employment

The labour market has shown signs of weakening since the summer. But this deterioration is too slow to result in a strong and sudden anti-inflationary shock   The biggest market in Budapest   The Hungarian Central Statistical Office (HCSO) released the latest set of labour market data (wages and unemployment rate) in early January. Wage growth from October suggests that employers are adapting to the strong inflation environment, giving unscheduled, additional wage increases to keep labour in place. In parallel, unemployment statistics reflect that there are still more sectors facing labour shortages than sectors suffering from cost pressures. Nominal and real wage growth (% YoY) Source: HCSO, ING   Gross average wages increased by 18.4% year-on-year in October 2022. If we remove the impact of one-off payments and bonuses, we see roughly similar underlying wage growth (18.5% YoY). This suggests that recent inflation-related wage adjustments are built into base salaries. However, despite the strong underlying wage increase, surging inflation is erasing more and more from the nominal rise. Real wages fell by 2.2% on a yearly basis in October due to the more than 20% headline inflation. With the expected move higher in inflation (possibly peaking only in March 2023), real wage growth could turn into deep negative territory, dragging down consumption during late 2022 and the first half of 2023. Wage dynamics (three-month moving average, % YoY) Source: HCSO, ING   Wage growth in the private sector came in at 18.2% year-on-year, significantly higher than the year-to-date average. Salaries rose by 18.6% in the public sector over a year. In this regard, there is a general sense of wage increase, though the private sector wage growth can be seen as remarkable, considering all the cost-related pressures here. This explains a lot about the health of the Hungarian labour market during a cost-of-living crisis. Employment data points to a steady labour market. The employment rate has been pretty much unchanged for five months now. The November unemployment rate came in at 3.8%, alternating between this and 3.6% for four months now. Though this is significantly higher than the 3.3% nadir in June, it is hard to say that this is an earth-shattering or ground-breaking change. The labour market is weakening only in incremental steps. Labour market trends (%) Source: HCSO, ING   Reading through the details, we can see that fluctuations in the labour market have increased in recent months. This may partly be the result of a bifurcated economy. While certain sectors (e.g. services) are reacting to the constantly changing economic environment with layoffs, other sectors (e.g. manufacturing) are able to partially absorb these workers. While the energy shock is impacting service providers more, the high level of new orders and the capacity expansions are keeping labour needs alive in manufacturing. It is also interesting that the number of participants in the labour market increased in November on a monthly basis. This did not lead to an increase in employment but rather increased the number of unemployed. We conclude from this that due to the intensified pressure on household budgets, more and more people are becoming active job seekers, increasing the statistical number of unemployed. Number of job vacancies and job vacancy rate Source: HCSO, ING   Despite the recent resiliency, if employers realise that difficulties are mounting (still high costs accompanied by lower demand for their products and services), more companies will be forced to start an extensive labour market adjustment. To put it more simply, they will try to save on costs by downsizing and thus will try to maintain their profitability despite the expected decrease in revenues. Accordingly, we expect the unemployment rate to rise further, and to peak around 4.5% during mid-2023. However, this hardly qualifies as a significant labour market adjustment or deterioration. The Hungarian labour market will remain tight and labour shortages will be there in some parts of the economy, thus we can’t see the job sector providing a sizable anti-inflationary shock in a 20%+ inflation environment. Read this article on THINK TagsWages Unemployment rate Labour market Hungary Employment Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Yesterday, the pound showed impressive growth. Similarly, the euro also showed significant gains. Considering that there was no macro data from the UK, unlike the eurozone, it is more accurate to say that the pound followed the euro. However, this growth contradicted all the macro data.   After all, eurozone inflation slowed down significantly more than expected, while employment in the United States increased substantially more than anticipated. So, the dollar should have extended its growth. But the market went in a different direction, and the formal reason for this was the minutes of the European Central Bank's governing council meeting, which mentioned the possibility of more interest rate hikes. However, the meeting itself took place before there were even rough forecasts for the current inflation.   Just a couple of days ago, several ECB officials explicitly stated that the cycle of interest rate hikes may have come to an end. So, the rise of the euro and, along with it, the pound, goes against common sense. Unless we consider the excessive overbought condition of the dollar, which became the main reason why European currencies increased.   However, there is a high probability that today everything will return to the values at the start of yesterday's trading. Employment data clearly suggests that the content of the US Department of Labor report will be slightly better than expected. In particular, unemployment, which was expected to increase from 3.4% to 3.5%, may well remain unchanged. But if unemployment does increase, the dollar may continue to lose its positions, primarily due to the persistent overbought condition.       During the intense upward movement, the GBP/USD pair jumped above the 1.2500 level. This served as the primary signal of the pound's recovery process relative to the recent corrective move. Due to the sharp price change, on the four-hour chart, the RSI reached the overbought zone, which indicates that long positions are overheated in the intraday period. On the four-hour period, the Alligator's MAs are headed upwards.   This indicates a shift in trading interests. Outlook In this situation, the sharp price change from the day before is a signal of the pound's overbought conditions in the intraday and short-term periods. The target level is set at 1.2550, around which the upward cycle slowed down, which reduced the volume of long positions and resulted in a stagnation. We can assume that the process of the pound's recovery will be temporarily interrupted by a pullback.   However, if the price remains stable above 1.2550, speculators may ignore the technical signal of overbought conditions. In this case, the pair can rise towards the peak of the medium-term trend. The complex indicator analysis unveiled that in the short-term and intraday periods, points to the pound' recovery process.  

Asia Morning Bites China's monetary stimulus and lower US inflation provide a positive backdrop for risk assets ahead of tonight's FOMC meeting.   Global Macro and Markets Global markets:  Equities seemed to like the continued decline in US inflation yesterday, as it bolsters the case for a pause from the Fed (next decision at 02:00 SGT Thursday). The S&P500 rose 0.69% yesterday, and the NASDAQ added another 0.83%. Chinese stocks also rose, helped by yesterday’s unexpected PBoC rate cut. Still, despite the lower inflation print, US Treasury yields rose some more – the yield on 2Y notes rose 8.9bp to 4.666%, and the 10Y bond yield rose 7.8bp to 3.813%. Once the Fed is out of the way, and the market has settled, perhaps with an even slightly higher bond yield, this might well feel excessively high, given that inflation for July will probably come in at the low 3% level. EURUSD rose a little yesterday, reaching 1.0789, Other G-10 currencies also made gains, though the JPY continues to look soft at 140.18.  The KRW was the standout in Asia yesterday, gapping lower to 1271.50, possibly helped by hawkish comments from the latest BoK minutes. Strong labour data just out will also likely help (see below).   G-7 macro: Yesterday’s US inflation figures for May came out more or less in line with expectations. Headline inflation dropped to just 4.0% from 4.9%, while the core fell a little less, reaching 5.3% (it was 5.5% previously). James Knightley’s note on what this means is worth a close read. But the short version is that it boosts the chances of a Fed pause tonight – even if they indicate further hikes in the dot-plot (we don’t think they will ultimately deliver).  US May PPI data due out should add to the case for falling pipeline inflation pressures. UK April industrial production will not make pleasant reading, though the index of services could be a bit stronger. The ECB meets to decide on rates tomorrow. There is a wide consensus for a further 25bp of tightening.   South Korea: The jobless rate unexpectedly fell to 2.5% in May (vs 2.6% in April, 2.7% market consensus). Employment of services such as whole/retail sales, recreation, and transportation, led the improvement. One interesting thing is that job growth in ICT and professional, scientific& technical activities has been particularly strong over the past several months, despite the recent weakness in the semiconductor business. We think this is not directly related to semiconductor manufacturing itself but more related to platform services and software development, including AI technology. We believe that the tech sector has held up relatively well. Meanwhile, the construction industry shed jobs for the second consecutive month, and real estate also cut jobs.  We think that despite weakness in manufacturing and construction, service-led labour market improvements have continued, and this probably supports the hawkish tone of the BoK. In a separate data release, import prices dropped significantly to -12.0% YoY in May (vs -6.0% in April), mostly due to falling commodity prices. We expect consumer inflation to decelerate further in the coming months and to reach the 2% range as early as June.     What to look out for: FOMC meeting South Korea unemployment (14 June) India Wholesale prices (14 June) US PPI inflation and MBA mortgage applications (14 June) FOMC policy meeting (15 June) New Zealand GDP (15 June) Japan core machine orders (15 June) Australia unemployment (15 June) China industrial production and retail sales (15 June) Indonesia trade (15 June) India trade (15 June) Taiwan policy meeting (15 June) ECB policy meeting (15 June) US retail sales and initial jobless claims (15 June) Singapore NODX (16 June) BoJ policy meeting (16 June) US University of Michigan sentiment (16 June)

GBP: Hard to buck the sterling bullish trend EUR/GBP pressing lower again this morning: a move below the 0.8540 support would set the pair back to pre-Mini-Budget crisis levels (August 2022). UK GDP figures for April matched expectations, showing 0.2% MoM growth, while industrial production declined by more than expected (1.9% YoY).   Still, the latest evidence from employment and wage growth has prompted yet another repricing higher in BoE rate expectations, with 132bp of tightening priced in by year-end. With short-dated gilts reaching their highest levels since 2008 yesterday, it remains hard to buck the EUR/GBP bearish trend, especially ahead of the ECB risk event, but our medium-term view remains bullish on the pair.

