economic recovery

EUR: Can China come to the euro's rescue? EUR/USD has quietly slipped below support at 1.0700/1.0720 and may be gently making its way to the March lows at 1.0515/0530. As we mentioned last week, we think   EUR/USD is relatively cheap given the massive reversal in energy prices over the last year and that, in time, the 1.05/1.07 area will come to be seen as a summer base.   Helping that proposition would be some kind of recovery in China. The release of the China Beige Book has shown some recovery in the China manufacturing sector in May.   Official May Chinese PMI figures are released later this week. A bounceback here, helping to reverse the recent run-up in USD/CNH, could provide the euro with some support.   For today, the eurozone focus will be on the release of industrial and consumer confidence figures for May. Consensus expects some further deterioration here and if so this should keep EUR/USD on the soft side. We will also hear from a raft of ECB speakers today.   Expect more hawkish rhetoric especially in advance of the May eurozone CPI data on Thursday. Consensus expects core eurozone CPI to edge lower to 5.5% year-on-year in May. Another upside surprise here – feeding the sticky inflation narrative – warns that investors could return to pricing a 4.00% ECB deposit rate.   - Chris Turner

Europe set for a mixed open, as debt ceiling deal heads towards a vote. By Michael Hewson (Chief Market Analyst at CMC Markets UK) With both the US and UK markets closed yesterday, there was a rather tepid response to the weekend news that the White House and Republican leaders had agreed a deal to raise the debt ceiling, as European markets finished a quiet session slightly lower. The deal, which lays out a plan to suspend the debt ceiling beyond the date of the next US election until January 1st 2025, will now need to get agreement from lawmakers on both sides of the political divide to pass into law. That could well be the hardest part given that on the margins every vote is needed which means partisan interests on either side could well derail or delay a positive outcome. A vote on the deal could come as soon as tomorrow with a new deadline of 5th June cited by US Treasury Secretary Janet Yellen. US markets, which had been rising into the weekend on the premise that a deal was in the making look set to open higher when they open later today, however markets in Europe appear to be less than enthused. That's probably due to concerns over how the economic recovery in China is doing, with recent economic data suggesting that confidence there is slowing, and economic activity is declining. Nonetheless while European stocks have struggled in recent weeks, they are still within touching distance of their recent record highs, although recent increases in yields and persistent inflation are starting to act as a drag. This is likely to be the next major concern for investors in the event we get a speedy resolution to the US debt ceiling headwind. We've already seen the US dollar gain ground over the last 3 weeks as markets start to price in another rate hike by the Federal Reserve next month, and more importantly start to price out the prospect of rate cuts this year. Last week's US and UK economic data both pointed to an inflationary outlook that is much stickier than was being priced a few weeks ago, with core prices showing little sign of slowing. In the UK core prices surged to a 33 year high of 6.8% while US core PCE edged up to 4.7% in April, meaning pushing back any possible thoughts that we might see rate cuts as soon as Q3. At this rate we'll be lucky to see rate cuts much before the middle of 2024, with the focus now set to shift to this week's US May jobs report on Friday, although we also have a host of other labour market and services data between now and then to chew over. The last few weeks have seen quite a shift, from the certainty that the Federal Reserve was almost done when it comes to rate hikes to the prospect that we may well see a few more unless inflation starts to exhibit signs of slowing markedly in the coming months. In the EU we are also seeing similar trends when it comes to sticky inflation with tomorrow's flash CPI numbers for May expected to show some signs of slowing on the headline number, but not so much on the core measure. On the data front today we have the latest US consumer confidence numbers for May which are expected to see a modest slowdown from 101.30 in April to 99, and the lowest levels since July last year. EUR/USD – has so far managed to hold above the 1.0700 level, with a break below arguing to a move back towards 1.0610. We need to see a rebound above 1.0820 to stabilise. GBP/USD – holding above the 1.2300 area for now with further support at the April lows at 1.2270. We need to recover back above 1.2380 to stabilise. EUR/GBP – currently struggling to move above the 0.8720 area, with main resistance at the 0.870 area. A move below current support at 0.8650 could see a move towards 0.8620. USD/JPY – having broken above the 139.60 area this now becomes support for a move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20. Further support remains back at the 137.00 area and 200-day SMA. FTSE100 is expected to open unchanged at 7,627 DAX is expected to open 17 points higher at 15,967 CAC40 is expected to open 30 points lower at 7,273

Weak Chinese manufacturing data put pressure on the single currency as Europe, particularly Germany, is highly correlated with China.   However, the Eurozone's data is not so bad today. The number of unemployed in Germany rose by 9K, down from 23K and 19K in the previous two months. Unemployment is rising much more slowly than in the recessions of 2009 and 2020, and the unemployment rate (5.6%) is low by historical standards.   Second estimates confirmed a 0.2% q/q and 0.9% y/y rise in French GDP in the first quarter, although private consumption fell by a further 1% in April after a 0.8% decline in the previous two months.   For Italy, the final data pointed to economic growth of 0.6% q/q and 1.9% y/y, 0.1 percentage points higher than previously estimated.   Despite the upbeat economic data, the EURUSD fell to 1.0660 in early European trading, its lowest level since 17 March.

Unacceptably high core price dynamics will lend a helping hand to ECB officials pushing for a hawkish line The most likely outcome to this week's inflation releases, still unacceptably high core price dynamics, will lend a helping hand to ECB officials pushing for a hawkish line.   Warnings that hikes may have to continue until September will stand a better chance of pushing longer term rates higher even if a subdued economic outlook, and growing doubts about the strength of China's post Covid recovery, should prevent European rates from rising as quickly as their US peers in the coming weeks. Wider USD-EUR rates differentials should only be a temporary development, however, and one resulting from a rise in global rates.   Market participants who, like us, expect lower rates into year-end, should also consider the possibility of US rates falling faster than their European peers, perhaps to sub-100bp levels for 10Y Treasury-Bund spreads.   This is all the more true since European markets have to contend with another dollop of political uncertainty in the form of early Spanish general elections on 23 July. The prime minister called for a vote after local elections defeat at the weekend and the opposition party PP is on the front foot, although it would likely rely on a coalition with another party due to the fragmented nature of the Spanish political landscape.   Spain’s still wide budget deficit (the European commission forecasts 4.1% of GDP this year and 3.3% next) mean a period of uncertainty is an unwelcome development and could lead to underperformance of Spanish government bonds vs peers such as Portugal and Italy.   Early elections mean Spanish bonds are at risk of underperformance vs Italy and Portugal   Today's events and market view Spain kicks off this week’s inflation releases. This will come on top of Eurozone monetary aggregate data and the European Commission’s confidence indicators for the month of May. One theme in European macro releases has been the softening of survey-based data, such as Germany’s Ifo (see above).   US releases feature house prices, the conference board’s consumer confidence, and the Dallas Fed manufacturing activity index.   Bond supply will take the form of Italian 5Y, 10Y fixed rate bonds, as well as 5Y floating rate bonds.    

A hawkish hold from the Bank of Canada next week We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.   Canadian resilience means a rate hike can't be ruled out The Bank of Canada last raised rates on 25 January and have held it at 4.5% ever since. The statement from the last meeting in April commented that global growth had been stronger than expected and that in Canada itself, “demand is still exceeding supply and the labour market remains tight”. The bank warned that it was continuing to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further” to ensure inflation returns to 2%.   Since then we have had additional warnings from Governor Tiff Macklem that the bank remains concerned about upside inflation risks with the latest CPI report showing a month-on-month increase in prices of 0.7% versus a consensus forecast of 0.4%, resulting in the annual rate of inflation rising to 4.4%. The economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. The resilience of the economy was then emphasised further by first quarter GDP growth coming in at 3.1% annualised, beating the 2.5% consensus growth forecast. Consumer spending was the main growth engine, rising 3.1%.     But we favour a hawkish hold – signalling action unless inflation softens again soon Nonetheless, the BoC accept that monetary policy operates with long and varied lags and continue to believe that “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year”. This will help to dampen inflation pressures and with commodity price softening we still believe that inflation can get close to the 2% target by the early part of 2024.   With the US economic outlook also looking a little uncertain, we doubt that the BoC will want to restart hiking interest rates unless it is certain that inflation pressures will not moderate as it has long been forecasting. Consequently we favour a hawkish hold, signalling that if there isn’t clearer evidence of softening in price pressures it could raise rates again in July.     The loonie's resilience can continue The Canadian dollar has been the best G10 performing currency in the past month, largely thanks to its high beta to the US economic narrative and a repricing of Canada’s domestic rate and growth story. These factors have outshadowed crude’s subdued performance in May and some risk sentiment instability.   A hawkish tone by the Bank of Canada at the June meeting is clearly an important element to keep the bullish narrative for CAD alive. As shown below, the recent repricing in Fed rate expectations caused a rebound in short-term USD swap rates relative to most currencies (like the euro), while the USD-CAD 2-year swap rate differential has remained on a declining path also throughout the second half of May.     As long as the BoC does not push back against the pricing for a hike in the summer, we expect CAD to remain supported. Some lingering USD strength in June can put a floor around 1.33/1.34 in USD/CAD, but we expect a decisive move to 1.30 in the third quarter and below then level before the end of the year.  

Eurozone industrial production up in April but with lots of underlying weakness The production increase in April underwhelms and leaves a good chance of negative overall production growth in the second quarter. The economy, therefore, remains in a stagnation environment as the second quarter is unlikely to show much of a bounceback in economic activity.   The 1% increase in production in April came on the back of a -3.8% decline in March. While this is a disappointing bounceback, the underlying data look worse. Growth was mainly down to a 21.5% increase in Ireland, which has notoriously volatile production data these days. The large countries experienced poor output developments in April. German production was flat according to the European definition, France posted a small 0.8% increase, but Italy, Spain and the Netherlands experienced a contraction of -1.9, -1.8 and -3.5% respectively.   Industrial dynamics provide a mixed picture at best for the sector. New orders have been weak for some time now. Domestic demand for goods has been declining for a while and global activity has also disappointed. Besides that, the catch-up effects from supply chain disruptions have been fading. On the other hand, lower energy prices should work favourably from a production perspective, but overall this is not yet resulting in stronger activity.   This release does not bode well for second-quarter GDP. The small increase in production in April leaves industrial output well below the first-quarter average. Given that May surveys of the sector continue to be downbeat, it is likely that production will contract on the quarter. With retail sales sluggish in April and May surveys pessimistic, don’t expect much of a second quarter in terms of economic recovery after two quarters of negative growth.

Country strategy: Limited short-term risks to the hryvnia Ukraine’s international reserves exceeded nearly US$36bn in May, for the first time since 2011. This reflected continued foreign aid and lower monthly costs of FX interventions (c.US$2bn in May, down from the monthly peak of US$4bn in June 2022). This significantly deceases near-term odds of another devaluation of the hryvnia, as the central bank may prefer a stable currency to combat inflation. The fundamental factors behind the hryvnia remain unsupportive though. Ukraine is running a significant trade deficit, as exports collapsed in 2022, while imports remained quite stable. With the central bank aiming to re-liberalise the FX market at some point this signals risk of further devaluation in the future.   Forecast summary     Positive growth in 2023 to follow 30% GDP wartime losses The Russian invasion in 2022 has brought huge human, social and economic losses to Ukraine. The country’s GDP shrank by nearly 30% in 2022. According to the World Bank estimates, sectoral output declined by about 60% in industry, 25% in agriculture and 20% in services. In the second half of 2022, severe disruptions to businesses were caused by damage to energy infrastructure, which impacted around 40% of Ukraine’s power grids. Out of about 20 million refugees, 8 million are yet to return home. The country’s economy seems to have passed the greatest shock and, on our estimates, real GDP is set to recover gradually and reach 2% positive growth in 2023, and accelerate in subsequent years, driven mainly by consumption.    GDP growth (%)

