consumer spending

The Japanese yen has edged lower on Thursday. In the North American session, USD/JPY is trading at 147.62, up 0.08%.

US GDP roars with 3.3% gain

The US economy continues to surprise with stronger-than-expected data. On Wednesday, the services and manufacturing PMIs both accelerated and beat the estimates, followed by first-estimate GDP for the fourth quarter earlier today.

The economy sparkled with an expansion of 3.3% q/q, blowing past the consensus estimate of 2.0%. This follows the blowout gain of 4.9% in the third quarter. Consumer spending remained strong at 2.8%, compared to 3.1% in the third quarter. The US economy expanded in 2023 at 2.5% y/y, up from 1.9% in 2022. The US dollar’s reaction to the positive GDP report has been muted.

There were concerns earlier this year that the economy might tip into a recession, as the Fed continued to raise interest rates to beat down inflation. However, solid consumer spending and a resilient labour market have boosted economic growth

Fed Rate Hike Expectations Wane, German Business Climate Declines

US Debt Limit Agreement Sets the Tone for Risk Demand, Dollar Sentiment Shifts

InstaForex Analysis InstaForex Analysis 30.05.2023 09:32
The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.   It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.   The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.     It is also worth noting a decrease in the long position on gold by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar. The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%.   Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator indicates that the fight against inflation is still far from over. In a 3-month annualized expression, the core PCE deflator stands at 4.3%, the same as in April 2022. The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."   The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely. Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements. EUR/USD The ECB maintains a firm stance on continuing rate hikes as part of its fight against inflation.   On June 1, preliminary inflation data for the Eurozone will be published, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data release aligns with expectations, it will lower the ECB rate forecasts and put additional pressure on the euro.   The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant reduction in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.     EUR/USD has predictably declined to 1.0730, where support held, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.   GBP/USD The decline in inflation in the UK is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of an aim than a reality. Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%.   If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected. Monday is a banking holiday in the UK, and there are no macroeconomic data expected this week that could influence Bank of England rate forecasts.   Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements. The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.     The pound has predictably moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the decline to continue, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for a resumption of growth.  
Bank of Canada Faces Hawkish Dilemma: To Hold or to Hike Interest Rates?

Bank of Canada Faces Hawkish Dilemma: To Hold or to Hike Interest Rates?

ING Economics ING Economics 05.06.2023 10:27
A hawkish hold from the Bank of Canada next week We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.   Canadian resilience means a rate hike can't be ruled out The Bank of Canada last raised rates on 25 January and have held it at 4.5% ever since. The statement from the last meeting in April commented that global growth had been stronger than expected and that in Canada itself, “demand is still exceeding supply and the labour market remains tight”. The bank warned that it was continuing to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further” to ensure inflation returns to 2%.   Since then we have had additional warnings from Governor Tiff Macklem that the bank remains concerned about upside inflation risks with the latest CPI report showing a month-on-month increase in prices of 0.7% versus a consensus forecast of 0.4%, resulting in the annual rate of inflation rising to 4.4%. The economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. The resilience of the economy was then emphasised further by first quarter GDP growth coming in at 3.1% annualised, beating the 2.5% consensus growth forecast. Consumer spending was the main growth engine, rising 3.1%.     But we favour a hawkish hold – signalling action unless inflation softens again soon Nonetheless, the BoC accept that monetary policy operates with long and varied lags and continue to believe that “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year”. This will help to dampen inflation pressures and with commodity price softening we still believe that inflation can get close to the 2% target by the early part of 2024.   With the US economic outlook also looking a little uncertain, we doubt that the BoC will want to restart hiking interest rates unless it is certain that inflation pressures will not moderate as it has long been forecasting. Consequently we favour a hawkish hold, signalling that if there isn’t clearer evidence of softening in price pressures it could raise rates again in July.     The loonie's resilience can continue The Canadian dollar has been the best G10 performing currency in the past month, largely thanks to its high beta to the US economic narrative and a repricing of Canada’s domestic rate and growth story. These factors have outshadowed crude’s subdued performance in May and some risk sentiment instability.   A hawkish tone by the Bank of Canada at the June meeting is clearly an important element to keep the bullish narrative for CAD alive. As shown below, the recent repricing in Fed rate expectations caused a rebound in short-term USD swap rates relative to most currencies (like the euro), while the USD-CAD 2-year swap rate differential has remained on a declining path also throughout the second half of May.     As long as the BoC does not push back against the pricing for a hike in the summer, we expect CAD to remain supported. Some lingering USD strength in June can put a floor around 1.33/1.34 in USD/CAD, but we expect a decisive move to 1.30 in the third quarter and below then level before the end of the year.  
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Asia in Focus: BoJ Meeting and China's Retail Sales Highlight the Week

ING Economics ING Economics 09.06.2023 09:10
Asia week ahead: BoJ meeting plus retail sales from China The Bank of Japan meets next week but don’t expect any changes. China has a raft of data but we’ll be particularly focused on retail sales.   BoJ policy meeting but don't expect any changes at this meeting We have changed our view on the Bank of Japan’s policy in the near term based on Governor Kazuo Ueda’s recent dovish comments. We expect the BoJ to keep all its current policy settings unchanged at its policy meeting next week. Likewise, a potential tweak in the BoJ’s yield curve control policy is not likely to happen this month. However, should inflation remain at current levels in the second half of the year, we could still see a possible adjustment in the YCC policy over the next few months.   Retail sales in China to be in focus China will release the usual raft of data on economic activity for May. This will include industrial production, fixed asset investment, construction, and retail sales. Of these, most attention will probably be on the retail sales number, as consumer spending is what is keeping the economy afloat while production and construction both struggle amidst a tough global trade environment.   But the news on retail sales will probably not be very encouraging. We anticipate a 13.8% year-on-year increase in retail sales, which only looks this strong due to a very weak base comparison period, and is equivalent to around a 1% month-on-month decrease in sales adjusted for seasonality. Residential construction is likely to remain depressed, as is production.
Asia Morning Bites: Singapore Industrial Production and Global Market Updates

US Household Wealth Surges by $3 Trillion in Q1: Strong Equities Offset Real Estate and Cash Declines

ING Economics ING Economics 09.06.2023 09:54
US household wealth rose $3tn in the first quarter A strong performance by equity markets lifted household wealth, helping to offset declines in real estate and cash, checking and time savings deposits. With wealth $35tn higher than before the pandemic households continue to have a strong platform to withstand intensifying economic headwinds, offering hope that any recession will be short and shallow.   Wealth increase led by equity market gains The value of assets held by US households increased by $3.05tn in the first three months of the year, taking the total assets held by the household sector to $168.5tn. Liabilities rose just $23bn to $19.6tn, leaving net household worth at $148.8tn.   Rising equity markets was the main factor leading to the increase, but holdings of debt securities increased $893bn. These factors more than offset the $617bn drop in household wealth in real estate and the $415bn decline in cash, checking and time savings deposits held by US households.     Excess savings are dropping We have to remember that March saw the collapse of Silicon Valley Bank and Signature Bank with deposit flight hitting many of the small and regional banking groups. We have subsequently seen this situation stabilize although some money that would typically be left in banks has been switched to money market funds.   Nonetheless, we do appear to be seeing much of the excess saving built up during the pandemic via stimulus payments and extended and uprated unemployment benefits being eroded – it is now "only" around 1.8tn above where we would expect it to be based on long run trends. This is especially the case now that households have an apparent appetite to spend, particularly on services.     Household balance sheets in a good position to help limit the downside from a recession After the most rapid and aggressive period of interest rate hikes seen in over 40 years plus the tightening of lending conditions currently being experienced in the US, recession fears are mounting. Households will play a huge role in how prolonged and deep any downturn will be given consumer spending accounts for more than two-thirds of economic activity in the United States.     Household assets are 860% of disposable income while liabilities are ‘just” 100% of disposable incomes. While this is down on the peak seen in 1Q 2022 and there are questions over wealth concentration, this is a much better position than any previous recessionary environment and means that the consumer sector should be better able to withstand intensifying economic headwinds. Consequently, we remain hopeful that a likely 2023 recession will be modest and short-lived assuming a swift easing of monetary policy from the Federal Reserve.
Rates Spark: Escalating into a Rout as Bond Bear Steepening Accelerates

China's Surprise Rate Cut and Impending Data: Implications for Economy and Currency

ING Economics ING Economics 13.06.2023 13:20
China cuts rates ahead of monthly activity data While there has been some speculation about rate cuts, today's cut was not widely expected, and coming just ahead of the monthly activity data suggests that this set of numbers could be very weak.   Reverse repo rate cut, 1Y MLF next? Before today's hike, the received wisdom had been that the People's Bank of China would not use blanket rate cuts as a first resort, but would rather use some of its more focused tools, such as targeted RRR cuts. So the 10bp cut of the 7-Day reverse-repo rate today raises some questions.   The first of which is whether this will be followed by a cut to the 1-Year Medium-Term Lending Facility (1Y MLF) on Thursday. Our first guess on this is, yes, probably. After all, window guidance on deposits was also lowered earlier in the month, so there does seem to be a general easing of policy going on.   The next question is, why now? What has changed? Certainly, China's reopening has been quite tepid, with a catering-led consumer spending surge that already looks to be losing steam and manufacturing still struggling. Activity data on retail sales is also due on Thursday, and it may be no coincidence that rates are being eased only days ahead of this release if it turns out that the reopening is already sputtering.   If the one engine of growth - retail sales - is not delivering what is required of it, and if the other sectors of the economy are failing to pick up the slack, then broader stimulus measures like these would seem appropriate. The consensus forecast for retail sales is for a 13.8% year-on-year rise, which sounds pretty strong. But it translates into about a 1% month-on-month (sa) decline, and the apparent strength is all due to base comparisons.   7-Day reverse repo rate and USD/CNY       CNY weaker, will drag other currencies with it The Chinese yuan has weakened above 7.16 at times today, adding to the month and a half of weakness it has already experienced. Further stimulus may prompt some short-term reversals, or slow the slide. But it may take a more concerted improvement in the macro data before the CNY turns decisively. Short of a substantial boost from fiscal policy, such as loans from the central government to local governments to spur infrastructure spending, that doesn't look on the cards just yet, though today's move does indicate that the authorities' patience with the weak recovery is wearing thin.    
Rising Chances of a Sharp Repricing in Hungarian Markets

Navigating Budgetary Challenges: Political Stability, Investments, and Deficit Reduction

ING Economics ING Economics 15.06.2023 07:59
Benefiting from an unusual context of political stability (which we expect to continue) and positive investor sentiment, the economy continues to perform decently, with help from increasing public investment spending. Yet, having not used the high GDP growth from 2021-22 to accelerate deficit reduction, the government finds itself in an uncomfortable budgetary position. Sticking to the 4.4% of GDP budget deficit target this year is proving more than just challenging, as public wage requirements are catching up after two years of high inflation, while budget revenues are not increasing as planned. Historically, cutting investments was the general solution to stick within the deficit, hence we do not exclude this option. And this is just for 2023 budget. Moving lower to a 3.0% of GDP deficit in 2024 as per current strategy looks very ambitious to say the least.   Forecast summary   GDP (YoY%) and components (ppt)   Investments offsetting the slowdown in consumption With a bit of help from the external context as well, which in the end hasn’t performed as badly as expected, the economy remained on track and continued to post solid quarterly advances throughout 2022. The environment is clearly weaker in 2023, with a quasistagnant first quarter growth, despite hard frequency data looking rather solid.   A welcome rebalancing in growth drivers from consumption to investments looks in the making, though we are not in a hurry to celebrate that, as the latest social demands might be partially satisfied by cutting into investment spending. This spending shift might in fact be growth supportive in the short term, though clearly not ideal from a medium- and long-term perspective.   On the brighter side, real wage growth turned positive in March as the average net wage advanced by an eye-catching 15.7%, with above-average growth visible in sectors such as agriculture, IT services, transportation and construction, while the public sector has generally seen below-average wage growth.   As real wage growth is set to accelerate further this year, a reacceleration of consumer spending could be envisaged in the second part of 2023.   Supply side GDP (YoY%) and components (ppt)   With a significant electoral year ahead, discussions about future economic policies and tax revamps are all over the place. This is blurring to some extent the policy visibility post-elections, though we tend not to put a too heavy emphasis on the headlines these days. Should it want to continue to tap into the RRF money, any future government will need to deliver the already agreed reforms as per the National Recovery and Resilience Plan, with very little room for manoeuvre. While some delays are already accumulating and losing some parts of future tranches cannot be excluded, the vast majority of political parties seem to strongly support sticking with the agreed plan.   Construction sector holding on (YoY% growth)   On the monetary policy front, we expect the National Bank of Romania (NBR) to cut rates when the first opportunity arises. Our central scenario assumes a rate cut once inflation inches below the key rate, which should happen in 1Q24. Nevertheless, if other regional central banks were to move ahead with cutting rates before the end of this year, we cannot rule out the NBR doing the same. For 2024, we expect a total of 150bp of rate cuts to 5.50%. 2024 inflation is likely to allow for even larger cuts, but we believe that the NBR will want to consolidate the lower inflation prints and will maintain a relevant positive differential between the key rate and inflation. The relative stability of the exchange rate should help as usual, with the EUR/RON rate expected to move upwards in small 1.0-2.0% increments each year.
British Pound Rallies Amidst Volatility Ahead of Key Employment Data

The Complex Case of Peak Rates: Weakening Signals and Cautious Outlook

ING Economics ING Economics 15.06.2023 11:46
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 (%)
National Bank of Hungary's Shift: Moving Away from Autopilot Monetary Policy

China Lowers Loan Prime Rates in Ongoing Easing Efforts

ING Economics ING Economics 20.06.2023 07:34
China: Loan prime rates lowered Following the earlier reduction in 7-day reverse repo rates and the 1Y medium-term lending facility (MLF), today was the turn of the loan prime rates (LPR) to be cut by 10bp - more cuts will follow.   Rates all coming down After lowering the window guidance for banks on deposit rates recently, this week has also seen the policy 7-day reverse repo rate reduced, the 1Y medium-term lending facility (1Y MLF) reduced, and today, the 1 and 5Y loan prime rates reduced. This brings to an end this round of formal rate reductions, though more will likely follow in the months ahead as the economy continues to struggle.   China's monetary policy framework is a little tricky to understand if you are used to a single rate like the US Federal funds rate, or the ECB's main refinancing rate as the point around which all other interest rates and bond yields tend to pivot. But in recent years, it has moved in the direction of a more market-based system, as this note, and the amended chart which we have borrowed from the People's Bank of China (PBoC) try to explain.   The 7-day reverse repo rate and the 1Y MLF are set with a view to driving money market rates and credit/bond market rates. Loan prime rates are the rates on which mortgage yields are based. The standing lending facility rate (SLF) is equal to the 7-day repo rate plus 100bp, and is the cap for the interest rate corridor, while the 7-day reverse repo forms the floor. Deposit rates for savers are notionally set by banks but within ranges indicated by the PBoC - the so-called window guidance.   So, there is a market mechanism at play, but the monetary framework is also subject to a lot more direct control by the PBoC than in many economies.   China's interest rates     A lot of action, but will it help? The first point to note is that despite all of the rate-cutting in recent days, we are only talking about 10bp of easing and a bit of increased loan issuance. This isn't going to do an awful lot to boost the struggling economy, though it clearly is better than nothing. Even with further reductions, and we expect more of the same in the coming months, perhaps several iterations of cuts, it is not likely that we will see demand for property swing around strongly, construction will likely remain weak, and local governments will continue to feel the pinch from reduced land sales and tight finances, limiting their ability to pursue expansionary infrastructure projects.   That said, lower mortgage rates will provide a little additional cash flow boost to households and help retail sales and consumer spending to provide some support. And at least China is not having the same spending-power-sapping inflation problems that the rest of the world is suffering from, so there are few impediments to further cuts in policy rates save the political desire not to overdo it and stoke bubbles in parts of the economy. The risk of that happening at the moment seems very low. That said, the current rate of retail sales growth does look to contain a fair bit of pent-up demand following the economy's re-opening at the end of last year, and it is likely to weaken in the months ahead. Further rate cuts may help to soften the adjustment downwards when it comes.    The reduced rate backdrop will likely continue to weigh on the CNY, at least until US Fed policy also turns lower, so we will probably need to make further amendments to our USDCNY profile, keeping it weaker through 3Q23 and maybe softening the turn when it comes.        
Likely the Last Hike for a While: FOMC Meeting Insights

Key Corporate Earnings Reports: US Bank Stress Test, Associated British Foods, Carnival Cruise Lines, Walgreens Boots Alliance, Nike

Michael Hewson Michael Hewson 26.06.2023 07:56
US bank stress test results – 28/06 –  these stress tests couldn't be timelier given the meltdown in the US regional banking sector in March. In February the US central bank released its criteria which included a severe recession with stress in commercial and residential real estate markets, as well as corporate debt. One of the main criticisms of these tests was a lack of a scenario that factored in a sharp rise in interest rates which brought down Silicon Valley Bank as well as First Republic. Furthermore, US regional banks were not covered under the stress test scenario as they were considered too small and not systemically important enough. As recent experience in Europe has taught us and particularly in Spain 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 problems in US regional banks were well known at the time, however, there appears to have been a serial underestimation of the risks that a sharp rise in rates would have on some of the smaller parts of the US banking sector, none of which are covered by this week's stress test results.           Associated British Foods Q3 23 – 26/06 –  the recovery in the Associated British Foods share price since the 10-year lows posted back in October appears to have ground to a halt after hitting 15-month highs back in April, just before the release of its H1 results. H1 group revenues rose by 21% to £9.56bn, while adjusted profit before tax came in at £667m. sales across all ABF businesses were higher from the previous year, partly due to higher prices, while its Primark business which has seen an expansion in the US performing particularly well. The company is also hoping to expand its new UK click and collect scheme. On the various businesses Primark sales rose 19% to £4.23bn while margins came in at 8.3%. The various food businesses saw revenues rise to £5.33bn, a rise of 23%, with the ingredients business posting strong profit growth. On the outlook management warned that input costs are a priority, even as some have started to reduce, saying they expect adjusted operating profit in the food business to be ahead of last year. With respect to the Primark business management expressed concern about consumer spending holding up in the face of rising interest rates, and the higher cost of living. H2 margin is still expected to in line with H1 at 8.3%, while adjusted operating profit for the year is expected to be in line with last year.   Carnival Cruise Lines Q2 23 – 26/06 –  the travel and leisure sector has been one of the hardest hit from the Covid shutdowns, and the journey back for the cruise ship sector has taken longer than most, with the industry still struggling to turn a profit even as revenues start to return to pre-Covid levels. For Carnival the journey has been a long one given that in the first year of lockdowns annual revenues fell from $20.8bn in 2019 to a mere $1.9bn in 2021, with the industry undergoing a near death experience. Last year the company managed to turnover $12.17bn in revenue with management optimistic that the new fiscal year would see a return to normal for the first time in 4 years. In Q1 the company said that revenues came in at $4.43bn as losses narrowed to $690m, against a forecast of -$759.7m. On the outlook management said that cruises are well booked for the remainder of the year at higher prices, however, the higher cost of fuel and other costs is acting as a headwind. On annual EBITDA Carnival says it expects to see a figure of around $4bn, which includes a $500m impact from higher fuel prices. For Q2 revenues are expected to come in at $4.75bn while losses are expected to come in at -$0.35c a share. Annual revenues are expected to exceed pre-Covid levels this year. On the downside while total operating expenses are only forecast to rise modestly from $12.9bn to $13.8bn, interest expenses have surged from $206m in 2019 to over $2bn.        Walgreens Boots Alliance Q3 23 – 27/06 –  Walgreens share price has performed poorly year to date, the shares down over 10%. When the company reported in Q2 revenues slid by 3% to $34.9bn, although profits came in above expectations at $1.16c a share. In Q1 the company also posted profits of $1.16c a share, however this was wiped out by a $5.2bn provision in relation to litigation the company was required to pay for opioid related litigation after several US states alleged the retailer mishandled prescriptions by overprescribing. Walgreens has found that its business has suffered through a decline in footfall since the pandemic a situation that it has struggled to adapt to. It has invested into the provision of primary health care, paying $3.5bn towards the acquisition of Summit Health, by VillageMD, putting it near the top of the pack in primary care provision. Walgreens reaffirmed its full year earnings forecast of mid $4.55c a share. Q3 profits are expected to come in at $1.08c a share on revenues of $34.15bn.        Nike Q4 23 – 29/06 –  back in February Nike shares hit their highest levels in 10 months, but have slipped back since then, despite a significant pick-up in their Greater China business. When they reported in Q3, revenues came in at $12.39bn well above forecasts, however a bigger than expected build up in inventory served to drag on its margins which fell more than forecast to 43.3%. Inventory levels were 16% above the levels they were last year at $8.9bn, while their forecasts for Q4 were also relatively conservative, with an expectation of flat to low single digit revenue growth. Given the lacklustre nature of recent Chinese consumer spending even these forecasts could miss expectations, while Nike sales may have also taken a hit due to recent publicity over its new brand ambassador Dylan Mulvaney, and the company's recent advertising campaign. Q4 revenues are expected to come in at $12.57bn pushing annual revenues to a record $50.9bn, with direct to consumer expected to rise to $21bn. Annual gross margins are expected to slip back to 43.5%. Q4 profits are expected to come in at $0.66c a share.   
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Resilient US Economy and Market Recovery Driven by Future Rate Cut Expectations, Technology Sector, and Low Inflation

Maxim Manturov Maxim Manturov 29.06.2023 14:01
According to the CME FedWatch tool, markets are currently seeing a ~74% probability that a hike will not take place at the Fed monetary policy committee meeting in June. In addition, expectations of future rate cuts closer to the end of 2023 and continued rate cuts through 2024 are increasing, further boosting investor sentiment, supporting valuations of technology companies, growth sectors in general and contributing to the upward trajectory of the market.   Lower inflation has also played a role in the positive market performance. Inflationary pressures continue to fall, allowing consumers to maintain their purchasing power and businesses to plan for the future with greater certainty, removing uncertainty about inflation. This favourable inflation environment has strengthened investor confidence in the resilience of the economy in the 2nd half of the year, given the expected policy shift from the Fed. Moreover, the US economy has demonstrated its resilience, continuing to show growth despite relatively high interest rate levels. Key economic indicators such as GDP growth, employment figures, labour market strength and consumer spending are showing signs of stability, indicating sustained and balanced economic growth. Expectations of a soft economic landing have allayed fears of a prolonged recession and laid a solid foundation for market recovery.
China: Slowdown in Non-Manufacturing Activity Raises GDP Downgrade Concerns

China: Slowdown in Non-Manufacturing Activity Raises GDP Downgrade Concerns

ING Economics ING Economics 30.06.2023 09:45
China: Non-manufacturing activity slows Official PMI data confirm that the re-opening surge in the service sector is subsiding.   The main engine of growth is spluttering Apart from a short-lived bounce in the manufacturing sector after the zero-Covid measures were shelved in early December 2022, China's manufacturing has been limping along. The official PMI index for the manufacturing sector (which tends to focus on larger, state-owned enterprises) has been below the breakeven 50 level since April. It was not much of a surprise to see it stay in this area in June, though perhaps the fact that the contraction is relatively stable is a source of some comfort. At least things aren't getting noticeably worse.     Instead, it has been the non-manufacturing sector, buoyed by consumer spending, that has been keeping China's economy growing in the first half of this year. But what this data confirms, which we already suspected, is that the initial surge contained a lot of pent-up demand. Domestic tourism, and dining out have been making up for lost time in the early part of the year. But there is only so long that this can go on. Other indicators of retail sales suggest that it remains well above historical trends, and suggests some further moderation over the second half of this year.  Looking at the breakdown of the surveys, there are no particular standouts. Most sub-indices are declining in both manufacturing and non-manufacturing surveys. This includes new orders, new export orders and employment.  Caixin PMI data due early next week will provide more insight into smaller and more export-oriented firms.   China PMI data   PMIs support our GDP downgrade These latest data provide further support for GDP downgrades for the second quarter. They also support the idea that the second half could see weaker support from the service sector. We will be publishing new GDP forecasts next week for China, and these look highly likely to show a cut to the existing full-year GDP figure of 5.7%, and likely take the forecast below the existing consensus forecast of 5.5%. We may still just sit on the right side of 5.0% - the government's target for this year - but that only goes to show what a low hurdle 5% was to achieve after last year's 3% outcome.   The market continues to fixate on the possibility of stimulus measures, and in due course, we do expect the government to step in and provide some support. However, we remain unconvinced that this will resemble anything like the financial bazooka that some want to see, but will instead be more of a buck-shot spray of smaller more targeted measures that may not move the GDP needle substantially. 
US Inflation Slows as Spending Stalls: Glimmers of Hope for Economic Outlook

US Inflation Slows as Spending Stalls: Glimmers of Hope for Economic Outlook

ING Economics ING Economics 03.07.2023 08:16
Glimmers of hope for US inflation slowdown The Federal Reserve's favoured measure of inflation slowed fractionally more than expected, but there was clearer evidence of softening in the so-called "super core" measure that Fed Chair Jay Powell has been focusing on. There is also evidence of a loss of momentum in spending which will dampen prices pressures further down the line   Incomes rose, but spending stalled in May The May US personal income and spending report in aggregate is a touch softer than predicted. Incomes rose 0.4% month-on-month, above the 0.3% MoM expectation, but then we had a corresponding 0.1pp downward revision to April's growth rate from 0.4% to 0.3%. The more interesting story is on the expenditure side with nominal personal spending rising only 0.1% MoM versus 0.2% expected and there were downward revisions to April (from 0.8% to 0.6%). This leaves "real" consumer spending softer at 0% and April was revised down to 0.2% MoM from 0.5%. This means the savings rate has risen from 4.3% to 4.6%.   2Q growth looks to be a fair bit weaker than 1Q as momentum fades For those that like digging into data, the MoM real consumer spending change was -0.03% MoM to two decimal places. This means if we get a +0.2% MoM real consumer spending print for June, we will have quarter-on-quarter annualised consumer spending of 1% for the second quarter, down from 4.2% in the first. 0.1% MoM for June works out at 0.9% QoQ annualised for 2Q. while 0% MoM reading for June real spending generates 0.8% QoQ annualised. This report suggests a fair bit of spending momentum has been lost as we progress through 2Q. We are currently pencilling in 0.2% MoM for real spending growth in June. So far, weekly chain store data (Redbook) has been soft and restaurant dining is currently (according to Opentable) running at -3% year-on-year and hotel occupancy is running at roughly -1.5% YoY for June (to June 24) according to our interpretation of STR data. TSA airport security check numbers are up though. A 1% QoQ annualised consumer spending number would leave us struggling to get GDP growth above 1.5% in 2Q.   Service sector inflation appears to be topping out (YoY%)   Early signs of softening in Fed's "super core" inflation measure Rounding the report out, we see the Fed's favoured measure of inflation, the core PCE deflator coming in at 0.3% MoM/4.6% YoY. A touch softer than the 0.3%/4.7% expected. At 4.6%, this is the slowest rate of core PCE inflation since October 2021. Based on my calculations, the core PCE deflator ex-energy and ex-housing (Fed Chair Powell is focusing on this as it is this component that is most heavily influenced by the tightness in the jobs market since wages make up the biggest cost input and in which demand has been robust) also slowed to 4.6% from 4.7% YoY while Bloomberg’s calculations back this up, saying on a MoM basis it came in at 0.23% MoM versus 0.42% in April. This is a really encouraging story since we need to see 0.1s or 0.2s MoM to get inflation to 2% YoY over time. It is early days, but NFIB corporate pricing intentions data and ISM prices series offer clear hope that we will soon consistently see these sorts of figures.
Inflation Outlook: Energy Prices Drive Hospitality, Food Inflation Eases

Money Markets Divided as RBA Decision Looms: Will Rates Rise or Pause?

