deceleration

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.

Energy price trends: impact on CEE CPI Representing 11-18% of the consumer basket, energy prices matter for the CPI dynamic in the CEE, and last year’s spike in global commodities translated into an acceleration of the CPI, the headline more so than the core CPI. However, it should be noted that the post-Covid spike in price growth results not only from energy inputs, but also other supply- and demand-side factors that are not the focus of this exercise.   One observation we have is that, unlike the trade balance, global commodity prices pass through into the local consumer prices with a lag and to a lesser extent due to price offsetting countermeasures taken by local governments. Looking at the non-core portions of country CPIs, it appears that Turkey saw the biggest non-core CPI growth of 12ppt in 2022, but that could have been largely the effect of the country’s unorthodox monetary policy and TRY depreciation.   Among our selected CEE countries, the Czech Republic and Poland saw the biggest (5-7ppt) non-core consumer price increases in 2022, while Hungary’s pick up in headline CPI seems to have been a result of a polycrisis (indirect effect of energy shocks, supply chain disruptions, rapid HUF weakening and productivity issues, mainly in agriculture). The Czech Republic’s sharper pass-through appears surprising given its relatively low share of energy in the CPI.   Looking forward, the positive effect of 2023 energy price moderation will only have a limited effect on CPI trends due to inertia and the fact that the drop or moderation in local energy price growth will be offset by continued acceleration in the core CPI. Within the CEE space, the Czech Republic, Poland and Romania are expected to see a deceleration of overall CPI by 1.6-4.1ppt thanks to a 4.6-5.9% slowdown in non-core CPI, while Hungary may see a pick-up. Turkey is a separate case, where CPI is expected to decelerate from 64% in 2022 to 47% in 2023, and purely on the core CPI components.   CE4 non-core CPI versus global energy prices   Looking at the impact on individual countries, energy has had only an indirect effect on Hungary’s inflation due to government support measures. Thus, the drop in global energy prices will have only a lagged positive impact on inflation. Like others in the region, lower energy prices are creating opportunities for the Czech and Polish governments to pressure the margins of the fuel retailers.   This creates downside risks to inflation and could provide room for rate cuts later this year. While being self-sufficient in energy to the greatest extent, Romania is still a price taker and had to abruptly cap prices for consumers. Even so, consumption dropped by 9.3% in 2022 and the acceleration of photovoltaic panel installation is determining large structural changes within the energy system. The business economy has nevertheless been exposed to higher prices and, to the extent possible, it might want to recover some of the losses when prices revert to more normal levels.   Turkey meets only a quarter of its energy demand from national resources (importing 99% of its natural gas and 93% of the petroleum it uses). While the country has been trying to diversify energy sources, lower energy prices should help to significantly improve external imbalances and reduce dependency on its suppliers.

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  

Manufacturing PMIs point to contraction across the eurozone but euro remains steady US ISM Manufacturing PMI weakens US PCE Index slows but Fed still expected to hike in July EUR/USD is almost unchanged on Monday, trading at 1.0909.   Eurozone manufacturing continues to sputter The eurozone manufacturing sector has been in poor shape for months and the downturn worsened worse in June. The eurozone PMI slowed to 43.4 in June, down from 44.8 and shy of the consensus of 43.6 points. Germany, the largest economy in the bloc, looked even worse, as the PMI fell to 40.6, down from 43.2 and below the consensus of 41.0 points. Spain, Italy and France also reported readings below 50, which separates contraction from expansion. Manufacturing in the eurozone has now contracted for 12 straight months and the PMI reading was the lowest since May 2020. Customer demand has fallen sharply and manufacturing employment declined in June for the first time since January 2021. These latest numbers indicate that manufacturing is in trouble, but this is nothing really new and the euro shrugged off the weak numbers. The news wasn’t much better in the US, as ISM Manufacturing PMI eased to 46.0 in June, down from 46.8 in May. ISM Manufacturing Employment contracted as well, falling from 51.4 to 48.4 and missing the consensus of 50.5 points. The week wrapped up with inflation releases showing that deceleration is alive and well. On Friday, the PCE Price Index, which is the Fed’s preferred inflation indicator, declined from 0.4% to 0.1% in June. As well, UoM Inflation Expectations dropped to 3.3% in June, down from 4.2% in May and the lowest since March 2021. Inflation may be headed in the right direction, but the Fed is still widely expected to raise rates at the July 12th meeting. Traders have priced in a 25-basis point hike at 86%, according to the CME FedWatch tool.   EUR/USD Technical EUR/USD is putting pressure on support at 1.0908. This is followed by support at 1.0838 1.0980 and 1.1050 are the next resistance lines    

