Core Inflation

Rates Spark: Treasuries need better than the consensus CPI outcome

Markets are awaiting Tuesday’s US CPI release which should give confirmation that the disinflation trend continues. But that's not enough, as a consensus month-on-month outcome would still be a tad too hot for comfort. Looking further ahead, foreign buyers aren't absorbing large UST supply, putting upward pressure on term premium.

 

US CPI inflation will fall, but Treasury yields are still at risk of rising

We're a bit troubled about Tuesday’s CPI report. On the one hand, year-on-year rates will fall, with practical certainty. That's because of a base effect. For January 2023 there was a 0.5% increase on the month, so anything less than this will bring the year-on-year inflation rate down, for both headline and core.

So why are we troubled? It's the size of the month-on-month increases. Headline is expected at 0.2% and core at 0.3% MoM. The 0.2% reading is just about okay, especially if it is rounded up to 0.2

ADP Employment Surges with 497,000 Gain, Nonfarm Payrolls Awaited - 07.07.2023

European Markets Sink Amid Recession Concerns and Oil Price Slump

Michael Hewson Michael Hewson 31.05.2023 08:09
With the White House and Republican leaders agreeing a deal on the debt ceiling at the weekend markets are now obsessing about whether the deal will get the necessary votes to pass into law, as partisan interests line up to criticise the deal.   With the deadline for a deal now said to be next Monday, 5th June a vote will need to go forward by the end of the week, with ratings agencies already sharpening their pencils on downgrades for the US credit rating. European markets sank sharply yesterday along with bond yields, as markets started to fret about a recession, while oil prices sank 4% over demand concerns. US markets also struggled for gains although the Nasdaq 100 has continued to outperform as a small cohort of tech stocks contrive to keep US markets afloat. As we look towards today's European open and the end of the month, we look set for further declines after Asia markets slid on the back of another set of weak China PMIs for May. We'll also be getting another look at how things are looking with respect to economic conditions in Europe, as well as an insight into some key inflation numbers, although core prices will be missing from this snapshot. French Q1 GDP is expected to be confirmed at 0.2% while headline CPI inflation for May is expected to slow from 6.9% to 6.4%. Italian Q1 GDP is also expected to be confirmed at 0.5, and headline CPI for May is expected to slow from 8.7% to 7.5%. We finish up with the flash CPI inflation numbers from Germany, which is also expected to see a slowdown in headline from 7.6% to 6.7% in May. While this is expected to offer further encouragement that headline inflation in Europe is slowing, that isn't the problem that is causing investors sleepless nights. It's the level of core inflation and for that we'll have to wait until tomorrow and EU core CPI numbers for May, which aren't expected to show much sign of slowing.   We'll also get another insight into the US jobs markets and the number of vacancies in April, which is expected to fall from 9.59m in March to 9.4m. While a sizeable drop from the levels we were seeing at the end of last year of 11m, the number of vacancies is still over 2m above the levels 2 years ago, and over 3m above the levels they were pre-pandemic. The size of this number suggests that the labour market still has some way to go before we can expect to see a meaningful rise in the unemployment rate off its current low levels of 3.4%. EUR/USD – slipped to the 1.0673 area before rebounding with the 1.0610 area the next key support. We need to see a rebound above 1.0820 to stabilise.   GBP/USD – rebounded from the 1.2300 area with further support at the April lows at 1.2270. Pushed back to the 1.2450 area and the 50-day SMA, before slipping back. A move through 1.2460 is needed to open up the 1.2520 area.   EUR/GBP – slid to a 5-month low yesterday at 0.8628 just above the next support at 0.8620. A move below 0.8620 opens up the December 2022 lows at 0.8558. Main resistance remains at the 0.8720 area.   USD/JPY – ran into some selling pressure at 140.90 yesterday, slipping back to the 139.60 area which is a key support area. A break below 139.50 could see a return to the 137.00 area, thus delaying a potential move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20.   FTSE100 is expected to open 22 points lower at 7,500   DAX is expected to open 64 points lower at 15,845   CAC40 is expected to open 34 points lower at 7,175
Weak Second Half Growth Impacts Overall Growth Rate for 2023

Labour-Market Induced Sell-Off: Impact on US Treasuries and Rates Differentials! Comparing US and Euro Rates: Factors Influencing Policy Rate Paths

ING Economics ING Economics 31.05.2023 08:37
10Y US Treasury yields are more than 60bp away from the peak they reached in early March, prior to the regional banking crisis. The Fed has been pushing a more hawkish line disappointed by the lack of progress on the inflation front, but end-2023 Sofr futures still price a rate that is 50bp below the early March peak.   At least so far, this doesn’t feel like a wholesale reappraisal of the market’s macro view although a more forceful Fed communication at the 14 June meeting, with potentially a hike and a higher end-2023 median dot, could push us closer to this year’s peak in rates.     ECB pricing is hard to move but markets look to the BoE for guidance In Europe, today’s inflation prints from France, Germany, and Italy will, in addition to yesterday’s Spanish release, give us a pretty good idea of where the eurozone-wide number will fall tomorrow. If the drop in Spain’s core inflation is any guide, EUR markets will struggle to follow their US peers higher.   Add to this that it is difficult for euro rates to price a path for policy rates that materially diverges from their US peers. Even if the Fed hikes in June or July, the EUR swap curve already prices ECB hikes at both meetings. Swaps assign a low probability to another hike in September for now.   That probability may well rise but we think any labour-market induced sell-off in US Treasuries will reflect, in part, in wider rates differentials between the two currencies.   It is difficult for euro rates to price a path for policy rates that materially diverges from their US peers  
Australian Dollar's Decline Persists Amid Evergrande Concerns and Economic Data

UK Inflation Dilemma: Can Rate Hikes Tackle Soaring Prices and Avert Recession?

InstaForex Analysis InstaForex Analysis 31.05.2023 09:00
On Tuesday, the demand for the pound was significantly higher than that for the euro. As soon as this happened, many analysts began to pay attention to the report on prices in UK stores, as shop price inflation accelerated to 9% this month. This indicates that UK inflation is decreasing slowly or not decreasing at all, despite the benchmark interest rate being raised to 4.5%.   The consensus forecast for the Bank of England's rate currently suggests two more quarter point rate hikes in June and August.   This would bring the rate to 5%. Any further tightening without alternatives would push the British economy into a recession, and even the current rate could potentially cause it, despite the BoE's optimistic forecasts. But how can inflation be combated if it hardly responds to the actions of the central bank?     I believe there can only be one disheartening answer: it cannot. If further rate hikes lead to a recession, the Brits, clearly dissatisfied with recent events within the country, may start a new wave of mass strikes. Take note that in the past year, many Brits have openly criticized the British government for the sharp decline in real incomes and high inflation.   If the rate increases further, the economy will contract, leading to an increase in unemployment. If the rate is kept as it is, it might take years for inflation to return to the target level. The BoE is in a deadlock. BoE Governor Andrew Bailey expects inflation to start decreasing rapidly from April. He noted the decline in energy prices, which will somewhat dampen inflationary pressure on all categories of goods and services. However, the April inflation report was unusually contradictory. While headline inflation showed a significant slowdown, core inflation continues to rise.   Therefore, it is not possible to conclude that inflation is slowing down in the general sense. We can only wait and observe. If Bailey turns out to be right, then the BoE will not need to raise the rate to 5.5% or 6%, which currently seems like a fantasy.   However, if inflation continues to hover around 10%, the BoE will need to devise new measures to address it without exerting serious pressure on the economy. It might require patience for several years. It is entirely unclear which option the central bank will choose.   The demand for the British pound may increase as market expectations of a hawkish stance grow. But will these expectations be justified? The pound may rise based on this, but fall even harder when it becomes clear that the BoE is not ready to raise the rate above 5%. I believe that wave analysis should be the primary tool for forecasting at the moment.     Based on the analysis conducted, I conclude that the uptrend phase has ended. Therefore, I would recommend selling at this point, as the instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic.   A corrective wave may start from the 1.0678 level, so you can consider short positions if the pair surpasses this level. The wave pattern of the GBP/USD pair has long indicated the formation of a new downtrend wave. Wave b could be very deep, as all waves have recently been equal.   A successful attempt to break through 1.2445, which equates to 100.0% Fibonacci, indicates that the market is ready to sell. I recommend selling the pound with targets around 23 and 22 figures. But most likely, the decline will be stronger.    
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Poland's First-Quarter GDP Highlights Disinflationary Trend, Raising Chances of Rate Reduction

ING Economics ING Economics 31.05.2023 15:27
Polish first-quarter GDP shows disinflationary structure, with odds of a rate cut growing. Poland's statistics office has revised the first-quarter GDP estimate to -0.3% year-on-year. In 2023 as a whole, we expect economic growth to be around 1% on the back of the improving foreign trade balance.   Seasonally adjusted GDP rose by a hefty 3.8% quarter-on-quarter in the first quarter of 2023, following a decline of 2.3% QoQ in the fourth quarter of last year. But seasonally adjusted data have shown surprisingly high volatility in recent quarters and should be taken with a pinch of salt.   The composition of the first quarter GDP was also revealed and shows a quite disinflationary picture, with some caveats. Domestic demand contracted by 5.2% year-on-year amid a deepening decline in consumption, which fell by 2.0% YoY, following a drop of 1.1% YoY in the fourth quarter of 2022. Investment activity continues to hold up well, expanding by 5.5% YoY in the first quarter of this year (vs +5.4% YoY increase in the fourth quarter of last year).   As expected, the change in inventories had a negative impact on activity, subtracting 4.1 percentage points from the annual GDP growth rate. This was offset by an improvement in the foreign trade balance. The positive impact of net exports on the change in annual GDP amounted to 4.3 percentage points. The exports of goods and services increased by 3.2% YoY, while imports were 4.6% lower than a year earlier. The GDP deflator reached 15.6%.     With respect to value added, we saw declines in trade and repair (-4.4% YoY), industry (-1.4% YoY) and transport and storage (-1.2% YoY). Most other sectors of the economy recorded increases.   2023 GDP and inflation outlook As expected, the start of 2023 brought a decline in GDP on a year-on-year basis, but on a markedly smaller scale than we had feared. However, this does not mean that the outlook for the year as a whole is markedly better. High-frequency data point to weakness in retail sales, industry and housing construction in the second quarter. At the same time, growth in infrastructure-related construction continues.   This is accompanied by continued elevated levels of inflation, which negatively affects consumers, dragging on the performance of the economy. On the other hand, investment activity will have a positive impact on the economy. Investments will most likely concentrate in large companies and the public sector (including defence spending). We expect that the main driving force of the economy will continue to be the improving foreign trade balance, mainly due to low imports.   The structure of GDP growth should be disinflationary this year due to the weakness of consumption, rising investment and the large role of foreign trade in shaping economic activity. Combined with the eradication of the direct impact of the energy shock, this should favour a further decline in inflation, with its pace being constrained by core inflation. The latter is more sticky than the headline CPI.   One factor in the slower deceleration of core inflation will be a tight labour market and high wage growth. We forecast that by the end of 2023, both the headline CPI and core inflation may moderate to single-digit levels, but the outlook for 2024 is more uncertain.     National Bank of Poland rates outlook Expectations for a cut by the National Bank of Poland (NBP) may rise (we see 30-40% odds in the second half of the year). Theoretically, today's data show an improvement in the inflation outlook: a better GDP structure, month-on-month core CPI slowing, and NBP more vocal on rate cuts.   But the cross-country comparison (especially with the Czech Republic) suggests this could be a premature move.   Moreover, we still see important inflationary risks in the long term: a strong public acceptance of price increases, an election spending race, and strong investment mainly in energy (other sectors are still performing poorly to offset high costs).   In our view, an NBP cut would not help Polish government bonds (POLGBs) with longer maturities.   The premature cut would extend the return of CPI to the target, which is already a distant prospect (in 2025-26).
Inflation Dynamics and Market Pricing: Assessing the UK's Monetary Outlook.  Job Openings Decline Continues in the US

Inflation Dynamics and Market Pricing: Assessing the UK's Monetary Outlook. Job Openings Decline Continues in the US

ING Economics ING Economics 31.05.2023 08:39
It is in the UK that the local swap curve is diverging most from the central bank’s message. Swap currently imply another 100bp of tightening will be implemented before year-end. We do not disagree that core inflation has been disappointingly slow to decline in the UK but betting on another four 25bp hikes this year requires a strong opinion on inflation dynamics which we think few in the market actually have.   This means current pricing is unlikely to be maintained. Markets should also be on alert for a pushback by Bank of England (BoE) officials against market pricing. Only Catherine Mann is due to speak today. As the more hawkish member, she is the least likely to disagree with elevated rates but her pushback would be all the more potent.   Forward EUR rates have been relatively immune to the recent re-pricing higher in USD and GBP rates   Today's events and market view Chinese PMIs released today missed expectations on both manufacturing and services, although the latter remains at a healthy level above the 50 expansion/contraction line.   French, Germany, and Italian CPIs for the month of May will be released today. In addition to yesterday’s Spanish prints, this means over 70% of the eurozone-wide print, which is only published tomorrow, will be available to markets today. As is increasingly the case, focus will be squarely on service inflation.   After the sharp re-pricing in BoE hike expectations Catherine Mann’s speech will be closely watched, although, as the most hawkish member on the MPC, we don’t see her as the most likely member to push back against the nearly 100bp of further hikes priced by the curve.   In the US, the decline in job openings is expected to continue, albeit at a more modest pace than last month. Details of the report, such as a worsening of the quits rate, will be closely watched for hints of a further softening of the labour market into Friday’s non-farm payroll release.
Italian Inflation Resumes Decline: Energy Still the Driving Force, Tentative Decline in Core Measure

Italian Inflation Resumes Decline: Energy Still the Driving Force, Tentative Decline in Core Measure

ING Economics ING Economics 31.05.2023 15:44
Italian inflation resumes its declining path in May. The headline measure is still being driven by prices of energy-related goods. Interestingly, core inflation posted the second consecutive minor decline, but we don’t expect it to accelerate in the short run.   Energy still in the driving seat The preliminary estimate of May‘s Italian inflation shows a resumption of the decline in the headline measure after April’s rebound. Headline inflation was down to 7.6% in May (from 8.2% in April), driven mainly by a decline in the non-regulated energy component and, to a lower extent, by inflation declines in “other goods”, transport services and non-fresh food, which more than compensated increases in fresh food (very likely weather related) and housing services.     Expect a faster decline in goods inflation than in services The decline in headline inflation, broadly in line with our expectations, confirms that the normalisation of the inflation path is a gradual one, notwithstanding recent sharp falls in the energy component driven by lower gas prices. The sharp decline in producer price inflation in April (down to -1.5YoY from +3.7% in March) suggests that a more marked decline in the goods price inflation is building in the pipeline, which might show up in the CPI components already in the third quarter.   The deceleration in the services component looks set to be slower, also courtesy of a prolonged re-opening effect which could intensify as we enter the hot tourism summer season.   The pricing intention components of business surveys seem to confirm such a pattern, with softening price increase intentions already in place for some months among manufacturers and only a tentative hint in of a decline among service providers in May.   Tentative hints of a declining trend in the core measure Interestingly, the core measure, which excludes energy and fresh food, was marginally down to 6.1% YoY in May (from 6.2% YoY in April), the second decline in a row. A tentative hint to a new trend, likely favoured by slowly adjusting wage dynamics.   Consumption developments will affect the speed of the inflation decline All in all, today’s inflation release comforts our view that the declining path for inflation is set, but that will be a gradual one. As we have seen earlier today in the GDP release, Italian households have been reluctant to adjust down their consumption levels to unfavourable developments in disposable income.   To be sure, resilient employment has helped weather the shock, but we suspect that the saving ratio has reached too low a level (around 5%) for Italian historical standards, which could prove hard to sustain. A marked deceleration in consumption might eventually kick start a more marked deceleration in the core component.   We are currently forecasting average Italian inflation at 6.3% in 2023 and 2.4% in 2024.
Germany's Disinflationary Trend Gains Momentum, Despite Drop in Headline Inflation

Germany's Disinflationary Trend Gains Momentum, Despite Drop in Headline Inflation

ING Economics ING Economics 31.05.2023 15:34
Disinflationary trend in Germany gains momentum in May Another drop in headline inflation suggests that the disinflationary trend in Germany is gradually broadening. However, it will not (yet) stop the European Central Bank from hiking rates again.   German headline inflation continued its downward trend, coming in at 6.1% year-on-year in May (from 7.2% YoY in April). Today’s data marks the next stage of a gradually broadening disinflationary process as the drop in headline inflation is no longer exclusively the result of base effects but also the result of dropping prices.   Headline inflation has now dropped from its winter peak of 8.8% to 6.1% YoY and the HICP measure came in at 6.3% YoY, from an 11.6% peak in October last year. For the first time this year, prices actually dropped compared with last month, mainly for energy and food but also for transportation as a result of the newly introduced €49 ticket for public transportation.   Disinflationary trend gradually broadening   Today’s drop in headline inflation will support the view of those who advocated that the inflation surge in the eurozone was mainly a long but transitory energy and food price shock with an unpleasant pass-through to the rest of the economy.   If you believe this argument, today’s drop in headline inflation marks the next stage of a longer disinflationary trend: first, it was negative base effects pushing down headline inflation, and now it is actually falling prices in the same categories accelerating the disinflation. However, signs that the disinflationary process is actually spreading to other parts of the economy are still missing. According to available regional data, even the base effect outside of energy and food is still very limited.   Looking ahead, let’s not forget that inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value.   Government intervention and interference, whether that's temporary or permanent, and has taken place this year or last, will blur the picture.   In Germany, for example, the newly introduced €49 ticket already helped to push down inflation in May. However, the reversal of last year’s negative base effects from the energy relief package for the summer months should automatically push up headline inflation again between June and August. It will take until the end of the year for headline inflation to fall into the 3%-4% range.   Beyond that statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather are likely to push down headline inflation faster than recent forecasts suggest.   On the other hand, recent wage settlements and still decent pipeline pressure in services are likely to keep core inflation high. We continue to expect that German headline inflation will average around 6% this year.   Weak growth and dropping inflation but ECB will continue hiking For the ECB, macro data released since the May meeting has had something for everyone. The eurozone economy has turned out to be less resilient than anticipated a few weeks ago and confidence indicators, with all the caveats currently attached to them, point to a weakening of growth momentum again.   As headline inflation is gradually retreating, the risk increases that any additional rate hike could quickly turn out to be a policy mistake; at least in a few months from now. However, at the same time, the ECB seems to have given up linking policy decisions too close to their own forecasts (rightly so) and has put more than usual emphasis on actual inflation developments. With this in mind, the unwritten law that high inflation can only be defeated for good with positive real interest rates remains a strong argument for the ECB hawks.   As we have learned over the last 12 months, the ECB seems to prefer to go too high with rates rather than stop prematurely. This is why we expect the ECB to continue hiking by 25bp at its next meeting in two weeks from now.
Indonesia Inflation Returns to Target, but Bank Indonesia Likely to Maintain Rates Until Year-End

Indonesia Inflation Returns to Target, but Bank Indonesia Likely to Maintain Rates Until Year-End

ING Economics ING Economics 05.06.2023 10:11
Indonesia: Inflation back within target but BI likely on hold until end of year. Headline inflation finally reverted to target in May, with headline inflation slipping to 4.0% year-on-year   Headline inflation back to target after a year Headline inflation slipped below expectations to 4.0% YoY, roughly 0.1% higher compared to the previous month. Inflation is back within Bank Indonesia's (BI) 2-4% target after 12 months and will likely stay within target for the rest of the year. Headline inflation enjoyed a much more pronounced moderation this year, sliding back within target even ahead of BI's expectations. Lower energy and food prices from a year ago level helped push headline inflation lower or unchanged across all items in the CPI basket. Meanwhile, core inflation was also down, dipping to 2.7% YoY and also lower than market expectations (2.8%).       Price stability objective reached but BI likely on hold to steady the IDR Bank Indonesia was one of the first central banks in the region to pause its tightening cycle earlier this year. BI Governor Perry Warjiyo who had expected inflation to slow gradually and revert to target by 3Q, has kept rates at 5.75% since the 16 February policy meeting. Despite the quick reversion to target for inflation, we believe BI will carry out an extended pause to shore up support for the Indonesian rupiah, which was down roughly 2.15% for the month of May. Thus we expect BI to retain policy rates at 5.75% until the end of the year and only consider cutting policy rates should global central banks opt to ease monetary policy.
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Analyzing the EUR/USD: Euro's Decline Expected as ECB and Fed Monetary Policies Diverge

InstaForex Analysis InstaForex Analysis 06.06.2023 08:08
The EUR/USD currency pair continued its downward movement on Monday. Not as strong as on Friday, but still a decline. Thus, the pair spent less than a day above the moving average line and now may drop to the last local minimum and continue its movement to the south. We have repeatedly mentioned that we expect a decline in the past two months. And in the last month (when the pair was already actively falling), we constantly repeated that the decline should continue.   There have been no grounds for the euro to rise in the past three months, during which it enjoyed active demand. Now it's time to "repay debts." The minimum target for the decline is 1.0500. On the 24-hour timeframe, the pair ended only one day out of the last 25, with a significant increase. It might have seemed that a new upward movement would begin, leading to a resumption of the upward trend, but last Friday and Monday show that such a conclusion is premature. The euro currency rose within the last upward trend by almost 1600 points, which implies a correction of at least 600–700 points. That is, to the range of 1.03–1.04.   And because there are no grounds for resuming the movement to the north, these targets look even more convincing. Thus, we expect the continuation of a calm decline. All the movements of the past months are very similar to consolidation - a type of movement when the pair does not have a clear trend but is not in a flat state either. Consolidation will continue until the first signs of readiness to soften monetary policy from the Fed or the ECB appear. In principle, everything written below is not "big news." Over the past few weeks, we have witnessed many speeches by ECB and Fed representatives. And if unexpected information came from anyone, it was from the members of the FOMC. Recall that the market fervently believed that the last planned increase in the key rate in the United States took place in May.       However, several Fed representatives immediately indicated that the rate could be raised again in June, and some stated that the regulator could now raise the rate once every two meetings. However, the rate will continue to rise, which the market did not anticipate. The situation with the ECB and its monetary policy is much simpler. Almost all monetary committee members insist on further tightening, so there is no doubt that the rate will increase by another 0.5% at the next two meetings. However, some analytical agencies and major banks believe that we will see the last rate hike in June, which raises doubts about a rate hike after August 2023.   If so, the ECB's rate will remain much lower than the Fed's rate, and in 2023, it will increase by approximately the same value. Thus, the euro currency loses the growth factor that could help it in the coming months. Bostjan Vasle stated last Friday that it is necessary to continue raising the rate to combat high inflation effectively. He also noted that core inflation needs to be higher. His colleague Gabriel Makhlouf confirmed that the ECB intends to continue tightening its monetary policy.     He also noted the high level of core inflation and that the end of the tightening cycle has yet to come. Mr. Makhlouf said the current picture is quite blurry, besides the confidence in two more rate hikes. It is worth adding that the market has long worked out the rate hikes mentioned above. We have already mentioned many times that after slowing down the pace of tightening to a minimum, we can expect three more 0.25% rate hikes.   Thus, two rate hikes in June and August are logical and expected. They could have been anticipated several months ago. Therefore, the current "hawkish" sentiment of the ECB representatives does not provide any support for the euro currency. In the 4-hour timeframe, the downward trend is visible. The oversold condition of the CCI indicator has been worked off, so now the pair can continue to decline with a calm mind.   The average volatility of the EUR/USD currency pair over the last five trading days as of June 6th is 81 points and is characterized as "average." Thus, we expect the pair to move between the levels of 1.0631 and 1.0793 on Tuesday. A reversal of the Heiken Ashi indicator back upwards will indicate a possible resumption of the upward movement.   Nearest support levels: S1 - 1.0681 S2 - 1.0620   Nearest resistance levels: R1 - 1.0742 R2 - 1.0803 R3 - 1.0864   Trading recommendations: The EUR/USD pair has dropped below the moving average line. It is advisable to stay in short positions with targets at 1.0681 and 1.0631 until the Heiken Ashi indicator reverses upward. Long positions will become relevant only after the price firmly reclaims above the moving average line, with targets at 1.0793 and 1.0803.   Explanations for the illustrations: Linear regression channels - help determine the current trend. If both channels point in the same direction, it indicates a strong trend. Moving average line (settings: 20.0, smoothed) - determines the short-term trend and direction for trading.   Murray levels - target levels for movements and corrections. Volatility levels (red lines) - the probable price channel the pair is expected to trade in the next 24 hours, based on current volatility indicators. CCI indicator - its entry into the oversold area (below -250) or overbought area (above +250) indicates an approaching trend reversal in the opposite direction.  
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Rates Volatility: Navigating the Goldilocks Environment for Risk Appetite and Eurozone Inflation Expectations - 06.06.2023

ING Economics ING Economics 06.06.2023 08:32
Rates Spark: Rates volatility goldilocks continues Eurozone consumer inflation expectations will be the main data point to look out for today. Markets have become numb to central banks’ hawkish comments. Low rates volatility looks set to continue, benefitting risk appetite in other markets.   Range trades are a near-term catalyst to our USD-EUR rates tightening view The Saudi oil production cut and calm market conditions paving the way to another flurry of debt issuance are the two most salient bearish risks for core government bonds this week. That said, the Fed went into its pre-meeting quiet period with the probability of a 25bp hike on 14 June well below 50%, and we think there is little the European Central Bank (ECB) can say to really cause a hawkish rethink of its rates trajectory. We take as evidence the lack of market reaction to various officials – including Christine Lagarde and Joachim Nagel – stating that inflation remains too high. The main reasons, we think, are that markets are already pricing two 25bp ECB hikes by the end of the summer and that central banks have been explicit that economic data will determine the path for monetary policy.   Markets are already pricing two 25bp ECB hikes by the end of the summer We see this as a recipe for rates to remain within their range. Core bonds erased their early sell-off in the US session yesterday thanks to signs of a cooling service sector displayed in the ISM services reading. Is this enough to change the prevailing narrative? It isn’t, but Treasuries went into the release very close to the top of their recent range in yields which we suspect made short-term investors all the more enthusiastic about buying the morning dip. The same cannot be said of Bund yields, which started the week close to the bottom of their range, making them less appealing to range traders.   This state of play, high dollar and low euro rates, happens to contradict our expectation of narrowing rates differentials and we expect this dynamic to reverse. In the short term because the lack of market direction should limit further US Treasury sell-off and further Bund rallies, and later because tangible signs of a decline in core inflation occurring in the US are so far lacking in Europe. This should allow a fall in USD rates later this year, even as their EUR peers remain elevated for a while longer.     High but stable rates volatility is a boon for risk appetite The implication for markets outside of rates is positive. After a year of being tormented by the relentless rise in borrowing costs in 2022, few investors are sorry to see yields lacking in direction. Realised and implied volatility remain high compared to their 2021 levels, but well below their late 2022 peak. Until rates make a decisive break lower on a dovish pivot by central banks, current levels of volatility can be thought of as the new normal. This stabilisation has been enough to boost risk appetite in other markets. Whether lower rates volatility is the cause or another symptom of lower macro uncertainty, it has come with valuations in some risk assets that belie recession calls.     Sovereign spreads, much like some measures of swaption implied volatility, are approaching their lowest levels in a year       This is visible in many corners of financial markets. Eurozone sovereign spreads, much like some measures of swaption implied volatility, are approaching their lowest levels in a year. Similarly, although the factors may also include money market dynamics, swap spreads are shedding their risk premium acquired during the latest bout of US regional banking stress. At the front-end of the curve, the credit premium received by investors is painting an upbeat picture. We will stop short of extrapolating this to other markets, but a continuation of the current rates volatility status quo seems to suit most markets.         Today's events and market view The release most likely to move euro markets today is the ECB’s consumer expectations survey and more specifically the questions on their inflation outlook. Eurozone retail sales are expected to edge modestly up after their slump in March. There will also be construction PMIs to look out for from Germany and the UK.   Bond supply takes the form of a 30Y gilt sale from the UK, to which Germany and Austria will add respectively 10Y/23Y linker and 10Y/13Y bond auctions. The EU has also mandated banks for the sale of 7Y and 19Y debt via syndication.   Klass Knot, Mario Centeno, and Boris Vujcic are on the list of ECB speakers for today.   Weak factory orders in Germany released this morning add to the sense of anemic growth. We think this is more likely to result in an even more inverted yield curve in the near term rather than significantly lower rates overall as the ECB is laser-focused on its inflation fight.    
NBP Holds Rates Steady with Focus on Future: Insights from Press Conference

NBP Holds Rates Steady with Focus on Future: Insights from Press Conference

ING Economics ING Economics 07.06.2023 08:18
National Bank of Poland leaves rates unchanged, focus on tomorrow’s press conference The National Bank of Poland rates and statement after the June Monetary Policy Council meeting were unchanged. More information should come from tomorrow's conference by the central bank president. We expect a slightly more dovish stance.   As expected, NBP rates remain unchanged (reference rate still at 6.75%). The post-meeting statement noted a decline in first quarter GDP and a further contraction in consumer demand, with investment still growing. The document again underlined the favourable labour market situation, including low unemployment. As expected, the MPC noted a further decline in CPI inflation and a marked decline in core inflation in May. The Council continued to see a pass-through of rising costs onto finished goods prices. Aside from updating paragraphs on the first quarter GDP figure and the latest inflation data, the rest of the statement was largely unchanged. The Council reiterated its view that the return of inflation to the NBP's target will be gradual due to the scale and persistence of past external shocks.     The key event in the context of the monetary policy outlook is tomorrow's press conference by NBP President Glapiński. We expect its tone to be more dovish than a month ago. The decline in inflation has been faster than expected (albeit close to the NBP's March projection). The peak in core inflation is most likely behind us, and the strengthening of the zloty and lower commodity prices should favour further disinflation. The short-term inflation outlook has improved, and some MPC members have again begun to raise the topic of a readiness to cut interest rates before the end of this year.     In our view, the medium-term inflation outlook remains uncertain, and with a tight labour market, high wage pressures and strong consumer acceptance to price increases, inflation may therefore stabilise in the medium term at levels well above the NBP target. The NBP's projection, assuming it leaves interest rates unchanged, suggests a return of inflation to the target by the end of 2025, and a possible rate cut before the end of 2023 could delay this.   Therefore, in the baseline scenario, we see no rate cuts this year. However, an improvement in the short-term inflation outlook, the strengthening of the zloty and a possible softening of other central banks' rhetoric in the coming months could serve as arguments for a single MPC rate cut in the second half of the year. We estimate the probability of such a scenario at 30-40%.
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ECB Preview: A 25bp Rate Hike Imminent, but Arguments for Further Increases Weaken

ING Economics ING Economics 07.06.2023 08:39
ECB Preview: Don’t look back in anger A 25bp rate hike looks like a done deal for next week’s European Central Bank meeting. However, with growth disappointing, the economic outlook getting gloomier and inflation dropping, arguments for several more rate hikes are becoming weaker. That said, the ECB is likely to ignore this.   Macro developments since the May meeting have clearly had more to offer the doves than the hawks at the ECB. Headline inflation has continued to come down but remains far off 2%, survey-based inflation expectations have also started to slow, growth has disappointed and confidence indicators seem to have peaked. In previous times, such a backdrop would have been enough for the ECB to consider pausing rate hikes and wait for the effects of the rate hikes so far to fully unfold. However, the ECB is fully determined right now to err on the side of higher rates.   Minutes of May meeting point to ongoing tightening bias This tightening bias was also reflected in the minutes of the ECB’s May meeting. The surprisingly weak Bank Lending Survey ahead of the last meeting clearly scared some ECB members enough to slow the pace of rate hikes but not enough to start thinking about an end to, or at least a pause in, the hiking cycle. In fact, a large number of ECB members assessed the risks to price stability as being clearly tilted to the upside over the policy-relevant horizon.   High underlying inflation and stubbornly high core inflation were the main reasons behind the ECB’s view that the conditions were not in place to “declare victory” or to be complacent about the inflation outlook.     Staff projections won't bring substantial change Next week’s meeting will also bring a new round of ECB staff projections. While gas prices have dropped further since the last projections in May, oil prices are broadly back at where they were in March. Market interest rates have also hardly changed and only the slightly weaker euro could technically add some inflationary pressure. At the same time, however, it will be interesting to see how the ECB is dealing with the disappointing soft and hard macro data of late.   Remember that back in March, the ECB expected eurozone GDP growth to return to its potential quarterly growth rate of 0.4% quarter-on-quarter from the third quarter of 2022 onwards. This was a surprising forecast given the delayed adverse impact from monetary policy tightening and ongoing structural transitions. It was also remarkable as at the same time, inflation was forecast to return to 2% by the end of 2025. An economy growing at full speed which also gradually allows inflation to disappear is a very unlikely phenomenon.     For next week, we expect slight downward revisions to the ECB’s GDP growth forecasts for this year and next but hardly any revisions to the inflation forecasts. This would mean that the ECB sticks to the 2025 forecast of 2.1% for headline and 2.2% for core inflation.     Hiking will continue, and not only next week Despite the recent decreases, actual headline and core inflation and expectations for inflation only to return to target in two years from now are clear arguments for the ECB to not only continue hiking by 25bp next week but to also keep the door open for rate hikes beyond then.   However, the eurozone economy has turned out to be less resilient than anticipated a few weeks ago and confidence indicators, with all the caveats currently attached to them, point to a weakening of growth momentum again. As headline inflation is gradually retreating, the risk increases that any additional rate hike could quickly turn out to be a policy mistake; at least in a few months from now. Still, the ECB simply cannot afford to get it wrong again.     This is why they are putting more than usual emphasis on actual inflation developments. Even if this completely contradicts forward-looking monetary policy, the ECB is in no position to take a chance and is not giving any impression that it might look back in anger.  
Rates Diverge: Flattening Yield Curves in US and Europe

Rates Spark: Navigating Uncertainty in the European Central Bank's Monetary Policy

ING Economics ING Economics 07.06.2023 08:55
Rates Spark: Enough out there to nudge market rates higher Weak economic data dents the European Central Bank’s ability to push rates up. Even if July and September hikes were fully priced in, Bund and swap will find it hard to rise above the top of their recent range. Direction is far from clear, but our preference is to position for upward pressure on yields.     Soft economic data dents ECB hawkish rhetoric For financial markets, a flurry of weak economic activity data – most prominently in the manufacturing sector such as yesterday’s German factory orders and tofay's industrial production – sits awkwardly with the European Central Bank's (ECB) message that more monetary tightening is needed.   The pre-meeting quiet period starts tomorrow, making today the last opportunity to skew investor expectations but markets pricing a 25bp hike at this meeting are unlikely to move much. Another important clue as to future policy moves will be in the staff forecasts released at the same time as next week’s policy decision.   The 2025 headline and core inflation projections at the March meeting stood at 2.1% and 2.2% annualised, above the ECB’s target and a clear signal that more tightening is needed – even above and beyond the path for interest rates priced by the market in late February.   Dovish-minded investors can point to a decline in oil and gas futures since the March meeting, as well as a downtick in consumer inflation expectations in the most recent survey released yesterday. Will this be enough for the ECB to no longer signal that it has ‘more ground to cover’? Probably not, but markets may not care. The focus among hawks is squarely on core inflation and the modest decline from a 5.7% peak in March to 5.3% in May hasn’t been met with much relief by the Governing Council, but it has pushed euro rates down relative to their dollar peers.        
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Surprising Drop: Hungarian Inflation Plunges Beyond Expectations, Prompting Easing Measures

ING Economics ING Economics 09.06.2023 09:38
Hungarian inflation drops further than expected While we flirted with the idea of calling for negative monthly inflation in May, we've now seen a sharper drop than anybody expected. Non-core factors were the key drivers, and we now see the National Bank of Hungary sticking to its May playbook in easing.   A sharp drop in both headline and core inflation For Hungary, the potential of further easing in inflationary pressures in May has been on everyone's minds recently. We all saw last year’s speedy acceleration in inflation (especially in food products) and this time around, we knew that base effects would play a crucial role. The main question remained the month-on-month print.   The inflation print came in at –0.4% MoM in May, marking the first price drop since November 2020. With the help of base effects, headline inflation decelerated by 2.5ppt to 21.5% year-on-year. There is one exception in items where inflation hasn't eased, which also caused some downside surprises.     The details Food inflation came in at just 0.1% on a monthly basis, which reflects pricing changes in both unprocessed and processed food items. Here, the reading retreated to 33.5% YoY. This easing in price pressure is responsible for half of the deceleration in inflation from April to May. Both core and non-core items showed easing price changes, helping prompt the drop in core inflation. Motor fuel prices declined by 6.6% from April to May – slightly more sharply than our forecasts. A fixed price for almost the entire year in 2022 – thanks to the fuel price cap measure – also resulted in a significant reduction in the YoY inflation index. Household energy prices fell by 3% MoM, yet another downside surprise to our expectation of a weaker drop in prices. This easing price pressure is a result of an ongoing decrease in household energy consumption, combined with some seasonal factors as the heating season came to an end in May. This created a lower weighted average unit price of piped gas, the most important factor behind the drop. We'd also like to point out one exception where inflation wasn’t able to ease. For services, prices rose by 0.9% MoM on average in May, moving the yearly index up to 14.3% – though still a weaker acceleration than we expected. There is still a significant repricing of other services (financial and insurance services mostly), but holidays have also become more expensive, along with cultural and leisure services.     Underlying price pressures begin to calmThough the May deceleration of headline inflation was mostly driven by non-core factors, we saw some positive developments in underlying price pressures as well. This means falling inflation in durables, clothing, and processed food. As a result, core inflation came in at 0.5% MoM, the lowest repricing since autumn of 2021. Significant easing of monthly repricing is a result of collapsing domestic demand, with households facing the biggest drop in their purchasing power since the 2008-2009 crisis. Thus, the combination of the eased repricing and higher base ended up in a 2ppt lower YoY core inflation at 22.8%. Other underlying indicators – like declining sticky price inflation – are showing some promising signs that Hungary's economy could soon be out of the woods.       Further easing in price pressures ahead Moving forward, we expect both headline and core inflation to continue to retreat over the coming months – perhaps at a slightly slower pace without a significant downward impact on fuel. Domestic demand will remain constrained, especially given the shortfall in savings.   On the energy front, seasonality might help further reduce the average amount printed on overhead bills. The forint is getting stronger, which also helps to reduce imported inflation. The mandatory price cuts on some basic food items by large retailers could boost a reduction in food inflation – although we have some reservations about the overall impact, given the methodology of inflation calculation. Services might remain the only area where we can still expect some further acceleration in inflation.   Lower inflation forecast, no change in monetary policy view In light of today's surprise, a single-digit inflation rate at the end of the year seems almost certain. In fact, barring an energy and fuel price shock, a sub-10% rate could even be within reach by November. Considering the May inflation print, we have also revised our full-year inflation forecast for this year. We now expect the headline reading to be around 18% rather than 19% on average.   When it comes to the monetary policy implications of the May inflation reading, it will lend more confidence to the National Bank of Hungary to continue its gradual and cautious easing cycle. However, we maintain our view that the central bank will not change its playbook, and we expect to see a copy-and-paste version of the May rate decision on 20 June when decision makers gather for the June rate setting meeting.   This means that, in our view, the effective interest rate (the overnight quick deposit rate) could be cut by 100bp to 16%.
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Summarizing Complex Macroeconomic Readings: Implications for Rates at 6% in the US, 4% in the Eurozone

ING Economics ING Economics 09.06.2023 09:47
Condensing complex macro readings into one number for rates It's often tough to summarise macro circumstances into a simple implication for rates. Right now it's particularly tough. Here we illustrate the contradictions, and bring it together into one number for rates. For the US, that number is 6%. For the eurozone, it's 4%. These are not targets. But they are relevant references to contrast levels against.   Some US macro numbers are pointing in dramatically different directions right now. Witness the stark juxtaposition between strong ongoing payrolls growth versus manufacturing and services surveys entering recessionary territory (low 40s for some components of the manufacturing PMI).   And on the inflation front, while there is evidence of more subdued pipeline pressure, core inflation remains elevated (in the area of 5%).   To help assess where we are in terms of rates pressure, we employ a simple model that aggregates the macro arrows pointing in different directions to a single outcome for rates. For example, readings on consumer price inflation are off the charts, as are readings on the labour market.   In contrast, PMIs are more in tune with a material slowdown, and in fact point to a recessionary tendency. Then we have the housing market, that had looked like it was about to implode lower, but has been fighting back of late. And then we have consumer confidence, which continues to hold up. It’s off the highs, but refuses to materially lie down.     We input all of these factors into our model where we look at how our selected variables deviate from normal, apply weights to each component, and then aggregate that to a deviation from normal for rates.   The outcome of this process is a single number, and that number is 3%. What does this mean? It tells us that based on contemporaneous circumstances, rates should be about 3% above normal.   And what’s normal? We think 3%, based on a neutral real rate of 0.5% to 0.75% and inflation of 2.25-2.50%. So we take our 3% neutral rate and add our 3% deviation above normal to that, to get 6%.   How do we interpret this? It suggests that based on where macro circumstances are right now, rates should be around 6%. This supports the Fed being above 5% currently.     And, by the way, our model for the eurozone has a deviation above normal now of 1.9%. Adding that to a neutral rate of 2% (zero real rate) sums to 3.9%. Effectively this points to the 4% area as the level that eurozone rates could or should be referenced against.     Back in the US, the fed funds rate at 5.25% is still below 6%. But bear in mind that the Fed has 2.5% as its implied neutral rate. So that, plus the 3% deviation from normal, gives 5.5%. In that respect, the Fed is already there or there abouts in terms of tightening requirements (from their perspective).   But the 10yr Treasury rate remains low in relative terms. The highest yield hit in this cycle was 4.5% in the fourth quarter of 2022, and again briefly it got to that area in March this year (just prior to the Silicon Valley Bank collapse). The suggestion is the US 10yr never really got to the heights that it should have during this cycle.   We are not suggesting that the 10yr yield needs to get to 6%. But we are pointing to the fact that it never did hit anything near that level. Also, we are noting that it remains well below that level, even as many indicators are pointing to a degree of macro stubbornness to slowdown enough to help kill off inflation. So there is a net risk here for residual upward pressure on market rates.   None of this factors in forecasts for the future, market discounts, the impact of recent banking angst in the US, or the tightening in lending standards for example. These factors generally pull lower on the headline rates identified here, or in due course argue for lower rates in the future.     Hence the curve inversions seen. Still, degrees of inversion can still be referenced within a framework that identifies long run neutral rates and a current rationale for deviation from them.   While there are some good reasons to expect market rates to fall (weak PMIs for example), our preferred expectation from here is to see some further upward pressure on market rates first.   The 4% area for the 10yr Treasury yield for example remains a generic target that could well be hit in the coming month or so. And higher would not look wrong, in the near term. That does not affect our medium term view which still sees 3% as the trough level to aim for on the US 10yr, by the end of 2023 and into 2024.  
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Market Outlook: Indian Inflation Declines and Global Macro Developments Ahead of Fed Pause Decision

ING Economics ING Economics 12.06.2023 08:20
Asia Morning Bites 12 June 2023 Indian inflation later will show further declines. Markets are reasonably upbeat ahead of the likely Fed pause decision later this week.   Global macro and markets Global markets: US Stocks continued to push higher on Friday, seemingly finding comfort in the prospect of a pause from the Fed later this week, though markets are split over whether this will be the last hike this cycle, or whether there will be one more. The S&P 500 is now at levels it has not seen since last September. The NASDAQ is up 26.68% YTD – not bad for an economy that seems poised to slip into recession later this year….   Chinese stocks also made gains on Friday. Both the Hang Seng index and CSI 300 rose between 0.4-0.5%. US Treasury yields also pushed higher. Yields on the 2Y Treasury rose 8.1bp to 4.596%, while those on 10Y Treasury bonds rose just 2.1bp to 3.739%. EURUSD is pretty steady at 1.0749, though the AUD has pushed back up to 0.6745. Sterling is also stronger, rising to 1.2579 though the JPY is a little softer at 139.35. Asian FX is a bit mixed, with gains from the THB, and IDR, but further weakness from the CNY, which is now 7.13 following a month and a half of losses. G-7 macro: It is a quiet start to the week, though this won’t last. US CPI for May is out tomorrow, and we should see decent falls in the headline rate and some smaller declines in core inflation ahead of the FOMC decision, which comes out at 02:00 SGT on 15 June. China: Aggregate Finance data are released at some point this week, along with the usual monthly data dump on economic activity and MLF rates, which are out on 15 June – and there is some growing market speculation of a small rate cut. Regarding the activity data, we will be watching the retail sales figure, in particular, to see how the main engine of the recovery is doing. We expect it to slow from April as the post-re-opening spending bounce is not sustainable at current levels.   India: CPI data for May will show inflation falling further into the Reserve Bank of India’s (RBI’s) target range. We expect inflation to drop from 4.7% to 4.3%YoY (consensus 4.37%). Keep an eye out for the core inflation figures, which will be key for determining when the RBI may feel it can start thinking about winding back some of its tightening. For the moment, on-hold seems the more likely response. But the RBI won’t ignore a chance to give growth a chance if offered and may signal a more neutral stance at the next meeting on 10 August.     What to look out for: Japan PPI inflation and machine tool orders (12 June) India CPI inflation (12 June) Australia Westpac consumer confidence and NAB business confidence (13 June) US CPI inflation and NFIB small business optimism (13 June) South Korea unemployment (14 June) India Wholesale prices (14 June) Philippines OF remittances (14 June) US PPI inflation and MBA mortgage applications (14 June) FOMC policy meeting (15 June) New Zealand GDP (15 June) Japan core machine orders (15 June) Australia unemployment (15 June) China industrial production and retail sales (15 June) Indonesia trade (15 June) India trade (15 June) Taiwan policy meeting (15 June) ECB policy meeting (15 June) US retail sales and initial jobless claims (15June) Singapore NODX (16 June) BoJ policy meeting (16 June) US University of Michigan sentiment (16 June)
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Central Bank Jury: Inflation Concerns Delay Dollar's Decline

ING Economics ING Economics 13.06.2023 13:03
The central bank jury is most certainly still out on whether policymakers have done enough to tame inflation. The implications for FX markets are that the Fed may need to stay hawkish a little longer and our forecast cyclical dollar decline may get delayed. For now, however, we maintain the view that the dollar will be much lower by year-end   Executive Summary: Burden of proof Despite all the talk of economic slowdown and the turn in the inflation cycle, it seems that policymakers still lack sufficient evidence that inflation is under control. Swiss National Bank President Thomas Jordan recently warned of 'second and third round effects' in this inflation cycle. Central bankers as far apart as Australia and Canada have recently had to restart tightening cycles after brief pauses. Investors are now increasingly questioning their own convictions that rates have peaked.   Nowhere is this challenge greater than in the US where tight labour markets and core inflation stubbornly above 4% are keeping the Fed vigilant. And there is a chance that the Fed has to hike one last time this summer. Yet our house view remains that US disinflation becomes much more obvious in the third quarter and that hard will follow soft activity data lower. We still look for substantial Fed cuts in the fourth quarter.   This means we are still looking for the start of a cyclical multi-year dollar bear trend – probably starting in the third quarter. This should carry EUR/USD above 1.15 and USD/JPY well below 130. The tide of a softening dollar should lift most currencies around the world – especially higher-yielding currencies enjoying the benefits of the carry trade.   Within Europe, we forecast most currencies to hold recent gains against the euro – although sterling looks most at risk to Bank of England re-pricing. Modest CEE FX appreciation can continue – despite looming easing cycles. Latin FX looks constructive on the back of high yields and pockets of Asia can appreciate – especially the Korean won.
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Central Bank Jury: Inflation Concerns Delay Dollar's Decline - 13.06.2023

ING Economics ING Economics 13.06.2023 13:03
The central bank jury is most certainly still out on whether policymakers have done enough to tame inflation. The implications for FX markets are that the Fed may need to stay hawkish a little longer and our forecast cyclical dollar decline may get delayed. For now, however, we maintain the view that the dollar will be much lower by year-end   Executive Summary: Burden of proof Despite all the talk of economic slowdown and the turn in the inflation cycle, it seems that policymakers still lack sufficient evidence that inflation is under control. Swiss National Bank President Thomas Jordan recently warned of 'second and third round effects' in this inflation cycle. Central bankers as far apart as Australia and Canada have recently had to restart tightening cycles after brief pauses. Investors are now increasingly questioning their own convictions that rates have peaked.   Nowhere is this challenge greater than in the US where tight labour markets and core inflation stubbornly above 4% are keeping the Fed vigilant. And there is a chance that the Fed has to hike one last time this summer. Yet our house view remains that US disinflation becomes much more obvious in the third quarter and that hard will follow soft activity data lower. We still look for substantial Fed cuts in the fourth quarter.   This means we are still looking for the start of a cyclical multi-year dollar bear trend – probably starting in the third quarter. This should carry EUR/USD above 1.15 and USD/JPY well below 130. The tide of a softening dollar should lift most currencies around the world – especially higher-yielding currencies enjoying the benefits of the carry trade.   Within Europe, we forecast most currencies to hold recent gains against the euro – although sterling looks most at risk to Bank of England re-pricing. Modest CEE FX appreciation can continue – despite looming easing cycles. Latin FX looks constructive on the back of high yields and pockets of Asia can appreciate – especially the Korean won.
Eurozone's Improving Inflation Outlook: Is the ECB Falling Behind?

Eurozone's Improving Inflation Outlook: Is the ECB Falling Behind?

ING Economics ING Economics 13.06.2023 13:04
The eurozone’s improving inflation outlook could leave the ECB behind the curve Slowly but surely, the inflation outlook for the eurozone is improving. Headline inflation is normalising, but persistent core inflation is complicating things. While this remains the case, the European Central Bank will continue hiking interest rates – but for how long?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply and is widely expected to continue to fall over the months ahead. The decline in natural gas prices has been remarkable over recent months, and while it would be naïve to expect the energy crisis to be completely over, this will result in declining consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there's more to come in terms of a downward impact on inflation. For food, the same holds true. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slowing increases. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Historical relationships and post-pandemic shifts As headline inflation looks set to slow down further – at least in the absence of any new energy price shocks – the question is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 80s are not available for many countries – but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 70s and 80s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   During previous supply-side shocks, core inflation did not remain elevated for much longer than headline inflation
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Diverging Inflation: Goods vs Services in the Eurozone and the ECB's Challenge

ING Economics ING Economics 13.06.2023 13:07
History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices in the months ahead.   The services sector, however, is still thriving, enjoying the post-pandemic shift from goods to services. Services most affected by lockdowns are currently experiencing much faster price growth than other services or goods. The upcoming summer holiday period could still fuel service price inflation.   Core inflation has been falling recently, but services inflation has been subdued by German public transport tickets   Still, a key question remains over how long the divergence between goods and services inflation can last. Historically, we don’t see much evidence of a significant difference between the two. Goods inflation actually leads services inflation by approximately six months, which means that the peak for goods from February historically suggests that services inflation is unlikely to remain elevated for the rest of the year. If we are right and the post-pandemic shift ends after the summer holiday period, we could see services inflation starting to come down before the end of the year.     Goods inflation historically leads services inflation by six months   Overall, core inflation seems set to trend down from here on While services inflation continues to see some upside risk for the months ahead, core inflation overall looks set to trend down on the back of slowing goods prices. Even services inflation could already be trending down, but perhaps not as fast as policymakers would like. When looking at selling price expectations for sectors that sell most to consumers, we see that there has been a steady downturn in the number of businesses intending to raise prices. This generally correlates fairly well with core inflation developments seven months later, which would point to a significant slowdown in core inflation. At the current juncture, experts and central bankers will be hesitant to make an outright call for a sharp drop in inflation. The latest track record of inflation forecasting is simply not on their (or our) side. Nevertheless, as much as it was once obvious that the era of low inflation had to end at some point, it's now clear that the short period of surging inflation will also cease sooner or later. Historical evidence and the latest developments in both goods and services give enough comfort to expect both headline and core inflation to decline. We currently expect core inflation to drop below 4% at the end of the year, and for it to be at 2.5% by mid-2024. The risks to that outlook seem to be fairly balanced, as stubborn core inflation on the back of faster wage growth and a quicker drop on the back of weak goods inflation remain decent possibilities.   Business expectations point to moderating core inflation over the second half of the year   Could the ECB fall behind the curve again? For the ECB, this isn't to say that tightening is over. In fact, the central bank can't – and won't – take a chance on this kind of core inflation forecast. Why? Because they've simply been wrong too often in previous years. To put it into ECB language: inflation forecasts are currently surrounded by an unprecedented amount of uncertainty. This is one of the reasons why the central bank has put more emphasis on current inflation developments and less emphasis on its own inflation forecasts for one or two years ahead. While such a strategy supports the ECB’s credibility, by definition it runs the risk of falling behind the curve. Given the time lags with which monetary policy operates and affects the economy, central banks should be forward-looking, not now-looking. This is the theory. In practice, however, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point. Taking all of the above into consideration, this implies that it will not only hike at this week’s meeting but could continue to do so at least until September – at the risk, by that point, of having gone too far.  
Central and Eastern Europe Economic Outlook: Divergent Policy Responses Amidst Disappointing Activity

Indian Inflation Trends: Assessing Policy Rates and Easing Possibilities

ING Economics ING Economics 13.06.2023 13:09
Indian inflation still falling Inflation in May fell further and is now only just above the mid-point of the Reserve Bank of India's 2-6% target range. We don't think inflation will fall much further, but this still means real policy rates are high, and that the RBI can start to think about reversing some of its tightening as early as 4Q23.   Further falls in inflation At 4.25%YoY, India's May inflation figures were close to expectations (consensus 4.31%, INGf 4.27%) but are nonetheless a welcome sight for policymakers and households alike. Inflation has fallen a long way from its 7.8%YoY peak in 2022. But although we may get a further month of falls in June, this may be as low as inflation gets for a while - unless we see some more moderation in the monthly run-rate. The CPI index has risen by 0.5% MoM in the last two months and if this persists, it will take inflation back up towards 5%YoY by the year-end. It will require a slowdown in the pace of CPI increase to between 0.3-0.4% MoM keep inflation close to the middle of the RBI target range. This, and the fact that core inflation (ex-food and beverages, fuel and light) has only fallen to 5.0%YoY means that is still too early to say the inflation fight has been won.   Inflation, policy rates and real rates   Real policy rates high But even if further proof may be needed before declaring "job-done" on inflation, at 6.5%, the gap between the policy repo rate and current inflation is high, and that means that the RBI's tightening should be having the desired dampening effect on the economy and inflation. It is too soon to be looking for the RBI to cut the repo rate. But rate cuts before the year-end are still possible. Rate cuts this year would be more likely if we were to see concrete signs that monthly inflation had eased, core rates continued to fall, or that the economy was showing some more obvious signs of a slowdown. So the next few months of data will be important. We are currently pencilling in 50bp of easing by the RBI by the end of 4Q23. This is earlier than the consensus of forecasters. Though we may see the RBI adopting a neutral stance on policy at its next meeting on 10 August as a first step towards actual easing.
Navigating Inflation and Central Bank Meetings: Assessing Rate Hike Odds

Navigating Inflation and Central Bank Meetings: Assessing Rate Hike Odds

ING Economics ING Economics 13.06.2023 13:11
Rates Spark: Inflation in focus before central bank meetings US inflation will affect the odds of a June Fed hike but should not move longer-dated rates much. A week heavy in supply promises more volatility but we expect curve flattening to persist into the Fed and ECB meetings.   Rolling the inflation dice once again A higher than expected US core inflation print is the last event that could boost the odds of a 25bp hike at tomorrow’s Fed meeting. Currently, these stand at just under 30%, reflecting the importance of, and uncertainty associated with, today’s CPI release. Currently, consensus stands at 0.4% MoM for the core reading, more than twice the rate needed for inflation to go back to the Fed’s 2% annual inflation target. Still, the less than 50% probability assigned by the curve to a 25bp June hike suggests markets collectively think that the Fed will be happy enough with 0.4% monthly core inflation to refrain from hiking.   One reason, we think, is the over-reliance on economic consensus to assess market moves. The second reason is that, even without a June hike, the Fed has dropped some heavy hints that it could hike in July regardless of its decision in June. For rates markets, this means that even if the Fed ‘skips’ the June meeting, odds of a 25bp hike by July, currently standing at around 80%, may not fall much.   The upshot for traded interest rates, such as swaps and US Treasury yields, is that the market reassessing June hike odds lower will not necessarily mean a drop in longer-dated rates. In fact, investors may well draw the logical conclusion that 0.4% core inflation would reinforce the case for a higher Fed dot plot and hawkish tone, regardless of what consensus is for today’s core inflation print.   What is sure is that price action today, and later this week into the Fed and European Central Bank meetings, is set to be choppy. In addition to the US CPI print, there is a heavy supply slate from sovereign issuers on both sides of the Atlantic. This tends to pressure yields higher into the supply and lower afterwards. In addition to, justified in our view, expectations of hawkish ECB and Fed tones, this skews yields higher. Whether this impacts the front-end or long-end the most depends on appetite to absorb this supply but the current market regime suggests that short-dated rates, ie the section most sensitive to central bank policy rates, is in the lead. This means a tendency to flatten when rates rise.     Curve flattening extends on the back of more hawkish central bank reaction functions   Today's events and market view A strong raft of UK employment data is likely to keep upward pressure on sterling front-end rates today although these have already priced more than 100bp of additional hikes as of yesterday's close. Faster wage and employment growth will probably be discussed by new MPC member Megan Greene today. Other Bank of England testimonies include that of governor Andrew Bailey. Today’s Eurozone inflation numbers are final reads and therefore less likely to surprise at the headline level. It will still be interesting to parse through the inflation components for signs of narrowing or broadening inflation pressure. Germany’s Zew survey will be an opportunity to get a (very) early read on June sentiment indicators. Consensus is for a decline as, we think, actually economic data and China’s reopening, are not living up to expectations. Italy is back on primary markets with auctions in the 3Y/7Y/30Y sectors, adding to auctions from the UK (10Y), Germany (5Y), and Finland (10Y/13Y). Later in the day, the US Treasury will auction 30Y T-bonds. Germany also mandated banks for the launch of a 30Y green bond which should take place today. The US release calendar kicks off early with the national federation of independent business’ optimism indicator. The main event, however, with be the publication of the May CPI report. Consensus is for the monthly core inflation print to remain at an elevated 0.4% but most seem to think this will be enough for the Fed to refrain from hiking at this week’s meeting.
Understanding Gold's Movement: Recession and Market Dynamics

The Dilemma for the Federal Reserve: To Hike or Hold This Week?

