk sentiment gradually recovers but two major risk-off forces – Ukraine/Europe and China – remain, CAD would be in an advantageous position, since Canada has much more limited direct exposure to China and Europe compared to other commodity-exporting economies.  Domestic economy: If the US proves to be a relative 'safe-haven' in the global recession, therefore withstanding the downturn better than other major economies like the eurozone, this should offer a shield to Canada’s economy, which is heavily reliant on exports to the US. There is probably one major concern for the domestic economy: house prices. Canada is among the most vulnerable housing markets in the world, with price-to-income ratios around 9x in many cities (compared to 5-6x in the US). Whether we’ll see a sizeable but controlled descent or a fully-fledged housing crash will depend on the Bank of Canada and the depth of the recession. Monetary policy and valuation: It does appear that the BoC has started to consider domestic warning signals (probably, also house prices), and recently shifted to a more moderate pace of tightening. Markets are currently expecting rates to peak around 4.25/4.50% in Canada, and we tend to agree. Barring a rapid acceleration in the unemployment rate, a housing crash should be averted. It is also likely that the BoC will start cutting before the Fed in 2023. All in all, accepting the downside risks stemming from the housing market and/or a further deterioration in risk sentiment, we see room for a descent in USD/CAD to the 1.25 level towards the end of 2023. In our BEER model, CAD is around 20% undervalued in real terms. AUD/USD: Riding Beijing’s roller coaster   Spot Year ahead bias4Q221Q232Q233Q234Q23 AUD/USD 0.68 Mildly Bullish 0.66 0.66 0.68 0.69 0.70 Exposure to China: The Australian dollar is a high-beta currency, and the direction of global risk sentiment will be the key driver next year. We think that a gradual recovery in sentiment will be accompanied by a still challenging energy picture, which may force investors to choose which pro-cyclical currencies to bet on. When it comes to AUD, the China factor will remain very central, as Australia has the most China-dependent export machine in the G10. Our economics team’s baseline scenario is that the real estate crisis will be the main drag on growth in China and while retail should recover on looser Covid rules, slowing global demand should hit exports. One positive development: the new Australian government is seeking a more friendly relationship with Beijing, paving the way for the removal of export curbs next year. Commodities and growth: Iron ore remains Australia’s main export (estimated at $130bn in 2022), and it is a very sensitive commodity to China's real estate sector. Our commodities team thinks a return to $100+ levels is unlikely given the worsening Chinese demand picture, but still forecasts prices to average $90/t in 2023. The second and third largest exports are oil and natural gas ($100bn combined). Here, we see clearly more upside room for prices, especially on the natural gas side. On balance, we expect the commodity picture for Australia to be rather constructive next year, which could offer a buffer to the Australian economy during the downturn. Growth in 2022 should have topped the 4% mark, but that will be much harder to achieve in 2023. The combination of higher rates, reset mortgages, a slowing housing market and possibly softening labour market should bring growth back closer to 3%. This would still be an extremely strong outcome against the backdrop of global weakness.   Monetary policy and valuation: The Reserve Bank of Australia has been one of the 'pioneers' of the dovish pivot, and a return to 50bp increases seems unlikely, as the Bank is probably monitoring the rather overvalued housing market, and the inflation picture is less concerning than in the US or in Europe. Most Australian households have short-term fixed mortgage rates, and we could see a deterioration in disposable income (especially at the start of the year). We think the RBA will be careful to avert an excessively sharp housing contraction, and we expect rates to peak at 3.60% (well below the Fed and the Reserve Bank of New Zealand) and cuts from 3Q23. This would mean a less attractive carry – and less upside risk in an optimistic scenario for global sentiment; but also less damage to the economy, which may play in AUD’s favour in our baseline scenario. Valuation highly favours AUD, as the positive terms of trade shock means that AUD/USD is 20% undervalued in real terms, according to our behavioural equilibrium exchange rate (BEER) model. We have a moderately upward-sloping profile for the pair in 2023, but high sensitivity to risk sentiment and China suggests downside risks remain high. NZD/USD: Dodging the housing bullet   Spot Year ahead bias4Q221Q232Q233Q234Q23 NZD/USD 0.62 Mildly Bullish 0.60 0.60 0.62 0.63 0.64 Monetary policy: The Reserve Bank of New Zealand has given very few reasons to believe it is approaching a dovish pivot. Markets are currently expecting the Bank to hike well into 2023, and take rates to around 5.0%. While inflation (7.2% year-on-year) and job market tightness (unemployment at 3.3%) both remained elevated in the third quarter, there are growing concerns about the rapid downturn in the New Zealand property market, which in our view will trigger either an earlier-than-expected end to the tightening cycle or a faster pace of rate cuts in 2023. Housing troubles: The RBNZ recently published its financial stability report, where it showed relatively limited concern about households’ ability to withstand the forthcoming downturn in house prices. In its August 2022 forecasts, the RBNZ estimated that the YoY contraction in house prices will reach 11.6% in the first quarter of 2023. However, that implied an Official Cash Rate at 4.0%, so only 50bp of extra tightening from now, which seems too conservative now. House prices have fallen 7.5% from their first quarter 2022 peak so far, but the trend may well accelerate, especially given a hawkish RBNZ and the risk of slowing global demand hitting the very open New Zealand economy. External drivers and valuation: Even assuming a constructive domestic picture in the housing market and an attractive yield for the currency in 2023, external factors will determine how much NZD can draw any benefit. As for AUD, risk sentiment and China are the two central themes. The New Zealand dollar is more exposed to risk sentiment (as it is less liquid and higher-yielding) than AUD, but probably less exposed to China’s story. In particular, the real estate troubles in China may well hit Australia via the iron ore channel, while NZ exports (primarily dairy products) are much more linked to China’s Covid restrictions, which look likely to be gradually scaled back. In our base case, the two currencies should largely move in tandem next year. The real NZD/USD rate is 15% undervalued, according to our BEER model. EUR/DKK: Tricky mix of intervention and rates   Spot Year ahead bias4Q221Q232Q233Q234Q23 EUR/DKK 7.44 Neutral 7.44 7.44 7.44 7.44 7.45 Central bank policy: Danmarks Nationalbank delivered FX intervention worth DKK45bn in September and October to defend the EUR/DKK peg. On 27 October, it opted for a smaller rate hike (60bp) compared to the ECB (75bp), which briefly sent EUR/DKK close to the 7.4460 February highs before rapidly falling back to 7.4380/90. We think it will be a busy year ahead for the central bank, as we expect very limited idiosyncratic EUR strength and potentially more pressure on EUR/DKK. Having now exited negative rate territory, DN has much more room to adjust the policy rate for a wider rate differential with the ECB if needed. However, with inflation running above 10% in Denmark, DN may prefer FX intervention over dovish monetary policy to support the peg. We have recently revised our EUR/DKK forecast, and expect a return to 7.4600 only in 2024. 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  
Saxo Bank's Podcast: Eyes On The US October Jobs Report

The Summarises Of The Key Research Questions Of ING Survey

ING Economics ING Economics 19.11.2022 10:30
This section summarises the responses to the key research questions of our survey. How are companies coping in times of an energy shock, mainly gas? How does expensive energy affect their business? Do companies have problems with access to energy? Are they worried about energy access problems in the coming year? • SMEs have been hit hard by the war in Ukraine due to higher energy prices, which account for a more significant share of total costs. • 70% of companies are concerned about access to energy in the upcoming heating season. • Companies have generally only partially passed on higher energy costs to buyers and are actively reducing other expenses, including development. How have they responded so far, and what are their plans regarding energy-saving technologies or perhaps their own sources like photovoltaics, windmill, heat pump, and energy storage? • Companies expect further increases in energy prices for the coming year, although slightly lower than in the past 12 months. • High energy prices are increasing interest from SMEs in investments in energy efficiency and RES, especially in industrial companies in towns with less than 100,000 residents. • Companies are mainly focused on ad hoc measures with quick effects - increasing prices, looking for substitutes and cutting costs, including developmental ones. Does the anti-inflation shield (including reductions in VAT and excise taxes on energy) help them? • Most companies see the positive effects of the energy tax cuts. • For two-thirds of all companies, the anti-inflation shield is not enough support. For 15%, the shield does not help at all. • Nevertheless, the majority (60%) of companies believe it should be maintained at least until the end of 2023.Do companies feel pressure/identify a need to switch to clean energy in the near future? • Just 1 in 5 companies feel pressure to do so industrial companies.this tends to apply to larger • For the companies perceiving said pressure, the source is generally national and EU regulations, and secondarily from local governments or residents in the vicinity of the company's headquarters. Are they aware of EU climate policy and opportunities to support clean energy and energy efficiency? • Companies are r ather sceptical about the effectiveness of support from EU policy. A bird’s eye view takeaway: the large energy shock will make inflation more persistent The massive increases and fluctuations in the prices of energy carriers in 2022 (for natural gas in particular) have caused an unprecedented shock for Polish companies. In times of crisis, we appreciate how important energy is for production – in all companies, not just energy-intensive ones. Attempting to pass on high energy costs to buyers was the initial reaction for most companies, but they did so only partially. Having observed the behaviour of demand, it is possible that they have since decided to stagger price increases for their products or services. As a result, upward price adjustments will still take place in the form of second-round effects. The government's anti-inflation shield (currently under re-consideration) and various other solutions for 2023 should help to smooth out energy price increases, buying more time for action and investment in energy-saving technologies and our own RES. However, the persistency of inflation throughout 2023 is to come from non-energy items, such as food. This is visible in the rising trend of core inflation, which reached double-digit levels in the recent months (11% YoY in October). Prioritising the potential for green investment is no doubt the right way to go as a sustainable option for improving energy security in such turbulent times. Amid negative external circumstances, the emphasis on going green at the enterprise level is a reassuring message. 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
External Assistance And EU Policy And Government's Shield

External Assistance And EU Policy And Government's Shield

ING Economics ING Economics 19.11.2022 10:29
External assistance and government's anti-inflation shield The vast majority of respondents say the anti-inflation shield is helpful. The shield comprised temporary cuts in indirect taxes, addressed mainly to households. However, most companies (63%) find the anti-inflation shield helps only slightly, and only 15% feel that it does not help at all. Does the anti-inflation shield help your company? External assistance and EU policy to combat the energy crisis Most companies are quite sceptical about the effectiveness of EU policies in dealing with the energy crisis. 44% of companies do not believe that EU policies can contain the crisis but do note the potential for good solutions within them. One in ten companies are strongly critical and see EU policies as a pause button rather than a firm solution for dealing with the crisis. Slightly rarer are the companies that view EU policies more positively and with more hope (a total of 36%, of which 6% believe in EU policies without reservations. The remaining 30%, however, would make changes). Could EU policies help in the energy crisis? 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
Ethereum: What Did Help ETH/USD To rise? We're Talking About A 12% Rise!

Most Companies Interested In Green Investments

ING Economics ING Economics 19.11.2022 10:29
Offsetting higher energy costs Given that around 95% of companies decided to increase the prices of their products or services, we asked a follow-up question on the extent to which they compensated for higher energy prices. Compensating for the increase in costs by passing them on to consumers appears to be an easier option than the search for cheaper production substitutes. When raising prices of own products or services, most companies tried to compensate themselves for at least half of the higher energy costs (as noted by 60% of companies that have raised prices). On the other hand, this means that still there is a large room for price adjustments in the future. To what extent did the companies compensate for higher energy prices by price hikes of own products or services? We also asked a similar question about offsetting higher energy costs to 77% of entrepreneurs looking for cheaper materials and services. Around 60% of companies that take such steps could only compensate themselves for energy price increases "to a very small extent," and 34% of companies for less than half. Limited substitution possibilities could result from supply constraints due to disruptions in global value chains amid the pandemic. To what extent did the compensate for higher energy prices by looking for cheaper materials and services Green investments For most companies interested in green investments, solutions aimed at saving energy or building their own RES installations are only in the planning stages. A relatively large number of companies are also in the process of modernising production lines or thermal modernisation of buildings. While investment in renewable energy sources has slowed down (with few currently in the pipeline), one in three companies interested in such investments have found a solution, appreciated its advantages and plans to expand investments in their own RES. Reasons for lack of green investments More than half of the companies that do not plan to invest in thermal modernisation have taken care of this beforehand. One in three companies that are not in the process of investing in their own energy sources are waiting for the availability of funds for this purpose. They also expect better solutions at the state level (e.g., the possibility of building windmills, increasing the profitability of setting up PV panels). However, more than 40% of companies currently not investing in renewable energy sources say they may consider doing so in the future. More than half of all industrial companies would be ready to modernise production lines if there were funds to do so, with 30% currently waiting for funding from EU sources (e.g., from the National Recovery Fund). Pressure to use energy-efficient and low-carbon solutions In the context of the climate crisis, we also asked companies about external pressure to go green. Generally, the pressure felt by companies to use energy-saving and low- carbon solutions is low, with just one in five companies noting its effect. Greater pressure is felt by larger companies and industrial firms. This stems mainly from national and EU regulations and policies, and secondarily from local governments and residents in the vicinity of the company's headquarters. Only one in four of those perceiving pressure see it from contractors; one in four from consumers; and one in ten from banks. Pressure to act in response to the climate crisis appears to be lower in the SME sector than in large companies. This conclusion is supported by our other research at both global and national levels. 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
Commodities: EU Members Manage To Agree On Price Caps For Russian Oil