On Tuesday, the EUR/USD currency pair struggled to establish itself above the moving average line, failing to surpass the Murray level of "3/8"-1.0925, resuming its downward trend in the latter half of the day. However, to label this movement as a "decline" would be an overstatement, as the day's total volatility was merely 40 points. As such, the past week better embodies the idea of a "flat" market rather than a trending one. Currently, the currency market is experiencing a tranquil period.   The fundamental and macroeconomic landscapes are intact, but the market appears saturated by them. Time and again, macroeconomic reports are in line with market expectations. Statements by representatives of the Fed and ECB do not offer traders any new or crucial information. The euro continues to maintain a relatively high position but has been static in recent weeks. The subject of interest rates is becoming less pertinent to traders. It's worth noting that when a monetary tightening or easing cycle initiates, the market endeavors to anticipate it. If this happens concurrently in two or more countries, as is usually the case, the market also strives to consider all changes preemptively.     For instance, last year, the Fed began raising rates ahead of the ECB, resulting in an initial surge in the dollar's value (taking geopolitics into account). Subsequently, as inflation in the US began to ease, the euro began to appreciate. It has been on an upward trend for the past ten months, although it has been largely consolidating in the 1.05–1.11 range for the last 5–6 months. Consequently, we do not foresee any significant triggers for a sudden upswing in the value of the euro or the dollar.   The pair will likely continue to consolidate within the outlined range, and it might take considerable time before this process reaches completion. The market has already accounted for 90% of all forthcoming interest rate hikes by the Fed and ECB.   Currently, neither the euro nor the dollar holds a distinct advantage. Many experts have been forecasting a downturn, recession, and deceleration for the US economy, particularly for the labor market. These predictions have been circulating since last year, yet official statistics suggest no signs of a looming recession.   Over the past three quarters, the US economy has grown by at least 2%, significantly more than the growth observed in the European Union or Britain. The labor market continues to demonstrate robust performance month after month, even with the Fed's rate escalating to 5.25%. Unemployment has seen minimal growth, while Nonfarm Payrolls consistently reveal at least 200 thousand new job additions each month.     As such, the Fed can continue its monetary tightening policy as required, especially now that inflation has fallen to 4%. This factor might play against the dollar in the medium term. Since inflation is already approaching the target level, the Federal Reserve will begin to soften monetary policy in 2024. It is unknown when the ECB, dealing with higher inflation, will begin to soften. Nevertheless, inflation in the Eurozone continues to decrease steadily. It initially rose more than in the US. Hence, it needs more time to return to 2%. However, the ECB began raising the rate after the Fed. Thus, everything is in its place. The European regulator may start reducing the rate a few months later than the Fed.   The monetary policy of the Fed and the ECB currently does not imply a strong strengthening of the dollar or the euro. The average volatility of the euro/dollar currency pair for the last five trading days as of July 5 is 70 points and is characterized as "average." Thus, we expect the pair to move between levels 1.0779 and 1.0915 on Wednesday. A reversal of the Heikin Ashi indicator upwards will indicate a new round of upward movement.