Kenny Fisher Kenny Fisher 03.07.2023 12:43
Money markets split on RBA decision on Tuesday US PCE Price Index eases in May The Australian dollar is showing some movement right off the bat on Monday. AUD/USD fell as much as 70 pips in the Asian session but has recovered most of those losses. In the European session, AUD/USD is trading at 0.6657 down 0.03%.     Money markets split on RBA decision The Reserve Bank of Australia meets on Tuesday, and it’s a coin-toss as to whether the central bank will raise rates for a third straight time or will it take a pause. Traders have priced in a 52% chance of a pause, according to the ASX RBA rate tracker. Just one week ago, the odds of a pause were 70%, after May inflation declined more than expected. Headline CPI fell from 6.8% to 5.6%, its lowest level in 13 months. Core CPI eased to 6.1%, down from 6.7%. The split over what call the RBA will make on Tuesday is indicative of the case that can be made both for a hike and a pause. The drop in inflation is certainly welcome news, but the RBA wants inflation to fall faster, as it remains almost triple the target of 2%. Additional rate hikes would likely send inflation lower, but that would raise the risk of the economy tipping into a recession. The Australian economy has cooled down, but the labor market remains strong and consumer spending has been resilient, despite high inflation. Retail sales for May jumped 0.7% m/m, up from 0.0% in April and smashing the consensus of 0.1%. RBA members in favor of a hike can point to employment and retail sales data as evidence that the economy can withstand additional hikes. The RBA minutes, which can be considered a guide of its rate policy plans, might point to a pause at Tuesday’s meeting. The April and May minutes were hawkish and the RBA raised rates after these releases. The June minutes were more dovish, sending the Australian dollar lower. Could that signal a pause? In the US, the week wrapped up with the PCE Price Index, the Fed’s preferred inflation indicator. In June, the index rose 0.1% m/m, down from 0.4% in May. This indicates that the disinflation process continues and traders have raised the probability of a July hike to 88%, up from 74% a week ago, according to the CME FedWatch tool.   AUD/USD Technical 0.6659 is a weak resistance line. Above, there is resistance at 0.6722 0.6597 and 0.6534 are providing support    
Housing Cracks and Central Bank Considerations: Analyzing Vulnerabilities and Implications

Housing Cracks and Central Bank Considerations: Analyzing Vulnerabilities and Implications

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.07.2023 08:22
Housing cracks...  Note that that's not the case elsewhere. The UK, Hong Kong and Commonwealth countries including Canada, Australia and New Zealand are the most vulnerable to the cracks in the housing market because the share of houses bought on mortgages on shorter-term fixed rates or variable rates are higher. In New Zealand, for example, house prices fell the most in 8 months in June and are down by more than 10% since a year earlier.     Interestingly, the US dollar index remains broadly unresponsive to the Fed's hawkishness, but against the greenback could perform better against the Aussie, Kiwi, sterling, and the Loonie in the second half, because the central banks of all the cited countries will have to sit down and think of broader economic implications of a full-blast housing crisis. History shows that, going back to the 1990s' Japan, where the Bank of Japan (BoJ) raised rates to halt the housing bubble, and which then triggered a real estate crisis, the implications were a long and dark tunnel of asset devaluation, reduced consumer spending, bankruptcies, a weakened banking sector, deflation, and long-term economic stagnation. That's certainly why Japan prefers letting inflation run hot, rather than hiking the rates and send the country to another, and a very sticky deflationary phase.    USDJPY capped near 145  And speaking of Japan, the rally in dollar-yen remains capped at 145 level. The only direction that the BoJ could take from here is the hawkish path, therefore turning long yen will, at some point, become a star trade. Yet getting the timing right is crucial and it all depends on a greenlight from the BoJ. 
FOMC Minutes Reveal Policy Divisions as USD/JPY Falls Sharply

FOMC Minutes Reveal Policy Divisions as USD/JPY Falls Sharply

Kenny Fisher Kenny Fisher 07.07.2023 09:26
FOMC minutes highlight policy divisions USD/JPY falls sharply Japan releases Household Spending and Average Cash Earnings on Friday The Japanese yen is showing strong gains on Thursday. In the European session, USD/JPY is trading at 143.82, down 0.57%.   Fed minutes point to disagreement over rate path The Federal Reserve has been aggressively tightening rates in order to curb inflation but took a pause in June after ten consecutive hikes. At the meeting, the Fed said that a pause would provide members with time to assess the impact of the hikes, which have amounted to some 500 basis points. The minutes of the June meeting were significant in highlighting that Fed members were in disagreement about the decision to pause rates. The decision to pause may have been unanimous, but the minutes made it clear that there was a difference of opinions, with some members preferring a hike but reluctantly agreeing to a pause. There was also disagreement over the pace of tightening in the second half of the year, with 16 of 18 members expecting at least one hike and 12 members expecting two or more hikes. After the minutes, the money markets slightly raised the probability of a 0.25% hike in July from 86% to 91%, according to the CME FedWatch tool. The pricing could continue to change, with two key reports ahead of the July meeting. The non-farm payrolls report will be released on Friday. Job growth is expected to have cooled to 225,000 in June, down sharply from 339,000 in May. This will be followed by the June inflation report next week, with headline inflation expected to fall from 4.0% to around 3.0%. Japan releases Household Spending and Average Cash Earnings on Friday. Household Spending declined by 4.4% in April and another decline of 2.4% is expected for May, as inflation has dampened consumer spending. Average Cash Earnings gained 1% in May and the consensus for June stands at 0.7%. . USD/JPY Technical There is resistance at 145.28 and 146.23 144.11 is a weak support level. The next support line is 143.16  
Market Watch: Earnings Boost and Consumer Confidence Surge Ahead of Key FOMC Decision

US Dollar Slides Below Critical Support Amid Tougher Capital Requirements and Cautious Market Sentiment

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.07.2023 08:33
US dollar slides below critical support.   The week started on a cautious note as European and US stocks eked out small gains, but appetite was limited appetite on news that the new capital requirements for the US banks would be tougher. And mega caps didn't give much support. Tesla lost up to 2% during the session, while Amazon closed the session more than 2% lower before its Prime Day – which now became an industrywide shopping day and will give us a hint on how much US consumers are ready to up their spending online. Meta, on the other hand, advanced 1.23%, as Threads already amassed 100 mio users since its launch last week, while internet traffic data from Cloudflare showed that Twitter use 'tanked'.   Tougher rules Michael Barr said yesterday that he will recommend tougher capital rules for banks with $100 billion or more in assets, as opposed to those that have $700bn and more so far concerned with the tough rules. More importantly, unrealized losses (and gains) on security portfolios will be considered when calculating regulatory proposal, a thing that could've helped avoiding Silicon Valley Bank's (SVB) collapse, but that will also put a bigger pressure on banks that bought tons of US treasuries and that are now sitting on significantly discounted portfolios. The good news is that big banks like JP Morgan and Citi didn't react aggressively to the news, and even more reassuring news is that the smaller, regional bank stocks tempered the news quite well as well. Pacwest for example lost only around 1% and Invesco's KBW index even closed the session slightly higher. What's less reassuring, however, is the fact that the Federal Reserve (Fed) will continue pushing the interest rates higher, and that will put an extra pressure on lenders, and the regional lenders are the most vulnerable to rate changes.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank
Market Sentiment and Fed Policy Uncertainty: Impact on August Performance

New Zealand Central Bank Hits Pause After 12 Consecutive Rate Hikes: Manufacturing Stalls and Inflation Expected to Decline

Kenny Fisher Kenny Fisher 12.07.2023 13:23
New Zealand’s central bank takes a pause after 12 consecutive hikes New Zealand Manufacturing PMI expected to show manufacturing is stalled US inflation expected to decline to 3.1% The New Zealand dollar showed some gains after the Reserve Bank of New Zealand paused rates, but has given up most of those gains. In the European session, NZD/USD is trading at 0.6206, up 0.14%.   RBNZ takes a breather There was no dramatic surprise from the RBNZ, which kept interest rates on hold at Wednesday’s meeting, as expected. The central bank has been aggressive, raising rates 12 straight times since August 2021 until Wednesday’s meeting. This leaves the cash rate at 5.50%. The RBNZ had signalled that it would take a break, with Deputy Governor Hawkesby stating last month that there would be a “high bar” for the RBNZ to continue raising rates. Today’s rate statement said that interest rates were constraining inflation “as anticipated and required”, adding that “the Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range.” The RBNZ did not issue any updated forecasts or a press conference with Governor Orr, which might have resulted in some volatility from the New Zealand dollar. The central bank has tightened rates by some 525 basis points, which has dampened the economy and chilled consumer spending. Is this current rate-tightening cycle done? The central bank would like to think so, but that will depend to a large extent on whether inflation continues to move lower toward the Bank’s inflation target of 1-3%. The pause will provide policymakers with some time to monitor the direction of the economy and particularly inflation. If inflation proves to be more persistent than expected, there’s every reason to expect the aggressive RBNZ to deliver another rate hike later in the year. New Zealand releases Manufacturing PMI for June on Wednesday after the rate decision. The manufacturing sector has contracted for three straight months, with readings below the 50.0 line, which separates contraction from expansion. The PMI is expected to rise from 48.9 to 49.8, which would point to almost no change in manufacturing activity. The US will release the June inflation report later in the day. Headline inflation is expected to fall from 4.0% to 3.1%, but core CPI is expected to rise to 5.3%, up from 5.0%. If core CPI does accelerate, that could raise market expectations for a September rate hike. A rate increase is all but a given at the July 27th meeting, with the probability of a rate hike at 92%, according to the CME FedWatch tool.   NZD/USD Technical 0.6184 is a weak support level. Below, there is support at 0.6148 0.6260 and 0.6383 are the next resistance lines  
Deciphering the Economic Puzzle: Unraveling Britain's Mixed Signals

Deciphering the Economic Puzzle: Unraveling Britain's Mixed Signals

Walid Koudmani Walid Koudmani 12.07.2023 15:47
  In analyzing the state of the British economy, this week's macroeconomic readings have provided a mixed outlook. With indicators such as wages, GDP, and industrial production under scrutiny, market observers are eager to gain insights into the potential depth of the recession and the Bank of England's (BoE) approach to interest rates.   Examining the released figures, renowned economist Walid Koudmani highlights the various nuances in the current economic landscape. Wages in the UK continue to rise, with average earnings for a 3-month period surpassing expectations at a 6.9% year-on-year (YoY) growth rate, slightly higher than the previous level of 6.7% YoY. However, the number of unemployment benefit claims has seen a significant increase of 25.7k, reversing the prior decline of 22.5k. Additionally, the quarterly change in employment of 102 thousand falls short of the previous level of 250k, although it exceeds expectations set at 85k.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?   Walid Koudmani The macroeconomic readings released this week paint a mixed picture of the British economy. Wages in the UK continue to rise with average earnings for a 3-month period increasing by 6.9% year-on-year (YoY), slightly higher than the expected 6.8% YoY and the previous level of 6.7% YoY.  However, the number of unemployment benefit claims increased by 25.7k, reversing the previous decline of 22.5k. The quarterly change in employment amounted to 102 thousand, surpassing the expected 85k but lower than the previous level of 250k. The rise in wage growth is a concern as it could indicate persistent inflationary pressures to come which could lead to a decline in consumer spending, leading to a negative impact on economic growth.  Overall, the macroeconomic readings released this week do not provide a clear picture of the state of the British economy. However, they do suggest that the economy could be facing some headwinds, such as rising inflation and slowing growth. It is too early to say whether the UK will experience a deep recession, but the BoE is likely to continue raising rates in an effort to combat inflation and expectations for those rates continue to increase. While the Pound has benefited from this news, there could be a noticeable pressure on stocks as the cost of money continues to rise and investors are left with less resources to allocate. In addition to this, there are several other factors which may influence the British economy including the outcome of the war in Ukraine, the pace of global economic growth, and the direction of commodity prices. 
Market Outlook: Oil Price Trends and Gold Amid Global Economic Uncertainties - 21.08.2023

Examining Eurozone's Industrial Production: Insights into the State of the European Economy and Industry

Antreas Themistokleous Antreas Themistokleous 13.07.2023 14:04
Recent industrial production data from the Eurozone paints a concerning picture for the European economy and industry. According to Eurostat data, industrial production in Europe declined by 2% year over year in May, exceeding expectations of a 1% decrease. This raises questions about the broader impact on the European economy. The industrial sector plays a crucial role in any economy as it encompasses the processing and transformation of raw materials into finished and semi-finished products. This sector significantly influences other parts of the economy, including the housing market, retail sector, consumer spending, and ultimately, inflation. Changes in industrial production directly affect the supply and availability of products, which can have broader implications for the overall economic landscape.     FXMAG.COM: What does the industrial production reading from the Eurozone tell us about the state of the European economy and European industry?   Antreas Themistokleous: The industrial production in Europe for the month of May has declined by 2% year over year according to Eurostat data. This came out to be worse than the expectations of only 1% so how does that affect the European economy?    First of all the industrial sector is a major component of an economy since it's responsible for the processing and the transformation of natural products (raw materials) into other finished and semi-finished products which in turn assist in other parts of the economy such as the housing market, the retail sector. In addition it affects the consumer spending and inevitably inflation since it directly affects the supply and availability of products to be consumed.    Inflation data is another major component that affects an economy and the European inflation rate has shown some steady decline since the high of 10.6% in October 2022. Currently the rate is at 6.1% and on the 19th the official rate for the month of June will be published. Expectations are for a further decline of around 0.6% which if confirmed could influence the decisions of the European Central Bank in regards to their monetary policy and inevitably their interest rate decision on their next meeting on the 27th of July.    The interest rate set by the ECB is currently at 4% while the market is expecting the central bank to proceed with another step hike , 0.25%, at their meeting in late July. If the expectations are correct then we might see some boost for the Euro against its pairs while unemployment is holding stable at 6.5% for the last two months.   All in all the European economy seems to be at a stagnant phase. Inflation seems to be stickier than expected resulting in continued hawkish stance by the central bank to increase interest rates in an effort to discourage economic activity in the market. On the other hand unemployment is near a 25 year low adding to the buying power of consumers pushing inflation figures to the upside creating what temporarily seems to be a never ending cycle when it comes to fighting inflation.   
RBA Minutes Signal Close Decision, US Retail Sales Expected to Rise

RBA Minutes Signal Close Decision, US Retail Sales Expected to Rise

Kenny Fisher Kenny Fisher 18.07.2023 12:16
RBA minutes point to close call at July decision US retail sales for June expected to climb The Australian dollar has edged lower on Tuesday, trading at 0.6807, down 0.14%. We could see some further movement in the North American session when the US releases retail sales.   RBA minutes point to uncertainty about the economy The RBA minutes didn’t provide much in the way of insights and the Australian dollar barely showed a muted response. Perhaps the most interesting aspect of the minutes was the spelling out of both sides of the argument about whether to raise rates or take a pause. In support of a hike, the minutes noted that wage growth is rising, inflation is falling and the labour market remains tight. The case for a pause relied on inflation remaining high and weaker growth. In the end, policy makers voted to pause since the arguments in favour of holding rates were more compelling. The minutes stated that monetary policy was “clearly restrictive” at the current rate level but that would not preclude the RBA from further tightening, which would depend on the economy and inflation. The money markets have priced a pause at the August 1st meeting at 75%, according to the ASX RBA rate tracker. At the July meeting, the decision to pause was a close call and that could repeat itself at the August meeting, so I am not as confident in a pause as the money markets.     US retail sales expected to climb The US releases the June retail sales report, with expectations that consumers remain in a spending mood. The consensus estimate for headline retail sales is 0.5% m/m, up from 0.3%, and the core rate is expected to rise 0.3%, up from 0.1%. The Federal Reserve is widely expected to raise rates at the July 27th meeting. If retail sales improve as expected, we could see the pricing for a September rate hike increase – currently, there is only a 14% chance of a rate hike, according to the CME Tool Watch.   AUD/USD Technical There is resistance at 0.6878 and 0.6947 0.6786 and 0.6676 are providing support        
US Retail Sales Mixed, UK Inflation Expected to Ease: Impact on GBP/USD and Monetary Policy

US Retail Sales Mixed, UK Inflation Expected to Ease: Impact on GBP/USD and Monetary Policy

Kenny Fisher Kenny Fisher 19.07.2023 08:21
US retail sales dip, core retail sales rise UK inflation expected to fall The British pound has edged lower on Tuesday. In the North American session, GBP/USD is trading at 1.3038, down 0.27%.     UK inflation expected to fall The UK is lagging behind other major economies in the fight to curb inflation. Will Wednesday’s inflation report bring some good news? In May, CPI remained stuck at 8.7% y/y but is expected to ease to 8.2% in June. The core rate is expected to remain steady at 7.1%. On a monthly basis, headline CPI is expected to fall from 0.7% to 0.4% and the core rate is projected to slow to 0.4%, down from 0.8%. The inflation report could be a game-changer with regard to the Bank of  England’s meeting on August 3rd. The BoE delivered an oversize 50-basis point hike in June and will have to decide between a modest 25-bp hike or another 50-bp increase at the August meeting. Last week’s employment report pointed to wage growth picking up, which moved the dial in favour of a 50-bp increase.   US retail sales report a mixed bag US retail sales for June provided a mixed spending picture. Headline retail sales rose just 0.2% m/m, below the 0.5% consensus estimate and the upwardly revised May reading of 0.5%. Core retail sales were much stronger at 0.6%, above the 0.3% consensus and the upwardly revised May release of 0.3%. The data points to resilience in consumer spending although momentum has slowed. The retail sales report did not change expectations with regard to rate policy, with the Fed expected to raise rates in July and take a pause in September. The Fed has tightened by some 500 basis points in the current rate-hike cycle and this has curbed inflation, which has fallen to 3%. Nevertheless, the Fed remains concerned that the solid US economy and a tight labour market will make it difficult to hit the 2% inflation target, and the Fed hasn’t given any hints that it will wrap up its tightening in July, although the money markets appear to think this is the case.   GBP/USD Technical GBP/USD has support at 1.2995 and 1.2906  There is resistance at 1.3077 and 1.3116    
Underestimated Risks: Market Underestimating Further RBA Tightening

Canada's Inflation Expected to Ease, US Retail Sales Projected to Improve

Ed Moya Ed Moya 19.07.2023 08:32
Canada’s inflation expected to ease US retail sales projected to improve The Canadian dollar is almost unchanged on Tuesday, trading at 1.3204. USD/CAD should show some life in the North American session, with the release of Canadian inflation and US retail sales.     Will Canada’s core inflation fall? Canada releases the June inflation report later today, and the Bank of Canada will be hoping for good news. On an annualized basis, headline inflation is expected to drop to 3.0%, down from 3.4% in June, while the core rate is projected to fall from 3.7% to 3.5%. On a monthly basis, the markets are expecting mixed news. CPI is expected to tick lower to 0.3%, down from 0.4% but core CPI is projected to rise from 0.4% to 0.5%. The Bank of Canada raised rates by 0.25% last week, which brought the benchmark cash rate to 5.0%. The BoC will have some time to monitor the economy, with the next rate meeting on September 6th. The BoC would like to take a pause in September but may have to wait until later in the year if the economy does not show further signs of cooling before the September meeting.   US retail sales expected to climb The US economy is by and large in good shape, despite aggressive tightening by the Federal Reserve in order to curb high inflation. A key driver behind the economy’s strong performance has been consumer spending, which accounts for two-thirds of economic activity. The US releases the June retail sales report later today, with expectations that consumers remain in a spending mood. The consensus estimate for headline retail sales is 0.5% m/m, up from 0.3%, and the core rate is expected to rise 0.3%, up from 0.1%. The retail sales release is unlikely to change expectations that the Fed will raise rates at the July 27th meeting, with a 96% chance of a hike, according to the CME Tool Watch. However, an unexpected reading could lead to a repricing of a September rate hike, which has just a 14% probability. . USD/CAD Technical There is resistance at 1.3205 and 1.3318 1.3106 and 1.3049 are providing support    
Mixed US Activity Picture: July Rate Hike Likely, Followed by a Pause

