demand

In the precious metals sector, platinum has struggled to capture the attention of investors. The precious metal managed to hold its critical long-term support at around $800 an ounce. The World Platinum Investment Council drew attention to the growing dichotomy in the market for platinum as a precious metal. According to the WPIC Platinum Quarterly report, the precious metal had a surplus of 349,000 ounces in the second quarter. The report says total surplus may increase to 974,000 ounces for the year, compared to a previous estimate of 627,000 ounces. The council noted that the outflow of funds from exchange-traded funds backed by platinum affected prices. However, despite the growing surplus, the market is still tight. Platinum remains undervalued by investors who only look at supply and demand factors. Investment demand has the most significant impact on demand for platinum, as the market experienced significant outflows in the second quarter. The report also noted that the outflow of ETFs outpaces the drop in supply by 8%. According to the WPIC, 89,000 ounces of platinum leaked from the ETF markets between April and June. The council said that the demand for bullion and coins is mixed, with purchases in North America rising to a new high of 292,000 ounces after quarantine. However, the weak yen in Japan prompted some investors to sell their physical metal. According to analysts, this year, the total demand for bullion and coins will fall by 47,000 ounces, which is 14% less than in 2021. In addition to investment demand, WPIC said that industry demand for platinum remains stable. And in the second quarter, automotive demand for platinum increased 8% to 50,000 ounces. Even with the global recession, demand for platinum in the automotive sector is above 2018 and 2019 levels. Platinum remains an important metal in automotive catalytic converters, which are used to remove harmful emissions from gasoline and diesel engines. Automotive demand makes up a significant portion of the platinum market. WPIC expects total industrial demand to fall 15% to 2.132 million ounces. At the same time, industrial demand continues to outpace global economic growth. Although there will be a significant surplus of platinum this year, demand from China remains a major surprise and a main driver of the market shortfall. WPIC noted that information on platinum imports to China is limited. However, they estimate that China received 1.3 million ounces in the first half of this year. However, this estimate is not included in the official supply and demand forecast. Significant levels of negative demand for ETFs and an outflow of stocks were enough to meet China's demand for imports and keep prices from rising. WPIC was able to test the demand from China: the current surplus will turn into a deficit. While platinum prices have fluctuated for most of 2022, the WPIC said that robust demand is expected to provide some support for the precious metal.     Relevance up to 10:00 2022-09-08 UTC+2 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade. Read more: https://www.instaforex.eu/forex_analysis/320919

Both exports and imports continued to contract on a yearly basis, which is the result of supply disruption in China as well as weak demand from the US and Europe. Looking forward, weak external demand could drive China's exports even lower Chinese container ship Trade slump China's exports and imports contracted by 8.7% and 10.6% year-on-year in November, respectively, after contracting by 0.3% and 0.7% in October.  Not everything is so bad. China's exports to ASEAN, which is now the number one export destination for China, still grew 2.9% YoY in November. China's exports to Europe, another big destination after ASEAN and the US, grew 1.5% YoY. China's exports to the US fell 13.2% YoY in the month. Bear in mind that the role of ASEAN for China is more of a joint supply chain than a final goods export destination. This implies that production activity for exports grew slightly in November. But final exports to the US and Europe were weak, especially exports to the US. This could mean that inventory will start to pile up as final goods sales were weak. Early indicator hints that slump in exports may continue Smartphone exports contracted 9.6% YoY in November. This could be a combined effect of supply disruption in China as well as weak demand in the US and Europe. But if we look further, it could be more an issue of weak demand.  Imports from Taiwan contracted by 10.4% YoY in November. Parts and raw material imports into China for the production of electronic parts and electronic goods contracted. As we use semiconductors as an early indicator of growth, we believe that exports in the coming months should continue to contract. Read this article on THINK TagsSemiconductors Imports Exports China Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Demand for smartphones across all price ranges is expected to decline quarterly in the first three months of this year due to the continuing economic slowdown and other factors contributing to macroeconomic instability. Samsung is suffring for lower demand Samsung is the world's largest manufacturer of two main types of memory chips called DRAM, which allows devices to multitask, and NAND flash, which provides storage in devices. Samsung Electronics Co. expects demand for semiconductors and smartphones to remain weak as macroeconomic challenges and recession fears continue to weigh on sales. The global smartphone industry is also in crisis, causing profits to fall for Samsung, the world's largest smartphone maker by shipments. Demand for smartphones across all price ranges will decline quarterly in the first three months of this year due to continued economic slowdown and other factors contributing to macroeconomic instability. Memory chip makers, many with large inventories, are also making bleak predictions as demand for gadgets continues to decline after the pandemic boom. Samsung's profit Samsung's fourth-quarter operating profit was 4.31 trillion won, equivalent to $3.5 billion. Revenue for the three-month period fell by about 8% compared to last year to 70.5 trillion won. The company's net profit for the last three months of 2022 more than doubled to 23.84 trillion won, reflecting a one-time tax cut based on new accounting procedures as part of a recent revision of South Korea's subsidiary dividend tax rules, Samsung said. Samsung's full-year net profit for 2022 was 55.6 trillion won, an increase of 39.5% over the previous year. Revenue for the full year was 302.2 trillion won, up 8% over the previous year. Read next: Glovo Is Planning To Layoff 250 Workers Worldwide, The Middle East Is Already Suffering From A Water Shortage| FXMAG.COM Samsung will keep its 2023 capex plans Despite the current slowdown, Samsung said it will keep its 2023 capex plans at a similar level to last year as it wants to prepare for mid- to long-term demand. The move contrasts with that of rivals, which have already withdrawn their capacity expansion plans or slashed production for this year to ease the oversupply. Samsung said it is in the process of optimizing and upgrading its production lines. While tough market conditions continue, Samsung plans to launch its new Galaxy S23 series of smartphones this week as the industry's first major launch this year. Opinion of analysts Given the global economic slowdown and persistent inflation and geopolitical tensions, the smartphone market is expected to shrink in 2023. Memory prices peaked during the early Covid-19 pandemic due to strong demand for tech products and began to fall in late 2021. Quarterly declines became steeper in the second half of last year. Industry analysts expect average contract prices for both types of memory to continue declining in the first half of the year as demand remains weak and inventory levels high amid continued macroeconomic challenges and deepening recession fears. Conditions may improve in the second half of this year depending on macroeconomic developments that could revive global demand for chips. Memory orders may increase as corporate and consumer spending rebounds based on changes in interest rate policy. Samsung share prices In late January, Samsung's shares rose to their highest levels of six months ago. But then Samsung shares traded about 3.5% lower on Tuesday afternoon after the results were announced. Highest scores in January were read at 64,600.00 then dropped to 61,000.00 Source: wsj.com, finance.yahoo.com

Economics is immediately associated with the concepts of demand and supply. However, there is also a special demand case. Definition Demand shocks are certain events, both policy and non-policy, that have the effect of shifting the aggregate demand curve. Then demand suddenly and dramatically changes. There are two types of demand shocks: positive (positive) and negative (negative). They are classified as economic shocks. From time to time, shocks or disturbances occur in the economy affecting economic dependencies, throwing the economy out of balance and which may require a policy response. Unpredictable events occurring in the economy are commonplace. They are influenced by, for example, the often inconsistent behavior of business people and the degree of technical sophistication of the financial system. These disruptions may be temporary or permanent. It is difficult to tell them apart when they occur. Transient disturbances can be ignored as they will soon disappear anyway. A shock to aggregate demand periodically shifts the economy away from potential GDP and sends it into boom or recession. By gradually adjusting the price level, the economy eventually returns to normal. The cause of shocks are unexpected changes concerning, for example: fiscal and monetary policy of the state (easing or tightening), expectations of market participants as to possible profits or income, increase in private or public spending and changes in consumer preferences. Monetary and fiscal policy are important determinants influencing the shape and location of the aggregate demand curve. Negative demand shock It occurs when there is a sharp drop in demand. As a consequence, the aggregate demand curve shifts to the left. Consequences: Falling GDP below the potential level, Lowering the price level (deflation), Interest rate decrease, Short-term decrease in supply, Increase in investment expenditures. The gradual adjustment process will continue until real GDP returns to its potential level. Investments will increase by exactly the amount by which they initially decreased. The interest rate will be low enough to stimulate investment. Over the long term, real GDP will return to normal, but during a period of gradual price adjustment, the economy will go through recession and rising unemployment. Read next: Stolen Goods End Up On Amazon, Ebay And Facebook Marketplace| FXMAG.COM Positive demand shock It occurs when there is a sharp increase in demand. Then the aggregate demand curve shifts to the right. Consequences: Initial drop in interest rate, Increase in investments, exports and consumption, Short-term increase in supply, Growth in GDP and prices (inflation), followed by an increase in the interest rate. Through this process of gradual price adjustment, the economy will eventually return to normal. However, before that, it will go through a period of inflation and a boom in economic activity. Policy response to demand shocks Monetary or fiscal policy is able to compensate for the shock that affects aggregate demand. A shift in aggregate demand outward or inward can be reversed by a policy in the opposite direction. In general, stability in aggregate demand is desirable. However, most economists argue that active policies could increase instability rather than compensate for it. Monetarists are even opposed to implementing policies that counter shifts in aggregate demand. Other anti-active policy economists believe that demand compensation policies will have no effect on Gross Domestic Product (GDP). Source: Begg D., Fischer S., Dornbusch R., (2007) Makroekonomia

We add Brand24’s shares to the long side of our monthly portfolio. Brand24 is the company for which we prepare the reports for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0. Rationale: (i) 1Q23 good financial results (in consequence, the realization of our FY revenues and profits forecasts is higher than a year ago) imply ceteris paribus the upside risk for our current FY forecasts, (ii) investors’ positive sentiment towards companies related to AI development/ implementation, and (iii) pending strategic options review.This is an excerpt from the Polish version of DM BOŚ SA’s research report prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.   Upcoming events 1. Release of selected KPIs for 2Q23: mid-July2. Release of 2Q23 financial results: October 23. Release of selected KPIs for 3Q23: mid-October4. Release of 3Q23 financial results: November 295. Completion of the (co-funded by EU) AI project (Abstrakcyjna sumaryzacja danych multimodalnych): by 2023-end6. Completion of the strategic options review: by 2023-end   Catalysts 1. ARPU/ MRR growth ahead of expectations2. More dynamic new clients acquisition3. Commercial success of new products (e.g. Insights24)4. Progression of financial results ahead of expectations5. Stronger USD vs PLN6. Agility in the AI field proves to be the right approach7. Strategic options review effects boosting the Company’s development on foreign markets   Risk factors 1. Lower availability of Internet data, higher cost of their acquisition2. IT infrastructure/ software malfunction3. Maintaining financial liquidity4. Product concentration5. Inability to adapt promptly to changes in ways of presenting/ consuming content in the Internet6. FX risk (USD weakening vs PLN))7. Adverse changes in search engines algorithms8. Rise in competitive pressures in the sector9. Hike in R&D needs10. Transfer pricing risk11. RODO risk12. Inability to attract new clients and retain the existing ones13. Rising churn14. Low share liquidity15. Smaller than assumed further rise in ARPU/ MRR16. Losing eligibility to use the IP BOX tax relief   We add Brand24’s shares to the long side of our monthly portfolio. Brand24 is the company for which we prepare the reports for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.   Rationale:  1Q23 good financial results (in consequence, the realization of our FY revenues and profits forecasts is higher than a year ago) imply ceteris paribus the upside risk for our current FY forecasts, (ii) investors’ positive sentiment towards companies related to AI development/ implementation, and (iii) pending strategic options review.        BASIC DEFINITIONSA/R turnover (in days) = 365/(sales/average A/R))Inventory turnover (in days) = 365/(COGS/average inventory))A/P turnover (in days) = 365/(COGS/average A/P))Current ratio = ((current assets – ST deferred assets)/current liabilities)Quick ratio = ((current assets – ST deferred assets – inventory)/current liabilities)Interest coverage = (pre-tax profit before extraordinary items + interest payable/interest payable)Gross margin = gross profit on sales/salesEBITDA margin = EBITDA/salesEBIT margin = EBIT/salesPre-tax margin = pre-tax profit/salesNet margin = net profit/salesROE = net profit/average equityROA = (net income + interest payable)/average assetsEV = market capitalization + interest bearing debt – cash and equivalentsEPS = net profit/ no. of shares outstandingCE = net profit + depreciationDividend yield (gross) = pre-tax DPS/stock market priceCash sales = accrual sales corrected for the change in A/RCash operating expenses = accrual operating expenses corrected for the changes in inventories and A/P, depreciation, cash taxes and changes in the deferred taxes   DM BOŚ S.A. generally values the covered non bank companies via two methods: comparative method and DCFm method (discounted cash flows). The advantage of the former is the fact that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the DCF method is its independence from the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those related to the residual value calculation. Please note that we also resort to other techniques (e.g. NAV-, DDM- or SOTP-based), should it prove appropriate in a given case.   BanksNet Interest Margin (NIM) = net interest income/average assetsNon interest income = fees&commissions + result on financial operations (trading gains) + FX gainsInterest Spread = (interest income/average interest earning assets)/ (interest cost/average interest bearing liabilities)Cost/Income = (general costs + depreciation)/ (profit on banking activity + other net operating income)ROE = net profit/average equityROA = net income/average assetsNon performing loans (NPL) = loans in ‘basket 3’ categoryNPL coverrage ratio = loan loss provisions/NPLNet provision charge = provisions created – provisions released   DM BOŚ S.A. generally values the covered banks via two methods: comparative method and fundamental target fair P/E and target fair P/BV multiples method. The advantage of the former is the fact that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the fundamental target fair P/E and target fair P/BV multiples method is its independence of the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those  to the residual value calculation. Assumptions used in valuation can change, influencing thereby the level of the valuation.   Among the most important assumptions are: GDP growth, forecasted level of inflation, changes in interest rates and currency prices, employment level and change in wages, demand on the analysed company products, raw material prices, competition, standing of the main customers and suppliers, legislation changes, etc. Changes in the environment of the analysed company are monitored by analysts involved in the preparation of the recommendation, estimated, incorporated in valuation and published in the recommendation whenever needed.   KEY TO INVESTMENT RANKINGS This is a guide to expected price performance in absolute terms over the next 12 months:   Buy – fundamentally undervalued (upside to 12M EFV in excess of the cost of equity) + catalysts which should close the valuation gap identified; Hold – either (i) fairly priced, or (ii) fundamentally undervalued/overvalued but lacks catalysts which could close the valuation gap; Sell – fundamentally overvalued (12M EFV < current share price + 1-year cost of equity) + catalysts which should close the valuation gap identified.   This is a guide to expected relative price performance: Overweight – expected to perform better than the benchmark (WIG) over the next quarter in relative terms Neutral – expected to perform in line with the benchmark (WIG) over the next quarter in relative terms Underweight – expected to perform worse than the benchmark (WIG) over the next quarter in relative terms     The recommendation tracker presents the performance of DM BOŚ S.A.’s recommendations. A recommendation expires on the day it is altered or on the day 12 months after its issuance, whichever comes first. Relative performance compares the rate of return on a given recommended stock in the period of the recommendation’s validity (i.e. from the date of issuance to the date of alteration or – in case of maintained recommendations – from the date of issuance to the current date) in a relation to the rate of return on the benchmark in this time period. The WIG index constitutes the benchmark. For recommendations that expire by an alteration or are maintained, the ending values used to calculate their absolute and relative performance are: the stock closing price on the day the recommendation expires/ is maintained and the closing value of the benchmark on that date. For recommendations that expire via a passage of time, the ending values used to calculate their absolute and relative performance are: the average of the stock closing prices for the day the recommendation elapses and four directly preceding sessions and the average of the benchmark’s closing values for the day the recommendation expires and four directly preceding sessions.         This report has been prepared by Dom Maklerski Banku Ochrony Środowiska SA registered in Warsaw (hereinafter referred to as DM BOŚ SA) and commissioned by the Warsaw Stock Exchange SA (hereinafter referred to as WSE SA) pursuant to the agreement on the research report preparation between DM BOŚ SA and WSE SA within the framework of the Analytical Coverage Support Program 3.0 described on the WSE SA website: https:/www.gpw.pl/gpwpa (hereinafter referred to as the Agreement). DM BOŚ SA will receive a remuneration for the research report in accordance with the Agreement.  

