core rate

The inflation story should start to turn over the summer Then there’s the inflation data itself. The dividing line on the committee right now seems between those hawks that are seeing persistent ‘second-round effects’ of higher energy/food prices, and the doves that think headline/core CPI is simply just lagging behind the wider fall in input and product price inflation over recent months (see a speech by BoE’s Dhingra). Elements of both are true. April’s CPI figures were undeniably ugly, though some of the drivers – higher vehicle and alcohol prices, for example – are unlikely to form long-lasting trends. We agree with the doves that food inflation should begin to ease back in line with producer prices, while services inflation (particularly hospitality) should come under less pressure now gas prices are so much lower. The BoE’s own Decision Maker Panel survey of chief financial officers suggests pay and price expectations have also eased noticeably over recent months. If nothing else, hefty base effects should ensure that the headline inflation rate comes down over the summer months and fluctuates around 6%, and to a lesser extent the same is true of the core rate. Barring some further unpleasant and consistent surprises in the services inflation figures over the coming months, we think a 5% peak for Bank Rate seems reasonable. That implies rate hikes on Thursday and again in August.  However, as we discussed in more detail in a separate piece, we think the downtrend in wage growth is going to be slow – even if it has probably peaked. Labour market shortages look at least partly structural, and we suspect wage growth could end the year above 5% (7% currently). While that doesn't necessarily require the Bank to take rates much higher, it does suggest rate cuts are unlikely for at least a year, not least given the mortgage market structure discussed earlier.   Sterling trade-weighted index pushes back to early 2022 highs   Sterling can hold onto gains in the near term Sterling continues to ride high. On a trade-weighted basis, it is returning to levels last seen in early 2022 before Russia's invasion of Ukraine. Barring a surprisingly soft May UK CPI on Wednesday, 21 June, it looks like sterling can largely hang onto those gains if the Bank of England does not push back against very aggressive tightening expectations. Our strong preference has been that sterling will enjoy more upside against the dollar than the euro. Currently, we have a 1.33 end-year forecast for GBP/USD and the near-term bias is for 1.30 given what seems to be bearish momentum building against the dollar. EUR/GBP has been weaker than we had expected. And next week's BoE meeting may be too soon to expect a bullish reversal here. Yet, consistent with our house view that the Bank Rate will not be taken as high as the 5.65% level currently priced by investors for the end of this year, we suspect that EUR/GBP ends the year closer to the 0.88 area, meaning that current EUR/GBP levels should make a good opportunity to hedge sterling receivables for euro-based accounts. 

RBA minutes state that the rate hike decision was close China’s central bank trims key lending rates The Australian dollar has hit a bump in the road and is down 1% this week. In the European session, AUD/USD is trading at 0.6795, down 0.80% on the day.   RBA minutes – rate decision was close The Reserve Bank of Australia has a habit of surprising the markets. The RBA’s rate hike earlier this month was a shocker, as the markets had expected rates to remain unchanged. The minutes of the meeting, released today, indicated that the decision was “finely balanced” between a pause and a hike. In support of a pause, members noted that the sharp increases in rates raised the possibility of the economy stalling. In the end, however, concerns over persistent inflation won the day as the Bank voted to hike rates by 0.25%. The takeaway from the dovish minutes is that the RBA was very close to taking a pause and will be open to holding rates at the July meeting, depending on the data, especially inflation. The Australian dollar has fallen sharply today as investors have lowered their expectations over future rate hikes. The RBA has backed up hawkish words with action, raising rates to 4.1%, the highest level since 2011. Still, inflation has been stickier than expected, and headline inflation jumped in April from 6.3% to 6.8%. The core rate fell from 6.9% to 6.5%, but that is incompatible with the target of 2%. The RBA has projected that inflation will not fall to 2% until mid-2025, which means more hikes are likely, barring a sharp drop in inflation. China’s central bank announced on Tuesday that it was cutting key lending rates, in a move to boost investment and consumption. The post-pandemic recovery has been slow, and soft demand for exports has been bad news for Australia, as China is a key trading partner. China posted 4.5% growth in the first quarter, which was better than expected, but key indicators such as retail spending and industrial output missed expectations in May. . AUD/USD Technical 0.6772 is under pressure in support. Below, there is support at 0.6668 0.6836 and 0.6940 are the next resistance lines        

