activity data

FX Daily: Markets steady ahead of final push on the debt deal After a long weekend in many parts of the world, FX markets are returning to mull progress on a US debt ceiling deal. This now has to pass the committee stage in the House and will probably go to a House vote tomorrow. Progress on the deal will allow investors to focus on sticky US inflation – likely seeing the dollar hold onto recent gains.   USD: Progress on debt deal allows markets to focus on another Fed hike After long weekends in many parts of the world, FX markets are returning to some progress on the US debt ceiling. President Joe Biden and House Speaker Kevin McCarthy have reached a two-year deal. That deal will be assessed by the House Rules Committee today and, if approved, will likely go to a vote in the House tomorrow. Both Democrat and Republican leaders feel they have the votes to get the deal through Congress – although at times like these, there may be a few holdout politicians who like their day in the sun.   Progress on the debt deal has seen some declines in yields for US Treasury Bills maturing in June, although it has had little impact on FX markets. We said last week that FX markets had already been trading in a de-stressed fashion on the assumption a deal would go through. Assuming there are no hiccups in the deal's passage, FX markets can return to the most pressing issue of sticky inflation and what central bankers plan to do about it.   Last Friday's US data set made the firm case for one additional 25bp Fed hike – now fully priced by the time of the 26 July meeting. Money markets price a 63% chance of that hike coming earlier at the 14 June meeting – a meeting which will likely see the Fed have to raise its inflation forecasts. The default view, therefore, seems to be that the dollar can hold its recent gains at least into that June meeting. That is unless US price and activity data start to fall away sharply.   On that front, this week sees US JOLTS job opening data (Wed), ADP (Thurs.), and the May NFP (Friday). Barring any major downside miss in these releases, it looks like the market will support another 25bp hike from the Fed, continued inversion in the US yield curve, and a strong/stronger dollar.   DXY looks comfortable above 104.00 and could extend recent gains to 104.65 or even 105.30 this week.    

The recent range is a tough ceiling to break for euro rates Even if ECB hawks continue to talk up the odds of July and September hikes, with the former still flagged as a more than even probability even by centrist members, it will take a pick-up in activity data for markets to price a terminal rate above 4%, as they did before the Silicon Valley Bank failure in March.   We’re not expecting a huge change in communication in short, and markets will focus on changes in economic data instead to infer how many more hikes the ECB has under its belt. In that context, we think longer-dated rates struggle to break above the top of their recent range, which roughly sits at 2.54% for 10Y Bund and 3.16% for 10Y swaps against 6m Euribor.   In light of the current lack of direction in financial markets, these levels may seem difficult to achieve, but the pre-ECB and Federal Reserve meeting lull is proving a fruitful time for primary market activity. On the sovereign side, Spain and France announced deals yesterday which we think will add to other deals in pushing yields up today.   Taking a step back, May has seen issuance volumes above historical averages every single week as opportunistic borrowers used this window of calm to push deals. We don't think this week will be any different. This shouldn’t be mistaken for a conviction macro trade, but we think the benign market conditions should continue to result in higher bond yields and weaker safe havens as investors feel more comfortable with owning riskier alternatives.       Big debate on direction from the US. We look for upward pressure on yields for now In the US, there is a stark juxtaposition between strong ongoing payroll growth versus PMIs and ISMs entering recessionary territory (low 40s for some components of the manufacturing PMI). On the inflation front, there is evidence of more subdued pipeline pressure while core inflation remains elevated (in the area of 5%).   Our model for US "rates" pitches fair value at 6% when we take everything into account. That has drifted up from 5.75% in the past week or so. Relative to this, the funds rate (ceilling at 5.25%) is not too deviant from that. But longer tenor rates are quite low relative to the big figure of 6%, reflecting ongoing deep inversion of the curve.   While there are some good reasons to expect market rates to fall (weak PMIs for example), our preferred expectation from here is to see some further upward pressure on market rates first. The 4% area for the 10yr Treasury yield for example remains a generic target that could well be hit in the coming month or so.     Today's events and market view Today’s session should be relatively light on economic releases with only US trade standing out. Instead, we expect the focus to be on the Bank of Canada’s meeting in the afternoon. Consensus is for no change in policy rates but the surprise Reserve Bank of Australia hike yesterday, as well as a greater skew towards a hike in the most recent contributions to the Bloomberg survey, means markets are on high alert. Bond supply will be concentrated in the 3Y sector with sales from the UK and Germany (a green bond in the latter’s case). Spain and France mandated banks for the sale of 10Y and 15Y linker bonds via syndication. ECB speakers on the last day before the pre-meeting quiet period will be VP Luis de Guindos, Klass Knot, Fabio Panetta, and Boris Vujcic.