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.    

FXMAG.COM: Could you please comment on the CPI in eurozone? The CPI in the Eurozone in May might remain at 7% y/y. For Spain and Belgium, the problem of inflation is fading into the background. Here, inflation indices are below the consensus level. For France and Germany, on the contrary, the topic of prices remains acute. The food segment is still a key contributor to high inflation. Agricultural costs are decreasing, and energy is becoming cheaper. Yet, a number of products remain extremely expensive for consumers. By comparison, cheese in Germany now costs almost 40% more than last year, and potatoes are 14% more expensive. Throughout the EU, food inflation rose by almost 17% y/y in April and might be even higher in May. The constantly rising food prices force households to cut demand at a time of low income. In Italy, for example, there was a special meeting of politicians about the rising price of spaghetti. This is a real problem. Next, we see the following. The agricultural sector is reducing basic spending on food production. Yet labour costs are rising. In addition, supply chain issues persist. It is unlikely that food will become cheaper in the nearest future. Globally, rising prices might put pressure on the ECB to raise interest rates further.

Both instruments continue to decline steadily even with the news background, which is not always "strong". Over the weekend, however, there was quite expected news from the U.S. Congress about the national debt limit.   US Treasury Secretary Janet Yellen reaffirmed June 1 as the "hard deadline" for the US to raise the debt ceiling or risk defaulting on its obligations. Since no one in the market doubted that the Democrats and Republicans would eventually find common ground, the decision and its announcement were just already expected.   US President Joe Biden's press office reported that the White House and House Republicans have striked an agreement, meaning an official bill will be passed by June 1 that would raise the debt ceiling by another $2 trillion. Problem solved, and the week could start volatile for the markets.       There is nothing scheduled for Monday. Nevertheless, many instruments can show good activity as they haven't had the opportunity to react to the news of raising the debt limit over the weekend. Since this decision is positive for the US economy, it is reasonable to expect an increase in demand for the US currency. However, some analysts believe that the recent appreciation of the US dollar was driven by rising risk aversion sentiment.   Despite the default risk that threatened the US and the dollar, many investors may have used it as a "safe haven." Personally, I don't believe in such an assumption, but I can't speak for every individual. I expect active movements on Monday, but it doesn't make sense to guess the direction. In any case, regardless of the direction of both instruments, we can assume that this movement will not disrupt the overall wave pattern. If the euro and the pound rise on Monday-Tuesday, it can be considered as a corrective wave within a downtrend.   In the opposite case, the main wave will continue to form. We have much more important news and reports, such as the US labor market or inflation in the European Union. The wave pattern is highly important for the market right now, as instruments can move in a certain direction based solely on it. The topic regarding central bank rates is currently losing some of its appeal.   Last week, there were many speeches by European Central Bank and Federal Reserve members, but we did not receive any clarity on the topic. I believe that there is a consensus on this issue, and the new speeches did not change it.     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. These are the targets I suggest for selling the instrument.   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.    

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.  

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.  

Older buildings are making way for new ones, and the trend of redeveloping plots in the centers of large cities in Poland is intensifying. Furthermore, the plans include not only new development projects that arise after demolitions but also transforming existing office buildings into residential projects, including those in PRS (Private Rented Sector) formula. The huge demand in the rental housing market in Poland, coupled with a gradual increase in rental rates amidst a significant housing shortage, is encouraging investors to undertake further projects in the PRS formula. Paradoxically, the geopolitical and macroeconomic situation, including war in Ukraine, is also conducive to the development of such investments, as it generates additional potential tenants. Above all, the Polish market still offers the opportunity to achieve higher investment returns than the Western European market. According to Avison Young experts, the value of transactions closed in 2022 could be estimated at 150 million euros, and cumulatively from 2014, it reached 325 million euros. However, the true dynamics of the sector is reflected in volume of forward funding transactions. Only in the years 2021-2022, according to Avison Young's analysis, it amounted to 700 million euros. Investors' announcements indicate that the plans for the upcoming years include the construction of another ~ 25,000 apartments for rent in Poland. PRS investments are mainly taking place in the largest cities in the country, with 40% of the currently active PRS stock, totaling 12,500 apartments, located in Warsaw. Over 13,000 units are currently under construction, with approximately 4,500 expected to be delivered this year. However, it is still not enough considering the demand.   Land at a premium A serious obstacle to the development of residential investments is the shortage of available land in attractive areas of the largest Polish cities. As a result, investors are seeking alternative solutions, such as acquiring parcels with older buildings that can be adapted to new functions or demolished. The trend of real estate conversions is intensifying on the market. The advantage of investments based on demolition or modernization of existing facilities is shorter administrative procedures, which do not require road approvals or participation in the construction of the surrounding infrastructure. - The number of inquiries regarding analyses of the possibility of adapting existing commercial properties for new purposes is increasing. In such cases, our team evaluates, among other things, the profitability of the investment, considering options of demolishing older office buildings or transforming them into PRSs. When planning such actions, investors seek well-located, easy accessible office buildings, with a rich offering of gastronomy and services in the vicinity. The profitability analysis of the investment indicates the direction for further investor’s actions. Functionally and technically worn-out office buildings generate lower income and are less attractive to tenants compared to modern office buildings that additionally meet ESG requirements. Therefore, it is often more cost-effective to consider a new function for the building, demolish or convert it into a product tailored to the current market's needs. – says Monika Bronicka, Head of Valuation and Advisory at Avison Young.   More and more demolitions in Warsaw One can see with the naked eye an increasing number of demolitions of commercial buildings in Poland. The value of older structures situated on attractive urban land is often lower than that of undeveloped plots. Investors are especially eager to buy such properties, when it is possible to obtain a permit for the construction of a modern facility with a larger usable floor space. Strict ESG standards and the need to adapt decades-old buildings to current environmental norms associated with sustainable development, as well as the desire to reduce maintenance and operating costs, also motivate changes and modernization of properties. Market participants are wondering how many more demolitions will occur in the near future, since even twenty-something-year-old buildings are disappearing from the landscape of Warsaw, such as: - Atrium International from 1995 will be replaced by the over 130-meter Upper One skyscraper and a 55-meter hotel - Empark Mokotów Business Park is being redeveloped by Echo Investment and will be partially replaced with new residential buildings - the unfinished EuRoPol Gaz office building is already being demolished, Dom Development will develop residential buildings in this area - Multikino Ursynów (building from 1999) was acquired by GH Development from Belgium; the new owner has announced the construction of a mixed-use building with about 300 apartments   Regional cities are not falling behind either Echo Investment is also preparing a project using demolition in Lodz. At 127 KiliÅ„skiego Street, in the place of an old tenement house, the investor is currently constructing a residential-hotel building. There will be about 290 residential units for short-term or subscription rental. Strabag Real Estate, in turn, has obtained permission to build 40,000 square meters of space on the site of the Plaza Gallery in Kraków, which is earmarked for demolition. The company is planning to develop a mixed-use project on the plot. Meanwhile, the former Impel office building, which stood at Åšlężna Street, disappeared from the map of WrocÅ‚aw. In its place, Develia started the construction of a residential complex with commercial premises. These are just a few examples of demolition and new development projects in Polish regional cities.   No-demolition option An alternative to demolitions is converting the existing buildings and changing their functions. Such actions are undoubtedly more environmentally friendly, as the carbon footprint associated with demolitions and constructing new structures is significantly higher. Avison Young's team of technical advisors has had the opportunity to analyze office buildings several times in terms of converting them into residential buildings, without the need for demolition. It turns out that it is not that difficult as it may seem, given the existing technical conditions. It is certainly much easier to change the functional use of office buildings to residential than the other way around.   Live loads Based on the proposed structure and assumed service loads, according to the PN-EN 1991-1-1 standard for residential buildings, it is recommended to assume a load of 2 kN/m², while for office buildings, a load of 3 kN/m² is typically considered. Therefore, when changing the use of a building, there is a load capacity reserve for the floor slabs that can be utilized as needed.   Higher ceilings According to the current technical conditions, the minimum ceiling height for workspaces intended for more than 4 people is 3 meters, while the minimum height for residential rooms is 2.5 meters. Planned apartments can, therefore, have higher ceilings, which is desirable in the market and also allows for more space for the sub-ceiling installations.   The question of daylight - One technical challenge that can be observed is related to the dimensions of office buildings. Most office spaces are designed as open space areas and rely on extensive glazing to provide daylighting throughout the space. However, when converting such buildings into residential units, it is necessary to consider the architectural possibilities to ensure compliance with technical requirements, including adequate daylighting. This typically involves maintaining a ratio of window area to floor area of 1:8. Any changes in the layout require a careful and thoughtful approach to ensure that the residential units are both functional and well-lit. – says PrzemysÅ‚aw KÅ‚opocki, Project Manager (Building Aspects), Technical Advisory & Project Management at Avison Young. The current regulations for transmission coefficients of the building envelope have been tightened significantly over the past years. When planning a change in the functional use of an existing office building with extensive glazing, consideration must be given to potential modifications or upgrades to minimize the building's energy consumption due to heat losses through the external walls and windows.   Closed windows When planning a change of use from office to residential, it is important to consider that many existing office buildings have non-operable windows, which necessitates the use of mechanical ventilation. Ventilation issues can be addressed by partially adapting the existing systems to meet the needs of future residents, taking into account the anticipated lower occupancy density of the building.   The biggest challenges - Adapting to the remaining sanitary needs becomes the most challenging. – says Karolina HytroÅ›, Project Manager (Sanitary Installations), Technical Advisory & Project Management at Avison Young. – Office buildings often have a single sanitary riser located in the core of the building, and it is necessary to expand the installation with numerous new supply pipes for bathrooms and kitchens in residential units. Additionally, the heating and cooling system is typically based on freon or glycol systems utilizing fan coil units, which may pose challenges in reusing them within the new functional layout of the floors.   - The electrical installation also requires adaptation; it is necessary to expand telecommunication installations enabling television reception, Internet access, and efficient access control. - adds Kamil Olechniewicz, Project Manager (Electrical Installations), Technical Advisory & Project Management at Avison Young.   Due to fire safety regulations in residential buildings, it is usually necessary to implement an extended fire alarm system. However, these challenges do not prevent the building from being adapted for residential use.   Summary Changing the use from office to residential in terms of technical aspects should not be problematic in many cases. However, it is important to consider that maintaining the desired level of Usable Floor Area (UFA) can be challenging. This may result in a lower profitability compared to a typical multifamily residential building, where every square meter is utilized almost 100% efficiently in the planning process.   - However, it is worth considering that older office buildings often differ significantly in terms of standards from modern and energy-efficient Class A office buildings. In this respect, converting them to a residential function may be more profitable than continuing to maintain increasingly less attractive and difficult-to-lease office space. - says Tomasz Daniecki, Director, Head of Technical Advisory at Avison Young. Especially since older office buildings are usually located in well-connected areas, which is often a key aspect for residents when choosing a place to live. Such locations often fit into the concept of the "15-minute city," which is gaining increasing popularity lately.

Metals – China steel production extends decline The latest numbers from the National Bureau of Statistics (NBS) show that monthly crude steel production in China fell by 7.3% year-on-year and 2.7% month-on-month for a second consecutive month to 90.1mt in May 2023 as domestic steel producers continue to curb output amid falling margins.   Meanwhile, cumulative output rose by 1.6% YoY to 444.6mt over the first five months of the year – overall growth was impacted by the lower production numbers in the April and May months. Among other metals, Chinese primary aluminium production rose by 1.1% YoY to 3.42mt in May 2023. Cumulatively, output rose almost 3.4% YoY to a total of 16.7mt over the first five months of the year. Chinese primary aluminium production might pick up in the coming months given the recent plans of Yunnan to bring back about 1mt of capacity from the end of next month.   Meanwhile, spot gold prices extended the downward rally for a fifth straight session and were trading marginally down this morning, following the latest comments from the Federal Reserve that more rate hikes are possible as the risks to inflation are still on the upside. At its latest meeting, the Fed kept interest rates steady at 5-5.25%.   Looking at the ETF holdings, gold ETFs reported outflows of 12.9koz yesterday, (the 12th consecutive session of outflow) taking the total known gold ETF holding to 93.8mz as of yesterday, the lowest level since 8 May.       Agriculture – Coffee quality premium continues to fall The spread between Robusta and higher-quality Arabica coffee dropped to around US¢59.7/lb this week (the lowest since December 2020), following the diverging fundamentals between the two types of coffee. Robusta coffee inventories in major producing regions such as Vietnam, Indonesia, and India are shrinking given the increased demand. Moreover, concerns about the potential impact of El Nino weather on crops in the nations near the Pacific have also been supporting robusta prices. The USDA projected a 5% YoY decrease in Brazil's Robusta coffee output for the season to 21.7m bags due to poor weather conditions. On the other hand, Arabica coffee prices have been under pressure due to the prospects of a massive crop from Brazil and weaker global demand. The commencement of harvest in Brazil for the season, following two years of lower production due to bad weather, has added to the downward pressure on Arabica prices.

