consumer confidence

After starting the week with sharp losses, the Japanese yen has settled down. In the European session, USD/JPY is showing limited movement, trading at 138.66. Japanese data improves Japan posted solid numbers today, as retail sales and industrial production both improved in July. Retail sales climbed 2.4% YoY in July, (vs 1.5% in June), above the forecast of 1.9%. Significantly, household spending stayed strong, despite high inflation due to rising energy and food prices. Industrial production surprised with a gain of 1.0% MoM (vs. -0.5% forecast), after a huge 9.2% gain in June. Two straight months of gains point to strong pent-up demand and an easing in supply line disruptions. As well, the consumer confidence index rose to 32.5 in August (vs. 31.0) up from 30.2 in July. Consumer confidence remains weak, but the index improving for the first time in three months is welcome news. The host of positive numbers is an indication that the Japanese economy, although fragile, continues to recover, in large part due to pent-up demand following the easing of Covid restrictions. Still, the economy has a long way to go before the Bank of Japan will join its counterparts and tighten policy. The BoJ is primarily focused on stimulating the economy, and inflation remains much, much lower than what we’re seeing elsewhere. With the BoJ vigilantly maintaining its yield control, the Japanese yen remains at the mercy of the US/Japan rate differential, and higher US yields of late have pushed USD/JPY close to the 139 level. We could see the yen fall to 140 in the short-term, with no indication that Japan’s Ministry of Finance has any appetite to intervene and support the yen. Later today, the US releases the ADP Employment report. The market consensus for August stands at 288 thousand, which would be a strong improvement from the July gain of 128 thousand. This event could cause some brief volatility in the dollar, but it is not a reliable indicator for Friday’s non-farm employment report. In fact, NFP is expected to fall to 300 thousand, down from July’s massive gain of 528 thousand. . USD/JPY Technical USD/JPY is testing support at 1.3822. The next support line is at 137.01 1.3891 and 1.4012 are resistance lines This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

EUR: Can China come to the euro's rescue? EUR/USD has quietly slipped below support at 1.0700/1.0720 and may be gently making its way to the March lows at 1.0515/0530. As we mentioned last week, we think   EUR/USD is relatively cheap given the massive reversal in energy prices over the last year and that, in time, the 1.05/1.07 area will come to be seen as a summer base.   Helping that proposition would be some kind of recovery in China. The release of the China Beige Book has shown some recovery in the China manufacturing sector in May.   Official May Chinese PMI figures are released later this week. A bounceback here, helping to reverse the recent run-up in USD/CNH, could provide the euro with some support.   For today, the eurozone focus will be on the release of industrial and consumer confidence figures for May. Consensus expects some further deterioration here and if so this should keep EUR/USD on the soft side. We will also hear from a raft of ECB speakers today.   Expect more hawkish rhetoric especially in advance of the May eurozone CPI data on Thursday. Consensus expects core eurozone CPI to edge lower to 5.5% year-on-year in May. Another upside surprise here – feeding the sticky inflation narrative – warns that investors could return to pricing a 4.00% ECB deposit rate.   - Chris Turner

Unacceptably high core price dynamics will lend a helping hand to ECB officials pushing for a hawkish line The most likely outcome to this week's inflation releases, still unacceptably high core price dynamics, will lend a helping hand to ECB officials pushing for a hawkish line.   Warnings that hikes may have to continue until September will stand a better chance of pushing longer term rates higher even if a subdued economic outlook, and growing doubts about the strength of China's post Covid recovery, should prevent European rates from rising as quickly as their US peers in the coming weeks. Wider USD-EUR rates differentials should only be a temporary development, however, and one resulting from a rise in global rates.   Market participants who, like us, expect lower rates into year-end, should also consider the possibility of US rates falling faster than their European peers, perhaps to sub-100bp levels for 10Y Treasury-Bund spreads.   This is all the more true since European markets have to contend with another dollop of political uncertainty in the form of early Spanish general elections on 23 July. The prime minister called for a vote after local elections defeat at the weekend and the opposition party PP is on the front foot, although it would likely rely on a coalition with another party due to the fragmented nature of the Spanish political landscape.   Spain’s still wide budget deficit (the European commission forecasts 4.1% of GDP this year and 3.3% next) mean a period of uncertainty is an unwelcome development and could lead to underperformance of Spanish government bonds vs peers such as Portugal and Italy.   Early elections mean Spanish bonds are at risk of underperformance vs Italy and Portugal   Today's events and market view Spain kicks off this week’s inflation releases. This will come on top of Eurozone monetary aggregate data and the European Commission’s confidence indicators for the month of May. One theme in European macro releases has been the softening of survey-based data, such as Germany’s Ifo (see above).   US releases feature house prices, the conference board’s consumer confidence, and the Dallas Fed manufacturing activity index.   Bond supply will take the form of Italian 5Y, 10Y fixed rate bonds, as well as 5Y floating rate bonds.    

The Eurozone and Schengen entrance on 1 January 2023 sealed the completion of Croatia’s EU integration story. The economy has shown a remarkable resilience through the pandemic and RussiaUkraine conflict, marking a striking difference compared to the 2008-09 global financial crisis.   While there is a long way to go in terms of catching-up with the Eurozone average in almost all aspects, the authorities seem quite determined to make good use of the EU’s Recovery and Resilience Facility, increasing fixed investments while keeping public deficits within very reasonable levels. Better terms of trade compared to 2022 and a tourism boost from Schengen entry might rebalance the external sector earlier than expected while quasi-balanced budgets could push the public debt ratio below the dreaded 60% of GDP over the next couple of years.   Forecast summary   At the right speed given the context Unlike most of its main EU partners that are experiencing mediocre growth at best, Croatia still managed to produce above potential growth rates in 2022. Momentum looks good in 2023 as well. Trends are clearly moderating in industry, construction and retail trade, with retail exposed to a generally weaker consumer confidence. However, this is likely to change for the better as real wage growth has already turned positive in 1Q23 but it will take a couple of quarters for consumers to start noticing the wage dynamics. All aside, the prospects for the tourist season look very good, authorities expecting a record year both in terms of number of tourists and revenues. We therefore reinforce our above-consensus GDP growth estimate of 2.7% for 2023 with upside risk.   Real GDP (YoY%) and contributions (ppt)   On the right track The revised official targets for the 2023 budget gap point to a 0.7% of GDP deficit, compared to an initial deficit estimate of 2.3%. In essence, as in 2022 that ended with a 0.4% of GDP surplus, the government is partly using the better-than-anticipated budget revenues to improve its budget metrics. In this context, the country has already returned to running primary balance surpluses which are expected to continue in the coming years.   We estimate that this will enable the debt-to-GDP ratio to dip below the dreaded 60% of GDP in 2025, having exceeded this level for 15 years. Looking forwards, we still anticipate the country to run small negative fiscal balances, as the phasing out of energy support measures will overlap increased social spending.   Public debt and fiscal balance (% of GDP)   Inflation is coming down but wage pressure remains After marking the top at 13.0% back in November 2022, the harmonised index of consumer prices (HICP) inflation has continually slowed to reach 8.5% in May, mostly on the back of energy price base effects. As the import price pressure starts to fade as well, the producer price growth is also visibly - though not as rapidly - decelerating. Core inflation, on the other hand, is reacting with lagged effects and we expect it to stay roughly 0.5ppt above headline inflation for the rest of the year.   The clear upside risks stem from wage pressures, as the purchasing power loss from 2H21 and 2022 now needs to be compensated. This comes on the back of an already tight labour market as the unemployment rate might hit record lows this year.   HICP inflation and wage rates    

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

The case for rates having already peaked is weakening We started by noting that markets seem confused by recent events and their pricing may reflect this. Cash rate futures point to rates rising to over 4.6% - a further 50bp of hikes. Our view is that this is too much and that the current cash rate of 4.1% could be the peak, though this view has certainly been damaged by the latest labour report.  Our principal argument for a more moderate rate outlook is that we do expect to see inflation coming down over the coming months, and consequently, the pressure for the RBA to keep hiking will lessen substantially – especially as they aren’t expecting inflation to come down much over the coming quarters, so the hurdle for surprises on the downside is quite a low one. Still, this isn’t likely to be plain sailing. What was once mainly a supply-side shock affecting energy and food prices has widened out to a much broader inflationary issue, with virtually all components of the CPI basket rising at a rate in excess of the RBA’s target range, and the annualised run-rate of inflation (currently about 4%) still inconsistent with getting inflation back to trend.     Further complicating the picture is the fact that despite the RBA’s tightening, house prices, which had been falling, ticked up in 1Q23. If the RBA’s tightening were sufficient to slow the economy, we would expect this to show up in housing - one of the most interest-sensitive parts of the economy. If it isn’t, then it is probably unlikely that we will see less sensitive areas, such as consumer spending dip as much as will be required for inflation to ease. That said, the house price increase seems at odds with sharply lower consumer confidence and so for now, our best guess is that the housing bump in 1Q23 was more of a blip than a concrete turn in prices. Nevertheless, a rapidly rising population, spurred by strong net inward migration as well as low housing supply could keep house prices and rents under further upward pressure. This area certainly bears close watching.     Conversely, the RBA has little interest in causing more hardship than needed in the residential property market, and will likely also be cautious about the outlook for commercial real estate should it squeeze growth too hard. Banking sector metrics look extremely solid, and delinquent and past-due loans aren’t flashing any warning signs. But as we’ve learned recently in other jurisdictions, even well-regulated financial markets are not immune to adjustment problems that are associated with monetary tightening of the scale we have seen in markets like the US, the EU, or Australia. And this, perhaps, also supports a more cautious outlook on rates than that currently priced in by markets.   Unemployment and wages (%)

UK retail sales (May) – 23/06 – for an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been even more surprising so far this year. Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent rising in interest rate costs that could well start to act as a drag in H2 of this year.   In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February. The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year. For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns.

The global tourism industry has faced unprecedented challenges during the COVID-19 pandemic and companies in the sector have suffered significant losses. However, as the world recovers and travel restrictions finally come to an end, the industry is now poised for a resurgence. A successful summer season on the horizon brings new hope to the afflicted industry. As travel resumes, equity prices in the tourism and travel sector are expected to show positive momentum. The market reaction to the reopening of borders and the resumption of international travel is likely to be reflected in the share prices of companies in the industry.   While the industry is on track to recover, it is important to note that reaching pre-pandemic levels may not happen immediately for all companies. The losses incurred during the pandemic have had a significant impact on the financial position of many tourism enterprises. Some companies are still striving to recover losses and restore financial stability, but here’s a look at the prospects for individual sectors of the tourism industry:   Airlines: Companies such as Lufthansa and other major airlines have been hit hard by the pandemic. As demand for travel increases, airline shares are expected to rise. However, the recovery of airline inventories will depend on various factors, including vaccination rates, travel regulations and consumer confidence in air travel.   Online booking platforms: Platforms such as Airbnb and Booking.com are likely are likely to benefit from the resurgence of the travel industry. As travelers start planning their trips, the demand for online booking services is expected to increase. Hence, these platforms may see their stock prices rise as they gain momentum.    Hotels: The hospitality sector has faced major challenges during the pandemic. As travel resumes, hotels are expected to reopen. However, the pace of recovery may vary depending on factors such as location, travel restrictions and the ability to meet changing consumer preferences, such as an increased focus on hygiene.    In terms of the impact of inflation on the travel industry, rising prices have the potential to affect both the market and share prices. Higher prices may lead to higher spending on travel-related services, which may affect consumer behavior and demand. Companies operating in the travel industry will need to carefully manage their pricing strategy to balance profitability and affordability for customers.   When it comes to investment opportunities, it is extremely important to do a thorough research and consider various factors before making an investment decision. While the share prices of some travel companies may have risen significantly, there may still be room for growth. Further development of stock prices in the near future will depend on factors such as the pace of the global recovery, travel trends, company performance and market dynamics against the backdrop of Fed policy.

Markets have certainly reacted. In money markets, SONIA OIS pricing has shifted higher by up to 15bp since yesterday alone. A forward of 34bp higher for the upcoming meeting period implies that markets are now seeing a more than 30% chance of a 50bp hike today. The BoE reaching a terminal rate of 6% by early next year is now the market’s base case - 150bp above the current interest rate level. For comparison - and to highlight the significance of the recent shift in pricing - after the May meeting the market was looking for a peak rate of 4.75% to 5% after this summer.   The main question around this meeting for markets will be to what extent the monetary policy committee will push back against this extreme market pricing. Our economists think pushback will be unlikely. For one, the BoE appears to be just as wise about the near-term outlook of inflation as the market and is probably unwilling to pick a side for the risk of having to walk back later. And BoE officials have passed on plenty of opportunities to already do so in the recent past.     Inflation and wage data have led to aggressive market pricing of the BoE       oday's events and market view Central banks will remain in focus, certainly with the BoE meeting today as well as the Swiss National Bank and Norges Bank decisions in the broader global picture. But we also have Fed Chair Powell’s second day on Capitol Hill giving testimony to the Senate Banking panel today. Add to that a busy slate of other speakers, where from the Fed we will hear from Christopher Waller, Michelle Bowman, Loretta Mester and Thomas Barkin, while over in the eurozone, the European Central Bank's Fabio Panetta and Luis de Guindos are speaking. Given what is priced, the question is, of course, how much more can be priced in. As the UK CPI release has shown, data remains key. And given central banks' narrow focus, inflation data is particularly important. Other data feeding into investors’ concerns over the longer-term outlook, with central banks potentially taking the tightening too far, could further feed into the curve flattening bias. Today’s US initial jobless claims are expected to remain elevated after they had come in higher than expected last month. Other releases today are data on US existing home sales and the Chicago and Kansas Fed activity indices. In the eurozone we get the preliminary consumer confidence reading for June. Sovereign primary market activity today is limited to the US selling a 5Y inflation-linked bond.

EUR: European rates are going higher EUR/USD looks to be benefiting from some portfolio re-allocation since yesterday's rise was not backed up by any noticeable change in short-dated EUR:USD rate differentials. Support levels roughly held this week and the bias looks to be to 1.1010/30 above which the highs near 1.1100 beckon. Any softer US data should certainly help here. On the eurozone side, look out for June consumer confidence and another batch of European Central Bank speakers. The market looks comfortable in pricing two further 25bp hikes by year-end. Elsewhere, the Swiss National Bank (SNB) meets to set rates today. The majority of economists are going for a 25bp hike, but a sizable minority look for 50bp - primarily since the SNB only meets four times per year. Recent SNB rhetoric has remained hawkish despite core inflation dropping below 2% year-on-year. Last September, we estimated that the SNB wanted to engineer 5% nominal appreciation per year to keep the real CHF stable. That is roughly what has happened. Where we were wrong is that it has come more through USD/CHF than EUR/CHF. Expect a hawkish SNB today to keep USD/CHF offered - targeting May's 0.8820  low.

UK retail sales could surprise to the upside, flash PMIs in focus - By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets fell for the fourth day in succession yesterday, driven lower on worries that central banks will look through concerns over a slowdown in economic activity and prioritise the battle against inflation, and look set to open lower this morning.     These concerns have been magnified in recent days with last week's hawkish Fed meeting, followed by the bigger than expected 50bps rate hikes from the Bank of England and Norges Bank yesterday, as investors started to worry that creating a possible recession was likely to become a necessary side-effect in their willingness to push inflation back down to their 2% targets. Certainly, the sticky nature of core inflation is causing a great deal of anxiety not only on the part of central bankers, but also on the part of those who are due to come off fixed rate mortgages in the next 12 months. The hope is that this period of high rates could soon give way to a softening later in the year, however the big rise in core inflation suggests that we may have to endure them for quite a bit longer.     On the plus side the lowering of the energy price cap next month is already seeing energy companies writing to customers and lowering their monthly direct debits with gas prices now back at 2021 levels. This should start to see headline inflation continue to decline into the end of the year.       While concerns over a possible recession are increasing, a lot of the economic data so far thisyear has proved to be reasonably resilient, which makes the timing of yesterday's decision to be more aggressive by the Bank of England a little bit after the fact.   For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been surprising so far this year, with clothing retailer Next surprising the market earlier this week when it upgraded its full year profits forecasts on better-than-expected trading activity.   Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent increase in interest rate costs that are likely to act as a drag in H2 of this year. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February.   The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year.   For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns. We also have the latest flash PMI numbers for June which are likely to continue to exhibit one of the more notable trends we've seen in recent months, which has been an ongoing divergence between services sector activity and manufacturing activity.   This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Both of these are expected to remain close to current levels.   Services continue to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56. Again, these are expected to come in slightly weaker at 52.1 and 56.3.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling, coming at 47.1 in May, while services also slowed to 55.2 from 55.9. UK manufacturing is expected to soften to 46.8 and services to 54.8.     Lower fuel costs may offer some support here; however, most service providers are struggling with higher costs, which by and large they are having to pass on.    EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – spiked up to 1.2850 yesterday before slipping back, however it remained above the lows this week at the 1.2680/90 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510, but needs to clear 1.2850.      EUR/GBP – failed between the 0.8630/40 area before slipping back. The main support is at least weeks low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally cracked the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 27 points lower at 7,475     DAX is expected to open 120 points lower at 15,868     CAC40 is expected to open 53 points lower at 7,150

UK retail sales bounce, but recession risk is rising amid rate hikes The worst is probably behind us for UK retailers, but with the Bank of England poised to hike at least a couple more times, we think the risk of a recession is rising.   UK retail sales rose fractionally in May, suggesting the additional bank holiday for the King’s Coronation had only a modest impact on the economy. Sales were up by 0.3% on the month, including fuel, and that saw weaker food sales around the bank holiday offset by stronger online spending, which the ONS puts down to the warmer weather. Indeed weather seems to have been a key driver of recent month-on-month sales volumes, which otherwise have essentially flatlined in real terms for a number of months now. None of this necessarily means UK GDP won’t temporarily contract during May, and evidence from last year’s two additional bank holidays points to a hit of roughly half a percent of monthly output, with the impact concentrated in various services industries. But the recent trend in retail activity suggests the worst is behind us for UK retailers, at least for now. A simple mapping of real wage growth against sales points to a very modest rebound in volumes over the coming months. The recent recovery in consumer confidence points this way too.   Improving real wage growth points to modest retail sales growth     None of this is particularly consequential for the Bank of England, where this week’s meeting made it abundantly clear that policymakers are focused on actual inflation and wage data, and probably not a lot else. We felt Thursday’s statement marked a subtle but important sea-change in the Bank’s thinking. So far this year it felt like the Bank wanted to tread more carefully having tightened a lot in a short period of time, and would watch a broad range of leading indicators, not just CPI itself, to guide policy. That’s still probably true, but June’s meeting – and the fact that seven members voted for a 50bp rate hike – signalled that the BoE is running out of confidence and patience in both its models, as well as surveys and other leading inflation metrics, both of which have pointed to improving inflation outcomes for a little while now. While we aren’t convinced the Bank will do another 50bp rate hike in August, we suspect it’s unlikely to be satisfied with only one more 25bp move. That suggests we should expect at least one 25bp hike in both August and September. But that would suggest the risk of recession is growing. Mortgage rates at 6% roughly equate to repayments of close to 40% of disposable income for the average consumer. The feed-through is gradual given that a relatively small share of mortgages refinance each quarter, but assuming rate cuts don’t come until the middle of next year, then that still translates into a large hit to household incomes over time. We’re also becoming more nervous about corporates – particularly small businesses – which are more commonly on variable rate debt and will have seen rate hikes pass through more rapidly.

US While Europe appears at great risk for a recession as traders bet on aggressive rate rises by all the European central banks, the Fed is still expected to be nearing the end of their respective rate hiking campaign.  The focus in the US will fall on the PCE readings. If inflation comes down as expected, the swap futures might grow even more confident that the Fed will only deliver one more rate hike.  Wall Street will also pay close attention to the Conference Board’s consumer confidence reading, which is expected to show a modest rebound.  Friday’s Personal income and spending data will also be closely watched as incomes continue to grow, while spending softens. Fed’s Williams speaks at the Bank for International Settlements on Sunday.  Fed Chair Powell heads to Europe and speaks at the ECB’s global banking forum in Portugal.  The Fed will also release the results of their annual banking stress tests.   Eurozone There’ll be a lot of attention on ECB President Christine Lagarde’s appearances early in the week, particularly in light of what we’ve seen recently with central banks continuing to raise interest rates amid stubborn inflation. But it’s the flash HICP data on Friday that investors will be most interested in. The ECB recently warned that it will take a significant improvement in the data to avoid another rate hike next month and another repeat performance of the May report could be just that. Instead, we’re expected to see a small move in the other direction as base effects become less favourable for a couple of months, enabling the ECB to hike again in July before reassessing the situation in September. Inflation data from individual countries earlier in the week may offer some insight into what we can expect on Friday.   UK In light of the Bank of England decision to hike interest rates by 50 basis points last week, focus will be on what MPC members have to say. There’s been a lack of unity for months but that was increasingly evident at the June meeting. Going forward, the decisions aren’t going to get easier which means there’s likely to be less unity, rather than more. It won’t take many votes to pause the tightening cycle and so, despite the clear inflation problem, comments from MPC members will become increasingly scrutinized.   Russia A few data releases on the agenda next week including unemployment, retail sales, industrial output and monthly GDP.  

US While Europe appears at great risk for a recession as traders bet on aggressive rate rises by all the European central banks, the Fed is still expected to be nearing the end of their respective rate hiking campaign.  The focus in the US will fall on the PCE readings. If inflation comes down as expected, the swap futures might grow even more confident that the Fed will only deliver one more rate hike.  Wall Street will also pay close attention to the Conference Board’s consumer confidence reading, which is expected to show a modest rebound.  Friday’s Personal income and spending data will also be closely watched as incomes continue to grow, while spending softens. Fed’s Williams speaks at the Bank for International Settlements on Sunday.  Fed Chair Powell heads to Europe and speaks at the ECB’s global banking forum in Portugal.  The Fed will also release the results of their annual banking stress tests.   Eurozone There’ll be a lot of attention on ECB President Christine Lagarde’s appearances early in the week, particularly in light of what we’ve seen recently with central banks continuing to raise interest rates amid stubborn inflation. But it’s the flash HICP data on Friday that investors will be most interested in. The ECB recently warned that it will take a significant improvement in the data to avoid another rate hike next month and another repeat performance of the May report could be just that. Instead, we’re expected to see a small move in the other direction as base effects become less favourable for a couple of months, enabling the ECB to hike again in July before reassessing the situation in September. Inflation data from individual countries earlier in the week may offer some insight into what we can expect on Friday.   UK In light of the Bank of England decision to hike interest rates by 50 basis points last week, focus will be on what MPC members have to say. There’s been a lack of unity for months but that was increasingly evident at the June meeting. Going forward, the decisions aren’t going to get easier which means there’s likely to be less unity, rather than more. It won’t take many votes to pause the tightening cycle and so, despite the clear inflation problem, comments from MPC members will become increasingly scrutinized.

Australia Two key data to focus on to gauge the next move on RBA’s monetary policy stance where it has reiterated its current tightening mode on last week’s release of RBA June meeting minutes. On Wednesday, the monthly CPI Indicator for May is expected to come in at a slower growth rate of 6.1% year-on-year from 6.8% in April. If it turns out as expected, it will be the lowest level of inflation growth since March 2023. On Thursday, preliminary retail sales for May is expected to show a growth of 0.1% month-on-month after zero growth recorded in April. As of 23 June, the pricing on the ASX 30-day Interbank Cash Rate futures July contract has indicated a 32% chance of a 25-bps hike in the next RBA monetary policy meeting on 4th July 2023 to bring the cash rate up to 4.35%.   New Zealand 2 key data to focus on; Business Confidence for June out on Thursday where the forecast is calling for a slight improvement to -28 from -31.1 in May. On Friday, Consumer Confidence for June is forecasted to dip to 77 from 79.2 recorded in May, if it turns out as expected, it will be the lowest level since December 2022.   Japan Several key data to pay attention to. On Monday, the Bank of Japan (BoJ)’s Summary of Opinions. Retail sales for May will be released on Thursday where the consensus estimates are calling for a rebound to 5.4% year-on-year from 5% in April. Consumer confidence for June will also be released on the same day with an improvement to 38 being forecasted from 36 recorded in May. If it turns out as forecasted, it will be the 5th consecutive month of improvement in Japanese consumer sentiment. Lastly, on Friday, we will have the all-important leading Tokyo area inflation data for June. Pay close attention to Tokyo’s core-core inflation rate (excluding fresh food & energy) that accelerated in May to 2.4% year-on-year, close to a 31-year high. If it continues to surge higher in June, it will run counter to BoJ’s latest guidance that has indicated that Japan’s inflation growth is at risk of a slowdown in the second half of the current fiscal year.   Singapore Industrial production for May will be released on Monday, a further deceleration is expected to -7.2% year-on-year from -6.9% printed in April. If it turns out as expected, it will mark eight consecutive months of contraction of industrial production given the slowing external demand environment. On Thursday, we will have PPI for May for a further deflationary spiral in producers’ prices is being forecasted at -12.4% year-on-year from -11.4% in April.  