Activity data was very weak The main body of activity data can be summed up in one word. Disappointing. Retail sales is the figure we have been focussing on, as it is at the moment, the only functioning engine of Chinese growth. And although the year-on-year growth rate of 12.7% looks impressive, this equates to a seasonally adjusted decrease in month-on-month sales and shows that the re-opening momentum is falling.  Breaking the numbers down to look at what is driving growth, and catering is still the major driver, which won't do a lot to boost domestic production and manufacturing, though it does lift GDP. Vehicle sales is the only other notable contributor to growth, after which very little else is showing much signs of life, including consumer confidence bellwethers, like clothing.    Industrial production rose 3.5%YoY, though this was well down on the 5.6% rate of growth in April, and the year-to-date growth figure was unchanged at 3.6%.  Urban fixed asset investment slowed from 4.7% to only a 4.0% pace, which may illustrate the problems local governments are having trying to boost growth in the absence of cash from land sales. Some more central government support may be of help here if it is forthcoming.    Also, property investment continues to weaken and is now falling at a 7.2%YoY pace, down from -6.2% in April. We had been hoping for more of a flat line from property development in China in 2023 after what we calculate was about a 1.5pp drag on GDP growth in 2022. It could be worse than this.    Contribution to year-on-year retail sales growth

Is the labour market turning? It is not at all clear The labour market is also remaining remarkably (and unhelpfully) firm, with May data showing an unexpected rise in full-time employment and a drop in the unemployment rate. Viewed against long-run trends, the unemployment rate remains extremely low and doesn't seem consistent with slower inflation. And then there is wage growth, which is also still heading higher, though is very lagging, so we don’t really know what is going on here in real time.    So, despite the slowdown in overall economic growth, there are a number of indicators that still look like reasons for more tightening, rather than either easing or pauses, though we suspect these are not yet showing the full extent of the effects of earlier monetary easing.     Also, the RBA has at times seemed keen not to overtighten given the lags involved in the monetary transmission mechanism. Time is likely to be a helpful ally for rate doves allowing the slowdown to work through the economy more fully. This is certainly true of the lagging labour market.  What happens in other central banks, most notably the US Federal Reserve may also play a role. It will be far easier for the RBA to hold fire if that is also what the Fed is doing. Though this also remains a tight call and the current guidance from the Fed is for another 50bp of tightening, even though we don't think that they will ultimately deliver.    All things considered, the case for believing that the cash rate may have already peaked is weakening, if not entirely dead. So while this remains the base forecast, it will not take much for us to jettison it in favour of further hikes. That said, the market expectation for a further 50bp of tightening does feel too high, and we would limit any further increase to 25bp. It would certainly help our current call a lot if activity and labour data both swung our way in the coming months, to bolster the message from lower inflation, on which we feel a much stronger conviction. We have, however, ditched our view that rates will be cut as soon as 4Q23, and have pushed this out into 2024.   AUD/USD outlook

FX Daily: Hard times to sell a hawkish narrative The Fed paused yesterday but signalled two more hikes in its dot plot. Markets, however, are not trusting the new projections, and barely price in one more 25bp increase to the peak, likely due to recent softish inflation figures. The ECB won’t have an easier task selling such hawkish rhetoric today, and EUR/USD faces some moderate downside risks.   USD: Dollar bulls can cling on to the dot plot The Federal Reserve matched market expectations for a hold yesterday, but definitely surprised on the hawkish side with its messaging. As discussed in our Fed review note, the FOMC retained maximum flexibility as it signalled openness to further rate increases: the updated dot plot rate projections were reviewed considerably higher from March, and the median projection now includes two more rate hikes in 2023, before 100bp of cuts in 2024. Remember that the March dot plot signalled we had reached the end of the tightening cycle, now only two FOMC members see rates being held at 5.25% until year-end.   The dollar had come into the FOMC announcement with a bearish tone, as PPI figures released yesterday morning showed more encouraging signs of a slowdown in inflation and prompted markets to fully price out a rate hike later in the day.   Despite the hawkish surprise contained in the Fed message – primarily in the dot plot – the dollar failed to rebound. That is because there was an evident dislocation between the Fed’s hawkish signals and the market reaction: investors are carefully weighing the evidence of slowing inflation from the CPI and PPI data, and appear – so far – reluctant to align with the Fed’s projections. The Fed funds futures curve prices in 17bp of tightening for July, and 22bp to the peak.   The post-FOMC pricing is telling us that markets accord higher credibility to data than the Fed’s communication, so more evidence of US disinflation/economic slowdown can prompt more dollar weakness moving ahead. However, with markets underpricing rate hikes compared to the dot plot, we’d be cautious before jumping on a bearish dollar trend just yet, given the high risk of market pricing converging to the Fed’s projections and pushing short-term swap rates higher again.   So, dollar bulls can probably cling on to the hawkish dot plot for now, or at least until (and if) data indicates more unequivocally that there is no longer a necessity to raise rates.   This morning, we are seeing the dollar recovering some ground, although that appears to be primarily driven by the weak activity data out of China and fresh rate cuts by the People's Bank of China.    