Market picture The crypto market has climbed 2% in the last 24 hours to 1.04 trillion. It took a continuation of the Nasdaq rally and a dollar weakening by more than 1% from its intraday high to revive demand here. Demand also came after Tether's USD peg was restored, although the exchange rate was still 0.1% lower than 7 and 30 days ago. The cryptocurrency's fear and greed index rose from 41 to 47, back into neutral territory. As expected, bitcoin found support on the dip below $25,000, leaning on external positivity and short-term oversold conditions. However, the move is still in a downtrend and will remain so until the price breaks above previous local highs - now at $27.3K. Targets for the current downtrend stay in the $23.6K area. Ethereum has exhausted most of its corrective potential, as it has breached the 200-day moving average at $1630 and briefly touched oversold territory on the daily RSI.     Tether's USDT stablecoin has moved away from parity with the US dollar. The coin's weighted average exchange rate fell to 0.9958, according to CoinMarketCap. "The markets are nervous these days, so it's easy for attackers to take advantage of the general sentiment. We at Tether are as ready as ever," said Tether CTO Paolo Ardoino.     News background Investment giant BlackRock is preparing to file for a Bitcoin ETF. The US Securities and Exchange Commission (SEC) has previously rejected almost all applications to register cryptocurrency ETFs. Apple has rejected a new version of its non-custodial Zeus wallet app for the Lightning Network on the App Store. Cryptocurrency broker Floating Point Group (FPG), which has $50 billion in assets under management, reported a hack and halted trading, deposits and withdrawals. Damage is tentatively estimated at $15-20 million. The total number of subscribers to Reddit's leading cryptocurrency communities, r/Bitcoin and r/Ethereum, reached a new record high of 7 million users. More than 364 thousand people subscribed to the BTC section between 4 and 11 June. The SEC's litigation with two major cryptocurrency exchanges has likely piqued the community's interest.  

Darden Restaurants Q4 23 – 22/06 – if ever there was an example of how resilient the US consumer is it's in the performance of Darden Restaurants after the share price plunged to its lowest levels since 2009 in the wake of the covid lockdowns. The recovery off the $26 lows has been extraordinary with the shares hitting another record high of $164 earlier this month. In its Q3 numbers the owner of the Olive Garden and Longhorn Steak House brands posted an increase in net sales of 13.8% to $2.79bn, while raising its revenue outlook for the full year to between $10.45bn and $10.5bn. On costs the company projected a range of 7% to 7.5% while forecasting profits of between $7.85 and $8 a share. All of the company's brands set record sales numbers during Q3, with little sign of slowing demand. For 2024 the restaurant chain said it intends to open another 50 to 55 new outlets in addition to the 35 new restaurants it opened during Q3.

Dollar drops after 3-day rally Powell remains hawkish; bringing down inflation has a long way to go Fed swaps price in a 69.2% chance of a hike at the July 26th FOMC meeting   US stocks declined as Fed Chair Powell’s testimony to the House affirmed the Fed’s threat of higher rates to combat inflation.  Wall Street should not have been surprised by Fed Chair Powell’s commitment to vanquish inflation, but swap futures are still only pricing in one more rate hike.  Powell reiterated that the economy is strong but that inflation remains elevated.  The Fed is clearly not nearing the end of its tightening cycle and if other central banks seem poised to deliver more than a couple rate hikes, that might make it easier for the Fed to remain aggressive with tightening.  Powell said lowering inflation has a long way to go and that could very well mean that they won’t stop until the fall.    Oil WTI crude prices are finally stabilizing above the $70 level as energy traders anticipate the start of summer should keep demand steady over the next few months. Oil got a boost from a weaker dollar and optimism that the economy will remain strong throughout the summer. Oil was getting near the bottom of its recent trading range and it could continue rebounding if the headlines for China remain upbeat.  The oil market is going to remain tight thanks to OPEC, so that should make trading a little easier for energy traders.  Most energy analysts envision $80 oil at some point this year, so any bullish headline could get us there.  Hurricane season is also here, and we might be getting our first taste of it with Tropical Storm Bret.

GBP: Option market prices 70 pip GBP/USD range on BoE day The big day has finally arrived. The market prices 34bp of rate hikes from the Bank of England (BoE) today as the Bank battles second-round inflation in an increasingly febrile political environment. The FX options market prices a 70 pip range for GBP/USD event risk today - which feels a little too narrow. As our UK economist, James Smith, discusses in his BoE preview, it looks too early for the BoE to push back against the very aggressive tightening expectations currently being built into to UK money market curves. These see the Bank Rate nearly 150bp higher at 6.00% early next year. In theory, a 25bp hike (our call) and no BoE pushback can see sterling stay relatively bid. However, it has been noticeable this week that sterling has not followed short-dated UK rates higher  - suggesting investors are looking through the hiking cycle to the pain ahead for the UK economy and asset markets. On balance, we think EUR/GBP has made an important turn higher this week and can easily see it trading back to 0.88 over coming months. The softer dollar environment should keep GBP/USD bid and suggests demand emerges below 1.2700 should the BoE statement or minutes say anything less hawkish than the market expects.

France: business climate stabilises, but growth outlook remains weak Business sentiment stabilised in France in June. The industrial sector is benefitting from the return to normal in the automotive sector, while the summer looks set to be a good one for the services sector. These temporary factors are mitigating the subdued outlook, but growth will remain weak over the coming quarters.   Automotive and services more optimistic The business climate figures are the first data to be published for the month of June, allowing us to better examine the economic situation in France at the end of the second quarter. And the news is not bad. The business climate stabilised in June, at 100, the level of its long-term average. While the situation is improving in the industrial and retail sectors, it is deteriorating further in the construction sector. The improvement in business sentiment in the industrial sector is particularly noteworthy, after weakening for several months, not only in France but also in the rest of the world. Manufacturers are more positive about past production, but also about future production prospects and order books. The details indicate that it is the automotive industry that is seeing its situation improve most, which probably follows the easing of supply chain problems. This is therefore more likely to be a catch-up effect from a previously disrupted situation than the start of a new trend. In the services sector, business sentiment is stable and still above its long-term average. Interestingly, the outlook for business activity has risen slightly. This increase is largely due to businesses in the accommodation and catering sector, which are much more optimistic about activity over the coming months. This indicates that the summer is shaping up to be a very good one for the French tourism sector, which will support economic growth in the third quarter. In the retail sector, order intentions and inventories are up. In construction, the business climate continues to decline for the sixth month in a row. Finally, price intentions are down in all sectors. This is a further sign that the inflation peak in France should finally be behind us, and that price growth should be less dynamic in the coming months. The fall in inflation is likely to take time, however, as price intentions in services remain high, despite falling over the past two years.   Growth likely to remain weak in 2023 and 2024 Ultimately, based on all the available figures, it seems that France is facing a moderation in its growth prospects. In the short term, however, this moderation will be mitigated by the catching-up of the automotive industry and the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. These factors should support growth in the third quarter but are likely to run out of steam after that. The end of 2023 and 2024 are likely to be much weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are still expecting growth of around 0.5% this year, a forecast close to those of the Banque de France and INSEE, which are predicting 0.6%. For 2024, we are less optimistic than the central banks, forecasting French GDP growth of 0.5% (compared with a forecast of 1% by the Banque de France).  

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

GBP: No push back against 6%+ Bank Rate this week There is much discussion in the financial press about central bankers having seen the 'easy', base effect-driven decline in headline inflation. But now they are into the hard yards of getting core inflation down from around 5% – or in the Bank of England's case 7%. In this environment, we should expect no pushback from BoE officials on the pricing of the Bank Rate above 6% early next year. Equally, we expect the government to yield no ground on mortgage interest relief, which would only make the BoE's job harder. EUR/GBP fell on the back of the Eurozone PMI dip last Friday. Despite UK hard landing fears, we are sticking with the initial views we put out in our latest BoE reaction piece. Namely, that a very inverted yield curve probably trumps hard landing fears and that sterling holds onto recent gains for the time being.  On this week's UK calendar is primarily BoE speakers, where Wednesday looks to be the main Sintra event for BoE Governor Andrew Bailey. EUR/GBP can drift back to 0.8520 this week, while GBP/USD should find demand under 1.27.

Oil It’s going to take a lot to change the minds of energy traders. Fears of a weaker global growth outlook are not going away anytime soon. In the US, good news is bad news as that will suggest the Fed might have to do more tightening. ​ Inflation is stubbornly high in Europe that could trigger a lot more rate hikes and a harsher recession. ​ Even comments from Delta CEO about demand outpacing expectations was unable to provide a boost for oil prices. ​ Oil is looking very vulnerable here as it is getting close again to the spring lows near the upper mid- $60s. One more plunge and that should make OPEC+ very nervous. A drop below the $67.50 level could ​ trigger momentum selling that won’t stop until the $62.50 region.   Gold Gold remains under pressure as the US consumer still looks strong. Today’s economic data in the US painted a picture of a resilient economy that could be subject to further Fed tightening. The ECB also signaled there is no end in sight for their rate hiking cycle and that has also helped send Global Bond yields higher. It has been pretty ugly for gold since early May and if expectations grow for further Fed tightening, that could send gold tentatively below the $1900 level.      

Strong performance of surgical robots continues In this report, we update our forecasts and valuation of Synektik after the publication of results for 2Q22/23. Based on the new upgraded forecasts and the current risk-free rate, we set our Fair Value at PLN 75.0ps, which implies 0% upside potential of the current share price. We downgrade our recommendation to HOLD. Synektik has an excellent business momentum in FY2022/23, the company has again increased its guidance for da Vinci system sales in Poland and Czechia.     We believe that the momentum will continue in the next years, as the device utilization in Poland building up. We now assume Synektik will deliver 18/14/12 da Vinci surgical robots in 2022/23E, 2023/24E and 2024/25E, respectively. After recent share price rally Synektik is trading at 8.9x EV/adj. EBITDA for 2022/23E and 8.9x for 2023/24E; we see that most of upside has materialized and further share price growth potential is limited, therefore we downgrade Synektik to HOLD. Da Vinci sales momentum continues.   In 1H22/23, the company booked a record ten deliveries of da Vinci surgical robots, and signed another eight contracts for deliveries in 2H22/23. We assume five robots to be sold in 3Q22/23 and three in 4Q22/23, in total 18 devices vs. our earlier assumption of 16. As the demand remains strong (also in Czechia and Slovakia), the geographic distribution of surgical robots in Poland is uneven and NFZ may expand the scope of reimbursement of surgical procedures using da Vinci, we have raised our sales forecasts for the following years: we assume 14 deliveries in FY2023/24 (previously 11) and 12 deliveries in FY2024/25 (previously 10).     In our opinion, the number of surgical robots in Poland can easily reach 50-60 in the next few years, which will support Synektik’s revenues on device sales, as well as increase recurring revenues from service and consumables. Adjusted EBITDA at PLN 65.4m in 2022/23E.   Since the current backlog for da Vinci systems exceeds our forecasts, we increase our sales forecasts to 18 devices from 16 previously. Consequently, we are raising our forecasts for FY22/23: we estimate PLN 359m in revenue (previously PLN 325m), PLN 65.4m in adjusted EBITDA (previously PLN 59.8m) and PLN 32.0m in net profit (previously PLN 28.2m). We assume that the DPS in the next financial year could almost double to PLN 1.1ps vs. the last payout of PLN 0.6ps. Recommendation and valuation.   We value Synektik using a 10-year DCF model. Taking into account the new financial and FX forecasts and the current risk-free rate, we are upgrading the company's Fair Value to PLN 75.0ps from PLN 56.7ps. The new valuation implies 0% upside potential relative to the current share price, and therefore we downgrade our recommendation to HOLD.       

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.

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

Renovation less vulnerable to economic sentiment Development of production volumes in Western Europe (EC-15), % YoY     Choppy periods for R&M market From a historic perspective, demand for renovation and maintenance has recently been remarkably volatile. During the first Covid-19 lockdown, people were reluctant to have handymen in their homes. This gradually changed and demand for improvement grew rapidly in 2021 as many people suddenly required a “home office” as remote work became the norm. In addition, consumers had spare money to invest in their homes as they couldn’t spend their savings on holidays during the pandemic. In 2022, skyrocketing energy prices (caused by the Ukraine War) decreased consumers’ purchasing power. This resulted in a downturn in the number of people that wanted to refurbish their homes. In contrast, the demand for energy-efficient investments (eg. solar panels, insulation and heat pumps) has grown as the payback period for these refurbishments has dropped enormously. Many governments also offer subsidies for energy-related renovation projects.   Demand for home improvements has been volatile lately Balance of EU consumers that expect to improve their home over the next 12 months     Stable growth will return in the renovation sector All in all, despite the temporary circumstances caused by the Covid-19 pandemic and the energy crisis, the trajectory for residential energy efficiency upgrades remains promising. Looking ahead, we expect gradual growth in the renovation market due to sustained government regulations and the structural impact of higher energy prices. Therefore, the demand for residential energy efficiency upgrades is likely to continue its upward trend.

An abrupt market crash seems ruled out All indicators point to a substantial slowdown in the housing market this year. A further rise in interest rates will continue to put pressure on affordability and further dampen demand for mortgages later this year. While a marked slowdown is expected, several factors are also reducing the likelihood of a severe price correction or abrupt market crash.  First, the drop in energy costs reduces uncertainty for households and frees up additional budget that can be spent on monthly mortgage payments. Second, incomes will continue to rise. Nominal wage growth will pick up after the sharp drop in real purchasing power in 2022. In addition, low unemployment ensures steady growth in gross national income. The combination of rising nominal incomes and a tight labour market will provide some support to the demand side of the real estate market. Finally, despite this current temporary dip, demand will continue to grow structurally in the coming years. Slower supply growth will create scarcity in the market, which will put upward pressure on prices.   Weak price growth in 2023 and 2024 We have updated our forecast for the current year and now assume price growth of 1%, which is an upward revision from our earlier estimate of 0%. This revision is due to the continued house price growth at the beginning of the year, albeit at a slower pace. Our price forecast assumes a slight decline in prices in the second half of this year. For 2024, we have revised our forecast downwards to 0% from our earlier estimate of 1% as we expect the continued rise in interest rates will dampen any recovery in the property market next year. Overall, this scenario forecasts a soft landing for the Spanish housing market. Although there is a risk of a slight drop in prices in the second half of this year, the overall price correction will remain modest in nominal terms. However, it is important to note that the correction in real terms will be significantly higher due to the impact of high inflation. Inflation-adjusted prices fell slightly last year and we expect further declines of around 2.5% to 3% in 2023 and 2024. Over a three-year period, the cumulative real price adjustment is expected to exceed 6%.   Evolution of Spanish house prices, including ING forecast

A bright future ahead for Dutch IT services Demand for cybersecurity services is on the rise – and with it the growth of the Dutch IT service sector. Labour shortages and rising wages are proving a major challenge, but businesses appear to remain optimistic. Could artificial intelligence offer a magic fix?   A promising outlook The Dutch IT services sector is expected to grow by 4.5% in 2023 and 2.5% in 2024. Despite a slightly lower growth rate than in both 2021 and 2022 (during which the Covid-19 pandemic led to the rapid adoption of digital products and services) the sector still shows strong growth compared to GDP. Growth is largely driven by the continued demand for cybersecurity services, as well as the need for automation and the outsourcing of IT services and infrastructure such as off-premise data centres. According to research firms such as IDC and Gartner, Western European companies are planning to increase their spending on IT services by 5% to 8%, and Canalys expects spending on cloud infrastructure to increase by 19% in 2023. Dutch IT service providers benefit from these trends, as the Netherlands plays a crucial role in the European cloud infrastructure.   However, the sector isn't growing without restrictions – namely, the slower pace of the Dutch economy, persisting labour shortages and rising wages. There was even a moment when the Dutch IT sector appeared to shrink in the first quarter of 2023 due to declining demand for IT equipment. After revisions by CBS, however, it has become evident that the sector is at least experiencing modest growth. In short, we expect it to continue growing through the remainder of this year and into 2024.   Continued growth for IT services

EUR/USD Euro dollar bears have been increasing their exposure to options, with some eyeing some protection to euro weakness in Q3.  Last week, the Depository Trust & Clearing Corporation saw strongest demand in over two months, with put volumes gaining more attention with a 3:2 margin. The euro-dollar has been triangulating and appears poised for a breakout soon.   Potential trigger: Everyone has their eye on the NFP report, but next week’s CPI report could be more impactful.  Wall Street might become more confident after the July 12th inflation report that the Fed will be done after delivering one more rate hike.  