Bank of Japan keeps policy settings unchanged – for now The BoJ has unanimously decided to maintain its ultra-easing monetary policy as it is still looking for clearer signs of sustainable inflation growth. We believe higher-than-expected inflation, a continued solid economic recovery, and growing pressures from the weaker yen will eventually convince the bank to revise its YCC policy in July.   The Bank of Japan's no change decision was very much in line with market expectations The Bank of Japan's (BoJ’s) monetary policy statement hasn’t changed much at all on its view on the growth and inflation outlook and hasn’t given a hint of any exit plans. The BoJ kept its dovish stance by repeating that “the bank will not hesitate to take additional easing measures if necessary”. What is more worth noting, however, is that the BoJ pointed out that wage gains are expected, accompanied by changes in firms’ price and wage-setting behaviour. We believe that this is the change of structural and behavioural disinflation factor that the BoJ has been looking for.   To be precise, the latest labour cash earnings data were disappointing despite the surprisingly solid Shunto (Spring wage negotiations) results. Thus, an improvement in earnings is another factor to watch to gauge the BoJ’s policy action and we will also see how earnings data unfold in the coming months. We believe that rising asset prices are another important factor in sustainable inflation. With recent rallies in Japanese equity markets and the gradual rise in housing prices, the positive wealth effect is likely to keep inflation above the BoJ’s target, in our view.   Dovish comments from Governor Ueda Governor Kazuo Ueda’s comments at the press conference were no different from what the statement suggested. Ueda is concerned that the outlook for wage growth is highly uncertain and wants to see clearer signs of sustainable inflation. There were no hints about future policy adjustments in his comments.   However, we still think that the BoJ can change its YCC policy in July for the following reasons: First, the BoJ is likely to upgrade its inflation forecast in the quarterly outlook report in July. That could more easily justify the BoJ’s policy action. As mentioned previously, we expect inflation to remain higher for longer than expected.   Second, the overall bond market functions have improved, although there have been some fluctuations since December’s YCC band widening, and the market is not testing BoJ’s YCC upper limit of 10Y JGB. Thus, we believe that the market stress has been reduced, and it is a good time for the BoJ to revisit its YCC policy to reflect changes in market conditions.   Third, a weaker yen will likely add more inflationary pressures. If the BoJ continues to maintain its current policy setting, it would risk leaving the BoJ “behind the curve”. We believe that Japan’s economy is recovering solidly compared to other major economies and will continue to outperform in the future. But, if monetary policy fails to reflect this shift of economic fundamentals and the BoJ keeps its dovish policy, then the yen should depreciate even more.Lastly, by the time of the July meeting, the US Federal Reserve will have already decided on monetary policy, and where the UST will be is another factor the BoJ should consider.   From now on, we will be closely watching upcoming data releases such as June Tokyo CPI, labour cash earnings, and the movement in JPY, to see if these give a clearer signal of sustainable inflation.

Despite the fact that the European Central Bank has much more reasons to consider lowering interest rates compared to the Federal Reserve, the ECB not only raised the refinancing rate but Lagarde practically stated that there would be another rate hike in July. This decision not only contradicts expectations but also goes against common sense to some extent. Of course, this resulted in the dollar's decline, thereby reducing the pressure caused by its apparent overbought condition. However, the European economy is facing serious difficulties associated with the increased cost of energy resources.   The European industry suffers the most. Many, including in the West, are already openly calling what is happening the deindustrialization of Europe. And a strong dollar may somewhat alleviate this negative trend. So, the decisions and intentions of the ECB are more harmful than beneficial to the European economy. Especially considering that inflation in the euro area is slowing down as fast as in the United States. Today's inflation report should confirm the fact of its slowdown from 7.0% to 6.1%. And don't think that the ECB was unaware of this yesterday because we are talking about final data.   The preliminary assessment was already available two weeks ago. In such a situation, the most reasonable approach would have been not to touch interest rates and observe the developments for at least two or three months.   Frankly speaking, the ECB's actions are raising more and more questions. And this naturally leads to an increase in concerns, which are usually referred to as uncertainty risks. Investors typically try to stay away from such risks. Therefore, the euro's substantial growth, which pulled the pound along, is likely to be unsustainable and probably won't last long. The GBP/USD pair has surged in value by nearly 300 pips since the beginning of the trading week.     This movement has resulted in the extension of the medium-term uptrend. Take note that such an intense price change has triggered a technical signal of the pound's overbought conditions. On the four-hour chart, the RSI is at its highest level since autumn 2022, indicating a technical signal of overbought conditions.   On the same timeframe the Alligator's MAs are headed upwards, which points to an upward cycle. Outlook In this case, speculators are disregarding the overbought status, as evidenced by the sustained momentum and the absence of a proper correction. However, this process cannot persist indefinitely, and sooner or later, there will be a liquidation of long positions, leading to a pullback. Until then, traders will consider the psychological level of 1.3000 as the main resistance level.  

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

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

Goldman Sachs eyes a significant crude deficit in the second half of the year Markets price in 25% chance Fed cuts at December 13th FOMC meeting Bitcoin supporter Novogratz expects Bitcoin ETF gets done by end of year   Oil Crude prices are lower as China’s economic recovery stalled and as Libya resumed production at key oil fields.  Oil won’t catch a bid unless China finally unleashes meaningful stimulus that propels large parts of the economy.  Little rate cuts here and there and support for property markets won’t do the trick for revitalizing the China recovery trade.   If China doesn’t appear strong the global growth outlook will get slashed and that could keep oil prices heavy a while longer. WTI crude has major support at the $70 level and should consolidate above here until we hear from Chinese officials at the end of the month.       Gold Gold’s rebound will have to take a break until we know for sure if the Fed is done raising rates at the July 26th FOMC meeting.  The labor market is still hanging in there, but expectations remain for it to gradually weaken.  Earnings season will be key for the precious metal because more Fed tightening might need to get priced in if corporate America is too optimistic about both a recession being avoided and that consumer resilience will remain. Gold may start to form a broadening formation here between the $1945 and $1965 range.   Bitcoin Bitcoin remains anchored until the cryptoverse gets an update with any of the latest bitcoin exchange-traded-fund (ETF) applications. We are approaching crunch time for getting the final comments from all the top Bitcoin ETF applications.  There has been some progress in small crypto companies finding banks that can help facilitate transactions, as Customers Bancorp has emerged as the winner from the downfall of Signature Bank and Silvergate Capital Corp. Bitcoin’s range of $29,500 and $31,500 may hold until we get a major crypto headline.  

The Commodities Feed: Copper drops from three-month high after weak China manufacturing data Copper dropped from a three-month high this morning after weak manufacturing data from China added to concerns over the economic recovery in the world’s biggest metal consumer.   Energy: European economic data helps sentiment ICE Brent maintained the positive trend yesterday and settled at a fresh three-month high of US$85.6/bbl on supply-side risks combined with a positive set of economic data from Europe. Eurozone inflation dropped further to 5.3% in July compared to 5.5% in June and the economics team at ING believes that inflation should be materially lower towards the end of the year. Meanwhile, EU GDP growth returned to positive territory last quarter at 0.3% quarter-on-quarter compared to negative 0.1% in the preceding quarter. On the supply side, the Alberta Energy Regulator reported that crude oil production in Alberta, a major crude oil production region in Canada, dropped by 21% year-on-year to 2.7MMbbls/d in June 2023. The June production numbers do not include production from Suncor, one of the largest producers in the country. Meanwhile, the suspense over Saudi’s plan for September production continues, and the market is waiting for any hint or confirmation during the OPEC+ Joint Ministerial Monitoring committee meeting that is scheduled for this Friday. On the products side, recent market reports suggest that oil processing rates in Russia could move higher in August, as major refineries complete their ongoing spring maintenance and as refineries maximise the operating rates to take advantage of the final month of full government subsidies. Russia has announced it will cut subsidies in half for domestic supplies of diesel and gasoline from September through 2026.

Metals: Chile copper production falls Copper, along with other base metals, traded lower in the morning session as weak manufacturing data from China raised concerns over the expected economic recovery in the country. The Caixin manufacturing purchasing index reached a six-month low of 49.2 in July from 50.5 reported a month earlier. It also remained lower compared to the average market expectation of 50.1. Meanwhile, a struggling real estate sector in China is also weighing on the metals complex. Preliminary data from China Real Estate Information Corp. shows that home sales by the country's biggest developers contracted 33% year-on-year (the most in a year) in July. The latest data from the National Statistics Institute of Chile shows that copper output fell by 1% YoY to 458kt in June due to a slowdown in manufacturing production. Cumulatively, copper output declined by 4% YoY to 2.55mt in the first half of the year, following a series of operational issues this year. As for zinc, LME data shows that total cancelled warrants rose by 7,425 tonnes for a second consecutive day, taking the total to 35,150 tonnes as of yesterday, the highest since 5 August 2022. Most of the inflows were reported from Singapore warehouses. Net increases for July totalled 22,650 tonnes as of yesterday when compared to the net increase of 6,825 tonnes during the same period last month. Meanwhile, total exchange inventories rose by 525 tonnes for a third consecutive day to 99,675 tonnes (highest since 26 April 2022) as of yesterday.

In this interview, we speak with Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd., to gain insights into Turkey's current inflation situation and the effectiveness of the central bank's monetary policy. Turkey has experienced a significant drop in inflation since Ms. Hafize Gaye Erkan took over as the central bank's governor. However, recent CPI and PPI readings indicate that the battle against inflation is far from over. Inflation in Turkey has decreased from a staggering 85.51% in October 2022 to 38.21% in June 2023. Nevertheless, the latest data for July, with PPI at 44.50% and CPI at 47.83%, suggests that inflation remains a pressing concern. The Central Bank of the Republic of Turkey has responded to this challenge by raising interest rates from 8.5% to 17.5%, but questions remain about whether these measures will be sufficient to bring inflation to a single-digit level.   FXMAG.COM: What is your assessment of the CPI and PPI readings from Turkey, and do they allow the central bank to continue too loose a monetary policy? Does Turkey have any chance at all of returning to its inflation target?   Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. The Central Bank of the Republic of Turkey has already gone a long way since Ms. Hafize Gaye Erkan was appointed as the central bank’s new governor. Previously, Turkey’s monetary policy was known to be ultra-accommodative, which provoked inflation that may be hard to imagine in the Western world. Turkey’s inflation plunged more than two times from 85.51% in October 2022 to 38.21% in June 2023, however, the July data of 44.50% for PPI and 47.83% for CPI show that the fight against inflation is certainly not over. After the new governor was appointed, the Central Bank of the Republic of Turkey doubled the key interest rates from 8.5% to 15% and later increased it to 17.5%. While the jump has been rather significant, the interest rates may still be too low to return the inflation to at least one-digit numbers. However, the Central Bank of the Republic of Turkey has expressed that the country’s monetary policy would be further tightened as much as necessary in a timely and gradual manner. Reasons for such an uptick in last month’s inflation may be at least partially related to the government raising taxes in July on fuel and a variety of goods to repair the deteriorated public finances due to the costly presidential re-election campaign and financing needs to recover from the February earthquakes. Governor Hafize Gaye Erkan has announced that inflation may reach 58% by the end of this year (more than doubling the previous forecast) acknowledging that the process of driving down the inflation may take more time than previously expected. It is important to note that driving inflation down is a complicated and time-consuming process, and none of the Western countries have succeeded in reaching their 2% target yet despite aggressive rate hike cycles and considerably lower “starting points” (the highest CPI in the US was 9.1% versus Turkey’s 85.51%). Furthermore, while the commonly accepted target for inflation is 2%, Turkish inflation has not reached this level since 1969. During the relatively low period of inflation in Turkey (2004 – 2018) CPI varied mainly from 6% to 8%. Therefore, these numbers could be more realistic inflation targets for Turkey. In order for Turkey to successfully return to one-digit inflation, its first task would be to stop its currency from depreciating further. Turkish Lira has lost nearly 45% of its value against the US Dollar (USDTRY = 26.9684) this year. For it to happen, Turkey would need to return the investors’ trust in its currency which may not be an easy task to accomplish. However, interest rates have historically proved to be the most effective and easiest-to-control instrument for policymakers to drive down inflation. Therefore, there may be a high chance of further rate hikes in Turkey’s future    