In the labour market, the seasonally adjusted unemployment rate has turned stagnant from 2H22 onwards with the latest March data standing at 10%. However, the actual rate is likely to be higher as TurkStat pointed out that the Household Labour Force Survey could not be conducted in certain cities due to the earthquake disaster. Accordingly, both male and female employment has returned to pre-2018 volatility levels, while the informality rate is now close to the lowest in the current series, started in 2014. Despite the same recovery trend in supplementary indicators for labour force, wider definitions of unemployment, ie, the composite measure of labour underutilisation, have remained well above of pre-2018 levels. This implies the labour market has not fully recovered since the pandemic and an expected slowdown in activity could further add to challenges on this front.   Unemployment vs NPLs (%)   Breakdown of C/A financing (12m-rolling, US$bn)   Primary balance (12m-rolling, % of GDP)   Widening external imbalances The current account deficit has expanded rapidly since early 2022 driven by commodity and gold imports in addition to the widening impact of strong domestic demand. A strong increase in tourism revenues has limited the extent of expansion. For the remainder of the year, an improvement is likely given the recent normalisation in energy prices and gold imports, while recovery in global demand and a possible change in policy mix to a tighter stance should also be supportive for the foreign trade balance.   On the capital account, with official transfers from Russia and strong unidentified inflows, official reserves recorded an increase last year, though the quality of external financing continues to overshadow the outlook given tighter global financial conditions. In the first quarter of this year, total flows have again weakened in the absence of strong unidentified inflows, leading to pressure on international reserves.     Budget deficit on the rise In the first four months of this year, there has been a major fiscal expansion pulling the central administration budget deficit to c.3.0% of GDP. According to the real budget trend based on the programme (IMF) defined primary balance realisation, which excludes one-off revenues, there was a deficit of around TRY42.5bn in April, bringing the primary balance for the last 12 months to a deficit of 1.9% of GDP.   In addition, the 12-month budget balance excluding one-off revenues rose to a deficit of 2.8% of GDP. Going forward, elevated spending pressures during the election period and an expected slowdown in activity and reconstruction efforts after the earthquakes point to a higher deficit, to above 5% of GDP. However, tax hikes and administrative price hikes to address the widening in the budget deficit in 2H23 should not be ruled out.   Signals of moderation in lending The latest volume data after the elections hint at momentum loss. Accordingly: (1) non-SME corporate lending decelerated sharply in both state and private banks though appetite in the latter dropped to single digits in annualised 13-week moving average terms. This shows increasing challenges for corporates in accessing financing lately; (2) SME lending momentum hand is strong but there has been a moderation in private banks. On the retail side, (3) credit cards have remained on a strong growth path given the supportive impact of low real interest rates; (4) there are signals that momentum in mortgages is about to peak; (5) while the appetite for GPLs is on the decline, in recent months this has been more evident in state banks.   Regarding deposits, FX deposit formation on both the retail and corporate sides remain in negative territory showing the impact of “liraization” moves to control residents’ FX demand.   Banking sector volume expansion

The productivity/unit labour cost conundrum Let’s start with the RBA’s assessment that depressed productivity growth and rising unit labour costs are an issue that they need to be mindful of when setting policy. Both issues are mentioned in the text accompanying the RBA’s latest rate decision and also in Governor Philip Lowe’s 5 April speech on Monetary policy, demand and supply.  In the view of this author, productivity is a much-misused concept. It sounds real enough, but it is a construct of both economic growth and employment (whether measured as the number of jobs or hours worked). In a sense, therefore, productivity doesn’t really exist at all but is simply a residual that drops out of consideration of these other concepts. So, if you know what is happening to GDP growth, and you know what is happening to employment or hours worked, productivity measures add nothing to your understanding of the economy and are basically just a ratio of these other measures.   The same goes for unit labour costs, which can be thought of as output per unit of wages. We could write these relationships in the following simplistic way: Productivity = Output/Labour Average Wages = Wages / Labour Unit labour costs  = Output / Wages (or re-arranged  = Productivity/average wages)   And all these measures are quite cyclical. Output slows in a recession. So does employment, though it tends to lag well behind GDP and slow much later. Wages growth lags even with these changes in employment.     The result is that in an economic slowdown, productivity drops, and unit labour costs rise. And yet this is not in the slightest bit inflationary, because the overarching piece of information is that the economy is slowing, and that will lead to weaker price pressures. This is as true for Australia as it is anywhere else, where productivity has been declining as growth has slowed, and unit labour costs have risen. And we are still looking for inflation to fall. Contributions to QoQ GDP (pp)  

Canada’s inflation rate eases US Durable Goods Orders accelerate The Canadian dollar spiked and gained 50 points after Canada released the May inflation report but has pared these gains. USD/CAD is unchanged at 1.3158.   Canadian inflation heads lower Canada’s inflation rate fell sharply in May to 3.4%, down from 4.4% in April. As expected, much of that decline was due to lower gasoline prices. Still, this is the lowest inflation rate since June 2021.The core rate, which is comprised of three indicators, fell to an average of 3.8% in May, down from 4.2% a month earlier. The decline should please policy makers at the Bank of Canada, as inflation slowly but surely moves closer to the 2% target. The BoC cited the surprise upswing in inflation in April as one reason for its decision to hike rates earlier this month. With headline and core inflation falling in May, will that be enough to prevent another rate increase in July? Not so fast. The BoC has said its rate decisions will be data-dependent, and there is the GDP on Friday and employment next week, both of which will factor in the rate decision. The US released a host of releases today, giving the markets plenty to digest. Durable Goods Orders jumped 1.7% in June, up from an upwardly revised 1.2% in May and crushing the consensus of -1%. The core rate rebounded with a 0.6% gain, up from -0.6% and above the consensus of -0.1%. Later today, the US publishes the Conference Board Consumer Confidence and New Home Sales. Wednesday is a light day on the data calendar, with the Fed will in the spotlight. Fed Chair Jerome Powell will participate in a “policy panel” at the ECB Banking Forum in Sintra, Portugal, and investors will be looking for some insights into Fed rate policy. As well, the Fed releases its annual “stress tests” for major lenders, which assess the ability of lenders to survive a severe economic crisis. The stress tests will attract more attention than in previous years, due to the recent banking crisis which saw Silicon Valley Bank and two other banks collapse.   USD/CAD Technical There is resistance at 1.3197 and 1.3254 1.3123 and 1.3066 are providing support  

China: Non-manufacturing activity slows Official PMI data confirm that the re-opening surge in the service sector is subsiding.   The main engine of growth is spluttering Apart from a short-lived bounce in the manufacturing sector after the zero-Covid measures were shelved in early December 2022, China's manufacturing has been limping along. The official PMI index for the manufacturing sector (which tends to focus on larger, state-owned enterprises) has been below the breakeven 50 level since April. It was not much of a surprise to see it stay in this area in June, though perhaps the fact that the contraction is relatively stable is a source of some comfort. At least things aren't getting noticeably worse.     Instead, it has been the non-manufacturing sector, buoyed by consumer spending, that has been keeping China's economy growing in the first half of this year. But what this data confirms, which we already suspected, is that the initial surge contained a lot of pent-up demand. Domestic tourism, and dining out have been making up for lost time in the early part of the year. But there is only so long that this can go on. Other indicators of retail sales suggest that it remains well above historical trends, and suggests some further moderation over the second half of this year.  Looking at the breakdown of the surveys, there are no particular standouts. Most sub-indices are declining in both manufacturing and non-manufacturing surveys. This includes new orders, new export orders and employment.  Caixin PMI data due early next week will provide more insight into smaller and more export-oriented firms.   China PMI data   PMIs support our GDP downgrade These latest data provide further support for GDP downgrades for the second quarter. They also support the idea that the second half could see weaker support from the service sector. We will be publishing new GDP forecasts next week for China, and these look highly likely to show a cut to the existing full-year GDP figure of 5.7%, and likely take the forecast below the existing consensus forecast of 5.5%. We may still just sit on the right side of 5.0% - the government's target for this year - but that only goes to show what a low hurdle 5% was to achieve after last year's 3% outcome.   The market continues to fixate on the possibility of stimulus measures, and in due course, we do expect the government to step in and provide some support. However, we remain unconvinced that this will resemble anything like the financial bazooka that some want to see, but will instead be more of a buck-shot spray of smaller more targeted measures that may not move the GDP needle substantially. 