Michael Hewson Michael Hewson 13.06.2023 15:46
To hike or to hold for the Fed this week     When the Federal Reserve last met at the beginning of May raising rates by 25bps as expected, the market reaction was relatively benign. There was little in the way of surprises with a change in the statement seeing the removal of the line that signalled more rate hikes were coming, in a welcome sign that the US central bank was close to calling a halt on rate hikes.     Despite this signalling of a possible pause, US 2-year yields are higher now than they were at the time of the last meeting.     This is primarily due to markets repricing the likelihood of rate cuts well into next year due to resilience in the labour market as well as core inflation. Some of the recent briefings from various Fed officials do suggest that a divergence of views is forming on how to move next, with a slight bias towards signalling a pause tomorrow and looking to July for the next rate hike.      At the time this didn't appear to be too problematic for the central bank given how far ahead the Federal Reserve is when it comes to its rate hiking cycle. The jobs market still looks strong, and wages are now trending above headline CPI meaning that there may be some on the FOMC who are more concerned at the message a holding of rates might send, especially given that the RBA and Bank of Canada both unexpectedly hiked rates this past few days.     With both Fed chair Jay Powell leaning towards a pause, and potential deputy Chair Philip Jefferson entertaining similar thoughts in comments made just before the blackout period, the Fed has made itself a hostage to expectations, with the ECB set to raise rates later this week, and the Bank of England set to hike next week, after today's big jump in wage growth.       This presents the Fed with a problem given that it will be very much the outlier if it holds tomorrow. Nonetheless there does appear to be increasing evidence that a pause is exactly what we will get, with the problem being in what sort of message that sends to markets, especially if markets take away the message that the Fed is done.     If the message you want to send is that another hike will come in July, why wait when the only extra data of note between now and then is another CPI and payrolls report. You then must consider the possibility that these reports might well come in weaker, undermining the commitment to July and undermining the narrative for a further hike that you say is coming, thus loosening financial conditions in the process.     While headline inflation may well be close to falling below 4% the outlook for core prices remains sticky, and at 5% on a quarterly basis, and this will be an additional challenge for the US central bank, when it updates its economic projections, and dot plots.   The Fed currently expects unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     As markets look to parse this week's new projections the key question will be this, is the US economy likely to be in a significantly different place between now and then, and if it isn't then surely, it's better to hike now rather than procrastinate for another 5 weeks, especially if you are, as often claimed "data dependant".       By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
US Inflation Eases, Fed Holds Rates; BoE Faces Dilemma Amid Strong Jobs Data; China Implements Stimulus Measures

US Inflation Eases, Fed Holds Rates; BoE Faces Dilemma Amid Strong Jobs Data; China Implements Stimulus Measures

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.06.2023 08:32
US inflation data gave investors a good reason to cheer up yesterday. The headline number fell more than expected to 4%, and core inflation met analysts' expectations at 5.3%. The biggest takeaway from yesterday's CPI report was, again, that easing in inflation was mostly driven by cooling energy prices, but shelter costs remained sticky – up by more than 8% on a yearly basis.   Yet because these shelter costs represent more than 40% of the core CPI, and private sector data is pointing at cooling housing costs, investors didn't see the sticky core inflation as a major issue. The producer price inflation data is due today, before the Federal Reserve's (Fed) policy decision, but the latter will unlikely change expectations for today's announcement. A softer-than-expected PPI number – due to soft energy and raw material prices, could, on the contrary, further soften the Fed hawks' hand.     In numbers, the expectation of a no rate hike at today's decision jumped past 90%, while the expectation of a no rate hike in July meeting rose from below 30% to above 35%. The S&P500 extended its advance to 4375, while Nasdaq 100 rallied past the 14900 level. Small companies followed suit, with Russell 2000 jumping to the highest levels since the mini banking crisis.     Tough accompanying talk?  The Fed's decision for today is considered as done and dusted with a no rate hike. But the chances are that Fed Chair Jerome Powell will sound sufficiently hawkish to let investors know that the war is not won just yet, because 1. Core inflation remains well above the Fed's 2% target, 2. US jobs market remains too strong to call victory on inflation, and 3. Equity valuations point at an overly optimistic market, at the current levels, the S&P500 trades at around 18 times its earnings forecast over the next year, and these levels are typically associated with times of healthy economic growth and rising corporate profits. But we are now in a period of looming recession odds, and falling profits.     Ouch, BoE!  Yesterday's jobs data in Britain printed blowout figures for April and May. The employment change rocketed to 250K in April, while the expectation was a fall from 180K to 150K. The unemployment rate unexpectedly dropped to 3.8%, and average earnings excluding bonus rose from 6.8% to 7.2%. Then, the jobless claims fell by more than 13K – while analysts expected a surge of more than 20K – hinting that the British job market will likely print solid figures for May as well.     While these are excellent news for Brits who could at least see their purchasing power partly resist to the terrible cost-of-living crisis – where eggs, milk and bread for example saw their prices rise by a whooping 30-and-something per cent, it makes the end of the BoE tightening look impossible for now.     The market prices in another 125bp hike this year, which will take the British policy rate to 5.75%, and there is around 20% chance for an additional 25bp by February next year.     And all this in a market where mortgage rates rise unbearably, and house prices tumble. The 2-year gilt yield took a lift yesterday and is preparing to flirt with the 5% mark. We are now at levels above the mini-budget crisis of Liz Truss, while the spread with the 10-year yield is widening, suggesting that the UK economy will hardly come out of this unharmed. On top, the FTSE 100 index has fallen well behind the rally recorded by the US and European stocks this month because of falling energy and commodity prices due to a disappointing Chinese growth. The only good news for the Brits is that the pound is being boosted by hawkish BoE expectations. Cable rallied past the 1.26 level and is slowly drilling above a long-term downtrending channel top. The trend and momentum indicators remain tilted to the upside, and the divergence between the Fed – preparing to call the end of its tightening cycle sometime in the coming meetings, and the BoE – which has no choice but to keep raising rates – remains supportive of further gains in Cable. We could see the pair regain the 1.30 level, last seen back in April 2022.      China cuts.  The People's Bank of China (PBoC) lowered its 7-day reverse repurchase rate by 10bp to 1.9% yesterday, a week after asking the state-run banks to lower their deposit rates. These are signals that the PBoC is preparing to lower its one-year loan rate tomorrow to give a jolt to its economy that has been unable to gather a healthy growth momentum after Covid measures were relaxed by the end of last year.     Copper futures jumped above their 200-DMA yesterday, though they remain comfortably within a broad downtrending channel building since the second half of January, while US crude rebounded from a two-week low yesterday but remains comfortably below its 50-DMA.     Final word.  Because the rally in tech stocks now looks overstretched and China is getting serious about boosting growth, we will likely start seeing investors take profit on their Long Big Tech positions and return to energy and mining sector to catch the next train which could be the one that leads to profits on an eventual Chinese reopening.   
EUR/USD Price Analysis: Anticipating Range Bound Movement

FX Daily: Fed's Hawkish Hold Sets a Floor for the Dollar and Anticipates Tightening Ahead

ING Economics ING Economics 14.06.2023 14:00
FX Daily: Fed's hawkish hold can put a floor under the dollar We expect the Fed to hold today but signal more tightening is possible. The endorsement of market pricing for future hikes can ultimately keep the dollar around strong levels for a bit longer. We expect EUR/USD to end the week closer to 1.0700 than 1.0800 when also factoring in the ECB meeting. In Sweden, an inflation surprise may bode well for a SEK recovery.   USD: Small deviations in core inflation can have huge implications Yesterday’s CPI numbers in the US had the potential of being the biggest risk event for markets this week, but May’s figures ultimately came in very close to consensus expectations: core inflation moved by 0.4% month-on-month (5.3% YoY, slightly above expectations), while the headline rate decelerated to 4.0%, a touch more than expected. On balance, Fed fund future pricing tells us that markets saw the release as slightly dovish, and the implied probability of a rate hike today was trimmed to 12% from 23% pre-CPI.   The dollar is trading moderately weaker into the FOMC day, with the post-CPI reaction in the currency market seemingly following a risk-on, European-rotation rationale: the high-beta NOK and SEK shone, while the yen dropped yesterday. USD/JPY is dangerously close to the 140.90 30 May high, which would leave the yen vulnerable to a move to 145 area, where Japanese authorities started to intervene last September.   The Bank of Japan announces policy on Friday, and the response that we are seeing in the FX market is probably a testament that market expectations for possible policy adjustments are rapidly disappearing at this Friday's meeting.   Our original call for today’s Fed announcement was a hawkish hold, and yesterday’s deceleration in inflation gave us no reason to review it. Our economist discusses here why the latest CPI read could mean we are indeed at the peak of the Fed’s rate cycle, while here is our scenario analysis for today’s FOMC policy announcement.   Despite the welcome developments in inflation, the Fed wants to see a 0.2% MoM or below CPI readings to feel confident inflation will return to target, and this is why we think today’s statement will include a quite explicit openness to further tightening in the future, which could be expressed via the wording “future increases may be appropriate”.     While our base case is that Dot Plot projections will be kept unchanged, it is surely possible that the committee will add another hike to the 2023 median forecast. The Dot Plot can really swing the balance for the dollar reaction: we think signalling another hike in the 2023 projections would trigger a quite substantial dollar rally as markets see the July meeting as the most likely date for the next rate increase.   We don’t see negative implications for the dollar in our baseline scenario (hawkish messaging, unchanged median Dot Plot), as the endorsement of the market’s hawkish repricing of Fed expectations should keep the recent bullish narrative for the dollar alive for a bit longer: that is until data takes a decisive turn for the worse in the US.  
Asia's Economic Outlook: Bank of Korea Pauses, India and China Inflation in Focus

Embracing Eurozone: Croatia's Resilient Path to Integration

ING Economics ING Economics 14.06.2023 14:34
The Eurozone and Schengen entrance on 1 January 2023 sealed the completion of Croatia’s EU integration story. The economy has shown a remarkable resilience through the pandemic and RussiaUkraine conflict, marking a striking difference compared to the 2008-09 global financial crisis.   While there is a long way to go in terms of catching-up with the Eurozone average in almost all aspects, the authorities seem quite determined to make good use of the EU’s Recovery and Resilience Facility, increasing fixed investments while keeping public deficits within very reasonable levels. Better terms of trade compared to 2022 and a tourism boost from Schengen entry might rebalance the external sector earlier than expected while quasi-balanced budgets could push the public debt ratio below the dreaded 60% of GDP over the next couple of years.   Forecast summary   At the right speed given the context Unlike most of its main EU partners that are experiencing mediocre growth at best, Croatia still managed to produce above potential growth rates in 2022. Momentum looks good in 2023 as well. Trends are clearly moderating in industry, construction and retail trade, with retail exposed to a generally weaker consumer confidence. However, this is likely to change for the better as real wage growth has already turned positive in 1Q23 but it will take a couple of quarters for consumers to start noticing the wage dynamics. All aside, the prospects for the tourist season look very good, authorities expecting a record year both in terms of number of tourists and revenues. We therefore reinforce our above-consensus GDP growth estimate of 2.7% for 2023 with upside risk.   Real GDP (YoY%) and contributions (ppt)   On the right track The revised official targets for the 2023 budget gap point to a 0.7% of GDP deficit, compared to an initial deficit estimate of 2.3%. In essence, as in 2022 that ended with a 0.4% of GDP surplus, the government is partly using the better-than-anticipated budget revenues to improve its budget metrics. In this context, the country has already returned to running primary balance surpluses which are expected to continue in the coming years.   We estimate that this will enable the debt-to-GDP ratio to dip below the dreaded 60% of GDP in 2025, having exceeded this level for 15 years. Looking forwards, we still anticipate the country to run small negative fiscal balances, as the phasing out of energy support measures will overlap increased social spending.   Public debt and fiscal balance (% of GDP)   Inflation is coming down but wage pressure remains After marking the top at 13.0% back in November 2022, the harmonised index of consumer prices (HICP) inflation has continually slowed to reach 8.5% in May, mostly on the back of energy price base effects. As the import price pressure starts to fade as well, the producer price growth is also visibly - though not as rapidly - decelerating. Core inflation, on the other hand, is reacting with lagged effects and we expect it to stay roughly 0.5ppt above headline inflation for the rest of the year.   The clear upside risks stem from wage pressures, as the purchasing power loss from 2H21 and 2022 now needs to be compensated. This comes on the back of an already tight labour market as the unemployment rate might hit record lows this year.   HICP inflation and wage rates    
EUR/USD Analysis: Low Volatility Ahead of US CPI Release, Market Players Brace for Potential Impact on Risky Assets

Emerging from Recession: Hungary's Path to Recovery and Inflation Normalization

ING Economics ING Economics 14.06.2023 15:13
The worst might be behind Hungary. Yes, the economy is still in a technical recession, but we see a way out from it by the second half of 2023. A key source of the recovery lies in the growing disinflation process. The collapse of the domestic demand erases the repricing power of companies. Thus, we see a single-digit headline inflation by the year-end and further normalisation in 2024.   This means a positive real wage growth yet again from late-2023. However, with depleted household savings and tighter fiscal headroom, we hardly see a boom in domestic demand. The recovery will be export driven, thus we see a quick return to surplus in the current account balance. Improving external financing needs and the new era of monetary policy (eg, persistent positive real interest rates from late-2023) lead us to be constructive towards Hungarian assets.   Forecast summary   Macro digest The Hungarian economy has been stuck in a technical recession for three quarters (3Q22–1Q23) due to sky-high inflation suffocating economic activity. Consumption has been markedly slowing down since last autumn, as households cope with double-digit price increases, resulting in deteriorating purchasing power. On top of this, the high interest rate environment prompted a collapse in private investment activity, coupled with the government’s mandated freeze on public investments.   The only silver lining has been net exports, recently. Export activity is helped by pent-up production in car and battery manufacturing, while imports slow on lower energy demand.   Contribution to YoY GDP growth (ppt)   We expect the economy to emerge from the technical recession in the second quarter of this year, although the year-on-year growth will remain negative. As most economic sectors are still struggling amid weak domestic demand, the one sector that stands out on the positive side is agriculture.   The reason for this lies in base effects, which this time will help a lot, as last year’s energy crisis and drought wreaked havoc on the performance of agriculture.   Though this year’s weather has been favourable as well. In this regard, the fate of the overall 2023 GDP growth rather depends on the performance of agriculture as domestic demand will remain weak for the remainder of the year, curbing industry, construction and services.   Key activity indicators (swda; 2015 = 100%) In parallel with an acceleration of the disinflationary process, we expect the economy to display a rebound from the third quarter, delivering growth in every aspect for the remainder of the year. However, we expect a modest growth rate of 0.2% for 2023 followed by a 3.1% GDP expansion next year, boosted by both returning consumption growth and rising investment activity next to positive net exports.   Headline and underlying measures of inflation (%YoY)     Headline inflation retreated to 21.5% YoY in May, after peaking in January, while core inflation has also improved, with services being the only component where we see upside risks in the short run. As for the other components, food inflation has moderated for five months, while both motor fuel and household energy prices have recently declined, supported by a fall in global energy prices and a stronger HUF. We expect inflation to continue to retreat gradually in the coming months, as demand is vastly constrained by the loss of household purchasing power. In addition, base effects are contributing significantly to this year’s disinflationary process, which will accelerate from the third quarter onwards, thus we see the year-end reading dipping comfortably below 10%. At the same time, we expect inflation to average around 18% for this year, with balanced risks to our forecast. However, after two years of double-digit average inflation figures, we expect the full-year average to come in at around 5% in 2024
Polish Economy: Slow Recovery Ahead Amid CPI Challenges and Political Uncertainty

Polish Economy: Slow Recovery Ahead Amid CPI Challenges and Political Uncertainty

ING Economics ING Economics 15.06.2023 07:47
The Polish economy should reach a bottom in 1H23 but recovery in 2H23 could be sluggish as the main growth engine from last year (consumption) will improve only gradually with lower CPI and some election spending. Net exports should be the main growth driver depending on uncertain foreign demand. CPI peaked in February at 18.4%YoY but should fall to single digits in 3Q23 and 2024. July’s NBP projection is likely to bring a lower CPI trajectory and the NBP may provide a single cut in 2H23 (50% possibility), also referring to strong PLN. We see risk of persistently high core CPI at c.5% in 2024- 25. To achieve the 2.5% target, Poland needs a paradigm shift in policy, ie, nominal wages growth below 5%YoY, less consumption and more investment. PLN is no longer undervalued; we still see some appreciation. POLGBs curve may keep steepening due to rate cut expectations driving the short end and risk of spending affecting the long end, both from the ruling and opposition parties.   Forecast summary   GDP composition (%YoY)   Macro digest Economic growth was choppy and uneven in 2022 amid energy and war shocks, but the Polish economy managed to expand by a hefty 5.1% even though economic conditions deteriorated in the second half of the year. With wages failing to catch up with double-digit inflation, real disposable incomes of households deteriorated, weighing down on consumption. Consumption contracted in 4Q22 and 1Q23 in annual trends and is projected to remain weak most of 2023.   At the same time, investment should continue expanding on the back of outlays by large firms and public infrastructure and military spending. 1Q23 brought a contraction in annual GDP (-0.3%), but it was shallower than expected. In 2023, GDP growth is projected at 1.2% as an improving foreign trade balance (subdued imports) will more than compensate for weak domestic demand exacerbated by destocking.   Real GDP (PLNbn, 2015 prices, SA)   Consumer prices jumped by 14.4% in 2022 and average CPI is expected to remain double-digit in 2023, but inflation has passed the peak. The downward trend in the headline CPI is clear and core inflation started slower sequential growth. The strong disinflationary trends abroad (lower commodity prices, GVC in pre-pandemic conditions) and PLN firming, improved the outlook for core inflation decline, but it will moderate visibly lower than headline consumer inflation. Still, some policymakers flag a cut in NBP rates in late2023. We still see risks of inflation anchoring above the upper bound over the medium term (tight labour market, wage pressure, fiscal expansion).   As a result, the return of CPI to the NBP target of 2.5% is likely to be a long process. Nonetheless, we assess the odds of an NBP rate cut this year at nearly 50% given policy guidance from the NBP governor Glapiński, who said a rate cut is possible, provided inflation falls below 10% YoY, which we see in September (to be released at the beginning of October).    Change in inventories contribution to YoY GDP (ppt)   General elections in October 2023 have led to a series of fiscal pledges by the government. It has announced: a new permanent spending from 2024 (0.7% of GDP) and 0.6% of GDP one-off spending for 2023 (and 0.7% of GDP higher central deficit). The opposition joined in and declared additional fiscal spending if it gained power (2.4% of GDP).   At the same time, the Recovery and Resilience funds for Poland remain frozen and any breakthrough in the conflict over the rule of law between Warsaw and Brussels is unlikely before the elections in Poland. Public debt is moderate by EU standards (below 50%) but Poland has a high structural deficit, foreign investors are eager to purchase Polish Eurobonds, unlike POLGBs, but high liquidity of the domestic banks ensures strong demand for POLGBs.   In such an environment, public borrowing is not a challenge for authorities, at least not over the short to medium term.     
Unlocking the Potential: Deliverable KRW and its Impact on the Market"

Poland's Fiscal Landscape: Outperforming, but Social Spending Looms

ING Economics ING Economics 15.06.2023 07:50
Disinflation in 2023, but NBP target still distant CPI peaked in 1Q23, but below 20% YoY, and started trending downwards as the direct impact of the energy shock started to abate, leading to annual declines in gasoline and diesel prices as well as slower growth of energy for households. Upward pressure on food prices has also started moderating.   Even core inflation peaked but declines are slower and core prices remain sticky. The legacy of the energy shock is still visible as businesses adjust their prices to cost levels. On top of that, the labour market remains tight and wages are expanding at double-digit pace. Core inflation is projected to moderate more slowly than headline inflation. The NBP target of 2.5% is unlikely to be reached before late-2025. In our view, the CPI picture doesn’t justify a rate cut this year, but the NBP may refer to the strong PLN and the NBH and provide a single cut in 2H23.   CPI inflation and its composition (%, percentage points)   Poland outperformed on fiscal front in 2022, but high social, military and infrastructure spending ahead In 2022, the general government deficit reached 3.7% of GDP but was below expectations. In 2023, we expect it to reach 5.2% of GDP. Authorities continue to bear the substantial cost of energy measures and are pursuing ambitious military and healthcare spending programmes. So far, pre-election pledges of the ruling party have reached 0.6% of GDP one-offs in 2023 and permanent from 2024 onwards at 0.7% of GDP, but more programmes are coming and the opposition also seems to be competing with the incumbents on that front. With public debt below 50% of GDP there are no immediate threats to fiscal sustainability, but the high structural deficit and high borrowing needs in the mid term are a challenge. Spending on energy transition, defence, healthcare and the risk to the RRF and EU funds call for careful choice of priorities   General government balance (% of GDP)   Tight labour market and robust wages growth Poland’s labour force is driven by a combination of structural and cyclical factors, with the former dominating the overall picture so far. The continuous decline in working age population (some c.2m fewer over the past 12 years) has curbed labour supply although both an increase in participation rate and working immigrants (including the influx of refugees from Ukraine) has eased the pressure. With labour shortages in many sectors of the economy the cyclical employment adjustment is shallow and firms are hoarding labour. The unemployment rate in Poland will remain one of the lowest in the European Union. High inflation, scarcity of skilled workers and the high administrative increase in the minimum wage has put upward pressure on salaries. Nominal wages are projected to continue increasing at a double-digit pace in the coming quarters.   LFS unemployment rate (Apr) (% of labour force, SA)   Swift switch from external CA deficit to a surplus in 2023 Poland’s current account deficit widened to 3.0% of GDP in 2022 from 1.3% in 2021 on the back of record-high energy prices in Europe, in particular natural gas and coal prices. Their deliveries from Russia were terminated in early spring 2022. By contrast, radical decreases in energy commodity prices in 2023 together with a deceleration of domestic demand led to a swift improvement in Poland’s external balance. We project a surplus of 1.5% of GDP this year as net exports is to be a major GDP growth driver. Poland’s external CA balance is to moderate over 2024-2025 in line with strengthening of consumer and domestic demand. Also, elevated spending on military equipment is to push imports up.   Current account and trade balance (% of GDP)  
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Erdogan's Re-election and the Challenges of Economic Rebalancing: A Post-Election Policy Outlook

ING Economics ING Economics 15.06.2023 08:14
President Erdogan was re-elected and the Erdogan-led People’s Alliance won a simple majority in Parliament. The macro outlook points to a need to rebalance the economy given that: (1) the current account deficit has remained on an expansionary path; (2) total capital flows have remained weak; (3) there is a major fiscal expansion; and (4) the extra fiscal burden and the CBT’s supportive stance create further pressure on already elevated inflation.   In this environment, the main policy debate focuses on interest rate policy and whether there will be a return to a more conventional policy setting post-elections. The appointment of Mehmet Simsek as Minister of Economy and Finance shows an intention to return to conventional economic policies, though it is too early to decide the degree of orthodoxy. The signals imply that actions will be taken without delay following formation of new economy management.   Forecast summary   Macro digest 1Q23 Turkish GDP growth came in at 4.0% year-on-year, slightly better than market consensus, on the back of private consumption, government consumption and gross fixed capital formation, while net exports were a drag once again. On a quarter-on-quarter basis, 1Q23 GDP growth was 0.3% after seasonal adjustments, showing some momentum loss compared with a relatively strong reading in 4Q22 of 0.9%.   Moderating sequential performance is attributable to: (1) a deceleration in household consumption to the lowest growth rate since the last quarter of 2020, also likely reflecting the impact of the earthquake disaster; and (2) government expenditure turning negative while stocks positively contributed to the headline and investment appetite remained solid.   Early indicators for 2Q23, on the other hand, hint at an acceleration in the GDP expansion on a yearly basis in comparison to 1Q23 given: (1) realisations of real sector confidence and capacity utilisation reflecting a continued strengthening in manufacturing, leaving the effects of the earthquake disaster behind; (2) further improvement in PMI to above the first quarter average, while confidence indicators for retail, construction and services show further improvement.   As growth forecasts for 1H23 imply a better-than-expected performance, the macro indicators point to a need to rebalance the economy. In this regard, the assignment of a new economy management team and guidance on policy direction will be key for the outlook, in our view.   GDP growth, on a quarterly basis (% YoY)   PMI and IP (seasonally adjusted, 3m-ma, % YoY)   Annual inflation has remained on its downward path in May thanks to: (1) TurkStat's implementation of the ‘zero price’ method for natural gas subsidies. Accordingly, the natural gas sub-group saw a monthly price decline of 100%; (2) the 2003-based index average for May in the last five years pointed to a favourable base effect for this year. Core inflation (CPI-C) rose to 46.6% on an annual basis.   This suggests that the exchange rate and commodity price-driven improvements in core inflation indicators in recent months may have come to an end. The underlying trend for the headline markedly recovered in comparison to the previous month thanks to goods inflation, while the services group has maintained the elevated trend given continuing pressures in rent, catering and telecommunication services. Despite the elections being behind us, at this stage uncertainty about exchange rates and interest rates persists, but it is expected that the new economy management team, led by Mehmet Simsek, will bring about significant changes in the CBT and the monetary and exchange rate policy to be implemented in the short term.   Accordingly, a lira adjustment postelection and potential adjustments in wages and administered prices are likely to weigh on inflation momentum, while a new equilibrium in rates will be key to return to disinflation in the period ahead.   Inflation (% YoY)
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NBU's Financial Stability Measures and Inflation Control During the War

ING Economics ING Economics 15.06.2023 08:28
NBU’s policy ensuring financial stability during the war Throughout the conflict the National Bank of Ukraine has remained active and effective in ensuring financial and exchange rate stability and has controlled inflation by hiking interest rates to 25%. In 2022, a part of the extraordinary public needs was monetised by the NBU, but the impact of these interventions was broadly neutralised by mopping up the liquidity of the banking sector.   In recent months, Ukraine has benefited from declines in global energy commodity prices and the inflation rate is dampened by the high statistical base.   CPI inflation slowed to 17.9%YoY in April, from 21.3% in March and 26.6% back in December. Core inflation slowed as well from 19.8% in March to 16.9% in April. Given heightened wartime uncertainty, we expect the NBU to wait for a more decisive period of disinflation and start interest rate cuts in early 2024.   Inflation and NBU policy rate (%)   Fiscal and external accounts driven by external aid Ukraine’s huge public and external financing needs have been met by foreign grants and loans, including a new four-year IMF programme of US$15.6bn.   In 2022, the fiscal balance reached almost 17% of GDP, without grants it was around 10% of GDP higher. A near 30% collapse in exports and fall in imports of less than 5% led to a huge trade gap but sizeable current account surplus as the gap was compensated for by foreign grants.   From 2023, the CA is expected to post a large deficit but accompanied by rising FDI flows.     The fiscal position is set to deteriorate further this year but improve gradually in the medium term. Nonetheless, the country will continue to rely heavily on donors’ support for internal defence, provision of social services and ensuring macroeconomic stability.   Fiscal and current account balance (% of GDP)    
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Central Banks Diverge: Fed and ECB Take Hawkish Stance, While Bank of Japan Remains Dovish

Michael Hewson Michael Hewson 16.06.2023 09:29
While the Fed and ECB sound hawkish, the BoJ continues to remain dovish    While European markets underwent a rather subdued and negative finish yesterday, US markets continued their recent exuberant run, with the S&P500 and Nasdaq 100 both closing higher for the 6th day in a row. This was a little surprising given that the Federal Reserve and the European Central Bank both delivered very hawkish outcomes in the space of 24 hours of each other, as well as painting very cautious outlooks for growth and inflation over the course of the next 12 months. While the Federal Reserve kept rates unchanged, they upgraded their terminal rate forecast for this year by indicating that they expected to deliver another 2 rate hikes by the end of this year. This was a little surprising even with the fact that the labour market continues to exhibit significant tightness.     This is because a lot of the main inflation indicators, particularly the forward-looking ones, are showing increasing evidence of disinflation. If they are showing these signs now then the signs will be much more evident in the next few weeks, which means that for all the Fed's jawboning today its highly unlikely they will be able to follow through on it.     Quite simply markets aren't buying it with US 2-year yields below the levels they were prior to Wednesday's Fed meeting. In essence the market thinks the Fed is done as far as rate hikes are concerned.     Yesterday's economic data also cast doubt on the Fed's forward guidance for rates this year with US import prices for May plunging by -5.9% year on year, close to levels last seen in April 2020. Export prices on the other hand fell even more sharply, falling to a record low of -10.1%   While the ECB did deliver a rate hike, they also revised upwards their core inflation forecasts for this year from 4.6% to 5.1%, which was quite punchy given that core inflation has already fallen back to 5.3% in this month's flash numbers, down from 5.6% in April, and just below the record high of 5.7% set in March. This core number is expected to be confirmed in data scheduled to be released later this morning.   ECB President Christine Lagarde even went as far as more or less pre-committing to another 25bps rate hike in July, which in turn helped to push European yields sharply higher. They may well be able to deliver on this, however there is room for scepticism when it comes to any rate moves beyond that.   This is because their core inflation expectations for the end of this year come across as way too high. Does anyone at the ECB seriously believe that core prices won't have fallen below 5% from where they are now by the end of this year, when producer price inflation is already slowing sharply. If they do, they need to have another look at their economic models.   This morning the Bank of Japan delivered their own assessment of the outlook for the Japanese economy, with traders and investors increasingly scratching their heads as to why new Bank of Japan governor Kazuo Ueda seems so reluctant to even consider starting to look at paring back their own easy monetary policy, when core CPI is at 4.1% and the highest level since the 1980's. The BoJ seems to be of the opinion that current levels of core inflation aren't sustainable and that prices will fall back towards 3.5%, before accelerating modestly again.      The central bank is due to update its economic forecasts in July, while Governor Ueda is due to speak in a couple of hours' time when he might offer further insights as to why the Bank of Japan is reluctant to alter its policy settings quite yet.   EUR/USD – pushed above the 50-day SMA at 1.0880, as well as pushing through 1.0920/30 opening the prospect for a return to the April highs at 1.1095. We now have support back at the 1.0820/30 break out level.     GBP/USD – broken above previous highs this year at 1.2680 and kicked on above the 1.2760 area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – continues to hold above the 0.8530/40 area rallying back to the 0.8600 area before slipping back. The key day reversal from earlier this week is just about still valid, however the lack of a rebound is a concern. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – pushed up to 141.50 yesterday, before slipping back, with the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 7 points higher at 7,635     DAX is expected to open 15 points higher at 16,305     CAC40 is expected to open unchanged at 7,290     By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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Hawkish ECB Raises Rates Amidst Slowing Eurozone Growth and Surging Inflation Forecasts

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.06.2023 09:34
It was mostly a good day for the global markets, except for Europe, which saw the European Central Bank (ECB) expectedly raise interest rates by 25bp, but unexpectedly raised inflation forecast, as well.   European policymakers now expect core inflation to average past the 5% mark, while in March projection this forecast was only at around 4.6%. This could sound a bit counterintuitive, because we have been seeing slower inflation and slower activity across the Eurozone countries, with the latest growth numbers even pointing at a mild recession. Yet the strength of the jobs market, and the stickiness of services and housing prices keep ECB officials alert and prepared for a further rate hike in July... and maybe another one in September.       Euro rallies  At the wake of the ECB meeting, the implied probability of a July hike jumped from 50% to 80%, sending the EURUSD rallying. The pair rallied well past its 50-DMA and hit 1.0950, and is up by more than 3% since the beginning of this month. The medium-term outlook remains bullish for the EURUSD due to divergence between a decidedly hawkish ECB, and exhausting Federal Reserve (Fed). The next bullish target stands at 1.12.  The US dollar sank below its 50-DMA, impacted by softening retail sales, rising jobless claims, slowing industrial production and perhaps by a broadly stronger euro following the ECB's higher inflation forecasts, as well.   Elsewhere, rally in EURJPY gained momentum above the 150 mark, as the Bank of Japan (BoJ) decided to do nothing about its abnormally low interest rates today, which seem even more anomalous when you think that the rest of the major central banks are either hiking, or say they will hike. The dollar yen is back above the 140 mark, as traders see little reason to buy the yen when the BoJ outlook remains blurred. Note that some investors expected at least a wider YCC policy to 1% mark, but the BoJ didn't even bother to make a change on that front.       Japanese stocks overbought near 33-year highs  Good news is, Japanese stocks benefit from softer yen and ample BoJ policy, and consolidate gains near 33-year highs. The overbought market conditions, and the idea that Japan will, one day in our lifetime, normalize rates could lead to some profit taking, but it's also true that companies in geopolitically sensitive sectors like defense and semiconductors have been major drivers of the rally this year, and there is no reason for that appetite to change when the geopolitical landscape remains this tense. The former US Secretary of State just said he believes that a conflict between China and Taiwan is likely if tensions continue their current course.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    
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ECB Raises Interest Rates: Market Reaction, Future Outlook, and Implications for EURUSD

Alex Kuptsikevich Alex Kuptsikevich 16.06.2023 14:01
On Thursday, the ECB raised three key interest rates by 25 basis points, taking the benchmark lending rate to 4%, the highest since 2008. It also confirmed its intention to refuse to refinance coupons and maturing bonds, accelerating quantitative easing - another parameter of policy tightening.     Markets had anticipated this move, so the attention of traders and journalists was, as usual, focused on the comments that would determine the trajectory of future actions. In contrast to Fed Chairman Powell, ECB President Lagarde was much more reassuring about future moves. She confidently stated that a few more hikes would be needed, leaving little doubt about a hike at the next meeting. This sharply contrasted with Powell, who highlighted a July hike as the more likely scenario but did not rule out the possibility of no hike. Lagarde pointed to the strength of the labour market and rising core inflation as factors in domestic price pressures. Despite the reversal to a lower inflation trend, she maintained that the ECB still has ground to cover to contain inflation.     It took some time for the markets to appreciate the seriousness of the ECB's stance. An initial 0.5% rise in EURUSD on the release of the commentary, which did not soften the tone significantly from May, picked up after the press conference and continued for the rest of the day, giving EURUSD a 1.1% gain, with the pair stabilising around 1.0950. The pair's technical disposition should also be considered, as it adds to the amplitude. After rising above 1.0880, the EURUSD crossed the 50-day moving average, and a decisive take of this level further supports the buyers' resolve. The EURUSD has been trading in a broad bullish corridor since the beginning of the year after bouncing off its lower boundary earlier this month and confirming the seriousness of the short-term uptrend with yesterday's strong move. The bulls are now focusing on the 1.1050 area, the April high.     However, given the upward bias of the move, the pair could be as high as 1.1100 by the end of the month. The 1.1200 area will be the next major milestone, through which the ultra-long 200-week moving average trend passes, and many pivot points are concentrated. The dollar will struggle there.
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Rising Rates and Stock Markets: Finding Comfort in Unconventional Pairings

Michael Hewson Michael Hewson 19.06.2023 09:44
Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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Rising Rates and Stock Markets: Finding Comfort in Unconventional Pairings - 19.06.2023

Michael Hewson Michael Hewson 19.06.2023 09:44
Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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Rates Spark: The Concern of Curve Inversion and Central Bank Impact on Market Sentiment

ING Economics ING Economics 21.06.2023 09:51
Rates Spark: The worry about curve inversion Hawkish central banks and low market growth expectations have kept rates in a range. This has largely benefitted risk appetite but is also resulting in a more inverted curve, hardly an encouraging macro signal.   Powell and Schnabel might accelerate the curve inversion trend today We tend to be sceptical of the overall impact central bank comments can have on day-to-day market rate movements. One reason is the abundance of central bank communication. The other is their data-dependent setting (see yesterday’s note) which put economic releases firmly in the driving seat of market moves. Unfortunately, today is, like yesterday, much heavier on central bank communication than on economic data. This means the signal to noise ratio is likely to remain low. Still, today’s headliner, Fed chair Jerome Powell, is probably the world’s most watched central banker, so his testimony will carry weight with investors. Similarly, we think Isabel Schnabel’s interventions are amongst the most listened to out of the European Central Bank (ECB).   This year in rates has been characterised by a tug-of-war between hawkish central banks and pessimistic markets, at least when it comes to growth. A hawkish tone in the face of sticky core inflation makes sense but central banks have hurt their credibility by reinforcing their message with overly upbeat growth forecasts.    This makes sense up to a point, as markets are much more likely to believe a hawkish central bank if economic growth allows it to tighten policy further. However it seems markets collectively disagree with central banks’ forecasts, by pricing subsequent rate cuts. In short, central banks’ sphere of influence doesn’t extend much beyond the front-end of the curve.
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UK Inflation Challenges Bank of England: Rate Hike Expectations and Economic Impact in Focus

ING Economics ING Economics 21.06.2023 10:06
Headline inflation should come down more noticeably over the next couple of months, owing to some pretty hefty base effects. Last June saw a near 10% spike in petrol prices, whereas prices are currently falling, and of course in July we’ll see a material fall in household electricity/gas bills. Core inflation we think should come lower too, though to a much lesser degree and mainly because of further renewed downward pressure from certain goods categories.     Headline CPI, we think, will be just below 7% by July and around 4.5% by year-end. Core inflation will probably end the year above 5%.   All of this makes life even harder for the Bank of England. We think the bar for another 50bp hike is set pretty high, but a 25bp hike is basically guaranteed, as is another in August. But markets are now fully pricing a 6% peak for the Bank rate, which implies six more rate hikes from current levels. That seems excessive, and we suspect the Bank of England would privately agree.   When rates got this high last November, the BoE offered some rare pushback against market expectations and signalled a lower peak for rates. But this time, with inflation consistently coming in hotter than expected, we suspect officials will be more reluctant to offer any firm guidance on what comes next. Policymakers won’t want to steer market rate expectations lower, only to find that further inflation surprises force it to go further than it would like over the coming months.    UK inflation should come in lower in June/July on energy base effects   Ultimately though, 6% rates would be extremely restrictive. The current structure of the mortgage market – whereby the vast majority of households are fixed for either two or five years – means rate hikes filter through to the economy fairly gradually. That means that the length of time rates stay restrictive is arguably more important these days than the absolute level interest rates reach over the shorter term. As the BoE itself has made clear, the impact of all those past hikes is still largely to hit the economy – and just taking rates to 5% and keeping them there would exert a large drag on the economy. We also expect the news on inflation to get a little better through the summer. The BoE’s survey measures of inflation have been improving, and forward-looking indicators like producer prices point to more noticeable declines in headline CPI later this year. Crucially, we think the fall in gas prices is good news for service sector inflation, and suggests we could get more noticeable disinflation in this sector, even if wage growth takes longer to ease.
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Bank of England Scratches Its Head as Stubborn Inflation Challenges Price Stability Ambitions

Craig Erlam Craig Erlam 22.06.2023 08:31
Policymakers at the Bank of England will be scratching their heads this morning wondering what they have to do to get inflation down, with the latest CPI report another setback in the central bank’s ambition of delivering price stability and a soft landing. While there are many reasons to be confident that inflation should fall sharply over the coming months including lower energy and food price contributions, it’s hard to be too optimistic when the data keeps consistently coming in well above forecasts.   There is clearly immense stubbornness in the UK inflation numbers and the fact that the core also unexpectedly rose yet again by another 0.3% will be a huge concern to the BoE. Services inflation was always going to take longer to regain control of and today’s data once again suggests momentum is strong here. Market interest rate expectations are continuing to fluctuate after the release but there’s clearly now a much stronger case for a 50 basis point hike tomorrow, which would take Bank Rate to 5%. What’s more, markets now see it reaching 6% early next year which could be very damaging and increases the risk of the economy buckling under the pressure. The pound initially spiked after the release, hitting 1.28 against the dollar before giving around half of that back. Higher interest rates for longer against the backdrop of a more resilient economy may remain supportive for the pound for now but as soon as the economy starts to buckle, traders may be forced to rethink.   GBP/USD Technical For a look at all of today’s economic events, check out our economic.
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SNB Raises Rates by 25bp, Signals Further Tightening in Store

ING Economics ING Economics 22.06.2023 11:45
SNB hikes rates by 25bp and signals further tightening still to come The SNB raised its policy rate by 25 basis points as expected, while at the same time sending out a very hawkish signal. With the central bank expecting inflation to remain persistent for some time, another 25bp move is expected for September.   25bp rate hike as expected As expected, the Swiss National Bank has raised its key interest rate by a further 25 basis points to 1.75%. This brings the total amount of rate hikes in this cycle to 250 basis points in one year, well below the European Central Bank's 400bp and the Federal Reserve's 500bp. At the same time, the SNB continues to intervene in the foreign exchange market by selling currencies, thereby strengthening the Swiss franc and bringing down imported inflation. After years of foreign currency purchases, this reduces the size of the SNB's balance sheet and is therefore a particularly effective form of quantitative tightening against inflation.   Long-term inflation concerns This rate hike comes against a backdrop in which inflation remains above the SNB's inflation target of between 0 and 2% – although it has fallen sharply. It reached 2.2% in May, a steady decline from the 3.4% reached in February 2023. Core inflation fell below 2% to 1.9% in May. Thanks to lower energy prices and the appreciation of the Swiss franc, the SNB expects inflation to continue to fall to 1.7% in the third quarter.   Despite this encouraging decline, the SNB continues to see inflation as a problem and expects it to strengthen over the coming winter due to second-round effects. Inflation is also expected to become increasingly domestic, and therefore less easily combatted by strengthening the exchange rate. Of particular concern is an expected rise in rents, which account for 16% of the consumer basket and are indexed to interest rates in Switzerland.   In light of this situation, the SNB has revised up its inflation forecasts for the next few years and now expects inflation to remain above 2% until the end of the forecast horizon in the first quarter of 2026. It's expected to average 2.2% in 2023, 2.2% in 2024 and 2.1% in 2025. In other words, aside from the fall expected this autumn, the SNB does not expect any moderation in inflationary pressures and believes that the current situation is likely to persist. This signal growing concerns about the long-term outlook for inflation.   Another hike expected in September This upward revision of forecasts is a particularly hawkish signal and suggests that the SNB will raise rates again. President Thomas Jordan almost pre-announced this at the press conference, stating that tighter monetary policy will be necessary to bring down inflation. As a result, we are now expecting another rate hike of 25 basis points in September.   At a time when other central banks seem to have lost confidence in their models and are looking primarily at the actual rate of inflation, the SNB seems to be taking a different approach by focusing primarily on inflation forecasts. The fact that the ECB is likely to be more aggressive than previously expected – probably raising rates again in July and September – should further reinforce the SNB's decision. After September, the SNB rate is likely to remain at 2%, with a rate cut looking unlikely between now and 2026.
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European Stocks Set to Open Lower Following Powell's Testimony as Inflation Concerns Persist

Craig Erlam Craig Erlam 22.06.2023 11:52
European stocks are poised to open a little lower on Thursday, tracking moves we saw in the US on Wednesday following Jerome Powell's appearance in Congress. The Fed Chair appeared before the House Financial Services Committee and very much stuck to last week's script, which should come as a surprise to no one. Inflation is not under control and the vast majority at the Fed believe more rate hikes will be warranted was the message, although we got that from the dot plot.   For once, markets are buying what the Fed is selling and have priced in a 70% chance of a hike in July. But that's where they believe it ends with the easing cycle then starting around the turn of the year so the Fed and the markets aren't entirely on the same page. The data will likely determine whether markets remain in agreement on July as I imagine it will take less to convince investors that another hike isn't warranted than the Fed.   Will the BoE be tempted to hike by 50 basis points? What the Bank of England would do to be in a position to be debating whether another rate hike or two is even necessary. Instead today, the debate will be whether 25 basis points is even enough or if it should revert back to 50. The central bank has made almost no progress in getting inflation back to 2%, in fact, core inflation is still rising which should be causing some alarm on the MPC. Aside from the decision itself, the vote will be very interesting today. At each of the last three meetings, two policymakers have voted for a pause. Will they stand firm today or accept that more is needed and what will that hawkish pivot do to interest rate expectations? They're already pretty hawkish, with the terminal rate seen at around 6% early next year but that could cement the view that much more is needed.   Oil remains choppy but edging towards the upper end of its range Oil prices remain very volatile as we've seen over the last week. Trading has been very choppy as traders have tried to reconcile weaker Chinese growth, slightly more modest support from the PBOC, more hawkish central banks, and resilient economies. We appear to be in a position where we're either waiting for the economy to break or for central banks to achieve their soft landing aims. Brent remains in its lower trading range for this year between $70-$80 but we are getting closer to the upper end of that and there's still plenty of momentum in the move. A break above $80 could be a very bullish development and suggest traders are feeling less pessimistic about the economy.   Gold sell-off losing momentum ahead of the BoE Gold has been seriously testing its recent range lows over the last 48 hours but so far it's struggling to generate enough momentum for a significant move lower. Despite Powell's hawkish delivery in Congress, the yellow metal recovered earlier losses to close only marginally lower on the day, albeit below the lower end of the $1,940-$1,980 range it previously largely traded within. Ahead of day two of his testimony, this time in front of the Senate, gold is trading relatively flat and potentially in need of another bearish catalyst. The sell-off is losing momentum although it could get an extra nudge from the BoE if we see a more hawkish shift.
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Asia Morning Bites: Japanese Inflation Rises, Anticipation of BOJ Policy Adjustment

ING Economics ING Economics 23.06.2023 12:00
Asia Morning Bites Japanese core inflation excluding food and energy edges higher in May - tees up the Bank of Japan for a July tweak to policy.   Global Macro and Markets Global markets:  After several days of decline, US stocks turned around on Thursday, and equity futures indicate that they may have a little further to go today. The S&P 500 rose 0.37%, while the NASDAQ rose 0.95%. China was out for Dragon Boat Day and will be out today too.  US Treasury yields went higher again. The Yield on both the 2Y note and the 10Y bond rose 7.6bp, taking 10Y yields to 3.795%. 10Y UK Gilt yields fell 3.8bp after the larger-than-expected Bank of England hike. EURUSD pushed above 1.10 yesterday, despite the rise in US yields, but it could not hold on to its gains and has retreated back to 1.0956 – not much changed from 24 hours ago.  G-10 currencies including the AUD and JPY lost ground to the USD, but GBP was steadier, helped by higher rates. Most Asian currencies weakened against the USD yesterday. The THB rose to 35.075, and the SGD rose to 1.3447. USDCNH has risen to 7.1957 and topped 7.20 overnight.   G-7 macro: There were further hawkish comments from Jerome Powell overnight, who said that the US may need one or two more rate hikes. Barkin also indicated that he was happy to see rates go higher. The main macro release from the US for the day was existing home sales. Lack of supply seems to be helping house prices to remain supported, as James Knightley writes here. Initial jobless claims held on to the recent highs at 264K, though continuing claims drifted a little lower. Not quite a smoking gun for the labour market, but it is becoming a little more interesting. The Bank of England’s 50bp hike took markets by surprise. James Smith and Chris Turner write about it here. James notes, “We’re tempted to say that today’s 50bp move won’t become a new trend, but two further 25bp hikes seem like the most likely route after today’s meeting”. Today is another quiet day for macro releases, with nothing of note from the US and only retail sales from the UK to look at.   Japan:  May inflation data came out slightly higher than expected. The headline inflation rate was 3.2% YoY in May (vs 3.5% in April, 3.2% market consensus) but core (3.2%) and "core-core" (4.3%) inflation beat market expectations. Inflation excluding food and energy even rose from 4.1% in April. The headline CPI index was unchanged month-on-month, but goods prices fell 0.1% MoM sa, while service prices rose 0.1%. Housing, transportation, telecommunications, and entertainment prices continued to rise, while utilities fell again. We think there are signs of inflationary pressure building up on the supply side, but it is certainly not strong enough for the BoJ to bring about immediate tightening.Looking ahead, the current energy subsidy program will end in September and some power companies will begin to raise electricity fees again. Thus, we see headline inflation staying above 2% for a considerable time. We expect June Tokyo inflation, released next week, will also pick up again.  We think that the BoJ will upgrade its inflation outlook in July and a yield curve control (YCC) tweak is still possible despite the dovish comments from several board members. They will probably justify their action by saying that a YCC tweak is not a tightening, but instead, that it is done to improve market functionality. Another reason that we think a July tweak is possible is that a shift in YCC may need to come as a surprise to avoid a large bond selloff. Singapore:  May inflation is set for release today.  The market consensus points to a slight softening in inflation with core and headline inflation slipping to 4.7%YoY and 5.4%YoY, respectively.  Continued robust domestic demand is preventing price pressures from dissipating quickly.  Despite the dip in inflation, the MAS will likely be on notice monitoring price developments with core inflation still well above target.  
UK Public Sector Borrowing Sees Decline in July: Market Insights - August 22, 2023

UK Retail Sales Outlook and Flash PMI Focus Amid Inflation Concerns - Analysis by Michael Hewson

Michael Hewson Michael Hewson 23.06.2023 11:35
UK retail sales could surprise to the upside, flash PMIs in focus - By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets fell for the fourth day in succession yesterday, driven lower on worries that central banks will look through concerns over a slowdown in economic activity and prioritise the battle against inflation, and look set to open lower this morning.     These concerns have been magnified in recent days with last week's hawkish Fed meeting, followed by the bigger than expected 50bps rate hikes from the Bank of England and Norges Bank yesterday, as investors started to worry that creating a possible recession was likely to become a necessary side-effect in their willingness to push inflation back down to their 2% targets. Certainly, the sticky nature of core inflation is causing a great deal of anxiety not only on the part of central bankers, but also on the part of those who are due to come off fixed rate mortgages in the next 12 months. The hope is that this period of high rates could soon give way to a softening later in the year, however the big rise in core inflation suggests that we may have to endure them for quite a bit longer.     On the plus side the lowering of the energy price cap next month is already seeing energy companies writing to customers and lowering their monthly direct debits with gas prices now back at 2021 levels. This should start to see headline inflation continue to decline into the end of the year.       While concerns over a possible recession are increasing, a lot of the economic data so far thisyear has proved to be reasonably resilient, which makes the timing of yesterday's decision to be more aggressive by the Bank of England a little bit after the fact.   For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been surprising so far this year, with clothing retailer Next surprising the market earlier this week when it upgraded its full year profits forecasts on better-than-expected trading activity.   Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent increase in interest rate costs that are likely to act as a drag in H2 of this year. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February.   The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year.   For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns. We also have the latest flash PMI numbers for June which are likely to continue to exhibit one of the more notable trends we've seen in recent months, which has been an ongoing divergence between services sector activity and manufacturing activity.   This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Both of these are expected to remain close to current levels.   Services continue to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56. Again, these are expected to come in slightly weaker at 52.1 and 56.3.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling, coming at 47.1 in May, while services also slowed to 55.2 from 55.9. UK manufacturing is expected to soften to 46.8 and services to 54.8.     Lower fuel costs may offer some support here; however, most service providers are struggling with higher costs, which by and large they are having to pass on.    EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – spiked up to 1.2850 yesterday before slipping back, however it remained above the lows this week at the 1.2680/90 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510, but needs to clear 1.2850.      EUR/GBP – failed between the 0.8630/40 area before slipping back. The main support is at least weeks low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally cracked the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 27 points lower at 7,475     DAX is expected to open 120 points lower at 15,868     CAC40 is expected to open 53 points lower at 7,150
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Navigating Central Banks and Inflation: Tightening, Yield Curves, and Market Expectations

