energy prices

The Japanese yen is drifting on Friday. In the European session, USD/JPY is trading at 147.80, up 0.10%.

Tokyo Core CPI falls to 1.6%

Tokyo Core CPI reached a significant milestone today, falling to 1.6% y/y in January, after a December reading of 2.1%. This was the first time the indicator dropped below the Bank of Japan’s 2% target since May 2022. The main driver of the decline was lower energy prices. Tokyo Core CPI excludes fresh food but includes fuel. The Tokyo core-core index, which excludes fresh food and fuel prices, rose 3.1% y/y in January, down from 3.5% in December.

The drop in inflation reinforces the BoJ’s view that cost pressures are gradually being replaced by rising service prices as the main driver of inflation. This is hugely significant, as it points to inflation being more sustainable, which is a requirement for the BoJ before it tightens its ultra-loose policy. Japan also released corporate service inflation for December which held steady at 2.4%, a nine-y

FX Daily: Eurozone Inflation Impact on ECB Expectations and USD

German Inflation Came In At 8.8%, Hitting Levels Not Seen In 50 Years

Rebecca Duthie Rebecca Duthie 30.08.2022 15:26
Summary: The rise in prices was led by those of food and energy. ECB interest rate decision. German inflation soars in the wake of rising energy prices Energy prices drove up inflation in August, pushing it to its highest level in over 50 years and surpassing a previous high set only three months earlier, statistics revealed on Tuesday. The acceleration of German inflation to a record level due to rising energy costs is supporting expectations for a sizable interest rate increase at the ECB meeting next week. Following an unexpected 8.5% increase in July, consumer prices, which are harmonised to be comparable with inflation data from other European Union countries (HICP), rose by 8.8% annually, according to the federal statistics agency. According to Germany's statistics office, the rise in prices was led by those of food and energy, however their effect was largely mitigated by temporary government aid, such as a fuel refund and incredibly inexpensive public transportation. According to the same statistics office, food costs rose 16.6% year over year in August compared to the same month the previous year, while energy prices rose 35.6% higher. The increase in August includes anti-inflationary measures like lower fuel taxes and cheaper public transportation tickets. These restrictions are about to expire, which suggests that price increase may pick up speed. Data on inflation in the eurozone are coming on Wednesday, and another record surge of 9% is anticipated. According to the Bundesbank, Germany's inflation percentage will reach around 10% in the fourth quarter of 2022, and the prognosis is very uncertain because of the "unclear situation" on the commodity markets, which is a result of Russia's conflict in Ukraine. The ECB is faced with not just the difficulty of extraordinary inflation but also the ensuing cost-of-living pressure that some analysts claim has already caused a recession in the 19-nation bloc. That is the biggest concern for the continent as a whole. While a half-point rate increase by the ECB is anticipated on September 8, some have suggested a larger 75 basis-point increase, similar to the more aggressive actions the Federal Reserve has recently taken. Positive news emerged on Tuesday as energy prices in Europe decreased as a result of the European Commission's plans to act quickly. Despite the risky nature of trading, nations in the region have been successful in filling natural gas storage facilities in time for the winter heating season. Sources: reuters.com, bloomberg.com
Saxo Bank Podcast: Natural Gas On Colder Weather, Wheat And Coffee Under Pressure, JPY Weaker And More

Governments Are Looking Into Ways To Mitigate The Impact Of Higher Energy Prices

ING Economics ING Economics 03.09.2022 08:55
  It is no secret that Europe is heading for a severe energy crisis. Energy prices have already skyrocketed but companies and households will only be confronted with higher energy bills in the coming months. While rising bills are inevitable, the other big risk for Europe is supply disruption In this article Europe's gas storage tanks are 80% full Governments are stepping in Europe's gas storage tanks are 80% full Amid all the doom and gloom, there is at least some positive news in that European countries have been able to fill gas storage ahead of schedule. The European Commission has asked member states to fill reserves up to at least 80% by 1 November. Most countries have already reached that level well ahead of time. Overall, Europe is currently at 80.2%, which is about two months ahead of time. European gas storage has been filling up Natural gas, stock level, country total, fill level (%) Source: Gas Infrastructure Europe (GIE), Macrobond Governments are stepping in This means that the EU has chosen to pay a high price to achieve sufficient gas supply ahead of the winter. At the same time, it is no guarantee that shortages will not happen. As Europe still relies on further imports in the winter months, there is a chance that a cold winter still results in shortages. If these shortages occur, it will be at the end of the winter. However, it currently also looks as if energy supply issues could go beyond this winter into next. While countries are filling their national gas reserves, governments are looking into ways to tackle or at least mitigate the impact of higher energy prices on consumers and corporates. Measures differ between countries, both in terms of magnitude and nature. We provide an overview of the current state of play below and expect more measures to be announced in the coming weeks. National policies introduced to help consumers with rising energy prices Western Europe Eastern Europe   Energy Source: https://think.ing.com/articles/how-europe-is-preparing-for-a-hard-winter/?utm_campaign=September-01_how-europe-is-preparing-for-a-hard-winter&utm_medium=email&utm_source=emailing_article&M_BT=1124162492   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
German labour market starts the year off strongly

Better Supply Chain Status Contrasted With Ecological Problems And Energy Prices. Situation In Germany Leaves Investors With Mixed Feelings

ING Economics ING Economics 05.09.2022 12:51
With disappointing July trade data, the German economy starts the third quarter on a weak footing Trade is no longer a growth driver but has become a drag on German growth Germany: Exports and imports declined German exports (seasonally and calendar-adjusted) disappointed at the start of the third quarter and dropped by 2.1% month-on-month in July. Imports also decreased, by 1.5% month-on-month, lowering the trade surplus to €5.4bn, from €6.2bn in June. Exports to Russia as a result of the sanctions almost came to a standstill and fell by another 15% month-on-month. Lower energy imports from Russia were the reason for German imports from Russia to drop by more than 17% MoM. Trade is no longer a growth driver but has become a drag on German growth. Since the second quarter of 2021, the growth contribution of net exports has actually been negative. Global supply chain frictions, geopolitical risks and rising production costs are the obvious drivers behind this new trend. Looking ahead, the outlook for German trade is mixed. There is some relief in supply chains and transportation costs. However, at the same time, low water levels, high energy prices and the possible fundamental change in supply chains and production processes on the back of geopolitical uncertainty will be clear obstacles to growth. After yesterday’s encouraging increase in July retail sales, today’s trade data add to the long list of growth concerns for the German economy in the second half of the year. Read this article on THINK TagsGermany Exports Eurozone 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
Disappointing German March macro data increase risk of technical recession

Germany: Supply Chains Issues Caused By The War, Lockdowns In China, Water Levels And Finally Energy Prices Worry Germans

ING Economics ING Economics 07.09.2022 09:48
Production in the construction sector prevented industrial activity from falling further in July. At the same time, high energy prices are leaving their mark on German industry   Is this the first gust of wind preluding a perfect storm? In July 2022, production in industry in real terms was down by 0.3% on the previous month on a price, seasonally and calendar adjusted basis, from an upwardly revised 0.8% MoM in June. On the year, industrial production was down by 1.1%. According to the statistical office, the relatively small number of school holidays and holiday leave prevented an even larger decrease in production compared with July last year. On the month, production in industry, excluding energy and construction, was down by 1.0%. Outside industry, energy production in July was up by 2.8% and production in construction by 1.4% from the previous month. Compared with developments in the second quarter, industrial production is down, while the construction sector shows some resilience. High energy prices have become biggest concern German industry is clearly suffering from disrupted supply chains on the back of the war in Ukraine, the aftermath of pre-summer lockdowns in China, low water levels in the main rivers and increasingly, higher energy prices. The statistical office released additional data showing that production in the energy-intensive industrial segments declined by more than the broader industry (-1.9% year-on-year). Production in this area has dropped by 6.9% since February 2022. For Germany’s industrial backbone, small and medium-sized enterprises, higher energy prices look like a ticking time bomb. With ongoing pressure on consumers’ disposable incomes, companies’ pricing power is fading. In this regard, it is remarkable that the government’s third relief package presented on Sunday provided only very limited support for this segment of the economy. Looking ahead, shrinking order books since the start of the Ukraine war, the well-known supply chain problems (both international and domestic) plus high uncertainty, high energy and commodity prices and potential energy supply disruptions will not make life any easier. Judging from the first macro data for the third quarter, the German economy has not fallen off a cliff at the start of the third quarter but is rather sliding into recession. Read this article on THINK TagsIndustrial propduction Germany Eurozone 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
The French Housing Market Is More Resilient | The Chance Of Republicans Winning The Senate Is Up

France: Industrial Production Decreased | French GDP (Gross Domestic Product) Is Expected To Decline

ING Economics ING Economics 09.09.2022 16:41
Industrial production fell sharply in July and remains 6% below its pre-pandemic level. Industry will probably contribute negatively to French economic growth in the third quarter   French industrial production fell by 1.6% over one month in July, and the decline was widespread across all branches of the industrial sector. Only construction increased its output by 0.5% over the month. Over a year, industrial production is down by 1%. It is therefore a difficult start to the third quarter for the French industrial sector, which is clearly suffering from the disruption of supply chains due to the war in Ukraine, lockdowns in China, and rising energy prices. Looking ahead, the contraction in order books since February, the high level of stocks of finished goods, high uncertainty, high energy and raw material prices, and potential disruptions to energy supplies do not point to an improved outlook for the French industrial sector. Indeed, the business climate indicator for the sector fell further in August. It is therefore likely that industry will make a negative contribution to French economic growth in the third quarter. The industrial sector only represents 15% of total French value added (20% if we include construction), so the weakness of industry is not enough in itself to conclude that the macroeconomic outlook for the next few quarters has worsened. However, the outlook is not much more favourable in the services sector. The deterioration in purchasing power caused by inflation, the decline in consumer confidence, and the fading of the positive effects of the post-pandemic reopenings will weigh on the dynamism of services in the coming months. As a result, the question is no longer really whether France and other European countries are heading for recession, but rather how fast the recession is coming. Given the developments of the last few weeks, there is a risk that French GDP growth will turn negative in the third quarter. We expect growth of 2.2% for the whole of 2022 and -0.2% for the whole of 2023.  Read this article on THINK TagsIndustrial Production GDP France Eurozone 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
Inflation in France increased to 6.2%. ING points to "fuel shortages" and food prices

In the European Union share of energy in food producers' costs rose dramatically

ING Economics ING Economics 27.10.2022 12:19
Surging energy prices create uncertainty for EU food producers, although national energy support measures reduce the impact and shield production. Nonetheless, food producers need to reassess their energy strategies because mandatory cuts in energy use can't be ruled out this winter and concerns about longer-term gas supply continue to linger A considerable increase in energy costs for food and beverage manufacturers Back in 2019 when energy markets were still calm, energy had a 2% share in the total costs of food manufacturers in the EU. Given the sharp increase in energy prices, we estimate that the share currently ranges between 7.5-10% (without price caps or compensation). There are also many signals that some food manufacturers have seen their energy bills rise to up to 30% of their total costs. In food processing, activities such as flour milling, baking and fruit/vegetable/potato processing are relatively energy intensive. At this stage, there are large differences between what companies are paying for energy because some still have longer-term fixed contracts, while others had to renew their contracts at much higher rates. Companies that locked in energy prices before 2021 and companies that use other energy sources than gas for generating heat are certainly in a more favourable position. However, differences will become less pronounced in the months ahead as older, lower-priced contracts and lucrative hedges expire and government support measures level out some variances. The Netherlands is an example of how energy costs have become a burden for food producers Energy costs as a share of total costs in food and beverage manufacturing Source: CBS, *estimate ING Research Food manufacturers feel the pinch from second-round effects Besides the direct impact on costs, there is also a pass-through of higher energy prices towards food and beverage makers as they procure many inputs from agriculture and because they need transportation. Agriculture is generally quite energy intensive (see this previous article), and this is especially the case for horticulture under glass and mushroom growing. Energy represented 25% of total costs in Dutch horticulture in 2021 and, based on energy prices in 2022, that share has gone up to more than 60%. When prices of agricultural products go up due to higher energy costs, the food industry has to deal with this as well. This article looks specifically at energy but it’s good to keep in mind that cost increases for packaging materials, agricultural inputs and labour all add to the cost pressure. Energy support measures also help to sustain food production Do we see any signs of a reduction in food production in the EU because of high energy prices? Thus far, food manufacturing output has proven to be quite resilient, aided by the ability to pass on (some of) the higher costs to customers and consumers. This pass-through is illustrated by current double-digit levels for food inflation in the EU (read more in this article). Still, food production data up until August show that production volumes in the food and beverage industry in the EU are higher this year compared to 2021. The long-term trend shows that output volumes are generally not very susceptible to external shocks, apart from a considerable drop at the start of the Covid-19 pandemic. Currently, we see two mechanisms that help to safeguard EU food production. First, international trade and substitution allow food processors to keep facilities running in case European agricultural supplies fall short. High energy prices haven't led to such a situation yet, but earlier this year trade helped to keep up production of spreads and frozen potatoes amid shortages of Ukrainian sunflower oil. Second, food producers also benefit from government support measures aimed at cushioning the impact of high energy prices on companies and consumers. Examples of recent measures that benefit companies include the reduced VAT rate for electricity and gas in Belgium and the Compensation Energy Costs (TEK) in the Netherlands. Meanwhile, measures aimed at consumers are beneficial because they prevent drastic cuts in expenditure on basic needs such as food. EU countries opt for a range of measures to reduce the burden on companies Selection of government support measures in several countries Source: Bruegel, VRT, FAZ, NOS, ING Research Not all support measures are created equal The introduction of all sorts of national energy support measures for companies will temporarily distort competition in multiple ways. This is very relevant as food and beverage is a major export category accounting for almost 270bn euros or 8% of all intra-EU trade. Hence, calls from food industry associations to maintain a level playing field have become louder over the last couple of months. However, differences between countries are likely to grow as some countries have more fiscal room than others. The longer the energy crisis and subsequent support measures last, the greater the chance that they will determine to some extent which companies will weather this storm best. How support measures distort competition in several ways Source: ING Research Energy costs add additional pressure to EU commodities exports In our base case scenario, energy prices in Europe will stay at relatively high levels for several years. Assuming energy support measures to be temporary means that the competitiveness of European food products in global markets will deteriorate to some extent. Still, global demand for calories is strong due to population and welfare growth, although affordability is a growing issue. Our expectation is that the general competitiveness of more premium products such as infant formula, beer or frozen fries will be impacted less. But for staple products such as milk powder, olive oil and pig meat, the EU Commission’s Agricultural Outlook has already signalled a decline in 2022 export volumes. This is attributed to a variety of reasons including high energy, feed and fertiliser costs, plus drought and animal diseases. So while higher energy prices are a factor impacting extra EU exports, it’s not the only factor. On the other hand, the strengthening of the dollar is a driver in the opposite direction and is currently supportive of EU exports. Chance of mandatory gas and electricity rationing poses a major risk Out of seven major EU food-producing countries, the importance of gas as a source of energy is highest in Benelux (Belgium, the Netherlands, and Luxembourg) and lowest in Spain and Poland. On top of that, a large part of the electricity supply in the Benelux comes from gas-fired power plants. Although concerns about gas supplies during this winter have eased somewhat, the possibility of gas rationing is a serious downward risk for companies that use gas for generating heat in their production processes, especially if they have limited options for fuel switching. Food processing plants that use other energy sources, such as coal, oil or woodchips, are currently better positioned and often run at full capacity even though their energy inputs are generally less sustainable. Another risk is that EU member states are supposed to reduce electricity demand during peak hours between 1 December 2022 and 31 March 2023. This could force companies to shift more production toward night or weekend shifts or reduce output in case this is not possible. Food and beverage makers in the Netherlands and Belgium are most dependent on gas Used energy sources in terajoule in the food, beverage and tobacco industry, 2019 Source: Eurostat, ING Research High energy costs will lead to some substitutions on our plate Elevated energy prices add to food inflation and the current level of food inflation leads to various shifts in food consumption. Such shifts range from an increase in shopping at discounters and higher market shares for private label products to a rebalancing between portion sizes of expensive protein and less expensive carbohydrates in restaurants. The impact of high energy prices might be best visible in the fruit and vegetable section in supermarkets. Here there will be all sorts of substitution effects on display this winter. Due to more energy-intensive processing, conserved and frozen vegetables are becoming less competitive compared to fresh vegetables. On top of that, growing tomatoes, cucumbers and peppers has become a lot less attractive this winter for many horticulture growers in northwestern Europe. If they leave their greenhouses empty, retailers are likely to source more vegetables from growers in Spain, Italy, Morocco and Turkey. These products need less energy to grow, but still require more expensive diesel to transport. In turn that could mean that some consumers will revert to other types of vegetables that provide more value for money. Prices for processed vegetables have increased more than for fresh vegetables Dutch consumer price index 2015 = 100, monthly data Source: CBS, ING Research The situation creates a need for companies to reassess energy procurement and related investments Contingency planning is likely to be a major talking point in strategy discussions for 2023 and beyond. For food manufacturers, reducing their output on short notice is often not easy. This is especially true for companies that have contracted a certain volume of agricultural inputs or for cooperatives that are obliged to purchase milk, animals or crops from members. On top of that, if they reduce output they risk losing contracts and customers which is an even bigger threat to business continuity. While EU farmers are considered to have more flexibility in deciding to reduce production, they generally have high fixed costs meaning that even in unfavourable market conditions they will often decide to ‘plough on’. Follow-up actions that food manufacturers take to cope with high energy prices: Optimise energy use and energy costs: this can be done with additional measures to save energy or by shifting some production to facilities with the lowest energy costs. The latter only works for larger companies with multiple sites that have spare capacity, and only if transport costs allow it. Adapt contracts to reduce energy price risks: price escalation clauses can be a way to pass on energy price increases to customers, but often only work when customers are very dependent on a certain supplier or are working with strategic partnerships focused on long-term continuity. Fuel switching in production processes to reduce dependency on gas: increase of own energy production. For example, with investments in solar panels or biogas installations. Increase electrification efforts: for example, through the installation of electric boilers or heat pumps. In some cases, companies have plans in place but are faced with local capacity constraints on electrical grids. Why it's wise to prepare for another difficult winter in 2023/24 This year, the EU has been able to fill gas storage to the current levels partly because there has still been Russian gas available. Futures markets now seem to be concerned about next winter and Europe’s ability to build stocks without the Russian gas supply. In the event of an ongoing supply squeeze, it can be a burden for food manufacturers with many newer or retrofitted food production plants having been catered to run on gas over the past decade. Such concerns provide a clear incentive for food companies to rethink their longer-term energy strategies, including aspects such as contracting energy supply, the optimal energy mix and related investments. Read this article on THINK TagsInflation Food & Agri European Union Energy 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
Asia Morning Bites - 22.05.2023

China's reopening seems to be a double-edged sword as energy and commodities prices will go up

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.12.2022 10:28
The good news with China's reopening is that it should boost global growth.   The bad news with China's reopening is that it will not only boost global growth, but also energy and commodity prices - hence inflation, the interest rate hikes from central banks and potentially the global Covid cases – which could then give birth to a new, and a dangerous Covid variant, which would, in return, bring the restrictive Covid measures back on the table, and hammer growth.   Note that the reasoning stops here right now, the risky markets are painted in the red, but we could eventually go one step further and say that if the Chinese reopening hits the global health situation – hence the economy badly, the central banks could become softer on their rate hike strategies. But no one is cheery enough to see silver lining anywhere.   This year really needs to end, now!  So, Wednesday was marked by further selloff across European and US markets. The S&P500 slid 1.20% and closed below the 50% Fibonacci retracement on the latest rally. The index gave back half of gains collected from October to November. Trend and momentum indicators, and more importantly market sentiment remain supportive of a deeper dive to meet the major 61.8% Fibonacci retracement, at 3724 mark.   Likewise, Nasdaq lost another 1.32%, and the dips don't look like anyone wants to grab them right now.  In Europe, the DAX struggles to keep its head above the 50-DMA, near 13925.   Across the Channel, despite political shenanigans and Brexit's knock-on effects, high inflation and the cost-of-living crisis, Britain's 100 biggest companies are preparing to close the year with small gains, while the S&P500 has lost more than a fifth of its value.   Why?  First, the British companies had to compensate for the weakening sterling this year –  but that's also true for the DAX, for example, but the DAX is also preparing to end the year around 15% lower. So, it's not only an FX story.   Second, and the most relevant, the fact that the FTSE 100 is heavily crowded in energy and mining stocks is what made the FTSE 100 perform so well this year.   Among the biggest market caps, BP and Shell are up by more than 40% each ytd.  Plus, British big caps make most of their revenues in terms of US dollars; a good thing for a year when sterling lost up to 23% against the greenback at some point and is still down around 10% right now.  And I believe that the FTSE 100's outperformance could stretch into the new year. If the Chinese reopening brings along another bump in inflation due to higher energy and commodity prices, the FTSE 100 could continue offering a good shelter to those willing to hedge against an energy-led global inflation to temper the negative effects.  Of course, the biggest British companies do not reflect the underlying British economy, so the FTSE 100's good performance won't change the fact that smaller, and domestic focused companies will likely continue to suffer from high inflation, recession and perhaps another year of political turmoil as a cherry on top. 
Australian Dollar's Decline Persists Amid Evergrande Concerns and Economic Data

UK Inflation Dilemma: Can Rate Hikes Tackle Soaring Prices and Avert Recession?