Companies Are Looking For Cheaper Materials And Suppliers

ING Economics ING Economics 19.11.2022 10:29
The quantitative survey was conducted by GFK Polonia on behalf of ING Bank Slaski in August 2022, using the Computer Assisted Telephone Interviewing (CATI) method. The sample consisted of 300 small and medium enterprises (SME). Research questions In the survey, we searched for responses to the following questions: 1) How are companies coping in times of an energy shock, mainly for natural gas? How does expensive energy affect their business? Do companies have problems with access to energy? Are they worried about energy access problems in the coming year? 2) How have they responded so far? What are their plans for investing in energy- efficient technologies or perhaps their own sources like photovoltaics, windmill, heat pump, and energy storage? 3) Does the anti-inflation shield (including the reduction of VAT and excise taxes on energy) help them? 4) Given the context of the current climate crisis, do they feel pressure/identify a need to switch to clean energy in the near future? 5) Are they aware of EU climate policy and opportunities to support clean energy and energy efficiency? Types of energy used One in five companies has its own power generator, and 17% of companies say they have their own sources of electricity. Own boilers/furnaces as heat sources are used by almost half of the companies - that's as often as heat from the grid. 10% of companies declare using electric-powered vehicles, although this result is likely inflated. According to local automotive associations PZPM and PSPA there are only about 50,000 pure electric and plug-in hybrid cars in Poland. Natural gas is twice as popular as electricity in company vehicles. Share of energy in total costs About two-thirds of all companies indicate a share of energy (all carriers, including transport fuels) making up more than 10% in company costs. Larger companies declare a larger share of energy in their costs, most often between 10% and 30% (for more than half of the companies over PLN 10 million in turnover last year). About half of the companies with higher turnover are industrial companies, which are generally more energy-intensive than the service or construction industries. Average share of energy costs in the company's costs Perception of the energy situation Companies perceive energy and fuel price increases differently. Most (26%) believe that prices have already risen between 50% and 80%. Perception of past increases in fuel and energy costs - by how much? (%) Expectations for future increases are slightly more consistent, with 32% of companies predicting that prices will still rise between 30% and 50% further. Predicting further increases in fuel and energy costs - by how much? (%) The vast majority of companies (nearly 70%) are concerned about problems with access to energy and fuels. Concerns about access to fuel and Energy Responses to increased energy and fuel costs Almost all companies have reacted to rising energy and fuel costs by increasing the price of products or services. Only 5% have avoided this so far. The second most common way to cope with the situation is looking for cheaper materials and suppliers (recorded by 77% of companies), followed by cutting other costs (60%) and halting R&D investments (41%). More than one in three companies intend to invest in solutions that will help save energy in the future. Responses to increased energy and fuel costs 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
Reducing The Risk Of A Gas Shortage In Poland In The Upcoming Heating Season

Reducing The Risk Of A Gas Shortage In Poland In The Upcoming Heating Season

ING Economics ING Economics 19.11.2022 10:28
EU response to Russian invasion of Ukraine: In response to the Russian invasion of Ukraine, the EU has introduced economic sanctions on Russia, including a full coal embargo (since August), an oil embargo (with exceptions) and a two-thirds reduction in gas imports by the end of the year. Substitution of Russian gas in the EU: EU measures (more LNG and network gas from other locations, fuel substitution, and energy efficiency) leave a gap of around 20bcm. The EC has proposed voluntary (and forced if necessary) consumption cuts of 15% in EU countries. This is roughly equivalent to the additional gas consumption that occurs during a cold winter in Europe. Re-Power EU: EU policy, in particular the May 2022 Re-Power EU program, has remained consistent with the long-term goal of climate neutrality and the Green Deal strategy. In addition to diversifying gas supplies, it envisions accelerating the low-carbon transition, mainly through support for RES and energy efficiency. EU shields package from high energy prices: On 14 September, EC President Ursula von der Leyen announced the following: •A target to reduce gas and electricity consumption by 10% and by 5% during the peak winter season to a 5-year average •A tax on excess profits of energy producers •A €180/MWh price cap on low-cost technologies (mainly nuclear, lignite and RES) for the wholesale market in all segments and bilateral contracts •A €3 million investment in hydrogen The gas shock has already caused a significant reduction in natural gas consumption in EU countries, although market prices have not been passed on to the end user. In January-July 2022, gas consumption in the EU was 10% and in Poland 15% YoY lower than in 2021. Natural gas consumption in JanuaryJuly 2022 (%YoY) In the context of deep declines in gas consumption this year, the mechanism proposed by the EC in July to reduce consumption by 15% by member countries does not seem to be a major challenge for Poland. Twelve EU countries, including Poland, have already re duced gas consumption by 15% YoY in January-July 2022. High storage fills, the launch of the Baltic Pipe pipeline from late September and new interconnectors with Lithuania and Slovakia reduce the risk of a gas shortage in Poland in the upcoming heating season. High prices are being boosted by negative events related to the war in Ukraine, including sabotage at Nord Stream. Record high prices encourage gas substitution and directly affect the decline in demand and production in gasintensive sectors. Househ olds and the service sector are generally protected; hence price increases are most severe for producers of the chemical (including fertilisers), mineral and metal smelting industries. 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
Enrico Tanuwidjaja: "We Maintain Our Inflation Forecast For 2022 At 4.9%"

The Government Has Actively Used Instruments To Mitigate Energy Price

ING Economics ING Economics 19.11.2022 10:28
Energy prices are driving up CPI inflation: The increase in energy carrier prices in 2022 strongly impacted the acceleration of consumer inflation. In August, the contribution of fuels in transportation and home energy carriers was 6.0 percentage points inflation at 17.2% YoY. Neverthel, with CPI ess, the initial impetus for higher energy prices was also translated through socalled secondround effects on price increases for food and other goods and services in the core inflation basket CPI inflation and its sources (% change YoY) It’s not only energy responsible for the acceleration of inflation: In our view, the high price increase is a combination of cost inflation (pandemic, war in Ukraine) and demand inflation (consumption boom for a few years, tight labour market). These factors will continue to bring about high inflation as a result of the o ngoing energy crisis. Core inflation will rise with a peak in early 2023 because of the delayed pass producer price increases to retail prices. We forecast double-- through of digit CPI price growth in 202324. The anti-inflation shield and energy prices for households: Since the beginning of 2022, the government has actively used instruments to mitigate energy price increases by introducing indirect tax cuts as part of the antiinflation shield. These solutions have now been extended until the end of 2 022. Thanks to the reduction of the VAT rate on electricity (from 23% to 8%) in January 2022, the increase in this component of the CPI was about 5% rather than 24%, which would have otherwise been the result of Energy Regulatory Office’s hike in tar the 6 iffs for households. Prices of energy carriers in Poland - components of the CPI index (%ch YoY) Increases despite the anti-inflation shield: While the government has announced a freeze on the price of electricity, energy and gas for early 2023, consumers are still expected to face solid fuel (coal) price increases in autumn. Upward pressure on the price of food and other goods and services (second-round effects) will also persist. 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 Could Be The Next Hit To Global Inflation | Donald Trump's Announcement

Energy Prices And Their Impact On Marekts And Consumer Price

ING Economics ING Economics 19.11.2022 10:28
Energy price shock for producers in 2022 Translation of wholesale market prices into Producer Price Index (PPI) and Consumer Price Index (CPI) prices: Producer prices typically respond quickly to changes in wholesale energy market prices, which are driven by global developments. In Europe, they are largely impacted by the EU’s energy and climate policy and the EU’s energy market design. However, for individual companies, price changes are often indexed to market prices and occur with some delay. While stock market transactions are transparent, we have limited insights into bilateral contracts between energy utilities and individual manufacturers. Finally , the transmission of shifts in wholesale and 4 producer prices on consumer prices in Poland is constrained by the Energy Regulatory Office, which is responsible for electricity and gas tariffs to households, as well as government decisions on taxes and bene fits. Energy prices what and what does it depend on? Postrecession rebound 2021 and rising oil prices: The upward pressure on industrial output in 2021 was a rebound from the 2020 pandemic recession steadily. In January 2021, PPI growth was 1% built up quickly and YoY, and by December was already at 14.4%, largely driven by price increases in the coke a nd refined petroleum products While January 2021 saw a 6.9% . YoY decline in this category, while December 2021 price growth was 64.3% YoY. This category accounts for 5.2% of the PPI index basket in 2022. Producer price index (PPI) and its energy categories (%ch YoY) A rapid buildup of cost pressures in 2022 and increases in gas and electricity prices: Throughout 2022, water incre prices in the generation and supply of electricity, gas, steam, and hot ased systematically . Price increases in this category reached 30% January 2022 and accelerated to nearly 80% YoY in YoY in August. This category accounts for .8% 7.5% of the PPI basket in 2022. Increases in energy and other categories moved the PPI index from 14 YoY in January to 25.5% in August At the starting point ( before the energy shock ) , 2022 . energy prices for companies in Poland were generally close to the EU average: for companies (including taxes) average in Poland in the second half of 2021. They the past According to Eurostat data, electricity prices were about a quarter lower than the EU27 have increased by a total of about 25% over four years (between the second half of 2021 and of 2018). The price of natural gas for companies saw a total increase of 30% in four years, close to the EU average . Electricity prices for companies in the EU in second half of 2021 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
Saxo Bank Podcast: Key Economic Indicators Point To An Incoming Recession In Europe

Recession Fears In The Global Economy

ING Economics ING Economics 19.11.2022 10:27
Executive summary 1)Following the Russian invasion of Ukraine in 2022, European and Polish economies are experiencing a huge energy shock due to record-high prices and the risk of energy supply disruptions. 2)Due to the dependence on energy from Russia and the structure of energy balances, it is mainly a gas problem for the EU and a coal problem for Poland. This applies less to power plants as it does to households and district heating units which rely heavily on imported coal from Russia. The source is not only high prices, but also the risk of natural gas and coal shortages over the coming winter. 3)Higher energy prices on wholesale markets have contributed to a significant increase in producer and consumer prices, but this is not an automatic pass-through. It is stretched over time. Producer prices depend on previous contracts, competitive conditions and the substitutability of energy carriers. 4)The pass-through of higher costs to the end user depends on both demand and fiscal policy. Energy prices for households are largely influenced by the decisions of the government (e.g., the anti-inflation shield) and the regulator (Energy Regulatory Office tariffs). On average, consumer electricity prices increased by about 5% in 2022, following increases of 12% in 2020 and 10% in 2021. 5)Our survey of 300 small and medium-sized companies shows that: •70% of companies are concerned about access to energy in the upcoming heating season. •Companies have generally only partially passed on higher energy costs to buyers and are actively reducing other expenses. •High energy prices are increasing SMEs' interest in investing in energy efficiency and renewable energy sources (RES), especially in industrial companies. •The anti-inflation shield alone is not enough support but should be maintained at least until the end of 2023. •Companies are rather sceptical about the effectiveness of EU policy support. Energy Shock 2022: On the back of an economic rebound following the pandemic in 2021 and thereafter due to Russia's invasion of Ukraine in 2022, the prices of energy carriers in Europe have remained in a clear upward trend and fluctuated strongly. They shot up in the summer of 2022 following the initial threat and again after Nord Stream 1 completely halted gas supplies to Europe. By the end imports to Europe were about threeof September, daily Russian gas quarters lower year Gazprom manipulation from mid2021:onyear. Prices of energy carriers have been on an upward trend since mid2021. Russia's gas manipulations led to a jump in prices later that year, with energy prices rising further after the outbreak of war in Ukraine. Local maximum in midAugust: In midAugust 2 022, energy prices were many times higher than the average in January 2021. Prices for natural gas rose more than 15 times, electricity (wholesale market) by 7 times, coal by almost 5 times, and oil almost twice. The explosion in gas prices was due to volu me restrictions imposed by Gazprom. Shipments through Nord Stream 1 fell to 40% in June 2022, then to 20% in July August preceding the complete suspension of supplies through this pipeline in early September. September correction: When the European Commission and EU member states responded to Russia's gas manipulation, prices fell sharply. The correction in oil prices was largely due to recession fears in the global economy and also driven partly by monetary tightening. In early October, following fluctuati ons due to the Nord Stream leaks and the EU Council's decision to control rising energy costs, price increases were eight times higher for natural gas, almost three times for electrici and 1.5 times for oil. Prices of energy carriers: January 2021 =100 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 Asia Forex Market Pack Were Broadly Weaker Vs The USD