AUD/USD slips after a four-day rally China’s Services PMI eases in June Australia’s retail sales jump 0.7% in May FOMC minutes will be released later on Wednesday The Australian dollar is in negative territory on Wednesday, after a four-day rally that saw the Aussie climb 100 pips. In the North American session, the Australian dollar is trading at 0.6663, down 0.42%.   China’s Services PMI eases but indicates expansion China is Australia’s largest trading partner, making the Aussie sensitive to Chinese data. China released the Caixin Services PMI on Wednesday, and the June report showed a deceleration to 53.9, down from 57.1 in May. This still points to expansion in business activity, but the reading was the lowest in five months, which is cause for concern as China experiences a bump recovery. The soft reading sent the Australian dollar considerably lower on Wednesday.   Australian retail sales jumps 0.7% If Australia is close to a recession, it looks like someone forgot to tell the consumer, who opened up the purse strings in May. Australia’s retail sales impressed with a 0.7% gain in May, unrevised from the flash estimate. This follows a flat reading in April and matched the consensus. This was the strongest showing since January. The Reserve Bank of Australia may have preferred a weaker retail sales release, as it needs the economy to continue to slow in order to push inflation lower. The RBA would love to continue pausing rate hikes and bring some relief to households, but inflation remains far too high – the 5.6% reading in May was still almost three times above the 2% target. The RBA announced a pause at the rate meeting this week but warned that inflation risks were tilted upwards and further rate hikes might be required. The central bank delivered a “hawkish pause”, signalling that the pause did not indicate an end to the current rate-hike campaign. Money markets have priced in a 45% chance of a rate hike in August, as investors are having a tough time figuring out the RBA’s rate path, which has wavered between hikes and pauses this year. All eyes are on the FOMC minutes of the June meeting, when the Fed paused rates after 10 straight hikes, leaving the benchmark cash rate in a range of 5.00%-5.25%. The markets are widely expecting the Fed to hike at the July meeting but haven’t bought into Fed Chair Powell’s stance that another hike is coming in the fall. If the minutes are hawkish, the market could fall in line with Powell which would likely give the US dollar a boost.   AUD/USD Technical AUD/USD tested 0.6659 earlier on Wednesday. Below, there is support at 0.6597 0.6722 and 0.6784 are providing support

AUD/USD slips after a four-day rally China’s Services PMI eases in June Australia’s retail sales jump 0.7% in May FOMC minutes will be released later on Wednesday The Australian dollar is in negative territory on Wednesday, after a four-day rally that saw the Aussie climb 100 pips. In the North American session, the Australian dollar is trading at 0.6663, down 0.42%.   China’s Services PMI eases but indicates expansion China is Australia’s largest trading partner, making the Aussie sensitive to Chinese data. China released the Caixin Services PMI on Wednesday, and the June report showed a deceleration to 53.9, down from 57.1 in May. This still points to expansion in business activity, but the reading was the lowest in five months, which is cause for concern as China experiences a bump recovery. The soft reading sent the Australian dollar considerably lower on Wednesday.   Australian retail sales jumps 0.7% If Australia is close to a recession, it looks like someone forgot to tell the consumer, who opened up the purse strings in May. Australia’s retail sales impressed with a 0.7% gain in May, unrevised from the flash estimate. This follows a flat reading in April and matched the consensus. This was the strongest showing since January. The Reserve Bank of Australia may have preferred a weaker retail sales release, as it needs the economy to continue to slow in order to push inflation lower. The RBA would love to continue pausing rate hikes and bring some relief to households, but inflation remains far too high – the 5.6% reading in May was still almost three times above the 2% target. The RBA announced a pause at the rate meeting this week but warned that inflation risks were tilted upwards and further rate hikes might be required. The central bank delivered a “hawkish pause”, signalling that the pause did not indicate an end to the current rate-hike campaign. Money markets have priced in a 45% chance of a rate hike in August, as investors are having a tough time figuring out the RBA’s rate path, which has wavered between hikes and pauses this year. All eyes are on the FOMC minutes of the June meeting, when the Fed paused rates after 10 straight hikes, leaving the benchmark cash rate in a range of 5.00%-5.25%. The markets are widely expecting the Fed to hike at the July meeting but haven’t bought into Fed Chair Powell’s stance that another hike is coming in the fall. If the minutes are hawkish, the market could fall in line with Powell which would likely give the US dollar a boost.   AUD/USD Technical AUD/USD tested 0.6659 earlier on Wednesday. Below, there is support at 0.6597 0.6722 and 0.6784 are providing support

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)  

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.