Higher start expected for Europe as we drift towards quarter end    Despite weekend events in Russia, European markets proved to themselves to be reasonably resilient yesterday, finishing the day mixed even as the DAX and FTSE100 sank to multi week lows before recovering.     US markets didn't fare much better with the Nasdaq 100 sliding sharply, while the Russell 2000 finished the day higher. While equity markets struggled to make gains there wasn't any sign of an obvious move into traditional haven assets which would indicate that investors had significant concerns about what might come next.     If anything, given how events have played out over the last few years, and the challenges that have faced global investors, the view appears to be let's worry about what comes next when and if it happens, rather than worrying about what might happen in what is becoming an increasingly fluid geopolitical situation.   Bond markets appeared sanguine, as did bullion markets with gold finishing modestly higher, while the US dollar finished the day slightly lower, ahead of the start of this week's ECB central bank forum in Sintra, Portugal which starts today.     Oil prices found themselves edging higher yesterday, largely due to uncertainty over the weekend events in Russia given its position as a key oil and gas producer.   The prospect that we might see supply disruptions if the geopolitical situation deteriorates further may have prompted some precautionary buying. While the crisis appears to have passed quickly the fact that it happened at all has been a bit of a wakeup call and raised some concerns about future long term political stability inside Russia.     One other reason for the so far muted reaction to recent events is that we are coming to the end of the month as well as the first half of the year, with investors indulging in portfolio tweaking rather than any significant shift in asset allocation.   With H2 fast approaching the key decisions are likely to involve determining how many more rate rise decisions are likely to come our way, and whether we can avoid the prospect of a recession in the US.   As far as the UK is concerned it's going to be difficult to see how we can avoid one, having just about avoided the prospect at the end of last year, while the EU is already in one. The US continues to stand out, although even here there is evidence that the economy is starting to slow.     On the data front there isn't much in the way of numbers before the back end of the week and various inflation numbers from Germany, France and the EU, as well as the US. Today we have the latest US durable goods numbers for May, as well as housing data for April and May, which are expected to show signs of softening, and consumer confidence numbers for June. Consumer confidence has been one area which has proved to be the most resilient edging up in May to 102.3. This is expected to continue in June to 103.90, in a trend that appears to be matching the resilience of the labour market.     EUR/USD – not much in the way of price movement yesterday, with resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which is acting as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – quiet session yesterday but still holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – struggling for momentum currently having failed at the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – while above the 142.50 area, the risk is for a move towards 145.00. This support area which was the 61.8% retracement of the 151.95/127.20 down move, needs to hold or risk a return to the 140.20/30 area. as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 22 points higher at 7,475     DAX is expected to open 30 points higher at 15,843     CAC40 is expected to open 20 points higher at 7,204

The monetary policy dilemma when markets won't listen The second, related, point is that it is debatable how much central banks can really tighten monetary policy on their won in a data-dependent regime. There has clearly been a reappraisal of global central banks’ reaction functions in June, but the result has been much flatter yield curves. To the extent that this is a symptom of higher short-end rates and unchanged long-end rates, this is a net tightening of financial conditions, an albeit a disappointingly limited one. The problem arises when, even as short-end nominal rates rise, long-end real rates drop. Taking EUR 5Y5Y real rates as an example, they have dropped 40bp since their peak a month ago, hardly a tightening of financial conditions.   What’s more, risk assets have taken the recent change of central bank tone in their stride, see for instance the spectacular tightening of sovereign spreads. The ECB may well gush that its policy stance is well transmitted, tighter sovereign and credit spreads suggest the cost of funding remains affordable for the economy. This is good news, but also suggests that a more hawkish stance is needed to yield results, but with increasing downsides. This is the choice faced by central bankers at this week’s Sintra conference: chase the diminishing returns of a hawkish stance, or accept that a lot of the financial variables responsible for ultimately supressing inflation are beyond their control.     Risk assets have taken the more hawkish central bank tone in their stride   Today's events and market view The data calendar this morning is dominated by Italian sentiment indicators, followed in the afternoon by US durable goods orders, house prices, new home sales, conference board consumer confidence, and the Richmond Fed manufacturing index. The ECB’s Sintra conference is underway with interventions scheduled by President Lagarde, and Dhingra and Tenreyro from the Bank of England. More curve flattening is on the cards if central banks continue to push the hawkish envelope, at the expense of a slowing economy. This may take the form of a bear-flattening, however, given the recent fall in rates. The weekly ECB MRO allotment will be in focus as the facility might be used by some banks to finance the repayment of TLTRO loans. Bonds supply will come from the Netherlands (30Y), Italy (3Y/7Y), and the UK (10Y Linker). The German federal state will publish its third quarter funding update.

FX Daily: Hawkish Sintra kicks off The ECB Symposium in Sintra starts today, with an introductory speech by Lagarde plus remarks from other ECB members. A generally hawkish tone should come from all sides: the eurozone (despite a worsening growth outlook), the UK (despite the mortgage crisis) and the US. We’ll also monitor the speech by Norges Bank Governor today and Canada’s CPI numbers.   USD: Slightly weaker into Sintra The week has started on a rather quiet tone across most asset classes. The dollar is trading softer against the pro-cyclical currencies, a sign that the FX market has also fully overlooked the weekend crisis in Russia. As highlighted in yesterday’s FX Daily, investors are fully focused on the central bank story, and with the FOMC and post-FOMC hawkish messages having now been absorbed, we are transitioning to a period where data will tell investors whether there is any need to push tightening expectations beyond the one rate hike priced in for July. The notion of first and second-tier data releases is a bit more muffled in an environment where markets are spasmodically looking for evidence of disinflation and/or economic slowdown. We will see a gradual intensification in the US data release calendar in the coming days, which will culminate with ISM services and payroll data on 6 and 7 July; and then June CPI figures on 12 July. Zooming back into this week, the Conference Board consumer confidence data today will be the highlight of the day, although some focus will also be on May’s Durable goods orders and new home sales, and on June’s Richmond Fed Manufacturing index. Consensus expectations point to a relatively firm set of numbers, and we see no reasons to strongly disagree. Considering the low likelihood of a dovish turn by Fed Chair Jerome Powell at his Sintra speech tomorrow, an acceleration in the dollar decline does not seem very likely.

Today's daily CNY fixing will be watched closely to see how much pushback the authorities will deliver after the recent CNY weakness. Industrial profit data for China are also on the calendar, as well as lower Australian May inflation numbers.     Global Macro and Markets Global markets: China’s daily CNY fixing was lower (stronger) yesterday, suggesting that the authorities felt that the pace of CNY depreciation had been a little too fast, or had gone on too long without any correction. The CNY traded in a much flatter range yesterday and is 7.2242 currently, well off the 7.24 peak on Monday. Today’s fix may hint whether the PBoC is more concerned about the level, or the rate of change in the currency. The USD lost some ground yesterday, and EURUSD traded up to 1.0977 before settling back to 1.0957. The AUD tried to go higher yesterday but hit a barrier at 0.6720 and has returned to 0.6682, little changed from a day ago. Cable made some modest gains, rising to 1.2747. But the JPY lost some further ground, drifting up to 143.90 amidst a lot of talk about intervention. For the most part, Asian FX gained against the USD yesterday, and the PHP led these gains, moving down to 55.32. The KRW also got back to 1300, and the SGD followed, dropping to 1.3496. A brighter session in US equities overnight may help Asian FX make further gains today. The S&P 500 rose 1.15% and the NASDAQ gained 1.65% making it one of the strongest sessions in the last few weeks. Semiconductor stocks did well, but so too did household items producers, auto manufacturers, steel producers and homebuilders after strong durable goods orders data and consumer confidence figures.  Chinese stocks also did well. The CSI 300 rose 0.94% and the Hang Seng index rose 1.88%. The stronger data and improved risk sentiment lifted US Treasury yields. 2Y yields rose 7.5bp to 4.755%, while the yield on 10Y Treasury bonds rose 4.3bp to 3.764%.   G-7 macro: Contrasting with the expectation for a decline, May durable goods orders actually rose 1.7%MoM, with core capital goods orders rising 0.7% and upwards revisions to April data showing that US industry is not as battered as might have been imagined after all the monetary tightening. Consumer confidence figures from the Conference Board were also considerably better than expected, and some of the regional manufacturing surveys also came in stronger than the previous month. US house price data also firmed. There is less on the calendar today, with only mortgage applications, inventory figures and advance trade balance numbers to peruse.   China: Industrial Profits are expected to weaken further in May after their 18.2%YoY decline in April (-20.6%YTD YoY%). Ongoing slowdowns in manufacturing together with falling factory gate prices will weigh on the May numbers.     Australia: May CPI inflation will fall from the 6.8%YoY April rate to only 6.2% (INGf, consensus 6.1%YoY). The decline mostly owes to strong month-on-month gains last year not being replicated this year. We anticipate the month-on-month increase came in at around 0.2%, which if it could be sustained, would take inflation back to the RBA’s target range. The lower May inflation rate will, we think, be enough to keep the RBA on hold in July after they hiked in June. But August may see a further, and hopefully, final rate hike as electricity tariff increases will keep inflation from falling much further, and could provide an excuse to hike due to slow progress.   What to look out for: Australia CPI inflation (28 June) Philippines bank lending (28 June) US MBA mortgage applications and wholesale inventories (28 June) Fed’s Powell speaks (28 June) Japan retail sales (29 June) Australia retail sales (29 June) US initial jobless claims and pending home sales (29 June) Fed’s Powell and Bostic speak (29 June) South Korea industrial production (30 June) Japan labour market data (30 June) China PMI manufacturing (30 June) US personal spending and Univ of Michigan sentiment (30 June)        

The Commodities Feed: Positive US macro data increases likelihood of further rate hikes Oil prices came under pressure yesterday despite better-than-expected macro data from the US. The oil market instead is focused on the implications of this stronger data - the potential for further rate hikes.   Energy - Brent-Dubai spread flip The oil market sold off quite aggressively yesterday following a raft of stronger-than-expected data from the US with durable goods orders surprisingly climbing in May. New home purchases also came in much better than expected, whilst consumer confidence rose to its highest level since early 2022. This strong set of data once again suggests that the Fed will likely have to hike rates further, which is obviously aligned with Jerome Powell’s testimony last week. Equity markets took the data as a positive sign. However, the oil market did not. ICE Brent settled almost 2.6% lower yesterday.   Overnight the API released weekly US inventory numbers which showed that US crude oil inventories fell by 2.41MMbbls over the last week, which is more than the roughly 1.5MMbbls decline the market was expecting. As for refined products, gasoline inventories fell by 2.85MMbbls, while distillate fuel oil stocks increased by 780Mbbls. The more widely followed EIA report will be released later today.   The Brent-Dubai spread has continued to see significant weakness over the last month  - a trend that has been at play since late last year. However, the spread now sees Brent trading at a discount to Dubai. This is fairly unusual, as the Dubai benchmark reflects a lower quality of crude oil relative to Brent. OPEC+ supply cuts have played an important role in the narrowing of the spread, while the expectation that Saudi Arabia may extend its additional voluntary cut of 1MMbbls/d beyond July will also be contributing to the relative strength in Dubai. However, the move in the spread should see Asian buyers looking to the Atlantic Basin for cheaper barrels.    

Yen in focus as it falls to multiyear lows   After 6 days of declines, European markets managed to break their recent losing streak yesterday, closing marginally higher after a day when the direction could have gone either way. The catalyst for the recovery off the day's lows was a strong US session which was driven by two sets of strong US economic numbers. US consumer confidence for June hit its highest levels in 17 months, while new home sales jumped by 12.2%, the highest number in over a year. If the US economy is starting to struggle then there is little evidence of that in yesterday's numbers, which in turn helped drive a strong finish for US markets, led by the Nasdaq 100.     Yesterday's resilience came in spite of another slide in crude oil prices, which have continued to suffer under the weight of concerns about a slowing global economy and a drop in demand over the second half of the year. The increased stridency of hawkish central bank rhetoric coming out of Sintra in Portugal at the ECB central bank conference, when it comes to future rate hikes is helping to drive yields higher, yet stock markets appear unfazed.     Yesterday we heard from several ECB governing council members, including President Christine Lagarde pushing back against the idea of rate cuts in 2024, as well as signalling a commitment to another rate hike at the July meeting. This seems set in stone now, although this week's June flash CPI number might cast some doubts as to whether the rate hikes might continue beyond July. Today's speaker slate at Sintra could well create more headlines with the likes of Bank of England Governor Andrew Bailey, Bank of Japan governor Kazuo Ueda, Fed chair Jay Powell and Christine Lagarde speaking on a panel discussing monetary policy.     Of particular interest will be any comments from Governor Ueda given the declinesseen in the Japanese yen over the past few days, seeing it sink to 15-year lows against the euro, as well as 8-year lows against the pound, and record lows against the Swiss franc in the last 24 hours. We've already heard from Japanese Finance Minister Suzuki in the last couple of days warning that excessive movements in the yen might prompt an appropriate response. While yen traders are focussing on the 145.00 area against the US dollar it can't have escaped their attention that their currency is getting hit even harder away from the spotlight of the greenback. If a response is coming it could well come soon.     Staying with currencies the Australian dollar plunged overnight after headline CPI slowed sharply on May from 6.8% to 5.6%, well below forecasts of 6.1%, and with the RBA meeting next week this slowdown could prompt the central bank to re-pause the pace of the current rate hiking cycle.   After the European close we also get the latest results from the US bank stress tests, which couldn't be more timely given recent events in March, however they aren't likely to offer much insight into what took place, as the US regional banks were not covered under the various scenarios, as they were considered too small and not systemically important enough. This was a major oversight, as recent experience in Europe has taught us, and particularly in Spain over 10 years ago, where a large cohort of Spanish Cajas nearly brought the economy to its knees and resulted in a banking bailout. Just because a bank is small doesn't mean it won't cause a financial meltdown if its troubles spread. The tests also had a rather big flaw in them in that they didn't factor a sharp rise in interest rates into any of the scenarios, the very scenario that started the dominos tumbling with the collapse of SVB.     EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area. We have resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.     GBP/USD – a positive session yesterday holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – appears to be building up to move higher but needs to move through the 0.8630/40 area. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.      FTSE100 is expected to open 19 points higher at 7,480     DAX is expected to open 45 points higher at 15,892     CAC40 is expected to open 25 points higher at 7,240       By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Strong data and soft inflation boost appetite US stocks shrugged off the early week pessimism on the back as of a set of strong economic data released yesterday.   The durable goods orders rose – along with strong jobs data, this is a sign that the US businesses are not in cash-saving mode, Richmond manufacturing index fell less than expected, house prices recovered and house sales beat expectations – in line with the rest of the strong data from US housing market over the past few weeks. US consumer confidence jumped more than expected in June, to the highest level since the beginning of last year.     We would've normally expected sentiment to be dampened by strong data because of more hawkish Federal Reserve (Fed) expectations, but the S&P500 jumped more than 1%, Nasdaq rallied almost 2%, while the Russell 2000 advanced around 1.5%.      Easing inflation is maybe why stock investors are happy with strong data The Australian inflation fell to a 13-month low, and the Canadian inflation fell more than expected, in a sign that the central bank efforts to pull prices lower is paying off. The AUDUSD was sharply sold below its 50-DMA which stands near the 0.6680 level, while the USDCAD rebounded off a fresh low since September on the back of soft inflation and a 2% fall in crude oil prices.   Across the Atlantic Ocean, some encouraging news came in regarding inflation, as well. The British shop prices dipped to 8.4% this month, down from 9% recorded in May. That was the sharpest decline in prices since the end of 2021 – when prices took a lift, and it was not thanks to the Bank if England (BoE) hikes, but it was because Tesco, Sainsbury's, Asda and Morrisons were asked to 'behave' in their pricing to prevent them from passing the higher costs, and higher wages on to their clients more than necessary. So, it is possible that Jeremy Hunt rolling up his sleeves would be more effective to bring inflation down than any BoE hike at this stage.   The good news for the Brits is that, Rishi Sunak and Jeremy Hunt have all the motivation in the world to bring inflation down if they don't want to be minced at next year's election. The bad news is that, if they don't achieve fast results, they will still be minced because the BoE will continue hiking rates and that will leave millions of households facing an enormous rise in their housing costs.   And the Bank for International Settlements, known as the central bank of the central banks, warned that the final stretch of the monetary tightening will likely be the toughest, with some 'surprises' on the way. Another banking crisis, real estate chaos, a financial crisis? We will see. Today, the Fed will reveal the result of its stress test for the banks. If they see no issue, they will keep pushing, until something breaks.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank

Global bond yields rise; 10-year Treasury rises 4.1bps to 3.762% Consumer Confidence hits highest levels since January 2022 Dow eyes first gain in 7 trading days   US stocks are bouncing back after some strong US economic data gave a boost to consumer discretionary stocks and as investors piled back into AI trades. The losing streak had to end, but that doesn’t mean the market will resume.     US data There was a lot of US economic data released today and the key takeaway was that the economy is not breaking just yet. The first key reading was durable goods and that surged, but the reason behind that was due to strong aircraft orders. The overall trend is expected to be softer, going forward as higher, borrowing costs and tighter lending from banks, will dampen demand. We also got a couple housing reports, the case Shiller report showed home prices are stabilizing as prices recover, mainly because there’s just not enough supply. New home sales impressed with a buying spree that hit the highest levels in more than a year. The main event was the Conference Board’s consumer confidence report which surged 7.2 points to 109.7, the best reading since January 2022. The strong consumer confidence report will likely suggest expectations are not for the labor market to deteriorate quickly, which should confirm expectations that a recession will not happen this year, but most likely next.     We also saw a couple fed regional surveys, the Richmond Fed manufacturing index remained in negative territory, and so did the Dallas Fed’s services activity report, which is in line with the other federal regional surveys. Overall the US economy is still chugging along, and that will complicate the disinflation process for the Fed. ​ Swap futures are still expecting one more rate hike by the Fed.  

FX Daily: How “contagious” are Sintra's hawks? The ECB’s message in Sintra has been firmly hawkish and has helped the euro. Today, a panel with Lagarde, Powell, Bailey and the BoJ’s Ueda will tell us if other major central banks will follow such hawkish rhetoric. It should be the case for Powell (backed by strong data) and Bailey (too early to push back against hike bets), but is Ueda ready to talk up the yen?   USD: Room for rebound The dollar has traded on the soft side since the start of the week, but US data has come in on the strong side, which makes us reluctant to think the dollar has much further to fall in the second half of the week and ahead of today’s Sintra speech by Federal Reserve Chair Jerome Powell.   Yesterday, all US data releases beat consensus. Durable goods orders rose in May despite expectations for a drop and the S&P Case Shiller US house price index rose for a third month in a row in April as tight supply keeps prices supported despite weak buyer demand in response to surging mortgage rates. Home sales also rose more than expected and consumer confidence jumped to 109.7, the highest since January 2022 (despite being considerably below pre-pandemic levels). Today, the US data calendar is lighter: MBA mortgage applications and wholesale inventories.   While those are not the set of data points either the markets or the Fed primarily focus on, they surely point to some resilience in key parts of the US economy and would underpin a reiteration of a hawkish message by Powell today. That would probably take the shape of a further endorsement of dot plot rate hike projections (two more before the peak) with potentially an additional pushback against rate cuts.   Markets continue to price only another 28bp of tightening and a 73% implied probability of a July hike, so there is still ample room for a hawkish repricing in the USD curve. We’d be cautious when jumping on a dollar bear trend before the data gives a more solid basis to justify the market's dot plot gap.

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.

Global manufacturing hubs; South Korea, Singapore & China continued to indicate a weaker external demand environment. Several key stock markets; US & Japan are on bullish footing, ignoring global recession risk. Higher US consumer confidence & more positive earnings guidance are required to maintain the bullish animal spirits. Higher cost of funding & a deeply inverted US Treasury yield curve are key hurdles for the bulls. The great divergence continues between the state of the real global economy and risk assets such as equities. Latest data from key global manufacturing hubs in Asia have indicated more potential weakness ahead in the external demand environment for the second half of 2023. South Korea, a key provider of semiconductors and smartphones for the global economy saw its latest full monthly exports figure decline to -6% year-on-year in June, a lower magnitude of -15.2% recorded in May but lower than expectations of a 3% drop. Overall, it’s nine consecutive months of contraction for South Korea’s exports. In addition, soft data from South Korea’s Manufacturing PMI which tends to have a lead time over exports figures has remained in contraction mode for twelve consecutive months; it fell to 47.8 in June from 48.4 in May. Data from China’s Caixin Manufacturing PMI which provides coverage for small and medium enterprises fared slightly better than the official NBS Manufacturing PMI for June but remained lackluster; it dipped to a neutral level of 50.5 from 50.9 recorded in May and came in slightly above expectations of 50.2. Singapore’s non-oil domestic exports (NODX) slumped by 14.7% year-on-year in May, worse than forecasts of an 8.1% decline after a 9.8% reading in April; so far it has marked its eighth consecutive month of contraction.   US Nasdaq 100 and Japan Nikkei 225 were star performers in H1 2023   Fig 1: Key cross-assets performances as of 30 Jun 2023 (Source: TradingView, click to enlarge chart   Fig 2: Nasdaq 100 long-term secular trend as of 30 Jun 2023 (Source: TradingView, click to enlarge chart) In contrast, several major benchmark stock indices have continued to shrug off these “real negative growth backdrop”, entered bull market territories, and staged stellar performances. The top performer was the US Nasdaq 100 assisted by the Artificial Intelligence (AI) equity theme play rocketed to a gain of 38.75% in the first half of 2023 and outperformed the MSCI All-Country World Index which recorded a positive return of 13.03% over the same period. Japanese equities also performed well in the first half; the Nikkei 225 rallied by 27.19%, and the bulk of H1 2023 gains came from Q2 (+18.36). Thanks to a change in corporate governance that favoured shareholders’ activism, lower valuation over the US stock market, and rosy foreign funds’ inflows reinforced by prominent value investor, Warren Buffet’s increased stakes in several major Japanese trading firms made over the first six months.     In contrast, other Asian stock markets in general have been trapped in a muted tone due to a slowing China economy after a diminished growth spurt from the removal of stringent Covid-19 lockdown measures and rather lukewarm monetary and fiscal stimulus measures being implemented at this juncture. The MSCI All Country Asia ex-Japan has managed to score only a meagre gain of 2.55% in the first half, which still has a significant gap to cover to recoup its annual loss of -21.66% posted in the prior year. Over in Europe, Germany’s DAX managed to squeeze an H1 2023 return of 15.98% but do take note the bulk of its gain came in Q1 as the lackluster external growth environment has triggered a negative ripple effect where the DAX’s Q2 performance only stood at 3.32% that’s a huge gap of around 1,180 basis points over Nasdaq’s Q2 return of 15.16%. Markets are always forward-looking, around the end of Q1 2023, the bullish camp for equities had a “Fed Pivot” narrative where there were significantly high odds being priced into the Fed funds futures market that advocated rate cuts of 75 bps to 100 bps in the second half of 2023. Right now, given the Fed’s latest monetary policy guidance is to have “higher interest rates for longer periods”, rate cuts pricing in the futures market for H2 has evaporated, and even though further hikes may not be implemented in 2024 after two more hikes on the Fed funds rate that are being priced in before 2023 ends to bring its likely terminal rate to 5.50% to 5.75%, the start of an easing cycle may only kick in during the second half of 2024 based on latest data from CME FedWatch tool at this time of the writing. Thus, with the liquidity punch bowl being taken away for now. What are the possible catalysts that can continue to drive the positive animal spirits in the US stock market that can increase the odds of spreading to the rest of the world?   Higher consumer confidence and better-than-expected earnings guidance So far, US consumer confidence has been trending up modestly since July 2022. The final June reading of the University of Michigan Consumer Sentiment Index has been revised higher to 64.4, its highest level in four months. Higher consumer confidence tends to lead to higher consumer spending in the US where the US consumers may take on a similar pre-pandemic role of the “global consumer” for goods and services. Q2 2023 earnings reporting season in the US will go full fledge in around two weeks. Based on FactSet data as of 30 June 2023, its estimated earnings decline compiled from analysts for the S&P 500 is at -6.8% year-on-year, a further drop from Q1’s -2% y/y. The key will be the number of positive earnings forward guidance from the cyclical sectors such as Industrials and Consumer Discretionary to take over the baton from Information Technology. So far, there is more positive earnings guidance for FY 2023/2024 in Industrials as the mix is 65% positive and 35% negative whereas else Consumer Discretionary share of positive guidance is only 48% (52% negative).   Higher cost of funding and a deeply inverted US Treasury yield curve are key hurdles for the bulls The bond market seems to be not “buying” into the H1 2023 bullish narrative seen in the stock market. On the last trading day of H1, the US Treasury yield curve spread (10-year minus 2-year) continued to invert deeply to -1.06%, its lowest level since March during the onset of the US regional banking turmoil which indicates an increase odd of a hard landing in the US economy coupled with a higher level of interest rates environment for a longer period that can drive up the cost of leverage and borrowings for corporates and depress profit margins. If such a scenario materializes, current lofty bullish expectations in the US stock market may see a swift downward adjustment that is at risk of spreading to the rest of the world, and to prevent such occurrences, perhaps China needs to implement more aggressive expansionary monetary and fiscal policies to fill up the liquidity punchbowl given that inflationary pressures are benign in China.  