The US economy has proven to be more resilient than we expected, but the threat of recession lingers on due to lagged effects of rate hikes and tighter lending conditions while the restart of student loan repayments could come as a financial shock for millions of Americans. Inflation is subsiding and this will open the door to looser Fed policy next year.   Upward revisions to near-term growth and Fed view We have made major changes to our US forecasts this month, which see us revising up the near-term growth profile while also inserting a July Federal Reserve rate hike. Inflation is still set to slow sharply, but interest rate cuts, which we have long been expecting, are unlikely to happen before the end of this year. We expected the economy to have been more impacted by the cumulative 500 basis points of interest rate hikes and a reduction in credit availability than it has been. Certainly, the banking stresses seen in March/April appear to have stabilised thanks to massive support for small and regional banks from the Federal Reserve. Employment creation has been robust, while residential construction has been stronger than expected despite the surge in mortgage rates. The lack of existing homes for sale is keeping prices elevated and is generating demand for new homes. Inflation is slowing, but not quickly enough for the Federal Reserve and with the jobs market remaining firm officials are taking no chances. The Fed signalled that June’s decision to leave interest rates on hold should be seen merely as a slowing in the pace of rate hikes rather than an actual “pause”. Consequently, a 25bp July rate looks likely, but we doubt the Fed will carry through with the additional 25bp hike outlined in its latest forecasts.   Bank nervousness points to a contraction in lending        

There is more room to the downside for market rates, but we will go up first Given all of this, we anticipate that the US 10yr Treasury yield can get back above 4%, back to where it was before the SVB story changed the dynamic. The 10yr could well take out the previous high, and remain elevated for a time. With European central banks tending to show urgency on the inflation issue, there is ample room for eurozone market rates to rise too. The 10yr Bund yield is quite likely to break back above 2.5%, and then trend towards 3%. The cycle high seen when SVB went down was 2.75% – that’s liable to be taken out.   We think these are moves that should be faded through, as increasingly we expect the residual oomph factor to be outweighed by an increasing angst factor. Growing unease with respect to the commercial real estate loan portfolios being held by banks will also begin to count. And further falls in inflation should be a natural outcome as demand slows. Once key core inflation readings have moved below 3%, the way will be clear for the Fed to consider rate cuts. A 2% handle is all that’s needed (so, for example, 2.9% will be good enough). The ECB won’t be too far behind. So sure, anticipate further rises in market rates now, but prepare for much bigger falls ahead.  

BoK likely to extend pause but stay hawkish The Bank of Korea will hold a policy meeting next Thursday. As inflation is slowing to the 2% range, the BoK is expected to keep its policy rate at the current 3.50% level. We think the central bank will continue to remain hawkish so as not to give market participants an easing signal too early.   Singapore GDP growth to see slight bounce Singapore is set to release second-quarter GDP figures next week. First quarter GDP showed that the economy contracted from the previous quarter but still managed to eke out a 0.4% YoY gain. Singapore faces the twin challenge of contracting exports and industrial production as global trade slows. One bright spot is retail sales, which have provided some support amid the resurgence of visitor arrivals. This has helped to offset softer demand caused by still-high inflation.  We expect second-quarter GDP to bounce back, with a shallow expansion of 1.4% YoY. Growth will likely be stuck in this range until global trade prospects improve.  

Services more popular than goods During 2022, household consumption of goods declined due to rising inflation. Dutch consumers shifted a portion of their expenditures to services, which became fully accessible again after the pandemic. For example, the number of overnight stays, air travel, and visits to entertainment and recreational facilities increased significantly. This came at the expense of goods consumption, which has not grown since the second quarter of 2022. Durable goods such as cars, home furnishings, and also food are being purchased less. Domestic household consumption is expected to grow at a slow pace in the coming quarters, with demand for goods remaining under pressure.   Consumption services continued to grow, fewer goods purchased Domestic private consumption, YoY volume change

Eurozone housing market is still searching for the bottom High interest rates, economic uncertainty, increasing renovation costs and questions over future energy efficiency requirements continue to add downward pressure on house prices. In our view, the bottoming out will only start towards the end of the year and the recovery of the eurozone housing market will take some time to materialise.   Drop in demand hinders recovery Mortgage rates have risen sharply over the past year, resulting in a slowdown in demand for housing loans. House prices in the region have also been pushed down as sellers have adjusted their asking prices. New production of housing loans in the eurozone in the first five months of this year was more than 60% below last year's volume, and the number of housing transactions has also seen a significant drop. In the first quarter of 2023, for instance, it fell 23% in Belgium and the Netherlands compared to the previous quarter, 16% in France, and 8% in Spain. With mortgage production leading housing transactions, a further decline in the number of transactions is still to be expected. Eurostat figures published last Wednesday showed that the fall in demand led to a 0.9% quarter-on-quarter drop in property prices in the eurozone, after a 1.7% QoQ fall in the fourth quarter of 2022. Looking ahead, it appears unlikely that we'll see a robust recovery any time soon. We expect demand to pick up slightly only at the end of the year, with prices following suit in the first half of 2024. Besides the negative impact of the rise in financing costs on prices, the green transition in the housing market will play an increasingly important role in price setting.   House price growth 1Q23, % QoQ    

Higher for longer means bottoming out later About a year ago, the European Central Bank (ECB) engaged in the most aggressive interest rate hike cycle since the start of the monetary union. Interest rates for housing loans have also shot up, financing costs have risen significantly and demand for housing loans dropped sharply. While the economic outlook has weakened lately and there are increasing signs that the monetary policy transmission is working, the fear of pausing too soon is currently greater within the ECB than the fear of doing so too late. We expect the central bank to raise policy rates by 25 basis points at both its July and September meetings. As a consequence, capital market rates will move up slightly and will only start to stabilise or begin to come down at the end of the year. Demand for housing loans will therefore be dampened for longer and may also follow a similar pattern. Rising interest rates drive affordability to historically low levels The recent rise in interest rates has made a significant impact on the affordability of residential real estate, putting a heavier financial burden on prospective homeowners. The sharp rise in energy prices last year exacerbated the situation, leaving families with less money for mortgage payments after paying their energy bills. Consequently, many people chose to postpone their purchase plans, leading to a noticeable drop in demand for credit and downward pressure on house prices. Since interest rates will remain higher for longer, it seems likely that mortgage rates will increase somewhat further in the second half of the year, putting additional pressure on affordability. Several factors partially mitigated the negative effects of rising interest rates on the housing market. These include a tight labour market, a pick-up in nominal wage growth after a sharp fall in real wages last year, an extension of average loan maturities and the implementation of government support measures. The sharp fall in energy prices also took some pressure off as households had to spend a smaller proportion of their income on their energy bills. In some eurozone countries, house prices fell significantly from their peak levels. Those positive drivers, however, only offset part of the negative effect of interest rates this year. In our view, housing affordability is expected to remain low throughout 2024, mainly due to a ‘higher for longer’ interest rate environment.   Green transition as structural key driver Looking further ahead, the role played by energy efficiency in the housing market is likely to grow. Both regulatory drivers and government investment, as well as changing consumer preferences are pulling in that direction. The surge of energy prices in 2022 and remaining uncertainty about future energy prices have made home buyers increasingly aware of the benefits of more energy efficient homes. European and national initiatives to reduce CO2 emissions from buildings will further disrupt the market. This seems to have recently increased the price premium for energy efficient homes compared to those which consume more energy. Demand for energy efficiency is growing, but lacking labour capacity and higher material prices provide bottlenecks on the supply side of the market to meet the extra demand for energy efficient homes. Given the structural nature of labour shortages, this delays the renovation of the housing stock needed to meet the climate goals. Overall, we expect house prices in the eurozone to fall by some 3.5% to 5% on average this year. House prices are likely to develop differently across eurozone countries, with Germany and the Netherlands seeing rather significant declines in house prices, while house prices in Belgium are only expected to fall slightly. However, there will be differences in price developments not only between countries but also between segments, with energy efficiency playing an increasingly decisive role in price-setting. The price of energy efficient new buildings is likely to be higher, whereas older residential properties with poor energy efficiency are likely to see even greater price discounts than the new market environment already shows.

Green is the new location The impact of climate change combined with policy uncertainty is already very much visible in the German real estate market. An analysis of anonymised ING data confirms that the green transition in the housing market has already been a decisive factor for price development in recent years. There is a strong price differential between energy efficient residential properties and their non-renovated counterparts, which has increased significantly between 2021 and 2023. Enormous efficiency premiums are already being paid and renovation discounts are being demanded. This year, the price of a home with an energy label H was on average 45% lower than that of a residential property with an A+ energy label. Last year, the difference was 36%. Even those with an energy label B are worth 28% less this year, after a 20% discount in 2022.   Renovation discount from energy efficiency class A+ per energy efficiency class   As regulation progresses, the demand for new buildings is likely to see a continued increase, which will lead to elevated prices given the scarce supply and simultaneously high construction costs. Prices for energy efficient new buildings are therefore likely to continue rising over the coming years, while we expect more significant price drops for non-renovated existing buildings. Sellers will now have to accept renovation discounts to compensate for the costs occurring after purchases. As a result, the negative price development for existing properties could be even stronger than the current market environment around high financing costs and real wage losses alone would suggest. In the past, the rule of thumb when buying a property was based on three criteria: location, location, location. With the green transition, it seems three more are quickly rising to the top of the list: energy efficiency, energy efficiency, energy efficiency.

  Clear earnings growth on horizon Novavis Group is a company that prepares photovoltaic farm projects for construction (from leasing land, through permits and acquiring grid connection) and has a portfolio of projects with a total capacity of 583MW. After acquiring the necessary permits and connection conditions, taking into account current prices for a ready-to-build project (EUR 140-180tsd), the value of the portfolio will increase to PLN 360-470mn. Novavis, as part of its ongoing projects, is working with Spain’s Iberdrola to deliver 425MW ready-to-build photovoltaic farms (with an estimated value of PLN ~180mn).   Given the expected timetable for obtaining project connections and further milestones in late 2023/2024, we assume a marked improvement in sales and financial performance. Current forecasts by the Institute of Renewable Energy call for an increase in photovoltaic capacity in Poland from 13.6GW to 26.8GW in 2025.   The development of RES so far supported by prosumers in the next few years will be the beneficiary of European Union regulations (RePowerEU, FIT55, CBAM). As a result, large professional photovoltaic farms will be the fastest-growing source of energy from the sun. The forecasts translate into increased demand for the ready-to-build photovoltaic farm projects that Novavis is developing. With improved financial performance, we expect Novavis to pay its first profit dividend to shareholders in 2024. We are initiating coverage of Novavis Group with a Buy rating and a target price of PLN 3.89/share.    

Merger to finalise by September If the environment remains supportive and market stability is maintained, the NBH is going to continue its series of gradual interest rate cuts of 100bps. In our base case, the base rate and the effective rate should merge accordingly at 13% at the September rate decision. There was a minor tweak to the forward guidance in the latest press release, with the term “prolonged period” being dropped as the Monetary Council assessed that maintaining the current level of the base rate will ensure price stability. We believe that this tiny shift might be the first hint that, following the expected merger of the effective rate with the base rate in September, easing will continue without a pause. In our assessment, this would be roughly in line with recent market pricing.   Our market views The Hungarian forint is gradually normalising following the sell-off two weeks ago, which affected the whole region. We see global momentum and market overvaluation as the main reasons as local conditions improve. The market sell-off has likely lightened the heavy long positioning and we believe the massive carry will once again attract market interest. In addition, we think the market is pushing NBH to cut rates at a faster pace and the hawkish tone should be a boost going back to EUR/HUF 370. In the rates space, we see that the very short end of the IRS curve has moved significantly lower in recent weeks due to the market wanting to see a more dovish central bank in the face of better macro numbers. However, our base case is that the NBH will not move away from the set course and these bets will be disappointed. In general, we see more steepening of the curve in the 2s10s spread, but a very short end. The FRA curve should see some repricing up this week, resulting in flattening in this segment. Hungarian government bonds (HGBs) eased in July and the rest of the region caught up with the swift rally. We therefore see current valuations of HGBs as more justifiable, which could attract new buyers. Despite the fiscal slippage risk, YTD issuance has reached 60% by our calculations, which we see as more than sufficient. Moreover, recent government measures supporting HGBs and the fastest disinflation in the region should be enough to sustain demand.

Eurozone PMI suggests worsening economic conditions The eurozone PMI suggests contracting economic activity at the start of the third quarter. Overall, this fits a trend of weakening survey indicators over recent months and increases the recession risk for the bloc. The survey continues to suggest moderating price pressures, but the impact of wages on services will remain a concern for ECB hawks. Survey data became progressively bleaker during the second quarter and the July PMI continues that trend. The June composite PMI stood at 49.9, broadly signalling stagnation, but in July the PMI dropped to 48.9, indicating contraction. Demand in the eurozone is falling for both goods and services according to the survey, with services new orders dropping for the first time in seven months while the decline in new orders for manufacturing steepened further. France and Germany look particularly bleak with output PMIs signalling contraction, which is offset slightly by the rest of the eurozone. We don’t have more details yet, but this could be due to more tourism-dependent economies profiting from a somewhat stronger summer period. Still, the positive tourism effect doesn't seem strong enough to counter weakening in the economy elsewhere. We have previously argued that the eurozone economy has been in a stagnation-type environment, and the recent two quarters of minimal negative GDP growth should not be taken as a broad recession given the strength of the labour market. The July PMI suggests that recession risk has increased though. With expectations of output weakening further, the outlook for the coming months is sluggish at best. The inflation picture coming from the survey is very similar to recent months. Price pressures are cooling, but more so for goods manufacturers than services providers. Rising wages continue to keep price pressures elevated for services, resulting in a slower downward trend. Dropping input costs are helping to bring inflation expectations down much faster for goods at the moment. This confirms our view of a materially lower inflation rate towards the end of the year but keeps hawkish concerns about the effect of wages on inflation alive.