As this week's macroeconomic readings unfold, providing insights into the state of the British economy, certain trends and challenges have emerged. The UK is facing a potential inflation rally, with average wages increasing by 6.9% over the three months ending in May, indicating a competitive labor market that can drive inflation higher. This pro-inflationary factor is closely monitored by the Bank of England, which stands ready to react if necessary. The central bank's ongoing efforts to raise interest rates are aimed at gaining control over inflationary pressures. However, the GDP data for May reflects a recessionary phase, with the economy contracting by 0.1% month-on-month. While this decline was not as severe as initially anticipated, the UK continues to grapple with inflation, logistic chain disruptions, and domestic challenges. Despite the current recessionary signals, there is optimism that the Bank of England's measures will yield positive results, leading to a decline in inflation and a normalization of economic processes. It is hoped that with time, negative statistics will gradually subside.   FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates   The UK faces a risk that the inflation rally will develop further. This week, statistical data has demonstrated that average wage over the three months ended in May increased by 6.9% against a rise of 6.7% earlier. There had been forecast an increase but a less expressed one. The growth of wages shows that the employment market is vigorous enough to compete over labour resources through raising payments. It is an apparent pro-inflationary factor. The Bank of England monitors this and will react if needed. The BoE's interest rate will be growing until inflation gets under control. The GDP data for May in the UK reflected a recession. The economy lost 0.1% m/m after a rise of 0.2% in April. The expectations had been gloomier, suggesting a decrease of 0.3%. The indications of a recession were not unexpected. The UK suffers greatly from inflation, logistic chain breaches, and domestic problems. It is doubtful whether the recession will be profound. Most probably, the Bank of England's effort will soon bring fruit, inflation will go down, and economic processes will start normalising. There might be a month or two more of negative statistics.     What does the industrial production reading from the Eurozone tell us about the state of the European economy and European industry? In May, industrial production in the Eurozone increased by 0.2% m/m, turning out inferior to the forecast. Calculated year by year, it dropped by 2.2% after a rise of 0.2% in April. It is very weak data. It was not unexpected, but the decrease in industrial production had been predicted to be less expressed. The statistics are comprised of extremely high purchase prices and increased salaries, and capacity maintenance expenses. At the same time, enterprises cannot count on future improvements and prefer to decrease production volumes, which allows for cutting down on estimated loss. Most probably, the picture of industrial production will be similar in June.     Visit RoboForex

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    

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

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

China PMIs remain downbeat A further slowdown in the service sector recovery coupled with a slight moderation in manufacturing contraction does not amount to any meaningful improvement to the overall economic backdrop.   Mixed news - but no real improvement in total The latest official PMI data were not uniformly bad. The manufacturing index actually rose slightly, to 49.7, and this is the third consecutive increase since the May trough of 48.8. But it remains below the 50-level that is associated with expansion, and so merely represents a moderation in the rate of decline. That may be of some comfort to those of a sunny disposition.  The non-manufacturing series, which had reflected the bulk of the post-re-opening recovery, fell further in August. The index of 51.0 was a little lower than the forecast figures (51.2) but it is at least still slightly above contraction territory.   China official PMIs (50 = threshold for expansion / contraction)   Brighter signs in manufacturing Looking at the components underlying both series and starting with the manufacturing series: the latest data show an improvement in production to a point which actually points to expansion. That has to be tempered by the forward-looking elements of orders. Here, the data is mixed. Total orders have improved to hit the 50 threshold signalling that contraction has ended. This must be mainly domestic orders, as the export orders series remains bombed out. But that at least provides some encouragement about the near-term outlook.    Manufacturing PMI components   Outlook for service sector remains negative The forward-looking elements of the service sector PMI index remain in contraction territory, unlike their manufacturing counterparts, and that suggests that the headline index has probably not yet troughed and will fall further. A glimmer of hope may be in the export series, which, while clearly continuing to signal contraction, did fractionally rise this month.  Overall, though, both series seem to be converging on a point close to 50 consistent with an economy that is neither expanding nor contracting. Things could be worse. But markets are not likely to take too much comfort from this set of data.      Non-manufacturing PMI sub-components

High 2024 borrowing needs in Poland no longer fundable locally Poland’s government unveiled the 2024 draft budget bill with a cash-basis deficit of PLN164.8bn and record-high net borrowing needs. Next year’s deficit is boosted by a strong rise in spending, while revenues should grow slower due to disinflation. Given the high borrowing needs the Polish budget should become more reliant on foreign financing in 2024.   The budget draft The 2024 draft budget bill approved by the government envisages the central deficit (cash-basis) at PLN164.8bn (vs. PLN92bn targeted this year). The reasons behind the strong rise in the deficit are spending, which grew by 22.5% year-on-year, while total revenues are projected to rise by 10.5% YoY amid further disinflation. What is even more striking is a strong increase in borrowing needs. Net borrowing needs for 2024 are projected at PLN225.4bn (c.6% of GDP). This is up by 55% vs. an already high PLN143bn planned for this year and close to zero in 2020-21. Combined with maturing debt it means that gross borrowing needs are expected to exceed PLN400bn next year.     In 2023 net savings in banking sector covers substantial part of borrowing needs In 2023 the financing of (central budget) borrowing needs is based mainly on local sources, ie, the net savings in the banking sector. It grew fast as high interest rates trimmed demand for new loans, while deposits continued expanding. As a result, the net savings in the domestic banks are expected to cover around two-thirds of the state budget net borrowing needs this year, which are estimated at PLN143bn. Also, the government turned more open to external financing and tapped the Eurobonds markets more eagerly than in the previous year, so overall funding of the budget is very safe.   A strong rise of net borrowing needs requires more external funding on hard currency bonds and POLGBs Net borrowing needs and its financing in 2023 and 2024 (PLNbn)   In 2024 net savings of local banks to grow much slower, while borrowing needs rise and budget requires more external funding than in past years We estimate that in 2024 the net savings in local banking sector may reach an equivalent of about 30% of total borrowing needs, estimated at PLN225.4bn. That is why the Ministry of Finance changed the funding plan, which requires much more external savings. In 2024 the authorities plan to expand Eurobonds issuance by nearly PLN37.8bn vs. PLN13.3bn in 2023 (net). Also, foreign investors’ engagement in Polish government bonds (issued domestically in PLN) may also need to increase as the domestic banking sector may not have sufficient capacity to absorb supply of PLN160.7bn in new PLN-denominated government securities (compared with some PLN62.9bn this year). In detail, the net supply of PLN-denominated government securities is the following: (1) the government intends to sell over PLN54.5bn T-bills in 2024; they will be issued for the first time in a long time (are usually purchased by domestic banks), (2) the supply of POLGBs should reach PLN99.2bn vs. PLN48.2bn in 2023, and (3) the supply of retail bonds is expected at PLN7bn vs. PLN14.9bn in 2023. On the top of that the borrowing needs assumes raising PLN28.6bn from the EU Recovery and Resilience Facility. This source of funds is currently locked due to Warsaw’s conflict with Brussels over the rule of law in Poland.   Summary We expect the Ministry of Finance to keep sizable offers of POLGBs in the second half of the year to take advantage of favourable market conditions. Also, the high cash buffer of MinFin (over PLN130bn at the end of July) will be held and used as a safety buffer to prevent problems with funding. Yet, given that net savings in domestic banks may prove insufficient to cover high government funding in 2024, MinFin is likely to rely on foreign investors, who refrained from increasing holdings of POLGBs in past years.

The third quarter may still be saved by tourism in the eurozone, but the latest data points to a more pronounced slowdown in the coming months. Inflation is falling, but a last interest rate hike in September is not yet off the table. The European Central Bank will be hesitant to loosen significantly in 2024, limiting the scope for a bond market rally.   Business sentiment in contraction territory In spite of heatwaves and wildfires, the tourist season seems to have been strong in Europe. It has continued to support growth in the third quarter following a better-than-expected growth figure in the second quarter. However, with the end of the summer in sight, we're now beginning to see a more sobering economic outlook emerge. The composite PMI survey for August was certainly a cold shower, falling to the lowest level in 33 months at 47 points. While the figure has already been in contraction territory in industry for some time, it has now fallen below the boom-or-bust level in the services sector. Deteriorating order books weighed on confidence in both the manufacturing and the services sector, which also explains why there were job losses in manufacturing while hiring plans in the services sector were put on a slow burner. This will probably stop the decline in unemployment in the eurozone. Disappointing external demand A softer labour market might lead to higher savings rates, thereby countering the positive impact on consumption of rising purchasing power. At the same time, the much-anticipated export boost is unlikely to materialise as the US economy eventually starts to cool while the Chinese recovery continues to disappoint. Finally, with a rapidly cooling housing market on the back of tighter monetary policy, the construction sector is also likely to see a slowdown. All of this explains why we still don’t buy the European Central Bank's story that economic recovery will strengthen on the back of falling inflation, rising incomes and improving supply conditions. We expect the winter quarters to see close to 0% growth, resulting in 0.6% annual GDP growth for both this year and next year.   Cooling housing market is likely to weigh on construction activity   Inflation is coming down, slowly While inflation is clearly trending down, the pace might still leave the ECB uncomfortable. Industrial goods prices have started to fall, but services prices are still growing monthly above 4% in annualised terms. Negotiated wage growth seems to have reached a plateau just below 4.5%. Still, given the slow productivity growth (with the decline in hours worked as one of the important drags), final demand will have to be very weak to prevent higher wages from feeding into higher prices. We expect headline inflation to hit 2% by the end of 2024, but over the coming months, core inflation remains likely to hover around 5%. As the recent trend in underlying inflation is one of the key determinants of monetary policy, this would lead to an additional rate hike.   Loan growth is close to stalling The ECB's job is almost done With credit growth now close to a standstill and money growth negative, there remains little doubt that monetary policy is already sufficiently restrictive and that the monetary transmission mechanism is working. On top of that, the median consumer inflation expectation for the period three years ahead fell back to 2.3% in June. So, it looks as though the job is nearly done. For now, we're still pencilling in a final 25 basis point hike for the ECB's September meeting – but it's a very close call. A pause would likely mean the end of the tightening cycle, as the faltering recovery will make it harder to continue raising rates afterwards. While we see the first rate cut by the summer of 2024, we can't imagine the central bank loosening aggressively next year. In her speech at Jackson Hole, President Christine Lagarde mentioned a number of structural changes that make the medium-term inflation outlook more uncertain, and we think that the ECB will keep short rates relatively high for some time to come. That will probably limit the potential for the bond market to rally strongly in the wake of the expected economic stagnation later this year.    

China’s latest activity data worsened across nearly every component. Markets have given up looking for fiscal stimulus, and have started making comparisons with 1990s Japan. We don’t agree with the Japanification hypothesis, but clearly a substantial adjustment is underway, and we have trimmed our growth forecasts accordingly.   Deflation is very different to this A couple of weeks ago, we wrote a piece debunking an argument that was doing the rounds which argued that China had slipped into deflation and was turning into a modern-day equivalent of 1990s Japan. Being old enough to remember that period quite well (unlike I imagine most of the proponents of the idea), it was clear to us that there was no merit to this view. Firstly, deflation is not negative consumer price inflation. Deflation is a much broader collapse in the general price level, which, in addition to consumer prices includes falls in real and financial asset prices, as well as money wages. And though we have seen some renewed falls in house prices, stocks are not looking very robust, and there is indeed some year-on-year decline in consumer prices, however, money wages are still positive. Moreover, the single defining feature of 1990s Japan was that it was the result of a monetary-induced bubble and subsequent bust. There was a property element to Japan's problems, but much more besides. Japan's response was a massive fiscal expansion, which failed to do much more than saddle the economy with a mountain of debt, and the rest is largely history. China’s issues also concern the property market, but it is the existence of large-scale local government debt that is the main constraint on the recovery. There is little evidence of any financial or property bubble. As a result, the government responses, of which there have already been a great many, have almost entirely focused on supply-side measures, which are only having a very marginal effect on activity.     Local government financing vehicles swell government debt    

Uncomfortably high inflation and wage growth should seal the deal on a September rate hike from the Bank of England. But emerging economic weakness suggests the top of the tightening cycle is near, and our base case is a pause in November. Markets have been reassessing Bank of England rate hikes Rewind to the start of the summer, and the view that the UK had a unique inflation problem had become very fashionable. At its most extreme, market pricing saw Bank Rate peaking at 6.5%, some 125bp above its current level. Since then, this story has begun to lose traction. The differential between USD and GBP two-year swap rates, a gauge of interest rate expectations, has halved. That reflects the growing reality that the UK inflation story looks less of an outlier than it did a few months back. Like most of Europe, food inflation has begun to slow, and further aggressive falls are likely judging by producer prices. Consumer energy bills fell by 20% in July, and another 5% decline is baked in for October. The Bank of England itself is now describing the level of interest rates as “restrictive” – a statement of the obvious perhaps, but nevertheless tells us that policymakers think they’ve almost done enough with rate hikes.   UK and US rate expectations have narrowed   A September hike is likely but November is less certain Still, we’re not quite there yet, and recent inflation data has continued to come in on the upside. Private sector wage growth – measured on a three-month annualised basis – is running at a cycle-high of 11%. Services inflation also edged higher in July, although this was partly attributable to some unusual swings in specific categories rather than broad-based moves. A September hike is therefore highly likely. Whether markets are right to be pricing another hike for November is less certain. We’ll only get one round of CPI and wage data between the September and November meetings. Wage growth is unlikely to have slowed much, but we’re hopeful for early signs that services inflation is inching lower. Various surveys suggest few service-sector firms are raising prices, and we think that reflects the sharp fall in gas prices. A lot also hinges on whether we continue to see signs of weakness in economic activity. Like Europe, the UK’s PMIs look worrisome and will have prompted some pause for thought at the Bank of England. The jobs market is also cooling, and the vacancy-to-unemployment ratio – which BoE Governor Andrew Bailey has consistently referenced – is closing in on pre-Covid highs. There’s also been an ongoing improvement in worker supply. We’re now at a point where survey numbers and various bits of official data suggest that both economic growth and inflation are losing steam. The inflation and wage growth figures aren’t there yet, but these are lagging perhaps most out of all economic indicators. A November pause isn’t guaranteed, but it remains our base case. To some extent, we’re splitting hairs. In the bigger picture, the Bank is becoming much more focused on how high rates need to go – and instead, the central goal will increasingly become keeping market rates elevated long after it stops hiking. Any further rate hikes should be seen as a means to that end.      