Asia Events: A Rate Hike By The Bank Of Korea (BoK)

ING Economics ING Economics 18.11.2022 14:58
A rate hike by the Bank of Korea, and inflation data from Tokyo and Singapore are just some of the highlights in the region next week In this article BoK to hike rates but expect a slower pace of tightening Inflation remains elevated in Japan and Singapore Export and manufacturing data for Taiwan Other important data reports: Loan rates in China steady and growth downgraded in Singapore Source: Shutterstock BoK to hike rates but expect a slower pace of tightening The Bank of Korea (BoK) will meet next Thursday and we expect it to carry out a 25bp hike. Consumer prices edged up in October but inflation appears to have passed its peak.  The recent FX market move probably would be one factor for BoK to adjust its pace of tightening after its recent jumbo increase. However, given that financial market stresses remain high, the BoK will need to consider market stability for its policy decision.  Inflation remains elevated in Japan and Singapore Next week, Japan will release November CPI inflation for Tokyo. We expect Tokyo inflation to accelerate to 3.6% year-on-year, from 3.5% in October. The travel voucher programme probably cooled down some of the service price pressures although other commodity prices rose to offset this decline. In Singapore, inflation is expected to remain elevated for both headline and core, although the headline number may dip from last month. Evident price pressure should keep the Monetary Authority of Singapore hawkish to close out the year as it monitors the impact of recent tightening.    Export and manufacturing data for Taiwan Taiwan will release data on export orders and industrial production. We project both figures to post a YoY contraction due to softer demand for semiconductors. Demand for electronics has been dampened by a mix of high inflation data in some economies and slower growth for others. More upside however could be anticipated in next month’s data as China’s Covid-19 measures have been eased. Other important data reports: Loan rates in China steady and growth downgraded in Singapore China will release its Loan Prime Rate next Monday and we expect no change from the current 3.65% for 1Y and 4.3% for 5Y. Loan prime rates will likely be untouched as the Medium Lending Facility Rate was put on hold by the People's Bank of China.   Lastly, Singapore will report revised third-quarter GDP figures and we expect a downward revision to the earlier report. Both retail sales and non-oil domestic exports have shown signs of moderation as higher inflation and slowing global trade appear to be taking their toll on the growth momentum. Asia Economic Calendar Source:Refinitiv, ING TagsAsia week ahead 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
ECB Is Fighting Hard To Prevent Markets From Undoing The Tightening Of Financial Conditions

Attention Turns Back To The Economic Data And The Riksbank Policy Rate

ING Economics ING Economics 18.11.2022 13:35
With the UK's Autumn Statement out of the way, attention turns back to the economic data which are deteriorating – UK PMIs are likely to re-emphasise the worsening condition and that a recession is coming. In Sweden, the Riksbank is expected to hike by 75bp next week, raising the policy rate to 2.5% In this article US: Ongoing weakness in housing data UK: Focus switches back to the data and Bank of England Sweden: Riksbank expected to hike by 75bp Source: Shutterstock US: Ongoing weakness in housing data Thanksgiving means a holiday-shortened week in the US with the focus set to remain on the outlook for Federal Reserve policy. Market pricing has switched markedly since the surprisingly soft October CPI print but Federal Reserve officials continue to suggest there is more work to be done to ensure the inflation front is defeated. Indeed, we continue to hear comments suggesting the risk of doing too little outweighs the consequences of doing too much in terms of interest rate increases. Expect more next week. Data-wise we are looking at ongoing weakness in housing data, but durable goods orders should rise given firm Boeing aircraft orders. Nonetheless, it is doubtful this will be market moving in any meaningful way. The November jobs report on 2 December and the November CPI print on 13 December are the big releases to watch. UK: Focus switches back to the data and Bank of England The key takeaway from the UK’s Autumn Statement was that much of the anticipated fiscal pain has been pushed back until after the next election. Chancellor Jeremy Hunt has calculated that calmer financial markets and the announcement of certain tax rises mean he can push back some of the tougher spending decisions, without sparking a fresh crisis of confidence in UK assets. No doubt the Treasury is banking on less aggressive Bank of England rate hikes to lower future debt interest projections, giving scope to water down some of the cuts further down the line. Read more about the Budget announcements here.  With the fiscal event out of the way, attention turns back to the economic data which is clearly deteriorating. Next week’s PMIs are likely to re-emphasise that more companies are seeing conditions worsen than improve right now, the latest sign that a recession is coming. There’s also the question of whether the Bank of England will pivot back to a 50bp rate hike in December, and we think it will, despite some mildly hawkish inflation data in recent days. We’ll hear from a couple of rate-setters next week to help shape expectations ahead of that meeting in a few weeks' time. Sweden: Riksbank expected to hike by 75bp Back in September, the Riksbank hiked the policy rate by a full percentage point but signalled that it expected to pivot back to a 50bp rate hike in November. Since then, core inflation has exceeded the central bank’s forecasts by half a percentage point, while the jobs market has remained relatively tight. Given that the ECB has continued with its 75bp rate hikes – and the Riksbank has been vocal about staying out in front of the eurozone’s interest rate policy – we expect further aggressive tightening by Swedish policymakers next week. Remember this is the Riksbank’s last meeting before February, and we therefore expect a 75bp hike on Thursday. We’d expect the new interest rate projection published alongside the decision to pencil in at least another 25bp worth of tightening early next year, but ultimately there are limits to how far it can go given the fragile housing market. Key events in developed markets next week Refinitiv, ING TagsUS UK fiscal policy Sweden 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
Hungary And Turkey Monetary Policy Decision Ahead

Hungary And Turkey Monetary Policy Decision Ahead

ING Economics ING Economics 18.11.2022 13:26
We do not expect any movement from the National Bank of Hungary at next week's meeting, as the latest data were in line with expectations. The labour market is expected to be a mixed picture, with the unemployment rate moving up and wage growth remaining strong. We also expect the Central bank of Turkey to conclude its easing cycle In this article Poland: Wage growth is no longer keeping up with rising prices Turkey: Easing cycle to be concluded with a 9% policy rate Hungary: Base rate set to remain unchanged Poland: Wage growth is no longer keeping up with rising prices Industrial output (October forecast: 8.8% year-on-year): Industrial production is benefiting from an improvement in supply chain functioning, which supports exports-oriented industries, including automotive and electric products. When the backlog of work is unloaded and re-stocking is finished, domestic manufacturing is expected to slow over the medium term.   Retail sales (October forecast: 3.8% YoY): Retail sales growth has slowed to low single-digit growth as wages are no longer keeping up with rising prices. We forecast growth of 3.8% YoY as high inflation is undermining consumers' purchasing power to such an extent that they are more cautious in their purchasing decisions. Household consumption growth is slowing. Unemployment rate (October forecast: 5.1%): A recent data revision lifted the registered unemployment rate toward a higher level, but the number of unemployed remains unchanged (lower denominator). Nevertheless, the trend remains positive and we forecast that in October the number of unemployed and the unemployment rate were broadly unchanged vs. in September. The Polish labour market remains resilient to softer economic conditions. Turkey: Easing cycle to be concluded with a 9% policy rate While inflationary pressures remained broad-based in October as all 12 main CPI categories contributed positively to the increase in inflation, the Central Bank of Turkey has signalled that it intends to conclude the easing cycle with another 150bp rate cut in November. This will bring the policy rate to 9.0%. Hungary: Base rate set to remain unchanged We do not expect any fireworks from the National Bank of Hungary at its November rate-setting meeting. The latest data regarding inflation and GDP were broadly in line with the central bank’s expectations and the next staff projection update is only due in December. Against this backdrop, we don't see any game-changing moves. When it comes to the risk environment, we haven’t seen a material improvement in domestic or external risk factors, which were flagged by the central bank as triggers to consider changes in its monetary stance. By the time the National Bank of Hungary's (NBH's) rate-setting meeting takes place, we might see some positive headlines coming from the European Commission regarding the Rule-of-Law procedure. With a green(ish) light, Hungary will be able to secure the Recovery and Resilience Facility (RRF) plan signature just in time to not lose €4.6bn of the €5.8bn RRF grant which is at stake should Hungary miss the year-end deadline to have an accepted plan. But no matter how green this light is, we don’t expect the central bank to make a policy change so quickly and we see the NBH underscoring its hawkish “whatever it takes” approach again. Though the EU fund story and the monetary policy decision will give plenty to talk about, we are going to see the latest labour market data as well. Here we expect wage growth to remain strong, reflecting the fact that companies made mid-year wage increases and one-off payments as inflation bit workers’ disposable income. Regarding the unemployment rate, we expect it to continue its gradual rise, as other employers are unable to remain in business without a reduction in their labour costs. In general, it will be quite a mixed picture of the state of the Hungarian labour market. Key events in EMEA next week Source: Refinitiv, ING TagsTurkey Poland wages 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
A Lot Of Attention On German Wage Settlements Across The Eurozone

A Lot Of Attention On German Wage Settlements Across The Eurozone

ING Economics ING Economics 18.11.2022 10:25
A regional wage agreement in Baden-Wuerttemberg yesterday will pave the way for broader wage developments and shows the European Central Bank that second-round effects will kick in next year but should be dampened Last night, employers and unions in the metal and electronics industry in Baden-Wuerttemberg reached a new wage agreement. Wages will be increased by 5.2% in June 2023 and by 3.3% in May 2024. There will also be a one-off payment of €3,000, exactly the amount the German government had offered to exempt from tax and social security contributions. While this is "only" a regional wage agreement, it will have knock-on effects on other regional and sectoral wage negotiations. Almost four million people in Germany work in the metal and electronics industry. Traditionally, there has been a lot of attention on German wage settlements across the eurozone. The takeaway for German wage developments and the risk of second-round effects is that last night's deal shows what a compromise can look like. It won’t be enough to fully offset the drop in purchasing power caused by higher inflation, but it softens the damage. For the ECB, it signals that second-round effects remain dampened and that a lower, subdued inflationary pressure can last for longer than markets currently think. TagsInflation 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
Euro feels a bit better after the release of European inflation data

FX: G10 Currencies Should Face Less Trend And More Volatility

ING Economics ING Economics 18.11.2022 09:47
In our 2023 FX Outlook, we argued that G10 currencies should face less trend and more volatility in 2023. We saw an example this week, as the fading bear-dollar trend did not prevent some wide swings in risk-sensitive currencies (like NOK and SEK). In the UK, the pound survived the Autumn Statement, but downside risks persist in GBP/USD In this article USD: Bearish sentiment cooling off EUR: Lagarde's speech in focus GBP: Most painful fiscal measures delayed NOK: Strong domestic story may not matter USD: Bearish sentiment cooling off As recently discussed in our 2023 FX Outlook, we are quite sceptical of a clean bear dollar trend from the current levels. This week’s moves in the FX market may have offered a glimpse of what we expect to be the main theme in G10 FX next year: less trend, more volatility. The dollar has stabilised after the big correction, but regional stories triggered significant swings in some crosses. Scandinavian currencies fell by around 2% this week, hit by equity volatility and geopolitical tensions, while NZD and GBP have appreciated on some domestic optimism. In New Zealand, next week’s central bank meeting will be a key risk event: here is our preview. We think this consolidation phase in the dollar may extend for a little longer, before a re-appreciation of the greenback into the end of the year. Indeed, markets will remain highly sensitive to Fed speakers: today, only Susan Collins is scheduled to speak, but we have a number of other members lined up for next week. FOMC minutes will also be released on Wednesday. So far, post-CPI comments have indicated some lingering caution on the inflation battle as most Fed members tried to curb the market’s enthusiasm about an imminent dovish pivot. The future market has now fully priced back in a 5.00% peak rate in the first half of 2023. The US calendar is rather light today and only includes existing home sales and the Leading Index. With the dovish pivot narrative softening, we expect some re-appreciation of the dollar in the near term, but that is a trend that could only start from next week or the one after. DXY may stay around 106/107 today.    Francesco Pesole EUR: Lagarde's speech in focus ECB President Christine Lagarde will deliver a keynote speech at a banking conference this morning. Two more ECB speakers are on the list today: Joachim Nagel and Klaas Knot, both hawkish voices in the Governing Council. If the Fed remains the key driver for the dollar, the ECB continues to have a rather marginal role for the euro, which instead remains primarily tied to global risk sentiment and geopolitical/energy dynamics. EUR/USD may stay in the 1.0350-1.0400 trading range into the weekend and while we don’t exclude another short-term mini-rally, we think that the macro picture continues to point to sub-parity levels in the coming months. Francesco Pesole GBP: Most painful fiscal measures delayed The pound survived the much-feared Autumn Statement by Chancellor Jeremy Hunt yesterday. The build-up to the statement seemed to signal more restrictive measures on the economy, but Hunt counted on a calmer market backdrop and – as discussed in detail by our economist – delayed some of the most painful measures. Ultimately, the impact on next year's growth should not prove huge, especially compared to expectations. The tax hike will only affect high incomes and energy companies, and the National Insurance cut by the previous government has not been reversed. The most relevant change was the increase in the energy bill guarantee from £2,500 to £3,000 from April 2023, which should generate some drag on consumers. That is only marginally more generous than the average household energy bill under current wholesale prices (which we estimate at around £3,200). The risk is obviously that wholesale prices spike again, meaning a higher cost for the energy support package. We think it is too early to call for a prolonged stabilisation in the gilt market, and our debt team notes that there is still a lot of extra supply for private investors to absorb. We continue to see downside risks for GBP/USD as the dollar may start to recover into year-end, and target sub-1.15 levels in the near term. However, we forecast some outperformance in EUR/GBP (primarily due to EUR weakness), which could rise to 0.89 by year-end. Francesco Pesole NOK: Strong domestic story may not matter Norwegian GDP data for the third quarter surprised on the upside this morning, showing a rather strong 1.5% quarter-on-quarter growth. This is a testament to how the domestic story should remain largely supportive of NOK, also into the new year. Whether this will ultimately feed into a stronger krone is another question, and mostly depends on whether markets will prove calm enough to allow fundamentals to play a role. The last week clearly showed that the road to a recovery in NOK is going to prove quite uneven, as the low-liquidity krone should continue to face large swings. We really think volatility will be the name of the game for EUR/NOK next year, even though our base-case scenario is downward-sloping in 2023. In the short run, a return to 10.60+ is a tangible possibility. Francesco Pesole TagsNOK FX Dollar 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
"Private investors will be required to increase their gilt exposure by at least £268bn in FY2023-24"