South Korea: stronger-than-expected activity data indicates recovery continues this quarter In May, all industry industrial production rose 1.3% MoM sa, with rising manufacturing production, retail sales, and investment. 2Q23 GDP should therefore accelerate modestly from the previous quarter. However, weak forward-looking data and the recent decline in service activity could suggest softer investment and consumption in 2H23.   Semiconductor output cuts plan yet to materialize in May Manufacturing industrial production unexpectedly rose 3.2% MoM sa in May (vs -0.9% market consensus) while April's production was revised up to -0.6% (vs -1.2%.). By product item, vehicle production (8.7%) gained again, reflecting strong demand from abroad. The upside surprise mainly came from the output gain in semiconductors (4.4%). NAND flash and system-chip production led the overall growth, but DRAM output also rose. It usually takes 6 months to reduce production, thus the planned production cuts are not evident in the May outcome. Also, the recent strong demand for AI chips may also have had some positive impact. Production gains in semiconductors also contributed to the rise in inventories (0.6%).   Manufacturing production suggests a GDP recovery in 2Q23   Consumption and investment activity rose in May Although retail sales rebounded 0.4% MoM sa, this only partially reversed the previous month’s 2.6% decline, and the underlying trend of retail sales appears to be weakening. In May, sales of home appliances were boosted by idiosyncratic factors such as the unseasonally warm weather compared to average and the sharp rise in moves to newly developed apartment complexes. However, in our view, this positive impact will reverse in the coming months. Also, with car sales declining for three months in a row, we believe that this quarter’s consumption growth will be smaller than the previous quarter. Meanwhile, both equipment and construction investment rose. Transportation-related equipment investment continued to rise solidly. Strong vehicle demand and aircraft investment due to increased travel are the main reasons.     Investment stayed in the contraction zone, but is bottoming out Service activity continued to decline for three months in a row In contrast to solid manufacturing and investment activity, service outcomes declined by 0.1% in May. Professional, science, and technology activity (3.2%) gained but were more than offset by the decline in financial (-4.1%), accommodation & restaurant activity (-4.5%). Along with the softening of retail sales, this is in line with our view that the support to growth from re-opening is running out of steam.   Growth outlook We believe Korea’s 2Q23  GDP will recover a bit more than we had expected. But, forward-looking orders, signs of softening retail sales and service activity, and an unfavourable inventory cycle will likely weigh on manufacturing, consumption, and investment in 2H23. Thus, we will revise our GDP outlook after checking the June export data released tomorrow