The current international debate on whether or not Germany is once again the 'Sick man of Europe' could finally bring about the long-awaited sense of urgency for a new reform programme by the government. It has been the big summer theme in Europe: weak growth, worsening sentiment and pessimistic forecasts have brought back headlines and public discussion about whether Germany is once again the ‘Sick man of Europe’. The Economist reintroduced the debate this summer more than two decades after its groundbreaking front page. The infamous headline seems currently justified when looking at the state of the German economy. The 'Sick man of Europe' debate The optimism at the start of the year seems to have given way to more of a sense of reality. In fact, the last few weeks have seen an increasingly heated debate about Germany’s structural weaknesses under the placative label “sick man of Europe”. Disappointing industrial data, ongoing problems in the energy-intensive industry and a long list of structural problems have fuelled the current debate. And indeed, no other eurozone economy is currently facing such a high number of challenges as the German economy. Cyclical headwinds like the still-unfolding impact of the European Central Bank’s monetary policy tightening, high inflation, plus the stuttering Chinese economy, are being met by structural challenges like the energy transition and shifts in the global economy, alongside a lack of investment in digitalisation, infrastructure and education. To be clear, Germany’s international competitiveness had already deteriorated before the Covid-19 pandemic and the war in Ukraine. To a large extent, Germany's issues are homemade. Supply chain frictions in the wake of the pandemic, the war in Ukraine and the energy crisis have only exposed these structural weaknesses. These deficiencies are the flipside of fiscal austerity and wrong policy preferences over the last decade. Fiscal stimulus during the pandemic years and last year to tackle the energy crisis have prevented the German economy from falling deeper into recession. However, with our current forecast of a contraction of the entire economy by roughly 0.5% over the entire year and yet another contraction next year, the economy would basically be back to its 2019 level in late 2024. There are many varieties of illness and the German economy has clearly caught a few bugs due to its own lifestyle choices.    

Has anything changed over the past two decades? The current economic situation and the public debate in Germany feel eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholy and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then-Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. In the early 2000s, the trigger for Germany to move into the final stage of change management – 'acceptance' (and solutions) – was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. Generally speaking, the current situation is worse and better than the one in the early 2000s. It is better because 20 years ago Germany breached European fiscal rules, while it currently has one of the most solid public finances of all eurozone countries, leaving sufficient fiscal space to react. What is worse is that there is currently a long list of other problems. Finally, low unemployment is a bit of a blessing in disguise. While positive for the economy and very different from 20 years ago, low unemployment also seems to have reduced the sense of urgency for policymakers. Given the multifaceted challenges, it will be harder than it was in the early Noughties to find and then politically agree on a policy answer. Another important difference between the current situation and two decades ago is the external environment. Back then, Germany had some good luck, or put differently, the economic reforms coincided with a favourable macro environment. Think of EU enlargement, which enabled many German corporates to outsource production to much cheaper-wage countries in Eastern Europe. The rise of China on the global stage also brought an almost symbiotic trade partner. China had a strong appetite for German investment goods and at the same time flooded world markets with deflationary policies. Finally, Germany actually benefitted from the euro crisis and the ECB’s "whatever it takes" approach as interest rates were artificially low and the euro artificially weak. None of these factors will sugarcoat any reform efforts at the current juncture. If anything, China has become a rival and competitor and the ECB needs to fight inflation. This lack of any sugarcoating makes the need for reform even more pressing, but will probably also make these reforms initially more painful.  

Waiting for 'Agenda 2030' Structural reforms implemented in the early 2000s were mainly aimed at the labour market. This was known as ‘Agenda 2010’. Today, the German economy needs an ‘Agenda 2030’. Short-term fiscal stimulus can ease the pain but will do very little to regain international competitiveness and restructure the entire economy. What Germany needs is a full menu card with policy measures. These measures could be categorised into those boosting confidence and giving companies security and clarity, as well as supply-side improving measures. In the first category, think of an energy price cap for industry. Not for one winter but for several years. Such a measure should be accompanied by a clear schedule for the energy transition. This would prevent more companies from exiting Germany and producing elsewhere. Combined with fast depreciation rules of investments in digitalisation and renewable energies, this could safeguard the economy’s industrial backbone. With subsidies for sectors like artificial intelligence, batteries or hydropower, the government could support innovation. Finally, less bureaucracy, more investment into e-government and consequently faster public tenders and implementation of federal investments at the regional level would strengthen the supply side of the economy. It is a long list that can easily be extended and broadened. One thing, however, is clear: any overhaul of the economy will be almost impossible as long as fiscal austerity remains the dominant tune. The German economy is in for a longer period of stagnation. The new debate about the ‘sick of man Europe’ could finally increase the sense of urgency among decision-makers; more than a protracted period of de facto stagnation could.  

US spending surges, but it’s not sustainable US consumer spending is on track to drive third quarter GDP growth of perhaps 3-3.5%. However, this is not sustainable. American consumers are running down savings and using their credit cards to finance a large proportion of this. With financial stresses becoming more apparent and student loan repayments restarting, a correction is coming.   Inflation pressures are moderating Today’s main data release is the July personal income and spending report and it contains plenty of interesting and highly useful information. Firstly, it includes the Federal Reserve’s favoured measure of inflation, the core Personal  Consumer Expenditure deflator, which is a broader measure of  prices than the CPI measure that is more widely known. It rose 0.2% month-on-month for the second consecutive month, which is what we want to see as, over time, that sort of figure will get annual inflation trending down to 2% quite happily.   Services PCE deflator (YoY%)   The slight negative is the core services ex housing, which the Fed is watching carefully due to if being more influenced by labour input costs. It posted a 0.46% MoM increase after a 0.3% gain in June so we are not seeing much of a slowdown in the year-on-year rate yet as the chart above shows. With unemployment at just 3.5% a tight jobs market could keep wage pressures elevated and mean inflation stays higher for longer so we could hear some hawkishness from some Fed officials on the back of this. Nonetheless, the market is seemingly shrugging this off right now given signs of slackening in the labour market from the latest job openings data and the Challenger job lay-off series.

Consumer spending is strong, but is unlikely to be sustainable We then turn to personal spending, which was strong, rising 0.8% MoM nominally and 0.6% MoM in real terms. This gives a really strong platform for third quarter GDP growth, which we are currently estimating to come in at an annualised rate of somewhere between 3% and 3.5%. However, the key question is how sustainable this is – we don't think it is. The robust jobs market certainly provides a strong base, but wage growth has been tracking below the rate of inflation. Note incomes rose just 0.2% MoM in July. Maybe it is that confidence of job security that is encouraging households to seek to maintain their lifestyles amidst a cost-of-living crisis, via running down savings accrued during the pandemic and supplementing this with credit card borrowing. The problem is savings are finite and the banks are tightening lending standards significantly. Credit card borrowing costs are the highest since records began in 1972 so there is going to be a lot of pain out there. The chart below shows the monthly flows of excess savings since the start of the pandemic. Fiscal support (stimulus checks and expanded unemployment benefits) more than offset falling income resulting from job losses in 2020. Meanwhile, less spending versus the baseline due to Covid constraints further boosted the accumulation of savings.   Contributions of monthly changes in income and spending to the flow of savings ($bn)     Then through 2021 spending picked up, but then through 2022-2023 the nominal pick-up in incomes has been less than the increase in spending. Consequently we have seen savings flows reverse and now we are running them down each and every month, which is not sustainable over the long term.    Stock of excess savings peaked at $2.2tn, but we have been aggressively running this down ($tn)   Excess savings will soon be exhausted and financial pressures will intensify Based on this data, the $2.2tn of excess savings accumulated during the pandemic, $1.3tn has already been spent. At the current run-rate it will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner. With banks far more reluctant to provide unsecured consumer credit, based on the Federal Reserve’s Senior Loan Officer Opinion survey, the clear threat is that many struggling households may soon find their credit cards are being maxed out and they can’t obtain more credit. With student loan repayments restarting, we expect consumer spending to slow meaningfully from late fourth quarter onwards and turn negative in early 2024.

FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.

Metals – Fresh stimulus from China for the property sector Base metals prices extended this week’s gains this morning as healthy economic data and fresh stimulus measures in China buoyed sentiment. Caixin manufacturing PMI in China increased to 51 in August compared to 49.2 in July; the market was expecting the PMI to remain around 49. This is the strongest manufacturing PMI number since February. Meanwhile, Beijing has announced fresh stimulus measures aimed at supporting the property sector. The People’s Bank of China has lowered the minimum downpayment for mortgages for both first-time buyers (from 30% to 20%) and second-time buyers (from 40% to 30%) while the minimum interest premium charged over the Loan Prime Rate has also been reduced. China is also allowing customers and banks to renegotiate interest rates on existing housing loans which could reduce interest expenses for borrowers. LME continues to witness an inflow of copper into exchange warehouses. LME copper stocks increased by another 3,675 tonnes yesterday, taking the total inventory to a year-to-date high of 102.9kt. Meanwhile, cancelled warrants for copper remain near zero levels, hinting that there may not be any inventory withdrawals from LME in the short term and total stocks could continue to climb over the coming weeks. Europe witnessed an inflow of 2,700 tonnes yesterday whilst 950 tonnes were added in the Americas and 25 tonnes in Asia. Gold prices have held steady at around US$1,940/oz as the latest economic data from the US eased some pressure on the Federal Reserve to continue with rate hikes. The core PCE (Personal Consumption Expenditure) deflator in the US increased at a flat 0.2% month-on-month in July, the second consecutive month at 0.2% which should help the Fed in getting inflation back on track to around 2%. On the other hand, data from Europe was not that supportive with core CPI falling gradually from 5.5% to 5.3% and CPI estimates remaining flat at 5.3%. The focus is now turning to today’s US non-farm jobs report which is expected to show a smaller rise in payrolls in August.