"Private investors will be required to increase their gilt exposure by at least £268bn in FY2023-24"

ING Economics ING Economics 18.11.2022 09:40
The rates rally has run into resistance as central bankers signal that their job is far from being done. In Europe the first TLTRO repayment will kick off the European Central Bank's balance sheet reduction, though the impact should at first be marginal. Over in the UK the prospect of substantial net supply has limited the downside in gilt yields First TLTRO repayment kicks off ECB balance sheet reduction The ECB’s outstanding targeted liquidity operations (TLTRO) and the quantitative easing portfolio currently still bloat the central bank’s balance sheet, a situation not deemed compatible with the ECB’s overarching goal of reining in policy accommodation to tackle high inflation. To that end the ECB had revised the terms of the TLTROs at the last meeting in October. Today the central bank will announce how much of the currently still €2.1tn outstanding banks will repay at the first additional repayment date on 23 November, the day that the new less attractive borrowing terms come into force. Some ECB officials have said they expected a sizeable repayment, though a Bloomberg survey sees estimates in a wide range anywhere from €200bn to €1500bn with a median at €600bn. At this early stage we think the risk is skewed towards a smaller repayment – we have pencilled in €400bn.    The Euribor-Estr basis will become more correlated to credit spreads after TLTRO repayments Source: Refinitiv, ING   Given total excess reserves of €4.7tn today’s repayment by itself will have a marginal impact Officials have hope that the repayments can ease the collateral scarcity. We would caution that the collateral pledged in these operations will unlikely be of the high quality liquid type so dearly in demand. For the system as an aggregate, the repayments will imply a lower amount of excess reserves chasing this quality collateral. Considering that the overall excess reserves are still at a staggering €4.7tn, today’s repayment is likely to have only a marginal impact. Over time with further repayments and at the latest with the bulk of the TLTROs maturing by mid next year the impact should increase, however. The suppression of money market rates that was achieved by high levels of excess reserves should start to fade. The overnight rates ESTR could see fading downward pressure, allowing it to gradually return to the deposit facility rate. Credit sensitive money market rates like the Euribor fixings could become more sensitive to growing systemic risks and the looming recession. Gilt investors will have plenty of supply to absorb The UK Chancellor has presented a plan that will stabilise the country’s debt over the medium term – as much has been confirmed by the independent OBR’s new projections, if only towards 2027/28. But faced with the trade-off between boosting credibility by presenting immediate plans to reduce borrowing and avoiding amplifying the forthcoming recession, the Chancellor is leaning more towards the second of those priorities – much of the fiscal tightening has been deferred to the later years.  Private investors will be required to increase their gilt exposure by at least £268bn in FY2023-24 The result is that borrowing is still elevated over the next couple of years, to the extent that gilt issuance plans have actually increased for the next fiscal year. Taking the Debt Management Office’s forecast 2023-24 remit of £305bn, and the BoE’s quantitative tightening programme, we estimate that private investors will be required to increase their gilt exposure by at least £268bn in FY2023-24. The previous peak was £107bn during the pandemic of FY2020-21.  The size of the gilt market will increase by a record amount next year Source: Refinitiv, ING Today's events and market view The rally in rates has finally run into some resistance. With a look to the UK the higher gilt remit will have helped, but it also seems that Fed officials saw more pushback was in order, warning not to read too much into one CPI reading. Standing out was the Fed’s Bullard, who signalled that he saw the terminal rate at least at 5-5.25%. There is little on the data calendars worth mentioning apart from US existing home sales. The attention should remain on central bank speakers. In the US only the Fed's Collins is scheduled to speak on the labour market, but over in Europe we will see President Lagarde, the Bundesbank’s Nagel and the Dutch central bank’s Knot speaking at the European Banking Congress. 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
Commodities: EU Members Manage To Agree On Price Caps For Russian Oil

Brent crude finished below $90. According to ING oil price is influenced by firmer greenback and hawkish Fed rhetoric

ING Economics ING Economics 18.11.2022 09:35
The commodities complex came under further pressure yesterday from a stronger USD and hawkish comments from Fed officials Energy - weakness persists The oil market sold off aggressively yesterday with ICE Brent falling by more than 3.3% to settle below US$90/bbl - its lowest close since early October. Macro developments continue to weigh on oil with a stronger USD and comments from some US Fed officials pointing towards hawkish policy. However, the sell-off in the oil market is not all macro-driven. There are signs of weakness in the physical oil market despite the looming EU ban on Russian crude oil. Prompt time spreads have also weakened significantly, suggesting that the spot physical market is loosening. The prompt WTI spread is trading at a backwardation of less than US$0.30/bbl, compared to  US$1.18/bbl at the start of the month. Similarly, for Brent, the prompt spread has fallen from US$1.86/bbl at the start of November to just below US$1/bbl currently. The loosening in the market is a surprise, particularly given that we are seeing OPEC+ reducing supply at the moment. However, we still hold a constructive outlook for the market through 2023 on the back of falling Russian supply and OPEC+ cuts. In the US, Henry Hub natural gas settled more than 2.7% higher on the day with colder-than-usual weather expected across large parts of the US in the coming days. In addition, US natural gas inventories increased by 64bcf over the week, which was below market expectations for an increase of around 66bcf. Despite coming in below expectations, this was still a record build for this time of year and compares to a 5-year average draw of 5bcf. Metals – China's alumina market to move to a surplus next year China’s alumina market is expected to move to a surplus of 520kt in 2023 following capacity expansions, compared to a deficit of 490kt this year, according to Antaike. Total alumina capacity is already around 98mt, and China needs only about 100mt over the long term to feed aluminium capacity. Strong Chinese alumina exports (mainly to Russia) are expected to ease as other nations such as India and Indonesia increase shipments. Meanwhile, around 70% of Chinese alumina producers are currently making losses due to surging raw materials costs (primarily coal). Refined copper output in China rose 11% YoY to 953kt in October, according to the latest data from the National Bureau of Statistics (NBS). Zinc output rose 9.4% YoY to 595kt while lead production increased 7.2% YoY to 687kt last month. The global zinc market remained in a deficit of 43kt in the first nine months of 2022, compared to a deficit of 101kt during the same period a year earlier, according to data from the International Lead and Zinc Study Group (ILZSG). Total refined production fell 2.4% YoY to 10.1mt, due to lower output in Europe, while total consumption declined 3% YoY to 10.2mt in Jan’22-Sep’22. As for lead, total production fell 1.6% YoY to 9.1mt, while consumption remained almost flat at 9.2mt in the first nine months of the year. The lead market reported a deficit of 52kt in Jan’22-Sep’22, compared to a surplus of 75kt during the same time last year. Sinter plants in the Tangshan region in China (a major steel-making hub) are cutting production by 30% for 10 days starting from 15th November, according to reports from Mysteel, as low profits continue to discourage domestic steel mills from resuming their full capacity. The group’s latest survey showed that Jiangsu province-based steel plants are also expected to curb crude steel output over the coming days. Meanwhile, the latest data from China Iron & Steel Association (CISA) showed that steel inventories at major Chinese steel mills were up 1.5% in early November from late October. Agriculture – Black Sea Grain deal renewed Grains came under pressure yesterday after Russia agreed to renew the Black Sea grain deal, which will allow the export of Ukrainian agricultural products through Black Sea ports for another 120 days. There were no major changes made to the terms and conditions of the previous deal. While this will come as a relief, it probably is still worth pricing in some form of supply risk when it comes to Black Sea grains, given the risk that Russia could still pull out of the deal. The latest data from the UN shows that Ukraine has shipped over 11mt of wheat, corn, sunflower oil and other goods from three ports located in the Odesa region since exports resumed in August. According to the International Sugar Mills Association (ISMA), India has entered contracts for the export of around 3.5mt of sugar so far for the 2022-23 season. Exports in October totalled around 0.2mt, below the 0.4mt shipped over the same period last year. ISMA also reported that mills have produced 2mt of sugar through until 15 November for the season that started 1 October, slightly lower than the 2.1mt produced over the same period last year. Lower production appears to be due to a number of mills in the West starting operations later this season. Read this article on THINK TagsUSD strength Oil Natural gas Federal Reseve 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
The RBNZ Has Signalled That Household Spending Will Have To Drop

ING expects Reserve Bank of New Zealand to hike the interest rate by 50bp as the bigger variant may be not proper amid current circumstances

ING Economics ING Economics 17.11.2022 21:11
We expect the Reserve Bank of New Zealand to hike by 50bp next week and signal a peak rate around 5.0%. The ongoing downturn in the housing market and worsening external conditions argue against a larger, 75bp move. We are not fully convinced the RBNZ will ultimately deliver all its projected hikes, but a dovish pivot is unlikely on the cards at this stage   Source: Shutterstock More tightening required As markets attempt to guess the timing of a dovish pivot by the Fed, another hawkish standout among developed central banks, the Reserve Bank of New Zealand, will announce monetary policy next week. At the October meeting, the RBNZ hiked rates by 50bp to 3.50%, and claimed that “monetary conditions needed to continue to tighten” until the Monetary Policy Committee is “confident there is sufficient restraint on spending to bring inflation back within its 1-3% per annum target range”.  In our view, another 50bp increase looks more likely Since the October meeting, domestic data for the third quarter have been released, and unmistakably argued in favour of additional tightening. Inflation (7.2% year-on-year) proved much more resilient than forecasted, unemployment remained low (3.3%) and wage growth accelerated (2.6% quarter-on-quarter). This has led markets to consider a more aggressive 75bp hike in November as an option: currently, the OIS curve embeds 63bp of tightening.  In our view, another 50bp increase looks more likely, especially when considering the ongoing correction in the housing market (more details below) and a challenging external environment: dairy prices, global demand, the Chinese economic outlook have all deteriorated lately.  Forward-looking message will be crucial A 50bp hike may be received as a slightly dovish surprise by markets, but we believe that a greater focus will be placed on the forward-looking policy message, in particular: a) any hints in the rate projections that we are close to the peak in rates; and b) other economic projections such as on inflation and house prices.  On point a): we expect a reiteration that monetary conditions need to be tightened further to bring down inflation. There should be a certain degree of acknowledgement that global and domestic conditions have started to deteriorate, but we doubt there is appetite within the MPC to deliver a dovish signal before having seen fourth quarter inflation and employment data.   RBNZ current rate projections are unrealistic Source: RBNZ   The trade-off the RBNZ is facing is not uncommon in the central bank world: signalling much more tightening to cap inflation expectations against delivering a more moderate and realistic rate path. At this stage, we feel the RBNZ may want to risk sacrificing a bit of credibility further down the road (should they underdeliver on hikes) for the sake of fighting inflation. If anything, the incentive to signal less tightening could be to keep mortgage rates capped, but they have not signalled excessive concerns on the housing market for now.   Our estimate is that the rate projections will largely align with market expectations for the RBNZ and the Fed, so showing a peak rate at around 5.00% (90bp higher than the 4.10% shown in the August forecasts). There is also a higher probability some rate cuts (possibly from late 2023) will be introduced in the projections.     Whether the RBNZ will effectively bring rates to 5.0%+ is another question. We are not fully convinced, as an expected acceleration in the house price contraction and further worsening of external conditions in the months ahead may force a dovish turn in early 2023 (next meetings are in February and April).  Housing market troubles to continue New Zealand’s house price index shows a -4.5% quarterly decline for price in October. The magnitude of this market downturn has now exceeded the worst quarter during the Global Financial Crisis period (-4.4% in August 2008). This is contributed by the rapid rise in mortgage rates, and the more stringent 40% deposit requirement.   We expect further deterioration to the housing outlook as lending activity continues to fall In RBNZ’s August statement, their projection shows a steeper and quicker decline of 15% from December 2021 to the trough, which is worse than the previous forecast in May. We expect further deterioration to the housing outlook as lending activity continues to fall and more borrowers face higher rates when re-mortgaging.   New Mortgage lending by borrower type (YoY%) Source: RBNZ   The supply side story is a bit better. Residential construction had remained strong and have finally past its peak. The decline in new dwelling consent is led by rising construction costs and limited capacity from a filled pipeline. However, due to supportive schemes like the KiwiBuild caps, this slowdown is much shallower than the one during and after the GFC.    Ultimately, current projections for the housing market are based upon the assumption that rate is peaking at 4.10% in April 2023. This would imply that the RBNZ only has 60bp worth of hikes to deliver in its tightening cycle – which looks quite unrealistic. If indeed the new projections show a peak rate around 5.0%+, then we suspect they will also need to display a steeper/longer downturn in the housing market. The speed of the house price correction will be crucial both for the pace of further hikes and for the timing/pace of rate cuts next year.   Market impact: NZD still mostly driven by external factors We don’t expect the impact on NZD to prove long-lived Given that markets are pricing in approximately a 50% probability of a 75bp hike, a 50bp may come as a dovish surprise. However, if this is accompanied by a hawkish rate path projection – i.e. peak rate around 5.0% – the overall message should remain quite hawkish. So we think the Kiwi dollar could rise after the announcement, even though we don’t expect the impact to prove long-lived, as external factors should continue to prevail.     We have recently revised our NZD/USD forecast profile (more details in our 2023 FX Outlook), and see the pair capped in 4Q22 and 1Q23 (we target 0.60), before a gradual rebound throughout 2023 (0.64 in 4Q23). 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 GBP/USD Pair Seems To Be Moving Upward A Rally

