divergence

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.  

France/Germany flash PMIs (Jun) – 23/06 – One of the more notable trends we've seen in recent months has been an ongoing divergence between services sector activity and manufacturing activity. This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Services continues to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling coming at 47.1 in May, while services also slowed to 55.2 from 55.9. Lower fuel costs may offer some support here; however, most services providers are struggling with higher costs, which by and large they are able to pass on.

The USD/JPY pair has barely managed to break above the resistance level of 143.80, opening up the next target level at 144.73. Two factors hinder the dollar's growth: divergence with the oscillator on the daily chart and investors' fear of intervention by the Bank of Japan, which is ready to support the national currency, as was the case on November 10, 2022 (the dollar fell by 550 points) - the intervention began from the level of 146.40.   For now, the price can safely rise to the first target resistance level at 144.73, and even the divergence will not hinder it. However, a reversal may occur at that level. If the divergence is broken, the pair will continue to rise to the nearest embedded line of the ascending price channel, clearly visible on the weekly chart, with 147.40 as the target.     Intervention is highly likely to occur from that level. If the price falls below the 143.20 level, the next targets will be 142.30 and 140.35. On the 4-hour chart, the price is steadily rising within the ascending channel (green), and it has consolidated above the resistance level of 143.80.       The Marlin oscillator is suppressed, indicating weak growth. For now, we're waiting for the pair to climb towards the 144.73 target.  

Rates Spark: Long end rates are also diverging Like other central banks, the Fed should reinforce its higher for longer message in today’s minutes. We’re not sure longer-dated rates should care, but even 5Y5Y rates trade like policy divergence is here to stay.   All eyes on Europe's service sector The heavy focus currently placed on service inflation from both markets and central banks means today’s PMI services should prove an interesting addition to the economic debate. The only problem is, the reports are second releases and so it is doubtful whether they will provide a lot of new information. Still, the fear of slower but more deeply entrenched price rises in that sector makes qualitative indicators all the more useful. The value of their employment component also stems from the lack of timely labour market indicators, especially with the European Central Bank (ECB) intent on making policy decisions on backward-looking indicators such as wages. Despite relative resilience in Europe’s service sector – which is perhaps still riding the post-Covid wave of optimism – the deterioration of the outlook in other sectors has driven the outperformance of euro-denominated government bonds relative to their dollar-denominated peers. At the long-end, the euro outperformance has in part reverted a hard to justify convergence of forward rates; for instance, the 5Y swap rate in five years’ time (5Y5Y). This is not the most spectacular case of rates divergence within the developed market interest rates complex, however. Torn between contradictory signals of economic slowdown but sticky inflation, sterling rates have risen well past the value of their US dollar equivalents. Despite the significant flattening of the UK curve over the past month, sterling rates are the only ones displaying a clear upward momentum. The fact is that this cycle’s inflation fight will require a more aggressive tightening campaign on the Bank of England’s part, and will probably be more protracted. This doesn’t mean indicators of long-term rates (such as 5Y5Y swaps) should meaningfully rise above that of the US, however.   Divergence in long-term forwards reflects near-term developments

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

Disinflation continues across Central and Eastern Europe, opening up the possibility of central bank rate cuts. However, lower inflation does not necessarily mean faster rate cuts. The local story will increasingly create divergence across the region.   Poland: Central bank easing around the corner Second-quarter growth in Poland most likely underperformed (with flat or negative year-on-year growth), given poor retail sales, industrial output and a 45.1 point manufacturing PMI reading in June. Consumer sentiment is improving but from a very low level. Moreover, real wages will just start to grow in the third quarter, after around a year of declines. Plus, the government’s cheap mortgage scheme has only recently started, arriving too late to give a boost to housing construction this year. Net exports are to be a key GDP driver this year. We expect no policy changes from the National Bank of Poland in July. However, we estimate that the chances of a rate cut after the August Monetary Policy Council break have increased to 65-70%. This is following the guidance provided by some MPC members, including President Adam Glapinski, and the lower-than-expected June CPI print. We see more than one interest rate cut in 2023 as possible. Our short-term inflation forecast is optimistic, with CPI falling to single digits in August. Our long-term CPI forecasts are substantially far less favourable, however. Core inflation may stabilise around 5% year-on-year in 2024-25 given the tight labour market, the large rise in the minimum wage and the valorisation of 500+ child benefits. The zloty continues to benefit from a mix of the current account surplus, more FX sales on the market by the Ministry of Finance, inflows from foreign direct investment, and portfolio capital. Some investors seem to expect a more market-friendly political environment after the parliamentary elections. We expect all those factors to persist at least until the elections. We expect EUR/PLN to gradually sink to, or slightly below, 4.40 in the coming weeks. Despite higher overall 2023 borrowing needs after the state budget amendment, the government aims to finance them via the reduction of the sizeable cash buffer (PLN117bn as of the end of May) and FX funding, hence limiting Polish government bond (POLGBs) issuance compared to the initial budget bill. In tandem with the expectations for monetary policy easing, this suggests a further drop in yields across the curve and some tightening in asset swaps.    