Market rates are feeling the pressure. Risk assets have been bought into, and inflation is not calming fast enough. Central banks are piling further pressure on them. The US 10yr Treasury yield won't look right until it hits 4% and can take out the prior high. The 10yr Bund yield should get back to 2.75%, at least, and can still look up, possibly to about 3%   The journey for 10yr rates is back to March highs Market rates peaked in March this year. At the time, there was what looked like a relentless rise in rates underway, only to be undercut by the sudden and unexpected implosion of Silicon Valley Bank (SVB), with echoes in Europe as Credit Suisse was forced into a merger. There have been ripples of concern since, but apart from another few manageable banking causalities in the US, there has been a calming of nerves. In fact, we managed to morph from a state of material concern for the system to one of outright 'risk-on'. The coincident rise in market rates is an outcome of this. Plus there's sticky inflation in both Europe and the US (and beyond), and in the US an economy that just won’t lie down. So where now? On the one hand, forward-looking indicators are in a recessionary state, small bank vulnerabilities remain, and lending standards are tight. The eurozone has moved into a state of technical recession, and China is showing only a subdued reopening oomph. That, together with the cumulative effects of rate hikes already delivered, plus the negative real wage growth environment, should ultimately place material downward pressure on market rates as we progress through the second half of 2023. A peaking out for official rate hikes from both the Federal Reserve and the European Central Bank in the coming months would mark an important point in the cycle. From that point on, market rates should be on the decline, and yield curves should be in a dis-inversion mode. But we are not at that point just yet. The latest US 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. In the eurozone, there has been a material easing in inflation rates, but the headline reading is still high, at 5.5%. UK inflation seems to have stopped falling, but it is still close to 9%, requiring the Bank of England to re-accelerate hikes. In the US, the latest consumer confidence number for June popped back out to 109.7 (versus 100 at neutral). All of this places upward pressure on market rates, and these factors are likely to sustain the upward pressure, at least for as long as an underlying oomph factor remains in play.  

Against a backdrop of tense social conditions and despite a disinflationary trend that is well underway, the outlook for the French economy remains weak. We forecast 0.5% growth in 2023 and 0.6% in 2024. The French economy has started the year better than other European countries In the first few months of 2023, the French economy held up a little better than the other eurozone countries, with GDP rising by 0.2 in the first quarter, after a period of near stagnation in the second half of 2022. After a sharp fall at the end of 2022 against a backdrop of high inflation, household consumption has stabilised, but this stabilisation is partly artificial. As the government reduced its support for energy consumption, public energy consumption fell, while household energy consumption was recorded as rising, offsetting the sharp fall in food consumption (to its lowest level for 23 years). At the same time, investment fell sharply, weighed down by rising interest rates. The global economic slowdown has also weighed more heavily on French exports. Tense social climate keeps confidence at a very low level The first few months of the year were marked by a tense social climate, with numerous demonstrations against pension reform in the spring, followed in the early summer by riots in some localities after a young man was killed by a police officer during a checkpoint. Although the microeconomic impact of these events may be significant for some sectors at the time, the effects are generally offset later. Studies have shown that the macroeconomic impact is generally very limited, removing a maximum of 0.1 or 0.2 points from annual growth. Nonetheless, these events monopolised attention and probably helped to keep consumer confidence at a historically low level, and the household savings rate well above its long-term average. Against a backdrop of persistently high inflation, rising interest rates and a less expansionary fiscal policy, this is contributing to weak momentum in domestic demand, which is likely to persist over the coming quarters. Given President Emmanuel Macron's lack of a majority in parliament, a tense and divided social and political context is likely to remain the norm over the next few years and will continue to slow down or prevent the implementation of important reforms. The pension reform, which raises the retirement age from 62 to 64, will come into force in autumn 2023.    

The Portuguese economy, driven by strong export dynamics in the first quarter, is expected to face a significant slowdown due to a weakening global economic context and rising financing costs. Although a further decline in inflation is expected, the inflation slowdown is hampered by increased wage growth.   Strong first-quarter growth will not be sustained In the first quarter, the Portuguese economy experienced 1.6% quarter-on-quarter growth, primarily driven by robust export dynamics. However, this positive momentum will be increasingly challenged by the tightening of monetary policy. As households and companies become more cautious about taking on new loans, consumption and investment will slow down. The coordinated tightening of global monetary policy will also contribute to weaker global growth prospects, which will dampen Portuguese export dynamics –an essential driver of economic growth in the first quarter. Despite numerous interest rate hikes, we maintain a positive growth scenario. For the second quarter, we still anticipate growth of 0.4% quarter-on-quarter, which is expected to decrease further to 0.2% in both the third and fourth quarters of this year. Positive factors such as favourable labour market developments, increased inflows of European funds, government measures to support income, and a thriving tourism sector partially mitigate the impact of higher interest rates. Additionally, consumer confidence has risen to its highest level since the start of the war in Ukraine, boosted by rising wages which have already risen more than 7% in certain sectors. Cautious recovery in consumer confidence

French outlook is weak amid social tension. Against a backdrop of tense social conditions and despite a disinflationary trend that is well underway, the outlook for the French economy remains weak. We forecast 0.5% growth in 2023 and 0.6% in 2024.   The French economy has started the year better than other European countries In the first few months of 2023, the French economy held up a little better than the other eurozone countries, with GDP rising by 0.2 in the first quarter, after a period of near stagnation in the second half of 2022. After a sharp fall at the end of 2022 against a backdrop of high inflation, household consumption has stabilised, but this stabilisation is partly artificial. As the government reduced its support for energy consumption, public energy consumption fell, while household energy consumption was recorded as rising, offsetting the sharp fall in food consumption (to its lowest level for 23 years). At the same time, investment fell sharply, weighed down by rising interest rates. The global economic slowdown has also weighed more heavily on French exports.   Tense social climate keeps confidence at a very low level The first few months of the year were marked by a tense social climate, with numerous demonstrations against pension reform in the spring, followed in the early summer by riots in some localities after a young man was killed by a police officer during a checkpoint. Although the microeconomic impact of these events may be significant for some sectors at the time, the effects are generally offset later. Studies have shown that the macroeconomic impact is generally very limited, removing a maximum of 0.1 or 0.2 points from annual growth. Nonetheless, these events monopolised attention and probably helped to keep consumer confidence at a historically low level, and the household savings rate well above its long-term average. Against a backdrop of persistently high inflation, rising interest rates and a less expansionary fiscal policy, this is contributing to weak momentum in domestic demand, which is likely to persist over the coming quarters. Given President Emmanuel Macron's lack of a majority in parliament, a tense and divided social and political context is likely to remain the norm over the next few years and will continue to slow down or prevent the implementation of important reforms. The pension reform, which raises the retirement age from 62 to 64, will come into force in autumn 2023.  

The fall in producer prices will bring goods disinflation down the line in CPI The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April,  anticipating further decelerations down the line in the goods component of headline inflation. Services inflation is proving relatively stickier, though, possibly reflecting in part a re- composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.   Stickier services inflation to slow the decline in core inflation     Resilient labour market to continue to support consumption A declining inflation environment will likely coexist with a resilient employment environment, at least in the short term. Labour market data continue to point to residual job creation, with a prevalence of open-ended contracts over temporary ones. This is clearly helping to support consumer confidence and keep concerns about future unemployment at low levels. Unfavourable demographics and supply-demand mismatches could keep some pressure on wages, at least in certain sectors. For the time being, the impact on aggregate hourly wages has been limited (in May it was up by 2.4% year-on-year), but we can’t rule out it inching up to the 3% area towards the end of the year. All in all, the combined effect of decelerating inflation, resilient employment and slowly accelerating wages should continue to support real disposable income, ultimately creating room for decent consumption growth in 2023.

After exceptionally strong growth for Portugal, a slowdown is looming The Portuguese economy, driven by strong export dynamics in the first quarter, is expected to face a significant slowdown due to a weakening global economic context and rising financing costs. Although a further decline in inflation is expected, the inflation slowdown is hampered by increased wage growth.   Strong first-quarter growth will not be sustained In the first quarter, the Portuguese economy experienced 1.6% quarter-on-quarter growth, primarily driven by robust export dynamics. However, this positive momentum will be increasingly challenged by the tightening of monetary policy. As households and companies become more cautious about taking on new loans, consumption and investment will slow down. The coordinated tightening of global monetary policy will also contribute to weaker global growth prospects, which will dampen Portuguese export dynamics –an essential driver of economic growth in the first quarter. Despite numerous interest rate hikes, we maintain a positive growth scenario. For the second quarter, we still anticipate growth of 0.4% quarter-on-quarter, which is expected to decrease further to 0.2% in both the third and fourth quarters of this year. Positive factors such as favourable labour market developments, increased inflows of European funds, government measures to support income, and a thriving tourism sector partially mitigate the impact of higher interest rates. Additionally, consumer confidence has risen to its highest level since the start of the war in Ukraine, boosted by rising wages which have already risen more than 7% in certain sectors.   Cautious recovery in consumer confidence

  UK Retail Sales (Jun) – 21/07 – retail sales in May surprised to the upside when the numbers were released just over a month ago, despite inflationary pressure rising to its highest levels since the 1990's. The two bank holidays appeared to prompt a rise in consumption spending, while the warmer weather prompted spending on holiday breaks, as well as other leisure activities as people booked tickets for music events. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February. May saw a rise of 0.3%, against an expectation of a decline of -0.2%. This appeared to be in line with recent retail updates which have been for the most part better than expected. Consumer confidence has also been improving despite the stickier nature of inflation, although the continued rise in mortgage rates is likely to start to act as a major drag as fixed rate mortgage deals roll off and consumers become more constrained. In some part higher savings rate have helped to boost consumer spending, given the delay in seeing the effects of the roll off in fixed rate loans. This is likely to change in the coming months, although June retail sales are expected to climb by 0.2%.     

  US Retail Sales (Jun) – 18/07 – US retail sales growth has been broadly steady for the most part during Q2, rising 0.4% in April and 0.3% in May. All the while consumer confidence has been increasing while inflation expectations have been falling. All of this should make for a more positive headwind for US consumer spending. Expectations for June retail sales are for a gain of 0.4%, against a backdrop of a still resilient jobs market, despite concerns that the manufacturing sector slowdown will start to act as a significant drag on the more resilient services sector. Ocado H1 23 – 18/07 – having narrowly avoided being relegated to the FTSE250 in the last reshuffle Ocado shares recently jumped to their highest levels in March, as chatter about a possible Amazon bid drove speculation in the share price. One of their largest shareholders Lingotto Investment Management increased its stake in the business to 5% fuelling speculation that something might be afoot, especially given the lack of any pushback on the speculation by either Amazon or Ocado. In Q1 Ocado reported revenues of £584m a rise of 3.4% on last year, while average orders per week have risen 3.6% to 381k. Average basket value remained flat, despite a fall in basket size and a rise in active customers to 951k, a rise of 13.8% year on year. This trend continues to show that with ever rising prices Ocado customers, like a lot of other retailers, are spending more money and getting less. Ocado kept its full year guidance unchanged.           

Further internal demand deterioration in China but PBoC refrains from cutting key interest rate Retail sales in China decelerated to 3.1% y/y in June from May’s 12.7% y/y, weakest growth rate since December 2022. Q2 GDP growth in China came in below expectations at 6.3% y/y vs. consensus estimates of 7.3% y/y. China’s central bank, PBoC left its one-year medium-term lending facility rate unchanged at 2.65% likely due to the risk of a “liquidity trap” scenario. China’s proxies stock benchmarks Hang Seng Index, Hang Seng TECH Index & Hang Seng China Enterprises Index outperformed intraday against the mainland “A” shares benchmark CSI 300.   China’s Q2 GDP growth came in below expectations at 6.3% year-on-year versus consensus estimates of 7.3% but above Q1 of 4.5%; 0.8% growth for Q2 on a quarter-on-quarter basis, below Q1’s 2.2% (q/q). Retail sales for June tumbled to single-digit growth of 3.1% year-on-year from 12.7% recorded in May, its steepest growth deceleration since December 2022, almost on par with expectations of 3.2%. On the other hand, industrial production rose to 4.4% year-on-year in June, above expectations of 2.7%, and May’s reading of 3.5%, its highest growth rate since October 2022. The labour market for youth has remained worrisome, the youth unemployment rate for 16 to 24 years old accelerated to 21.3% in June, a new high from 20.8% in May, that’s around four times the nationwide unemployment rate that remained steady at 5.2% in June. The growth deceleration in retail sales and continued uptick in youth unemployment have further reinforced the ongoing weak internal demand environment in China since March this year that dented consumer confidence and increased the risk of a deflationary spiral.     A liquidity trap scenario is likely to see less marginal benefits from interest rate cuts To negate weak internal demand and eroding consumer confidence, expansionary fiscal stimulus measures are likely to be more effective than more interest rate cuts, and accommodating monetary policy in a deflationary environment reduces the “marginal benefit” from an extra added effort of monetary policy stimulus; a “liquidity trap scenario”. Hence, it is not surprising for China’s central bank, PBoC to refrain from cutting its key one-year medium-term lending facility today and left it unchanged at 2.65% after a 10-basis point reduction in June, which in turn implies a likely similar no-cut scenario for its decision on the one-year (3.55%) and five-year loan prime rates (4.2%) out later this Thursday.   China “A” shares benchmark CSI 300 dragged down by financial stocks   Fig 1: CSI 300 sectors rolling 1-month performance as of 17 Jul 2023 (Source: TradingView, click to enlarge chart) Interestingly, the China proxies benchmark stock indices listed in Hong Kong do not suffer a steep sell-off; In contrast, the China mainland “A” shares benchmark stock index, CSI 300 shed -1.1% dragged down by the banks that underperformed intraday likely due to the fear of a “liquidity trap” scenario that led to slower loan growth, the CSI  300 Financials Index shed -1.44% intraday.    

NZD/USD in negative territory after jumping 2.58% last week US dollar was broadly lower last week on expectations that Fed rate-tightening almost over The New Zealand dollar has started the week with considerable losses. In the European session, NZD/USD is trading at 0.6338, down 0.51%. This follows a superb week for the New Zealand dollar, which soared 2.58%.   US dollar in trouble over Fed expectations It was a week to forget for the US dollar, which hit a 15-month low. The US dollar index fell by 2.52% last week, its worse weekly performance since November 2022. The New Zealand dollar made the most of the greenback’s woes and pummelled the US dollar even though the Reserve Bank of New Zealand took a pause last week for the first time in almost two years. The US dollar’s nosedive last week against the major currencies was exacerbated by the US inflation report, which was softer than expected. The headline and core rates both eased in June, raising market speculation that the Fed may finally wrap up its rate-tightening cycle after the July 26th meeting. The markets have priced in a July hike at 96% and a pause in September at 83%, according to the CME tool. The Fed has relied on interest rate hikes as its main tool to curb inflation, and an end to the cycle will result in investors looking elsewhere to park their funds. The US dollar is under pressure, but traders and investors should be careful before writing off the US currency. Earlier this year, the markets were too hasty in betting that the Fed would cut rates and the US dollar would fall. Instead, the Fed continued to raise rates as the US economy remained robust and the US dollar rebounded. Fed Chair Powell has signalled one more rate after the July meeting and Fed members have sounded hawkish, noting that inflation remains much higher than the 2% target. The markets may once again be getting ahead of themselves in assuming that inflation is won and the Fed is done. . NZD/USD Technical There is support at 0.6316 and 0.6221 0.6466 and 0.6561 are the next resistance lines    

US Q2 GDP – 27/07  one of the key themes this week has been the resilience of the US economy, despite the sharp rise in rates over the last 12 months. Notably the resilience of the labour market has surprised with little sign of a slowdown on hiring, while inflation has been slowing quite sharply. This has helped consumers stay resilient with a solid rebound in personal consumption in Q1 to 4.2% after a weak end to last year. This rebound in consumer spending helped Q1 GDP get revised up from 1.2% to 2% in the final revision of Q1 GDP. The key test in this week's first iteration of US Q2 GDP will be whether this momentum was maintained. Judging by recent consumer confidence numbers, spending patterns and a resilient labour market there is little reason to suppose otherwise, although manufacturing is likely to be a weak spot. It's also worth keeping an eye on inventories to see whether these are being maintained, or being run down. 

USD: Short dollar positioning looks quite heavy It's a big week for FX markets given looming rate decisions in the US, the eurozone and Japan. The dollar goes into these meetings in a slightly corrective mood and retracing some of the sharp losses after the release of the soft US June CPI report earlier this month. What might support that corrective mood is market positioning, where the latest data from the FX futures markets in Chicago suggests that asset managers are running their largest short dollar position on record when aggregating their positioning across eight FX futures contracts. We also happen to see some upside risk to the dollar this week from Wednesday's FOMC meeting, where we think it's still too early for the Fed to switch to a data-dependent approach to any further rate hikes.  This week also sees US consumer confidence, second quarter GDP revisions and the second quarter Employment Cost Index. As always, the dollar story is driven by the push-pull factors of the US versus the Rest of the World (RoW). Unless we get some upside surprises in European PMIs today or Chinese authorities announce some overwhelming stimulus measures at Friday's Politburo meeting, it looks like the dollar can continue in this corrective/slightly bid tone. DXY looks like it could grind higher to the 101.50 area.

CEE: Recovery despite global story This week, the calendar is light again in the region and the focus will be on the global central bank story. But before that, today we will see consumer confidence in the Czech Republic. Tomorrow, the Hungarian National Bank will meet and we expect the cutting cycle to remain unchanged, i.e., 100bps in the effective rate to 15%. Tomorrow we will also see labour market data in Poland and Hungary. In the Czech Republic, we can expect a few Czech National Bank (CNB) speakers ahead of Thursday's blackout period. Otherwise, market attention will be driven by the global story.  In the FX market, we saw the region's rally stall last week, with the Hungarian forint and Czech koruna in particular weakening once again. The National Bank of Hungary meeting should be the main driver for the forint this week and we expect a hawkish tone versus market expectations to be positive for FX. The forint remains our favourite currency in the region due to by far the highest carry and attractive current levels. Moreover, we see the forint lagging behind Friday's renewed improvement in market conditions. Thus, in the short term, we expect a pullback back to 370 EUR/HUF. A stronger US dollar as a result of central banks in the second half of the week may be a problem and might also be an obstacle for the Czech koruna. However, it could be supported by the hawkish remarks of the CNB board members, so we expect a recovery from the weakest levels since March this year to 23.90 EUR/CZK

US The Fed is expected to resume raising rates at the July 26th FOMC meeting.  Fed funds futures see a 96% chance that the central bank will deliver a quarter-point rate rise, bringin the  target range to between 5.25% and 5.50%, almost a 22-year high. The Fed delivered 10 straight rate increases and then paused at the June FOMC meeting.  The Fed is going to raise rates on Wednesday and seems poised to be noncommittal with what they will do in September.  The economic data has been mixed (strong labor data/cooling pricing pressures) and that should support Powell’s case that they still could deliver a soft landing, a slowdown that avoids a recession.  This seems like it will be the last rate hike in the Fed’s tightening cycle, but we will have two more inflation reports before the Fed will need to commit that more rate hikes are no longer necessary. The Fed will steal the spotlight but there are several other important economic indicators and earnings that could move markets.  Monday’s flash PMI report should show both the manufacturing and service sectors continue to soften, with services still remaining in expansion territory. Tuesday’s Conference Board’s consumer confidence report could fuel expectations of a soft landing. Thursday’s first look at Q2 GDP is expected to show growth cooled from 2.0% to 1.8% (0.9%-2.1% consensus range) as consumer spending moderated.  Friday contains the release of personal income and spending data alongside the Fed’s preferred inflation and wage gauges. The Q2 Employment Cost Index (ECI) is expected to dip from 1.2% to 1.1%. The personal consumption expenditures price index is expected to cool both on a monthly and annual basis (M/M: 0.2%e v 0.3% prior;Y/Y: 4.2%e v 4.6% prior). Earnings will be massive this week as we get updates from 3M, AbbVie, Alphabet, Airbus, AstraZeneca, AT&T, Barclays, BASF, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Chevron, Chipotle Mexican Grill, Comcast, Exxon, Ford Motor, General Electric, General Motors, GSK, Hermes International, Honeywell International, Intel, Mastercard, McDonald’s, Meta Platforms, Microsoft, Nestle, PG&E, Procter & Gamble, Raytheon Technologies, Samsung Electronics, STMicroelectronics, Texas Instruments, Thermo Fisher Scientific, UniCredit, Unilever, Union Pacific, Verizon Communications, Visa, and Volkswagen

FX Daily: European pessimism, Chinese optimism In quiet markets ahead of G3 central bank meetings later this week, currency pairs are being driven by the soft set of eurozone July PMIs and also the prospect of some renewed Chinese stimulus after China's Politburo promised 'counter-cyclical' measures. These look like short-term trends. We would wait for the policy meetings to set the true FX tone.   USD: China stimulus – here we go again In quiet markets ahead of G3 central bank meetings, the FX market's focus has once again fallen on China. Having broadly disappointed investor expectations this year, China's economy is seen as enjoying a lift after China's Politburo yesterday promised 'counter-cyclical' measures. These follow a drip feed of support measures over recent weeks, such as the easing of restrictions in the mortgage sector, the encouragement to buy cars and electronics, and perhaps some support to local governments saddled with debt. None of these seem to be a game-changer so far, but the market optimists are hoping that this new directive from the Politburo will be turned into powerful stimulus at the State Council level.  Tellingly, USD/CNH did not move much when these measures were announced during the European session yesterday, but Asian investors are running with the story and driving the renminbi some 0.6% higher this European morning. Chinese equities are having a decent run too. These short-term trends may well fizzle out – we've been here before with prospects of China stimulus – but they could provide some mild support to emerging market and commodity currencies through the session. The reason why we warn against pursuing a full 'risk-on' rally in Rest of World (RoW) currencies is that the European economy looks weak and tomorrow's FOMC meeting will probably see the Fed's foot remaining firmly on the monetary brakes. Additionally, there was an overnight Wall Street Journal article by Fed watcher Nick Timiraos entitled: 'Why the Fed isn't Ready to Declare Victory on Inflation' – perhaps a nod to a still hawkish FOMC statement tomorrow.  Today's US data releases are second tier, but the consensus is expecting a decent tick-up in the July consumer confidence reading. As in the UK, there is a growing sense that consumers have so far been able to handle the pain of higher rates, diluting the case for any early easing cycles.   DXY can trade a tight 101.00-101.50 range ahead of tomorrow's Fed meeting.

Asia Morning Bites Australian inflation this morning is an appetizer ahead of tonight's FOMC main course.   Global Macro and Markets Global markets:  US stocks crept higher on Monday, though without much conviction. The S&P rose 0.28%, while the NASDAQ rose a further 0.61%. That leaves the NASDAQ up 35.14% ytd… Chinese stocks responded well to the supportive comments coming out of the Politburo yesterday. The Hang Seng index rose 4.1% and the CSI 300 rose 2.89%. However, we remain cautious about the economic outlook as the recent comments continue to lack detail despite the various “pledges” and “vows” to boost spending.  Ahead of today’s FOMC, which we in Asia will wake up to tomorrow morning, Treasuries were relatively quiet. 2Y yields rose 1.5bp to 4.874%, while 10Y UST yields rose just 1.2bp to 3.884%. EURUSD has drifted back down to 1.1051 on expectations of a hawkish Fed tonight. But the AUD gained ground yesterday, rising to 0.6788.  The GBP and JPY also strengthened against the USD ahead of Friday’s Bank of Japan meeting (see our latest note on this). The positive sentiment in China has enabled the CNY to strengthen to 7.1363 and the yuan was Asia’s best performing currency yesterday. Most other Asian currencies also gained against the USD. G-7 macro:  House prices in the US gained further ground in May, with both the FHFA and S&P CoreLogic measures of house prices rising more than expected.  There were also gains in the Conference Board’s consumer confidence indices. None of which plays into the “one and done” view that the market currently holds for the FOMC. Elsewhere, Germany’s Ifo survey presented more bad news, falling more than expected, though the UK’s CBI business survey was a little brighter. Today is quiet ahead of the Fed (02:00 SGT/HKT) with just US home sales and mortgage applications.   Australia:  CPI inflation for June should show further declines in inflation, with the headline rate declining to around 5.4% YoY from 5.6% currently. That would be a 3 percentage point decline from the December 2022 peak. Inflation should decline again next month. Thereafter, we will need to see month-on-month changes in inflation slow considerably to stop inflation from stabilizing at high levels or even backing higher again, as all the helpful base effects will have been used up until we get nearer to the end of the year. Singapore: Singapore reports industrial production figures for June.  We expect another month of contraction, extending the slump to 9 months of decline, tracking the downturn in non-oil domestic exports.  Industrial production should slip by 6%YoY and we can expect the slide to continue for as long as global demand stays subdued. 