ING Economics predicts Bank of England may go for a 50bp rate hike during the December meeting

ING Economics ING Economics 17.11.2022 15:55
Markets have calmed in recent weeks which has allowed the Chancellor to push back some of the fiscal pain, particularly on public spending. The result is elevated borrowing in the near term, but the impact on UK growth isn't necessarily huge. Still, with energy support becoming less generous, the Bank of England can afford to hike more gradually Chancellor Jeremy Hunt leaves 11 Downing Street to present the Autumn Statement Has the government done enough to calm markets? This is a much less pertinent question than it was a few weeks ago. The change in political management, relentless leaks of possible austerity measures, and an end to the liability-driven investment (LDI) pension crisis have all contributed to calmer markets and a narrower risk premium in UK assets. Investors have also bet that a tighter budget will lessen pressure on the Bank of England to increase rates. That is perhaps an exaggeration, but the combination of these factors helped 10-year government bond yields fall from 4.5% to 3.25% in the run-up to today's Budget. But this logic was still contingent on Chancellor Jeremy Hunt presenting a plan which saw debt stabilise as a percentage of GDP in the medium-term – and the Office for Budget Responsibility has confirmed this will be the case by the fiscal year 2027/28. But the story is a little more complex than that, and the reality is the Chancellor faced a trade-off between boosting credibility by presenting immediate plans to reduce borrowing and avoiding amplifying the forthcoming recession. If anything, the Chancellor is leaning more towards the second of those priorities, in that much of the pain – particularly in terms of tighter government spending – won’t kick in for a couple of years. Public sector net investment rises to 3% of GDP next year but then falls back to 2.2% in five years’ time. The result is that borrowing is still elevated over the next couple of years, to the extent that gilt issuance plans have actually increased for the next fiscal year. Taking the Debt Management Office’s forecast 2023-24 remit of £305bn, and the BoE’s quantitative tightening programme, we estimate that private investors will be required to increase their gilt exposure by at least £268bn in FY2023-24. The previous peak was £107bn in FY2020-21. Gilt markets may be calmer, but there’s still plenty of supply for private investors to absorb – and a lot rests on delayed pain coming through in the public finances later this decade. For now, though, sterling has taken the Autumn Statement in its stride, barely changing against the euro and slightly softening against today’s modest dollar recovery. The lack of reaction will be down to the well-flagged measures from the new government, although the currency market might once again be keeping one eye on the slight softness in the gilt market today. Our baseline view sees GBP/USD dipping below 1.15 after the current bout of position adjustment has run its course, while we also favour some modest underperformance against the euro. EUR/GBP could be trading back to 0.89 by year-end. Energy support is becoming less generous Source: Ofgem, Refinitiv, ING calculations The impact on the economy and inflation The fact that a fair chunk of the pain has been delayed means that the economic impact of the Autumn Statement on next year’s growth isn’t necessarily huge – or at least not compared to expectations. A lot of the near-term tax rises are also either concentrated on higher-income earners or energy companies – and remember that the national insurance cut implemented under former Prime Minister Liz Truss hasn't been reversed. That said, the major change is that the average household will see energy bills fixed at £3,000 a year from April, up from £2,500 previously promised. That’s still slightly more generous than would otherwise be implied by wholesale gas/electricity futures, but not by much. We estimate that, without government intervention, the average energy bill would be £3,200 in FY2023, and that reflects the big fall in prices we’ve seen since August. Interestingly, even though the Chancellor has committed to supporting households for another 12 months beyond April, we estimate that energy bills will actually fall below £3,000 on an annualised basis by the first quarter of 2024 if wholesale prices stay where they are. Admittedly that's a big "if", and the risk for the Treasury is that they increase once more, particularly for futures covering the winter of 2023/24, pushing up the cost of support – albeit this is somewhat mitigated by a widened windfall tax that will now cover renewable electricity generators. For the economy, the important point is that households will be paying a little over 8% of disposable incomes for energy in FY2023, from 7% under the original guarantee, by our estimates. However, this is before considering new payments for low-income households, which will help cushion the blow. We’re forecasting a recession with a cumulative hit to GDP of roughly 2% by the middle of next year, and expect overall 2023 GDP to fall by 1.2%. The decision on energy prices lifts our inflation forecasts by roughly one percentage point from April next year. UK inflation will be roughly 1pp higher after April Source: Macrobond, ING The impact on the Bank of England The reality is there’s not much in the Autumn Statement to cause any earthshattering changes to the Bank of England’s view that it unveiled at the November meeting. The BoE's forecasts, which envisaged recession with or without further rate hikes, were premised on some withdrawal of energy support. The assumptions it made at the time are not wildly different from what has been announced today. As a result, we think the November 75bp rate hike will probably prove to be a one-off. Admittedly, some hawkish surprises in this week’s inflation data, and signs of ongoing worker shortages, suggest the Bank’s work isn’t finished yet. But we think the committee will pivot back to a 50bp hike in December and either 25bp or 50bp in February, seeing the Bank Rate peak around 4%. Read this article on THINK TagsUK fiscal policy Inflation 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
COP27: Russia’s Invasion Of Ukraine Has Led Countries To Ensure Short-Term Energy Security

COP27: Russia’s Invasion Of Ukraine Has Led Countries To Ensure Short-Term Energy Security

ING Economics ING Economics 17.11.2022 14:32
The key theme for COP27 has been to follow through on commitments made at COP26. The climate conference so far has shown some but not enough progress in implementation. While talks are slowly advancing on loss and damage funding and carbon offset markets, we expect more to be done in the remaining days of COP27 In this article Slow progress in addressing loss and damage Complications of developing a more mature carbon market Few new targets and climate plans revealed Will there be an agreement to phase down all fossil fuels? Corporate sustainability commitments grabbing more attention Conclusion and what to expect from the final days of COP27 Climate change forecasts have been more alarming than ever. Just days before COP27, the United Nations annual climate conference, a report released by the UN Environmental Programme projected that current nationally determined contributions (NDCs, or country pledges that cover agreed policies) will likely result in a 2.4 to 2.6-degree Celsius increase in global temperature by 2100, well above the Paris Agreement’s 1.5-degree Celsius goal. This gloomy outlook emphasises the urgency for governments to act and collaborate. Deemed an 'implementation COP', COP27 has largely been focusing on how governments are going to honour their commitments, and how they can work together to address climate challenges at the global level. While COP27 is still a few days away from its conclusion, here’s what the conference has achieved so far. Four key things to watch out for at COP27 Good COP, Bad COP: Separating heat from light at the climate summit Slow progress in addressing loss and damage The issue of loss and damage – which refers to how developing countries are suffering disproportionally from climate change while having contributed little to it – has been taking centre stage at COP27 as it appears officially for the first time on the agenda. Developed countries previously agreed to provide $100bn per year by 2020 to help developing countries mitigate climate change but have been falling short of that target (developed countries collectively only financed $83.3bn in 2020). Climate finance provided and mobilised by developed countries OECD   This year at COP27, developed countries such as the US and the UK have announced plans to increase their climate funding to developing countries, but these announcements are likely not going to be enough to reach the $100bn per year target. Moreover, while the UK, for example, pledged to triple climate funding, the money is expected to come from the $13.65mn that the country had already committed to paying, with no extra funding planned. So far, negotiations on the topic have been hindered by disagreements between developing and developed countries. On Monday, the UN published a draft proposing to either launch a two-year process to establish a funding mechanism to compensate for loss and damage or to delay the decision on what the UN’s role would be until 2023. Developing countries including China, however, have requested a loss and damage fund be established at COP27. The geopolitical situation is not helpful either. Although the US and China have resumed bilateral climate talks, which is expected to boost COP27 negotiations in general, the two countries are divided on climate financing. While China is among the group of developing countries requesting funding, the US has expressed concern about putting money in a fund as this could pose a liability to donors in the event that funds turn out to be insufficient. And there are reasons to believe it will, as experts claim that $100bn per year is far from sufficient in the long-term to help developing countries mitigate climate change consequences. A recent UN-backed report shows that roughly $2tn per year of investment will be needed by developing countries by 2030 to fight climate change, and half of it will have to come from external financing. The $100bn per year of funding target from developed countries is therefore only a start; a coordinated mechanism will need to be in place for global climate financing to work. In addition to direct climate aid, the UN’s proposed draft notes that arrangements for funding for loss and damage can also include debt relief, reform of international financial institutions, and humanitarian assistance, among others. These measures can effectively improve the climate financing system and are relatively easier for developed countries to get on board with. Indeed, the IMF and the World Bank have announced at COP27 that countries affected by extreme weather disasters will be able to defer their debt repayments for a maximum of two years. Complications of developing a more mature carbon market Although not as popular as loss and damage, Article 6 is an important discussion point at COP27. Article 6, which was finally agreed upon at the COP26 Glasgow summit, addresses the functioning of international carbon markets and carbon trading and discusses how countries can collaborate across borders to meet their climate goals. Yet several issues remain outstanding for COP27. First, despite the agreed-upon principles regarding additionality and performance to enhance the credibility of carbon credits, detailed rules are needed for the carbon market to function. Second, countries still need to decide whether they can modify their authorisations for carbon credits and how to deal with unauthorised credits. Third, while avoided emissions currently do not qualify under Article 6, it will be up to negotiators to decide whether they will qualify in the future. Discussions on Article 6 have been advancing slowly at COP27, partly because the loss and damage topic is dominating delegates’ attention, and partly because of the complexity of designing an effective global carbon market. Yet we could still expect final decisions to be made on the matter, as Article 6 is not as controversial as some of the other issues at COP27.   We could still expect final decisions to be made on Article 6. Separately, the US has proposed setting up a carbon offset programme – called the Energy Transition Accelerator (ETA) – which would allow private companies to buy a newly created class of carbon credits from projects in developing countries to help cut emissions and accelerate the transition from fossil fuels to renewable energy. Such a programme could transfer large amounts of money from the private sector to developing countries and help with climate financing, but the proposal has encountered resistance. First, without careful design and successful implementation, the programme is not guaranteed to lead to substantial cuts in emissions. For instance, if a renewable project is planned to be built in a developing country anyway, without replacing fossil fuels, the project would not replace emissions but would nevertheless allow credit purchasers to emit more. Additionally, with the current $2bn carbon offset market remaining unregulated, the ETA would likely face challenges on the regulation front as well. The ETA will likely not be included in COP27’s final text, but will likely start to be implemented anyway, led by the US. From a global perspective, there are good reasons to go for one carbon offsetting market, rather than different systems. So it will be curious to see how this plays out. Few new targets and climate plans revealed Another topic being watched at COP27 is whether and how countries will revisit and strengthen their 2030 climate targets to be aligned with the 1.5-degree Celsius Paris Agreement goal. We were not expecting an overflow of government announcements at COP27 amid the global energy crisis and fears of economic recessions. Indeed, only 28 countries have submitted an updated NDC so far. Further efforts are needed to push countries to roll out concrete plans to back their climate targets. Of these countries, India stands out. The world’s third largest emitter is now committed to reducing carbon intensity by 45% below 2005 levels by 2030, up from 33%-35% before. India has also submitted during COP27 its Long-Term Low-Carbon Development Strategy (LTS), which includes plans that range from increasing renewable deployment to electrifying the transport sector to enhancing climate resiliency. However, the submitted LTS appears to be insufficient without specific pathways to achieving its 2030 and 2070 targets. Notably, the document states that India will need coal in the long run. India is proposing to rationalise the use of fossil fuels and close inefficient thermal power. Yet it suggests that although the share of coal-fired power generation will decrease, it will be a gradual process (also discussed later). This is evidence that further efforts are needed to push countries to roll out concrete plans to back their climate targets. Will there be an agreement to phase down all fossil fuels? While Russia’s invasion of Ukraine has led countries to ensure short-term energy security by switching to more coal consumption, it has also prompted them to make more efforts to switch to renewable energy. As such, the International Energy Agency’s (IEA’s) most recent World Energy Outlook suggests for the first time under its Stated Energy Policy Scenario that demand for fossil fuels will see a definitive plateau this decade. Global fossil fuel demand under different scenarios International Energy Agency, ING Research   However, the plateau of fossil fuel demand is not enough. The IEA’s Net Zero Scenario requires a deep decline in fossil fuel consumption, with the demand for coal needing to fall by 90% (unabated coal demand to fall by 98%), oil by 75%, and gas by 55% by 2050. At COP26, almost 200 countries pledged for the first time to phase down the use of unabated coal and end inefficient subsidies on fossil fuels, although these 200 countries notably did not include China and India. At COP27, China expressed that it would need to continue relying on coal production to ensure grid stability; India also stated in its LTS that it needs coal to “guard against a lack of adequate and reliable energy.” Since it remains uncertain how much of the coal production in China and India will be abated, the continuing reluctance of the world’s two largest coal consumers to substantially phase down coal means limited effects of the global coal pledge reached at COP26. India, on the other hand, is pushing to include in the final text of COP27 a phase-down of all kinds of fossil fuels. The EU has stated its support for India’s proposal, but only if this does not weaken any of the commitments already made on coal. But we would expect oil-producing countries – and poor countries in regions such as Africa – to oppose this proposal, which makes the chances of it being included in the final decision uncertain. While it is still subject to change, a first draft of the overarching COP27 decision reportedly did not include phasing down fossil fuels. Corporate sustainability commitments grabbing more attention With a flurry of announcements from corporates to reach net-zero emissions, there is a growing concern about companies making pledges without releasing concrete action plans. During COP27, an UN-backed organisation published a report recommending how corporates can avoid greenwashing based on inaction and inaccurate claims. These recommendations include coupling long-term pledges with short-term science-based targets, addressing Scope 3 emissions, prioritising deep emissions reduction over purchasing carbon credits, increasing climate action transparency and accountability, as well as transitioning from fossil fuels to renewables. The report affirms the mounting trend that companies will increasingly be held accountable – by investors, regulators, and now international organisations – for not only their pledges but also their strategies and actions. Conclusion and what to expect from the final days of COP27 Although discussions have been advancing slowly, which is not completely abnormal at COP conferences, we could still see important agreements made by parties this Friday toward the very end of COP27. On financing for loss and damage, we would expect some final decision to be made, as this is the single most important topic of COP27. The optimistic case is that countries agree to establish a fund and an official entity to manage and oversee funding flows; the less optimistic case is that countries leave the decision to COP28. The longer countries delay climate action, the deeper and faster we will need to cut emissions to reach net-zero emissions by 2050. And while we think that agreements on the details of Article 6 could be reached, we are less confident that countries will, on a large scale, agree to phase down all kinds of fossil fuels, given the global energy crisis. Understandably, most of the above-mentioned issues are complex in nature, and it is hard to get every country on board. But we must keep in mind that the longer countries delay climate action, the deeper and faster we will need to cut emissions to reach net-zero emissions by 2050. Compromises and timely collaboration have become critical to keeping global warming under control.   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
Bangko Sentral ng Pilipinas hikes the rate by 75bp, in line with expectations