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

After over 7 months without new contracts DataWalk informed that it signed three new agreements for a delivery of its analytical platform: (i) with Northern California Regional Intelligence Center, (ii) with selected units of Polish public administration, and (i) with Ally Financial (American bank) which is a contract extension actually. All 3 contracts will probably be settled in 2Q23, albeit this may not be enough to show a yoy improvement of revenues (2Q22 demanding base with 7 new contracts signed) and we forecast an 11% yoy decline of revenues in 2Q23.   On the other hand, during last conferences and in 1Q23 financial report the Company admitted that it managed to overcome most of the obstacles that hindered its growth last year. In particular, the Company’s engineers implemented the majority of drawn-out contracts signed in 2020 or 2021 which means that they will be able to handle the implementation of new pilot (pre-sales) and full (post-sales) projects. Additionally, the Company has already 4 fully trained system architects which should also expedite the implementations of the subsequent projects. This coupled with the sales funnel growth should translate into increasing dynamics of new contracts acquisition and implementation starting already from 2H23. Thus, we keep our revenue growth forecasts for 2023/ 2024/ 2025 at c. 20%/ 50%/ 70% implying that 2H23 revenues should grow c. 60% at least which we deem attainable given the relatively low base.   It is worth noting that the market sentiment for the growth companies operating in the field of data analysis has improved considerably in recent months thanks to the investors’ positive approach to AI issues and lower inflation expectations (and lower cost of money).   Since May when we issued DataWalk our last report, the Company’s peers median of EV/Sales multiples for 2023-25 has grown by 70% on average, which with the financial forecasts kept intact affects our 12M EFV assessment that rises by 67% to PLN 122 (from PLN 73) per share implying a c. 90% upside.   We would like also to indicate that DataWalk’s share price has not been the beneficiary of the above mentioned sentiment improvement yet. Given positive news from the Company, including an increase of engineering capacity, dynamic sales funnel growth, and new contracts signed we expect to see rising volumes and value of contracts in the near future and return of the Company’s sales to strong growths starting from 3Q23. Besides, we also assume that along with the inflow of news about new contracts DataWalk will experience the beneficial impact of the investors’ sentiment improvement for growth companies and the valuation gap will recede. Thats why we upgrade our recommendations: LT fundamental to Buy (from Hold) and ST relative to Overweight (from Neutral).   Financial forecast We keep our revenue growth forecasts for 2023/ 2024/ 2025 at c. 20%/ 50%/ 70% implying that 2H23 revenues should grow c. 60% at least which we deem attainable given the relatively low base. We also assume that DataWalk is able to deliver a revenue growth expected for 2024 with the current employment level, however in the subsequent years a dynamic increase in employment should follow to support further growth, therefore, we raise our costs estimates (and thus forecast higher ND) in 2023.   Dynamic growth of sales funnel value In 1Q23 financial report the Company informed that as of the day it was issued (May 18, 2023) the total value of sales funnel stood at US$ 41 million (up 11%/ 60% qoq/ yoy), which is the record high. We would like to note that a high level of the sales funnel may be to some extent related to current low revenues (as the Company is not completing the contracts that would have left the sales funnel otherwise). However, such a high dynamic of a sales funnel growth cannot be explained solely by this negative factor. In our view, a sales funnel growth confirms high interest in DataWalk’s product and also brings hope for a revenue growth in 2H23 (at the moment we assume it at c. 60% yoy after a slight decline in 1H23).   Valuation and recommendation Since May when we issued our last report, the Company’s peers median of EV/Sales multiples for 2023-25 has fallen by 70% on average, which with the financial forecasts kept intact affects our 12M EFV assessment that rises by 67% to PLN 122 (from PLN 73) per share implying a c. 90% upside. Given recent positive news from the Company, including an increase of engineering capacity, dynamic sales funnel growth, and new contracts signed we expect to see rising volumes and value of contracts in the near future and return of the Company’s sales to strong growths starting from 3Q23.   Besides, we also assume that along with the inflow of news about new contracts DataWalk will experience the beneficial impact of the investors’ sentiment improvement for growth companies and the valuation gap will recede. Thats why we upgrade our recommendations: LT fundamental to Buy (from Hold) and ST relative to Overweight (from Neutral).        

Recent PMI readings in the European economy have raised concerns about the future of the region. The Euro area composite PMI dipped below the 50-point mark, indicating a contraction for the first time this year. This significant shift in momentum suggests a potential 3 to 6-month period of economic decline.  The tightening monetary policy by the European Central Bank (ECB) aimed at reducing inflation has contributed to these contracting indicators. The drop in composite PMI was driven by a decline in both manufacturing and services PMI, with manufacturing consistently below the expansion territory. However, services PMI still remains in expansion, although a continued decrease could indicate contracting business confidence. Job creation in the Euro area remained limited to the services sector, while employment in factories declined for the first time in over two years. This slowdown in hiring, coupled with a decrease in business confidence, may lead to rising unemployment rates. On a positive note, the weakness in PMI readings can be partly attributed to destocking activities, which can benefit businesses in the long run. Additionally, there have been slight improvements in new order numbers, particularly in Italy's construction sector, suggesting a potential turnaround. These dynamics will likely influence the ECB's monetary stance moving forward.   FXMAG.COM:  How would you comment on the entire series of PMI readings from the European economy? What do the sentiment in industry and services say about the future of the European economy?   Santa Zvaigzne-Sproge, CFA: The Euro area composite PMI came out below the 50-point level indicating that it has entered the zone of contraction for the first time this year. This was a considerable change in momentum in comparison to April’s reading of 54.1 and even the previous month’s reading of 52.8. Furthermore, the historical data show us that once the PMI slides below the 50-point mark, it tends to stay there for a 3 to 6-month period. As tightening monetary policy by the ECB has been performed with the key aim to draw down inflation by reducing economic activity, contracting economic indicators such as PMI may not be a big surprise.    The drop in composite PMI resulted from a combination of lowering manufacturing PMI and services PMI data. However, the difference between both is nearly 10 points with services PMI still being in the expansion territory while manufacturing has not been there since August 2022. The large difference might be partially explained by the nature of both sectors. Manufacturing generally implies more capital intensity and longer production times, therefore, requiring more planning ahead, while services may be more flexible and adapt faster. However, if the services PMI data continues to lower, it may indicate that business confidence is contracting also in this sector.    In June, private companies in the Euro area maintained their efforts to expand their workforce, but job creation was limited to the services sector, while employment in factories declined for the first time since January 2021. The slowdown in hiring coincided with a decrease in business confidence across the Euro area. While firms maintained an optimistic outlook, the level of positive sentiment reached its lowest point in 2023 thus far. Growth expectations also softened in both the manufacturing and services sectors. In case job growth continues to stagnate, it may translate into increasing unemployment rates across the Euro area, which may give the ECB a reason to reconsider its hawkish monetary stance.    To finish on a more positive note, we need to point out that the weakness in PMI readings has been partially associated with destocking, leading to lower new order numbers. While negatively affecting PMI numbers, destocking may be considered as cyclical activity performed by managers beneficial to their businesses. Furthermore, destocking cannot last endlessly – once the stock levels reach a certain point, new orders may need to go up to support the “restocking”. There has been a somewhat positive development in this section in Italy where according to the latest construction PMI report, new orders increased marginally ending the six-month-long strike of contraction.  Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. 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The British pound has strengthened its leadership in the G10 currency race thanks to the U.S. employment report. The increase of 209,000 jobs in June disappointed USD supporters, causing GBP/USD quotes to soar to the highest level since April 2022. However, it failed to consolidate at that level as the unemployment rate dropped to 3.6% and average wages accelerated to 4.4%, indicating that the Federal Reserve still has a lot of work ahead. The Bank of England also faces challenges. Wage growth in the United Kingdom is outpacing that of the United States. Bloomberg experts forecast a 7.1% increase in May.   The current values, along with sustained elevated inflation at 8.7%, are perceived by companies as a greater incentive for price increases than the BoE's optimistic forecasts of CPI slowdown. BoE Governor Andrew Bailey and his colleagues are determined to prevent inflation from solidifying at elevated levels, but their actions could lead to a recession. Indeed, the short-term market expects the repo rate to reach 6.5% by March 2024. Such a high borrowing cost could risk a recession. Additionally, the yield curve inversion signals an impending downturn.     At first glance, the pound is at a turning point: the projected 150 basis points increase in borrowing costs could trigger a GDP contraction. Markets generally perceive this negatively, as was the case with the U.S. dollar at the turn of 2022–2023, when its quotes were falling. However, it's important to remember that in any currency pair, there are two currencies. The current success of GBP/USD is only partially related to expectations of a repo rate increase to 6.5%.   It's also influenced by some weakening of the U.S. dollar against major global currencies. Some Forex experts believe that the most aggressive monetary restriction by the Federal Reserve in decades will eventually worsen the health of the U.S. economy. Meanwhile, Bloomberg experts predict a slowdown in U.S. consumer prices to 3.1% in June, causing the USD index to decline. The pound faces a test with the release of UK labor market data by July 14. Alongside the previously mentioned wage growth of 7.1%, Bloomberg experts forecast a slowdown in employment from +250,000 to +158,000.   According to Pantheon Macroeconomics, this change will not be sufficient to stop the Bank of England. The repo rate hike toward 6.5% will continue. Considering that markets were anticipating 5.3% a month ago, the pound's successes are logical.     In my opinion, investors have been somewhat excessive in selling the U.S. dollar based on mixed U.S. employment statistics. This vulnerability makes sterling positions vulnerable. Technically, on the daily GBP/USD chart, a reversal pattern like a Double Bottom may form, or an upward trend may resume. In the first case, we sell the pair on a breakthrough of the pivot level at 1.2785. In the second case, on the contrary, we buy it upon a new local high at 1.285.  