Mixed US Activity Picture: July Rate Hike Likely, Followed by a Pause

ING Economics ING Economics 19.07.2023 09:43
Mixed US activity picture supports July hike then another pause Retail sales grew in June but these are dollar values and in volume terms, spending appears lacklustre. Meanwhile, with the manufacturing sector languishing and inflation showing encouraging signs of slowing, the widely-anticipated July Federal Reserve interest rate hike may be the last.   Retail sales indicate a mixed spending picture US June retail sales are a little bit softer than expected at the headline level, rising 0.2% month-on-month versus the 0.5% consensus expectation, but May's figure was revised up to 0.5% MoM growth from 0.3%. Meanwhile, the "control group" which strips out the volatile auto, building materials, gasoline and food service components was better-than-hoped, rising 0.6% MoM versus 0.3% consensus. There was also a 0.1pp upward revision to May for this series. This is important as this stripped-down version of retail sales tends to have a better correlation with broader consumer spending trends over time. The details show auto sales were weaker-than-expected (+0.3% MoM), given decent unit volume figures from manufacturers, while gasoline station sales surprisingly fell despite rising prices. It was a good month for furniture (+1.4% MoM) and electronics (+1.1% MoM) and miscellaneous (+2%) and internet (+1.9%), but building materials fell 1.2%, sporting goods were down 1% and department store sales fell 2.4%, indicating a very mixed picture for spending.   Challenges mount as credit support fades and student loan repayments restart Looking at it in year-on-year percentage terms, retail sales are up 1.7% in aggregate while the "control group" is up 4.3%, but these are nominal dollar figures so accounting for inflation, sales volumes are pretty lacklustre. Moreover, weekly Johnson Redbook sales are in negative territory YoY in early July - also a dollar value figure. This tends to lead the official retail sales numbers, so doesn't bode well. Nor does the softness in restaurant dining, which according to Opentable is running at -2% YoY for July month-to-date.   Weekly Redbook sales point to decelerating retail activity (YoY%)   Also check out the softer consumer credit numbers that have been coming through, for example rising only $7.2bn in May versus the $20bn consensus and the outright consecutive declines in the stock of consumer credit provided by commercial banks in the US over the past three weeks. With student loan repayments also restarting in the next few months the challenges facing the retail sector appear to be mounting, with a further slowing in consumer activity looking like the most likely path ahead.   Softer data indicates manufacturing recession Unfortunately, US industrial production was much weaker than anticipated in June, falling 0.5% MoM versus expectations of 0% growth. Manufacturing output fell 0.3% MoM rather than coming in flat as predicted while mining fell 0.2% and utility output dropped 2.6%. We know that the ISM has been in contraction territory for the past eight months and we know that the Baker Hughes oil and gas rig count has fallen heftily over the past three months (from 748 at the beginning of March to 675 as of last week – the lowest since April 2020 when spot prices for oil were turning negative). Given this, we aren't expecting an imminent rebound in output from the manufacturing or mining sectors.   US manufacturing output versus the ISM index   July utility output will be up sharply though, with AC units in overdrive, and this is the only hope for a positive number for industrial activity. So with the activity backdrop for the US looking more mixed and the inflation story looking more favourable, the data seemingly supports the narrative of the Fed hiking rates again in July, but pausing again in September, perhaps for a number of months.
USD Outlook: Fed's Push for Higher Rates and Powell's Speech at Jackson Hole Symposium

US Inflation Moderates, Fed Eyes Another 25bp Hike; All Eyes on Bank of Hungary's Rate Decision

ING Economics ING Economics 24.07.2023 09:57
US inflation has moved lower, but as the jobs market remains tight and activity holds up, another 25bp hike still looks to be the most likely course of action for the Fed next week. In the EMEA region, all eyes will be on the Bank of Hungary's upcoming rate decision, where we're expecting the base rate to be kept at 13% US: The Fed starts slowing the pace of rate hikes as inflation moves lower After ten consecutive interest rate hikes over the last 15 months, the Federal Reserve left the Fed Funds target rate unchanged at 5-5.25% in June. However, the central bank has characterised this as a slowing in the pace of rate hikes rather than an actual pause, with two further hikes signalled for the second half of 2023 in their individual forecast projections. Since then, inflation has moved lower, but the jobs market remains tight and activity has held up well. As such, commentary from officials has broadly indicated that they feel the need to hike again on July 26th, which would bring the Fed funds to range up to 5.25-5.5%. We suspect that the accompanying press conference will acknowledge encouraging signs on inflation, but also a desire not to take any chances that could allow it to re-accelerate. We expect the door to be kept open for further policy tightening later in the year. In terms of data, the highlight will be second quarter GDP. The first quarter posted a firm 2% annualised growth rate, led by consumer spending. We suspect that the second quarter will be slower at around 1.5%, with inventories as the main contributor to growth. Meanwhile, durable goods orders should be lifted by very strong figures from Boeing, which received 304 aircraft orders in June, up from 69 in May. Outside of transportation, the data will be softer given that the ISM manufacturing new orders series has been in contraction territory for the last ten months. We will also get the June reading of the Fed’s favoured inflation measure, the core personal consumer expenditure deflator. As with the CPI report, we expect it to slow quite markedly with broadening signs of disinflation in more categories.    
EUR/USD Outlook: Dovish Shift and Inflation Data Impact Forex Markets

Canada's Retail Sales Slow as Former Fed Chair Suggests Last Hike

Kenny Fisher Kenny Fisher 24.07.2023 10:27
Canada’s retail sales expected to slow Former Chair Bernanke says the July hike may be the last increase The Canadian dollar is trading quietly on Friday. In the European session, USD/CAD is trading at 1.3157, down 0.09%. It has been a busy week in the currency markets, with the US dollar rebounding and posting strong gains against the major currencies. The notable exception has been the Canadian dollar, which has held its own against the greenback this week. We could see some movement from USD/CAD in the North American session when Canada releases retail sales for May.   Will Canada’s retail sales point to a softer economy? We’ll get a snapshot of consumer spending later on Friday, as Canada releases the May retail sales report. The markets are bracing for a slowdown in May after an impressive April release. The consensus estimate for retail sales is 0.5% in May, down from 1.1% in April. The core rate is expected to fall to 0.3%, compared to 1.3%. If the estimates prove to be accurate, it would point to the economy cooling down and provide support for the Bank of Canada to take a pause at the next meeting in September.   Is the Fed finally done? The Federal Reserve meets on July 26th and investors have priced in a 0.25% hike as a near certainty. September is less clear, but the markets have priced another hike at just 16%, according to the CME FedWatch tool. Are the markets being too dovish? Fed members have said that inflation isn’t falling fast enough, which could mean that another hike is coming after July. Former Fed Chair Ben Bernanke appeared to side with the market view, saying on Thursday that the July hike could be the final rate increase in the current tightening cycle. Bernanke said that the economy would slow further before the 2% inflation target was reached, but he expected any recession to be mild.   USD/CAD Technical There is resistance at 1.3205 and 1.3318 1.3106 and 1.2993 are providing support  
UK Retail Sales Surge in June Amid Concerns Over Fed Rate Hikes

UK Retail Sales Surge in June Amid Concerns Over Fed Rate Hikes

Kenny Fisher Kenny Fisher 24.07.2023 10:30
UK retail sales rise in May Former Fed Chair Bernanke says Fed hikes could be done after July The British pound is in negative territory on Friday. In the European session, GBP/USD is trading at 1.2824, down 0.34%. The pound continues to show strong volatility – after gaining 2% last week, it has surrendered all of those gains this week.   UK retail sales beat expectations UK retail sales rebounded in June after a sluggish May due to King Charles’ coronation, which dampened consumer spending. Retail sales rose 0.7% m/m in June, up sharply from the 0.1% gain in May (revised downwards from 0.3%). Core retail sales jumped 0.8% in June, up from 0.0% in May (revised downwards from 0.1%). The hot weather in June contributed to strong sales and the uptick was broadly distributed throughout the economy. At the same time, high inflation means that consumers are getting less for their buck. Food prices have been especially high and jumped in June by 17.4% y/y according to the Office for National Statistics. Consumers may still be spending but that doesn’t mean they are a happy lot. GfK Consumer Confidence slipped to -30 in July, down from -24 in June and below the consensus of -26. This marked the first time that consumer confidence declined since January. High interest rates and an inflation rate of close to 8% have soured the mood of consumers. The Bank of England has struggled to curb inflation despite aggressive tightening, and the UK boasts the unwanted record of the highest inflation among the major economies.   Is the Fed finally done? The Federal Reserve meets on July 26th and investors have priced in a 0.25% hike as a near certainty.  Will that wind up the current tightening cycle? The markets seem to think so and have priced a hike in September at just 16%, according to the CME FedWatch tool. Are the markets out of sync with the hawkish Federal Reserve? Fed members have said that inflation isn’t falling fast enough, which could mean that another hike is coming after July. Former Fed Chair Ben Bernanke appeared to side with the market view, saying on Thursday that the July hike could be the final rate increase in the current tightening cycle. Bernanke said that the economy would slow further before the 2% inflation target was reached, but he expected any recession to be mild.     GBP/USD Technical There is weak support at 1.2816. Next, there is support at 1.2766  There is resistance at 1.2891 and 1.2995  
Apple's Market Slide Over China iPhone Ban Exaggerated: Potential Buying Opportunity Emerges

Goldilocks GDP Boosts US Soft Landing Narrative: Inflation Moderates and Growth Strengthens

ING Economics ING Economics 28.07.2023 08:33
Goldilocks GDP feeds the US soft landing narrative GDP growth was a little stronger than expected in 2Q 2023, but inflation pressures continue to moderate, supporting the soft landing narrative. The Fed will leave the door open to further rate hikes, but the legacy of past rate hikes and tighter lending conditions will restrain activity and dampen price pressures, negating the need for further action.     Not too hot inflation, not too cold growth We’ve got a nice combination on the US data front this morning for risk assets. Second-quarter GDP growth is stronger than expected (2.4% vs 1.8% consensus), led by consumer spending and investment with inventories not being as important a growth driver as thought likely. Meanwhile, the core PCE price deflator slowed to 3.8% annualised from 4.9% (consensus 4%). So we’ve got decent growth with slowing inflation while jobless claims fell to 221k from 228k and continuing claims dropping to 1,690k from 1,749k, which have further helped to boost the soft landing narrative. At the same time June durable goods orders jumped 4.7% month-on-month thanks to strong Boeing orders boosting civilian aircraft orders by 69.4%. Non-defense capital goods orders ex aircraft remain subdued though at 0.2% MoM – a little better than expected, but there were downward revisions.   Contributions to US quarterly annualised GDP growth (%)   Focusing on GDP, the 1.6% gain in consumer spending was slower than the warm-weather-boosted 4.2% surge in the first quarter, but it was better than the 1% figure we expected to see and points to some upward revision to the monthly profile in tomorrow’s personal income and spending report. Fixed investment was also better than predicted, rising 4.9%, led by a 10.8% jump in equipment and software investment after a couple of negative quarters. Government expenditure was also robust, rising 2.6%. The main drags were inventories, which weren’t rebuilt as much as expected while net trade was disappointing, subtracting 0.12 percentage points from headline growth with exports plunging 10.8% and imports falling 7.8%.   GDP continues to run below pre-Covid trend   GDP below pre-Covid trend, suggesting inflation still largely a supply side story If we look at the levels of GDP we see that while today’s growth number was better than expected, output is still around 2 percentage points below where we would have been had the economy remained on its pre-pandemic track. This suggests that supply side constraints continue to have an important legacy impact on inflation and additional rate hikes to dampen growth and get inflation sustainably back to target are not necessary. This view gets some support from that lower-than-expected core PCE deflator which at 3.8% annualised is the slowest rate of price increase since the first quarter of 2021. The headline PCE deflator slowed to 2.6% annualised.   Leading indicators still point to downside risk for GDP growth   Recessions risks linger on In terms of the outlook, we remain concerned that the cumulative effect of tighter monetary policy plus tighter lending conditions will increasingly restrain economic activity and growth will slow and possibly contract from the fourth quarter. Certainly the leading economic indicator suggests that the risks are skewed to the downside for economic activity. This should result in weaker employment numbers through the second half of this year and into 2024, which will further dampen price pressures, As such, we continue to believe that while the Fed will leave the door open to further interest rate hikes, there is less urgency to do so and that yesterday’s rate hike to 5.25-5.5% will end up marking the peak for US interest rates.
Turbulent Times Ahead: Poland's Central Bank Signals Easing Measures

Rates Spark: US 10yr Hits 4%, ECB Returns to 0% on Excess Reserves

ING Economics ING Economics 28.07.2023 08:36
Rates Spark: Don’t look down, yet Policy rates have practically peaked in the US and eurozone. Even if there is another hike it would be the final one. But market rates are not yielding to this. The US 10yr has re-hit 4%. The issue here is not the peak in policy rates, but the potential for cuts. Basically the market has reined back rate cut expectations, and that's keeping long rates elevated.   US 10yr makes the break to 4%. It should stay there for a while US market rates latched on to the strength in the activity data released on Thursday, rather than the calming in inflation data. Even if lower, the 3.8% on core PCE is still too high for comfort, and remains vulnerable to future upside should the economy continue to bubble as it has been doing. The release of decent consumer spending, a fall in jobless claims and firm durable orders all point to an economy that continues to defy the forces acting against it. For the 10yr Treasury yield, the issue remains that there is little room for lower yields if the terminal discount for the funds rate is not much below 4% in the medium term. The implied fed funds discount for Jan 2025 has in fact drifted higher, now up at 4.1%. Based off that the 10yr is in fact still arguably too low. We view the push up to the 4% area as perfectly valid, and indeed we anticipate that the 10yr yield remains above 4%, at least for as long as the medium-term discount for the fed funds rate also remains above 4%.   The ECB moves to 0% on excess reserves; don't worry, it's a move back to normalcy The European Central Bank (ECB) decision to pay 0% on excess reserves brings things back to where they were before the Great Financial Crisis (GFC). Regulatory reserves always paid zero percent. But since the GFC the ECB has remunerated reserves at the overnight deposit rate. This had to be done as else the banks would simply not hold them. The move back to 0% applies only to regulatory reserves, and not to excess reserves. It is a mild hit to banks, as they receive less interest income on reserves. But it is not dramatic, as the reserves held over and above the minimum will continue to get remunerated as normal. Latest data show that excess reserves across the banking system were running at EUR 3.6trn. These continue to get compensated at the deposit rate. Reserve requirements were running at an average of EUR 165bn. These will be compensated at zero percent. That represents about 5% of total reserves. It's not nothing, but it's also not terribly significant. This saves the ECB a few bob, but nothing more to it.   Today's events and market views Key US data on Friday includes the June PCE deflator. Look for a continuation of the deceleration in inflation, with the headline deflator set to ease down to 3% and the PCE core deflator to ease down in the direction of 4% (but likely to remain above). The University of Michigan Sentiment indicator for July is set to hold in the low 70's, which is below the average in the 85 area. It's been on a upward recovery, from around 60 in May. We'll also get the 5-10yr inflation expectation, which is expected to ease slightly to 3%. The eurozone will have a consumer price inflation focus, with the German lander CPI data to be followed by a country-wide one. A mild easing is expected, but still leaving inflation running uncomfortably high. We'll also see EU consumer confidence, which is likely to remain in the mid 90's, and below the benchmark reference of 100, signalling ongoing macro weakness.
Portugal's Growing Reliance on Retail Debt as a Funding Source and Upcoming Market Events"

EUR/USD Pair Faces Turbulence Amidst Conflicting Fundamentals: Traders Await Core PCE Index for Direction

InstaForex Analysis InstaForex Analysis 28.07.2023 15:48
The EUR/USD pair has been caught in turbulence amid conflicting fundamental signals, causing the price to move sideways. Market participants still need to unravel this tangle of contradictions to determine the price's direction. Currently, traders are driven by emotions, experiencing a rollercoaster-like ride. The verdict of the Federal Reserve and the US GDP The results of the Federal Reserve's July meeting were not in favor of the greenback. Bulls returned to the 1.1150 resistance level (the Tenkan-sen line on the 1D chart) and tested it. However, when it comes to the overall outcome, it would be more accurate to say otherwise: the market interpreted the results of the July meeting against the US currency, while the Fed's verdict can be viewed from different angles. The US central bank avoided specifics, especially regarding the future prospects of tightening monetary policy. According to Fed Chair Jerome Powell, everything will depend on what new economic data shows: the September meeting may end with either a rate hike or keeping rates unchanged. Such rhetoric disappointed dollar bulls, as recent inflation reports came out in the "red," reflecting a slowdown in inflation in the US. It is logical to assume that if July's inflation follows the trajectory of June's, the September rate hike will be in question. These conclusions put significant pressure on the greenback – the US dollar index hit a weekly low, declining towards the 100 level. However, the situation changed drastically. Dollar bulls once again saw a "light at the end of the tunnel" thanks to the latest US GDP report. The data significantly surpassed forecasts.   According to preliminary calculations, US GDP increased by 2.4% in the second quarter, with a growth forecast of 1.8%. It is worth mentioning that the first quarter's result was recently revised upwards: the initial estimate showed a 1.3% growth in the US economy, while the final data showed a different result of 2.0%. The Bureau of Economic Analysis report (US Department of Commerce agency) indicates that this growth was driven by increased consumer spending, government and local government spending, growth in non-residential fixed investment, private investment in equipment, and federal government spending. Consumer spending, which accounts for two-thirds of the economy, increased by 1.6% in the second quarter, while government spending increased by 2.6%. EUR/USD sellers are back in action In addition to the GDP report, dollar bulls were also pleasantly surprised by another indicator.   Durable Goods Orders in the US increased 4.7% in June, compared to forecasts of 1.3%. This reading followed the 2.0% increase recorded in May. Orders for durable goods excluding transportation also rose by 0.6% last month. This component of the report also showed a positive outcome, as most experts expected a more modest growth of 0.1%.   As a result, hawkish expectations regarding the Fed's future actions have increased in the market. According to the CME FedWatch Tool, the probability of a 25 basis points rate hike in September is nearly 30%, whereas after the announcement of the July meeting's outcome, this probability fluctuated in the range of 19-20%. Such an information background contributed to the "revival" of the greenback.   The US dollar index fully recovered all lost positions, rising to the middle of the 101 level. Consequently, the EUR/USD pair plummeted and hit two-week price lows.       The European Central Bank also played its role in this. Following the July meeting, the ECB raised interest rates by 25 basis points but did not announce further steps in this direction.   Similar to the Fed, the ECB indicated that one additional rate hike from the central bank would now depend on key economic data, primarily inflation. According to ECB President Christine Lagarde, the central bank has "turned off the autopilot" – decisions on interest rates will be made from meeting to meeting and will be based on "inflation forecasts, economic and financial data, and the underlying inflation dynamics."   It is worth noting that after the previous meeting, Lagarde had directly announced the rate hike at the July meeting. Conclusions The latest US reports, as well as the outcomes of the ECB's July meeting, "redrew" the fundamental picture for the EUR/USD pair. There is one more important piece of the puzzle remaining: the core PCE index, which will be published at the start of the US session on Friday, July 28th. However, for another upward reversal, this indicator must deviate significantly from the forecasted value (naturally, in a downward direction), with experts predicting a declining trend to 4.2% (following the May increase to 4.6%).   From a technical perspective, you can consider short positions on the pair after sellers overcome the support level of 1.0950 (Tenkan-sen line on the weekly chart). In such a case, the next bearish target for EUR/USD would be at 1.0850 – the upper band of the Kumo cloud on the 1D chart.  
Portugal's Growing Reliance on Retail Debt as a Funding Source and Upcoming Market Events"

UK Q2 GDP Forecast: Potential Stall Amid Economic Outlook Uncertainty - Analysis by Michael Hewson

Michael Hewson Michael Hewson 11.08.2023 08:07
UK economy expected to stall in Q2. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets enjoyed their second successive day of gains yesterday, boosted by the announcement by China to end its ban on overseas travel groups to other countries has also helped boost travel, leisure, and the luxury sector. The gains were also helped by a lower-than-expected rise in US CPI of 3.2%, with core prices slipping back to 4.7%, which increased expectations that we could well have seen the last of the Fed rate hiking cycle, which in turn helped to push the S&P500 to its highest levels this week and on course to post its biggest daily gain since July.     Unfortunately, San Francisco Fed President Mary Daly had other ideas, commenting that the central bank has more work to do when it comes to further rate hikes, which pulled US yields off their lows of the day, pulling stock markets back to break even.   This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though Daly isn't a voting member on the FOMC this year, and she's hardly likely to say anything else. Certainty hasn't been helped this week by data out of China which shows the economy there is in deflation, despite recent upward pressure on energy prices.     It also means that we can expect to see a lower open for markets in Europe with the main focus today being on the latest UK Q2 GDP numbers, as well as US PPI for July. Having eked out 0.1% growth in Q1 of this year, today's UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth. That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.     Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy. PMIs have held up well throughout the quarter even as they have weakened into the summer. Retail sales have been positive every month during Q2, rising by 0.5%, 0.1% and 0.7% respectively. Consumer spending has also been helped by lower fuel pump prices, and with unemployment levels still at relatively low levels and wage growth currently above 7%, today's Q2 GDP numbers could be as good as it gets for a while.     Despite the resilience shown by the consumer, expectations for today's Q2 are for a 0% growth which seems rather stingy when we saw 0.1% in Q1. This comes across as surprising given that Q2 has felt better from an economic point of view than the start of the year, with lower petrol prices helping to put more money in people's pockets despite higher bills in April. This raises the prospect of an upside surprise, however that might come with subsequent revisions.       Nonetheless, even as we look back at Q2, the outlook for Q3 is likely to become more challenging even with the benefit of a lower energy price cap, helping to offset interest rates now at their highest levels for over 15 years. With more and more fixed rate mortgages set to get refinanced in the coming months the second half of the year for the UK economy could well be a lot more challenging than the first half.     Yesterday US CPI came in slightly softer than expected even as July CPI edged up to 3.2% from 3% in June. Today's PPI numbers might show a similar story due to higher energy prices, but even here we've seen sharp falls in the last 12 months. A year ago, US PPI was at 11.3%, falling to 0.1% in June, with the move lower being very much one way. We could see a modest rebound to 0.7% in July. Core prices have been stickier, but they are still expected to soften further to 2.3% from 2.4%. 12 months ago, core PPI was at 8.2% and peaked in March last year at 9.6%.       EUR/USD – squeezed above the 1.1050 area yesterday, before failing again, and sliding back below the 1.1000 area. Despite the failure to break higher we are still finding support just above the 50-day SMA. Below 1.0900 targets the 1.0830 area.     GBP/USD – popped above the 1.2800 area yesterday and then slipped back. We need to see a sustained move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – pushed up to the 100-day SMA with resistance now at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – closing in on the June highs at the 145.00 area. This is the key barrier for a move back towards 147.50, on a break above the 145.20 level. Support now comes in at the 143.80 area.     FTSE100 is expected to open 42 points lower at 7,576     DAX is expected to open 70 points lower at 15,926     CAC40 is expected to open 30 points lower at 7,403
Canadian Inflation Rises to 3.3%, US Retail Sales Climb: USD/CAD Analysis

Canadian Inflation Rises to 3.3%, US Retail Sales Climb: USD/CAD Analysis

Kenny Fisher Kenny Fisher 16.08.2023 11:42
Canada’s inflation rises to 3.3% US retail sales climb 0.7%, core rate soars 1% The Canadian dollar is showing limited movement on Tuesday. In the North American session, USD/CAD is trading at 1.3477, up 0.13%.   Canada’s inflation jumps Canada released the July inflation report earlier today. CPI rose 3.3% y/y, up from 2.8% in June and above the consensus estimate of 3.0%. On a monthly basis, CPI was up 0.6% in June, compared to 0.1% in May and higher than the estimate of 0.3%. The average of two of the Bank of Canada’s core measures came in at 3.65% y/y in June, a drop lower than the 3.7% gain in May. Core CPI, which is considered more reliable than headline CPI, remains uncomfortably high for the Bank of Canada. The June inflation reading managed to fall within the BoC’s 1%-3% target, for the first time since March 2021. The rise in the July reading is a reminder that the fight against inflation is not over and it will be a challenge for the BoC to keep inflation below 3%. The Bank of Canada holds its next meeting on September 6th. The BoC has said that its rate decisions will be based on the data, and the rise in July CPI could provide support for a rate hike at that meeting. Reuters reported that the money markets have raised the probability of a 25 basis point hike in September to 31% currently, up from 22% prior to the inflation report release.   Consumer spending remains resilient In the US, retail sales for July surprised on the upside. Headline retail sales rose 0.7% m/m, above the June reading of 0.3% (upwardly revised from 0.2%). The core rate jumped 1.0%, blowing past the 0.2% gain in June. Both readings beat the consensus estimate of 0.4%. The Fed is widely expected to hold rates in September, but November is less clear-cut, with a 64% chance of a pause, a 32% likelihood of a 25-basis point hike and a 3% chance of a 50-bps increase.   USD/CAD Technical There is resistance at 1.3513 and 1.3580 1.3434 and 1.3367 are providing support      
US Retail Sales Boost Prospects for 3% GDP Growth, but Challenges Loom Ahead