Bangko Sentral ng Pilipinas hikes the rate by 75bp, in line with expectations

ING Economics ING Economics 17.11.2022 13:40
Bangko Sentral ng Pilipinas (BSP) has followed through with its planned rate increase of 75bp, following an announcement by its governor two weeks ago Bangko Sentral ng Pilipinas in Manila 5.0% BSP policy rate   As expected BSP follows through with planned increase BSP has hiked policy rates by 75bp, a move telegraphed by governor Felipe Medalla two weeks ago. Medalla opted to pre-announce his decision to hike rates aggressively to help anchor expectations via forward guidance.  The punchy 75bp increase to the overnight reverse repurchase rate was warranted given surging domestic inflation (7.7% year-on-year in October).  BSP believes that the domestic economy can handle the rapid-fire tightening with growth expected to hold firm as evidenced by the robust third-quarter GDP performance.    Catch me if you can: BSP hikes rates aggressively to quell inflation pressures Source: Philippine Statistics Authority Matchy-matchy: BSP to take its cue from the Fed BSP will likely retain its hawkish tone given its recent adjustment to inflation forecasts for both 2022 and 2023. Inflation is now forecast to average 5.8% (from 5.6%) in 2022 and 4.3% in 2023 (from 4.1%).. Medalla hinted that he would prefer to match any rate increase by the US Federal Reserve to maintain a 100bp interest rate differential.  We expect the BSP to increase policy rates to 5.5% in December given expectations for a 50bp increase by the Fed. The Philippine peso could get a boost from today's decision although given that the hike was pre-announced, any upside for the peso may be capped by global developments.   Read this article on THINK TagsPHP 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
Indonesia: inflation reaches 5.4% year-on-year, 0.3% less than in October

Indonesian rupiah: Bank Indonesia goes for a 50bp rate hike

ING Economics ING Economics 17.11.2022 13:37
Bank Indonesia hiked rates aggressively despite softer-than-expected inflation Indonesia's central bank governor Perry Warjiyo 5.25% BI policy rate   As expected BI hikes rates by 50bp Bank Indonesia hiked policy rates by 50bp, a move widely expected by market participants. The 50bp rate increase was dubbed as “pre-emptive” and “front-loaded” by BI Governor Perry Warjiyo as the central bank attempts to cap inflation pressures and shore up the currency.  BI expects growth to remain robust, retaining its 4.5-5.3% year-on-year growth forecast for the year. With growth momentum intact, Governor Warjiyo decided to continue on with aggressive tightening to help maintain a healthy differential with the Fed funds target rate. BI likely keeping hawkish tone amid IDR struggles and core inflation trends Source: Badan Pusat Statistik and Bank Indonesia Core inflation trends and IDR struggles to keep BI hawkish Indonesia’s core inflation has been steadily on the uptick (October at 3.3%) and should likely sustain this trend in the coming months. The price increase for subsidised fuel, recently implemented, will likely feed through to the rest of the CPI inflation basket to keep inflation elevated. Furthermore, the recent struggles of the Indonesian rupiah should keep BI hawkish going into 2023.  We expect BI to hike rates by 50bp at the December policy meeting, matching the likely increase by the Fed at the end of the year.  Read this article on THINK TagsBank 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
ECB Is Fighting Hard To Prevent Markets From Undoing The Tightening Of Financial Conditions

Rates: 50bp As Next Likely Move By Central Banks

ING Economics ING Economics 17.11.2022 12:12
Markets outside the US are also increasingly leaning towards 50bp being the next probable moves by central banks. European Central Bank speakers turning less hawkish and the rediscovered UK austerity should validate the rally in rates In this article 50bp is becoming the new norm Gilts benefit from both fiscal tightening and the need for less BoE hikes Today’s events and market view 50bp is becoming the new norm Looking at the Fed, markets have converged on a 50bp hike in December following the US CPI data. Fed officials have attempted – with some success – to push back against the pricing of the terminal rate dropping too much, and it has since hovered just below 5%, but it hasn’t prevented longer rates such as the 10Y UST slipping below 3.7%. Appetite seems to have returned to longer durations with yesterday’s 20Y auction also posting very decent metrics. In the eurozone, ECB officials also appear to have dialed down their hawkishness. When arch-hawk Holzmann of the Austrian central bank is mindful that too strong tightening would not just lead to stagnation but to a recession, then markets should take note. Even with its new ECB reaction function, there appears only so much pain officials are willing to tolerate. Renewed appetite for duration risk is flattening yield curves Source: Refinitiv, ING   The ECB’s hawks might ask for more progress on quantitative tightening The ECB's shift was later corroborated by a Bloomberg story suggesting that momentum for a further 75bp move was lacking. With the market still eyeing a 20% probability of a larger move in December, there is still room to test a little lower. Alongside central bankers seemingly more mindful of the recessionary risks appears to validate the rally in rates that has also pushed the 10Y Bund yield below 2%. But mind you, that the ECB could eventually slow once the key rate approaches a neutral level – seen around 2% – is not news. With a view to the December meeting we caution that the ECB’s hawks might ask for more progress on quantitative tightening in return for less aggressive action on rates. The tightening of monetary policy could thus just rely to a growing degree on the balance sheet. That could eventually test the current  indiscriminate rally across sovereign credit in the eurozone.   Gilts benefit from both fiscal tightening and the need for less BoE hikes When it comes to the Bank of England, the next expected policy moves have become more interlinked with fiscal policies. This puts the attention squarely on today’s Autumn Statement that will outline the government’s fiscal plans. The government’s main task with a view to financial markets will be to rebuild credibility lost in September’s ill-fated mini budget. To that end much is already achieved by having forecasts of the independent Office for Budget Responsibility accompany the new plans. And looking at 10Y gilt yields, they have indeed already slipped back towards levels seen before the September budget just now. The government’s main task will be to rebuild credibility lost in September’s ill-fated mini budget Perhaps the greater risk is that the government decides to push austerity too far under the impression of the rattling experience in the wake of the last budget. That could see markets further pricing out their Bank of England hike expectations. Long-end yields could also decline further, though our expectation would be that of an overall steeper curve. Keep in mind that the effective debt that private investors will have to absorb will see a considerable increase nonetheless. A Reuters survey among gilt dealers sees issuance in the 2022/23 financial year falling to £185bn compared to DMO’s September plans, but issuance in 2023/24 will rise towards £240bn. Crucially, one has to add the Bank of England’s quantitative tightening.      Private investors will be required to increase their gilt holdings by a record amount in FY2023-24 Source: Refinitiv, ING Today’s events and market view Main event on the calendar is the UK government’s Autumn Statement. The FT has reported that up to £60bn of savings may be required, which is higher than had been expected. Reports also suggest the Chancellor will more heavily focus on spending cuts than tax rises. As our economist notes, the impact on the economy will depend on how much of the burden is placed on consumers via higher taxation, and how immediately those changes come through. A fair amount of pain could be delayed until after the 2024 election. Another point to watch are details on how the government intends to restructure its flagship Energy Price Guarantee, which can have more direct bearing on funding needs. Away from the UK the focus remains on central bank speakers and how they bridge the gap between signaling a slower pace and ensuring that financial conditions don’t already ease too much. Scheduled today are the Fed’s Bullard, Mester, Jefferson and Kashkari.   In data the focus is on the US housing market where numbers should be softer due to the rapid rises in mortgage borrowing costs that have prompted a collapse in demand. Also on the calendar are initial jobless claims as well as Philadelphia and Kansas Fed activity indices. The eurozone see the final CPI for October. Today’s supply comes from France in shorter dated bonds as well as inflation linked securities, as well as Spain with taps in 3Y to 20Y bonds. 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
FX: Credible UK Budget Will Deliver Substantial Fiscal Tightening