Painting a 3% to 4% range for the US 10yr We are nearing the peak for US rates, but we are not there yet. The 10yr needs to get to a 4% handle, the 2yr to a 5% one and the funds rate should peak out at 5.5%. Sticky inflation and an economy that won’t lie down rationalise a continuation of rising rates. But a dash lower in market rates is a theme for 2024, with an overshoot to the 3% handle the target for the 10yr   The US curve has shifted higher. More to come as a 4% handle on the 10yr is coming In recent weeks the US yield curve has shifted higher and the curve inversion has deepened further. The 10yr is now at 3.8%, and the 2yr is back above 4.8%, stretching the 2/10yr inversion back above 100bp. There is room for the 2yr to rise to 5% on the likelihood that the market prices out the rate cut bias just about discounted for the December 2023 meeting. Remember the 2yr was above 5% just before Silicon Valley Bank (SVB) went down.   The latest core PCE number at 4.9% reminds us that the US is still a '5% inflation economy'. We think this will change (inflation will ease lower), but for now it is what it is until dis-proven. The issue is that activity data is not lying down. The latest consumer confidence number for June, for example, has popped back out to 109.7 (versus 100 at neutral). Market rates can only rise given this, albeit muted by recent good demand for bonds. Had it not been for this recent buying we’d already be at 5% for the 2yr and 4% for the 10yr yield. But based on what we see in front of us, we are likely to get there. The rising pressure on market rates is also underpinned by a Federal Reserve that continues to sound quite a hawkish tone on worries that the inflation monster remains alive and well. The Fed skipped the rate hike opportunity for June, but seem very ready to resume hiking at the July meeting. There is over an 80% probability attached to a 25bp hike from that meeting. Beyond that, there is a 50:50 chance attached to the delivery of one final 25bp hike.   The rationale for maintenance of rate hikes for now is centred on the stickiness of inflation and the refusal of the economy to slow by enough to really quell inflation pressures. We actually think the Fed has done enough and could simply hold here rather than hike. But the Fed has made it pretty clear that it thinks it needs to keep hiking some more. The Fed will want to do the rate hiking exercise once, and not to have to come back again later and re-accelerate hikes. We target the 10yr Treasury yield to get back up to the 4% area; back to where it was before the SVB induced rally in bonds and sell-off in risk.   But the peak in market rates is nearing, and the next big journey is towards a 3% handle in 2024 At the same time, we note that lending standards have tightened significantly in recent months. On top of that there is a growing degree of concern with respect to the commercial real estate loans portfolios being held by US banks (a post-pandemic outcome). All of this adds to stresses coming from the banking sector, stresses that can hamper macro circumstances. Already key US forward-looking indicators, such as PMIs and ISMs, are in recessionary territory. The external backdrop is not great either, with the eurozone having moved into a state of technical recession, and China showing only a subdued re-opening oomph. The move to the recessionary environment paves the route for interest rate cuts from the Federal Reserve by early 2024.   The idea then is for 2024 to be a year with a rate-cutting theme. We see the Federal Reserve getting the funds rate down to 3% by the end of the year. Market rates will get there first. So, we see the 10yr Treasury yield heading to the 4% area in the next month, but by the end of 2023 it will be comfortably back below 4% with a view to heading towards 3%, likely overshooting to the downside.   The theme for the remainder of 2023 is for the 10yr to head for the 4% area, the 2yr to head for the 5% area, and for the fed funds rate to peak at 5.5%. The 10yr can then journey back down towards 3% through the first half of 2024, with the funds rate getting there by the end of 2024. And provided the funds rate bottoms at 3%, then the 10yr Treasury yield should be heading back up again in order to generate a normal upward sloping curve. A move back up to 3.75% would have a suitable 75bp gap above the funds rate.

Dollar could get a lift from hawkish Fed script Having hit a new low for the year in the aftermath of the soft June CPI report, the dollar has since been clawing back those losses. At the heart of that story is market uncertainty as to how the Fed may react to one piece of soft price data. As above, it looks a little too early for the Fed to drop its tightening bias and switch to a data-dependent approach. With the market positioning itself for a cyclical dollar sell-off over coming months and quarters, we suspect another reading of the hawkish Fed script could send the dollar a little higher. Looking at the FX options market, the expected EUR/USD 24-hour trading range encompassing both the Fed and European Central Bank decisions next week is only 60 USD pips. Clearly, fireworks are not expected, but EUR/USD could dip back towards the 1.1050 area on the Fed event risk. Looking beyond next week’s Fed meeting, softer US price data over the summer – plus some softer activity data too – should keep the dollar on the soft side. And dollar losses should accelerate in the fourth quarter when the Fed has more evidence to embrace the disinflation story and we move into what is normally a weak seasonal period for the dollar. We have a year-end target for EUR/USD at 1.15.