US Retail Sales Boost Prospects for 3% GDP Growth, but Challenges Loom Ahead

ING Economics ING Economics 16.08.2023 13:19
Strong consumer keeps US on track for 3% GDP growth Retail sales provided another upside data surprise and indicates a 3% annualised GDP growth rate is possible for the third quarter. However, higher consumer borrowing costs, reduced credit availability, the exhausting of pandemic-era savings and the restart of student loan repayments pose major challenges for fourth quarter activity.   Retail sales lifted by Prime Day and eating out We have another US data upside surprise from the household sector with retail sales rising 0.7% month-on-month in July versus the 0.4% consensus. June's growth was also revised up 0.1 percentage point to 0.3% MoM. Importantly, the control groups which excludes volatile autos, gasoline, food service and building materials, rose 1% MoM versus 0.5% consensus, but here there was a 0.1pp downward revision to June's growth to 0.5% MoM. This category, historically, has a better correlation with broader consumer spending. Remember retail sales is only around 45% of consumer spending in total, with consumer services taking a greater share. Amazon Prime Day appears to have been the main driver with non-store sales up 1.9% MoM, but there was also strength in restaurants and bars (+1.4%) while sporting goods rose 1.5%, clothing was up 1% and grocery up 0.8%. Electronics (-1.3% MoM) and vehicles (-0.3%) and furniture (-1.8%) were the weak spots. All in it points to the US being on track to report 3% annualised GDP growth in the third quarter, which will keep the Fed's language hawkish even if they don't carry through with further rate hikes, as we expect.   Official retail sales growth versus weekly chain store sales growth (YoY%)   The challenges for spending are mounting Interestingly, there has been a bit of a breakdown in the relationship between official retail sales growth of the control group and the weekly Redbook chain store sales numbers, as can be seen in the chart above. Maybe this is the Prime day effect playing out and we see a reconvergence again in August. The Retail sales report is a good story for now, but we are expecting weakness to materialise in the fourth quarter. Higher market interest rates will add to upward pressure on what are already record high credit card borrowing rates and rising auto, mortgage and personal loan rates. With households also continuing to run down pandemic-related excess savings, as measured by Fed numbers on cash, checking and time savings deposits, this will act as a brake on growth.   US consumer borrowing costs (%)   Higher borrowing costs and reduced credit availability will hurt However, it is important to remember that reduced access to credit is just as important as the cost of credit in taking heat out of the economy. The latest Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) underscores how the tightening of lending conditions will increasingly act as a headwind for activity and contribute to inflation sustainably returning to target. Banks are increasingly unwilling to make consumer loans and as the chart below shows, this has historically pointed to an outright contraction in consumer credit outstanding.   Fed's Senior Loan Officer Opinion Survey points to negative consumer credit growth (YoY%)   Fed to keep rates on hold Add in the squeeze on household finances from the restart of student loan repayments for millions of households and it means further weakness in retail sales and broader consumer spending remains has to remain our base case. The concern is that it will also heighten the chances of recession, which we believe will discourage the Fed from any further interest rate increases. Instead, we expect interest rate cuts from March 2024 onwards as monetary policy is relaxed to a more neutral footing.  
Will Entertainment Trends Spark a Retail Revival? Examining the Impact of Taylor Swift, Barbie, and More on UK Retail Sales

Will Entertainment Trends Spark a Retail Revival? Examining the Impact of Taylor Swift, Barbie, and More on UK Retail Sales

Michael Hewson Michael Hewson 18.08.2023 07:58
Will Taylor Swift and Barbie help to lift UK retail sales? By Michael Hewson (Chief Market Analyst at CMC Markets UK)   This week hasn't been a good week for the FTSE100, with 4 days of declines on top of a poor finish to the end of last week, with the index down 4% over the last 5 days, and down at 5-week lows. The performance of the DAX has been slightly better, but it is still down by 2% over the same period as concerns about the health of the Chinese economy, along with a sell-off on global bonds causes investors to question how long rates are likely to stay at these sorts of levels.   For so long the debate has been about how high interest rates would be likely to go, and has been framed around the duration period before rates start to get cut again. In the last few days, the frames of reference have started to shift from how high rates are likely to go, towards how long they are likely to stay at current levels if inflation continues to be on the sticky side. US markets continued to slip lower after Europe had closed, as the momentum from the recent technical breaks on the S&P500 and Nasdaq 100 gained momentum, both closing at 5-week lows, as US 10-year yields posted their highest daily close since 2008, with UK gilt yields already back at 2008 levels. Yesterday's weak US close looks set to translate into another weak open for markets here in Europe, putting the FTSE100 on course to post its worst run of daily losses since October last year. While we've heard plenty of alarmist headlines over the effects of global warming in the past few months, at least the weather gave UK consumers a reason to go out and spend in June, beating expectations of a gain of 0.2% by some amount, with a rise of 0.7%.     Not only did sales in supermarkets and food outlets see a decent rebound, but we also saw a strong showing from department stores and furniture outlets. Retail sales have proved to be remarkably resilient in the past few months with gains over the course of April, May, and June. The resilience in wages growth over the past few months may also have played a part in this resilience, however heading into Q3 the big question is whether this can be sustained. Recent spending data from Barclaycard showed entertainment spending rose 15.8% in July on the back of an uptick in spending for live events including Taylor Swift, as well as bookings for holidays after a warm June. We also saw the release of 4 big movie releases during July, including Indiana Jones and the Dial of Destiny, Mission Impossible Dead Reckoning, Barbie, and Oppenheimer. On the flip side, spending on clothing saw a decline due to the wet weather. If we see another positive month for July retail sales, could we call it a Barbie bounce? For the most part expectations aren't especially positive with an expectation that we could see a decline in July retail sales including fuel of -0.6%, which would be the first negative month since March when sales fell by -1.2%. The final reading of EU CPI for July is expected to be confirmed at 5.3%, with core prices at 5.5%.       EUR/USD – currently languishing close to the bottom of its recent range but just above the main support area at the 1.0830 area. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – continues to edge higher back towards the 1.2800 area. Remains well supported above the recent lows at the 1.2600 area. A break below 1.2600 targets 1.2400. A move above the 1.2800 area through 1.2830 could see a move to target 1.3000.           EUR/GBP – slipped back to the 0.8520/30 area, which is holding for now. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – continues to edge higher, towards the 147.50 area. The previous peaks this year at 145.10 should act as support.  A move below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 25 points lower at 7,285     DAX is expected to open 50 points lower at 15,626     CAC40 is expected to open 16 points lower at 7,176  
Pound Slides as Market Reacts Dovishly to Wage Developments

Market Insights: Walmart's Optimism, Dollar Rebound Halted, Fed's Hiking Mode

Ed Moya Ed Moya 18.08.2023 10:04
Walmart CEO is more optimistic about spending patterns  than he did 3 months ago Dollar’s five-day rally halted as yen and yuan rebound Fed could remain in hiking mode if economic resilience prevents inflation from coming down   Now that we heard from Walmart, it is clear that the US consumer is still willing to spend. Expectations for robust consumer spending in Q3 have been confirmed and that should keep growth estimates trending higher.  With COVID savings still expected to be used over the next couple of months and a lag with how student debt repayments go, confidence in continued business momentum should remain.  The Atlanta Fed’s estimate of 5.8% looks like it might actually happen, which should keep the Fed standing by its hawkish stance that they might need to do more tightening to combat inflation. The US dollar is seeing some profit-taking as the yen and yuan, each respectively stage a rebound.  It might be hard for risk appetite to remain in place if  the bond market selloff continues.  With global bond yields to a 15-year high, that surely will feel like restrictive territory for the world.  China remains in focus and the decision from authorities to tell state-owned banks to step up intervention efforts is providing some support to markets. It is clear that China is working on their response here and that more support is on its way. Walmart Walmart’s top and bottom earnings beats were accompanied with raised guidance, which made them have one of the top results from the retailers.  It seems that Walmart is taking away business from Target too, with grocery and ecommerce sales leading the way.  When the economy starts to cool in Q4, Walmart looks well positioned to be one of the top retailers. ​   FX Snapshot       Oil ​The Australian dollar declined after the unemployment rate rose more than expected. Labor market weakness should make the next RBA meeting easy as the economy is feeling the impacts of the RBA rate hiking cycle.  The RBA will hold rates steady for a third straight time at the September policy meeting. The Chinese yuan rallied against the dollar after the PBOC asked state banks to intervene. The yuan was depreciating too quickly and authorities needed to boost sentiment. ​ ​ ​ Some traders are not expecting BOJ intervention until we see excessive weakness that takes dollar-yen possibly beyond the 150 level. ​ ​ We also need to hear Japan officials state they are watching exchange rates with great interest. Japan will likely need to step into markets, but until we see further yen downside, traders might eye further dollar short-term strength. ​ ​   After falling nearly six dollars, it was only a matter of time before crude prices found support.  WTI crude is rebounding on expectations that Chinese officials will deliver meaningful stimulus and that the oil market will remain tight. Earnings are also providing optimism that the US consumer is still strong and willing to spend and travel at the end of the year. The dollar rally has stalled but if the bond market selloff falls to a new level, that could prevent commodities from rebounding further.  Oil looks like it will find a home around the $80 level as too many risks to the outlook still remain on the table; fears that the Fed will overtighten are back and uncertainty persists on how will the US consumer behave once all their COVID savings disappear and as student loan debt bills come due.   Gold Gold prices are trying to recover after some hawkish Fed Minutes kickstarted a global bond market selloff.  Bond yields are too high as more people become convinced inflation is not going away anytime soon.  After making a 5-month low, spot gold has fallen below the $1900 level.  For the spot market the $1870 level remains major support, as the $1900 level with the gold’s future contract appears to have solid support.   Bitcoin It looks like some leveraged funds are ramping up bearish bets that Bitcoin will drift lower.  The US Commodity and Futures Trading Commission’s (CFTC) report on commitment of traders (COT) showed that as of August 8th, two-thirds are bearish, most likely a result of disappointment with the delays in seeing a Bitcoin US ETF approved.  When you throw in what is happening in the bond market, it becomes easy for Bitcoin prices to soften.  If risk aversion becomes the dominant theme on Wall Street, Bitcoin’s bearish momentum could target the $27,200 level.      
Market Highlights: US CPI, ECB Meeting, and Oil Prices

UK Retail Sales Expected to Slip as Concerns about Inflation Persist

Kenny Fisher Kenny Fisher 18.08.2023 10:09
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    
Market Sentiment and Fed Policy Uncertainty: Impact on August Performance

UK Retail Sales Decline Amid Weather and Economic Factors

Kenny Fisher Kenny Fisher 21.08.2023 12:58
UK retail sales post a sharp decline Rainy weather and high prices weighed on consumer spending The British pound has given up ground on Friday after several days of modest gains. In the European session, GBP/USD is trading at 1.2736, down 0.07%.   UK retail sales decline more than expected The weather in the UK continues to have a major impact on consumer spending. The June retail sales report was stronger than expected, with record-hot weather contributing to an increase in spending. July brought cold and rainy weather, which led to a decline in spending as shoppers preferred to stay home. Retail sales declined -1.2% m/m in July, down from +0.6% in June and below the consensus estimate of -0.5%. The UK consumer’s spending appetite isn’t only dependent on the weather, of course. Consumer spending has been surprisingly resilient in a tough economic environment, but high inflation and rising interest rates are taking their toll. The cost-of-living crisis has created a situation in which sales volumes are falling but the value of goods purchased has been rising – in other words, consumer purchasing power has been falling as consumers are spending more to buy less. What is bad for consumers may be welcome news for the Bank of  England, whose battle with inflation hasn’t gone all that well. The BoE has raised interest rates to 5.25% in order to curb inflation, but a tight labour market and strong consumer spending have contributed to high inflation, which is currently running at a 6.8% clip. If the cracks we saw this week in the labour market and consumer spending continue, it could mean that the BoE has finally turned the corner in its tenacious battle to bring inflation closer to the 2% target.   GBP/USD TechnicalNew button GBP/USD is testing support at 1.2787. Below, there is support at 1.2634  1.2879 and 1.2940 are the next resistance lines  
US Corn and Soybean Crop Conditions Decline, Wheat Harvest Progresses, and Weaker Grain Exports

Canadian Retail Sales Show Weak Gain as Markets Focus on Jackson Hole Symposium

Kenny Fisher Kenny Fisher 24.08.2023 12:26
Canadian retail sales post weak 0.1% gain Markets eye Jackson Hole Symposium as tightening cycles near end The Canadian dollar remains under pressure on Wednesday. In the North American session, USD/CAD is trading at 1.3554, up 0.04%. Earlier, the Canadian dollar fell below the 1.36 line for the first time since May 31st.   Canada’s retail sales stagnant in June Canada’s retail sales for June barely moved, with a gain of just 0.1% m/m. This was unchanged from the May reading, which was downwardly revised from 0.2%, and just above the consensus estimate of zero. On a yearly basis, retail sales slipped 0.8% in June, compared to a gain of 0.2% (revised downwards from 0.5%) and shy of the estimate of 0.3%. The data indicates that consumer consumption is cooling down as higher interest rates continue to filter through the economy. Canada’s GDP in the first quarter was solid at 3.1%, but second-quarter growth is expected to be much more modest, at around 1%. Consumer spending has been a key factor in the Bank of Canada’s rate decisions. Earlier in the year, stronger-than-expected consumer spending resulted in the BoC raising interest rates in June and July. Today’s soft retail sales figures will provide support for the central bank to take a pause at the September 6th meeting, with GDP the final key release ahead of that meeting.   Markets await Jackson Hole There has been a whole lot happening this week and investors will be hoping for some interesting comments from central bankers who are meeting this week in Jackson Hole, Wyoming. Many of the major central banks, including the Federal Reserve, are winding up their rate-tightening cycles and Jackson Hole has often served as a venue for announcing shifts in policy. That said, Fed Chair Powell has insisted that the fight against inflation is not done, although the dark days of high inflation appear to be over. There is talk in the markets of the Fed trimming rates next year, but I doubt that Powell will mention any cuts to rates, when he is yet to acknowledge that the Fed is done tightening.   USD/CAD Technical USD/CAD put strong pressure on the resistance at 1.3606 earlier. Above, there is resistance at 1.3660 1.3522 and 1.3468 are providing support    
Earnings, Soft PMIs, and Market Dynamics: Impact on Yields, Dollar, and Key Developments

Earnings, Soft PMIs, and Market Dynamics: Impact on Yields, Dollar, and Key Developments

Ed Moya Ed Moya 24.08.2023 12:47
Earnings and soft services PMIs sends yields and dollar lower Fed rate hike odds for September 20th meeting stand at 11% (down from yesterday’s 16%) Russian mercenary leader Prigozhin may have died in plane crash The US dollar remained near session lows against the Japanese yen after the Treasury’s mixed 20-year auction.  The bond market rally that started yesterday is holding up after decent demand saw a 4.499% yield, which was higher than the pre-sale yield of 4.490%, and obviously above the 3.954% prior 20-year bond auction.  Eventually the bond market will fixate over foreign demand, but for now the Treasury doesn’t seem to be seeing have any trouble with the extra issuance.   PMIs Both the dreadful eurozone PMIs and softening US ones helped keep the bond market rally going and that should help with the global disinflation process. Rates are coming down and so are Fed rate hiking expectations.   Earnings For a second consecutive quarter, Foot Locker significantly slashed their guidance.  Wall Street was already skeptical of how Foot Locker would finish the year, but the outlook just went from bad to abysmal.  Foot Locker suspended their dividend and cut their full-year sales and earnings guidance, noting softening trends in July. A tough consumer backdrop is only going to get worse, which could lead to a few ugly quarters for the footwear chain. Abercrombie & Fitch Co. earnings were the exact opposite to what came out of Foot Locker.  Abercrombie is raising their outlook as their customers appear to be bucking the trend we saw from Macy’s and Kohls.   All the signs are there for the outlook to get worse for the consumer. Mortgage rates are over 7% for the first time in nearly 2 decades.  Credit card debt just jumped over $1 trillion as Generation X has the highest balance.  The US job market is showing signs of cooling and that should continue as consumer spending softens.   USD/JPY daily chart     The USD/JPY chart is tentatively pulling back as global bond rates decline following weak global PMIs.  Despite the two-day slide, a bullish bias might remain if the long end of the curve sees rates remaining elevated.  If bearish momentum remains, the 142.75 will provide initial support.  To the upside the 147.50 provides key resistance, while the 150.00 level remains a key price barrier.
Australian Dollar Volatility Persists with 1% Slide: Assessing Economic Factors and Technical Levels

Australian Dollar Volatility Persists with 1% Slide: Assessing Economic Factors and Technical Levels

Ed Moya Ed Moya 25.08.2023 09:38
Australian dollar slides close to 1% The Australian dollar continues to show strong volatility for a second straight day. In the North American session, AUD/USD is trading at 0.6426, down 0.84%. After a sleepy start to the week, the Aussie is showing some life. AUD/USD jumped 0.90% on Wednesday but has pared practically all of those gains today. The pair’s upswing on Wednesday was more a case of US dollar weakness than Aussie strength, as US PMIs pointed to deceleration in the manufacturing and services sectors. The US Manufacturing PMI fell to 47.0 in August, down from 47.0 in July and well below the consensus estimate of 49.3. The manufacturing sector has been unable to find its footing, with declines in ten of the last eleven months. New orders are down and weaker demand has meant a decrease in output. The services sector in the US is in better shape and posted a seventh straight month of growth in August. However, the Services PMI slowed to 51.0 in August, weaker than the July reading of 52.3 and the estimate of 52.2. Business activity in services has been falling and the August read was the lowest in six months. Consumer spending is down due to the usual suspects – high interest rates and broad-based inflation. Interestingly, business confidence improved in August, likely due to expectations that US interest rates are close to their peak. Weakness in manufacturing and services is not unique to the US, as we saw this week in PMI reports from Europe, the UK and Australia. Manufacturing and services continued to contract in Australia, as the August PMIs remained below the 50.0 level, which separates contraction from expansion. The weak PMIs are further signs of weaker economic activity, and the alarming slowdown in China will make it even more challenging for the Reserve Bank of Australia to guide the economy to a soft landing and avoid a recession.   AUD/USD Technical AUD/USD is testing support at 0.6431. Next, there is support at 0.6339 There is resistance at 0.6588 and 0.6653
GBP: ECB's Dovish Stance Keeps BoE Expectations in Check

Market Insights Roundup: A Glimpse into Economic Indicators and Corporate Performance

Michael Hewson Michael Hewson 28.08.2023 09:11
In a world where economic indicators and market movements can shift with the blink of an eye, staying updated on the latest offerings and promotions within the financial sector is crucial. Today, we delve into one such noteworthy development that has emerged on the horizon, enticing individuals to explore a blend of banking and insurance services. As markets ebb and flow, being vigilant about trends and opportunities can lead to financial benefits. Let's explore this exciting promotion that brings together the worlds of banking and insurance to offer a unique proposition for consumers.     By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Aug) – 01/09 – the July jobs report saw another modest slowdown in jobs growth, as well as providing 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 the ADP report has looked much more resilient, adding 324k in July on top of the 455k in June. This resilience 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%. This week's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 160k jobs added, with unemployment remaining steady at 3.5%. It's also worth keeping an eye on vacancy rates and the job opening numbers which fell to just below 9.6m in June. These have consistently remained well above the pre-Covid levels of 7.5m and have remained so since the start of 2021. This perhaps explain why the US central bank is keen not to rule out further rate hikes, lest inflation starts to become more embedded.                          US Core PCE Deflator (Jul) – 31/08 – while the odds continue to favour a Fed pause when the central bank meets in September, markets are still concerned that we might still see another rate hike later in the year. The stickiness of core inflation does appear to be causing some concern that we might see US rates go higher with a notable movement in longer term rates, which are now causing the US yield curve to steepen further. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%. This week's July inflation numbers could prompt further concern about sticky inflation if we get sizeable ticks higher in the monthly as well as annual headline numbers. When we got the CPI numbers earlier in August, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. We can expect to see a similar move in this week's numbers with a move to 3.3% in the deflator and to 4.3% in the core deflator.       US Q2 GDP – 30/08 – the second iteration of US Q2 GDP is expected to underline the resilience of the US economy in the second quarter with a modest improvement to 2.5% from 2.4%, despite a slowdown in personal consumption from 4.2% in Q1 to 1.6%. More importantly the core PCE price index saw quarterly prices slow from 4.9% in Q1 to 3.8%. The resilience in the Q2 numbers was driven by a rebuilding of inventory levels which declined in Q1. Private domestic investment also rose 5.7%, while an increase in defence spending saw a rise of 2.5%.             UK Mortgage Approvals/ Consumer Credit (Jul) – 30/08 – while we have started to see evidence of a pickup in mortgage approvals after June approvals rose to 54.7k, this resilience may well be down to a rush to lock in fixed rates before they go even higher. Net consumer credit was also resilient in June, jumping to £1.7bn and a 5 year high, raising concerns that consumers were going further into debt to fund lifestyles more suited to a low interest rate environment. While unemployment remains close to historically low levels this shouldn't be too much of a concern, however if it starts to edge higher, we could start to see slowdown in both, as previous interest rate increases start to bite in earnest.            EU flash CPI (Aug) – 31/08 – due to increasing concerns over deflationary pressures, recent thinking on further ECB rate hikes has been shifting to a possible pause when the central bank next meets in September. Since the start of the year the ECB has doubled rates to 4%, however anxiety is growing given the performance of the German economy which is on the cusp of three consecutive negative quarters. On the PPI measure the economy is in deflation, while manufacturing activity has fallen off a cliff. Despite this headline CPI is still at 5.3%, while core prices are higher at 5.5%, just below their record highs of 5.7%. This week's August CPI may well not be the best guide for further weakness in price trends given that Europe tends to vacation during August, however concerns are increasing that the ECB is going too fast and a pause might be a useful exercise.     Best Buy Q2 24 – 29/08 – we generally hear a lot about the strength of otherwise of the US consumer through the prism of Target or Walmart, electronics retailer Best Buy also offers a useful insight into the US consumer's psyche, and since its May Q1 numbers the shares have performed reasonably well. In May the retailer posted Q1 earnings of $1.15c a share, modestly beating forecasts even as revenues fell slightly short at $9.47bn. Despite the revenue miss the retailer reiterated its full year forecast of revenues of $43.8bn and $45.2bn. For Q2 revenues are expected to come in at $9.52bn, with same store sales expected to see a decline of -6.35%, as consumers rein in spending on bigger ticket items like domestic appliances and consumer electronics. The company has been cutting headcount, laying off hundreds in April as it looks to maintain and improve its margins. Profits are expected to come in at $1.08c a share.        HP Q3 23 – 29/08 – when HP reported its Q2 numbers the shares saw some modest selling, however the declines didn't last long, with the shares briefly pushing up to 11-month highs in July. When the company reported in Q1, they projected revenues of $13.03bn, well below the levels of the same period in 2022. Yesterday's numbers saw a 22% decline to $12.91bn with a drop in PC sales accounting for the bulk of the drop, declining 29% to $8.18bn. Profits, on the other hand did beat forecasts, at $0.80c a share, while adjusted operating margins also came in ahead of target. HP went on to narrow its full year EPS profit forecast by 10c either side, to between $3.30c and $3.50c a share. For Q3 revenues are expected to fall to $13.36bn, with PC revenue expected to slip back to $8.79bn. Profits are expected to fall 20% to $0.84c a share.         Salesforce Q2 24 – 30/08 – Salesforce shares have been on a slow road to recovery after hitting their lowest levels since March 2020, back in December last year, with the shares coming close to retracing 60% of the decline from the record highs of 2021. When the company reported back in June, the shares initially slipped back after full year guidance was left unchanged. When the company reported in Q4, the outlook for Q1 revenues was estimated at $8.16bn to $8.18bn, which was comfortably achieved with $8.25bn, while profits also beat, coming in at $1.69c a share. For Q2 the company raised its revenue outlook to $8.51bn to $8.53bn, however they decided to keep full year revenue guidance unchanged at a minimum of $34.5bn. This was a decent increase from 2023's $31.35bn, but was greeted rather underwhelmingly, however got an additional lift in July when the company said it was raising prices. Profits are expected to come in at $1.90c a share. Since June, market consensus on full year revenues has shifted higher to $34.66bn. Under normal circumstances this should prompt a similar upgrade from senior management.   Broadcom Q3 23 – 31/08 – just prior to publishing its Q2 numbers Broadcom shares hit record highs after announcing a multibillion-dollar deal with Apple for 5G radio frequency components for the iPhone. The shares have continued to make progress since that announcement on expectations that it will be able to benefit on the move towards AI. Q2 revenues rose almost 8% to $8.73bn, while profits came in at $10.32c a share, both of which were in line with expectations. For Q3 the company expects to see revenues of $8.85bn, while market consensus on profits is expected to match the numbers for Q2, helping to lift the shares higher on the day. It still has to complete the deal with VMWare which is currently facing regulatory scrutiny, and which has now been approved by the UK's CMA.
Copper Prices Slump as LME Stocks Surge: Weakening Demand and Economic Uncertainty