GBP/USD In a complex and convoluted game shown on Monday, the pound sterling reached the target level of 1.2870. Conditions for divergence with the Marlin oscillator were formed.     But these are bare minimum conditions for a divergence, with the pound's strength, it can easily rise to the next resistance level of 1.3000, and from there it can form a stronger signal for a reversal. The divergence will remain, it will become more light and moderate.     On the four-hour chart, the situation is standard for moderate growth: there was a reversal of the oscillator signal line from the zero line, and the price is rising above both indicator lines. Consolidation above 1.2870 will allow the price to extend its growth. The first sign of a reversal (from the current level) will appear only when the price is firmly trading below 1.2785.  

While other eurozone countries are recording significant declines in headline inflation, the downward trend in Austrian inflation is, optimistically speaking, sluggish. This decreases Austria's attractiveness, both in terms of industry and tourism, and will ultimately lead to a decline in the country's competitiveness   Better than expected, but far from good After the first flash estimates indicated that the Austrian economy had contracted slightly by 0.3% quarter-on-quarter in the first quarter of 2023, the final revision revealed a small increase of 0.1% quarter-on-quarter, which could be considered stagnation rather than growth. While the construction sector and other economic services supported economic activity in the first three months of 2023, the slowdown in activity in the manufacturing, trade and transport sectors had a negative impact. As in the rest of the eurozone, Austria is witnessing a divergence between industry and services. Looking ahead, however, this divergence doesn’t look sustainable. In fact, due to the loss of consumers' purchasing power and accelerating service inflation, the outlook for the services sector is also expected to become gloomier. Sticky inflation to weigh on services sector While other eurozone economies have recorded significant declines in headline inflation, the downward trend in Austrian inflation has been sluggish so far. In June, headline inflation in Austria came in at 7.8% year-on-year, against 5.5%YoY in the eurozone. Compared with the peak reached in October last year, headline inflation in the monetary union fell by 5.1 percentage points. In Austria, the decline in headline inflation between October 2022 and May this year was 3.8 percentage points only – the disinflationary trend beginning to unfold in other eurozone economies is being sought in vain in Austria. This will affect the service sector in two ways. First, private consumption will suffer from persistently high price levels, especially since part of the cost of living is determined by administered prices, which in Austria are mostly indexed and thus increased based on inflation. This applies, amongst others, to public services, the rent of social housing or telecommunications. Moreover, services inflation is tending to accelerate, and there is no sign of an easing of price pressures in the sector. Second, persistently high inflation will cause Austria's tourism sector to lose competitiveness. The hotels and restaurants component of the inflation basket recently became 13.1% more expensive year-on-year, and recreation and culture went up by 7%. In the eurozone, inflation in these categories was 8.4% and 5.7% respectively. If tourism in Austria becomes significantly more expensive than in other eurozone countries, tourists might switch to other holiday destinations. Inflation in the services sector is also likely to be amplified by wage increases. Wages in the Austrian accommodation and food services sector increased by around 28% between the fourth quarter of 2019 and the first quarter of 2023. In the eurozone, wages in the sector came up by 16% over the same period. Strong wage growth in this sector was probably the result of a particularly high lack of skilled workers.