Canada releases retail sales Fed Chair Powell testifies before a House Committee The Canadian dollar is drifting lower on Wednesday. USD/CAD is trading at 1.3222 in Europe, down 0.10%. The US dollar has endured a rough month of June, and the Canadian dollar has climbed an impressive 2.6% during that time.   Markets eye Canadian retail sales Canada’s retail sales have hit a bump in the road. In March, retail sales and core retail sales both contracted for a second straight month. Headline retail sales came in at -1.4% and the core rate fell by 0.3%. The markets are expecting better news in the April report, with a consensus of 0.2% for the headline reading and 0.4% for the core rate. With inflation running at 4.4% and the Bank of Canada continuing to raise interest rates, consumers have been hard hit by the cost-of-living crisis and have cut back on spending. The Bank of Canada needs the economy to cool before it can wrap up the current rate-tightening cycle. The BoC surprised the markets when it raised rates earlier this month, as investors had expected a third-straight pause. The BoC defended its hike by pointing at GDP and inflation, both of which were higher than expected. The labour market remains tight and this has complicated the Bank’s battle with inflation, which could mean a “higher and longer” rate-hike cycle than the BoC had anticipated.  

Canada’s inflation expected to ease in May The inflation data could be a key factor in BoC’s July rate decision The Canadian dollar moved higher earlier on Monday but has pared these gains. In the North American session, USD/CAD is trading at 1.3169, down 0.10%. The Canadian dollar has been red-hot against its US counterpart, surging 3% in the month of June.   Canadian inflation expected to ease Canada releases May inflation numbers on Tuesday, and the markets are expecting inflation to fall after rising slightly in April. Headline inflation is expected to fall to 3.4%, down sharply from the current 4.4%. Core CPI is projected to ease to 3.9%, down slightly from 4.1%. The Bank of Canada has been fighting a long and tough battle against inflation, and a deceleration on Tuesday would be welcome news. Still, it may not be enough to convince the bank to hold rates at the July 12th meeting. The BoC raised rates in May, citing stronger-than-expected GDP growth as one of the reasons for the hike. Last week’s strong retail sales report could force the Bank to raise rates again, as the solid economic numbers are making it more difficult for the BoC to reach its 2% inflation target.   A sharp drop in headline inflation is unlikely to prevent a July rate hike since much of that decline can be attributed to lower energy prices. The real test will be the core rate – a sharper-than-expected decline could convince BoC policy makers to take a pause, which would be welcome news for weary householders who are grappling with high inflation and rising mortgage costs. Otherwise, Canadian consumers are likely to see more rate hikes in the coming months. The Federal Reserve releases its annual “stress tests” for major lenders, which assess whether the lenders could survive a sharp economic downturn. 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  

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  

EUR: Looking at June national CPIs today Hawkish rhetoric from European Central Bank President Christine Lagarde this week has failed to move the needle much on market pricing of 25bp hikes in July and September. Let's see whether those expectations change much on the release today of national CPI data in both Germany and Spain. These are a precursor to tomorrow's release of the eurozone CPI figure, where the core rate is expected to tick up to 5.5% year-on-year from 5.3%.  The difference between the US and the eurozone story, however, is the confidence and activity data. Today, the eurozone is expected to release another soft set of consumer and industrial confidence data for June. This leaves a lingering sense that the ECB's hawkishness could crumble before the Fed's.  With USD/CNY staying bid and eurozone data soft we would say EUR/USD risks another drop to the 1.0850 area. Valuation metrics suggest EUR/USD does not have to sell off too far - but the pieces of the investment puzzle have yet to fall into place for a EUR/USD rally.