ING Economics ING Economics 23.06.2023 11:39
Rates Spark: Whatever it takes, until it breaks The Bank of England showed that central banks will not be shy to tighten more if disinflationary dynamics don't materialize. A reaction function more geared to current data than to being forward looking biases yield curves flatter - until something breaks.   Deeper curve inversions highlight potential costs of tightening too far The initial market reaction to the Bank of England increasing key rates by a larger than anticipated 50bp increment to 5% was revealing. Yield curves twisted flatter, with outright drops in the 10y rate as the more aggressive approach by central banks is seen as coming with an increasing economic cost. Curves staked out new post-March lows although the move lower in long end rates later faded. What sticks is the sense that central banks will remain hawkish and won’t be shy to increase rates further should the lack of disinflationary dynamic warrant it. In any case markets think the BoE has shifted to a more aggressive reaction function, with an even greater focus on current inflation dynamics. After yesterday’s 50bp hike, another 50bp in August is seen as more likely than not. In total, a further 110bp of tightening is discounted in forwards, implying expectations that the BoE will take the terminal rate above 6% before year end. This is a view that our economist does not share, seeing only two more 25bp hikes eventually being realised.      The question remains how far central banks can credibly take the tightening, with record curve inversions pointing to stretched levels. Macro indicators such as, in the US, the Conference Board’s Leading Index are also signalling recession. Today’s release of the June PMI  flash estimates could also serve to highlight the growing discrepancy between the central banks' own optimistic macro outlooks and the softening data indicators, but they alone are unlikely to resolve the disconnect.    More front-loaded tightening seen after the BoE's hawkish surprise   Next week offers key inflation data Sticky core inflation could remain the key theme for next week. Even if there were some positive surprise, central banks have made it clear they want to see a trend for the better in inflation data. By definition that will take a couple of releases at least, but it won’t keep forward-looking markets from extrapolating any incoming data points. That difference can still keep a curve flattening bias in play.   In the US the key release to watch is the PCE inflation data at the end of the week. The headline rate is seen lower, but the consensus is looking for both the monthly and yearly core readings to remain unchanged, at 0.4% and 4.7%, respectively, after their upward surprise last month. Stickier core inflation could still validate the Fed’s hawkish case, but with a lower headline that might not be enough for markets to endorse the two more hikes implied by the FOMC's latest "dot plot". In the eurozone markets will be closely following first the individual country inflation data before we get the June CPI estimate for the block on Friday. The market eyes a decrease in the headline rate to 5.6% year on year, while our economists have pointed out that within core, services inflation continues to see some upside risk for the months ahead. Ahead of the these key releases central banks will have plenty of opportunity to lay out their current reaction function, with the ECB’s central banking forum in Sintra kicking off on Monday. The main event will be a policy panel attended by the ECB’s Lagarde, Fed’s Powell, BoE’s Bailey and BoJ’s Ueda.   Gilt yields higher, but Treasuries and Bunds still appear capped for now   Today's events and market views Through all the key central bank meetings of the last few weeks, it is notable that the trading ranges for longer-dated EUR and USD rates have held, resulting in the overall curve flattening move. The diffrence to the UK is that that, inflation-wise, things have been moving in the right direction, even if only slowly. Still, it does look as if there is a stronger will to test the upside and we would not exclude that 10Y UST yields hit 4% again before going lower.   For now, an eventful week will be capped off by the release of the June PMI flash estimates.  In the eurozone last month brought a pretty bleak report as the PMI indicated that services experienced slower growth and manufacturing experienced a sharper contraction. Consensus is looking for services growth to slow further, but the manufacturing slowdown to at least stabilise. Last month’s main upside was around fading inflation expectations. Central banks will want to rely on the actual inflation readings, where the UK has shown that in the current circumstances, one reading disappointing to the upside can make quite a difference. The next key inflation releases out of the US and eurozone are what markets can look forward to towards the end of next week.  
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Navigating Uncertainty: Shifting Sentiment in European and US Stock Markets

ING Economics ING Economics 26.06.2023 08:04
European and US stock markets have seen a significant shift in sentiment over the past few days when it comes to the global economy. Rising bond yields, driven by more hawkish central banks, which has prompted investors to reassess the outlook when it comes to valuations and growth.     While European markets saw their biggest weekly loss since March, US markets also took a tumble, albeit the first one in 8 weeks, as a succession of central banks pledged that they had significantly further to go when it comes to raising rates. Bond markets also started to flash warning signs with yield curves becoming more inverted by the day whether they be France, Germany, or the UK. Friday's weak finish hasn't translated into a strongly negative vibe as we start a new week for Asia markets, even allowing for events in Russia at the weekend which aren't likely to have helped the prevailing mood, with the US dollar slightly softer this morning after getting a haven bid at the end of last week.     With economic data continuing to show varying signs of vulnerability, particularly in manufacturing the situation could have got even spicier over the weekend when Wagner Group boss Yevgeny Prigozhin set his troops on the road to Moscow in an insurrection against the Kremlin, and Russian President Vladimir Putin.   As it turns out a crisis was quickly averted when it was announced that Prigozhin would go into exile in Belarus, with any charges against him dropped, and Wagner troops would return to their bases. One can only imagine the reaction if that news had broken if markets had been open at the time, however it only adds to the general uncertainty surrounding the war in Ukraine and how quickly things can start to unravel.   This weekend's events also serve to indicate how fragile Vladimir Putin's position is given that one of his most trusted advisors suddenly went rogue.   As we look ahead to the final week of June and the end of the quarter, as well as the first half of the year we can reflect to some extent that markets have held up rather well when all things are considered. They have been helped in that by the sharp falls in energy prices back to pre-Russian invasion of Ukraine levels, as well as the low levels of unemployment which have served to keep demand reasonably resilient.     The elephant in the room has been the stickiness of core inflation as well as signs that demand is starting to falter, and this week we could get further confirmation of that trend.   Today we get the latest Germany IFO Business Climate survey for June, which if last week's flash PMI numbers are any guide could well show that the confidence amongst German business is faltering, with expectations of a slowdown to 90.6, from 91.7.     We also get flash CPI inflation numbers from Germany, France and the EU where headline prices are likely to show further signs of softening, with core prices set to remain sticky. At around the same time we get the latest PCE inflation numbers from the US for May.   These are likely to be important in the context of the Federal Reserve's stated intention to raise interest rates at least twice more before the end of the year.     In April the core PCE Deflator edged up from 4.6% to 4.7%, an area it has barely deviated from since November last year. You would have thought that even with the long lags seen from recent rate hikes they would start to have an impact on core prices.   This perhaps explains why central banks are being so cautious, even as PPI prices are plunging and CPI appears to be following.       EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – currently holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – failed to rebound above the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally moved above the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 6 points higher at 7,468     DAX is expected to open 28 points higher at 15,858     CAC40 is expected to open 8 points higher at 7,171
USD/JPY Climbs Above 143 as Japan's Core CPI Remains Above 3%

USD/JPY Climbs Above 143 as Japan's Core CPI Remains Above 3%

Kenny Fisher Kenny Fisher 26.06.2023 08:34
USD/JPY climbs above 143 Japan’s core CPI remains above 3%   The Japanese yen has stabilized on Friday after falling close to 1% a day earlier.  In the European session, USD/JPY is trading at 143.05, down 0.04%. Earlier, USD/JPY touched a high of 143.45, the highest level since early November 2022. On the data calendar, the US releases ISM Services PMI later today. The consensus stands at 54.0 for June, following 54.9 in May. The services sector has posted four straight readings over the 50 level, which separates expansion from contraction.     Japan’s core inflation higher than expected Japan continues to grapple with high inflation and core CPI for May was higher than expected. With inflation around 3%, other central banks would love to trade places with the Bank of Japan, but Japan’s inflation remains above the 2% target and has become an issue for the central bank after decades of deflation.   Nationwide core CPI, which excludes fresh food but includes energy items, climbed 3.2% in May y/y, down from 3.4% in April but above the consensus of 3.1%. What was more worrying was the “core-core index”, which excludes fresh food and energy, jumped 4.3% in May, up from 4.1% in April. This was above expectations and marked the highest level since June 1981.     Core CPI has now remained above the BoJ’s inflation target of 2% for 14 consecutive months. This puts into question the BoJ’s stance that cost-driven inflation is temporary and therefore there is no need to tighten monetary policy. Inflation risks are tilted to the upside and the BoJ will find it more difficult to defend its ultra-loose policy if inflation pressures don’t ease.   The BoJ maintained its policy settings at last week’s meeting and has no plans to tighten interest rates anytime soon. This puts the BoJ at odds with other major central banks, which have been aggressively tightening rates in order to curb inflation. The US/Japan rate differential has been widening as the Fed raises rates while the BoJ stands pat. This has sent the yen sharply lower, raising concerns that the government could intervene in the currency markets in order to prop up the yen.   The Ministry of Finance stunned the global financial markets in September and October when it intervened, at a time when the yen had fallen below the 150 line. The yen hasn’t fallen quite that low, but I would expect to hear louder verbal intervention out of Tokyo if the yen falls below 145.     USD/JPY Technical USD/JPY tested support at 142.82 earlier. The next support level is 142.07 There is resistance at 143.83 and 144.27  
Challenges Loom Over Eurozone's Economic Outlook: Inflation, Interest Rates, and Uncertainty Ahead

Canada's Inflation Eases as US Durable Goods Orders Accelerate, Impacting CAD/USD Exchange Rate

Kenny Fisher Kenny Fisher 28.06.2023 08:46
Canada’s inflation rate eases US Durable Goods Orders accelerate The Canadian dollar spiked and gained 50 points after Canada released the May inflation report but has pared these gains. USD/CAD is unchanged at 1.3158.   Canadian inflation heads lower Canada’s inflation rate fell sharply in May to 3.4%, down from 4.4% in April. As expected, much of that decline was due to lower gasoline prices. Still, this is the lowest inflation rate since June 2021.The core rate, which is comprised of three indicators, fell to an average of 3.8% in May, down from 4.2% a month earlier. The decline should please policy makers at the Bank of Canada, as inflation slowly but surely moves closer to the 2% target. The BoC cited the surprise upswing in inflation in April as one reason for its decision to hike rates earlier this month. With headline and core inflation falling in May, will that be enough to prevent another rate increase in July? Not so fast. The BoC has said its rate decisions will be data-dependent, and there is the GDP on Friday and employment next week, both of which will factor in the rate decision. The US released a host of releases today, giving the markets plenty to digest. Durable Goods Orders jumped 1.7% in June, up from an upwardly revised 1.2% in May and crushing the consensus of -1%. The core rate rebounded with a 0.6% gain, up from -0.6% and above the consensus of -0.1%. Later today, the US publishes the Conference Board Consumer Confidence and New Home Sales. Wednesday is a light day on the data calendar, with the Fed will in the spotlight. Fed Chair Jerome Powell will participate in a “policy panel” at the ECB Banking Forum in Sintra, Portugal, and investors will be looking for some insights into Fed rate policy. As well, the Fed releases its annual “stress tests” for major lenders, which assess the ability of lenders to survive a severe economic crisis. The stress tests will attract more attention than in previous years, due to the recent banking crisis which saw Silicon Valley Bank and two other banks collapse.   USD/CAD Technical There is resistance at 1.3197 and 1.3254 1.3123 and 1.3066 are providing support  
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Australian Inflation Report and RBA Decision: Impact on Australian Dollar and Rate Outlook

Kenny Fisher Kenny Fisher 28.06.2023 08:50
Australian inflation expected to slow in May The inflation report will have a significant impact on RBA decision in July The Australian dollar is in positive territory on Tuesday. AUD/USD rose as high as 50 pips earlier but has pared these gains and is trading at 0.6685, up 0.16%. The Australian dollar is showing some life after last week’s awful performance, in which it declined by 2.87%.   Markets eye Australian CPI On Wednesday, Australia releases the monthly inflation report for May. Inflation is expected to ease to 6.1% y/y, down from 6.8% in April. If the consensus is accurate, this would mark the lowest inflation level since March. The Reserve Bank will be keeping close tabs on the inflation release, especially core CPI, which is a more accurate gauge of inflation trends. The core rate fell from 6.9% to 6.5% in April, but that is incompatible with a 2% inflation target, and the RBA will need to see core inflation fall much more quickly before it can think about winding up the current rate-tightening cycle. The markets have priced in a rate pause from the Reserve Bank of Australia at 77%, and a significant drop in inflation on Wednesday should cement a pause at the July meeting. The RBA surprised the markets earlier this month when it raised rates by 25 basis points, bringing the cash rate to 4.35%. The minutes of the meeting indicated that the decision to hike was close, and a key factor in the decision was concern over persistently high inflation. The central bank is well aware of the pain inflicted on households and businesses due to rising rates, and a pause in rate hikes would provide some relief, as well as allow the RBA to monitor the effects of its rate policy. At the same time, the central bank has made it absolutely clear that its number one goal is curbing high inflation, which means Wednesday’s inflation release could have a significant effect on the direction of the Australian dollar.   AUD/USD Technical AUD/USD put pressure on resistance at 0.6729 in the Asian session. Above, there is resistance at 0.6823 0.6598 and 0.6518 are providing support    
EUR/USD Rangebound Ahead of Data Releases and Rate Expectations

Asia's Economic Outlook: Trade, Inflation, and Recovery Patterns in Korea, Japan, Indonesia, and the Philippines

ING Economics ING Economics 29.06.2023 13:56
Korea trade and inflation data set for release Exports in Korea are expected to contract again in June. But due to strong auto and vessels exports, the contraction (-6.4%) should be quite a bit lower than the previous month of -15.2% YoY. We think vessel exports should be strong this year due to the imminent delivery of pre-order ships, considering that the shipbuilding period is at least two-to-three years. But since this does not reflect the current global demand cycle, it is necessary to focus more on exports excluding ship data to understand global demand conditions better. Meanwhile, we expect consumer inflation to decelerate quite sharply in June and reach the 2% range mainly due to the high base last year. The gains from utility fees should be partially offset by the decline in gasoline, fuel and rent prices.   Japan's Tankan survey to show economic recovery Business survey data will be released in Japan next week. Both Tankan and PMI surveys will show that the country’s economy is on the path to recovery, led by solid service activity in particular.   Inflation to moderate further in Indonesia and the Philippines Headline inflation is set to moderate further for both Indonesia and the Philippines. Inflation should remain within target in Indonesia, settling at 3.8%YoY, while core inflation could be flat at 2.7%YoY. Meanwhile, Philippine inflation should sustain its downtrend, with May inflation possibly slipping to 5.5%YoY from 6.1% previously. Slowing inflation should give both Bank Indonesia and the Bangko Sentral ng Pilipinas space to keep rates untouched in the near term.    Key events in Asia this week
August CPI Forecast: Modest Inflation Increase Expected Amidst Varied Price Trends

USD/JPY Outlook: Tokyo Core CPI Data and Ueda's Policy Stance Impact Yen's Direction

Kenny Fisher Kenny Fisher 29.06.2023 14:18
Japan releases Tokyo Core CPI on Friday USD/JPY moves closer to symbolic 145 line Ueda says no changes to policy unless core inflation rises USD/JPY has edged lower on Thursday. In the European session, the yen is trading at 144.19, down 0.20%. The yen dropped as low as 144.70 in the Asian session, as the symbolic 145 line remains under pressure.   Tokyo Core CPI expected to tick higher Japan releases a key inflation indicator, Tokyo Core CPI, on Friday. The indicator dipped to 3.2% in May but is expected to inch up to 3.3% in June. Tokyo CPI excluding food and energy, currently at 2.4% and known as the “core core index”, will be under the microscope after the National “core core index” rose unexpectedly in June. Earlier this week, BoJ Core CPI, the preferred inflation gauge of the central bank, rose from 2.9% to 3.1%, above the consensus of 3.0%. If today’s inflation report also shows that inflation is creeping higher, it will put into question the BoJ’s stance that cost-driven inflation is temporary and therefore there is no need to tighten monetary policy. Governor Ueda reiterated this position at the ECB Bank Forum on Wednesday. Ueda stated that he would continue the BoJ’s ultra-easy monetary policy unless he was “reasonably sure” that inflation accelerated in 2024. He said that the BoJ was not confident that this would occur, noting that even though headline inflation was above 3%, core inflation remained below the Bank’s 2% target. The BoJ’s ultra-accommodative policy has seen the yen slide to 7-month lows, which has drawn warnings from the Ministry of Finance about intervening in the currency markets. Ueda declined to comment on the possibility of intervention, saying that the BoJ was closely monitoring the exchange rate and that the yen was influenced by many other factors besides BoJ policy.     USD/JPY Technical There is resistance line at 144.65 and 145.36 143.94 and 142.94 are providing support  
Oil Prices Find Stability within New Range Amid Market Factors

German Disinflationary Trend Pauses for the Summer: Inflation Data and ECB's Outlook

InstaForex Analysis InstaForex Analysis 29.06.2023 15:00
German disinflationary trend pauses for the summer German inflation increased in June to 6.4% year-on-year, from 6.1% YoY in May. But what looks like an end to the disinflationary trend of the last few months is only a temporary break. Disinflation should gain more momentum after the summer. According to the just-released first estimate, German headline inflation increased in June, coming in at 6.4% year-on-year (from 6.1% YoY in May). The harmonised European measure showed German headline inflation at 6.8% YoY, from 6.3% in May. This marks an end to the disinflationary trend seen over the last six months. However, a closer look at the data suggests that the disinflationary trend will gain new and even stronger momentum after the summer.   Disinflationary trend has paused, not stopped Inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value. Government intervention and interference, whether temporary or permanent or occurring this year or last, will continue to blur the picture. Today’s inflation data show that headline inflation is and will be affected by several base effects: while lower energy prices insert downward pressure on inflation, the end of last summer’s temporary government energy relief measures has inserted upward pressure. Looking at monthly price changes actually paints a promising picture of German inflation dynamics. For the third month in a row, food prices have dropped month-on-month. Prices for clothing have dropped for the first time since January; a tentative sign of weaker demand and price discounts. With still lower-than-expected energy prices, dropping food prices and fading pipeline price pressures in both services and manufacturing, German (and eurozone) inflation could come down faster than the ECB expects, at least after the summer. In fact, there is the risk that another chapter will be added to the misconceptions of inflation dynamics: after ‘inflation is dead’ and ‘inflation is transitory’, we could now have ‘inflation will never come down’. Don’t get us wrong, we still believe that, structurally, inflation will be higher over the coming years than pre-pandemic. Demographics, derisking and decarbonisation all argue in favour of upward pressure on price levels. However, be cautious when hearing comments that inflation will never come down. These comments might come from the same sources that only a few years ago argued that inflation would never surge again. This does not mean that the loss in purchasing power as a result of the last inflationary years will be reversed any time soon. It only means that headline inflation can come down faster than currently anticipated. We see German headline inflation falling to around 3% towards the end of the year. Admittedly, the risks to this outlook are obvious: sticky core inflation, wage pressure and government measures to support the demand side of the economy.   ECB will continue to hike ECB President Christine Lagarde made it clear at this week’s ECB forum in Sintra that the job is not done, yet. We, however, still think that the ECB is too optimistic about the eurozone’s growth outlook. Historic evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. These are two strong arguments for a further slowing of core inflation in the second half of the year and reasons to start doubting the need for further rate hikes. But, the ECB simply cannot afford to be wrong about inflation (again). The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why it is putting more emphasis on actual inflation developments, and why it will rely less on forecasts than in the past. As a consequence, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point and will continue hiking until then. If we are right and the economy remains weak, the disinflationary process gains momentum and core inflation starts to drop after the summer, the ECB’s hiking cycle should end with the September meeting.
Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Inflation Numbers Take Center Stage as Quarter Comes to a Close

Michael Hewson Michael Hewson 30.06.2023 09:50
Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      
Asia Morning Bites: Focus on Regional PMI Figures, China's Caixin Manufacturing Report, and Upcoming FOMC Minutes and US Non-Farm Payrolls"

Asia Morning Bites: Focus on Regional PMI Figures, China's Caixin Manufacturing Report, and Upcoming FOMC Minutes and US Non-Farm Payrolls"

ING Economics ING Economics 03.07.2023 08:56
Asia Morning Bites Market attention today will be on regional PMI figures and China's Caixin manufacturing report. Later in the week, the focus will shift to the FOMC minutes and US non-farm payrolls.   Global Macro and Markets Global markets:  US stocks finished last week on a positive footing, with both the S&P 500 and NASDAQ rising more than a per cent. That was a better performance than Chinese stocks. The CSI 300 did rise about half a per cent on Friday, but the Hang Seng was roughly unchanged. Tomorrow is the 4th of July, so the US will be out, and markets may be a bit thin ahead of the holiday. US Treasury yields nosed higher again on Friday. The 2Y UST yield rose 3.6bp to 4.895%, while the yield on the 10Y actually edged down 0.2bp to 3.837%. EURUSD staged an abrupt turn on Friday, rising back above 1.09 and it sits just above that level currently. The AUD has also made gains, rising to 0.666 ahead of tomorrow's RBA decision (we think no change, but the consensus is split), as has Cable, which is up to 1.2698. The Yen briefly went above 145 on Friday but with concern about intervention, it came down to 144.3 and traded in the narrow range. From previous years’ experience, intervention could be imminent, but we should watch the pace of depreciation more closely than the actual level of the JPY.  If the yen depreciates by more than 2% within 1-2 business days, we think that could be a trigger for government intervention. Other Asian FX has also made some gains against the USD. The THB and PHP were the main gainers on Friday, while the TWD lagged the pack.   G-7 macro:  US data on Friday was a little softer than predicted. Personal spending was up just 0.1% MoM, and flat on the previous month in real terms. The core PCE deflator rose 0.3%MoM, in line with expectations, but the core PCE inflation rate came in a little softer on rounding, to 4.6%YoY, down from 4.7%. Core inflation in the Eurozone edged 0.1pp higher to 5.4%, though this wasn’t quite as bad as had been expected. To kick this week off, we have the US Manufacturing ISM survey. Forecasters expect the headline index to move to a slightly less negative reading of 47.2 after 46.9 last month.   China: Caixin releases PMI data today. The official PMI numbers last week showed manufacturing still struggling with a below-50 reading. But although the non-manufacturing survey index was still in the expansion zone above 50, it was lower than the previous month. The Caixin manufacturing PMI has been a little stronger than the official numbers and was still just above 50 last month. We think it will probably drift down to about the 50 level this month, in line with the consensus view.   Japan:  The latest Tankan survey showed that Japan’s economy stays on its recovery path and will likely accelerate in the third quarter. The Tankan survey for large firms (both manufacturing and non-manufacturing) rose in both the current conditions and outlook indices. The current condition for manufacturing advanced from 1 to 5 for the first rise since June 2021 with confidence rising in the auto and electronics sectors. The outlook index also advanced to 9, beating the market expectation of 4. Despite the weakening of global demand, solid domestic demand, strong auto-sector performance and improving profits due to the weak JPY all may have supported the improvement seen in the manufacturing indices. The service-sector index also improved as expected. More importantly, capital investment across large enterprises rose 13.4% YoY (vs 3.2% 1Q, 10.0% market consensus).  The Tankan survey is one of the most closely watched indicators by the Bank of Japan, and we think the BoJ will likely upgrade its growth outlook in its quarterly macro-outlook report.   South Korea:  The trade balance in June recorded a surplus for the first time in sixteen months mainly due to falling global commodity prices. Within the export side, transportation - autos and vessels - gained the most, but this was more than offset by a decline in chips and petroleum. By destination, exports to the US fell for a third month while exports to the Middle East rose solidly due to regional infrastructure investment projects.  Please see the link for more details. However, business surveys showed that the manufacturing sector recovery is not so promising. Today’s manufacturing PMI fell to 47.8 in June from 48.4 in May. Last week’s local business survey also retreated. Thus, we are cautious about the improvement in manufacturing and exports in the current quarter.   Indonesia:  Indonesia reports inflation numbers today.  We expect inflation to moderate further with the market consensus pointing to a 3.6% YoY increase in prices last June.  Despite the slowdown in inflation, BI may opt to extend their pause and keep rates at 5.75% in the near term to help support the IDR.     What to look out for: Regional PMI reports and US NFP Japan Tankan survey and Jibun PMI (3 July) Regional PMI reports (3 July) Australia building approvals (3 July) China Caixin PMI manufacturing (3 July) Indonesia CPI inflation (3 July) US ISM manufacturing (3 July) South Korea CPI inflation (4 July) Australia RBA meeting (4 July) Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)
ECB's Dovish Shift: Markets Anticipate Softer Policy Guidance

US Jobs Report and Fed Minutes in Focus; Eurozone Inflation Promising; Central Bank Speak and Final PMIs Awaited

Ed Moya Ed Moya 03.07.2023 10:23
US It will be an eventful week, the ISM manufacturing report, the fourth of July Holiday, the Fed Minutes, and the nonfarm payroll report.  Wall Street is starting to believe in those Fed dot plots and this week’s economic data points may provide more evidence for the hawks.  The ISM manufacturing report is expected to show activity is stabilizing.  The Fed minutes will emphasize the fear that core inflation is proving to be stickier.  The June US jobs report is expected to show hiring cooled from the 339,000 pace to 200,000 jobs. The unemployment rate however is expected to improve from 3.7% to 3.6%.  Wage pressure is also expected to remain steady with a 0.3% increase from a month ago.    We will hear from a couple of Fed speakers this week. Williams participates in a moderated discussion at the 2023 annual meeting of the Central Bank Research Association at the New York Fed. Logan speaks on a panel about the policy challenges for central banks at the Central Bank Research Association annual meeting at Columbia University.     Eurozone Eurozone inflation data on Friday was very promising and while it likely won’t influence whether the ECB hikes or not in July – Lagarde previously strongly hinted they will – if followed by further signs of disinflation over the summer, it could see the central bank consider a pause in September.  Next week is a little short of tier-one releases but final PMIs on Monday and Wednesday will be of interest, as will another appearance by ECB President Christine Lagarde on Friday.   UK  Very little data of note next week with final PMIs the only highlight. That aside, central bank speak will be followed closely although in the absence of better inflation data, their hands are seemingly tied. The real question ahead of the next meeting is whether they’ll hike by 25 basis points or 50 again.   Russia A relatively quiet week with PMIs on Monday and Wednesday as the only notable releases. That aside there’s the Russian central bank financial congress on Thursday and Friday so we may hear from Governor Elvira Nabiullina.   South Africa The whole economy PMI is the only notable economic release or event next week.   Turkey With the CBRT pivoting toward more conventional monetary policy in the aftermath of the election, the economic data becomes increasingly relevant and next week we’ll get June inflation numbers on Wednesday. The CPI is expected to remain close to 40% but with the currency in freefall, the inflation outlook is likely to get worse before it gets sustainably better. The central bank has stepped back from burning through reserves to support the lira and effectively pay for bad policy choices and that has sent the lira to record lows, falling more than 20% in the last month, alone.
AUD Faces Dual Challenges: US CPI Data and Australian Labor Market Statistics

RBA Decision and Global Market Updates

ING Economics ING Economics 04.07.2023 08:45
Asia Morning Bites The RBA decision will be the main data release for the day as the US takes a holiday.   Global Macro and Markets Global markets:  Not surprisingly, it was a fairly moribund start to the week for US stocks ahead of today’s US holiday.  Both the NASDAQ and S&P 500 made small gains. There was more action on Chinese bourses, where the Hang Seng rose 2.06% and the CSI 300 rose 1.31%. US Treasury yields continued to rise with 2Y yields up a further 4bp but 10Y yields up just 1.8bp. EURUSD is largely unchanged at 1.0914. The AUD is looking a little stronger at 0.6675 ahead of the RBA later today (we expect no change from them, though the market is split).  Cable was little changed, but the JPY lost further ground rising to 144.64. In Asian Markets, the KRW and THB made some gains, but it was a lacklustre day for most currency pairs.   G-7 macro:  The US Manufacturing ISM index weakened further to 46.0 from 46.9, and the employment index dipped into contraction territory, falling from 51.4 to 48.1. New orders were slightly less bad at 45.6, up from 42.6, but still in contraction territory. The equivalent manufacturing PMI index produced by S&P also registered 46.0, though was flat from the previous month. US construction data was stronger than expected, rising 0.9% MoM, though there were a lot of downward revisions. Apart from German trade data, it is quiet for Macro today in the G-7.   Australia:  The RBA decision today has the market split. Of 32 economists surveyed by Bloomberg, 13 expect a rise of 25bp to 4.35%, while 19 (including ourselves) expect no change to the current 4.1% cash rate target. The main reasons for our decision are as follows: The RBA hiked in June, and although the data has been mixed, back-to-back hikes seem excessive with rates already at an elevated level. Moreover, the run of recent inflation data has been far more benign than was expected, and if last month’s finely balanced decision was pushed over the edge by higher-than-expected inflation, this month’s decision should result in no change by the same logic. See this note on the latest CPI data for more on this. Finally, there will be much better occasions for the RBA to hike in the months ahead if that remains necessary. September will be one of those, as the RBA can assess the impact of large electricity tariff increases which are due in July, and should be visible in CPI data by September. Also, favourable base effects drop out after July's CPI release for several months, so it is not inconceivable that we see some backing up of inflation over the third quarter before it dips again into the year-end.   South Korea: Consumer prices rose 2.7% YoY in June, slowing for a fifth month (vs 3.3% in May, 2.8% market consensus) as gasoline (-23.8%) and diesel (-35.2%) prices limited overall price increases. Excluding agricultural products and oils, core inflation also slowed to 4.1% from 4.3% in May. We believe that inflation will stay in the 2% range throughout the year, there will be some ups and downs, but inflation probably won’t return above 3%. KEPCO raised power bills from the middle of May leading utility fees to rise sharply (25.9%), but we don’t expect additional fee hikes throughout this year due to falling global commodity prices. Also, rent prices marked five monthly drops in month-on-month comparisons, and the declines are gradually increasing each month. As a result, we think that service prices will come down further in the coming months. Today’s data support our view that the Bank of Korea (BoK) will continue to stay on hold.  Now, the question is the timing of the first rate cut. We have pencilled in a 25bp cut in October as inflation is expected to head towards 2% while the economic recovery remains sluggish. The BoK may be concerned that rate cuts could cause a rebound of household borrowing, along with the recent easing of mortgage measures. At the same time, rising delinquency rates and default rates will also be a concern for the BoK as strict credit conditions have increased the burden on households.     What to look out for: RBA meeting South Korea CPI inflation (4 July) Australia RBA meeting (4 July) Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)
Swiss Inflation Falls Below Expectations; US Markets Closed, Fed Minutes Awaited

Swiss Inflation Falls Below Expectations; US Markets Closed, Fed Minutes Awaited

Kenny Fisher Kenny Fisher 04.07.2023 15:48
Swiss inflation lower than expected US markets closed on Tuesday Fed minutes will be released on Wednesday The Swiss franc is showing little movement on Tuesday, trading at 0.8959 in the European session. US markets are closed for the July Fourth holiday and we can expect a quiet day for USD/CHF.   Swiss inflation falls to 1.7% Switzerland’s inflation rate dipped in June to 1.7% y/y, down from 2.2% in May and just below the consensus of 1.8%. On a monthly basis, inflation rose 0.1%, down from 0.3% and below the consensus of 0.2%. Core inflation eased to 1.8% y/y, down from 1.9%. Swiss National Bank President Jordan has often complained that inflation remains too high, although other central bankers, who are grappling with much higher inflation, would be happy to change places. Both the headline and core rates have now dropped into the Bank’s target range of 0%-2%, which should lend support to the SNB taking a pause at the September meeting. However, Jordan has been quite hawkish and one positive inflation report may not be enough to convince the SNB that the decline in inflation is temporary. The markets have priced in a 66% probability of a 0.25% in September, which would bring the cash rate to an even 2.0%. US markets are closed today, but Wednesday should be a busy session as the Fed releases the minutes from the June meeting. The markets are widely expecting a rate hike in July, and there are growing concerns that if the Fed continues to hike, the economy will tip into a recession.  The spread between 2-year and 10-year Treasury note yields deepened to a 42-year high on Wednesday, raising fears of a recession. A yield curve inversion is considered a reliable indication of a recession and the current inversion has been in place since July, raising fears about the direction of the US economy.   USD/CHF Technical USD/CHF is testing support at 0.8961. Below, there is support at 0.8904 0.9009 and 0.9081 are the next resistance lines  
The Mexican Curve: Deeper Inversion Than the US, Signaling Turning Points Ahead

Rates Spark: Fed Minutes Sustain Hawkish Stance Amid Inflation Concerns

ING Economics ING Economics 06.07.2023 09:34
Rates Spark: ISM is a dancer It's very much glass half full for inflation risks, and the latest Fed minutes voice concern that has been echoed by the ECB (and BoE). This plus supply pressure and rising deficits is placing ongoing upward pressure on market rates. Despite survey evidence pointing down, we think pressure remains for even higher market rates.   Fed minutes sounds suitably hawkish – in tune with the market mood of late Fed minutes are sustaining the hawkish tilt that has been dominating policy discussion of late. The Fed paused in June, but some participants would have preferred a hike. There was acknowledgement of ongoing firm GDP growth and high inflation, with core inflation in particular showing no tendency to show any material fall this year so far. The balance is one of a hawkish Fed, with some seeing the possibility of avoiding a material downturn. Staff still see a mild recession ahead. The Fed also noted that credit remains available to highly rated borrowers, but that lending conditions had tightened further for bank-dependent borrowers. Apart from obviously higher borrowing costs, the Fed also notes a tightening in lending standards in the commercial real estate space. There was also a tightening in credit conditions for lower rated borrowers in the residential mortgage market. But overall vulnerabilities to funding risks are deemed moderate by the Fed.      
Stocks Rebound Amid Rising Volatility: Analysis and Outlook

Navigating the Economic Landscape: Three Calls for the Second Half of 2023

ING Economics ING Economics 06.07.2023 13:06
For the global economy, the first half of the year was packed with action. The remainder of the year will see a further weakening of the global economy, a rapid fall in headline inflation, and a dearth of central bank rate cuts.   Our three calls for the remainder of 2023  It’s halftime for 2023 but not halftime like at the Super Bowl with Snoop Dogg, Shakira or Rihanna. It’s halftime of the economic year, and economists are taking a deep breath with no singing or dancing (even if some of us might have hidden talents). It is simply the moment to assess the first half of the year and to sharpen our minds (and calls) for the second half. For the global economy, the first half of the year was packed with enough action for an entire year. An energy crisis in Europe that was avoided thanks to a mild winter and fiscal stimulus. A reopening of China that is more sluggish and wobblier than hoped for. A banking crisis in the US and Switzerland which hasn’t ended in a global financial crisis as feared. Unprecedented central bank tightening and gradually retreating inflation, with the latter not necessarily the result of the former. Against this backdrop, the age-old question of whether the glass is half-empty or half-full comes to mind. Should we cherish the current resilience of many economies and the financial system as things could have become much worse? Or should we moan about the missed opportunities, lacklustre growth and a still very long list of potential risks? As is so often the case, the truth is probably somewhere in the middle.     Looking ahead, the risk for every forecaster is the temptation to spread optimism and predict an upturn of almost everything towards the end of the year (or the end of the forecast horizon as many traditional macro models do). We are more cautious. The fact that things didn’t get as bad as feared does not automatically lead to a return of optimism or a surge of economic activity. In fact, the structural themes of the last few years are still pressing and impacting the economic outlook. Think for example of geopolitical tensions, the war in Ukraine, demographics, climate change more generally and more specifically the energy transition, and high government debt. It is impossible to tell how and when exactly these factors will affect growth or an inflation forecast profile but we definitely know that these effects are here and they are here to stay. Let’s be a bit more precise and come back to economic developments in the second half of this year. Bold or not, we have three major calls for the remainder of the year: Further weakening and not strengthening of the global economy. Headline inflation will retreat faster than central banks currently think. Rate cuts are a 2024 but not a 2023 story. Let's look at these three calls in more detail. The global economy will further slow down and "slowcessions" are likely in several parts of the developed world. The Chinese reopening will continue to stutter, the US economy is likely to experience a winter recession and the eurozone will remain in this twilight zone between stagnation and recession. Besides negative base effects from energy and food prices, the cooling of many economies will lower wage pressure, reduce inflation pipeline pressures and will increasingly lead to price discounts. Headline but also core inflation are likely to come down faster than central banks anticipate towards the end of the year. The phenomenon of "slowcessions" is a new challenge for central banks. Reacting to a more pronounced cycle is much easier as it takes much longer to identify a "slowcession". Until central bankers have realised that we are in a "slowcession" for good, they will continue hiking rates, not cutting them. If we are right, central bankers will adjust to the new reality in the last months of the year, acknowledging weaker growth, broader disinflation and no further need for rate hikes. It might not be as eye-catching as Janet Jackson and Justin Timberlake, but it is definitely an exciting view of the global economy. Have a good summer.  
Analyzing the Euro's Forecast Amidst Eurozone Data and Global Factors

Disinflationary Trend in the Eurozone: Spotlight on Core Inflation

ING Economics ING Economics 06.07.2023 13:18
  The disinflationary trend in the eurozone has started and should gain more momentum after the summer. It will take a while but core inflation should follow suit as well.   Slowly but surely, the inflation outlook for the eurozone is improving. Base effects as well as fading supply chain frictions and lower energy prices have and will continue to push down headline inflation in the coming months – a drop that the European Central Bank deserves very little credit for orchestrating. With headline inflation gradually normalising, the big question is how strong the inflation inertia will be. As long as core inflation remains stubbornly high, the ECB will continue hiking interest rates. How long could this be?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply, which is widely expected to continue over the months ahead. The decline in natural gas prices has been remarkable over recent months and while it would be naïve to expect the energy crisis to be over, this will result in falling consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there will be more to come in terms of the downward impact on inflation. The same holds true for food. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slow. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Headline inflation – at least in the absence of any new energy price shocks – looks set to slow down further, but the main question now is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 1980s are not available for many countries, but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 1970s and 1980s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices over the coming months.      
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Divergence in Goods and Services Inflation: Implications for Core Inflation and the Outlook

ING Economics ING Economics 06.07.2023 13:20
The services sector is still thriving, however, and enjoying the post-pandemic shift from goods to services. Services most affected by lockdowns are currently experiencing much faster price growth than other services or goods. While the upcoming summer holiday period could still fuel service price inflation, we did see a decline last month. The drop was largely due to cheaper public transportation tickets in Germany, however, so it seems too early to call a significant improvement in services inflation just yet. Finally, services inflation traditionally shows a much stronger correlation with wage growth than goods inflation. With wage growth trending up and probably coming in at around 5% year-on-year in the eurozone, services inflation remains the largest problem for core inflation and the ECB.   Still, a key question remains over how long the divergence between goods and services inflation can last. Historically, we don’t see much evidence of an extended difference between the two. Goods inflation typically leads services inflation by approximately six months, which means that the peak in the former from February suggests that the latter is unlikely to remain elevated for the rest of the year. If we are right and the post-pandemic shift ends after the summer holiday period, we could see services inflation starting to come down before the end of the year.   Core inflation set to trend down from here on out While services inflation continues to see some upside risk for the months ahead, core inflation overall looks set to trend down on the back of slowing goods prices. Even services inflation could already be trending down, but perhaps not as fast as policymakers would like it to. When looking at selling price expectations for sectors that sell most to consumers, we see that there has been a steady downturn in the number of businesses intending to raise prices. This generally correlates fairly well with core inflation developments seven months later, which would point to a significant slowdown in the core rate. At the current juncture, experts and central bankers will be hesitant to make an outright call for a sharp drop in inflation. The latest track record of inflation forecasting is simply not on their (or our) side. Nevertheless, as much as it was once obvious that the era of low inflation had to end at some point, it's now clear that the short period of surging inflation will also cease sooner or later. Historical evidence and the latest developments in both goods and services give enough comfort to expect both headline and core inflation to decline. We currently expect core inflation to drop below 4% at the end of the year and for it to fall to 2.5% by mid-2024. The risks to that outlook seem to be fairly balanced, with more stubborn core inflation on the back of faster wage growth and a faster drop on the back of weak goods inflation both decent possibilities.        
A slowing services sector and downward trend in inflation

A slowing services sector and downward trend in inflation

ING Economics ING Economics 06.07.2023 13:27
Services are now also slowing We certainly don’t deny that the pick-up in wage growth, in combination with lower energy prices, is boosting consumers’ purchasing power, supporting consumption growth over the coming quarters. But at the same time, some increase in the savings ratio looks likely as the economic outlook has become more uncertain (in some member states unemployment has started to increase). All sectors are now signalling a deceleration in incoming orders, while inventories in industry and retail are at a very high level. Even services, which held up well despite the recessionary environment in manufacturing, are losing steam. The services confidence indicator fell in June below its long-term average. That doesn’t necessarily mean that the only way is down – we still expect a strong summer holiday season, supporting third-quarter growth. But after that things might become shakier again, as the US economy is expected to have fallen into recession by then. The bottom line is that we now only expect 0.4% growth in 2023. Subsequently, on the back of the low carry-over effect, we pencil in a 0.5% GDP expansion for 2024.   Downward trend in inflation continues The flash headline inflation estimate for June came out at 5.5%, while core inflation increased slightly to 5.4%. However, the increase in core inflation is entirely due to a base effect in Germany that will disappear in September. The growth pace of core prices, measured as the three-month-on-three-month annualised change in prices, now stands at 4.4%. That is still too high, but the trend is clearly downwards. The inventory overhang is leading to falling prices for goods. In the European Commission’s survey, selling price expectations softened again in all sectors, while the expected price trends in the consumers’ survey fell to the lowest level since 2016. It, therefore, doesn’t come as a surprise that we expect the downward trend in inflation to continue, with both headline and core inflation likely to be below 3% by the first quarter of 2024.   Selling) price expectations are coming down across the board
A Delayed Dollar Downtrend: Evaluating the Medium-Term Outlook for EUR/USD

A Delayed Dollar Downtrend: Evaluating the Medium-Term Outlook for EUR/USD

ING Economics ING Economics 06.07.2023 13:37
We had previously pointed at the third quarter of 2023 as the period where the dollar would decisively turn lower. Recent developments in US data and Fed communication may well have delayed the big chunk of the USD decline, but medium-term valuation and our expectations for Fed rate cuts in early 2024 mean EUR/USD can still eye 1.15 around the turn of the year.   A prolonged pause in the dollar decline In previous rounds of forecasting, we had pointed to the third quarter of this year as the period where a dollar downtrend could truly materialise, as the combined evidence of slowing inflation and the economic slowdown would lead the Federal Reserve to a dovish turn. Now in July, we have to acknowledge that it may still be too early for the dollar to take a decisive and sustainable turn lower this summer. The recent strengthening in FX with short-term rate correlations means central bank divergence remains generally the predominant driver across USD crosses, and the dollar outlook is likely to remain strictly tied to Fed rate expectations. Our rates team believes a drop in short-term USD rates now looks more likely to be a fourth-quarter and early-2024 story, which means EUR/USD could mostly bounce around the 1.08-1.10 range this summer, without a very clear sense of direction, before taking a decisive turn higher to 1.15 by year-end. The ECB’s hawkishness, underpinned by sticky core inflation in the eurozone, can help keep front-end EUR swap rates supported, and offer more support to the euro, but is also unlikely to do the heavy lifting in a longer-lasting EUR/USD bull trend. We expect two ECB hikes, in July and September, and only a gradual abatement of the hawkish rhetoric. Markets however are fully pricing this in, and the magnitude of potential Fed expectation repricing remains considerably larger compared to the ECB’s.    
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Assessing Rate Hike Expectations: Resilient US Economy and UK Wage Inflation Data

ING Economics ING Economics 07.07.2023 11:40
The resilience of the US economy makes a July rate hike look a certainty, with the market sensing a strong chance that we get another before the year's end. In the UK, the size of the August rate hike seems to be dependent on wage inflation data. US: July rate hikes look certain The resilience of the US economy has seen market interest rate expectations push higher with the yield on the 10Y Treasury bond breaking above 4%. A July rate hike looks certain, with the market sensing a strong chance that we get another hike, as suggested by the Federal Reserve, before year-end. The upcoming data flow centres on inflation and here we expect to see some good news, with lower energy costs, softening food prices, a topping out in housing rents and falling vehicle prices set to partially offset strength in the core services ex-housing component that the Fed is so fearful of. A 0.3% month-on-month reading for headline and core inflation would see the annual rate of headline inflation slowing to 3.1% from 4% and core (ex-food and energy slowing to 5% from 5.3%). While this will do little to alter the likelihood of a July hike, it could at the margin provide a little relief and see longer-dated interest rate expectations tick a little lower. Pipeline price pressures are set to offer more encouragement that inflation can continue slowing, with the PPI report set to show annual increases in producer prices slowing to just 0.4%YoY with the core PPI rate slowing to 2.5%. We will also be closely following the National Federation of Independent Businesses’ pricing intentions survey. A further decline in company appetite to hike prices would offer encouragement that we will also start to see more of an easing in service sector inflation.    
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Norwegian Krone Gains Momentum: Norges Bank's Hawkish Stance and Positive Economic Outlook Drive Recovery

Michał Jóźwiak Michał Jóźwiak 07.07.2023 16:17
The Norwegian krone, except for the Japanese yen, has faced a challenging start in 2023 as it emerged as the worst-performing G10 currency. This downward trend continued from the previous year, resulting in disappointments for the Scandinavian currency. However, experts have argued that the krone was undervalued given Norway's robust macroeconomic fundamentals. Now, with the help of a hawkish Norges Bank, which recently increased rates by 50 basis points in June, the currency is showing signs of recovery. The Norges Bank's decision to adopt a more hawkish stance should not come as a surprise. Core inflation, a key indicator of price dynamics, reached new highs in May. Additionally, the latest report from the Norges Bank indicates that Regional Network contacts expect wage growth to reach 5.4% in 2023, marking its highest level since 2008. These developments provide further support to the notion that price pressures in Norway may be more persistent than previously anticipated. FXMAG.COM: How would you comment on the latest data from the Norwegian economy and the actions of the central bank there, and what about the Norwegian krone as a result?   Michal Jozwiak: Aside from the Japanese yen, the Norwegian krone has been the worst performing G10 currency so far in 2023 - last year was also marked by disappointments for the Scandinavian currency. For a while, we have argued that the krone was deeply undervalued, particularly given Norway’s excellent macroeconomic fundamentals, and it seems that, with the help of a hawkish Norges Bank, which hiked rates by 50bps in June, the currency is beginning to recover.  Norges Bank’s recent hawkish pivot should come as no surprise. Core inflation, our preferred measure of price dynamics, rose to new highs in May. Furthermore, based on the recent report from the Norges Bank, Regional Network contacts expect wage growth to reach 5.4% in 2023 – its highest level since 2008. This gives further backing to the argument that price pressures in Norway may be more stubborn than previously thought.   The market is currently pricing in about 50bps of rate hikes in the next six months, however, we do not rule out an even more hawkish stance should we see further increases in core inflation and wages, possibly at the expense of lower growth in 2023. The possibility of higher central bank rates, and a degree of normalisation in the exchange rate that moves it closer to values justified by its fundamentals should, we believe, allow NOK to recover some of its earlier losses in the coming months.
US Non-Farm Payrolls Disappoint: What's Next for EUR/USD?

US Non-Farm Payrolls Disappoint: What's Next for EUR/USD?

InstaForex Analysis InstaForex Analysis 10.07.2023 11:54
First impressions can be deceiving. US non-agricultural employment rose by 209,000 in June fell short of the Bloomberg expert consensus forecast and was the weakest since December 2020. Moreover, the data for April and May were revised down by 110,000. Initially, the market perceived the report as weak, which led to a drop in Treasury bond yields and a rise in EUR/USD above 1.092. However, the devil is always in the details. In the lead-up to the report, investors were counting on strong numbers as private sector employment from ADP rose by nearly half a million people.   However, the actual non-farm payrolls turned out to be worse than that report by the largest amount since the beginning of 2022. This fact can be seen as a sign of a cooling labor market. Nevertheless, unemployment in June dropped from 3.7% to 3.6%. As long as it does not increase, we can forget about a recession in the US economy. In addition, the average wage increased faster than expected, so it's still too early for the Federal Reserve to relax.     The employment report for the US private sector turned out to be mixed. It reduced the probability of a rate hike to 5.75% in 2023 from 41% to 36%, which worsened the position of the US dollar against the main world currencies. However, Deutsche Bank noted that only a figure of +100,000 or less for non-farm payrolls could change the worldview of FOMC officials and make them abandon their plans for two acts of monetary restriction this year. June employment data gave food for thought to both the "hawks" and "centrists" of the Fed, as well as the "bulls" and "bears" for EUR/USD.   Now, investors' attention is shifting to US inflation data and Fed Chair Jerome Powell's speech in Jackson Hole. Bloomberg experts expect consumer prices to slow in June from 4% to 3.1%, and core inflation from 5.3% to 5% year-on-year. CPI is moving so quickly towards the 2% target that it's as if Fed officials have not changed their minds. Could it be that this time the financial market will be right? And those who went against the Fed will make money? We'll see.     Not everyone agrees with this. ING notes that the minutes of the FOMC's June meeting set a very high bar for incoming data for the Bank to abandon its plans. The US labor market report is unlikely to have surpassed this bar. Core inflation continues to remain high, and the economy is firmly on its feet.   All this allows ING to predict the EUR/USD pair's fall towards 1.08 within the next week. Technically, on the daily chart, there is a battle for the fair value at 1.092. Closing above this level will allow you to buy on a breakout of resistance at 1.0935. This is where the upper band of the consolidation range within the "Spike and Ledge" pattern is located. On the contrary, if the 1.092 mark persists for the bears, we will sell the euro from $1.089.      
The Euro Dips as German Business Confidence Weakens Amid Soft Economic Data

Mixed Signals: US Dollar Weakens, Eurozone Faces Recession, Pound's Fate Hangs in the Balance

InstaForex Analysis InstaForex Analysis 11.07.2023 09:05
The ADP report on employment in the private sector, published a day before the non-farm payroll data release, was so shocking that it instantly raised expectations for the labor market as a whole, leading to rapid repositioning on Friday before the data release. However, the non-farm payroll figures were significantly weaker than expected, with 209,000 new jobs created (225,000 expected), and data for the previous two months were revised downwards by 110,000. Employment growth is slowing, but the pace remains high. As for wage growth, the figures were an unpleasant surprise for the Federal Reserve. In June, wages increased again by 0.4% instead of the expected 0.3%, and annual growth rates remained at 4.4%, which is higher than the 4.2% forecast. Steady wage growth does not allow inflation expectations to fall, the growth of real rates does not allow the Federal Reserve to start lowering the rate this year.       The U.S. inflation index, which will be published on Wednesday, is the main event of the week and the last important data before the Fed meeting at the end of July. The markets expect an 89% probability of a quarter-point rate hike. Furthermore, the probability of another increase in November has already exceeded 30%, and the first cut is now expected only in May of next year. The U.S. dollar fell after the data release and ended the week weaker than all G10 currencies. The growth of real rates in the current conditions makes a recession in the U.S. almost inevitable.   EUR/USD The Sentix Economic Index for the eurozone has fallen for the third time in a row to -22.5 points, a low since November 2022, and expectations also remain depressed. The eurozone economy has fallen into a recession as of early July. The situation in Germany is even more depressing – the index has fallen to -28.5 points, and the possibility of improvement is ephemeral.     The ZEW index will be published on Tuesday, and the forecast for it is also negative, with a decrease from -10 points to -10.2 points expected in July. On Thursday, the European Commission will present its forecasts. Bloomberg expects that industrial production in the eurozone fell in May from 0.2% y/y to -1.1% y/y, a sharp decline that characterizes the entire eurozone economy as negative and tending to further contraction.   Under the current conditions, the European Central Bank intends to continue raising rates, and even plans to shorten the reinvestment period of the PEPP program. If this step is implemented, a debt crisis, which will put strong bearish pressure on the euro, is inevitable in the face of capital outflows to the U.S. and an expanding recession.   The net long position on the euro has hardly changed over the reporting week and amounts to just over 20 billion dollars, positioning is bullish, there is no trend. However, the calculated price is still below the long-term average and is trending downward.     The euro attempted to strengthen on Friday in light of the news, but it was unable to rise beyond the borders of the technical figure "flag", let alone higher than the local high of 1.1012. We assume that the corrective growth has ended, and from the current levels, the euro will go down, the target is the lower boundary of the "flag" at 1.0730/50. GBP/USD Updated data on the UK labor market will be published on Tuesday. It is expected that the growth of average earnings including bonuses increased in May from 6.5% to 6.8%, and if the data comes out as expected, inflation expectations will inevitably rise. As will the Bank of England's peak rate forecasts. The NIESR Institute expects that further rate increases could trigger a recession.   The cost of credit is rising, and an increase in the volume of bad debts is inevitable in an economic downturn. Inflation did not decrease in May, contrary to expectations, and remained at 8.7%, even though energy prices significantly decreased. Food inflation on an annual basis reached 18.3%, and core inflation at 7.1% is at its highest since 1992. The labor force is decreasing, and if this trend is confirmed on Tuesday, it will almost inevitably result in increased competition for staff, which will mean, among other things, the continuation of wage growth. The Bank of England has already raised the rate to 5%, with forecasts implying two more increases. What does the current situation mean for the pound?   If the economy can keep from sliding into a recession, then in conditions of rising nominal rates, the yield spread will encourage players to buy assets, leading to increased demand for the pound and its strengthening. However, if signs of recession intensify, which could be clear as soon as Thursday when GDP, industrial production, and trade balance data for May will be published, the pound will react with a decrease, despite high rate expectations. After impressive growth two weeks ago, pound futures have stalled at achieved levels, a weekly decrease of just over 100 million has no significant impact on positioning, which remains bullish.  
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Soft US CPI is not enough: Fed's hawkish stance remains strong

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.07.2023 08:30
Soft US CPI is not enough.    The US dollar extended losses after breaking a long-term ascending channel base yesterday. The British pound rallied on yet another stronger than expected wages growth data released yesterday morning. Average weekly earnings excluding bonuses increased 7.3% in the three months to May. And although the unemployment rate ticked up to 4%, it was because more Brits started looking for jobs, and not because people lost the jobs they had.   But don't be jealous of Brits that get such a good jump in their pay because UK inflation is still too hot. The average mortgage rate rose to 6.6%, the highest since 2008, inflation in Britain is sitting at 8.7%, and according to truflation, prices grow at a speed that's faster than 11%. The thing is, the robust wages growth partly explains why the Bank of England (BoE) is having so much pain fighting inflation, and that's why yesterday's data fueled the expectation of another 50bp hike from the BoE at its next meeting. The BoE's policy rate is seen peaking at the 6.5/7% range by the Q1 of next year as predicted by many analysts. Cable hit 1.2970 level, the highest since last April, but whether this really could continue will depend on 1. where the US dollar will be headed after today's CPI data in the short run, and 2. where the UK economy is headed if the BoE hikes rates to 6.5/7% range in the long run. Because the BoE hikes will continue pressuring the British housing market, and growth, and that could limit Cable's topside potential following a kneejerk positive reaction.     Lower US CPI won't be enough to soften the Fed hawks' hand.  The consumer price index in the US is expected to have fallen to 3.1% from 4% printed a month earlier. But unfortunately, it won't be enough to prevent the Fed from further rate hikes, because the further fall in headline inflation to 3% is due to a favourable base effect on energy prices, while core inflation is expected to remain sticky at around the 5% mark - still more than twice the Federal Reserve's (Fed) 2% policy target.   Plus, the rebound in oil prices hints that the risk of an uptick in headline inflation is building stronger for the coming months. The barrel of American crude rallied past the 100-DMA yesterday and is flirting with the $75pb level this morning. Trend and momentum indicators remain positive, and we are not in overbought territory just yet, meaning that this rally could further develop. The next natural target for the oil bulls stands at the 200-DMA, at $77pb level. In percentage terms, we are talking about a 12% rally since the start of the month, and the rebound is a response to the further production restriction from Riyadh and Moscow that are determined to push oil prices to at least $80pb level, and also Beijing's stepping up efforts to boost the Chinese economy by fresh monetary and fiscal stimulus.   But despite the lower OPEC supply and news of fresh monetary and fiscal stimulus from China, US crude should see a solid resistance into $77/80 range as, yes, in one hand, OPEC+ is cutting supply to boost prices, and their supply cuts will dampen the global oil glut in H2 - even more so if China finally achieves a healthier recovery. But on the other hand, the Chinese recovery is not a won game just yet, while increased oil output outside the cartel helps keeping price pressure contained. American crude production is on track for a record year this year, and half of the new crude is coming from the US where companies like Devon Energy that deliver strong output thanks to improved efficiencies.     RBNZ stays pat, BoC to deliver a final 25bp hike  The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 5.5%. Later today, the Bank of Canada (BoC) is expected to announce a final 25bp hike in this tightening cycle. The Fed however is seen hiking two more times as the strength of the US jobs data, combined with solid economic data, and little pain on US housing market thanks to life-long mortgages.   Therefore, it's interesting that the US dollar depreciates while there is nothing that hints at softening in the Fed's hawkish policy stance. That, and the fact that we will soon be flirting with oversold market conditions in the US dollar hint at a rebound in the greenback, if backed with robust core inflation and strong economic data.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
EUR/USD Faces Resistance at 1.0774 Amid Inflation and Stagflation Concerns