Navigating the Fluctuating Landscape of Food Inflation: A Comprehensive Analysis of European Consumer Trends and Market Dynamics

ING Economics ING Economics 31.08.2023 10:42
Food inflation finally cools in Europe after a long hot summer Food price rises are finally subsiding in Europe. We saw the first Month-on-Month decline in almost two years in July. Many branded food manufacturers, however, are reporting lower sales as shoppers turn to more affordable goods. And a combination of high food prices and sluggish growth means those volumes won't be returning anytime soon.   Extraordinary rally in consumer food prices comes to an end Food inflation rates have been cooling for the past couple of months, and July’s inflation figures even showed a small Month-on-Month decrease in the European Union. That said, food prices remain at high levels. A typical EU consumer currently pays almost 30% more for groceries compared to the start of 2021, with some considerable differences across the continent. In Hungary, prices have gone up by more than 60% since January 2021, while food prices in Ireland went up by ‘only’ 19%. Across Europe, consumers reacted by buying less, shopping more at discount supermarkets and favouring private label products over brands. The trend in the US looks fairly similar. The main difference is that 'cooling down' set in a little earlier, and the relative increase was lower compared to Europe. That's partly explained by the fact that US food makers are less exposed to the energy price shock compared to their peers in Europe. American food prices started to move sideways in the first quarter of this year; a typical American consumer currently pays 20% more for groceries compared to the start of 2021.   Food inflation reaches a plateau in the EU and the US Consumer price index for food, 2020 = 100   Is Germany really leading the way on prices? Within the eurozone, Germany has been the only country seeing consumer food prices drop for several months in a row. According to Eurostat data, prices of food and non-alcoholic beverages in Germany were 1.4% lower in July compared to their peak in March this year. This is largely the result of lower prices for dairy products, fresh vegetables, margarine and sunflower oil.   What distinguishes the German food retail market from most other European countries is that discounters have a relatively large market share. Schwarz Group (Lidl) and Aldi have a combined market share of around 30%, and other major retailers such as Edeka and Rewe also own discount subsidiaries. Given the large and competitive German market, food retailers seem to have negotiated more strongly with suppliers than their counterparts in other European countries, even at the risk of losing those suppliers. As a result, retail food prices started to drop earlier. Also, the highly competitive market delivered special sales offers for consumers since the spring. For now, German consumers are benefiting from a reversal of the price trend, and consumers in other European countries might experience a similar trend in the months ahead. However, we believe that consumers shouldn’t get their hopes up too high given that some inflationary trends in the cost base of food manufacturers and retailers are still present. That’s also why we deem it too early to forecast a prolonged period of decreasing food prices.   Modest drop in German consumer prices due to lower dairy, vegetables and margarine prices Consumer price index, 2020 = 100   Underlying costs for food manufacturers show a mixed picture Throughout 2022, almost all of the costs for food manufacturers moved in one direction, and that was up. That picture has changed when we look at some important types of costs.   Input costs are by far the most important cost category, and agricultural commodities are a major part of these inputs. Prices for agricultural inputs are moving in different directions. World market prices for wheat, corn, meat, dairy and a range of vegetable oils are down year on year, which is partly on the back of reduced uncertainty around the war in Ukraine. However, prices for commodities such as sugar and cocoa rallied considerably in 2023. The prospects of the El Niño weather effect potentially upsetting the production of commodities like coffee and palm oil in Southeast Asia alongside India’s partial export ban on rice have given rise to new concerns.We estimate that energy costs make up about 3 to 5% of the costs of food manufacturing, but this will also depend on the subsector and the type of energy contracts. Current energy prices in Europe are much lower compared to their peak in 2022, but they are still much higher compared to their pre-Covid levels. Volatility continues to linger, in part because more exposure to global LNG (Liquified National Gas) markets makes European gas markets more susceptible to price fluctuations. Uncertainty about where energy costs will be headed over winter can make food manufacturers more reluctant to reduce prices.Continuing services price inflation means companies along the food supply chain will face higher fees for the services they contract, such as accounting services and corporate travel.     Wages account for a bit more than 10% of the costs of a typical food manufacturer in the EU (excluding social security costs). Both the spike in inflation in 2022 and 2023 and the continued tightness in labour markets are leading to a series of wage increases in food manufacturing and food retail. In our view, wages will be an important driver for the production costs of food and for consumer prices over the next 18 months, given that wages go up in subsequent steps. Examples of wage increases in the food industry In the German confectionery industry, 60,000 employees get an inflation compensation of €500 in 2023 and 2024 on top of a 10-15% increase in regular wages. We see similar patterns for wage agreements at individual companies, such as for the German branch of Coca-Cola Europacific Partners. In the Dutch dairy industry, wages will increase by 8% in 2023 and another 2.65% in 2024, while the collective labour agreement in the Dutch meat industry contains a three-tiered increase of 12.25% in total between March 2023 and 2024. In France, it's expected that average wages in the commercial sector will rise by 5.5% in 2023 and 4.2% in 2024. This also gives an indication for wage development in industries such as food manufacturing.   Wages make up 13% of German food manufacturers' costs with some variation between subsectors Wage costs as a percentage of total costs, 2020     Adverse weather pushes up prices for potatoes and olive oil Following the warmest July on record, it’s evident that people are wondering to what extent weather will push up food inflation in the months ahead. The most recent monthly crop bulletin from the European Commission notes that weather conditions were on balance negative for the yield outlook of many crops and thus supportive for prices. Although the picture can be different from crop to crop and from region to region, there are certain food products where inflation is accelerating due to weather. One of the biggest victims of unfavourable weather in Europe this year is olive oil. The continued drought in Spain, and particularly a lack of rain during spring, leads to estimates that olive oil production will be down by 40% this marketing year. It will be quite difficult to find enough alternative supplies outside the bloc, given that the EU is the top exporter of olive oil. This is also the case for potatoes and potato products. Here, a wet start of the year in northwestern Europe followed by dry weather in May and June and abundant rain in July means conditions have been very unfavourable for potato yields and quality.   Food prices are likely to hover around their current levels for a while The developments in underlying costs for food producers lead us to the view that consumer food prices will likely hover around their summer levels for a while. When there are decreases in general prices, those will be the result of trends in specific categories, such as dairy, rather than being widely supported across all categories. This view is also supported by business surveys which show that sales price expectations of food manufacturers are now clearly past their peak, as you can see in the chart below.  Multiple major food companies, including Danone, Heineken and Lotus Bakeries, have signalled in their second-quarter earnings calls that there will be less pricing action in the second half of this year. However, some companies are indicating that they’re not yet done with pricing through their input cost inflation. Unilever, for example, reported that we should expect moderate inflation in ice cream in the second half of the year, for instance. In any case, we do see a likely increase in promotional activity as brands step up their efforts to re-attract consumers and boost volume growth. But given the elevated price levels and the muted macro-economic outlook, it’s likely to take a while before volumes fully recover.   European food manufacturers expect fewer price increases in the months ahead Sales price expectations for the months ahead, balance of responses       Price negotiations remain tense Food manufacturers have fought an uphill battle to get their higher sales prices accepted by their customers, such as food retailers. Negotiations in the current phase won’t be easy either because food and beverage makers will be heavily pushed by major retailers to reduce prices. Retailers that lost market share will be especially looking to secure better prices in a bid to re-attract consumers. Whether there is room for price reductions will vary from manufacturer to manufacturer depending on the agricultural commodities they rely on, the energy contracts they have and cross-country differences in wage developments. As such, explaining why prices still need to go up, cannot go down (yet) or can only go down by so much will be a significant task for food manufacturers in the coming months.
Assessing the Resilience of the US Economy Amidst Rising Challenges and Recession Expectations

Assessing the Resilience of the US Economy Amidst Rising Challenges and Recession Expectations

ING Economics ING Economics 01.09.2023 09:34
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.  
Weak Economic Outlook for China: Challenges in Debt Restructuring and Growth Prospects

Weak Economic Outlook for China: Challenges in Debt Restructuring and Growth Prospects

ING Economics ING Economics 01.09.2023 09:44
The outlook is for further weakness in economic activity China now looks set to endure a period of sub-trend growth while it restructures this debt and alleviates some of the debt-service cost strains that are apparently weighing on some local government financing vehicles. Much of this off-balance sheet debt will need to be brought back on the balance sheet. Clarity over the scale of the existing problem will help determine the central government’s response, as at this stage, we suspect that even they don’t know. But lower interest rates for official debt and longer payment schedules seem very likely to dominate proceedings. Bucketloads of new debt, however, will not. We think that China's longer-term potential growth rate is around the 5% mark. But in the near term, even this may present a challenge for policymakers to achieve. We have downgraded our GDP forecast for 2023 to 4.5% as the previous main engine of growth – consumer spending – is faltering. Estimating how long this balance sheet adjustment will weigh on the economy is pure guesswork at this stage, but a wet-finger estimate of two years seems a reasonable starting point. We are not looking for 5% growth to be achieved again until 2025.   Chinese inflation is just unwinding earlier food price spikes   Inflation is low, but will recover Such weakness is likely to keep inflation very subdued in the meantime. Much of the recent decline in overall inflation is due to falls in food price inflation, which spiked up to more than 10% in July last year on the back of swine fever-affected pork prices. This is yet another reason for dismissing deflation claims. Indeed, if you create a conventional CPI index from China’s year-on-year inflation series, then it looks like the price level rose by about 0.3% month-on-month in each of the last two months. So temporary base effects are doing most of the damage to inflation currently, and by November these will have passed. In the meantime, though, further negative year-on-year CPI inflation figures are likely to keep the 'deflation' argument alive for a while longer.      
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Turbulent Times Ahead: US Spending Surge and Inflation Trends

ING Economics ING Economics 01.09.2023 10:11
US spending surges, but it’s not sustainable US consumer spending is on track to drive third quarter GDP growth of perhaps 3-3.5%. However, this is not sustainable. American consumers are running down savings and using their credit cards to finance a large proportion of this. With financial stresses becoming more apparent and student loan repayments restarting, a correction is coming.   Inflation pressures are moderating Today’s main data release is the July personal income and spending report and it contains plenty of interesting and highly useful information. Firstly, it includes the Federal Reserve’s favoured measure of inflation, the core Personal  Consumer Expenditure deflator, which is a broader measure of  prices than the CPI measure that is more widely known. It rose 0.2% month-on-month for the second consecutive month, which is what we want to see as, over time, that sort of figure will get annual inflation trending down to 2% quite happily.   Services PCE deflator (YoY%)   The slight negative is the core services ex housing, which the Fed is watching carefully due to if being more influenced by labour input costs. It posted a 0.46% MoM increase after a 0.3% gain in June so we are not seeing much of a slowdown in the year-on-year rate yet as the chart above shows. With unemployment at just 3.5% a tight jobs market could keep wage pressures elevated and mean inflation stays higher for longer so we could hear some hawkishness from some Fed officials on the back of this. Nonetheless, the market is seemingly shrugging this off right now given signs of slackening in the labour market from the latest job openings data and the Challenger job lay-off series.
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Consumer Spending Strength, Sustainability Concerns, and Excess Savings

ING Economics ING Economics 01.09.2023 10:13
Consumer spending is strong, but is unlikely to be sustainable We then turn to personal spending, which was strong, rising 0.8% MoM nominally and 0.6% MoM in real terms. This gives a really strong platform for third quarter GDP growth, which we are currently estimating to come in at an annualised rate of somewhere between 3% and 3.5%. However, the key question is how sustainable this is – we don't think it is. The robust jobs market certainly provides a strong base, but wage growth has been tracking below the rate of inflation. Note incomes rose just 0.2% MoM in July. Maybe it is that confidence of job security that is encouraging households to seek to maintain their lifestyles amidst a cost-of-living crisis, via running down savings accrued during the pandemic and supplementing this with credit card borrowing. The problem is savings are finite and the banks are tightening lending standards significantly. Credit card borrowing costs are the highest since records began in 1972 so there is going to be a lot of pain out there. The chart below shows the monthly flows of excess savings since the start of the pandemic. Fiscal support (stimulus checks and expanded unemployment benefits) more than offset falling income resulting from job losses in 2020. Meanwhile, less spending versus the baseline due to Covid constraints further boosted the accumulation of savings.   Contributions of monthly changes in income and spending to the flow of savings ($bn)     Then through 2021 spending picked up, but then through 2022-2023 the nominal pick-up in incomes has been less than the increase in spending. Consequently we have seen savings flows reverse and now we are running them down each and every month, which is not sustainable over the long term.    Stock of excess savings peaked at $2.2tn, but we have been aggressively running this down ($tn)   Excess savings will soon be exhausted and financial pressures will intensify Based on this data, the $2.2tn of excess savings accumulated during the pandemic, $1.3tn has already been spent. At the current run-rate it will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner. With banks far more reluctant to provide unsecured consumer credit, based on the Federal Reserve’s Senior Loan Officer Opinion survey, the clear threat is that many struggling households may soon find their credit cards are being maxed out and they can’t obtain more credit. With student loan repayments restarting, we expect consumer spending to slow meaningfully from late fourth quarter onwards and turn negative in early 2024.
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India's Robust 2Q23 GDP Growth of 7.8% Signals Economic Strength

ING Economics ING Economics 01.09.2023 10:15
India: GDP growth accelerates in 2Q23 At 7.8% YoY, India's GDP print for 2Q23 was precisely in line with the consensus expectation but nonetheless, singles out India as one of the few economies in the region where growth is actually firming, not declining. Total calendar-year growth of 7% or close is within reach.   No surprise, but it's still a good result The consensus forecast seems to have correctly decided to trust in some of the NowCasts circulating, which also pointed to a 7.8% growth rate. But although the number was correctly anticipated, this doesn't reduce just what a good figure this is.  Across the region, the combination of China's faltering economy, along with the lingering impacts of the semiconductor downcycle, is keeping growth subdued, and in some cases, actually weakening. Not so in India, where growth remains very firm. Part of that is clearly due to the very limited direct exposure to trade with China - the legacy of decades of political tensions. India is also not as exposed to the semiconductor industry as some other economies in the region, though this is slowly changing as supply chains are shifted around the region. At least for now, that has provided some insulation for India against some of the headwinds being faced by other Asian economies.    Where's the growth coming from Despite what was a fairly generous Union Budget this year, with only a modest reduction in the deficit target to 5.9% of GDP in fiscal 2023/24 from 6.4% in fiscal 2022/23, government spending is doing none of the direct heavy lifting at the moment. That said, behind the scenes, government capex and infrastructure development is almost certainly helping to draw in private investment growth. Capital investment contributed 2.8 percentage points of the 7.8% GDP growth total - another solid contribution after the 3.1pp contribution in 1Q23.  The other big contributor remained consumer spending. This too has been consistently strong, but has more than doubled its contribution this quarter to 3.5pp, up from 1.6pp in 1Q23.  The only blot on the ledger was from net exports, which were a substantial drag on growth this quarter, though this has not shown up in terms of a large inventory build, which often happens, so that doesn't necessarily imply any ominous unwinding of stock build-ups in the coming quarters. There was, however, also a fairly chunky swing in the "discrepancies" part of GDP, which is a residual term to account for GDP not picked up in the other main areas. This may well end up being reclassified into stocks at some point, so we aren't ruling out a future stock correction just yet.     Contributions to YoY% GDP growth (pp)
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US Jobs Data Signals Potential Fed Pause as Savings Dwindle

ING Economics ING Economics 01.09.2023 10:18
Jobs day!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   August ended on a downbeat note for the S&P500 and on an upbeat note for the US dollar as, even though the Federal Reserve's (Fed) favourite gauge of inflation, PCE, came in line with expectations in July for both the core and headline figures – and even though the core PCE posted the smallest back-to-back rise since late 2020, the supercore services inflation – very closely watched by Mr. Powell and team, and that excludes not only energy but also housing, rose by the most on a monthly basis since the year began. Plus, personal spending remained strong – in line with the GDP data released earlier this week.   Digging deeper, the personal income fell slightly, meaning that Americans continue to tap into the reserves to continue spending. But the good news for the Fed is that the consumer spending at this speed could continue as long as the savings are available. And according to the latest data, personal savings in the US fell from 4.3% in June to 3.5% in May. Before the pandemic, the savings level was close to 9%. In conclusion, savings are melting, housing affordability is falling, mortgage rates are up, low-income Americans reportedly fall behind their important payments like rent, and the main street gives away signs of suffering. But the GDP remains above 2%, above the long-term trend which is thought by the Fed to be around 1.8%, and the scenario of soft landing is what the market is pricing convincedly.  Jobs day!  The US jobs data shows signs of loosening but the numbers are still at historically strong levels. Due to be released later today, the US unemployment rate is expected to remain at a multi-decade low of 3.5%, and the US economy is expected to have added around 170K new nonfarm jobs in August. In the last twelve months, the US economy added almost 280K jobs on average. If today's data comes in line with expectations, the last 12-month average will still remain close to 270K monthly job additions on average. Historically, we expect NFP to fall to around 50K per month a few months into recession. So, to tell you that: we are not there just yet.   Today, a softer than expected NFP figure, a slight deterioration in the unemployment rate, or softer-than-expected wages data could further cement the idea that the Fed will skip a pause at the September meeting, and maybe at the November as well. So far, the US Treasuries have had their best week since mid-July. The US 2-year yield retreated to 4.85%, while the 10-year yield flirted with the 4% mark for the first time in three weeks. But who says a rapid jump, also says a rising possibility of a correction. One thing is sure, we don't expect any major central banker to call victory on inflation just yet...  European inflation sticks around 5.3% due to rising energy  Latest CPI estimate showed that Eurozone inflation stagnated at 5.3% in August due to the sticky energy costs, versus a fall to 5.1% expected by analysts. Inflation in France for example accelerated at a much faster pace than expected in August, while the latest PMI numbers showed weakness in activity. German retail sales also fell faster than expected in July, whereas inflation in Germany also ticked higher last month. The combination of weak economic data and sticky inflation is a nightmare scenario for the European Central Bank (ECB). The ECB should raise the rates to continue fighting inflation, even though the underlying economies are under pressure. Today, the final PMI figures will likely confirm the ongoing slowdown. The EURUSD gave back most of its weekly advance after yesterday's inflation data, hinting that the market is worried that further ECB hikes will further damage economic activity. The bears are tempted to retest the 200-DMA support. If they are successful, the next natural bearish target stands at a distant 1.0615, the major 38.2% Fibonacci retracement on past year's rally, which should distinguish between the continuation of the actual positive trend and a bearish medium term reversal.   More stimulus from China  This week's PMI data showed that the Chinese manufacturing contracted at a slower pace, and today's Caixin PMI showed that it stepped into the expansion zone in August, whereas the Chinese services PMI fell short of expectations and the wave of further bad news, like Country Garden announcing an almost $7bn loss in H1, talk of the company's yuan denominated bond default, Moody's downgrading of the firm to Ca and Evergrande's wealth unit saying that it couldn't make payments on its investment products due to a cash crunch, combined to the existing and worsening property crisis get the People's Bank of China (PBoC) to announce lower payment requirements for first and second-time house buyers, and to encourage lower rates on existing mortgages. But it won't improve the situation overnight. The CSI 300 is closing a week PACKED with fresh stimuli on a meagre note.   Crude rallies  The barrel of American crude jumped more than 2% yesterday and is consolidating above the $84pb level. The next bullish targets stand at $85pb, the August peak, and $89pb, in the continuation of an ABCD pattern. But the rally can't extend above $90 without reviving global inflation expectations and recession worries, which would then start playing against the bulls. 
Canadian Economic Contraction Points to Bank of Canada's Pause

Canadian Economic Contraction Points to Bank of Canada's Pause

ING Economics ING Economics 04.09.2023 15:37
Canadian growth shocker confirms central bank to pause Canada’s economy surprisingly contracted in the second quarter with consumer spending slowing sharply and residential investment collapsing. Together with a cooling labour market, this should ease the Bank of Canada's inflation fears and lead to a no-change decision on 6 Sep. Still, the USD/CAD rally appears overdone, and we expect a correction soon.   We expect a pause this week Ahead of last Friday’s data, analysts were favouring a no-change outcome with just three out of 32 economists surveyed by Bloomberg expecting a 25bp interest rate increase while overnight index swaps suggested the market saw only a 15% chance of a hike. This was despite headline inflation surprising to the upside in July and the BoC signalling at the July policy meeting that it continued to believe inflation would only return to 2% by mid-2025 and that the door remained open to further hikes. The GDP numbers and the manufacturing PMI that we got on Friday have only cemented the no-change expectation. Markets are now pricing little more than a 1% chance of a hike after the economy contracted 0.2% annualised in 2Q versus expectations of a 1.2% increase while 1Q GDP growth was revised down from 3.1% to 2.6%. Consumer spending rose just 1% annualised while residential investment fell 8.2% to post a fifth consecutive substantial contraction. Net trade was also a drag, but there was at least a decent non-residential investment growth figure of 10.3%. Meanwhile, the manufacturing PMI slipped to 48.0 from 49.6 to post its fourth consecutive sub-50 (contraction) reading.   Canadian unemployment and inflation   Given the economy lost jobs in July we completely agree that the BoC will leave rates unchanged this month after having resumed hikes in June and July following a pause since January. Nonetheless, the BoC is likely to leave this as a hawkish hold given that policymakers are yet to be fully convinced they’ve done enough to return inflation sustainably to 2% given the recent stickiness seen. At a bare minimum, we will get a messaging of rates staying “higher for longer”, but given the perilous state of the Canadian property market and signs of spreading weakness globally, we do expect rate cuts to come onto the agenda by March next year.   CAD weakness not justified USD/CAD has rallied 3% since the start of August, broadly in line with the general strengthening in the US dollar, but in contrast with short-term USD:CAD rate differential dynamics. While USD/CAD rose in the past month from 1.32 to 1.36, the USD:CAD two-year swap rate differential was relatively stable in the -50/-40bp range throughout August, and only tightened to -30/-35bp after Canada’s poor 2Q GDP report.   Our short-term valuation model, which includes swap rate differentials as an endogenous variable, shows that USD/CAD is trading more than 2% over its fair value, a rather unusual mis-valuation level for the pair. Incidentally, CFTC data shows that speculators have moved back into bearish positioning on the loonie in recent weeks, with net-shorts now amounting to 9% of open interest.   USD/CAD is overvalued   We don’t expect the BoC to turn the tide for CAD, but the recent weakness in the loonie appears overdone, and technical indicators suggest a rebound is on the cards. We still expect USD/CAD to end the year close to 1.30 as CAD should benefit from the most attractive risk-adjusted carry in the G10, even without any more hikes by the BoC.    
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Services PMIs Confirm Contraction, RBA Holds Rates: Market Analysis for September 5th, 2023