InstaForex Analysis InstaForex Analysis 31.05.2023 09:00
On Tuesday, the demand for the pound was significantly higher than that for the euro. As soon as this happened, many analysts began to pay attention to the report on prices in UK stores, as shop price inflation accelerated to 9% this month. This indicates that UK inflation is decreasing slowly or not decreasing at all, despite the benchmark interest rate being raised to 4.5%.   The consensus forecast for the Bank of England's rate currently suggests two more quarter point rate hikes in June and August.   This would bring the rate to 5%. Any further tightening without alternatives would push the British economy into a recession, and even the current rate could potentially cause it, despite the BoE's optimistic forecasts. But how can inflation be combated if it hardly responds to the actions of the central bank?     I believe there can only be one disheartening answer: it cannot. If further rate hikes lead to a recession, the Brits, clearly dissatisfied with recent events within the country, may start a new wave of mass strikes. Take note that in the past year, many Brits have openly criticized the British government for the sharp decline in real incomes and high inflation.   If the rate increases further, the economy will contract, leading to an increase in unemployment. If the rate is kept as it is, it might take years for inflation to return to the target level. The BoE is in a deadlock. BoE Governor Andrew Bailey expects inflation to start decreasing rapidly from April. He noted the decline in energy prices, which will somewhat dampen inflationary pressure on all categories of goods and services. However, the April inflation report was unusually contradictory. While headline inflation showed a significant slowdown, core inflation continues to rise.   Therefore, it is not possible to conclude that inflation is slowing down in the general sense. We can only wait and observe. If Bailey turns out to be right, then the BoE will not need to raise the rate to 5.5% or 6%, which currently seems like a fantasy.   However, if inflation continues to hover around 10%, the BoE will need to devise new measures to address it without exerting serious pressure on the economy. It might require patience for several years. It is entirely unclear which option the central bank will choose.   The demand for the British pound may increase as market expectations of a hawkish stance grow. But will these expectations be justified? The pound may rise based on this, but fall even harder when it becomes clear that the BoE is not ready to raise the rate above 5%. I believe that wave analysis should be the primary tool for forecasting at the moment.     Based on the analysis conducted, I conclude that the uptrend phase has ended. Therefore, I would recommend selling at this point, as the instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic.   A corrective wave may start from the 1.0678 level, so you can consider short positions if the pair surpasses this level. The wave pattern of the GBP/USD pair has long indicated the formation of a new downtrend wave. Wave b could be very deep, as all waves have recently been equal.   A successful attempt to break through 1.2445, which equates to 100.0% Fibonacci, indicates that the market is ready to sell. I recommend selling the pound with targets around 23 and 22 figures. But most likely, the decline will be stronger.    
EUR Reacts to ECB's Dovish Hike, Now More Influenced by the USD

UK Mortgage Approvals Show Promising Rebound, Fueling Optimism for Housing Market Recovery

Michael Hewson Michael Hewson 29.05.2023 09:11
UK Mortgage Approvals (Apr) – 31/05 We've started to see a modest improvement in mortgage approvals since the start of the year, after they hit a low of 39.6k back in January, as the sharp rise in interest rates at the end of last year weighed on demand for property as well as house prices.   As energy prices have come down, along with lower rates, demand for mortgages has started to pick up again with March approvals rising to 52k, while net consumer credit has also started to improve after similar weakness at the end of last year.   With inflationary pressures starting to subside we could see this trend continue in the coming months, as long as energy prices remain at their current levels, and the Bank of England starts to signal it is close to being done on raising rates.     Manufacturing PMIs (May) – 01/06 Last week saw the latest flash PMIs show that manufacturing activity in France and Germany remained weak, while in Germany activity deteriorated further to its lowest levels since June 2020, when economies were still reeling from the effects of pandemic lockdowns.   We also found out that the German economy was in recession after Q1 GDP was revised lower to -0.3%. The UK and US on the other hand were able to see a modest pickup in economic activity. It is clear that manufacturing globally is in a difficult place, we're also seeing it in China, as well as copper and iron ore prices, which suggests that global demand is weakening sharply.   Italy and Spain economic activity is also expected to see further weakness in manufacturing when their latest PMIs are released later this week.
Germany's Disinflationary Trend Gains Momentum, Despite Drop in Headline Inflation

Germany's Disinflationary Trend Gains Momentum, Despite Drop in Headline Inflation

ING Economics ING Economics 31.05.2023 15:34
Disinflationary trend in Germany gains momentum in May Another drop in headline inflation suggests that the disinflationary trend in Germany is gradually broadening. However, it will not (yet) stop the European Central Bank from hiking rates again.   German headline inflation continued its downward trend, coming in at 6.1% year-on-year in May (from 7.2% YoY in April). Today’s data marks the next stage of a gradually broadening disinflationary process as the drop in headline inflation is no longer exclusively the result of base effects but also the result of dropping prices.   Headline inflation has now dropped from its winter peak of 8.8% to 6.1% YoY and the HICP measure came in at 6.3% YoY, from an 11.6% peak in October last year. For the first time this year, prices actually dropped compared with last month, mainly for energy and food but also for transportation as a result of the newly introduced €49 ticket for public transportation.   Disinflationary trend gradually broadening   Today’s drop in headline inflation will support the view of those who advocated that the inflation surge in the eurozone was mainly a long but transitory energy and food price shock with an unpleasant pass-through to the rest of the economy.   If you believe this argument, today’s drop in headline inflation marks the next stage of a longer disinflationary trend: first, it was negative base effects pushing down headline inflation, and now it is actually falling prices in the same categories accelerating the disinflation. However, signs that the disinflationary process is actually spreading to other parts of the economy are still missing. According to available regional data, even the base effect outside of energy and food is still very limited.   Looking ahead, let’s not forget that inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value.   Government intervention and interference, whether that's temporary or permanent, and has taken place this year or last, will blur the picture.   In Germany, for example, the newly introduced €49 ticket already helped to push down inflation in May. However, the reversal of last year’s negative base effects from the energy relief package for the summer months should automatically push up headline inflation again between June and August. It will take until the end of the year for headline inflation to fall into the 3%-4% range.   Beyond that statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather are likely to push down headline inflation faster than recent forecasts suggest.   On the other hand, recent wage settlements and still decent pipeline pressure in services are likely to keep core inflation high. We continue to expect that German headline inflation will average around 6% this year.   Weak growth and dropping inflation but ECB will continue hiking For the ECB, macro data released since the May meeting has had something for everyone. The eurozone economy has turned out to be less resilient than anticipated a few weeks ago and confidence indicators, with all the caveats currently attached to them, point to a weakening of growth momentum again.   As headline inflation is gradually retreating, the risk increases that any additional rate hike could quickly turn out to be a policy mistake; at least in a few months from now. However, at the same time, the ECB seems to have given up linking policy decisions too close to their own forecasts (rightly so) and has put more than usual emphasis on actual inflation developments. With this in mind, the unwritten law that high inflation can only be defeated for good with positive real interest rates remains a strong argument for the ECB hawks.   As we have learned over the last 12 months, the ECB seems to prefer to go too high with rates rather than stop prematurely. This is why we expect the ECB to continue hiking by 25bp at its next meeting in two weeks from now.
Indonesia Inflation Returns to Target, but Bank Indonesia Likely to Maintain Rates Until Year-End

Indonesia Inflation Returns to Target, but Bank Indonesia Likely to Maintain Rates Until Year-End

ING Economics ING Economics 05.06.2023 10:11
Indonesia: Inflation back within target but BI likely on hold until end of year. Headline inflation finally reverted to target in May, with headline inflation slipping to 4.0% year-on-year   Headline inflation back to target after a year Headline inflation slipped below expectations to 4.0% YoY, roughly 0.1% higher compared to the previous month. Inflation is back within Bank Indonesia's (BI) 2-4% target after 12 months and will likely stay within target for the rest of the year. Headline inflation enjoyed a much more pronounced moderation this year, sliding back within target even ahead of BI's expectations. Lower energy and food prices from a year ago level helped push headline inflation lower or unchanged across all items in the CPI basket. Meanwhile, core inflation was also down, dipping to 2.7% YoY and also lower than market expectations (2.8%).       Price stability objective reached but BI likely on hold to steady the IDR Bank Indonesia was one of the first central banks in the region to pause its tightening cycle earlier this year. BI Governor Perry Warjiyo who had expected inflation to slow gradually and revert to target by 3Q, has kept rates at 5.75% since the 16 February policy meeting. Despite the quick reversion to target for inflation, we believe BI will carry out an extended pause to shore up support for the Indonesian rupiah, which was down roughly 2.15% for the month of May. Thus we expect BI to retain policy rates at 5.75% until the end of the year and only consider cutting policy rates should global central banks opt to ease monetary policy.
GBP/USD Analysis: GBP Maintains Growth Momentum, Market Awaits US Inflation Report

Emerging Signs of Economic Recovery in Central and Eastern Europe: Trade, Energy Prices, and Tourism Point to Optimism"

ING Economics ING Economics 14.06.2023 07:34
After facing three years of headwinds to economic growth, the economies of Central and Eastern Europe (CEE) might just be on the verge of an upturn. So far this year, most economies have managed to avoid the most pessimistic forecasts.   And moving into the second half we see the region ‘making the best’ of an admittedly still challenging environment. In our main article we analyse which economies in the region might be able to benefit from: (1) modestly improving trade trends; (2) lower energy prices; and (3) the return of tourism to pre-pandemic levels.   While forecasts for a rebound in global trade are not particularly aggressive, trade has already delivered an important offset to poor domestic demand in the region. In theory, the more open economies of Hungary and the Czech Republic stand to benefit more from the improvement in merchandise trade volumes. Lower energy prices benefit the region as a whole – particularly Turkey.   Higher energy prices wreaked havoc on CEE external balances last year and lower prices this year are most welcome. Lower energy prices also support governments – in the likes of the Czech Republic and Poland – in encouraging fuel retailers not to expand margins. This will help the disinflation process across the region. When it comes to tourism, Turkey, Hungary and Poland have all typically enjoyed net positive tourism receipts.   Romania notably runs a net negative position here. A return of tourism to pre-pandemic levels can certainly provide some support.   These effects will be felt more keenly in Croatia and Bulgaria, where tourism is worth one-fifth of GDP. Incorporating these trends into our overall forecasts for the region, our team of economists feel that growth trends will improve in the second half. A major driver of this will be the broad disinflation process, where we forecast 2024 inflation at roughly half that seen in 2023.   The evidence of disinflation should be enough to start/extend easing cycles in Hungary, the Czech Republic and even a one-off cut in Poland this year. Romania may be tempted to join in with lower rates if it sees peers making the move.   The clear disinflation process should also mean less pressure on real household incomes and suggests that domestic demand will not weigh as heavily on activity as it has done during the recent cost of living crisis. However, there will be key differences across the region driven by the local political climate. Fiscal policy is one clear example here. Fiscal policy looks set to stay loose into October elections in Poland, while the Czech Republic is embarking on an aggressive fiscal consolidation programme.   Equally politics plays a role in the region’s access to EU funds, where we should know a lot more by September/October this year. Turkey, again, is very much focused on its own political cycle. A new economics team faces a much greater challenge in getting inflation under control. It is early days, but hints of more orthodox policy points to large rate hikes through the summer.   Looking further across the region, we note the improvement in Ukraine’s FX reserves amidst the tragedy of the ongoing conflict. As always, this Directional Economics showcases ING’s global reach with our local team of experts in the CEE region. Please reach out to them with any questions. We very much hope you enjoy reading it as much as we do sharing our latest views.
German Inflation and US Q1 GDP Awaited: Market Focus Shifts

Prospects and Challenges for Central and Eastern European Economies in 2023

ING Economics ING Economics 14.06.2023 08:00
2023 will prove another tough year for global growth. Central bankers in most advanced economies will keep their collective foot on the monetary brake pedal. Yet trade volumes and tourism should improve, plus energy prices are substantially lower than a year ago. In this article, we take a look at how selected Central and Eastern European (CEE) economies could benefit on a relative basis.   Key observations • Looking at what an improvement in the external trade environment could mean for the region, we note Hungary and the Czech Republic are the more open economies, Poland and Romania the more closed. Turkey’s more geographically diversified trade mix has helped. Better trade trends should prove an important offset to weaker domestic demand in the region, although we caution that foreign value-add in exports is quite high. Given the recent Turkish lira depreciation, sectors using imported inputs at the lowest rate, eg, labour-intensive industries, could fare better.   • The spike in energy prices did most of the damage to the external imbalances over 2021-22 and falling prices should now be a welcome boon – especially to Hungary and Turkey. Lower energy prices may also give governments more room to pressure margins of the fuel retailers – helping to make the case for rate cuts especially in the CE4 region later this year. Romania’s relative self-sufficiency in energy suggests it will not be a major beneficiary of this story.   • When it comes to tourism, none of the selected CEE countries we cover in this article come close to the near 20% of GDP that tourism represents in the likes of Croatia, Bulgaria and Montenegro. Yet a further recovery in tourism back to pre-2019 levels would certainly be positive for the likes of Turkey, Hungary and Poland – countries that run net positive balances in terms of tourism receipts.   Current account evolution by components: 2022 vs 2019 (% of GDP)
Hungary's Industrial Production Continues to Decline in May; Manufacturing Subsectors Contribute to the Negative Trend

Navigating Slowdown: Assessing CEE Countries' Potential for Growth Amid Global Trends

ING Economics ING Economics 14.06.2023 08:03
Restrictive monetary policy, tighter credit conditions and declining confidence levels point to slowing growth in many parts of the world. The Central and Eastern Europe (CEE) region is no exception, where weakening domestic demand will keep growth rates under pressure. In later sections of this Directional Economics publication, we discuss whether policymakers will be in a position to address this slowdown with easier monetary policy. Yet the prospect of lower policy rates is not the only positive for the region. In this article, we look at which of our selected countries in the CEE region stand to benefit from: (1) a pick-up in trade volumes; (2) the drop in energy prices; and (3) a rebound in tourism   Indices of global exports, energy prices, tourism; 2019 = 100   At a first glance, the CEE is seen as a group of countries that share a few similarities, such as membership in regional economic and political unions, a similar level of income and population, global supply chain specialisation, historical connections, negative current accounts and a high role of trade with the EU. That said, there are differences within the group that call for a separate analysis of the exposure to global trends.   For example, the Czech Republic is a slower-growing developed economy by international standards, while the rest are faster-growing developing economies. There are as well differences in the domestic and foreign policy course that also affect the economic ties.   We see several channels through which the outlined global trends manifest themselves in the economic realities of the CEE. Physical trade volumes and services/tourism are factored into net exports and economic growth, the values of trade are contributing to current accounts and FX expectations, while commodity inputs affect the CPI trends (and the current account).   In this article, we explore the exposure of selected CEE countries, the Czech Republic, Hungary, Poland, Romania and Turkey – as a group and individually – in terms of these channels and see how they factor in the expected economic and financial performance. To set the scene, we look at which countries in the region stand to benefit the most from the pick-up in trade. Global merchandise trade surpassed pre-Covid levels in 2021 but has proved sluggish since. Yet factors like the expected, but so far delayed, Chinese recovery, lower shipping costs and a weaker dollar should support trade over coming years.   The IMF expects global merchandise trade to return to 3-4% pa growth rates in 2024-25 after temporarily slowing to 1.5% in 2023.   Another positive trend we examine is that of the sharp decline in energy prices. After a 63% spike in 2022 (including a 100% spike in natural gas) global energy prices (oil, gas, coal) are expected to post a 40% decline this year, according to the IMF. While we acknowledge that energy prices are subject to upside risks (largely supply related), there are big differences in how lower energy prices will play out across the region – both through energy’s share of imports and weight in CPI baskets. And lastly, we look at the positive expectations for tourism, which unlike merchandise trade has yet to recover to pre-pandemic levels.   This is bouncing back with the removal of epidemiological constraints and a catch up on the previously under-consumed services. According to UNWTO (World Tourism Organization), despite showing 86% YoY growth in 1Q23, the number of international arrivals globally is still 20% below 1Q19 levels. The reopening of China is one of the most important factors supporting expectations of further recovery. UNWTO’s panel experts expect better tourism performance later this year and a return to 2019 levels in 2024 or somewhat later. We take a look at how each of the three factors will impact countries across the region
Challenges Ahead for Belgium: Solid Consumption Masks Competitiveness and Fiscal Concerns

Navigating Current Account Challenges: Impact of Energy Prices and Tourism Sector on CEE Economies

ING Economics ING Economics 14.06.2023 08:19
Bringing it all together, Figure 11 summarises all that we were trying to focus on. The current account is the most sensitive and most complex indicator representing an overall picture of the merchandise trade, tourism and energy-related shocks.   Increased energy prices have played by far the largest role in the deterioration of the current accounts of each country since 2019 and price reversals should ensure a reversal of deteriorating trends. Hungary proved to be impacted the most by these combined shocks which puts it in a position to gain the most in a recovery period. Hungary stands out with its relatively large tourism sector and, at the same time, as being one of the most open economies in Europe, hence exposed to global goods and services trade shocks (be it positive or negative). For Romania, on the other hand, we do not expect to see significant gains from a reversal of the tide.   At the margin, it could be argued that the Czech Republic could gain more than Poland on these themes given its more open economy – although in reality the diverging fiscal stances of these countries (ongoing loose fiscal policy in Poland and tight fiscal policy in the Czech Republic) will have a far greater impact on growth over the next two years. Despite the partial increase in Turkey's share in world exports, the current account deficit reached the highest level of the past five years recently as import costs increased much more than export revenues. Given this backdrop, lower energy prices and a continuing strength of the tourism sector will remain key for Turkey’s external outlook.     Current account evolution by components, 2022 vs 2019 (% of GDP)       However, domestic factors should play a more important role to contain imbalances in the near term as: (1) a change in policy mix towards a tighter stance to control domestic demand, and hence import demand; and (2) the likely normalisation of gold imports on the back of improving confidence, should help narrow the current account deficit.
Challenges Ahead for Austria's Competitiveness and Economic Outlook

Fed Signals Rate Pause as UK GDP Aims for April Rebound

Michael Hewson Michael Hewson 14.06.2023 08:30
Fed set for a rate pause; UK GDP set to rebound in April    European markets closed higher for the second day in a row, after the latest US inflation numbers for May came in at a 2-year low, and speculation about further Chinese stimulus measures boosted sentiment.   US markets followed suit although the enthusiasm and gains were tempered ahead of today's Fed meeting as caution set in ahead of the rate announcement.   Having seen US CPI for May come in at a two year low of 4%, in numbers released yesterday, market expectations are for the US central bank to take a pause today with a view to looking at a hike in July. Of course, this will be predicated on how the economic data plays out over the next 6-7 weeks but nonetheless the idea that you would commit to a hike in July begs the question why not hike now and keep your options open regarding July, ensuring that financial conditions don't loosen too much.   Today's May PPI numbers are only likely to reinforce this more dovish tilt, if as expected we see further evidence of slowing prices, with core prices set to fall below 3% for the first time in over 3 years. Headline PPI is expected to slow to 1.5%, down from 2.3%.       When Fed officials set out the "skip" mindset in their numerous briefings since the May decision when the decision was taken to remove the line that signalled more rate hikes were coming, there was always a risk that this sort of pre-commitment might turn out to be problematic.   So, while markets are fully expecting the Fed to announce no change today, Powell's biggest challenge will be in keeping the prospect of a July rate hike a credible outcome, while at the same time as outlining the Fed's economic projections for the rest of the year, as well as for 2024.   In their previous projections they expect unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     Before we get to the Fed meeting the focus shifts back to the UK economy after yesterday's unexpectedly solid April jobs data, as well as the sharp surge in wages growth, which prompted UK 2-year gilt yields to surge to their highest levels since 2008, up almost 25bps on the day.   While unemployment slipped back to 3.8% as more people returned to the work force, wage growth also rose sharply to 7.2%, showing once again the resilience of the UK labour market, and once again underlining the policy failures of the Bank of England in looking to contain an inflation genie that has got away from them.   This failure now has markets pricing in the prospect that we could see bank rate as high as 6% in the coming months, from its current 4.5%. The risk is now the Bank of England, stung by the fierce and deserved criticism coming its way, will now overreact at a time when inflation could well start to come down sharply in the second half of this year.   So far this year the UK economy has held up reasonably well, defying the doomsters that were predicting a 2-year recession at the end of last year. As things stand, we aren't there yet, unlike Germany and the EU who are both in technical recessions.   Sharp falls in energy prices have helped in this regard, and economic activity has held up well, with PMI activity showing a lot of resilience, however the biggest test is set to come given that most mortgage holders have been on fixed rates these past two years which are about to roll off.     As we look to today's UK April GDP numbers, we've just come off a March contraction of -0.3% which acted as a drag on Q1's 0.1% expansion. The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%.     The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.     This isn't expected to be repeated in today's April numbers, however there was still widespread strike action which is likely to have impacted on public services output.   The strong performance from manufacturing is also unlikely to be repeated with some modest declines, however services should rebound to the tune of 0.3%, although the poor March number is likely to drag the rolling 3M/3M reading down from 0.1% to -0.1%.       EUR/USD – failed at the main resistance at the 1.0820/30 area, which needs to break to kick on higher towards 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – finding resistance at trend line resistance from the 2021 highs currently at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – has slipped back from the 0.8615 area yesterday, however while above the 0.8540 10-month lows, the key day reversal scenario just about remains intact. A break below 0.8530 targets a move towards 0. 8350.     USD/JPY – looks set to retest the recent highs at 140.95, with the potential to move up towards 142.50.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,585     DAX is expected to open 15 points lower at 16,215     CAC40 is expected to open 3 points lower at 7,288
US Inflation Eases, Fed Holds Rates; BoE Faces Dilemma Amid Strong Jobs Data; China Implements Stimulus Measures

US Inflation Eases, Fed Holds Rates; BoE Faces Dilemma Amid Strong Jobs Data; China Implements Stimulus Measures