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

EIA Report: stockpiles  dropped 600K vs -2.12M eyed Crude production falls to 12.2 million bpd (lower boundaries of this year’s range) Gold struggles as Fed leaves door open for more hikes Oil Crude prices softened after the EIA crude oil inventory report stockpiles fell less-than-expected as surging gasoline prices weighed on demand.  Gas is almost over 10 cents a gallon according to AAA and that rising trend might continue going to the end of summer.  Crude exports also rose above the 4 million barrel a day threshold, which shows overseas demand is growing as OPEC+ tightens the oil market.  Gold Gold prices remained heavy after the FOMC statement as Fed swaps continue to price in small chances of an additional rate hike.  The Fed will probably see no change with rates in September and when the market is confident that November will be a pause, then gold might break out higher.   Gold is now in wait-and-see mode for the rest of the big earnings releases and if the ECB and BOJ can surprise markets.   Bitcoin Bitcoin caught a modest bid after the Fed decision triggered a modest risk-on rally.  The Fed is most likely done raising rates and that should provide some relief to the interest rate sensitive sectors in the cryptoverse.    

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.

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.

The Japanese yen continues to slide and is down 1.41% this week. In Tuesday’s European session, USD/JPY is trading at 143.16, up 0.64%.   Dollar/yen powers above 143 The yen continues to lose ground against the US dollar. Earlier in the day, the yen weakened to 143.18, its weakest level against the US dollar since July 7th. The yen has plunged 370 basis points since Friday when the Bank of Japan stunned the markets and tweaked its yield control (YCC) policy. The Bank of Japan has loosened its YCC and this has sent the yen sharply lower. The BoJ had set a rigid cap of 0.50% yields on 10-year government bonds but has turned that cap into a yardstick, saying it would offer to purchase JGBs at 1%. The 10-year yield rose has risen to a multi-year high of 0.61% and there is a strong possibility of the yield continuing to rise. The BoJ has been an outlier of central banks, sticking to its policy of negative rates. True, inflation in Japan is much lower than in other developed economies, but there is growing criticism that this policy is outdated and the central bank needs to take further steps toward normalization. Governor Ueda stressed on Friday that the YCC tweak was not a move towards normalization and we’re unlikely to see any tightening from the BoJ unless inflation moves significantly higher.   In the US, ISM Manufacturing PMI is today’s key release. The manufacturing sector remains in the doldrums and has been in decline since October, with readings below the 50.0 level. Demand has been weak and production has been declining due to the lack of orders. In June, the Manufacturing PMI slipped to 46.0, the lowest level since May 2020. Another decline is expected for July, with a consensus estimate of 46.8 points. . USD/JPY Technical USD/JPY has pushed above resistance at 142.63. Above, there is resistance at 144.09 There is support at 141.47 and 140.35  

Policy is still pointing at greater disclosure transparency and standardisation despite turbulence As mentioned above, transparent and standardised sustainability reporting is essential in assuring the credibility of an issuer’s ESG products, helping to boost investor confidence, and to drive the healthy growth of the global sustainable finance market. Policies and initiatives need to play a role here, and we are seeing more efforts ramped up in this area. In late June, the International Financial Reporting Standards Foundation’s International Sustainability Standards Board (ISSB) launched its sustainability and climate disclosure standards. The ISSB signals an important convergence of different reporting standards and frameworks such as the Taskforce on Climate-related Financial Disclosure (TCFD), offering companies an overarching framework. Already having support from G7 and G20 countries, the ISSB is expecting wide adoption over time.   The EU has a relatively more unified ESG policy environment, where disclosure requirements (Corporate Sustainability Reporting Directive, or CSRD), the sustainable activity classification system (Taxonomy) and the Green Bond Standard reinforce each other. Admittedly, complying with all the regulatory requirements can meet difficulties around necessary data and interpretation. And many of the bloc’s policies are still evolving, with the newly adopted European Sustainability Reporting Standards (ESRS) introducing more flexibility around ESG materiality and Scope 3 emissions disclosure. Still, the EU’s more established and complex ESG system can support smoother growth in sustainable finance issuance. In the US, although more than 30 states have passed or proposed anti-ESG investment bills, the Securities and Exchange Commission (SEC) is slowly advancing in mandating climate-related disclosure and aims to release the final proposed rules this October. The final rules will likely allow more flexibility – for instance, Scope 3 emissions data may no longer be required. Even if less strict relative to original plans, these rules will be revolutionary for the US market, facilitating a large step closer to European and other peers. In Asia, several economies already have their own guidelines and taxonomies, such as Japan’s green, social, and climate transition finance guidelines, China’s Green Bond Principles, South Korea’s Korea Green Taxonomy, etc. Yet Asia is more of a follower rather than a trend setter, and several jurisdictions have adopted the EU’s system, or the widely accepted international frameworks. The ISSB is likely to have a considerable impact on APAC – Singapore, for instance, has already proposed ISSB-aligned disclosure from listed companies starting in 2025. Nevertheless, we would expect more lenient local specifications in policy setting. For example, the Association of Southeast Asian Nations’ (ASEAN’s) taxonomy considers certain types of coal phase-out activities to be aligned.   What does this mean for investors and issuers? Quality issuance is the best strategy against uncertainty. As the sustainable finance market moves from the initial period of rapid growth to a maturing phase with more ESG disclosure mandates and scrutiny, it has become important for issuers to navigate through greenwashing risks by actively leveling up their sustainability credibility. Investors have started to and will increasingly favor quality issuers with ambitious long-term ESG targets, clear interim targets, rigorous progress reporting, as well as detailed disclosure of capital allocation from their sustainable finance products. Environmental, Social, and Governance aspects will all progress, but the urgency to reduce emissions and mitigate climate risks will remain a strong source of demand for sustainable financing. This can help promote innovation and facilitate the commercialization of nascent decarbonization technologies. We are in an era of adjustment and normalisation, but sustainable finance remains a crucial tool to provide financial support for sustainable activities. Therefore, we do see the market continuing to grow in the future.

Industrial Metals Monthly: Dim global economic growth clouds metals outlook Our new monthly report looks at the performance of iron ore, copper, aluminium and other industrial metals, and their outlook for the rest of the year.   Industrial metals struggle in the first half of the year as China demand disappoints   China's economic activity loses more steam in July Prices for industrial metals remained mostly volatile in the first half of the year amid an uneven economic recovery in China.  Beijing has set a cautious growth target of 5% this year, the lowest in decades. In the second quarter, the economy added 6.3% compared with the same period last year, when Shanghai and other big cities were in strict lockdown, but growth was just 0.8% in quarter-on-quarter terms. Last month’s data releases offered new evidence that China’s overall economic momentum was weak at the start of the second half of the year, but have also raised hopes of more government stimulus measures as the top metal-consuming country slides into deflation. China’s consumer and producer prices both declined in July from a year ago as demand has continued to weaken. The consumer price index dropped by 0.3% last month from a year earlier, while producer prices, which are heavily driven by the cost of commodities and raw materials, fell for a tenth consecutive month, contracting by 4.4% in July from a year earlier. This marks the first time since November 2020 that both consumer and producer prices registered contractions. Meanwhile, the manufacturing and property sectors, which are crucial for industrial metals demand, are struggling to turn around. Manufacturing activity in China contracted again in July, proving that the economy’s recovery remains under pressure. China’s official manufacturing PMI climbed to 49.3 in July, from 49.0 in June. The sector has been in contraction since April. The Caixin manufacturing PMI fell back into contraction, dropping to 49.2 in July, from 50.5 in June, reflecting flagging demand for Chinese exports. Similarly, China’s property sector continues to struggle. In June, home sales dropped by 18% from a year earlier, while residential construction fell by 10%. Overall, China’s post-reopening recovery has disappointed so far this year. Chinese government continues to promise more support, including for the beleaguered property sector, but measures have lacked detail so far. At last month's Political Bureau of the Communist Party of China's Central Committee meeting, the announcement of continued stimulus for China's economy lifted metals prices toward the end of July. However, the optimism quickly subsided as the scale of the stimulus promised was somewhat disappointing and details are yet to emerge of specific policy steps that would benefit industrial metals. We believe metals will stay under pressure in the second half of the year as the sluggish recovery in China will likely continue to weigh on demand, with most industrial metals remaining dependent on economic stimulus from the world’s biggest consumer of metals. However, if China introduces stimulus measures, in particular for the property sector, this will boost metals demand and support higher prices. We believe that any improvements in metals prices will depend on the eventual implementation of China’s stimulus measures and actual demand improvement.   China's recovery is showing fatigue   Weak trade data highlight struggling recovery Plunging trade in July fuelled more concerns about China's growth prospects. Exports fell by 14.5% in dollar terms last month from a year earlier, the worst decline since the start of the Covid-19 pandemic in February 2020. Imports contracted by 12.4%, reflecting weak domestic demand, leaving a trade surplus of $80.6bn for the month. Flagging industrial activity also capped China’s metals imports. Iron ore imports fell by 2.1% in July to 93.5 million tonnes, a three-month low, as steel output declined over the month.   Copper ore imports slide to nine-month low   Imports of unwrought copper and products fell by 3% on a daily basis in July to 451,000 tonnes. They are now down 11% year-to-date. Meanwhile, copper ore imports slid to a nine-month low. The premium paid for refined metal at the port of Yangshan, which acts as a measure of import demand, has been on a downtrend too. It recently stood at $31.50/t, down from its record highs of $152.50/t in October last year.   Weak external demand remains a challenge for China's recovery   Global economic outlook remains dim World manufacturing PMIs also continued to struggle in July, mostly staying below the expansion level. This ongoing weakness, especially in the US and Europe, continues to be a drag on demand for industrial metals. Although China dictates most of the industrial metals prices, weak external demand also caps gains. In the US, while economic data releases in July indicated that the consumer price index dipped to its lowest in June since March 2021, the US Federal Reserve proceeded with a 25 basis-point interest rate increase at its July meeting. And at the start of August, Fed policymaker Michelle Bowman said more rises may be needed in the inflation battle after a mixed jobs report, further dampening demand for industrial metals.   Manufacturing PMIs stagnate globally    

Any steel output cut would add to bearish risks for the iron ore market, while the seaborne supply side is showing signs of strength with major producers reporting robust production numbers and exports from Australia and Brazil remaining elevated. We believe the outlook for iron ore remains bearish in the short term amid sluggish demand from China’s steel-intensive property sector. The pledges from Beijing to support the economy are underwhelming for now and support for the real estate sector is not likely to translate into large-scale property development that would revitalise steel demand in the country and lift iron ore prices. We believe prices will remain volatile as the market continues to be responsive to any policy change from Beijing.   Copper warehouse stocks remain historically low   Like iron ore, copper prices are driven by economic policies from China and other major economies. LME copper prices had a strong start to the year as China's reopening boosted the outlook for demand. Copper was one the biggest winners following China’s reopening amid expectations that China’s support for the property market would kickstart demand for industrial metals. But prices quickly turned as that optimism faded, remaining mostly rangebound since February. Copper prices ended the first half of the year flat from where they started the year. Since May, prices have mostly been on an upward trend. Copper was lifted in the first half of July by the US dollar dropping to a one-year low on the release of a positive June inflation number and prices remained elevated throughout the month trading mostly above $8,400/t. However, in recent weeks, copper has been struggling for direction amid an uncertain path of US rate hikes and China’s lacklustre economic recovery. LME prices dropped to a one-month low following worse-than-expected July trade data from China. However, the supply side remains supportive of copper prices – total warehouse stocks at the LME, COMEX and SHFE remain historically low. Refined copper exchange inventories are now at the equivalent of just two-and-a-half days of global consumption. This sets up the market for squeezes and spikes in prices if we see demand improving sooner than expected. For example, weekly copper stockpiles reported by the SHFE dropped by 15% last week and remain below the seasonal average. These critically low levels of Chinese inventories could be partially explained by weaker supply out of Chile, the biggest producing nation. The country saw its July copper exports come in at the lowest level since January, suggesting that Chilean operations continue to suffer project delays and mine setbacks. Chilean state copper producer Codelco has reduced production guidance to between 1.31 Mt and 1.35 Mt for 2023, from a previous 1.35 Mt and 1.45 Mt. Codelco's production drop has been systematic for the last three years. We remain cautious about the short term for copper, with sluggish demand from China pointing to lower prices. We believe in the near term, copper prices are likely to continue to be dictated by the pace of China’s economic recovery as well as the Fed’s interest rate hiking path. However, we believe low levels of global visible stocks are likely to prevent prices from significant decreases until copper consumption improves again.   Aluminium supply side woes ease as Yunnan restarts July was the first month this year that saw LME aluminium prices closing the month higher than where they started. Prices closed at a similar level to their peak within the month. However, the fundamental picture for aluminium has not changed. Instead, the July price increase came amid a softer US dollar and hopes of more stimulus from China. The start of August saw LME prices moving lower again. On the supply side, we expect output to grow fast in China. The power supply in Yunnan improved significantly from May with the arrival of the rainy season. By late July, around 1.1Mt of capacity restarted in Yunnan, and we believe the resumption of Yunnan capacity remains the key headwind for aluminium in the near term. However, if the upcoming dry season has insufficient rain, output could be cut again with a lack of hydropower leading to rising Chinese imports.   China's primary aluminium production (1000 metric tonnes)   In Europe, however, we don’t expect major restarts before 2025, while demand for aluminium remains weak. Europe suspended around 2% of the global total capacity by the end of 2022 as power prices surged. And although power costs have now eased, only one smelter has restarted so far this year. Meanwhile, Norsk Hydro recently said it does not plan to restart the aluminium output it curtailed during the European energy crisis while market conditions remain weak.   Chinese aluminium exports drop on weak global demand   On the demand side, Chinese exports of aluminium products did not improve in July, signalling weak demand for aluminium products globally. China exported 489,700 tonnes of unwrought aluminium and aluminium products, a drop of 24.9% year-on-year and down 0.6% month-on-month. The cumulative export from January to July 2023 is now at 3.29 Mt, which represents a decrease of 20.7% from the same period last year. In the near term, we believe aluminium prices will remain volatile as the market’s focus will stay on the bigger macro-economic picture with flagging global growth weighing on aluminium demand. We expect prices to start recovering in the fourth quarter on the improving global economy, which will lead to stronger aluminium demand growth. However, the recovery will be slow as demand will only start improving substantially before next year.   ING Forecasts

The Australian dollar’s slide continues Evergrande bankruptcy raises contagion fears It has been all red for the Australian dollar, as AUD/USD has closed lower for eight straight days and declined 230 basis points during that time. The downswing has continued on Friday, as AUD/USD is trading at 0.6390 in the European session, down 0.20%. There are no Australian or US releases today, so I expect a calm day for AUD/USD.   Evergrande collapse raises contagion fears Chinese economic releases have looked weak in recent weeks, with exports and imports in decline, a slump in domestic demand, and soft services and manufacturing data. The news from Evergrande, one of the country’s largest property developers, is one more headache that the Chinese economy could do without. Evergrande filed for bankruptcy in New York on Thursday. The company defaulted on its massive debt in 2021, which triggered a massive property crisis in China and damaged the country’s financial system. The bankruptcy has raised fears that China’s property sector problems could spread to the rest of the economy, which is experiencing deflation and is suffering from weak growth. There are growing concerns about the stability of the Chinese economy and the Evergrande bankruptcy has raised contagion fears, similar to when the company defaulted on its debt. Australia is particularly sensitive to economic developments in China, which is Australia’s largest trading partner. A slowdown in China has meant less demand for Australian exports, and that has contributed to the Australian dollar’s sharp slide, with the currency plunging a massive 4.93% in August.   In the US, there was unexpected good news from the manufacturing sector on Thursday. Manufacturing has been in the doldrums worldwide, as high inflation and weak demand have taken a heavy toll. The US is no exception, but Philly Fed Manufacturing sparkled in August with a reading of +12, up sharply from -13.5 in July and blowing past the consensus estimate of -10 points.   AUD/USD Technical AUD/USD is testing support at 0.6402. This is followed by support at 0.6319 0.6449 and 0.6532 are the next resistance lines    

Polish construction activity remains lacklustre in July Construction output rose by 1.1% year-on-year in July, from 1.5% a month earlier and significantly below expectations of 2.5%. EU-backed infrastructure projects continue to be the main growth driver, while housing remains a major drag. Civil engineering (which rose by 11.8% YoY, from 5.9% in June) remains construction’s biggest growth driver. This is most likely because there are still incomplete infrastructure projects planned under the last settlement year of the "old" EU budget. The experience of previous EU budget perspectives allows us to assume that dynamic growth in this category will be maintained (or even accelerated) until the end of this year. The construction of buildings, primarily residential, remains the weak spot, falling by 7.8% in July, following a 5.7% decline a month earlier. The number of housing units under construction remains on a strong downward trend from record levels in the first half of 2022 but is still at a fairly high historical level. Moreover, a significant number of apartments continue to be delivered. In the first seven months of this year, almost as many apartments were completed as in the same period in 2022. We expect that smaller developers are completing projects they have started in order to regain liquidity. Combined with weak demand at the turn of the year, the result is a very high number of apartments on offer, enough to cover demand for many months. Therefore, even a significant increase in interest in housing related to the government's "2% Safe Credit" programme will not be enough to substantially improve housing construction this year. Given the number of housing projects started in previous years and the small number of new projects, the downtrend in the construction of buildings should persist or even accelerate until the end of the year. Industrial and commercial construction, especially warehouse halls, remains a positive element but will be significantly insufficient to balance weak housing.