Rates Spark: The Fed set to keep the pressure on A key driver of market rates of late has not been the projection for the July FOMC meeting, but rather the projection for where the Fed gets to at the end of the rate cutting cycle to come. The market has been busy pricing out future rate cuts as a reflection of residual macro robustness. That's helping to elevate long dated rates, and we expect that to continue.   Consumers show confidence and yields head higher In the US, a lot of the macro oomph that was seen through much of the June data is continuing to show up in the July readings. A case in point was yesterday's consumer confidence number. It had been slipping through to May, and looked at that point that it could easily lurch lower. But from around 102 (vs a reference of 100), it popped up to 110 for June, and then to 117 for July. That's now running at 17% above average, which is remarkable for an economy that is being (apparently) battered by higher interest rates, high inflation and a weak international backdrop.   These types of data keep the pressure on the Federal Reserve to maintain a hawkish tilt to policy. Yes, the manufacturing PMI and other survey evidence points to a recessionary tendency in the US ahead. But at the same time such warning flags have been flying for over a year now, and here we are with the consumer seemingly getting more optimistic. We doubt very much that this lasts, as the headwinds of tighter financial conditions should ultimately bite harder than currently being seen. Similarly, the tightening in financial conditions seen in Europe is having a significant dampening effect on the takedown of credit, as the latest ECB survey shows.   That said, we continue to identify net upward pressure on market rates in the immediate few weeks ahead. We note that the Jan 2025 fed funds implied rate is only just under 4%. This was closer to 3% when Silicon Valley Bank went down. That paved a route, at the time, for the 10yr Treasury yield to trend in the same direction – towards 3%. But not, that route is being obstructed by a markedly lower rate cut discount for the Federal Reserve through 2024 and into 2025. For that reason, and despite the macro headwinds ahead, we continue to remain positive for the US 10yr Treasury yield to head back up to a 4% handle.   Auctions have been heavy as interest has been drying up in Treasuries Yesterday's 5yr auction in the US tailed, meaning that the yield at auction was higher than the market yield at the point of issue. And this was at a point where market yields were on the rise. Typically tailed auctions happen when yields are falling, or when there is underwhelming demand. The latter was applicable to yesterday's auction. The bond was well covered and had a reasonable indirect bid (often representing players like central banks). But it just was not that firm in terms of overall tone. The 2yr auction on the previous day was also well covered, but it took the highest yield since 2007 at auction to get the paper away. Flows in previous week had been high on long duration and quite impressive. But flows in the past week or two have been less impressive. If this continues, market yields will likely continue their drift higher. We have a 7yr auction today. The good thing is its not in as rich a spot of the curve as the 5yr is. But it's still below the 2yr yield, and requires a bit of an appetite for duration.   Today's events and market views The big event today is the Federal Open Market Committee outcome, from which a 25bp hike looks to be virtually guaranteed (as a zero or 50bp hike is quite unlikely). A 25bp hike is 97% priced in, so that is what the Federal Reserve is likely to deliver. The question is what Chair Powell will say, and ahead of that, the tone from the FOMC statement. In all probability that tone and Chair Powell's phraseology will be hawkish. He has little to gain from showing even a smidgen of reduced hawkishness. The Fed will feel they need to keep the pressure on, and especially during a period that has been as risk-on as we've seen of late. In the eurozone we have to wait till Thursday for the European Central Bank decision (should be a 25bp hike), while no change is expected from the Bank of Japan at this juncture. More on that tomorrow.

USD/JPY       Dollar-yen has entered its pre-FOMC/BOJ consolidation range.  Heading into the FOMC decision the data has been holding up.  The US economy has still yet to feel the complete impact of the Fed’s rate hiking campaign as the flash PMIs showed that business activity is slowing and as consumer confidence surged to a two-year high.  Wall Street wants to believe the Fed will be one and done, but the data might not allow that to happen.  They are likely to signal an extended pause, but hold onto a tightening bias, which could help push dollar-yen higher initially.  Will USD/JPY rise towards prior intervention levels around the 145 is the big question at hand.  A short-term advance in the dollar seems possible going into and that could extend post Fed if policymakers focus on the resilience of the US economy. The bigger driver for USD/JPY might stem from the BOJ decision.  There was a chance that we could get a Yield Curve Control (YCC) tweak, but that seems less likely.  A key Tokyo CPI report will occur hours before the BOJ decision, but probably won’t sway the bank unless it comes scorching hot.  The BOJ should deliver a tweak, but Ueda’s comments from a conference in India last week suggest they will stay the course with their ultra-loose monetary stance.  The BOJ might eventually need to trigger an abrupt change to policy given the trajectory of the US economy and how high inflation has turned. To the downside, a break of the 140 level could see momentum selling target the 137.50 region.  The 142.50 level should provide initial resistance, with the 145 level likely to trigger calls of future currency intervention.  

The press release of the recently concluded China’s Politburo meeting consisted of a more expansionary tone such as the implementation of “counter-cyclical” measures. A dovish tilt is now being priced in by interest rates futures after yesterday’s FOMC meeting. Based on the CME FedWatch tool, the odds have increased to bring forward the expected first Fed Funds rate cut to March 2024 from May/June 2024. This latest set of dovish expectations on the future path of the Fed’s monetary policy has negated the prior steep depreciation of the yuan against the US dollar. Short-term positive animal spirits have been revived in China equities, and its proxies (the Hang Seng Indices) ex-post Politburo & FOMC.   The market’s reaction so far has been positive in terms of risk-on behaviour toward China equities and their proxies (Hang Seng Index, Hang Seng TECH Index & Hang Seng China Enterprises Index) ex-post press release on the outcome of the July’s Politburo meeting that concluded on Monday, 24 July after the close of the Asian session as well as yesterday’s ex-post US central bank, Federal Reserve’s FOMC meeting on its interest rate policy. The Politburo is a top decision-making body led by President Xi that set key economic policy agenda for China, and Monday’s meeting set the agenda for the coming months to implement expansionary policies to address the current weak internal demand environment. It vowed to implement a counter-cyclical policy to boost consumption, more support for the property market, and ease local government debt. The share prices of China ADR listed in the US stock exchanges have a remarkable intraday performance on Monday, 24 July US session. China’s Big Tech such as Alibaba (BABA), and Baidu (BIDU) ended the US session with gains of around 5%. A basket of China stocks listed as exchange-traded funds in the US soared as well, the KranShares CSI China Internet ETF (KWEB), and Invesco Golden Dragon China ETF (PGJ) rallied by +4.5% and +4% respectively, notched their best single day return since May 2023. Even though the press release lacks the details of the implementation of upcoming fiscal stimulus measures (again), and refrains from enacting major stimulus measures that increase the risk of debt overhang in the property sector, it is the choice of words, and tonality used that sparked the risk-on behaviour. Firstly, President Xi’s key phrase on China’s housing market, houses are for living, not for speculation” has been omitted for the first since mid-2019” which suggests that more leeway to negate the ongoing weakness in houses prices such as easing home buying restrictions in major cities such as Shanghai and Beijing. Secondly, the term “counter-cyclical” measures are being emphasized which suggests that boosting domestic demand takes priority over infrastructure spending. Given the heightened risk of a deflationary spiral taking shape in China and a “liquidity trap” situation where more accommodative monetary policy may lead to lesser marginal economic growth, the key solution to break the adverse deflationary spiral and its liquidity trap aftereffects is to shore up consumer confidence via expanding domestic demand actively.     Outperformance of China ADR exchange-traded funds supported by a stronger yuan     Fig 1: Relative momentum of China ADRs ETFs vs. MSCI All Country World ETF of 26 Jul 2023 (Source: TradingView, click to enlarge chart) Overall, short-term sentiment seems to have turned bullish for China equities where China ADR ETFs have outperformed major US benchmark US stock indices on a month-to-date horizon as of yesterday, 26 July 2023; the KranShares CSI China Internet ETF (KWEB), and Invesco Golden Dragon China ETF (PGJ) gained by +12% and +13.14% respectively over S&P 500 (+2.61%), and MSCI All Country World Index ETF (+2.97%). Also, yesterday’s Fed Chair Powell ex-post FOMC press conference indicated that the Fed will be data-dependent in deciding whether to pause or hike the Fed Funds rate at its next FOMC meeting on 20 September. This implies that the Fed is likely not in a mode of raising interest rates at every other meeting after yesterday’s expected 25 basis points hike to bring the Fed Funds rate to a 22-year high at 5.25% to 5.50%. Markets seem to be pricing in a more dovish tilt on the expected start of the first Fed Funds rate cut. Based on the CME FedWatch tool derived from the 30-day Fed Funds futures pricing data, the odds have increased for the first expected cut to occur on the 20 March 2024 FOMC meeting with a combined probability of 56.07%. Previously, before yesterday’s FOMC, higher odds for the expected first-rate cut were clustered between the 1 May and 19 June 2024 FOMC meetings. The current dovish tilt on the expected future trajectory of the Fed Funds rate has negated further upside yield premium of the US’s 2-year Treasury note over China’s 2-year sovereign bond. Since Monday, 24 Jul, the yield premium has narrowed by 11 bps to 2.75% from 2.86% as of today at this time of the writing which in turn supported the yuan from a further deprecation against the US dollar. USD/CNH (offshore yuan) remained below its 20-day moving average     Fig 2: USD/CNH medium-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart) The yuan has started to strengthen against the US dollar in the short-term horizon since last Thursday, 20 July which in turn created a positive feedback loop back that reinforces the bullish sentiment towards China equities. The USD/CNH (offshore yuan) has failed to break above its 20-day moving average, acting as a key intermediate resistance at 7.2160 with a bearish momentum reading seen on its daily RSI oscillator. Hence, further potential weakness in the USD/CNH is likely to be able to kickstart short-term uptrend phases for China equities and its proxies.

Asia week ahead: China inflation and trade data China's producer and consumer price updates next week may continue to fuel concern about deflation in the world's second-biggest economy. Elsewhere, look for second-quarter GDP releases from Indonesia and the Philippines.   China and Taiwan to release trade data and CPI We expect China’s July CPI to be almost unchanged as recently adopted measures by the government have yet to take full effect. While the Politburo reiterated support for the economy, we await further details on the said measures. Meanwhile, we expect PPI inflation to remain in negative territory. Despite the recent increase in oil prices, mining and manufacturing prices are likely to drop further as evidenced by data releases this week (Caixin and property prices).   For Taiwan, July CPI inflation is expected to rise only slightly as the price of household amenities remains high amid robust demand, with consumer confidence up for a third consecutive month. The consumer confidence index rose 1.73 points from June to 68.39 points in July, the highest level since April last year.   RBI to extend pause Food prices are still climbing in India despite government efforts to keep price increases under control. Tomato prices in July recently spiked due to seasonal factors compounded by the early arrival of monsoon rains. The government announced an export ban on non-basmati rice, resulting in a further tightening of global supply for grain. Given the lagged impact of the ban, headline inflation could still exceed the Reserve Bank of India's target range of 2-6%. This development, however, is unlikely to prompt a rate hike from the RBI as food inflation is expected to recede in the coming months.   Indonesia and Philippines to experience moderate growth in 2Q Next week features 2Q GDP reports from Indonesia and the Philippines. Growth is expected to slow slightly in 2Q for both economies as base effects fade and higher inflation caps purchasing power. Meanwhile, tight financial market conditions are also expected to have weighed on investment activities as bank lending slowed. Despite the slowdown, Indonesia and the Philippines are expected to post respectable year-over-year expansion with Indonesia set to grow by 4.7% YoY while the Philippine economy likely growing by 5.6% YoY.   Trade data to show exports in the region struggling amid weak global demand Several regional economies will be reporting trade data in the coming week. China and Taiwan will release trade figures that will likely show another period of contraction for both exports and imports. Soft electronic exports due to weak global demand should continue to weigh on exports, which in turn would cap the outlook for the manufacturing sectors of both China and Taiwan. For the Philippines, June data will show both exports and imports likely in contraction given slowing global trade. Exports, which posted a surprise expansion in May, might revert to a contraction as demand for the mainstay export item, electronics, remains soft. Meanwhile, imports will continue to contract as global commodity prices normalise from the peaks experienced in 2022. All in all, the overall trade balance will likely stay in deficit with the shortfall pegged at roughly $4.5bn for the month. 

All eyes on US inflation!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   US equities fell, while yields pushed higher in the run up to today's most important US inflation data. Inflation in the U.S. is expected to have rebounded from 3 to 3.3% in July and core inflation may have steadied at around 4.8%. Any bad surprise on the inflation front could revive the Federal Reserve hawks, but we are far from pricing another hike in September just yet; activity on Fed funds futures assesses more than 85% chance for pause in September FOMC meeting. Rising oil, crop and rice prices are the major upside risks, while potential downside pressure on shelter could counter higher raw material prices. According to a latest publication from SF Fed shelter prices could see significant disinflation or deflation in the months ahead. They wrote that their 'baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024', and that we could see 'the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09'.  The idea of further Fed hikes is not helping sentiment in bond markets, especially since Fitch downgraded the U.S. credit rating from AAA to AA+. That's bad news for two reasons. First a lower credit rating means that the US should compensate for the higher risk investors take while buying the US government bonds so it's an additional upside pressure on yields. And combined to Fed hikes, the US interest payments will become an increasingly growing burden. In numbers, the US spends $1.8 bn interest payments every day. According to Peter Peterson foundation this number will double in the next decade and interest payments will become the fastest growing part of the federal budget. And if that's not enough, Moody's downgraded credit ratings for 10 small and midsize US banks, citing higher funding costs, potential regulatory capital weaknesses and risks tied to commercial real estate loans. And speaking of banks, Italian banks also sold off earlier this week on news of a new windfall tax. The latter triggered some risk averse inflows into bonds until Italy issued a clarification of its new tax on banks' windfall profits, saying that the impact may be limited for some banks and the levy won't exceed 0.1% of a firm's assets. Banks that have already increased the interest rates they offer to depositors 'will not have a significant impact as a consequence of the rule approved yesterday'. Phew....  The U.S. 2-year yield rebounded past 4.80%, while the 10-year yield is back to around%, after a spike to 4.20% on Fitch downgrade.  Troubled China  Chinese indices are up and down. Up, thanks to measures that the Chinese government announced to support the economy, down because of plunging export/import, deflation worries following another round of soft trade, CPI and PPI numbers since the start of the week, and the jitters that the US could limit investments to China. One interesting point is that the Chinese stock market shows decorrelation from the stock markets of developed countries. KraneShares CSI China Internet ETF saw $342.23 million inflows last week, the biggest weekly inflow in 14 months. Yet impressive growth numbers are probably not in China's near future as the population is shrinking, the real estate crisis fuels the local debt crisis with Country Garden's potential default on its debt now making the headlines, investor and consumer confidence in Chinese government will take time to be restored, and further restrictions of US investments in China, especially in cutting-edge sectors like AI and quantum computing could further dampen appetite.   

GBP: Housing market pessimism starting to show Earlier today, we saw the release of the RICS UK house price data survey, which showed the most pessimism over UK house prices since early 2009. It will be interesting to see whether this starts to feed more heavily into UK consumer confidence and spending. We also expect it will pressure the pricing of the Bank of England cycle, where another 50bp of tightening is still seen. Next week's release of UK earnings data, plus the July CPI, will be the next major catalyst for this story. EUR/GBP seems happy to trace out an 0.8600-0.8650 range for the time being. But we are happy with our upside bias towards the 0.88 area for later in the year.

Australian consumer confidence declines, business confidence steady Fed member Harker says Fed may be done raising rates The Australian dollar has bounced back on Wednesday and is trading at 0.6552, up 0.13%. AUD/USD slipped 0.45% on Tuesday and dropped to its lowest level since June 1st. Australian consumer confidence slips, business mood stays steady Australia’s consumers remain deeply pessimistic about economic conditions. The Westpac consumer sentiment index declined in August by 0.4% to 81 points, well below the 100 level which divides optimists and pessimists. In July, the index rose 2.7%. Consumer sentiment fell despite the Reserve Bank of Australia’s decision in July to hold rates steady for a second straight month. The RBA has raised rates by some 400 basis points in the current cycle and high borrowing costs continue to dampen consumer sentiment. Business confidence also remains low, but the situation is somewhat better. The National Bank Business Confidence (NAB) index for July improved to 2, up from a downwardly revised -1 in June. This was the highest level since January. The zero level divides optimists from pessimists. Business conditions eased slightly to 10, indicating that businesses continue to show resilience to higher borrowing costs. The strength of the business sector is an encouraging sign that the economy could avoid a hard landing despite the RBA’s aggressive tightening cycle. Fed’s Harker eyes rate cuts in 2024 Fed member Harker said on Tuesday that the Fed might be done raising rates, “absent any alarming new data”. Harker said that rates would need to stay at the current high levels “for a while” and went as far as saying that the Fed would likely cut rates at some point in 2024. Harker was careful not to express an opinion about the September decision, but the Fed rate hike odds are just 14%, according to the FedWatch tool. The Fed raised rates in July, and Fed Chair Powell has signalled that he would raise rates one more time a stance that is clearly more hawkish than that of the markets.   AUD/USD Technical There is resistance at 0.6607 and 0.6700 0.6475 and 0.6382 are providing support  

Is China on path for longer economic stagnation?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the latest CPI data showed that the headline inflation in the US ticked higher from 3 to 3.2%. That was slightly lower than the 3.3% penciled in by analysts, core inflation eased to 4.7% in July from 4.8% expected by analysts and printed a month earlier.   But the rising energy and crop prices threaten to heat things up in the coming months and inflation's downward trajectory could rapidly be spoiled. That's certainly why an increasing number of investors and the Federal Reserve's (Fed) Mary Daly warned that this was 'not a data point that says victory is ours'.   And indeed, looking into details, the fact that the 20% fall in gasoline prices is what explains the decline in headline number is concerning. The barrel of US crude bounced lower yesterday after a 27% rally since the end of June, and the latest OPEC data indicated that we would see a sharp supply deficit of more than 2mbpd this quarter as Saudi cuts output to push prices higher. And this gap could further widen as global demand continues growing and shift to alternative energy sources is nowhere fast enough to reverse that upside pressure.   On the other hand, we also know that the rising energy prices fuel inflation expectations and further rate hikes expectations around the world. And that means that oil bears are certainly waiting in ambush to start trading the recession narrative and sell the top. The $85pb could be the level that could trigger that downside correction despite the evidence of tightening supply and increasing gap between rising demand and falling supply.   Today, eyes will be on the July PPI figures before the weekly closing bell, where core PPI is seen further easing, but headline PPI may have ticked higher to 0.7% on monthly basis, probably on higher energy, crop and food prices.     In the market  Yesterday's slightly softer-than-expected inflation numbers and the initial jobless claims which printed almost 250K new applications last week - the highest in a month - sent the probability of a September pause to above 90%, though the US 2-year yield advanced past the 4.85% level, and the longer-terms yields rose with a weak 30-year bond action, which saw the highest yield since 2011.   Major stock indices stagnated. The S&P500 was up by only 0.03% yesterday while Nasdaq 100 closed 0.18% higher, as Walt Disney rallied as much as 5% even though Disney+ missed subscription estimates and said that it will increase the price of the streaming service. Disney is considering a crackdown on password sharing, which, combined with higher prices could lead to a Netflix-like profit jump further down the road.     In the FX  The USD index consolidates above the 50 and 100-DMAs and just below a long-term ascending channel base. The EURUSD sees support at the 50-DMA, near the 1.0960 level, and could benefit from further weakness in the US dollar to attempt another rise above the 1.10 mark.   European nat gas futures fell 7% yesterday after a 28% spiked on Wednesday on concerns that strikes at major export facilities in Australia could lead to a 10% decline in global LNG exports. Yet, the European inventories are about 88% full on average and the industrial demand remains weak due to tightening financial conditions imposed by the European Central Bank (ECB) hikes. Therefore this week's massive move seems to be mostly overdone, and we shall see some more downside correction.     Chinese property market is boiling  The property crisis in China is being fueled by a potential default of Country Garden, which is one of the biggest property companies in China and which recently announced that it may have lost up to $7.6bn in the first half of the year as home sales slumped and the government stimulus measures didn't bring buyers back to the market. Equities in China slumped further today, as property crisis is not benign. In fact, China's local governments have plenty of debt, and their major source of income is... land and property sales. Consequently, the property crisis explodes local governments' debt to income ratios- And the debt burden prevents China from rolling out stimulus measures that they would've otherwise, because the government doesn't want to further blast the debt levels.   Shattered investor and consumer confidence, shrinking demographics, property crisis and deflation hints that the Chinese economy could be on path for a longer period of economic stagnation. We could therefore see rapid pullback in investor optimism regarding stimulus measures and their effectiveness. Hang Seng's tech index fell to the lowest levels in two weeks yesterday, as all members fell except for Alibaba which jumped after beating revenue estimates last quarter.   

UK retail sales expected to slip in July Fed minutes note concern about inflation The British pound has extended its gains on Thursday. In the North American session, GBP/USD is trading at 1.2772, up 0.32%. UK retail sales expected to decline The UK will wrap up a busy week with retail sales on Friday. The July report is expected to show a decline in consumer spending. Headline retail sales are expected to fall by 0.5% after a 0.7% gain in May and core retail sales are projected to decline by 0.7% after a 0.8% increase in May. The June numbers were higher than expected despite high inflation, helped by record-hot weather. Will the July data also surprise to the upside? The UK consumer has been grappling with the highest inflation in the G7 club, which means shoppers are getting less for their money. This has dampened consumption, a key driver of the economy. Energy prices are lower, thanks to the energy price cap, but food inflation continues to soar and was 17.4% y/y in June. Consumer confidence has been mired deep in negative territory and the GfK consumer confidence index, which will be released later today, is expected at -29, almost unchanged from the previous release of -30 points. The Bank of England would like to follow some of the other major central banks that are in a pause phase, but the grim inflation picture may force the BoE to keep raising interest rates, which could tip the weak economy into a recession. Wage growth jumped to 7.8% in the three months to June, up from 7.5% in the previous period. In July, headline CPI fell to 6.9%, down sharply from 7.9%, but core CPI remains sticky, and was unchanged at 6.9%. The data points to a wage-price spiral which could impede the BoE’s efforts to curb inflation.   The Federal Reserve remains concerned about high inflation and said that additional rate hikes might be needed, according to the minutes of the July meeting. At the meeting, the Fed raised rates by 0.25%, a move that was widely anticipated. Most members “continued to see significant upside risks to inflation, which could require further tightening of monetary policy”. At the same, time, members expressed uncertainty over the future rate path since there were signs that inflationary pressures could be easing.   GBP/USD Technical GBP/USD is testing resistance at 1.2787. The next resistance line is 1.2879  1.2726 and 1.2634 are providing support    

CEE: Rates matter again This week, we will see a number of hard data from the Polish economy. Industrial production, PPI and wage numbers will be released today. Our economists expect another 0.5% year-on-year decline in industrial production – better than market expectations. However, the slowdown in China and the weak performance of German industry shows the risk of another weak result for Polish industry. On the other hand, wage growth should confirm steady double-digit growth. Tomorrow, Poland will remain the main focus with the release of retail sales and construction data. Thursday will see consumer confidence data in the Czech Republic, which could show further improvement thanks to a rapid slowdown in inflation.  On the sovereign rating side, Fitch will publish a review of the Czech Republic on Friday. The agency downgraded the outlook to negative from AA- stable in May last year, mainly due to the deteriorating fiscal policy trajectory. However, the negative scenario has not materialised since then, and the government has unveiled a large consolidation package resulting in a rough halving of the public deficit next year. We therefore expect the outlook to return to stable.   In the FX market, CEE currencies have gained some ground in the past week after some time despite the fact that US dollar levels are not making the region's life easier. In our view, the gains were mainly driven by rising market interest rates and support from the interest rate differential. Moreover, after weeks of weakness, more balanced positioning across the region is also helpful. Interest rates drivers seem to be back after a long time, and Friday's move indicates further gains for today. The Polish zloty seems most tempting from this perspective, almost touching 4.50 EUR/PLN last week, which we believe is the upper ceiling of the current 4.40-4.50 range. Unless today's data surprises on the negative side, we could see further gains below 4.44 EUR/PLN. The Czech koruna should finally settle below 24.00 EUR/CZK. 