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.06.2023 08:32
US inflation data gave investors a good reason to cheer up yesterday. The headline number fell more than expected to 4%, and core inflation met analysts' expectations at 5.3%. The biggest takeaway from yesterday's CPI report was, again, that easing in inflation was mostly driven by cooling energy prices, but shelter costs remained sticky – up by more than 8% on a yearly basis.   Yet because these shelter costs represent more than 40% of the core CPI, and private sector data is pointing at cooling housing costs, investors didn't see the sticky core inflation as a major issue. The producer price inflation data is due today, before the Federal Reserve's (Fed) policy decision, but the latter will unlikely change expectations for today's announcement. A softer-than-expected PPI number – due to soft energy and raw material prices, could, on the contrary, further soften the Fed hawks' hand.     In numbers, the expectation of a no rate hike at today's decision jumped past 90%, while the expectation of a no rate hike in July meeting rose from below 30% to above 35%. The S&P500 extended its advance to 4375, while Nasdaq 100 rallied past the 14900 level. Small companies followed suit, with Russell 2000 jumping to the highest levels since the mini banking crisis.     Tough accompanying talk?  The Fed's decision for today is considered as done and dusted with a no rate hike. But the chances are that Fed Chair Jerome Powell will sound sufficiently hawkish to let investors know that the war is not won just yet, because 1. Core inflation remains well above the Fed's 2% target, 2. US jobs market remains too strong to call victory on inflation, and 3. Equity valuations point at an overly optimistic market, at the current levels, the S&P500 trades at around 18 times its earnings forecast over the next year, and these levels are typically associated with times of healthy economic growth and rising corporate profits. But we are now in a period of looming recession odds, and falling profits.     Ouch, BoE!  Yesterday's jobs data in Britain printed blowout figures for April and May. The employment change rocketed to 250K in April, while the expectation was a fall from 180K to 150K. The unemployment rate unexpectedly dropped to 3.8%, and average earnings excluding bonus rose from 6.8% to 7.2%. Then, the jobless claims fell by more than 13K – while analysts expected a surge of more than 20K – hinting that the British job market will likely print solid figures for May as well.     While these are excellent news for Brits who could at least see their purchasing power partly resist to the terrible cost-of-living crisis – where eggs, milk and bread for example saw their prices rise by a whooping 30-and-something per cent, it makes the end of the BoE tightening look impossible for now.     The market prices in another 125bp hike this year, which will take the British policy rate to 5.75%, and there is around 20% chance for an additional 25bp by February next year.     And all this in a market where mortgage rates rise unbearably, and house prices tumble. The 2-year gilt yield took a lift yesterday and is preparing to flirt with the 5% mark. We are now at levels above the mini-budget crisis of Liz Truss, while the spread with the 10-year yield is widening, suggesting that the UK economy will hardly come out of this unharmed. On top, the FTSE 100 index has fallen well behind the rally recorded by the US and European stocks this month because of falling energy and commodity prices due to a disappointing Chinese growth. The only good news for the Brits is that the pound is being boosted by hawkish BoE expectations. Cable rallied past the 1.26 level and is slowly drilling above a long-term downtrending channel top. The trend and momentum indicators remain tilted to the upside, and the divergence between the Fed – preparing to call the end of its tightening cycle sometime in the coming meetings, and the BoE – which has no choice but to keep raising rates – remains supportive of further gains in Cable. We could see the pair regain the 1.30 level, last seen back in April 2022.      China cuts.  The People's Bank of China (PBoC) lowered its 7-day reverse repurchase rate by 10bp to 1.9% yesterday, a week after asking the state-run banks to lower their deposit rates. These are signals that the PBoC is preparing to lower its one-year loan rate tomorrow to give a jolt to its economy that has been unable to gather a healthy growth momentum after Covid measures were relaxed by the end of last year.     Copper futures jumped above their 200-DMA yesterday, though they remain comfortably within a broad downtrending channel building since the second half of January, while US crude rebounded from a two-week low yesterday but remains comfortably below its 50-DMA.     Final word.  Because the rally in tech stocks now looks overstretched and China is getting serious about boosting growth, we will likely start seeing investors take profit on their Long Big Tech positions and return to energy and mining sector to catch the next train which could be the one that leads to profits on an eventual Chinese reopening.   
Resilient US Economy and the Path to Looser Fed Policy

Underwhelming Eurozone Industrial Production in April Raises Concerns for Second Quarter

ING Economics ING Economics 14.06.2023 14:09
Eurozone industrial production up in April but with lots of underlying weakness The production increase in April underwhelms and leaves a good chance of negative overall production growth in the second quarter. The economy, therefore, remains in a stagnation environment as the second quarter is unlikely to show much of a bounceback in economic activity.   The 1% increase in production in April came on the back of a -3.8% decline in March. While this is a disappointing bounceback, the underlying data look worse. Growth was mainly down to a 21.5% increase in Ireland, which has notoriously volatile production data these days. The large countries experienced poor output developments in April. German production was flat according to the European definition, France posted a small 0.8% increase, but Italy, Spain and the Netherlands experienced a contraction of -1.9, -1.8 and -3.5% respectively.   Industrial dynamics provide a mixed picture at best for the sector. New orders have been weak for some time now. Domestic demand for goods has been declining for a while and global activity has also disappointed. Besides that, the catch-up effects from supply chain disruptions have been fading. On the other hand, lower energy prices should work favourably from a production perspective, but overall this is not yet resulting in stronger activity.   This release does not bode well for second-quarter GDP. The small increase in production in April leaves industrial output well below the first-quarter average. Given that May surveys of the sector continue to be downbeat, it is likely that production will contract on the quarter. With retail sales sluggish in April and May surveys pessimistic, don’t expect much of a second quarter in terms of economic recovery after two quarters of negative growth.
Examining the Inflation Outlook: Anticipating a Summer Turnaround and its Impact on Bank of England's Monetary Policy

Inflation Outlook: Easing Prices and Base Effects Bring Some Relief

ING Economics ING Economics 15.06.2023 08:02
Industrial production contracted by 2.0% in 2022 and 4.6% year-todate. As of March 2023, it remains almost 6.0% below its prepandemic levels (ie, January 2020). Among the few brighter spots are the food, automotive and pharma sectors which have continued their upward trend and are above both the pre-pandemic period and the similar period from 2022. On the downside, the textile and chemical industries are both some 35% below their pre-pandemic levels, followed by the metallurgical industry at 30% below. The latest confidence data does not look particularly encouraging as production expectations and capacity utilisation collapsed in May 2023 to a two-year low. The number of employees remained fairly constant, though significant shifts occurred within subsectors.   Industry still below pre-pandemic levels   Fiscal picture is improving but we are not there yet   Elections and social demands could derail the adjustment The 4.4% of GDP budget deficit target for 2023 was shaping up to be quite challenging and it definitely is. As of April 2023, the budget deficit reached 1.72% of GDP and already prompted the government to come up with a mild (read: insufficient) spending optimisation plan, amounting at best to some 0.3% of GDP.   Given the social demands for higher wages (at the time of writing there is an ongoing major strike in the public education sector) and the lower GDP growth (leading to lower budget revenues), a more substantial adjustment is likely to be needed at the usual mid-year budget revision. The good news is that sticking to the 4.4% of GDP target for 2023 seems to be a priority.   The bad news is that it might involve cutting public investments which were just catching up some speed.   Current account deficit remains Achille’s heel (% of GDP)   Inflation (YoY%) and main components (ppt)   Economic slowdown and lower fiscal gap are helping The current account deficit (CAD) surpassed the worst fears in 2022 as it reached 9.4% of GDP, from 7.3% in 2021. We estimate that at least 1ppt of the 2022 deterioration came from worsening terms of trade, which should be largely reversed in 2023. As mentioned many times already, we remain particularly worried about the stickiness of the CAD and blaming it on the fiscal deficit only holds so much. More positively, the financing structure of the CAD looks relatively sound.   We estimate that over the next 3-4 years, between 70% and 80% of the deficit can be covered via non-debt-creating inflows such as FDIs and EU funds. As a consequence, we estimate that a CAD of 4.0-5.0% of GDP could be considered a ‘natural’ level for an emerging economy like Romania. But we’re not there yet…   Switching to single digits by the Autumn After remaining consistently at the lower end of inflation forecasts, it seems things are finally turning our way: inflation looks set to touch 7.0% by the end of 2023, driven by base effects, lower energy prices and an easing of food prices.   We reduce our 2024 year-end estimate to 4.0% from 4.3% previously, while maintaining the view that inflation will not reach NBR’s 1.5-3.5% target range over the next two years. These developments alone (especially those from 2024) would allow the NBR to cut the key rate quite significantly and still maintain a positive real rate. However, we believe that the NBR will want to consolidate the lower inflation prints and will maintain a relevant positive differential between the key rate and inflation, at least until we see inflation within NBR’s target range.
Market Highlights: US CPI, ECB Meeting, and Oil Prices

UK CPI Data Sets the Stage for Bank of England Rate Decision

Michael Hewson Michael Hewson 21.06.2023 08:32
UK CPI set to tee up tomorrow's Bank of England rate decision    We've seen a lacklustre start to the week for markets in Europe, as well as the US as disappointment over a weak China stimulus plan, gave investors the excuse to start taking some profits after the gains of recent weeks. Weakness in energy prices also reinforced doubts about the sustainability of the global economy as we head towards the second half of this year.   As we look towards today's European open the main focus is on the latest UK inflation numbers for May ahead of tomorrow's Bank of England rate decision.   Today's UK CPI numbers could make tomorrow's rate decision a much less complicated decision than it might be, especially if the numbers show a clear direction of travel when it comes to a slowing of price pressures. Nonetheless, whatever today's inflation numbers are, we still expect to see a 25bps rate hike tomorrow, however what we won't want to see is another upside surprise given recent volatility in short term gilt yields.   When the April inflation numbers were released, there was a widespread expectation that headline inflation would fall back sharply below 10% and to the lowest levels since March last year. That did indeed happen, although not by as much as markets had expected, falling to 8.7%.       It was also encouraging to see PPI input and output prices slow more than expected in April on an annual basis, to 3.9% and 5.4% respectively.   Unfortunately, this is where the good news ended as while we saw inflation fall back in April it wasn't as deep a fall as expected with many hoping that we'd see headline inflation slow to 8.2%. The month-on-month figure was much hotter than expected at 1.2% and core prices surged from 6.2% to 6.8%, and the highest level since 1990.   The areas where inflation is still looking hot is around grocery prices which saw an annual rise of 19.1%, only modestly lower than the 19.2% in March, while services inflation in hotels and restaurants slowed from 11.3% to 10.2%. Since then, food price inflation has slowed to levels of around 16.5%, still very high, while today's headline number is forecast to slow to 8.5%. More worryingly core prices aren't expected to change at all, remaining at 6.8%, however if we are to look for crumbs of comfort then we should be looking at PPI where in China and Germany we are in deflation.   Given that this tends to be more forward-looking we could find that by Q3 headline CPI could fall quite sharply. Both PPI input and output prices are expected to both decline on a month-on-month basis, while year on year input prices are expected to rise by 1.1%.   In the afternoon, market attention will shift to Washington DC and today's testimony by Fed chair Jerome Powell to US lawmakers in the wake of last week's decision to hold rates at their current levels, while issuing rather hawkish guidance that they expect to hike rates by another 50bps by year end.   This was a little surprising given that inflation appears to be a problem that could be subsiding. Powell is likely to also face further questions from his nemesis Democrat Senator Elizabeth Warren who is likely to further press the Federal Reserve Chairman on the costs that further rate hikes might have in terms of higher unemployment.   Her dislike for Powell is well documented calling him a "dangerous man", however despite these comments her fears of higher unemployment haven't materialised despite 500bps of rate hikes in the past 15 months.   We could also get further insights into last week's discussions with a raft of Fed speakers from the likes of Christopher Waller, Michelle Bowman, James Bullard and Loretta Mester this week.          EUR/USD – currently holding above the 50-day SMA at 1.0870/80 which should act as support. We still remain on course for a move towards the April highs at the 1.1095 area, while above 1.0850.     GBP/USD – slipped back from 1.2845/50 area sliding below 1.2750 with the next support at the 1.2680 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area with resistance at the 0.8580 level. While below the 0.8620 area bias remains for a move toward the 0.8470/80 area.     USD/JPY – slipped back from just below the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 4 points higher at 7,573     DAX is expected to open 42 points higher at 16,153     CAC40 is expected to open 3 points higher at 7,297     By Michael Hewson (Chief Market Analyst at CMC Markets UK)
GBP/USD Technical Analysis: Sideways Trend and Support Levels

Bank of England Scratches Its Head as Stubborn Inflation Challenges Price Stability Ambitions

Craig Erlam Craig Erlam 22.06.2023 08:31
Policymakers at the Bank of England will be scratching their heads this morning wondering what they have to do to get inflation down, with the latest CPI report another setback in the central bank’s ambition of delivering price stability and a soft landing. While there are many reasons to be confident that inflation should fall sharply over the coming months including lower energy and food price contributions, it’s hard to be too optimistic when the data keeps consistently coming in well above forecasts.   There is clearly immense stubbornness in the UK inflation numbers and the fact that the core also unexpectedly rose yet again by another 0.3% will be a huge concern to the BoE. Services inflation was always going to take longer to regain control of and today’s data once again suggests momentum is strong here. Market interest rate expectations are continuing to fluctuate after the release but there’s clearly now a much stronger case for a 50 basis point hike tomorrow, which would take Bank Rate to 5%. What’s more, markets now see it reaching 6% early next year which could be very damaging and increases the risk of the economy buckling under the pressure. The pound initially spiked after the release, hitting 1.28 against the dollar before giving around half of that back. Higher interest rates for longer against the backdrop of a more resilient economy may remain supportive for the pound for now but as soon as the economy starts to buckle, traders may be forced to rethink.   GBP/USD Technical For a look at all of today’s economic events, check out our economic.
US Retail Sales Mixed, UK Inflation Expected to Ease: Impact on GBP/USD and Monetary Policy

Key Economic Updates: UK and US GDP Figures, Core PCE Deflator, and UK Mortgage Approvals

Michael Hewson Michael Hewson 26.06.2023 07:53
UK Q1 GDP final – 30/06 – in the recent interim Q1 GDP numbers the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on Q1's 0.1% expansion.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%. There is a risk that this modest expansion could get revised away, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile. US Q1 GDP final – 29/06 – the first iteration of US Q1 GDP was disappointing with the economy growing by 1.1%, slowing by more than expected, largely due to a bigger than expected scaling down in inventories. This was subsequently revised up to 1.3%, helped by an upward revision to 3.8%, which was a strong rebound from 1% in Q4, as US consumers went out on a New Year splurge. Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We're not expecting to see much of a change in this week's revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. US Core PCE Deflator (May) – 30/06 – this week's core PCE deflator numbers could go some way to pouring further cold water on the Fed's claims that it has another 2 rate rises in its locker. A couple of weeks ago the US central bank warned that while it had taken the decision to implement rate increase pause, it still felt that inflation risk was skewed to the upside and that the market should prepare itself for a terminal rate of 5.6%. This was a little unexpected given the current direction of travel we've been seeing over the past few months, when it comes to prices. When the Core PCE Deflator numbers were released in April headline inflation did edge up from 4.6% to 4.7%, while the deflator itself pushed up to 4.4% from 4.2%, begging the question as to whether central bank officials are right to be cautious. This week's core PCE numbers, along with personal spending numbers ought to offer markets an additional insight as to whether these concerns are valid, or whether the Fed's recent hawkishness is justified.   UK Mortgage Approvals (May) - 29/06 - since the start of the year we've seen a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest which weighed on demand for property as well as house prices. As energy prices have come down, along with lower rates, demand for mortgages picked up again with March approvals rising to 51.5k, before slipping back to 48.7k in April. This could well be as good as it gets for a while with the renewed increase in gilt yields, we've seen in the past few weeks, prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness. Although inflationary pressures are starting to subside, the increase in wages is prompting concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021.   By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Barclays H1 2023: Mixed Performance with Strong Investment Banking and Consumer Division

Navigating Uncertainty: Shifting Sentiment in European and US Stock Markets

ING Economics ING Economics 26.06.2023 08:04
European and US stock markets have seen a significant shift in sentiment over the past few days when it comes to the global economy. Rising bond yields, driven by more hawkish central banks, which has prompted investors to reassess the outlook when it comes to valuations and growth.     While European markets saw their biggest weekly loss since March, US markets also took a tumble, albeit the first one in 8 weeks, as a succession of central banks pledged that they had significantly further to go when it comes to raising rates. Bond markets also started to flash warning signs with yield curves becoming more inverted by the day whether they be France, Germany, or the UK. Friday's weak finish hasn't translated into a strongly negative vibe as we start a new week for Asia markets, even allowing for events in Russia at the weekend which aren't likely to have helped the prevailing mood, with the US dollar slightly softer this morning after getting a haven bid at the end of last week.     With economic data continuing to show varying signs of vulnerability, particularly in manufacturing the situation could have got even spicier over the weekend when Wagner Group boss Yevgeny Prigozhin set his troops on the road to Moscow in an insurrection against the Kremlin, and Russian President Vladimir Putin.   As it turns out a crisis was quickly averted when it was announced that Prigozhin would go into exile in Belarus, with any charges against him dropped, and Wagner troops would return to their bases. One can only imagine the reaction if that news had broken if markets had been open at the time, however it only adds to the general uncertainty surrounding the war in Ukraine and how quickly things can start to unravel.   This weekend's events also serve to indicate how fragile Vladimir Putin's position is given that one of his most trusted advisors suddenly went rogue.   As we look ahead to the final week of June and the end of the quarter, as well as the first half of the year we can reflect to some extent that markets have held up rather well when all things are considered. They have been helped in that by the sharp falls in energy prices back to pre-Russian invasion of Ukraine levels, as well as the low levels of unemployment which have served to keep demand reasonably resilient.     The elephant in the room has been the stickiness of core inflation as well as signs that demand is starting to falter, and this week we could get further confirmation of that trend.   Today we get the latest Germany IFO Business Climate survey for June, which if last week's flash PMI numbers are any guide could well show that the confidence amongst German business is faltering, with expectations of a slowdown to 90.6, from 91.7.     We also get flash CPI inflation numbers from Germany, France and the EU where headline prices are likely to show further signs of softening, with core prices set to remain sticky. At around the same time we get the latest PCE inflation numbers from the US for May.   These are likely to be important in the context of the Federal Reserve's stated intention to raise interest rates at least twice more before the end of the year.     In April the core PCE Deflator edged up from 4.6% to 4.7%, an area it has barely deviated from since November last year. You would have thought that even with the long lags seen from recent rate hikes they would start to have an impact on core prices.   This perhaps explains why central banks are being so cautious, even as PPI prices are plunging and CPI appears to be following.       EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – currently holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – failed to rebound above the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally moved above the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 6 points higher at 7,468     DAX is expected to open 28 points higher at 15,858     CAC40 is expected to open 8 points higher at 7,171
Canada's Inflation Expected to Ease in May, Impacting BoC's Rate Decision

Canada's Inflation Expected to Ease in May, Impacting BoC's Rate Decision

Kenny Fisher Kenny Fisher 27.06.2023 10:28
Canada’s inflation expected to ease in May The inflation data could be a key factor in BoC’s July rate decision The Canadian dollar moved higher earlier on Monday but has pared these gains. In the North American session, USD/CAD is trading at 1.3169, down 0.10%. The Canadian dollar has been red-hot against its US counterpart, surging 3% in the month of June.   Canadian inflation expected to ease Canada releases May inflation numbers on Tuesday, and the markets are expecting inflation to fall after rising slightly in April. Headline inflation is expected to fall to 3.4%, down sharply from the current 4.4%. Core CPI is projected to ease to 3.9%, down slightly from 4.1%. The Bank of Canada has been fighting a long and tough battle against inflation, and a deceleration on Tuesday would be welcome news. Still, it may not be enough to convince the bank to hold rates at the July 12th meeting. The BoC raised rates in May, citing stronger-than-expected GDP growth as one of the reasons for the hike. Last week’s strong retail sales report could force the Bank to raise rates again, as the solid economic numbers are making it more difficult for the BoC to reach its 2% inflation target.   A sharp drop in headline inflation is unlikely to prevent a July rate hike since much of that decline can be attributed to lower energy prices. The real test will be the core rate – a sharper-than-expected decline could convince BoC policy makers to take a pause, which would be welcome news for weary householders who are grappling with high inflation and rising mortgage costs. Otherwise, Canadian consumers are likely to see more rate hikes in the coming months. The Federal Reserve releases its annual “stress tests” for major lenders, which assess whether the lenders could survive a sharp economic downturn. The stress tests will attract more attention than in previous years, due to the recent banking crisis which saw Silicon Valley Bank and two other banks collapse.   USD/CAD Technical There is resistance at 1.3197 and 1.3254 1.3123 and 1.3066 are providing support  
German Inflation and US Q1 GDP Awaited: Market Focus Shifts

German Inflation and US Q1 GDP Awaited: Market Focus Shifts

Michael Hewson Michael Hewson 29.06.2023 09:24
German inflation in focus, ahead of US Q1 GDP       Having stopped the rot on Tuesday, ending a 6-day losing streak, European markets saw another positive session yesterday, although gains were tempered by remarks from Fed chairman Jay Powell who warned that several more rate hikes could be expected in the coming months, in comments made in an ECB panel discussion in Sintra, Portugal.     US markets finished the day mixed with little in the way of direction, as they digested the various remarks from central bankers, as they all peddled a similar narrative, of further rate rises to come. The Japanese yen continued to decline, already at record lows on a trade-weighted basis, Bank of Japan governor Kazuo Ueda gave little indication that officials were any close to stemming the recent losses. The subdued finish in the US is likely to translate into a flat European open.     There is the hope that upcoming data could prompt a softening of this hawkish message starting today with the latest June inflation numbers from Germany. We've seen a sharp deceleration in the last few months, falling from 7.6% in April to 6.3% in May. Today's June numbers could see a modest increase to 6.8%, which will do little to assuage ECB concerns that inflation is falling back sharply. In the UK the sharp rise in gilt yields in the wake of surging inflation is prompting concerns about the housing market, and more specifically the ability of consumers to pay their existing mortgage or take out new ones.        Since the start of the year, we've seen a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest rates which weighed on demand for property, as well as weighing on house prices.     As energy prices have come down, along with lower rates at the start of the year, demand for mortgages picked up again with March approvals rising to 51.5k, before slipping back to 48.7k in April. This could well be as good as it gets for a while with the renewed increase in gilt yields, we've seen in the past few weeks, prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness.     Although inflationary pressures are starting to subside, the increase in wages is unlikely to offset concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty, consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021.     We also have the final iteration of US Q1 GDP, which was revised up to 1.3% from 1.1% a few weeks ago. The main drag was down to a bigger than expected scaling down in inventories, as well as an upward revision to personal consumption to 3.8%, which was a significant improvement from 1% in Q4, as US consumers went out on a New Year splurge.     Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We're not expecting to see much of a change in today's revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. Weekly jobless claims are expected to come in unchanged at 265k.   EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area, but unable to move through the 1.1000 level. The main resistance remains at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.   GBP/USD – slid back sharply below the 1.2670 area, now opens a move towards the 50-day SMA at 1.2540. If this holds, we remain on course for a move towards the 1.3000 area.    EUR/GBP – broken above 0.8630, heading towards the 50-day SMA at 0.8673, which is the next resistance area. Support comes in at the 0.8580 area.   USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 2 points higher at 7,502   DAX is expected to open 7 points higher at 15,956   CAC40 is expected to open 10 points higher at 7,296   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Italian Inflation Continues to Decelerate in August, Reaffirming 6.4% Forecast for 2023