The net short position in USD grew by $490 million to -$16.272 billion over the reporting week after a strong correction a week earlier. The decline is largely related to long positions on the euro, and in terms of other major currencies, the notable trend is selling across all significant commodity currencies (Canadian, Australian, New Zealand dollars, and also the Mexican peso). The yen and franc are slightly doing better, i.e., there is demand for safe-haven currencies and a sell-off in commodity currencies. Since long positions in gold have decreased by $4.5 billion, we can expect increasing demand for the US dollar.     PMIs for the eurozone, the UK, and the US will be published on Wednesday, which can significantly influence the rate forecasts of the European Central Bank, the Bank of England, and the Federal Reserve. Last week, we witnessed a clear uptrend in bond yields, suggesting increased demand for risk amid more upbeat economic reports. At the same time, we see a sharp deterioration in China's economy, which, on the contrary, points to slowing demand. This dilemma may be resolved after the release of the PMIs, so we can expect increased volatility.   EUR/USD The final estimate confirmed that the euro area annual inflation rate was 5.3% in July 2023, with core inflation unchanged at 5.5%. Since there are no seasonal factors that could explain the price increase at the moment, it would be best to assume the most obvious explanation - price growth is supported by broad price pressures in the growing services sector. Stubborn inflation supports market expectations that the ECB will raise rates in September, and this increase is already reflected in current prices. The strong labor market is also in favor of a rate hike. After a sharp decrease a week earlier, the net long position in the euro grew by $1.275 billion, putting the bearish trend into question. The settlement price is below the long-term average, giving grounds to expect a continuation of the euro's decline, but the momentum has noticeably weakened.   A week earlier, we assumed that the bearish trend would continue. Indeed, the euro consistently passed two support levels, but did not reach the 1.0830 level. The resistance at 1.0960, which the euro can reach if a correction develops, is still considered in the long term. We assume that the trend remains bearish, and the 1.0830 level will be tested in the short term. GBP/USD Inflation in July fell from 7.9% to 6.8%. This is mostly due to the fall in the marginal price of OFGEM (Office of Gas and Electricity Markets) from 2500 pounds to 2074. Without this decline, inflation would have still fallen, but much less - to 7.3%. Despite the sharp decline, inflation remains at a very high level, and further falls in the marginal price of energy carriers are unlikely. The NIESR Institute suggests that, among the possible scenarios for future inflation behavior, we should choose between "very high", assuming an average annual inflation of around 5% over 12 months, and "high persistence", which is equivalent to an annual level of 7.4%. Needless to say, both scenarios imply inflation higher than in the US, so the likelihood of a higher BoE rate remains, leading to a yield spread in favor of the pound. These considerations do not allow the pound to fall and support it against the dollar, while against most major currencies, the dollar continues to grow. After three weeks of decline, the long position in GBP grew by $302 million to $4.049 billion. Positioning is bullish, the price is still below the long-term average, but, as in the case of the euro, an upward reversal is emerging.       In the previous review, we assumed that the pound would continue to decline, but UK inflation pressure remains stubborn, which changed the rate forecast and supported the pound. A correction may develop, and the nearest resistance level is 1.2813. If the pound goes higher, the long-term forecast will be revised. At the same time, we still consider the bearish trend, and the chances of restoring growth are high, with the nearest target being the support area of 1.2590/2620.  

While we've understood Federal Reserve Chair Jerome Powell's potential rhetoric, what about European Central Bank President Christine Lagarde's statement? That's much more complicated. The ECB's rate is below the Fed's, yet inflation in the European Union is higher. This single factor suggests that the ECB should agree to additional tightening. However, in recent months, we've repeatedly heard that a pause is needed. A pause doesn't mean the end of the tightening process, but, in a manner of speaking, its final stretch. If Lagarde hints at such a scenario in her speech, the euro will dip even further in the market.     The second crucial factor is the state of the European economy. GDP has been stagnant for almost four quarters, and PMIs keep falling. As a result, every new rate hike will push the European economy into an even deeper hole. It's important for the ECB to maintain a balance between the rate and the economy. Every subsequent ECB meeting is now a mystery. Some members of the Governing Council believe in another rate hike, while others insist on a pause. Lagarde is set to guide the market on Friday. In my opinion, the chances of a dovish stance from Lagarde is much higher. Even if she announces that the current course will be maintained, it doesn't mean all members of the Governing Council will support her stance. From this perspective, the Fed appears to be a more cohesive entity, so the preliminary verdict is as follows: Powell's hawkish stance is more likely, while Lagarde's is "conditionally-hawkish".   This means a further decline for the EUR/USD. As for the GBP/USD, a lot hinges on the 1.2618 mark. A successful attempt to break through it will signal the market's readiness to continue selling, regardless of Powell's remarks in Jackson Hole. Based on all the above, I don't expect the market mood to change on Friday. Both instruments might start forming corrective upward waves, but so far, there are no signs for either. Hence, it's too early to talk about a strong increase in demand for the euro and the pound.     Based on the conducted analysis, I came to the conclusion that the upward wave pattern is complete. I still believe that targets in the 1.0500-1.0600 range are quite realistic, and with these targets in mind, I advise selling the instrument. The a-b-c structure appears complete and convincing. Therefore, I advise selling the instrument with targets set around the 1.0788 and 1.0637 marks. I believe that the bearish segment will persist, and a successful attempt at 1.0880 indicates the market's readiness for new short positions. The wave pattern of the GBP/USD pair suggests a decline within the downtrend segment. There is a risk of ending the current downward wave if it is wave "d" and not "1". In that case, wave 5 could start from current levels. However, in my opinion, we are currently seeing the construction of a corrective wave within a new downtrend segment. If this is the case, the instrument will not rise much above the 1.2840 mark, and then a new downward wave will commence. We should brace for new short positions.  

Metals and global supply chain vulnerabilities Metals are another obvious vulnerability in the global economy, particularly those linked to the green transition. Scarcity due to a lack of production capacity and/or geopolitics are important risks. The challenges in scaling up the production of electric vehicle batteries are a good example, as we highlighted in a recent report. Nickel-based batteries, currently favoured for their superior driving range, not only face constraints from long lead times on new mining development, but 20% of high-grade nickel, the type used in batteries, is sourced from Russia, and trade restrictions are also a key risk for supply. Supply chains of alternative battery technologies – lithium iron phosphate (LFP) and sodium iron (Na-ion) – are almost entirely reliant on China. Geopolitics is clearly a risk here too. That battery story can be expanded to other metals associated with the green transition. While lithium and nickel are the most exposed to critical supply risks, according to analysis by the US Department for Energy (chart below), plenty of others are seen as near-critical. Those include aluminium, where more than 80% of inventory on the London Metals Exchange is Russian material. Meanwhile copper prices – currently dampened by China’s weak recovery – are more likely to rise in the longer term, in part owing to a lack of investment in mining facilities in South America.   Nickel and lithium are most exposed to critical supply risks   Against this backdrop, near-shoring (or “friend-shoring”) will undoubtedly rise – though it’s early days and evidence of companies exiting the likes of China in favour of alternatives is mixed. Green industrial policy, like the US Inflation Reduction Act, is also beginning to reshape supply chains at the margin. Near-shoring is likely to be a slow-moving ship, but ultimately, if firms are trading lower costs for greater resilience, that’s likely to be inflationary. A recent ECB working paper concludes that re-shoring increases the price level for both producers and consumers, particularly in trade-intensive manufacturing. Is any of this capable of pushing inflation to the sorts of levels seen in 2022? Perhaps not. However, the glut of new vehicles and the resulting demand for used cars alone succeeded in adding more than a percentage point to US CPI in 2021. That showed that disruption for key products is capable of generating sizable upward inflation moves.

Strong run continues Chinese data doesn’t hinder the rally Momentum may be key as price approaches August highs   Oil prices are nudging higher again today, technically on course for a fifth day of gains in six in Brent – six in a row in WTI – although broadly speaking they’re just a little above the middle of what appears to be a newly established range. Brent peaked near $88 a few weeks ago and bottomed around $82 last week as we await more direction on the economy and therefore demand. Data this week has been on the weaker side, although it’s the jobs report tomorrow we’re most interested in. The Chinese PMIs overnight had something for everyone. Manufacturing was unexpectedly improved but still contracting at 49.7 while services were quite the opposite, expanding but at a slower pace than anticipated. All in all, it continues to paint the picture of a sluggish economy that’s showing few signs of bouncing back stronger.   Head and shoulders not meant to be The head and shoulders that formed over the last month appears to have failed before it even completed, with the recent rally taking the price above the peak of the right shoulder.     BCOUSD Daily   While these formations are never perfect, as per the textbook, and it could be argued that a decline from here could still potentially qualify as a second right shoulder, that may be clutching at this point. It’s peaked a dollar above, even if it only looks relatively minor on the chart which suggests to me the previous formation – which is only complete with a break of the neckline – is now null and void. Perhaps I can be persuaded otherwise if the price heads south from here. The question now is how bullish a signal this actually is? Are we going to see a run at this month’s highs? A break above $90? I’m not convinced at this stage. Recent momentum looks quite healthy but which could be a promising sign. But that will only be put to the test as we near the previous highs around $88. If the MACD and stochastic keep making higher highs as the price approaches $88 then that would certainly look more promising.  

Peso positives remain in place Physically it looks like the majority of this hedge unwind will hit the USD/MXN market in September. However, the hedge unwind does nothing to reduce one of the key driving factors of peso strength this year – which is the risk-adjusted carry. Even Banxico in its meeting minutes highlights how the risk-adjusted yield is the dominant force in driving the peso. As we highlight below, the peso offers the higher carry-to-risk ratio in the EM space. This is the nominal implied yield available through the deliverable/non-deliverable FX forward market, adjusted by implied volatility from the FX options market. Unless Banxico plans to slash nominal rates or engineer some local factor that would command significantly higher implied volatility for USD/MXN, then this carry-to-risk ratio will remain a major boon to the peso.   EM currencies 'carry-to-risk' ratio and YTD performance versus USD   On the subject of potential rate cuts, it was noticeable that the Mexican TIIE swap curve barely budged on this announcement. If the FX market thinks Banxico may potentially even want to cut rates to put a floor under USD/MXN, the rates market is not buying the story. And Banxico this week has, in fact, said it will not be rushed into early rate cuts. Recall that Banxico had kept policy rates 600bp+ over the Fed to keep USD/MXN stable. We would be more worried for the peso if Banxico did threaten large, early rate cuts. New FX policies from central banks?     We tend to view this as more a commercial and financial stability-led decision from Banxico rather than a formal red flag to further peso strength. As an aside, Brazil’s central bank – the BCB – has a $100bn short USD/BRL position through the FX forwards following intervention and probably would not go near unwinding it for fear of crashing the Brazilian real. Chile’s central bank happens to be buying FX at the moment – but that looks a function of financial stability as it tries to rebuild FX reserves after losing half of them last year. In short, we do not think Banxico’s move is part of an effort to cap the strength in Latin currencies. Instead, we think Mexico’s high carry, decent growth, strong sovereign position and positioning for geo-political nearshoring should mean strong demand for the peso on any weakness this month. Additionally, foreign positioning in Mexcio’s local currency MBONO bond market is not particularly extreme; Mexico should be well positioned to receive funds when bond markets eventually come back into favour given its large 10% weight in the JPM GBI-EM local currency bond index. We currently forecast USD/MXN trading down through 16.50 next year when the broad dollar turns lower on a larger-than-expected Fed easing cycle. We do not think this Banxico announcement necessitates a forecast change, and the peso will comfortably outperform its steep forward curve.          Non-resident holdings of Mexican government securities  

Market outlook Poland is one of the largest railway markets in Europe. Taking into account the strategic investments planned by the government (including the CPK – central transfer hub, regional program aimed at elimination of transport exclusions or the ‘Three Seas’ initiative), next to modernisation ones, the coming years should bring, in our view, high expenditures on the development of the domestic railway infrastructure. Therefore, we expect (1) solid demand and (2) a gradual shift in the company's revenue structure towards a greater sales of new products (accompanied by a relatively stable contribution of revenues from rolling stock modernization and repairs) in the subsequent period. Unfortunately, in the current turbulent business environment, we anticipate continuing demand fluctuations caused by the lack of long-term plans for rolling stock investments and the varying access to funding for such projects.      

China Caixin services PMI slips to 51.8 UK100 erases earlier losses Potential breakout confirmation could be a bullish signal China is continuing its sluggish recovery this year with the latest Caixin services PMI slipping back to 51.8 from 54.1 and well below forecasts. As we saw in the official survey data last week, it highlights the economy is struggling from both weak internal and external demand. Measures to support the economy have been limited and targeted so far and there’s little to suggest that approach is going to change in the foreseeable future. The PMI data may be contributing to the weaker performance in China and Hong Kong overnight and the uninspiring start in Europe.     Confirmation of last week’s breakout in UK100  The chart isn’t offering too many clues either, with early declines erased and the UK100 trading marginally higher on the day. UK100 Daily Source – OANDA on Trading View The index has pulled off its lows over the last couple of weeks after a pretty miserable August but I’m not convinced the last month truly reflects the sentiment in the market going into the end of the year. It’s seen support this morning around 7,400, as it has on a number of occasions in months gone by after running into resistance yesterday around 7,500. That could perhaps be viewed as a bullish signal, a confirmation of the break above 7,400 last week, with 7,500 and 7,600 above the next notable areas of technical resistance. But broadly speaking, this still looks like an index that’s struggling for sustained direction. Perhaps with the end of global monetary tightening almost upon us, the outlook can become clearer which will enable a break in one direction or another.