FX: Credible UK Budget Will Deliver Substantial Fiscal Tightening

ING Economics ING Economics 17.11.2022 10:56
Today's FX highlight will be the UK's autumn statement. Given that the UK's bond market has largely regained its composure from the sell-off in September, we struggle to see what upside there is for sterling today. Positioning could be the wild card, however. Elsewhere, we have five Fed speakers and favour further dollar consolidation In this article USD: Softer renminbi helps support the dollar EUR: Could be dragged around by sterling GBP: Caution advised BRL: Reality check USD: Softer renminbi helps support the dollar Yesterday, we published our 2023 FX Outlook and for professional customers our FX Top Trade ideas. Our core message for FX markets in 2023 is to expect fewer FX trends - i.e. a repeat of a clean 18-month dollar trend is unlikely - and instead look for more volatility as central banks tighten rates into a recession. Feedback on the report is welcome! For today, the dollar has entered a consolidative mode. We note the rise in USD/CNH which may be giving the dollar a little support. Somewhat conversely, the better news out of China seems to be giving the local banks some problems. Here, retail investors have en masse withdrawn from Chinese bond markets in favour of equities, prompting authorities to check with local banks whether they have sufficient liquidity to meet these withdrawals. For today, we have five Fed speakers. Market pricing for the 14 December FOMC meeting is settling on a 50bp hike - such that any further reference to that today need not demand a much weaker dollar. Our slight bias near term is that long dollar position adjustment may have a little further to run, but that something like the 105 area in DXY proves a 4Q22 base. Chris Turner EUR: Could be dragged around by sterling EUR/USD remains in corrective mode and is not reacting much to press reports of the European Central Bank favouring a 50bp over a 75bp hike in December. Notably, the FX options market has shown no more signs of distress - i.e. investors are not scrambling to buy euro call options - and one can argue that this makes the 1.05 area a slightly firmer ceiling for 4Q22. Expect EUR/USD to be dragged around by GBP/USD today - just as it was in September. 1.0270-1.0500 remains our expected near-term trading range for EUR/USD. Chris Turner GBP: Caution advised The big day has arrived. Chancellor Jeremy Hunt will unveil the autumn statement aimed at plugging the fiscal hole that led to the collapse of Gilts and sterling in September. Investor views of UK fiscal credibility have largely returned to pre-Truss levels, where the 10-year German Bund-Gilt spread is now 115bp (versus 228bp in September) and the UK's 5-year sovereign CDS has narrowed to 27bp from 52bp. Arguably then, the positive re-assessment of the UK fiscal position has largely taken place and suggests that sterling does not have to rally a lot more on a credible budget. Indeed, a credible budget will deliver substantial fiscal tightening and cement views of a multi-quarter UK recession and one in which the Bank of England will continue to hike rates into 2023. As a pro-cyclical currency, this cannot be a good environment for sterling. And were Chancellor Hunt to try and back-load fiscal tightening - e.g. until after the next election in 2024 - Gilts and sterling would sell off. Overall, we expect GBP/USD to be unable to hold any gains above 1.20 and would prefer sub 1.15 levels before year-end. Equally, EUR/GBP should find support near 0.86/87. The only thing going for sterling is buy-side positioning. Being short the pound had been one of the most popular buy-side trades going into October. We have seen what positioning has done to crowded long dollar trades over the last week. It is hard to see what sterling positives the market could take from today's budget - but there is an outside risk that investors have some residual sterling shorts to cover. The outside risk near term is a very painful sterling short-squeeze taking GBP/USD to 1.23. However, that squeeze should not last long. Chris Turner   BRL: Reality check It seems fair to say that the Brazilian real has disappointed some of the more bullish expectations made when Luiz Lula won the Presidential election run-off in October. Investors had been attracted to the real because of Brazil's high real interest rates and the idea that a centrist congress could keep some of President-elect Lula's spending plans in check. However, concerns about Brazil's fiscal position and welfare spending plans have come back to the fore. The new administration, taking office in January is looking at a constitutional amendment to exclude around $30bn of welfare spending from the nation's fiscal debt limit. Reuters is also reporting that Lula may be favouring a left-wing choice for Finance Minister - typically a very sensitive topic for Latam currencies. Equally, further choices for Lula's new team are said to be coming from the administration of former left-wing President, Dilma Rousseff, who was widely associated with Brazil's last fiscal crisis. We have been more bearish on the Brazilian real than consensus for some time and in our recently published FX Outlook, we make the case for USD/BRL to be ending 2023 much closer to the 5.80 highs than the consensus estimate of 5.15. Investors looking for yield in Latam should instead continue to favour the less volatile and better fiscally positioned Mexican peso. And near term, BRL/MXN can trade back to the 3.50 lows.  Chris Turner Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more  
How The Reserve Bank Of Australia Conducts Its Monetary Policy

How The Reserve Bank Of Australia Conducts Its Monetary Policy

ING Economics ING Economics 17.11.2022 10:51
Against some expectations that labour supply constraints could begin to slow the pace of hiring and push the unemployment rate higher, October's labour market data shows that there is still room for solid gains in full-time jobs in Australia  Source: Shutterstock 32,200 Total employment gains understates full-time employment gains  Better Despite labour shortages, employment growth is still happening On casual inspection, Australia is running out of available labour. Retail outlets and F&B establishments uniformly display "we are hiring" signs, and it looks very much as if the economy is hitting labour supply constraints. But despite this, it still appears that there is enough labour available, not only to fill more jobs than there is growth in the population of working age, but that those jobs are also predominantly, full-time, and typically higher quality and better-paid jobs.  In terms of the numbers: The total gain in employment in October from the previous months was 32,200. but this understates the boost to household spending, as the full-time employment gain was 47,100, which must have included some conversion of part-time jobs to full-time. Part-time employment fell by 14,900.  The total number of unemployed broadly mirrored the employment gains, falling 20,500, though there was also a very small drop in labour force participation which helped to bring the unemployment rate down to 3.4%, equal to its previous record low.  Australia's unemployment rate and forecasts Source: CEIC, ING Labour market probably close to its maximum tightness It is difficult to see how the labour market is going to tighten significantly further from here. This month may be one of the last to show solid employment gains, though we may need to wait until early 2023 for softening to become more apparent and for the unemployment rate to start nosing higher.  In the meantime, we don't expect today's data to have any material bearing on how the Reserve Bank of Australia conducts its monetary policy in the coming months. We still anticipate further tightening and at a moderate 25bp per meeting pace now that rates are already at 2.85%, with the RBA signalling that they can take more measured approach from here on. We still anticipate rates rising into the early part of 2023, with the cash rate target peaking at 3.6% in 1Q23 amidst signs of inflation topping out and growth beginning to slow.  TagsRBA rate policy Australia unemployment Australia employment AUD   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 Asia-Pacific Region Is Facing Immense Heat

Asia News: Bank Indonesia (BI) Meets Today To Discuss Policy

ING Economics ING Economics 17.11.2022 10:37
Australian employment data bounces back, Singapore NODX flops, and markets are flailing around for direction  In this article Macro outlook What to look out for: Fed speakers and US housing data Source: shutterstock Macro outlook Global Markets: There doesn’t seem to have been much improvement in sentiment following the revelation that the missile that struck Poland yesterday may not have been fired by Russia after all. But it’s not clear to me that this was a major force for market moves anyway, as the EUR largely outperformed Asian FX, which doesn’t tally with the missile narrative. And despite, or perhaps because of a fairly robust set of US retail sales figures for October (1.3%MoM vs 1.0% expected), coupled with some weak industrial production data (-0.1%MoM) and a slowdown in import price inflation (4.2%YoY down from 6.0%), US stocks took a turn for the worse yesterday.  One newswire story put this down to diminished hopes for a Fed pause. This is nonsense. That has not been a strongly held market view for a while. Equity prices opened slightly lower and slowly lost further ground through the session. The S&P500 ended down 0.83% while the NASDAQ dropped 1.54%. Chinese stocks were also weaker again yesterday, the CSI 300 falling 0.82%, while HK’s Hang Seng Index was down 0.47%. US equity futures are indicating a small gain at today’s open, while China’s stock outlook remains negative.  The EURUSD exchange rate has clawed its way back within grasping distance of 1.04 as of writing despite the stock weakness. The AUD, in contrast, has retreated back to 0.6742 from its intraday high of 0.6793 yesterday. Cable has crept slowly higher to 1.1916 ahead of today’s tax and spending announcements. And the JPY is pretty steady on a 24-hour view, though did test the weaker side early yesterday. Asian FX has mostly gone backwards in the last 24 hours. The CNY has pushed up to 7.0982 and pulled other currencies like the KRW with it. US Treasury markets aren’t doing a lot. There was a small increase in 2Y US Treasury yields (+1.7bp), though the back end continued to rally and 10Y yields dropped 8bp to 3.69% - maybe helped by dovish comments from the Fed’s Waller, who remarked that he was open to half point hikes from here on. Though I think the market was already fully on board for this.   G-7 Macro: As mentioned, there was a mixed bag of macro data on Wednesday, some stronger-than-expected retail sales, weak industrial production and improving pipeline price pressures from imported goods. Taken together, these don’t add a great deal to the picture of the US economy or rate expectations, though to the extent that they say anything at all, they tend to support the notion that price pressures are abating - something we wrote about in more detail yesterday, and which is backed up by industry data on falling residential rents. Today’s G-7 data is mainly focused on the US housing market, with building permits and housing starts data for October, both of which are expected to show month-on-month declines. Australia:  October labour market data rebounded after the weak September figures. Total employment rose by 32,200, though that understates the improvement which was entirely due to a 47,100 increase in full-time employment offsetting a 14,900 decline in part-time employment. The participation rate dipped slightly, which helped to nudge the unemployment rate down 0.1pp to 3.4%. We do not believe this data substantially affects the Reserve Bank’s rate policy decisions. We expect them to continue hiking at a 25bp pace, with rates to peak early next year at 3.6%.   Singapore: Non-oil domestic exports (NODX) data for October showed a second month of contraction.  NODX fell by 5.6%YoY and was down by 3.7% month-on-month as signs of the slowdown in global trade become more evident.  Shipments to China (-31%YoY) were the main reason for the slowdown after electronics exports dropped by -9.3%YoY.  We can expect NODX to continue to struggle in the coming months as global trade is expected to be weighed down by probable recessions in Europe and the US.  Indonesia: Bank Indonesia (BI) meets today to discuss policy.  We expect BI to hike by 50bp to combat elevated headline and core inflation.  The relatively sizable rate hike will also be needed to steady the currency which is the worst-performing regional currency for November.      Philippines: Bangko Sentral ng Pilipinas (BSP) will follow through with its previously announced rate hike decision.  BSP Governor Medalla pre-announced his intention to hike the policy rate by 75bp two weeks ago to match the Fed’s own move.  We do not expect any surprises from BSP today with the policy rate set to increase to 5%.  What to look out for: Fed speakers and US housing data Japan trade balance (17 November) Australia labor data (17 November) Singapore NODX (17 November) Malaysia trade (17 November) Bank Indonesia policy meeting (17 November) Bangko Sentral ng Pilipinas policy meeting (17 November) US housing starts and initial jobless claims (17 November) Fed's Waller, Bullard, Bowman, Mester, Jefferson, Kashkari speak (17 November) Japan CPI inflation (18 November) US existing home sales (18 November) 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
Hungary: GDP declines by 0.4% in the third quarter. What's behind the drop?