Lagarde Signals ECB Rate Hike in July, German Inflation Report and Eurozone CPI Awaited

Kenny Fisher Kenny Fisher 29.06.2023 14:16
Lagarde signals ECB rate hike in July Germany releases inflation report later on Thursday Eurozone inflation report follows on Friday EUR/USD is unchanged on Thursday and is trading at 1.0912 in the European session,   German CPI  Germany releases the June inflation report later today. Inflation in the eurozone’s largest economy fell to 6.1% in May, down sharply from 7.2% in April. Much of the decline, however, was driven by lower energy prices. Inflation is expected to head higher, with a consensus of 6.3%. If CPI surprises to the downside, the euro could get a boost.   Lagarde signals rate hike in July Investors were hoping to gain some insights this week from ECB President Lagarde, who hosted the ECB Bank Forum in Sintra. There really wasn’t anything new in her remarks, which may have been disappointing to some. One could make the argument that Lagarde is being consistent in her message to the markets and used the Sintra meeting to reiterate the ECB’s intent to raise rates at the July 27th meeting, unless there is an unexpected drop in inflation, in particular the core rate. Lagarde stated on Wednesday that the central bank is not considering a pause in July as things currently stand. At the same time, Lagarde has some wiggle room, as she has said each rate decision will be data-dependent. The ECB has an entire month before the next meeting, and if core inflation slides or the eurozone economy takes a turn for the worse, the ECB could pause, arguing the conditions were appropriate for holding rates steady. Lagarde & Co. will get a look at eurozone inflation data on Friday. Headline inflation is expected to fall to 5.6% in June, down from 6.1% in May. Core CPI is projected to rise from 5.3% to 5.5%.   EUR/USD Technical EUR/USD is putting pressure on resistance at 1.0916. This is followed by 1.0988 1.0822 and 1.0750 are providing support    
Oil Prices Find Stability within New Range Amid Market Factors

German Disinflationary Trend Pauses for the Summer: Inflation Data and ECB's Outlook

InstaForex Analysis InstaForex Analysis 29.06.2023 15:00
German disinflationary trend pauses for the summer German inflation increased in June to 6.4% year-on-year, from 6.1% YoY in May. But what looks like an end to the disinflationary trend of the last few months is only a temporary break. Disinflation should gain more momentum after the summer. According to the just-released first estimate, German headline inflation increased in June, coming in at 6.4% year-on-year (from 6.1% YoY in May). The harmonised European measure showed German headline inflation at 6.8% YoY, from 6.3% in May. This marks an end to the disinflationary trend seen over the last six months. However, a closer look at the data suggests that the disinflationary trend will gain new and even stronger momentum after the summer.   Disinflationary trend has paused, not stopped Inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value. Government intervention and interference, whether temporary or permanent or occurring this year or last, will continue to blur the picture. Today’s inflation data show that headline inflation is and will be affected by several base effects: while lower energy prices insert downward pressure on inflation, the end of last summer’s temporary government energy relief measures has inserted upward pressure. Looking at monthly price changes actually paints a promising picture of German inflation dynamics. For the third month in a row, food prices have dropped month-on-month. Prices for clothing have dropped for the first time since January; a tentative sign of weaker demand and price discounts. With still lower-than-expected energy prices, dropping food prices and fading pipeline price pressures in both services and manufacturing, German (and eurozone) inflation could come down faster than the ECB expects, at least after the summer. In fact, there is the risk that another chapter will be added to the misconceptions of inflation dynamics: after ‘inflation is dead’ and ‘inflation is transitory’, we could now have ‘inflation will never come down’. Don’t get us wrong, we still believe that, structurally, inflation will be higher over the coming years than pre-pandemic. Demographics, derisking and decarbonisation all argue in favour of upward pressure on price levels. However, be cautious when hearing comments that inflation will never come down. These comments might come from the same sources that only a few years ago argued that inflation would never surge again. This does not mean that the loss in purchasing power as a result of the last inflationary years will be reversed any time soon. It only means that headline inflation can come down faster than currently anticipated. We see German headline inflation falling to around 3% towards the end of the year. Admittedly, the risks to this outlook are obvious: sticky core inflation, wage pressure and government measures to support the demand side of the economy.   ECB will continue to hike ECB President Christine Lagarde made it clear at this week’s ECB forum in Sintra that the job is not done, yet. We, however, still think that the ECB is too optimistic about the eurozone’s growth outlook. Historic evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. These are two strong arguments for a further slowing of core inflation in the second half of the year and reasons to start doubting the need for further rate hikes. But, the ECB simply cannot afford to be wrong about inflation (again). The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why it is putting more emphasis on actual inflation developments, and why it will rely less on forecasts than in the past. As a consequence, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point and will continue hiking until then. If we are right and the economy remains weak, the disinflationary process gains momentum and core inflation starts to drop after the summer, the ECB’s hiking cycle should end with the September meeting.
UK Inflation Data Boosts Chances of August Rate Hike

The Growing Share of Home Improvement Market and Increasing Importance of Renovation in Europe

ING Economics ING Economics 03.07.2023 12:17
Share of home improvement market increases The share of the R&M market has steadily increased over the past 15 years. In 2008, 48% of EU production volume consisted of R&M works. This has gradually increased to more than 54% in 2022. When we compare the different subsectors, renovation is the largest in the residential sector. We expect that the renovation share will increase further as the need for energy efficiency measures increases due to high energy prices and sustainability legislation, such as the Energy Performance of Buildings Directive (EPBD IV: see below) which aims to ensure a higher sustainability rate.   Share of renovation increases slowly in the building sector Renovation share of total building production   Share of R&M differsThe share of the R&M market varies among countries. Typically, countries with a higher GDP per capita have a relatively larger R&M market. There are several reasons for this: Less developed countries are often catching up and therefore they are investing heavily in new buildings and infrastructure. That results in a relatively lower share of R&M. Well-developed countries often have a larger stock of older buildings and infrastructure that requires regular maintenance and renovation. As structures age, they need repairs, upgrades and modernisation to ensure safety, functionality and efficiency. Developed countries typically have stricter building codes, safety regulations and environmental standards. Compliance with these regulations often requires periodic upgrades and renovations. This narrative holds true for Europe, resulting in relatively higher renovation shares in Western European countries. There, the renovation market is approximately 55% of the total building volume. In Eastern Europe, where there is still a lot of catching up (new building) being done, the renovation sector has a smaller share of the total construction output (approximately 33%).   Share of renovation market is higher in Western Europe Renovation share of total building production, 2022     Renovation costs on the riseIn recent years, the cost of house improvements has increased, surpassing the inflation rate in the European Union. In addition, energy prices have seen an even greater increase, making energy efficiency measures still more financially beneficial than they were in the past.
CHF Strengthens Against USD: Bullish Exhaustion Signals Potential Downtrend Continuation

Renovation Market Resilient: Navigating Volatility and Driving Growth

ING Economics ING Economics 03.07.2023 12:24
Renovation less vulnerable to economic sentiment Development of production volumes in Western Europe (EC-15), % YoY     Choppy periods for R&M market From a historic perspective, demand for renovation and maintenance has recently been remarkably volatile. During the first Covid-19 lockdown, people were reluctant to have handymen in their homes. This gradually changed and demand for improvement grew rapidly in 2021 as many people suddenly required a “home office” as remote work became the norm. In addition, consumers had spare money to invest in their homes as they couldn’t spend their savings on holidays during the pandemic. In 2022, skyrocketing energy prices (caused by the Ukraine War) decreased consumers’ purchasing power. This resulted in a downturn in the number of people that wanted to refurbish their homes. In contrast, the demand for energy-efficient investments (eg. solar panels, insulation and heat pumps) has grown as the payback period for these refurbishments has dropped enormously. Many governments also offer subsidies for energy-related renovation projects.   Demand for home improvements has been volatile lately Balance of EU consumers that expect to improve their home over the next 12 months     Stable growth will return in the renovation sector All in all, despite the temporary circumstances caused by the Covid-19 pandemic and the energy crisis, the trajectory for residential energy efficiency upgrades remains promising. Looking ahead, we expect gradual growth in the renovation market due to sustained government regulations and the structural impact of higher energy prices. Therefore, the demand for residential energy efficiency upgrades is likely to continue its upward trend.
Navigating the Risks: The Consequences of Aggressive Interest Rate Hikes and Banking Crisis on the Global Economy

Navigating the Risks: The Consequences of Aggressive Interest Rate Hikes and Banking Crisis on the Global Economy

ING Economics ING Economics 06.07.2023 13:07
What happens if central banks hike interest rates too much, and how a renewed crisis in the banking system could weigh on the global economy.   Aggressive interest rate hikes trigger a ‘hard landing’ Our base case: The most aggressive rate hike cycle in decades will no doubt take its toll. We’re more concerned about the US, where a tightening in lending standards post-banking crisis is likely to trigger more noticeable weakness in hiring and investment. Europe is currently enjoying the benefit of lower energy prices, which partly offsets the impact of higher rates in the short term. But the longer-term outlook for Europe remains one of subdued growth at best. In the US, we’re not expecting a deep downturn, and developed economies are insulated by the greater prevalence of fixed-rate mortgages relative to past crises. That makes for a longer/more drawn-out transmission to the economy. Stagnation is likely, and the impact of higher rates is less concentrated in any single quarter. Risk scenario and how it plays out: There are three ways things could be worse than we expect. Firstly, central banks hike more aggressively than currently expected – and with rates already well into restrictive territory, that would make deeper recessions in 2024 more inevitable. Rates at 6% or above in the UK and US, or 5% in the eurozone, would be challenging. Secondly, businesses begin to feel the pinch more acutely. Corporates have enjoyed pricing power over the past couple of years as economies emerge from Covid. But that’s fading as consumer demand – especially for goods – abates, and the impact of interest rates on unemployment could accelerate as debt servicing becomes a greater challenge. Finally, a high interest rate environment raises the risk of something breaking in the financial system. March’s banking crisis was a taster of that, and despite central banker assurances to the contrary, persistently higher interest rates clearly risk having knock-on effects for financial stability. The feedback loop could tighten lending standards yet further, adding to the pressure on smaller businesses as well as real estate and the construction sector. Wider economic impact: We’d expect to see many major economies enter recession through the early part of 2024, or perhaps earlier. Where economic weakness has so far been concentrated in manufacturing, we’d expect the service sector to enter a downturn too. That would see a corresponding easing in service-sector price pressure, via lower wage growth. Central banks would turn to rate cuts much earlier than we’re currently forecasting.  
Analyzing the Euro's Forecast Amidst Eurozone Data and Global Factors

Disinflationary Trend in the Eurozone: Spotlight on Core Inflation

ING Economics ING Economics 06.07.2023 13:18
  The disinflationary trend in the eurozone has started and should gain more momentum after the summer. It will take a while but core inflation should follow suit as well.   Slowly but surely, the inflation outlook for the eurozone is improving. Base effects as well as fading supply chain frictions and lower energy prices have and will continue to push down headline inflation in the coming months – a drop that the European Central Bank deserves very little credit for orchestrating. With headline inflation gradually normalising, the big question is how strong the inflation inertia will be. As long as core inflation remains stubbornly high, the ECB will continue hiking interest rates. How long could this be?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply, which is widely expected to continue over the months ahead. The decline in natural gas prices has been remarkable over recent months and while it would be naïve to expect the energy crisis to be over, this will result in falling consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there will be more to come in terms of the downward impact on inflation. The same holds true for food. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slow. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Headline inflation – at least in the absence of any new energy price shocks – looks set to slow down further, but the main question now is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 1980s are not available for many countries, but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 1970s and 1980s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices over the coming months.      
A slowing services sector and downward trend in inflation

A slowing services sector and downward trend in inflation

ING Economics ING Economics 06.07.2023 13:27
Services are now also slowing We certainly don’t deny that the pick-up in wage growth, in combination with lower energy prices, is boosting consumers’ purchasing power, supporting consumption growth over the coming quarters. But at the same time, some increase in the savings ratio looks likely as the economic outlook has become more uncertain (in some member states unemployment has started to increase). All sectors are now signalling a deceleration in incoming orders, while inventories in industry and retail are at a very high level. Even services, which held up well despite the recessionary environment in manufacturing, are losing steam. The services confidence indicator fell in June below its long-term average. That doesn’t necessarily mean that the only way is down – we still expect a strong summer holiday season, supporting third-quarter growth. But after that things might become shakier again, as the US economy is expected to have fallen into recession by then. The bottom line is that we now only expect 0.4% growth in 2023. Subsequently, on the back of the low carry-over effect, we pencil in a 0.5% GDP expansion for 2024.   Downward trend in inflation continues The flash headline inflation estimate for June came out at 5.5%, while core inflation increased slightly to 5.4%. However, the increase in core inflation is entirely due to a base effect in Germany that will disappear in September. The growth pace of core prices, measured as the three-month-on-three-month annualised change in prices, now stands at 4.4%. That is still too high, but the trend is clearly downwards. The inventory overhang is leading to falling prices for goods. In the European Commission’s survey, selling price expectations softened again in all sectors, while the expected price trends in the consumers’ survey fell to the lowest level since 2016. It, therefore, doesn’t come as a surprise that we expect the downward trend in inflation to continue, with both headline and core inflation likely to be below 3% by the first quarter of 2024.   Selling) price expectations are coming down across the board
Foreign Demand Growth Limited: Outlook for Dutch Exports and Inventory Reduction

Foreign Demand Growth Limited: Outlook for Dutch Exports and Inventory Reduction

ING Economics ING Economics 10.07.2023 11:03
Limited growth in foreign demand After a weak first quarter, Dutch exports are expected to pick up over the rest of 2023 and 2024, in line with a recovery in global merchandise trade, which recently experienced a setback. Conditions have improved as supply chain disruptions are hardly hampering trade anymore, global destocking is gradually decreasing, and China is no longer having lockdowns. This expectation is also in line with the increased outlook of producers regarding foreign turnover in the next three months. However, goods exports are likely to grow only at a slow pace. The economies of the eurozone, the US, and the UK remain weak, and the shift from goods to services consumption continues.   Inventory reduction will gradually decrease Producers are still relying on their inventories due to reduced demand and significantly diminished supply chain issues. The historically large stock of materials and finished products is increasingly seen as a cost item since financing has become more expensive due to higher interest rates. With the long-lasting disrupted supply chains fresh in memory and considering the current geopolitical unrest, producers won’t deplete their buffer stocks completely. However, a majority of Dutch producers still consider their finished product inventory to be too large. Therefore, traders and final producers are aligning their inventories with expected sales. Suppliers are also reducing their inventories. This bullwhip effect has led to significant production declines at the beginning of value chains, such as in basic chemistry, basic metal, and plastic industries, but it will gradually decrease.   Bottom for energy-intensive industry in sight On the other hand, new orders in the chemical and plastics industries are picking up again. Energy prices are also significantly lower than the average of the past year. Therefore, some recovery in the energy-intensive industry is possible from the second quarter onwards. As a result, the energy-driven growth gap between manufacturing sectors is gradually disappearing. However, due to economic headwinds and energy prices expected to remain structurally higher than in 2021, the energy-intensive industry does not anticipate a quick return to previous production levels.
Prospects for Investment Goods Dampened by Higher Interest Rates and Moderate Sales Expectations

Prospects for Investment Goods Dampened by Higher Interest Rates and Moderate Sales Expectations

ING Economics ING Economics 10.07.2023 11:04
Higher interest rates dampen prospects for investment goods Higher interest rates and moderate sales expectations are inhibiting the need for expansion investments. This applies to both the manufacturing sector itself and the demand from sectors such as construction, which is experiencing a decline in investments in homes and commercial buildings. Financial surveys also indicate a decrease in investment demand. In the first quarter of this year, investments in ICT equipment and machinery and other equipment in the Netherlands decreased by 6.2% and 0.6%, respectively. Overall, investments are under pressure this year and next, negatively affecting the demand for industrial investment goods such as machinery and equipment. However, investment expectations in the industrial sector itself are still relatively high due to sustainability requirements, capacity constraints – especially in the technological industry – and the need for expanding digitisation, automation, and robotics to mitigate the impact of labour shortages.   Many industries are still working overtime, while energy-intensive production is on the backburner Deviation of current occupancy rate from long-term average, in percentage points       Energy gap is closing, but growth remains subdued The energy-driven growth gap between industry sectors is gradually disappearing. Nevertheless, we do not expect energy-intensive production to return to previous levels in the near future. Growth is being held back by economic headwinds and energy prices are expected to remain structurally higher than before. All in all, a slight contraction (-1.0%) in 2023, followed by moderate growth (1.5%) in 2024 seems the most likely scenario for Dutch manufacturing.
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Equity Rotation Impact: EUR/USD Nudges Higher Amid Dollar Softness

ING Economics ING Economics 11.07.2023 08:56
FX Daily: Is equity rotation helping EUR/$? EUR/USD is nudging above 1.10 in quiet conditions. US interest rates are a little softer, but key drivers of EUR/USD such as interest rate differentials and energy prices have barely budged. Reports suggest that hedge funds may be rotating away from the narrow rally in US equities towards better valuations in Europe. If so, the dollar could soften further.   USD: Let's see if this dollar softness can extend The dollar has started the week on the soft side. There has not been too much data but the push factor of the Fed/US interest rate story versus the pull factor of overseas asset markets is slightly working against the dollar. On the former, US short-dated rates came off 10bp in the European afternoon yesterday seemingly on the back of a New York Fed consumer inflation expectations survey that in the one-year tenor fell to the lowest levels since April 2021. The market seemed to ignore three Fed speakers all sticking to the script that the policy rate would probably need to be hiked another 25bp or 50bp this year.   And in terms of the pull factor, some very modest support measures announced for the Chinese property sector seem to be raising speculation that broader support for the private sector will be forthcoming this summer. Asian equities are modestly bid today.  However, a story that caught our eye in today's Financial Times may be partially explaining this soft dollar tone. The report suggests hedge funds have slashed their positions in US equities to the lowest in a decade and are turning their attention to under-valued European equities. Obviously, there are myriad factors that drive FX rates, but one can argue that the dollar trading to the weak side of what interest rate differentials suggest may be partially down to this kind of rotation. Remember that unlike bond market flows, equity flows are normally left FX unhedged. Back to today and the best chance for this dollar decline to extend a little further will be the release of the NFIB small business optimism data for June. As our US economist James Knightley points out in our week ahead, a further decline in pricing intentions in this survey will add weight to the view that inflation is coming lower. (The main event, however, remains tomorrow's release of June CPI.) We do not expect big FX moves today, but DXY could continue drifting toward the 101.50 area.
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UK Employment Falls, but Wage Growth Remains High; BoE Governor Bailey Signals More Rate Hikes Needed

Kenny Fisher Kenny Fisher 11.07.2023 14:06
UK employment falls but wage growth remains high BoE Governor Bailey says inflation will fall but more rate hikes needed The British pound has edged upward on Tuesday. In the European session, GBP/USD is trading at 1.2898, up 0.28%. The pound has put on an impressive rally, rising close to 200 pips against the dollar since Thursday.   UK employment softens, wages rise The UK delivered a mixed employment report for June. The economy created 102,000 jobs, far less than the 250,000 in May and shy of the consensus of 125,000. The unemployment rate rose from 3.8% to 4% and unemployment claims rose by 25,700, after a decline of 22,500 in May. However, wage growth excluding bonuses remained at 7.3% in the three months to May, above the consensus estimate of 7.1%. For Bank of England policymakers, the employment report is a good news/bad news release. The central bank needs the labour market to cool as it struggles to bring inflation down. To put it mildly, that battle has not gone as planned, with the OECD giving the UK the ignominious distinction of being the only major economy where inflation is rising. The June employment and unemployment numbers showed some cracks in the tight labour market, but wage growth, a key driver of inflation, remains stubbornly high. The takeaway from the jobs report is that the labour market is a bit less tight but wage growth remains inconsistent with the 2% inflation target and the BoE will have to continue to tighten policy. The cash rate is currently at 5.0% but the money markets have priced in a peak rate of 6.5%, which means that more pain is coming for businesses and households in the form of higher interest rates. BoE Governor Bailey is doing his best to put a brave face on a difficult situation. On Monday, Bailey said that inflation would fall “markedly” due to falling energy and food prices, but more rate hikes would be needed to bring inflation down from the current 8.7% to the 2% target.   GBP/USD Technical GBP/USD tested support at 1.2782 earlier today. The next support level is 1.2716 There is resistance at 1.2906 and 1.2972  
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Soft US CPI is not enough: Fed's hawkish stance remains strong