Lagarde signals ECB rate hike in July Germany releases inflation report later on Thursday Eurozone inflation report follows on Friday EUR/USD is unchanged on Thursday and is trading at 1.0912 in the European session,   German CPI  Germany releases the June inflation report later today. Inflation in the eurozone’s largest economy fell to 6.1% in May, down sharply from 7.2% in April. Much of the decline, however, was driven by lower energy prices. Inflation is expected to head higher, with a consensus of 6.3%. If CPI surprises to the downside, the euro could get a boost.   Lagarde signals rate hike in July Investors were hoping to gain some insights this week from ECB President Lagarde, who hosted the ECB Bank Forum in Sintra. There really wasn’t anything new in her remarks, which may have been disappointing to some. One could make the argument that Lagarde is being consistent in her message to the markets and used the Sintra meeting to reiterate the ECB’s intent to raise rates at the July 27th meeting, unless there is an unexpected drop in inflation, in particular the core rate. Lagarde stated on Wednesday that the central bank is not considering a pause in July as things currently stand. At the same time, Lagarde has some wiggle room, as she has said each rate decision will be data-dependent. The ECB has an entire month before the next meeting, and if core inflation slides or the eurozone economy takes a turn for the worse, the ECB could pause, arguing the conditions were appropriate for holding rates steady. Lagarde & Co. will get a look at eurozone inflation data on Friday. Headline inflation is expected to fall to 5.6% in June, down from 6.1% in May. Core CPI is projected to rise from 5.3% to 5.5%.   EUR/USD Technical EUR/USD is putting pressure on resistance at 1.0916. This is followed by 1.0988 1.0822 and 1.0750 are providing support    

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.        

Bank of Canada raises rates by 0.25% US inflation falls to 3.0%, lower than expected The Canadian dollar has posted strong gains in Wednesday’s North American session. In the North American session, USD/CAD is trading at 1.3146, down 0.63%. On the economic calendar, it has been a busy day, with the Bank of Canada raising interest rates and US inflation falling lower than expected.   Bank of Canada hikes by 0.25% The Bank of Canada raised rates by 0.25% on Wednesday, bringing the cash rate to 5.0%. The BoC has delivered 475 basis points in hikes since March 2022 and the aggressive tightening has sent inflation lower. Still, the BoC’s rate statement noted that it remains concerned that progress towards the 2% target could stall and that it does not expect to hit the target before mid-2025. This can be considered a hawkish hike and the Canadian dollar has responded with strong gains on Wednesday.   US inflation falls more than expected Wednesday’s US inflation report should please the Federal Reserve, which has circled high inflation has enemy number one. The June release showed headline inflation falling to 3.0%, down from 4.0% in May. This beat the consensus estimate of 3.1% and was the lowest level since March 2021. Even more importantly, the core rate fell from 5.3% to 4.8%, below the consensus estimate of 5.0%. On a monthly basis, both the headline and core rate came in at 0.2%, below the consensus estimate. The inflation release was excellent news, but isn’t expected to change the Fed’s plans to raise rates at the July 27th meeting. The inflation data didn’t change market pricing for the July meeting (92% chance of a hike), but did raise the chances of a September hike from 72% prior to the inflation release to 80% after the release. Although the jobs report on Friday showed nonfarm payrolls declining considerably, wage growth was higher than expected and likely convinced the Fed to raise rates at the July 26th meeting before taking a pause.   USD/CAD Technical There is resistance at 1.3191 and 1.3289 1.3105 and 1.3049 are providing support    

RBA Governor Lowe announces major changes at RBA Board US inflation expected to decline The Australian dollar was sharply higher on Wednesday but could not consolidate these gains. AUD/USD is unchanged in Europe, trading at 0.6691.   Will RBA Governor be replaced? Reserve Bank of Australia Governor Lowe spoke on Wednesday and announced key changes to the RBA Board. The moves were in response to a scathing review that called for major changes in how the RBA Board operates. Lowe announced that the RBA Board would meet eight times a year rather than the current eleven times, although each meeting would be longer. The RBA Governor will hold a press conference after every meeting to explain the Board’s interest rate decision. As well, the rate statement announcing the decision will be issued by the Board, rather than the governor as is currently the case. The RBA and particularly Governor Lowe have faced intense criticism over their rate decisions, in particular Lowe’s promise as late as November 2021 that he would not raise rates until 2024. This resulted in households borrowing heavily, only to be whacked with an aggressive rate-tightening campaign in early 2022. Lowe later claimed that he had not made such a promise but the damage was done and it’s a strong possibility that he may be replaced as RBA Governor- a decision could be made in the next few days. Lowe has indicated he would be happy to remain at the helm of the RBA. Lowe’s speech also touched on policy but didn’t add anything new. Lowe said that the full effects of high rates were yet to be felt and it remained to be seen if more hikes would be required. Lowe said the situation remains complex, which is very much the case both for the Australian economy and his role as Governor.   US inflation expected to drop All eyes are on the US June inflation report, which will be released later on Wednesday. Headline inflation is expected to drop to 3.1% y/y, down from 4.0%. That would be good news, but the Fed will be more interested in how the core rate performs. Core CPI is expected to fall from 5.3% y/y to 5.0%, and on a monthly basis from 0.4% to 0.3%. If the core rate is higher than expected, we could see market pricing rise with regard to a September hike. A rate hike at the July 27th meeting is widely expected, but the key question is what is the Fed planning after that, and today’s inflation release could help answer that question. . AUD/USD Technical AUD/USD is testing support at 0.6666. This is followed by support at 0.6623 0.6732 and 0.6838 are the next resistance lines  

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

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    

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.