UK gilt yields in focus, ahead of latest wages data By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets managed to procure a second successive day of gains yesterday, despite a slide in Asia markets, after Chinese inflation slipped further towards deflation. The FTSE100 also managed to eke out a daily gain for the first time this month bringing an end to a sequence of 5 successive daily losses.     US markets also underwent a cautious start to the week with attention focussed on this week's inflation numbers, which are due tomorrow and could go some way to indicating whether we see any more rate hikes beyond this month.   While last week's losses were largely predicated on concerns that central banks were gearing up for multiple rate rises in the coming months, the data out of China appears to suggest that the bigger danger in the coming months might be deflation. Today's final Germany inflation numbers are expected to confirm that June CPI rose to 6.8% from 6.3% in May, although most of that rise appears to have been attributed to one-off factors that won't be repeated in the coming months, after temporary reductions in rail fares were reversed.     The pound had a slightly softer tone yesterday after a private sector survey showed that wage growth is starting to slow along with the pace of hiring in June. There has been little evidence of this trend in any other recent data, although with the latest ONS numbers due today there is more of a lag.     Just over a month ago the April UK wages numbers reinforced the challenge facing the Bank of England, after wage growth surged to 7.2%, and a record high outside of the pandemic, prompting a surge in UK 2-year gilt yields which took them above their October peaks of last year in the wake of the ill-fated Kwarteng budget.     The surge in the last few months wages has served to highlight the abject policy failure of the Bank of England to act early enough, as workers already being squeezed on all sides agitate for bigger pay rises in order to close the real wages gap. Today's May wages data is unlikely to see much evidence of a weakening in these upward pressures with expectations of 7.1% for the 3-months to May.       Short term yields have continued to rise in anticipation of further rate rises in the coming months, although we have seen a pullback in the last couple of days, from 15-year highs in UK 2-year yields. If today's wage numbers continue to look sticky, the central bank may find it has no good options when it comes to getting prices under control.     The number of people in employment also rose to a record 76% as high food inflation forced people back into work, forcing the unemployment rate down to 3.8%, where it looks set to stay this month. It's also important to note that the wages numbers are average numbers which means in a lot of cases, pay rises are much higher in certain areas of the economy, trending at between 10% to 20%. This trend may slow in the coming months; however, it is unlikely to slow rapidly even as headline inflation starts to come down rapidly after July.     Later on, this morning, the July German ZEW survey is expected to show a further deterioration in expectations sentiment to -10.6 down from -8.5, with the current situation expected to fall to -62, from -56.5.               EUR/USD – We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week at 1.0830, opens the way for a potential move towards 1.0780.     GBP/USD – fell back to 1.2750 yesterday, before making new 14-month highs nudging above the June highs, as we continue to look for a move towards the 1.3000 area. Main support at 1.2680 area.       EUR/GBP – tested up to the 0.8570/80 area yesterday before slipping back. Still have support at the 0.8515/20 area and June lows. We also have resistance at the 50-day SMA which is now at 0.8630. Below 0.8500 targets 0.8460.     USD/JPY – continues to look soft falling below 142.00 with the risk of further losses towards the 139.80 area. Last weeks' weekly reversal suggests that a short-term top might be in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.     FTSE100 is expected to open unchanged at 7,274     DAX is expected to open 45 points higher at 15,718     CAC40 is expected to open 18 points higher at 7,162

The ADP report on employment in the private sector, published a day before the non-farm payroll data release, was so shocking that it instantly raised expectations for the labor market as a whole, leading to rapid repositioning on Friday before the data release. However, the non-farm payroll figures were significantly weaker than expected, with 209,000 new jobs created (225,000 expected), and data for the previous two months were revised downwards by 110,000. Employment growth is slowing, but the pace remains high. As for wage growth, the figures were an unpleasant surprise for the Federal Reserve. In June, wages increased again by 0.4% instead of the expected 0.3%, and annual growth rates remained at 4.4%, which is higher than the 4.2% forecast. Steady wage growth does not allow inflation expectations to fall, the growth of real rates does not allow the Federal Reserve to start lowering the rate this year.       The U.S. inflation index, which will be published on Wednesday, is the main event of the week and the last important data before the Fed meeting at the end of July. The markets expect an 89% probability of a quarter-point rate hike. Furthermore, the probability of another increase in November has already exceeded 30%, and the first cut is now expected only in May of next year. The U.S. dollar fell after the data release and ended the week weaker than all G10 currencies. The growth of real rates in the current conditions makes a recession in the U.S. almost inevitable.   EUR/USD The Sentix Economic Index for the eurozone has fallen for the third time in a row to -22.5 points, a low since November 2022, and expectations also remain depressed. The eurozone economy has fallen into a recession as of early July. The situation in Germany is even more depressing – the index has fallen to -28.5 points, and the possibility of improvement is ephemeral.     The ZEW index will be published on Tuesday, and the forecast for it is also negative, with a decrease from -10 points to -10.2 points expected in July. On Thursday, the European Commission will present its forecasts. Bloomberg expects that industrial production in the eurozone fell in May from 0.2% y/y to -1.1% y/y, a sharp decline that characterizes the entire eurozone economy as negative and tending to further contraction.   Under the current conditions, the European Central Bank intends to continue raising rates, and even plans to shorten the reinvestment period of the PEPP program. If this step is implemented, a debt crisis, which will put strong bearish pressure on the euro, is inevitable in the face of capital outflows to the U.S. and an expanding recession.   The net long position on the euro has hardly changed over the reporting week and amounts to just over 20 billion dollars, positioning is bullish, there is no trend. However, the calculated price is still below the long-term average and is trending downward.     The euro attempted to strengthen on Friday in light of the news, but it was unable to rise beyond the borders of the technical figure "flag", let alone higher than the local high of 1.1012. We assume that the corrective growth has ended, and from the current levels, the euro will go down, the target is the lower boundary of the "flag" at 1.0730/50. GBP/USD Updated data on the UK labor market will be published on Tuesday. It is expected that the growth of average earnings including bonuses increased in May from 6.5% to 6.8%, and if the data comes out as expected, inflation expectations will inevitably rise. As will the Bank of England's peak rate forecasts. The NIESR Institute expects that further rate increases could trigger a recession.   The cost of credit is rising, and an increase in the volume of bad debts is inevitable in an economic downturn. Inflation did not decrease in May, contrary to expectations, and remained at 8.7%, even though energy prices significantly decreased. Food inflation on an annual basis reached 18.3%, and core inflation at 7.1% is at its highest since 1992. The labor force is decreasing, and if this trend is confirmed on Tuesday, it will almost inevitably result in increased competition for staff, which will mean, among other things, the continuation of wage growth. The Bank of England has already raised the rate to 5%, with forecasts implying two more increases. What does the current situation mean for the pound?   If the economy can keep from sliding into a recession, then in conditions of rising nominal rates, the yield spread will encourage players to buy assets, leading to increased demand for the pound and its strengthening. However, if signs of recession intensify, which could be clear as soon as Thursday when GDP, industrial production, and trade balance data for May will be published, the pound will react with a decrease, despite high rate expectations. After impressive growth two weeks ago, pound futures have stalled at achieved levels, a weekly decrease of just over 100 million has no significant impact on positioning, which remains bullish.  

The weakening in industry temporarily leaves the onus of growth on services. Demand-wise, expect consumption to benefit from resilient employment and decelerating inflation. Investments will reflect better progress (or the lack thereof) in the implementation of the European Recovery and Resilience funds. First quarter consumption driven by a strong recovery in purchasing power The surprisingly strong 0.6% quarter-on-quarter GDP growth between January and March this year was driven by domestic demand. The relative strength of consumption was due to a 3.1% quarterly rebound in households’ real purchasing power, which benefited from the slowdown in inflation dynamics. The resilient labour market, with employment up and unemployment and inactivity down on the quarter, was apparently a decisive factor. Conditions were there for household saving ratios to reach 7.6% (from 5.3% in the fourth quarter of 2022), close to the pre-Covid 8% average, without penalising consumption.     Weakening industry points to softer growth in the second quarter Data for the second quarter suggests that the very good performance of the first will be hard to replicate. Industry just managed to propel value-added in the first quarter, but this seems highly unlikely in the second after a very disappointing -1.9% industrial production reading in April. Business confidence data for May and June and the relevant PMIs point to manufacturing softness through the rest of the second quarter and, possibly, into the third. For the time being, the decline in gas prices has failed to provide any relevant supply push for manufacturers, outweighed by deteriorating order books and stable stocks of finished goods. Services are also signalling some fatigue, but still look to be a decent growth driver, helped by a strong summer tourism season.     The fall in producer prices will bring goods disinflation down the line in CPI The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April, anticipating further decelerations down the line in the goods component of headline inflation. Services inflation is proving relatively stickier, though, possibly reflecting in part a re-composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.   Stickier services inflation to slow the decline in core inflation  

The service sector is driving Italy’s growth The weakening in industry temporarily leaves the onus of growth on services. Demand wise, expect consumption to benefit from resilient employment and decelerating inflation. Investments will reflect better progress (or the lack thereof) in the implementation of the European Recovery and Resilience funds.   First quarter consumption driven by a strong recovery in purchasing power The surprisingly strong 0.6% quarter-on-quarter GDP growth between January and March this year was driven by domestic demand. The relative strength of consumption was due to a 3.1% quarterly rebound in households’ real purchasing power, which benefited from the slowdown in inflation dynamics. The resilient labour market, with employment up and unemployment and inactivity down on the quarter, was apparently a decisive factor. Conditions were there for households’ saving ratio to reach 7.6% (from 5.3% in the fourth quarter of 2022), close to the pre-Covid 8% average, without penalising consumption.   Weakening industry points to softer growth in the second quarter Data for the second quarter suggests that the very good performance of the first will be hard to replicate. Industry just managed to propel value-added in the first quarter, but this seems highly unlikely in the second after a very disappointing -1.9% industrial production reading in April. Business confidence data for May and June and the relevant PMIs point to manufacturing softness through the rest of the second quarter and, possibly, into the third. For the time being, the decline in gas prices has failed to provide any relevant supply push for manufacturers, outweighed by deteriorating order books and stable stocks of finished goods. Services are also signalling some fatigue, but still look to be a decent growth driver, helped by a strong summer tourism season.