FX Daily: Underdogs Rally Ahead of US CPI Release

ING Economics ING Economics 12.07.2023 09:08
FX Daily: Underdogs make a comeback ahead of US CPI It has been a good week for the underdogs in the G10 FX world. The Japanese yen, Norwegian krone, Swedish krona and Swiss franc led the gains against the dollar over the last week. This may well be a position adjustment against the risk of a benign US CPI print today and a tweak in Bank of Japan policy at the end of the month. Today's CPI reading will therefore be key.   USD: Benign CPI could unlock a leg lower lower in the dollar Another European morning follows another Asian session where USD/JPY has led the dollar lower. The Japanese yen has now appreciated 3.6% against the dollar over the last week, closely followed by NOK (+3.4%), SEK (+2.7%) and CHF (+2.4%). We discussed some of the push-pull factors driving the dollar in yesterday's update, but the outperformance of these underdog currencies clearly points to some position adjustment at work. The broad-based nature of the rally in these currencies suggests investors may be anticipating a more benign US price environment like the one we saw in November last year when the US started to print core inflation at 0.3% month-on-month after a string of 0.6% releases. That nicely brings us to today's main event, which is the June CPI release at 14:30CET. Expectations are for a more benign 0.3% MoM core reading - the lowest since last November - and base effects bringing the headline CPI down to just 3.1% YoY - the lowest since March 2021. Assuming no nasty upside surprises here, this may be enough to firm up a view that a 25bp Fed hike may well be the last in the cycle. If so, DXY could make a run at the year's lows near 100.80. A quick word on the yen. Developments in USD/JPY - especially the sell-off in early Asia - seem to be led by selling in the JGB bond market. Here, 30-year JGB yields are rising - spreads between 30-year US and Japanese government bonds have narrowed 12bp over the last week - and the Nikkei equity index is underperforming. This has all the hallmarks of position adjustment before the 28 July Bank of Japan (BoJ) policy meeting, where expectations are growing that the BoJ could switch to targeting the five-year part of the JGB yield curve - another small step to policy normalisation. In short, then, this USD/JPY move looks driven by the private not public sector (i.e. no intervention) and something like 138.25 looks like a near-term target for USD/JPY assuming today's US CPI data does not surprise on the upside    
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Eurozone Outlook: Gradual Appreciation of EUR/USD Supported by Tight Labor Market and Hawkish ECB Stance

Roman Ziruk Roman Ziruk 07.07.2023 12:12
In light of the latest data from the Eurozone, market participants are keen to gain insights into the future forecast for the euro (EUR). We turn to Roman Ziruk, Senior Analyst at Ebury, to provide valuable perspectives on the current economic landscape and the potential trajectory of the EUR. Despite a marginal downside surprise in core inflation figures for June, the Eurozone's core inflation remains persistently high. This, coupled with the tightness of the labor market and the European Central Bank's (ECB) hawkish stance, as reiterated by President Lagarde, supports the view that the bank's tightening cycle will be extended. Ziruk predicts that there will be at least a couple more interest rate increases and no rate cuts in the near future.  In this article, we delve into the factors supporting Roman Ziruk's outlook for the EUR and explore the potential implications for the Eurozone's economy and the EUR/USD exchange rate in the foreseeable future.   FXMAG.COM:  In light of the latest data from the Eurozone, what forecast can you make for the EUR? Roman Ziruk, Senior Market Analyst: Although core inflation in the Eurozone surprised marginally to the downside in June, it remains stubbornly high. This, combined with the tightness of the Eurozone’s labour market and the ECB’s hawkish stance, reiterated by President Lagarde at Sintra last week, supports our view that the bank’s tightening cycle will last longer, rates will be increased at least a couple more times and no rate cuts are in the offing anytime soon. Although some of the recent economic data, particularly the PMIs, have been disappointing, we maintain our view that the scale of the slowdown in the Eurozone need not be very significant, nor do we expect a full-year recession in 2023. Therefore, we continue to pencil in a gradual EUR/USD appreciation in the coming quarters to 1.12 at year-end and 1.15 at the end of 2024       Informacje zawarte w niniejszym dokumencie sÅ‚użą wyÅ‚Ä…cznie do celów informacyjnych. Nie stanowiÄ… one porady finansowej lub jakiejkolwiek innej porady, majÄ… charakter ogólny i nie sÄ… skierowane dla konkretnego adresata. Przed skorzystaniem z informacji w jakichkolwiek celach należy zasiÄ™gnąć niezależnej porady. Ebury nie ponosi odpowiedzialnoÅ›ci za konsekwencje dziaÅ‚aÅ„ podjÄ™tych na podstawie informacji zawartych w raporcie.   Ebury Partners Belgium NV / SA jest autoryzowanÄ… i regulowanÄ… przez Narodowy Bank Belgii instytucjÄ… pÅ‚atniczÄ… na mocy ustawy z dnia 11 marca 2018 r., zarejestrowanÄ… w Crossroads Bank for Enterprises pod numerem 0681.746.187.  
EUR/USD Downtrend Continues Amidst Jackson Hole Symposium Anticipation

A Call for Reform: Germany's Stagnating Economy and the Need for Agenda 2030

ING Economics ING Economics 12.07.2023 14:01
A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than-hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024. Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural. Fiscal and monetary austerity will extend economic stagnation With the economy on the edge of recession, the government’s decision to return to (almost) balanced fiscal budgets next year is a bold move. No doubt, after years of zero and sometimes even negative interest rates, Germany’s interest rate bill is increasing and there are good reasons to stick to fiscal sustainability in a country that will increasingly be affected by demographic change (and its fiscal impact). Nevertheless, the last 20 years have not really been a strong argument for pro-cyclical fiscal policies. With both fiscal and monetary policy becoming much more restrictive, the risk is high that the German stagnation will become unnecessarily long. Waiting for 'Agenda 2030' In the early 2000s, the trigger for Germany to move into the final stage of change management, 'acceptance' (and solutions), was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. In fact, a protracted period of de facto stagnation without a severe recession may reduce the sense of urgency among decision-makers and suggests Germany could be stuck in the stages of denial, anger, bargaining and possibly depression for a long time. Two decades ago, it took almost four years for Germany to go through the five stages of change. We hope this time that history will not be repeated.   German economy in a nutshell (%YoY)  
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Growth Shifts to Services Amid Weakening Industry, Consumption Benefits from Employment and Decelerating Inflation

ING Economics ING Economics 12.07.2023 14:07
The weakening in industry temporarily leaves the onus of growth on services. Demand-wise, expect consumption to benefit from resilient employment and decelerating inflation. Investments will reflect better progress (or the lack thereof) in the implementation of the European Recovery and Resilience funds. First quarter consumption driven by a strong recovery in purchasing power The surprisingly strong 0.6% quarter-on-quarter GDP growth between January and March this year was driven by domestic demand. The relative strength of consumption was due to a 3.1% quarterly rebound in households’ real purchasing power, which benefited from the slowdown in inflation dynamics. The resilient labour market, with employment up and unemployment and inactivity down on the quarter, was apparently a decisive factor. Conditions were there for household saving ratios to reach 7.6% (from 5.3% in the fourth quarter of 2022), close to the pre-Covid 8% average, without penalising consumption.     Weakening industry points to softer growth in the second quarter Data for the second quarter suggests that the very good performance of the first will be hard to replicate. Industry just managed to propel value-added in the first quarter, but this seems highly unlikely in the second after a very disappointing -1.9% industrial production reading in April. Business confidence data for May and June and the relevant PMIs point to manufacturing softness through the rest of the second quarter and, possibly, into the third. For the time being, the decline in gas prices has failed to provide any relevant supply push for manufacturers, outweighed by deteriorating order books and stable stocks of finished goods. Services are also signalling some fatigue, but still look to be a decent growth driver, helped by a strong summer tourism season.     The fall in producer prices will bring goods disinflation down the line in CPI The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April, anticipating further decelerations down the line in the goods component of headline inflation. Services inflation is proving relatively stickier, though, possibly reflecting in part a re-composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.   Stickier services inflation to slow the decline in core inflation  
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Weak Growth Forecast for the Dutch Economy in the Second Half of 2023

ING Economics ING Economics 12.07.2023 14:11
Second half growth is expected to be too weak for a decent growth rate for 2023 The technical recession will, in our view, be followed by weak growth. Investment is expected to be the main drag on growth during the remainder of the year, as higher funding costs and weak sales expectations kick in. GDP growth in the second half of 2023 needs to come from the expansion of service consumption by households, higher service exports due to a further rebound of inbound tourism (especially in the third quarter) and public expenditures. We also forecast goods exports to pick up again, but only sluggishly. Public expenditures are assumed to rise a bit less than initially anticipated, due to the recent fall of the government: this is likely to put a stop to the execution of a number of policy plans. Consumption of households so far has held up well during the energy crisis, even though the Netherlands also experienced a terms of trade loss due to the high prices of imported gas and therefore the loss of consumer purchasing power. Very strong employment growth (+6.4% compared to pre-pandemic) and high net nominal income growth for lower-income households (who have a high marginal propensity to consume) explain why. As inflation is coming down in the second half of 2023 while wage increases remain high, household consumption is forecast to continue its (mild) growth, even though employment growth will not be as strong as in the past. Saving rates are coming down from still elevated levels, also providing support for consumption to remain decent. Despite this support for consumption, GDP is forecast to expand by only 0.3% for the full year 2023, adjusted for working days.     Inflation is falling in 2023 thanks to energy base effects Although lower than the inflation rate of 11.6% in 2022, our forecast for 2023 is still at a high of 4.7%. Food and bars and restaurants are important contributors to the higher price level in 2023. Yet, inflation has been falling throughout the year. Headline consumer price inflation fell recently, from 6.8% YoY (HICP) in May to 6.4% in June. Core inflation (inflation excluding volatile items like energy and food) came down from 8.2% in May to (a still high) 7.1% in June. The deceleration in June was due to services and fuel, industrial goods and food, beverages and tobacco.   For energy and fuel, the fall in prices was smaller than in May due to statistical base effects, i.e. due to movements in the price level in 2022: the month-on-month changes in June 2023 were slightly negative. Such base effects for energy are the main reason we project the headline year-on-year inflation rate to move close to 2% in the last quarter of 2023.     Inflation falling with large negative energy base effects Change in harmonised index of consumer prices for the Netherlands year-on-year in % and contributions in %-points     Firms signal lower selling price inflation We see overall inflation pressures falling in the near future: selling price expectations of businesses for the next three months fell for the eighth month in a row in June. There is one major exception: services. Inflation of services is not forecast to decelerate as quickly as for food and industrial goods. For now, we are working with the assumption of wages decelerating in 2024 compared to the high numbers (of around 6% for bargained wages) of 2023. The forecast for headline inflation to fall to 2.3% in 2024 depends on that assumption. This scenario has become more likely now that demand for personnel from the public sector might slow a bit, as the government is adopting a caretaker mode for many months to come.   New method for measuring energy inflation distorts headline picture June was the first month in which Statistics Netherlands (CBS) used a new method for measuring energy inflation. While it used to only look at the prices of new contracts, it is now also taking existing (fixed-term) contracts into account. If this new method was used in the past, the 2022 inflation rate would have been a lot (i.e. more than 3%) lower than actually recorded, while for 2023 the rate of change would be much higher than observed now. Since Statistics Netherlands is not legally allowed to revise historical inflation figures, this means that all year-on-year inflation rates are somewhat distorted. As of June 2024, this issue is gone. Fortunately, the price levels of the old and new methods have been already quite similar in recent months. As such, the introduction of the new method had only limited effects on our recent forecasts.     The Dutch economy in a nutshell (%YoY)  
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Tapping into Tourism: Spain's Growth Driven by the Tourism Sector

ING Economics ING Economics 12.07.2023 14:16
Tourism will be the main growth driver this year The slowdown in the Spanish economy can be attributed to the overall deceleration of the global economy. Nevertheless, Spain is poised to become the best-performing economy among the larger eurozone countries this year. We forecast average growth of 2.2% for Spain this year, well above the eurozone average of 0.4%. Continued growth in the tourism sector will be the main driver of Spain's higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year. In May, the number of international visitors had already risen to 104% of the pre-pandemic level, compared with 88% in May 2022. Strong travel demand points to a promising tourist season ahead. Contributing about 15% to GDP, the tourism sector will remain one of the main catalysts for economic growth throughout the year.   The number of foreign tourists increased above pre-Covid levels in April and May (in millions)     Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   Spanish economy in a nutshell (%YoY)  
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Projected Growth Slowdown and Inflation Trends in the Portuguese Economy

ING Economics ING Economics 12.07.2023 14:31
Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024.   More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024. Falling producer prices, but wages rise   A significant growth slowdown in the pipeline While we continue to expect continued economic growth for the rest of the year, we expect a significant slowdown after the strong start. Export dynamics, the major growth driver in the first months of the year, are likely to be affected by a deteriorating global economic environment and a significant rise in financing costs. While we expect a further decline in inflation, this downward trend will be tempered by upward pressure from rising wages.   Summary table
US Inflation Eases, but Fed's Influence Remains Crucial

US Inflation Eases, but Fed's Influence Remains Crucial

Alex Kuptsikevich Alex Kuptsikevich 13.07.2023 08:16
The latest report on the US consumer price index reveals a slowdown in inflation, with an annual rate of 3.0% in June compared to 4.0% the previous month. This figure, slightly below the expected 3.1%, indicates a moderation in price growth. Core inflation also decelerated to 4.8% from 5.3%, falling in line with expectations. Surprisingly, this marks the ninth consecutive report where indicators have either met or fallen short of expectations, sparking a distinct market reaction. Notably, the response from the market differs this time around, as confidence grows and risk appetite increases, leading to a decline in the value of the US dollar. The latest report has fueled speculation that the Federal Reserve (Fed) may deviate from its planned two rate hikes this year or consider an expedited shift towards policy easing in the upcoming year.   US inflation slows, but Fed has the last word The US consumer price index slowed to an annual rate of 3.0% in June from 4.0% the previous month. This was slightly below the expected 3.1%. Core inflation slowed to 4.8% from 5.3%, and 5.0% expected. This is the ninth consecutive report where an indicator has been in line or weaker than expected, but we see a different market reaction.       This time the markets are confident, risk appetite is rising, and the dollar is falling as the latest report has fuelled speculation that the Fed will not need to stick to its plan of two rate hikes this year or will allow for a quicker reversal to policy easing next year. While the Fed is often wrong in its forecasts, it is still the Fed that has the final say on interest rate decisions. Despite the constant inflation surprises, FOMC members remain hawkish in their comments, regularly pointing out that the fight against inflation is not over.     After the latest inflation report, the dollar index was close to its lowest level since April 2022, losing more than 12% from its peak last September. This decline creates additional pro-inflationary pressure, unlikely to please the central bank. Traders' and investors' attention should now turn to the Federal Reserve's assessment of the latest data. In addition to the speeches by Barkin, Kashkari and Bostic, the Fed's Beige Book will be released today, which will be used as the basis for the Fed's observations at the July meeting.    
Bank of Korea Maintains Hawkish Stance on Inflation Slowdown

Bank of Korea Maintains Hawkish Stance on Inflation Slowdown

ING Economics ING Economics 13.07.2023 08:48
Bank of Korea’s hawkish pause extended on slowing inflation As widely expected, the Bank of Korea decided to leave its policy rate at 3.50%. However, the BoK maintained its hawkish stance, seeing the risk of inflation reaccelerating to the 3% range over the coming months.   BoK still concerned about inflation According to the Monetary Policy Decision statement, the BoK reiterated concerns about inflation despite the recent slowdown and estimated core inflation would exceed its current forecast of 3.5% in 2023, while its assessment of growth conditions has improved somewhat from the previous meeting. At the press conference, Governor Rhee Chang-Yong commented that the inflation path going foward is still unclear with several persisting upside risk factors, thus board members kept the door open to the possibility of a rate of 3.75%. The lower-than-expected US inflation report will likely provide some relief for the BoK over its decision in the third quarter. The current situation is somewhat different from last year, when inflation exceeded 6%, forcing the BoK to chase the Federal Reserve's hikes. Given the current 2% range of inflation, we believe that the BoK will pay more attention to domestic economic factors such as inflation, financial market conditions, household debt, the Korean won, and growth conditions rather than the widening rate differential itself.   BoK watch Based on the governor’s comments and the MPC statement, we think the BoK will keep its hawkish stance at least until September. By then, the BoK will have a clearer picture of the inflation path as well as other major central banks' monetary policy. If we are right about inflation forecasts staying in the 2% range throughout the year, the BoK will make its first move to cut in the fourth quarter. With restrictive monetary conditions lasting more than a year, household consumption and investment are likely to be disrupted and signs of credit distortion will grow even more. However, high levels of household debt and the widening gap between the Fed will limit the pace of rate cuts. 
Germany's 'Agenda 2030': Addressing Stagnation and Structural Challenges

Germany's 'Agenda 2030': Addressing Stagnation and Structural Challenges

ING Economics ING Economics 13.07.2023 08:57
Germany needs an ‘Agenda 2030’. A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda   As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than- hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024.   Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural.
Producer Price Fall and Stickier Services Inflation: Impact on CPI and Resilient Consumption

Producer Price Fall and Stickier Services Inflation: Impact on CPI and Resilient Consumption

ING Economics ING Economics 13.07.2023 09:07
The fall in producer prices will bring goods disinflation down the line in CPI The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April,  anticipating further decelerations down the line in the goods component of headline inflation. Services inflation is proving relatively stickier, though, possibly reflecting in part a re- composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.   Stickier services inflation to slow the decline in core inflation     Resilient labour market to continue to support consumption A declining inflation environment will likely coexist with a resilient employment environment, at least in the short term. Labour market data continue to point to residual job creation, with a prevalence of open-ended contracts over temporary ones. This is clearly helping to support consumer confidence and keep concerns about future unemployment at low levels. Unfavourable demographics and supply-demand mismatches could keep some pressure on wages, at least in certain sectors. For the time being, the impact on aggregate hourly wages has been limited (in May it was up by 2.4% year-on-year), but we can’t rule out it inching up to the 3% area towards the end of the year. All in all, the combined effect of decelerating inflation, resilient employment and slowly accelerating wages should continue to support real disposable income, ultimately creating room for decent consumption growth in 2023.
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Spanish Inflation: A Closer Look at Headline and Core Rates

ING Economics ING Economics 13.07.2023 09:23
Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   The Spanish economy in a nutshell (% YoY)
Portugal's Economic Outlook: Growth Forecast and Inflation Trends

Portugal's Economic Outlook: Growth Forecast and Inflation Trends

ING Economics ING Economics 13.07.2023 10:01
Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024. More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024.   Falling producer prices, but wages rise
Czech Inflation Falls to Single Digits, Lowest in CEE Region

Czech Inflation Falls to Single Digits, Lowest in CEE Region

ING Economics ING Economics 13.07.2023 11:43
Czech inflation back in single digits Inflation fell into single-digit territory for the first time since early 2022 and is the lowest in the CEE region. However, this will not be enough for the Czech National Bank to change its tone. Disinflation will slow next month. We do not expect the first cut until November.   Lowest inflation in the CEE region June consumer prices rose 0.34% month-on-month, which translated into a drop from 11.1% to 9.7% year-on-year. Inflation in the Czech Republic is the lowest since December 2021 and the country is now the first in the CEE region to have returned to single-digit territory. Prices were pushed up in June mainly by seasonal factors in recreation prices. Otherwise, we saw a steady rise across the consumer basket. Core inflation fell from 8.6% to 7.8% YoY with downside risk, according to our calculations. The CNB will release official numbers later today, as always. June inflation is four-tenths below the central bank's forecast, but this means a one-tenth reduction in the previous forecast deviation. Core inflation in the second quarter, by our calculations, surprised the central bank to the downside by two-tenths on average.   Contributions to year-on-year inflation (bp)     The CNB wants to see more before cutting rates Looking ahead, our fresh nowcast indicator points to July inflation falling to 8.6% YoY. The pace of disinflation should thus start to slow in line with our earlier expectations. Therefore, we think today's result will not be a game-changer and the current drop in inflation will not be enough for the CNB. Today's inflation number is the last before the central bank's August meeting, including a new forecast. We expect the CNB to wait to cut rates until the November meeting with the risk of postponement until the first quarter of next year.
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Stock Rally Driven by Soft Inflation and Strong Earnings

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.07.2023 08:30
Soft inflation, strong earnings fuel stock rally  We are having a great week in terms of US inflation news. After Wednesday's data showed that the US headline inflation slowed to 3%, and core inflation fell to 4.8% - both lower than what analysts had penciled in, yesterday's producer price inflation data also came in lower than expected. The monthly PPI eased to 0.1%, perhaps the last positive figure we see before sinking into negative territory in the coming months, and core PPI fell to 2.6%. One more good news, some underlying details in the PPI report, including health care and hotel accommodations, are used to compute the Fed's favourite PCE Price Index that will be released in the coming weeks – which could also benefit from softening inflation trend.    As a result, the US 2-year yield fell another 15bp yesterday and hit 4.60%, while the 10-year yield retreated below 3.80%. The US dollar index slipped below the 100 mark. This is the first time the US dollar index has traded below this level since April 2022, as the Federal Reserve (Fed) is not seen getting more aggressive than this when inflation is slowing. Plus, one of the most aggressively hawkish Fed members, James Bullard, resigned yesterday. The probability of another 25bp hike at the Fed's July meeting didn't change much. It's still given more than 90% probability. But the chances of another rate hike following the June hike are getting blurrier, so equity markets cheer the softening Fed expectations. The S&P500 extended gains yesterday and closed the session above the 4500 mark for the first time since April 2022, while Nasdaq 100 rallied another 1.73%. Amazon jumped to a 10-month high yesterday after reporting record sales during its Prime Day. Happily, this week's inflation numbers were sufficiently soothing, so that the record Prime Day sales didn't boost inflation expectations. MAMAA stocks were up by 1.72%. Crude oil on the other hand rallied past the 200-DMA, near $77pb, and consolidates at around that level this morning. Supply shortages in Libya and Nigeria are pushing price higher but the IEA says that global oil demand won't rise as much as they previously forecasted due to the weakened economies of developed nations. It will increase by around 2.2mbpd, +2%. This is 200'000 barrels less than previously forecasted. It could help bring the bears back to the market at around the 200-DMA. The $77/80 barrel resistance will be difficult to drill because the market is now approaching overbought conditions and a key technical level is generally a good moment to sell, and because otherwise it would be bad news for inflation expectations, and the Fed.    One good news is that, although the resilience of the US jobs market remains a major concern for the Fed, the stock market rally could be a much smaller concern because the Fed recently launched a financial conditions index, an index that takes into account bond yields, mortgage rates, the stock market, Zillow's house price index and the dollar's value on global currency markets to determine how the market conditions would impact growth. And the index showed that the financial conditions in the US became increasingly less favourable this year and hit an all-time peak in December when they were more of a drag on growth than at any time in recent decades, apart from the 2008 financial crisis. And at the current levels, the market conditions remain historically unfavourable to growth – and that despite the stock market rally.     Slow growth is bad for stock valuations, but investors remain focused on earnings, rather than the overall financial conditions, and we have good news on the earnings front so far. Delta Airlines for example jumped to the highest level since April 2021 yesterday after reporting after announcing record revenue and profit in Q2 andsaying that they are 'looking at a very, very strong Q3', as indicated by their guidance, and that they could have a strong Q4 as well. While PepsiCo rallied almost 2.40% after revealing a strong quarter thanks to higher prices they could ask from customers, and after raising its sales and earnings estimates. Today, some big US banks will go to the earnings confessional. The big banks benefited from ample deposit inflows following the Silicon Valley Bank (SVB) collapse in March, but their net interest income is expected to have declined, credit costs are normalizing, and they have increased expenses due to inflation. So, the numbers could be soft, but what matters for investors is the comparison between the numbers and expectations. If expectations are better than the actual numbers, stock prices will not be hurt. And that's why Goldman Sachs is out trying to dampen expectations, so that the results can more easily beat them!    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    
Key Economic Events and Earnings Reports to Watch in US, Eurozone, and UK Next Week

Key Economic Events and Earnings Reports to Watch in US, Eurozone, and UK Next Week

Craig Erlam Craig Erlam 17.07.2023 08:57
US The week before the July 26th FOMC meeting will contain a handful of key economic reports and several key earnings results. The initial assessment of the economy is somewhat upbeat as CEO Jamie Dimon noted that the US economy continues to be ‘resilient’. Next week’s big earnings include Goldman Sachs, Tesla, Netflix, Morgan Stanley, and American Express.   On Monday, the ISM manufacturing report will show activity is slowing down, with the headline reading expected to fall back into contraction territory.  On Tuesday, the June retail sales report is expected to show strength, as major car discounts encouraged buying.  Demand for services might still remain strong but is expected to weaken once we get into the fall.  Industrial production probably won’t impress given the weakness we saw with the PMI readings.  On Wednesday, both building permits and housing starts should show some weakness.  Thursday’s releases include jobless claims which might only show modest labor market sluggishness and some weaker existing home sales.  Eurozone President Christine Lagarde’s comments at the ECB conference in Frankfurt on Monday may be the highlight next week as traders try to better understand whether the central bank is as close to the end of its tightening cycle as they think. The ECB has pushed back before but the data is looking on a much better trajectory. Final HICP inflation figures will also be released on Wednesday. UK  UK inflation data on Wednesday is undoubtedly the one to watch next week. It seems we’re seeing progress on inflation everywhere except the UK at the moment. The headline is expected to fall back to 8.2% for June, with core staying at 7.1%. But both have surpassed expectations on numerous occasions recently as inflation has remained stubbornly high. Are better readings from the US and eurozone a sign of things to come for the UK, finally? Retail sales will also be released on Friday.  
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Assessing the Disinflationary Impact on FX Markets: Outlook for the Dollar and Potential Reversal Signals

ING Economics ING Economics 17.07.2023 10:41
FX Daily: How much more fuel in the disinflation tank? Last week’s US disinflation shock altered the FX landscape, but a few days without key data releases will tell us whether that impulse can keep the dollar on the back foot as the FOMC risk event draws nearer. EUR/USD appears a bit overstretched in the short term and could face a correction this week.   USD: Some caveats to the bearish narrative On Friday, we published FX Talking: The dollar’s break point, where we discuss our updated views on G10 and EM currencies and present our latest forecasts. The radical shift in the FX positioning picture since the US CPI and PPI releases last week now forces a reassessment of the dollar outlook. The Commodity Futures Trading Commission (CFTC) data on speculative positioning offers little help in understanding how much dollar positioning has changed since the latest reported positions were as of Tuesday, before the inflation report. Back then, the weighted aggregate positioning against reported G9 currencies (i.e., G10 excluding SEK and NOK) had already inched into net-short territory (-2% of open interest, in our calculations). When making the parallel with the November-December 2022 dollar decline, positioning shows a key difference. At the end of October 2022, markets were still speculatively long on the dollar (around 10% of open interest against CFTC-reported G9). Another important factor – especially for EUR/USD – is the degree to which other central banks outside of the US can still surprise on the hawkish side, which is significantly lower than it was last autumn. These caveats to the rather compelling bearish dollar story mean that it may not be one-way traffic from here in FX, even if we see the dollar weaken further into year-end. On the fundamental side, the disinflation story puts risk assets on a sweet spot, favours a re-steepening of the US yield curve and should make pro-cyclical currencies more attractive. However, the Federal Reserve may not turn into a USD-negative that swiftly. Our US economist still sees a 25bp hike next week as likely. It is fully priced in, but will the Fed be ready to throw the towel on more hikes just yet? Core inflation is declining, but the jobs market remains very tight and other economic indicators remain resilient. The dot plot is still showing another hike before a peak and Fed Chair Jerome Powell may prefer to err on the hawkish side, especially through a rate cut pushback (first cut priced in for the first quarter of 2024). This week will be interesting to watch since the lack of tier-one data in the US will offer a clue on how FX markets will trade from now on; the question is whether investors now see enough reasons to add short positions on the dollar ahead of the FOMC or take a more cautious approach. The latter – which appears marginally more likely in our eyes – may see the dollar reclaim some portions of recent losses. DXY could find some support after climbing back above 100.00.
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CEE Region: Economic Outlook and FX Performance

ING Economics ING Economics 17.07.2023 10:46
CEE: Global conditions boost the region This week in the region offers only secondary data and should bring some calm. Today we will see core inflation in Poland. We expect a drop from 11.5% to 11.1% year-on-year. Tomorrow in the Czech Republic, PPI numbers for June will be released. With the August CNB meeting also approaching, we can expect the first comments from board members trying to fight dovish market pricing. Thursday will see the release of wage and industrial production statistics in Poland. IP fell by 2.2% YoY according to our estimates, more than the market expects. Nominal wage growth has stabilised at low double-digits at 12.1% YoY. Poland's retail sales numbers will be released on Friday and we expect a 5.5% YoY decline, also slightly more than the market expects. CEE FX showed a strong rally last week – especially the Hungarian forint due to global conditions. We expect the same story this week. The region should still benefit today from EUR/USD's move higher late last week. Sentiment remains open to risk and the renewed fall in gas prices to the lowest levels since early June is playing into the hands of the Hungarian forint in particular. The calendar in the region has little to offer and so the main focus will be on the global story. Overall, we expect further gains across the region albeit at a slower pace. The Hungarian forint remains our favourite in the CEE region. We expect the forint to strengthen further below 373 EUR/HUF. However, we also expect further gains from the Polish zloty and Czech koruna with moves below EUR/PLN 4.40 and EUR 23.70/CZK.
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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    
UK Inflation Shows Promising Decline, Signaling a Path to More Sustainable Levels

UK Inflation Shows Promising Decline, Signaling a Path to More Sustainable Levels

Craig Erlam Craig Erlam 19.07.2023 09:29
It's been a long time coming but inflation in the UK is finally on the decline and in a rare show of good news, it's falling at a faster pace than expected on both the headline and core levels.  We haven't been treated to many reports like this over the last couple of years, and even when we have any enthusiasm has quickly been extinguished. But this feels different. Without wanting to fall victim to the "this time it's different" mantra that often precedes a terrible turn of events, there is something more promising about this shift. It follows similar declines in the US and the eurozone in recent months, both of which were sharper than expected and at the headline and core level. Unless this is a blip across the board, which is possible, it may be a sign that inflation is on a path to more modest and sustainable levels.  Of course, there's still an awfully long way to go and the central bank is not going to declare victory on the back of one release. But those wild interest rate forecasts of 6.5%+ that we've been seeing may start to be pared back, perhaps quite significantly as it becomes clear that favourable base effects combined with lower energy and food inflation and the impact of past hikes start to have a substantial impact on the data.  The pound has fallen quite heavily on the back of the release which probably reflects those expectations now being pared back. I don't want to get too carried away but peak rate expectations may now be behind us which could make for a more hopeful second half of the year.  I say I don't want to get carried away but then, upon seeing the release, I was immediately reminded of the famous Office US "It's happening!" scene that is so often widely circulated on social media so perhaps I also, in the words of Michael Scott, need to stay calm.   Oil flat but recent developments have been positive Oil prices are a little flat early in the European session after bouncing back a little on Tuesday. Since breaking above the recent range highs late last week, oil prices have been a little choppy although importantly they have held above that prior range and, in the case of Brent crude, seen support around the previous highs. That could be viewed as a bullish technical signal, although that will naturally depend on a number of other factors including the economic data and what producers are doing. Both have been favourable for prices recently, helping Brent break back above $80 for the first time in almost three months.   Gold eyeing another move above $2,000?  Gold broke higher again on Tuesday after briefly paring gains late last week and early this. Lower yields and a weaker dollar are continuing to boost its appeal on the back of some more promising inflation data and lower interest rate expectations. The yellow metal broke above $1,960 yesterday before running into some resistance around $1,980. It's now closing in on $2,000 which is the next major barrier to the upside, a break of which may suggest traders have turned bullish on gold after two months of declines.   Is bitcoin looking vulnerable after yesterday's break?  Bitcoin is back above $30,000 today but looking vulnerable to another dip below. Broadly speaking, the cryptocurrency has been range-bound over the last month but it has drifted toward the lower end of this and the move below $30,000 yesterday may have made some nervous. If we do see a significant break lower, the next key area of support may be found around $28,000.
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FX Update: US Dollar Consolidates as ECB Dovish Comments Impact EURUSD, UK Inflation Eases, Sterling Faces Challenge

Ipek Ozkardeskaya Ipek Ozkardeskaya 19.07.2023 09:54
In the FX   The US dollar index consolidates at the lowest levels since April 2022, as the oversold market conditions certainly encourage short-term traders to pause and take a breather. Also helping are some dovish comments from European Central Bank's (ECB) Knot yesterday, who said that monetary tightening beyond next week's meeting is not guaranteed, while at least two 25bp hikes were seen as almost a done deal by markets until yesterday. Ignazio Visco also hinted that inflation could ease more quickly than the ECB's latest projections. So the comments sent the German 2-year yield to a 3-week low. The EURUSD bounced lower after hitting 1.1275, and rising dovish voiced from the ECB could keep the EURUSD within the 1.10/1.12 range into the next policy decision.   Across the Channel, inflation numbers freshly came in this morning, revealing that inflation in Britain eased to 7.9% in June versus 8.2% expected by analysts and 8.7% printed a month earlier. Core inflation on the other hand fell below the 7% mark last month. Cable slipped below 1.30 as a kneejerk reaction as softer inflation tempered Bank of England (BoE) hawks. But even with a softer-than-expected figure, inflation in Britain remains high and stickier than in other Western economies, and that keeps odds for further BoE action sensibly more hawkish than for other major central banks. The BoE raised its policy rate to 5% at its latest meeting, and is expected to continue toward 6.5 to 7% range in the next few months. If inflation slows, the peak rate will be pulled to 6-6.5% range, but not lower. And rising rates, that weigh on mortgages in Britain where Brits must renew mortgages every 2-5 years, pressure housing market and fuels the worst living crisis in decades, combined with political shakes into next year's elections are all factors that could stall the rally in sterling against major peers. Cable benefited from a broad-based weakness in the US dollar since last September dip, but gaining field above the 1.30 mark could prove difficult.    
UK Inflation Data Boosts Chances of August Rate Hike

UK Inflation Data Boosts Chances of August Rate Hike

ING Economics ING Economics 19.07.2023 10:05
Good news on UK inflation bolsters chances of a 25bp August hike UK inflation fell more than expected in June, owing in part to an encouraging decline in service-sector CPI. The August Bank of England meeting is going to be a close call, but we think this latest data makes a 25bp hike more likely than a repeat 50bp increase. Finally, we have some good news on UK inflation. Headline CPI has dropped back to 7.9%, below consensus and almost a full percentage point lower than in May. Much of that can be put down to petrol and diesel prices, which fell by 2.6% across the month – a stark difference to the same period last year, where we saw a near-10% spike amid the ongoing fallout of the Ukraine war. But encouragingly, we also saw a marked slowdown in food inflation. These prices increased by 0.4% on the month, which looks like the slowest month-on-month increase since early 2022. This is a trend that should continue, given that producer prices for food products are now falling on a three-month annualised (and seasonally-adjusted) basis, as the chart below shows.   Producer prices point to further improvements in food inflation   The good news continues for services What matters most to the Bank of England is services inflation, and the good news continues here too. Service-sector CPI slipped back from 7.4% to 7.2%, contrary to both the Bank of England’s and our own forecasts for this to remain unchanged in the near term. As always, we caution that one month doesn’t make a trend, but our expectation is that services inflation should gradually nudge lower through the remainder of this year. While stubbornly high wage growth will ensure that the journey back towards target is a long one, surveys have shown that price rises among service-sector firms (most notably hospitality) can be traced in large part back to higher energy prices. Now that gas prices are dramatically lower, the impetus for firms to continue to raise prices quite as aggressively should fade. Indeed, the proportion of hospitality firms expecting to raise prices over the next few months has tumbled from 46% in April to 26% now, according to ONS survey data.   Has UK services inflation finally peaked?   All in all, we now expect headline inflation to dip back to 6.6% in July, owing to the near-20% fall in household energy prices. Core inflation should slip back to roughly the same level too. Is this enough to convince the Bank of England to opt for a 25bp rate hike in August? We think it probably will – but it's going to be a close call. The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply. The risk is that the BoE applies a similar logic to that seen in June. This could mean that if it expects to hike again in September, then it might as well opt for a larger 50bp hike in August. We certainly wouldn’t rule this out.    
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Fed to Keep up the Squeeze with Another 25bp Hike

ING Economics ING Economics 24.07.2023 09:48
Fed to keep up the squeeze with another 25bp hike The Federal Reserve is set to resume its policy tightening on 26 July. Inflation is moderating but remains well above target and with a tight jobs market and resilient activity, officials may feel they can't take any chances. The Fed will continue to signal the prospect of further hikes, but with the credit cycle turning, we doubt it will carry through.       25bp hike an obvious call After 10 consecutive interest rate hikes over the previous 15 months, the Federal Reserve left the Fed funds target rate unchanged at 5-5.25% in June. While it was a unanimous decision, there was hawkish messaging in the accompanying press conference and updated Fed forecasts, signalling a broad consensus behind the idea of two more rate rises later in the year. Fed Chair Jerome Powell stated that the long and varied lags in monetary policy meant that the decision should be interpreted as a slowing in the pace of rate hikes rather than an actual pause. While inflation is moderating, it is still far too high and with the jobs market remaining very tight, the Fed can’t take any chances. The commentary since then remains consistent with this messaging, with broad support among officials that the 26 July Federal Open Market Committee (FOMC) announcement will be for another 25bp rate rise, taking the Fed funds range to 5.25-5.5%. Fed funds futures contracts are pricing 24bp with economists nearly universally expecting a 25bp hike   Keeping the door open for additional tightening The scenario graphic outlines the options open to the Fed and our sense of the likely market consequences of those actions. The no change and 50bp hike options seem very remote possibilities given comments from officials. The dilemma is whether the Fed hikes 25bp and sticks with the view that it needs to signal the likely need for one or more rate hikes or whether it moves more to a data dependency stance. A data dependency narrative would be a shift in position and lead the market to latch onto the possibility of the Fed not hiking further. This would likely see Treasury yields and the dollar fall quite significantly, which would loosen financial conditions in the economy. Given low unemployment, robust wage growth and the fact that core inflation is still running at more than double the 2% target, this is not something Fed officials would willfully countenance. Consequently, we put a 70% probability on the 25bp hike scenario that includes commentary emphasising the need to be attentive to inflation risks, that growth needs to slow below trend and that further rate hikes “may be appropriate”. We would then say there is a 25% chance of a more dovish 25bp hike, signalling a likely peak for rates, while the 0bp and 50bp outcomes each have a 2.5% chance of materialising.   Tighter lending standards suggest credit growth will turn negative
Likely the Last Hike for a While: FOMC Meeting Insights

Likely the Last Hike for a While: FOMC Meeting Insights

ING Economics ING Economics 24.07.2023 09:50
But it is likely the last hike for a while... By the time of the next FOMC meeting on 20 September, we will have had two further job and inflation reports, a detailed update on the state of bank lending plus more time for the lagged effects of the already enacted Fed tightening to be felt. In terms of inflation, the next couple of months have some tough comparisons with last year. Energy prices fell sharply last summer so headline year-on-year CPI could be a tenth or two of a percentage point higher than the current 3% rate at the September FOMC meeting, but core inflation looks set to slow further and could be down at around 4.2% versus the current 4.8% rate. If anything, the risks are that core inflation could be a little lower given decelerating housing rent inflation may materialise more quickly than we are currently conservatively forecasting. It is also the composition of inflation the Fed will be paying close attention to. Is the super core (non-energy services ex housing) slowing meaningfully? We think the answer will be 'yes' based on lead surveys such as the ISM prices paid, PPI trade services and the National Federation of Independent Business price intentions surveys.   Inflation pressures are fading   As for activity, industrial activity is already struggling with the ISM manufacturing index in contraction territory for the past nine months, while consumer spending growth is slowing. Over the next two months, we think the headwinds for activity will intensify with outstanding stock of commercial bank lending set to fall further thanks to the combination of higher borrowing costs and tightening of lending standards. This is a hugely important story given the insatiable appetite for credit within the US economy. We may also see the spreading awareness of the financial implications of the restart of student loan repayments starting to impact the spending behaviour of tens of millions of Americans. So, by the time of the 20 September FOMC meeting, we think the Fed will have evidence to be pretty confident that inflation is on the path to 2% and that activity is slowing to below trend rates and the jobs market is cooling. This is likely to be characterised as another pause and the Fed is likely to keep one additional rate hike in its forecast profile before year-end. However, our base case is that it will not carry through with it, and 5.25-5.5% marks the peak for US rates.   Market rates to edge towards 4% and money markets to slowly re-tighten post the FOMC The US rates curve has been re-pricing in recent weeks to reflect the relative robustness of the economy, primarily by pricing out many of the rate cuts that had been discounted. The liquid portion of the strip out to early 2025 is now not tending to dip below 3.75%. Adding a 30bp term premium to this suggests that the US 10yr yield could easily be closer to 4%. It’s far from a perfect model, but it does help to explain why the 10yr yield has not collapsed lower, and in fact, we rationalise this as a factor that can force US yields higher as a tactical view. It goes against the consensus out there that the inflation story is behind us but is rationalised by the reality of relative contemporaneous macro robustness. For this reason, we maintain a moderate bearish stance on the directional view, expecting market rates to remain under moderate rising pressure. A hawkish Fed pushes in the same direction, preventing the strip from becoming too inverted. The Fed may or may not choose to focus on liquidity circumstances at the press conference. If quizzed, it will likely note that the impact of ongoing quantitative tightening and resumed bills issuance by the US Treasury is largely showing up in reduced amounts going back to the Fed on the reverse repo facility. The Fed will generally be happy with this, as this facility is more of a balancing mechanism, one that can take in liquidity that is not flowing into bank reserves. Bank reserves themselves have not seen a material fall, which acts to keep the overall liquidity banks circumstance reasonably ample. It also coincides with money market funds balances still around record highs and bank deposits holding up very well, too. Many of these factors will, in fact, justify the Fed’s decision to maintain a tightening trajectory for policy, as at least the price of money continues to rise even if underlying liquidity volumes are slow to fall.
Asia's Key Events: BoJ Meeting, Korea's GDP, Singapore Inflation, and Australia's CPI Data

Asia's Key Events: BoJ Meeting, Korea's GDP, Singapore Inflation, and Australia's CPI Data

ING Economics ING Economics 24.07.2023 09:56
The Bank of Japan meeting could be a close call, while Bank Indonesia is likely to extend its pause. Meanwhile, Korea reports GDP figures and Singapore reports inflation Australia's second quarter CPI data are a key variable for the central bank The highlight for the week will be the second quarter CPI release in Australia on Wednesday. The inflation outlook will help determine whether the Reserve Bank of Australia (RBA) hikes rates again in the second half of the year. The unemployment data released earlier today showed that the unemployment in June stood at 3.5%, slightly lower than the consensus of 3.6%. The improvement in the labour market could point to solid economic activity despite the recent string of tightening. As such, CPI for the second quarter is likely to remain elevated but lower compared to the first quarter. Taiwan's industrial output to continue decline Given the poor performance of China’s second-quarter data, industrial output in export-reliant Taiwan is likely to have remained in contraction last month. Semiconductor production plays an integral role in Taiwan’s industrial output. A report released by TrendForce recently showed that global foundry sales will decrease by 4% year-on-year in 2023, with many major firms suggesting no significant rebound in orders. Korea’s GDP to pickup Korea’s GDP growth in the second quarter is expected to accelerate to 0.5% quarter-on-quarter seasonally-adjusted compared to the first quarter’s 0.3%. The improvement in net export contributions is likely to have driven overall growth on the back of a sharp decline in imports, while private consumption growth will probably remain flat. Monthly activity data should stay soft with construction and service activity declining in June. BoJ meeting to be a close call? The Bank of Japan (BoJ) will meet on Friday and we believe that recent swings in the FX and Japanese government bond markets reflect market expectations for policy adjustment. It is a close call, but we still think yield curve control (YCC) tweaks are possible, given that recent data support steady inflation growth and a sustained economic recovery. BI expected to pause Bank Indonesia (BI) is set to extend its pause, keeping policy rates at 5.75%. Inflation has returned to target but pressure on the Indonesian rupiah (IDR) of late may give Governor Perry Warjiyo reason to keep rates steady. We expect BI to stay on hold for a couple more meetings and only consider a potential rate cut once the IDR stabilises. Singapore inflation to slow Favourable base effects and moderating commodity prices could help both headline and core inflation dip in Singapore. Headline inflation may edge lower to 4.6% YoY with core inflation also expected to slow. The Monetary Authority of Singapore will be weighing the upside GDP growth surprise alongside the improving price outlook for its meeting later this year.   Key events in Asia next week    
ECB Meeting Uncertainty: Rate Hike or Pause, Market Positions Reflect Tension

Economic Calendar: Key Data Releases and Events Across Global Economies

Ed Moya Ed Moya 24.07.2023 11:00
Russia No major economic releases or events next week. Industrial output and central bank reserves are the only items on the agenda. South Africa The SARB paused its tightening cycle in July while stressing it is not the end – although it likely is as both headline and core inflation are now comfortably within its 3-6% target range – and that future decisions will be driven by the data. With that in mind, next week is looking a little quiet with the leading indicator on Tuesday and PPI figures on Thursday. Turkey Next week offers mostly tier three data, with the only release of note being the quarterly inflation report. Against the backdrop of a plunging currency and a central bank that finally accepts it needs to raise rates but refuses to do so at the pace required, it should make for interesting reading. Though it likely won’t do anything to restore trust and confidence in policymakers to fix the problems. Switzerland Next week consists of just a couple of surveys, the KOF indicator and investor sentiment. China No key economic data but keep a lookout for a possible announcement of more detailed fiscal stimulus measures in terms of monetary amount, and scope of coverage. Last week, China’s top policymakers announced a slew of broad-based plans to boost consumer spending and support for private companies in share listings, bond sales, and overseas expansion but lacking in detail. India No major key data releases. Australia Several pieces of data to digest. Firstly, flash Manufacturing and Services PMIs for July out on Monday. Forecasts are expecting a further deterioration for both; a decline in Manufacturing PMI to 47.6 from 48.2 in June, and Services PMI slip to contraction mode at 49.2 from June’s reading of 50.3. Secondly, the all-important Q2 inflation data out on Wednesday where the consensus is expecting a slow down to 6.2% year-on-year from 7% y/y printed in Q1. Even the expectation for the less volatile RBA-trimmed median CPI released on the same day is being lowered to 6% y/y for Q2 from 6.6% y/y in Q1. These latest inflationary data will play a significant contribution in shaping the expectations of the monetary policy decision outlook for the next RBA meeting on 1 August. Based on the RBA Rate Indicator as of 21st July, the ASX 30-day interbank cash rate futures for the August 2023 contract have priced in a 48% probability of a 25-bps hike to bring the cash rate to 4.35%, that’s an increase in odds from 29% seen in a week ago. Lastly, retail sales for June out on Friday where the forecast is expected a decline to -0.3% month-on-month from 0.7% m/m in May. New Zealand One key data to note will be the Balance of Trade for June out on Monday where May’s trade surplus is being forecasted to reverse to a deficit of -NZ$1 billion from NZ$ 46 million. Japan On Monday, we will have the flash Manufacturing and Services PMI for July. The growth in the manufacturing sector is expected to improve slightly to 50 from 49.8 in June while growth in the services sector is forecasted to slip slightly to 53.4 from 54.0 in June. Next up, on Friday, the leading Tokyo CPI data for July will be released. Consensus for the core Tokyo inflation (excluding fresh food) is expected to slip to 2.9% year-on-year from 3.2% y/y in June, and Core-Core Tokyo inflation (excluding fresh food & energy) is forecasted to dip slightly to 2.2% y/y from 2.3% y/y in June. Also, BoJ’s monetary policy decision and latest economic quarterly outlook will be out on Friday as well. The consensus is an upgrade of the FY 2023 inflation outlook to be above 2% and a Reuters report out on Friday, 21 July stated that it is likely no change to the current band limits of the “Yield Curve Control” (YCC) programme on the 10-year JGB yield based on five sources familiar with the BoJ’s thinking. Prior to this Reuters news flow, there is a certain degree of speculation in the market place the BoJ may increase the upper limit of the YCC to 0.75% from 0.50%. Singapore Two key data to watch out for. Firstly, inflation for June is out on Monday. Consensus is expecting core inflation to cool down to 4.2% year-on-year from 4.7% y/y in May. If it turns out as expected, it will be the second consecutive month of a slowdown in inflationary pressure. Next up, industrial production for June out on Wednesday, another month of negative growth is expected at -7.5% year-on-year but at a slower magnitude than -10.8% y/y recorded in May.  
Eurozone Inflation Drops to 5.3% in July with Focus on Services

Eurozone Inflation Drops to 5.3% in July with Focus on Services

ING Economics ING Economics 31.07.2023 16:00
Eurozone inflation dropped to 5.3% in July as all eyes turn to services Services inflation remains the main concern for the European Central Bank as inflation moves slowly in the right direction. While base effects muddy the picture, inflation should be materially lower towards the end of the year.   Eurozone inflation continues to move in the right direction. As expected, it came in at 5.3% in July, down from 5.5% in June. Energy inflation was sharply negative on base effects from last year at -6.1% while food inflation was lower at 10.8%, down from 11.6% last month. While recent price developments have been less disinflationary, overall headline inflation should continue to trend lower. Core inflation was flat on the month at 5.5% thanks to diverging developments between non-energy industrial goods and services inflation. Goods inflation is trending down quickly as demand for goods has moderated, supply chain problems have faded and energy input costs are now sharply down from a year ago. Services inflation continues to trend up though as wage growth continues to push input costs for service providers higher. Demand is also much stronger than for goods, allowing stronger price increases. Overall, the inflation picture looks positive for the coming months. Even though energy prices have been increasing recently, base effects will push energy inflation down further. Selling price expectations look encouraging for core inflation, especially for goods. Services inflation is set to trend higher for longer, but also slowing from here on. While the summer will see inflation blurred by base effects from government measures, we do expect a much lower reading in inflation by the end of the year. Still, the ECB September meeting will come too early for that, which means that the concern around services inflation will remain key to the Bank's next move.
Polish Inflation Declines in July, Paving the Way for September Rate Cut

Polish Inflation Declines in July, Paving the Way for September Rate Cut

ING Economics ING Economics 31.07.2023 16:01
September rate cut on the cards as Polish inflation falls in July According to a flash estimate, CPI inflation in Poland declined in July to 10.8% year-on-year (ING forecast: 10.9%, market consensus: 10.9-11%) from June's 11.5%. We are on track to reach single-digit CPI in August and a rate cut by the National Bank of Poland in Septembe.   The main driver behind the July CPI decline was food prices, which dropped by 1.2% month-on-month, likely driven by seasonal declines in the prices of vegetables and fruits. They deducted 0.6pp from the yearly CPI. Energy carrier prices were unchanged month-on-month, but their year-on-year slowdown deducted 0.2pp from yearly CPI. Fuel prices, on the other hand, rose by 0.4% MoM, despite holiday price promotions, adding 0.2pp to yearly CPI. We estimate that July brought a further sharp decline in core inflation excluding food and energy prices – to around 10.5% YoY from 11.1% in June, which deducted 0.2pp from yearly CPI.\   CPI outlook: short-term positive, mid-term mediocre Inflation is on the path to a single-digit print as early as September. The decline in inflation is largely related to the receding of external shocks. After dynamic disinflation in the second quarter, we expect a slower decline in CPI inflation during the second half of the year. If oil prices remain at current levels (above $80/bbl), we may see fuel prices rise again after the summer holidays. The medium-term inflation outlook remains uncertain, in part due to likely increases in regulated energy prices beginning in 2024 and continued double-digit wage growth (given a significant minimum wage increase next year).   Monetary policy outlook Despite some easing in the monetary policy stance in July, the major central banks (such as the US Federal Reserve and the European Central Bank) remain cautious in their assessments of the inflation outlook and see risks of price increases being perpetuated at elevated levels, maintaining a hawkish stance and willingness to tighten monetary policy further. They also point out that the medium-term inflation outlook is not so optimistic, due to overly strong labour markets, demographics, fiscal expansion, and the earlier loosening of the policy mix, among other factors.   Real interest rates in emerging and core economies Emerging market central banks are likely to start rate cuts ahead of developed markets'   The situation is slightly different in emerging economies. Some are already cutting interest rates (e.g. Chile, Hungary). The National Bank of Poland (NBP) is focusing on the expected decline in inflation to single-digit levels and says it is ready to cut interest rates after the holidays. This is despite the central bank's projection indicating that the decline in inflation to the target will be a long-term process. In our view, the NBP should cut rates by 50-75bp in 2023 and begin easing in September. However, monetary easing will prolong the period for inflation to return to target and we see important mid-term risks.
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Italian GDP Contracts in Q2, Posing Disinflation Challenges

ING Economics ING Economics 31.07.2023 16:02
Weaker than expected Italian GDP may help disinflation process The surprising contraction in GDP in the second quarter was driven by domestic demand. This could well have affected services, as July inflation data shows. Based on business confidence and labour market data, we believe that another contraction in GDP should be avoided in the third quarter.   After posting a surprisingly strong 0.6% quarterly expansion in the first quarter, Italian GDP contracted by 0.3% in the second, doing worse than expected. The succinct press release by Istat indicates that the quarterly decline was driven by domestic demand (gross of inventories), while net exports were growth neutral. From the supply side, Istat notes that value added contracted in both industry and agriculture and expanded marginally in services. We anticipated that the very positive first quarter would be difficult to replicate in the second, but thought that resilience in services could manage to marginally compensate for the contraction in industry. Apparently, this was not the case. On the demand front, we suspect that soft private investment and inventories might have been at the heart of the negative surprise, while private consumption could have managed to remain in positive territory courtesy of a still resilient labour market and decelerating inflation. After the preliminary estimate for the second quarter, the statistical carryover for full-year GDP growth stands at 0.8%. Our base case forecast for average GDP growth is currently 1.2%, but today’s disappointing release adds downside risks. Still, we believe that a technical recession could still be avoided in 3Q23. July business confidence data were a mixed bag, with another decline in manufacturing and improvements in services (tourism and transport) and construction (specialised works). We believe such a pattern is still compatible with a return to modest positive growth in the third quarter. The weakening economy possibly helped to cool inflation in July. Preliminary inflation data, also released today, confirms that the disinflationary path is still in place, both for the headline and core measures. Headline inflation was down to 6% (from 6.4% in June), mostly driven by the deceleration in transport services and non-regulated energy goods. The deceleration of core inflation to 5.2% (from 5.6% in June) is a comforting factor on its own, helped by a decline in services, but a similar rate of decline over the second half of the year cannot be taken for granted. Indeed, the recent acceleration in hourly wages (at 3.1% in June from 2.4% in May) will filter through the price pipeline, possibly showing up in services inflation over the next few months. Today’s inflation release still fits with our current projected profile, which points to an average headline reading of 6.5% for 2023.
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EUR: Diverging Growth and Inflation Data Spark Debates on ECB's Next Move

ING Economics ING Economics 01.08.2023 10:19
EUR: Markets too dovish? Yesterday’s set of data releases in the eurozone showed the growth and inflation side moving in diverging directions. The euro area grew slightly more than expected, at 0.6% year-on-year (0.3% quarter-on-quarter) in the second quarter, while inflation slowed in line with consensus from 5.5% to 5.3% in July. Core inflation was, however, unchanged at 5.5%. The most interesting dynamic in inflation, and one that the ECB will likely follow closely, is related to service price pressure. While goods inflation continues to ease, service price pressure has kept mounting in line with wage growth and stronger demand.   In our view, yesterday’s figures leave the door open for another hike by the ECB before the end of the year, even in September. Markets, however, remain reluctant to endorse this scenario and only price in 17bp of tightening by December, likely having read last week’s ECB messaging as a dovish tilt. It is possible investors will want to hear more hawkishness from ECB members before aligning with the data’s indications and fully price in another hike. However, August is a quiet month for ECB speakers: we’ll hear from the dove Fabio Panetta later this week, and that will hardly help. EUR/USD should be primarily driven by the dollar leg and US data for the remainder of the week, and there are some downside risks to the 1.0900 handle.
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Eurozone GDP Shows Growth, US Stocks Await NFP Friday, Euro Remains Heavy Amid Germany's Economic Concerns