US The main event for next week will be the Kansas City Fed’s Jackson Hole Symposium.  Fed Chair Powell’s speech will reiterate that more rate hikes might be needed and that rates should stay higher for longer.  With the recent surge with real yields, Fed Chair Powell can acknowledge that policy is restrictive and that future rate cuts could eventually be warranted as long as inflation has been defeated. The economic data starts on Tuesday with the July existing homes sales report, which should show signs of stabilizing.  Wednesday contains the flash PMIs, which could show manufacturing remains in contraction territory and softness with the service sector continues.  On Thursday, we will get both initial jobless claims and the preliminary look at durable goods, which is expected to show weakness in July. Friday contains the release of the final reading of the University of Michigan sentiment report, with most traders wanting to know if inflation expectations had any major revisions. Earnings for the week include results from Baidu, Lowe’s, Nvidia, and Snowflake,   Eurozone As the ECB is poised to continue delivering more rate hikes to combat inflation, the risks of a hard landing are growing.  There’s no shortage of economic releases next week but the one that stands out is the flash PMI readings. The manufacturing sector is clearly going to remain in contraction territory for all the key regions(Germany, France, eurozone), while the service sector steadily weakens, fighting to stay in expansion territory.  Traders will also pay attention to both the German IFO business climate report as that could show expectations might be stabilizing and what should be another soft consumer confidence report. Thin trading conditions in Europe could occur on Tuesday as some banks (France, Italy) are closed for Assumption Day.   UK Next week is mostly about the UK flash PMI survey, as the composite PMI collapse in July is expected to be followed by further weakness in August. The manufacturing PMI is expected to weaken further from 45.3 to 45.0, the service reading to drop from 51.5 to 50.8, while the composite drops from 50.8 to 50.3.   The UK economy is still expected to barely show growth in Q3, but the momentum is fading as the BOE’s rate hiking cycle starts to weigh on the economy.   Russia Following the plunge in the ruble and an emergency rate hike, the focus on Russia will shift back to the war in Ukraine and the BRICS summit.  Russia was having a growing influence in Africa, but that might get tested as President Putin will be absent given his indictment by the ICC. The economic calendar is light with two releases, industrial production data on Wednesday and money supply on Friday.   South Africa The one notable release will be the July inflation report.  Inflation is expected to stay in the SARB’s target range between 3-6%.  The annual headline reading is expected to drop from 5.4% to 4.9%, while the monthly reading rises from 0.2% to 1.0%.  The monthly core reading is also expected to see a rise from 0.4% to 0.6%.   Turkey With inflation out of control, the CBRT is expected to deliver its 3rd straight rise, bringing the 1-week report rate to 19.50%.  The consensus range is to see the rate rise from 17.5% to anywhere between 18.50% and 20.5%. The 19.0% level was a key level in the past as that triggered the sacking of Governor Agbal.   Switzerland Another quiet week with Money supply data released on Monday and export data on Tuesday.   China One sole key economic data to watch will be on Monday, the monetary policy decision on its one-year and five-year loan prime rates that commercial banks used as a benchmark to price corporate, household loans and housing mortgages respectively. After a surprise cut of 15 basis points (bps) on the one-year medium-term lending facility rate to 2.50% last Monday, its lowest level since late 2009 to defuse the potential contagion risk in China’s financial system triggered by a major trust fund that failed to make timely payments to holders of its wealth management products which are backed by unsold properties of indebted property developers; forecasts are now calling for a similar 15 bps cut on the one and five-year loan prime rates to bring it down to 3.4% and 4.05% respectively. Market participants will also be on the lookout for more detailed fiscal stimulus from China’s top policymakers after recent “morale-boosting piecemeal rhetoric measures” that have failed to break the negative feedback loop in the China stock market; the benchmark CSI 300 index has given up all its ex-post Politburo gains from 25 July after the top leadership group promised to implement “counter-cyclical” measures to defuse the deflationary risk spiral in China. For earnings report releases, a couple of major companies to take note of; Sunny Optical Technology (Tuesday), Country Garden Services (Tuesday), China Life Insurance (Thursday), NetEase (Thursday), Meituan (Friday).   India A quiet calendar with only foreign exchange reserves and fortnightly bank loan growth data out on Friday.   Australia Flash Manufacturing and Services PMIs for August will be out on Wednesday.   New Zealand Balance of Trade for July out on Monday is forecasted to shrink to a deficit of -NZ$0.4 billion from a surplus of NZ$9 million posted in June. If it turns out as expected, it will be its first trade deficit since March 2023 due to a weak external demand environment. Q2 retail sales will be out on Wednesday where its prior Q1 negative growth of -4.1% y/y is forecasted to narrow to -0.9% y/y.   Japan Two key data releases to monitor. Firstly, flash Manufacturing and Services PMIs for August out on Wednesday; manufacturing activities are forecasted to improve slightly to 49.9 from 49.6 printed in July while growth in the services sector is expected to come in almost unchanged at 53.6 versus 53.9 in July  Next up, the significant leading Tokyo area consumer inflation data for August out on Friday; both Tokyo core inflation (excluding fresh food) as well as its core-core inflation (excluding fresh food & energy) are forecasted to be unchanged at 3% y/y and 2.5% y/y respectively. Both inflation measures have remained elevated especially the core-core rate which has soared to a 31-year high. Market participants will be keeping a close watch on the USD/JPY as it rallied past a key resistance zone of 145.50/146.10 despite rising concerns on possible BoJ’s FX intervention to negate the current bout of JPY weakness.   Singapore Two key data to focus on. July’s consumer inflation out on Wednesday where the core inflation rate is expected to be almost unchanged at 4.1% y/y versus 4.2% y/y in June. On Friday, industrial production for July is forecasted to show an improvement; -2.5% y/y from -4/9% y/y printed in June. Despite this forecasted improvement, it is still ten consecutive months of negative growth which increases the risk of a recession for Singapore in Q3 due to a weak external demand environment.      

EUR: ECB cannot ignore PMIs Any forward-looking economic indicator is, at this stage, quite important for the euro and the European Central Bank. The bank is officially fully focused on inflation, but evidence of a slowdown in key parts of the euro area has mounted and is now too blatant to be overlooked. Core inflation dynamics will still remain the main input for the ECB – but should we see more indications from today’s PMIs that the eurozone outlook is deteriorating, then policymakers might see the window for one last hike closing rapidly and opt for a September hike rather than delaying it until the fourth quarter.  The focus will also be on Germany’s PMIs. Manufacturing is expected to have flattened in August at 38.8, and services to have declined modestly to 51.5. Overall, the eurozone numbers are not expected to show any further material deterioration. Later today, the euro area consumer confidence will also be published. EUR/USD came under pressure yesterday and unless we receive some encouraging news from PMIs, or a drop in the dollar (e.g., caused by an equity rally after Nvidia results), we suspect markets may marginally prefer to stay bearish on the pair as for some pre-Jackson Hole positioning.   EUR/USD is testing the early-July 1.0834 low this morning, a break lower puts the next support at 1.0800 (200-day MA).

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

Dutch retail sales volumes expected to shrink for the first time in a decade Retail sales volumes in the Netherlands are expected to contract by 2% in 2023 for the first time in a decade. In addition to higher wages and purchasing costs, staff shortages are limiting growth for many retailers. Retail bankruptcies are expected to increase in 2023, especially in the more cyclical non-food segment.   Slight contraction in 2023 These are challenging times for retailers, with high inflation and low consumer confidence. Retail sales volumes in the Netherlands are expected to decline by around 2% in 2023 for the first time in 10 years. This is mainly due to a sharp fall in sales in the non-food segment, which is most sensitive to the economic cycle. Despite a contraction in retail sales, we expect turnover to grow by an average of 5%. The higher turnover is almost entirely due to higher retail prices.   Retail sales volume in the Netherlands is expected to shrink in 2023 Retail sales volume in the Netherlands, year-on-year   Food and clothing are now significantly more expensive During the first seven months of 2023, food prices increased by an average of 16%. Clothing also became considerably more expensive at 11%, as did personal care, such as shampoo and perfume, with an increase of 9%. Although the largest price increases are probably behind us, inflation remains relatively high this year, at around 4.5%.    Strong price increases for food and clothing in the first seven months of 2023 Average consumer prices from January to July, year-on-year    Consumers cut back on non-essential spending Due to high inflation and persistently low consumer confidence, consumers are cutting back their purchases, especially when it comes to non-essential goods such as home furnishings and electronics. As a consequence, retail sales in practically all non-food segments have fallen sharply compared to 2022, when the high street was still catching up after the pandemic. Volume shrinkage is expected in all non-food segments, except personal care. The largest contraction has occured in home furnishings and electronics stores   Significantly lower sales growth for non-food retail in 2023 Sales growth (value) in the Dutch non-food retail sector, year-on-year    Food purchases are shifting from specialty stores to supermarkets In terms of turnover development, 2023 is a big year for food retail entrepreneurs with expected growth of almost 8%. However, this is purely and solely due to higher prices. Higher costs for personnel, purchasing, energy and transport give ample reason for adjusting the prices on the shelves. Just like in 2022, sales will shrink this year because consumers are buying less. Due to the high inflation, consumer spending is also shifting from specialist shops to supermarkets and from premium brands to supermarket own-label products.     Sales growth peaks in 2023 in Dutch food retail Sales growth (value) in Dutch food retail, year-on-year    E-commerce returns to calmer waters After the turbulent pandemic years, e-commerce has returned to calmer waters in 2023. A turnover growth of 4% in online purchases is expected for 2023, after a slight decrease in 2022. With the disappearance of lockdowns at the beginning of 2022, purchases that had been made online were taking place in physical stores again. Nevertheless, it is expected that in the years ahead there will be a further shift from physical to the online sales channel. Not only because consumers have experienced the convenience of online shopping, but also because retailers more often have an omnichannel strategy, in which they often offer a smaller range in store than online. In addition, a shortage of staff may have an impact on the service provided in physical stores, as 40% of retailers are still experiencing staff shortages in the Netherlands.    Strong fluctuations in online sales growth Sales growth (value) online shops and omnichannel, year-on-year    More bankruptcies expected in 2023 In addition to higher rents, which are often increased on the basis of inflation, retailers are faced with higher energy, purchasing and staffing costs. On top of that, they also have to repay the tax debt accrued during the pandemic. This puts further pressure on the viability of an increasing number of stores. It is therefore expected that the number of business closures and bankruptcies in retail, especially in the non-food sector, will be higher this year than in previous years when the number of bankruptcies was at an extremely low level.   More bankruptcies on the high street since the end of 2022 Number of bankruptcies in the Dutch retail (excluding car sales), per quarter 

Asia Morning Bites Tokyo inflation for August dips slightly on base effects. Asian markets await the outcome of Powell's Jackson Hole speech.   Global Macro and Markets Global markets:  Pre-speech nerves? US equities reversed Wednesday’s gains on Thursday. The S&P 500 dropped by 1.35% while the NASDAQ fell 1.87%. Equity futures are non-committal ahead of Powell’s speech today.  Chinese stocks put in a rare up-day on Thursday. The CSI 300 rose 0.73%, and the Hang Seng index rose 2.05%, though this may have been following the earlier US lead, and could reverse today. US Treasury yields moved a little higher yesterday after Wednesday’s large falls. The 2Y yield is back above 5% now at 5.023%, while the 10Y yield regained 4.5bp to reach 4.237%. That’s still about 13 bp off the recent high.  The increase in yields was enough to push the USD stronger against the G-10 currencies yesterday, and EURUSD is now down to 1.0799. The AUD reversed all of Wednesday’s gains falling to 0.6415, Cable has dropped below 1.26 and the JPY is back up again to just under 146. In Asia, the KRW benefited from the BoK’s hawkish pause, and has gapped down more than a per cent to 1322.35. The TWD was also among the gainers, moving down to 31.786. The VND was weaker again yesterday, rising to 24008 as it looks to recalibrate against the CNY against which it has appreciated this year. The CNY was roughly unchanged on the day at just under 7.28.   G-7 macro:  Today’s Powell speech will get a great deal of scrutiny and there has already been a lot written about what he will say, with the majority view being that he will tread a cautious path with respect to any further potential tightening, looking for confirmation from the totality of the data before committing to any additional hikes. Lots of comparisons to the Greenspan “risk management” era are being wheeled out. At the same time, the Fed pundits are also saying that he will not want to suggest that there is any pre-set path for easing. We will know soon enough how well markets take his comments. The fact that this speech is scripted, and there is no Q&A means that room for going "off-piste" is limited. Besides this, and all the other Fed speakers this weekend, the University of Michigan publishes its August consumer confidence and inflation expectations surveys. Sentiment has been picking up recently, while the inflation expectations numbers have eased back slightly. Yesterday’s data was mixed. Weaker durable goods figures but lower jobless claims.   Japan: Tokyo inflation eased to 2.9% YoY in August (vs 3.2% July, 3.0% market consensus) mainly due to base effects and lower energy prices. Utility prices dropped to -15.0%YoY from the previous month’s -10.8%. However, core inflation excluding fresh food and energy stayed at 4.0%YoY as expected for the second month, the highest level for decades. Demand side pressures are clearly building up, suggested by inflation increases in entertainment (5.7%), transport & communication (3.6%), and medical care (2.8%). On a monthly comparison, goods prices dropped -0.1% MoM sa while services prices stayed flat. Also, higher than expected PPI services inflation (1.7% YoY in July vs revised 1.4% June, 1.3% market consensus) also reinforced the same message.   There are risks on both sides in the near future. On the downside, entertainment price pressures will be partially reduced as the summer holiday season ends. On the upside: The energy subsidy program will come to an end by September; Recent renewed JPY weakness; and rises in pipeline service prices. We believe that upward pressures will likely build a bit more significantly at least for the next few months and push up inflation again. We think inflation will exceed the BoJ’s outlook for this year and next year and core inflation excluding fresh food and energy will likely stay in the 3% range by the end of this year.   Singapore:  July industrial production is set for release today.  We expect another month of contraction, tracing the struggles faced by non-oil domestic exports, which were down 20.2%YoY for the same month.  We can expect industrial production to stay subdued until we see a turn in NODX, which should also weigh on 3Q growth.   What to look out for: Jackson Hole conference Malaysia CPI inflation (25 August) Singapore industrial production (25 August) US Univ of Michigan Sentiment (25 August)

US Now that we heard from Fed Chair Powell at the Kansas City Fed’s Jackson Hole Symposium, the focus shifts back to the data. This week is filled with data that will outline how quickly the economy is weakening. Consumer data will show personal income growth is not keeping up with spending, while confidence holds steady. The Fed’s favorite inflation reading is also expected to show subdued growth is holding steady on a monthly basis. Friday’s NFP report will show private sector hiring is cooling.    Over the weekend, the spotlight will be on US-China relations.  US Commerce Secretary Gina Raimondo will meet with Chinese officials, striving to lower tensions between the world’s two largest economies.  The week will also be filled with Fed speak.  On Monday and Tuesday, Barr speaks about banking services. On Thursday, we hear from both Bostic and Collins, while Friday contains appearances by Bostic, a couple of hours before the NFP report, and Mester on inflation later in the morning.   Eurozone Next week is data-heavy but there are a few releases that stand out. The most notable is the HICP flash estimate for the eurozone on Thursday which is expected to drop slightly at the headline and core levels. There will be individual country releases in the days running up to this which may signal whether Thursday’s data will likely beat or fall short of expectations. ECB accounts are also released on Thursday which will be of interest considering markets now view the rate decision at the next meeting as a coin toss between 25 basis points and no change.    UK  The week starts with a bank holiday and it doesn’t get much more exciting from there. There are a few tier-three data releases and Huw Pill from the Bank of England will make appearances on Thursday and Friday. Russia A selection of economic data is on offer next week including unemployment on Wednesday, GDP on Thursday, and the manufacturing PMI on Friday.  South Africa No major events next week with PPI on Thursday the only notable release. It follows CPI data this past week which fell to 4.8%, well within the SARB 3-6% target range, following a much lower 0.9% monthly reading in July.  Turkey The CBRT surprised markets last week by hiking rates far more aggressively than expected, taking the repo rate to 25%, up from 17.5%. The move may cost people at the central bank their jobs if history is anything to go by, with President Erdogan openly no fan of higher rates. That said, he did employ these people shortly after his election victory so perhaps with that behind him, he may be more open to it while remaining vocally against. This week offers very little, with GDP on Thursday the only release of note. Switzerland Inflation data on Friday is expected to show prices rising 1.5% on an annual basis, slightly lower than in July and well below the SNB 2% target. The central bank hasn’t appeared satisfied though and markets are fully pricing in a hike in September, with 32% chance of it being 50 basis points. The manufacturing PMI will also be released on Friday, with retail sales on Thursday, and the KoF economic barometer and economic expectations on Wednesday. China Only three key economic releases to monitor for the coming week. First up, the NBS manufacturing and services PMIs for August will be out on Thursday. Another contractionary print of 49.5 is expected for the manufacturing sector, almost unchanged from July’s reading of 49.5. If it turns out as expected, it will be the fifth consecutive month of negative growth for manufacturing activities as China grapples with a weak external environment and domestic financial contagion risk that has been triggered by debt-laden property developers. Secondly, the NBS services PMI for August is forecasted to remain surprisingly resilient at 51, almost unchanged from 51.5 in July. The services sector is still in an expansionary mode albeit at a slower pace that is likely being supported by domestic tourism. Thirdly, the private sector-focused Caixin manufacturing PMI for August which consists of small and medium enterprises will be released on Friday, 1 September. Consensus is still expecting a contractionary reading of 49.5, almost unchanged from July’s print of 49.2. If it turns out as expected, it will be the second consecutive month of negative growth. A slew of key earnings releases to take note of starting this Saturday, 26 August will be China Merchants Bank, and Bank of Communications followed by; BYD (Monday, 28 August), Ping An Insurance, NIO, Country Garden (Tuesday, 29 August), Agricultural Bank of China (Wednesday, 30 August), ICBC, Bank of China, China Minsheng Bank (Thursday, 31 August). Also, market participants will be on the lookout for fiscal stimulus measures to defuse the $23 trillion debt bomb owed by local governments, financial affiliates, and property developers. On Friday, 25 August, China policymakers unveiled a further easing of its home mortgage policies that scrap a rule that disqualifies first-time homebuyers who had a mortgage that is fully repaid from being considered a first-time buyer in major cities in an attempt to boost up residential property transactions.  India Two key data to focus on. Q2 GDP on Thursday where the consensus is expecting a further economic growth expansion to 7% y/y in Q2, a further acceleration from 6.1% y/y recorded in Q1. Lastly, the manufacturing PMI for August will be released on Friday where it is being forecasted to come in at 57, almost unchanged from the July reading of 57.7 which will indicate a 26th straight month of growth expansion for manufacturing activities. Australia Retail sales for July will be out on Monday, with a recovery to 0.3% m/m from -0.8% m/m in June. On Wednesday, the important monthly CPI indicator for July will be out and the consensus forecast is another month of cooling to 5.2% from 5.4% in June. If it turns out as expected, RBA may have more reasons to justify its current pause at 4.1% for two consecutive meetings. Its next monetary policy meeting will be on 5 September, and as of 24 August, the ASX 30-day interbank cash rate futures have priced in a 12% chance of a rate cut to 3.85% (25 bps cut).  New Zealand A quiet week with the only focus on the ANZ business confidence indicator for August on Thursday followed by ANZ consumer confidence for August on Friday. Japan The action comes mid-week. Consumer confidence for August is released on Wednesday and is expected to be almost the same at 37.2 versus July’s 37.1. On Thursday, we will have retail sales and industrial production for July. Growth in retail sales is expected to slip slightly to 5.4% y/y from 5.9% in June. Meanwhile, industrial production is expected to contract to -1.4% m/m from 2.4% m/m in June, and -0.7% y/y is forecasted from 0% y/y recorded in June. Singapore The sole key data to monitor will be the producer prices index for July out on Tuesday with another month of negative growth forecasted at -9% y/y, a slower pace of contraction from -14.3% recorded in June. It would be the 7th consecutive month of decline.

Dream JOLTS data By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     Yesterday was a typical 'bad news is good news' day. Risk sentiment in the US and across the globe was boosted by an unexpected dip in US job openings to below 9 mio jobs in July, the lowest levels since more than two years, and an unexpected fall in consumer confidence in August. The weak data pushed the Federal Reserve (Fed) hawks to the sidelines, and bolstered the expectation of a pause in September, and tilted the probabilities in favour of a no hike in November, as well. $    Note that the latest JOLTS data printed the ideal picture for the Fed: Job vacancies eased, but hiring was moderate and the layoffs remained near historically low levels. The data also suggested that the era of Great Resignation, where quit rates hit a record, could be over, as people quitting their jobs retreated to levels last seen before the pandemic. The US 2-year yield dived 15bp, the 10-year yield fell 8bp, while the S&P500 jumped nearly 1.50% to above its 50-DMA and closed the session at a spitting distance from the 4500 level. 90% of the S&P stocks gained yesterday; even the Big Pharma which had a first glance at which medicines will be subject to price negotiations with Medicare held their ground. But of course, tech stocks led the rally, with Nasdaq 100 closing the session with more than a 2% jump. Tesla was one of the biggest gainers of the session with a more than a 7.5% jump yesterday.    US and European futures suggest a bullish open amid the US optimism and news of upcoming deposit and mortgage rate cuts from Chinese banks.    On the data front, all eyes are on the US ADP report and the latest GDP update. The ADP report is expected to reveal below 200K new private job additions in August, while the US growth is expected to be revised from 2% to 2.4% for the Q2 with core PCE prices seen down from 4.90% to 3.80%. If the data is in line with expectations, we shall see yesterday's optimism continue throughout today. Again, what we want is to see – in the order of importance: 1. Slowing price pressure, 2. Looser, but still healthy jobs market, 3. Slowing but not contracting economy to ensure a soft landing. We will see if that's feasible.     In Europe, however, that slow landing seems harder to achieve. Today, investors will keep an eye on the latest inflation updates from euro-area countries, and business and sentiment surveys. We expect to see some further red flags regarding the health of the European economy due to tighter financial conditions in Europe and the energy crisis. German Chamber of Commerce and Industry warned yesterday that German businesses are cutting investments and move production abroad due to high energy prices at home. The EURUSD flirted with 1.09 yesterday, as investors trimmed their long dollar positions after the weak JOLTS data. The AUDUSD rebounded, even though the latest CPI print showed that inflation in Australia slowed below 5% in July, a 17-month low. In the UK, shop prices fell to a 10-month low. But it won't be enough for central bankers to cry victory just yet, because the positive pressure in energy prices remains a major concern for the months ahead. The barrel of American crude is pushing toward the $82pn level, with improved trend and momentum dynamics hinting that the bullish development could further extend.  

Rates Spark: Losing buoyancy Weaker data is eroding the US narrative that has helped push yields higher over the past week. A lower landing zone for the Fed also means a lower floor to long-end rates. There is still more data and volatility in store this week, with the US jobs data looming large. EUR markets will look to the inflation data key input for the upcoming ECB meeting.   The Fed discount is eroding and so is the floor for the 10Y yield Recent data is eroding the narrative of US resilience that had supported the rise of 10Y yields to above 4.3% over the past weeks. Poor job openings data and dipping consumer confidence yesterday saw the 10y falling through 4.2% and then briefly further towards 4.1% overnight. Interestingly the move was largely in real rates, and it reversed all of the gains that they had managed after dipping on the weaker PMIs last week.   We had suspected that an elevated Fed discount would draw a floor under longer rates. But just as data had shifted this floor higher, data is now hacking away at that discount. The curve bull-steepened with 2Y SOFR swap rates dropping more than 12bp while the 10Y still dropped close to 10bp. Data this week holds more candidates to push yields around, especially with US jobs data out on Friday. The consensus is already looking for further cooling with the payroll increase decelerating to 170K, but the unemployment rate is seen steady at 3.5%. Keep in mind that the Federal Reserve itself – in comments and its June projections – has pointed to an unemployment rate of 4% and above as being necessary to cool inflation towards the target rate. The indications it got yesterday are going in the right direction.   A pause in September is widely seen as the base case, with markets firming their view as the discounted probability of a pause moves towards 90%. One final hike is still possible this year, but the discounted chances for that to happen have slipped from close to 70% to a coin toss. Our economist believes the Fed has already reached its peak.   Assessing the Fed's landing zone remains crucial to overall rates   Aiding the ECB decision process, first August CPI indicators from Spain and Germany European Central Bank President Lagarde did not provide any further guidance in Jackson Hole with regard to the upcoming meeting in September. From recent comments, it is clear that the hawks on the governing council would still like to see higher rates. Austria’s Holzmann had been quite explicit, saying he saw the case for a hike if there were negative surprises until then. Latvia’s Martins Kazaks also wants to err on the side of raising rates, while Bundesbank’s Joachim Nagel also says it is too early to consider a pause. In later comments, he seemed to soften his tone, suggesting to wait for the data. Following the dip in the wake of the PMIs, the market has slowly priced the probability of a hike back into the forwards, but still just below 50%. But further out, markets are back to seeing a 75% chance that a 25bp rate hike comes before the end of the year to take the ECB’s depo rate to 4%. We would focus more on the upcoming meeting, however. We also think a September hike at this stage could be more of a coin toss, but more importantly, we sense that the hawks will see it as a last chance to hike one final time. If there is no hike in September, rates will probably not rise any further. One key input to arrive at a final assessment is the inflation data this week, starting today with the preliminary readings from Spain and Germany.   Today's events and market view It appears that the tide has turned again for rates now that data is eroding the resilience narrative. The latest auction metrics, such as the strong 7Y UST sale last night, also suggest that levels had been pushed sufficiently high to attract demand again. But the key remains in the data, with the US jobs report looming large on Friday. Today, we will get the ADP payrolls estimate, with a consensus for a weaker 195K after 324K last month. The value of the ADP as a predictor for the official data is questionable, however, as was also evidenced early this month – a large upside surprise in the ADP was followed by a disappointing official payrolls figure. But today’s data and anecdotal evidence from the release can still offer insight into the health of the labour market where more signs of cooling have come to light. In other US data today, we will get the pending home sales and the second reading of second-quarter GDP growth. The main highlight for the EUR markets will be Spanish and German regional CPI data. The consensus is for Spanish headline inflation to tick higher from 2.1% to 2.4% year-on-year. For Germany, the headline is seen falling somewhat from 6.5% to 6.3% year-on-year, but the state of NRW numbers already came in slightly hotter this morning. Yesterday, supply had initially helped push yields higher before the US data turned the market. Today, we will see Germany tapping a 4Y green OBL for €1.5bn. Italy’s bond sales today include a new 10Y benchmark and will amount to up to €10bn in total.    