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.07.2023 08:30
Soft US CPI is not enough.    The US dollar extended losses after breaking a long-term ascending channel base yesterday. The British pound rallied on yet another stronger than expected wages growth data released yesterday morning. Average weekly earnings excluding bonuses increased 7.3% in the three months to May. And although the unemployment rate ticked up to 4%, it was because more Brits started looking for jobs, and not because people lost the jobs they had.   But don't be jealous of Brits that get such a good jump in their pay because UK inflation is still too hot. The average mortgage rate rose to 6.6%, the highest since 2008, inflation in Britain is sitting at 8.7%, and according to truflation, prices grow at a speed that's faster than 11%. The thing is, the robust wages growth partly explains why the Bank of England (BoE) is having so much pain fighting inflation, and that's why yesterday's data fueled the expectation of another 50bp hike from the BoE at its next meeting. The BoE's policy rate is seen peaking at the 6.5/7% range by the Q1 of next year as predicted by many analysts. Cable hit 1.2970 level, the highest since last April, but whether this really could continue will depend on 1. where the US dollar will be headed after today's CPI data in the short run, and 2. where the UK economy is headed if the BoE hikes rates to 6.5/7% range in the long run. Because the BoE hikes will continue pressuring the British housing market, and growth, and that could limit Cable's topside potential following a kneejerk positive reaction.     Lower US CPI won't be enough to soften the Fed hawks' hand.  The consumer price index in the US is expected to have fallen to 3.1% from 4% printed a month earlier. But unfortunately, it won't be enough to prevent the Fed from further rate hikes, because the further fall in headline inflation to 3% is due to a favourable base effect on energy prices, while core inflation is expected to remain sticky at around the 5% mark - still more than twice the Federal Reserve's (Fed) 2% policy target.   Plus, the rebound in oil prices hints that the risk of an uptick in headline inflation is building stronger for the coming months. The barrel of American crude rallied past the 100-DMA yesterday and is flirting with the $75pb level this morning. Trend and momentum indicators remain positive, and we are not in overbought territory just yet, meaning that this rally could further develop. The next natural target for the oil bulls stands at the 200-DMA, at $77pb level. In percentage terms, we are talking about a 12% rally since the start of the month, and the rebound is a response to the further production restriction from Riyadh and Moscow that are determined to push oil prices to at least $80pb level, and also Beijing's stepping up efforts to boost the Chinese economy by fresh monetary and fiscal stimulus.   But despite the lower OPEC supply and news of fresh monetary and fiscal stimulus from China, US crude should see a solid resistance into $77/80 range as, yes, in one hand, OPEC+ is cutting supply to boost prices, and their supply cuts will dampen the global oil glut in H2 - even more so if China finally achieves a healthier recovery. But on the other hand, the Chinese recovery is not a won game just yet, while increased oil output outside the cartel helps keeping price pressure contained. American crude production is on track for a record year this year, and half of the new crude is coming from the US where companies like Devon Energy that deliver strong output thanks to improved efficiencies.     RBNZ stays pat, BoC to deliver a final 25bp hike  The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 5.5%. Later today, the Bank of Canada (BoC) is expected to announce a final 25bp hike in this tightening cycle. The Fed however is seen hiking two more times as the strength of the US jobs data, combined with solid economic data, and little pain on US housing market thanks to life-long mortgages.   Therefore, it's interesting that the US dollar depreciates while there is nothing that hints at softening in the Fed's hawkish policy stance. That, and the fact that we will soon be flirting with oversold market conditions in the US dollar hint at a rebound in the greenback, if backed with robust core inflation and strong economic data.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
French Economy Faces Challenges Amid Disinflationary Trend

French Economy Faces Challenges Amid Disinflationary Trend

ING Economics ING Economics 12.07.2023 14:05
Moderate outlook From a sectoral point of view, the strength of demand for tourism-related activities and the high level of bookings for this summer should support French economic activity in the third quarter, but the support should diminish thereafter. At the same time, the industrial sector is suffering from weakening global demand. According to survey results, business leaders' assessment of order books has remained very weak for several months. At the same time, inventories of finished products remain high. This means that production is likely to decline over the coming months, as companies see no new orders coming in and have to clear their inventories. The PMI indices for the manufacturing sector have been in contraction territory (below 50) since January. In short, the growth outlook for the French economy is moderate. Growth in the second quarter will be weak, with a fall in GDP remaining a risk. Growth in the third quarter should be slightly better, supported by the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. But this is likely to lose momentum in the fourth quarter, and the end of 2023 and 2024 look weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are expecting growth of around 0.5% this year. For 2024, the gradual recovery in household purchasing power thanks to lower inflation is likely to be offset by even weaker global demand. As a result, we are less optimistic than the central banks and are forecasting French GDP growth of 0.6% in 2024 (compared with a forecast of 1% by the Banque de France).     The trend toward disinflation has begun and will continue Inflation in France stood at 4.3% in June, compared with 5.1% in May, thanks to a fall in energy prices and slower growth in food prices. The fall in inflation is set to continue over the coming months. Growth in producer price indices has slowed markedly. In addition, business price intentions are moderating sharply: price intentions in the manufacturing sector are at their lowest since early 2021, while in the services sector they are at their lowest since November 2021. These figures are in addition to those for the prices of agricultural products, which are falling sharply, which should lead to a sharp fall in food inflation over the coming months. The trend toward disinflation is therefore clearly underway and will continue. However, this trend will probably be slower in France than in other countries, due to less favourable base effects for energy. The tariff shield and fuel rebates prevented a sharp rise in energy prices over the summer and autumn of 2022. As a result, energy inflation is likely to return to positive territory in France in the coming months, with energy prices for the remainder of 2023 likely to remain higher than their levels in 2022, unlike in other countries. This will probably keep overall inflation higher in France than elsewhere this autumn and at the end of 2023. But this does not change the overall picture: ultimately, although less visible than elsewhere, disinflation is well underway and will continue to be seen in France over the coming months. While this trend is clearly encouraging, it does not mean that the problem of inflation is completely over. There is still a major risk pocket, namely services inflation, which is likely to increase in the months ahead and will probably become the main contributor to French inflation by the end of the year. The successive increases in the minimum wage, particularly in January and May 2023, which are being passed on to all wages, will continue to push up the price of services. The Banque de France estimates that negotiated pay rises will average 4.4% in 2023 (compared with 2.8% in 2022 and 1.4% in 2021), often supplemented by a one-off bonus. Salary increases are more pronounced in sectors where recruitment difficulties are greatest. As we expect the labour market to remain tight over the coming quarters despite the economic slowdown, wage increases are likely to strengthen further. However, given the lower price intentions and sluggish demand we expect in the coming quarters, it is likely that wage increases will not be fully passed on to selling prices, weighing on margins. Therefore, inflationary pressures, including in the services sector, should eventually subside. We expect CPI inflation to average 4.6% in 2023 (5.6% for the harmonised index) and 2.1% in 2024 (3.1% for the harmonised index).   The French economy in a nutshell (%YoY)  
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Growth Shifts to Services Amid Weakening Industry, Consumption Benefits from Employment and Decelerating Inflation

ING Economics ING Economics 12.07.2023 14:07
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  
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Scaling Back Ambitions: Challenges for Belgian Economy and Declining Inflation

ING Economics ING Economics 12.07.2023 14:26
Ambitions scaled back With just one year to go before the elections, coming up with clear and effective measures will likely prove a challenge Secondly, while growth in activity is fuelling tax receipts, Belgian public finances continue to create problems. The measures taken to support households and businesses in recent years have weighed heavily on public finances and so far have not been offset. Given the deterioration in public finances, the government will have to take the first steps towards fiscal consolidation in order to comply with the requirements of the European Commission. However, with just one year to go before the elections and given that the coalition in place brings together parties that are opposed in socio-economic terms, coming up with clear and effective measures will likely prove a challenge. Even so, we believe that consolidation will have to take place sooner or later. Most of the effort will probably be made after the elections and will follow the formation of a new majority, which is likely to weigh on the dynamics of the economy over the next few years. On top of this, the federal government had originally planned to carry out two major structural reforms (pensions and fiscal). Pension reform was agreed at the beginning of July, but political hurdles have greatly reduced the initial ambitions included in the final agreement. In a nutshell, there will be an incentive to keep employees at work longer, and at the same time, the highest additional pension schemes will be required to contribute more to the legal pension system. This should satisfy the European Commission, which requested certain measures before releasing funds from the Recovery and Resilience Facility (RRF). This agreement is certainly not the major structural reform that was announced. Moreover, it's becoming increasingly clear that the tax reform will not be achieved. Instead, it will be left to the next legislature, which once again limits the ability of the current majority to put public finances back on a sustainable track.   Further decline in inflation story Inflation peaked at 12.3% in October 2022, and fell back to 4.2% in June, thanks mainly to lower energy prices (gas bills down by almost 64% YoY, and electricity bills down by more than 29%). We're now also seeing signs of easing in other areas – and particularly for food products. Overall, our leading inflation indicator (Net Acceleration Inflation Index – see chart below) tends to show that inflation should continue to fall over the coming months. This indicator uses all the categories of goods and services that are included in the consumer price index in order to determine whether upward pressure on inflation is broad-based or not. In June, the proportion of the consumer price index in a deceleration phase now far exceeds the proportion in an acceleration phase, which is a strong sign that the bulk of the inflation wave is behind us.   Leading indicator shows further decline in inflation   The Belgian economy in a nutshell Note: the net acceleration index is calculated as the share of the CPI with lower inflation in t compared to t-1 minus the share with higher inflation. The shares are calculated on the basis of the weights of each item in the index. The net acceleration indicator is then taken as a three-month moving average.  
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Projected Growth Slowdown and Inflation Trends in the Portuguese Economy

ING Economics ING Economics 12.07.2023 14:31
Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024.   More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024. Falling producer prices, but wages rise   A significant growth slowdown in the pipeline While we continue to expect continued economic growth for the rest of the year, we expect a significant slowdown after the strong start. Export dynamics, the major growth driver in the first months of the year, are likely to be affected by a deteriorating global economic environment and a significant rise in financing costs. While we expect a further decline in inflation, this downward trend will be tempered by upward pressure from rising wages.   Summary table
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Challenges Ahead: Declining Demand and Rising Interest Rates in Eurozone Housing Market

ING Economics ING Economics 12.07.2023 14:36
Drop in demand hinders recovery Mortgage rates have risen sharply over the past year, resulting in a slowdown in demand for housing loans. House prices in the region have also been pushed down as sellers have adjusted their asking prices. New production of housing loans in the eurozone in the first five months of this year was more than 60% below last year's volume, and the number of housing transactions has also seen a significant drop. In the first quarter of 2023, for instance, they fell 23% in Belgium and the Netherlands compared to the previous quarter, 16% in France, and 8% in Spain. With mortgage production leading housing transactions, a further decline in the number of transactions is still to be expected.   Looking ahead, it appears unlikely that we'll see a robust recovery any time soon   Eurostat figures published last Wednesday showed that the fall in demand led to a 0.9% quarter-on-quarter drop in property prices in the eurozone, after a 1.7% QoQ fall in the fourth quarter of 2022. Looking ahead, it appears unlikely that we'll see a robust recovery any time soon. We expect demand to pick up slightly only at the end of the year, with prices following suit in the first half of 2024. Besides the negative impact of the rise in financing costs on prices, the green transition in the housing market will play an increasingly important role in price setting.   House price growth 1Q23, % QoQ   Higher for longer means bottoming out later About a year ago, the European Central Bank (ECB) engaged in the most aggressive interest rate hike cycle since the start of the monetary union. Interest rates for housing loans have also shot up, financing costs have risen significantly and demand for housing loans dropped sharply. While the economic outlook has weakened lately and there are increasing signs that the monetary policy transmission is working, the fear of pausing too soon is currently greater within the ECB than the fear of doing so too late. We expect the central bank to raise policy rates by 25 basis points at both its July and September meetings. As a consequence, capital market rates will move up slightly and will only start to stabilise or begin to come down at the end of the year. Demand for housing loans will therefore be dampened for longer and may also follow a similar pattern. Rising interest rates drive affordability to historically low levels Higher for longer rates will keep additional pressure on affordability through 2024 The recent rise in interest rates has made a significant impact on the affordability of residential real estate, putting a heavier financial burden on prospective homeowners. The sharp rise in energy prices last year exacerbated the situation, leaving families with less money for mortgage payments after paying their energy bills. Consequently, many people chose to postpone their purchase plans, leading to a noticeable drop in demand for credit and downward pressure on house prices. Since interest rates will remain higher for longer, it seems likely that mortgage rates will increase somewhat further in the second half of the year, putting additional pressure on affordability. Several factors partially mitigated the negative effects of rising interest rates on the housing market. These include a tight labour market, a pick-up in nominal wage growth after a sharp fall in real wages last year, an extension of average loan maturities and the implementation of government support measures. The sharp fall in energy prices also took some pressure off as households had to spend a smaller proportion of their income on their energy bills. In some eurozone countries, house prices fell significantly from their peak levels. Those positive drivers, however, only offset part of the negative effect of interest rates this year. In our view, housing affordability is expected to remain low throughout 2024, mainly due to a ‘higher for longer’ interest rate environment. Green transition as structural key driver Looking further ahead, the role played by energy efficiency in the housing market is likely to grow. Both regulatory drivers and government investment, as well as changing consumer preferences are pulling in that direction. The surge of energy prices in 2022 and remaining uncertainty about future energy prices have made home buyers increasingly aware of the benefits of more energy-efficient homes. European and national initiatives to reduce CO2 emissions from buildings will further disrupt the market. This seems to have recently increased the price premium for energy-efficient homes compared to those which consume more energy. Demand for energy efficiency is growing, but a lack of labour capacity and higher material prices are bottlenecks to meeting the extra demand for energy-efficient homes. Given the structural nature of labour shortages, this delays the renovation of the housing stock needed to meet the climate goals. Overall, we expect house prices in the eurozone to fall by some 3.5% to 5% on average this year. House prices are likely to develop differently across eurozone countries, with Germany and the Netherlands seeing rather significant declines in house prices, while house prices in Belgium are only expected to fall slightly. However, there will be differences in price developments not only between countries but also between segments, with energy efficiency playing an increasingly decisive role in price-setting. The price of energy-efficient new buildings is likely to be higher, whereas older residential properties with poor energy efficiency are likely to see even greater price discounts than the new market environment already shows.  
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US Dollar Plunges: Implications for Global Markets

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.07.2023 08:36
US dollar plunges  The selloff in the US dollar accelerates post-CPI, with the dollar index approaching the 100 level with big and steady steps. This is good news for inflation in the rest of the world, because the softer the US dollar, the softer the energy and raw material prices negotiated in terms of US dollars. In the same way the dollar appreciation fueled inflation globally, its depreciation could help ease it as well.   The EURUSD spiked to 1.1150, Cable advanced past the 1.30 level, while the dollar-yen extended losses below the 140 psychological mark. In precious metals, gold is thriving on the back of softer yields and the softer dollar. The price of an ounce rallied past $1960 and consolidates near $1955 at the time of writing.   In energy, oil bulls target the 200-DMA, that stands near the $77pb level, yet the $77/80 range will be hard to drill as the higher the energy the prices, the higher the inflation expectations, and the higher the inflation expectations, the tighter the Fed policy. The tighter the Fed policy, the stronger the odds of recession, and the stronger the odds of recession, the softer the global energy demand, and the softer the energy prices.        In equities, soft US inflation and decline in US yields pushed the S&P500 to a fresh high since April 2022. The index flirted with the 4500 level on expectation that the Fed will hike one more time and stop, and that the actual tightening cycle could very well end with a soft landing. Nasdaq 100, on the other hand, rallied to the highest levels since the beginning of last year. Meta for example jumped 3.70% on the back of inflation optimism and the news that its Threads platform is growing while dampening traffic on rival Twitter.  On a side note, because Nasdaq 100 is now over-concentrated in Mega Cap stocks, there will be a rebalancing in the weightings of the index. Nasdaq has a rule stating that the aggregate total of individual weights above 4.5% in the index shouldn't exceed 48% of the total weighting. And today, the Magnificent Seven is worth around 55% of Nasdaq 100. So, the changing weights could weigh on Nasdaq, as the best performing stocks will see their weight drawn down.    
The Commodities Feed: Brent Breaks Above $80, Energy Market Dynamics and Trade Data Analysis

The Commodities Feed: Brent Breaks Above $80, Energy Market Dynamics and Trade Data Analysis

ING Economics ING Economics 13.07.2023 08:37
The Commodities Feed: Brent breaks above $80 A below-consensus US CPI release has provided a boost to the commodities complex, with it weighing on the USD and leading to a rethink on how much more hiking there is to come from the Federal Reserve. For oil markets, attention will be on today’s IEA and OPEC monthly reports.   Energy: Urals trading above price cap The oil market continued its move higher yesterday, which saw ICE Brent not only break above US$80/bbl, but settle above this level. As a result, Brent has finally broken out of the range it has spent almost two months trading in. The key catalyst for the move was US CPI data coming in below consensus. And while the data is unlikely to change expectations for the Fed to hike at its next meeting, it does call into question the need for further tightening after the July meeting. While the fundamentals continue to support the view that oil prices should trend higher over the remainder of the year, there are still clear macro concerns in the market. In addition, in the very short term, the 200-day moving average is likely to provide some strong resistance to the market. According to Argus, Russian Urals are now trading slightly above the US$60/bbl G7 price cap for shipments from Black Sea ports. Western insurance and shipping services can only be used for Russian crude priced under the cap. Obviously, there is nothing stopping this crude oil from moving with the use of alternative ships and insurance. And the fact that Russia has managed to secure a large amount of non-western shipping capacity does make the price cap less effective. If Urals remain above the cap for a sustained period, it will be interesting to see if it eventually has any impact on Russian export volumes. The latest trade data from China this morning shows that crude oil imports averaged 12.67MMbbls/d over June, up 4% month-on-month and 45% higher year-on-year. Obviously imports were under pressure last year due to Covid related lockdowns. Meanwhile year-to-date crude imports are up 11.7% YoY. Yesterday’s EIA report saw some big inventory builds in crude and products. Commercial US crude oil inventories increased by 5.95MMbbls over the last week, which was quite a lot more than the 3MMbbls increase reported by the API the previous day. The crude build was largely driven by lower exports with crude oil exports falling by 1.76MMbbls/d week-on-week to 2.14MMbbls/d, which is the lowest weekly export number since January. On the product side, distillate fuel oil inventories increased by 4.82MMbbls, whilst there was little change in gasoline stocks. Meanwhile, refinery run rates increased by 2.6pp over the week to 93.7%. Overall, the report was on the bearish side, given the large builds and weaker implied demand. However, clearly the market was more focused on US CPI data yesterday. Both the IEA and OPEC will be releasing their monthly oil market reports today, which will include their latest outlook for the oil market. Despite broader macro concerns, last month the IEA remained constructive on the demand picture, with the agency forecasting oil demand to grow by 2.4MMbbls/d in 2023. However, the agency believes the macro picture will provide more headwinds for demand in 2024, with demand estimated to grow by 860Mbbls/d next year. European natural gas prices continue to come under pressure. TTF settled more than 8% lower yesterday and front month prices have traded down to their lowest levels in more than a month. Norwegian gas flows continue to edge higher from the lows seen in late May and over much of June (due to maintenance), whilst European storage is more than 80% full at the moment, well above the average of 65% for this time of year. Prices are likely to remain under pressure through the summer with storage expected to be full well ahead of the heating season. The Asian market is more profitable for LNG, with Asian spot LNG prices trading at its largest premium to TTF since January- more than US$3/MMBtu.
Moderate Outlook: Growth and Disinflation Trends in the French Economy

Moderate Outlook: Growth and Disinflation Trends in the French Economy

ING Economics ING Economics 13.07.2023 09:03
Moderate outlook From a sectoral point of view, the strength of demand for tourism-related activities and the high level of bookings for this summer should support French economic activity in the third quarter, but the support should diminish thereafter. At the same time, the industrial sector is suffering from weakening global demand. According to survey results, business leaders' assessment of order books has remained very weak for several months. At the same time, inventories of finished products remain high. This means that production is likely to decline over the coming months, as companies see no new orders coming in and have to clear their inventories. The PMI indices for the manufacturing sector have been in contraction territory (below 50) since January. In short, the growth outlook for the French economy is moderate. Growth in the second quarter will be weak, with a fall in GDP remaining a risk. Growth in the third quarter should be slightly better, supported by the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. But this is likely to lose momentum in the fourth quarter, and the end of 2023 and 2024 look weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are expecting growth of around 0.5% this year. For 2024, the gradual recovery in household purchasing power thanks to lower inflation is likely to be offset by even weaker global demand. As a result, we are less optimistic than the central banks and are forecasting French GDP growth of 0.6% in 2024 (compared with a forecast of 1% by the Banque de France).   The trend toward disinflation has begun and will continue Inflation in France stood at 4.3% in June, compared with 5.1% in May, thanks to a fall in energy prices and slower growth in food prices. The fall in inflation is set to continue over the coming months. Growth in producer price indices has slowed markedly. In addition, business price intentions are moderating sharply: price intentions in the manufacturing sector are at their lowest since early 2021, while in the services sector they are at their lowest since November 2021. These figures are in addition to those for the prices of agricultural products, which are falling sharply, which should lead to a sharp fall in food inflation over the coming months. The trend toward disinflation is therefore clearly underway and will continue. However, this trend will probably be slower in France than in other countries, due to less favourable base effects for energy. The tariff shield and fuel rebates prevented a sharp rise in energy prices over the summer and autumn of 2022. As a result, energy inflation is likely to return to positive territory in France in the coming months, with energy prices for the remainder of 2023 likely to remain higher than their levels in 2022, unlike in other countries. This will probably keep overall inflation higher in France than elsewhere this autumn and at the end of 2023. But this does not change the overall picture: ultimately, although less visible than elsewhere, disinflation is well underway and will continue to be seen in France over the coming months. While this trend is clearly encouraging, it does not mean that the problem of inflation is completely over. There is still a major risk pocket, namely services inflation, which is likely to increase in the months ahead and will probably become the main contributor to French inflation by the end of the year. The successive increases in the minimum wage, particularly in January and May 2023, which are being passed on to all wages, will continue to push up the price of services. The Banque de France estimates that negotiated pay rises will average 4.4% in 2023 (compared with 2.8% in 2022 and 1.4% in 2021), often supplemented by a one-off bonus. Salary increases are more pronounced in sectors where recruitment difficulties are greatest. As we expect the labour market to remain tight over the coming quarters despite the economic slowdown, wage increases are likely to strengthen further. However, given the lower price intentions and sluggish demand we expect in the coming quarters, it is likely that wage increases will not be fully passed on to selling prices, weighing on margins. Therefore, inflationary pressures, including in the services sector, should eventually subside. We expect CPI inflation to average 4.6% in 2023 (5.6% for the harmonised index) and 2.1% in 2024 (3.1% for the harmonised index).   The French economy in a nutshell (% YoY)
Producer Price Fall and Stickier Services Inflation: Impact on CPI and Resilient Consumption

Producer Price Fall and Stickier Services Inflation: Impact on CPI and Resilient Consumption