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)

Poland’s inflation may fall to single digits in August but pace of disinflation to slow The final CPI print for June confirmed that inflation slowed to 11.5% year-on-year from 13.0% in May. We estimate that core CPI fell to 11.1% YoY from 11.5% a month prior. We see further deceleration ahead, likely allowing the MPC to cut rates in September and October.   Prices of goods rose by 11.4% YoY, and service prices by 11.7% YoY, compared with 13.3% and 12.3%, respectively, in the previous month. The biggest contributors to further disinflation in June were the deepening of the decline in fuel prices, the slowdown in the growth of prices of energy carriers, and the slightly slower growth of food prices compared to a month ago. These factors lowered the annual inflation rate in June by about 1.1 percentage points relative to May. For the second month in a row, consumer prices did not change significantly vs. the previous month. Core inflation declined markedly again and according to our estimates eased to about 11.1% YoY in June vs.11.5% in May. However, the months of rapid disinflation are behind us. Since the peak in February, CPI inflation has declined by nearly seven percentage points. We expect the disinflation process to continue, but its pace in the second half of the year will be slower, due to, among other things, a somewhat smaller drag from the reference base. In July, we may see a decline in prices relative to June and we may see the annual inflation rate at single-digit levels as early as August. The Monetary Policy Council has officially ended the cycle of interest rate hikes and is preparing for rate cuts, which, according to recent announcements by the National Bank of Poland President Adam Glapinski, may take place as early as after the summer holidays. This is also our baseline scenario, assuming rate cuts in September and October (both by 25bp). At the same time, the NBP's July projection indicates that even in the absence of interest rate changes, inflation will take a long time to return to target so the space for rate cuts seems limited. The market-priced scale of monetary easing may prove too aggressive.

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.

UK manufacturing and services PMIs decelerate The British pound has edged lower on Wednesday. In the North American session, GBP/USD is trading at 1.2720, down 0.09%.     UK PMIs head lower The UK economy continues to cool down, and today’s PMI readings showed deceleration in both the manufacturing and services sectors. The Manufacturing PMI eased to 42.5 in August, down from 45.3 and below the consensus estimate of 42.5. The Services PMI disappointed and fell into contraction territory, with a reading of 48.7. This was lower than the July reading of 51.5 and missed the estimate of 50.8. GBP/USD fell over 100 basis points earlier but has recovered these losses. The weak data might not be such bad news as far as the Bank of England is concerned. The battle to curb inflation has not gone all that well, as the UK has the dubious honour of having the highest inflation among G-7 countries. If weakness in the manufacturing and services sectors dampens hiring and weighs on the tight labour markets, inflationary pressures could ease. The Bank of England meets in September and the markets have fully priced in a rate hike, but it’s unclear what will happen after that, with the markets pricing in one more hike before the end of the year. The BoE’s rate path after September will depend heavily on upcoming inflation and employment reports. It has been a light week on the data calendar and investors will be hoping for some interesting comments at the Jackson Hole Symposium which begins on Thursday. The Fed and other major central banks are expected to wind up their rate-tightening cycles and Jackson Hole has often served as a venue for announcing shifts in policy. Fed Chair Powell has insisted that the fight against inflation is not done, with inflation still above the 2% target. There is talk in the markets of the Fed trimming rates next year, but I would be surprised if Powell mentions rate cuts in his speech on Friday.   GBP/USD Technical GBP/USD pushed below support at 1.2714 and 1.2641 before rebounding higher  There is resistance at 1.2812 and 1.2885    

JPY: Tokyo inflation slows Inflation figures for Tokyo were released overnight, showing a deceleration in price pressures which were in line with the Bank of Japan estimates and slightly below consensus. Inflation in the capital moved below the 3% mark in August for the first time since September 2022, essentially endorsing the BoJ’s reluctance to scale back monetary easing. USD/JPY has risen steadily in line with rebounding US treasury yields since yesterday’s early session when it touched a 144.50 low. We think that a hawkish tone by Powell is largely priced in today, but should be enough to keep USD/JPY around 146.00 for today.