Ed Moya Ed Moya 01.08.2023 13:31
Eurozone Q2 GDP returned to growth with a 0.3% advance reading (prior revised higher to 0.0%). Eurozone core inflation held steady at 5.3% Stocks have a flat session as traders await NFP Friday US stocks are wavering ahead of a key Fed survey that should show loan growth is weakening and that the economy should steadily weaken.  The Senior Loan Officer Opinion Survey (SLOOS) will tell us how top lending officers feel about the credit outlook. The US dollar isn’t making any major moves as Wall Street grows more confident that a soft landing is very much obtainable.  Many traders won’t do much positioning until Friday’s NFP report, which should show the labor market remains tight.  The key for the payroll report might be what is happening with wages, as it seems fears of an acceleration of inflation have been downsized.  This week also includes the ISM reports which should show manufacturing activity is picking up and the service sector is cooling.  Weakening growth prospects is not the takeaway from this earnings season, but that could change if Apple and Amazon’s results tell a different story.      The euro remains heavy as concerns grow for Germany’s outlook.  German economy minister warned of five tough years and that bleak outlook could weigh on the euro.  EUR/USD might start to form a narrow trading range but that could change once we get beyond the NFP report.  It seems everyone is in wait-and-see mode and right now the US jobs report will steal the spotlight. The 1.0950 to 1.1050 could emerge as the key trading range until this week’s fireworks. US Data Both the ISM Chicago PMI and Dallas Manufacturing survey showed activity improved for a second consecutive month.  The Chicago PMI was softer-than-expected but has yet to benefit from increasing aircraft orders.  The Dallas Fed did not provide an inspiring outlook as activity remains sluggish, while prices paid and received rose.  The manufacturing part of the economy is still in contraction territory and the recovery will likely be unbalanced.   
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Eurozone Core Inflation Surprises, GDP Accelerates to 0.3%: EUR/USD Holds Steady

Ed Moya Ed Moya 01.08.2023 13:32
Eurozone core inflation surprises on the upside Eurozone GDP accelerates to 0.3% The euro is showing little movement on Monday. In the North American session, EUR/USD is trading at 1.1023, up 0.06%. It has been a wild ride for the euro over the past two weeks. On July 18th, EUR/USD hit its highest level since February 2022, but the same day, the euro began a slide which saw it drop almost 300 points. Interestingly, the euro had a muted reaction to Monday’s eurozone inflation and GDP reports. Eurozone inflation for June was within expectations. Headline CPI dropped from 5.5% to 5.3% y/y, matching the consensus estimate. Core CPI remained steady at 5.5%, a notch higher than the consensus of 5.4%. Core CPI, which is closely watched by the ECB, hasn’t improved much from the 5.7% gain in March, which marked a record high. The inflation report shows that inflation remains stubbornly high, and will provide support to ECB members who favor a rate hike at the September meeting. The ECB raised interest rates last week, which came as no surprise as the ECB had signalled that it would do so. What happens next is anyone’s guess. ECB Lagarde said at last week’s meeting that “the September meeting will be deliberately data-dependent”. This didn’t clear up any uncertainty or really say anything, as the ECB has abandoned forward guidance and made rate decisions based on key data, especially inflation and employment reports. The ECB could go either way in September – inflation remains well above the 2% target, which would support a hike, but the eurozone economy remains weak and some members may wish to pause in order to avoid a recession. There was a bright spot in Monday’s releases as eurozone GDP rose to 0.3% in the second quarter, up from 0.0% in Q1. We’ll get a look at German and eurozone Manufacturing PMIs on Tuesday. EUR/USD Technical EUR/USD is testing resistance at 1.1037. The next resistance line is 1.1130 There is support at 1.0924 and 1.0831    
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Eurozone's Core Inflation and the ECB: Analyzing the Dynamics for Rate Decisions

ING Economics ING Economics 02.08.2023 09:33
The ‘real’ dynamics of core inflation in the eurozone As the European Central Bank has been putting increasing emphasis on the recent readings of underlying inflation, it is more important to look at the short-term dynamics than at the year-on-year figures. While some easing of inflationary tensions is indeed observable, it would be premature to exclude another rate hike.   Why core inflation matters for the ECB The flash estimates showed that eurozone headline inflation fell to 5.3% in July, while core inflation stabilised at 5.5%. At the next monetary meeting of the ECB’s Governing Council, the bank will have only one additional inflation figure at its disposal to decide whether it will hike rates again or pause its tightening cycle. Christine Lagarde stressed several times during the July press conference that the ECB is determined to break the back of inflation and to take inflation back to 2% in the medium term on a sustainable basis. We also know that the “dynamics of underlying inflation” play an important role, as this was singled out as one of three criteria on which policy decisions would be based (the other two being the assessment of the inflation outlook and the strength of monetary transmission). And it’s probably even the most important criterion, as the ECB has started to have serious doubts about the forecasting ability of its models. But how these dynamics are actually studied is an open question. In the German press, a comment made by an unnamed official source in Sintra was interpreted as if the ECB would stop its tightening cycle after three consecutive falls in core inflation. Since core inflation has not even started to fall, the end of interest rate hikes doesn’t seem to be near following that reasoning. However, not too much emphasis should be put on comments from anonymous sources. And while we surely believe that a decline in core inflation could be a trigger for the ECB to change gear, we doubt that monetary policy would be based on a mechanical rule.   Changing inflation dynamics Three-month on three-month annualised change in prices (in %)     Don't be fooled by year-on-year inflation figures Another issue is how to measure the “dynamics of underlying inflation”. Looking at the year-on-year core inflation figures says as much about last year’s price level as today’s. Base effects can indeed have a very strong impact. As such, the current year-on-year core inflation figures in the eurozone have been affected by the temporary introduction of a cheap train ticket in Germany last year. Therefore, it is much more interesting to look just at the evolution of prices in recent months, using data with seasonal adjustments published by the ECB. Since month-on-month changes are a bit more volatile, we take the three-month on three-month annualised change in seasonally adjusted prices. The good news is that if you look at headline inflation, this measure stands at 2%, though this figure is of course heavily influenced by energy prices. Inflation without food and energy, which stood at 5.8% in April, came in at 3.8% in July. That’s already a nice decline, but still clearly above the 2% target. More in detail, the rapid fall of non-energy industrial goods price inflation is striking, a consequence of the ongoing inventory correction and the fall in input prices. However, services price inflation, while also declining, still stands at 4.5%. Survey data suggest that the slow downward trend will continue, but if the ECB’s criterion is the current “dynamics of underlying inflation”, then it would certainly be premature to exclude a 4% deposit rate.
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EUR/USD Undergoing Third Significant Correction of the Year amid Dovish ECB Expectations

ING Economics ING Economics 03.08.2023 10:19
EUR: An episodic correction EUR/USD is currently going through its third significant correction of the year. The corrections in February and May were worth 5% and 4%, respectively. The current correction is around 3%. These corrections largely come on the back of heavy one-way positioning, given that most expect EUR/USD to be higher by year-end - the current consensus is for 1.12. We would warn against getting too pessimistic on EUR/USD because of the European Central Bank. True, the market has taken 15bp out of the expected ECB tightening cycle over recent weeks, but as our colleague Peter Vanden Houte outlined yesterday, core inflation is still high and the September ECB meeting should still be considered 'live' for a 25bp rate hike.  For today, the eurozone calendar is light and EUR/USD will again be driven by US inputs. Unless US activity data surprisingly softens today, expect EUR/USD to continue to press the 100-day moving average near 1.0930, below which there is an outside risk to the 1.0850 area. We do, however, believe this dip should be temporary and continue to forecast 1.12 by the end of September on further signs of US disinflation and finally some softer US activity data, too. Elsewhere we see Swiss July CPI data today. The headline rate is expected to fall further to 1.7% year-on-year and the core to remain at 1.8%. Despite this, the Swiss National Bank (SNB) is expected to remain hawkish and hike 25bp at its September meeting. The SNB also continues to guide the nominal Swiss franc higher. Given that USD/CHF is now rallying, the SNB may need more of that trade-weighted Swiss franc appreciation to come via EUR/CHF. That could mean that 0.9650 now proves the top of a new - and lower - 0.9500-0.9650 range.
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RBA Policy Statement: Inflation High but Ebbing, Markets Eye US Nonfarm Payrolls

Ed Moya Ed Moya 07.08.2023 09:02
RBA policy statement says inflation high but declining Money markets betting on a pause in September US nonfarm payrolls expected at 200,000 The Australian dollar has stabilized but it has been a rough week, with losses of 1.37%. In Friday’s European session, AUD/USD is trading at 0.6558, down 0.04%. RBA says inflation high but moving in right direction The Reserve Bank of Australia released its quarterly policy statement earlier today. Investors looking for clues as to the RBA’s next steps may be disappointed as there were no interesting disclosures. Still, the statement provides a useful summary of the RBA’s thoughts on inflation, which remains its primary focus. The statement noted that inflation remains “high and broadly based” and voiced concern over high wage growth and strong services and core inflation. The statement added that inflation is moving in the right direction and is consistent with the RBA’s forecast that the 2% target will be achieved in 2025. RBA Governor Lowe said at this week’s meeting that future rate decisions will “depend on the data” and the statement reinforced this stance. The RBA’s message to the markets is that a rate hike remains on the table, but the money markets are more dovish and have priced in another pause at 95%, according to the ASX RBA Rate Tracker. If the RBA decides to pause for a third straight time at the September meeting, I would expect to see increased speculation about rate cuts.   The US releases nonfarm payrolls, one of the most important US releases, later today. In June, a massive ADP employment report fuelled expectations that nonfarm payrolls would also soar. In the end, nonfarm payrolls fell to 209,000, down sharply from a downwardly revised 306,000. ADP sparkled again this week with a reading of 324,000. We’ll have to wait and see if nonfarm payrolls come in around the consensus estimate of 200,000 or follow ADP and move sharply higher. . AUD/USD Technical AUD/USD tested resistance at 0.6573 earlier in the day. Above, there is resistance at 0.6697 There is support at 0.6449 and 0.6375    
Continued Disinflation Trend in Hungary: July Inflation Figures and Prospects

Continued Disinflation Trend in Hungary: July Inflation Figures and Prospects

ING Economics ING Economics 08.08.2023 12:00
Hungarian disinflation continued in July While food deflation was weaker than expected, price pressures in other items showed a more marked easing. The July inflation figure does not change the big picture as we anticipate that disinflation will continue.   Wide range of items shows slowdown in price increases The disinflationary process continued in July, as expected, with headline inflation dropping to 17.6% year-on-year. In addition to base effects, this was the result of a 0.3% month-on-month increase in price pressure. While at first sight this says that monthly repricing is still relatively strong, we have some positive developments as well. The pace of monthly repricing in July 2023 was the same as we have seen every July since the 2000s on average, meaning that the current monthly inflation was no stronger than the historical data. However, many analysts, including ourselves, had forecast a much lower rate of month-on-month inflation, expecting prices to fall on a monthly basis. It seems that the deflation in food prices derived from the government’s online Price Monitoring System does not correspond to reality, or more precisely to the official inflation figure based on the Hungarian Central Statistical Office's methodology. Focusing on the positives, however, there are several elements behind disinflation and while food is the key driver, abating price pressures are more widespread than anticipated. This is a welcome outcome and explains why core inflation posted a more marked deceleration than the headline reading.   Main drivers of the change in headline CPI (%)   The details Food inflation continued to moderate for the seventh consecutive month, as the annualised index retreated to 23.1% YoY. The monthly reading is likewise promising, as food prices fell by 0.9% between June and July, reflecting price changes in both unprocessed and processed food items, but mainly in the former. The collapse in retail sales is therefore clearly helping to contain inflation. Competition between retailers for households' overall shrinking disposable income is intensifying. The global disinflationary trend, retreating shipping costs and a stronger forint (versus the second half of 2022) helped to lower the price of consumer durable goods. Though dropping consumption might be also a force here and the same can be said about clothing items. While the drop in domestic demand was reflected in disinflation and the other goods segment (household goods, pharma products, goods for recreation and education), there was one important exclusion in this group: fuel prices moved higher by 1.1% MoM, reflecting higher oil prices. The continued rise in services inflation to 14.6% YoY was roughly in line with expectations, while the single most important upside surprise stems from household energy. We saw an increase in prices, mainly on gas. Those who have paid a flat rate received the final balance at the end of the heating season, which showed a payment shortfall, so the bill may have been higher than usual.   The composition of headline inflation (ppt)     Underlying price pressure eases at a fast pace As upward pressure in inflation mainly came from fuel and energy items in July, and disinflation was more widespread than expected, this explains why we see a stronger deceleration in core inflation than in the headline print. The core reading moved lower by 3.3ppt to 17.5% YoY in July and with that, core inflation is now lower than the headline print for the first time since February 2023. Other underlying indicators, like the sticky price inflation calculated by the National Bank of Hungary, are showing further promises as well, implying that there is a continued turnaround in price pressure in the deeper levels of the economy. Hungary is slowly but surely coming out of the woods.   Headline and underlying inflation measures (% YoY)   ingle-digit inflation by November In light of today's data, a single-digit inflation rate at the end of the year looks certain. In fact, if there is no further price shock, we could see a sub-10% rate as early as November. As for average annual inflation, we have not changed this forecast either, and we are looking for an inflation rate close to but below 18% in 2023 as a whole. Looking ahead to next year, we expect average inflation to be around 4.5-5.0%, with upside risks. This signals that the risk of a persistently high inflation environment has not yet been averted. The very dynamic wage outflows could translate into positive real wage growth even as early as September. A combination of the companies’ typically retrospective pricing behaviour in Hungary (carrying out price increases based on past inflation data) and the rise in real wages could trigger further repricing. On the other hand, we might get away with this if households focus on replenishing their depleted savings accounts rather than start consuming again.   We see no change in monetary strategy In our view, the July inflation indicator is unlikely to have a significant impact on monetary policy. Given that the central bank still distinguishes between market and price stability, and that the current easing cycle is essentially a reflection of market stability, the more important question is to what extent the weakening of the forint will rewrite the central bank's view. Primary, post-data market reactions also suggest that investors are dismissive of the possibility that the central bank will cut rates more aggressively in response to the disinflation it has seen. Perhaps this is why we have seen the forint begin to strengthen again. Although, the surprisingly wide trade surplus in June might be a factor as well. If this strengthening continues, we see no significant obstacle to another 100bp rate cut in August and September as well. With that, the merger of the base rate and the effective rate will be done in September.
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Asia Morning Bites: Chinese Stocks Navigate US Investment Ban, Philippines GDP Data Ahead

ING Economics ING Economics 10.08.2023 09:03
Asia Morning Bites Chinese stocks weather the latest US investment ban. Chinese lending data today and 2Q23 GDP from the Philippines.   Global Macro and Markets Global markets:  It was another day of slight falls for US stocks on Wednesday, though things could have gone either way until late trading when there was a final dip lower. The S&P 500 fell 0.7% while the NASDAQ fell 1.17%. Chinese stocks were mixed, which isn’t a bad result considering the inflation data which turned negative, and the new US ban on investment in Chinese technology. The Hang Seng fell 0.32%, while the CSI 300 fell 0.31%. US treasury bond yields were also mixed on Wednesday, the 2Y yield rose 5.7bp to 4.808%, though the 10Y yield fell 1.4bp to 4.008% after a good auction.  EURUSD recovered a little ground, rising to 1.0976, but failed to make it above 1.10. The AUD and GBP were both fairly flat relative to the previous day, though the JPY saw further losses, rising to 143.657. Asian FX was fairly rangebound yesterday too, with most registering small gains of less than a quarter of a percent. G-7 macro:  US CPI inflation data for July is due today, and we are likely to see something we haven’t seen for some time, namely, annual inflation rising. The good news is that this is mainly due to base effects, and the month-on-month gain in the CPI index is expected to be modest at 0.2%, which is broadly in line with the Fed’s target. The bad news is that this indicates that the going will be a lot heavier for inflation from now on, without those nice helpful base effects that dominated the second quarter. Core inflation is expected to drop only 0.1pp to 4.7%. China: Aggregate finance data is released today. New CNY loans are forecast to rise by CNY780bn, which puts it slightly ahead of last year’s CNY678bn figure. Given the recent disappointing macro data, there might be some downward surprises here, though loans have been one of the stronger parts of China’s data in recent months.   Philippines:  2Q GDP is set for release today.  Market consensus is at 6.0%YoY, a slowdown from the 6.4% reported in 1Q.  Elevated prices likely capped household spending while capital formation also probably slowed due to the lagged impact of previous monetary tightening. Government officials are targeting full-year growth of 6-7%YoY, although given various headwinds, we feel that growth may be headed for a slowdown for the rest of the year.  What to look out for: US inflation Philippines GDP (10 August) RBI policy meeting (10 August) US initial jobless claims and CPI inflation (10 August) Singapore CPI inflation (11 August) Hong Kong GDP (11 August) US PPI inflation, University of Michigan sentiment (11 August)
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CEE Inflation Update: Czech Republic Faces Downside Inflation Surprises Amid Stable FX Market

ING Economics ING Economics 10.08.2023 09:16
CEE: Another dovish message for CNB Today's calendar includes the publication of July inflation in the Czech Republic. We expect a further fall from 9.7% to 8.7% YoY in the headline number. The market expects 8.8% and the CNB's new forecast paints 8.9% YoY. Previously released inflation in Poland and Hungary confirmed food prices dropped by 1.2% and 1.4% MoM in July, implying a drop in the Czech Republic as well. At the same time, core inflation, in particular, has surprised to the downside in recent months. Overall, we think the bar for hawkish surprises is high and see the potential for further downside surprises in the Czech Republic today. In the FX market, EUR/CZK has been surprisingly stable since last week's CNB meeting, when the Board ended the intervention regime. One may wonder if the CNB is not active in the market again. The available central bank balance sheet data only shows us last week. However, these numbers imply zero CNB activity as expected. Thus, we think today's inflation numbers may open the way for the market to test higher EUR/CZK above 24.30 and confirm that the central bank is fine with a weaker koruna. Elsewhere in the region, we are curious to see what impact yesterday's jump in gas prices up nearly 40% will have. For now, the CEE FX reaction has been muted, but in any case, this is not good news for the region. US inflation will also come into play today, while EUR/USD has been the main driver for HUF and PLN in recent days. Overall, we are on the bearish side for CEE FX today.
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US Inflation Trends Suggest End of Rate Hikes and Potential for Rate Cuts Ahead

ING Economics ING Economics 11.08.2023 08:02
US inflation boosts case for no further rate hikes A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centred on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materialises.   US inflation pressures continue to ease The US consumer price inflation report showed that prices rose 0.2% month-on-month at both the headline and core (ex food and energy) level as was expected. To two decimal places it was even better at 0.17% and 0.16% respectively, which meant that the annual rate of headline inflation came in at 3.2% rather than 3.3% (versus 3% in June). Core inflation slowed to 4.7% from 4.8% as expected. A decent drop in used car prices helped (-1.3% MoM), but a second consecutive large decline in air fares (-8.1%) is a bit of a surprise. With medical care (-0.2%), recreation (0.1%), education (0%) and other goods and services (0.1%) all very subdued the Federal Reserve has got to be pretty happy with this. That so-called 'supercore' services (services ex energy ex housing) looks like it comes in at around 0.2% MoM, although the year-on-year rate ticks higher a little due to base effects.   Supercore services on the right path (YoY%)   Housing costs rose more than we thought though, with owners’ equivalent rent (the largest CPI component with a 25% weighting) rising 0.5% MoM/7.7% YoY but all in this report supports the nice golidlocks scenario of a slowdown in inflation allowing the Fed to stop hiking and eventually cut rates next year, which catches the slowing economy in time to prevent a recession. Obviously a lot can go wrong and we think it probably will given the worries about the abrupt slowdown in credit growth, but for now this data is encouraging   Housing components of CPI set to slow in line with rents   Headline may tick higher on energy but core will slow much further Unfortunately we are likely to see headline annual inflation rise further in YoY terms in August, albeit modestly. This will largely reflect higher energy costs, but we suspect it will resume its downward path again by October. Core inflation won't have this problem as the 0.6% MoM prints for August and September last year will drop out of the annual comparison to be replaced by 0.2% readings we predict, allowing annual core inflation to slow to below 4% by September. This is going to be increasingly driven by the all-important housing components, which are set to slow sharply based on observed rents while used car prices are set to fall further based on auction prices. Consequently we are increasingly confident of a sub 3.5% YoY core CPI print by year-end. We had been hoping that headline inflation could be around 2.5%, but the rise in oil and gasoline prices over the last couple of months makes this look less achievable.   Higher energy costs can be viewed like a tax – no need for the Fed to hike further In fact there has been some talk that the rise in energy costs will make the Fed more inclined to hike rates since it will push up inflation with rising costs potentially passed onto other components such as logistics and airline fares. We are not that concerned though since it can have a disinflationary effect elsewhere because higher energy prices can be viewed similarly to a tax. You can't avoid filling up your car with gasoline and you can't not heat your home etc so it effectively means you have less money at the end of the day to spend on other goods and services. It hurts economic activity and effectively intensifies disinflation in other components over time. As such the Fed will be watching and waiting to see what happens rather than any knee-jerk hike action.   NFIB survey points to weakening corporate pricing power and lower core CPI     Moreover, business surveys continue to point to weakening pricing power, such as the ISM services index being consistent with 1% headline CPI and the National Federation of Independent Business survey pointing to core inflation heading to 3% by year-end. Such an inflation backdrop should allow the Fed to respond to any recession threat with interest rate cuts next year.
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US Inflation Accelerates to 3.2%, UK GDP Forecast, and Pound's Reaction to Economic Data

Kenny Fisher Kenny Fisher 11.08.2023 08:23
US inflation accelerates by 3.2% UK GDP expected to rise 0.1% in Q2 The British pound showed some strength earlier but reversed directions and lost ground after the US inflation report. In the North American session, GBP/USD is trading at 1.2725, up 0.05%. US headline CPI rises, core rate ticks lower The US inflation report was somewhat of a mix, but most important was that both headline and core inflation were within expectations. This meant that the reaction of the US dollar was muted following the inflation release. Headline CPI climbed to 3.2% y/y in July, above the June reading of 3.0% but shy of the consensus estimate of 3.0%. This marked the first time in 13 months that headline CPI accelerated, but the upswing isn’t all that significant, as it was due to base effects. Core CPI ticked lower to 4.7% y/y in July, down from 4.8% in June. The Fed will be encouraged by the fact that on a monthly basis, both headline and core CPI posted a very modest gain of 0.2%, matching the estimate and unchanged from June. Inflation has fallen sharply in recent months, but the Fed will find it more difficult to bring core inflation down to the 2% target. The sharp drop in energy prices has sent headline CPI lower, but the core rate excludes food and energy prices. Inflation is being driven by services and wages, which explains why core CPI is so much higher than headline CPI. The inflation report has cemented the Fed holding rates in September, barring a huge surprise. The odds of a pause have risen to 90%, up from 86% prior to the inflation report, according to the CME FedWatch tool. The Fed may well be done with the current rate-tightening cycle, but don’t expect to hear that from anyone at the Fed, which does not want the markets to become too complacent about inflation.   UK GDP expected to rise by 0.1% The UK will post preliminary GDP on Friday. The consensus estimate stands at 0.1% q/q for the second quarter. If GDP misses the estimate and falls into negative territory, investors could get nervous and send the pound lower. Conversely, if GDP beats the estimate, the pound could gain ground. The Bank of England will be watching carefully, as it digests key economic data ahead of the next meeting on September 21st. . GBP/USD Technical GBP/USD is testing resistance at 1.2747. The next resistance line is 1.2874  1.2622 and 1.2495 are providing support  
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Navigating Market Rates Amidst Inflation and Economic Factors

ING Economics ING Economics 11.08.2023 08:30
Rates Spark: Not enough yet for rates to fall There are good reasons to get hopeful that US inflation will continue to drop in the months ahead. But there are also good reasons for market rates not to get too carried away with this single input. Nothing has broken yet, and it probably has to before market rates can meaningly fall.   US CPI was good, but we can't get too comfortable just yet US CPI came in on track to a tad below expected. But we still have headline inflation above 3% and core inflation not significantly through 5%. The prognosis ahead is looking positive, but we need to see delivery. The jobless claims number was higher than expected, but still not at a level where we could conclude that something has broken. Given that, there remains a net impulse for market rates to rise some more. While this seems at odds with the notion that the Fed has likely peaked and the European Central Bank is not far behind, there is also an ongoing nagging elevation in inflation expectations. So, while inflation rates have certainly eased lower, and will likely continue to do so, market expectations coming from 5yr/5yr forward rates have in fact been edging higher. This may or may not manifest in a re-acceleration in actual inflation down the line, but it in any case presents an issue for central banks to keep an eye on. The US 30yr auction tailed by 1.4bp. Not great, especially as a concession has been built into the curve ahead of time. Cover was not great either, but perfectly acceptable. A decent indirect bid though. Overall not the best auction, but safely away. The 10yr US Treasury yield is managing to just about remain in the 4% area and the 10yr Bund yield is holding in the 2.5% area. Our central opinion here is for market rates to remain elevated, with a mild tendency to test higher. A lot of this is a reflection of US macro robustness and heavier US supply. While circumstances are weaker in the eurozone, the pull of Treasury yields should dominate, especially with the spread already at a wide enough 150bp between Bunds and Treasuries. We also note that this US macro robustness has acted to pare lower future rate cut expectations. This too is containing the degree to which longer tenor market rates can fall. In due course, the US economy is liable to break as the various pressures hitting it will cumulate and hurt. And this will ultimately correlate with market rates falling by the time we get to the fourth quarter of this year. As a guide, expect the US 10yr to remain above 4% for now with a tendency to edge higher, but then to be targeting the 3.5% area by the turn of the year. Eurozone market rates should follow a similar trend.   Net impulse is for US rates to rise more and EUR rates to feel it too   Today's events and market view The US CPI was broadly in line with expectations which feeds expectations that the Fed will stay on hold in September. To corroborate the unfolding goldilocks scenario, markets will look to the PPI release and the University of Michigan consumer sentiment survey today. The PPI headline is seen somewhat higher though, also on a month-on-month basis. The Michigan survey’s measured 1Y ahead inflation is seen a tad higher as well at 3.5%, while sentiment itself could ease lightly. After this morning's UK GDP figures, the eurozone will see the release of final July CPI data for France and Spain.  At the end of the day, it was the 30Y auction that nudged the 10Y UST yield more decisively above 4%. Looking into next week, we are spared further auction supply in the US. In data, markets are looking for a slightly firmer retail sales release and housing indicators. Markets will also parse the FOMC minutes against the background of the new data since the July meeting. Recent comments by the Fed's Bowman and yesterday by Daly bring back to mind that the Fed had indeed kept its bias to do more.
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Dollar's Strength: A Consequence of Limited Alternatives

ING Economics ING Economics 11.08.2023 10:44
FX Daily: Dollar benefits from a lack of alternatives The US remains on an encouraging disinflation track, but the dollar is not turning lower. This is, in our view, due to a lack of attractive alternatives given warning growth signals in other parts of the world (such as the eurozone and China). Evidence of a US economic slowdown is needed to bring USD substantially lower.   USD: Disinflation not enough for the bears July’s US inflation numbers released yesterday were largely in line with expectations, reassuring markets that there are no setbacks in the disinflationary process for now. Core inflation inched lower from 4.8% to 4.7%, while the headline rate suffered a rebound (from 3.0% to 3.2%) due to a reduced base effect compared to previous months, which was still smaller than the consensus of 3.3%. With the exception of resilience in housing prices, price pressures clearly abated across all components. All in all, the US report offered reasons for the Fed and for risk assets to cheer, as the chance of another rate hike declined further. Equities rallied and the US yield curve re-steepened: the dollar should have dropped across the board in this scenario. However, the post-CPI picture in FX was actually more mixed. This was a testament to how currencies are not uniquely driven by US news at the moment. The Japanese yen drop was not a surprise, given abating bond and FX volatility, equity outperformance and carry-trade revamp, but FX markets seemed lightly impacted by CPI figures and the subsequent risk-on environment, as many high-beta currencies failed to hang on to gains. From a dollar point of view, we think the recent price action denotes a reluctance to rotate away from the greenback given the emergence of concerning stories in other parts of the world. This is not to say that the activity outlook in the US is particularly bright – jobless claims touched a one-month high yesterday, and the outlook remains very vulnerable to deteriorated credit dynamics – but if economic slowdown alarms are flashing yellow in Washington, they are flashing amber in Frankfurt and Beijing. Chinese real estate developer Garden reported a record net loss of up to $7.6bn during the first half of the year yesterday, at a time when China’s officials are trying to calm investors’ nerves about another potential property crisis. Back to the US, PPI and the University of Michigan inflation expectation figures out today will clarify how far the disinflation story has gone in July, but we still sense a substantial dollar decline is not on the cards for the moment, or at least until compelling evidence of slowing US activity makes the prospect of Fed cuts less remote. DXY may consolidate above 102.00 over the next few days.
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Romanian Inflation Takes a Dive, Strong Wage Growth Looms Ahead"

ING Economics ING Economics 11.08.2023 12:52
Romanian inflation finally dips into single digits After a couple of months of questionable inflation data, July confirmed that double-digit inflation prints are now safely behind us. However, consistently strong wage advances might complicate the disinflation story as the 2024 electoral year approaches.   The 9.44% July inflation print surprised marginally to the downside (vs our 9.60% estimate) due almost exclusively to lower electricity prices. Recently-adopted caps on the mark-ups of basic food products seem to be working already, slightly ahead of schedule, and might cause another downside surprise to August inflation, which we currently estimate at around 9.0%. To put a number on it, food prices decreased in July by 0.5% versus June (+16.3% year-on-year), which marks a return to more usual seasonal behaviour. Non-food items advanced by 0.25% (+4.3% YoY) with pretty well-behaved price dynamics across the subcomponents, while services remained a mild outlier, advancing by 1.00% monthly (+11.6% YoY), a slight upset in an otherwise positive inflation print. Perhaps the less-than-positive news for today comes from core inflation which proves to be quite sticky, falling to 13.2% in July from 13.5% in June. At this moment it is not certain that we will see core inflation below 10% this year, though our base case is that it will dip below in December. In any case, core inflation is probably less of a concern for the National Bank of Romania (NBR) right now, as it most likely wants to see headline inflation safely lower first.   Inflation (YoY%) and components (ppt)   Strong wage growth is here to stay The average net wage advance continues to impress, printing at +15.7% in June and it looks increasingly likely we'll see full-year average wage growth above 15.0% in 2023. Besides the usual sectors which have posted above-average wage advances lately (e.g. agriculture, IT services, transportation etc.), June saw a whopping 28.7% increase in the public education sector’s wage, boosting the general public sector average wage growth to 14.0%, not far from the 16.1% growth in the private sector. This trend is most likely to continue in the coming quarters, given recent and ongoing public wage demands and the approaching electoral year. The extent to which the strong wage advance will filter into inflation is still unclear, given that it overlaps a period of fiscal uncertainties, economic slowdown and still relatively high interest rates which are more stimulative for savers. However, it is also difficult to believe that it will have no effect either. As recently underlined by the NBR’s Governor, Mugur Isarescu, wage-led inflation might prove quite dangerous and tricky to control, given that it could require a further restriction of the aggregate demand via even higher interest rates.   Positive real wages to support consumption   We maintain our estimate of a 6.9% year-end inflation reading, though we admit that risks are mildly to the upside on the back of the recently announced (but not yet adopted) fiscal package. These risks have been clearly underlined by the NBR as well, as they indeed have the potential to derail the disinflation story. On the other hand, next year’s profile hasn’t changed much, as we see headline inflation below 7.0% (NBR’s key rate) in February 2024, followed by a gradual descent toward the 4.0% area by the year-end, where our projection also stabilises for the medium-term. All in all, we remain reasonably confident that the NBR will start the cutting cycle in the first half of 2024, with a total of 150bp cuts by the year-end. If anything, risks are for the cycle to be more backloaded rather than frontloaded. To the extent that the global risk sentiment will not worsen, it is likely that the accommodative liquidity conditions are here to stay for longer, though we tend to be increasingly cautious about this.
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Key Data Releases and Projections for Poland and Hungary: CPI, GDP, and Economic Trends

ING Economics ING Economics 11.08.2023 14:31
There will be essential data releases in Poland next week with CPI expected to fall and GDP to decline for the second consecutive quarter. In Hungary, all eyes will be on the preliminary release of second-quarter GDP growth as it is expected to break a streak of three consecutive quarters of negative growth. Poland: CPI and Flash GDP to be released CPI (July): 10.8% YoY The StatOffice is expected to confirm its flash estimate of July CPI inflation at 10.8% year-on-year. According to preliminary estimates, the price of food and non-alcoholic beverages fell by 1.2% month-on-month, the price of energy sources for housing was unchanged vs. in June, while gasoline prices increased by 0.4%MoM. We estimate that core inflation moderated to 10.5%YoY from 11.1%YoY in the previous month. In August, annual inflation will be close to single-digit levels and will certainly fall below 10%YoY in September. Flash GDP (2Q23): -0.3% YoY According to our forecasts, the second quarter of 2023 was the second consecutive quarter of GDP declines in annual terms. We think the economy shrank at a similar scale as in the first quarter, with an even deeper annual decline in household consumption (close to -3%YoY), while fixed investment continued to expand. We judge the positive contribution of net exports was higher than the drag from a change in inventories. A more decisive improvement in economic activity is projected for the fourth quarter.  
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US Retail Sales Strength Boosts Inflation Expectations Amid Fed Hawkishness

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.08.2023 11:14
Resilient US retail sales fuel inflation expectations, Fed hawks  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Americans continue spending and that's bad news for the entire world. Announced yesterday the July retail sales data came in better-than-expected in the US. Sales grew 0.7% on a monthly basis and more than 3% on a yearly basis - the biggest figure since January, when sales soared by 3% as well. Amazon's Prime day apparently helped boost online sales, while demand for bigger items including furniture and auto parts declined. But all in all, the American consumer spent 3% more compared to a year ago, Home Depot reported small earnings beat yesterday and its CEO confirmed that 'fears of a recession have largely subsided, and the consumer is generally healthy... while adding that 'uncertainties remain'. Uncertainties remain, yes, but the resilience of the US consumer spending sapped investor sentiment by fueling inflation expectations and Federal Reserve (Fed) hawks, yet again. The US 2-year yield spiked above the 5% mark, but bounced lower, certainly helped by a big drop in Empire State manufacturing in August, the 10-year yield flirted with 4.30%, while major stock indices fell. The S&P500 closed below the 50-DMA, which stands at 4446, Nasdaq 100 remained offered below its own 50-DMA, at 15175, while Russell 200 slipped below the 50-DMA.  In the FX, the strength of the US consumer spending is reflected as a stronger US dollar across the board. The US dollar index remains bid, while Cable bulls resist to the bears around the 1.27, and above the 200-DMA, which stands near 1.2620, as the data released yesterday showed that wages in Britain accelerated at a record pace. Happily, this morning's inflation data poured some cold water on the fire, as the CPI fell from 7.9% to 6.8% in July, as expected, yet core inflation remained steady at 6.9%, while the core PPI came in higher than expected. On the food front, grocery prices also fell more than 2 percentage points to 12.7%. But 12.7% is still a very high number. As a result, odds for a 50bp hike at the Bank of England's (BoE) September meeting is given a 1 over 3 chance, the 2-year gilt yield is back above 5%, and looks like it's there to stay, as the peak BoE rate is seen at 6%.       Across the Channel, the 10-year bund yield is also pushing higher near a decade high, and all eyes are on the European GDP and industrial production data this morning. The European economy is weakening due to the rising rates, tightening credit conditions and high energy prices, but the fact that the labour market remains tight in Europe as well remains a major concern for inflation expectations for the European Central Bank (ECB), which will let the economy sink further if it doesn't take further control over inflation. Therefore, the EURUSD will certainly react negatively to a weak European data set today, and the pair could re-test the minor 23.6% Fibonacci retracement level, at 1.0870, but figures more or less in line with expectations should not change the ECB's hawkish tilt. The problem is, there is nothing the ECB could do - other than restricting financial conditions - regarding the energy and gas prices – which move parallel to completely external factors like the Ukrainian war and labour strikes in Australia.   In this sense, the Dutch TTF futures were again up by 12% yesterday, while US crude tanked near the $80pb level, pressured lower by 1. the surprise Chinese rate cut's inability to spark interest in risk assets, 2. news that China's imports of sanctioned Iranian hit a record high of 1.5mbpd this month - that oil trading at around $10 discount to Brent and 3. the latest data from the API hinting at an almost 7mio barrel decline in US crude inventories last week. The more official EIA data is due today, and the consensus is a 2.4 mio barrel fall. US crude could well slip below the $80pb on slow growth concerns, but Saudis will fight to keep the price above $80pb in the medium run.     Back to the inflation talk, the recent rise in energy and food prices is concerning for the euro area's inflation in the next readings. Therefore, the falling inflation trend remains in jeopardy, as the discussion of an ECB pause on rate increases.     The Reserve Bank of New Zealand (RBNZ) held its cash rate unchanged for the 2nd consecutive month but warned that there is a risk that activity and inflation measures do not slow as much as expected, and that they won't be cutting rates until the Q1 of 2025. The kiwi extended losses against the greenback, but the selloff remained contained.      Due today, the FOMC minutes will likely show that the Fed officials remain cautious despite the latest fall in inflation numbers, for the same reasons: rising energy and food prices that are sometimes driven by geopolitical events and that the Fed could only watch and adopt. The Fed is expected to hold fire on its rates in the September meeting, but nothing is less guaranteed than the end of the tightening cycle before the year end.      
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PLN Faces Challenges: GDP Data and Market Reopening Amidst FX Uncertainty

ING Economics ING Economics 16.08.2023 11:22
PLN: Damage control after a closed market We have GDP data in the region with second-quarter results across the board. We expect -0.3% year-on-year in Poland, -1.2% YoY in Hungary and +2.4% YoY in Romania, all more or less in line with market expectations. To complete the picture, the Czech Republic reported -0.6% YoY earlier. Also later today, core inflation in Poland will be released. We estimate that core inflation moderated to 10.5% YoY from 11.1% YoY in the previous month. The Polish market opening after yesterday's holidays and Monday's limited trading will be especially interesting. By comparison, Czech rates have strictly followed core rates in the last two days and the Polish market should catch up today. But at the same time, yesterday the Polish zloty almost touched the upper boundary of the long-term range of 4.40-4.50 EUR/PLN, which we last saw in early July. As we mentioned earlier, for the entire CEE region, the US dollar still seems to be the main driver, indicating weaker values across the board. At the same time, yesterday we saw gas prices jump back to 40 MWh/EUR following news from Australia, again not signalling positive conditions for CEE FX. On the other hand, the interest rate differential is starting to play a role in the region again after some time and if PLN rates catch up after the close of trading, EUR/PLN should stave off touching the 4.50 level and return to 4.46. But a stronger US dollar on more negative news for EM FX is a clear risk here.
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Canadian Inflation Surges, European Natural Gas Soars, and Market Trends Dominate

Ed Moya Ed Moya 16.08.2023 11:39
Headline Canadian inflation surges above BOC’s 1-3% target range Mixed report as core inflation falls to 9-month low European Natural Gas skyrockets on fears Aussie labor strikes could disrupt 10% of global LNG exports Canadian CPI The Canadian dollar initially rallied after the July inflation rose back the Bank of Canada’s inflation-control target range of 1% to 3%. ​ This was not entirely hot as both core readings remained subdued. This report means that the BOC will remain data-dependent and that the odds of one more rate hike might be growing. Global growth concerns appear to be dominating the macro theme here and that is why the Canadian dollar is softer. The USD/CAD weekly chart is showing price action is tentatively breaking out above key trendline resistance and the 50-week SMA.   If bullishness remains, upside targets include the 1.3675 region.  To the downside, the 1.3200 remains critical support.   ​​Gas Prices European natural gas futures are surging as the risk for Australian LNG workers to strike grow. ​ If talks collapse, the world could see about 10% of global LNG exports at risk. Europe has bolstered their inventories, but a hot end to summer could lead to a surge in cooling demand. ​ Inventories are not a concern right now, but if we get further disruptions and if weather trends in the summer and winter lead to many spikes in demand, we could see natural gas surge significantly higher. ​   Jackson Hole ​We are a week away from Jackson Hole and Wall Street is not expecting any major surprises. ​ Fed Chair Powell will remain upbeat regarding the progress with bringing inflation down. July PCE data to be sticky and keep risk of one more hike on the table. Given the US economic resilience backdrop, the Fed will want to keep optionality here, so an end of tightening will not be signaled. ​   Oil Crude prices continue to pullback after both disappointing Chinese industrial production data and the German ZEW survey that showed concerns with recovery are elevated. The oil market might remain tight, but most of the headlines are turning bearish for the demand side. ​ Oil’s pullback might need to continue a while longer before buyers emerge. ​   Gold Gold prices are falling as real yields continue to rise. ​ Gold could be stuck in the house of pain a little while longer if the bond market selloff does not ease. ​ The 30-year Treasury yield rising above 2% is a big red flag for some traders. ​ We haven’t seen yields on the 30-year at these levels since 2011, which is making non-interest bearing gold less attractive even as China’s property market rattle markets.      
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Asia Week Ahead: Central Bank Meetings and Inflation Reports in Focus

ING Economics ING Economics 17.08.2023 10:05
Asia week ahead: Key central bank meetings and inflation reports Japan and Singapore will be releasing inflation numbers while the Bank of Korea and Bank Indonesia meet to discuss policy. Other highlights include China’s move on the LPR rates after a surprise medium-term lending facility rate cut.     China to lower LPR rates after surprise medium-term lending facility (MLF) rate cut The People's Bank of China (PBoC) surprised the market on Tuesday with an unexpected cut to its one-year medium-term lending facility loan rates by 15bp to 2.5%. This is the steepest cut seen in three years. The 7-day reverse repo rate was also lowered by 10bp to 1.8%. This was likely carried out in response to disappointing activity and aggregate finance data. The 5-year and 1-year LPR are likely to follow suit with a 15bp cut.     Taiwan industrial output and unemployment rate release Taiwan’s exports for July fell by only 10.4% year-on-year, less than the consensus expectation of a 20.7% decline. Consequently, industrial output for July could come in lower than the consensus forecast of a 14.7% decline.  Taiwan’s unemployment rate reached a 23-year low in June. Given the weak growth so far this year, new graduates may have a more difficult time finding employment than in previous years, leading to a slight increase in the unemployment rate.     Korea expects to keep policy rate The Bank of Korea is expected to keep its policy rate at the current 3.5%.  However, concerns over inflation by the BoK and a weaker won are expected to be the main reasons for reinforcing the hawkish stance. Inflation is currently in the 2% range, but the base effect will be reversed in the coming months and will likely help nudge headline inflation higher. The recent KRW move should be a concern for the BoK, as it could push up inflationary pressures and heighten uncertainty in the financial market.     Tokyo CPI inflation likely steady Tokyo's CPI inflation is expected to stay at the current level. With inflation in the 3% range and surprisingly higher than expected second quarter GDP results, the Bank of Japan is likely to consider taking another minor policy change over the next few months. We think that BoJ Governor Kazuo Ueda’s approach to the FX market will be different from that of the former governor. The continued weakness of JPY is a clear reflection of the yield gap which fails to address the recent solid recovery and relatively high inflation. Rising cost push inflation may also hurt households’ consumption and investment recovery. The current JPY move does not justify the BoJ’s claim that FX reflects the fundamentals of the economy.     Singapore inflation to drop slightly Inflation is still on a downward trend but will remain relatively high. July inflation could dip to 4.3% YoY, down 0.3% from the previous month. Meanwhile, core inflation will likely slip to 4% YoY. Moderating inflation alongside disappointing second quarter GDP growth numbers – which were revised lower recently – will likely prompt the Monetary Authority of Singapore to consider maintaining its current stance at their upcoming October meeting.     Bank Indonesia ready to resume rate hikes? Bank Indonesia has kept rates unchanged since February since inflation remains well within its target band. However, given fast-narrowing interest rate differentials with the Fed (currently at 25bps), we believe BI will consider a rate hike at their next meeting. Currency stability is a priority for the central bank, and Governor Perry Warjiyo believes a stable IDR will help him deliver his price stability mandate. Given a fading trade surplus and renewed pressure on the IDR, we believe there could be a chance for a rate hike next week.
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Market Update: UK Bond Yields Surge, Pound's Rebound, and Retail Sales Outlook

Ed Moya Ed Moya 18.08.2023 10:07
UK 10-year government bond yield surges to a 15-year high US 10-year real yields approach 14-year high Dollar also lower on rebounding yen and yuan The British pound is still rallying from the latest inflation that suggests sticky core inflation will keep the BOE in tightening mode.  With the global bond market selloff being the dominant theme on Wall Street, traders are noticing Gilt yields are standing out.  With FX traders pricing in three more rate hikes by the BOE, it seems that could be the trigger to allow the pound to continue its rebound. Today’s the UK benchmark 10-year bond yield rose 7.7 bps to 4.716%, the highest levels since August 2008.  If we see a further vicious cycle here with Gilt yields, this will suggest BOE rate hike wagers are not cooling.       The GBP/USD daily chart is displaying a Dragonfly doji pattern has identified a bullish reversal that is currently respecting the 50-day SMA.  Price action is also tentatively breaking above the downward sloping trendline that has been in place since mid-July.  If bullishness remains intact, further upside could target the  1.2825 level, followed by the 1.2920 region.  The psychological 1.30 level could remain an elusive target as expectations remain for the US economy to outperform most advanced economies.       Looking Ahead: The UK July retail sales report will show spending declined, impacted by the unseasonable wet weather.  If the mortgage crisis is hitting the economy more harder than expected, we will see that reflected in this report.  Any better-than-expected spending figures could send the pound surging higher.  An-line or worse-than-expected report might trigger some profit-taking from the pound bulls    
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Kenny Fisher Kenny Fisher 22.08.2023 09:12
The euro started the week on a stable note, with little response to the eurozone inflation report released on Friday. In the North American session, EUR/USD is trading at 1.0886, reflecting a minor increase of 0.13%. Given the sparse data calendar for Monday, it is expected that the euro will maintain its calm trajectory for the rest of the day. Eurozone Inflation Trends: Headline Falls, Core Remains Unchanged The past week concluded with a eurozone inflation report that brought about a mixed reaction. The euro displayed minimal volatility in response to the data. The headline inflation rate for June was confirmed at 5.3% year-on-year (y/y), down from 5.5% in the previous month. This decline marked the lowest level observed since January 2022, primarily driven by a drop in energy prices.     Markets show little reaction to Friday’s eurozone inflation report Headline inflation falls but core rate unchanged The euro is steady at the start of the week. In the North American session, EUR/USD is trading at 1.0886, up 0.13%. With a very light data calendar on Monday, I expect the euro to remain calm for the remainder of the day.   Eurozone headline inflation falls, core inflation unchanged The week ended with a mixed inflation report out of the eurozone and the euro showed little reaction. Inflation was confirmed at 5.3% y/y in June, down from 5.5% in June. This marked the lowest level since January 2022 and was driven by a decline in energy prices. Core CPI remained unchanged at 5.5% in July, confirming the initial reading. The news was less encouraging from services inflation, which rose from 5.4% to 5.6% with strong wage growth driving the upswing. The labour market remains tight and inflation is still high, which suggests that wage pressure will continue to increase. Inflation has been moving in the right direction but core inflation and services inflation remain sticky and are raising doubts, within the ECB and outside, if the central bank’s aggressive tightening cycle can bring inflation back to the 2% target. The deposit rate stands at 3.75%, its highest level since 2000. The ECB’s primary goal is to curb inflation but policy makers cannot ignore that additional rate hikes could tip the weak eurozone economy into a recession. The ECB meets next on September 14th and there aren’t many key releases ahead of the meeting. ECB President Lagarde has said that all options are open and investors will be listening to any comments coming out of the ECB, looking for clues as to whether the ECB will raise rates next month or take a pause.   EUR/USD Technical EUR/USD tested resistance at 1.0893 earlier. Above, there is resistance at 1.0940 There is support at 1.0825 and 1.0778    
European Markets Anticipate Lower Open Amid Rate Hike Concerns

New Inflation Methodology Sparks Hope for BoE as GBPUSD Faces Resistance

Craig Erlam Craig Erlam 23.08.2023 10:33
New inflation methodology offers hope for BoE 1.28 could be major resistance point for GBPUSD A break of 1.26 could be bearish signal   Recent UK economic data has been a mixed bag, with wages rising at a much-accelerated rate but inflation decelerating as expected. While the Bank of England will be relieved at the latter, the former will remain a concern as wage growth even near those levels is not consistent with inflation returning sustainably to target over the medium term. The ONS released new figures overnight that appeared to suggest core inflation is not rising as fast as the CPI data suggests. The reportedly more sophisticated methodology concluded that core prices rose 6.8% last month, down from 7% the previous month and 7.3% the month before. The official reading for July was slightly higher at 6.9% but down from only 7.1% in May. So not only is the new methodology showing core inflation lower last month but the pace of decline is much faster. That will give the BoE hope that price pressures are easing and they’re expected to do so much more over the rest of the year.     GBPUSD Daily     It’s not clear whether this will prove to be a resumption of the uptrend or merely a bearish consolidation. It is currently nearing 1.28, the area around which it has previously run into resistance this month and around the 38.2% Fibonacci retracement level. Another rebound off here could be viewed as another bearish signal, which may suggest we’re currently seeing a bearish consolidation, while a move above could be more promising for the pound. If the pair does rebound lower then the area just above 1.26 will be key, given this is where it has recently seen strong support. It is also where the 55/89-day simple moving average band has continued to support the price in recent months.
AUD: RBA Maintains Rates as New Governor Upholds Continuity

Asia Morning Bites: Tokyo Inflation Dips and Markets Await Powell's Jackson Hole Speech

ING Economics ING Economics 25.08.2023 09:03
Asia Morning Bites Tokyo inflation for August dips slightly on base effects. Asian markets await the outcome of Powell's Jackson Hole speech.   Global Macro and Markets Global markets:  Pre-speech nerves? US equities reversed Wednesday’s gains on Thursday. The S&P 500 dropped by 1.35% while the NASDAQ fell 1.87%. Equity futures are non-committal ahead of Powell’s speech today.  Chinese stocks put in a rare up-day on Thursday. The CSI 300 rose 0.73%, and the Hang Seng index rose 2.05%, though this may have been following the earlier US lead, and could reverse today. US Treasury yields moved a little higher yesterday after Wednesday’s large falls. The 2Y yield is back above 5% now at 5.023%, while the 10Y yield regained 4.5bp to reach 4.237%. That’s still about 13 bp off the recent high.  The increase in yields was enough to push the USD stronger against the G-10 currencies yesterday, and EURUSD is now down to 1.0799. The AUD reversed all of Wednesday’s gains falling to 0.6415, Cable has dropped below 1.26 and the JPY is back up again to just under 146. In Asia, the KRW benefited from the BoK’s hawkish pause, and has gapped down more than a per cent to 1322.35. The TWD was also among the gainers, moving down to 31.786. The VND was weaker again yesterday, rising to 24008 as it looks to recalibrate against the CNY against which it has appreciated this year. The CNY was roughly unchanged on the day at just under 7.28.   G-7 macro:  Today’s Powell speech will get a great deal of scrutiny and there has already been a lot written about what he will say, with the majority view being that he will tread a cautious path with respect to any further potential tightening, looking for confirmation from the totality of the data before committing to any additional hikes. Lots of comparisons to the Greenspan “risk management” era are being wheeled out. At the same time, the Fed pundits are also saying that he will not want to suggest that there is any pre-set path for easing. We will know soon enough how well markets take his comments. The fact that this speech is scripted, and there is no Q&A means that room for going "off-piste" is limited. Besides this, and all the other Fed speakers this weekend, the University of Michigan publishes its August consumer confidence and inflation expectations surveys. Sentiment has been picking up recently, while the inflation expectations numbers have eased back slightly. Yesterday’s data was mixed. Weaker durable goods figures but lower jobless claims.   Japan: Tokyo inflation eased to 2.9% YoY in August (vs 3.2% July, 3.0% market consensus) mainly due to base effects and lower energy prices. Utility prices dropped to -15.0%YoY from the previous month’s -10.8%. However, core inflation excluding fresh food and energy stayed at 4.0%YoY as expected for the second month, the highest level for decades. Demand side pressures are clearly building up, suggested by inflation increases in entertainment (5.7%), transport & communication (3.6%), and medical care (2.8%). On a monthly comparison, goods prices dropped -0.1% MoM sa while services prices stayed flat. Also, higher than expected PPI services inflation (1.7% YoY in July vs revised 1.4% June, 1.3% market consensus) also reinforced the same message.   There are risks on both sides in the near future. On the downside, entertainment price pressures will be partially reduced as the summer holiday season ends. On the upside: The energy subsidy program will come to an end by September; Recent renewed JPY weakness; and rises in pipeline service prices. We believe that upward pressures will likely build a bit more significantly at least for the next few months and push up inflation again. We think inflation will exceed the BoJ’s outlook for this year and next year and core inflation excluding fresh food and energy will likely stay in the 3% range by the end of this year.   Singapore:  July industrial production is set for release today.  We expect another month of contraction, tracing the struggles faced by non-oil domestic exports, which were down 20.2%YoY for the same month.  We can expect industrial production to stay subdued until we see a turn in NODX, which should also weigh on 3Q growth.   What to look out for: Jackson Hole conference Malaysia CPI inflation (25 August) Singapore industrial production (25 August) US Univ of Michigan Sentiment (25 August)
EUR/USD Flat as Eurozone and German Manufacturing Struggle Amid Weak PMI Reports

Tokyo Core CPI and US Economic Data Impact USD/JPY Movement

Kenny Fisher Kenny Fisher 25.08.2023 09:33
Tokyo Core CPI expected to tick lower to 2.9% US to release jobless claims and durable goods orders later on Thursday USD/JPY put together a mid-week rally with gains of 1% but is considerably lower on Thursday.  In the European session, USD/JPY is trading at 145.72, up 0.60%.   Markets eye Tokyo Core CPI Japan releases Tokyo Core CPI on Friday, the third inflation report in just over a week. The previous two releases were for July, but Tokyo Core CPI is the first indicator of August inflation, hence its importance. The Bank of Japan closely follows core inflation, which excludes fresh food, as it is considered a more accurate estimate of underlying price pressures than headline inflation.  But which way is core inflation headed? Last week, National Core CPI eased to 3.1% in July, down from 3.3% in June.  However, BoJ Core CPI followed this week with a gain of 3.3%, up from 3.0%. Tokyo Core CPI eased to 3.0% in July, marking the 14th consecutive month above the Bank of Japan’s 2% target.  This is a sign that inflationary pressures remain strong.  Little change is expected for August, with a consensus estimate of 2. The BoJ has insisted that inflation is transient and that without evidence that high inflation is sustainable, such as stronger wage growth, it will not tighten policy. Still, there is speculation that unless inflation falls significantly, we could see the central bank make a shift in policy, especially if the yen remains at such low levels.     USD/JPY Technical USD/JPY is testing resistance at 145.54. Above, there is resistance at 146.41 There is support at 144.51 and 143.64
ECB Hawkish Pushback and Key Inflation Test Await FX Markets

ECB Hawkish Pushback and Key Inflation Test Await FX Markets

ING Economics ING Economics 29.08.2023 10:13
FX Daily: ECB hawkish pushback to face key inflation test The ECB hawks have stepped in to revive depressed rate expectations, but markets are opting for data dependency, and EUR/USD is set to face two key risk events with eurozone inflation figures before the US payrolls this week. We expect core inflation will prove resilient enough to trigger another ECB hike, so see upside room for the pair.   USD: Things will get hectic this week It has been a slow start to the week for FX markets. Yesterday’s closure of the UK’s markets for a national holiday meant much thinner trading volumes, and the key data calendar was quite light. In the US, the only release to note was the Dallas Fed Manufacturing Index, which dropped slightly more than expected into contraction territory, confirming the slack in the manufacturing territory already signalled by other surveys (ISM, PMIs). Still, the slowdown in manufacturing activity is hardly a US-only story. We have seen a deterioration in global forward-looking economic indicators in many developed economies recently, especially in Europe. The difference now is how the US service sector is appearing more resilient than the eurozone’s, despite significantly tighter monetary policy in the US. The relative strength in US activity indicators – compared to the rest of the world and to expectations – is what has kept the dollar in demand over the past few weeks, and should remain the number one driver of USD moves into year-end. That is because the disinflationary process appears to be cementing, allowing the Fed to halt hikes and focus on growth: until data turn for the worst, however, markets will not be pricing in more cuts, and a favourable real rate (the highest in the G10) will keep a floor under the dollar. This week presents some important risk events for the dollar from this point of view. Today, the JOLTS job openings for July will be watched closely in search for signs that the labour market has started to cool off more drastically. The Conference Board consumer confidence index is also published, and expected to come in only marginally changed compared to July. Later in the week, we’ll see ADP jobs numbers (they move the market, but tend to be unreliable), and the official payrolls report. Remember that payrolls through March were revised lower (although that is a preliminary revision) by 306,000, which probably adds extra heat to this week’s release. DXY is trading around the May-June 104.00 high area. Investors may want to wait for confirmation from jobs data to push the dollar significantly higher from these levels, and a wait-and-see, flat (or moderately offered) dollar environment could dominate FX markets into Friday’s payrolls.
Summer's End: An Anxious Outlook for the Global Economy

Spanish Headline Inflation Sees Second Consecutive Monthly Increase, Driven by Rising Fuel Prices

ING Economics ING Economics 30.08.2023 09:59
Spanish headline inflation rises for second month in a row Spanish headline inflation rose to 2.6% in August from 2.3% in July, the second consecutive increase. Core inflation, however, did drop slightly to 6.1% last month from 6.2% in July.   Rising fuel prices main driver behind uptick in headline inflation Spanish headline inflation rose to 2.6% in August from 2.3% in July, the second consecutive increase. Core inflation, excluding volatile food and energy prices, did cool slightly to 6.1% in August from 6.2% the month before. The strong tourism season has probably kept core inflation rather high.   Rising oil prices push headline inflation higher Rising oil prices are putting upward pressure on inflation, which could intensify in the coming months. Since the beginning of summer, oil prices have risen sharply. While a barrel of oil was worth $72 at the end of June, the price has now risen to $86. Oil prices could rise further to above $90 a barrel by the end of this year. Much, of course, will depend on how global oil demand evolves in the coming months. If the Chinese economy continues to languish, oil demand may weaken again. The US economy also remains an uncertain factor. Most analysts were expecting a sharp slowdown of the American economy on the back of the interest rate hikes, but it has been holding up well so far.   Inflation likely to rise further We expect headline inflation to stabilise in the coming months. Gas prices rose further in September last year, which creates a favourable base effect for this year’s inflation. On the other hand, rising oil prices and expiring inflation-inhibiting measures may cause headline inflation to edge higher. Inflation could still increase at the start of 2024 before moving back towards 2%. For the whole of 2023, we assume an average inflation rate of 3.6%, and 2.7% for 2024.
The Japanese Yen Retreats as USD/JPY Gains Momentum

The Japanese Yen Retreats as USD/JPY Gains Momentum

Kenny Fisher Kenny Fisher 30.08.2023 10:02
The Japanese yen continues to lose ground on Tuesday. In the North American session, USD/JPY is trading at 147.26, up 0.50%. The yen broke above the 147 level for the first time since November 2022.   Tokyo says battle with inflation has reached turning point Just a few days after Bank of Japan Governor Kazuo Ueda’s speech at the Jackson Hole summit, the Japanese government released a potentially significant white paper. To say that the two events were contradictory might be a stretch, but they appeared to present a very different stance towards inflation. At Jackson Hole, Ueda stuck to the BoJ’s well-worn script that underlying inflation remains lower than the BoJ’s target of 2%. As a result, the BoJ has insisted it will stick with the current ultra-easy policy until there is evidence that inflation remains sustainably above target. The white paper sounded a different tone, noting that “Japan has seen price and wage rises broaden since the spring of 2022. Such changes suggest the economy is reaching a turning point in its 25-year battle with deflation” and “a window of opportunity may be opening to exit deflation.” Could this be a turning point that leads to a tightening in policy? The government hasn’t acknowledged that deflation is over, despite the fact that core inflation has remained above the 2% target for 16 successive months. Wages are also on the rise after companies significantly bumped up employee wages earlier in the year. The white paper spoke of the need to “eradicate the sticky deflationary mindset besetting households and companies”, but I wonder if the BoJ also suffers from the same mindset, even with inflation remaining above target month after month. Investors should remain on guard for a shift in central bank policy, especially if the yen continues to head towards the key 150 level.     USD/JPY Technical There is resistance at 147.19 and 147.95 146.30 and 145.10 are providing support        
Tepid BoJ Stance Despite Inflation Surge: Future Policy Outlook

Market Developments: Australian Inflation Slides to 4.9%, US GDP Expected to Rise to 2.4%, Australian Dollar Dips Amid Mixed Economic Data

Kenny Fisher Kenny Fisher 30.08.2023 15:47
Australian inflation falls to 4.9% US GDP expected to rise to 2.4% The Australian dollar has edged lower on Wednesday after sharp gains a day earlier. In the European session, AUD/USD is trading at 0.6473, down 0.10% on the day.   Australia’s inflation slips to 4.9% There was good news on the inflation front as July CPI fell to 4.9% y/y, down from 5.4% in June and below the consensus estimate of 5.2%. Inflation has now fallen to its lowest level since February 2022. Core inflation, which has been stickier than headline inflation, gained 5.8% in July, down from 6.1% in June. The markets are widely expecting the Reserve Bank of Australia to hold rates at the September 5th meeting and the drop in the headline and core inflation readings could well cement a pause. Inflation remains well above the RBA’s 2% target, but it is an encouraging sign that inflation continues to move in the right direction.   Soft US numbers send Aussie sharply higher The Australian dollar sparkled on Wednesday, climbing 0.80% and hitting a one-week high. The uptick was more about US dollar weakness than Aussie strength, as the US posted softer-than-expected consumer confidence and employment data on Wednesday. US consumer confidence took a hit as the Conference Board Consumer Confidence Index fell to 106.1 in July. This was a sharp drop from the August reading of 116.0 and marked a two-year low. JOLTS Job Openings fell to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. This was the sixth decline in the past seven months, another sign that the strong US labour market is showing cracks.
A Bright Spot Amidst Economic Challenges

Inflation Data Analysis: Will Key Numbers Prompt ECB's September Pause?