In recent sessions, the price of gold has experienced a retreat, approaching the vicinity of $1,900 per ounce. This raises the question of what lies ahead for gold prices and whether the King of Metals will find support at this level to initiate a bounce back. However, it is worth noting that gold has already demonstrated a strong rebound from its previous low, just below the $1,900 mark. In addition, it has broken its short-term bearish trend and surpassed several static resistances, including the significant level of $1,940. Currently, gold finds itself in a congestion area between $1,955 and $1,970, with the next notable resistances located at $1,985 and eventually $2,000. One important factor to consider is the divergence between gold and long-term real interest rates, which historically has exhibited a correlation of over 80%, particularly in the last five years. This divergence is currently significant and may need to return to more normal levels in due course. While real interest rates have recently experienced a modest decline of around 20 basis points, dropping from 1.79% to 1.574%, sustaining gold at its current levels would require either a significant bond rally or a resurgence of inflationary pressures.     FXMAG.COM: The gold price has made a retreat to the vicinity of $1,900 per ounce. What's next for gold prices - will the King of Metals find support there from which to bounce?   Marco Turatti: Gold has already rebounded strongly from its low just below $1900 ($1892, a strong support area) and has been bid for several sessions (as has Silver) now; besides, it has broken the short term bearish trend that began in early May and also several static resistances including the important $1940 one. It is currently in the congestion area between $1955 and $1970 and the next strong resistances will be at $1985 first and then $2k (as can be seen at approximately 1% intervals). We continue to think that the divergence with long-term real rates - with which historically and certainly in the last 5 years Gold has had a correlation of more than 80% - is considerable and will have to return to more normal levels at some point. It is true that in the last few days real rates have fallen by about 20bps (from 1.79% to 1.574%), but to justify Gold at these levels we will have to see either a notable bond rally or a resurgence of inflationary pressures.      

GBP/USD On Friday, the British pound fell by 42 pips. The signal line of the Marlin oscillator has turned downwards, and the upper band of the descending price channel in green remains untested. Now the question arises - if the pound decides to reverse (or deep correction), will it proceed to test the price channel? The pound tends to test key levels, so it can rise to 1.3180. Price consolidation below 1.3034 will lower such probability.     Bringing the price back to the initial level of speculative growth at 1.2666 on July 6th, when US private sector employment data from ADP was released, will be a challenging task - a four-figure move lies ahead with strong intermediate levels (1.2847, 1.2720). It is possible that the price will reach the designated area in the first week of August (the Federal Reserve's rate decision will be on July 26th, and the Bank of England's meeting will be on August 3rd).     On the 4-hour chart, the Marlin oscillator has come close to bearish territory. Marlin encourages the price to overcome 1.3034 in the near term, but further difficulties may arise, the nearest one is the MACD line (1.2907). The rapid decline of Marlin carries the risk of divergence, in which case the price may rise towards the upper band of the daily chart's price channel.    

Chinese trade data only a temporary distraction Recovery not as bullish as it first appears Divergence a red flag Oil prices are advancing again today after briefly dipping on Tuesday following some weaker Chinese trade figures. While that data did appear to trigger some profit-taking in crude, it was never going to be a game-changer as oil market dynamics have turned much more bullish recently. Furthermore, weak global trade and an uninspiring Chinese rebound this year are not new stories. The numbers were naturally disappointing but nothing more. That the price recovered from the lows yesterday, following a quite large decline, to end the day in the green says everything you need to know.     Momentum is still an issue and it has been waning over the last week or so even as price has made new highs. This could be a sign of exhaustion and unless that changes, these sell-offs will remain a concern and the rebounds unconvincing.       The stochastic and MACD histogram both failed to make new highs last week alongside the price creating a divergence. In itself, that’s not necessarily bearish but it is a red flag and indicates the trend is weakening. With the price now approaching $87-$88, an area that has been a significant zone of resistance this year, it may come as a concern. Of course, momentum could return again and confirm the moves that we’re seeing in the price but as it stands, it’s lacking. The move above the 200/233-day simple moving average band was a very positive move but Brent is up more than 20% since the end of June so a corrective move wouldn’t come as a major surprise.    