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

Refined products: Middle distillate tightness to persist Refinery margins have been volatile in recent months due to tight inventories and a number of outages over the summer. We expect margins to remain volatile and relatively elevated given the tightness in middle distillates, along with the lack of new refining capacity.   Volatile and elevated refinery margins likely to remain Refined product markets witnessed significant strength over the northern hemisphere summer, which helped to drive refinery margins to their highest levels since last year. Strength was seen across the board, although it has predominantly been middle distillates which have pushed margins higher. More recently, however, margins have started to give back a lot of these gains. Weakness has been largely driven by gasoline as we come to the end of the summer driving season. Middle distillates have also come under some renewed pressure more recently. The latest release of Chinese export quotas would likely have put some pressure on cracks.   Longer-term, refined product markets remain vulnerable. Inventories are mostly tight and global refining capacity has remained largely unchanged since 2019, with new capacity offset by longer-term closures. This is happening at a time when demand continues to grow, leaving markets tight. While there is spare capacity in China, the ability for significantly more refined products to make it onto the world market is restricted by export quotas. This suggests that refinery margins are likely to remain relatively elevated and volatile for the foreseeable future.   China releases further export quotas A delay in the release of the third batch of refined product export quota from the Chinese government initially provided some support to refined product markets. Uncertainty over when we would finally see this released and the volume of the third tranche were supportive. Recently, the government finally issued the third batch, which amounted to 12 million tonnes, more than the 10 million tonnes the market was expecting. This also means that export quotas released to date total 39.99 million tonnes, above the 37.25 million issued over the whole of 2022. The increase in refinery run rates this year has allowed for a higher quota allocation. However, what is not clear is whether the government will release a fourth batch of export quotas. Much will likely depend on how domestic demand evolves over the remainder of the year. Even if we see further releases, it does not guarantee that further quotas will have to be used before the end of the year. As we saw last year, the government may allow some of these to be rolled over into early next year. Higher export quotas have obviously translated into higher export volumes of refined products. Over the first seven months of the year, refined product exports totalled 36.62 million tonnes, up 46% year-on-year. Diesel exports have seen the largest increase with 8.4 million tonnes exported, compared to just 2.4 million over the same period last year.   China refined product export quota releases exceed 2022 levels (m tonnes)

  Industrial Metals Monthly: China's stimulus in focus Our monthly report looks at the performance of iron ore, copper, aluminium and other industrial metals, as well as their outlook for the rest of the year. In this month's edition, we take a closer look at the recent impact of new stimulus measures introduced in China.   Metals markets assess China policy   China ramping up economic support A mixed picture of China's economy has been painted by the latest releases of official PMI data. While the manufacturing index increased slightly to 49.7 – its third consecutive rise since the lows of 48.8 seen in May – it's still falling short of the 50-level mark associated with expansion.  The non-manufacturing series, which had reflected the bulk of the post-reopening recovery, fell further in August. At 51.0, the index was a little lower than the forecast figures of 51.2 but at least remains slightly above contraction territory.   Meanwhile, the Chinese government has moved forward with a series of stimulus measures designed to turn around the flagging economy and its ailing property sector, which accounts for more than a quarter of China’s economic activity. Included in these measures was the decision to cut down payments and lower rates on existing mortgages. The nationwide minimum down payment will be set at 20% for first-time buyers and 30% for second home buyers. Mortgage rate cuts will be negotiated between banks and customers, and both policies will go into effect on 25 September. The introduction of these measures came after China’s home sales slumped in August. Sales by the country’s largest developers fell 34% from the previous year, according to China Real Estate Information Corp. It was the deepest drop seen in over a year. Further stimulus packages could also be introduced, which could boost the need for industrial metals. So far, Beijing has remained reluctant to back major stimulus that might be necessary to put a floor under falling home sales. News of a surge in home sales in two of China’s biggest cities has offered an early sign that government efforts to cushion a record housing slowdown are helping. Existing home sales for Beijing and Shanghai doubled over the last weekend (2-4 September) from the previous one. Reports of property developer Country Garden avoiding default with last-minute interest payments also restored some additional confidence in China’s property sector.   The metals markets will now be watching how sustainable this pickup in interest is and how long it will last. China’s recovery is still uncertain, and metals are likely to see some continued volatility for a while – at least in the near term. For the remainder of this year, the key factor for the direction of metals prices will be whether China will be able to stabilise its property market. Until the market sees signs of a sustainable recovery and economic growth in China, we will struggle to see a long-term move higher for industrial metals.   Fed pause bets bolster sentiment Sentiment in metals markets also received a boost after last week’s US jobs report that showed a steadily cooling labour market, offering the Federal Reserve room to pause rate hikes this month. Nonfarm payrolls increased 187,000 in August, while hourly earnings rose slightly less than the median economist forecast. The central bank hiked rates by 25 basis points at its July meeting following the recent strength seen in economic data. At the Jackson Hole conference last month, Fed Chair Jerome Powell announced plans to keep policy restrictive until confidence that inflation is steadily moving down toward its target has been fully restored. Over the next few weeks, we'll be keeping a close eye on US data releases which could shed more light on what the Fed may do next.   Higher-for-longer interest rates will ultimately lead to a drop in metals prices September appears set for a pause given recent encouraging signals on inflation and labour costs, but robust activity data means the door remains open for a further potential increase. Markets see a 50% chance of a final hike, while our US economist believes that rates have most likely peaked. US interest rates remaining higher for longer would lead to a stronger US dollar and weakening investor confidence, which in turn would translate to lower metals prices.     US rate cuts to start by the spring   Iron ore rises on China property aid Iron ore prices held above the $100/t mark in August despite China’s worsening property crisis, which in typical years makes up about 40% of demand.   Iron ore has managed to stay above $100/t for most of 2023    

Iron ore prices surged more than 15% over the past three weeks as China has continued its efforts to boost the steel-intensive property sector. Steel mills are also expected to ramp up as the building season begins again this month. However, the uncertainty around mandatory curbs will weigh on the outlook. After China’s steel output climbed to a record of more than one billion tonnes in 2020, the government responded by ordering production cuts in each of the next two years to cut back on emissions and match supply with demand. The intensity and the timeline of production cuts this year are still unknown, but any steel output cut would add to bearish risks for the iron ore market.   CISA daily average crude steel output at member companies   Meanwhile, China’s iron ore stockpiles are hovering around the lowest level since August 2020 as mills have been cautious about restocking amid property woes. From July to August, total iron ore inventories in China across major ports fell 16% to less than 120 million metric tonnes. However, the arrival of the construction season might encourage domestic mills to start restocking. China's iron ore imports in August were at their strongest in almost three years at 106.415 metric tonnes. Low inventories should also support iron ore’s price at elevated levels.   China iron ore total ports inventory   The supply side has been largely stable, with total iron ore production from the top four miners (Vale, Rio Tinto, BHP and Fortescue) ticking up to 539 million metric tonnes in the first half of the year – 4% higher than a year earlier. We believe that with the supply side largely stable, it will be demand in China that will continue to be the main driver for iron prices moving forward. We believe prices will remain volatile as the market continues to respond to any policy change from Beijing. We expect prices to average $105/t in the third quarter, with seasonal demand supporting. We're expecting $100/t in the fourth quarter and we see the 2023 average at $108/t. Risks will remain to the downside heading into year-end amid China steel output cuts, an uncertain outlook for the property sector and healthy supply.   Copper struggles for direction Against the backdrop of an uncertain path of US rate hikes and China’s lacklustre economic recovery, copper has been struggling for direction lately. Beijing’s latest measures to support the housing market helped copper make a recovery from a low in mid-August, but it has failed to hold above the $8,500/t mark.   After two weeks of rising prices, copper is falling again as the market assesses the effects of China’s measures to support its property market and how they might translate into demand for industrial metals.   LME copper warehouse stocks have been rising   Copper’s inventory levels in LME warehouses have been growing, up more than 40% in August after doubling in July. This shows clear signals of weakening demand. They do, however, remain at historical lows. We believe low inventories fuel the possibility for spot prices to rise rapidly if consumption picks up sooner than expected.   China's imported copper demand is showing signs of improvement   The Chinese market has just entered a peak demand season, which should be supportive for copper prices in the near term. China copper ore and concentrate imports are up 9% year-to-date to 18.104m tonnes, while imports in August climbed to all-time highs at 2.697m tonnes ahead of a seasonal pick-up in demand.  Signs of improvement are also emerging for China’s imported copper demand. The Yangshan copper cathode premium – which usually serves as an indicator of China’s import needs – has steadily been moving up over August to stand at $58/mt compared to a year-to-date low of $19.50/mt in March. Still, it remains even below the post-pandemic average of around $65/mt. A boost for China's property sector will be crucial in supporting demand going forward. We remain wary about the short-term outlook for copper, and China remains a key source of caution. We believe commodity-intensive stimulus is needed to support short to medium-term demand growth. In the longer term, we believe copper’s supportive decarbonisation trend should support prices. We maintain our price forecast at $8,400/t in the third quarter and $8,500/t in the fourth quarter, taking the 2023 average to $8,582/t.   Nickel underperforms Nickel has been the worst-performing metal on the LME so far this year, with year-to-date prices down more than 30%. One of the key drivers of the price decline has been the disappointing recovery in Chinese demand, with nickel prices dropping to a one-year low in August. We believe this underperformance is likely to continue amid a weak macro picture and sustained market surplus, with supply from Indonesia continuing to surge to meet the growing demand from the battery sector. In the past, market surpluses have been due to Class 1 nickel – but in 2023, the surplus will be on account of Class 2 nickel.   LME nickel stocks are critically low The LME’s Class 1 nickel stocks are critically low. However, we believe that LME’s new initiative – which has reduced waiting times for approving new brands that can be delivered against its contract – could potentially increase inventories.   China's refined Class 1 nickel output has been increasing in 2023       China’s refined Class 1 output has seen a solid increase in 2023 in response to historically elevated LME prices, and we believe Chinese producers will continue to submit fast-track LME nickel brand applications. This will allow them to deliver their Class 1 material to LME warehouses. The LME has already approved nickel produced by Quzhou Huayou Cobalt New Material Co, a subsidiary of China's Zhejiang Huayou Cobalt Co, as a listed brand in July. GEM Co. Ltd., a subsidiary of Jingmen Gem Co. Ltd. also applied last month to become an LME-deliverable brand. China’s refined Class 1 nickel output jumped 34.5% year-on-year to 129,400 metric tonnes in the first seven months of the year. This was faster than the 33.9% year-on-year increase in the country’s total output of battery-grade nickel sulphate over the same period, according to data from Shanghai Metals Market. Shanghai Metals Market estimates that 145,300 t/y of new refined class 1 nickel production capacity will be added in China this year. We forecast nickel prices to remain under pressure in the short term as a surplus in the global market builds and a slowing global economy mutes stainless steel demand. We see prices averaging $21,000/t in the third quarter and $20,000/t in the fourth quarter. However, the downside will be limited due to tightness in the LME deliverable market. Prices should, however, remain at elevated levels compared to average prices seen before the historic LME nickel short squeeze in March last year due to nickel’s role in the global energy transition. The metal’s appeal to investors as a key green metal will support higher prices in the longer term. We believe that demand for use in electric vehicle batteries remains a key factor for the longer-term narrative for nickel.    ING forecasts      

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

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

Agriculture – USDA projects larger US corn supplies In its latest WASDE, the USDA estimates 2023/24 US corn production to rise by 23m bushels to 15.134bn bushels as a sizable harvest offsets falling yields. As a result, 2023/24 ending stock estimates were increased by 19m bushels to 2.2bn bushels. For the global balance, 2023/24 ending stock estimates were increased from 311.1mt to 314mt, primarily due to higher beginning stocks and rising supply. For soybeans, the USDA slashed its 2023/24 US production estimate from 4,205m bushels to 4,146m bushels due to falling yields. Lower beginning stocks and output mean that US ending stocks were cut from 245m bushels to 220m bushels. The global soybean balance saw 2023/24 ending stocks lowered marginally from 119.4mt to 119.3mt. Lower US supplies were largely offset by reduced demand. Finally, for wheat, the USDA lowered its global ending stocks estimate by 7mt to 258.6mt for 2023/24. The agency expects 2023/24 global wheat production to slide by 6mt to 787.3mt, due to lower production from Australia (-3mt), Canada (-2mt), Argentina (-1mt) and the EU (-1mt). The USDA left the US wheat balance largely unchanged.

WASDE update: Tighter wheat and looser corn market The USDA’s latest monthly WASDE report was constructive for wheat as adverse weather in Australia, Canada and the EU is expected to tighten global supply. However, the release was more bearish for corn on the back of revisions higher to US acreage and ending stocks.   Higher acreage pushes US corn supply up The USDA revised up its 2023/24 US corn production estimates by 23 million bushels to 15.13 billion bushels, with an increase in acreage offsetting lower yields. This is higher than the roughly 15 billion bushels the market was expecting. Planted acreage estimates were increased by 0.8 million acres to 94.9 million acres, whilst yield estimates were lowered by 1.3bu/acre to 173.8bu/acre. With no changes to demand estimates, 2023/24 ending stocks were increased by 19 million bushels to 2.2 billion bushels. This is higher than the roughly 2.13 billion bushels the market was expecting. Therefore, it was not surprising to see CBOT corn coming under pressure following the release. For the global balance, 2023/24 ending stock estimates were revised up from 311.1mt to 314mt primarily due to higher beginning stocks and expectations for larger US output. The market was expecting a number below 310mt, so again, the USDA’s estimate is a lot more bearish than what the market was expecting. It will also provide some comfort to those who have been concerned over lower export availability from Ukraine since the suspension of the Black Sea Grain deal.   Corn supply/demand balance

Lower yields tighten US soybean market For the US, the USDA slashed its 2023/24 soybean production estimates from 4,205 million bushels to 4,146 million bushels on the back of revisions lower in yields, whilst acreage was largely flat. This lower supply was partly offset by downward revisions in demand with export estimates cut by 35 million bushels, whilst domestic demand estimates were lowered by 10m bushels. As a result, 2023/24 US ending stock estimates were reduced from 245 million bushels to 220 million bushels. However, it was still higher than the roughly 213 million bushels the market was expecting. For the global soybean balance, the USDA revised down 2023/24 global ending stocks marginally from 119.4mt to 119.3mt. The market was expecting a number of a little over 118mt.   Soybean supply/demand balance   Unfavourable weather weighs on wheat supply The global wheat balance continues to tighten, with 2023/24 ending stocks lowered by 7mt to 258.6mt, which is quite some distance below just over 264mt as expected by the market. This tightening was driven by revisions lower in supply with 2023/24 global output cut by 6mt. Lower output is largely driven by Australia (-3mt), Canada (-2mt), Argentina (-1mt) and the EU (-1mt), primarily due to unfavourable weather conditions. These reductions were partly offset by expectations for higher Ukrainian output. The main concern for Ukrainian supply is whether it will all be able to make it onto global markets. For the US market, the agency made no changes to the wheat balance.   Wheat supply/demand balance

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.