US inflation expected to rise to 3.3% UK GDP projected to fall to 0% Fed member Harker says rates may have peaked The British pound has had a relatively quiet week. In the North American session, GBP/USD is trading at 1.2731, down 0.13%. Markets eye US inflation, British GDP It has been a quiet week on the data calendar, with no tier-1 events out of the UK or the US. The rest of the week will be busier, with the US inflation report on Thursday and UK GDP on Friday. That could mean some volatility for the sleepy British pound. US inflation expected to rise The Federal Reserve’s aggressive tightening campaign has made its impact felt, as inflation has been falling and dropped to 3.0% in June. Headline CPI is expected to rise to 3.3% in July, while the core rate is expected to remain steady at 4.8%. Will an uptick in inflation change the Fed’s rate path? Probably not, especially if Jerome Powell follows the view that he has often stated, which is that a rate policy is not based on one or two inflation reports. The money markets are confident that the Fed will take a pause at the September 20th meeting, with an 86% probability according to the FedWatch tool. Another pause in November is likely (71% probability), but a higher-than-expected inflation report on Thursday would likely raise the odds of a rate hike in November.   Fed member Harker said on Tuesday that the Fed might be done raising rates, “absent any alarming new data”. Harker said that rates would need to stay at the current high levels “for a while” and went as far as to say that the Fed would likely cut rates at some point in 2024. The UK economy is not in good shape and the possibility of a recession is very real. GDP is expected to flatline in Q2 (0.0%) after a weak gain of 0.1% in the first quarter. A weaker-than-expected GDP reading could spook investors and send the British pound lower.     GBP/USD Technical GBP/USD is testing support at 1.2747. The next support level is 1.2622  1.2874 and 1.2999 are the next resistance lines

Japanese yen rebounds, but intervention worries remain Japan releases July inflation on Friday The Japanese yen has bounced back on Thursday after failing to post a winning day since August 4th. In the North American session, USD/JPY is trading at 145.92, down 0.30%. USD/JPY has been the worst performer among the major currencies over the past month, declining about 7%. The yen dropped below the 146 line on Wednesday which marked a new nine-month low. The Japanese currency lost ground in the aftermath of the Federal Reserve minutes, in which members expressed concern about high inflation. The sharp depreciation of the Japanese currency is raising concerns that Japan’s Ministry of Finance (MOF) could respond by intervening in the currency markets in order to prop up the yen. The yen is now trading at levels at which the MOF shocked the markets last September and instructed the Bank of Japan to sell billions of dollars in support of the yen. The MOF and the BoJ have stated in the past that they are more concerned with sharp swings in the exchange rate and not so much with a particular value for the yen. The yen has plunged about 800 points since late July which means that another intervention cannot be ruled out. The US/Japan rate differential has been widening, with the yen depreciating as a result. The economic troubles in China have led to a sharp drop in the Chinese yuan, which is another factor weighing on the ailing yen. Japan releases the July CPI inflation report on Friday. Headline CPI is expected to fall from 3.3% to 2.5%, while the core rate is projected to dip from 3.3% to 3.1%. The ‘core-core’ rate, which excludes food and energy items, is projected to rise to 4.3%, up from 4.2%. Any surprises from the inflation report could mean volatility for the Japanese yen.   USD/JPY Technical There is resistance at 146.74 and 147.31 USD/JPY tested support at 145.71 earlier. Below, there is support at 144.92  