Michael Hewson Michael Hewson 05.09.2023 11:35
06:15BST Tuesday 5th September 2023 Services PMIs set to confirm contraction, RBA leaves rates unchanged  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets struggled for gains yesterday in the absence of US markets, as the initial boost of a China stimulus inspired rally in Asia faded out, even though basic resources outperformed. This late weakness in the European day looks set to continue this morning.      The day began brightly when Asia markets rallied on signs that China's recent stimulus measures were helping to boost the property sector, after a jump in China home sales in two major Chinese cities helped to propel the Hang Seng to 3-week highs. This followed on from the Friday boost of a US jobs report, which added to the argument that the Federal Reserve would be able to keep rates on hold when they meet later this month.     The return of US markets after yesterday's Labour Day holiday should offer a bit more depth to today's price action in Europe with the focus today set to be on the services PMIs for August, after the RBA left Australian interest rates unchanged at 4.10% earlier this morning, and the latest Chinese Caixin services PMI slipped back to its weakest this year at 51.8. No surprises from the RBA keeping rates on hold for the 3rd time in a row, with little indication that rates will be cut in the future, with the central bank insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.     For most of this year it has been notable that services PMIs on both sides of the Atlantic have managed to offset the weakness in manufacturing in the form of keeping their respective economies afloat. The strength of services has been a major factor behind the hawkishness of central banks in their efforts to contain inflation with prices and other related costs proving to be much stickier than other areas of the economy, due to high levels of employment and tight labour markets.       In the last couple of months there has been rising evidence that this trend has started to shift with the August flash PMIs from Germany and France seeing a sharp drop off in economic activity. This weakness translated into a sharp slide in services sector activity in both France and Germany during August to 46.7 and 47.3, with Italy and Spain also set to show a similar slowdown, although given the size of their tourism sectors they should be able to avoid a contraction, with Italy expected to slow to 50.4 and Spain to 51.5.     Today's numbers could well be the final piece of the puzzle when it comes to whether the ECB decides to pause its rate hiking cycle, even as August inflation saw an unwelcome tick higher. Further complicating the picture for the ECB is the fact that PPI has been in negative territory for the last 3 months on a year-on-year basis and looks set to slide even further into deflation territory in July. On a month-on-month basis we can expect to see a decline of -0.6% which would be the 7th monthly decline in a row. On a year-on-year basis prices are expected to fall by -7.6%.   On the PMI front the UK services sector is expected to confirm a fall to 48.7 from 51.5 in June, in a sign that higher prices are finally starting to constrain consumer spending.     EUR/USD – holding above the August lows at the 1.0760/70 area for now, as well as the trend line from the March lows. A break of the 1.0750 area potentially opens up a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – currently holding above the support at the August lows at 1.2545, after last week's failure to push above the 1.2750 area. We need to push back through the 1.2800 area to diminish downside risk or risk a move towards 1.2400, on a break below 1.2530.         EUR/GBP – the bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area, where we failed last week. We also have resistance at the 50-day SMA, and while below that the bias remains to sell into rallies.     USD/JPY – having found support at the 144.50 area on Friday, the bias remains for a return to the 147.50 area. A break above 147.50 targets a move towards 150.00. Below support at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 22 points lower at 7,430     DAX is expected to open 34 points lower at 15,790     CAC40 is expected to open 12 points lower at 7,267  
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Lower Open Expected as European Markets Decline for the Fourth Consecutive Day, China Trade Shows Modest Improvement

Michael Hewson Michael Hewson 08.09.2023 10:22
Lower open expected, China trade sees modest improvement   By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets declined for the 4th day in a row yesterday with both the DAX and FTSE100 falling to one-week lows on concerns over slowing economic activity, against a backdrop of rapidly rising oil prices which could act as a long-term headwind for central banks. The initial catalyst was a truly dreadful German factory orders number for July which saw output plunge by -11.7%, the biggest fall since April 2020. When combined with the recent manufacturing and services PMI numbers, which showed further deterioration.     The weakness in European markets also weighed on US markets, which came under additional pressure for an entirely different reason after the latest ISM services report saw economic activity rise to its highest level since February, while prices paid jumped to their highest levels since April, pushing both the US dollar and yields higher, on expectations that even if the Fed pauses this month, we could still see another rate hike in November. Last night's Beige Book showed the US economy grew at a modest rate through July and August, with consumer spending stronger than expected, while today's weekly jobless claims are set to remain steady at 230k.     Earlier this morning we got another snapshot of the Chinese economy, with the latest trade numbers for August. Over the past few weeks China has taken several measures to help boost the prospects for its economy and has continued to do so on a piecemeal basis. From easing overseas travel restrictions to modest cuts to lending rates, recent PMIs have shown that these have had limited success. In July, the economy slipped into deflation after headline CPI fell from 0.2% in June to -0.3%. PPI, which has been in deflation since the end of last year improved slightly but still declined by -4.4%, with the latest inflation numbers for August due this weekend.     This morning's trade numbers for August did show an improvement on the July figures but given how poor these were it was a low bar. Imports declined by -8.8%, an improvement on the -12.4% decline in July, while exports fell -7.3%, which was a significant improvement on the -14.5% seen in July. While this is encouraging, demand for Chinese goods was still weak from an international, as well as domestic perspective. The pound was the worst performer yesterday after Bank of England governor Andrew Bailey gave every indication that the Bank of England might have concerns over further tightening measures, given worries about transmission lags. With Deputy Governor Ben Broadbent and Chief economist Huw Pill also indicating that they think monetary policy is already restrictive enough, the markets could be being lined up for a pause later this month.     With Asia markets also slipping back, European markets look set to open lower, with German industrial production data for July set to show similar weakness as factory orders yesterday, albeit with a more modest decline of -0.4%.      EUR/USD – this week's slide below the August lows has seen the euro slip lower with the May lows at 1.0635 the next target. Resistance now comes in at the 1.0780 area, and behind that at the 1.0945/50.     GBP/USD – remains under pressure with the 200-day SMA the next target at the 1.2400 area. Only a move back above the 1.2630/40 area, and behind that the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 50-day SMA having found a short-term base at 0.8520 area. We have resistance at the 0.8570/80 area, as well as the 0.8620/30 area.     USD/JPY – remains on course for the 150.00 area, despite a brief sell-off to 147.00 yesterday. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 18 points lower at 7,408     DAX is expected to open 45 points lower at 15,696     CAC40 is expected to open 19 points lower at 7,175
Riksbank's Potential Rate Hike Amid Economic Challenges: Analysis and Outlook

Riksbank's Potential Rate Hike Amid Economic Challenges: Analysis and Outlook

ING Economics ING Economics 08.09.2023 10:37
Further declines in economic output are likely, but for now, the Riksbank is focused on high services inflation and renewed krona weakness.   Riksbank set for at least one more hike There are two weeks to go until the Riksbank’s September meeting and another 25bp rate hike looks pretty likely. Services inflation is uncomfortably high and the trade-weighted value of the krona is back to its lows. A follow-up rate hike in November can’t be ruled out. Yet the economy is clearly reacting to higher interest rates. A 0.8% decline in second quarter GDP, while not as bad as initially reported, shows the economy is under strain. On a year-on-year basis, Sweden is in the bottom five performers in the EU when it comes to growth. Still, the story isn’t universally bad and there are some bright spots. The jobs market is still very tight by historical standards, the housing market has stabilised, confidence is rebounding and consumer spending is showing signs of levelling out. Here, we look at how the economy is performing in several key areas. Housing market Housing is a well-known vulnerability for Sweden, and the 16% peak-to-trough fall in prices during 2022 was not hugely surprising. Compared to other European economies, Sweden has a much greater percentage of variable rate mortgages, and that proportion has only increased since interest rates started to rise. According to the Riksbank, 90% of loans have a remaining fixation period of below two years, and in the majority of cases, these are not fixed at all. The result is that the average rate on outstanding mortgages has increased by 200bp since the Covid low, compared to 64bp for the eurozone as a whole, and much less still in France/Germany. How average mortgage rates have changed since 2021 That said, housing prices have stabilised this year and household sentiment towards housing has improved noticeably. But the fundamentals of the market still look challenging, and data from Hemnet – a property search site – shows housing supply at multi-year highs, while separate figures show transactions are at a low. We tend to agree with the Riksbank’s forecast that further price falls are likely. Supply of housing has increased as transaction volumes fall   Jobs market Sweden’s unemployment rate is at a post-pandemic low, and that resilience has been helped by a pronounced reduction in joblessness among foreign-born workers. One of the key issues for a number of years has been a skills mismatch and poor integration of migrant workers into the Swedish jobs market – and the gulf between native unemployment (below 5%) and foreign-born workers (near 14%) is still large, but has narrowed. There are signs that the jobs market is cooling, however. The number of layoffs has started to rise, though from a low base. Vacancy numbers have been falling too, though so far the decline in the ratio of job openings to unemployment has been less sharp than in other economies, notably the US and UK. The proportion of service-sector businesses that see labour as a constraint on production has fallen from 45% to 30% in just over a year. Still, there are signs that firms are “hoarding” staff – i.e. they are afraid of letting people go given rehiring concerns. This is helped by the fact that nominal wage growth is relatively contained given the level of inflation, with the benchmark negotiated pay deal set at 3-4% for the next couple of years. That's noticeably below the rate we've been seeing in some other advanced economies. As a result, while we’re assuming that unemployment will increase over the coming months, the rise is likely to be gradual. Vacancy numbers are falling, albeit slowly Consumer spending Consumption has been falling consistently for a year now, though this masks big differences across spending categories. Furniture sales are down 15% on pre-pandemic levels while spending on recreation/culture is up by a similar percentage. Even in the weaker areas though, the story is stabilising. Consumer confidence has risen noticeably, and real wage growth is slowly becoming less negative. Still, with interest payments set to consume an ever-increasing share of household budgets, we don’t expect consumer spending to return to meaningful growth any time soon. Higher consumer confidence points to stabilisation in retail sales Production Like consumer spending, and like pretty much everywhere, Sweden’s manufacturing sector is also in contraction, at least according to the PMIs. Admittedly, this weakness hasn’t entirely been borne out in the official production data, and Swedish manufacturing has been operating 5-10% above pre-pandemic levels for much of the last year – in sharp contrast to the likes of France/Germany where production remains below early-2020 levels. This growth has been heavily concentrated though, primarily in chemicals/pharmaceutical products, and more recently in a sharp recovery in vehicle production. The latter is up almost a third since the start of 2022 on improved supply chains, but we suspect this is more of a catch-up story and can only last for so long. We expect the weaker manufacturing numbers to show up more clearly in the official data over the coming months. Bottom line Assuming there's a renewed fall in house prices, some gradual weakness in the jobs market and ongoing pressure on consumer spending and production, we're likely to see further declines in economic output through the remainder of this year. While the Riksbank clearly isn't quite done with rate hikes, the fragile economic backdrop suggests we're near the peak.
Assessing the Future of Aluminium: Key Areas to Watch

Assessing the Future of Aluminium: Key Areas to Watch

ING Economics ING Economics 08.09.2023 13:17
Watch: Four areas to keep an eye on for aluminium It's no secret that aluminium prices have been facing a challenging outlook over the last few months, and after hitting a peak in January, they've now dipped by more than 7%. But are encouraging signs of life slowly beginning to emerge?   It's fair to say that aluminium prices have seen better days. But what's causing the slump? As major economies across the globe slipped into a widespread slowdown, aluminium products have followed suit – and it isn't quite clear just yet how long the weakness we're currently seeing could last. For the rest of 2023, we're keeping our eye closely on a few key areas that could help clear up a rather gloomy outlook. As the world's largest consumer of aluminium, developments in China will be crucial for determining the direction of metals prices as we head into the last few months of the year. Encouraging signs are slowly beginning to unfold in recent data following the introduction of new stimulus measures, and we believe the boost to consumer spending could help to alleviate rising concerns over lagging demand. The US dollar, Russia's market share of aluminium, and European production also have key roles to play – and while we're not entirely convinced that aluminium prices will return to their year-to-date highs anytime soon, we're just about starting to see the light at the end of the tunnel. In this video, ING's Ewa Manthey delves into the details.
The UK Contracts Faster Than Expected in July, Bank of England Still Expected to Hike Rates

US ISM Services PMI Defies Global Trends, Boosting US Dollar Amid Mixed Economic Signals

InstaForex Analysis InstaForex Analysis 08.09.2023 13:50
Instead of declining, the US ISM Services PMI rose to 54.5 in August from 52.7 in July. The report recorded growth in all key parameters – employment, new orders, and even prices. Apparently, increased levels of consumer spending had become the main reason for the rise, but the question of whether consumer activity will remain high in the coming months remains debatable. The US ISM data contrasts with the rest of the world, as similar gauges in China, the eurozone, and the UK, showed a decline, and the market interprets the results in favor of the US dollar.   Take note that the final reading from S&P Global Business on the US services sector PMI was slightly lower than the preliminary one - 50.5 vs. 51.0, which sharply contradicts the ISM readings. This imbalance will be resolved next month. The Federal Reserve's Beige Book showed that economic and labor market growth slowed in July and August, while many businesses expect wage growth to slow down in the near future. Here, too, we see a discrepancy with the ISM assessment, especially in light of the Fed's policy of restraining consumer demand as one of the key factors in inflation.   The GDPNow model estimate for real GDP growth by the Federal Reserve Bank of Atlanta in the third quarter of 2023 is 5.6 percent on September 6. Take note that this is a very high figure.   In summary, the general fundamental story suggests that the US is still a bit stronger compared to the rest of the world, and this will be the catalyst for the dollar strength, which remains the primary favorite in the currency market.   USD/CAD As anticipated, the Bank of Canada held its key overnight interest rate unchanged at 5%. Therefore, changes in policy are deferred to the next meeting on October 26, where, among other things, forecasts will be updated. In the accompanying statement for the July 12 meeting, it was stated that the rate was raised due to accumulation of evidence that excess demand and elevated core inflation have proved to be persistent. This time, the wording has been changed to a more neutral tone: "With recent evidence that excess demand in the economy is easing, and given the lagging effects of monetary policy...". This implies that the BoC believes that the measures taken earlier are yielding results and no changes are needed. Only time will tell whether this is really the case, but one thing is clear – the Canadian dollar has become more susceptible to further weakness. At least, concern about the persistently high core inflation was specifically emphasized. At the moment, the probability of a rate hike in October is estimated at 25%, which is too little for a bullish revision of CAD forecasts. The net short CAD position increased by 0.3 billion to -1.2 billion over the reporting week, indicating bearish positioning. The price is significantly above the long-term average, and there are no signs of a reversal. USD/CAD continues to gradually rise. The pair has reached the nearest target that we mentioned in the previous review, and it appears that it will eventually test the upper band of the 1.3700/20 channel. It is likely for the pair to break above the channel, with 1.3857 as the medium-term target. From a technical perspective, after testing the upper band of the channel, we can expect a retracement towards the channel's midpoint. However, fundamental indicators suggest further growth.      
Metals Exchange Inventories in China Decline: Copper, Aluminium, and Nickel Stocks Fall

Turbulent Times Ahead: US Inflation on the Rise Ahead of September FOMC Meeting

ING Economics ING Economics 11.09.2023 10:35
Next week in the US, the last major reports will be released ahead of the September FOMC meeting. The general theme is likely to be higher inflation than seen as of late. All eyes will also be on UK wage data, which will be key for locking in another rate hike from the Bank of England. In Poland, we expect to see CPI to drop below 9%   US: The general theme likely to be higher inflation It is a very big week for US data as the last major reports ahead of the Federal Reserve’s September FOMC meeting come in. Consumer and producer price inflation, retail sales and industrial production are all due, with the general theme likely to be higher inflation than seen of late versus weaker activity relative to recent trends. Nonetheless, Federal Reserve officials are seemingly of the mindset that they will likely pause interest rate hikes again and re-evaluate in November with just 2bp of policy tightening priced for later this month. For inflation, we look for fairly big jumps in August’s month-on-month headline readings with upside risk relative to consensus predictions. Higher gasoline prices will be the main upside driver, but we also see the threat of a rebound in airfares and medical care costs, plus higher insurance prices. These factors are likely to also contribute to core CPI coming in at 0.3% MoM rather than the 0.2% figures we have seen in the previous two months. Slowing housing rents will be evident, but it may not be enough to offset as much as the market expects. Nonetheless, the year-on-year rate of core inflation will slow to perhaps 4.4%. We are hopeful we could get down to 4% YoY in the September report and not too far away from 3.5% in October. We would characterise these relatively firm MoM inflation prints as a temporary blip in what is likely to be an intensifying disinflationary trend. Indeed, it was interesting to see the Fed’s Beige Book characterise recent consumer spending strength as being led by tourism expenditure, which had been "surging". But the general sense was that this would be "the last stage of pent-up demand for leisure travel from the pandemic era". Moreover, other spending was softer, "especially on non-essential items". This may well show up in the retail sales report. We already know that auto volume sales fell quite heftily too, but remember this is a value figure and that higher prices, particularly for gasoline, will help keep overall retail sales just about in positive territory. But with savings being rapidly exhausted and credit card delinquencies on the rise, there are concerns that weaker numbers are coming – particularly with student loan repayments restarting, which will add to financial stresses on the household sector. Rounding out the reports, we expect industrial production to be much softer than the 1% jump seen last month. Manufacturing surveys continue to point to contraction, and weakness in the component could offset a bit of firmness in utilities and mining/drilling activities.      
European Markets Anticipate Lower Open Amid Rate Hike Concerns

Economic Highlights and Key Events for the Week Ahead: US Inflation, ECB Meeting, UK Labor Market, and More

Ed Moya Ed Moya 11.09.2023 11:32
US This week is all about the US CPI report and retail sales data. If the US demand for goods didn’t weaken that much and if inflation heated up, rate hike expectations for the November meeting might become the consensus.  The inflation report might not be as clear as headline inflation will obviously rise given the surge in gasoline prices, but core might deliver another subdued reading.  Moderation with consumer spending will be the theme as Americans deal with higher energy prices, rising debt levels, and as confidence softens.   Investors will also pay close attention to the University of Michigan’s inflation expectations on Friday. The 1-year outlook for prices may drop from the 3.5% August reading.  Fed speak will be nonexistent as the blackout period begins for the September 20th policy meeting.   Eurozone The European Central Bank meets next week and it’s not clear at this stage what decision they will come to. Refinitiv is pricing in around a 65% chance of a hold, which may signal the end of the tightening cycle – not that the ECB would in any way suggest that at this stage – but expectations do differ. There’s every chance the committee will push through one more, at which point the data is expected to improve regardless making a Fed-style exit all the more difficult. Ultimately, it will likely come down to the projections which will be released alongside the decision. ZEW surveys aside, on Tuesday, the rest of the week is made up of tier-three data. UK  Potentially a big week for the UK ahead of the next monetary policy meeting on 21 September. Andrew Bailey and his colleagues this past week hinted that the decision is in the balance and not the foregone conclusion many expect. Markets are pricing in a more than 70% chance of a hike and more than 50% of another after that by February. If what they said is true, then the labor market report on Tuesday could be hugely significant as further slack could give those on the fence the reassurances they need that past measures, among other things, are working and more may not be needed. Huw Pill also speaks on Monday while Catherine Mann will make an appearance in Canada on Tuesday. GDP on Wednesday could also be interesting, with the rest of the week made up of less influential releases. Russia The CBR is expected to leave the key rate unchanged at 12% on Friday. It hiked very aggressively at the last meeting – from 8.5% – so there is scope for another surprise, with inflation having risen again last month to 5.1%. The rouble has also been in steady decline after rebounding following the last announcement, to trade not far from its recent lows against the dollar.  South Africa A relatively quiet week ahead, with manufacturing figures due on Monday and retail sales on Wednesday. Turkey The CBRT is desperately trying to get inflation under control again with successive large interest rate hikes. In response the currency has stopped making new lows but it has drifted lower again over the last couple of weeks since the surprisingly large last hike. It’s sitting not far from the pre-meeting lows now and inflation data this past week won’t have helped, rising to 58.94% annually. More rate hikes are likely on the way. Next week the focus is on unemployment and industrial production figures on Monday. Switzerland A very quiet week to come, with PPI inflation the only economic release. We’ve been seeing some deflation in recent months in the PPI data which will be giving the SNB some comfort that price pressures are back under control. Another rate hike is no longer viewed as guaranteed, with markets slightly favoring a hold over the coming meetings but it is tight.  China The much sought-after consumer and producers’ price inflation data for August will be released this Saturday where market participants will have a better gauge of the current deflationary conditions in China. After a slight improvement in the two sub-components of August’s NBS Manufacturing PM where new orders and production rose to their highest level since March at 50.2 and 51.9 respectively coupled with an improvement in export growth for August that shrunk to a lesser magnitude of -8.8% y/y from -14.5% y/y in July, there are some signs of optimism that the recent eight months of deflationary pressures may have started to abate. The August CPI is expected to inch back up to 0.2% y/y from -0.3% y/y in July and the PPI is forecast to shrink at a lesser magnitude of -3% y/y in August versus -4.4% in July. If the PPI turns out as expected, it will be the second consecutive month of improvement from a persistent loop of deflationary pressure in factory gate prices since November 2022. Other key data to focus on will be new yuan loans and M2 money supply for August which will be released on Monday. It will provide a sense of whether China’s economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers. Lastly, the housing price index, industrial production, retail sales, and the unemployment rate for August will be released on Friday with both retail sales and industrial production expected to show slight improvement; 2.8% y/y for retail sales over 2.5% y/y recorded in July, 4% y/y for industrial production versus 3.7% in July. Market participants will be keeping a close eye on youth unemployment for August after July’s figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for the suspension. The youth joblessness data in China is of key concern after the youth unemployment rate skyrocketed to a record high of 21.3% in June, around four times more than the national unemployment rate of 5.3%. Lastly, China’s central bank, the PBoC, will announce its decision on a key benchmark interest rate, the 1-year medium-term lending facility rate on Friday and the expectation is no change at 2.50% after a prior cut of 15 basis points.  India Inflation and balance of trade for August will be the focus for the coming week. Inflation data is released on Tuesday and is expected to dip slightly to 7% y/y from 7.44% in July, the highest since April 2022. Balance of trade will be released on Friday and the expectation is for the deficit to widen slightly to -$21 billion from -$20.67 billion in July.   Australia On Monday, the Westpac consumer confidence change for September is expected to improve to 0.6% m/m from a reading of -0.4% m/m in August, following three consecutive interest rate pauses from RBA. The key employment change data for August will be released on Thursday with 24,300 jobs expected to be created, an improvement on the 14,600 reduction in July. Meanwhile, the unemployment rate is expected to slip to 3.6% from 3.7% in July. New Zealand Electronic retail card spending for August is due on Tuesday and is forecast to dip to 1.4% y/y from 2.2% in July. That would represent a declining trend in growth in the past five months. Next up, food inflation for August will be released on Wednesday; its growth rate is expected to slow to 7.8% y/y from 9.6% in July. That would be the slowest growth in food inflation since June 2022. Japan A couple of key data points to note for the coming week. Firstly, the Reuters Tankan Index on manufacturers’ sentiment on Wednesday; after a big jump to +12 in August – its highest level recorded so far this year – sentiment is expected to taper off slightly to +10 for September. Producers’ price index for August will be released on Wednesday and a slight dip is expected to 3.2% y/y from 3.6% in July. Lastly, on Thursday, we will have data on machinery orders from July with the consensus expecting a further decline of 10.7% y/y from -5.8% in June. Singapore One key data to focus on is the balance of trade for August which will be out on Friday. The trade surplus is being expected to increase slightly to $7 billion from $6.49 billion in July. That would be the fourth consecutive month of expansion in the trade surplus.  
European Markets Anticipate Lower Open Amid Rate Hike Concerns

Economic Highlights and Key Events for the Week Ahead: US Inflation, ECB Meeting, UK Labor Market, and More - 11.09.2023