ING Economics ING Economics 13.07.2023 09:07
The fall in producer prices will bring goods disinflation down the line in CPI The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April,  anticipating further decelerations down the line in the goods component of headline inflation. Services inflation is proving relatively stickier, though, possibly reflecting in part a re- composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.   Stickier services inflation to slow the decline in core inflation     Resilient labour market to continue to support consumption A declining inflation environment will likely coexist with a resilient employment environment, at least in the short term. Labour market data continue to point to residual job creation, with a prevalence of open-ended contracts over temporary ones. This is clearly helping to support consumer confidence and keep concerns about future unemployment at low levels. Unfavourable demographics and supply-demand mismatches could keep some pressure on wages, at least in certain sectors. For the time being, the impact on aggregate hourly wages has been limited (in May it was up by 2.4% year-on-year), but we can’t rule out it inching up to the 3% area towards the end of the year. All in all, the combined effect of decelerating inflation, resilient employment and slowly accelerating wages should continue to support real disposable income, ultimately creating room for decent consumption growth in 2023.
Understanding Gold's Movement: Recession and Market Dynamics

Spanish Inflation: A Closer Look at Headline and Core Rates

ING Economics ING Economics 13.07.2023 09:23
Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   The Spanish economy in a nutshell (% YoY)
Challenges Ahead for Belgium: Solid Consumption Masks Competitiveness and Fiscal Concerns

Challenges Ahead for Belgium: Solid Consumption Masks Competitiveness and Fiscal Concerns

ING Economics ING Economics 13.07.2023 09:29
Nothing comes for free in Belgium Solid household consumption is keeping the Belgian economy afloat, but a loss of competitiveness accompanied by worsening public finances and political hurdles will likely weigh on future growth.    Solid consumer spending The sharp rise in energy prices through to autumn 2022 and fall in prices thereafter raised fears of a V-shaped recession, particularly for household consumption. This, however, was not the case in Belgium. On the contrary, household consumption remained very solid throughout the period, even when energy bills hit consumer budgets the hardest. Household consumption has actually remained the main driver of economic growth over the last four quarters, as shown in the first chart below. There are several reasons for this: Labour market strength First, the labour market remains very solid, despite slowing economic growth in the last quarter of 2022. 75,000 jobs were created in 2022 and 11,500 in the first quarter of this year alone. Job creation has therefore become a key driver in supporting both household income and consumption. Automatic wage indexation Second, automatic wage indexation has remained in place and has resulted in a nominal increase in wages of at least 10%. It should be noted that, depending on the sector, the indexation mechanism comes into play at different times. A large number of workers, for example, saw their nominal wages increase by more than 11% at the start of 2023. It should also be noted that indexation applies to pensions and all social benefits too. Government support measures Third, significant additional measures have been taken by the authorities to soften the impact of rising energy prices on household bills – including the first few months of 2023, when gas and electricity prices were falling sharply.     Consumption remains the main support for GDP growth
Portugal's Economic Outlook: Growth Forecast and Inflation Trends

Portugal's Economic Outlook: Growth Forecast and Inflation Trends

ING Economics ING Economics 13.07.2023 10:01
Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024. More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024.   Falling producer prices, but wages rise
Unraveling the Resilience: US Growth, Corporate Debt, and Market Surprises in 2023

Prognosis for Eurozone housing market: Bottoming out delayed by persistent higher interest rates

ING Economics ING Economics 13.07.2023 10:11
Higher for longer means bottoming out later About a year ago, the European Central Bank (ECB) engaged in the most aggressive interest rate hike cycle since the start of the monetary union. Interest rates for housing loans have also shot up, financing costs have risen significantly and demand for housing loans dropped sharply. While the economic outlook has weakened lately and there are increasing signs that the monetary policy transmission is working, the fear of pausing too soon is currently greater within the ECB than the fear of doing so too late. We expect the central bank to raise policy rates by 25 basis points at both its July and September meetings. As a consequence, capital market rates will move up slightly and will only start to stabilise or begin to come down at the end of the year. Demand for housing loans will therefore be dampened for longer and may also follow a similar pattern. Rising interest rates drive affordability to historically low levels The recent rise in interest rates has made a significant impact on the affordability of residential real estate, putting a heavier financial burden on prospective homeowners. The sharp rise in energy prices last year exacerbated the situation, leaving families with less money for mortgage payments after paying their energy bills. Consequently, many people chose to postpone their purchase plans, leading to a noticeable drop in demand for credit and downward pressure on house prices. Since interest rates will remain higher for longer, it seems likely that mortgage rates will increase somewhat further in the second half of the year, putting additional pressure on affordability. Several factors partially mitigated the negative effects of rising interest rates on the housing market. These include a tight labour market, a pick-up in nominal wage growth after a sharp fall in real wages last year, an extension of average loan maturities and the implementation of government support measures. The sharp fall in energy prices also took some pressure off as households had to spend a smaller proportion of their income on their energy bills. In some eurozone countries, house prices fell significantly from their peak levels. Those positive drivers, however, only offset part of the negative effect of interest rates this year. In our view, housing affordability is expected to remain low throughout 2024, mainly due to a ‘higher for longer’ interest rate environment.   Green transition as structural key driver Looking further ahead, the role played by energy efficiency in the housing market is likely to grow. Both regulatory drivers and government investment, as well as changing consumer preferences are pulling in that direction. The surge of energy prices in 2022 and remaining uncertainty about future energy prices have made home buyers increasingly aware of the benefits of more energy efficient homes. European and national initiatives to reduce CO2 emissions from buildings will further disrupt the market. This seems to have recently increased the price premium for energy efficient homes compared to those which consume more energy. Demand for energy efficiency is growing, but lacking labour capacity and higher material prices provide bottlenecks on the supply side of the market to meet the extra demand for energy efficient homes. Given the structural nature of labour shortages, this delays the renovation of the housing stock needed to meet the climate goals. Overall, we expect house prices in the eurozone to fall by some 3.5% to 5% on average this year. House prices are likely to develop differently across eurozone countries, with Germany and the Netherlands seeing rather significant declines in house prices, while house prices in Belgium are only expected to fall slightly. However, there will be differences in price developments not only between countries but also between segments, with energy efficiency playing an increasingly decisive role in price-setting. The price of energy efficient new buildings is likely to be higher, whereas older residential properties with poor energy efficiency are likely to see even greater price discounts than the new market environment already shows.
China's Ninth Straight Month of Gold Holdings Increase; Oil Resilient Despite Russian Tanker Incident; Dollar Supported by Bond Supply Concerns

UK Inflation Data Holds the Key for August Rate Hike Decision

ING Economics ING Economics 18.07.2023 08:26
UK inflation data to make-or-break a 50bp August rate hike After some unexpectedly strong wage data last week, Wednesday's services inflation data will determine whether the Bank of England implements another aggressive 50bp rate hike in early August.   Services inflation is key for the Bank of England Whether or not the Bank of England repeats June’s 50 basis-point rate hike in two weeks comes down to one number in the UK inflation data due on Wednesday. That number is services inflation, and it’s likely to stay at 7.4%, its highest level in over 30 years. This is the bit of the inflation basket that the Bank of England is most interested in – it tends to exhibit the most persistent trends, and is generally less volatile than the likes of energy or goods. Until now our base case has been for a 25bp rate hike when the BoE meets in early August. But unexpectedly strong wage data last week has moved the dial closer to a 50bp move, and that would be further cemented if Wednesday’s services inflation figure rises once again.   Hospitality has been a key driver of higher services inflation   If various surveys are to be believed though, services inflation should be at its peak. Indeed if we look at hospitality – a key driver of services inflation over recent months – there are already signs of disinflation, which could be linked to the sharp fall in gas prices. Data from a January ONS survey of businesses showed that energy prices, much more than wage costs, was the primary driver of higher consumer prices in hospitality through winter. By that logic, lower gas prices should help ease service sector price pressure over the coming months, and indeed the latest version of that ONS survey shows the percentage of hospitality firms that are expecting to raise prices has tumbled from 46% in April to 26% now. That signals disinflation in the services sector through the rest of the year, albeit stubbornly-high wage growth will ensure that’s a slow process. Admittedly we might have to wait until later in the summer before this trend becomes more apparent, and for now the Bank of England appears sceptical that improvements in forward-looking inflation indicators are translating into better actual CPI figures. Like us, the BoE expects services inflation to flatline in the near-term, and any deviation above or below last month’s reading will be what helps cement either a 25bp or 50bp hike in early August.    
Inflation Outlook: Energy Prices Drive Hospitality, Food Inflation Eases

Inflation Outlook: Energy Prices Drive Hospitality, Food Inflation Eases

ING Economics ING Economics 18.07.2023 08:28
Energy prices were the main driver of hospitality price rises over winter     Food and core goods inflation should start to come lower Away from services, the news is a bit brighter and headline inflation should dip back noticeably in Wednesday's figures. Last June we saw a near-10% spike in petrol/diesel prices; this year, they fell by 2.6% across the month by our estimates. That alone shaves 0.4pp off the annual CPI rate, and the result is that inflation is likely to hit 8.1% (down from 8.7%). Expect an even more pronounced decline in July’s numbers, as the 17% fall in average household electricity/gas bills wipes almost another full percentage point off the annual rate of inflation. The news on food prices should start to get better too. While still at a lofty 18%, food inflation does appear to have peaked and we've seen more noticeable early signs of slowing in the equivalent eurozone data. Given the UK's food inflation rate mirrored the eurozone until a few months ago, we don't see why this downward trend shouldn't also be replicated in Britain. That's because producer prices have been rising much less aggressively over recent months, and on a seasonally-adjusted basis, the change in prices over the past three months is compatible with what we typically saw before pre-2022 (see chart below). We doubt the divergence between producer and consumer prices will persist for much longer   Producer price inflation for food has slowed dramatically     Finally, we’ll also be watching ‘core goods inflation’ after various categories showed unexpected strength over recent months. April saw a surprise spike in vehicle prices, and we’ve also seen stickiness in clothing as well as alcohol/tobacco. The chart below shows that durable goods inflation has picked up again, despite inventory levels rising relative to sales among retailers/wholesalers. This isn’t unique to the UK, and we saw something similar in the US earlier this year. But we don’t expect this divergence between leading indicators and core goods inflation to continue. Base effects should also help disinflation among goods categories too over the next few months. We think this should help core inflation nudge fractionally lower in Wednesday’s data.   Durable goods inflation has picked up despite higher inventories/lower sales     Implications for the Bank of England Throw all of that together, and the result is that headline CPI should end up a tad below 7% in July (released in August). And a further downshift in energy inflation in October should take us to around 5% on our current projections. Core inflation will be stickier, ending the year north of 5%, and services is likely to be closer to 6%. If we’re right, then the Bank of England can probably get away with hiking slightly less than markets expect. Investors currently expect a peak for Bank Rate at 6.15%. Progress on services inflation should be enough to convince the committee to pause its hiking cycle in November, which would suggest a peak rate of either 5.50% or 5.75%. But given the tendency of inflation data to come in on the high side, we certainly shouldn't rule out a peak of 6% should services CPI fail to slow.  
Energy and Metals Decline, Wheat Rallies Amid Disappointing Chinese Growth

Energy and Metals Decline, Wheat Rallies Amid Disappointing Chinese Growth

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.07.2023 08:29
Energy, metals fall, wheat rallies.    The week started with unpleasant news really. First, the Chinese growth numbers disappointed at yesterday's open, and sent the metal, energy, and European stocks down. A barrel of American crude fell 1.72% and slipped below the $75pb level, and is still consolidating below this level this morning, the European nat gas prices continue trending lower following an upbeat mood at the start of the summer on expectation that the European nations refilling their reserves for winter would push prices higher. But the disappointing growth numbers and the slowing activity in Europe hammered the positive trend and the prices remained under pressure despite the recent spike in oil prices. Then, Wisdomtree's industrial metals ETF dropped nearly 2% and Hermes slumped more than 4% below its 50-DMA and to its 100-DMA yesterday on worries that the Chinese costumers, who were the reason why the company announced juicy earnings in the past few quarters. In summary, energy and French luxury goods, and the British FTSE 100 index – full of energy and miners – didn't react well to the news.   Then, Russia cancelled the grain deal, which allowed the safe passage of around 33 million of crops from Ukraine via Black Sea since last June and wheat futures jumped nearly 3.50% yesterday. While Russia had only half-heartedly agreed to sign a Turkish brokered deal, the latest explosion in the bridge between Russian and Crimea and the Western sanctions that are taking a toll on the Russian exports brought Russia to drop the deal, turning all eyes to Turkish President Erdogan, who said that he will meet Vladimir Putin in August, but given the urging situation he will certainly call him before. There is one thing that could displease Russians though, and it is the fact that Erdogan gave a greenlight for Sweden joining NATO just a couple of days ago. The latter could make another crop deal harder to be sealed. So, all eyes are on Turkish President Erdogan. If he can't agree on a new deal, the Ukrainian crops must take a pricier detour to reach the international market and that extra cost could discourage farmers to keep supply steady. Lower supply could boost wheat prices and add to food price inflation worries that had just started easing.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
Challenges Persist for Company Amidst Falling Demand and Competitive Pressure in Q2'23

New Capacities of Professional PV Installations in Poland: RES Auction System and Market-based Growth

GPW’s Analytical Coverage Support Programme 3.0 GPW’s Analytical Coverage Support Programme 3.0 19.07.2023 08:45
New capacities of professional PV installations in Poland (GW)   The market for professional PV installations gained momentum with the introduction of the RES auction system in 2016. The auction system operated from 2016 to 2021, with the first six-year period ending with the traditional December auction round in 2021.   At the end of that period, numerous projects that won the auctions were left to start producing energy within 18 months, according to the schedule. By a decision of the European Commission at the end of 2021, the auction system was extended into 2022-27. The 2016-21 RES auctions proved to be quite a success and a stimulus for the development of primarily large-scale photovoltaic farms, providing support for 6.8 GW of capacity in this technology and 5.3 GW for wind power plants, which together with photovoltaics participated in the auctions in the same auction basket.   The next six-year period of RES auctions was carefully laid out year by year and for specific possible capacities to be contracted for the technology. For photovoltaics, 750 MW of capacity for installations up to 1 MW and above 1 MW are provided for each year, starting in 2022. Also included was an onshore wind position starting in 2023 of 250 MW and ending in 2027 with available capacity of 1,000 MW. In 2022, the first pilot RES auction from the EC's extended new auction system was held, with the volume set in advance for 2022-27.   This time, farms up to 1 MW were not very successful, despite significant offered capacity volume of 750 MW. The decided auction will result in only 150 MW of small PV farm capacity. In contrast, there was much more interest in auctions for farms above 1 MW, where onshore wind projects were also included. Wind farms were awarded contracts for capacities of around 245 MW, while large PV farms were awarded contracts for 336 MW, bringing the total to over 581 MW of new capacity.   In 2021-22, however, we witnessed a decline in interest in the auction support instrument, as photovoltaic technology has matured and, with the rise in energy prices during Russia's gas blackmail and energy crisis, investors opted to build farms on a commercial basis (market-based energy sales, including PPAs).   The largest PV farm operators include Respect Energy, PAK-Polska Czysta Energia, Solis Bond Company, Better Energy Impact, Energa, Regesta (the aforementioned account for more than 60% of the number of farms in Poland).      
Analysis of Q2'23 Results: Revenue Decline and Gross Margin Improvement

Unlocking the Hidden Potential: Energy Storage Market in Poland

GPW’s Analytical Coverage Support Programme 3.0 GPW’s Analytical Coverage Support Programme 3.0 19.07.2023 08:53
Energy stores - hidden potential The market for energy storage (in the form of heat and electricity) for prosumers in Poland is developing almost exclusively thanks to subsidies from the "My Current" program. The market basis for the development of prosumer storage has been undermined in 2H22 and 1H23 by the legislature's interference in the energy market. Interference in energy prices and their profile includes the law of October 27, 2022, on emergency measures to curb electricity price levels and support certain consumers in 2023, which set a fixed (hour-independent) price of 693 PLN/MWh for households, with no indication of peak hours, when the energy price, according to EU requirements, should be 10% higher. Added to this was the complete suspension of the exchange obligation and interference with the balancing market. These changes did not serve the operation of the law of value in the energy industry and the creation of business models for energy storage, or, for example, the construction of PV installations exposed to the east or west. Investments in energy storage are being made more with an eye to moving away from market interference in 2024 and plans to introduce dynamic tariffs from July 2024, including prosumers' transition to full net-billing (billing energy prices according to real-time dynamic tariffs, already in a liberalized energy market). Currently, in Western Europe, regulations indicate that when building 1MW of RES capacity, the developer must plan for 10% of the capacity for energy storage (China 20%). In time, regulations will also take effect in Poland, which will determine the development of this market. Currently, the cost of building energy storage is still expensive (PLN 8mn/MW).   This makes the payback period longer than for PV installations. If the regulator allowed energy storage and trade between day and night, the storages could act as automatic arbitrage in the future (during the peak day the price currently exceeds PLN 600/MWh, and at night it drops to PLN 300/MWh; modern installations have efficiency above 70%).
Analysis of Q2'23 Results: Revenue Decline and Gross Margin Improvement

Unlocking the Hidden Potential: Energy Storage Market in Poland - 19.07.2023

GPW’s Analytical Coverage Support Programme 3.0 GPW’s Analytical Coverage Support Programme 3.0 19.07.2023 08:53
Energy stores - hidden potential The market for energy storage (in the form of heat and electricity) for prosumers in Poland is developing almost exclusively thanks to subsidies from the "My Current" program. The market basis for the development of prosumer storage has been undermined in 2H22 and 1H23 by the legislature's interference in the energy market. Interference in energy prices and their profile includes the law of October 27, 2022, on emergency measures to curb electricity price levels and support certain consumers in 2023, which set a fixed (hour-independent) price of 693 PLN/MWh for households, with no indication of peak hours, when the energy price, according to EU requirements, should be 10% higher. Added to this was the complete suspension of the exchange obligation and interference with the balancing market. These changes did not serve the operation of the law of value in the energy industry and the creation of business models for energy storage, or, for example, the construction of PV installations exposed to the east or west. Investments in energy storage are being made more with an eye to moving away from market interference in 2024 and plans to introduce dynamic tariffs from July 2024, including prosumers' transition to full net-billing (billing energy prices according to real-time dynamic tariffs, already in a liberalized energy market). Currently, in Western Europe, regulations indicate that when building 1MW of RES capacity, the developer must plan for 10% of the capacity for energy storage (China 20%). In time, regulations will also take effect in Poland, which will determine the development of this market. Currently, the cost of building energy storage is still expensive (PLN 8mn/MW).   This makes the payback period longer than for PV installations. If the regulator allowed energy storage and trade between day and night, the storages could act as automatic arbitrage in the future (during the peak day the price currently exceeds PLN 600/MWh, and at night it drops to PLN 300/MWh; modern installations have efficiency above 70%).
UK Inflation Data Boosts Chances of August Rate Hike

UK Inflation Data Boosts Chances of August Rate Hike

ING Economics ING Economics 19.07.2023 10:05
Good news on UK inflation bolsters chances of a 25bp August hike UK inflation fell more than expected in June, owing in part to an encouraging decline in service-sector CPI. The August Bank of England meeting is going to be a close call, but we think this latest data makes a 25bp hike more likely than a repeat 50bp increase. Finally, we have some good news on UK inflation. Headline CPI has dropped back to 7.9%, below consensus and almost a full percentage point lower than in May. Much of that can be put down to petrol and diesel prices, which fell by 2.6% across the month – a stark difference to the same period last year, where we saw a near-10% spike amid the ongoing fallout of the Ukraine war. But encouragingly, we also saw a marked slowdown in food inflation. These prices increased by 0.4% on the month, which looks like the slowest month-on-month increase since early 2022. This is a trend that should continue, given that producer prices for food products are now falling on a three-month annualised (and seasonally-adjusted) basis, as the chart below shows.   Producer prices point to further improvements in food inflation   The good news continues for services What matters most to the Bank of England is services inflation, and the good news continues here too. Service-sector CPI slipped back from 7.4% to 7.2%, contrary to both the Bank of England’s and our own forecasts for this to remain unchanged in the near term. As always, we caution that one month doesn’t make a trend, but our expectation is that services inflation should gradually nudge lower through the remainder of this year. While stubbornly high wage growth will ensure that the journey back towards target is a long one, surveys have shown that price rises among service-sector firms (most notably hospitality) can be traced in large part back to higher energy prices. Now that gas prices are dramatically lower, the impetus for firms to continue to raise prices quite as aggressively should fade. Indeed, the proportion of hospitality firms expecting to raise prices over the next few months has tumbled from 46% in April to 26% now, according to ONS survey data.   Has UK services inflation finally peaked?   All in all, we now expect headline inflation to dip back to 6.6% in July, owing to the near-20% fall in household energy prices. Core inflation should slip back to roughly the same level too. Is this enough to convince the Bank of England to opt for a 25bp rate hike in August? We think it probably will – but it's going to be a close call. The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply. The risk is that the BoE applies a similar logic to that seen in June. This could mean that if it expects to hike again in September, then it might as well opt for a larger 50bp hike in August. We certainly wouldn’t rule this out.    
Likely the Last Hike for a While: FOMC Meeting Insights