Michael Hewson Michael Hewson 31.08.2023 10:25
Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. 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%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  
Eurozone PMI Shows Limited Improvement Amid Lingering Contraction Concerns in September

Eurozone Economic Focus: Navigating Through August CPI and ECB Signals

ING Economics ING Economics 31.08.2023 10:32
EUR: Focus on the eurozone August CPI Flash August CPI data for the eurozone is released at 11:00 am CET today and is expected to show a gradual decline in both headline and core YoY readings to 5.1% and 5.3%, from 5.3% and 5.5% respectively. However, the decline is proving gradual and we are actually starting to see expectations of one more rate hike from the European Central Bank firm up a little. These peak at around 21bp of tightening priced in for January next year. Our macro team feels that the chances of a September rate hike are under-priced (now a 43% probability) meaning that EUR/USD could get a little support from the ECB story over the coming weeks. Today, also look out for a 09:00 am CET speech from ECB hawk Isabel Schnabel, speaking at a conference on 'Inflation: Drivers and Dynamics'. We will also see the ECB minutes for the July policy meeting released at 1:30 pm CET. EUR/USD has turned a little more bid over the last few days as US jobs data has softened the front end of the US yield curve and sticky inflation has kept EUR short-dated interest rates supported. Our short-term Financial Fair Value model sees EUR/USD fairly priced near 1.0900 - suggesting a probably range-bound session into tomorrow's US NFP release. Elsewhere, we note that Switzerland is planning some new large-scale Anti Money Laundering measures for 2024. This may be a slow-burn story, but one which may ultimately weigh on the Swiss franc in 2024.
Strong August Labour Report Poses Dilemma for RBA: Will Rates Peak or Continue to Rise?

Eurozone Inflation Trends and ECB Meeting: Assessing Monetary Policy Options

ING Economics ING Economics 31.08.2023 12:12
Eurozone inflation stagnates ahead of ECB September meeting Inflation in the eurozone did not fall in August, which could tip the ECB in favour of a final 25bp hike at the governing council meeting in two weeks' time. Still, overall inflation dynamics remain relatively benign, and we still expect inflation to trend much lower at the end of the year. The eurozone inflation rate was stable at 5.3% in August, with core inflation also dropping to 5.3% (from 5.5% in July). Headline inflation was slightly higher than expectations due to energy price developments which increased by 3.2% month-on-month. This will fuel concern about inflation remaining more stubborn than anticipated. The overall trend in inflation remains cautiously disinflationary though as developments in goods and services inflation were more or less as expected. By country, we see that rising prices mainly came from France and Spain, while drops in the Netherlands and Italy kept inflation broadly in check. Energy effects and how they translate to consumer prices – look at rising regulated prices in France – were important drivers of differences this month. Looking ahead, more declines in inflation are in the making. In Germany, we expect a significant drop next month as base effects from government support drop from the data. Surveys also point to a sizable disinflationary effect for goods prices, while services inflation is set to fall more slowly thanks to higher wage costs. Indeed, wage growth is still trending above a level consistent with 2% inflation. For the European Central Bank, these August inflation data were among the most important data points ahead of the governing council meeting in two weeks’ time. While inflation remains stubborn enough to make ECB hawks uncomfortable, it does look like a further deceleration in inflation is in the making for the months ahead. Given the ECB mantra over recent months that doing too little is worse than doing too much in terms of hikes, we still expect another 25 basis point rate rise, despite this being a close call.
Summer's End: An Anxious Outlook for the Global Economy

Poland Poised for Interest Rate Cut in September Despite Double-Digit Inflation

ING Economics ING Economics 01.09.2023 08:35
Poland set to cut interest rates in September despite double-digit inflation Even though latest figures show Poland's inflation is still in double digits, we think the country's central bank will start its easing cycle in September. CPI fell to 10.1% in August from 10.8% in July, Year-on-Year. It reflects lower food and energy prices. Core inflation's drop came in third place; we estimate that fell to 10% from 10.6%.   Polish headline CPI inflation fell from 10.8% YoY to 10.1% YoY in August, marginally above expectations (ING 10.0% YoY and consensus 9.9% YoY; the forecast range was 9.7 to 10.6%). Food price dynamics subtracted 0.8pp from the CPI, energy carriers 0.3pp and core inflation only 0.3pp. In contrast, fuel prices rose in August and added 0.6pp to the headline figure. The release of double-digit CPI means that one of the conditions for easing, which the National Bank of Poland Governor mentioned, has not been met. However, we still believe the MPC will cut rates in September. Here's why:  We are on the path to single-digit inflation in September; the data will be published after the September MPC meeting. The CPI path in 2H23 should be either close to or slightly lower than the NBP's July projection. The MPC should consider this as a disinflation scenario materialising.  The pace of GDP growth in 2Q23 was lower than the NBP's projection, and data on economic activity in Poland and Europe suggests pushing back the economic rebound instead to 4Q23, so the state of the economy in the second half of this year will still be weak. In the short term, monetary easing is supported by strong disinflationary trends in global supply chains, resulting in a large drop in companies' inflation expectations, and these trends are still stronger than the rebound in oil and wheat prices. So, we expect the NBP to cut rates by 50-75 basis points this year, and the easing cycle may well continue into 2024. However, the inflation picture in Poland is not unequivocally positive. Poland's core inflation rate is declining significantly slower than elsewhere in the region; a roughly 20% increase in the minimum wage is expected in 2024, and a sizeable fiscal loosening is planned. Once the favourable impact of falling external prices ends, it's going to be difficult to bring inflation back to target on a sustained basis. 
Italian Inflation Continues to Decelerate in August, Reaffirming 6.4% Forecast for 2023

Italian Inflation Continues to Decelerate in August, Reaffirming 6.4% Forecast for 2023

ING Economics ING Economics 01.09.2023 08:46
Italian inflation continued to decelerate in August The August inflation release provides comforting signals of a broad-based deceleration in inflation, including the core measure. The trend looks set to continue until year-end, at a pace which will be affected by residual base effects. We stand by our 6.4% forecast for 2023 HICP inflation.   Goods and services both decelerate The preliminary estimate by the Italian National Institute of Statistics (Istat) of August consumer prices confirms that inflation is on a solid decelerating path. The headline measure was down to 5.5% (from 5.9% in July), broadly in line with expectations, driven by the non-regulated energy component, recreational services, fresh food, transport services and durable goods, only partly compensated by housing services and regulated energy goods. The statistical carryover for 2023 headline inflation now stands at 5.7%. Both goods and service inflation decelerated to 6.4% and 3.6%, respectively, and food inflation, at 9.6% in August, fell below double digits for the first time since July 2022.   Core inflation falls Core inflation, which strips out energy and fresh food, and is a key indicator in the eyes of the European Central Bank, also sent encouraging signals, falling to 4.8% from 5.2% in July, confirming the deceleration pace seen since June. This reflects the deceleration in services, not yet impacted by the recent acceleration in hourly wages (at 3.2% year-on-year in June)   Further declines in inflation expected... As the pace of the decline in headline inflation is still being set by the energy component, we should be aware that substantial base effects have yet to play out as a decelerating factor over the autumn. Indicators such as import prices and producer prices continue to point to softer headline inflation ahead. Import prices contracted by 9.8% in June and producer price inflation, at -5.5% YoY in June, has been in negative territory since April. The latter is still driven by the energy component (-26.2% YoY in June), however stripping out energy and construction, the PPI inflation read in June of 2% confirms a clear declining trend.   ...but the pace will depend on a combination of factors If the pricing pipeline is sending encouraging signals, other indicators coming from August business surveys deserve attention. For the first time since September 2022, the manufacturers’ pricing intentions balance rose in August from the previous month and increased in services for the second consecutive month. The only area where the deceleration in price increase intentions remains in place is the retail sector. This is a warning signal that the current pace of inflation deceleration, particularly at the core level, cannot be taken for granted. The wage cost variable will likely have a say in the process. Here, indications are mixed. If some more wage concessions look likely over the next few months as a consequence of past inflation surprises, labour market tightness might loosen a bit. July labour market data, also released earlier today, offer some tentative evidence of this. For the first time over the last eight months, employment declined from the previous month and the unemployment rate edged up to 7.6% (from 7.4% in June). The Italian labour market is possibly finally responding to cyclical developments. After today’s inflation release, we confirm our forecast for average HICP inflation for 2023 at 6.4% YoY.
Assessing the Resilience of the US Economy Amidst Rising Challenges and Recession Expectations

ECB at a Crossroads: Inflation Concerns and the Prospect of a Final Rate Hike

ING Economics ING Economics 01.09.2023 09:29
European Central Bank Macro developments over the summer have caused further complications for the ECB. While the rapid worsening of the economy should come as a surprise, at least judging from overly optimistic ECB growth forecasts so far, the speed with which headline inflation is coming down should still leave the central bank uncomfortable. Core inflation also remains too high and wage growth up until now signals that even without excessive wage settlements core inflation could stay higher for longer. We still expect headline inflation to come down significantly after the summer, mainly on the back of German headline inflation falling. However, if the ECB sticks to its stance of putting more emphasis on actual data rather than on expected data, the current inflation picture still argues in favour of another rate hike. After 425bp of rate hikes in slightly more than a year, a pause in the ECB’s hiking cycle at the September meeting would make perfect sense. However, the worsening economy and our expectation of an acceleration of disinflationary risks after the summer could easily transform a pause into an actual full stop. The question is whether everyone at the ECB could live with a terminal rate of 3.75%. We think that the hawks would prefer 4% and will therefore push for one final rate hike at the September meeting. A last one for the road, even if it remains a very close call.  
Central and Eastern Europe Economic Outlook: Divergent Policy Responses Amidst Disappointing Activity

Central and Eastern Europe Economic Outlook: Divergent Policy Responses Amidst Disappointing Activity

ING Economics ING Economics 01.09.2023 09:51
Economic activity in the first half of the year has been disappointing across Central and Eastern Europe, leading us to expect a gloomier full-year outlook. Despite this synchronised bottoming, we see a divergence in economic policy responses, driven by country-specific challenges. Poland: A weak third quarter so far The Polish economy started the third quarter on a soft note. All real economy figures for July underperformed, showing generally lacklustre domestic demand, while global conditions remain unfavourable. This indicates that the recovery will be slow and more visible in the fourth quarter than in the third. This suggests downside risks to our 2023 GDP forecast of 1%. CPI inflation in July came in at 10.8% year-on-year (down from 11.5% YoY in June), largely owing to food (-0.6pp) and energy (-0.2pp) prices. Core inflation receded as well to 10.6%, but subtracted only 0.2pp from CPI. Compared to the CPI peak in February, CPI has already slowed by nearly 8pp, mainly due to fading external supply shocks. We estimate CPI will dip near 10% YoY in August, but not lower. It should decisively reach single digits in September and hover around 7% by the year-end. We expect the Monetary Policy Council to start its easing cycle in September, even without meeting the governor's guidance on CPI reaching single digits. The recent real economy data proved lacklustre, i.e. the second quarter GDP print of -0.5% YoY came in below the July National Bank of Poland projection (-0.1% YoY), and the outlook for the second half of the year is also subject to downside risks. At the same time, inflation is on a clear path to reach single-digit levels later in the second half of the year. Still, recent MPC statements do not indicate the Council is willing to cut rates by more than 25bp at a single meeting. Consequently, we look for two or three 25bp cuts in 2023. €/PLN remains range-bound against the euro and it’s unlikely to change prior to the mid-October general elections. The zloty remains supported by the trade surplus and presumably Ministry of Finance activity, which offsets rather unsupportive emerging market sentiment. The zloty may ease after the elections, as opinion polls suggest that the political set-up may prevent prompt access to the Recovery Fund. Moreover, we see domestic demand recovering gradually in the second half, which should trim Poland’s trade surplus, given limited external demand. We expect further Polish government bond curve steepening. The 2024 budget draft presents a strong rise (by 55%) in net borrowing needs (to PLN225bn vs. PLN143bn in 2023), while local banks may cover one-third of it in 2024 vs. two-thirds in 2023, and the Ministry of Finance should rely strongly on foreign demand. Also, core market developments are generally unsupportive for the local long end, while domestic data should maintain, or even strengthen, market views on central bank easing.  
The ECB's September Meeting: Hawkish Tilt or Dovish Pause?

The ECB's September Meeting: Hawkish Tilt or Dovish Pause?

ING Economics ING Economics 01.09.2023 10:09
Previewing the ECB's September meeting The countdown is on until the next ECB meeting. Every day new macro information and/or comments by ECB officials fuel questions about whether or not there'll be another hike at the September meeting. To tell you the truth, as much as we would like to provide certainty of what will happen, the ECB itself will probably only know on the day of the next meeting what to do. Macro developments over the summer have caused further complications for the ECB. While the rapid worsening of the economy should come as a surprise, at least judging from overly optimistic ECB growth forecasts so far, the speed with which headline inflation is coming down should still leave the central bank uncomfortable. Despite today’s drop, core inflation remains too high and wage growth up until now signals that even without excessive wage settlements core inflation could stay higher for longer. We still expect headline inflation to come down significantly after the summer, mainly on the back of German headline inflation falling. We also expect the ECB’s September macro projections to bring downward revisions to both the short-term growth and longer-term inflation outlook. After a total of 425bp rate hikes in slightly more than a year, a pause in the ECB’s hiking cycle at the September meeting would make perfect sense. However, times at the ECB have changed. Today’s minutes stress that the central bank is sticking to its stance of putting more emphasis on actual data rather than on expected data, that it still sees a higher risk of stopping tightening too early rather than going too far, and that it seems to have a higher tolerance for negative growth surprises than for unexpected inflation developments. Also, for the hawks, the risk might be too high that a pause could actually transform into an actual full stop. This is why we think the hawks will have their final say and push the ECB for a final dovish hike at the September meeting. A last one for the road, even if it remains a very close call.
Morning Market Update: Korean Inflation Surprises, RBA Governor's Final Meeting Expected to Be Uneventful

Morning Market Update: Korean Inflation Surprises, RBA Governor's Final Meeting Expected to Be Uneventful

ING Economics ING Economics 05.09.2023 11:18
Asia Morning Bites Korean inflation surprises on the upside as bad weather causes food prices to spike. Lowe's last meeting as RBA Governor is likely to be uneventful.   Global Macro and Markets Global markets:  With the US out for Labour Day on Monday, there isn’t much market action to report. Equity futures aren’t providing much insight into today’s open either. Chinese stocks had a good start to the week, buoyed by further reductions in down payments for mortgages across a number of Chinese cities and the Country Garden debt repayment deal. The CSI 300 rose 1.52% and the Hang Seng rose 2.51%. European bond yields rose slightly, The yield on German 2Y and 10Y government bonds rose by about 3bp. EURUSD had a quiet day and remains below 1.08. The AUD was also steady ahead of today’s likely no-change RBA meeting. Sterling made some small gains taking it back above 1.26 and the JPY drifted fractionally higher to 146.49. There was very little action in Asian FX markets, besides the THB, which weakened to 35.235   G-7 macro:  With the US out on vacation, there was nothing of note on the G-7 calendar yesterday.  Final service sector and composite PMIs are out today in Europe. No changes are expected.  Final US durable goods orders and factory orders are due for July. Factory orders will likely reverse the 2.3% gain in June with a 2.5% decline. The ECB’s Lagarde gave nothing away about next week’s rate meeting in a speech yesterday in London. But the Bundesbank President, Joachim Nagel, suggested raising reserve requirements to “tackle the excess liquidity story”. Australia: The Reserve Bank of Australia (RBA) meeting today is Governor Philip Lowe’s last, and it should be an uneventful one. The surprise drop in inflation in July from 5.4% to 4.9% should be enough to keep rates on hold at this meeting. And indeed, we may have seen the peak in rates from the RBA as Michele Bullock takes over. However, the next three months’ base effects are far less helpful than they have been in the prior 6 months, and we may see inflation’s progress stall or even backslide. So, while the chances of another and almost certainly final rate hike have diminished, we aren’t totally ruling out one more before the year-end.   Singapore: Retail sales for July are set for release this afternoon. We expect another month of modest gains with retail sales up roughly 2%YoY.  The steady increase of visitor arrivals is likely supporting department store sales and services related to rest and recreation.  Retail sales have been one of the few bright spots for the economy this year with both trade and manufacturing struggling.      South Korea: Consumer price inflation reaccelerated in August after six months of cooling, recording a 3.4% YoY gain (vs 2.3% in July and the market consensus of 2.9%). The main upside surprises came from fresh food and pump prices, which rose more than expected due to bad weather and the recent pick-up in global oil prices. However, core inflation (excluding food and energy) stayed at 3.3% for a second month. Although the pace of inflation sped up again, it does not deviate much from the BoK’s own inflation projection and it is likely to be considered a temporary pick-up only. Also, with weaker-than-expected monthly activity data, domestic growth conditions are expected to deteriorate further in 2H23, so it is unlikely that the Bank of Korea (BoK) will respond with an additional rate hike. Looking ahead, we believe headline inflation will calm down after Chooseok holiday, but core inflation will likely accelerate again over the next couple of months which will support the BoK’s hawkish tone throughout the year. Based on today’s results, we have revised up our annual CPI forecast from 3.3% YoY to 3.5% for 2023 and 1.8% to 2.0% for 2024. Also, given inflation will likely remain above the BoK’s target until the end of this year, we have pushed back our forecast for the BoK’s first cut from 4Q23 to 2Q24.    Philippines: August inflation is set for release today. The market consensus is for inflation to be flat at 4.7%YoY.  We expect, however, the impact of accelerating prices for rice and energy-related commodities to push headline inflation to 5.0%YoY.  Crop damage and low production due to the onset of El Nino have pushed up retail prices for rice, which counts for 9% in the CPI basket. What to look out for: RBA decision South Korea GDP and CPI inflation (5 September) Japan Jibun PMI services (5 September) Regional PMI (5 September) China Caixin PMI services (5 September) Philippines CPI inflation (5 September) Thailand CPI inflation (5 September) Australia RBA decision (5 September) Singapore retail sales (5 September) US factory orders and durable goods orders (5 September) Australia GDP (6 September) Taiwan CPI inflation (6 September) US trade balance and ISM services (6 September) Australia trade balance (7 September) China trade balance (7 September) Malaysia BNM policy (7 September) US initial jobless claims (7 September) Japan GDP (8 September) Philippines trade balance (8 September) Taiwan trade balance (8 September) US wholesale inventories (8 September) Meanwhile, resurgent global energy costs have filtered through to higher domestic fuel prices. With inflation flaring up again, we could see Bangko Sentral ng Pilipinas forced to put off their rate cuts, possibly into mid-2024. 
GBPUSD Testing Key Support at 1.2175: Will Oversold Conditions Trigger a Correction?

A Surprisingly Aggressive Start to Poland's Easing Cycle Amidst Inflation Concerns

ING Economics ING Economics 08.09.2023 10:11
A sharp start to the easing cycle in Poland The direction is not a surprise, but its scale clearly is (75bp vs an expected 25bp cut). Poland joins other emerging markets in easing, despite a more risky inflation backdrop.   A 75 basis point cut On the anniversary of the last interest rate hike, the Monetary Policy Council (MPC) cut rates by 75bp. The direction is not a surprise, but its scale clearly is (we expected a 25bp cut). The MPC did not wait for inflation to fall to single-digit levels, despite this being a condition set by the National Bank of Poland (NBP) president. Also contrary to earlier declarations, the MPC did not start the cycle gradually.   A weaker GDP outlook, lower demand pressure and inflation expectations but important inflation risks omitted The main message from the post-meeting statement is that given a weaker global and Polish economic situation, the Council expects inflation to return to the NBP's target quicker than previously expected. The MPC pointed to lower demand pressures and a decline in inflation expectations. In our opinion, the Council overlooks many risks: expansionary fiscal policy, high wage growth, and the worrisome structure of core inflation (rapidly rising service prices). In addition, the post-meeting statement underlined that "a faster reduction in CPI would be supported by strengthening of the zloty", but today's decision results in the opposite move.   Thursday's press conference should provide guidance on the easing cycle The press conference by NBP President Glapiński on Thursday should underline the strategy behind the rate cut today. This may either be a one-time adjustment (the market had priced in about a 125bp cut by the end of the year prior to the decision), followed by a pause, or it is the decisive start of a longer cycle of interest rate cuts. The NBP's past track record disallows that to be settled today. Investors were surprised, as seen in the rapid zloty easing, just after the NBP decision was announced.   Short-term disinflation should continue, medium-term risks arise In theory, Poland joins the group of emerging markets that are starting to ease, but it is very different from them: core inflation is falling more slowly than in other Central European countries, while LATAM economies first brought real rates to very positive before launching their easing cycles. In the short term headline inflation should keep decreasing, but the medium-term outlook is more uncertain. The decline in inflation is due in large part to the receding of the earlier energy shock, but the deceleration in core inflation has been slow. So a further decline in inflation toward the NBP target in the medium term is not clear in our view. The labour market remains tight, resulting in upward pressure on wages. Fiscal policy also remains expansionary. In this context, we perceive the Council's decision as risky from the point of view of restoring price stability in the medium term.
Navigating the New Normal: Central Banks Grapple with Policy Dilemmas

Navigating the New Normal: Central Banks Grapple with Policy Dilemmas

ING Economics ING Economics 08.09.2023 10:33
A period of policy stasis wouldn't go amiss from central banks this month By Michael Hewson (Chief Market Analyst at CMC Markets UK) For all of August and most of the summer, attention has been fixed on this month's central bank rate meetings for clues as to how close we are to the end of the current central bank rate hiking cycle, as we look towards year end.     The Federal Reserve would like to have you think it will raise rates again before the end of this year, while the Bank of England is currently priced for the possibility of another two rate increases due to much higher core inflation. This week we saw the Reserve Bank of Australia, as well as the Bank of Canada, kick off an important 3 weeks for central bank policy meetings, with investors set to hang on to every nuance of this month's meetings to determine the next move when it comes to interest rates.     The RBA kicked things off on Tuesday by keeping rates unchanged at 4.1%, while maintaining its guidance that inflation remains elevated, and the central bank will do whatever is required to return inflation to target. The central bank also maintained its forecast that inflation is unlikely to return to target of between 2% and 3% by late 2025. The Bank of Canada also mirrored this narrative in keeping its own central rate unchanged at 5%, while pledging to act further if required.     As we look towards next week's ECB meeting, opinion is split on whether the governing council will follow this narrative, or whether they will go for one more rate hike of 25bps. The hawks on the governing council appear committed to such a move, with the likes of Bundesbank President Joachim Nagel, as well as Isabel Schnabel, along with the likes of Pierre Wunsch of the Belgian Central Bank, and Klaas Knot of the Netherlands central bank. The hawkish nature of German central bankers may come across as surprising given the state of the German economy, which is currently on its knees, as shown by this week's horrific factory orders data for July, and the further deterioration in last month's PMIs as services followed manufacturing into contraction territory.     This pathology comes from Germany's historical fear of inflation and is unlikely to change given that German CPI is currently at 6.3%, although it is fallen from its peaks. Even so, when faced with such awful economic data across the entire economy, one must question what might prompt a little bit of self-reflection on the part of the inflation hawks. On the more dovish side we have the likes of the National Bank of Greece's Stournaras, and Italy's Visco pushing for restraint. ECB President Christine Lagarde's comments at the July press conference were particularly telling when she undermined the central message of optionality in keeping the ECB's options open when it comes to a September hike, and being data dependant, by concluding that she doesn't think that the ECB has more ground to cover when it comes to further hikes.     If this week's data are any guide perhaps wiser heads will prevail with a pause seemingly the most likely outcome next week. Lagarde's recent tone suggests that given the nature of recent economic data the ECB could well be done when it comes to rate hikes, and that the next move could well be a rate cut, if the data continues to look ugly, although when that might happen is anybody's guess.      Assuming we get no change next week from the ECB, then it's more than likely that we could see the Federal Reserve go down the same route with another pause to their own rate hiking cycle, if recent comments from Fed governor Christopher Waller are any guide, although recent strong economic data might suggest the Fed might need to move in November, especially after this week's strong ISM services numbers. US policymakers do have one more rate hike in their forward guidance with a terminal rate of 5.6% by year end, with markets currently pricing that for November, assuming it happens at all. If we get no change from the ECB, as well as the Federal Reserve, that will likely take the pressure off the Bank of England to hike again, even though market pricing is for at least one or possibly two more hikes this year.     The dynamics here are especially interesting given the pricing on the number of UK rate hikes over the summer has been much higher than other central banks. We've already seen pricing on that shift considerably where we were over a month ago when the market was pricing the eye-watering notion of a terminal rate of over 6%. This never seemed remotely credible given the inevitable consequences for financial stability and the housing market of such rate moves. Inevitably this pricing has started to come in and could come in some more given recent comments from senior Bank of England officials. In the last 2 weeks we've heard from Bank of England Deputy Governor Ben Broadbent, as well as Chief Economist Huw Pill arguing that monetary policy is already restrictive enough, and with 14 consecutive rate hikes behind them that would suggest a pause is well overdue.     This appears to be the direction Governor Andrew Bailey is leaning as well if his comments this week to MPs are any guide. This suggests that senior Bank of England officials are softening the market up for a rate pause this month, an outcome markets seem reluctant to price. The biggest challenge for the bank is communicating this shift to markets without tanking the pound. Based on previous experience that might be a tall order, however given what's happening right now a pause would be the right move to make, and then reassess in November when they update their economic projections.  As far as the data is concerned the argument for a pause outweigh the risks of hiking further, however the fear is they may decide to hike again as they attempt to compensate for being late into the hiking cycle.     Certainly, a period of policy stasis from central banks wouldn't go amiss right now, even allowing for the risks of rising oil prices which threaten to make inflation a lot stickier than it could be. That said it's hard to see how more rate hikes would help a consumer being squeezed by higher energy prices, as both factors suck demand out of the economy.   Even though markets aren't currently pricing a series of rate pauses this month, that's what we might get, especially when you look at what is driving the current sticky nature of price inflation. We've already found out that the UK isn't the international outlier when it comes to GDP, after the recent recalculations from the ONS, and the only reason inflation here is higher than elsewhere is because of the ridiculous energy price cap, which has served to keep core inflation higher than it should be and could well continue to do so with oil prices on the rise again.     With the Swiss National Bank and the Bank of Japan also set to meet in the same week as the Fed and the Bank of England, the next few weeks may have the potential to spring a few surprises, with perhaps central banks adopting policy stasis as a default position given the uncertainty around how much of a lag there is when it comes to recent increases in interest rates.      While central banks received a lot of criticism for being asleep at the wheel when it came to recognising that inflation wasn't as transitory as they thought, they are now running the risk of overcompensating in the other direction, and hiking too aggressively to combat a problem which already appears to be dissipating.     The only outlier to that is the Bank of Japan which could tweak its policy settings further when it comes to YCC, as it looks to combat a problem of an ever-weakening currency and high core inflation. This could be an area where we might see further volatility given that USD/JPY is once again approaching the 150.00 area.  
Positive Shift in Inflation Structure: Core Inflation Falls in Hungary

Positive Shift in Inflation Structure: Core Inflation Falls in Hungary

ING Economics ING Economics 08.09.2023 13:33
Inflation structure takes a favourable turn Upward pressure on inflation in August came mainly from fuel and other non-core items, and disinflation was more widespread than expected (including services). This explains why we're now seeing a stronger deceleration in core inflation than in the headline. The core reading fell 2.3ppt to 15.2% YoY. This is not just a base effect phenomenon, as the month-on-month print was 0.2%. Moreover, over the last three months, core inflation has averaged 0.247% MoM, which is in line with the central bank's target of 3% annualised inflation. We are not saying the job is done, but the underlying inflation performance is encouraging. Other underlying indicators, such as the sticky price inflation calculated by the National Bank of Hungary, are also promising and suggest that price pressures are continuing to ease in the deeper layers of the economy. Hungary is slowly but surely coming out of the woods.   Headline and underlying inflation measures (% YoY)     Single-digit inflation achievable by November In light of today's data, a single-digit inflation rate at the end of the year seems certain. If there are no further price shocks, we could even see a rate below 10% as early as November. If we see a continuation of the recent repricing trend, and based on retail price expectations, we can be hopeful that the core reading will reach the sub-10% range by December. When it comes to average headline inflation, we have not changed our view and are looking for an inflation rate of around 18% in 2023 on average.     The correlation between retail price expectations and core inflation   Looking ahead to next year, we're expecting average inflation to be at around 5.0% – although we still see some upside risks. The expected dynamic wage outflows next year should translate into significant positive real wage growth. Households with savings in inflation-linked retail bonds should also see a large coupon payment in the first quarter of 2024. Should the reinvestment rate turn out to be lower than expected, the rising consumption propensity could bring back the strong repricing power of companies on the back of boosted domestic demand. Upcoming tax changes – such as the increase in fuel excise duty and the hike in road tolls – could also lead to second-round effects. On the other hand, recessionary risks in the developed world and the renewal of corporate energy contracts expiring this year on much more favourable terms will help to partially offset these risks.   No room for complacency in monetary policy In our view, monetary policy is unlikely to be significantly influenced by inflation developments in August. It is almost out of the question that the central bank will cut the effective rate to 13% in September, merging this with the base rate. The National Bank of Hungary will reduce the complexity of the monetary policy to some extent. However, given the risks to financial markets (mostly FX markets) and the evolution of global monetary policy with higher-for-longer narratives, the central bank may adopt a more hawkish stance than the market consensus after September, which could include leaving the effective interest rate unchanged for one or two months.    
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.      
Ukraine's Grain Harvest Surges, Export Challenges Persist Amid Black Sea Grain Initiative Suspension

Poland's Economic Snapshot: Declining CPI and Improving Current Account Balance

ING Economics ING Economics 11.09.2023 10:41
Poland: CPI expected to decline below 9% Current account (July): €1598mn Poland’s current account has been improving markedly over the recent months amid improving trade balance. The 12-month cumulative current account balance turned positive (+0.1% of GDP) in June, whereas in late 2022 it was approaching 3.5% of GDP. While export growth has been slowing in nominal terms over recent months, imports have started declining as the surge in imported energy commodities abated. We expect another current account surplus (€1598mn) in July as exports (+1.7% YoY) outpaced imports (-5.8% YoY). The outlook for the rest of the year is less positive, as poor conditions in German manufacturing are likely to weigh on Poland’s export prospects. On the other hand, external positions may benefit if the current weakening of the PLN is continued. CPI (August): 10.1% YoY The StatOffice should confirm its flash estimate of August CPI inflation at 10.1% YoY. While headline inflation remained at double-digit levels, price growth has continued moderating. The decline in inflation seen last month can mostly be attributed to developments in food and beverages prices (down by 1% MoM), lower annual growth of house energy and further moderation of core inflation. Our current estimates point to CPI inflation decline below 9% YoY.   Key events in developed markets next week   Key events in EMEA next week    
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A Week Ahead: Market Insights and Key Events with Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.09.2023 10:54
A busy week ahead By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The S&P500 ended last week on a meagre positive note, as the selloff in Apple shares slowed. Apple will be unveiling the new iPhone15 after the Chinese storm. Last week's selloff was certainly exaggerated. Once the Chinese dust settles, Apple's performance will continue to depend on the overall sentiment regarding the tech stocks, which will in return, depend on the Federal Reserve (Fed) expectations, the rates, energy prices, Chinese property crisis, deflation risks, and how that mix affects the global price dynamics.   China announced this morning that consumer prices rose by 0.1% y-o-y in August, slower than 0.2% penciled in by analysts and after recording its first drop in over two years of 0.3% a month earlier. Core inflation, excluding food and energy prices, rose 0.8% y-o-y, at the same speed as in July, and remained at the fastest pace since January. The numbers remain alarmingly low, and the recent stimulus measures announced by the government did little to boost investors' appetite. The CSI 300 was thoroughly sold on the rallies following stimulus news. And the yuan continued trending lower against the US dollar.  The US dollar is under a decent selling pressure this morning, particularly against the yen, after comments from the Bank of Japan (BoJ) Governor Ueda were interpreted as being 'hawkish'. Ueda said that 'there may be sufficient information by the year-end to judge if wages will continue to rise', and that will help them decide whether they would end the super-loose monetary policy and step out of the negative rate territory. The remarks were disputably hawkish, to be honest, but given how negatively diverged the Japanese monetary policy is, any hint that the negative rates could end one day boosts hope. The 10-year JGB yield jumped 5bp to 70bp on the news, and the USDJPY fell to 146.30. The USDJPY has a limited upside potential as the Japanese officials have been crystal clear last week that a further selloff would be countered by direct intervention. But the pair has plenty of room to drop significantly, when the BoJ finally decides to jump and leave the negative rates behind.   This week, the US inflation numbers will give the dollar a fresh direction, and hopefully a softish one. The headline inflation is expected to tick higher from 3.2% to 3.6% in August, on the back of rising energy prices, while core inflation may have eased from 4.7% to 4.3%. 'We've gotten monetary policy in a very good place' said the NY Fed President Williams last week. Indeed, the Fed hiked the rates by more than 500bp and shed its balance sheet by $1 trillion, while keeping the GDP around 2%, as inflation eased significantly from the 9% peak last summer to around 3% this summer. But crude oil cheapened by more than 40% between last summer and this spring, and the prices are now up by nearly 30% since then. The Fed will likely hold fire when it meets this month, but nothing is less sure for the November meeting. This week's inflation data will be played in terms of November expectations.   For the European Central Bank (ECB), the base case scenario is a no rate hike at this week's monetary policy meeting, but the European policymakers could announce a 25bp hike despite the latest weakness in economic data. The EURUSD is slightly better bid this morning, expect consolidation and minor correction toward the 200-DMA, 1.0823, into the meeting. The ECB, unlike the Fed, is not worried about surprising the market, on one side or the other. A no rate hike – even if it's a hawkish pause - could push the EURUSD to below 1.0615, the major 38.2% Fibonacci retracement, into a medium term bearish trend whereas a 25bp hike should trigger a rally toward the 1.09 level.   On the corporate calendar, ARM will go public this week, in what is going to be this year's biggest IPO. The company is expected to price on the 13th of September with a price range of $47-51 per share, and will start trading on Nasdaq the following day. ARM is expected to be valued at around $52bn, roughly 20 times its last disclosed annual revenue on expectation that the chips needed to power the generative AI will make ARM a sunny to-go place. Hope it won't be stormy.  
German Ifo Index Continues to Decline in September, Confirming Economic Stagnation

Fed Expected to Hold Rates on September 20th, Dollar Softens as Treasury Yields Ease, Retail Sales Weaken, Mixed US Inflation Report

Ed Moya Ed Moya 11.09.2023 11:26
Fed expected to keep rates on hold on September 20th 10-year Treasury yield eases back to 4.248% as 4.36% remains key resistance US retail sales are expected to weaken and the US inflation report will be mixed (core steady, headline rises)   The US dollar rally may have to wait till next week’s inflation and retail sales data. The dollar is slightly softer across the board as Treasury yields soften. It was a rather quiet day in the US as most of the attention stayed on Apple shares and another earnings report that supported the resumption of the disinflation process.  Kroger’s earnings release stated, “we believe inflation will continue to decelerate and the environment will remain challenging for consumers.” Today, we didn’t learn anything new about the short-term direction of inflation and the US economy.  Next week, will either bolster up the Fed hawk argument that more tightening might be needed in November or show the consumer is finally feeling the impact of the Fed’s tightening cycle, as financing costs surge, student-loan repayments come due, and as households run out of excess savings.   USD/CHF Daily Chart       USD/CHF (a daily chart of which is shown) as of Friday (September 8th 2023) has shown the bullish move that started in the middle of July is running out of steam.  Price action in September recaptured both the 50- and 100-day SMAs.  The strong bearish trend that has been in place since last November is being tested and bullish momentum could thrive over the short-term if price is able to recapture the 200-day SMA, alongside making its first higher high since late last year. The bearish case for USD/CHF however could unfold over the coming months.  The cost of capital will clearly be much higher and that will take a major toll on just personal consumption but also corporate spending.  When risk aversion runs wild, USD/CHF may return quickly.  Right now the market is pricing in a soft landing that includes orderly weakness, but that could get rattled if geopolitics deliver a couple shocks to risk appetite.  
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.  
ECB Decision Dilemma: Examining the Hawkish Hike and Its Potential Impact on Rates and FX

ECB Decision Dilemma: Examining the Hawkish Hike and Its Potential Impact on Rates and FX

ING Economics ING Economics 12.09.2023 08:54
ECB cheat sheet: Is a hike hawkish enough? Markets are torn. Will the ECB hike this week or not? We think it will, but we look at how different scenarios can impact rates and FX. Even in our base case, we suspect that convincing markets that this is not the peak will be very hard, and dovish dissenters may get in the way. The upside for EUR rates and the euro may not be that big and above all, quite short-lived.       As discussed in our economics team’s European Central Bank meeting preview, we narrowly favour a rate hike this week. The consensus of economists is slightly tilted towards a hold, and markets also see a greater chance of no change (60%). In the chart above, we analyse four different scenarios, including our base case, and the projected impact on EUR/USD and 10-year bunds. We expect to see a more fragmented than usual Governing Council at this meeting. Whichever direction the ECB decides to take, the debate will likely be fiercer than in previous meetings, as lingering core inflationary pressure is being counterbalanced by evidence of rapidly worsening economic conditions in the euro area. Accordingly, expect the overall messaging by the ECB to be influenced not only by the written communication but also by: a) how much President Christine Lagarde manages to conceal growing division and disharmony within the Governing Council during the press conference and; b) any post-meeting “leaks” to the media, which could be used by dissenters to influence the market impact.        
The AI Impact: Markets and the Inflation Surprise - 12.09.2023

The AI Impact: Markets and the Inflation Surprise

John Hardy John Hardy 12.09.2023 10:58
In this Outlook, our chief focus is on the current market impact of the AI theme across markets and around the world. But Steen’s introductory piece also argues that market participants are making a mistake in believing that the current market cycle will play out like previous ones, as inflation is set to stay higher for longer than the market anticipates, which will eventually register as an enormous surprise, given that yield curves in most markets are pricing significant eventual policy easing starting early next year and a glide path to a soft landing. The complacency surrounding that disinflationary and soft-landing scenario have kept long yield anchored and allowed equity markets, and particularly AI-linked names, to inflate perilously. Also on the AI theme that has dominated focus over the last quarter: Equity strategist Peter Garnry argues that the emergence of advanced AI systems such as GPT-4 from OpenAI is by far the most surprising event this year, a phenomenon that has turned everything on its head. Further, he writes that the AI-hyped rally has pushed the US equity market to new extremes, even as the benefits and risks of this new technology are hotly debated. He predicts that we risk seeing US and China engaging in an AI arms race. Our Greater China strategist, Redmond Wong, points to the challenges China faces in the field of generative AI as it navigates a global order of fragmentation. The success of generative AI breakthroughs in the US, coupled with limited computing power and geopolitical tensions, has threatened to break down China’s virtuous cycle of technology application, productivity enhancement and growth. Macro strategist Charu Chanana highlights Japan’s expertise in semiconductor manufacturing and robotic integration, suggesting these could be the foundation of a very strong presence in AI. She notes that Japanese equities and artificial intelligence combine the two most powerful market themes of this year. Cryptocurrency analyst Mads Eberhardt notes that AI fever has stolen the spotlight from blockchain technology and the cryptocurrency market generally, pushing the space further into speculative no man’s land. Despite the contrasting performance between crypto and AI-linked assets, there are striking similarities, especially the risk of bubble-like dynamics. Investment Coach Hans Oudshoorn outlines in his piece how investors can gain exposure to AI via ETFs that provide considerable diversification, but still noting the risks from valuations that have become very elevated in places. In addition to the AI focus, this report also delves into the outlook across major asset classes: In currencies, FX strategist John Hardy notes that USD shorts could be set for a vicious reality check if the US economy remains resilient and core inflation remains sticky, possibly engaging both sides of the "USD smile" that drive USD strength: the Fed remaining on the warpath and market turmoil.  John notes that the stakes are even higher for the Japanese yen if the longer yields of the major sovereign yield curves have to price in a new economic acceleration, as the BoJ will have to eventually capitulate on its yield-curve-control policy. In commodities, commodity strategist Ole Hansen suggests that the commodity sector looks set to start the third quarter on a firmer footing after months of weakness saw a partial reversal during June. Ole notes that strong gains were at times driven by a weaker US dollar, but specific developments in each sector also weighed. Most concerning for is the risk of higher food prices into the autumn, as several key growing regions battle with hot and dry weather conditions sparked by the first El Niño weather pattern in years. Fixed income strategist Althea Spinozzi argues that central banks face a troubling dilemma: if they really want to get ahead of inflation, they will need to burst asset bubbles created by a decade of quantitative easing (QE) and trigger a recession. But she asks whether they are willing to take policy tightening that far and ever win the inflation fight.
The AI Impact: Markets and the Inflation Surprise - 12.09.2023

The AI Impact: Markets and the Inflation Surprise - 12.09.2023

John Hardy John Hardy 12.09.2023 10:58
In this Outlook, our chief focus is on the current market impact of the AI theme across markets and around the world. But Steen’s introductory piece also argues that market participants are making a mistake in believing that the current market cycle will play out like previous ones, as inflation is set to stay higher for longer than the market anticipates, which will eventually register as an enormous surprise, given that yield curves in most markets are pricing significant eventual policy easing starting early next year and a glide path to a soft landing. The complacency surrounding that disinflationary and soft-landing scenario have kept long yield anchored and allowed equity markets, and particularly AI-linked names, to inflate perilously. Also on the AI theme that has dominated focus over the last quarter: Equity strategist Peter Garnry argues that the emergence of advanced AI systems such as GPT-4 from OpenAI is by far the most surprising event this year, a phenomenon that has turned everything on its head. Further, he writes that the AI-hyped rally has pushed the US equity market to new extremes, even as the benefits and risks of this new technology are hotly debated. He predicts that we risk seeing US and China engaging in an AI arms race. Our Greater China strategist, Redmond Wong, points to the challenges China faces in the field of generative AI as it navigates a global order of fragmentation. The success of generative AI breakthroughs in the US, coupled with limited computing power and geopolitical tensions, has threatened to break down China’s virtuous cycle of technology application, productivity enhancement and growth. Macro strategist Charu Chanana highlights Japan’s expertise in semiconductor manufacturing and robotic integration, suggesting these could be the foundation of a very strong presence in AI. She notes that Japanese equities and artificial intelligence combine the two most powerful market themes of this year. Cryptocurrency analyst Mads Eberhardt notes that AI fever has stolen the spotlight from blockchain technology and the cryptocurrency market generally, pushing the space further into speculative no man’s land. Despite the contrasting performance between crypto and AI-linked assets, there are striking similarities, especially the risk of bubble-like dynamics. Investment Coach Hans Oudshoorn outlines in his piece how investors can gain exposure to AI via ETFs that provide considerable diversification, but still noting the risks from valuations that have become very elevated in places. In addition to the AI focus, this report also delves into the outlook across major asset classes: In currencies, FX strategist John Hardy notes that USD shorts could be set for a vicious reality check if the US economy remains resilient and core inflation remains sticky, possibly engaging both sides of the "USD smile" that drive USD strength: the Fed remaining on the warpath and market turmoil.  John notes that the stakes are even higher for the Japanese yen if the longer yields of the major sovereign yield curves have to price in a new economic acceleration, as the BoJ will have to eventually capitulate on its yield-curve-control policy. In commodities, commodity strategist Ole Hansen suggests that the commodity sector looks set to start the third quarter on a firmer footing after months of weakness saw a partial reversal during June. Ole notes that strong gains were at times driven by a weaker US dollar, but specific developments in each sector also weighed. Most concerning for is the risk of higher food prices into the autumn, as several key growing regions battle with hot and dry weather conditions sparked by the first El Niño weather pattern in years. Fixed income strategist Althea Spinozzi argues that central banks face a troubling dilemma: if they really want to get ahead of inflation, they will need to burst asset bubbles created by a decade of quantitative easing (QE) and trigger a recession. But she asks whether they are willing to take policy tightening that far and ever win the inflation fight.
The US Dollar Weakens as Chinese and Japanese Intervention Threats Rise, While US CPI and UK Jobs Data Await: A Preview

The US Dollar Weakens as Chinese and Japanese Intervention Threats Rise, While US CPI and UK Jobs Data Await: A Preview

Saxo Bank Saxo Bank 12.09.2023 11:37
Central banks are realising that over a year of aggressive monetary policies might not have been enough to fight inflation. Financial conditions remain loose, governments continue to implement expansionary fiscal policies, and the economy is not decelerating at the expected pace. There is more tightening to do, which will continue to drive yield curves to a deeper inversion in the third quarter of the year. However, additional interest rate hikes might not work as intended. That's why policymakers must consider the active disinvestment of central banks' balance sheets to lift yields in the long part of the yield curve. As the hiking cycle approaches its end, the corporate and sovereign bond markets will provide enticing opportunities in the front part of the yield curve. Central banks face a troubling dilemma: should they burst the bubble created by more than a decade of Quantitative Easing (QE), or are they able to fight inflation without doing that? Hiking interest rates by 500bps in the United States and 400bps in Europe has not done the job as central bankers hoped. The job market remains solid, and inflation is stubbornly sticky and well above central banks’ 2% target. All developed central banks have done so far is to drive yield curves to inversion. While an inverted yield curve puts cash-strapped companies at risk, bigger corporates continue to take advantage of lower yields in the long part of the yield curve. Amazon can raise debt at 4.5% and invest at more than 5% in short-term bills. It doesn’t take much to understand that such a rate environment would create the wrong incentives. The dream that fighting inflation won’t mean putting financial stability at risk is adding to the existing bubble. Overall, financial conditions remain loose. The Chicago Fed adjusted national financial conditions index is negative, indicating that financial conditions are looser on average than would be typically suggested by current economic conditions. Similarly, the real Fed Fund rate has turned positive at the end of March for the first time since November 2019, reaching a restrictive posture only one year and 500bps rate hikes later. The ECB, on the other hand, is markedly behind the curve with the real ECB deposit rate in the bottom range it was trading in before Covid, when the ECB was trying to stimulate growth. Yet, governments continue to perpetrate lavish fiscal policies to win the electorate, adding pressure to the dangerous inflationary environment.     The way forward: active quantitative tightening becomes preferrable over rate hikes Despite being officially ended, quantitative easing and big central banks’ balance sheets remain the core issue to sticky inflation.  The joint balance sheet of the Federal Reserve and the ECB is above $15 trillion. Currently, both central banks are not actively selling their balance sheets as they have chosen not to reinvest part of their maturing securities. Calling such a strategy “Quantitative Tightening” is just a way for them to talk hawkish and act dovish. They know that to fight the inflation boogeyman, long term yields need to rise, and the way to do that is to actively disinvest their balance sheets, which are composed of long-term bonds. The outcome might be the opposite if central banks choose to hike rates beyond expectations. The higher the benchmark rate, the more likely long-term sovereign yields will begin to drop, as markets forecast a deep recession. Such a move would work against the central banks’ tightening agenda. Thus, it’s safe to expect that the tightening cycle will come to an end in the second half of the year as more interest rate hikes than those expected by markets would just further invert yield curves rather than have a significant impact on inflation. As the tightening cycle approaches its end, we expect Federal Reserve and ECB officials to begin to talk about balance sheet disinvestments. At that point, yield curves will begin to steepen, driven by the rise of long-term yields. The front part of the yield curve might start to descend, as markets anticipate the beginning of a rate-cutting cycle. However, if interest rate cut expectations are pushed further in the future, there is a chance that they will remain underpinned for a period. Yet, this path is less certain, as it depends on the ability of policy makers to keep rate cut expectations at bay and the capability of the economy to endure periods of higher volatility. It is at this point that we expect the market to rotate from risky assets to risk-free assets, bursting the bubble created by decades of QE. We expect the first central bank to end the rate hiking cycle to be the Federal Reserve, while the ECB will need to hike a few additional times to bring the real ECB deposit rate further up. The Bank of England might need to hike into the new year, diverging further from its peers.  
Sticky US Inflation Expected to Maintain Dollar Strength Ahead of FOMC Meeting

Sticky US Inflation Expected to Maintain Dollar Strength Ahead of FOMC Meeting

ING Economics ING Economics 13.09.2023 08:52
FX Daily: Sticky US inflation to keep dollar bid Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative.   USD: CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.
The Commodities Feed: Oil fundamentals remain supportive