Ed Moya Ed Moya 11.09.2023 11:32
US This week is all about the US CPI report and retail sales data. If the US demand for goods didn’t weaken that much and if inflation heated up, rate hike expectations for the November meeting might become the consensus.  The inflation report might not be as clear as headline inflation will obviously rise given the surge in gasoline prices, but core might deliver another subdued reading.  Moderation with consumer spending will be the theme as Americans deal with higher energy prices, rising debt levels, and as confidence softens.   Investors will also pay close attention to the University of Michigan’s inflation expectations on Friday. The 1-year outlook for prices may drop from the 3.5% August reading.  Fed speak will be nonexistent as the blackout period begins for the September 20th policy meeting.   Eurozone The European Central Bank meets next week and it’s not clear at this stage what decision they will come to. Refinitiv is pricing in around a 65% chance of a hold, which may signal the end of the tightening cycle – not that the ECB would in any way suggest that at this stage – but expectations do differ. There’s every chance the committee will push through one more, at which point the data is expected to improve regardless making a Fed-style exit all the more difficult. Ultimately, it will likely come down to the projections which will be released alongside the decision. ZEW surveys aside, on Tuesday, the rest of the week is made up of tier-three data. UK  Potentially a big week for the UK ahead of the next monetary policy meeting on 21 September. Andrew Bailey and his colleagues this past week hinted that the decision is in the balance and not the foregone conclusion many expect. Markets are pricing in a more than 70% chance of a hike and more than 50% of another after that by February. If what they said is true, then the labor market report on Tuesday could be hugely significant as further slack could give those on the fence the reassurances they need that past measures, among other things, are working and more may not be needed. Huw Pill also speaks on Monday while Catherine Mann will make an appearance in Canada on Tuesday. GDP on Wednesday could also be interesting, with the rest of the week made up of less influential releases. Russia The CBR is expected to leave the key rate unchanged at 12% on Friday. It hiked very aggressively at the last meeting – from 8.5% – so there is scope for another surprise, with inflation having risen again last month to 5.1%. The rouble has also been in steady decline after rebounding following the last announcement, to trade not far from its recent lows against the dollar.  South Africa A relatively quiet week ahead, with manufacturing figures due on Monday and retail sales on Wednesday. Turkey The CBRT is desperately trying to get inflation under control again with successive large interest rate hikes. In response the currency has stopped making new lows but it has drifted lower again over the last couple of weeks since the surprisingly large last hike. It’s sitting not far from the pre-meeting lows now and inflation data this past week won’t have helped, rising to 58.94% annually. More rate hikes are likely on the way. Next week the focus is on unemployment and industrial production figures on Monday. Switzerland A very quiet week to come, with PPI inflation the only economic release. We’ve been seeing some deflation in recent months in the PPI data which will be giving the SNB some comfort that price pressures are back under control. Another rate hike is no longer viewed as guaranteed, with markets slightly favoring a hold over the coming meetings but it is tight.  China The much sought-after consumer and producers’ price inflation data for August will be released this Saturday where market participants will have a better gauge of the current deflationary conditions in China. After a slight improvement in the two sub-components of August’s NBS Manufacturing PM where new orders and production rose to their highest level since March at 50.2 and 51.9 respectively coupled with an improvement in export growth for August that shrunk to a lesser magnitude of -8.8% y/y from -14.5% y/y in July, there are some signs of optimism that the recent eight months of deflationary pressures may have started to abate. The August CPI is expected to inch back up to 0.2% y/y from -0.3% y/y in July and the PPI is forecast to shrink at a lesser magnitude of -3% y/y in August versus -4.4% in July. If the PPI turns out as expected, it will be the second consecutive month of improvement from a persistent loop of deflationary pressure in factory gate prices since November 2022. Other key data to focus on will be new yuan loans and M2 money supply for August which will be released on Monday. It will provide a sense of whether China’s economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers. Lastly, the housing price index, industrial production, retail sales, and the unemployment rate for August will be released on Friday with both retail sales and industrial production expected to show slight improvement; 2.8% y/y for retail sales over 2.5% y/y recorded in July, 4% y/y for industrial production versus 3.7% in July. Market participants will be keeping a close eye on youth unemployment for August after July’s figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for the suspension. The youth joblessness data in China is of key concern after the youth unemployment rate skyrocketed to a record high of 21.3% in June, around four times more than the national unemployment rate of 5.3%. Lastly, China’s central bank, the PBoC, will announce its decision on a key benchmark interest rate, the 1-year medium-term lending facility rate on Friday and the expectation is no change at 2.50% after a prior cut of 15 basis points.  India Inflation and balance of trade for August will be the focus for the coming week. Inflation data is released on Tuesday and is expected to dip slightly to 7% y/y from 7.44% in July, the highest since April 2022. Balance of trade will be released on Friday and the expectation is for the deficit to widen slightly to -$21 billion from -$20.67 billion in July.   Australia On Monday, the Westpac consumer confidence change for September is expected to improve to 0.6% m/m from a reading of -0.4% m/m in August, following three consecutive interest rate pauses from RBA. The key employment change data for August will be released on Thursday with 24,300 jobs expected to be created, an improvement on the 14,600 reduction in July. Meanwhile, the unemployment rate is expected to slip to 3.6% from 3.7% in July. New Zealand Electronic retail card spending for August is due on Tuesday and is forecast to dip to 1.4% y/y from 2.2% in July. That would represent a declining trend in growth in the past five months. Next up, food inflation for August will be released on Wednesday; its growth rate is expected to slow to 7.8% y/y from 9.6% in July. That would be the slowest growth in food inflation since June 2022. Japan A couple of key data points to note for the coming week. Firstly, the Reuters Tankan Index on manufacturers’ sentiment on Wednesday; after a big jump to +12 in August – its highest level recorded so far this year – sentiment is expected to taper off slightly to +10 for September. Producers’ price index for August will be released on Wednesday and a slight dip is expected to 3.2% y/y from 3.6% in July. Lastly, on Thursday, we will have data on machinery orders from July with the consensus expecting a further decline of 10.7% y/y from -5.8% in June. Singapore One key data to focus on is the balance of trade for August which will be out on Friday. The trade surplus is being expected to increase slightly to $7 billion from $6.49 billion in July. That would be the fourth consecutive month of expansion in the trade surplus.  
Tesla's Market Surge, Apple's Recovery, and Market Dynamics: A Snapshot

Tesla's Market Surge, Apple's Recovery, and Market Dynamics: A Snapshot

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.09.2023 08:49
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. 
USD/JPY Eyes Psychological Level of 150.00 Amidst BoJ's Monetary Policy and Fed's Rate Hike Expectations

UK Economy Shows Signs of Contraction Amid Volatility and Rising Rates

ING Economics ING Economics 13.09.2023 09:12
The monthly GDP numbers have been highly volatile, but we do expect slower growth over coming months as the cooler jobs market and higher rates continue to bite.   The UK economy contracted by half a percent in July, though frankly, these numbers have been all over the place recently. Remember that output had increased by the same percentage in June, thanks in no small part to a highly unusual surge in manufacturing. That boost to production, which was linked to car production and pharmaceuticals, partially unwound in July. But the hit from there was amplified by the service sector, which saw output fall by 0.5%. Strikes offer part of the explanation, with losses most visible in health. But we also saw declines in a range of other sectors, including IT and admin/support services, and this is harder to explain. Cutting through the noise, the economy seems to be still growing, albeit fractionally. The change in activity over the past three months relative to the three months before is still slightly positive. We think the economy is likely to more or less flatline over coming quarters – and a mild recession can’t be ruled out. The jobs market is cooling, while the impact of higher rates is still yet to hit the economy. The average rate paid on outstanding mortgages is roughly 3%, up from a low of 2% but well below the 6%+ rates being quoted on two-year mortgages for new lending. As more and more borrowers refinance, we expect the average mortgage rate to rise above 4% in 2024, even without any further Bank of England rate hikes. That’s a gradual process so we don’t expect an abrupt hit to GDP in any specific quarter, but it will act as an ever-increasing drag on consumer spending.   Corporates have felt the impact of higher rates more quickly than households   The caveat of course is that considerably more households own their home outright than 10 years ago (39%), relative to those with a mortgage (28%). Then again, businesses have already felt the full effect of higher borrowing costs, given lending is more typically on floating rates. Back to this latest data, and given the volatility in the GDP figures, we expect the Bank of England to largely ignore them. Officials have been clear that they are focused on wage growth, services inflation and labour market slack – and not a lot else. We expect one more rate hike at next week’s meeting, before a pause in November.
Strong August Labour Report Poses Dilemma for RBA: Will Rates Peak or Continue to Rise?

Strong August Labour Report Poses Dilemma for RBA: Will Rates Peak or Continue to Rise?

ING Economics ING Economics 14.09.2023 08:06
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.   
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US CPI Data Indicates Hawkish Stance Remains, Dollar Strengthens

Craig Erlam Craig Erlam 14.09.2023 10:11
September still a hold, while swap contracts suggest odds a 49.3% chance of a hike at the November 1st FOMC meeting Supercore inflation rate rises most since March Two-year Treasury drifts lower by 2.1 bps to 4.999% Inflation is not easing enough for the Fed to abandon their hawkish stance.  The upside surprises might be small, but that should keep the hawks in control.  Core inflation heated up for the first time in six months and that should have markets leaning towards one more Fed rate hike in November.  Inflation will likely still be running well above the Fed’s 2% target for the rest of the year, but a weaker consumer supports the case the disinflation process will remain intact. ​   US CPI   Source: BLS This was a complicated inflation report. Everyone knew that gas prices were sharply higher and that the housing market is still seeing elevated prices(house prices are now rising, while rents have eased).  The headline inflation read showed CPI increased 0.6% in August from a month ago, which was the highest reading since June 2022.  The annual inflation reading rose from 3.2% to 3.7%, a tick above expectations.   Market reaction A weakening US consumer will continue as they battle surging gasoline prices, stubborn shelter prices, and increasing medical costs. US stocks are wavering as this inflation report will keep the Fed pushing the ‘higher for longer’ narrative. If Wall Street remains convinced that the labor market is cooling, that will do the trick for getting inflation closer to the Fed’s target. The US dollar and Treasury yields were initially higher given the core CPI delivered an upside surprise, but once traders digested the entire report, the bond market reversed course. Core inflation rose 0.3%, which was due to the rounding of 0.278% which somehow makes it a lot less hot.  Rent makes up 40% of Core PCE and prices posted the smallest gain since the end of 2021. Expectations are elevated for the consumer to be significantly weaker and that we could have a soft holiday spending season, which should support the disinflation process.   Dollar  5-minute Chart The dollar is wavering as Wall Street wasn’t able to come up with any definitive stances on when the Fed will signal the all clear that policy is restrictive enough.  The dollar’s strength is most notably against the Japanese yen, while the euro will likely react to Thursday’s ECB rate decision.  Following yesterday’s Reuters report that the ECB will have inflation projections above 3%, markets appear to be leaning towards a rate hike.          
Fed Rate Hike Expectations Wane, German Business Climate Declines

Fed Rate Hike Expectations Wane, German Business Climate Declines

Ed Moya Ed Moya 26.09.2023 14:57
Fed rate hike expectations for November 1st stand at 18.6% vs 30% from a week ago Germany IFO Business climate declines for a fifth straight month 10-year Treasury yield surges 7.7bps to 4.511% The euro softened earlier after an uninspiring German business outlook suggests the eurozone’s largest economy still has a rough road ahead.  This was the fifth straight month of declines for Germany’s business confidence. Investors focused on the expectations survey’s slight miss. The IFO economists believe that a third quarter contraction is likely.  As long as the ECB is done raising rates, the outlook should gradually improve for Germany.  US dollar strength remains as global bond yields shift higher on fears that central banks will follow the Fed’s lead and keep rates higher over the long-term. It is a slow start to Monday, with one economic release and one Fed speaker, but right now it seems a weaker consumer is steadily getting priced in.  The Chicago Fed National Activity index showed slower growth in August, which didn’t surprise anyone. Fed’s Goolsbee, one of the more dovish members, noted that the risk of inflation staying too high is the bigger risk. He is still holding onto hopes that a soft landing is possible, but he will likely be data dependent. Inflation flare up risks are growing and that still suggests the Fed might have to do more tightening despite the trajectory of the economy. Retail/US consumer Retail stocks, Foot Locker and Urban Outfitters both got downgraded to hold by Jefferies as the consumer is faced with headwinds. Softer spending with apparel and footwear will be driven on the resumption of student loan repayments.  Last week, Bankrate’s survey noted that 40% of Americans feel financially burdened by holiday shopping.  Two weeks ago, Deloitte forecasted soft holiday sales.   It is no surprise that the consumer won’t be spending as much this holiday season given excess savings will have disappeared, credit card balances will become crippling with higher rates, and the labor market will be seeing some type of a slowdown. Sticky inflation which comes with renewed dollar strength risks remain a risk on the table as oil prices appear poised to remain elevated all the way through the winter. Also on the minds of traders is the rising risk of a government shutdown next week. EUR/USD Daily Chart The dollar remains king but that could show some signs of exhaustion once the euro falls towards the 1.05 handle.  As long the global outlook doesn’t fall apart, the dollar should be nearing a peak.    
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French GDP Growth Slows Sharply in Q3 Despite Domestic Demand Rebound: A Detailed Analysis and Future Projections

ING Economics ING Economics 02.11.2023 12:01
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%.
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UK and US Inflation Data and China Retail Sales: Key Economic Indicators to Watch

Michael Hewson Michael Hewson 13.11.2023 14:36
By Michael Hewson (Chief Market Analyst at CMC Markets UK) UK Wages (Sep) /UK CPI (Oct) – 14 and 15/11 – last week's Q3 GDP numbers showed how much pressure the UK economy is under despite the continued slowdown in headline inflation we've seen over the past few months. Despite this slowdown headline inflation remains well above its peers in Europe and the US mainly due to the impact of the energy price cap which has kept prices in this area artificially high.   One major plus point has been wages growth which has taken some of the edge off, but which now looks as if it might have peaked. The last 3-months has seen earnings excluding bonuses remain steady at record highs of 7.8%, although including bonuses we're still above 8%. At the most recent Bank of England meeting interest rates were kept unchanged and a further sharp slowdown in headline inflation in October could reinforce the idea that the Bank of England is done when it comes to further rate hikes. September CPI came in higher than expected at 6.7%, with most of the increase being driven by higher petrol prices, which offset a modest fall in food prices.   Core prices eased slightly to 6.1% however services-based inflation rose from 6.8% year on year to 6.9%, and this is the area where the BOE has some concerns. That said this week's October inflation numbers should see another big slowdown given that the energy price component is expected to fall sharply from the same period last year, when the price cap jumped sharply. With energy prices now much lower, we can expect to see another sharp fall in this component which in turn should see a commensurate fall in the headline rate with expectations for a sharp slowdown to 4.8%, from 6.7%. Core CPI is expected to slow to 5.7%, from 6.1%.   US CPI (Oct) – 14/11 – having found a short-term base in June at 3%, US headline inflation has spent the last 3 months edging higher, although core CPI has still been slowing at a steady rate. Core prices slowed to 4.1% from 4.3% while there was a modest upside surprise in the headline number caused mainly by higher rent and fuel prices, and which did raise concerns that the Fed may well go with another rate hike between now and the end of the year.   These concerns have eased in recent days after a weaker than expected October jobs report, while retail sales in the US have also slowed. If we see further evidence of core prices slowing in October, then it could add fuel to the idea that the Fed might forego a pre-Christmas rate hike and leave policy as is. US CPI is expected to slow from 3.7% to 3.3%, with core prices expected to come in unchanged at 4.1%.   China Retail Sales (Oct) – 16/11 – last month China reported that its economy expanded by 1.3%, helped by a more resilient consumer, after retail sales rose by 5.5% in September, while industrial production rose by 4.5%. Industrial production has been steadily consistent over the third quarter; however, consumer spending has been much more constrained since the post Covid lockdown spike we saw at the start of the year.   One of the more consistent narratives of the last few months has been various luxury as well as other retailers who have reported a sharp slowdown in Chinese consumer spending, a trend that doesn't appear to be being reflected in the official Chinese data. The Q3 months have seen retail sales slow sharply, with gains of 2.5% and 4.6% in July and August, rounded off by 5.5% in September. While today's numbers do suggest a modest improvement in Q3 the extent of the rebound does raise questions given the weakness of recent trade data, as well as PMIs. For October retail sales are expected to show an increase of 7%, with industrial production remaining steady at 7%
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US Retail Sales Show Resilience in Q3 but Face Potential Slowdown in October

Michael Hewson Michael Hewson 13.11.2023 14:38
  US Retail Sales (Oct) – 15/11 the US consumer has been remarkably resilient for most of this year. with only 2 negative months, in February and March. Since then, consumer spending has been steady, helped by a resilient labour market and inflation that has slowed much faster than elsewhere in the world. Q3 was particularly strong and consistent with gains of 0.5%, 0.8% and 0.7% from July to September. As we head into Q4 this week's October numbers could well see a slowdown in the pace of spending as consumers pare back ahead of the holiday seasons of Thanksgiving as well as the Christmas period. In comments made recently the CEO of Target, one of the US's largest retailers said that consumers were starting to slow the pace of their spending. Expectations are for a decline of -0.5%.     US Government shutdown deadline – 17/11  back on October 1st US lawmakers agreed a 45-day extension that averted a government shutdown, but which ultimately cost House Speaker Kevin McCarthy his job. There are huge differences of opinion on how much money the US is spending in supporting Ukraine in its battle against Russia, while recent events in the Middle East have complicated matters further. With new House Speaker Mike Johnson now in place markets are likely to get increasingly anxious the nearer to the date we get with any new deal likely to be of the variety that saw an extension at the beginning of October. Republicans want to see spending cuts due to concerns over the sharp rises in government debt as well as the rising cost of that debt. Any new deal will need to convince the markets that US debt isn't on an unsustainable upward path.        Birkenstock Q3 23 – 14/11  as IPOs go Birkenstock hasn't had a great time of it, trading consistently below its $46 listing price, the shares fell 12% on the opening day, trading down to $36 although we have since rebounded from those lows. They say timing is everything when it comes to IPO's and we can safely say Birkenstocks timing was off, given the sharp sell-off in October. One thing in its favour is that the business is profitable, with the business seeing total revenue in 2022 of $1.35bn, with net income of $202.8m. When the accounts were released prior to the IPO the revenues for the 9-months to June were estimated to be $1.2bn, and on course to beat last year's total revenue number. The money raised by the IPO as allowed the company to repay $550m in loans, reducing its total debt to €1.31bn. Will this week's Q3 numbers give the stock a decent leg up?            
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Taming Inflation: Supercore Progress Pleases the Fed, Setting the Stage for Policy Shift in 2024

ING Economics ING Economics 16.11.2023 11:05
Supercore progress should please the Fed The so-called “supercore” measure of inflation – services excluding energy and housing costs – which the Fed keeps a close eye on due to wages and labour market tightness having a large influence, came in at a pretty benign 0.2% MoM rate, pulling the annual rate down to 3.75%. The Federal Reserve has got to be pretty happy with this and unsurprisingly, it has reinforced market expectations that the policy rate has peaked. Just 1.5bp of tightening is now priced by the January 2024 FOMC meeting with more than 90bp of rate cuts now anticipated by the end of next year.   Supercore inflation is making progress   Housing and vehicles to prompt further disinflation Housing rents should slow a lot further based on observed rents. If the relationship holds between observed rents and the CPI housing components, the one-third weighting housing has in the headline inflation basket and 41.8% weighting for the core rate will subtract around 1.3 percentage points of headline inflation and 1.7ppt off core annual inflation rates. Higher credit card and car loan borrowing costs, student loan repayments and very low housing transaction numbers in an environment of weak real household disposable incomes will continue to slow consumer spending activity. Big ticket items, such as vehicles, look set to see ongoing downward pricing pressure while slower economic growth should restrict corporate pricing power more broadly in the economy. Fed Chair Jerome Powell recently acknowledged that “given the fast pace of the tightening, there may still be meaningful tightening in the pipeline”. This will only intensify the disinflationary pressures that are building in an economy that is showing some signs of cooling. We forecast headline inflation to be in a 2-2.5% range from April onwards with core CPI testing 2% in the second quarter of 2024.   Housing slowdown will increasingly depress core inflation   Scope for significant Fed policy easing in 2024 With growth concerns likely to increase over the same period, this should give the Federal Reserve the flexibility to respond with interest rate cuts. We wouldn’t necessarily describe it as stimulus but more an attempt to move monetary policy to a more neutral footing, with the Fed funds rate expected to end 2024 at 4% versus the consensus forecast and market pricing of 4.5%.
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US Retail Sales and PPI Data Support Soft Landing Narrative Amid Subdued Inflation and Activity Resilience

ING Economics ING Economics 16.11.2023 11:56
Pipeline pressures support the US soft landing view After yesterday’s big reaction to the benign CPI data, which saw risk assets rally hard and the dollar come off as interest rate expectations fell sharply, it is the turn of retail sales and producer price inflation today. It once again feeds the soft landing narrative with subdued price pressures and resilience in activity. Last month, US retail sales surprised to the upside, rising 0.7% month-on-month despite credit card transaction numbers looking weak and we get a repeat of that for today’s October report. Headline retail sales fell 0.1% MoM, but this was better than the 0.3% drop expected, while September’s 0.7% initial print has been revised up to 0.9% MoM growth. The details show motor vehicle sales fell 1%, which tallies with the drop in unit sales reported by manufacturers while furniture sales dropped 2% MoM – the fourth consecutive monthly decline, which is consistent with the collapse in housing transactions on the basis that when you move home buyers tend to also buy a few new items. Gasoline station sales fell only 0.3% MoM despite the price of gasoline plunging while department stores and miscellaneous stores had a tough month with sales down more than 1% MoM. On the positive side it was a good month for health & personal care (+1.1%) while groceries and electronic both rose 0.6% MoM. Clothing was flat on the month and non-store (internet) rose 0.2%. Therefore the control group, which better matches the trends of broader consumer spending via removing volatile items such as autos, gasoline, building materials and eating out, came in at +0.2% MoM as expected. This indicates decent resilience and supports our view that fourth quarter GDP growth may not be as weak as the consensus is currently predicting – consensus is currently predicting 0.7% annualised 4Q GDP growth while we are forecasting 1.5% GDP growth.   WoW change in credit card spending   There will no doubt be some scepticism of the resilience in retail sales given the credit card spending numbers have been so soft over the past couple of months – are we all really returning to cash? But this is the life of an economist at the moment – data inconsistencies everywhere.   PPI shows weak pipeline price pressures Meanwhile, pipeline inflation pressures as measured by PPI are very soft with headline producer prices falling 0.5% MoM versus +0.1% consensus while core (ex food & energy) was flat on the month (0.3% consensus). This means that the annual rate of producer price inflation has slowed to 1.3% year-on-year from 2.2% while core is at 2.4% versus 2.7% previously. With wage growth looking more subdued amidst rising productivity growth, it reinforces our view that we will start consistently getting 2% CPI YoY prints at some point in the second quarter of  2024, giving the Federal Reserve the ability to respond to any eventual economic weakness with interest rates cuts.   Import prices, PPI and CPI (YoY%)
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New Zealand Dollar Gains as Retail Sales Face Expected Decline, US Markets Quiet for Thanksgiving

Kenny Fisher Kenny Fisher 23.11.2023 15:26
New Zealand retail sales expected to decline by 0.8% US markets closed for Thanksgiving The New Zealand dollar is in positive territory on Thursday. Early in the North American session, NZD/USD is trading at 0.6042, up 0.34%. Will New Zealand retail sales continue declining? Retail sales are a key gauge of consumer spending and the New Zealand consumer has been holding tightly to the purse strings. In the second quarter, retail sales fell 1% q/q, with most retail industries showing lower sales volumes. This marked a third consecutive losing quarter. The markets are bracing for another decline for Q3, with a consensus estimate of -0.8%. The soft retail sales data isn’t really surprising as consumers are being squeezed by high inflation and elevated borrowing costs. The decrease in household purchasing power has meant a decline in spending. High interest rates are still filtering through the economy, which could further dampen consumer spending in the fourth quarter. The Reserve Bank of New Zealand has put a pause on rates for three straight times, which has naturally raised speculation that the central bank has completed its tightening cycle, which has brought the cash rate to 5.5%. Inflation in the third quarter eased from 6.0% to 5.6% y/y in the third quarter and this decline means that there is a strong likelihood that the RBNZ will hold rates at the November 27th meeting. US markets are closed for the Thanksgiving holiday, which means we’re unlikely to see much movement today with the US dollar. That could change on Friday, with the release of US manufacturing and services PMIs. The consensus estimates for November stand at 49.8 for manufacturing (Oct: 50.0) and 50.4 for services (Oct. 49.8). If either of the PMIs miss expectations, that could translate into volatility from the US dollar.   NZD/USD Technical NZD/USD is putting pressure on resistance at 0.6076. The resistance line 0.6161 There is support at 0.5996 and 0.5885    
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USD Slips Below 200-DMA Despite Rebound in Yields: A Weekly Market Analysis