FX Daily: Eurozone inflation, round one Spain and Germany will release inflation figures today, and market expectations for the ECB's September meeting may already be impacted. Eurozone numbers are out tomorrow. Meanwhile, ADP payrolls are out in the US after a soft batch of data hit the dollar yesterday, while AUD is shrugging off lower-than-expected CPI figures.   USD: ADP could be inaccurate, but may move the market Two softer-than-expected data releases in the US yesterday prompted a sizeable correction in the USD 2-year swap rate yields, which fell from 4.94% to the 4.80% area. JOLTS job openings data fell to 8.8 million in July, meaning there were approximately 1.5 open positions for each unemployed worker – the lowest ratio since September 2021. The hiring rate declined marginally, but the layoff rate was unchanged. Consumer confidence figures also disappointed, with the Conference Board survey dropping from a revised 114 level in July to 106 in August. Other components of the survey also declined. The rally in pro-cyclical currencies and the dollar’s weakness across the board was a confirmation of how US activity data – even if non tier-one releases – remain firmly in the driver's seat for global currency markets. Developments in China and in the commodity sphere, while important, clearly continue to play a secondary role. Today, expect markets to focus on the ADP employment figures. These have not proven to be a very accurate estimator of the official payrolls recently but have often impacted rate expectations. The consensus is for a 195k print. Wholesale inventories and pending home sales for July, as well as the GDP and core PCE secondary release for the second quarter, are also on the calendar today. The dollar is regaining some ground this morning after yesterday’s losses, but data will determine the direction of travel today. We had called for a weaker dollar at the start of this week and we’d like to see whether eurozone inflation data boost the chances of one last hike from the European Central Bank. With markets being more convinced of no more hikes by the Federal Reserve – barring a surprise in payrolls – a re-tightening in the EUR/USD short-term real rate gap could set the tone for a weaker dollar across the world. DXY may continue its correction from the 104.00 highs and test 103.00 should eurozone inflation figures come in strong enough and US employment not surprise on the upside. 

Germany to release CPI on Wednesday, Eurozone on Thursday US consumer confidence and jobs data disappoint   The euro’s mini-rally has run out of steam. EUR/USD climbed 0.80% over the past two days but is trading in negative territory on Wednesday. In the European session, the euro is trading at 1.0867, down 0.11%. The markets will be keeping a close eye on European inflation releases today and Thursday. Germany releases the July CPI report later today, with a consensus estimate of 6.0%, compared to 6.2% in July. The once-formidable German juggernaut is in trouble and inflation remains high. The eurozone releases July CPI on Thursday, which is expected to drop from 5.3% to 5.1%. The ECB meets next on September 14th and ECB President Lagarde may have signalled that another rate hike is coming. Lagarde attended the Jackson Hole summit last week and said that interest rates would remain high “as long as necessary” in order to bring inflation back to the ECB’s 2% target. Lagarde’s hawkish remarks were more hawkish than her comments at the July meeting, where she said that ECB policy makers had an “open mind” about the September decision.   There’s no arguing that eurozone inflation remains too high, but the argument against raising rates even higher is that the eurozone economy is not in great shape, and nine straight rate hikes from the ECB have cooled economic growth. Further hikes could tip the economy into a recession, which means that the ECB has its work cut out in deciding whether to raise rates again or take a pause in September. The Federal Reserve is widely expected to hold rates at next week’s meeting, and disappointing data on Tuesday may have cemented a pause. The Conference Board Consumer Confidence Index fell sharply to 106.1 in July, compared to 116.0 in August, marking a two-year low. As well, JOLTS Job Openings slowed to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. This was the sixth decline in the past seven months, a sign that the resilient US labour market is showing cracks.   EUR/USD Technical EUR/USD is putting strong pressure on resistance at 1.0896. The next resistance line is 1.0996 1.0831 and 1.0731 are providing support    

Gold is traditionally seen by investors as a hedge against inflation. However, it is not inflation that drives the XAU/USD quotes, but recession. In the spring, the precious metal confidently rose towards historical highs amid expectations of an impending downturn in the U.S. economy. However, a stable labor market and positive macroeconomic indicators suggested a soft landing. This led to a collapse in the price of gold during the summer. As autumn approaches, the cooling economy is once again translating into its rise. Disappointing statistics from the U.S. are a reason to buy gold. The weaker the data, the less likely the Federal Reserve will implement its June forecast and raise the federal funds rate to 5.75%. Regardless of how much Fed Chairman Jerome Powell argues otherwise in Jackson Hole.   Furthermore, once a tightening monetary policy cycle ends, a dovish pivot usually follows. Monetary expansion creates a favorable environment for XAU/USD. Dynamics of the federal funds rate and gold     In this respect, the sharp decline in consumer confidence from the Conference Board in August and the continued peak in job vacancies and layoffs in the U.S. labor market in June are alarming signs for the U.S. economy and great news for gold enthusiasts. The chances of the Fed raising borrowing costs in 2023 have once again dropped below 50%, which adversely affected the dollar and allowed XAU/USD to counterattack. In essence, asset managers who reduced their net short positions on precious metals to their lowest levels since mid-March were mistaken. Aswere investors who withdrew money from ETFs for 13 weeks in a row. They were betting on the highest yield of U.S. Treasury bonds in over a decade. However, as soon as the U.S. macro data began to deteriorate, U.S. debt market rates declined, and XAU/USD quotes went up.   Dynamics of market expectations on the Federal Reserve rate   What's next? Gradual cooling of the labor market, a sharp reduction in excess savings, and mortgage rates rising above 7% paint a picture of new cracks in the U.S. economy. The tightening of the Fed's monetary policy occurs with a temporary lag. The more time that passes since the beginning of the cycle, the more painful the monetary restriction will be. Under such circumstances, recession risks will increase again.   In the end, the markets will return to the original conditions that existed in the spring and pushed gold to $2,075 per ounce. However, there is another scenario. The U.S. economy will continue to pleasantly surprise; the likelihood of forming a new inflation peak increases, as do the chances of raising the federal funds rate to 5.75%. Technically, on the daily chart of the precious metal, there is a "Double Bottom" pattern. Thanks to this, gold broke above the EMA and has the opportunity to continue its rally towards the fair value of $1,962 per ounce. As long as prices hold above $1,929, traders should focus on buying.    

Australian inflation falls to 4.9% US GDP expected to rise to 2.4% The Australian dollar has edged lower on Wednesday after sharp gains a day earlier. In the European session, AUD/USD is trading at 0.6473, down 0.10% on the day.   Australia’s inflation slips to 4.9% There was good news on the inflation front as July CPI fell to 4.9% y/y, down from 5.4% in June and below the consensus estimate of 5.2%. Inflation has now fallen to its lowest level since February 2022. Core inflation, which has been stickier than headline inflation, gained 5.8% in July, down from 6.1% in June. The markets are widely expecting the Reserve Bank of Australia to hold rates at the September 5th meeting and the drop in the headline and core inflation readings could well cement a pause. Inflation remains well above the RBA’s 2% target, but it is an encouraging sign that inflation continues to move in the right direction.   Soft US numbers send Aussie sharply higher The Australian dollar sparkled on Wednesday, climbing 0.80% and hitting a one-week high. The uptick was more about US dollar weakness than Aussie strength, as the US posted softer-than-expected consumer confidence and employment data on Wednesday. US consumer confidence took a hit as the Conference Board Consumer Confidence Index fell to 106.1 in July. This was a sharp drop from the August reading of 116.0 and marked a two-year low. JOLTS Job Openings fell to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. This was the sixth decline in the past seven months, another sign that the strong US labour market is showing cracks.

The US confounded 2023 expectations that it would fall into recession as households used pandemic-era savings and their credit cards to maintain lifestyles amidst a cost-of-living crisis. But with loan delinquencies on the rise, savings being exhausted, credit access curtailed and student loan repayments restarting, financial stress will increas.   Robust resilience in the face of rate hikes At the beginning of the year, economists broadly thought the US economy would likely experience a recession as the fastest and most aggressive increase in interest rates inevitably took its toll on activity. Instead, the US has confounded expectations and is on course to see GDP growth of 3%+ in the current quarter with full-year growth likely to come in somewhere between 2% and 2.5%. What makes this even more surprising is that this has been achieved in the face of banks significantly tightening lending conditions while other major economies, such as China, are stuttering and even entering recessions, such as in the eurozone.   Consumers still happy to spend with the jobs market looking so strong So why is the US continuing to perform so strongly? Well, the robust jobs market certainly provides a strong base, even if wage growth has been tracking below the rate of inflation. Maybe that confidence in job security has encouraged households to seek to maintain their lifestyles amidst a cost-of-living crisis by running down savings accrued during the pandemic and supplementing this with credit card borrowing. The housing market was another source of concern at the start of the year, but even with mortgage rates at 20-year highs and mortgage applications having halved, prices have stabilised and are now rising again nationally. Home supply has fallen just as sharply, with those homeowners locked in at 2.5-3.5% mortgage rates reluctant to sell and give up that cheap financing when moving to a different home and renting remains so expensive. This has helped lift new home construction at a time when infrastructure projects under the umbrella of the Inflation Reduction Act are supporting non-residential construction activity.   But lending is stalling and savings have been run down The Federal Reserve admits monetary policy is now restrictive, and while it could raise interest rates further, there is no immediate pressure to do so. With inflation showing encouraging signs of slowing nicely, this is fueling talk of a soft landing for the economy. With less chance of an imminent recession, financial markets have scaled back the pricing of potential interest rate cuts in 2024, with the resiliency of the US economy prompting a growing belief that the equilibrium level of interest rates has shifted structurally higher. This resulted in longer-dated Treasury yields hitting 15-year highs earlier this month.   Outstanding commercial bank lending ($bn)   Nonetheless, the threat of a downturn has not disappeared. We estimate that around $1.3tn of the $2.2tn of pandemic-era accumulated savings has been exhausted and at the current run rate all will be gone before the end of the second quarter of 2024. At the same time, banks are increasingly reluctant to lend to the consumer with the stock of outstanding bank lending flat lining since the banking stresses in March, having increased nearly $1.5tn from late 2021. We suspect that financial stresses have seen middle and lower income households accumulate the bulk of the additional consumer debt and have run down a greater proportion of their savings vis-à-vis higher income households so a financial squeeze for the majority is likely to materialise well before the second quarter of 2024.   Rising delinquencies will accelerate as student loan repayments resume Indeed, consumer loan delinquencies are on the rise, particularly for credit card and vehicle loans with the chart below showing data up until the second quarter of this year. Since then the situation has deteriorated further based on anecdotal evidence with Macy’s CFO expressing surprise at the speed and scale of the rise in delinquencies experienced through June and July on their own branded credit card (Citibank partnered). With credit card interest rates at their highest level since 1972 and with household finances set to become more stressed with the imminent restart of student loan repayments, something is likely to give. We see the risk of a further increase in delinquencies, which will hurt banks and lead to even further retrenchment on lending, together with slower consumer spending growth and potentially even a contraction.   Percent of loans 30+ days delinquent   Downturn delayed, not averted The manufacturing sector is already struggling and we see the potential for consumer services to come under increasing pressure too. On top of this there are the lingering worries about the demand for office space and the impact this will have on commercial real estate prices in an environment where there is around $1.5tn of loans needing to be refinanced within the next 18 months. With small banks the largest holder of these loans, we fear we could see a return to banking concerns over the next 12 months. Consequently, we are in the camp believing that it's more likely that the downturn has been delayed rather than averted. Fortunately, we think inflation will continue to slow rapidly given the housing rent dynamics, falling used car prices and softening corporate pricing power and this will give the Federal Reserve the flexibility to respond swiftly to this challenging environment. We continue to forecast the Federal Reserve will not carry through with the final threatened interest rate rise and instead will switch to policy loosening from late first quarter 2024 onwards.  

05:55BST Friday 1st September 2023 A soft US payrolls report could seal a Fed pause later this month   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After 6 days of gains, the FTSE100 ended the month on a sour note bringing the curtain down on a negative month for European markets, as sentiment soured somewhat on concerns over the outlook for interest rates, and the China recovery story.     US markets also ended a similarly negative month on a downbeat note, although we have seen a shift in some of the negative sentiment in the past few days due to softer than expected US economic data which has brought yields lower and encouraged the idea that this month's Fed meeting will see US policymakers vote to keep rates on hold. This week we've seen the number of job openings for July slow to their weakest levels since March 2021, a sharp slowdown in August consumer confidence, a weaker than expected ADP payrolls report, and a downgrade to US Q2 GDP.     US continuing claims also rose sharply to a 6-week high, suggesting that recent rate hikes were starting to exert pressure on the US economy and a tight labour market. If today's non-farm payrolls report shows a similarly modest slowdown in the rate of jobs growth, then there is a very real sense that we could see further gains in stock markets, as bets increase that the Federal Reserve may well be done when it comes to further rate hikes. At the very least it could go some way to signalling a pause as the US central bank looks to assess the effects recent rate hikes are having on the US economy.     In July we saw another modest slowdown in jobs growth, along with downward revisions to previous months. 187k jobs were added, just slightly above March's revised 165k, although the unemployment rate fell to 3.5%, from 3.6%.     While the official BLS numbers have been showing signs of slowing, up until this week's 177k, the ADP report had proven to be much more resilient, adding 371k in July on top of the 455k in June. The resilience in the US labour market is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI, while on the BLS measure average hourly earnings remained steady at 4.4% and are expected to stay around this level.       Today's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 170k jobs added, with unemployment remaining steady at 3.5%, although it is important to remember that whatever today's jobs numbers tell us, vacancies in the US are still well above pre-Covid levels on a participation rate which is also lower at 62.6%.     After the payroll numbers we also have the latest ISM manufacturing report which is expected to continue to show that this part of the US economy is in contraction territory for the 10th month in a row. Before today's US payrolls report, we'll also get confirmation of the dire state of the manufacturing sector in Europe with the final August PMIs from Spain, Italy, France and Germany, with expectations of 48.8, 45.7, 46.4 and 39.1 respectively.     UK manufacturing PMI similarly is also expected to be confirmed at 42.5 and the lowest level since June 2020. Weak numbers here, along with similarly weak services numbers next week will also go a good way to ensuring that the ECB and perhaps even the Bank of England err on the side of a pause when they also meet later this month.     The bar to a pause for the Bank of England appears to be a much higher one, however yesterday's comments from Chief Economist Huw Pill would appear to suggest that the MPC is already leaning towards the idea that monetary policy in the UK is already restrictive. In a speech made in South Africa he said that he preferred to see a rate profile along the lines of a "Table Mountain" approach, in other words keeping them at current levels, or even a little higher for a lengthy period of time. The contents of the speech appeared to suggest that while inflation levels remained elevated, there was an acknowledgement that a lot of the recent rate hikes hadn't yet been felt, raising the risk of overtightening, and that monetary policy was already sufficiently restrictive. This would appear to suggest that a consensus is growing that the Bank of England could be close to the end of its rate hiking cycle, with perhaps one more at most set to be delivered in September.     There also appears to be an increasing debate over the sustainability of the current 2% inflation target as being too low given current levels of inflation, with arguments being made for increasing it to 3% or 4%. The 2% target has been a key anchor of central bank monetary policy over the last 30-40 years, and while it has served a useful purpose in anchoring inflation expectations some are arguing that trying to return it to 2% could do more harm than good.     That may well be true, but there is also the argument that in moving the goalposts on the current inflation target now sends the message that central banks are going soft in getting inflation under control, and that rather than return it to target over a longer period, it's easier to move the goalposts.     This comes across as unwise particularly in terms of timing. The time to have moved the inflation target was when inflation was below or at 2%, not while it is miles above it. Optics are everything particularly when inflation is well above target, with central banks needing to send the message that inflation remains their number one priority, and not water down their long-term commitment to it because it's too hard. The time to discuss a change of a target is when that target has been met and not before. Once that happens in perhaps 1-2 years' time the discussion on an inflation target, or an inflation window of between 1.5% to 3.5% can begin.       EUR/USD – the retreat off the 1.0950 area this week has seen the euro slip back with the 1.0780 trend line support from the March lows coming back into view. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year. Below 1.0750 targets 1.0630.     GBP/USD – pushed up the 1.2750 area earlier this week but has failed to follow through. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – having failed at the 0.8620/30 area earlier this week has seen the euro slip below the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.     USD/JPY – the 147.50 area remains a key resistance and remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.     FTSE100 is expected to open 16 points higher at 7,455     DAX is expected to open 50 points higher at 15,997     CAC40 is expected to open 21 points higher at 7,335

Swiss economy slows sharply Switzerland's GDP stagnated in the second quarter, with its industry suffering from the global economic slowdown. While inflationary pressures continue to ease, the Swiss economy is likely to remain sluggish over the next few quarters.   Swiss industry suffers Switzerland's GDP stagnated in the second quarter, following growth of 0.9% in the first quarter (adjusted for sporting events). This marked slowdown is primarily due to the downturn in manufacturing (-2.9% over the quarter), with the cyclical sectors suffering from the global economic slowdown. In addition, after years of very strong growth, the chemical-pharmaceutical industry is also contracting. This is weighing on Swiss exports of goods (-1.2% over the quarter). Meanwhile, the construction sector is being battered by rising interest rates. Investment in construction fell over the quarter (-0.8%), as did investment in capital goods (-3.7%). Private consumption remained strong (up 0.4% over the quarter), still buoyed by the post-pandemic rebound in the consumption of services, particularly in the hotel and catering sectors. Exports of services have also rebounded.   Headwinds likely to intensify Ultimately, while the Swiss economy has largely outperformed its European neighbours since the pandemic (Swiss GDP has risen by 5.6% since the end of 2019, compared with 3.1% for the eurozone), it now seems to have been caught up by major headwinds, namely the global economic slowdown and interest rate rises. It is only the strength of the service sector caused by the post-pandemic recovery, and in particular tourism, that has enabled Switzerland to avoid a contraction in GDP in the second quarter. The Swiss economy is likely to remain sluggish over the next few quarters, with all the leading indicators pointing to a continued slowdown. In particular, the PMI index for the manufacturing sector fell below 50 in December 2022 and has continued to decline since then, now reaching 39.9, its lowest level since 2008. Businesses are less confident and their order books are shrinking, while consumer confidence remains at a very low level. The Swiss economy is therefore likely to remain close to stagnation over the next few quarters. Ultimately, thanks to the strong start to the year, we are expecting growth to average 0.7% in 2023, compared with 2.7% in 2022. Growth in 2024 should remain weak and below the long-term average, at 0.6% for the year.   Inflationary pressures increasingly subdued Against this negative backdrop, one more positive factor remains. Inflationary pressures in Switzerland continue to moderate, and the loss of household purchasing power is smaller than elsewhere. In August, consumer price inflation stood at 1.6%, the same level as in July and slightly lower than in June (1.7%). For the past three months, Swiss inflation has therefore remained below 2%, in line with the Swiss National Bank's (SNB's) target. With wage growth remaining moderate, producer price growth back below 2%, import prices down year-on-year and the economy slowing, a sharp pick-up in inflation over the next few months seems unlikely. By intervening in the foreign exchange market to stabilise the overall effective exchange rate, as it did extensively in 2022, the SNB is able to control external inflationary pressures fairly easily. The only risk lies in rising rents, which in Switzerland are often indexed to the central bank's key rates, and could push inflation up a little in early 2024.   An uncertain central bank meeting Against this backdrop, the outcome of the SNB's monetary policy meeting scheduled for 21 September remains uncertain. It is not impossible that the SNB decides to make a final rate hike, focusing on the risks to inflation in the medium term and choosing to seize the opportunity as the end of the global rate hike cycle approaches. This would take the key rate to 2%, a total increase of 275 basis points since 2022, compared with 500 points for the Fed and 450 points expected for the ECB over the same period. However, with inflationary pressures moderating and the economy slowing, the likelihood of a further rate hike has clearly diminished.

Tesla fuels market rally By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    Tesla jumped 10% yesterday and reversed morose mood due to the Apple-led selloff. Tesla shares flirted with the $275 per share on Monday, thanks to Morgan Stanley analysts who said that its Dojo supercomputer may add as much as $500bn to its market value, as it would mean a faster adoption of robotaxis and network services. As a result, MS raised its price target from $250 to $400 a share.   Tesla rally helped the S&P500 make a return above its 50-DMA, as Nasdaq 100 jumped more than 1%. Apple recorded a second day of steady trading after shedding almost $200bn in market value last week because of Chinese bans on its devices in government offices, and Qualcomm, which was impacted by the waves of the same quake, recovered nearly 4%, after Apple announced an extension to its chip deal with the company for 3 more years. Making chips in house to power Apple devices would take longer than thought.   Speaking of chips and their makers, ARM which prepares to announce its IPO price tomorrow, has been oversubscribed by 10 times already and bankers will stop taking orders by today. The promising demand could also encourage an upward revision to the IPO price, and we could eventually see the kind of market debut that we like!    Today, at 10am local time, Apple will show off its new products to reverse the Chinese-muddied headlines to its favour before the crucial holiday selling season. The Chinese ban of Apple devices in government offices sounds more terrible than it really is, as the real impact on sales will likely remain limited at around 1%.   In the bonds market, the US 2-year yield is steady around the 5% mark before tomorrow's much-expected US inflation data. The major fear is a stronger-than-expected uptick in headline inflation, or lower-than-expected easing in core inflation. The Federal Reserve (Fed) is torn between further tightening or wait-and-see as focus shifts to melting US savings, which fell significantly faster than the rest of the DM, and which could explain the resilience in US spending and growth, but which also warns that the US consumers are now running out of money, and they will have to stop spending. So, are we finally going to have that Wile E Coyote moment? Janet Yellen doesn't think so, she is on the contrary confident that the US will manage a soft landing, that the Fed will break inflation's back without pushing economy into recession. Wishful thinking?   But everyone comes to agree on the fact that the Eurozone is not looking good. The EU Commission itself cut the outlook for the euro-area economy. It now expects GDP to rise only 0.8% this year, and not 1.1% as it forecasted earlier, as Germany will probably contract 0.4% this year. The slowing euro-area economy has already softened the European Central Bank (ECB) doves' hands over the past weeks. Consequently, the EURUSD gained marginally yesterday despite the fresh EU commission outlook cut and should continue gently drifting higher into Thursday's ECB meeting. There is no clarity regarding what the ECB will decide this week. The economy is slowing but inflation will unlikely to continue its journey south, giving the ECB a reason to opt for a 'hawkish' pause, or a 'normal' 25bp hike. 

Australia’s consumer confidence falls sharply Australia’s business conditions improve Markets eye US inflation report on Wednesday The Australian dollar has edged lower on Tuesday after starting the week with massive gains. In the North American session, AUD/USD is trading at 0.6412, down 0.28%. Australia’s consumer confidence slides Australian consumers are in a sour mood, as they feel the squeeze of high interest rates and stubborn inflation, which has led to heavily-debted households. The Westpac Consumer Sentiment Index fell by 1.5% in September to 79.7, following a decline of 0.4% in August. This missed the consensus estimate of 0.6%. Consumer sentiment remains at its lowest levels since 2020, during the Covid pandemic. The corporate sector is showing more confidence than consumers, as businesses have shown stronger resilience to higher rates and increasing inflationary pressures than consumers. NAB Business Conditions climbed to 13 in August, up from 11, while business confidence remained at 2 points, indicative of slight optimism. The Australian dollar roared out of the gates on Monday, gaining 0.85%. The driver of the uptick was China’s August inflation release. CPI rose 0.1% y/y, after a surprise decline of 0.3% in July. China’s slowdown has raised alarm bells about the impact it will have on global growth, and the Asian giant is Australia’s number one trading partner. The Aussie is sensitive to economic developments in China, as we saw on Monday, and China’s Industrial Production, which will be released on Friday, could be a market-mover for the Aussie. Next week features a host of central bank meetings, and one of the most closely watched will be the Federal Reserve meeting on September 20th. Jerome Powell has broadcast loud and clear that the battle against inflation isn’t over and rate hikes remain on the table, but are the markets paying attention? Investors have priced in a pause in September at 93% and are talking about rate hikes in 2024.   The US releases the August inflation report on Wednesday, which is unlikely to change expectations about a September hold, although the inflation release could have an impact on the Fed’s rate path for the final quarter of the year. . AUD/USD Technical AUD/USD is putting strong pressure on support at 0.6405. Below, there is support at 0.6330 There is resistance at 0.6453 and 0.6528    

Australia: Strong labour report complicates RBA decision Although most of the jobs created this month were part-time, these have a habit of turning into full-time jobs, with all that this implies for higher spending power and other benefits. This pushes the pendulum back a little in favour of some further RBA tightening.   August labour report Keeping up its reputation for being an unforecastable piece of data, Australia's August labour report surprised strongly on the upside. A total of 64,900 new jobs were created in August. And although almost all of these were part-time jobs (62,100), such jobs have a habit of becoming full-time in the months ahead, which will also imply higher wages, greater job security, and better benefits - all things that usually go hand in hand with consumer confidence and stronger consumer spending.  The chart below shows the evolution of Australian employment smoothed over three months. What is evident is that although full-time employment had been slowing, the ongoing rise in part-time jobs might presage a renewed pick up in full-time jobs in the months ahead.  This would be a problem because the Reserve Bank of Australia (RBA) has been trying to cool the economy enough to bring inflation down. It has certainly made some good progress this year, getting the headline monthly inflation rate down to 4.9% in July, and the wage growth figures have also been surprisingly well-behaved. But just like the US, where inflation is now rising again at a headline level, Australian inflation has used up all the helpful base effects from last year, and the going will be a lot harder in the months ahead until we get to the November data when it should start to improve again.    Rates peaked or not? We have been wrestling with our RBA rate call, coming very close this month to chopping out our forecast for one final rate hike before the end of this year - possibly at the November meeting. We are glad now that we didn't remove this because the data flow on the activity side seems to be holding up better than would be consistent with further decent progress towards the RBA's inflation target.  Presentationally, it also might be useful for the new RBA Governor, Michelle Bullock, to stamp her authority on markets and establish a reputation for not taking risks with inflation. This would be better done early in her tenure before minds start to get made up, on the assumption that central banks still follow the implications of the seminal Barro and Gordon research.  So for now, the final 25bp cash rate hike to 4.35% remains part of our forecast. We will need to see further solid progress on inflation reduction, as well as some more concrete signs of slowing activity and domestic demand before we ditch it.   