China: PBoC cuts rates amidst data weakness The market was expecting the PBoC to wait until September before easing again, and today's cuts suggest that the authorities' concern about the state of the macroeconomy is mounting. But that doesn't mean that they are about to undertake unorthodox policy measures.   Chinese policy rates   Rate cuts show that concern is mounting The 15bp cut to the medium-term lending facility (MLF) was unexpected. Almost all forecasters expected China's central bank, the PBoC, to wait until September to cut again. MLF lending volumes of CNY401bn were in line with expectations. The PBoC also cut the seven-day reverse repo rate by 10bp, which now stands at 1.8%.  The market responded abruptly. The CNY rose to close to 7.29 immediately after the decision, though eased lower soon after. And 10Y Chinese bond yields dropped about 6bp to 2.56%.  From a macro perspective, today's policy decisions are somewhat helpful. They will help improve the debt-service ability of cash-strapped local governments and property companies. But this isn't a game-changing outcome, and so we doubt that market sentiment will dramatically improve just on this.    Activity data remains extremely poor The activity data release contained no bright spots, and quite a few downside surprises. Perhaps the worst of these was the 2.5% YoY growth in retail sales. This has declined sharply from an admittedly base-effect inflated 18.4%YoY growth rate in April as the re-opening briefly led to a retail sales surge. Now the idea of a consumer-spending-led recovery is looking very vulnerable.  In year-on-year terms, industrial production slowed to 3.7% YoY, from 4.4% in June. Year-to-date, production growth remained at 3.8% for the second month. Property investment slowed at a faster pace in July, falling at an 8.5%YoY pace, weaker than the 7.9% YoY decline achieved the previous month. Property sales growth also slowed to almost a standstill in July, rising at only 0.7% YoY YTD, down from 3.7% in June. And fixed asset investment slowed to 3.4% from 3.8% YoY YTD. Topping all of this off, the surveyed unemployment rate rose to 5.3%.   China activity summary   What does this mean for policy? The question of the day based on the number of times it has been posed to this author is "Does this mean the PBoC will undertake Quantitative Easing (QE), and if so, when?"  At the current juncture, QE does not seem to be the right response to what we are seeing. Nor does a large dollop of fiscal stimulus.  China is undergoing a painful transition to a less debt-fuelled, less property-centric and more consumer-driven economy. An "emergency" policy like QE that primarily inflates real and financial asset prices does not appear to have a strong role to play here. QE would also put the CNY under further weakening pressure, which it is very clear the PBoC does not want and would make it much harder for them to manage the CNY. It would also raise the risks of capital outflows, which they will also be keen to avoid.   More policy measures will be needed and more will certainly be delivered. The PBoC has not ended the rate-cutting cycle yet, and there will be further iterations of policy rate cuts along the lines of what we have seen today. As for government stimulus policies, these, we think, will tend to be along the lines of the many supply-side enhancing measures that we have already seen. The way through a debt overhang is not to print more debt, though it may be to swap it out for lower-rate central government debt, or longer maturity debt to ease debt service. Enhancing the efficiency of the private sector will also play a key role, though this and all the supply-side measures will take a considerable time to play out. The tiresome chorus clamouring for more stimulus is unlikely to stop in the meantime. And we will continue to see weak macro data for the foreseeable future. It is a necessary part of the adjustment and is far preferable to resurrecting the debt-fuelled property model that propelled growth previously. But we do need to lower our expectations for China's growth. 

China’s latest activity data worsened across nearly every component. Markets have given up looking for fiscal stimulus, and have started making comparisons with 1990s Japan. We don’t agree with the Japanification hypothesis, but clearly a substantial adjustment is underway, and we have trimmed our growth forecasts accordingly.   Deflation is very different to this A couple of weeks ago, we wrote a piece debunking an argument that was doing the rounds which argued that China had slipped into deflation and was turning into a modern-day equivalent of 1990s Japan. Being old enough to remember that period quite well (unlike I imagine most of the proponents of the idea), it was clear to us that there was no merit to this view. Firstly, deflation is not negative consumer price inflation. Deflation is a much broader collapse in the general price level, which, in addition to consumer prices includes falls in real and financial asset prices, as well as money wages. And though we have seen some renewed falls in house prices, stocks are not looking very robust, and there is indeed some year-on-year decline in consumer prices, however, money wages are still positive. Moreover, the single defining feature of 1990s Japan was that it was the result of a monetary-induced bubble and subsequent bust. There was a property element to Japan's problems, but much more besides. Japan's response was a massive fiscal expansion, which failed to do much more than saddle the economy with a mountain of debt, and the rest is largely history. China’s issues also concern the property market, but it is the existence of large-scale local government debt that is the main constraint on the recovery. There is little evidence of any financial or property bubble. As a result, the government responses, of which there have already been a great many, have almost entirely focused on supply-side measures, which are only having a very marginal effect on activity.     Local government financing vehicles swell government debt    