Inflation in Romania: Analyzing August's Higher-Than-Expected Numbers

ING Economics ING Economics 13.09.2023 13:34
Higher-than-expected Romanian inflation is not as bad as it looks At 9.4%, August inflation came in higher than expected but can be largely blamed on one item: drug prices. These increased by a whopping 20.8% versus the previous month. On the bright side, core inflation dropped by 1.1pp versus July, to 12.1%, and looks on track to reach single digits this year. August inflation in Romania was higher than anticipated, as we expected the headline print to be 8.70%. The forecast error on our side came almost entirely from a single item – drug prices – which advanced by 20.8% versus July and added 0.82pp to the headline figure, versus an assumption of flat prices. This has pushed the non-food items to increase by 2.43% compared to the previous month, the strongest acceleration in the last 16 months. Assuming flat drug prices, the increase would have been 0.89% – still the highest in 2023, due to the recent increase in fuel prices. Otherwise, price dynamics in the other sectors largely matched our expectations. Food prices dropped by almost 2pp versus July on seasonal items and the effect of the government ordinance which caps the mark-ups on basic food products. The latter is scheduled to expire in November, although talks about it being prolonged are already underway. Service inflation decelerated to 0.44% month-on-month, the lowest increase in the last 12 months.] Headline and core inflation converge in 2024   At 12.1%, the core inflation print confirms our view that it will reach single digits this year, most likely in November and could even dip below 9.0% in December. The outlook for 2024 remains largely unchanged, as the core is likely to stay above the headline, though the spread will get narrower and could reach zero around mid-2024.   Today's data are not as bad as the headline number suggests. Capping the mark-ups on basic food items seems to be working, services inflation looks to be softening, and even wage growth appears to be moderating slightly. Moreover, the economy is clearly decelerating, and we have recently re-confirmed our below-consensus GDP growth forecast of 1.5% in 2023. We maintain our forecast for inflation to reach 6.9% in December 2023 and 4.0% in December 2024. From a monetary policy perspective, we still believe that rate cuts can be excluded this year. The start of the easing cycle should come in the first quarter of next year, with a total of 150bp cuts by the year-end. This might be done alongside the gradual restriction on liquidity conditions in the interbank market, as the current surplus is likely not giving a lot of comfort to the National Bank of Romania. We therefore still expect that pressure on the EUR/RON will be used as an opportunity to mop up some of the excess liquidity, hence the upside room for EUR/RON still looks limited in the short term.
Assessing the Path: Goods and Shelter Inflation and the Fed's Pause Decision

Risk Sentiment Shifts: Key Indicators and Impact on G10 Currencies

FXMAG Team FXMAG Team 14.09.2023 08:55
At -0.78 (vs -0.83 last week) our Risk Index has pulled back a little from elevated levels indicating significant risk-seeking behaviour by investors. The downward trend in the Index is decelerating. The pillars of the recent improvement in risk sentiment are (1) slowing US inflation and (2) investors’ hope that the Fed is likely finished hiking rates or very close to the end of its tightening cycle. Some recent events have dented this hope, including rising food prices on the back of El Nino and higher oil prices on the back of Saudi Arabia & Russia deciding to extend their voluntary production cuts. Higher food & energy prices threaten a re-acceleration in inflation and at the very least high rates for longer or worse a return to Fed rate hikes. Today’s US headline inflation data will be supported by higher energy prices, which will leave investors focusing on the core inflation data for evidence of further deceleration in inflation. Investors are understandably nervous ahead of this data release. The largest contributors to the rise in our Risk Index were rising Sovereign-EM spreads as well as the outperformance of cyclical stocks by defensive stocks. Rising FX market volatility also contributed to the rise in the Index. Falling credit spreads and gold prices restrained the rise in our Risk Index. The CAD is the G10 currency most sensitive to our Risk Index, followed by the GBP and EUR. These currencies are negatively correlated with the Index. The JPY & SEK are the most positively correlated currencies with the Index.      
Recent Economic Developments and Upcoming Events in the UK, EU, Eurozone, and US

Recent Economic Developments and Upcoming Events in the UK, EU, Eurozone, and US

FXMAG Team FXMAG Team 14.09.2023 08:56
Economic data, news & events ■ UK: Monthly GDP contracted by 0.5% mom in July, reversing the rise of 0.5% in the prior month. The main downward contribution came from services, where output fell 0.5% mom in July. Within services, the largest downward contribution came from healthcare activity, where industrial action increased. But there were also falls in industrial production and construction in July. Monthly GDP has been particularly volatile recently due to: 1. an additional bank holiday in May; 2. exceptionally warm weather in June, which boosted hospitality, tourism and construction; and 3. Industrial strike action. Looking instead at the less volatile 3M/3M growth rate, GDP rose 0.2% in July, unchanged from June. We continue to expect the economy to enter a recession around the turn of the year. ■ EU: Today, European Commission President von der Leyen will deliver her speech on the State of the Union 2023 during the European Parliament plenary session in Strasbourg. She is expected to outline the main priorities and flagship initiatives for the year to come, based on the EU’s achievements of the past years (9:00 CET). ■ Eurozone: We forecast a 0.7% mom decline in industrial output for July, following a contraction of 1% qoq in 2Q23. The expected contraction will have come about in a difficult environment for the industrial sector, which faces weak global demand for goods and fading support from backlogs of orders. The latest surveys of industrial activity do not point to a turnaround any time soon. The manufacturing PMI and its gauges of output and new orders remain stuck far below the expansion threshold (11:00 CET). ■ US: Headline monthly CPI inflation likely jumped to 0.6% mom in August, from 0.2% mom in July. In yearly terms, CPI inflation likely rose to 3.6%, from 3.2%. Such an acceleration was likely entirely driven by energy prices, as we estimate that gasoline prices rose by around 10% mom in seasonally adjusted terms and utility (piped) gas prices probably followed wholesale prices higher. Core inflation, on the other hand, is likely to come in at 0.2% mom for a third consecutive month, taking the yoy rate down to 4.4% from 4.7% in the prior month. We expect the disinflation process continued in housing, while inflation for core-goods and for non-housing core services (referred to as supercore) likely continued to moderate (14:30 CET).
Market Focus: Economic Data and Central Banks' Policies

Market Focus: Economic Data and Central Banks' Policies

FXMAG Team FXMAG Team 14.09.2023 08:58
EGB curves bear-flattened yesterday, with investors adjusting their positions ahead of upcoming macro events. Gilts were the stars of the day, with their yields declining after July jobs data confirmed a softening of the labor market, while USTs were little changed. European stocks edged moderately lower. Brent rose by 1.5% to USD 92/bbl   Caution has prevailed overnight, as highlighted by the weak performance of Asian stocks as well as US and European stock futures. While USTs are little changed, Bund futures have edged lower following a Reuters report that the ECB might raise its inflation projection for next year to above 3%. EGBs are set to open the trading session under pressure. In FX, EUR-USD has risen towards the 1.0750 area and USD-JPY has reached 147.40. EGB issuance activity will be quite lively today, with Italy, Germany and Portugal selling a total of EUR 13bn. Focus will be on the new 7Y BTP, the fourth and last new benchmark to be issued by Italy in 3Q23. With respect to the macro data, investor focus will be on US CPI data. The inflation report precedes the FOMC meeting by a week and will probably affect the Fed’s decision and, to a lesser extent, the updated economic projections that will be published next Wednesday. August CPI data are expected to show a mixed picture, with headline inflation likely having increased due to higher energy prices (in August, the average oil price was 6% higher than in July), while core inflation probably softened further. If data come in line with our estimates and consensus, the impact on fixed-income securities will probably be negligible as there seems to be consensus among analysts. Although market-based inflation expectations have already risen due to higher energy prices, especially at shorter tenors, their increase has been limited and breakeven rates have remained within the trading ranges of the last three months. Since 10 August, when July CPI data were published, the 10Y UST yield has risen by 20bp, with the real yield component, now close to 2%, contributing almost 100%. This move shows that inflation expectations remain anchored and that the re-acceleration of headline inflation in August is not seen as a major concern for investors or the Fed. On the other hand, the fresh increase in real yields seems to suggest that investors are continuing to reduce their expectations of a recession in the US and a rapid shift towards a looser monetary policy by the Fed. We see credit starting on a more cautious tone today ahead of the release of US CPI data in the afternoon and higher oil prices are weighing on equity markets. The sentiment on the Swedish residential property market declined again in September with more respondents in the monthly SBAB house price survey now seeing prices falling. The market expectation of a further rate hike by the Swedish central bank indicates expectations that further rising borrowing costs and inflation will lead to accommodation becoming less affordable. Swedish residential property prices are around 10% below their peak in March 2022 and market commentators see overall price declines of 20% as possible. For Swedish banks we see a further decline as still manageable given that average LTVs are in the 50-60% rang   Today and tomorrow are set to be two crucial days for the FX market US CPI inflation for August is the key release early this afternoon, but the USD reaction might prove to be complicated. This is because the US data will likely be mixed. We expect a rise in the headline index and a further decline in the core rate. This might spark some USD swings when the data are published but FX majors will probably end today’s session not far from current levels, given the ECB decision tomorrow. For there to be a more directional reaction, both headline and core inflation would have to surprise to the upside or the downside. Since a steady FOMC meeting outcome on 20 September is highly likely at this point, we expect the market reaction to be asymmetric and think that softer-than-expected data (even in the headline component) are unlikely to dent the current USD strength too much. On the other hand, an unexpected and sharp acceleration in the core index is probably needed to force investors to return to pricing in a higher chance of another rate hike in the US next week, which would drive the dollar index (DXY) back towards the recent peak of 105.15. In our view, EUR-USD is set to remain close to 1.0750, after press report suggesting that the ECB expects inflation to remain above 3% next year. Recent lows of around 1.0690 and 1.0770-1.08 are thus the key levels to monitor. Meanwhile, bad economic data in the UK early this morning will likely keep GBP-USD below 1.25. The return of USDJPY to 147 makes it clear that the debate on policy normalization in Japan is not enough to convince investors to ride a yen recovery, while USD-CNY and USD-CNH are likely to remain below 7.30 amid higher funding costs in the offshore market. Early tomorrow morning the decline that we expect in both headline and core inflation data in Sweden is unlikely to prevent another 25bp rate hike by the Riksbank next week. Still, the data will probably weigh somewhat on the SEK at the start of the European session. The PLN looks set to continue to suffer from the NBP’s bold rate cut last week. The HUF will likely trade close to 385 against the EUR after Hungarian Economic Development Minister Nagy hinted at stagnant growth for Hungary this year, while the NBH confirmed that the base rate (now 13%) will replace the 1D depo rate (now 14%) from 1 October. Lastly, the RUB steadying around 95 against the USD further suggests a steady outcome to the CBR meeting on Friday.
Market Risk Sentiment Adjusts as Investors Eye US Inflation Data

Market Risk Sentiment Adjusts as Investors Eye US Inflation Data

FXMAG Team FXMAG Team 14.09.2023 09:01
At -0.78 (vs -0.83 last week) our Risk Index has pulled back a little from elevated levels indicating significant risk-seeking behaviour by investors. The downward trend in the Index is decelerating. The pillars of the recent improvement in risk sentiment are (1) slowing US inflation and (2) investors’ hope that the Fed is likely finished hiking rates or very close to the end of its tightening cycle. Some recent events have dented this hope, including rising food prices on the back of El Nino and higher oil prices on the back of Saudi Arabia & Russia deciding to extend their voluntary production cuts. Higher food & energy prices threaten a re-acceleration in inflation and at the very least high rates for longer or worse a return to Fed rate hikes. Today’s US headline inflation data will be supported by higher energy prices, which will leave investors focusing on the core inflation data for evidence of further deceleration in inflation. Investors are understandably nervous ahead of this data release. The largest contributors to the rise in our Risk Index were rising Sovereign-EM spreads as well as the outperformance of cyclical stocks by defensive stocks. Rising FX market volatility also contributed to the rise in the Index. Falling credit spreads and gold prices restrained the rise in our Risk Index. The CAD is the G10 currency most sensitive to our Risk Index, followed by the GBP and EUR. These currencies are negatively correlated with the Index. The JPY & SEK are the most positively correlated currencies with the Index.        
Asia Weakens as UST Yields and Oil Prices Rise; Focus on US Inflation Data

Asia Weakens as UST Yields and Oil Prices Rise; Focus on US Inflation Data

FXMAG Team FXMAG Team 14.09.2023 10:02
It was a weak session in Asia as higher oil prices and UST yields sapped investors’ enthusiasm for risk. UST yields were pushed higher by concerns about US inflation ahead of the August CPI release later today. Indeed, a 10Y UST auction drew its highest yield since 2007. Asian technology shares were also hurt by a weak investor reception of Apple’s launch of its iPhone 15. At the time of writing, most Asian bourses as well as S&P 500 futures were trading in the red. Higher UST yields and risk-off trading led to a modestly stronger USD with the AUD and JPY leading the declines against the USD. G10 FX is trading cautiously and in tight ranges ahead of the US inflation data release later today.   USD: of (headline) inflation and head fakes Ahead of the US CPI data, our US economist is looking for the headline print to reaccelerate to 3.7% YoY in August, up from 3.2% previously (and above the consensus expectation of 3.6%). In contrast, core inflation is expected to slow down to 4.2% YoY in August, down from 4.7% in July. The mix of accelerating headline and decelerating core inflation highlights that the main driver of the latest price developments is the renewed rebound of energy prices. Fed Chair Jerome Powell signalled back in July that the August CPI is the final of the five key data points that will inform the outcome of next week’s policy meeting. In that, we believe that the Fed may decide to look past the revival of cost-push inflation and focus instead on the persistent drop of core inflation. If confirmed, today’s data could therefore confirm market expectations of a Fed pause in September. Turning to the FX market reaction, the USD will likely take its cue from the US rates markets. We further note that while today’s CPI print may not reignite the Fed rate hike expectations, it could still encourage investors to push back on their rate cut expectations and thus boost the USD rate appeal especially if the (headline) inflation print overshoots market expectations. In addition, the safe-haven USD could continue to draw support from the market’s fragile risk sentiment.
The ECB to Hike, But Euro Rally May Be Short-Lived as Dollar Strength Persists

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.          
US Inflation Rises but Core Inflation Falls to Two-Year Low, All Eyes on ECB Rate Decision on Thursday

US Inflation Rises but Core Inflation Falls to Two-Year Low, All Eyes on ECB Rate Decision on Thursday

Kenny Fisher Kenny Fisher 14.09.2023 10:12
US inflation rises but core inflation falls to two-year low All eyes on ECB rate decision on Thursday The euro is trading quietly on Wednesday. In the North American session, EUR/USD is trading at 1.0739, down 0.16%. The August US inflation report today was an interesting mix. Headline inflation rose for a second straight month, from 3.2% y/y to 3.7% y/y and above the consensus estimate of 3.6% y/y. On a monthly basis, headline inflation rose 0.6% in August, while core CPI came in at a modest 0.3%. The jump in headline inflation will no doubt grab the headlines and cause some groans.  Nobody wants to see inflation rise, but the main driver of the upswing was higher gasoline prices, which can change quickly from one month to the next. If gasoline prices reverse direction and fall sharply, that will be weigh on headline inflation. The Federal Reserve will be paying more attention to Core CPI, which fell to 4.3%, down from 4.7% in July. This matched the consensus estimate and notably, marked the lowest level since September 2021. The inflation report should cement a pause from the Fed at next week’s meeting.   Will the ECB raise rates? The European Central Bank meets on Thursday and it remains unclear whether policy makers will raise rates by a quarter-point or pause for the first time after nine straight hikes. Interest rate futures have priced in a hike at 65% but both the hawks and doves at the ECB have persuasive arguments. The hawks will argue that inflation has fallen to 5.3% in the eurozone but it’s unrealistic to expect inflation to fall back to the ECB’s 2% target without further rate hikes. With a deposit rate of 3.75%, there is still room for the ECB to continue raising rates and push inflation lower, which is the central bank’s number one priority. The doves will respond that inflation is moving in the right direction and a pause will give the central bank time to monitor the effects of rate hikes. The eurozone economy is sputtering and Germany, the bloc’s largest economy is now expected to fall into a recession, according to the European Commission. If the ECB continues hiking, it will only worsen economic conditions. I don’t envy ECB President Lagarde, who will have to decide which position to adopt and may face criticism no matter what she does.   EUR/USD Technical EUR/USD tested support at 1.0732 earlier. Below, there is support at 1.0654 There is resistance at 1.0777 and 1.0855          
ECB Rate Decision: A Close Call for Christine Lagarde"

ECB Rate Decision: A Close Call for Christine Lagarde"

Kenny Fisher Kenny Fisher 14.09.2023 15:08
ECB rate decision expected to be a close call US to release retail sales and producer prices The euro is showing limited movement on Thursday, ahead of today’s ECB rate decision. In the European session, EUR/USD is trading at 1.0736, down 0.06%. Will she or won’t she? All eyes are on ECB President Christine Lagarde, who will decide whether the ECB will increase rates by a quarter-point or hold off and take a pause after nine straight increases. Interest rate futures have priced in a hike at 65% but there is a lot of uncertainty among economists and the decision is expected to be a close call, as the Governing Council appears split on the issue. There are strong arguments on both sides, and Lagarde could end up with a type of compromise that ends up being a ‘hawkish hold’ or a ‘dovish hike’. The latest development was a report in Reuters on Wednesday that the ECB inflation forecasts will be increased at today’s meeting, which raised expectations for a hike. Traders should be prepared for volatility from the euro after the decision, which is a binary risk event for the euro. A rate hike would likely boost the euro while a hold could weigh on the currency. Still, any swings in EUR/USD could be immediate and short-lived. The markets will be paying close attention to the policy statement and whether the Governing Council decision was a close call. It’s a busy day in the US as well, with the release of retail sales and producer prices for August. Retail sales are expected to ease to 0.2% m/m, down from 0.7% m/m, while PPI is forecast to rise to 1.2% y/y, up from 0.8% m/m. The releases could trigger volatility from EUR/USD in the North American session.   The US inflation report on Wednesday was a mix, as headline inflation rose in August from 3.2% to 3.7%, while core CPI eased to 4.3%, down from 4.7%. The jump in headline inflation may have attracted media attention, but the Fed will be pleased with the drop in core CPI, which is a better gauge of underlying inflation. The inflation report has cemented a pause at next week’s meeting, with the future markets pricing in a pause at 97%, up from 93% prior to the inflation release. . EUR/USD Technical EUR/USD is testing resistance at 1.0732. Above, there is resistance at 1.0777 There is support at 1.0654 and 1.060        
ECB's 25bp Rate Hike Signals End to Hiking Cycle Amid Inflation and Growth Concerns

ECB's 25bp Rate Hike Signals End to Hiking Cycle Amid Inflation and Growth Concerns

ING Economics ING Economics 15.09.2023 08:32
ECB hikes by 25bp and signals end to hiking cycle Another rate hike of 25bp from the European Central Bank, but a clear signal that the current hiking cycle has come to an end. These are the main takeaways from today’s meeting The fear of not getting inflation fully under control and the risk of stopping too early must have outweighed concerns around the rising recession risk in the eurozone, motivating the European Central Bank to hike interest rates for the tenth consecutive time since July 2022. After a total of 450bp rate hikes, the ECB’s deposit rate is now at a record high.   ECB's staff projections point to too high inflation and lower growth The ECB remains highly concerned about inflation, not only actual inflation but also future inflation. The newest ECB staff projections show headline inflation coming in at 3.2% in 2024 and 2.1% in 2025. However, the upward revision for 2024 is mainly the result of higher energy prices. The inflation forecast for 2025 was revised downwards. The ECB’s core inflation forecasts were slightly revised downwards to 2.9% in 2024 and 2.2% in 2025. Still, in the eyes of the ECB, both headline and core inflation above 2% in 2025 is not compatible with its own definition of price stability. It was not so much the direction of the revisions but rather the absolute levels and the long period of deviating from the target which motivated the ECB’s decision today. The ECB’s staff projections for eurozone GDP growth were also revised downward to 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025. However, the downward revision for 2024 is purely the result of carry-over effects and the quarterly profile for 2024 remained unchanged, showing a return to potential growth from the second quarter of 2024 onwards. The ECB is still sticking to the view of a temporary slowdown and not of more structural growth weakness.   Dovish rate hike as a compromise The staff projections have probably increased the ECB’s dilemma: inflation, while coming down, remains too high but the growth outlook continues to deteriorate. With this macro backdrop, both a rate hike and a pause would have been plausible. This time, the ECB decided to compromise: a dovish hike, mainly aimed at strengthening credibility and probably bridging growing divergences between ECB hawks and doves. In this regard, one remark in the official communication is key: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”. Given the imprecision of the ECB’s own models over the last few years, it is questionable how the ECB has now come to the conclusion that the current level is enough. Why not 25bp less? Why not 25bp more? During the press conference, ECB President Christine Lagarde hinted at different views within the Governing Council. According to Lagarde, today’s decision was taken with a “solid” majority. A dovish hike as compromise to balance between credibility, inflation, growth and team spirit.   The final hike Looking ahead, the ECB would be crazy to completely rule out further rate hikes. Inflation has simply taken too many unexpected turns and the ECB has been wrong too often in the past. This is why today’s meeting still leaves the possibility of picking up hiking at a future stage. However, such a scenario is highly unlikely. A further weakening of the economy and more traction in a disinflationary trend will make it very hard to find arguments for additional rate hikes any time soon. For now, the ECB is determined to keep rates where they currently are, waiting for the 450bp of total rate hikes to filter through to the economy. The next discussion will be on how long the new “high for longer” can be sustained. Even if the door to future rate hikes remains open, today’s rate hike will soon be remembered as the final hike of the ECB’s most aggressive rate hike cycle in history.
European Central Bank's Potential Minimum Reserve Increase Sparks Concerns

Fed Likely to Pause with Potential for a Final Hike in Sight

ING Economics ING Economics 18.09.2023 09:09
Fed set to hold, but signal the potential for a final hike Mixed US data and Federal Reserve comments solidly back the market pricing of another pause at the 20 September FOMC policy meeting. However, inflation concerns linger and economic resilience suggest the Fed will continue to signal the potential for a final hike even if we don’t think it carry through with it.     Fed set to pause again on 20 September At the last Federal Reserve monetary policy meeting in July, the Federal Open Market Committee raised the Fed funds policy rate range 25bp to 5.25-5.5%. The minutes to the decision also showed officials continue to have a bias to hike further since “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". At the Fed’s Jackson Hole Conference in late August Chair Powell said that policymakers “are attentive to signs that the economy may not be cooling as expected”, indicating a sense that it may indeed need to do more to ensure inflation sustainably returns to target. Nonetheless, the FOMC minutes also suggested differences of opinion are forming. While all voting FOMC members backed the hike, there were two non-voting members who “indicated that they favoured leaving the target range for the federal funds rate unchanged”. Moreover, “a number of participants judged that… it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening”. In recent months we have had some encouraging news on core inflation with two consecutive 0.2% month-on-month prints with a third coming in at 0.278%, much better than the 0.4-0.5% MoM consecutive prints we got over the prior six months. There has also been evidence of moderating labour costs (the Employment Cost index and cooling average hourly earning growth) together with more modest job creation. Yet we have to acknowledge that the activity data has remained strong with the US economy on track to grow at an annualised 3% rate in the current quarter. The commentary from officials, including the hawks, such as Neel Kashkari, suggest a willingness to pause again in September (just as it did in June), but to leave the door ajar for a further hike at either the November or December FOMC meetings.  Given this situation economists are universally expecting the Fed funds target rate range to be left at 5.25-5.5% with markets not pricing even 1bp of potential tightening. While the European Central Bank hiked rates but indicated it may be done, the Fed is set to pause, but keep its options open.   The potential for further hikes remains As with the June hold decision, the Fed is set to suggest that the decision should be interpreted as part of its process of a slowing in the pace of rate hikes rather than an actual pause. While inflation is moderating, it is still too high and with the jobs market remaining very tight and activity holding firm, the Fed can’t take any chances. The scenario graphic above outlines the range of possibilities outside of our core view of no change, but the door left open for future hikes. However, the other options have very low probabilities attached to them. We simply cannot see the point of the Fed softening its stance on the outlook for policy and give the markets the green light to sell the dollar and drive Treasury yields lower given this will undermine their fight against inflation. At the same time, a 25bp hike would be such a shock it could be seen as inconsistent with the Fed’s attempt to engineer a soft landing and would hurt risk appetite.   Dot plot to retain a final hike – but we don't see it being implemented This brings us onto the updated Fed’s forecasts. The key change in June was the inclusion of an extra rate hike in their forecast for this year, which would leave the Fed funds range at 5.5-5.75% by year-end. It seems highly doubtful this will be changed given the data flow, while the unemployment and inflation numbers seem broadly on track. GDP for 2023 is likely to be revised up substantially though given the remarkable resilience of activity and the consumer spending splurge over the summer, much of which appears to have gone on leisure activities.   ING expectations for the Federal Reserve's new forecasts
Upcoming Central Bank Meetings and China's LPR Rates: Asia's Economic Outlook

Upcoming Central Bank Meetings and China's LPR Rates: Asia's Economic Outlook

ING Economics ING Economics 18.09.2023 09:25
Central banks in Indonesia, Japan, the Philippines, and Taiwan will hold their respective policy meetings next week. China will also be announcing its 1-year and 5-year LPR rates. China's 1-year and 5-year LPR rates likely to remain unchanged China will decide on one and five-year loan prime (LPR) rates next week. Given the current challenges, with the People's Bank of China helping to support the Chinese yuan, it is unlikely the central bank will announce any further rate cuts. We are expecting rates to remain unchanged.   Regional central banks to stand pat The Central Bank of the Republic of China (CBC), Bank Indonesia (BI) and Bangko Sentral ng Pilipinas (BSP) are all expected to retain current policy settings in line with the US Federal Reserve. For Taiwan, as inflation turned up recently and with the New Taiwan dollar being quite soft, we are expecting it to hold the rate steady. Similarly, BI will likely hold rates steady to support the Indonesian rupiah, which is down 0.78% for the month. Lastly, the BSP will also likely stand pat as inflation pressures flare up, with the latest inflation reading surging to 5.3% year-on-year.   Inflation and trade figures for Japan next week We expect headline consumer inflation to slow to 3.1% YoY in August (vs 3.3% in July) with the ongoing energy subsidy programme, however, core inflation excluding fresh food and energy will likely edge up slightly to 4.4% (vs 4.3% in July), which will be a major concern for the Bank of Japan (BoJ). For the trade report, we expect exports in August to rebound from the recent dip, with strong auto shipments while imports could decline more sharply to -18% YoY compared to the previous month as base effects dominate the rise in commodity prices and weak Japanese yen. Meanwhile, the BoJ is likely to stay pat next week. The central bank could however probably send a subtle hawkish message to the market after higher-than-expected inflation and a weak JPY, combined with rising global oil prices, pushed inflation up further.   Key events in Asia next week
US Housing Market Faces Challenges Due to Soaring Mortgage Rates

US Housing Market Faces Challenges Due to Soaring Mortgage Rates

ING Economics ING Economics 25.09.2023 11:04
US housing feels the squeeze from high mortgage rates A tripling of US mortgage rates constrained both the demand and supply of housing, leaving existing home sales at post-GFC lows. Mortgage rates will rise further in the wake of the market's reaction to yesterday's Fed forecasts, further constraining activity.   Market acknowledges the risk of a final hike, but it will depend on the data The Fed's messaging of higher for longer interest rates has been taken on board by financial markets, with the dollar strengthening and the yield curve shifting higher in the wake of yesterday's decision. Nonetheless, the market remains somewhat sceptical on the prospect of the final 25bp interest rate rise that the Fed's forecasts signalled for this year, with the pricing for November's FOMC meeting only being 8bp with 13bp priced by the time of the December meeting. The jobs market remains tight, as highlighted by low jobless claims numbers today, but we continue to believe that core inflation pressures will slow meaningfully, the economic outlook will soften, and the Fed won't end up carrying through. The jobs market is always the last thing to turn lower in a downturn and there are areas of more obvious weakness.  For example, US existing home sales fell 0.7% MoM in August to a level of 4.04mn rather than rising the 0.7% MoM as the market expected. This is due not only to weakness in demand but also a complete collapse in properties available for purchase. The affordability issue is front and centre here, with prices having risen nearly 50% nationally during the pandemic, but demand has obviously been crushed by the fact that mortgage rates have tripled since the Federal Reserve started hiking interest rates. But this surge in borrowing costs is constraining the supply of homes for sale as well - people who are locked in at 2.5-3.5% mortgage rates cannot afford to give them up. They can't take the mortgage with them when they move home, so even if you downsize to a smaller, cheaper property, you are, in all likelihood, going to end up paying a higher monthly dollar mortgage payment.   We're in a crazy-sounding position Consequently, we are in a crazy-sounding position whereby the number of housing transactions is on a par with the lows seen during the global financial crisis, yet home prices are rising. This should be a boon for home builders, but note the big drop in sentiment and housing starts seen earlier in the week. The drop-off in prospective buyer traffic is making builders cautious. Mortgage rates at 7%+ will obviously do that over time, but it may be another sign of the household sector starting to pull back at the margin now that the Fed believes pandemic-era savings are close to being exhausted.   Existing homes sales transactions and home prices   Leading index still indicates recession can't be ruled out Meanwhile, the US leading economic indicator, which combines a range of other numbers, including jobless claims, orders, average work week, the yield curve and credit conditions, posted its 17th straight monthly decline. As the chart below shows, the index at these sorts of levels has been a clear recession indicator in the past, but for now, GDP growth is strong.   Leading index versus GDP (YoY%)   Our view remains that this strength in activity has been caused primarily by households running down pandemic-era accrued savings aggressively and borrowing more on credit cards. But with savings obviously being finite - note the Fed's Beige Book citing evidence of the "exhaustion" of these savings - and consumer credit harder to come by and certainly less affordable than it was, the cashflow required to finance ongoing increases in spending will have to increasingly come from rising real income growth. Rising gasoline prices will erode spending power while student loan repayments, strikes and the prospect of a government shutdown will add to the financial stresses on millions of households, so we will need to see substantial wage increases for everyone - not just auto workers - to keep this growth engine firing.  Given this situation, we not only think the Fed will leave rates at their current levels, we also see the potential for more rate cuts next year than the 50bp currently being signalled by the Federal Reserve.
Tepid BoJ Stance Despite Inflation Surge: Future Policy Outlook

Tepid BoJ Stance Despite Inflation Surge: Future Policy Outlook

ING Economics ING Economics 25.09.2023 11:13
Bank of Japan keeps policy unchanged and sticks to dovish stance The Bank of Japan unanimously decided to keep its policy settings unchanged, but the result was a bit disappointing given that there wasn’t any clear sign of a shift in policy stance either from its statement or from Governor Ueda’s comments.   Sustainable inflation targeting is not yet in sight The BoJ’s statement maintained most of the wording from before and kept its forward guidance unchanged. Firmer-than-expected inflation is not yet enough for the BoJ to tilt its policy stance. In the statement, the BoJ expects inflation to decelerate and said core inflation has been around +3% because of pass-through price increases. At the press conference, Ueda said, “if inflation, accompanied by the wages goal is in sight, then the BoJ will mull an end to the YCC and a rate shift”. Taken together, the BoJ still thinks that higher-than-expected inflation is transitory and driven more by cost-push factors.   Yet inflation has been consistently beating the BoJ's expectation In our view, recent inflation data showed inflation to be more stable and stickier than expected and also showed signs of increasing both demand-side and supply-side pressures. The headline consumer price data for August rose 3.2% year-on-year (vs 3.3% in July, 3.0% market consensus) while core inflation excluding fresh food and energy stayed at 4.3% for a second month. Private service prices such as entertainment have risen notably for more than a couple of months, with increases in foreign tourism adding upside pressure. In addition, pipeline prices such as producer prices and import prices rose mostly due to higher commodity prices.    BoJ outlook We still think that the BoJ will likely bring about another policy change in October and make a first rate hike attempt in the second quarter of next year. In our view, consumer prices will likely stay above the BoJ's projection and clearer signs of demand-side pressure will emerge over the next couple of months, allowing the BoJ to at least change its YCC policy. In terms of a rate hike, the BoJ will likely wait until there are signs that solid wage growth has been sustained, and thus it will likely come in the second quarter of next year.    
Oil Price Impact on Inflation Forecasts: A Closer Look

Oil Price Impact on Inflation Forecasts: A Closer Look

ING Economics ING Economics 26.09.2023 14:52
How do current oil prices change our inflation forecast? Despite this not being the 1970s, expectations of further disinflation will be impacted by higher oil prices. This could result in a slower decline of inflation to 2%. Given that our expectations for oil prices do include a drop in the first half of 2024 again, the effect on our own forecast is rather moderate. Plus, a smaller decline in energy prices has materialised this year compared to expectations (which impacts next year’s base effects). Assuming oil prices stay at 95 USD/b for all of 2024, however, the headline figure would rise by 0.3 pp next year, with a peak of the energy price contribution of 1 ppt in the second quarter. At the same time, higher oil prices would probably further dent consumer confidence and spending, thereby contributing to the current disinflationary trend due to weaker demand. Indeed, the big question is whether the higher oil price will once again result in broad-based second-round effects like we saw last year. A lot of drivers of core inflation are at this point still disinflationary, with manufacturing businesses still indicating that input costs are falling despite higher wages and energy prices. And as new orders are weakening, deflation for non-energy industrial goods is realistic towards the end of the year. For services, weaker demand is also contributing to slowing inflation despite higher wage costs, according to the September PMI. Our expectations are that core inflation will slow significantly from the 5.3% August reading towards the end of the year. Still, if the labour market remains as tight as it is now and the economy bounces back a bit in early 2024, there is a risk that higher energy input costs would also put core inflation further above 2%. A lot depends on the strength of the economy in the months ahead, adding uncertainty for the ECB.   Pressure on the ECB to continue hiking Prior to the pandemic, most central banks would probably have looked past surging oil prices. Some even considered rising oil prices to eventually be deflationary, undermining purchasing power and industrial competitiveness. However, we are no longer in the pre-pandemic era, but the era of returned inflation. The ECB has emphasised in recent months that doing too little is more costly than doing too much in terms of rates. For the ECB, the recent staff projections were based on the technical assumption of an average oil price of 82 USD/b in 2024. If oil prices were to average 95 USD/b next year, this would probably push up the ECB’s inflation forecasts to 3.3% for 2024 (from 3.2%) and more importantly to 2.4% in 2025 (from 2.1%). As a result, the return to 2% would be delayed to 2026. The delayed return to 2% would not be the only reason for the ECB to consider further rate hikes. Even though the ECB would still acknowledge the deflationary nature of a new oil price shock, the risk that this new oil price shock could lead to a de-anchoring of inflation expectations will definitely add to the ECB’s concerns, making not only an additional rate hike more likely, but also that they stay higher for longer.
Inflation Resurgence in Australia: RBA's Rate Cycle Uncertainty

Inflation Resurgence in Australia: RBA's Rate Cycle Uncertainty

ING Economics ING Economics 27.09.2023 13:01
Australia: Inflation back on the rise While this is mostly down to less helpful base effects, international energy prices and excise duty hikes, it is not safe to conclude that the RBA rate cycle has peaked.   In line with expectations, but more progress needed At 5.2% YoY, the August inflation figures were bang in line with expectations. However, inflation is rising again, not falling, and the month-on-month and core inflation figures (0.69% MoM and 0.3% MoM respectively) leave no room for complacency. It is still possible that the Reserve Bank of Australia (RBA) will conclude that the trend pace of improvement in inflation is insufficiently fast and that a further hike is required.  Base effects can take some of the blame for the rise in inflation this month. In 2022, the August CPI index rose only 0.3% MoM, so this year's August CPI was always going to have to come in low just to keep inflation steady. It didn't come in low enough. This could be a problem over the coming two months, with September and October 2022 CPI increases also just 0.3% MoM.   Excluding volatile items, the rise in CPI was indeed only 0.3%, but with oil prices rising, and September retail gasoline prices likely to boost the transport component almost as much as it did in August, this is not going to be enough to keep inflation on a downward trend. And that sort of consecutive backsliding in inflation could be exactly the sort of condition that could pressure the Reserve Bank of Australia to respond with some further tightening. This could perhaps occur at the November meeting, after the September (and 3Q23) CPI release, or even in December, when the October inflation figures will be available.    Australian CPI by major component (MoM%)
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Steady Employment Numbers in Poland Amidst Wage Growth Challenges

ING Economics ING Economics 19.10.2023 14:34
Little change in Poland’s employment numbers but wages remain high Average employment in the enterprise sector declined by around 6,000 in September, likely reflecting weaker demand in manufacturing. Wage growth remained in double-digits though, allowing for a further rise in real terms. The trend should continue into 2024, which is good for consumption but bad for persistent core inflation.   Average employment in Poland's enterprise sector in September was unchanged on an annual basis (in line with the consensus) from the previous month. There was, however, a decline in employment in Month-on-Month terms by around 6,000. Despite the weak economy, we see no signs of mass layoffs, and companies are 'hoarding' employment, at least for now; they are concerned about workers' availability in the future. This is most likely related to the limited personnel supply due to the decline in the working-age population and the departure of some immigrants. For months, the situation has been weakest in manufacturing. Furniture manufacturing stands out in particular, which probably felt a strong deceleration in the housing market after  rate hikes from both the Polish central bank and the ECB. However, the rebound in demand for mortgages due to government support gives hope for an improvement at the turn of the year. On the positive side, some service industries stand out, particularly lodging and food service, likely still benefiting from the recovery in pandemic demand and the population rise following the rise in Ukrainian refugees and exports to the country. In September, average wages in the enterprise sector rose 10.3% YoY (very close to our 10.2% forecast, with a consensus of 10.8%), following an 11.9% YoY increase in August. The slowdown in wage growth most likely reflects a higher base and fewer working days than in September 2022 (which lowered piecework wages). The minimum wage will increase twice in 2024 (by a total of about 20%), which, especially in service industries, forces an adjustment of the entire wage structure for those earnings above the minimum. This, combined with the still generally good condition of the labour market, suggests that double-digit wage growth will also continue next year. This allows for a further rebound in consumption but has negative consequences as far as persistent core inflation is concerned.
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Day of Reckoning: Anticipating a Cutting Cycle as Czech National Bank Gears Up for November Meeting

ING Economics ING Economics 27.10.2023 15:02
Czech National Bank Preview: Day of Reckoning We expect the CNB to start the cutting cycle with a 25bp move at the November meeting. The central bank will also unveil a new forecast with a significant revision in the dovish direction. We see the geopolitical situation and the impact on energy prices and EUR/CZK as the main risk to our call at the moment.   Cutting cycle starts The Czech National Bank will meet on Thursday next week when it will present its last forecast published this year. We go into the meeting expecting the first rate cut of 25bp to 6.75%, a view we have held since June. On the data front, a lot has changed in the economy since the CNB's August forecast, and almost everything is pointing in a more dovish direction. GDP is expected to be revised significantly downwards, especially for the first half of the next year and not only because of domestic weakness but also the outlook for abroad. The labour market, while still tight, is showing slower wage growth than the CNB expected in August. Most importantly, inflation is below the central bank's forecast. Headline inflation for Q3 came in at 0.1pp, and core inflation at 0.3pp on average below expectations. Add to that, energy prices! They look set to fall faster than expected in the coming months and in January.   New forecast will convince the undecided votes Moreover, the CNB is already behind the curve, given that the Bank's model indicates rate cuts earlier. This, combined with other deviations from the forecast, should lead to a significant revision in the path of interest rates of around 50bps on average over the forecast horizon. On the other hand, this is countered by a weaker CZK, which the CNB expects to reach current levels only in Q1 next year. However, the board's communication seems to suggest that the weaker koruna is not a problem for now. We believe the pain threshold for delaying a rate cut would be the 25.0 EUR/CZK level, which we don't see on the table for now. Board members are basically unanimous in their statements that the November meeting is the first live one for a rate cut and we believe the new forecast will convince the undecided votes. Otherwise, we believe a rate cut will be delayed only until December, but next week's meeting should already show some votes for a rate cut. In general, we see the main risks more at the global level, especially the impact on energy prices and EUR/CZK, which is probably the CNB's main focus these days.    
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EUR/USD Stagnant Despite ECB Meeting and US GDP: Analyzing Market Perceptions

InstaForex Analysis InstaForex Analysis 27.10.2023 15:23
The currency pair EUR/USD showed absolutely no movements on Thursday—no reaction to important events. In our previous articles, we've already mentioned that people can have different opinions about what happened yesterday. On one hand, it's not uncommon to see meetings where no significant decisions are made, but the pair starts moving in different directions afterward. On the other hand, there were no significant decisions made yesterday, and Christine Lagarde's rhetoric was maximally bland and uninteresting. Therefore, the market had nothing to react to, and it all seems logical. However, this week, there is very little logic in the pair's movements. On Monday and Tuesday, there were movements of such strength that it feels like the ECB meeting actually happened on Monday, not on Thursday. In other words, the market considered business activity indices much more important than the ECB meeting and the US GDP report. The technical picture over the past day, of course, has not changed. How could it change when there were essentially no movements? The price is once again below the moving average, but that doesn't stop it from resuming its rise today and forming a third corrective wave. The fact that we didn't see further depreciation of the pair on strong statistics from across the ocean could indicate the market's mood for a new corrective wave. However, we want to note that the current area where the pair is located is quite dangerous for traders. Both buy and sell signals are forming in this area. The pair seems like it should be falling, but it may correct a bit more. On the 24-hour time frame, the price is "dancing" around the important level of 1.0609 and the critical line. On the 4-hour time frame, it crosses the moving average about once a day. All of this just confuses traders. The ECB didn't evoke any emotions in the market. In principle, there was no intrigue regarding the ECB meeting.     Market participants were 100% sure that the key rate wouldn't change, and therefore, the other two rates wouldn't change either. Expecting strong statements from Christine Lagarde, who spoke twice this week, was very difficult. What could Lagarde say? "We are tightening monetary policy again!"? Or "We are lowering the key rate!"? Neither the first nor the second option had anything to do with reality. In the end, Ms. Lagarde stated that "rate cuts were not discussed at the meeting," and in the future, rate decisions will be made based on incoming information. The ECB will continue to closely monitor GDP, inflation, and core inflation indicators and regularly assess the impact of current monetary measures on the economy. In essence, we didn't hear anything new. The market already knew all of Lagarde's statements by heart. And the statement about not considering rate cuts sounds like mockery. How can there be any easing when inflation exceeds the target level by more than double? As for the market's reaction, it could have provided insights into how the market perceives the received information. However, the reaction was practically non-existent, so we can't draw any conclusions here either. We believe that the strengthening of the dollar will continue in the medium term, especially after yesterday's strong package of statistics from across the ocean. We believe that the Federal Reserve has a much better chance and real opportunities to raise rates one or two more times than the ECB. Perhaps the market is not yet ready to resume selling the pair, and it may require one or even two more correction cycles, but we don't even consider the scenario of a new upward trend at the moment. We expect the dollar to rise to 1.0200. Read more: https://www.instaforex.eu/forex_analysis/358692
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Eurozone Economy Faces Minor Contraction Amid Plummeting Inflation: A Look at the Challenges and ECB's Dovish Debate

ING Economics ING Economics 02.11.2023 12:08
Eurozone economy sees a small contraction as inflation plunges A drop in eurozone GDP keeps a small technical recession in the second half of 2023 a realistic prospect. With inflation falling faster than expected, the debate within the European Central Bank's governing council is set to turn more dovish, but don’t expect rate cuts anytime soon.   GDP decline is not meaningful, broad stagnation continues The drop of 0.1% quarter-on-quarter in eurozone GDP is not very dramatic. It was led by Irish GDP falling by 1.8% – a figure which is often subject to dramatic revisions. Germany experienced a small decline of 0.1%, while Italy stagnated over the quarter. Growth in France and Spain remained positive but still lower than last quarter. All in all, growth continued to trend around zero in the third quarter. While a technical recession is certainly possible in the second half of this year on the back of the third-quarter GDP reading and a weak start to the quarter according to first business surveys, we don’t see too much reason for real alarm so far. It does look like the economic environment is weakening at the moment, but no sharp recession is in sight either. Still, continued economic and geopolitical uncertainty alongside the impact of higher rates on the economy will weigh on economic activity in the coming quarters.   Inflation surprises should make ECB debate more dovish at coming meetings Inflation is really looking more benign at the moment. It has been falling for some time, but the pace of declines disappointed up until summer. September and October surprised positively despite high oil prices and still stubborn wage growth, which adds to confidence that inflation is slowly getting under control. The October decline from 4.3 to 2.9% was mainly driven by base effects from last year's high energy prices, but core inflation also continues to come down. Month-on-month price growth does not get reported on but a quick calculation suggests that goods prices rose well under 2% annualised in October, while services prices remained more sticky around 3.5% annualised. While high services inflation remains a concern, these figures do mean that annual core inflation – currently at 4.2% – will likely trend lower over the coming months. Especially as businesses are not indicating a new surge in prices is expected. The numbers start to point to a much better inflation environment, especially now that the economy is clearly performing much weaker than last year and most of the impact of recent hikes is still in the pipeline. While the European Central Bank (ECB) will be very keen to avoid making the mistake of the 1970s by easing too soon and allowing another spell of high inflation later, debates over whether current restrictive levels of interest rates are not too strict are set to grow louder in the months ahead. Don’t expect the ECB to lower rates anytime soon though; upside risks to inflation will weigh heavily in the central bank's decision-making at the coming meetings.
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Impact of Energy Base Effects: Italian Inflation Plummets to 1.8% in October, Paving the Way for Potential Winter Rebound

ING Economics ING Economics 02.11.2023 12:19
Italian inflation sees a sharp fall on favourable energy base effects The decline in Italian inflation in October was stronger than expected, bringing the headline inflation rate temporarily below the 2% threshold. While we could see a rebound over the winter, this is good news for real disposable income developments.   Headline inflation surprises to the downside, driven by a favourable base effectWe had anticipated a steep fall in Italian headline inflation for October – but the actual data has turned out even stronger than expected. The preliminary estimate disclosed by the Istat shows that headline inflation fell to 1.8% year-on-year (from 5.3% in September), the lowest level since July 2021 and helped by huge base effects in the energy components. The bulk of the decline is explained by non-regulated (to -17.7% from +7.5% YoY) and regulated (-32.9% from -32.7% YoY) energy goods, but food components also provided a solid contribution. These falls trumped the increases in housing and transport services. Core inflation (which leaves out energy and fresh food) also decelerated to 4.2% from 4.6% in September, and now lies well above the headline measure as expected. Behind this, there is a re-widening between services inflation at 4.1% and goods inflation (+0.1%).   Inflation to return above 2% over the winter Looking ahead, the energy component will unlikely be able to act any further as a drag and we expect inflation to return back above 2% over the winter. The pace at which the core component will be able to decelerate will crucially depend on consumption developments. As shown by the preliminary estimate of third-quarter GDP also released this morning, the Italian economy stalled over the quarter, with a negative contribution of domestic demand (gross of inventories) compensated by net exports. Thanks to a resilient labour market and decent wage growth, we suspect that consumption might not have acted as a drag in the third quarter, and could gain potential support over the winter from the impact of declining inflation on real disposable income. This could potentially slow the decline in core inflation through the services component. All in all, after today’s release we're revising down our inflation forecasts to 5.9% for 2023 and 2.3% for 2024.
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Bank of England Holds Rates Steady Amid Growing Rate Cut Expectations for 2024

ING Economics ING Economics 02.11.2023 15:10
Bank of England keeps policy steady but pushes back against rate cut expectations The Bank of England may have kept rates on hold, but we're seeing the first signs of pushback against financial markets which are starting to price in rate cuts for 2024. We think investors are right to be thinking that way and we expect the first cut over summer next year.   The Bank of England has kept rates on hold for a second consecutive meeting and, barring some major unpleasant surprises in the data between now and Christmas, it’s fair to say the tightening cycle is over. On the face of it, this latest decision looks neither surprising nor controversial. Six members voted to keep rates on hold and three for a hike, in line with what more or less everyone had expected. With the exception of Sarah Breeden, where this was her first meeting, the remaining members voted exactly as they did in September – a recognition that we’ve had very little data since then, and what we have had hasn’t moved the needle for policy. But beneath the surface, we detect hints that the Bank is uncomfortable with markets beginning to price rate cuts for next year. Ahead of the meeting, investors were pricing at least two 25 basis point cuts by the end of 2024. BoE Governor Andrew Bailey is quoted as saying it’s “too early” to be talking about cuts, while the statement says rates need to be restrictive for “an extended period of time”. That's a slight hardening in the language compared to what we'd seen in August and September. And while the Bank’s models forecast inflation a touch below target in two years' time – which is considered to be the time horizon over which monetary policy is more effective – they show headline CPI at 2.2% once an “upside skew” is applied. That’s policymakers trying to tell us that, at the margin, the amount of tightening and subsequent easing may be insufficient to get inflation back to target. That said, the committee is visibly putting less weight on its forecasts than it once might have done given ongoing uncertainty and poor model performance.   The Bank's models point to inflation at or just below target in two years' time   As has been clear since the start of the summer, this is a central bank whose overriding goal now is to convince investors that it won’t need to cut rates for a significant period of time. However, we believe markets are right to be thinking about rate cuts from next summer. As the BoE itself acknowledges, much of the impact of past tightening is still to hit the economy. We estimate the average rate on mortgage lending, which so far has gone from 2% to 3.1%, will go to 3.8% by the end of 2024 as more homeowners refinance. It will be higher still if the Bank ultimately doesn’t cut rates next year. We also forecast core inflation to be below 3% by next August – and assuming the jobs market continues to gradually weaken, we think the Bank will be in a position to take its foot off the brake. We’re forecasting a gradual easing cycle that takes Bank Rate back to just above 3% by the middle of 2025 from the current 5.25% level.
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The Czech National Bank's Prudent Approach: Unchanged Rates and Economic Evaluation

ING Economics ING Economics 03.11.2023 14:01
Czech National Bank review: Staying on the safe side The CNB decided to wait for the start of the cutting cycle due to concerns about the anchoring of inflation expectations, high core inflation in its forecast and possible spillover into wage negotiations. The December meeting is live, but we slightly prefer the first quarter of next year. Economic data will be key in coming months.   Rates remain unchanged for a little longer The CNB Board decided today to leave rates unchanged despite expectations of a first rate cut. Five board members voted for unchanged rates at 7.00% and two voted for a 25bp rate cut. During the press conference, Governor Michl justified today's decision on the continued risk of unanchored inflation expectations, which may be threatened by the rise in October inflation due to the comparative base from last year. This could seep into wage negotiations and threaten the January revaluation, according to the CNB. At the same time, the board still doesn't like to see core inflation near 3% next year. So overall, it wants to wait for more numbers from the economy and evaluate at the December meeting, which the governor said could be another decision on whether to leave rates unchanged or start a cutting cycle   New forecast shows weaker economy and more rate cuts The new forecast brought most of the changes in line with our expectations. The CNB revised the outlook for GDP down significantly and the recovery was postponed until next year. Headline inflation was revised down slightly for this year but raised a bit for next year. The outlook for core inflation will be released later, but the governor has repeatedly mentioned that the outlook still assumes around 3% on average next year. The EUR/CZK path has been moved up, but slightly less than we had expected. 3M PRIBOR has been revised up by a spot level from the August forecast, implying now the start of rate cuts in the fourth quarter of this year and a larger size of cuts next year. For all of next year the profile is 30-65bp lower in the rate path, indicating more than 100bp in cuts in the first and second quarter next year.   New CNB forecasts   First cut depends on data but a delay until next year is likely Today's CNB meeting did not reveal much about what conditions the board wants to see for the start of the cutting cycle and given the governor's emphasis on higher inflation in the next three prints, we slightly prefer February to December. The new inflation forecast indicates 8.3% for October and levels around 7% in November and December. The last two months seem too low to us, but given the announced energy price cuts, this is not out of the question. So this is likely to be a key indicator looking ahead as to whether or not it will give enough confidence to the board that inflation is under control. Another key question is whether the CNB will move up the date of its February meeting so that it has January inflation in hand for decision-making.   What to expect in FX and rates markets EUR/CZK jumped after the CNB decision into the 24.400-500 band we mentioned earlier for the unchanged rate scenario after the decision. For now, the interest rate differential does not seem to have changed much after today's meeting, which should not bring further CZK appreciation. On the other hand, the new CNB forecast showed EUR/CZK lower than we expected and the board seems more hawkish. Therefore, we could see EUR/CZK around these levels for the next few days if rates repricing remains roughly at today's levels. However, we expect pressure on a weaker CZK to return soon as weaker economic data will again increase market bets on a CNB rate cut, which should lead EUR/CZK to the 24.700-24.800 range later. In the rates space, despite the high volatility, the market did not change much at the end of the day. The very short end of the curve (FRAs) obviously repriced the undelivered rate cut, however the IRS curve over the 3Y horizon ended lower, resulting in a significant flattening of the curve. The market is currently pricing in more than a 150bp in cuts in a six-month horizon, which in the end is not so much given the possible acceleration of the cutting pace after the January inflation release. Even though the CNB didn't deliver today's rate cut, we think the central bank is more likely to catch up with the rate cuts next year rather than the entire trajectory shifting. Therefore, we see room for the curve to go down, especially in the belly and long end.
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Tightening Financial Conditions and Weakening Prices: US Inflation on Track for 2% Next Summer