Poland: Industrial output decreases YoY in June Industrial output (June): -2.2% YoY We forecast that industrial production remained in the red in June, falling for the fifth consecutive month in annual terms. Last month’s PMI report points to a further sharp deterioration in new orders, particularly from Germany, which suggests that weakness in Poland’s manufacturing activity is likely to continue in the near term. On a positive note, capital goods manufacturing has remained solid recently, giving reason to expect further growth in fixed investment. PPI (June): 1.3% YoY Rapid disinflation in producer prices likely continued in June and annual growth is trending towards negative figures. In monthly terms, PPI has been falling since February this year and prices in manufacturing have been declining in MoM terms since November last year. Given the high reference base, this has led to a rapid drop in annual wholesale inflation. June's PMI report showed that the downward pressure on manufacturing prices remains strong. In the second half of 2023, we expect producer prices to be lower than in the second half of 2022. Retail sales (June): -5.5% YoY We forecast that retail sales of goods fell again in June as the broad-based decline in consumption demand continued. Higher prices and a deterioration in the real purchasing power of households trimmed spending. According to our estimates, 2Q23 was the third consecutive quarter of annual decline in private consumption in Poland. Some improvement should be visible towards the end of this year as CPI inflation moderates and real wage growth returns. Wages (June): 12.1% YoY Nominal wage growth stabilised at low double-digit levels and swings along additional payments in mining and energy sectors. We project wage pressure to continue over the medium term despite some deterioration in economic activity. Demographic trends are curbing the supply of labour and the gap has mostly been filled with immigrants. On top of that, the government has pursued sharp increases in minimum wages recently. In 2024, the minimum wage is proposed to go up by more than 20%. Employment (June): 0.4% YoY The level of employment in the enterprise sector has been moderating slightly in recent months and annual growth remains low. A cooling in manufacturing has reduced the demand for workers in some sectors. At the same time, unemployment remains at very low levels and the supply of labour is limited.

Polish PMI dips in July on falling new orders Poland's manufacturing PMI fell to 43.5pts in July, down from 45.1pts in June, the lowest level since mid-2022, when the domestic economy struggled with the effects of rising energy prices, among other factors. The assessment of current production, orders, employment and purchases all worsened in July from the previous month.   The most significant thing to note from this data release is the deteriorating assessment of the acquisition of new orders (the worst ratings in eight months), especially for exports (the weakest performance since May 2020). This was followed by a decline in current production, the fastest since November 2022 and the fifteenth consecutive month of decline. We are most likely seeing the effects of economic weakness in the eurozone, especially in Germany (the industrial PMI there is below 40pts). Around 50% of Polish industry products go to foreign markets, and Germany is Poland's main trading partner. Planned employment decreased for the fourteenth month in a row. This can be seen in the CSO's employment data, where manufacturing accounts for much of the decline. In June, for example, the business sector lost about 5,000 full-time jobs, of which 3,000 were in manufacturing. Companies also reduced purchasing activity and sought to reduce inventories. In our view, this will translate into relatively weak imports. In addition to energy commodity prices, this should sustain Poland's trade surplus despite the weak export outlook.   Manufacturing PMI in Poland and Germany External demand affects the Polish industry   The bright spot is rapidly decreasing price pressure. The lack of demand has again pushed prices down. Input costs have fallen at the strongest rate since the survey began more than 25 years ago. This was helped by declines in raw material prices and/or the strengthening of the zloty. Selling prices also fell at the fastest pace ever. More than 27% of respondents reduced their prices during the month. While there are signs of stabilisation in domestic industrial production data, recent PMI reports suggest a cautious approach to expectations of a marked improvement in the sector's condition in the second half of the year. Manufacturing is seeing a marginal rebound in the US, Asia, and sluggishly in China, but not in Europe. We think the PMIs for Poland (and elsewhere) are much more pessimistic than real trends in activity (see graph), but other anecdotal evidence we collect has not provided positive signals so far.

GBP: Sterling enjoys a temporary lift from the wage data Sterling is rallying this morning after wage growth data surprised on the upside. Here is what our UK economist, James Smith, says about the data: "Private sector wage growth is now running at 8.1%, up from 7.9% previously. These figures have been backwardly revised, so not all the upside surprise is in the latest month. But still clearly running much too fast for the BoE's liking and will help cement a September hike. The flip side is that unemployment is clearly rising now and employment on the "single month" measure was down by 360k vs three months ago." James had thought that the wage growth could surprise on the upside, but equally, he feels that tomorrow's release of July CPI could see services inflation surprise on the downside. If he's right, today's EUR/GBP dip below 0.86 should prove temporary. The 0.8550/80 area may well hold in EUR/GBP ahead of tomorrow's CPI release.

Further signs of weakness in the Polish labour market Average wages in the corporate sector increased by 10.4% year-on-year in July, weaker than in June (11.9%) and slightly below expectations (10.9%). While this largely reflects base effects, employment remains lacklustre, suggesting mounting pressures in the labour market. The slower growth in wages mostly reflects the high base from July 2022, when a number of industries (particularly mining) paid high bonuses. This July, the difference between total salaries and without-profit payments is small (more than twice as small as a year ago). According to press reports, mining paid high bonuses again, suggesting that other industries must have performed poorly. However, the effects of the weakening labour market can be seen in employment. In the corporate sector, it grew by just 0.1% year-on-year in July (in line with the consensus), compared with 0.2% the month before. This represents an increase of around 1,000 jobs compared with June, and in comparison to around 3,000 and 11,000 jobs during the previous two years. The weaker situation continues to be seen particularly in manufacturing, which is probably linked to the generally weak condition of these industries in Europe (especially Germany). Since February (this year's peak in manufacturing employment in Poland), the sector has cut 9,000 jobs out of 13,000 in the corporate sector over this period. However, low employment growth is largely the result of worsening labour supply. This is due to both an ageing population and a potential outflow of refugees from Ukraine. We, therefore, expect the registered unemployment rate to remain low (5% in July) and wages to maintain double-digit growth in the coming months. This, combined with falling inflation, will support a gradual rebound in domestic consumer spending and, consequently, in overall GDP after a weak first half of the year.

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.

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

Italian inflation continued to decelerate in August The August inflation release provides comforting signals of a broad-based deceleration in inflation, including the core measure. The trend looks set to continue until year-end, at a pace which will be affected by residual base effects. We stand by our 6.4% forecast for 2023 HICP inflation.   Goods and services both decelerate The preliminary estimate by the Italian National Institute of Statistics (Istat) of August consumer prices confirms that inflation is on a solid decelerating path. The headline measure was down to 5.5% (from 5.9% in July), broadly in line with expectations, driven by the non-regulated energy component, recreational services, fresh food, transport services and durable goods, only partly compensated by housing services and regulated energy goods. The statistical carryover for 2023 headline inflation now stands at 5.7%. Both goods and service inflation decelerated to 6.4% and 3.6%, respectively, and food inflation, at 9.6% in August, fell below double digits for the first time since July 2022.   Core inflation falls Core inflation, which strips out energy and fresh food, and is a key indicator in the eyes of the European Central Bank, also sent encouraging signals, falling to 4.8% from 5.2% in July, confirming the deceleration pace seen since June. This reflects the deceleration in services, not yet impacted by the recent acceleration in hourly wages (at 3.2% year-on-year in June)   Further declines in inflation expected... As the pace of the decline in headline inflation is still being set by the energy component, we should be aware that substantial base effects have yet to play out as a decelerating factor over the autumn. Indicators such as import prices and producer prices continue to point to softer headline inflation ahead. Import prices contracted by 9.8% in June and producer price inflation, at -5.5% YoY in June, has been in negative territory since April. The latter is still driven by the energy component (-26.2% YoY in June), however stripping out energy and construction, the PPI inflation read in June of 2% confirms a clear declining trend.   ...but the pace will depend on a combination of factors If the pricing pipeline is sending encouraging signals, other indicators coming from August business surveys deserve attention. For the first time since September 2022, the manufacturers’ pricing intentions balance rose in August from the previous month and increased in services for the second consecutive month. The only area where the deceleration in price increase intentions remains in place is the retail sector. This is a warning signal that the current pace of inflation deceleration, particularly at the core level, cannot be taken for granted. The wage cost variable will likely have a say in the process. Here, indications are mixed. If some more wage concessions look likely over the next few months as a consequence of past inflation surprises, labour market tightness might loosen a bit. July labour market data, also released earlier today, offer some tentative evidence of this. For the first time over the last eight months, employment declined from the previous month and the unemployment rate edged up to 7.6% (from 7.4% in June). The Italian labour market is possibly finally responding to cyclical developments. After today’s inflation release, we confirm our forecast for average HICP inflation for 2023 at 6.4% YoY.