The Objective Of The National Bank Of Hungary Is Stability

ING Economics ING Economics 17.11.2022 10:28
We have seen no material improvement either in the risk environment or in the macro outlook which would make the National Bank of Hungary think about any change. We expect a reinforcement of the hawkish ‘whatever it takes’ stance, even if we get some positive news about the Rule-of-Law procedure 13% ING's call No change in the base rate The rationale behind our call Since mid-October, the National Bank of Hungary has been in Phase 3 of its tightening cycle. This means it has used both temporary and targeted measures to ensure both long-term price stability and short-term market stability. In this regard, the effective (marginal) rate is defined as the one-day deposit quick tender. After the previous rate-setting meeting, Deputy Governor Barnabás Virág highlighted that the central bank needs to see a significant improvement in general risk sentiment to gradually reduce the spread between the base rate (13%) and the effective rate (18%). General risk sentiment is defined as a combination of external (war, global monetary policy, energy, general investor sentiment) and internal risks (Rule-of-Law procedure, current account imbalance). As we see no material improvement in these criteria, we expect no change in the monetary policy setup. Regarding the war, the Polish missile incident proved that the geopolitical situation remains very fragile. We can say the same about general investor sentiment as well. When it comes to global monetary policy, we might see the beginning of a slowdown in general tightening as we approach year-end, but as a developing, BBB-rated economy with a free-floating currency, it is too early to make a move on these early changes. Hungary’s gas storages are now filled, so the worst-case scenario is off the table, though the energy crisis is still with us and winter is still ahead. On internal risks, the current account balance has been dragged down by the import of energy goods. After the record trade deficit in August (EUR 1.58bn), the balance in goods showed an improvement in September, posting just a EUR 0.65bn shortfall. The same happened with the monthly current account balance, showing a roughly EUR 0.5bn improvement to EUR -1.1bn from August to September. A small step in the right direction but not enough to label it as a permanent and material change. Finally, there is the Rule-of-Law debate. The next milestone here is the European Commission's report and recommendation which will be published on 19 November and the following European Commission meeting on 22 November. By the time the NBH’s rate-setting meeting takes place (also 22 November), we might see some positive headlines coming from the European Commission regarding the Rule-of-Law procedure. With a green(ish) enough light, Hungary may be able to secure a signature on the Recovery and Resilience Facility just in time so as not to lose EUR 4.6bn of the EUR 5.8bn grant which is at stake should Hungary miss the year-end deadline to have its plan accepted. However, no matter how green this light is, we don’t expect the central bank to make a policy change on that very quickly and we expect the NBH to underscore its hawkish “whatever it takes” approach again. When it comes to macro developments, neither the inflation nor the GDP outlook show a material decoupling from the latest central bank forecast. Core and headline inflation readings moved higher in October and the peak might come only in late 2022 or early 2023. This gives no room for manoeuvre in monetary policy this time. Real GDP has started to decline on a quarterly basis, but as it is just the first leg of the technical recession, Hungary is not out of the woods yet from an inflation and external balance point of view. Moreover, this drop in economic activity was widely expected, including by the central bank.  And yes, despite the 18% marginal rate and the hawkish monetary policy stance in Hungary, the forint has remained volatile. The recent market movements have provided excellent proof that it is not fundamentals, monetary policy intentions or financial processes that decide what happens to a given country's financial assets. In our view, all this confirms that the central bank will continue to maintain a high state of alert and policy flexibility. In our FX Outlook 2023, particularly in our CEEMEA FX Outlook 2023, we said that a material improvement in risk sentiment could translate into a gradual convergence of the effective rate to the base rate, starting as soon as late December. Perhaps even that seems to be too optimistic based on the developments of the past few days. At the moment, it is more than likely that the central bank will change interest rates on its temporary and targeted measures only at the beginning of next year. TagsRates National Bank of Hungary Monetary policy 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
The EUR/USD Currency Pair Has Been Trading Higher

FX Market: Range Of 2023 The EUR/USD Pair Outcomes

ING Economics ING Economics 16.11.2022 13:57
The dollar is tumbling from multi-decade highs. Calling the FX market in 2023 requires taking a view on the Federal Reserve, the war in Ukraine, China, and the overall investment environment. We suspect that the dollar can stay stronger for a little longer. But the main message in our 2023 FX Outlook is to expect fewer FX trends and more volatility Source: Shutterstock The dollar's highwire act Having risen around 25% since the summer of 2021, the dollar has recently taken quite the tumble. For 2023, the question is whether this is the start of a new bear trend or whether the factors that drove the dollar to those highs still have a say.  Given that the most liquid FX pair, EUR/USD, was such a large driver of global FX trends in 2022, we use a scenario approach to look at a range of 2023 EUR/USD outcomes – derived from the expected volatility priced into the FX options market. The range of scenarios and end-year FX levels extend from ‘Permacrisis’, where EUR/USD could be trading at 0.80, to ‘Safe and Sound’, where EUR/USD could be closer to 1.20. Key inputs to that scenario approach are factors like: i) how aggressive the Fed will be, ii) Ukraine, Europe, and energy, iii) China, and iv) the overall risk environment. Given ING’s house view of the Fed taking rates to 5.00% in early 2023, four quarters of recession in Germany amid higher energy prices, relatively weak Chinese growth, and a still difficult equity environment, our baseline view favours softer EUR/USD levels. 2023 will see fewer FX trends and more volatility But perhaps the strongest message to get across in our outlook is that FX markets in 2023 will see fewer trends and more volatility. We say this because conditions do not look to be in place for a clean dollar trend – no ‘risk-on’ dollar decline nor ‘risk-off’ dollar rally. And central banks tightening liquidity conditions through higher policy rates and shrinking balance sheets will only exacerbate the liquidity problems already present in financial markets. Volatility will stay high. Softening global activity and trade volume growth at less than 2% will likely limit the gains of pro-cyclical currencies in 2023. EUR/USD could be ending the year near 1.00. If the positive correlation between bonds and equity markets does break down next year, it will likely come through a bond market rally. Our forecast for US 10-year Treasury yields at 2.75% year-end will argue for USD/JPY to be trading at 130 or lower. EUR/USD will set the tone for European currencies in general. We favour the Swiss franc to outperform and sterling to underperform. Scandinavian currencies may continue to struggle with the high volatility environment. Further east, we see scope for the Hungarian forint to be re-assessed positively, while the overvalued Czech koruna and Romania leu look more vulnerable as FX intervention slows. In the commodity bloc, the uncertain outcome for China continues to place a question mark on the Australian and New Zealand dollars. We again prefer the Canadian dollar – although how the housing market correction plays out will be a risk. USD/CNY itself may struggle to sustain a move sub-7.00. And in a more mixed FX environment, expect local stories to win out – one of which may be Korean debt being included in world government bond benchmarks – helping the won. EUR/USD: Four scenarios for 2023 Source: ING, Refinitiv 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 Bank Of England Is Undoubtedly Worried About Inflation

The Bank Of England Is Undoubtedly Worried About Inflation

ING Economics ING Economics 16.11.2022 13:10
With the government fixing energy prices until at least April, it looks like October's 11.1% inflation rate could mark the peak. But it's unlikely to fall below double-digits until early next year, and the Bank of England is undoubtedly worried about inflation linked to the tight jobs market. Still, a pivot back to a 50bp hike in December looks likely The latest rise in household energy costs was enough to take UK inflation up to 11.1% in October. That’s a bit higher than was expected, and seems to be partly explained by another punchy 2% month-on-month increase in food prices, and a little bit of upside at the core level. All of this is marginally hawkish for the Bank of England in that its closely watched measure of ‘core services’ inflation, which excludes some volatile components and the impact of VAT changes, came in a few percentage points higher than they’d pencilled in. By our calculation, that sits slightly above 6% YoY, compared to a forecast of 5.7% by the BoE a couple of weeks ago.   As we noted yesterday, worker shortages are proving to be a persistent issue for firms, and that potentially points to stickier inflation rates for service-sector firms where pay is a key pricing input. Still, with hiring demand falling, we suspect we’re near the peak for wage growth. In fact – famous last words – it looks like UK headline inflation is at its peak too, or there or thereabouts. The fact that the government is effectively fixing electricity/gas unit prices below wholesale costs until next April means this is probably as high as it will get, though admittedly we expect headline rates to stay in double-digits until at least February next year. From there, we think there are compelling reasons to expect headline inflation to drift lower through the year, ending up closer to the Bank of England’s 2% target by early 2024. That’s especially true of goods categories, where lower input/shipping prices, stalling consumer demand and rising inventory levels not only point to lower inflation rates, but potentially also outright price falls in certain areas as retailers are forced to become more aggressive with discounting. The story, as we discussed earlier, is less clear-cut for services inflation. UK inflation in 2023 will depend a lot on how energy support evolves after April   Source: Macrobond, ING   The 2023 inflation outlook will also heavily depend on how the government adapts energy support next year. We’re still awaiting detail, but one possibility is that the majority of households switch back to paying the Ofgem regulated price from April. Based on our latest estimates using wholesale energy costs, the average household would pay £3300 in fiscal-year 2023 without any government support, compared to £2500 if prices remain capped. That would initially bump up inflation rates after April by roughly 2pp. While it’s tempting to say that higher headline inflation rates in that scenario would be hawkish for the Bank of England, in practice the opposite is probably true. Reduced energy support would amplify the UK recession that most, including ourselves, now expect. That would imply lower core inflation further down the line. With signs that inflation – both in core and headline terms – is close to or at a peak, and signs of recession mounting, we think the Bank of England is likely to pivot back to hiking in 50bp increments in December. Assuming another 25-50bp hike in February, we think the peak for Bank Rate is likely to be around 4%, a little below what markets are now pricing.   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
Decline In Market Volumes Will Lead To A Strong Increase In Volatility

The Impact On The Volatility Of The Forex Market Is Mainly Geopolitical Risk In Europe

ING Economics ING Economics 16.11.2022 13:03
FX markets are maintaining very high levels of realised volatility. Driving markets in the very short term is the stand-off between geopolitical risk in Europe and the powerful short squeeze in risk assets on the back of softer US price data. On the calendar today are US retail sales, industrial production, and a host of Fed and ECB speakers In this article USD: Buy-side wants and needs a weaker dollar EUR: Ongoing correction GBP: BoE speakers in focus JPY: Wild ride continues Source: Shutterstock USD: Buy-side wants and needs a weaker dollar Realised levels of FX volatility remain near the highs of the year. For example, one-month EUR/USD realised volatility, at 14%, is back to levels not seen since April 2020. The dominant near-term theme is the aggressive position adjustment in FX, perhaps more so than in other asset classes, on the back of softer US price data. The dollar took another sharp leg lower on yesterday's release of soft October PPI data. Clearly, US price data is the hottest commodity in the macro space right now. Dollar price action does suggest the market is caught long dollars at higher levels and that corrective rallies in the dollar are tending to be relatively shallow. There is also a lot of buy-side interest in expectations (and hopes) that the dollar has peaked. If so, that will release some handsome gains for emerging market local currency bond and equity markets. For example, were it not for the recent dollar correction, returns in the EM local currency bond index would be a lot lower than the current -10% year-to-date figures, and EM hard currency bond indices are down closer to 20% year-to-date.  Given the weight of long dollar positioning after a major 18-month bull trend, it looks too early to expect that this position adjustment has run its course. Yet developments in Poland late yesterday have somewhat clouded the picture. The market will await any announcement from NATO representatives today on the source of the explosion - although President Biden has partially defused the situation by suggesting the missile was not fired from Russia.  Beyond geopolitics today, the focus will be on US retail sales and industrial production data. Both should be reasonably strong, but less market-moving than price data. We will also hear from the Federal Reserve's John Williams and Mary Daly around 16CET. For the DXY today, we did note that the dollar seemed to find a little natural buying interest after the PPI data, but before the Polish news broke. That might tend to favour a 106.00-107.20 DXY trading range today. In terms of the bigger picture, the question is whether 105 is a large enough correction for DXY.   Chris Turner EUR: Ongoing correction EUR/USD turned from a high of 1.0480 yesterday - driven there by the softer US PPI data. By comparison, today's US data is second tier and might prove a weak dollar positive if retail sales and industrial production emerge on the strong side. Attention may also return to the energy markets given events in Poland. And this will also serve as a reminder of the upcoming embargo on Russian oil exports due to start in early December. This potentially is a downside risk to European currencies should energy prices take a leg higher. On the calendar today are plenty of European Central Bank speakers. The ECB will also release its semi-annual financial stability report. Expect plenty of focus on the regulation of the non-bank financial sector after the recent debacle amongst the UK pension fund industry with its LDI hedges in the UK Gilt markets. Remarks earlier this week from the ECB relating to this report drew a conclusion that financial risks had increased. We noted yesterday that EUR/USD seemed to turn naturally from 1.0480, suggesting the corrective rally might have run its course - at least for the very short term. But the bottom of the short-term range has now been defined at 1.0270 - pointing to a 1.0270-1.0500 range over coming sessions. This assumes no major escalation in geopolitics. Bigger picture, we are in the camp that something like 1.05/1.06 may be the best EUR/USD levels between now and year-end. Chris Turner GBP: BoE speakers in focus Bank of England speakers will be in focus today after the release of the October CPI data. This is expected to be peaking around the 11%year-on-year level around now.  BoE Governor Andrew Bailey and colleagues testify to the Treasury Select Committee at 1515CET today. We suspect the message will be very much the same as that given at the policy meeting earlier this month - i.e. do not expect 75bp hikes to become common and that the market pricing of the tightening cycle is too aggressive.  GBP/USD briefly peaked over 1.20 yesterday. We think 1.20 is a good level to hedge GBP receivables. Equally, we have a slight preference for EUR/GBP staying over 0.8700. Tomorrow is the big event risk of the autumn budget - which on paper should be sterling negative. Chris Turner  JPY: Wild ride continues USD/JPY continues to deliver 20% annualised readings in volatility (as do the high beta commodity currencies and those in Scandinavia). We suspect the next five big figures in USD/JPY come to the upside. We see this because the US 10-year Treasury yield typically only trades 50-75bp below the Fed funds rate towards the end of the tightening cycle. And given that our team is looking for the policy rate to still be taken 100bp higher, we think US 10-year Treasury yields will probably return to the 4.25/4.35% area before the end of the year. Equally and once position adjustment has run its course, the yen rather than the dollar should become the preferred funding currency should market conditions begin to settle. Although that does seem an unlikely prospect right now. Chris Turner 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