Euro yawns after weak German and eurozone PMIs US to release unemployment claims and durable goods orders on Thursday The euro has edged lower on Thursday. In the European session, EUR/USD is trading at 1.0851, down 0.11%. On the data calendar, there are no releases from the eurozone. The US releases unemployment claims and durable goods orders and we could see some movement from EUR/USD in the North American session. On Friday, Germany releases Ifo Business Climate. The index has decelerated for three consecutive months and the downturn is expected to continue (87.3 in July, 86.7 expected).   Euro pares losses after dismal PMIs Eurozone and German PMIs were nothing to cheer about, as the August numbers pointed to contraction in the manufacturing and services sectors. Germany’s manufacturing sector has been particularly weak, although the Manufacturing PMI rose slightly to 39.1 in August, up from 38.8 in July and the consensus estimate of 38.1. Eurozone Manufacturing PMI climbed to 43.7 in August, higher than the July reading of 42.7 and the estimate of 42.6 points. The services sector is in better shape and has been expanding throughout 2023. That trend came to a screeching halt on Wednesday when German and Eurozone Services PMIs fell into contraction territory in August (a reading of 50.0 separates expansion from contraction). Germany dropped to 47.3, down from 52.3 in July and below the estimate of 51.5. Similarly, the eurozone slowed to 48.3, down from 50.9 and shy of the estimate of 50.5 points.   The weak PMI reports pushed the euro lower but it managed to recover without much fuss. As for the ECB, the data supports the case for a pause, as the softness in manufacturing and services is evidence that the eurozone economy is cooling down. A pause would give the ECB some time to monitor the impact of previous rate hikes are having on the economy and on inflation. Future market traders are viewing the September meeting as a coin toss between a 25 basis point hike and a pause.   EUR/USD Technical There is resistance at 1.0893 and 1.0940 EUR/USD has support at 1.0825 and 1.0778    

EUR: Spain and Germany release inflation figures The first round of inflation figures out of the eurozone will see the release of Spanish and German CPI this morning. In Spain, headline inflation should rebound marginally from low levels (2.3%), but all eyes will be on core inflation, which remains elevated. The consensus is for a slowdown from 6.2% to 6.0%. German’s figures will likely have the largest market impact: consensus is also centred for a deceleration from 6.2% to 6.0%. It is a crucial juncture for the euro. Markets approach the key risk event pricing in just slightly below 50% implied probability of another rate hike in September and 15bp in total. The EUR curve appears to largely agree with our view that if the ECB skips the September meeting, it will find it increasingly hard to raise rates again at all given the deterioration in the eurozone economic outlook. We expect markets to be very sensitive to even the smallest deviations from consensus, especially in Germany’s figures and the eurozone-wide numbers released tomorrow. We admit it’s a very close call, but our economists expect this week’s inflation reports to signal that core inflation remains too high for comfort and lead the ECB to one last rate hike in September. In our base case scenario, we see EUR/USD rally into the 1.0900-1.0950 area into the US payrolls on Friday.

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.

Indices trying to end 2023 on a high note Global stock markets seem to be headed for an end-of-year 'Santa rally' as traders and investors return to their desks after the Christmas break, gearing up for the final push into 2024. The ongoing optimism surrounding the prospect of central banks initiating interest rate reductions in 2024, with multiple cuts expected next year, continues to propel shares higher after the US stock market experienced gains in light trading, bringing the S&P 500 index to its highest intraday level in nearly two years.   This positions the S&P 500 just below 1% of its closing all-time high of 4,796.56 recorded in January 2022 with this rally reflecting investors' growing confidence in the ability of US policymakers to engineer a 'soft landing,' effectively curbing inflation without precipitating a recession with this sentiment gaining further traction after the recent US PCE index data revealed a deceleration in inflation last month. However, it is important to note that the situation in the UK is significantly more troubling after recently released data continues to indicate inflationary and economic issues in the economy as the Bank of England may have run out of moves.