Rates Spark: A wedge between US and EUR rates 10Y UST yields have tested 4.36%, with the gap to Bunds opening further. The flash PMIs today shine a light on the contrasting macro backdrops. This is also reflected in real rates having been the driver of the US dynamic of the sell-off, while inflation expectations have played a greater role in EUR.   PMIs today shine a light on the contrasting macro backdrops Upward pressure on rates remains persistent, keeping the 10Y UST yield above 4.3%. Yesterday we also saw the gap to 10Y Bunds widening somewhat, perhaps already in anticipation of the flash PMIs released today. They are set to highlight the contrasting macro backdrops between the US and the eurozone. The eurozone PMIs are expected to show that the economy is increasingly feeling the weight of the European Central Bank’s tightened monetary policy. And that weakness could spread to the services sector, which has so far been relatively resilient while the reading for the manufacturing sector has been in contractionary territory for a year now. A decomposition of the current upward leg in rates, i.e. the rise in 10Y nominal rates since around mid-July, highlights the different narratives underlying the moves in the US and Europe. While in the US the change was mainly driven by the real component, which also reflects expectations of growth, the more moderate rise in EUR rates was largely driven by the rise of the inflation component. That is also likely to cause some headaches at the ECB as it might call into question the bank’s inflation fighting credentials. It has to be seen whether the PMIs today can extend that theme of divergence after the 10Y UST/Bund spread has now widened to 167bp already. There have also been other factors such as supply driving the wedge. For the US that theme had shifted back into focus with the Fitch downgrade of the US and increased issuance prospects, and crystallised in the weak 30Y auction two weeks ago. Tonight the sale of a new a 20Y bond still looms large. But also in the eurozone supply activities are starting to emerge from the summer lull.   Unlike in the US, the sell-off in EUR rates was driven more by inflation   Today's events and market view The main event today is the publication of the preliminary PMIs for August. For the eurozone, the consensus expect the manufacturing PMI to remain unchanged in contractionary territory at 42.7. The services sector is seen further losing momentum with the PMI declining from 50.9 to 50.5. In The US we will also see new home sales data being released. In European primary markets Germany will auction €3bn in 7Y Bunds. Finland will sell a new 5Y bond via syndication. Supranational, Sovereigns and Agencies will see the EFSF tapping a 3Y bond and sell €2bn in a  new 15Y bond. The main focus, as the US remains at the helm of the push higher in rates, will be the new US$16bn 20Y bond sold by the US Treasury tonight. Shortly before that the Treasury will also sell a 2Y floating rate note.

USD/JPY: After testing the target support at 145.90, the USD/JPY pair has been rising for two days. The price may reach the price channel line at 147.80, but it's unlikely to break above it and reach the target level of 148.50. The lack of divergence is still a hindrance to the pair's growth, and there's a good chance that the US dollar will strengthen after tonight's US inflation report.     Given these conditions, the price could test the support at 145.90, supported by the MACD indicator line, and only then will it be able to continue rising if the yen considers this plan. However, if the price settles below 145.90, it will continue to fall towards 144.73.    

Saudi and Russian cuts continue to drive the price higher Could a cooler economy push it back? Momentum indicators continue to support the rally This oil rally has been relentless and I’m not seeing any signs of exhaustion yet. A 15% rally in the space of around three weeks to trade at levels not seen since last November and not far from triple figures, it’s been an impressive move and there could be more to come. Saudi Arabia and Russia have been very effective in squeezing a tight market that much further to create a situation in which oil prices are trading well above the zone they’ve been stuck around for much of the year. You would imagine there’ll be a limit to their ambitions, not to mention their desire to continue the additional voluntary cuts but that may well depend on the demand side over the coming months. They’re committed until the end of the year but if demand softens as those additional cuts expire then the price could cool somewhat. The group has been heavily criticized over the last year for what were labelled unjustified cuts but for the bulk of that time, the price hasn’t risen as much as thought. Is this a sign of cuts going a step too far or will demand weaken to the point of prices pulling back again?   No lack of momentum in the rally The key to this chart after such a powerful rally is the momentum indicators at the bottom and neither the stochastic nor MACD are showing signs of divergence.   BCOUSD Daily Source – OANDA on Trading View That doesn’t mean the price can’t fall or correct lower but it does suggest the rally is healthy, even after such a large move. If the rally does continue, it will be interesting to see whether divergences form on approach to $100. Psychology can often play a role in the markets and that could be the case again. This is also where the price failed last October and November barring a couple of brief moments above. $98 may also be an area of interest having been so at times in the past, although at that point I expect all of the talk will be about whether it can breach triple figures once more, and if so, where next?