Spanish tourist season on track to beat pre-Covid levels for the first time 10.1 million foreign tourists visited Spain in July, surpassing the levels seen before the Covid-19 pandemic in July 2019. With such strong figures, it's very likely that more foreign tourists will visit Spain this year than in 2019 – but global warming could soon begin to cloud the possibility of further growth.   Number of foreign visitors above pre-covid levels in July Spain is well on its way to matching or even surpassing its 2019 tourist season. According to figures released this morning by Spain's statistical services, 10.1 million foreign tourists visited Spain in July compared to 9.9 million in 2019, the last year before the Covid-19 pandemic. After two years of travel restrictions, Europeans are hungry to travel abroad again and for many, Spain is still an attractive destination. The UK is still the main source country for Spain, accounting for one in five international visitors. Still, the number of UK visitors is lagging behind slightly, standing at 94% of its 2019 level in July. The weak lira may have convinced many British tourists to change their travel destination to Turkey. The number of German tourists is also still a lot lower than in 2019, but this is more than offset by an increase from other countries.   International tourists arriving in Spain   Spain welcomed 71.7 million international visitors in 2022, which was still 14% less than the number of tourists received in 2019. Spain seems on track to shake off the effects of the pandemic and match the number of foreign visitors in 2019. With the tourism industry holding a significant pace in Spain's economy, it is also currently boosting the country's growth. A surge in international tourist arrivals often leads to increased consumption, ranging from accommodation and transportation to dining and shopping. It also stimulates job creation. As a result, we expect decent growth of 0.3% quarter-on-quarter again in the third quarter of this year. Thanks in part to resurgent tourism, Spain remains one of the leaders in the eurozone after the Netherlands plunged into recession and Germany continues to flirt with one.   Global warming could hit Spanish tourism sector For now, Spanish tourism seems little affected by the country's drought and extreme weather conditions, but this could change in the coming years. A recent report by the European Commission estimates that global warming could lead to a shift in European tourist flows away from the southern coastal regions to more northern shores. They estimate that in the most pessimistic scenario, a rise in temperature of either 3°C or 4°C could reduce the number of tourists during the summer season by 10% in southern coastal cities, while more northern coastal cities would see their numbers grow by 5%. Southern Spain in particular would be hardest hit in such a scenario.

RBA expected to pause US nonfarm payrolls rise slightly to 187,000 The Australian dollar has started the week with slight gains. In Monday’s European session, AUD/USD is trading at 0.6464, up 0.21%.   RBA expected to pause The Reserve Bank of Australia is expected to hold interest rates at 4.10% when it meets on Tuesday and a rate hike would be a huge surprise. The central bank has paused for two straight meetings and the odds of a third pause stand at 86%, according to the ASX RBA rate tracker. The most important factor in RBA rate policy is of course inflation. In July, CPI fell to 4.9% y/y, down from 5.4% y/y and better than the consensus of 5.2% y/y. Inflation is moving in the right direction and has dropped to its lowest level since February 2022. A third straight pause from the RBA will likely raise expectations that the current rate-tightening cycle is done but I don’t believe we’re at that point just yet. This is Governor Lowe’s final meeting and he is expected to keep the door open to further rate hikes. Incoming Governor Bullock stated last week that the RBA “may still need to raise rates again”, adding that the Bank will make its rate decisions based on the data. The RBA isn’t anywhere near declaring victory over inflation and has projected that inflation will not fall back within the 2%-3% inflation target until late 2025.   The week wrapped up with the US employment report for August. The Fed will be pleased as nonfarm payrolls remained below 200,00 for a third straight month, rising from a revised 157,000 to 187,000. Wage growth fell to 0.2% in August, down from 0.4% in July and below the consensus of 0.3%. The data cements a rate hold at the September 20th meeting, barring a huge surprise from the CPI report a week prior to the rate meeting. . AUD/USD Technical AUD/USD is testing resistance at 0.6458. Above, there is resistance at 0.6516 There is support at 0.6395 and 0.6337    

Labour shortages are mainly being driven by lower average hours worked Despite the fact that the eurozone economy has broadly stagnated, job creation remains strong and the eurozone labour market seems to be tighter than ever. The good news is that the unemployment rate has fallen to a historic low of 6.4% on the back of this. At the same time, eurozone enterprises now see labour as the largest supply-side problem hindering their business, and the ECB worries that the tight labour market will keep inflation above target for longer. Clearly, the labour market is one of the most important parts of the economy to watch at the moment. Strong economic recovery and ageing populations are often cited as the key reasons for labour shortages. What is often overlooked is the lower number of average hours worked per person that has occurred since the pandemic. While the ECB has previously written about it and President Christine Lagarde mentioned it in her Jackson Hole speech, the extent of the impact of this is very large. The average number of hours worked per person was fairly stable between 2013 and 2019. It experienced a large drop during the pandemic – which was mainly caused by the massive take-up of furlough schemes – but has never fully recovered since. While the recovery is still ongoing, the trend has slowed substantially. This means that more people are needed to do a similar amount of work. At the moment, this equates to 3.8 million more people employed than if everyone was working the average amount of hours they did in the years before the pandemic   The gap in average hours worked amounts to 3.8 million more people in work   This excess of 3.8 million workers equates to about two percentage points of unemployment, adding to a substantial easing of labour shortages. Of course, a lot of people would not have been looking for work in an environment that was not this exceptionally tight, however even using the Abel and Bernanke (2005) Okun’s Law estimate, we find that recent GDP growth should roughly correlate with an unemployment rate of 7.5%. This is by no means high, but it is high enough to not generate meaningful wage pressures, according to the European Commission’s natural unemployment rate estimate. So, the argument that the current economy is so strong that it causes labour shortages does not really hold up, especially given the fact that total hours worked have only just breached pre-pandemic levels. Ageing populations – which are expected to cause the active population to shrink over time – are also not a reason for current shortages, as the number of people at work and looking for work has never been higher than it is now. The main cause for shortages seems to lie in lower average hours worked.   An Okun's law estimate would currently put eurozone unemployment at 7.5%

In a pivotal decision, the Bank of Canada has chosen to maintain its benchmark interest rate at 5%, opting for stability amidst a backdrop of increasing uncertainty in the global economy. This move underscores the delicate balancing act that central banks worldwide are currently navigating as they seek to foster economic growth while mitigating the persistent threat of inflationary pressures.   At the Heart of the Matter The Bank of Canada's steadfast commitment to keeping interest rates at their current level is emblematic of the institution's concerns regarding the fragility of the global economic recovery. While inflation remains a prevalent worry, policymakers are treading cautiously to avoid the potential adverse consequences of premature rate hikes.   A Global Ripple Effect The Bank of Canada's stance on interest rates carries significant implications that extend well beyond its borders. As one of the world's leading economies, Canada's monetary policy decisions hold the power to influence the strategies adopted by central banks in other nations. Additionally, these decisions reverberate through global financial markets, shaping investor sentiment and influencing asset prices. In a rapidly evolving economic landscape, the Bank of Canada's decision to maintain interest rates provides a snapshot of the nuanced considerations faced by central banks worldwide. As they grapple with uncertainty and attempt to strike a delicate balance between economic growth and inflation control, the world watches with keen interest, cognizant of the potential ripple effects that each policy move may bring.   This article aims to provide readers with a succinct yet comprehensive overview of the Bank of Canada's recent interest rate decision and its broader implications within the global financial landscape. Optimized for SEO, it offers valuable insights into the current challenges facing central banks and the evolving dynamics of the global economy.   The decision by the Bank of Canada to maintain interest rates at 5% highlights the central bank's cautious approach to addressing economic challenges. In the face of uncertainties such as the ongoing global supply chain disruptions and the potential impact of new variants of the COVID-19 virus, central banks worldwide are opting for prudence. By holding the benchmark rate steady, the Bank of Canada aims to support domestic economic recovery while closely monitoring inflationary pressures. This stance reflects a broader trend among central banks, as they grapple with the complexities of an ever-evolving economic landscape.   The Bank of Canada's decision will undoubtedly be scrutinized by economists, policymakers, and financial markets, as it provides valuable insights into the delicate balancing act of managing economic growth and inflation in a post-pandemic world. In this interconnected global economy, the implications of such decisions ripple across borders, affecting businesses, investors, and individuals alike.   As economic conditions continue to evolve, central banks remain at the forefront of efforts to navigate the path forward, seeking to foster stability and sustainable growth in an uncertain world. In a rapidly shifting economic landscape, the Bank of Canada's choice to maintain interest rates provides a snapshot of the multifaceted considerations confronting central banks worldwide. As they grapple with an atmosphere of uncertainty and endeavor to strike an intricate balance between stimulating economic growth and effectively managing inflation, the world watches with acute interest. It is well aware of the potential far-reaching consequences that each policy decision can bring.  

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. 

Looking ahead, investors are closely watching the upcoming PMI data releases. The National Bureau of Statistics (NBS) is set to release Manufacturing and Non-manufacturing PMI data on September 30. The Emerging Industries PMI's rise to 54.0 in September, up from 48.1 in August, has boosted expectations for a Manufacturing PMI above 50 for the first time since March. Non-manufacturing PMI is also anticipated to show growth, driven by infrastructure construction and local government bond issuance. The Caixin Manufacturing PMI and Services PMI are scheduled to release on Sunday, October 1. Bloomberg's survey is projecting the Caixin Manufacturing PMI to increase to 51.2, up from 51.0 in August. Having a higher weight in exporters in the eastern coastal regions of China, the Caixin survey tends to be influenced by the export trend in China. The first 20-day trade data in Korea showed a rebound in trading activities with China and pointed to the potential of a positive surprise in this data. But the fact that the Korean data this September had 2.5 more working days might caution such a conjecture. The Caixin Services PMI is expected to tick up to 52 from 51.8. These PMI indicators serve as timely barometers of economic activity and provide insights into the pace of recovery of the Chinese economy. If they come in higher, it will tend to confirm our base case for a gradual recovery in progress and a tactical rally in the making for Chinese equities. Nonetheless, if the majority of them come in lower than expected or even fall, the equity market will be at risk of making new lows. The upcoming PMI data will be pivotal for the near-term direction of the Hong Kong and mainland Chinese markets. It's worth noting that during this period, the Stock Exchange of Hong Kong will be closed for the National Day holiday on Monday, October 2, while mainland bourses will be closed for six sessions to observe the Mid-autumn festival and the National Day holidays from Friday, September 29 to Friday, October 6, 2023.   Crucial Meetings on the Horizon Looking beyond the immediate economic data, several crucial meetings are on the horizon that will significantly impact China's economic and financial policies. The Third Plenary Session of the 20th Central Committee of the Communist Party of China is expected to convene in late October. This session will address critical economic policies and set the strategic framework for economic development over the next 5 to 10 years. Another important meeting is the 6th National Financial Work Conference, which guides major financial system reforms and addresses critical issues in the financial system. It is held every five years, and the last one was held in 2017. While it was initially slated for 2022, it was postponed and is widely expected to be held in Q4 this year. This conference is likely to cover topics such as deleveraging in the property sector, shadow banking, and local government debts. Additionally, it will likely shape the financial system in ways that focus on serving the real economy, the government’s industrial policies, and comprehensive national security. Additionally, the Central Economic Work Conference in December will review the economic performance of 2023 and begin formulating policies for 2024. These meetings come at a crucial juncture for China's economic trajectory and provide an opportunity for policymakers to address pressing issues and shape the country's economic future.   Closing Thoughts In conclusion, the situation surrounding China Evergrande and the broader property developer debt overhang remains a significant concern. There is no expectation of a policy bailout for property developers, and the focus is on clearing housing inventory and completing pre-sold units. Deleveraging efforts will continue in the property sector, shadow banking, and local government financing vehicles. Recent economic data show tentative signs of a recovery in the Chinese economy. The upcoming PMI data releases will provide further insights into the sustainability of this recovery. Beyond that, the forthcoming critical meetings, such as the Third Plenary Session and the 6th National Financial Work Conference, will play a vital role in shaping China's economic and financial policies. In light of these developments, the base case remains a gradual economic recovery. However, it's important to monitor the evolving situation and be prepared for potential market volatility based on the outcomes of these meetings and economic data. For now, a tactical trade to go long on China and Hong Kong equities for Q4 is intact, but investors should remain vigilant and adaptable in the face of uncertainty.