Asia Morning Bites 25 September 2023 Singapore inflation to ease slightly lower on a quiet day for macro.   Global Macro and Markets Global Markets: Friday was a choppy day for US stocks, and though they ended marginally down, futures suggest that they will open positively today. Chinese stocks had a rare positive day. The CSI 300 rose 1.81%, while the Hang Seng index climbed 2.28%. US Treasury yields declined across the curve on Friday. 2Y UST yields fell 3.4bp to 5.11%, while yields on the 10Y bond fell 6bp to 4.434%. That didn’t have much impact on the USD. EURUSD. remained almost unchanged at around 1.0650. The AUD gained a little, rising to 0.6440, and the GBP slid further to 1.2243. James Smith has made a video which describes how markets are now eyeing rate cuts following the recent Bank of England pause. The JPY weakened on Friday after the disappointing lack of anything new from Governor Ueda at Friday’s BoJ meeting. Here’s a note by Min Joo Kang on the meeting and her thoughts about what comes next. Apart from the JPY, most Asian currencies made modest gains on Friday, with the THB and KRW out in front. The THB is sitting just above 36 currently, the KRW at 1336.75.   G-7 macro: There was very little on the macro calendar on Friday apart from the Bank of Japan meeting, and it is a quiet start to the week too, with Germany’s September Ifo survey the only notable data point.  Singapore:  Singapore reports inflation today on a quiet day in what will be a quiet week, with much of Asia off for mid-Autimn holidays later this week.  The market consensus suggests a slight dip for both headline and core inflation as favourable base effects and softer retail sales kick in. Headline inflation could dip to 4%YoY (from 4.1%YoY), while core inflation should slip to 3.5%YoY from 3.8%.  This alongside slowing growth will be factored into the upcoming MAS decision next month with no likely adjustments to policy settings just yet.      What to look out for: US sentiment data Singapore inflation (25 September) Japan department store sales (25 September) US Dallas and Chicago Fed national activity (25 September) Fed Kashkari speaks (25 September) South Korea consumer confidence (26 September) Singapore industrial production (26 September) US Conference board consumer confidence, new home sales, FHFA house price index (26 September) Australia CPI inflation (27 September) China industrial profits (27 September) Japan machine tool orders (27 September) US durable goods orders and MBA mortgage applications (27 September) Australia retail sales (28 September) US initial jobless claims, personal consumption, pending home sales (28 September) Fed's Powell, Goolsbee and Barkin speak (29 September) Japan Tokyo CPI inflation and labor report (29 September) Thailand trade (29 September) US University of Michigan sentiment, personal spending (29 September)

05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  

Asian stocks fell with US futures as yields on 10-year Treasuries reach a 16-year high above 4.54% while China Evergrande Group missed a debt payment adding to fears about the sectors massive debt pile. Broad dollar strength continues with the greenback trading at its highest level since December as another Fed member said another rate hike this year will be needed. Crude oil trades softer amid macroeconomic concerns and a stretched speculative long while gold holds support despite multiple headwinds. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events. Equities: S&P 500 futures are under pressure this morning with the US 10-year yield hitting 4.55% extending its relentless move higher. If the US 10-year yield moves to 4.75% we will most likely begin seeing widening cracks in equities as the prevailing narrative of falling inflation collapses. Yesterday’s session saw no meaningful rotation between defensive and cyclical sectors. Today’s key events are US consumer confidence figures and Costco earnings tonight after the market close. FX: Higher Treasury yields, particularly in the long end, pushed the dollar higher to extend its gains. USDCHF rose to near 4-month highs of 0.9136 with immediate target at 0.9162 which is 0.382 retracement level. EURUSD broke below 1.06 support despite better-than-expected German Ifo. USDJPY attempted a move towards 149 with verbal intervention remaining lacklustre. AUD slipped on China woes while NZD and CAD were relative gainers, and the outperformer was SEK with the Riksbank starting its FX hedging today. Commodities: Crude trades lower for a second day with macroeconomic concerns, a stronger dollar and a stretched speculative long and easing refinery margin weighing on prices. Gold prices continue to defy gravity, holding above $1900 support with demand for stagflation protection offsetting the current yield and dollar surge. LME copper is trading at the widest contango (oversupply) since at least 1994 as inventories expand and China demand concerns persist. Wheat continues to face downward pressure from huge Russian harvest despite weather related downgrades in Australia. Fixed Income. The Federal Reserve’s higher-for-longer message reverberates through higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening, and waning foreign investors demand, it’s likely to see yields continue to rise until something breaks. This week, our attention turns to US PCE numbers and Europe CPI data while the US Treasury will sell 2-, 5- and 7-year notes. It will be interesting to see if investors buy the belly of the yield curve as a sign that they are preparing for a bull rather than a bear-steepening. Overall, we continue to favour short-term maturities and quality. Volatility: VIX Index still sits at around the 17 level, but the downward pressure in equity futures this morning could push the VIX much higher. This could be a cycle where the market tests the 20 level. Macro: Fed’s Goolsbee (voter) kept the door open for more rate hikes while emphasizing higher-for-longer. Moody’s warned of a protracted government shutdown saying that it could weigh on consumer confidence and markets. Meanwhile, after PMIs, Germany’s Ifo also showed a slight improvement in business outlook to 85.7 vs. 85.2 expected, while the previous was revised higher to 85.8. There were several ECB speakers once again. Lagarde largely repeated what was said at the ECB Press Conference, noting policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target. Schnabel said there is not yet an all-clear for the inflation problem. In the news: Interest rates will stay high 'as long as necessary,' the European Central Bank's leader says (Quartz), Teetering China Property Giants Undercut Xi’s Revival Push (Bloomberg), Russia dodges G7 price cap sanctions on most of its oil exports (FT), Global trade falls at fastest pace since pandemic (FT), Dimon Warns World Not Ready for 7% Fed Rate: Times of India via Bloomberg Technical analysis: S&P500 downtrend support at 4,328 & 4,200. Nasdaq 100 support at 14,687 &14,254. DAX downtrend support at 14,933. EURUSD below strong support, resuming downtrend to 1.05. GBPUSD downtrend strong support at 1.2175. Gold rangebound 1,900-1,950. Crude oil correction: WTI expect to 87.58. Brent to 80.62. US 10-year T-yields 4.55, uptrend but expect minor correction Macro events: US New Home Sales (Aug) exp 699k vs 714k prior (1400 GMT), US Consumer Confidence (Sep) exp 105.5 vs 106.1 prior. Speeches from Fed’s Bowman (voter) as well as ECB’s Lane, Simkus and Muller. Earnings events: Costco reports FY23 Q4 earnings (aft-mkt) today with estimated revenue growth of 8% y/y and EPS growth of 14% y/y. H&M reports FY23 Q3 earnings (bef-mkt) with estimated revenue growth of 7% y/y and EPS growth of 47% y/y. Micron Technology reports FY23 Q4 earnings (aft-mkt) with estimated revenue growth of -41% y/y and EPS of $-1.18 vs $1.37 a year ago. Accenture reports FY23 Q4 earnings (bef-mkt) with estimated revenue growth of 4% y/y and EPS unchanged from a year ago. Nike reports FY24 Q1 earnings (aft-mkt) with estimated revenue growth of 3% y/y and EPS growth of –20% y/y.

Asia Morning Bites Australia's August CPI inflation report should show inflation rising again. The fall in Chinese industrial profits may be moderating.   Global Macro and Markets Global markets:  For a change, US Treasury yields didn’t rise yesterday. Nor did they fall particularly. The yield on the 2Y UST was down just 0.4bp to 5.121%, while that on the 10Y bond rose just 0.2bp to leave it at 4.536%. This was despite Neel Kashkari, a voter on the FOMC this year, saying that he thought even a soft-landing scenario would probably require one more rate hike this year. Michelle Bowman talked about the need to cool the economy to bring rents down in line with wage growth, though she did not explicitly outline a path for rates. But she implied more was needed. With this, it feels as if markets are listening and choosing to believe that in the end, the Fed will not carry through on their threats to raise rates again, either because the threat lacks credibility, or because they believe that the growth and inflation evidence will turn sufficiently to make it unnecessary. It’s a tough call to make and leaves upside as well as downside risk. Kashkari and Bowman are both due to speak again today. US Stocks cooled on Tuesday. The S&P 500 dropped 1.47% while the NASDAQ fell 1.57%. Equity futures are looking mildly positive. It was also another off-day for Chinese stocks. The Hang Seng fell 1.48%, while the CSI 300 fell 0.58%.   The risk-off sentiment may be helping the USD, which has pushed even lower overnight, dropping to 1.0570. The AUD has declined below the 64 cent level, though may get a boost from CPI inflation data later on today. Cable has dropped to 1.2148, and the JPY has risen to 149.07, a level at which you have to think there could be some more verbal intervention (Finance Minister Suzuki has already waded in) and close to a level where physical intervention may occur. The CNY has held roughly level at 7.3112, though the rest of the Asia pack was weaker against the USD. The KRW and THB, together with the IDR were the weakest currencies in the region yesterday. G-7 macro:  US new home sales fell a little more than expected in August, dropping 8.7% MoM to a 675K annual pace. The Conference Board consumer confidence index was down slightly, breaking down into a slightly stronger present situation response, but a sharply weaker expectations survey. Germany also releases consumer confidence figures from GfK today. The only US data of note is the August durable goods orders and shipments figures.   Australia: A combination of base effects wearing off, and higher gasoline and food prices will take Australia’s monthly inflation rate for August back up again after the surprising decline in July. The inflation rate should push back from the July 4.9% YoY rate to a little over 5%. The consensus estimate sits at 5.2%, which is not far from our estimate of 5.1%. While this does not immediately threaten the market’s view that the RBA has peaked in its rate cycle, a few more results like this, plus some economic resilience may spur thoughts that there is still one more hike to come. We certainly are not ruling another hike out.   China: Industrial profits figures for August are released this morning. The year-on-year decline in this series has been moderating, and we expect this to continue, though probably still leaving profits down from a year ago.   What to look out for: Australia inflation Australia CPI inflation (27 September) China industrial profits (27 September) Japan machine tool orders (27 September) US durable goods orders and MBA mortgage applications (27 September) Australia retail sales (28 September) US initial jobless claims, personal consumption, pending home sales (28 September) Fed's Powell, Goolsbee and Barkin speak (29 September) Japan Tokyo CPI inflation and labor report (29 September) Thailand trade (29 September) US University of Michigan sentiment, personal spending (29 September)

Firmer yields continue to weigh on equity markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent another negative session yesterday, with the DAX and CAC 40 slipping to their lowest levels in 6-months, as firmer yields and stagflation concerns kept markets on the back foot. We could also be seeing the result of technical effects after both the French and German benchmarks fell below their respective 200-day SMA's earlier this week.     US markets also slipped back with the S&P500 and Nasdaq 100 closing at their lowest levels since early June, after US consumer confidence slowed more than expected in September, and new home sales slipped to a 5-month low.     This weakness looks set to continue this morning with another soft start for European markets, with Asia markets also on the back foot.  Yields on US treasuries have continued to push higher, with a $48bn 2-year treasury auction achieving its highest yield since 2006, while the US dollar index closed at its highest level since November last year.   The rise in the US dollar, along with yields appears to speak to an expectation that sticky inflation will be sustained, keeping rates higher for longer, particularly since oil and gasoline prices appear to be showing little sign of drifting back from their recent highs.    The rise in the US dollar is also causing problems for the Bank of Japan after Japanese finance minister Suzuki said that he viewed recent currency moves on the currency with a high sense of urgency. Suzuki went on to say that appropriate action would be taken against rapid FX moves. Unfortunately for the Japanese government momentum is in the US dollars favour while the Bank of Japan continues to argue the case for further easing.   The very prospect of stickier US inflation will mean that Fed will err more towards higher US rates for longer which means the line of least resistance is for USD/JPY to move through 150 and on to last year's peak at 152.00, unless the BoJ suddenly reverses course.   The Fed isn't being helped by concerns that the trickledown effect of the ironically named inflation reduction act fiscal stimulus is making the Federal Reserve's job much more difficult in pulling inflation back to target in the coming months.         EUR/USD – remains under pressure with the March lows at 1.0515 the next support, along with the lows this year at 1.0480. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.    GBP/USD – slipped below the 1.2190 area, with the bias remaining for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – continues to find resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.   USD/JPY – continues to creep towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.   FTSE100 is expected to open 9 points lower at 7,616   DAX is expected to open 26 points lower at 15,230   CAC40 is expected to open 4 points lower at 7,070

Australian CPI expected to rise to 5.2% The Australian dollar is in negative territory on Tuesday. In the North American session, AUD/USD is trading at 0.6405, down 0.28%. Australian CPI expected to rise Australia releases the CPI report on Wednesday. In July, CPI eased to 4.9%, beating expectations and dropping to the lowest inflation rate since February 2022. CPI is expected to rise to 5.2% in August. Inflation remains more than double the 2% target, and the core rate is also high, with the trimmed mean dropping from 6.0% to 5.6% in August. The RBA has raised rates to 4.1%, the highest level since 2012. Have interest rates peaked? That is the thousand-dollar question. The futures markets have priced in a final rate hike before the end of the year at 35%, as investors are betting the Reserve Bank of Australia is likely done with rate tightening. The Australian economy has cooled off as a result of the RBA’s tightening, and the slowdown in China could tip the economy into a recession if rates were to move higher. The central bank is understandably more hawkish, as policy makers don’t want to close the door on further tightening with inflation still well above the target. The new RBA Governor, Michelle Bullock, has warned that the door remains open to further rate hikes and said that upcoming decisions will be based on key data. The RBA minutes from the September meeting indicated that members considered a rate hike, but in the end, opted to pause rates.   In the US, Consumer Board (CB) Consumer Confidence slipped to 103.0 in August, down sharply from a revised July read of 108.7 and shy of the market consensus of 105.5. This marked a 4-month low. Consumers noted concern over rising gasoline prices and high interest rates and the percentage of consumers who expect a recession rose in September, according to the CB. This does not bode well for consumer spending, a key driver of US growth. . AUD/USD Technical AUD/USD is putting pressure on support at 0.6380. The next support line is 0.6320 There is resistance at 0.6446 and 0.6506    

US and European equity futures trade mixed following Tuesday's US technology stocks led weakness after consumer confidence dropped to a four-month low and the expectations index fell below a level that in the past has signaled an incoming recession. The S&P 500 dropped to a June low as the Fed’s higher for long message drove US 10-year yields to a fresh 16-year high while the Dollar index reached a fresh year-to-date high. Overnight equities in Hong Kong gained with those on the mainland cooling after sharp gains earlier as China reported improved industrial profits Crude oil prices remain elevated adding to inflation concerns while gold trades soft near $1900. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events. Equities: The relentless rise in long-end US Treasury yields saw selling accelerate across US stocks on Tuesday with the S&P 500 dropping 1.5% to hit the lowest level since June 7. Technology stocks, which led the rally earlier this year, has been challenged all month on concerns the Fed’s higher for longer message is starting to hurt consumer confidence. A message that was strengthened after the Consumer Expectations Index declined below 80, the level that historically signals a recession within the next year. The S&P 500 will be looking for support around 4,200, the 50% correction of the March to July rally and the 200-day moving average. FX: The DXY dollar index broke higher to fresh YTD highs, having taken out the 105.80 resistance, as long-end Treasury yields continued to rise. Data remained soft, helping keep the short-end yields capped but Fed member Kashkari, who is usually a dove, noted he puts a 40% probability on a scenario where Fed will have to raise rates significantly higher to beat inflation and a 60% probability of a soft landing. USDCAD rose to 1.3528 while GBPUSD slid below 1.2150 and next target at 1.20. EURUSD plunged further to lows of 1.0556 while USDJPY is hovering close to the 150-mark as verbal jawboning continues to have little effect. Commodities: Crude oil remains rangebound with tight market conditions, as seen through the highest premium for near-term barrels in more than a year, being offset by a stronger dollar and the general risk-off tone. API inventory data showed a crude build of 1.6m barrels vs expectations of a 1.7m drop. Gold trades below $1900 on continued dollar and yield strength with focus on $1885 support while China property market concerns sees copper traded near a four-month low. Meanwhile in agriculture, El Nino has been confirmed, and it could be a strong one, potentially impacting food inflation from rising risks of droughts in Southeast Asia, Australia and Brazil-Columbia. Fixed Income. The Federal Reserve’s higher-for-longer message reverberates through higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly, or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening and less foreign investors demand, it’s not unlikely to see yields to continue to rise towards 5% until something breaks. This week, our attention turns to US PCE numbers and Europe CPI data and US Treasury auctions. Yesterday’s 2-year notes auction received good demand while offering the highest auction yield for that tenor since 2006. Yet, our focus is on the belly of the yield curve with the Treasury selling 5- and 7-year notes today and tomorrow. If demand is poor, it might mean that the yield curve is poised to bear-steepen further. Overall, we continue to favour short-term maturities and quality. Volatility: The CBOE Volatility Index jumped 2 on Tuesday to close at 18.94%, a four-month high after the underlying SPX index lost 1.5% to settle at the lowest level since June Macro: US consumer confidence fell for a second consecutive month to 103.0 from 108.7 (upwardly revised from 106.1) and beneath the expected 105.5. Present Situation Index marginally rose to 147.1 (prev. 146.7), while the Expectations Index declined further to 73.7 (prev. 83.3), falling back below 80 - the level that historically signals a recession within the next year. Inflation expectations for the 12 months ahead were unchanged at 5.7% in September. New home sales in the US fell 8.7% to 675k from 739k (upwardly revised from 714k), shy of the consensus 700k. Fed's Kashkari has published an essay where he says there is a 60% chance of a soft landing with a 40% chance the Fed will have to hike 'significantly higher'. In the news: FTC Sues Amazon, Alleging Illegal Online-Marketplace Monopoly (WSJ), Foreign brands including Tesla to face scrutiny as part of EU probe into China car subsidies (FT), Senate leaders agree on a short-term spending bill, aiming to avert a shutdown, extending government funding until November 17, pending House approval (CNN). What ‘peak oil’ will mean for China (FT), Americans finally start to feel the sting from the Fed’s rate hikes (WSJ), Exclusive: German economic institutes forecast 0.6% GDP contraction this year – sources (Reuters) Technical analysis: S&P 500 downtrend support at 4,200. Nasdaq 100 support at 14,254. DAX downtrend support at 14,933. EURUSD downtrend support at 1.05. GBPUSD below support at 1.2175, oversold, next support 1.2012. USDJPY uptrend stretched but could reach 150. Gold bearish could drop to 1,870. Brent and WTI Crude oil resuming uptrend. US 10-year T-yields uptrend expect minor correction Macro events: US Durable Goods Orders (Aug) est –0.5% vs –5.2% prior (1230 GMT), Feds Kashkari Speaks on CNBC (1200 GMT), EIA’s Weekly Crude and Fuel Stock Report (1430 GMT)

The S&P 500 and Nasdaq 100 fell 1.5% amid weaker new home sales, consumer confidence, and elevated bond yields. Amazon dropped 4% due to an antitrust lawsuit. The DXY dollar index reached YTD highs above 105.80. USDCAD rose to 1.3520 while GBPUSD slid below 1.2150 and the next target at 1.20. Gold tested $1900 amid rising yields, while Copper hit 4-month lows. The Hang Seng Index and CSI300 declined as news of China Evergrande's bond repayment failure weighed. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.      US Equities: The S&P 500 and Nasdaq 100 tumbled by 1.5% due to softer readings on new home sales and the Conference Board consumer confidence survey, triggering selling in consumer discretionary and information technology. Amazon, impacted by news of an antitrust lawsuit, plummeted by 4%. Elevated bond yields also continued to weigh on market sentiment.     Fixed income: Treasury yields continued to hover at elevated levels, with the 30-year yield edging up by 2bps to 4.68%, while the 2-year and 10-year yields held steady at 5.12% and 4.54%, respectively. The selling pressure was particularly concentrated in the longer end of the curve as the high yield levels attracted strong demand in the 2-year auction.     China/HK Equities: The Hang Seng Index and CSI300 sank once again. The news that Hengda Real Estate Group, the mainland unit of China Evergrande, failed to make payments of RMB4 billion in principal and interest due yesterday further dampened market sentiment. The Hang Seng Index plummeted 1.5% to 17,467, marking a new low in 2023. The CSI300 slid 0.6%.     FX: The DXY dollar index broke higher to fresh YTD highs, having taken out the 105.80 resistance, as high-end Treasury yields continued to rise. Data remained soft, helping keep the short-end yields capped but Fed member Kashkari, who is usually a dove, noting he puts a 40% probability on a scenario where Fed will have to raise rates significantly higher to beat inflation and a 60% probability of a soft landing. USDCAD rose to 1.3520 while GBPUSD slid below 1.2150 and next target at 1.20. EURUSD plunged further to lows of 1.0562 while USDJPY is hovering close to the 150-mark and verbal jawboning continues to have little effect.     Commodities: The message on higher-for-longer was felt in the crude market as oil prices dipped earlier in the session with WTI falling to lows of ~$88/barrel and Brent going below $92. API inventory data also showed a crude build of 1.586 million barrels last week vs. expectations of a 1.65 million drop, but oil prices recovered later. Gold tests $1900 amid yield surge and Copper down to fresh 4-month lows at $3.62.     Macro: US consumer confidence fell for a second consecutive month to 103.0 from 108.7 (upwardly revised from 106.1) and beneath the expected 105.5. Present Situation Index marginally rose to 147.1 (prev. 146.7), while the Expectations Index declined further to 73.7 (prev. 83.3), falling back below 80 - the level that historically signals a recession within the next year. Inflation expectations for the 12 months ahead were unchanged at 5.7% in September. New home sales in the US fell 8.7% to 675k from 739k (upwardly revised from 714k), shy of the consensus 700k. Fed's Kashkari has published an essay where he says there is a 60% chance of a soft landing with a 40% chance the Fed will have to hike 'significantly higher'. Macro events:  BoJ Minutes (Jul), US Durable Goods (Aug)     In the news: FTC Sues Amazon, Alleging Illegal Online-Marketplace Monopoly (WSJ) Foreign brands including Tesla to face scrutiny as part of EU probe into China car subsidies (FT) Senate leaders agree on a short-term spending bill, aiming to avert a shutdown, extending government funding until November 17, pending House approval (CNN). For all macro, earnings, and dividend events check Saxo’s calendar.  

Both instruments were relatively muted on Monday. The euro and the pound started a new upward movement, presumably as part of the third wave within wave 2 or b. I previously mentioned that wave 2 or b should be a three-wave structure because the first wave was extended for both instruments. Therefore, the price increase at the beginning of the week was expected. If it hadn't happened today, it would have occurred tomorrow. Moreover, there was no significant news. Therefore, I conclude that positive news is not necessary for building the corrective waves for the euro and the pound.     Over the weekend, European Central Bank President Christine Lagarde delivered a speech. As I previously mentioned, Lagarde did not say anything that was particularly important. The members of the ECB Governing Council have not been providing any interesting or critical information for the markets. This is easily explained by the fact that the ECB has generally completed the process of tightening monetary policy and does not intend to ease it in the near future. Consequently, the market does not expect any changes either, so what can de Guindos, Lagarde, and others report in such a case? Lagarde mentioned wages and inflation with no significant consequences, so to speak. She noted that the pace of wage growth remains too high, and core inflation is far from the target. At the same time, the EU labor market shows no signs of weakening, but the European economy may slow down even further as the global economy could weaken due to new geopolitical conflicts. Economic growth could be stronger if consumer confidence rises due to a stronger labor market, income growth, and reduced uncertainty. Regarding monetary policy, the ECB plans to maintain a cautious approach. Based on everything, it will be very difficult for the euro to find support until a downtrend is fully developed. I believe that the news background will not affect the framework of the corrective wave 2 or b. It won't impact the next, third wave either.     Based on the analysis conducted, I conclude that a bearish wave is currently being built. The targets around the 1.0463 level have been achieved, and the fact that the market has yet to breach this mark indicates that it is prepared to build a corrective wave. In my recent reviews, I warned you that it would be wise to consider closing short positions because there is currently a high probability of constructing an upward wave. The unsuccessful attempt to break the 1.0637 level, corresponding to the 100.0% Fibonacci, indicates the market's readiness to resume the decline, but I believe that wave 2 or b will be a three-wave structure. The wave pattern of the GBP/USD instrument suggests a decline within a new downtrend segment. The most that the British pound can hope for in the near future is the construction of wave 2 or b. However, as we can see, even with the corrective wave, significant challenges are currently emerging. I wouldn't recommend opening new shorts at this time, but I also don't advise buying because the corrective wave may turn out to be relatively weak.  