China’s new yuan loans skyrocketed to 1.36 trillion yuan in August, much higher than the prior month’s 345 billion yuan. Optimism grows for China’s outlook as stimulus appears to filtering throughout the economy Dollar has biggest drop in two months as yen and yuan gain The big risk aversion trade over the summer has seen AUD/JPY consolidate around the 94.00 level.  A downbeat outlook for China kept the Australian dollar heavy, while US economic resilience has kept yen softer on a widening interest rate differential.  The AUD/JPY daily highlights a global growth picture that is either looking for a China rebound, which should help Australia’s growth momentum or a Japan recovery that is not on solid footing. The AUD/JPY daily displays a symmetrical triangle that shows price has converged towards the 94.00 region.  The bullish trend that started in the spring ended mid-June ahead of the 97.70 level.  Price is poised to either resume the longer-term bullish trend that started after the pandemic low was made in March 2020 or potentially show the start of a significant bearish reversal.                   The Australian dollar and Japanese yen seems likely to remain a key risk barometer, which means it could react strongly with what happens with this week’s US inflation data and with China’s decision on rates and their activity data.  If bullishness emerges, price could initially targets the 95.50 region, while downside support would come from the 200-day SMA level, which currently resides at the 92.00 level. This week the Australian economic calendar is filled with economic data that might take a backseat to everything that happens from the US and China.  The main Australian data release of the week is Australia jobs, which could show job growth rebounded, but will unlikely bring back rate hike expectations for the RBA  

China: Some spots of improvement in activity While the overall economic background remains a very challenged one, there were some more positive signs in the latest data deluge, though all things related to the property market continue to struggle.   No signs of panic from the PBoC The day of China's data deluge started quietly enough. The PBoC left the one-year medium-term lending facility (1Y MLF) unchanged. Given the problems they have been having propping up the CNY in recent weeks, and the fact that the day before, they had already reduced the reserve requirement, any cut to the MLF today would have seemed excessive and would have put the CNY under undue weakening pressure. That did not happen.  Shortly after that, new home price data were released. These fell again from the previous month and at a slightly faster pace. As we noted in the summary - amongst some brighter data on activity, anything real-estate related remains troubled.    Activity data either better, or better-than-expected When the bulk of data was released 30 minutes later, it was immediately apparent that this was on balance a more positive set of data than we have seen recently. Growth rates across a broad range of activity indices were slightly higher, and where they weren't, they tended to beat expectations. So for the most part, the data was either better, or better-then expected.    Summary of August's activity data   Retail sales actually rose Breaking the data down by component, the standout result was the 4.6%YoY rise in retail sales. This was up from only 2.5% in July, though the year-on-year, year-to-date (ytd) growth still slowed slightly. With the historical comparisons so messed up by lockdowns and re-openings, we prefer to look at our own seasonally adjusted real retail sales series. And this shows that sales actually picked up in real terms in August from July, and are now close to their long-run trend. That's both good and bad. Good as retail sales seems to have turned the corner. Bad, because this probably means growth will be more pedestrian from now on.   Real seasonally adjusted retail sales ING Calculations   Production also improved While it is also subject to the same caveats about year-on-year comparisons, the industrial production growth figures also edged slightly higher. We also got a slight decline in the surveyed jobless rate to 5.2%. This is not a terribly helpful or informative set of data, but the direction of travel is at least encouraging. As mentioned, anything real-estate related remained problematic. Property investment decreased at an 8.8%YoY pace, worse than the 8.5% decline in July, but not as bad as the market was expecting. And perhaps given the relationship between infrastructure spending and the property sector, it was not too surprising to see infrastructure spending growth slow slightly to 3.2% from 3.4%, though it is at least still growing.    CNY took advantage of the data After having been under weakening pressure for several weeks, the CNY rallied into this data, helped by another low PBoC reference rate which fixed at 7.1786, lower than the 7.1874 the previous day. Remarkably, our end-of-month, end-of-quarter forecast for CNY is no longer looking too bad at 7.25 with the CNY currently trading at 7.2597. Whether this will hold until the end of the month is another matter.      PBoC supporting the CNY

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.