Likely the Last Hike for a While: FOMC Meeting Insights

ING Economics ING Economics 24.07.2023 09:50
But it is likely the last hike for a while... By the time of the next FOMC meeting on 20 September, we will have had two further job and inflation reports, a detailed update on the state of bank lending plus more time for the lagged effects of the already enacted Fed tightening to be felt. In terms of inflation, the next couple of months have some tough comparisons with last year. Energy prices fell sharply last summer so headline year-on-year CPI could be a tenth or two of a percentage point higher than the current 3% rate at the September FOMC meeting, but core inflation looks set to slow further and could be down at around 4.2% versus the current 4.8% rate. If anything, the risks are that core inflation could be a little lower given decelerating housing rent inflation may materialise more quickly than we are currently conservatively forecasting. It is also the composition of inflation the Fed will be paying close attention to. Is the super core (non-energy services ex housing) slowing meaningfully? We think the answer will be 'yes' based on lead surveys such as the ISM prices paid, PPI trade services and the National Federation of Independent Business price intentions surveys.   Inflation pressures are fading   As for activity, industrial activity is already struggling with the ISM manufacturing index in contraction territory for the past nine months, while consumer spending growth is slowing. Over the next two months, we think the headwinds for activity will intensify with outstanding stock of commercial bank lending set to fall further thanks to the combination of higher borrowing costs and tightening of lending standards. This is a hugely important story given the insatiable appetite for credit within the US economy. We may also see the spreading awareness of the financial implications of the restart of student loan repayments starting to impact the spending behaviour of tens of millions of Americans. So, by the time of the 20 September FOMC meeting, we think the Fed will have evidence to be pretty confident that inflation is on the path to 2% and that activity is slowing to below trend rates and the jobs market is cooling. This is likely to be characterised as another pause and the Fed is likely to keep one additional rate hike in its forecast profile before year-end. However, our base case is that it will not carry through with it, and 5.25-5.5% marks the peak for US rates.   Market rates to edge towards 4% and money markets to slowly re-tighten post the FOMC The US rates curve has been re-pricing in recent weeks to reflect the relative robustness of the economy, primarily by pricing out many of the rate cuts that had been discounted. The liquid portion of the strip out to early 2025 is now not tending to dip below 3.75%. Adding a 30bp term premium to this suggests that the US 10yr yield could easily be closer to 4%. It’s far from a perfect model, but it does help to explain why the 10yr yield has not collapsed lower, and in fact, we rationalise this as a factor that can force US yields higher as a tactical view. It goes against the consensus out there that the inflation story is behind us but is rationalised by the reality of relative contemporaneous macro robustness. For this reason, we maintain a moderate bearish stance on the directional view, expecting market rates to remain under moderate rising pressure. A hawkish Fed pushes in the same direction, preventing the strip from becoming too inverted. The Fed may or may not choose to focus on liquidity circumstances at the press conference. If quizzed, it will likely note that the impact of ongoing quantitative tightening and resumed bills issuance by the US Treasury is largely showing up in reduced amounts going back to the Fed on the reverse repo facility. The Fed will generally be happy with this, as this facility is more of a balancing mechanism, one that can take in liquidity that is not flowing into bank reserves. Bank reserves themselves have not seen a material fall, which acts to keep the overall liquidity banks circumstance reasonably ample. It also coincides with money market funds balances still around record highs and bank deposits holding up very well, too. Many of these factors will, in fact, justify the Fed’s decision to maintain a tightening trajectory for policy, as at least the price of money continues to rise even if underlying liquidity volumes are slow to fall.
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Central Banks in Focus as Weak PMIs Impact Equity Markets; NAS100 Approaches Channel Lows Ahead of Fed Meeting

Craig Erlam Craig Erlam 25.07.2023 08:56
Fed, ECB and BoJ all meet this week Weak PMIs point to further cooling in the economy NAS100 nears channel lows  Equity markets are treading water at the start of what is going to be a very lively week. There are some huge central bank meetings this week, the most notable naturally being the Federal Reserve on Wednesday. Interest rates are finally at or very close to their peaks and this week could see the Fed and ECB announce the last rate hike in their tightening cycles. And a look at the PMI data may help to explain why, with economies around the world cooling at a decent rate. Inflation is also falling, primarily driven by favourable base effects at this stage, as well as falling energy prices and decelerating food costs. The PMIs from the eurozone, the UK, and the US today all tell a pretty similar story. Manufacturing is continuing to struggle – although not as much as expected in the US – while services growth expectations are slowing. There are clear signs in the surveys of more cooling on the horizon, fewer inflationary pressures, and weaker hiring. Central banks will be relieved, though almost certainly not enough to claim victory or explicitly declare the end of the tightening cycle. Policymakers will proceed with extreme caution, albeit very much buoyed by the data they’ve seen over the last month or two.     NAS100 nears channel lows ahead of the Fed The NAS100 pulled back over the last couple of sessions after coming close to 16,000, a level it hasn’t traded at since the start of last year. It was previously a notable level of support and resistance as well, which may explain why we’ve seen some profit-taking. It’s now pulled back to 15,250-15,500 where it saw plenty of resistance over the last couple of months and now coincides with the bottom of the rising channel. A break of this could be a bearish development after such a strong recovery this year.      
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Eurozone's Core Inflation and the ECB: Analyzing the Dynamics for Rate Decisions

ING Economics ING Economics 02.08.2023 09:33
The ‘real’ dynamics of core inflation in the eurozone As the European Central Bank has been putting increasing emphasis on the recent readings of underlying inflation, it is more important to look at the short-term dynamics than at the year-on-year figures. While some easing of inflationary tensions is indeed observable, it would be premature to exclude another rate hike.   Why core inflation matters for the ECB The flash estimates showed that eurozone headline inflation fell to 5.3% in July, while core inflation stabilised at 5.5%. At the next monetary meeting of the ECB’s Governing Council, the bank will have only one additional inflation figure at its disposal to decide whether it will hike rates again or pause its tightening cycle. Christine Lagarde stressed several times during the July press conference that the ECB is determined to break the back of inflation and to take inflation back to 2% in the medium term on a sustainable basis. We also know that the “dynamics of underlying inflation” play an important role, as this was singled out as one of three criteria on which policy decisions would be based (the other two being the assessment of the inflation outlook and the strength of monetary transmission). And it’s probably even the most important criterion, as the ECB has started to have serious doubts about the forecasting ability of its models. But how these dynamics are actually studied is an open question. In the German press, a comment made by an unnamed official source in Sintra was interpreted as if the ECB would stop its tightening cycle after three consecutive falls in core inflation. Since core inflation has not even started to fall, the end of interest rate hikes doesn’t seem to be near following that reasoning. However, not too much emphasis should be put on comments from anonymous sources. And while we surely believe that a decline in core inflation could be a trigger for the ECB to change gear, we doubt that monetary policy would be based on a mechanical rule.   Changing inflation dynamics Three-month on three-month annualised change in prices (in %)     Don't be fooled by year-on-year inflation figures Another issue is how to measure the “dynamics of underlying inflation”. Looking at the year-on-year core inflation figures says as much about last year’s price level as today’s. Base effects can indeed have a very strong impact. As such, the current year-on-year core inflation figures in the eurozone have been affected by the temporary introduction of a cheap train ticket in Germany last year. Therefore, it is much more interesting to look just at the evolution of prices in recent months, using data with seasonal adjustments published by the ECB. Since month-on-month changes are a bit more volatile, we take the three-month on three-month annualised change in seasonally adjusted prices. The good news is that if you look at headline inflation, this measure stands at 2%, though this figure is of course heavily influenced by energy prices. Inflation without food and energy, which stood at 5.8% in April, came in at 3.8% in July. That’s already a nice decline, but still clearly above the 2% target. More in detail, the rapid fall of non-energy industrial goods price inflation is striking, a consequence of the ongoing inventory correction and the fall in input prices. However, services price inflation, while also declining, still stands at 4.5%. Survey data suggest that the slow downward trend will continue, but if the ECB’s criterion is the current “dynamics of underlying inflation”, then it would certainly be premature to exclude a 4% deposit rate.
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FX Daily: Dollar Demand Persists Amidst Waiting Game

ING Economics ING Economics 07.08.2023 08:50
FX Daily: Waiting game keeps the dollar in demand Another mixed US jobs report on Friday has maintained choppy conditions in FX markets. While consensus expects the dollar to edge lower through the year, we are yet to see both the decline in inflation and activity (particularly jobs data) that would cement this trend. Key inputs to FX markets this week will be Thursday's CPI data and the Treasury refunding.   USD: CPI and quarterly refunding will be the highlights Friday's release of a mixed US July jobs report was enough to deliver some calm to the US bond market. Recall that the sharp sell-off at the long end of the curve had upset benign market conditions on Wednesday and Thursday last week. Lower headline employment in July saw 10-year Treasury yields drop nearly 15bp on Friday and investors jump back into their preferred high-yielding currencies such as the Mexican peso.  Looking ahead, we see two key US highlights this week. The main event will be Thursday's release of July CPI figures. Despite base effects nudging the YoY rate higher, MoM readings should deliver another benign 0.2% outcome at the core level and provide another piece of disinflation evidence for the Fed. The problem for FX markets is that it seems that disinflation is not enough to get the dollar lower. Instead, we also need to see signs of softening activity - especially in the labour markets. Unless initial claims spike on Thursday or consumer sentiment falls sharply on Friday, there are few real signs of softer activity coming through just yet. The second highlight of the week will be the US Treasury's quarterly refunding, where a collective $103bn of three, ten, and thirty-year US Treasuries are auctioned Tuesday through Thursday. It is very rare to have a bad Treasury refunding - e.g. consistently low bid to cover ratios or other such metrics. But the risk is that dealers build concessions into bond prices ahead of the auctions - keeping US yields firm and the investment environment mixed. On the face of it then, this week looks unlikely to trigger the kind of benign dollar decline around which the Rest of the World currencies can rally.  Additionally, events in the Black Sea and what they could mean for food and energy prices could keep investors nervous about embracing disinflation trends. For today, we doubt Fed speakers will have a meaningful impact on the dollar and can see DXY trading well within a 101.80-102.80 range.
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European Consumers Concerned About Long-Term Inflation and Its Impact on Living Costs

ING Economics ING Economics 10.08.2023 08:55
Inflation’s here to stay, say European consumers Inflation is a major concern for consumers, and policymakers should worry that they think it's a long-term problem. Our latest ING Consumer Research survey indicates that people in eight European countries not only expect inflation to stay high for at least three more years but also expect those same goods to keep getting more expensive.   Food and energy prices top list of perceived inflationary pressures Households across Europe are worried that the so-called 'cost of living crisis' is here to stay. That's despite inflation rates in most European countries recently coming down, not least on the back of base effects and subsiding food and energy price pressures. Economists expect prices to fall further, but the consumers we've been speaking to in Germany, Belgium, the Netherlands, Spain, Luxembourg, Poland, Romania and also Turkey beg to differ. Most expect prices to stay well above what they consider 'stable' for at least three more years. And they also assume their inflationary pain points will stay the same.   These perceptions are concerning as far as they relate to future spending. We'll dive into the figures shortly, but our survey suggests three-quarters of people whose saving habits were impacted by inflation say they're saving less because they can't afford to or they're saving more to be prepared for future price increases. So, this should have a negative impact on discretionary spending. Only one in eight say they're saving less to spend their money now.  In a survey for ING Consumer Research, consumers were asked to compare the percentage of their net income they now spend on various groups of goods to what percentage they had been spending 5 years ago. Unsurprisingly, food and energy top the list; these items have also been leading official inflation statistics. This picture is roughly the same across participating countries, with Belgium and the Netherlands consistently producing some of the lowest numbers. In most eurozone countries, spending on savings and retirement provision suffered, whereas the non-eurozone countries had considerably larger fractions reporting increases rather than decreases.   Compared to 5 years ago, I now spend on:    
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Inflation Concerns: European Consumers Expect Long-Term Price Increases, Impact on Spending Habits

ING Economics ING Economics 10.08.2023 08:58
Consumers expect more of the same We asked consumers to make an assumption about the percentage of income they'd be spending five years down the line compared with today. And this column chart looks remarkably similar across the countries we surveyed. Most consumers do not appear to believe in any sort of base effect. Instead, they expect to spend more of their income on those categories that have already seen the largest increases.   5 years ahead compared to now, I assume I will spend this much on...     Many can't afford to save anymore More than 80% of consumers reported changes in their savings behaviour, with the vast majority being related to rising prices. Being forced to reduce the amount that goes into savings was by far the most-selected answer in all countries. Depending on the circumstances, it might also make sense from an economic point of view to save less and spend the money on goods before they become even more expensive. But this is not a popular choice among consumers, who instead prefer to save more in order to be better prepared for rising prices. More than 20% in Turkey reported this. So, while spending on basic needs is likely to simply go up or down with prices and stay more or less constant in real terms, discretionary spending is going to be hit. If prices do come down faster than consumers expect, we might see a bit of a spending spree from those who were able to build up savings in preparation for higher prices that never came. But that's unlikely to affect the overall picture.     Which of the following statements best describes the influence that inflation has had on your saving habits?     Inflation is believed to stay high for longer, especially in Turkey Turkish consumers have a different kind of experience with inflation than the rest of Europe. So, it doesn’t come as a surprise that only 10% do not have an opinion as to when inflation numbers will come down to a level of price stability; at least 18% selected “I don’t know” in all other countries. Some Turkish consumers are sceptical; others are fatalistic. The number of 35% for “5 years or more from now or never again” is the survey’s largest, and so are the 10% who already consider current inflation levels to mean price stability, as they are at least a bit removed from 2022’s record levels.   When do you think official headline inflation in your country will come back down to a level that you would consider price stability?   Consumers' assessment of their financial situation shows little signs of improvement If you don’t believe that the most pressing economic issue will subside anytime soon, you most likely won’t expect things to get better, and European consumers don’t either. Ratings of their own current financial situation on a scale from 1 to 10 compute to an average of 5.4, ranging from 4.6 in Turkey to 6.2 in the Netherlands. Looking back on their situation five years ago, consumers give an average score of 5.9, with every country seeing a drop of at least 0.1. And the outlook is bleak: Consumers’ expectations for their situation in 5 years average out at 5.2, with no country expecting an upswing.   How would you rate the following?   Consumers were also asked to rate the financial situation of their own peer group and that of their country’s general population over the same time span. Their peers' finances rank a bit lower than their own, with lower percentages for the extreme ends of the scale and a higher one for “I don’t know”. But the nationwide picture looks alarming: Consumers rate their fellow countrymen’s finances five years ago at just a bit lower than their own. But the current situation and the future look much worse to them, with a drop twice as big as the one they experienced themselves. What’s striking about this finding is that consumers’ individual perceptions and expectations about inflation don’t appear to tally with what they expect for their economies as a whole. Inflationary pressures, not least in food and energy, have been dominating global news headlines since the war in Ukraine started. That sustained media focus on people’s troubles may well explain the discrepancy.
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Philippines 2Q23 GDP Disappoints: Slowdown in Revenge-Spending and Impact of Rate Hikes

ING Economics ING Economics 10.08.2023 09:06
Philippines: 2Q GDP disappoints as revenge-spending fades and rate hikes finally weigh on momentum 2Q23 GDP grew 4.3%YoY, much slower than the market expectation of a 6% gain.   2Q23 GDP disappoints in a big way The Philippine economy grew 4.3%YoY in the second quarter of 2023, much slower than the market expectation, which was for a 6% gain.  On a quarter-on-quarter basis, the economy contracted by 0.9% as high inflation and the lagged impact of previous monetary tightening weighed on economic activity.  This was the slowest pace of expansion since 2011, with growth momentum slowing due to a challenging global landscape, price pressures, lacklustre fiscal stimulus and elevated borrowing costs.    Overall, this was a disappointing report with the slowdown evident in all major sectors of the economy.  Household consumption posted slower growth of 5.5%YoY, slowing from the 6.4% expansion in 1Q23.  A combination of fading revenge-spending on top of an unfavourable base effect (presidential elections were held in 2Q 2022) capped household consumption.  Meanwhile, the aggressive tightening carried out by Bangko Sentral ng Pilipinas last year weighed on capital formation, with overall investment outlays unchanged from last year.  Lastly, government spending, which had been an important source of support throughout the pandemic, contracted by 7.1%YoY.  Year-to-date growth slowed to 5.3%, much lower than the government’s target of 6-7% growth, which now looks out of reach given our expectation for growth to slow further in the coming quarters.   PHL economic growth sputters to slowest pace (YoY%) since 2011   Governor Remolona stuck between slowing growth and rising inflation risk BSP meets next week to discuss monetary policy against a backdrop of slowing domestic growth momentum and rising upside risks to the inflation outlook.  The Philippines imports energy and grain, and the prices of both have been on the rise recently, potentially threatening the current downward path of inflation. 
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Assessing the Risk of Prolonged Economic Stagnation in China - Insights by Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.08.2023 08:09
Is China on path for longer economic stagnation?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the latest CPI data showed that the headline inflation in the US ticked higher from 3 to 3.2%. That was slightly lower than the 3.3% penciled in by analysts, core inflation eased to 4.7% in July from 4.8% expected by analysts and printed a month earlier.   But the rising energy and crop prices threaten to heat things up in the coming months and inflation's downward trajectory could rapidly be spoiled. That's certainly why an increasing number of investors and the Federal Reserve's (Fed) Mary Daly warned that this was 'not a data point that says victory is ours'.   And indeed, looking into details, the fact that the 20% fall in gasoline prices is what explains the decline in headline number is concerning. The barrel of US crude bounced lower yesterday after a 27% rally since the end of June, and the latest OPEC data indicated that we would see a sharp supply deficit of more than 2mbpd this quarter as Saudi cuts output to push prices higher. And this gap could further widen as global demand continues growing and shift to alternative energy sources is nowhere fast enough to reverse that upside pressure.   On the other hand, we also know that the rising energy prices fuel inflation expectations and further rate hikes expectations around the world. And that means that oil bears are certainly waiting in ambush to start trading the recession narrative and sell the top. The $85pb could be the level that could trigger that downside correction despite the evidence of tightening supply and increasing gap between rising demand and falling supply.   Today, eyes will be on the July PPI figures before the weekly closing bell, where core PPI is seen further easing, but headline PPI may have ticked higher to 0.7% on monthly basis, probably on higher energy, crop and food prices.     In the market  Yesterday's slightly softer-than-expected inflation numbers and the initial jobless claims which printed almost 250K new applications last week - the highest in a month - sent the probability of a September pause to above 90%, though the US 2-year yield advanced past the 4.85% level, and the longer-terms yields rose with a weak 30-year bond action, which saw the highest yield since 2011.   Major stock indices stagnated. The S&P500 was up by only 0.03% yesterday while Nasdaq 100 closed 0.18% higher, as Walt Disney rallied as much as 5% even though Disney+ missed subscription estimates and said that it will increase the price of the streaming service. Disney is considering a crackdown on password sharing, which, combined with higher prices could lead to a Netflix-like profit jump further down the road.     In the FX  The USD index consolidates above the 50 and 100-DMAs and just below a long-term ascending channel base. The EURUSD sees support at the 50-DMA, near the 1.0960 level, and could benefit from further weakness in the US dollar to attempt another rise above the 1.10 mark.   European nat gas futures fell 7% yesterday after a 28% spiked on Wednesday on concerns that strikes at major export facilities in Australia could lead to a 10% decline in global LNG exports. Yet, the European inventories are about 88% full on average and the industrial demand remains weak due to tightening financial conditions imposed by the European Central Bank (ECB) hikes. Therefore this week's massive move seems to be mostly overdone, and we shall see some more downside correction.     Chinese property market is boiling  The property crisis in China is being fueled by a potential default of Country Garden, which is one of the biggest property companies in China and which recently announced that it may have lost up to $7.6bn in the first half of the year as home sales slumped and the government stimulus measures didn't bring buyers back to the market. Equities in China slumped further today, as property crisis is not benign. In fact, China's local governments have plenty of debt, and their major source of income is... land and property sales. Consequently, the property crisis explodes local governments' debt to income ratios- And the debt burden prevents China from rolling out stimulus measures that they would've otherwise, because the government doesn't want to further blast the debt levels.   Shattered investor and consumer confidence, shrinking demographics, property crisis and deflation hints that the Chinese economy could be on path for a longer period of economic stagnation. We could therefore see rapid pullback in investor optimism regarding stimulus measures and their effectiveness. Hang Seng's tech index fell to the lowest levels in two weeks yesterday, as all members fell except for Alibaba which jumped after beating revenue estimates last quarter.   
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US Retail Sales Strength Boosts Inflation Expectations Amid Fed Hawkishness

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.08.2023 11:14
Resilient US retail sales fuel inflation expectations, Fed hawks  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Americans continue spending and that's bad news for the entire world. Announced yesterday the July retail sales data came in better-than-expected in the US. Sales grew 0.7% on a monthly basis and more than 3% on a yearly basis - the biggest figure since January, when sales soared by 3% as well. Amazon's Prime day apparently helped boost online sales, while demand for bigger items including furniture and auto parts declined. But all in all, the American consumer spent 3% more compared to a year ago, Home Depot reported small earnings beat yesterday and its CEO confirmed that 'fears of a recession have largely subsided, and the consumer is generally healthy... while adding that 'uncertainties remain'. Uncertainties remain, yes, but the resilience of the US consumer spending sapped investor sentiment by fueling inflation expectations and Federal Reserve (Fed) hawks, yet again. The US 2-year yield spiked above the 5% mark, but bounced lower, certainly helped by a big drop in Empire State manufacturing in August, the 10-year yield flirted with 4.30%, while major stock indices fell. The S&P500 closed below the 50-DMA, which stands at 4446, Nasdaq 100 remained offered below its own 50-DMA, at 15175, while Russell 200 slipped below the 50-DMA.  In the FX, the strength of the US consumer spending is reflected as a stronger US dollar across the board. The US dollar index remains bid, while Cable bulls resist to the bears around the 1.27, and above the 200-DMA, which stands near 1.2620, as the data released yesterday showed that wages in Britain accelerated at a record pace. Happily, this morning's inflation data poured some cold water on the fire, as the CPI fell from 7.9% to 6.8% in July, as expected, yet core inflation remained steady at 6.9%, while the core PPI came in higher than expected. On the food front, grocery prices also fell more than 2 percentage points to 12.7%. But 12.7% is still a very high number. As a result, odds for a 50bp hike at the Bank of England's (BoE) September meeting is given a 1 over 3 chance, the 2-year gilt yield is back above 5%, and looks like it's there to stay, as the peak BoE rate is seen at 6%.       Across the Channel, the 10-year bund yield is also pushing higher near a decade high, and all eyes are on the European GDP and industrial production data this morning. The European economy is weakening due to the rising rates, tightening credit conditions and high energy prices, but the fact that the labour market remains tight in Europe as well remains a major concern for inflation expectations for the European Central Bank (ECB), which will let the economy sink further if it doesn't take further control over inflation. Therefore, the EURUSD will certainly react negatively to a weak European data set today, and the pair could re-test the minor 23.6% Fibonacci retracement level, at 1.0870, but figures more or less in line with expectations should not change the ECB's hawkish tilt. The problem is, there is nothing the ECB could do - other than restricting financial conditions - regarding the energy and gas prices – which move parallel to completely external factors like the Ukrainian war and labour strikes in Australia.   In this sense, the Dutch TTF futures were again up by 12% yesterday, while US crude tanked near the $80pb level, pressured lower by 1. the surprise Chinese rate cut's inability to spark interest in risk assets, 2. news that China's imports of sanctioned Iranian hit a record high of 1.5mbpd this month - that oil trading at around $10 discount to Brent and 3. the latest data from the API hinting at an almost 7mio barrel decline in US crude inventories last week. The more official EIA data is due today, and the consensus is a 2.4 mio barrel fall. US crude could well slip below the $80pb on slow growth concerns, but Saudis will fight to keep the price above $80pb in the medium run.     Back to the inflation talk, the recent rise in energy and food prices is concerning for the euro area's inflation in the next readings. Therefore, the falling inflation trend remains in jeopardy, as the discussion of an ECB pause on rate increases.     The Reserve Bank of New Zealand (RBNZ) held its cash rate unchanged for the 2nd consecutive month but warned that there is a risk that activity and inflation measures do not slow as much as expected, and that they won't be cutting rates until the Q1 of 2025. The kiwi extended losses against the greenback, but the selloff remained contained.      Due today, the FOMC minutes will likely show that the Fed officials remain cautious despite the latest fall in inflation numbers, for the same reasons: rising energy and food prices that are sometimes driven by geopolitical events and that the Fed could only watch and adopt. The Fed is expected to hold fire on its rates in the September meeting, but nothing is less guaranteed than the end of the tightening cycle before the year end.      
Market Highlights: US CPI, ECB Meeting, and Oil Prices