Polish manufacturing bottoming out and producer prices starting to stabilise Industrial production fell 3.1% YoY in September, but there are early positive signs as seasonally adjusted data points to a turnaround. Producer prices (PPI) also started stabilising, but deflation in YoY terms is there to stay for some time   Industrial production fell by 3.1% YoY in September (ING: -3.8%; consensus: -3.0%) with a further deepening of the decline in manufacturing (-3.7% YoY vs. -2.0% in August), though it is worth remembering that September this year had one working day less than in September 2022, what deducted ca 3pp from production in YoY terms. There are, however, some encouraging signs as seasonally adjusted data points to a 0.9%MoM increase in output. It was the second consecutive month of rising activity growth in seasonally adjusted terms.   Industrial ouput bottoming out Industrial production, 2015=100, SA Large annual declines in production were recorded in export-oriented industries: metals (-15.7% YoY), electrical equipment (-15.0% YoY), and electronic and optical products (-10.4% YoY). At the same time, increases were recorded in areas related to investment and energy. Production in the “repair and installation of machinery and equipment” increased by 7.3% YoY. Growth was also observed in the “electricity, gas, steam and air conditioning supply” (+3.7% YoY). This suggests that we should see continued expansion of investment and further deepening of the decline in exports in the composition of 3Q23 GDP.     Economy reached a bottom and should slowly recover Although the headline production indicator on an annual base still looks dismal, the seasonally adjusted data suggests that industry has most likely found the bottom and has started to rebound. Business surveys suggest that the decline in orders is slowing down, which should support a gradual stabilisation and then a bounce back in activity in the coming months.   Producer prices stabilise but the recent decline is yet to pass to consumer prices Producer prices (PPI) fell by 2.8% YoY in September (ING: -3.4%; consensus: -2.7%), following a 2.9% YoY decline in August (data revised). On an annual basis, we still have deflation, but the price level is beginning to stabilise. The MoM decline in prices over the past two months has stalled. Despite strong reductions in wholesale fuel prices, the magnitude of the price decline in the 'coke and refined petroleum products production' category turned out shallower than expected   PPI deflation continues, but price level ceased to decline PPI inflation, %YoY  

Strong Tokyo CPI will likely put pressure on the Bank of Japan The Bank of Japan should be concerned about whether 'higher for longer' inflation could hurt the economic recovery.   Headline inflation in Tokyo topped 3% again in three month Tokyo inflation climbed up to 3.3% YoY in October (vs 2.8% in September, market consensus). Upside surprises came from: Higher than expected pick up in utilities with a reduction of government subsidies and A solid rise in entertainment prices. More importantly, the BoJ's preferred measures of inflation, core CPI excluding fresh food (2.7% vs 2.5% in September & market consensus) and core-core CPI excluding fresh food and energy (3.8% vs revised 3.9% in September, 3.7% market consensus) came out higher than market consensus. Since Tokyo inflation is a leading indicator for nationwide inflation, today's readings showed that inflation has been clearly overshooting the BoJ's projections.  On a monthly comparison, CPI soared 0.9% MoM, seasonally adjusted, in October, with both goods and services prices rising by 1.6% and 0.4% each   Tokyo's inflation reaccelerated in October   Utilities and fresh food prices rose the most, but prices of all other major items gained. In particular, the weak JPY has accumulated pressure on the imported goods prices, and this prolonged pressure pushed up prices of household goods, apparel, and transportation. The rise in entertainment is mostly driven by strong demand from foreign and domestic tourists. Going forward, we expect that base effects will kick in and suppress the headline inflation again by the end of the year, but we will likely witness a stickier than expected inflation trend throughout next year.   Overheated inflation is a risk for the recovery Today’s hotter-than-expected Tokyo CPI reading will likely be a warning to the Bank of Japan. It may still rule out a policy change at its October meeting, but at least we expect the BoJ to change its view on inflation. It is clearer that companies are shifting the pressure of rising input costs to consumers, and the weak JPY is partially contributing to the added pressure on input costs. Also, demand-led price hikes continued on the back of a solid recovery in service activity despite a fall in real wage growth. But, if the yen weakens further and brings about overly heated inflation for longer, it will eventually hamper private consumption even before the BoJ's long-awaited goal of sustainable inflation is accomplished, which is the biggest risk for the BoJ. We are sticking to our call that the BoJ will deliver a policy tweak and revise the inflation outlook meaningfully for FY 23 and 24. And today's outcome has slightly increased our confidence in our non-consensus view. There are more details about the BoJ's next moves in our article earlier this week;  Source: CEIC

Labour hoarding persists in Hungary September brought a tiny weakening in official labour market statistics. However, the changes have been so gradual that the unemployment rate has remained unchanged and is still stubbornly low despite Hungary's economic difficulties.   Unemployment rate remains stubbornly low According to the latest unemployment statistics from the Hungarian Central Statistical Office (HCSO), only a minimal change was seen in Hungary's labour market in September. The model estimate for the ninth month of the year showed a slight improvement (3.9%) in the unemployment rate. Meanwhile, the official three-month moving average of the unemployment rate (based on the survey) remained unchanged at 4.1%. Against this backdrop, the number of those unemployed is estimated to be between 190,000 and 200,000. Unemployment rates are still significantly higher than a year ago. However, given that the overall performance of the Hungarian economy remains weak – even if the underlying expectation is that the third-quarter GDP data will show that the period of technical recession is likely to have ended – the latest series of labour market data can be considered very positive overall.   Historical trends in the Hungarian labour market (%, 3-m moving average) Looking at the monthly data, perhaps the most important change is that the number of non-participants fell sharply by around 47,000, while the number of employed persons rose by 45,500. At the same time, those entering the labour market found jobs straight away, with the number of people in employment rising by almost 50,000 in one month and the number of those unemployed falling slightly by almost 4,000. This suggests that seasonal and technical effects may be the main drivers behind the changes. We find it hard to believe that such a large labour market spill-over has taken place in one month – all the more so given that the labour market data for September are in line with those for June and July. It is therefore likely that the weakening of the labour market in August can be seen as an anomaly.   The monthly changes in the main labour market statistics   Looking at the monthly data, perhaps the most important change is that the number of non-participants fell sharply by around 47,000, while the number of employed persons rose by 45,500. At the same time, those entering the labour market found jobs straight away, with the number of people in employment rising by almost 50,000 in one month and the number of those unemployed falling slightly by almost 4,000. This suggests that seasonal and technical effects may be the main drivers behind the changes. We find it hard to believe that such a large labour market spill-over has taken place in one month – all the more so given that the labour market data for September are in line with those for June and July. It is therefore likely that the weakening of the labour market in August can be seen as an anomaly.   The monthly changes in the main labour market statistics   On this basis, we do not consider the slight change in the labour market indicators to contain any meaningful extra information. Overall, our picture of the Hungarian labour market has not changed – it remains close to full employment and we still see persistent labour shortages.   We don't see major changes in the strength of the labour market ahead We expect similar volatility in the unemployment rate in the coming months, without any structural change. Companies will continue to insist on retaining staff or even hoarding, having learned from the shocks of recent years that it is quite difficult to expand the workforce in a recovery period in an economy with a general shortage of labour. The Hungarian economy is also on the verge of recovery – that is, if disinflation continues to target and EU funds are available soon to draw down to support economic performance. We continue to see inflation as the biggest risk to the labour market. The backwards-looking inflation expectations based on the recent history of inflation and the government's desire to achieve positive real wages could push companies towards higher wage increases. The question is whether employers will be able to absorb these wage increases in the face of external inflationary shocks without further price increases. Our calculations suggest that companies will need to increase labour productivity by 2-3% to avoid a price-wage spiral, based on the roughly 10% wage increase forecasted in 2024. Encouragingly, the repricing of energy contracts at the end of this year promises cost reductions, which may give companies more room to raise wages without profit margin pressure. In addition, the declining but still high interest rate environment may also encourage more efficient investment. If consumption does not explode even if inflation falls sharply (and we see only a slow recovery), a gradual increase in domestic demand is also likely to prevent a renewed rapid rise in prices. The risk of a wage-price spiral therefore remains alive given the tight labour market, but we see a good chance of avoiding it for the time being.

French growth slows sharply despite a rebound in domestic demand French GDP growth slowed markedly in the third quarter, coming in at 0.1% quarter-on-quarter, compared with +0.6% in the second quarter. The details of the figures are solid, with domestic demand rebounding strongly. Nevertheless, the French economy is facing a significant economic slowdown that is likely to persist over the coming quarters.   Weak growth In line with expectations, French GDP growth slowed sharply in the third quarter to 0.1% quarter-on-quarter, following an upwardly revised 0.6% rise in the second quarter. Despite the sharp deceleration in growth, the details of the figures are fairly solid, with domestic demand accelerating and making a very positive contribution to GDP growth (+0.7 points compared with +0.2 points in the second quarter). Household consumption grew by 0.7% over the quarter, after stagnating in the previous quarter, thanks to a rebound in the consumption of capital goods, transport equipment and food. Consumption of services slowed. Investment also accelerated sharply in the third quarter (+1.0% compared with +0.5% in the second quarter), particularly in manufactured goods and information and communication services. However, construction investment stagnated over the quarter. The weak growth in GDP in the third quarter can be attributed to foreign trade, which made a strongly negative contribution (-0.3 points) due to a fall in exports that was greater than that of imports. While inventories were the main contributor to growth in the second quarter (+0.5 points), the situation has reversed, and they are now making a very negative contribution to economic activity (-0.3 points). In short, while the details are fairly good, they do not alter the reality that the French economy is facing a major economic slowdown, and this is likely to continue.    The slowdown is likely to continue The construction sector, for its part, is likely to see its activity continue to weaken due to higher interest rates which are having an increasing impact on demand for credit. The dynamism of household consumption is also likely to moderate over the coming months. While nominal wages have risen, allowing households to regain some purchasing power, the labour market is beginning to show the first signs of weakening, consumer confidence remains low and inflation remains rather sticky. Recent rises in oil prices linked to geopolitical tensions will keep energy inflation buoyant in France until the end of the year and into 2024, which will weigh on purchasing power and limit consumer spending. Retail and services are therefore likely to face weak demand. Ultimately, the French economy is likely to slow further in the fourth quarter. We expect GDP to stagnate over the quarter, which would bring average growth for 2023 to 0.8%. We believe that the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by monetary policy that remains very restrictive. Given the low starting point for the year, average growth in 2024 is likely to be weak, and well below the government's forecast of 1.4%. Our forecast for average French GDP growth in 2024 is 0.6%.

National Bank of Poland set to cut rates in November followed by a pause The first Monetary Policy Council policy decision in the aftermath of general elections should bring further policy easing, but the NBP is likely to be more cautious than before given previous guidance on limited space for further easing. According to the flash estimate, CPI inflation moderated further in October and turned out slightly lower than expected by the markets. In such an environment the policy choice is between holding rates flat and a 25bp cut (to 5.50%) we find as a baseline scenario. The central bank will also release the new macroeconomic projections, which should also bring important policy guidance. Overall, it should point to an economic recovery in 2024, with consumption playing the predominant role. At the same time the inflation path should be adjusted downwards, given the lower starting point, but again it would point at CPI returning to the target of 2.5% (+/- 1 percentage point) in 2025 only. We will also see if a 2026 projection will be added, as this may also bring multiple hints about the next decisions. National Bank of Poland Governor Glapiński's press conference will be closely followed by the markets as it may give some hints on the central bank policy bias ahead. The Council is broadly expected to take a pause in December as rate setters usually avoid making any decisions in the last month of the year unless there is a pressing urgency for policy actions and we do not see it to be the case this year. The pause may be extended into the following months as the Monetary Policy Council will want to see the impact of administrative and political decisions. There is a lot of uncertainty regarding the 0% VAT on food, regulated prices of electricity and gas, policy measures to trim a jump in energy costs and its impact on inflation at the beginning of the year. We do not rule out that the Council may refrain from any policy moves until the March NBP staff projection, in order to get a clearer picture of inflation prospects. The fiscal outlook also gives arguments for a more cautious approach with respect to policy easing. The 2024 draft budget prepared by the incumbent Law and Justice (PiS) government had already envisaged a sizable fiscal gap (close to 5% of GDP and 6% of GDP borrowing needs). The new coalition government by the former opposition (Civic Coalition, Third Way, New Left) is likely to pursue delivering on some of its fiscal pledges from campaign, driving the 2024 fiscal deficit towards 5.5-6.0% of GDP and borrowing needs to 7% of GDP).