FX Daily: The indestructible dollar Today's US Labor Day holiday means that it has been a quiet start to the week in the world of FX. The dollar remains near its highs despite Friday's US NFP jobs report showing a jobs market moving better into balance and wages softening. That probably owes to poor growth prospects overseas. Second-tier US data releases look unlikely to hit the dollar too hard.   USD: Little reason to offload dollar positions The dollar has had a good couple of months. It has been buoyed by domestic strength in the US economy and souring sentiment in key trading partners such as Europe and China. The source of that strong domestic demand in the US has been a tight labour market, which has powered consumption. Despite US wage growth softening in August and the unemployment rate finally climbing, US Treasury yields actually rose on Friday and the dollar strengthened. Driving that move may have been the rise in the participation rate with people returning to the workforce. This suggests that the narrative may have moved on from the disinflation debate towards the extension of employment, consumption and domestic demand.  This week's US data calendar looks unlikely to open a decisive new chapter in this narrative – although in the past, the release of the ISM services index (remember that sub-50 reading at the start of the year?) has moved markets. That index is released on Wednesday. There are a few Federal Reserve speakers this week, but market expectations that Fed rates have peaked look set, as do views of a modest 100bp of Fed easing next year (we look for 200bp+). We see little to challenge a strong dollar this week and could see DXY edging up to the 104.50/70 area.  Elsewhere in the world, the central bank policy focus is on the likes of Australia, Canada, Poland, Chile, and Israel. No change is expected in most, although Poland should be starting its easing cycle this week, and Chile is expected to follow up its 100bp cut in July with another large rate cut.

The reasons for the drop in average hours worked are not clear cut It is tough to get a full picture of what’s causing the average hours worked per person to remain so low. Oddly, the number of people working part-time has decreased since the start of the pandemic, which actually has a positive effect on average hours worked. When looking at the average number of hours worked by part-timers, these are even increasing at the moment. On the other hand, the number of hours worked by full-timers has come down.   Part-time work has dropped significantly since the start of the pandemic Sick leave and labour hoarding are plausible reasons for the drop in average hours worked, as the ECB also concluded in a recent blog post. Sick leave was up significantly in 2022 for countries providing data, such as Germany, the Netherlands and Spain, but it is hard to match the numbers to the loss of hours worked. This seems to be in part related to "long-Covid", but other types of longer-term sick leave also seem to be up, according to anecdotal evidence. Labour hoarding could also contribute to the lower average hours worked. In these times of shortages, businesses could be holding onto employees they might need in the future by making them work fewer hours. The ECB reports that “firms have been reluctant to let go of skilled employees who would be needed in the future”. What could also be happening is that the people who have been hired since the pandemic want to work fewer hours, bringing the average hours worked down. In a tight labour market, this could happen as people are able to make more demands in negotiations with employers. There is no data to provide evidence on this though. There is also a compositional effect at play, but that does not fully explain the fall in average hours worked. Still, the reduction is influenced to a degree by the demographics of those in work and in what sectors. Female full-time workers work fewer average hours per week than men and women have been entering the workforce more in recent years. Female employment (at 32 average hours per week) has grown by 4% since the fourth quarter of 2019, while male employment (at almost 38 hours per week) grew by just 0.8% over the same period. While this contributes to the average decline, there has also been a sharp fall for both men and women in average hours worked, indicating that the compositional effect does not explain the full story. The same can be said when looking at the sector breakdown. More people have found employment in sectors with lower average hours worked, but the impact of that is marginal to the overall outcome. If we held the shares of employment from 2019 steady throughout the pandemic, this would not have resulted in a different employment outcome. We do note that hours worked fell more for the sectors that saw employment grow quicker, but we would be cautious in calling that a compositional explanation for the decline in average hours worked. It seems more logical that the stronger drop in average hours worked resulted in more demand for workers to keep output up. Indeed, labour shortages are largest in sectors that saw average hours worked fall most. So overall, it is hard to fully pinpoint the causes of why average hours worked per person are now so much lower than they were prior to the pandemic. A variety of reasons like sick leave, labour hoarding, and the composition of the labour market will play a role. That means that both the demand and supply side of the labour market influence this. But we could of course also miss contributing factors.   Vacancy rates are highest in the sectors with the largest drop in average hours worked    

US service sector’s strong summer boosted by concerts and movies The US service sector ISM surprised to the upside in August and while not at very high levels is consistent with US growth accelerating in the third quarter. There are doubts as to how sustainable this will be, but the rise in the inflation component will keep hawks wary even if they do indeed go with the majority and vote for a pause on rate hikes in two weeks.   Entertainment drives a strong summer for services The US ISM services index was surprisingly strong in August, rising to 54.5 from 52.7. This is well ahead of the 52.5 consensus expectation and in fact above every single forecast submitted by economists, leaving the index at a six-month high. Activity improved to 57.3 from 57.1, new orders jumped to 57.5 from 55.0 while employment rose to 54.7 from 50.7, indicating broad-based strength throughout the report. It may well be that the summer entertainment boon has been a big factor with concerts and cinemas pulling in record revenues and ancilliary businesses feeling the benefits too. Nonetheless, as the chart shows, the headline reading is still at levels that would historically point to lower YoY GDP growth than the 2.5% recorded in the second quarter.   US ISM indices and US GDP growth (YoY%)   Inflation concerns to keep the hawks wary amid data uncertainty The prices paid component rising to 58.9 from 56.8 is a concern though and is likely to keep the hawks wary even if there does seem to be a consensus amongst Federal Reserve officials that it can afford to pause in September and assess the situation again in November. Interestingly S&P's PMI measure for services, also released this morning, told a very different story. The headline index dropped sharply to 50.5 from 52.3, indicating barely any growth with its employment measure weakening and its prices measure recording their lowest reading since February. Just shows you how tricky it is to get a clear reading of what is going on in the economy right now and reinforces the view that a pause at the September FOMC makes sense.

Asia Morning Bites Higher for longer US rates trade takes its toll on Asian FX. Australia and China trade reports out.   Global Macro and Markets Global markets:  Market sentiment turned sour again yesterday, with stocks across the board dropping. The S&P 500 opened down and went lower over yesterday’s session, falling 0.7% from the previous day. The NASDAQ fell 1.06% and equity futures today are showing no respite. Chinese stocks also fell, though only slightly. The Hang Seng fell 0.04% and the CSI 300 fell just 0.22%. US bond yields pushed higher yesterday as the market continued to take out easing previously priced in for 2024/25. 2Y US Treasury yields rose 5.6bp while 10Y yields rose  2bp to 4.28%. EURUSD stayed at the low end of 1.07 on Wednesday. The AUD was also flat at about 0.6380 despite better-than-expected GDP data, as was the JPY at 147.71 despite comments from officials saying they would take action amid speculative market moves. Sterling dropped below 1.25 on suggestions from Governor Bailey that the rate tightening cycle in the UK was done, or if not, nearly done.  Asian FX sold off against the USD yesterday. The SGD unusually propped up the bottom of the list, weakening 0.27% to 1.3639. The CNY rose above 7.30 to reach 7.3180, and we would anticipate a forceful response from the PBoC at this morning’s fixing. G-7 macro:  The US services ISM index unexpectedly rose yesterday, rising to 54.5 from 52.7 (52.5 expected). There were also gains in the prices paid index, employment, and new orders. This is what drove the market to price out further easing next year, helping to lift the USD. The Fed’s latest Beige Book was somewhat downbeat given the ISM numbers. Today, there isn’t too much to look out for. US non-farm productivity and unit labour costs are both residuals from earlier GDP data and don’t really add to the sum of knowledge on the US economy. Weekly jobless claims are the only other US data of note. The Eurozone releases final GDP figures for 2Q23. No revisions are expected. China:  August trade figures will likely show a slight moderation in the pace of contraction, though it would be generous to describe this as a bounce. A trough might be a more accurate description. Still, that’s better than what has gone before, so it could buoy sentiment. The trade balance may shrink slightly despite this, from the $80.6bn figure from July. Australia:  A slight contraction in Australia’s AUD11.3bn trade surplus for July is also expected for the August figures published later this morning. This is unlikely to have any meaningful impact on the AUD, whose current weakness is more a function of broad USD strength.    What to look out for: China and Australia trade balance Australia trade balance (7 September) China trade balance (7 September) Malaysia BNM policy (7 September) US initial jobless claims (7 September) Japan GDP (8 September) Philippines trade balance (8 September) Taiwan trade balance (8 September) US wholesale inventories (8 September)

Canada expected to have shed 6,400 jobs BoC’s Macklem says rate increases may be needed to lower inflation The Canadian dollar is steady on Friday in what should be a busy day. In the European session, USD/CAD is trading at 1.3670, down 0.12%. Canada releases the August job report later today, with the markets braced for a decrease of 6,400 in employment. The US dollar has been on a tear against the major currencies since mid-July. The Canadian dollar has slumped, losing about 450 basis points during that span. The Canadian economy hasn’t been able to keep pace with its southern neighbor, and that was made painfully clear as GDP contracted by 0.2% in the second quarter, below expectations. The deterioration in economic growth is a result of a weak global economy as well as the Bank of Canada’s steep tightening cycle. After back-t0-back increases, the BoC opted to pause at this week’s meeting and held the benchmark cash rate at 5.0%. Governor Macklem likes to use the term “conditional pause”, which means that a break from rate hikes will depend on economic growth and inflation levels.   At this week’s meeting, the BoC’s rate statement was hawkish, warning that inflation was too high and not falling fast enough. This was a signal that the door remained open to interest rate increases. Macklem was more explicit on Thursday, stating that further rate hikes might be needed to lower inflation and warning that persistently high inflation would be worse than high borrowing costs. The markets are more dovish about the BoC’s rate path, given that the economy is cooling and the central bank will be wary about too much tightening which could tip the economy into a recession. The markets have priced in a 14% probability of a rate hike at the October meeting.   USD/CAD Technical USD/CAD is testing resistance at 1.3657. The next resistance line is 1.3721 1.3573 and 1.3509 are providing support  