Eurozone PMI once again signals contraction in activity in September The PMI ticked up slightly from 46.7 to 47.1 in September. This is better than expected but does not ease concerns about a possible contraction in GDP in the second half of the year.   To be fair, the PMIs are getting harder to read at this point. The slight tick-up from last month does end a streak of four consecutive declines in the composite PMI, but it remains firmly in contraction territory. While better than analysts had expected, the overall picture remains rather bleak on economic growth and adds to contraction concerns. Still, at least today’s PMI indicates that the deterioration of conditions has stopped for the moment. Perhaps that’s the glass-half-full take because the underlying picture that the PMI paints is far from positive. The decline in demand is worsening as new orders fell at the fastest pace since late 2020. Manufacturing has performed poorly for quite some time, but the fact that services are the main contributor to the drop in new orders shows that the weakening of demand in the eurozone is becoming more broad-based. Businesses are still working off old orders at the moment, which is keeping output reasonable right now. Still, that suggests a weaker outlook for the months ahead. With hiring slowing to a snail’s pace, concerns about activity in the months ahead remain. Our base case is for a continuation of very slow growth, more or less stagnation, which means that a quarter of negative growth is certainly imaginable. The inflation picture is also getting more complicated. The surge in oil prices and high wage growth have caused input prices to increase again, which is mainly the case for the service sector. In manufacturing, input prices have turned deflationary. Still, the increase in service sector costs has not resulted in accelerated selling price inflation. Weaker demand is resulting in slowing selling prices in services and in outright drops in prices for manufacturing. Music to the ears of the European Central Bank, no doubt.

Surging oil prices: a new concern for central banks Life for the European Central Bank has become even more complicated as surging oil prices add to the trilemma of how to balance slowing economies, the delayed impact of the rate hikes so far and still too-high inflation.   Surging oil prices have become the new concern for central banks, aggravating the current trilemma: how to balance slowing economies, still too-high inflation and the delayed impact of unprecedented rate hikes. Interestingly, the answer to this conundrum differs between major central banks. Looking ahead, the recent surge in oil prices will make things even more complicated as it will both worsen the economic slowdown but also push up inflation (or at least reduce the disinflationary trend). Balancing growth and inflation will become even harder and future interest rate decisions will not only be determined by these two variables but also by central banks’ credibility. In this regard, central banks most concerned about their credibility and the longer-term impact on inflation expectations could end up continuing to hike interest rates. In the following article, we will mainly focus on the eurozone and the EC   Oil price rally likely to continue, but it's not sustainable in the longer run Oil prices are currently up by more than 25% this quarter and briefly reached 95 USD/b last week. Our commodities analyst Warren Patterson expects oil prices to break above 100 USD/b in the near term as supply cuts by OPEC+ countries more than offset weaker demand due to the global economy’s slowdown. However, he doesn’t see oil prices remaining above 100 USD/b for long as weaker demand and political pressure to increase supply should help to bring oil prices back to levels slightly above 90 USD/b.   Is this the second wave of inflation that we thought would never come? A few weeks ago, we argued that the current inflation situation is not the same as the 1970s and that a second inflation wave looked highly unlikely. However, we also admitted that in the late 1970s, the second energy crisis was a main driver for the second inflation wave in many countries. In the eurozone, there were three peak periods for inflation in the 1970s. The first was in 1974, when headline inflation was close to 14%; the second in 1977 with headline inflation above 10%, and then again in late 1979 and early 1980 with headline inflation back at double-digit levels. Back then, real wage growth remained positive even during the spikes of the oil crises, which allowed inflation to remain above 7% for more than a decade (1972-1984). Indeed, the countries that experienced higher real wage growth for the period also experienced the highest inflation over this period (see chart below). The current surge in inflation is different in that real wage growth turned negative quickly, which has slowed consumer demand drastically. This makes the chances of a prolonged second spike in inflation much smaller. With inflation currently trending down and wage growth stabilising above 4%, real wage growth is set to soon turn positive again, but we wouldn’t expect it to erase the losses from the past two years. At the same time, it is important to note that government support and employment growth have limited disposable income losses quite substantially.   In the 70s, countries with higher real wage growth also experienced higher inflation    

Crude oil futures in London and New York continue to attract buying interest as the available supply, especially of diesel-rich crude oil from the Middle East and Russia remain tight as producers keep output well below their respective production ability. The current tightness is increasingly being expressed at the front end of the curve, where the premium for near-term barrels of WTI trades compared to the next month has almost reached 2 dollars a barrel, the highest level in more than a year. However, while the short-term outlook points to higher tight supply-driven crude prices, the recent bear steepening move in the US yield curve signals an incoming economic slowdown and with that an increase risk to growth and demand next year.   Crude oil futures in London and New York continue to attract buying interest as the available supply, especially of diesel-rich crude oil from the Middle East and Russia remain tight as producers keep output well below their respective production ability. Not least Saudi Arabia who despite OPEC’s own projection for the tightest market in more than a decade this coming quarter decided to extend its unilateral one million barrels a day production cut until yearend.  That decision along with cuts from others, including Russia, helped drive up the cost of energy, thereby supporting the risk of sticky inflation, and together with a still resilient US economy and strong labor market they recently led the US Federal Reserve to deliver a hawkish pause in their aggressive rate hike campaign, while at the same time indicating that rates may have to stay higher for longer. A signal which helped send US 10-year Treasury yields to a 16-year high while the dollar reached a year-high against a basket of major currencies.      In WTI, the mini correction that followed the recent rejection at $93.75, the double top from October and November last year, seems to have stopped before challenging the first level of support at $87.60, the 38.2% retracement of the latest run up in prices as well as the 21-day moving average. It highlights the current market strength being supported by tight market conditions. A break above $93.75 would bring $97.65 into focus while supporting a fresh attempt by Brent to reach the important $100 per barrel mark. Source: Saxo.   Looking ahead, there is little doubt that until a decision to raise production is made, the global energy market will remain tight, and during this time the risk of a major correction still is relatively low, something that is being reflected in the current positions held by hedge funds and CTA’s, more on that later. However, at the same time the US yield curve is increasingly sending a signal of distress, as recession risks continue to gather momentum, not only in the US but also in Europe where German economic institutes forecast a 0.6% GDP contraction already this year.      What do recent movements in the US yield curve signal? There has been a lot of talk recently about the US yield and the so-called bear-steepening move, and what it signals. Since early July, the US 2-10 yield curve spread has steepened, halving from around -110 basis points to the current -55 basis points. The latest steepening has been driven by a faster increase in the 10-year yield while the 2-year yield held steady amid doubts about how much higher the FOMC will be able to raise rates without damaging the economy.  Bear steepening does not only raise red flags for stock market investors but also the wider economy. Rising long-dated yields has a large and rapid tightening effect on the real economy given the impact on private mortgage rates and corporate borrowing rates. In a situation where the economy is running hot, rising interest rates pose limited risks as rising yields are a normal reaction to robust growth. However, in the current situation where sticky inflation drives long-end yields higher it may pose a threat as the economic outlook looks increasingly challenged and could deteriorate faster. Back to the oil market where the current tightness is increasingly being expressed at the front end of the curve, where the premium for near-term barrels of WTI trades compared to the next month has almost reached 2 dollars a barrel, the highest level in more than a year. Looking further out the curve we find the 12-month spread between December 2023 and December 2024 has jumped to more than 11 dollars a barrel from around 2 dollars back in July. The chart below shows the rising backwardation - higher prices now followed by lower prices later – and the mentioned bear steepening of the US yield curve.  It's often said the oil curve never lies, and it is currently telling us that prices will remain high in the short term before recession risks begin to weigh on demand into 2024. A situation, if realized, that may force OPEC to accept lower prices or forcing an extended period of production cuts.      Speculators onboard the bull train but with some hesitation The latest Commitment of Traders report covering the week to September 19 showed continued belief in higher crude oil prices with hedge funds adding to their long positions in WTI and Brent Crude oil futures. Since June 30 when the latest round of production cuts began to bite, the combined net long in Brent and WTI has risen by 329k contracts (329 million barrels) to 560k contracts. However, looking at how the change has occurred,we find the increase being driven by 171k contracts of fresh longs and a 158k contract reduction in the gross short, and while the WTI long has reached a February 2022 high, the Brent long has not even returned to the March 2023 high. Funds are buying Brent and especially WTI futures, but not at a pace that could be expected given the recent strength and momentum, potentially signaling a battle between current tight fundamental and macroeconomic headwinds pointing to lower prices later. In addition, with almost half of the increase in the net long being driven by short covering, the gross short has collapsed to a 12-year low at just 46k contracts, and while a very small gross short attracts little attention while prices are rising, it will pose a challenge once the technical and/or fundamental outlook turns negative. At that point, a sizable number of longs might be forced to chase a small pool of short positions willing to buy and it may lead to expanded daily trading ranges.        

According to the latest CFTC report, the past week was relatively calm in the futures market. One notable change was the value of the net short yen by position, which corrected by 1.2 billion, while changes in other currencies were minimal. The US dollar's net positioning, after sharply rising the previous week, saw a 0.3 billion correction, bringing it to 8.5 billion, indicating a firm speculative positioning for the dollar. Other factors that supported the greenback are the drop in the number of long positions in oil and especially gold, with a weekly change of -4.8 billion, implying further declines. This often signifies growing bullish sentiment for the US dollar.   The University of Michigan's Consumer Sentiment Index fell to 63.0 in October, the reading was below the forecast of 67.2, reaching the lowest level since May. This marks the third consecutive decline and can be largely attributed to rising gas prices and a decline in the stock market. However, consumer spending remains at a good level despite weaker sentiment in recent months. China's consumer price index remained flat from a year earlier in September, while the Producer Price Index fell by 2.5% as concerns linger about weak demand. Both figures were slightly below consensus estimates. This week's data on industrial production, retail sales, and third-quarter GDP will provide a clearer picture of the impact of the government's additional stimulus measures. The conflict between Israel and Hamas has quickly escalated into the bloodiest clash in the past 50 years from both sides. As both Israel and Iran are minor natural gas exporters, European natural gas prices rose by about 40% last week. Oil markets remain calmer due to reduced demand and excess production capacity. US consumer price inflation for September shows headline prices rose 0.4% month-on-month (consensus 0.3%), and the core index slowed down from 4.3% year-on-year to 4.1% year-on-year, which is a positive sign for the Federal Reserve. There is growing confidence that the Fed's rate hike cycle is coming to an end.   The British pound corrected slightly above the resistance level at 1.2305 and then resumed its decline. It is assumed that the local peak has been formed, and the sell-off will continue, with the nearest target being 1.2033 (the low from October 4). In case it breaks below this level, selling pressure may intensify, with the long-term target being 1.1740/90.  

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.

Eurozone is likely in a shallow technical recession The November PMI does not provide much evidence that eurozone GDP growth will turn positive in the fourth quarter, but the good news is that the downturn is not deepening. We’re currently likely in a very shallow technical recession. The eurozone composite PMI ticked up from 46.5 to 47.1 in November, which still indicates a contraction in business activity. New orders continue to fall as backlogs of work are being depleted. This is more so the case for manufacturing, where the downturn is deeper than for services. Still, new orders fell slightly less in November than in October. This confirms the view that the downturn is not worsening at the moment, but there is little evidence of recovery either. Overall, it looks like this is a shallow technical recession. The employment outlook continues to deteriorate. Services job growth had kept overall employment growing up till now but the survey suggests that employment in this sector is now growing at a snail’s pace. With manufacturing shedding jobs, this is resulting in a marginal downturn. To us, this fits into the bigger picture of a labour market weakening on the back of a few quarters of negative growth. Inflation is on a solid downward trend, but the PMI indicates that input cost pressures remain and that selling price inflation ticked up in November compared to last month. This is mainly coming from services as prices in manufacturing continue to fall. This serves as a warning that inflation pressures are not over yet, even though inflation does continue to move in the right direction with demand having weakened materially.

  Foot Locker Q3 24 – 29/11 – back in August Foot Locker shares plunged to a 10-year low, just below $15, after sliding to a loss in Q2 of $0.05c a share and falling short on revenues at $1.86bn. Inventory levels came in higher than expected, with signs of softening demand in July. The retailer also slashed its full profit outlook from between $2 and $2.25 to $1.30 and $1.50, as well as pausing the dividend. Since then, the shares have rebounded, helped by stronger numbers from the likes of sector peers like Nike and JD Sports, who own the Finish Line brand in the US. For Q3 revenues are expected to come in at $1.97bn while same store sales are expected to decline by 9.7%, while profits are forecast to plunge from $1.27c a share to $0.26c a share.    

Warm weather spells trouble for Natural Gas US natural gas prices experienced a noticeable decline with NATGAS trading nearly 4% lower at the start of the week. This downturn can be attributed to the prevailing forecasts indicating a shift towards warmer weather in the United States in the coming days as the expectation of milder temperatures has cast a shadow on natural gas prices as it suggests a potential decrease in demand, particularly at the start of the heating season.    Projections for the next 8-14 days consistently point towards above-average temperatures spanning a more extensive geographic scope across the United States and this prediction of higher-than-average temperatures intensifies the downward pressure on natural gas prices.   Looking at the technical situation shows the persistence of a bearish trend since the end of October 2023.   This further reflects the delicate balance between weather forecasts, demand dynamics, and market trends, emphasizing the sensitivity of natural gas prices to external factors.   While this appears to be the current situation, a sudden shift towards a colder climate prediction could bring a significant rebound of prices in the near term.   

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

CAD: BoC to make dovish shift more gradually than the Fed The Bank of Canada announces monetary policy today and will almost surely keep rates on hold. As discussed in our BoC preview, the focus is on whether the Bank is ready to deliver a Fed-like dovish pivot. We think it may be too early for a radical shift in the policy message. December’s core inflation figures were hotter than expected, with the trim measure rising from 3.5% to 3.7% and the median measure holding at a revised 3.6%. That may well be enough to outweigh concerns about a cooling off in the jobs market: full-time employment declined by 25k in December. While the hawkish bias should be softened and the discussion on rate cuts opened, we think the BoC will fall short of the dovish stance expressed by the Federal Reserve in December. Expect the policy message to include concerns about the path of inflation and readiness to keep policy restrictive for longer if necessary. Markets are pricing in around 110bp of tightening by the BoC in the next 12 months: we suspect today’s meeting will fail to endorse those expectations, and CAD can find some moderate support. Still, we expect USD/CAD to find good demand below the 1.34 mark.