Retail sales and construction point to signs of recovery in Poland Retail sales showed the first signs of annual growth since January, rising by 2.3% YoY. Construction output also expanded by 9.8% YoY, pointing to a solid start to the fourth quarter for the Polish economy. This recovery should continue on the back of reviving private and public consumption, and in 2024, GDP could grow by around 3%.   A solid start to the fourth quarter for retail sets the stage for consumption bounce back Retail sales of goods rose by 2.8% year-on-year in October (versus our expectations of 2.3% and the consensus view of 1.4%) after shrinking by 0.3% YoY a month earlier. This was the first increase in goods sales in real terms since the turn of 2022/23. The seasonally adjusted data showed the fifth consecutive month of sales growth. The highest double-digit increases were recorded in fuel sales (16.7% YoY) and car sales (12.3% YoY). Weakness persisted in sales of durable goods other than auto. Double-digit declines were recorded in the furniture, consumer electronics, and household appliances category (-10.9% YoY) and in the group comprising newspapers, books and other sales in non-specialised shops (-11.1% YoY).   Retail sales turned positive again after months of declines Retail sales of goods, %YoY   The start of the fourth quarter of this year is encouraging for the retail trade. The recovery of real household disposable income is continuing. In October, real wages in the corporate sector increased by nearly 6% YoY. Consumer sentiment – including willingness to make major purchases – has been steadily improving since the beginning of the year. We expect the fourth quarter to see a year-on-year increase in household consumption, with a further rebound continuing into 2024. Next year, economic growth should reach 3%, driven mainly by private and public consumption growth. Private consumption would be supported by an increase in real disposable income due to lower inflation, while public consumption would benefit from high valorisation of social benefits (with more than 800 pensions) and planned salary increases in public services and administration.   Construction output growth still close to double-digits Construction output jumped up by 9.8% YoY in October after 11.5% in September, slightly below the market consensus of 10.5%. The annual growth was supported by a higher number of working days (22 vs. 21 a year earlier) and favourable weather conditions for construction activity (the average air temperature was 10.9˚C, 2.1 ˚C higher than the multi-year average for that month). On a monthly basis, output rose by 2.5% MoM after 11.4% in September, although on a seasonally adjusted basis, it fell by 1.1% MoM.   Almost double-digit growth in construction Construction output, %YoY

No surprise in November The National Bank of Hungary (NBH) reduced its base rate by 75bp to 11.50% at its November rate setting meeting. At the same time, the entire interest rate corridor was lowered by 75bp, maintaining the symmetry of the +/- 100bp range. Although this was again a unanimous decision, the menu seen in October was also present at this rate-setting meeting. That is, the Monetary Council decided between a 50, 75 or 100bp cut. The statement and press conference made it clear what the reasoning was for sticking with the proverbial golden mean.   The pros and cons canceled each other out A hawkish shift compared to the October meeting was dropped due to favourable incoming macroeconomic data. Hungarian inflation returned to single-digit territory, with the underlying monthly repricing pattern showing similarities to 2019-2020 (pre-shock pattern). The improvement in the external balance continued on the back of rising export capacity, supported by shrinking domestic demand, which reduced import needs and the energy balance also improved. Last but not least, together with the ongoing disinflation, the Hungarian economy exited the recession and the incoming high-frequency data suggest that the year-on-year print could return to positive territory from the fourth quarter of 2023. However, all these positive changes have been accompanied by significant external risks. Geopolitical tensions and sanctions are still with us, and we can't rule out another shock to energy and commodity markets as a result. The armed conflicts in Ukraine and Gaza keep the economic landscape highly unpredictable. On the macroeconomic side, there are ongoing labour market tensions and recessionary fears in the international environment. Against this background, the Monetary Council decided to maintain its cautious approach and closed the door on the dovish 100bp easing option.   Steady as she goes Even before today's official and explicit forward guidance, we expected the National Bank of Hungary to stick to the recent step size as the baseline pace of further rate cuts. During the background discussion, Deputy Governor Virág made it clear that – based on the latest information – the policy rate could fall below 11% by the end of the year and reach single digits in February 2024. We wouldn't go so far as to say that this is a pre-commitment, but it's certainly the closest thing to it. Such a rate path would imply a continuation of 75bp rate cuts up to (and including) the February rate-setting meeting. In general, the statement and the press conference did not bring any changes either in the tone of monetary policy or in the main functions that influence monetary policy decisions. As a result, today's rate-setting meeting can be described as a well-managed non-event.   Our market views After the NBH meeting, everything seems to be in line with market expectations and rates have not moved much. This is good news for the HUF, which has re-established a relationship with rates over the last three days and has weakened to 380 EUR/HUF before the meeting. Still, the recent rally in rates points to weaker HUF levels, but this will probably not be the case for now. A stable NBH and higher EUR/USD could offset this, plus we could see some progress in negotiations with the EU in the near term. Overall, today's meeting thus seems to be positive for HUF, which will halt the weakening from recent days. In the short term we probably need to see some catalysts for new gains, e.g. the EU story, but overall we remain positive on the HUF. If everything goes in a positive direction, then we believe EUR/HUF will move into the 370-375 range before the year ends. On the other hand, the current weakness probably hasn't changed the market's long positioning much and we should still keep that in mind if bad news comes. Rates have rallied a lot in recent weeks and have closed the biggest gaps between market pricing and our forecast. But something is still missing to perfection and we still see the whole curve lower but rather flatter later. At the short end of the curve, we think the market needs to accommodate the set pace of 75bp rate cuts as the central bank confirmed today, while the long end remains significantly elevated also because of high core rates. Thus, as we mentioned earlier, the long end in our view has more potential to rally further and the curve has steepened too early and too quickly, closing the gap with the region.

Poland: Solid labour market supports bounce back in spending A rebound in real wages and relatively stable employment are great starting points for a recovery in household spending. Economic growth in 2024 may reach around 3% on the back of both private and public consumption. The pro-inflationary structure of GDP may encourage the MPC to keep rates unchanged in 2024. Average wages and salaries in the enterprise sector rose by 12.8% year-on-year in October (ING: 13.0%; consensus: 11.7%), following an increase of 10.3% YoY in September. Higher annual wage growth than the previous month was a consequence of a more favourable pattern of working days and bonus payments. Average paid employment was slightly lower (-0.1%) in October than in the corresponding month of 2022 (ING and consensus: 0.0% YoY). Compared to September, the number of posts was down by 2,000 and this was the third month of decline in employment levels, albeit still on a modest scale. In real terms (after adjusting for the rise in consumer prices), average wages increased by 5.8% YoY showing the strongest increase since February 2019. Elevated wage pressure will be visible in the medium term amid an increase in the minimum wage, record-low unemployment levels and a reviving economy. Slightly lower inflation may act to moderate wage expectations. The recovery of real disposable income with relatively stable employment provides a good springboard for a rebound in consumption, which will be the main growth engine of the Polish economy in 2024. GDP growth in 2024 could be close to 3%.   Real wages and salaries in enterprises, %YoY Rebound in real wages to support consumption   The recovery and relatively pro-inflationary structure of GDP growth in 2024, with consumer demand dominating, may be an argument for the Monetary Policy Council to keep interest rates unchanged in the coming months. Unless the National Bank of Poland's March projection signals a faster return of inflation to target, interest rates may remain at the current level (the main policy rate at 5.75%) until the end of 2024.

Singapore: Industrial production rebounds for its first gain in more than a year Singapore industrial production jumped 7.4%YoY, much better than expectations for a contraction.   October industrial production up 7.4% Singapore’s string of positive data continues, this time with industrial production beating market consensus to rise 7.4% YoY.  Market expectations tipped production to slow for a 13th straight month.  Compared to the previous month, industrial production jumped 9.8%, much better than expectations for a 0.4% contraction. Electronics picked up to 14.8% YoY, from 12.7% in the previous month. Biomedical and general manufacturing rose 5.1% YoY and 4.3% YoY, respectively.  Chemicals remained in contraction (1.0% YoY) but at a less pronounced pace compared than the 13.0% YoY drop of the previous month.   Industrial production bounces back sharply, tracking NODX   Better IP data today a sign of things to come? Industrial production had been mired in an extended slump (13 months), tracking the struggles of the export sector.  With global demand relatively subdued of late, soft non-oil domestic oil (NODX )orders filtered through to the industrial output numbers.  The improvement in the October NODX report signaled a potential recovery for the industrial sector and we could see this sector string together a decent streak of expansion now that global demand appears to be showing signs of a potential recovery.  Today's industrial production report should contribute well to 4Q GDP numbers which will continue to get a boost from leisure related services. 2023 full year GDP growth of 1% YoY is well within reach.     

Hungary’s labour market cools slight The cost of living crisis has not gone completely unnoticed in employment statistics, with labour metrics cooling slightly in the autumn. However, the labour market still remains tight, which also puts upward pressure on wage growth.   There has been a slight increase in the unemployment rate According to the latest unemployment statistics published by the Hungarian Central Statistical Office (HCSO), there was little change in the labour market in October. The model estimate for the tenth month of the year showed a slight deterioration in the unemployment rate (4.1%). Meanwhile, the official three-month moving average of this labour metric (based on a survey) rose by a similar 0.2ppt to 4.3%. Against this backdrop, the number of people out of work has once again risen meaningfully above 200,000, a level not seen since March 2021. Looking at the longer-term trend, the cost of living crisis has not gone completely unnoticed in the labour market. Apart from a (seasonal) improvement this summer, there has been a slow, trend-like deterioration in the unemployment rate since spring 2022. However, it is important to note that both the activity rate and the employment rate in the labour market have increased significantly over the same period. In other words, more and more people want to work as a result of the impact of the crisis on their livelihoods, and they have been absorbed to a significant extent, but not entirely, by the labour market.   Historical trends in the Hungarian labour market (%, 3m moving average) Looking at the monthly data, perhaps the most important change is that the number of people in employment rose by around 10,000, while the number of people unemployed rose by 11,000 and the number of people without a job by just under 2,000. On the one hand, these changes are within the margin of error, i.e. they are not significant. On the other hand, they suggest that more people are entering the labour market as the year draws to a close, but that finding a job is not as easy as it was a year ago. Compared to the beginning of 2023, there has been a significant increase in the proportion of people who have been unemployed for 0-3 months (i.e. either recently lost their job or recently returned to the job search), although there has also been an increase in the number of long-term unemployed who have been out of work for more than a year. The hiring propensity of companies thus appears to be easing significantly in the overall economy. Nevertheless, considering the cost of living crisis, we can conclude that the Hungarian labour market remains in good shape and labour shortages remain significant.   Unemployment by job search duration   Going forward, we do not calculate for any structural changes in the labour market for the rest of the year. The vast majority of companies will continue to insist on retaining staff, having learned from the shocks of recent years that it is quite difficult to expand the workforce in a recovery period in an economy with a structural shortage of labour. In this regard, judging by the latest third-quarter GDP data, the Hungarian economy is on the verge of recovery. The structural labour shortage can raise workers’ bargaining power and therefore support wage increases, especially in light of the recent minimum wage agreement. Positive real wages may support the economic recovery, but they also carry reflationary risks. For the time being, we believe that the corporate costs of the expected real wage increase can be covered by expected revenue growth and efficiency gains, so that while the risk of a price-wage spiral remains, we see a good chance that it can be avoided.   Slowdown in average gross earnings on the back of base effects According to the latest wage statistics published by the HCSO, the pace of year-on-year (YoY) average wage growth in Hungary slowed slightly in September. On the one hand, the 14.1% YoY average wage growth (for the full range of employers) can still be considered very strong. On the other, the slowdown in wage dynamics compared with the pace observed in recent months is due to a strong base effect, as salaries of professional members of law enforcement agencies increased significantly in September.   Nominal and real wage growth (% YoY)   Meanwhile, regular earnings in September were 14.9% higher than a year earlier, which means that the increase in total earnings (including bonuses and one-off payments) is higher than the increase in average earnings. This also means that one-off payments and bonuses were lower in September this year than a year ago. Again, this should come as no surprise, as at the end of last year, with inflationary pressures rising, many companies decided to give their employees one-off payments. The aim was to improve the financial situation of workers without imposing a long-term increase in wage costs on firms. It is therefore likely that, for the same reasons, the increase in regular earnings in the coming months will be higher than total average earnings. The impact of bonuses can also be seen from the fact that the increase in median gross earnings (14.1% YoY) was exactly the same as the increase in average gross earnings.   Wage dynamics (three-month moving average, % YoY)   The detailed data also shows that the base effect of last September's pay settlement for law enforcement officers influenced the change in average wage growth in the whole economy. In the public sector, the pace of wage growth slowed considerably, from almost 15% to just under 12% YoY. Meanwhile, wage growth in the private sector has also slowed, although this is mainly due to a decline in the level of one-off payments.  Looking at the individual branches of the economy in general, the pace of wage growth has slowed significantly almost everywhere, but there are a few exceptions, like scientific and technical activity, and education. As inflation continued to slow in September, the 12-month negative real wage growth on an annual basis has come to an end, despite the slowdown in average wage growth. The purchasing power of average wages was 1.7% higher in September 2023 than it was a year earlier, which is a significant change, but at the same time needs to be taken with a pinch of salt. In general, this simply means that the purchasing power of the population has started to increase again compared with the previous year.   The level of average and median real wages (1990 CPI adjusted HUF)   The problem might be that this is only one month of positive data, and it looks at the growth compared to the same period of the previous year. However, if we look at the level of monthly real wages at 1990 prices (i.e. we are not looking at a percentage change), our calculation shows that the level of real wages was 28,784 forints (around US$83). This compares with an average monthly wage of around 31,000 forints (US$89) in the last three months of 2021, calculated at 1990 price levels. This shows that the current positive year-on-year change basically marks the beginning of a recovery and that there is still a long way to go before the purchasing power of wages catches up with the decline caused by the inflation shock and the living standards crisis. The purchasing power of average wages is currently around the average in 2020, so we have managed to invent the time machine and get back to the 2020 standard of living in terms of wages. None of this suggests that households are going to start consuming a lot just because a statistic has gone from negative to positive. The recovery in domestic demand will therefore be a slow and gradual process, in our view.