Grants account for an increasingly smaller share of sales, as XTPL's sales of products and services expand. The company is currently pursuing three publicly subsidized projects, and one project was completed at the end of 2Q23 (a project with NCBiR "Innovative technology for precise deposition of conductive meshes for use in next-generation OLED displays" for PLN 11.7mn). Current ongoing projects include: 1. A grant from NCBiR for PLN 7.7mn (total project value PLN 11.6mn); duration October 1, 2020, to September 30, 2023. 2. A grant from the Polish Agency for Enterprise Development for PLN 0.4mn (total project value PLN 0.9mn); duration January 18, 2018, to December 31, 2023. 3. A grant from the European Commission for EUR 0.4mn (XTPL's budget is EUR 0.4mn, the total value of the project is EUR 4.3mn); duration from September 1, 2022, to August 31, 2024. We expect that, due to the innovative nature of the company's business, XTPL should obtain more grants for its ongoing projects. However, we do not assume an increase in the value of grants relative to historical values.     Cost analysis Management (G&A) and research and development (R&D) costs, adjusted for the impact of the incentive program, have been rising in recent quarters as business scale increases, product commercialization begins, and marketing and sales activity increases after the pandemic period. In the coming quarters, monthly costs expressed as R&D and G&A costs adjusted by the cost of the incentive program should continue to increase - especially with the assumption of more intensive product commercialization and the entry of individual projects with customers into the production deployment phase.     Since the company operated in start-up mode in the current years and began commercializing products from 2021, the cost structure has remained relatively unchanged in recent years. Investments in fixed assets and intangible assets resulted in an increase in depreciation in 2022. The increase in the scale of operations and investments in the company's further development are driving up the cost of raw materials and materials consumption, increasing the cost of third-party services (sales commissions, hiring additional specialists), and increasing the cost of employee benefits (increasing employment and including the cost of the incentive program).      

Employment The group employs over 900 people, of which about 80% are men. The number of employees in the last financial year increased by nearly 7% y/y, in the previous 3 years it remained at the level of approximately 850 employees. At the end of 2022/23, manual workers accounted for approximately 55% of the workforce, every fifth employee was employed in sales.     Strategy 2020-2023 The Company’s current covers the years 2020-2023, it was published in 2020 after the outbreak of the Covid-19 pandemic. The key elements/objectives of the strategy include: ■ Continuation of the current business model (design, production and sale of fire protection systems) ■ Maintaining the position of the leader in passive fire protection in Poland, while striving to gain and strengthen the position in the markets of Central and Eastern Europe, Scandinavia, Benelux, and England (the goal is a 60% share of foreign markets in revenues). ■ ROE at 13% per annum. ■ Współczynnik ROE na poziomie 13% w skali roku. ■ Stable dividend policy assuming a dividend payment of 30% of the consolidated net profit. ■ Net debt (excluding IFRS 16) below 3x EBITDA.     In our opinion, the strategy was not particularly ambitious, taking into account the results generated by the Company before its announcement. ROE in the 2019/20 financial year was almost 16%, and the net debt to EBITDA ratio was below 1.3x. These indicators improved further in the following years. The dividend payout ratio is also above the level assumed in the strategy (56% for the 2022/23 financial year). However, the Company did not increase the share of exports in revenues, but this is also due to the dynamic growth of domestic revenues.  

Australia: Strong labour report complicates RBA decision Although most of the jobs created this month were part-time, these have a habit of turning into full-time jobs, with all that this implies for higher spending power and other benefits. This pushes the pendulum back a little in favour of some further RBA tightening.   August labour report Keeping up its reputation for being an unforecastable piece of data, Australia's August labour report surprised strongly on the upside. A total of 64,900 new jobs were created in August. And although almost all of these were part-time jobs (62,100), such jobs have a habit of becoming full-time in the months ahead, which will also imply higher wages, greater job security, and better benefits - all things that usually go hand in hand with consumer confidence and stronger consumer spending.  The chart below shows the evolution of Australian employment smoothed over three months. What is evident is that although full-time employment had been slowing, the ongoing rise in part-time jobs might presage a renewed pick up in full-time jobs in the months ahead.  This would be a problem because the Reserve Bank of Australia (RBA) has been trying to cool the economy enough to bring inflation down. It has certainly made some good progress this year, getting the headline monthly inflation rate down to 4.9% in July, and the wage growth figures have also been surprisingly well-behaved. But just like the US, where inflation is now rising again at a headline level, Australian inflation has used up all the helpful base effects from last year, and the going will be a lot harder in the months ahead until we get to the November data when it should start to improve again.    Rates peaked or not? We have been wrestling with our RBA rate call, coming very close this month to chopping out our forecast for one final rate hike before the end of this year - possibly at the November meeting. We are glad now that we didn't remove this because the data flow on the activity side seems to be holding up better than would be consistent with further decent progress towards the RBA's inflation target.  Presentationally, it also might be useful for the new RBA Governor, Michelle Bullock, to stamp her authority on markets and establish a reputation for not taking risks with inflation. This would be better done early in her tenure before minds start to get made up, on the assumption that central banks still follow the implications of the seminal Barro and Gordon research.  So for now, the final 25bp cash rate hike to 4.35% remains part of our forecast. We will need to see further solid progress on inflation reduction, as well as some more concrete signs of slowing activity and domestic demand before we ditch it.   

The higher price of oil could already be starting to have an influence on Fed rate expectations for next year. The amount of rate cuts priced in by December of next year has been pared back to around -83bps. If the Fed is encouraged to keep rates on hold for longer it would pose upside risks for our US dollar forecasts (click here). In our latest monthly FX Outlook report we pushed back our forecasts for further Us dollar weakness and the start of Fed rate cuts into 1H of next year. Bringing developments back to today, the release of the US CPI for August is expected to reveal a pick-up in headline inflation (+0.6M/M) while core inflation is expected to increase at a slower pace (+0.2%M/M) for the third consecutive month. The recent faster than expected slowdown in inflation, employment and wage growth has reinforced market expectations that the Fed will leave rates on hold this month. There are currently only 2bps of hikes priced in for the 20th September FOMC meeting. There would have to be a significant upside for inflation today to alter market expectations for the Fed to remain on hold. Looking at price action around CPI report releases this year, the dollar index has weakened in the first 30 minutes after releases following the last six CPI reports.    

The latest labour market statistical release from the ONS showed: • The ILO unemployment rate rising to 4.3% from 4.2% previously • Employment falling by 207k 3m/3m • Private sector regular pay growth at 8.1% 3m/yr from 8.2% 3m/yr   The latest UK labour market data showed the recent loosening of the labour market continuing. In terms of volumes, the release was very much in line with expectations. The unemployment rate ticked up to 4.3% from 4.2% previously with employment falling by 207k 3m/3m (cons 195k). The one shift from recent trends was that the inactivity rate rose slightly, by 0.1ppts to 21.1% mainly due to a sharp rise in inactivity amongst younger (aged 16-24) cohorts and students. That may be a result of summer holidays and likely to reverse in coming months. Inactivity linked to long-term sickness rose again, however, with the overall post-pandemic increase in inactivity still concentrated amongst older cohorts. The number of vacancies fell again, dropping below 1m (to 989k) for the first time in two years and down from a peak of fall 1.3m in the spring of 2022. The number of payrolled employees (based on HMRC tax data which leads the ILO data by one month) is estimated to have fallen by 1k in August after a fall of 3.5k the previous month.   Regular pay growth was 7.8% 3m/yr, unchanged from the previous period and in line with expectations. Total, whole economy pay including bonuses was 8.5% 3m/yr up from a revised 8.4% 3m/yr previously. However, the total pay (i.e. including bonus)) measure is still being affected by one-off non-consolidated payments made to the civil service and NHS as part of recent pay settlements. Private sector regular pay (the measure the MPC have indicated they are actually focused on) dipped to 8.1% 3m/yr from 8.2% 3m/yr previously. The MPC remain focused in two aspects of the labour market 1) its overall tightness and 2) private sector pay developments. On 1) there is now sustained evidence therefore that the labour market is loosening, unemployment has risen, the number of vacancies continues to fall which is backed up by survey data of employment intentions. However, as MPC member Jon Cunliffe noted at last week’s Treasury Committee, "the pay data lag the activity data” and therefore “it takes time for all that to work through". So even if the MPC can begin to feel more confident that the cooling of the labour market will feed through to wage growth it remains too high for comfort in the here and now. We continue to see next week’s meeting delivering a 25bps increase in Bank Rate which we think will mark the end of the current tightening cycle.          