Business sentiment darkens in France, signalling a general loss of economic dynamism The business climate in France darkened in October across all sectors. Business leaders are less optimistic about past and future activity. Economic growth is likely to slow further.   The business climate in France darkened in October, dropping two points over the month to 98. The fall is visible in all sectors, signalling a widespread loss of economic dynamism. Business leaders everywhere are less optimistic about past production and activity but also about future activity and production prospects. Order books are judged to be less full in the retail and construction sectors, though they improved slightly in industry. This indicator, the first available for the fourth quarter of 2023, suggests that the French economy is likely to continue to slow. After a third quarter in which economic activity probably softened markedly (we forecast quarterly growth of 0.1% in Q3 compared with 0.5% in the second quarter), business sentiment suggests that a rebound in the fourth quarter is unlikely. Against a backdrop of persistently poor order books in industry, weakening demand, particularly from international markets, and a waning catch-up effect in some sectors, the outlook for the industrial sector is weak and a rebound is not expected before 2024. The construction sector, for its part, is likely to see a further fall-back in activity due to higher interest rates, which are having an increasing impact on credit demand. Household consumption is also likely to remain subdued over the coming months. While wages have risen, allowing households to regain a little purchasing power, the labour market is showing the first signs of weakening, consumer confidence remains low, and inflation proves to be stickier than expected. Recent rises in oil prices linked to geopolitical tensions will keep energy inflation buoyant in France until the end of the year and into 2024, which will continue to depress household purchasing power and limit consumer spending. Retail and services are, therefore, likely to face weak demand. Ultimately, this data suggests the French economy is likely to slow further in the fourth quarter. We expect GDP to stagnate in the coming three months, which would bring average growth for 2023 to 0.8%. We believe the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by a very restrictive monetary policy. Because of a negative carry-over effect, we forecast average GDP growth of only 0.6% in 2024.

EU GDP expected to stall in Q3 , BOJ tweaks YCC  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to get off to a positive start to the week yesterday, helped in no small part by the limited and incremental nature of the Israeli incursions into Gaza which appears to be helping assuage concerns that the escalations might prompt another front opening on Israel's northern border with Lebanon and Hezbollah. US markets also got off to a strong start with the Dow posting its biggest one-day gain since July, while the Nasdaq 100 and S&P500 both rose by more than 1%, while oil prices closed at their lowest level in over 2 weeks. While yesterday's rebound was welcome it isn't likely to change the fact that US stocks look set to close their 3rd successive monthly decline.     Yesterday the Japanese yen pushed higher on a report from Nikkei that the Bank of Japan was set to move the bands when it comes to its yield curve control policy. This morning we found out how true that story was when the Bank of Japan, while keeping rates unchanged, did just that, pushing the upper boundary to 1% which was less hawkish than markets had been expecting, given they had already been targeting that level when it came to their bond buying operations.     In moving the band, they have merely removed the discrepancy between the YCC rate and their bond buying levels, disappointing the markets who had been expecting something a little more radical, like pushing the band beyond 1%. In not being more hawkish the Japanese yen tumbled and slid back through the 150.00 level. At the same time, the BoJ raised their inflation forecasts for 2023 to 2.8, and for 2024 to 2.8%.   Despite yesterday's strong US session markets here in Europe look set to open slightly lower as we head into the final trading day of October and look ahead to tomorrow's Federal Reserve rate meeting as well as a tsunami of US economic data this week, we'll also be getting an insight into how the economy in Europe has fared over the last 3 months.     Yesterday we found out that theGerman economy contracted by -0.1% in Q3, while also slipping into disinflation in October, raising the question as to how far behind the rest of Europe might be in that regard.     The French economy is expected to have slowed from 0.5% in Q2 to 0.1% in Q3, with a similar slowdown expected to be seen in the Italian economy, which is also expected to have slowed to 0.1%.   On the wider EU measure the economy is expected to have slowed to 0% in Q3 from 0.1%, meaning that over the last 4 quarters we've seen little to no growth at all. Inflation is also expected to have slowed sharply with French CPI for October expected to have slowed to 4.5% from 5.7% on an annualised basis. EU flash CPI is expected to have similarly slowed from 4.3% to 3.1%, with core prices forecast to remain a little stickier at 4.2%, down from 4.5%.     Given the weakness seen in these figures there is rising concern that the ECB may have erred when it raised rates by another 25bps in September. They certainly ought to offer some pause for thought to the German hawks on the governing council who probably still feel that more needs to be done, when it comes to further rate hikes. In the US we have the latest Chicago PMI as well as October consumer confidence, neither of which are expected to show much in the way of resilience. Consumer confidence is expected to slow to 100.5 from 103, while Chicago PMI is forecast to edge higher to 45, from 44.1.               EUR/USD – continues to rally off the 1.0520 lows of last week, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.    GBP/USD – continues to rally off the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – retested the 0.8740 area yesterday, before slipping back. We need to see a break above 0.8750 to target the 0.8800 area. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.   USD/JPY – retreated from the 150.78 area at the end of last week, slipping back to the 148.75 area and the lows from 2-weeks ago. Below 148.70 targets the 147.30 area. Still on course for a potential move towards 152.20, while above the 148.75 area.   FTSE100 is expected to open 10 points lower at 7,317   DAX is expected to open 20 points lower at 14,696   CAC40 is expected to open 5 points lower at 6,820  

Rates Spark: US Treasuries brave the first supply test First country inflation and growth indications ahead of today's aggregate eurozone data have already confirmed the ECB's more dovish tone of the last meeting. Meanwhile, markets' worst fears have not materialised in the Treasury's quarterly borrowing announcement, although concerns about the overall US debt trajectory remain unaddressed.   Bund curve steepens on dovish data and improving risk sentiment The first eurozone inflation readings confirmed the European Central Bank’s somewhat more dovish tone and decision to hold rates at the recent meeting. German inflation dropped to 3% year-on-year, noticeably cooler than the 3.3% the market was looking for. Similarly, Spanish inflation also came in cooler.       ECB officials have tried to limit the downside in rates. The ECB’s Kasimir and Simkus both dismissed any notion of the ECB cutting rates already in the first half of next year. They were not the first ones to spell out how 'high for longer' should be interpreted. Two weeks ago Klaas Knot had pointed to holding key rates for at least a year. However, even though the early rally in rates started to fade they could not entirely prevent a slight bull steepening of the curve.   The second feature of the European session was a backdrop of improving risk sentiment that also exerted upward pressure on rates to fade the initial rally. That change of tone was especially felt by Italian sovereign bond spreads with the key 10Y spread over German Bunds tightening towards 190bp, its tightest since early October. However, it was the ECB not having discussed the possible slowing of pandemic emergency purchase programme reinvestments – although that debate has only been postponed – as well as rating affirmations last week by DBRS and earlier by S&P that have laid the basis for this tightening.   US borrowing for Q4 lower than expected, but Q1 somewhat higher US rates moving higher in anticipation of the Treasury’s borrowing estimates were a third factor that also pulled EUR rates up from the day’s lows. In the end the Treasury lowered the fourth quarter borrowing estimate to US$776bn from the guidance of US$852bn which it had provided in August. This also helped dampen the impact of the initial borrowing guidance for the first quarter of next year coming in at US$816bn, which was toward the higher end of market expectations. The market’s worst fears have not materialised and the yield increase on the day was thus modest with 10Y UST yields staying below 4.9% in the wake of the announcement. The relief in very long-end rates resulted in a 2bp flattening of the 10s30s curve while 2s10s ended little changed. The market is still waiting for the maturity split of the funding which will be announced on Wednesday. And while the quarterly funding may have come in a bit lower, concerns surrounding the longer term trajectory of the US deficit remain unaddressed.   Today's events and market view A fourth overarching factor leading to wider upward pressure on rates were reports in the lead up to the Bank of Japan meeting that hinted of possible tweaks of the yield curve control framework to potentially allow the 10Y JGB yield to rise above 1%. in the end it was only a slight tweak, the upper 1% threshold was rephrased to be reference point, thus allowing more flexible approach to controlling the yield. The 10Y UST yield eased back towards 4.86% after the decision.  Main events over today’s session are the CPI flash estimate and third quarter GDP data for the eurozone. The indications from yesterday’s country data point to cooler inflation than consensus has forecasted while the growth figures should point to an economy mired in stagnation. This should come as affirmation of 10Y UST-Bund spread at its currently elevated levels of above 200bp. While the next US main events are lined up for tomorrow with the quarterly refunding announcement and the FOMC meeting, today’s quarterly employment cost index should not be dismissed. After all it is the Fed’s preferred wage metric, and is expected to come in at 1% quarter-on-quarter. We will also get house price data and the Conference Board’s consumer confidence index.    Today’s government bond supply will come from Italy, which sells 4Y, 6Y and 10Y bonds as well as floating rate notes for up to €8.75bn in total.

French growth slows sharply despite a rebound in domestic demand French GDP growth slowed markedly in the third quarter, coming in at 0.1% quarter-on-quarter, compared with +0.6% in the second quarter. The details of the figures are solid, with domestic demand rebounding strongly. Nevertheless, the French economy is facing a significant economic slowdown that is likely to persist over the coming quarters.   Weak growth In line with expectations, French GDP growth slowed sharply in the third quarter to 0.1% quarter-on-quarter, following an upwardly revised 0.6% rise in the second quarter. Despite the sharp deceleration in growth, the details of the figures are fairly solid, with domestic demand accelerating and making a very positive contribution to GDP growth (+0.7 points compared with +0.2 points in the second quarter). Household consumption grew by 0.7% over the quarter, after stagnating in the previous quarter, thanks to a rebound in the consumption of capital goods, transport equipment and food. Consumption of services slowed. Investment also accelerated sharply in the third quarter (+1.0% compared with +0.5% in the second quarter), particularly in manufactured goods and information and communication services. However, construction investment stagnated over the quarter. The weak growth in GDP in the third quarter can be attributed to foreign trade, which made a strongly negative contribution (-0.3 points) due to a fall in exports that was greater than that of imports. While inventories were the main contributor to growth in the second quarter (+0.5 points), the situation has reversed, and they are now making a very negative contribution to economic activity (-0.3 points). In short, while the details are fairly good, they do not alter the reality that the French economy is facing a major economic slowdown, and this is likely to continue.    The slowdown is likely to continue The construction sector, for its part, is likely to see its activity continue to weaken due to higher interest rates which are having an increasing impact on demand for credit. The dynamism of household consumption is also likely to moderate over the coming months. While nominal wages have risen, allowing households to regain some purchasing power, the labour market is beginning to show the first signs of weakening, consumer confidence remains low and inflation remains rather sticky. Recent rises in oil prices linked to geopolitical tensions will keep energy inflation buoyant in France until the end of the year and into 2024, which will weigh on purchasing power and limit consumer spending. Retail and services are therefore likely to face weak demand. Ultimately, the French economy is likely to slow further in the fourth quarter. We expect GDP to stagnate over the quarter, which would bring average growth for 2023 to 0.8%. We believe that the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by monetary policy that remains very restrictive. Given the low starting point for the year, average growth in 2024 is likely to be weak, and well below the government's forecast of 1.4%. Our forecast for average French GDP growth in 2024 is 0.6%.

Monitoring Hungary: The moment of truth approaches In our latest update, we reassess our Hungarian economic and market forecasts. We think that over the coming weeks, it will become clear whether the risks to our base case scenario have materialised. We remain positive but cautious as we await the new data.   Hungary: at a glance The Hungarian government responded to the nine questions from the European Commission, and our sources indicate that the net 90-day review period has recommenced. There are just under 10 days remaining until the final decision. The technical recession probably ended in the third quarter of this year, and the next GDP figure will therefore bring a moment of truth. Nevertheless, a full-year recession cannot be avoided. Recent retail sales and industrial production data have disappointed, and the question remains whether we can expect a turnaround in the short term. Real wages will flip back to positive by September, but we doubt that the impact on consumption will be significant and we expect the labour market to remain tight. Energy price-related consequences of geopolitical risks will be a crucial factor in determining whether the current account will have a slight surplus by the year-end. Recent inflation dynamics have shown more promise than we or the market expected, giving the National Bank of Hungary (NBH) ammunition to argue for larger rate cuts. On the other hand, the biggest question remains whether the risk environment will allow the central bank to continue the rate-cutting cycle at the same pace. While the government revised the 2023 ESA-based deficit target to 5.2% of GDP, we need more evidence to assess whether the updated target can be met or not. The forint survived the first rate cut in the base rate without major damage. After some short-lived weakness and volatility, the forint should continue to strengthen. In the rates space, we can expect further steepening of the IRS curve again, while in bonds we need to see progress in the EU money story and a clearer fiscal policy picture for a significant rally.   Quarterly forecasts   Will the longest technical recession end in the third quarter? Hungary has been in a technical recession for a year now, with economic activity contracting in all sectors except agriculture in the first half of 2023. The positive contribution from agriculture in the second quarter was not enough to pull the economy out of a technical recession, as the collapse in domestic demand weighed on all sectors. This time around, we expect the technical recession to end in the third quarter on the back of the agricultural outperformance. Favourable weather conditions combined with a good harvest season support our view. 14 November will be the moment of truth – when the third quarter GDP data is due. Nonetheless, agriculture alone will prove insufficient in generating a positive balance in the entire economy this year. In our view, a 0.5% recession awaits us in 2023.   Real GDP (% YoY) and contributions (ppt)   Is the deterioration in export sales a turning point for industry? Industrial production surprised on the downside in August, as production volumes declined by 2.4% month-on-month, contributing to a sharp fall in output of 6.1% year-on-year. At a sectoral level, the picture remains unchanged from recent months, with volumes expanding only in the electrical and transport equipment sub-sectors. However, in contrast to the dynamics of recent months, this time export sales deteriorated in line with domestic sales – which may explain the large drawdown in overall output. We suspect that export sales may pick up as the dismal August figure was more the result of factory shutdowns, but subdued global demand limits the export outlook. Nevertheless, barring an ugly surprise in September, the expected industrial performance in the third quarter should be better than in the second quarter. This should help the economy to emerge from its technical recession.   Industrial production (IP) and Purchasing Manager Index (PMI)   Will the turnaround in real wages boost retail sales? The retail sector is suffering from the cost of living crisis. The volume of sales in August fell by 7.1% YoY, while on a monthly basis, the overall volume declined by 0.5%. At the component level, food and fuel sales both contracted, while non-food retailing stagnated compared to last month. These dynamics are broadly in line with those seen in previous months, but the main question now is whether the turnaround in real wages will lead to a pick-up in consumption. We suspect that the answer is no, as we believe that households will mainly deleverage and/or rebuild their savings before consumption picks up. In this regard, the 10-year low in households’ consumer confidence index supports our view. We therefore believe that the impact of the turnaround in real wages will not markedly boost consumption until 2024, leaving the rest of this year’s retail sales figures in the red.   Retail sales (RS) and consumer confidence    

EUR: Unsustainable gains Yesterday was a volatile session for EUR/USD. Eurozone headline inflation dropped more than expected to 2.9%, but markets might have focused on core staying relatively high at 4.2% by looking at the positive EUR/USD reaction. Anyway, the rally was very short-lived. Above-consensus US employment costs and consumer confidence, Canada entering a technical recession, and sustained USD/JPY demand all prompted a dollar comeback and EUR/USD is now trading closer to its 1.0550 anchor. Today, the direction of travel for EUR/USD will be set by US data releases first and the FOMC then. As discussed in the USD section above, we might see a dollar correction, but our base case is that it would follow the pattern of the one we saw yesterday, with gains above 1.0650 in EUR/USD proving hardly sustainable. Most of Europe is on holiday today, so European calendars are quite empty.

FX Daily: Hard to get excited by the same story Fed minutes once again reiterated the cautious approach to interest rates but for the US dollar, this seems to be a non-event. Expect trading volumes to fall away into Thursday's US Thanksgiving holiday, and look out for US jobless claims today instead of tomorrow. Meanwhile, the NBH delivered another 75bp rate cut, which is good news for FX.   USD: Consolidation continues Federal Reserve minutes once again reiterated the cautious approach to interest rates, which did not excite the markets much. US equity markets broke a five-day winning streak and Treasuries ended a little lower again. For EUR/USD, this seems to be more of a non-event. Looking ahead, expect trading volumes to fall away into tomorrow’s US Thanksgiving holiday but the holiday means we get to see US initial jobless claims earlier than usual. Here, continued claims are expected to climb, reflecting a softening labour market. Today’s US calendar also sees durable goods orders and the latest readings on US consumer confidence - the latter is expected to stabilise at the lowest levels since May. In terms of the bigger picture, we tend to think it is a little too early to expect the dollar bear trend to run a lot further just yet. That will require some substantially weaker US data or the Fed formally taking an additional rate hike off the table.  

EUR: German debt brake causes some headaches The uncertainty over Germany’s fiscal headroom, after last week’s Constitutional Court ruling, has yet to have any significant impact on the euro. On the one hand, it could limit Germany’s room for fiscal manoeuvre next year, but at the same time, it might deliver a softer interpretation of fiscal rules across the whole region. Indeed recently, the European Commission agreed that the Excessive Deficit Procedure will not be applied before European parliamentary elections next June. Locally, the focus will be on eurozone consumer confidence today, but the bigger driver for the euro should be tomorrow’s November flash PMIs – which are expected to be soft.  

CEE: Possible improvement in the rating outlook for the Czech Republic Today, the calendar in the region is again basically empty. This morning we will see consumer confidence in the Czech Republic, which rebounded in October, but so far, we don't see an improving trend. Moody's will publish a rating review of the Czech Republic after the close of trading. The agency has held a negative outlook for the Aa3 rating since last August. We see some chance here for an improvement in the outlook to move towards greater stability. The main reason for the downgrade was the country's dependence on energy from Russia and the deteriorating fiscal outlook. Both issues have been resolved this year, and we thus think that an improvement in the outlook is a matter of time. In the FX market, yesterday's news of possible EU money for Hungary was greeted by a strengthening HUF. While yesterday's news involves a different part of the EU money than was mostly mentioned in the context of the conflict over the rule of law, it is good news for Hungary. As we mentioned after the National Bank of Hungary (NBH) meeting this week, for new FX gains, we need to see some new triggers, such as the EU money progress. We therefore think yesterday may unlock the next wave of HUF appreciation. Market rates have stabilised, and we might even see some upside after a long string of declines. EUR/HUF has thus probably consolidated slightly above 380 and fell below that level yesterday. Looking ahead, 378 EUR/HUF should not be too ambitious a target if EUR/USD stays at high levels today.

Australia releases consumer and business confidence on Tuesday The Australian dollar has posted slight losses in Monday trading. In the North American session, AUD/USD is trading at 0.6564, down 0.18%. The Aussie continues to show sharp swings and declined 1.50% last week. This snapped a three-week winning streak in which the Australian dollar surged 4.9% against its US counterpart. Australian dollar eyes consumer and business confidence Australia will release consumer and business confidence data on Tuesday. Consumer confidence fell sharply in November, as the Westpac Consumer Sentiment index declined 2.6% to 79.9, down from 82 in October. Consumers are deeply concerned about the rising cost of living and the possibility of further interest rate increases. The markets are expecting a rebound in December, with a forecast of 3.0%. The NAB Business Confidence index is expected to improve to -1 in November. The index came in at -2 in October, the first time it dropped into negative territory in four months. The zero level separates pessimism from optimism. Reserve Bank of Australia Governor Michele Bullock speaks at an event in Sydney on Tuesday and the markets will be looking for hints regarding future rate policy. The RBA held the cash rate at 4.35% at its meeting earlier this month and doesn’t meet again until February. This will give policy makers a chance to monitor the effect of elevated rates on the economy.   US nonfarm payrolls beats forecast Friday’s US nonfarm payrolls came in at 199 thousand in November, higher than the consensus estimate of 180,000 and the October gain of 150,000. Unemployment dropped from 3.9% to 3.7% and average hourly earnings rose to 0.4% m/m, up from 0.2% in October and above the market consensus of 0.3%. The strong data points to a resilient labour market despite signs that the economy is cooling down, and has reduced fears of recession. The markets are still expecting around four rate cuts in 2024, while the Fed is still talking about possible rate hikes. Tuesday’s inflation report will be closely watched by the markets, and if CPI is stronger than expected, the markets may have to tone down their expectations of a rate cut early in 2024.   AUD/USD Technical AUD/USD tested support at 0.6555 earlier. Below, there is support at 0.6523 0.6585 and 0.6613 are the next resistance lines  

FX Daily: One last big central bank meeting The dollar is recovering some ground after the pushback from Fed officials against rate cut bets. However, the dovish Dot Plot may work as an anchor for rates and keep the dollar soft into the end of December. In Japan, the BoJ announces its policy in the early hours of tomorrow, and that will direct market expectations about a January hike.   USD: Softer into year-end? The last few days of market action, before volumes dry up for Christmas, should continue to revolve around the “tug of war” between Fed officials trying to temper rate cut speculation and investors who have instead seen a validation of dovish bets from last week’s Dot Plot projections. Data can tip the scale in these situations, so consumer confidence, personal spending, and PCE figures should move the market this week. We don’t expect the last bits of US data in 2023 to paint a very different picture, though. Ultimately, the Dot Plot surprise should keep providing an anchor for rates into the new year and prevent a major dollar rebound in a period that is also seasonally unfavourable for the greenback. It will, however, be important to see how much louder the post-meeting pushback against rate cut bets by Fed officials will be. We’ll hear from Chicago Fed President Austan Goolsbee today and Raphael Bostic tomorrow, but with Christmas getting closer, there will obviously be fewer chances to collect FOMC members’ remarks. Today, the US calendar is otherwise quiet, and the FX market will primarily focus on the Bank of Japan announcement overnight (more in the JPY section). We expect DXY to stabilise around 102/103 into year-end, but risks are skewed to the downside.

FX Daily: Cautious BoJ hits the yen The Bank of Japan did not give in to market pressure and kept its dovish guidance intact. However, the wording on the economic and inflation outlook paves the way for a hike in the second quarter in our view. The yen should revert to being driven mostly by US rates after taking a hit today. Elsewhere, Fedspeak will remain in focus along with some US data.   USD: Mixed Fedspeak The dollar has started the week modestly offered, with Scandinavian currencies performing well and the yen dropping after this morning’s Bank of Japan announcement (more in the JPY section below). The US calendar was empty yesterday, so the spotlight was on Fedspeak. Loretta Mester said that the markets are “a little bit ahead” on rate cuts, and Mary Daly said that her outlook for rate cuts is very close to the median Dot Plot (75bp of easing next year). Interestingly, Daly said that policy would still be restrictive if three cuts were delivered next year, which would probably imply greater room for easing if the economic outlook deteriorates. Chicago Fed President Austan Goolsbee said he is confused by the market reaction to the Dot Plot, but remarks from Daly and Mester instead seemed to endorse investors’ bullish response. We’ll keep monitoring Fed speakers today, with Thomas Barkin and Raphael Bostic (the latter swings more to the dovish side) set to deliver remarks. However, the focus will also be on US data, with housing starts set to have declined along with building permits in November. October TIC data is also due today. Tomorrow’s consumer confidence and Friday’s PCE and personal income numbers will be the last bits of data that can move the market before Christmas. Today, FX markets may stay quiet, and the general mood on the dollar could be modestly bearish unless we hear some more convincing pushback on rate cuts by Fed offici

  UK retail sales (Dec) – 19/01 – the UK consumer saw a big rebound in spending in November after 2-months of weak demand, rising 1.3% comfortably beating forecasts of 0.4%. an improvement in consumer confidence along with sharp falls in the price of petrol appear to have prompted some resilience in consumer demand with Black Friday sales helping to bring forward some early pre-Christmas spending. A sharp reduction in the energy price cap in October may also have helped boost confidence along with lower mortgage rates. The rebound in consumer spending has also raised the hope the UK economy will avoid a technical recession. In the last 2-weeks we've also seen several retailers report strong pre-Christmas trading updates which augurs well for a positive December retail sales number, following on from the November rebound.    

EUR: Benefits from better risk sentiment The eurozone consumer confidence and the ECB lending survey are in focus today as markets await tomorrow’s PMIs and the European Central Bank's decision on Thursday. We summarise our expectations for FX and rates under different scenarios in January’s ECB Cheat Sheet. EUR/USD jumped after overnight news out of China, taking the pair closer to its short-term fair value model of 1.0980 (in our calculations). The direction of travel today for the pair will mostly be a consequence of whether Western stock indices will be able to keep the positive mood shown by Asian equities and FX. We still deem a sustainable rally to levels above 1.100 as unlikely and do not see the ECB meeting as a game changer for the euro.  

ECB bank lending survey shows monetary transmission persisting Ahead of Thursday's ECB meeting, the bank lending survey provides confirmation that higher interest rates still dampen loan demand from businesses and households. This leaves the outlook for investment rather bleak, but also confirms easing prospects for the central bank later in the year.   The European Central Bank's fourth quarter survey suggests that monetary transmission continues to be forceful, but perhaps somewhat less so than in previous quarters. Banks continued to tighten their credit standards to enterprises and business demand for loans weakened once more, but again, less so than seen previously. This still makes credit standards the strictest and loan demand the weakest seen in a long time. According to the survey, businesses indicated that high interest rates and low demand for fixed investment are the main reasons for weaker loan demand, which makes the outlook for lending and investment quite bleak. For households, credit standards also became somewhat stricter again while terms and conditions of loans eased. Most importantly for the housing market, demand for loans continued to decrease forcefully. Main contributors maintain a downbeat view on the housing market, low consumer confidence and high interest rates. Expectations are for loan demand to slightly improve again in the first quarter, while credit standards are still expected to become stricter. This does cautiously suggest that the eurozone is getting close to the point where the impact of monetary tightening on new loans will ease off slightly. That does not mean, however, that there will be overall easing of conditions. Average interest rate payments are still set to rise as businesses and households have to refinance at higher rates. For the ECB, the survey provides confirmation that monetary transmission remains forceful and that economic activity will remain curbed by tight policy in the coming quarters. That further paves the way for first rate cuts over the course of the year