CEE: Quiet first half of the week The first half of the week basically has nothing to offer in the region. We will see the first interesting data on Thursday. In Poland, November inflation will be published, where we expect a slight increase from 6.6% to 6.7% YoY, slightly above market expectations. Poland's second estimate of third-quarter GDP will also be released, which will offer a breakdown. We expect a confirmation at 0.4% YoY. On Friday, we will see the same GDP numbers in Hungary and the Czech Republic and also PMI in the region. The Czech Republic will also release budget numbers, and Moody's will publish a rating review of Poland. We don't expect any changes, but it will be interesting to see the assessment of the political and fiscal situation after the elections.  The zloty did not move much last week despite confirmation of an economic recovery. However, the short end of the rate curve is gradually moving up as we expected, which we think should push EUR/PLN down. Of course, the long positioning of the market is good to keep in mind here and will likely be an issue for faster PLN appreciation. These days, we see EUR/PLN below 4.360.  The koruna strengthened last week after a surprise paying flow and maybe some hints of hawkishness from the Czech National Bank (CNB). However, we believe that weak economic data and more mixed CNB views will bring back the rate-cutting discussion and that market rates will go down again. The first signal was already visible on Friday, and rates are thus pointing to a weaker koruna back above 24.450 EUR/CZK.  The forint rebounded last week after the National Bank of Hungary (NBH) meeting but still failed to hold new gains. We think EUR/HUF should go down from these levels, but we need to see new triggers. Last week, we saw positive headlines from the EU money story – and we may see more this week, which would certainly help. Rates also bounced up after the central bank meeting. Overall, we are positive on the HUF and expect levels below 380 EUR/HUF in the coming days. 

By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Nov) – 08/12 – last month's October jobs report was the first one this year when the headline number came in below market expectations, though not by enough to raise concerns over the resilience of the US economy. Unlike September, when US jobs surged by 297k, jobs growth slowed in October to 150k, while the unemployment rate ticked higher to 3.9%, in a sign that the US economy is now starting to slow in a manner that will please the US central bank. Combined with a similarly weak ADP report the same week, where jobs growth slowed to 113k, and a softer ISM services survey yields have slipped back significantly from their October peaks, as well as being below the levels they were a month ago in a sign that the market thinks that rate hikes are done and has now moved on to when to expect rate cuts. This is the next challenge for the US central bank who will be keen to continue to push the higher for longer rates mantra. It's also worth noting that JOLTS job openings are still at elevated levels of 9.55m, and weekly jobless claims continue to trend at around 210k which means the Fed still has plenty of leeway to push back on current market pricing on rate cuts. Expectations are for 200k jobs to be added in November; however, it should also be remembered that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.          Services PMIs (Nov) – 05/12 –while manufacturing activity in Europe appears to be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation, which is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4. The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The UK economy appears to be more resilient where was saw a recovery into expansion territory in the recent flash numbers to 50.5. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have gone after Italy fell sharply in October to 47.7, while Spain was steady at 51.1.  

RBA rate decision – 05/12 – back in November the RBA took the decision diverge from its peers and hike rates again, by 25bps to 4.35%, after 5 months of keeping it at 4.10%. In a sign that this could well be the last hike the guidance was tweaked from "further monetary tightening may be required" to "whether monetary tightening may be required" which at the time sent the Australian dollar sharply lower, although the recent weakness in the US dollar has seen the Aussie recover since then. Despite increasing evidence that inflation is slowing in the global economy the RBA clearly felt it necessary to close the gap on its peers when it comes to rate policy, in a sign that perhaps they are concerned about domestic price pressures. That said we are already seeing the economic numbers in China starting to respond to the piecemeal measures by authorities there to stimulate the economy, although the improvements have been fairly modest. We also saw another upside surprise in headline CPI, while Q2 GDP came in at 0.4%, above forecasts of 0.2% to the economy continues to remain resilient. No changes to policy are expected this week, however some ex-RBA staffers have suggested that we could see another rate hike if wages growth continues to remain strong.   China Trade (Nov) – 07/12 – the recent set of Chinese Q3 GDP numbers pointed to a modest pickup in economic activity over the quarter in a sign that we are starting to see an improvement in the underlying numbers underpinning the Chinese economy. The recent October trade numbers helped to support the idea of a modest improvement however they don't change the fact that the economy still has some way to go when it comes to domestic demand which has remained subdued over the last 6 months. In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline. Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon.       

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

Japan Data Brief : What you may have missed over the year-end holiday After an unexpected contraction in 3Q23, the economy appears to have recovered modestly. Inflation slowed due to base effects while the monthly activity outcomes were a bit mixed. We don't expect an imminent Bank of Japan rate hike but it may still terminate the yield curve control programme in the first quarter as JGB market conditions remain supportive. Summary The monthly activity data was mixed. Industrial production was softer than expected, but the rebound in retail sales was stronger than expected. As Japan's main growth engines are consumption and services, we expect fourth quarter 2023 GDP to rebound despite soft manufacturing activity. Inflation has also came down sharply, which should support the BoJ's dovish stance for now. We believe that the BoJ is preparing for its first rate hike in the second quarter, when the government's stimulus will be supporting growth while another big jump in wage growth is achievable throughout the spring wage negotiation season. Meanwhile, the yield curve steepened from November when the BoJ decided to discontinue its daily fixed-rate purchase operations but the 10Y Japanese government bond (JGB) yields were below the 0.6% level at the end of last year. We think the Bank of Japan is likely to terminate its yield curve control programme in January as market pressures should be off thanks to the global bond market rally and JGB yields have been below the BoJ's hinted proper 10Y level of 0.8%. Also, a new quarterly outlook report could justify the BoJ's policy changes by raising its inflation outlook for FY 2024 and 2025.  Industrial production declined but only marginally so Industrial production fell -0.9% month-on-month seasonally adjusted in November (vs 1.3% in October, -1.6% market consensus), mainly led by poor vehicles outcomes (-1.7%). There were temporary shutdowns of factories due to shortages of some auto parts. Thus, we expect a rebound in December as production lines returned to normal. We found a rebound in chip-producing equipment (7.2%) is likely to continue. Japan is not a major semiconductor production hub, but is one of the major players in the chip-making equipment industry. Together with upbeat outcomes from South Korea's chip production and exports, we believe the global semiconductor cycle is on a recovery path.  Retail sales rebounded more than expected in November Retail sales rose 1.0% MoM sa in November (vs -1.7% in October, 0.5% market consensus). The rebound was stronger than expected, but it couldn't fully offset the previous month's decline. But in a positive note, retail sales rebounded in most of the major categories, except food and beverages (-0.8%), signalling the consumption recovery was widespread

UK wages/UK CPI (Dec) – 16/01 and 17/01 Since March of last year headline CPI in the UK has more than halved, slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. The decline in headline inflation is very much welcome, however most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing. Food price inflation for example is still much higher, slowing to 6.6% in December, while wage growth is still trending above 7% at 7.2%. Services inflation is also higher at 6.3% while core prices rose at 5.1% in the 3-months to November.   This week's wages and inflation numbers are likely to be key bellwethers for the timing of when the Bank of England might look at starting to reduce the base rate, however the key test for markets won't be on how whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers. Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 7% is likely to stay the Bank of England's hand when it comes to looking at rate cuts. It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike. That means it will take more than a further slowdown in the headline rate for these 3 MPC members to reverse that call, let alone call for rate cuts. Expectations are for wages to slow to 6.7% and headline CPI to come in at 3.8%.  

Canada edges towards a rate cut in the second quarter Subtle dovish shifts in the Bank of Canada’s thinking and a weak growth backdrop give us increasing confidence that inflation concerns will fade and the BoC will cut rates in 2Q. There may be room for a rebound in short-term CAD rates in the near term though, and USD/CAD could stabilise, but the loonie remains less attractive than the likes of NOK and AUD.   Dovish hints point to cuts The Bank of Canada left monetary policy unchanged at today’s meeting. The target for the overnight rate remains at 5% and the Bank is continuing with quantitative tightening. The market has latched onto the mildly dovish shift in the BoC’s stance with Governor Macklem stating that “there was a clear consensus to maintain our policy at 5%” with the deliberations “shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance”. In this regard the Bank has taken the significant step of removing the line that the Bank “remains prepared to raise the policy rate further if needed” from the accompanying statement. Nonetheless, the Bank remains concerned about the inflation backdrop. It doesn’t expect annual CPI to return to the 2% target until 2025 given “core measures of inflation are not showing sustained declines”, not helped by wages rising 4-5%. That said, there was acknowledgement that the economy “has stalled” with the economy likely stagnating in 1Q 2024. The BoC remains hopeful that it will recover from mid-2024, but 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”.  Jobs growth does appear to be cooling and remember, too, 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. In our view 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 1Q and get down to 2% in the second quarter, well ahead of what the BoC expects. Consequently we see scope for the BoC to cut rates by 25bp at every meeting from April onwards (the market is pricing this as a 50:50 call right now). This means 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing. CAD remains less attractive than other commodity currencies The Canadian dollar has weakened following the BoC the announcement, although 2-year CAD yields did not move much after having dropped 10bp to 4.0% since yesterday’s peak on the back of global factors. There may be some room for CAD short-term rates to tick back higher in the near term though, mostly following USD rates. From an FX perspective, it’s key to remember that CAD has been tracking quite closely the dynamics in US data, and that may remain the case until a broader USD decline emerges and favours pro-cyclical currencies such as CAD. We target a move in USD/CAD below 1.30 in the second half of the year, but still see CAD as less attractive than other pro-cyclical currencies like NOK and AUD this year - also due to our expectations for large rate cuts in Canada.

French industrial output continues its rebound French industrial production rebounded sharply in December. The worst appears to be over for the sector, and its recovery is set to continue into 2024. A brighter start to 2024 French industrial production rebounded sharply in December, rising by 1.1% over the month, following on from November's increase (+0.5% over the month). The data are also good in the manufacturing industry sub-sector, where production is up by 1.2% over the month (after +0.2% in November). The manufacture of transport equipment, industrial products and agri-foodstuffs all rose sharply in December. On the other hand, production fell in the equipment goods manufacturing branch. All in all, between the end of 2022 and the end of 2023, French manufacturing output rose by 0.3%. From these figures, we can conclude that the French industrial sector continues to recover. After a very complicated 2023 overall, the end of the year was a little better and suggests that 2024 is beginning under better conditions. The worst is probably over. In fact, all the indicators already published for January suggest that the recovery in industry should continue in the first quarter. In the surveys, industrial companies are slightly more confident about the future and more optimistic about their production in the coming months. In addition, order books have started to rebound, albeit still at very low levels. Demand no longer seems to be weakening. There are therefore signs of a sustained rebound in the industrial sector, and we can expect production to grow slightly faster in 2024 than in 2023. However, this rebound is likely to be gradual and not continuous over the course of the year, as external shocks such as blockades, strikes or geopolitical events could temporarily limit industrial output.   GDP growth to remain weak While the rebound is already visible in the industrial sector, this is not necessarily the case in other sectors. As a result, the better industrial performance will not be enough to produce dynamic GDP growth in the first quarter of 2024, and growth is likely to remain close to 0%. For the year as a whole, even if we expect a gradual recovery in other sectors from spring onwards, the very low starting point means that we are only forecasting 0.5% GDP growth in 2024 (compared with 0.8% in 2023). This is a much lower figure than the government's – likely unattainable – forecasts.

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