EUR: A new PMI test EUR/USD is around 1.0% cheaper compared to its short-term financial fair value at current levels. Normally, only deviations beyond the 1.5 standard deviation band (+/- 1.5% for EUR/USD) are followed by rapid convergences to the fair value. However, we believe the dollar rallied a bit too far yesterday, and there is some room for EUR/USD to tick back above 1.0900 into tomorrow’s European Central Bank announcement (here is our preview). At the same time, much of today’s price action in the pair will depend on PMIs. French and German figures are published ahead of the eurozone-wide numbers this morning. Expectations are modestly optimistic, with the eurozone composite PMIs seen rising from 47.6 to 48.0, led by marginal gains in both services and manufacturing. PMIs are often assessed in comparison with other countries. In the case of the eurozone, against the US and the UK. The consensus for UK PMIs is for a flat 52.1 (composite) reading. Barring a material surprise in the eurozone print, the lingering divergence between contractionary (EZ) and expansionary (UK) PMIs will keep EUR/GBP pressured today.

UK PMIs point to brighter growth outlook but stubborn inflation Unlike the eurozone, the UK's service sector is picking up steam. The issue for the Bank of England is that inflation is also proving sticky, and the PMI highlights the disruption in the Red Sea. Today's data adds to the case for the Bank of England to wait a little longer before cutting rates. We expect a cut in August.   The UK service sector, which accounts for the lion’s share of economic output, edged further into growth in January, according to the latest purchasing manager’s index. What’s particularly interesting is that this extends a recent trend whereby UK service sector growth is apparently accelerating at a time when the equivalent eurozone index is edging further into contraction (though Europe’s manufacturing sector appears to be bottoming out). Before last autumn, the UK’s services PMI had largely tracked what was happening in its closest neighbours. This is another signal that the consensus among economists going into this year, which suggests the UK will underperform most major European economies in 2024, looks a bit too gloomy. While the recent sharp fall in market rates is good news for all economies, in the UK it makes a particular difference to the mortgage squeeze given the relatively high share of households due to refinance this year (around a fifth). Other economies, like France and the US, have a higher prevalence of much longer fixed-rate mortgage products. The anticipation of Bank of England rate cuts also looks highly likely to translate into more tax cuts in the spring, with the Chancellor set to be gifted with around £12bn extra “headroom” to spend whilst still meeting his fiscal rules.   The UK's services PMI has started to diverge from the eurozone   When it comes to rate cuts, the reality is that the BoE is putting relatively little weight on activity data right now. And on inflation, the press release from S&P Global contains a few sentences that policymakers won’t want to hear. There are reports of increased input cost pressures following the Red Sea disruption. It’s worth emphasising though that the PMI is a diffusion index, so it tells us that more firms than before are reporting higher cost pressures, but it doesn’t say anything about the magnitude of the price rises. For now, we don’t think the Red Sea crisis will make a decisive difference to the UK inflation outlook. It may slow the decline in core goods inflation, but ultimately we still expect headline CPI to dip below 2% in April. The PMI also notes ongoing wage pressures in the service sector, and this echoes the BoE's survey of Chief Financial Officers (CFOs) which suggests pay growth expectations have been stuck around 5% for several months now. All of this serves as a reminder that the BoE won’t be rushed into rate cuts this year. Its new forecasts next week will reflect an inflation backdrop that is much improved since the last projections in November. But the committee will want to see more progress on services inflation and wage growth before acting, while a large tax cut package in March would probably be another reason to hold rates higher for a little longer. Our base case is for an August start to rate cuts and 100bp of easing in the second half of the year. Markets have more-or-less aligned with this view too.