ING Economics ING Economics 10.11.2023 10:39
US could soon see 2% inflation After encouraging inflation data in early summer, progress stalled in August and September amid robust consumer activity. But with tighter financial and credit conditions set to weigh further on corporate pricing power, supplemented by slowing rents and falling gasoline and used car prices, we expect to see inflation move close to 2% in 2Q.   Progress being made, but the Fed wants much more At the recent FOMC press conference, Federal Reserve Chair Jerome Powell said that the economy has “been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that has been very typical of rate hiking cycles like this one”. Nonetheless, there was the acknowledgement that “the process of getting inflation sustainably down to 2% has a long way to go”. Headline US consumer price inflation has indeed fallen sharply from a peak of 9.1% year-on-year in June 2022, hitting a low of 3% in June 2023. However, this stalled in August and September with the annual rate rebounding to 3.7% as higher energy costs and resilience in some of the core (ex-food and energy) components re-emerged amid a strong summer for consumer spending. The annual rate of core inflation has continued to soften from a peak of 6.6% in September 2022 to 4.1% currently, but it is still running at more than double the 2% target. In an environment where the economy has just posted 4.9% annualised GDP growth in the third quarter and unemployment is only 3.9%, there are several hawks on the FOMC who continue to make the case for additional interest rate rises, arguing that they cannot take chances and allow any opportunity for inflation pressures to reignite.   Contributions to US annual consumer price inflation (YoY%)   But the Fed's work is most probably done The Fed is still officially forecasting one further 25bp interest rate rise this year, but we doubt it will follow through. The Fed last hiked rates in July and since then financial and credit conditions have tightened, with residential mortgages and car loans now having 8%+ interest rates while credit card borrowing costs are at all-time highs and corporate lending rates are moving higher. It isn’t just the rise in borrowing costs that will act as a brake on economic activity and constrain inflation pressures. The Federal Reserve’s Senior Loan Officer Opinion survey shows that banks are increasingly reluctant to lend. This combination of sharply higher borrowing costs and reduced credit availability tends to be toxic for growth. The Fed itself has reported significant weakness in loan demand while commercial bank lending data shows a clear topping out in the amount of borrowing conducted by households and businesses. With real household disposable incomes falling for the past four months amid evidence of increasing numbers of households having exhausted pandemic-era savings, we expect to see GDP contract in at least two quarters in 2024. In this environment, we see the slowdown in inflation regaining momentum in early 2024.   Corporate pricing power is waning With business attitudes becoming more cautious on the economic outlook we are seeing a reduction in price intention surveys. The chart below shows the relationship between the National Federation of Independent Businesses' (NFIB) survey on the proportion of members expecting to raise prices in coming months and the annual rate of core inflation. It suggests that conditions are normalising, with core inflation set to return to historical trends.   NFIB price intentions surveys suggest corporate pricing power is normalising   While concerns about the outlook for demand are a key factor limiting the desire for companies to raise prices further, a more benign cost backdrop has also helped the situation. The annual rate of producer price inflation has slowed from 11.7% to 2.2%, having dropped to just 0.3% year-on-year in June while import prices are falling outright in year-on-year terms. There are also signs of labour market slack emerging, with unemployment starting to tick higher and average hourly earnings growth slowing to 4.1% from near 6% just 18 months ago. Perhaps more importantly, non-farm productivity surged in the third quarter with unit labour costs falling at a 0.8% annualised rate. With cost pressures seemingly abating from all angles, this should argue for core services ex-housing, a component that the Fed has been keeping a careful eye on, to soften quite substantially over coming months.   Fed's "supercore" inflation should slow more rapidly   Energy and vehicle price falls to depress inflation Another area of recent encouragement is energy prices. The fear had been that the conflict in the Middle East would have consequences for energy markets but, so far, we have seen energy prices soften. Gasoline prices in the US have fallen 50 cents/gallon between mid-September and early November, leaving prices at the lowest level since early March. Gasoline has a 3.6% weighting in the CPI basket. Our commodity strategists remain wary, warning of the risk that an escalation in the conflict could lead to oil and gas supply disruptions from some key producers in the region, most notably Iran. For now though, energy prices will depress inflation rates and could mean at least one or two month-on-month outright declines in headline prices with lower energy prices limiting any upside potential from airline fares (0.5% weight in the CPI basket). On top of this, we expect to see new and used vehicle prices (combined 6.9% weighting in the CPI basket) being vulnerable to further price falls in an environment where car loan borrowing costs are soaring. New vehicle prices have risen more than 20% since 2020 amid supply problems and strong demand while used vehicle prices rose more than 50%, according to both the CPI measure and Manheim car auction prices. Prices for used cars have fallen this year but still stand 35% above those of 2020. Experian data suggests the average new car loan payment is now around $730 per month while for second-hand cars it is now $530 per month. With car insurance costs having risen rapidly as well (up 18.9% YoY with a 2.7% weighting in the CPI basket), the cost of buying and owning a vehicle is increasingly prohibitive for many households and we suspect we will see incentives increasingly capping the upside for vehicle prices. It is also important to remember that the surge in insurance costs is a lagged response to the higher cost of vehicles – and therefore insured value – and that too should slow rapidly (but not fall) over coming months.   Gasoline prices and oil prices surprise to the downside   Rent slowdown will be the big disinflationary force in early 2024 The big disinflationary influence should come from housing over the next couple of quarters. The chart below shows the relationship between Zillow rents and the CPI housing components. This is important because owners’ equivalent rent is the single biggest individual component of the basket of goods and services used to construct the CPI index, accounting for 25.6% of the headline index and 32.2% of the core index. Meanwhile, primary rents account for 7.6% of the headline index and 9.6% of the core. If the relationship holds and the CPI housing components slow to 3% YoY inflation, the one-third weighting that housing has in the headline rate and 41.8% weighting in the core will subtract around 1.3 percentage points of headline inflation and 1.7ppt off core annual inflation rates.   Rents point to major housing cost disinflation   On track for 2% inflation next summer There are some components on which there is less certainty, such as medical care, but we are increasingly confident that inflationary pressures will continue to subside and this means that the Federal Reserve will not need to raise interest rates any further. Next week’s October CPI report may not show huge progress with headline CPI expected to be flat on the month and core prices rising 0.3% month-on-month, but we expect headline inflation to slow to 3.3% in the December report with the annual rate of core inflation coming down to 3.7%. Sharper declines are likely in the first half of 2024. Chair Jerome Powell in a speech to the Economic Club of New York 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 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. With growth concerns likely to increase over the same period, this should give the Fed the flexibility to respond with interest rate cuts. We wouldn’t necessarily describe it as stimulus, but rather 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%.   ING CPI forecasts (YoY%)
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Czech Inflation Inches Up: Analyzing the Numbers and Future Rate Cut Prospects

ING Economics ING Economics 10.11.2023 11:24
Czech inflation rises on base effects Inflation rose in October, as expected, due to the effect of government measures last year. However, the trend remains disinflationary. Inflation will fall again in November and we are likely to approach inflation targets in January. However, the central bank will probably want to have the January number in hand before cutting rates.   Seasonal effects kick-started inflation again Headline inflation accelerated again from -0.7% to 0.1% month-on-month in October, which translated into a rise from 6.9% to 8.5% year-on-year due to the base effect from last year when the government introduced measures to reduce household energy prices. The statistical office mentions that without this effect, inflation in October would have been 5.8% YoY. The result was 0.1ppt above the market's and our expectations and 0.2ppt above the Czech National Bank's forecast. However, the range of estimates was very wide and biased towards higher numbers this time.   Food prices rose for the first time since May, up 0.8% MoM, which was an expected seasonal rebound but we had expected a smaller increase. Housing prices fell 0.5% MoM dragged down by energy prices, in line with our forecast. Fuel prices were flat for the first time after a large increase in recent months. And clothing prices rose 2.4% MoM, in line with seasonal expectations.   Headline inflation breakdown (pp)   Above the CNB forecast but still close Core inflation fell from 5.0% to 4.5% YoY, according to our calculations. The CNB expects 4.0% on average for the fourth quarter, implying that today's number should be close to the central bank's forecast. However, as always, we will see the official numbers later today. Our fresh nowcast indicator for November shows 7.3% YoY, which would again be slightly above the CNB's forecast (7.1%) but less than we expected earlier. Surprisingly for us, the central bank left rates unchanged in November and, as we mentioned in the CNB review, the board seems to be more cautious than we expected. So today's numbers will not be a game changer and as we mentioned earlier, for now, we see February as the more likely opportunity for a first rate cut given that we are unlikely to see much information changing the overall picture until the December meeting.
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Hungarian Inflation Dips into Single Digits: A Symbolic Victory with Challenges Ahead

ING Economics ING Economics 10.11.2023 12:53
Hungarian inflation falls into single digits Disinflation was stronger than expected in October. The monthly decline in food and fuel prices, combined with base effects, pushed inflation into single digits. This is a symbolic victory from a political point of view, but there is still a long way to go to achieve price stability   Inflation back in single digits for the first time in 18 months The analyst community had expected a marked easing in the annual inflation rate in October. However, almost no one was betting on a fall below 10% right now. Yet the reading was in line with the government's communication, which had gained momentum in recent weeks and months, that inflation could be in single digits as early as November. Two factors contributed to the headline inflation rate of 9.9%: last year's high base and monthly deflation. According to the Statistical Office’s data collection, the average price of the consumer basket fell by 0.1% in October compared with September. At first glance, therefore, the inflation trend is clearly positive. However, it is worth noting that core inflation rose by 0.3% on a monthly basis. This also means that the surprisingly strong disinflation and monthly deflation are clearly driven by price changes in products not included in the core inflation basket. Among these, the 3.8% fall in fuel prices stands out. In addition, unprocessed food prices also fell significantly on a monthly basis.   Main drivers of the change in headline CPI (%)   The details Disinflation in food prices continued in October, helped by the base effect and the month-on-month decline in both unprocessed and processed food prices. While the year-on-year print moved lower to 10.4%, it hardly tells the full story. Compared to December 2020, food prices are still 63.2% higher while we have seen food retailing plummet.   Fuel prices dropped by 3.8% on a monthly basis, causing some downside surprise compared to publicly available information. While oil prices in HUF came in lower by 2.4% in October, it seems the retail margin of fuel retailers narrowed significantly as well. The food and fuel price declines were overwhelming, responsible for 89% of the 2.3ppt disinflation compared to September.   The other items show minimal disinflationary forces. All the main items – except clothing – have seen a decline in the year-on-year inflation print. Durables goods inflation slowed to only 0.7% YoY as a result of weaker inflation among the most important trade partners and a stable EUR/HUF exchange rate.   The 13.2% year-on-year rate of increase in the price of services has become the second largest contributor to the headline inflation reading after fuel and should now be the focus of attention. This is especially true in light of the expected minimum wage increase of 10-15%, which implies another significant cost increase and price increase potential for labour-intensive sectors, including services. The composition of headline inflation (ppt)   Underlying inflation also improves, but risks lurk As the downward pressure on inflation in October came mainly from processed and unprocessed food, disinflation was strong in the core basket as well. The core reading fell 2.2ppt to 10.9% YoY. While the month-on-month print showed 0.3% core inflation, base effects helped a lot. The quarter-on-quarter annualised seasonally-adjusted core inflation rate is now 2.7%, which is roughly in line with price stability. We are not saying that the job is done, but the recent underlying inflation performance is clearly encouraging. Unfortunately, we don’t expect that core inflation will be able to remain that subdued during 2024 due to a lot of changes and risks which will probably translate into an uptick in monthly repricing.   Headline and underlying inflation measures (% YoY)   In terms of average inflation in 2023, we continue to expect an inflation print around 17.8%. When it comes to the year ahead, we forecast an average price increase of 5-6% next year, with risks tilted to the upside. The increase in excise duty on fuel from January, the reshuffled extended producer responsibility (EPR) scheme, the introduction of the mandatory Deposit and Return System ensuring the return of beverage packaging for recycling or reuse, the expected high minimum wage increase, significant geopolitical risks, and the fiscal situation which may justify some tax increases, all pose major inflation risks that could stop or in the worst case scenario, reverse this year's disinflationary trend in 2024.   After this inflation print, all eyes are on the forint As far as monetary policy is concerned, we see the chances of a 100bp rate cut increasing significantly. In October, there were three options on the table when the Monetary Council decided on the size of the easing: 50, 75 or 100 basis points. The October figures for both headline and core inflation were in the more favourable, lower half of the forecast range in the September Inflation Report. As a result, we believe that the 50bp option can be taken off the table, when it comes to the November rate-setting meeting. If EUR/HUF can hold the recent level of 377-378 (which is 1.6% stronger than around the end of October), the single-digit inflation print may be convincing enough for some members of the Monetary Council to opt for a 100bp cut instead of continuing with 75bp. Although it is too early for a high conviction call (especially after Deputy Governor Barnabás Virág's recent message stressing the need for a disciplined monetary policy), the latest price and market stability data point in the direction of a possible fine-tuning in the pace of easing. But to be fair, it doesn't matter whether the latest inflation reading is just below or just above 10%. Politically it may matter, but from an economic policy perspective the CPI target is still 3% and there is a long way to go to get there. Today's data hasn't changed our longer-term monetary policy view, i.e. we still see a need for a +200bp real interest rate environment to keep HUF stable and achieve the inflation target over the monetary policy horizon. The only thing that can change after today's CPI result is the short-term trajectory of easing in the policy rate to the 7-8% terminal rate, in line with our expected inflation rate of 5-6% in 2024.    
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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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Rates Spark: Evaluating the Likelihood of a Shift in the Rate Cycle

ING Economics ING Economics 16.11.2023 11:06
Rates Spark: Shifting the rate cycle discount How convinced are we that the Fed has peaked? You can never be 100% sure on this, but the odds firmly favour the view that they’re done. That places rate cutting on the radar. Ahead of that, market rates tend to ease lower.   Have market rates peaked in the United States? Most probably yes The US 10yr has gapped below 4.5% in the wake of the CPI report – immediate impact effect. It did feel like Treasuries were waiting for this report before making any conclusive subsequent move having had a look below 4.5% twice and each time finding an excuse (good ones though) to get back above. Although the headline inflation rate is now 3.2%, the caveat is that core is still at 4% (even if lower than the 4.1% expected). But the path is positive, and that’s what the market rates are extrapolating. It is still not clear that market rates should capitulate lower from here though. Tuesday’s CPI report was great. But the absolute numbers mean there is still some inflation reduction work to get done. There will be an interesting supply test next week from the 20yr auction, which will be watched following the badly tailed 30yr one last week (the main reason we gapped higher again in yields). On the front end, the 2yr is back in the 4.85% area, having been above 5%. This is an easier sell. A big move lower is likely here. It’s only a matter of when – typically it’s about 3 months before an actual cut. Not quite at that point, but it will be there as a theme over the turn of the year. Breakeven inflation has also moved lower post the number. But real yields are lower by more – by over 20bp in the 10yr (now 2.2%). Real yields are still elevated though, and reflective of macro resilience and the fiscal deficit. That’s a resistance that can remain an issue for longer tenor market rates. Ongoing dis-inversion and a steeper curve ahead.   Today's events and market view The CPI data gave the market the green light to drop the 10Y US yield back to just below 4.5%. EUR rates were pulled lower alongside, bull flattening with the 10Y Bund yield touching 2.6%. This level held twice last week, having marked the lowest yield since mid September. Today’s calendar features more data that could feed the bullish sentiment. We will get the US producer prices and  we will likely also see softer retail sales data, where gasoline prices will have depressed values of sales. But as our economists point out, vehicle sales were down on the month and that credit card spending has been subdued, also pointing to a soft spending number. In the eurozone, markets will be looking at industrial production data, pointing to a worsening situation in the sector. With a view to the risk of a government shutdown, there are signs that the Speaker's interim plan that continues government funding at current levels until early next year has some support among Democrats. In primary government bond markets Germany will tap two 30y bonds for €2bn in total.
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Inflation Fever Breaks: Fed Doves Energized as US CPI Falls, Markets React

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:14
Inflation fever breaks By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) doves got a big energy boost yesterday by a slightly lower-than-expected inflation report. The headline inflation fell to 3.2% in October from 3.7% printed a month earlier, and core inflation eased to 4% from 4.1% printed a month earlier. Services excluding housing and energy costs – the so-called super core figure closely watched by the Fed - rose only 0.2% and shelter costs rose only 0.3%, down from a 0.6% advance printed a month earlier. The soft set of inflation print cemented the expectation that the Fed is done hiking the interest rates. The US 2-year yield – which best captures the rate bets – tanked 24bp to 4.81%. The 10-year slipped below 4.50% and activity on Fed funds futures gives around 95% chance for a no rate hike in December. That probability stood at around 85% before yesterday's US CPI data.   In equities, the S&P500 jumped past its 100-DMA, spiked above the 4500 mark, and closed the session a few points below this level. Nasdaq 100 extended its gain to 15850. In the FX, the US dollar took a severe hit. The index fell 1.50% on Tuesday, pulled out a major Fibonacci support and sank into the medium-term bearish consolidation zone. The EURUSD jumped to almost the 1.09 level. Yes, there is no mistake – to nearly 1.09 level, and Cable flirted with the 1.25 resistance. What a day!   A small parenthesis on UK inflation   Good news came from Britain this morning, as well. Inflation in the UK fell 6.7% to 4.6% in October, lower than the 4.7% penciled in by analysts. Core inflation also eased more than expected to 5.7%. There is growing evidence that the major central banks' efforts are bearing fruit. Cable is sold after the CPI data, but the pullback will likely remain short-lived if the USD appetite continues to wane globally.   
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Poland's Inflation Prospects Amid Sharp Commodity Price Drops: A Balancing Act for Monetary Policy

ING Economics ING Economics 16.11.2023 11:30
Poland’s uncertain inflation prospects as commodity prices drop sharply October CPI inflation was revised to 6.6% YoY, against a preliminary estimate of 6.5%. The inflation outlook is exceptionally uncertain due to administrative decisions. Our baseline scenario assumes 2024 CPI as high as 6%, leaving no room for additional NBP rate cuts. Food and non-alcoholic beverage price growth in Poland was revised from 0.4% MoM to 0.5%. Commodity prices rose 5.7% YoY, while service prices increased 9.3% YoY, compared to 7.6% and 9.7%, respectively, in September. The deceleration of services price inflation is noticeably slower than that of goods prices. The biggest contributors to last month's decline in the annual inflation rate, relative to September, were a further slowdown in food price growth (7.6% in October vs. 10.1% YoY in September), a deeper decline in fuel prices than a month ago (-14.4% vs. -7.0% YoY) and slower growth in energy prices (8.3% vs. 9.9% YoY). We estimate that core inflation, excluding food and energy prices, declined to around 8.0% from 8.4% in September. On a monthly basis, however, we saw a high increase in core prices (about 0.6% MoM). The inflation outlook is exceptionally uncertain due to the lack of any final decision on the zero VAT rate on food and support measures in the energy market, as well as a decision on electricity and gas prices for households in 2024. Based on past declarations by representatives of the future government coalition, we assume that the VAT rate on food will be raised from January 1, 2024, and electricity prices will be frozen until the middle of next year. In such a scenario, average annual CPI inflation in 2024 could be as high as 6%, leaving no room for interest rate cuts. We forecast that they will remain unchanged until the end of next year (the main NBP rate at 5.75%).
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Rates Spark: Feeble Pushback Amid Central Bank Messaging and German Budget Uncertainty

ING Economics ING Economics 27.11.2023 14:21
Rates Spark: Feeble pushback Markets are clearly eyeing the turn of the rate cycle, but amid central banks’ 'high for longer' messaging and data releases, volatility remains elevated. Add to that the uncertain outlook for the German budget and Bund supply.   Feeble ECB pushback amid a broader sense of improving inflation Markets are still pricing more than three 25bp cuts over the next year, and more than a 50% chance discounted that the first cut will already come in April. By June, it is already fully priced. We have had pushback over the past few days from European Central Bank (ECB) officials, but aggressive pricing shows it has had limited effect. The hawks were signalling again that hikes are not off the table. More centrist members seemed to downplay these chances but still stressed persistence. Francois Villeroy, for instance, stated that rates should plateau for the next few quarters. More interesting were discussions surrounding ending PEPP reinvestments sooner picking up again. The minutes of the October ECB meeting confirmed the messaging around the key rate – that hikes are not entirely off the table. But the reality is also that the “disinflation process was proceeding somewhat faster than expected”, while the ECB is not as optimistic about the macro backdrop anymore. Amid all the central bank messaging, we should also note that financial conditions remain relatively tight, at least when measured by real interest rates. The 2Y real OIS is just 10bp shy of this cycle’s highest levels. At the longer end, the 10Y is well off the September spike but still higher than any time before that. This is thanks to the market inflation expectations component having come down notably from its highs over the past two months. Overall, it might lessen the need for officials to push back more aggressively, although some would point out the often-cited fragility of inflation expectations.   Yesterday’s flash PMIs remained in contractionary territory but notched up a bit and signalled that the downturn is not worsening. For market interest rates yesterday, that was enough to start turning somewhat higher again.   German budget woes highlight downside risks across the supply and macro outlook As we head into the final months and weeks of the year, bond supply prospects move into focus. But this time around, there is increasing uncertainty surrounding the outlook for issuance of German Bunds after the constitutional court derailed the government’s budget plans. The downside risks are obvious, but we still have to get a clearer picture of what the ultimate impact is – not just in terms of supply but also for fiscal stance and the macro outlook as a whole. The political fallout is brewing, too. Members of the Free Democratic Party (FDP), which currently holds the finance ministry within the government coalition, have successfully petitioned to get a vote on whether to leave the coalition. The outcome would be non-binding for party leadership, though. Yesterday, the finance minister announced that he wants parliament to retroactively declare an “emergency situation” for the current year, which would also allow for a suspension of the debt brake for the 2023 budget. This prospect gave Bund yields an uplift and retightened the Bund asset swap spread. But this plan is largely an after-the-fact legitimisation of 2023 borrowing given few other viable options and does not mean more debt issuance. The more relevant announcement of the 2024 budget has been postponed.    Today's events and market view Left to their own US Thanksgiving holidays, 10Y Bund yields climbed over 2.6%, again steepening the curve in the process. Today’s calendar mainly features the German Ifo index – seen improving slightly – and public appearances from ECB President Christine Lagarde, Vice President Luis de Guindos and Spain’s Pablo Hernández de Cos. US markets will see an early close today, but we will have data releases from the US in the form of the S&P flash PMIs for November. Both services and manufacturing were just above the 50 threshold that demarks contractionary territory. Looking into next week, the inflation outlook, which has helped drive the rally, will likely remain the main focus. The eurozone flash CPI could show inflation easing further, with the core rate likely getting into the 3% handle – even if only barely. The easing trend of inflation should also be confirmed in the US by the PCE data, the Fed’s preferred inflation measure.
Upcoming Economic Data: Focus on US Manufacturing Index, Eurozone CPI, and GDP Reports in Hungary and Poland

Upcoming Economic Data: Focus on US Manufacturing Index, Eurozone CPI, and GDP Reports in Hungary and Poland

ING Economics ING Economics 27.11.2023 14:30
Next week in the US, we will be closely following the ISM manufacturing index and the Fed's favoured measure of inflation. All eyes will be on CPI releases in the eurozone, where we expect continued improvement and the core rate falling to 4%. Elsewhere, we expect to see positive third-quarter GDP releases in Hungary and Poland.   US: Closely following the ISM manufacturing index for any signs of a rebound Markets have firmly bought into the view that the Federal Reserve won’t hike interest rates any further and that 2024 will see a series of interest rate cuts from the second quarter onwards. Around 90bp of cuts are currently priced, whereas we're forecasting 150bp for next year on the basis that consumer weakness is likely to be a key theme given subdued real household disposable income growth, fewer savings resources, and less borrowing as interest rates continue rising. This should allow inflation to slow more quickly, giving the Federal Reserve greater scope to loosen monetary policy. Next week’s data flow includes the Fed’s favoured measure of inflation, which we expect to show a 0.2% month-on-month rate of price increases. This is broadly in line with what the central bank wants to see and, if repeated over time, would bring the annual rate of inflation as measured by the core personal consumer expenditure deflator back to 2%. We also get more housing numbers, which should signal healthy new home sales, but this is due to the lack of availability of existing homes for sale. Prices should continue rising in this environment, but with home builder sentiment having plunged in recent months, cracks are starting to form as the legacy of high borrowing costs bites more and more harshly. We will also be closely following the ISM manufacturing index for any signs of a rebound after having been in contraction territory for the past 12 months. Eurozone: Core inflation to continue improving to 4% Next week, we'll see new inflation numbers for the eurozone. Inflation dropped more than expected in September and October, and the question now is whether the low inflation trend will continue. We expect some continued improvement, with core inflation falling to 4% and headline inflation dropping to 2.7%. Still, there are signs of continued inflation pressures that shouldn’t be ignored after a few encouraging data releases. The November PMI showed that businesses still see increased input costs, resulting in more survey respondents indicating that selling price inflation ticked up. Thursday will tell us whether inflation has continued its rapid normalisation. Poland: We forecast a further decline in core inflation Flash CPI (Nov): 6.7% YoY Our forecasts suggest that in November, CPI inflation inched up to 6.7% year-on-year from 6.6% YoY in October, marking the first increase since it peaked in February. We expect a further decline in core inflation, but it will be accompanied by less favourable developments in energy prices as gasoline prices bounced back after two months of declines. GDP (3Q23): 0.4% YoY We expect the flash estimate of 0.4% YoY to be confirmed by the final data. We will also learn the composition of third-quarter GDP. According to our forecasts, household consumption declined slightly (-0.2% YoY), while fixed investments continued expanding at a solid rate (7.5% YoY). At the same time, we project a smaller drag from a change in inventories and a lower contribution of net exports than observed in recent months. Monthly data suggests that economic recovery continued at the beginning of the fourth quarter as annual change in industrial output and retail sales turned positive in October. Hungary: Novembers manufacturing PMI expected to remain in positive territory The Statistical Office will release the details behind Hungary's strong GDP growth in the third quarter next week. We see positive contributions from industry, construction and agriculture. On the expenditure side, we think net exports were the main driver of the improvement, along with some early positive signs on consumption. November's manufacturing PMI could remain in positive territory, with export capacity still in good shape, reinforcing our view that year-on-year GDP growth could also return to positive territory in the fourth quarter. Key events in developed markets next week Key events in EMEA next week    
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Japanese Core Inflation Edges Up to 2.9%, Adding Pressure on BoJ; US PMIs Awaited for Economic Insights

Kenny Fisher Kenny Fisher 27.11.2023 15:42
Japanese core inflation rises US PMIs expected to show little change The Japanese yen is unchanged on Friday, trading at 149.57. Japan’s core inflation rises to 2.9% Japan’s core CPI rose slightly in October to 2.9% y/y, up from 2.8% in September and just below the consensus estimate of 3.0%. The core CPI print excludes fresh food but includes energy. Core CPI has now exceeded the Bank of Japan’s 2% target for 19 consecutive months. Headline inflation jumped to 3.3% y/y, up from 3.0% in September and above the market consensus of 3.2%. The acceleration in inflation will put further pressure on the BoJ to tighten its ultra-loose policy. There is growing speculation that the BoJ could raise interest rates from -0.1% to zero early in 2024. The BoJ is known to be very tight-lipped and there’s little chance of any communication with the markets with regard to a shift in policy. What is clear is that any move away from the current policy could cause market turmoil and hurt Japan’s fragile economy. Still, with inflation remaining stubbornly high, a shift in monetary policy is likely only a question of time. The Bank of Japan meets next on December 19th. Once dull affairs that barely made the radar of investors, the meetings are now closely watched on expectations that the BoJ could change policy, which would be a sea-change after years of ultra-loose policy. The US wraps up the week with the release of 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 stand at 49.8 for manufacturing (Oct: 50.0) and 50.4 for services (Oct. 49.8). The manufacturing sector has been particularly weak, with the PMI indicating declines over most of the past year. If either PMI misses expectations, the US dollar could show stronger movement. . USD/JPY Technical 149.29 and 148.54 are providing support There is resistance at 150.22 and 151.25  
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Trend of Improvement: Turkey's Underlying Inflation Holds at 61-62% for Third Consecutive Month

ING Economics ING Economics 04.12.2023 14:35
Continued improvement in Turkey’s underlying inflation trend Annual inflation has remained at 61-62% for a third consecutive month with a better-than-expected monthly November figure. The underlying trend continues to improve. With another better-than-expected monthly reading at 3.3% (vs the consensus at 3.9% and our call at 3.8%), annual inflation in Turkey recorded a slight increase to 62% from 61.4% a month ago. The data reflect elevated upward pressures in services and the impact of natural gas prices. October PPI, on the other hand, stood at 2.8% MoM, translating into 42.2% YoY. The decline in annual PPI from close to triple digits at the end of last year shows improvement in cost pressures despite a Year-on-Year increase in the Turkish Lira equivalent of import prices lately due to commodity price developments and exchange rate increases. Core inflation (CPI-C) came in at 1.96% MoM, inching up to 69.9% on an annual basis on the back of pricing behaviour, exchange rate developments, adjustments in administered prices and inertia in services. However, the underlying trend (as measured by 3m-ma, annualised percentage change, based on seasonally adjusted series), which dropped in October, maintained its recovery in November with a continued decline in not only the core but also the headline rate of goods and services inflation.   Inflation outlook (%)   In the breakdown, all main expenditure groups, with the exception of clothing, positively affected the headline: Among them, housing turned out to be the major contributor with 1.44ppt due to natural prices as households exceeded the free natural gas usage limit. Accordingly, energy inflation jumped to 21.2% from 11.6% a month ago. This was followed by food with 0.74ppt, though annual group inflation moderated to 67.2% (vs the CBT assumption at 66.7% in the latest inflation report release) on the back of both processed and unprocessed food. However, price pressures in processed food were still high, with the second-largest November increase in the current inflation series. 33ppt contribution, on the other hand, was attributable to alcoholic beverages and tobacco with adjustments in cigarette prices. On the flip side, clothing recorded a slight price decline on the back of seasonality. As a result, goods inflation moved slightly up to 52.1% YoY, while core goods inflation receded to 52.2% YoY. Annual inflation in services, which is significantly influenced by domestic demand and wage hikes, maintained its uptrend and reached another peak at 89.7% YoY, attributable to the continuing rise in rents, transportation and telecommunication services.   Annual inflation in expenditure groups   Overall, annual inflation has remained in the 61-62% range for the last three months as pass-through from the post-election adjustment in FX, wages and taxes is reflected in the prices. The monthly trend of inflation may continue to improve if:  currency stability is maintained, adjustments in wages and administered prices prioritize inflation concerns, the impact of geopolitical issues on oil prices remains under control  domestic demand sustains its moderation path. We expect inflation to remain elevated until mid-2024, with further increases above 70% on seasonal effects in January and unfavourable base effects in May. The second half of next year will likely see a sharp downtrend – reflecting this year’s high base and further impact of tighter policy, pulling inflation to 40-45% by the end of the year. At the November MPC meeting, the CBT raised the one-week repo rate to 40.0%, providing guidance that: the pace of monetary tightening would slow the tightening steps would be completed in a short period of time, the monetary tightening required for sustained price stability would be maintained as long as necessary. Accordingly, we expect that the interest rate hike process will be completed at 45.0% with more limited increases of 250 basis points in December and January meetings. However, better-than-expected inflation readings and currency stability may also lead the bank to end the hiking cycle after a single 250bp hike.
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Eurozone Inflation Drops to 2.4%, ECB Faces Divergence with Market Expectations

Kenny Fisher Kenny Fisher 04.12.2023 15:04
Eurozone inflation falls to 2.4% US ISM Manufacturing PMI expected to improve to 47.6 Fed Chair Powell will deliver remarks in Atlanta The euro is showing limited movement on Friday. In the European session, EUR/USD is trading at 1.0897, up 0.09%. Eurozone inflation falls more than expected Eurozone inflation has been falling and the November report brought good tidings. Headline inflation ease to 2.4% y/y, down from 2.9% in October and below the market consensus of 2.7%. A sharp drop in energy prices was a key driver in the significant decline. Core inflation, which is running higher than the headline figure, dropped to 3.6%, down from  4.2% in October and below the market consensus of 3.9%. The soft inflation report sent EUR/USD lower by 0.74% on Thursday, but ECB policy makers are no doubt pleased by the release, as it indicates that the central bank’s aggressive tightening continues to curb inflation. Headline CPI has dropped to its lowest level since July 2021 and is closing in on the 2% inflation target. Still, core CPI, which excludes food and energy and is a better gauge of inflation trends, will need to come down significantly before the ECB can claim that the battle against inflation is over. The ECB has signalled a ‘higher-for-longer policy’, and hasn’t given any indications that it plans to cut rates anytime soon. This has resulted in a significant disconnect with the financial markets, as traders believe that the ECB will have to respond to falling inflation and weak growth by trimming rates. The markets have brought forward expectations of a rate cut to April due to the soft inflation report. Just one month ago, the markets had priced in an initial rate cut in July. It will be interesting to see if ECB President Lagarde clings to the higher-for-longer stance or will she acknowledge the possibility of rate cuts in 2024. The US wraps up the week with the ISM Manufacturing PMI. The manufacturing sector has been in a prolonged slump and the PMI has indicated contraction for twelve consecutive months. The PMI is expected to improve to 47.6 in November, compared to 46.7 in October. A reading below 50 indicates contraction.   Investors will be listening closely to Jerome Powell’s remarks today, looking for hints about upcoming rate decisions. Powell has stuck to his script of a ‘higher for longer’ rate policy, but the markets have priced in a rate cut in May at 84%. . EUR/USD Technical There is resistance at 1.0920 and 1.0986 1.0873 and 1.0807 are the next support levels
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Polish Central Bank Maintains Rates, Praises PLN Strength, and Awaits External Factors for Further Policy Decisions

ING Economics ING Economics 12.12.2023 12:58
No change in Polish rates and stronger PLN may be a game-changer Poland's central bank keeps rates on hold and reiterates its uncertainty about the fiscal outlook and regulated prices that may impact future inflation. The MPC welcomed recent PLN appreciation as it facilitates disinflation and is more aligned with economic fundamentals. Policymakers will remain in a 'wait and see' mode until at least March 2024. The Monetary Policy Council's decision to maintain interest rates (the policy rate at 5.75%) comes as no surprise. We await tomorrow's conference by the NBP chairman,  Adam Glapiński. On the one hand, recent communication points to the end of the easing cycle, but on the other, the main central banks are about to start monetary easing (Fed, ECB, CNB). In addition, the external inflation picture is improving strongly, and the consensus is shifting towards an earlier return of CPI to target in the euro area and the US or even earlier cuts by the Fed and the European Central Bank. Minor amendment of the post-meeting press release In the official written communiqué, the Council assessed that recent appreciation is conducive to lowering inflation and is consistent with economic fundamentals. For many months, the MPC had expressed a wish that such a move in the PLN exchange rate would occur. This suggests that, in the NBP's view, further appreciation of the zloty is no longer welcomed and would not be beneficial to the Polish economy. Policymakers also noted a further fall in core inflation in November and PPI deflation, which, in the Council's view, confirms the extinction of most external supply shocks. The MPC also mentioned a gradual economic recovery. MPC communication and decisions in the coming months We wonder which way the MPC's communication will go in the coming months. There is a great deal of uncertainty about whether it will be even more hawkish or, following other banks, neutral or perhaps dovish. Factors that will shape the policy decisions in the coming months mentioned in the press release include the scale of fiscal expansion, the scale and timing of regulated price adjustments and their impact on inflation. Policymakers repeated that future decisions will depend on incoming macroeconomic data. Rates to remain unchanged in 2024, but new risk factors emerged In our view, the MPC is likely to refrain from changing the main parameters of monetary policy in 2024, awaiting important administrative decisions for the inflation profile (regulated energy prices, shield measures, VAT on food) and information on the scale of fiscal expansion in 2024. The MPC is likely to make its first serious consideration regarding the level of rates in March on the occasion of the next inflation projection, which should take into account the aforementioned factors. If our inflation scenario materialises (i.e. in the short term, inflation may surprise on the lower side, especially the core inflation rate, but in the longer term it will still remain above the target), there will be no room for NBP rate cuts at least until the end of 2024. In our view, the picture of the Polish inflation outlook may change with further PLN firming. We see risks of a stronger zloty and an earlier return of CPI to target, suggesting earlier cuts than we currently assume. At the same time, large inflows of EU funds, foreign direct investment and fiscal expansion are arguments against rate cuts as they may boost economic activity; the balance of risks points to an earlier cut than we assume.
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Japanese Economic Signals: Insights into BoJ Policy, GDP Contraction, and Future Rate Hike Expectations

ING Economics ING Economics 12.12.2023 14:08
Japanese data improves but we still don’t expect a BoJ policy shift this month Although third-quarter GDP was revised down unexpectedly, the improved current account and cash earnings suggest a rebound in growth in the current quarter. Market speculation about the Bank of Japan's possible policy turnaround at the December meeting has been amplified after recent remarks from Governor Kazuo Ueda and Deputy Governor Ryozo Himino.   GDP contraction deepened in 3Q23 Third-quarter GDP was unexpectedly revised down to -0.7% quarter-on-quarter (seasonally adjusted) compared to the flash estimate and market consensus of -0.5%. The largest revision came from private consumption, which fell 0.2% (vs 0.0% in the flash estimate) and the inventory contribution to GDP, which was down by 0.2% ppt. The negative contribution of inventory should be a good sign for the inventory restocking cycle. But household spending still lagged amid high inflation despite relatively healthy labour market conditions, which should be a real concern for the Bank of Japan. We think that weaker-than-expected GDP could justify the Bank of Japan's current easing policy at least for now.   Meanwhile, GDP for the first quarter was revised up meaningfully from 0.9% to 1.2% resulting in an upward revision to annual GDP. Thus, now we expect 2023 GDP to rise 2.0% year-on-year.    However, other data releases today - labour cash earnings, household spending, and current account - point to a rebound in growth in the fourth quarter, thus we believe that the BoJ will shift its policy early next year.   Contraction deepened in 3Q23   Labour cash earnings rose in October Labour cash earnings rose 1.5% YoY in October (vs 1.2% in September, 1.0% market consensus) beating the market consensus. Contractual earnings gained steadily by 1.3% (vs 0.9% in September) while volatile bonus earnings (7.5%) rebounded after two months of declines. Also, hours worked bounced back 0.7% for the first time in four months, thus overall labour market conditions and earnings appear to have recovered in October. However, wage growth was still short of inflation growth, thus real earnings dropped 2.3% in October, although at a slower pace than the previous month's -2.9%.  Nominal wage growth continues and is clearly faster than the previous year. Also, there are several news reports that big companies plan to raise wages above this year's level of growth. Thus, we believe that next year's wage growth should accelerate a bit more than the current year.    Cash earnings and household spending improved in October   Current account surplus widened in October In a separate report, the current account surplus widened more than expected in October to JPY 2.6tn (vs 2.0 in September, 1.8 market consensus). Despite the global headwinds, the current account surplus will likely widen in the coming months. Due to falling commodity prices, the merchandise account will turn to surplus while an influx of foreign tourists will help the travel account to remain in surplus. We expect the trade of goods and services to improve in the current quarter.    Current account surplus in October led by service (travel)   BoJ preview Several remarks by the Bank of Japan, including Governor Ueda, have shaken the FX market quite strongly. Deputy Governor Himino said that ending the negative interest rate policy would have only a limited impact on the economy and Governor Ueda yesterday met with the prime minister, highlighting the importance of sustainable wage growth and inflation, which led to a fairly rapid shift in market sentiment betting on the Bank of Japan's policy tightening. Dollar weakness is also supporting the sudden move of the yen partially, especially ahead of today's release of the US nonfarm payrolls data.   It seems like the BoJ is paving the way to a gradual normalisation and giving the market a signal that the time is approaching. However, since these comments were made outside of the BoJ meeting, any sudden major change of policy is not expected this month. Yes, we remember that Governor Kuroda surprised the market with a yield curve control tweak last December, but we believe Governor Ueda is unlikely to adjust policy without prior communication. Thus, we expect some changes in the statement and dialogue from Governor Ueda at the BoJ meeting on 18-19 December.    As we have previously argued, we think the Bank of Japan's rate hike will come in 2Q24, most likely at its June meeting. By then, the BoJ will be able to confirm a solid wage increase with Shunto's results. In terms of inflation, it will trend down early next year, but still core inflation, excluding fresh food, is expected to remain above 2%. Even if the BoJ carries out a rate hike, we believe that the Bank's JGB buying operation will continue in order to avoid a rapid rise in long-term yields.
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This Week's Focus: US Jobs Report Signals Economic Uncertainty, Turkey Anticipates Annual Inflation at 65.1%

ING Economics ING Economics 03.01.2024 14:45
Key events in developed markets and EMEA this week This week, the main focus in the US will be the jobs report which is expected to indicate that hiring is slowing more meaningfully as economic uncertainty increases. In Turkey, all eyes will be on the release of December annual inflation which we expect to come in at 65.1%.   US: Jobs report expected to indicate that hiring is slowing more meaningfully After the dovish shift from the Federal Reserve at the December FOMC meeting, markets continue to price six 25bp rate cuts for 2024, in line with our long-held view. There are several key data releases that will give the markets food for thought as to what the risks are to this assessment. The ISM reports will give us an update on how businesses are seeing the situation and we expect them to indicate an ongoing soft trend in growth rather than clear evidence of a downturn. The jobs report will be the focus though and that is expected to indicate that hiring is slowing more meaningfully now as economic uncertainty increases. The unemployment rate is likely to tick slightly higher to 3.8% from 3.7%. Markets are on the verge of pricing the first rate cut for March, but we think the Fed is more likely to wait until May. Turkey: Annual inflation expected to increase to 65.1% In December, we expect annual inflation to increase to 65.1% (with a  3.2% month-on-month reading) from 62.0% a month ago, in line with the forecast presented in the latest inflation report of the Central Bank, while core inflation will remain elevated at around 72%. Inertia in services inflation, along with administered price and wage adjustments will likely remain as the major drivers of the inflation outlook in the near term. Key events in developed markets this week Source: Refinitiv, ING Key events in EMEA this week Source: Refinitiv, ING
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Romanian Inflation Trends Downward: A Closer Look at 2023 and Future Outlook

ING Economics ING Economics 12.01.2024 15:25
Romanian inflation edges lower Inflation in Romania closed 2023 at 6.6%, slightly higher than our estimate of 6.5%, largely in line with the consensus call of 6.65%. The breakdown by components matched our expectations, with only the non-food item prices ending slightly above our call   Compared to the previous month, December price pressures stopped dropping in month-on-month terms and recorded small increases in all categories. The largest positive contribution was again from services. Fuel items continued to get slightly cheaper due to positive developments in the world oil markets, while heating got slightly more expensive in line with seasonal heating demand. Core inflation ended up at 8.2%, decelerating from 9.1%. Overall, such small monthly changes reconfirm that price pressures have been milder than the market had expected at the end of the year. What’s more, the reading also sets the stage for price pressures to remain well-behaved in the first quarter of this year when higher taxes and excise duties kick in. These are likely to briefly push the headline back above 7.0% in January 2024 and create a hump in the inflation profile. However, by the end of the first quarter of this year, inflation should be largely back where we are today and continue the gradual descent towards our 4.7% estimate for December 2024.   Inflation outlook - core to continue to remain above headline Source: NSI, ING Looking at the outlook for 2024, once the impact of higher taxation has been largely incorporated by firms, we think that wage pressures will continue to be the main driver against the disinflationary trend. Wage data for November showed a robust annual increase of 15.1%, in line with our view that real income growth should fuel consumption ahead. The main risk to our view is whether consumers will start to act on their extra income earlier and more forcefully than expected, giving firms the full confidence to maintain their profit margins after the tax hikes. However, at this stage, we keep our 4.7% forecast for the end of the year.   As for the outlook for the National Bank of Romania, we don’t see much change at the moment. Our expectation is that the Bank will avoid being too dovish at today’s meeting, even though it will most likely welcome the positive developments on the inflation front at the end of the year, as we explain in more detail here. We hold on to our view of a first rate cut in May, although April is equally likely if firms choose a more cautious pricing strategy in early 2024.  
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Global Market Overview: Mixed Signals from China and Taiwan, Currency Moves Set Tone for the Week

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.01.2024 12:14
Elsewhere  The People's Bank of China (PBoC) held its policy rate steady this Monday - defying the expectation of a 10bp cut - while pumping more cash into the financial system to reverse the selloff and boost asset prices, and eventually growth. But in vain. The Chinese CSI 300 index barely reacted to the news after China posted a third negative CPI read on a yearly basis. China is still expected to hit its official 5% target this year, but the confidence crisis and the slump in property prices are not going to reverse overnight. Outlook for Chinese equities is not bright.   Taiwan's stock exchange, on the other hand, which diverged positively from the mainland stocks last year, had a cheery start to the week after the ruling DPP's Lai – who is pointed at as a 'separatist' by Beijing - won presidency and his party lost its legislative majority. The latter was seen as a good compromise for relations between China and Taiwan – as the outcome was clearly not over-provocative for Beijing. The Japanese Nikkei 225, on the other hand, hit the 36K mark on the back of a softer yen, and waning expectations that the BoJ will be normalizing at a decent speed this year.   In the FX, the US dollar kicks off the week on a slightly negative note, the AUDUSD struggles to find buyers near the lower bound of its October to now ascending channel, as the PBoC could've been more supportive. The EURUSD couldn't clear the 1.10 resistance last week, and the failure to break above the crucial psychological could weaken the euro bulls' hands this week. Across the Channel, Cable remains cautiously bid after Friday's GDP printed a better-than-expected growth number. The UK will release its latest inflation report on Wednesday. UK inflation is expected to have further eased from 3.9% to 3.8% in December, and core inflation is seen slipping below the 5% mark. A softer-than-expected set of inflation figures could prevent Cable from making a sustainable move above the 1.28 level.   
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Singapore Inflation Surges: MAS Expected to Maintain Policy Amidst Elevated Pressures

ING Economics ING Economics 25.01.2024 12:47
Singapore's central bank likely to stand pat after inflation picks up Stubborn inflation points to the Monetary Authority of Singapore standing pat at its 29 January meeting.   December inflation picks up to 3.7% Singapore’s December inflation quickened to 3.7% year-on-year, faster than markets had forecasted (3.5% YoY) and up from the 3.6% YoY reported in the previous month. December saw food inflation moderate to 3.7% YoY (from 4% YoY) while clothing inflation fell 1% YoY.  Forcing headline inflation higher were faster prices increases for transport (3.9% vs 2.8% YoY) and recreation and culture (6.3% vs 5.6% YoY previously). Meanwhile, core inflation, which is the price measured more closely followed by the Monetary Authority of Singapore (MAS), rose to 3.3% YoY – much higher than expectations of a 3% YoY rise. December’s core inflation was faster than the 3.2% YoY gain recorded in November.   We expect inflation to remain elevated in the near term, with Singapore implementing the second round of increase for the goods and services tax (GST). On top of this, a potential increase in global shipping costs due to issues on security at important shipping lanes could mean that inflation remains sticky in 2024.       Inflation comes in higher than expected, pointing to MAS keeping setting untouched     Faster inflation points to MAS standing pat MAS recently switched to conducting four policy meetings per year, with the first policy meeting for 2024 set for 29 January. With inflation accelerating more than expected and price pressures remaining elevated due to the implementation of GST and potential spikes in global shipping costs, we expect the MAS to retain all policy settings at its upcoming meeting. Furthermore, we believe the MAS will likely want to retain their hawkish bias until they are convinced that core inflation will remain under control.  
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Bearing Witness to Change: National Bank of Hungary Contemplates 100bp Interest Rate Cut Amidst Shifting Dynamics

ING Economics ING Economics 25.01.2024 16:31
National Bank of Hungary Preview: Embracing the present Despite a clear deterioration in external risks, we believe that favourable internal developments, accompanied by recent comments from Deputy Governor Barnabás Virág, will tip the balance towards a 100bp cut. However, if the forint continues to weaken markedly, then the previous 75bp pace will likely be maintained.   The decision in December The National Bank of Hungary cut its key interest rate by 75bp to 10.75% in December. At the same time, the central bank has given clear indications that the pace of rate cuts may be increased if internal and external developments allow, as we discussed in our last NBH Review.   The main interest rates (%)   Internal developments strengthen the case for a larger cut Headline inflation fell by 2.4ppt to 5.5% year-on-year (YoY) between November and December, which in fact was a downside surprise compared to our 5.7% forecast. However, what’s more important is that December’s figure was 0.2ppt lower than the central bank’s own estimate, published in the latest Inflation Report. Other measures of price pressures also look favourable, as core inflation decelerated to 7.6% YoY in December, while on a three-month on three-month basis, it was below 3%. At the same time, the National Bank of Hungary's measure of inflation for sticky prices also decreased, displaying a reading of less than 8.7% YoY.   Underlying inflation indicators   The country's external balances are also improving, as the trade balance has been in surplus for 10 months, and even reached an all-time high of EUR 1.7bn in November. As for the current account, we have already seen surpluses in the second and third quarters of 2023, and we expect it to remain in positive territory at the end of 2023.   External developments warrant a cautious approach Let’s start with two of the positive developments regarding external risks: We've already seen a dovish pivot from the Federal Reserve, and we expect the European Central Bank to follow suit at some point. This means that the next move for both central banks will be a cut rather than a hike, which in turn means that the HUF carry will not decline as much going forward as it would have if these central banks were still in rate-hiking mode. Even though rate cut expectations have been slightly dialled down compared to the time of the December NBH meeting, the direction of travel is favourable for emerging market currencies, including the HUF. One of the key uncertainties has been removed with the positive decision of the European Commission on the horizontal enablers (judicial reforms). With Hungary now having access to around EUR 10.2 bn of Cohesion funds, this could increase risk appetite towards Hungary and support market stability. Container freight benchmark rate per 40 foot box (USD)   In our view, there has been one external factor where there has been a clear and marked deterioration, and that is the conflict over the Red Sea. Several shipping companies have already suspended shipments on the Red Sea routes due to the ongoing Houthi attacks, and in our latest note on Hungarian inflation, we’ve also discussed the effects of trade diversion. The impact of the Red Sea conflict on supply chains is already being felt as Suzuki halted the production of the Vitara and S-Cross models at its Esztergom, Hungary plant between 15 and 22 January. The shutdown was caused by delays in the delivery of Japanese engines. With shipping costs rising and supply chain disruptions already evident, we have identified the deterioration in external developments as the dominant factor that would affect the central bank's reaction function.
Czech National Bank Poised for Aggressive Rate Cut: Unpacking Monetary Policy Dynamics, Market Reactions, and Economic Forecasts

Czech National Bank Poised for Aggressive Rate Cut: Unpacking Monetary Policy Dynamics, Market Reactions, and Economic Forecasts

ING Economics ING Economics 02.02.2024 15:29
Czech National Bank Preview: Time to catch up We expect the pace of cutting to accelerate to 50bp, which will push the CNB key rate to 6.25%. The main reasons will be low inflation in the central bank's new forecast, which should allow for more cutting in the future. For year-end, we see the rate at 4.00% but the risk here is clearly downwards.   Optimistic forecasts could speed up the cutting pace to 50bp The Czech National Bank will meet on Thursday next week and will present its first forecast published this year. We are going into the meeting expecting an acceleration in the cutting pace from 25bp in December to 50bp, which would mean a cut from the current 6.75% to 6.25%. This means a revision in our forecast, which previously saw an acceleration taking place in March. Still, it's certain to be a close call given the cautious approach of the board – and that could bring a 25bp cut.   The board will have a new central bank forecast, which is likely to be a key factor in decision-making. Here we see the need for revision in a few places, but overall everything points in a dovish direction. On the global side, compared to the November forecast, we expect the CNB to revise down both GDP growth, rates and oil prices. On the domestic side, inflation has surprised downwards only slightly in the past three months for both headline and core inflation. Still, we expect some downward profile shift due to a better outlook for food, energy and oil prices. As for GDP, the CNB was the most pessimistic forecaster in the market in November and the incoming data was rather mixed in this regard, so we expect only modest changes here. The CZK was 0.35% stronger than the central bank's expectations in the fourth quarter of last year. On the other hand, it was slightly weaker in January. Overall, we do not see any significant impact on the new forecast here, but the lower EURIBOR profile after the revision may indicate a stronger CZK in the new forecast, or allow for faster rate cuts in the CNB model. The November forecast indicated roughly a 50bp cut in the fourth quarter last year and reaching 3.50% by the end of this year, delivering a total 350bp of rate cuts. As we know, the CNB delivered only 25bp last year, which will need to be reflected in the new forecast. Overall, we expect a slightly steeper rate path again with a 3.00% level at the end of 2025, which should have a dovish outcome for the market in our view. As always these days, we can also expect several alternative scenarios, one of which will be the board's preferred scenario, showing a slightly slower rate cuts profile than the baseline.   Inflation nowcast will be key to the decision We see from public statements that the dovish wing of the board (Frait, Holub) will push for a faster pace of rate cuts given inflation numbers indicating a quick return to the 2% inflation target this year and will be open to more than 50bp of rate cuts. For the rest of the board, we think the inflation indication for January and beyond in the central bank's new forecast is key. We are currently expecting 2.7% for January headline inflation, with room for it to come in lower if the anecdotal evidence of January's repricing is confirmed. This, in our view, will give the rest of the board the confidence to accelerate the pace of cutting as early as this meeting.   4% at the end of the year or lower depending on core inflation Looking forward, we believe the favourable forecast for the coming months will allow the 50bp pace to continue. Here, our forecast remains unchanged and we think core inflation will still prevent the board from going faster later. We therefore still assume a 4% key rate at the end of this year. But if core inflation continues to surprise to the downside, we find it easy to imagine lower levels here.     What to expect in FX and rates markets The CZK has weakened in recent days following comments made by Deputy Governor Jan Frait and touched 24.90 EUR/CZK, which is basically the weakest level since early 2022. If the CNB delivers a 50bp rate cut, it's obviously negative news for the CZK. But on the other hand, we believe that the market positioning is already heavy short and rates are already pricing in the vast majority of CNB rate cuts. That's why we see the cap at 25.20 EUR/CZK. A minor cut, however, could bring a temporary strengthening towards 24.70 given heavy dovish expectations. In our base case scenario, we think that after the 50bp rate cut and January inflation, the market should have hit the limit of what can be priced in and the CZK should start appreciating again later this year thanks to the economic recovery, good current account results and falling EUR rates improving the interest rate differential. The rates market fully priced in a 50bp move recently and expects another 50bp move for the next meeting, which is close to our forecast. However, the terminal rate is already priced in at 3% at the end of this year, which we don't have on paper until next year – but we still see this as a possible scenario if inflation remains under control. If we do see the CNB's forecast, the market can easily get excited for a lower terminal rate and overshoot market pricing. Therefore, we expect the combination of the 50bp cut and the dovish forecast to push market rates further down, resulting in further steepening of the curve. In the bond space, we maintain our positive view here going forward. Czech government bond supply has fallen significantly as we expected and, combined with the inflation profile and central bank cutting rates, offers a perfect combination in the CEE region. Here, we continue to prefer belly curves and see more steepening.
Rates Spark: Navigating US CPI Data and Foreign Appetite for USTs

Rates Spark: Navigating US CPI Data and Foreign Appetite for USTs

ING Economics ING Economics 15.02.2024 11:01
Rates Spark: Treasuries need better than the consensus CPI outcome Markets are awaiting Tuesday’s US CPI release which should give confirmation that the disinflation trend continues. But that's not enough, as a consensus month-on-month outcome would still be a tad too hot for comfort. Looking further ahead, foreign buyers aren't absorbing large UST supply, putting upward pressure on term premium.   US CPI inflation will fall, but Treasury yields are still at risk of rising We're a bit troubled about Tuesday’s CPI report. On the one hand, year-on-year rates will fall, with practical certainty. That's because of a base effect. For January 2023 there was a 0.5% increase on the month, so anything less than this will bring the year-on-year inflation rate down, for both headline and core. So why are we troubled? It's the size of the month-on-month increases. Headline is expected at 0.2% and core at 0.3% MoM. The 0.2% reading is just about okay, especially if it is rounded up to 0.2%. But the 0.3% on core is not okay. That annualises to 4%, which is clearly too high. And it's been at 0.3% MoM for the past two months, and if repeated it would be three of the last four months. Again, that annualises to 4%. If we get the anticipated 0.3%, we doubt there can be a positive reaction. At the other extreme, a 0.4% outcome would be a huge negative surprise, one that would likely cause the probability for a May cut to move comfortably south of 50%. That would throw the easing inflation story up in the air, bringing US Treasury yield with them. But this is unlikely, as the tendency has been for inflation to dip as opposed to spike. We assume a consensus outcome for inflation, and given that, we'd expect to see the 10yr Treasury yield creeping towards 4.25%. For the market to conjure up a positive reaction to the inevitable fall in year-on-year rates, there needs to be a 0.2% MoM outcome for core   Foreign UST appetite not enough to absorb issuance The ECB's Lane spoke about financial flows and shared data that showed renewed interest by foreign investors in eurozone debt securities. Lane notes that foreign investors were a significant seller of eurozone government debt securities in 2021-2022, which matches the period of significant ECB balance sheet expansion. The trend reversed in 2023 when the ECB started unwinding its balance sheet and foreigners became net buyers again. With high debt issuance and a shrinking ECB balance sheet, the growing interest of foreign buyers is welcomed to keep long-end euro yields from rising too much.   In the US the amount of government debt to absorb in the coming years is even larger and foreign investors do not seem to come to the rescue. Looking at US foreign holding statistics in the figure below, we see that foreign holdings are diminishing as a share of total USTs. The significant issuance during the pandemic was not matched by an uptake from foreigners. Instead, as Lane also argued, in the eurozone the central bank was the big buyer. Looking at the downward trend of relative foreign holdings, it seems unlikely that foreign buyers have enough appetite to absorb the increase of USTs from the Fed and the Treasury in the coming years. Low demand from foreign buyers for USTs will have an upward effect on term premia, leading to structurally steeper curves.   Foreign UST holdings as share of public debt in decline   Tuesday's key data and events The main driver of markets will be the US CPI numbers of January. In the shadow of this we have Germany's ZEW survey in the eurozone. The UK's data-heavy week will kick off with employment figures on Tuesday, followed later this week by CPI and GDP data.  We have Italian 3y, 6y and 20y auctions totalling EUR 8.5bn, a GBP 1.5bn 9y Gilt Linker, and a EUR 5bn German Bobl auction.

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