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.11.2023 15:10
USD slips below 200-DMA despite rebound in yields  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Last week ended on a positive note where the US equities advanced to fresh highs since summer on a holiday shortened trading week. The S&P500 gained for the 4th consecutive week and closed the week near 4560, the rate-sensitive and technology heavy Nasdaq 100 extended gains beyond the summer peak, and hit an almost 2-year high, while the VIX index, which is known as Wall Street's fear gauge, or the volatility index, slumped to the lowest levels since January 2020. The belief that the Federal Reserve (Fed) is done hiking the interest rates, and the rapidly falling US long-term yields are at the source of this optimism – especially after the latest CPI update in the US printed a softer-than-expected number, suggesting that inflation in the US fell to 3.2% last month. This week, investors will find out if the Fed's favourite inflation gauge, the PCE index, tells the same story. The PCE index is expected to have fallen from 3.4% to 3.1% in October, and core PCE may have eased from 3.7% to 3.5% during the same month. Anything less than soothing could lead to some more correction in the US long-term yields. The 10-year yield jumped to 4.50% early Monday, though the positive pressure slowed above 4.50%.   News that the Black Friday spending jumped 7.5% this year to hit a record high of $9.8 billion certainly reminds investors that consumer spending in the US remains strong. The latter gives a strong support to the US economy, which in return gives a solid confidence to the Fed that keeping the rates high for long is not necessarily a bad idea. Today, the sales continue with Cyber Monday deals.   Yet the holiday shoppers' enthusiasm is less visible on the financial markets this Monday. The US futures are down, along with their Asian peers on the back of a rebound in US yields, the nearly 8% slump in Chinese industrial profits in October and news that children in China are suffering from respiratory infections – which spurs speculation that it could be a new strain of Covid. Chinese authorities say that it's simply a mix of known respiratory diseases. But you know, once bitten, twice shy.   
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Turbulent Times: German GDP Contracts in Q3, US PMIs Awaited

Kenny Fisher Kenny Fisher 27.11.2023 15:44
German GDP shrinks in Q3 US to release manufacturing and services PMIs The euro is almost unchanged on Friday. In the European session, EUR/USD is trading at 1.0903, down 0.03%. German economy declines German GDP posted a minor drop in the third quarter, coming in at -0.1% q/q. This was down slightly from -0.1% in the second quarter and matched the market consensus. On an annualized basis, GDP declined by 0.4%, down from a revised o.1% gain in Q2 and missing the market consensus of -0.3%. The consumer spending component of GDP decelerated in the third quarter and was a key driver of the decline in GDP. German consumers remain in a sour mood and are being squeezed by rising interest rates and a high inflation rate of 3.8%. The German business sector is also pessimistic about economic conditions. The Ifo Business Climate index managed to climb to 87.3 in November, up from 86.9 in October but below the market consensus of 87.5. A reading below 100 indicates that a majority of the companies surveyed expect business conditions to deteriorate in the next six months. Earlier this week, German services and manufacturing PMIs pointed came in below 50, which points to contraction. The manufacturing sector is particularly weak and has been in decline since June 2022. It has been a relatively light week for US releases, with markets back in action after the Thanksgiving holiday. Later today, the US releases manufacturing and services PMIs, with little change expected. Still, the markets will be watching carefully, as the data will provide insights into the strength of the US economy. The consensus estimates for November are 49.8 for manufacturing (Oct: 50.0) and 50.4 for services (Oct. 49.8). If the readings diverge significantly from the estimates, we could see some strong movement from the US dollar before the weekend.   EUR/USD Technical There is resistance at 1.0943 and 1.0997 1.0831 and 1.0748 are providing support  
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Federal Reserve Outlook: Navigating Monetary Policy in the Face of Market Expectations and Economic Signals

ING Economics ING Economics 12.12.2023 14:11
We expect another Fed hold, but with pushback on rate cut prospects The Fed last raised rates in July and we think that marked the peak. There is growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, the Fed will not want to endorse the market pricing of significant rate cuts until they are confident price pressures are quashed   Fed to leave rates unchanged, oppose market pricing of cuts The Federal Reserve is widely expected to leave the fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign MoM% inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here.   Markets pricing 125bp of cuts, the Fed will likely stick to 50bp prediction There has been a big swing in expectations for Federal Reserve policy since the last FOMC meeting, with markets firmly buying into the possibility of some aggressive interest rate cuts next year. Back on November 1st, after the Fed held rates steady for the second consecutive meeting, fed funds futures priced around a 20% chance of a final hike by the December FOMC meeting with nearly 90bp of rate cuts expected through 2024. Today, markets are clearly of the view that interest rates have peaked with 125bp of rate cuts priced through next year. Underscoring this shift in sentiment, we have seen the US 10Y Treasury yield fall from just shy of 5% in late October to a low of 4.1% on December 6th.   Federal Reserve rhetoric has certainly helped the momentum of the moves. Chief amongst them is the quote from Fed Governor Chris Waller suggesting that if inflation continues to cool “for several more months – I don’t know how long that might be – three months, four months, five months – that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower”. The real Fed funds rate (nominal rate less inflation) is indeed now positive and we expect it to move above 3% as inflation continues to fall. Does it need to be this high to ensure inflation stays at 2%? We would argue not, and so too, it appears, do some senior members of the Fed. Other officials, such as Atlanta Fed president Raphael Bostic, suggest that the US hasn’t “seen the full effects of restrictive policy”. However, there are still some residual hawks. San Francisco Fed President Mary Daly is still contemplating “whether we have enough tightening in the system”.   ING's expectations for what the Federal Reserve will predict   Fed to talk up prolonged restirctive stance In that regard, the steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year. For example, mortgage rates have been swift to respond, with the 30Y fixed-rate mortgage dropping from a high of 7.90% in late October to 7.17% as of last week. With inflation still well above the 2% target despite recent encouraging MoM prints, we expect the Fed to be wary of anything that could be interpreted as offering an excuse to price in even deeper Fed rate cuts for next year and result in even lower longer-dated Treasury yields.   Consequently, we expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen.Fed Chair Jay Powell’s assessment in a December 1st speech is likely to be the template for the tone of the press conference. There, he argued, “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so”. Similarly, NY Fed president John Williams expects “it will be appropriate to maintain a restrictive stance for quite some time”.   But the Fed will eventually turn dovish We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. The consumer is key, and with real household disposable incomes flatlining, credit demand falling, and pandemic-era accrued savings being exhausted for many, we see a risk of a recession during 2024. Collapsing housing transactions and plunging homebuilder sentiment suggest residential investment will weaken, while softer durable goods orders point to a downturn in capital expenditure. If low gasoline prices are maintained, inflation could be at the 2% target in the second quarter of next year, which could open the door to lower interest rates from the Federal Reserve from May onwards – especially if hiring slows as we expect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.   The Fed will try to keep the market rates impact to a minimum There may be some interest from the press on money market conditions following the spikes seen in repo around the end of the month and reverberating into the early part of December. It comes against a backdrop where banks' reserves are ample, in the US$3.3tr area. The last time the Fed engaged in quantitative tightening, bank reserves bottomed at a little under US$1.5tr and there was a material effect felt on the money markets. It’s unlikely that we'll get anywhere near that this time around. Bank reserves will certainly get below US$3tr and possibly down to US$2.5trn. The Fed will want to get liquidity into better balance as a first port of call, but beyond that, it won’t want to over-tighten liquidity conditions. Taking this into account, QT likely ends around the end of 2024. In the meantime, the clearest manifestation of quantitative tightening is to be seen in falling liquidity volumes going back to the Fed on the overnight reverse repo facility. This is now at US$825bn but will hit zero in the second half of 2024. Whether Chair Powell gets drawn into this will likely be down to whether the press wants him - they'll need to ask the question(s)! In terms of expectations for market movements, we doubt there will be much. If, as we expect, the Fed sticks to the hawkish tilt and does not give the market too much to get excited about, then expect minimal impact. As it is, the structure of the curve, as telegraphed by the richness of the 5yr on the curve, is telling us that a rate cut is not yet in the 6-month countdown window. That will slowly change, and we’ll morph towards a point where we are three months out from a cut and the 2yr yield really collapses lower. It's unlikely the Fed will change that at this final meeting of 2023, though, and they won’t want to.   Fed pushback could dent recent high-yield FX rally As mentioned above, a Fed pushback against market pricing of the easing cycle in 2024 should be mildly supportive of the dollar. Even though EUR/USD has performed poorly through the start of December and could get some mild support a day later from the ECB, this FOMC meeting could prompt losses to the 1.0650 area. We have had 1.07 as a year-end target for a few months now and expect the more powerful, dollar-led, EUR/USD rally to come through in 2Q when we expect those short-dated US yields to collapse. Perhaps more vulnerable to a decent Fed pushback against lower rates might be what we call the 'growth' currencies, such as the high beta currencies in Scandinavia and the commodity sector (Australian and Canadian dollars). These currencies have had a good run through November on the lower US rate environment. However, as per our 2024 FX Outlook, these currencies are our top picks for next year and should meet good demand on pullbacks this month. As to the wild ride that is USD/JPY, higher US yields could provide some temporary support. However, we doubt USD/JPY will sustain gains above the 146/147 area as traders re-adjust positions for a potential change in Bank of Japan (BoJ) policy on December 19th. We suspect that USD/JPY has peaked, however, and are happy with our call for USD/JPY to be trading close to 135 next summer after the BoJ starts to dismantle its ultra-dovish policy in the first half of next year. 
Eurozone PMIs: Tentative Signs of Stabilization Amid Ongoing Economic Challenge

Assessing the Impact: UK Wages and CPI Figures for December and Their Implications on Monetary Policy

Michael Hewson Michael Hewson 16.01.2024 11:45
UK wages/UK CPI (Dec) – 16/01 and 17/01 Since March of last year headline CPI in the UK has more than halved, slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. The decline in headline inflation is very much welcome, however most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing. Food price inflation for example is still much higher, slowing to 6.6% in December, while wage growth is still trending above 7% at 7.2%. Services inflation is also higher at 6.3% while core prices rose at 5.1% in the 3-months to November.   This week's wages and inflation numbers are likely to be key bellwethers for the timing of when the Bank of England might look at starting to reduce the base rate, however the key test for markets won't be on how whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers. Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 7% is likely to stay the Bank of England's hand when it comes to looking at rate cuts. It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike. That means it will take more than a further slowdown in the headline rate for these 3 MPC members to reverse that call, let alone call for rate cuts. Expectations are for wages to slow to 6.7% and headline CPI to come in at 3.8%.  
Bank of Canada Preview: Assessing Economic Signals Amid Inflation and Rate Expectations

Bank of Canada Preview: Assessing Economic Signals Amid Inflation and Rate Expectations

ING Economics ING Economics 25.01.2024 12:17
Bank of Canada preview: Too early for a radical pivot Core inflation came in hotter than expected in December which rules out the Bank of Canada shifting meaningfully in a dovish direction at the January meeting. However, higher interest rates are biting and we continue to look for rate cuts from the second quarter onwards. US-dependent BoC rate expectations and the Canadian dollar may not move much for now.   Hot inflation warrants caution before dovish turn The Bank of Canada is widely expected to leave the target for the overnight rate at 5% when it meets next week. Policymakers continue to talk of their willingness to “raise the policy rate further if needed”, and inflation does indeed continue to run hotter than the BoC would like, but we see little prospect of any additional policy tightening from here. Instead, the next move is expected to be an interest rate cut, most probably at the April meeting. The latest BoC Business Outlook Survey reported softening demand and “less favourable business conditions” in the fourth quarter with high interest rates having “negatively impacted a majority of firms”, leading to “most firms” not planning to “add new staff”. Job growth does appear to be cooling and the Canadian economy contracted in the third quarter and is expected to post sub 1% growth for the fourth quarter. Also remember that Canadian mortgage rates will continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. This will intensify the financial pressure on households, dampening both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high immigration and population growth rates. Given this backdrop, we expect Canadian headline inflation to slow to 2.7% in the first quarter and get down to 2% in the second versus the consensus forecast of 2.6%. As such, we see scope for the BoC to cut rates by 25bp at every meeting from April onwards – 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing.   Rate expectations in US and Canada   Fighting market doves is still hard Markets currently price in 95/100bp of easing by the Bank of Canada this year. As shown in the chart above, the pricing for rate cuts in the US and Canada has followed a very similar path. The implied timing for the first rate cut is also comparable: May for the Fed (March is 50% priced in), June for the BoC (April is 45% priced in). That is despite the communication by the Federal Reserve which has already pivoted (via Dot Plots) to the easing discussion while the BoC officially still retains a tightening bias. In practice, even if the BoC chooses – as we suspect – to delay a radical dovish pivot and stay a bit more hawkish than the Fed, pricing for the BoC will not diverge too much from that of the Fed. So, the room for a rebound in CAD short-term rates appears more tied to USD rates than BoC communication.     FX: USD/CAD to stabilise In FX, the story isn’t much different. The Canadian dollar has been a de-facto proxy for US-related sentiment, acting less and less as a traditional commodity currency – that would normally be hit by strong US data – thus outperforming the rest of high-beta G10 FX since the start of the year. The rebound in USD/CAD to 1.35 is in line with a restrengthening of the USD primarily due to risk sentiment, positioning and seasonal factors, rather than a divergence in Fed-BoC policy patterns. In fact, the USD-CAD two-year swap rate gap has widened further in favour of CAD so far in January, from 20bp to 32bp.   We expect the impact on CAD from this BoC policy meeting to be modestly positive as expectations of a radical dovish shift are scaled back. However, Governor Tiff Macklem already introduced the idea of rate cuts in a speech this month and will need to acknowledge the downward path for the policy rate to a certain extent. While waiting for the Fed meeting a week later and the crucial US CPI numbers for January, US-dependent rate expectations in Canada may not move much. USD/CAD may trace back to 1.34, but we don’t see much further downside for the pair this quarter as USD shows the last bits of strength.    
Bank of Canada Contemplates Rate Cut Amid Dovish Shifts and Weak Growth

Bank of Canada Contemplates Rate Cut Amid Dovish Shifts and Weak Growth

ING Economics ING Economics 25.01.2024 15:54
Canada edges towards a rate cut in the second quarter Subtle dovish shifts in the Bank of Canada’s thinking and a weak growth backdrop give us increasing confidence that inflation concerns will fade and the BoC will cut rates in 2Q. There may be room for a rebound in short-term CAD rates in the near term though, and USD/CAD could stabilise, but the loonie remains less attractive than the likes of NOK and AUD.   Dovish hints point to cuts The Bank of Canada left monetary policy unchanged at today’s meeting. The target for the overnight rate remains at 5% and the Bank is continuing with quantitative tightening. The market has latched onto the mildly dovish shift in the BoC’s stance with Governor Macklem stating that “there was a clear consensus to maintain our policy at 5%” with the deliberations “shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance”. In this regard the Bank has taken the significant step of removing the line that the Bank “remains prepared to raise the policy rate further if needed” from the accompanying statement. Nonetheless, the Bank remains concerned about the inflation backdrop. It doesn’t expect annual CPI to return to the 2% target until 2025 given “core measures of inflation are not showing sustained declines”, not helped by wages rising 4-5%. That said, there was acknowledgement that the economy “has stalled” with the economy likely stagnating in 1Q 2024. The BoC remains hopeful that it will recover from mid-2024, but the latest BoC Business Outlook Survey reported softening demand and “less favourable business conditions” in the fourth quarter with high interest rates having “negatively impacted a majority of firms”, leading to “most firms” not planning to “add new staff”.  Jobs growth does appear to be cooling and remember, too, that Canadian mortgage rates will continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. In our view this will intensify the financial pressure on households, dampening both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high immigration and population growth rates. Given this backdrop we expect Canadian headline inflation to slow to 2.7% in 1Q and get down to 2% in the second quarter, well ahead of what the BoC expects. Consequently we see scope for the BoC to cut rates by 25bp at every meeting from April onwards (the market is pricing this as a 50:50 call right now). This means 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing. CAD remains less attractive than other commodity currencies The Canadian dollar has weakened following the BoC the announcement, although 2-year CAD yields did not move much after having dropped 10bp to 4.0% since yesterday’s peak on the back of global factors. There may be some room for CAD short-term rates to tick back higher in the near term though, mostly following USD rates. From an FX perspective, it’s key to remember that CAD has been tracking quite closely the dynamics in US data, and that may remain the case until a broader USD decline emerges and favours pro-cyclical currencies such as CAD. We target a move in USD/CAD below 1.30 in the second half of the year, but still see CAD as less attractive than other pro-cyclical currencies like NOK and AUD this year - also due to our expectations for large rate cuts in Canada.
Bank of Canada Holds Rates as Governor Macklem Signals Caution Amid Inflation Concerns, USD/CAD Tests Key Support

ECB and US Q4 GDP in Focus: Divergence in Markets and Potential Rate Cut Discussions

Michael Hewson Michael Hewson 25.01.2024 15:58
05:40GMT Thursday 25th January 2024 ECB and US Q4 GDP in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a much more positive session yesterday, carrying over the momentum from a buoyant US market, but also getting a lift after China announced a 0.5% cut in the bank reserve requirement rate from 5th February. US markets finished the day mixed with the Dow finishing lower for the 2nd day in succession, while the S&P500 and Nasdaq 100 once again set new record highs, as well as record closes, although closing off the highs of the day as yields edged into positive territory. This divergence between the Dow and Russell 2000, both of which closed lower for the second day in succession, and the Nasdaq 100 and S&P500 might be a cause for concern, given how US market gains appear to be being driven by a small cohort of companies share prices. Today's focus for European markets which are set to open slightly lower, is on the ECB and the press conference soon after with Christine Lagarde, where apart from questions on timelines about possible rate policy, Lagarde could face some questions a little closer to home amidst dissatisfaction over her leadership style from ECB staffers. When looking at the economic performance of the euro area, we've seen little in the way of growth since Q3 of 2022, while inflation has also been slowing sharply. Yet for all this economic weakness, a fact which was borne out by yesterday's flash PMI numbers, especially in the services sector, the ECB has been insistent it is not close to considering a cut in rates, having hiked as recently as last September. Only as recently as last week we heard from a few governing council members of their concerns about cutting too early, yet when looking at the data, and the fact that the German economy is on its knees, the ECB almost comes across as masochistic in its desire to combat the risks of a return of inflation. In a way it's not hard to understand given that after November headline inflation slowed to 2.4%, it picked up again in December to 2.9%, while core prices slowed to 3.4%. This rebound in headline inflation while no doubt driven by base effects will be used as evidence from the hawks on the governing council that rates need to stay high, however there is already evidence that the consensus on rates is splintering, and while no more rate hikes are expected the economic data increasingly supports the idea of a cut sooner rather than later. Markets currently have the ECB cutting rates 4 times this year in increments of 25bps, starting in June, although given the data we could get one in April. This contrasts with the market pricing up to 6 rate cuts from the Federal Reserve despite the US economy being magnitudes stronger than in Europe. No changes are expected today with the main ECB refinancing rate currently at 4.5%, however Q4 GDP due next week, and January CPI due on 1st February calls for a March/April rate cut could start to get louder in the weeks ahead, especially since PPI has been in deflation for the last 6 months. US bond markets appear to be starting to have second thoughts about the prospect of 6 rate cuts from the Federal Reserve this year, although there is still some insistence that a March cut remains a realistic possibility. Today's US Q4 GDP numbers might bury the prospect of that idea once and for all if we get a reading anywhere close to 2%. This seems rather counterintuitive when you think about it, the idea that the Fed would cut before the ECB when Europe is probably in recession and the US economy is growing at a reasonable rate, albeit at a slower pace than in Q3. Expectations for Q4 are for the economy to have slowed to an annualised 1.9% to 2%, which would be either be the weakest quarter of 2023 or match it. Nonetheless the resilience of the US consumer has been at the forefront of the rebound in US growth seen over the past 12 months, with a strong end to the year for consumer spending. This rather jars against the idea that US GDP growth might get revised lower in the coming weeks as some have been insisting. If you look at the December control group retail sales numbers, they finished the year strongly and these numbers get included as a part of overall GDP. Weekly jobless claims are also at multi-month lows of 187k, and while we could see a rise to 200k even here there is no evidence that the US economy is slowing in such a manner to suggest anything other than a modest slowdown as opposed to a sudden stop or hard landing.  The core PCE Q/Q price index is expected to slow from the 3.3% seen in Q3 to around 2%, which may not be enough to prompt a softening in yields unless we drop below 2%. EUR/USD – pushed up to the 1.0930 area before retreating. While above the 200-day SMA at 1.0830, the bias remains for a move higher towards the main resistance up at 1.1000.  GBP/USD – pushed up towards 1.2775 yesterday with support at the 50-day SMA as well as the 1.2590 area needed to hold or risk a move lower towards the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum. EUR/GBP – fell to 0.8535 before rebounding modestly. Also have support at the 0.8520 area, with resistance at the 0.8620/25 area and the highs last week. USD/JPY – finding a few offers at the 148.80 area over the last 3days which could see a move back towards the 146.25 area. A fall through 146.00 could delay a move towards 150 and argue for a move towards 144.00. FTSE100 is expected to open 19 points lower at 7,508 DAX is expected to open 36 points lower at 16,854 CAC40 is expected to open 10 points lower at 7,445.  
Dream Comes True: Analyzing Euro Weakness and US GDP Goldilocks Moment

Dream Comes True: Analyzing Euro Weakness and US GDP Goldilocks Moment

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.01.2024 14:15
A dream comes true. By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank The EURUSD traded south yesterday, as the European Central Bank (ECB) Chief Christine Lagarde reckoned that growth and inflation are slowing, while insisting that the rate cut decision will be data dependent. The pair cleared the 200-DMA support, fell to 1.0820, it's a little higher this morning, but we are now below the 200-DMA and the ECB rate cut bets on falling inflation and slowing European economies remain the major driver of the euro weakness, with many investors now thinking that June could be a good time to start cutting the rates. Three more rates could follow this year. Across the Atlantic, the US released its latest GDP update and the data was as good as it could possibly get. The US economy grew 3.3% in Q4 versus 2% expected by analysts. It grew 2.5% for all of last year –quite FAR from a recession. The consumer spending growth slowed to 2.8%, but remained strong on healthy jobs market and wages growth, business investment and housing were supportive and... the cherry on top: the GDP price index, a gauge of inflation fell to 1.5%. Plus, data from rent.com showed that the median rent rate declined in December, and that's good news when considering that rents have been one of the major drivers of inflation lately, and they look like they are cooling down. In summary, yesterday's US GDP data was the definition of goldilocks in numbers: good growth, slowing inflation. A dream comes true. As reaction, the US 2-year yield fell below 4.30% and the 10-year yield fell below 4.10%. The strong numbers didn't necessarily hammer the Federal Reserve (Fed) cut expectations given that inflation slowed! Investors are not sure that March would bring the first rate cut from the Fed – as the probability of a March cut is around 50%, but a May cut is almost fully priced in. Today, all eyes are on the Fed's favorite gauge of inflation: core PCE – expected to have retreated to 3% in December. A number in line with expectations, or ideally softer than expected could further boost risk appetite.
The Japanese yen retreats as US GDP soars 3.3% in Q4

The Japanese yen retreats as US GDP soars 3.3% in Q4

Kenny Fisher Kenny Fisher 26.01.2024 14:46
The Japanese yen has edged lower on Thursday. In the North American session, USD/JPY is trading at 147.62, up 0.08%. US GDP roars with 3.3% gain The US economy continues to surprise with stronger-than-expected data. On Wednesday, the services and manufacturing PMIs both accelerated and beat the estimates, followed by first-estimate GDP for the fourth quarter earlier today. The economy sparkled with an expansion of 3.3% q/q, blowing past the consensus estimate of 2.0%. This follows the blowout gain of 4.9% in the third quarter. Consumer spending remained strong at 2.8%, compared to 3.1% in the third quarter. The US economy expanded in 2023 at 2.5% y/y, up from 1.9% in 2022. The US dollar’s reaction to the positive GDP report has been muted. There were concerns earlier this year that the economy might tip into a recession, as the Fed continued to raise interest rates to beat down inflation. However, solid consumer spending and a resilient labour market have boosted economic growth and the Fed is well on its way to achieving the tricky task of a soft landing for the economy. On the inflation front, the core personal expenditure price index was unchanged at 2% in the fourth quarter, while the headline index rose 1.7%, down sharply from 2.6 in Q3. The week wraps up with the personal consumption expenditures (PCE) price index on Friday, considered the Fed’s preferred inflation gauge. The PCE price index and core PCE price index are expected to edge slightly lower in January, which would be an encouraging sign that the inflation is moving lower.   Japan releases Tokyo Core CPI, a key inflation indicator, on Friday. The consensus estimate for January stands at 1.9% y/y for January, after a 2.1% gain in December. If the estimate proves correct, it would mark the first time in almost two years that it has fallen below the BoJ’s target of 2%. . USD/JPY Technical USD/JPY is testing resistance at 147.54, followed by resistance at 148.44 There is support at 146.63 and 145.73  

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