Weak UK PMIs bolster chances of November BoE pause The latest UK purchasing managers indices undoubtedly vindicate the Bank of England’s decision to keep rates on hold this month. We think the Bank’s tightening cycle is over.   We’ve had the latest purchasing managers indices for the UK and it’s another dismal outcome. The services PMI now stands at 47.2, down from 49.5 and that’s lower than had been expected by economists. There’s little doubt from the accompanying S&P Global press release that the economy is weakening, and the comments on the jobs market stand out in particular. The survey indicates that employment is now falling at the fastest rate since October 2009, when you exclude the volatility during lockdowns. And prices charged by firms are increasing less rapidly too. All of this supports the wider body of evidence from the data that the jobs market is weakening and that domestically-generated inflation is likely to slow over coming months. Admittedly, the Bank of England has been more reluctant to base policy on surveys while actual inflation and wage data have (at least until recently) been coming in consistently hot. But with lower gas prices taking pressure off the service sector to lift prices aggressively, in an environment where demand appears to be cooling, inflation in the service sector should continue to fall over coming months. Services CPI – currently 6.8% - should end the year below 6%. We therefore think the Bank will remain on hold in November and that August’s rate hike marked the top in this tightening cycle. Remember that we only have one inflation and wage data release before November’s meeting. So if the Bank felt it had enough evidence to pause yesterday, then barring any big surprises in those data releases, it’s unlikely that much will have changed by the next meeting. Remember, too, that one official who voted for a rate hike this week – Jon Cunliffe – now leaves the committee and there’s no guarantee his successor – Sarah Breeden – will vote the same way. That suggests the decision in November could be a little less contested than it was this month. Bigger picture, the Bank is also acutely aware that the impact of past hikes is still feeding through, and it’s made it abundantly clear that the length of time rates stay high is now more important than how high they peak in the short-run. That said, we expect the first rate cuts by the middle of next year.

Little change in Poland’s employment numbers but wages remain high Average employment in the enterprise sector declined by around 6,000 in September, likely reflecting weaker demand in manufacturing. Wage growth remained in double-digits though, allowing for a further rise in real terms. The trend should continue into 2024, which is good for consumption but bad for persistent core inflation.   Average employment in Poland's enterprise sector in September was unchanged on an annual basis (in line with the consensus) from the previous month. There was, however, a decline in employment in Month-on-Month terms by around 6,000. Despite the weak economy, we see no signs of mass layoffs, and companies are 'hoarding' employment, at least for now; they are concerned about workers' availability in the future. This is most likely related to the limited personnel supply due to the decline in the working-age population and the departure of some immigrants. For months, the situation has been weakest in manufacturing. Furniture manufacturing stands out in particular, which probably felt a strong deceleration in the housing market after  rate hikes from both the Polish central bank and the ECB. However, the rebound in demand for mortgages due to government support gives hope for an improvement at the turn of the year. On the positive side, some service industries stand out, particularly lodging and food service, likely still benefiting from the recovery in pandemic demand and the population rise following the rise in Ukrainian refugees and exports to the country. In September, average wages in the enterprise sector rose 10.3% YoY (very close to our 10.2% forecast, with a consensus of 10.8%), following an 11.9% YoY increase in August. The slowdown in wage growth most likely reflects a higher base and fewer working days than in September 2022 (which lowered piecework wages). The minimum wage will increase twice in 2024 (by a total of about 20%), which, especially in service industries, forces an adjustment of the entire wage structure for those earnings above the minimum. This, combined with the still generally good condition of the labour market, suggests that double-digit wage growth will also continue next year. This allows for a further rebound in consumption but has negative consequences as far as persistent core inflation is concerned.

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.

Korea: Exports rebound for the first time in thirteen months Exports rebounded in October, driven mainly by solid vehicle and machinery exports, along with signs of improvement in chip exports, suggesting that global demand conditions are holding up well. However, the weak manufacturing PMI hints that the expected export recovery will only be modest.   Exports gain suggests global demand conditions remain healthy October exports rose 5.1% YoY (vs -4.4% in September, 6.1% market consensus) on the back of solid car (19.8%) and machinery exports. We also see some signs of improvement in chip exports as their decline moderated to -3.1% from the recent low of -44.5% in January 2023. We believe that Korean chip makers benefit the most from the recent strong demand for AI investment, and chip exports will likely rebound by the end of the year. Also, the recent rise in oil prices has boosted petroleum exports, which registered an 18% gain.  Despite growing concerns over the slowdown in developed economies, Korean exports suggest that global demand remains robust and is even recovering in some sectors. The robust exports to the US (17.3%) signal that resilient private consumption and investment may be sustained at least in the near term as EV cars, mobile devices, and machinery gained the most. However, exports to the EU declined (-10.7%) on the back of weak steel and machinery exports.  Imports dropped more than expected in October, falling by -9.7% (vs -16.5% in September, -2.1% market consensus). The recent rise in global commodity prices hasn't had much impact yet but will come through more meaningfully in the coming months. This will likely narrow the trade surplus despite the recovery in exports.    Exports rebounded but the trade surplus narrowed in October   Manufacturing PMI edged down in October The manufacturing PMI fell to 49.8 in October (vs 49.9 in September), staying below the neutral 50 level for a sixteenth consecutive month. Output and new orders gained compared to the previous month, which is a good sign for exports in the near term. However, a high level of inventories and heightened tensions in the Middle East probably dragged down other subindexes such as inventories, employment, and supplier deliveries. We expect the semiconductor industry to continue to recover with robust demand, but other consumer goods manufacturers may face strong headwinds in the near future.  

In the reported period, the company generated a net profit of PLN 4,5 million (+161,5% y/y). • In Q3’23, operating cash flow was PLN 0,9 million, investment cash flow was PLN 0,3 million, and financing cash flow was - PLN 0,2 million. As of the end of September’23, the company had PLN 23,3 million in cash and financial assets (+ PLN 0,1 million q/q). • At the end of September’23, capitalized game development costs amounted to PLN 43,5 million (+ PLN 3,6 million q/q, + PLN 15,8 million y/y), of which PLN 43,2 million pertained to the F2P game in production (+ PLN 3,6 million q/q, + PLN 15,9 million y/y) – PLN 7,9 million for 'Unsolved' (+ PLN 0,9 million q/q), PLN 15,4 million for the New RPG game (+ PLN 2,0 million q/q), and PLN 16,7 million for research and development projects (+ PLN 1,1 million q/q). • Investment outlays for game production = PLN 4,7 million (+24,6% y/y, -9,6% q/q). • Slightly increase of employment = 98 in Q3’23 (vs. 95 in Q2'23). • Unsolved – in the past quarter, work continued on the development of the current version of the game, including increasing the number of titles available in the app, implementing new mechanics and functionalities, giving a significant increase in LTV, creating space for multiplying player acquisition spending. At the same time, work continued on the game engine, enabling Unsolved to be expanded with metagame, a layer that adds additional gameplay mechanics to the players involved, increasing the game's monetisation potential. • New RPG Game - during the past period, work proceeded according to the schedule. Tests of the game with players (the so-called technical soft-launch) conducted in Q2'23, aimed at verifying the key assumptions and indicators of the project, confirmed the strengths of the game (unique selling points) in the form of, among others, a high level of content quality, a unique art style or gameplay. Taking into account the conclusions from the analysis of the data collected during and after the Q3'23 tests, up to the date of the report, the project has been working on, among other things. In the area of game modes and content. The timetable for further work on the project is to carry out further tests with players in 1H'24, followed by the reveal of the game and the start of marketing activities in 2H'24. • HOPA Games – at the end of the September'23, a total of 50 games from Artifex Mundi's entire portfolio were available on at least two console platforms (+1 q/q).  

The French labour market weakens still further France's unemployment rate rose in the third quarter to 7.4% of the active population, confirming the weakening of the labour market. And that weakening is set to continue in the coming months due to weak growth and the rise in the active population.   Unemployment rate up more than expected France's unemployment rate rose slightly more than expected in the third quarter to 7.4% of the active population. This represents an increase of 0.2 points over the quarter, or 64,000 more unemployed people. The unemployment rate nevertheless remains well below its pre-pandemic level (8.2%). The employment rate also fell slightly over the quarter, by 0.2%, to 68.3% of people aged 15 to 64. The decline was most marked in the 50-64 age group. This data confirms that the labour market is indeed weakening in France and that the weakening is even happening a little faster than expected. This is probably a turning point. For two years, employment growth in France had been much more dynamic than economic growth. Now, weak growth (French GDP rose by 0.1% in the third quarter) and a gloomy outlook appear to be leading to a weakening of the labour market. What's more, the leading indicators suggest that this is only the beginning of a rise in unemployment, which is likely to continue over the coming quarters. Payroll employment in the private sector fell in the third quarter, and hiring intentions are down in most sectors, signalling that the decline in the workforce could continue. Temporary employment, generally considered to be a good leading indicator of the labour market as a whole, fell sharply and is now back below its pre-pandemic level. In addition, the lack of labour is much less of a constraint on production for companies in all sectors than it was a few quarters ago. Added to this is the expected impact of pension reform on the active population. With the increase in the retirement age, older people will be working longer than before, and a marked increase in the active population is therefore expected in 2023 and 2024 (the effect of the reform on the active population being estimated at 0.2 points in 2023 and 0.4 points in 2024). There would have to be a very strong dynamic of job creation for such an increase in the active population not to lead to an increase in the unemployment rate. However, under current conditions, job destruction is more likely in the coming quarters.

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.