Next to Italy, Portugal has also been ramping up its funding via the retail sector, although to a greater degree via short-dated instruments – savings certificates. From mid-2022 until mid-2023, their outstanding amount has increased from just over €30bn to almost €46bn. That does not appear much in absolute terms, but it means that the retail segment went from making up 11% to 15.6% of direct state debt. The last time we observed a share that high was in 2008.   Portugal ramped up its share of (short-term) retail debt instruments   It is likely no coincidence that the outperformance of Portuguese government bonds versus Spanish bonds or the overall resilience of Italian spreads versus Bunds occurred alongside a larger reliance on domestic households for funding. To be sure, it is not the only driver as for instance in the summer of 2022, the European Central Bank also revealed its Transmission Protection Instrument. But it can also be a supportive factor going into a renewed debate around the speed of the ECB's quantitative tightening.     Next week: ECB meeting and US inflation Next week is a busy one for markets, the key event being the ECB meeting on Thursday. It will be a close call, but overall we think the chance that we get another hike is greater than markets think. The upside for rates still seems somewhat limited, because it would be pulling forward the hike that markets currently view as happening before year-end with a chance of roughly 70%. We doubt that markets would readily embrace the idea of further tightening on top of that. They could sense that this is the likely end of the cycle as concerns about macro weakness gain more weight, also in the ECB’s own deliberations. Still, the ECB will probably want to counter the notion that this is the definitive end. The degree to which this is successful will determine how much of a bear flattening we could get in the case of a hike. A renewed focus on QT, in particular, could help prop up longer rates. In the US, the upcoming week will be about inflation dynamics. The CPI release is the key event here ahead of the FOMC meeting the following week. The headline is seen picking up to 3.6%, but we think that is largely in the price already. More important is what happens to the core rate, which is seen dropping to 4.3% from 4.7% year-on-year, with the month-on-month rate steady at 0.2%. We will also see the release of producer and import prices as well as the University of Michigan consumer sentiment survey with its reading on inflation expectations. The ISM services this week has highlighted lingering inflation risks, even if the overall dynamics are gradually improving. In terms of market impact, the inflation narrative seems to be driving the curve more from the front end as it determines whether more near-term action from the Fed is required.   Today's events and market view The ECB is already in its pre-meeting blackout period, and the Fed will follow this weekend. The data calendar is light today which may leave markets with more room to contemplate the busy week ahead with a US inflation theme and the chance for another, possibly final ECB hike. We think markets are still trading with an upward bias to rates. The different backdrops against which the next policy meetings are held, a position of macro strength versus a position of growing weakness, has seen UST rates more buoyant again, with the 10-year yield gap over Bunds creeping wider again to 166bp.   

US retail sales, PPI accelerates New Zealand to release Manufacturing PMI on Friday China to release retail sales and industrial production on Friday The New Zealand dollar is in negative territory on Thursday. NZD/USD is trading at 0.5904 in the North American session, up 0.12%.   Markets eye Manufacturing PMI, Chinese data New Zealand releases the Manufacturing PMI on Friday. Manufacturing across the globe has been hard-hit by weak demand and New Zealand has not been immune. The Manufacturing PMI has contracted for five straight months, falling from 47.5 to 46.3 in July. The downswing is expected to continue, with a forecast of 46.0 for August. The markets will also be keeping an eye on Chinese releases on Friday. China is New Zealand’s largest trading partner and weak Chinese data has weighed on the New Zealand dollar, which plunged 3.90% against the US dollar in August. Chinese retail sales are expected to rise in August from 2.5% to 3.0%, and industrial production is projected to rise to 3.9% in August, up from 3.7% in July. If China’s numbers improve, it could provide a boost for the New Zealand dollar.   US posts strong retail sales, PPI US retail sales climbed in August to 0.6% m/m, higher than the consensus estimate of 0.2% and a notch higher than the 0.5% gain in July. The main factor behind the upswing was gasoline prices, which jumped over 10% in August (that increase was a key factor in headline inflation rising in August). Producer prices followed the pattern of the August CPI data, with the headline reading rising while the core rate declined. PPI climbed 0.7% in August, higher than the July read of 0.4% and the market consensus of 0.3%. Core PPI dropped to 0.2%, down from a revised 0.4% in June and matching the consensus estimate. On an annualized basis, headline PPI rose from 0.8% to 1.6% (1.2% est.) while the core rate dropped from 2.4% to 2.2% (2.2% est.).   NZD/USD Technical NZD/USD tested resistance at 0.5944 but has retreated. The next resistance line is 0.6003 There is support at 0.5901 and 0.5842    

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