UK Retail Sales Expected to Slip as Concerns about Inflation Persist

Kenny Fisher Kenny Fisher 18.08.2023 10:09
UK retail sales expected to slip in July Fed minutes note concern about inflation The British pound has extended its gains on Thursday. In the North American session, GBP/USD is trading at 1.2772, up 0.32%. UK retail sales expected to decline The UK will wrap up a busy week with retail sales on Friday. The July report is expected to show a decline in consumer spending. Headline retail sales are expected to fall by 0.5% after a 0.7% gain in May and core retail sales are projected to decline by 0.7% after a 0.8% increase in May. The June numbers were higher than expected despite high inflation, helped by record-hot weather. Will the July data also surprise to the upside? The UK consumer has been grappling with the highest inflation in the G7 club, which means shoppers are getting less for their money. This has dampened consumption, a key driver of the economy. Energy prices are lower, thanks to the energy price cap, but food inflation continues to soar and was 17.4% y/y in June. Consumer confidence has been mired deep in negative territory and the GfK consumer confidence index, which will be released later today, is expected at -29, almost unchanged from the previous release of -30 points. The Bank of England would like to follow some of the other major central banks that are in a pause phase, but the grim inflation picture may force the BoE to keep raising interest rates, which could tip the weak economy into a recession. Wage growth jumped to 7.8% in the three months to June, up from 7.5% in the previous period. In July, headline CPI fell to 6.9%, down sharply from 7.9%, but core CPI remains sticky, and was unchanged at 6.9%. The data points to a wage-price spiral which could impede the BoE’s efforts to curb inflation.   The Federal Reserve remains concerned about high inflation and said that additional rate hikes might be needed, according to the minutes of the July meeting. At the meeting, the Fed raised rates by 0.25%, a move that was widely anticipated. Most members “continued to see significant upside risks to inflation, which could require further tightening of monetary policy”. At the same, time, members expressed uncertainty over the future rate path since there were signs that inflationary pressures could be easing.   GBP/USD Technical GBP/USD is testing resistance at 1.2787. The next resistance line is 1.2879  1.2726 and 1.2634 are providing support    
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Kenny Fisher Kenny Fisher 22.08.2023 09:12
The euro started the week on a stable note, with little response to the eurozone inflation report released on Friday. In the North American session, EUR/USD is trading at 1.0886, reflecting a minor increase of 0.13%. Given the sparse data calendar for Monday, it is expected that the euro will maintain its calm trajectory for the rest of the day. Eurozone Inflation Trends: Headline Falls, Core Remains Unchanged The past week concluded with a eurozone inflation report that brought about a mixed reaction. The euro displayed minimal volatility in response to the data. The headline inflation rate for June was confirmed at 5.3% year-on-year (y/y), down from 5.5% in the previous month. This decline marked the lowest level observed since January 2022, primarily driven by a drop in energy prices.     Markets show little reaction to Friday’s eurozone inflation report Headline inflation falls but core rate unchanged The euro is steady at the start of the week. In the North American session, EUR/USD is trading at 1.0886, up 0.13%. With a very light data calendar on Monday, I expect the euro to remain calm for the remainder of the day.   Eurozone headline inflation falls, core inflation unchanged The week ended with a mixed inflation report out of the eurozone and the euro showed little reaction. Inflation was confirmed at 5.3% y/y in June, down from 5.5% in June. This marked the lowest level since January 2022 and was driven by a decline in energy prices. Core CPI remained unchanged at 5.5% in July, confirming the initial reading. The news was less encouraging from services inflation, which rose from 5.4% to 5.6% with strong wage growth driving the upswing. The labour market remains tight and inflation is still high, which suggests that wage pressure will continue to increase. Inflation has been moving in the right direction but core inflation and services inflation remain sticky and are raising doubts, within the ECB and outside, if the central bank’s aggressive tightening cycle can bring inflation back to the 2% target. The deposit rate stands at 3.75%, its highest level since 2000. The ECB’s primary goal is to curb inflation but policy makers cannot ignore that additional rate hikes could tip the weak eurozone economy into a recession. The ECB meets next on September 14th and there aren’t many key releases ahead of the meeting. ECB President Lagarde has said that all options are open and investors will be listening to any comments coming out of the ECB, looking for clues as to whether the ECB will raise rates next month or take a pause.   EUR/USD Technical EUR/USD tested resistance at 1.0893 earlier. Above, there is resistance at 1.0940 There is support at 1.0825 and 1.0778    
Metals Exchange Inventories in China Decline: Copper, Aluminium, and Nickel Stocks Fall

US Banks React to Fresh Rating Downgrades as Nvidia Earnings Take Center Stage

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.08.2023 10:05
US banks fall on fresh rating downgrades, Nvidia earnings in focus  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     The market mood turned sour again, and the S&P500 fell after a short relief. S&P's bank rating downgrades – which came a few days after Moody's downgraded some US small and mid-sized banks and Fitch downgraded the US' rating, came as a reminder that the rising rates won't be benign for banks as depositors move their funds into higher interest-bearing accounts, increasing banks' funding costs. The decline in bank deposits squeezes liquidity, while the value of securities that they hold in their portfolios decline. Plus, regional banks continue to face the risk of a sharp decline in commercial real estate loans. As a result, the S&P500 fell 0.28% on Tuesday, Invesco's KBW bank ETF dived more than 2.50%.       Elsewhere, the rising rates and declining purchasing power finally start showing in some retailers' quarterly announcements. Macy's for example sank 14% yesterday on rising credit card delinquencies and Dick's Sporting Goods slumped more than 24% on 'elevated inventory shrink – in particular theft. Both companies gave a morose outlook for consumer demand moving forward. Could that be a sign of potentially slower consumer spending in the next few months? We will see that. For now, the latest US data remains strong, the Fed expectations are hawkish, no one sees Jerome Powell back off with the Fed's tightening policy, and the US yields are rising. The US 2-year yield pushes higher above the 5% mark, while the 10-year yield struggles near 4.30%, where it sees decent resistance. In one hand, there is a strong demand for US 10-year papers at these levels as many asset managers consider that the levels are good entre points. On the other hand, the hawkish Fed expectations, prospects of – maybe – higher rates, which will be held for a prolonged period of time continue pressuring the yields higher along with the US Treasury's plan to issue more bonds in H2 – as they issued too many T-bills so far to fund their deficit.       And there is one more thing weighing on US treasuries and that's China. Yes, the sluggish Chinese growth is tempering energy and commodity prices and doesn't add to inflationary pressures. But Beijing adds on the US Treasury selloff as it fights against a softer yuan. The People's Bank of China (PBoC) set its daily yuan fixing surprisingly higher than expected this week in a move that Bloomberg described as the most forceful on record.       When the USD/CNY rallies due to higher US and lower Chinese yields, the Chinese sell their US denominated assets to defend yuan. And doing so, they contribute to the further strengthening of the US yields, and the US dollar is pressured higher on the back of stronger yields. Then, the cycle starts all over again. A stronger dollar, and weaker yuan forces the PBoC to sell USD assets. The UST selloff pushes US yields higher and strengthens the dollar and the yields.   
AUD: RBA Maintains Rates as New Governor Upholds Continuity

Asia Morning Bites: Tokyo Inflation Dips and Markets Await Powell's Jackson Hole Speech

ING Economics ING Economics 25.08.2023 09:03
Asia Morning Bites Tokyo inflation for August dips slightly on base effects. Asian markets await the outcome of Powell's Jackson Hole speech.   Global Macro and Markets Global markets:  Pre-speech nerves? US equities reversed Wednesday’s gains on Thursday. The S&P 500 dropped by 1.35% while the NASDAQ fell 1.87%. Equity futures are non-committal ahead of Powell’s speech today.  Chinese stocks put in a rare up-day on Thursday. The CSI 300 rose 0.73%, and the Hang Seng index rose 2.05%, though this may have been following the earlier US lead, and could reverse today. US Treasury yields moved a little higher yesterday after Wednesday’s large falls. The 2Y yield is back above 5% now at 5.023%, while the 10Y yield regained 4.5bp to reach 4.237%. That’s still about 13 bp off the recent high.  The increase in yields was enough to push the USD stronger against the G-10 currencies yesterday, and EURUSD is now down to 1.0799. The AUD reversed all of Wednesday’s gains falling to 0.6415, Cable has dropped below 1.26 and the JPY is back up again to just under 146. In Asia, the KRW benefited from the BoK’s hawkish pause, and has gapped down more than a per cent to 1322.35. The TWD was also among the gainers, moving down to 31.786. The VND was weaker again yesterday, rising to 24008 as it looks to recalibrate against the CNY against which it has appreciated this year. The CNY was roughly unchanged on the day at just under 7.28.   G-7 macro:  Today’s Powell speech will get a great deal of scrutiny and there has already been a lot written about what he will say, with the majority view being that he will tread a cautious path with respect to any further potential tightening, looking for confirmation from the totality of the data before committing to any additional hikes. Lots of comparisons to the Greenspan “risk management” era are being wheeled out. At the same time, the Fed pundits are also saying that he will not want to suggest that there is any pre-set path for easing. We will know soon enough how well markets take his comments. The fact that this speech is scripted, and there is no Q&A means that room for going "off-piste" is limited. Besides this, and all the other Fed speakers this weekend, the University of Michigan publishes its August consumer confidence and inflation expectations surveys. Sentiment has been picking up recently, while the inflation expectations numbers have eased back slightly. Yesterday’s data was mixed. Weaker durable goods figures but lower jobless claims.   Japan: Tokyo inflation eased to 2.9% YoY in August (vs 3.2% July, 3.0% market consensus) mainly due to base effects and lower energy prices. Utility prices dropped to -15.0%YoY from the previous month’s -10.8%. However, core inflation excluding fresh food and energy stayed at 4.0%YoY as expected for the second month, the highest level for decades. Demand side pressures are clearly building up, suggested by inflation increases in entertainment (5.7%), transport & communication (3.6%), and medical care (2.8%). On a monthly comparison, goods prices dropped -0.1% MoM sa while services prices stayed flat. Also, higher than expected PPI services inflation (1.7% YoY in July vs revised 1.4% June, 1.3% market consensus) also reinforced the same message.   There are risks on both sides in the near future. On the downside, entertainment price pressures will be partially reduced as the summer holiday season ends. On the upside: The energy subsidy program will come to an end by September; Recent renewed JPY weakness; and rises in pipeline service prices. We believe that upward pressures will likely build a bit more significantly at least for the next few months and push up inflation again. We think inflation will exceed the BoJ’s outlook for this year and next year and core inflation excluding fresh food and energy will likely stay in the 3% range by the end of this year.   Singapore:  July industrial production is set for release today.  We expect another month of contraction, tracing the struggles faced by non-oil domestic exports, which were down 20.2%YoY for the same month.  We can expect industrial production to stay subdued until we see a turn in NODX, which should also weigh on 3Q growth.   What to look out for: Jackson Hole conference Malaysia CPI inflation (25 August) Singapore industrial production (25 August) US Univ of Michigan Sentiment (25 August)
Copper Prices Slump as LME Stocks Surge: Weakening Demand and Economic Uncertainty

Dream JOLTS Data Sparks Optimism and Market Gains

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.08.2023 09:43
Dream JOLTS data By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     Yesterday was a typical 'bad news is good news' day. Risk sentiment in the US and across the globe was boosted by an unexpected dip in US job openings to below 9 mio jobs in July, the lowest levels since more than two years, and an unexpected fall in consumer confidence in August. The weak data pushed the Federal Reserve (Fed) hawks to the sidelines, and bolstered the expectation of a pause in September, and tilted the probabilities in favour of a no hike in November, as well. $    Note that the latest JOLTS data printed the ideal picture for the Fed: Job vacancies eased, but hiring was moderate and the layoffs remained near historically low levels. The data also suggested that the era of Great Resignation, where quit rates hit a record, could be over, as people quitting their jobs retreated to levels last seen before the pandemic. The US 2-year yield dived 15bp, the 10-year yield fell 8bp, while the S&P500 jumped nearly 1.50% to above its 50-DMA and closed the session at a spitting distance from the 4500 level. 90% of the S&P stocks gained yesterday; even the Big Pharma which had a first glance at which medicines will be subject to price negotiations with Medicare held their ground. But of course, tech stocks led the rally, with Nasdaq 100 closing the session with more than a 2% jump. Tesla was one of the biggest gainers of the session with a more than a 7.5% jump yesterday.    US and European futures suggest a bullish open amid the US optimism and news of upcoming deposit and mortgage rate cuts from Chinese banks.    On the data front, all eyes are on the US ADP report and the latest GDP update. The ADP report is expected to reveal below 200K new private job additions in August, while the US growth is expected to be revised from 2% to 2.4% for the Q2 with core PCE prices seen down from 4.90% to 3.80%. If the data is in line with expectations, we shall see yesterday's optimism continue throughout today. Again, what we want is to see – in the order of importance: 1. Slowing price pressure, 2. Looser, but still healthy jobs market, 3. Slowing but not contracting economy to ensure a soft landing. We will see if that's feasible.     In Europe, however, that slow landing seems harder to achieve. Today, investors will keep an eye on the latest inflation updates from euro-area countries, and business and sentiment surveys. We expect to see some further red flags regarding the health of the European economy due to tighter financial conditions in Europe and the energy crisis. German Chamber of Commerce and Industry warned yesterday that German businesses are cutting investments and move production abroad due to high energy prices at home. The EURUSD flirted with 1.09 yesterday, as investors trimmed their long dollar positions after the weak JOLTS data. The AUDUSD rebounded, even though the latest CPI print showed that inflation in Australia slowed below 5% in July, a 17-month low. In the UK, shop prices fell to a 10-month low. But it won't be enough for central bankers to cry victory just yet, because the positive pressure in energy prices remains a major concern for the months ahead. The barrel of American crude is pushing toward the $82pn level, with improved trend and momentum dynamics hinting that the bullish development could further extend.  
Italian Inflation Continues to Decelerate in August, Reaffirming 6.4% Forecast for 2023

Navigating Energy Prices: Analyzing Trends, Risks, and Impacts on Inflation

ING Economics ING Economics 30.08.2023 13:16
Energy prices Energy must be the starting point when thinking about a second wave. Our base case sees oil edging higher this year, and the risk is that we continue to see a lack of investment in upstream production while demand continues to move higher. That would point to an increasingly tight oil balance in the years ahead. Stricter legislation on new US oil/gas drilling, though unlikely, would be a key source of upside risk given America has been a major driver of supply growth over the last decade. That aside though, the US is largely energy-independent and that makes it far less exposed to 1970s-style shocks. Europe is more vulnerable, though the situation is evolving. National gas reserves are currently well filled and the eurozone looks better prepared to enter the winter heating season. Russian gas exports to Europe are marginal now, so any further supply cuts would be unlikely to take us back to 2022 highs. We’d also argue that natural gas demand has peaked and suspect it will be gradually lower over the next decade. RePowerEU, the bloc’s flagship energy strategy, puts emphasis on moving aggressively towards renewables. At the same time, last winter’s price spike appears to have resulted in a permanent demand loss in energy-intensive industries.   Still, in the short to medium term, the continent is more reliant on liquefied natural gas (LNG). The combination of strike action at Australian producers and a colder-than-usual European winter could prompt a significant price response. So, too, would any disruption to Norwegian natural gas supply.   For inflation though, remember that in Europe electricity/gas prices are still more than 50% higher than they were in 2021 in Germany, and roughly double in the UK, according to CPI data. Even if we got another 2022-style shock to wholesale prices, arithmetically, the scope for a similar shock to inflation at this point is more limited.
Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

Ipek Ozkardeskaya Ipek Ozkardeskaya 31.08.2023 10:26
Wishful thinking?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    America had another 'bad news is good news' moment yesterday; softer-than-expected ADP and growth data further fueled expectations that the Federal Reserve (Fed) is – maybe – good for a pause. The ADP report, released yesterday, showed that the US economy added 177K new private jobs in August, lower than expected and more than half the number printed a month earlier, while the US GDP was revised from 2% to 2.1% instead of 2.4%, due to lower business investment than initially reported and to downside revisions in inventory and nonresidential fixed investment. Household spending, however, continued leading the US economy higher; it was revised up to 1.7%. All in all, the data was certainly weaker than expected but the numbers remain strong, in absolute terms.     The S&P500 gained for the 4th consecutive session yesterday, the index is now above the 4500 level and has around 85 points to go before recovering to July highs. The US 2-year yield settles below the 5% level on expectation that the Fed has no reason to push hard to hike rates; it could just wait and see the impact of its latest (and aggressive) tightening campaign.  In the FX, the softening Fed expectations are weighing on the US dollar. The dollar index fell to its 200-DMA and could sink back to its March to August descending channel. But the seasonality is on the dollar's side in September. Empirical data shows that the US dollar performed better than its peers for six Septembers in a row since 2017, and it gained 1.2% on average, thanks to increased quarter-end dollar buying, and an increased safe haven flows before October – which is seasonally a bad month for stocks, according to Bloomberg.       But the dollar's relative performance is also much influenced by the growth and price dynamics elsewhere. Looking at the latest Euro-area CPI numbers, the picture in Europe is much less dovish despite morose business and consumer sentiment in Europe and weak PMI numbers printed recently. Despite the dark clouds on the European skies, the latest inflation numbers showed that inflation in both Spain and Germany ticked higher in August for the second month – a U-turn that could be explained by the re-surge in oil prices since the end of June. This morning, the aggregate CPI number may not confirm a fall to 5.1% in headline inflation. And a stronger-than-expected CPI print will likely boost the ECB hawks and get the euro bulls to test the 50-DMA, near 1.0970, to the upside.     Later today, investors will focus on the US core PCE data, which has a heavier weight on the international platform.  Therefore, the strength of the US core PCE will say the last word before tomorrow's jobs data. Analysts expect a steady 0.2% advance on a monthly basis, and a slight advance from 4.1% to 4.2% on a yearly basis. A bad surprise on the topside could eventually wash out the past days' optimism regarding the future of the Fed policy. So, fingers crossed, we really need the US inflation to fall, and to stay low.    But looking at energy prices, a sustainable fall in headline inflation could be wishful thinking for the upcoming months. US crude remains upbeat near the $82pb, as the latest EIA data showed that crude inventories fall more than 10mio barrel last week, as separate data showed that crude stored on ships at sea fell to the lowest levels in a year - a clear indication that OPEC's supply cuts are taking effect. Plus, Russia is discussing with OPEC to extend oil-export cuts and Saudi is expected to prolong its supply cuts.    
Eurozone PMI Shows Limited Improvement Amid Lingering Contraction Concerns in September

French Inflation Surges in August Due to Energy Prices

ING Economics ING Economics 31.08.2023 10:37
French inflation back on the rise Inflation rose again in August, after falling for three consecutive months, due to higher energy prices. Despite a rebound in household consumption of goods, French domestic demand remains very weak, and a quasi-stagnation of GDP in the second half of 2023 seems the most likely economic scenario. Sharp rise in inflation After falling for three months in a row, inflation in France rose sharply again in August, to 4.8%, compared with 4.3% in July. The harmonised index, which is important for the European Central Bank, stood at 5.7% compared with 5.1% in July. August's rebound was entirely caused by the rise in energy prices, due to higher oil prices and electricity tariffs. Over a year, energy prices have increased again (+6.8% in August), whereas they had been falling in previous months. It should be noted that, because of the tariff shield and fuel price rebates, energy prices rose less dramatically in France than in other European countries last year. The starting point is therefore much lower, and energy inflation will be more of a problem in France than elsewhere in the coming months. Apart from the rebound in energy inflation, the details suggest that inflationary pressures are moderating. Food inflation continues to ease, coming in at 11.1% in August, compared with 12.7% in July. This trend is likely to continue in the months ahead, albeit slowly. We will probably have to wait until 2024 for food prices to stabilise in terms of annual growth. The details of underlying inflation have not yet been published, but they should point to a decline. Prices of manufactured goods slowed to 3.1% in August from 3.4% in July. Given that producer prices are continuing to fall and are now down year-on-year (-1.5% in July compared with +1% the previous month), this trend is likely to continue over the coming months, especially as selling price expectations continue to fall across all sectors. Finally, despite wage increases, services inflation is also continuing to moderate (2.9% compared with 3.1% in July), which is encouraging. Although service inflation is likely to become the main contributor to inflation in the coming months, the risk of an explosion in service prices appears to be limited, in the context of weak economic growth. The trend towards disinflation should therefore resume from September onwards, although it will probably be slower in France than in neighbouring countries. We are expecting inflation, according to the national definition, to reach 4.6% in 2023 on average. We will probably have to wait until the second half of 2024 for inflation to return to 2%.
Strong August Labour Report Poses Dilemma for RBA: Will Rates Peak or Continue to Rise?

Eurozone Inflation Trends and ECB Meeting: Assessing Monetary Policy Options

ING Economics ING Economics 31.08.2023 12:12
Eurozone inflation stagnates ahead of ECB September meeting Inflation in the eurozone did not fall in August, which could tip the ECB in favour of a final 25bp hike at the governing council meeting in two weeks' time. Still, overall inflation dynamics remain relatively benign, and we still expect inflation to trend much lower at the end of the year. The eurozone inflation rate was stable at 5.3% in August, with core inflation also dropping to 5.3% (from 5.5% in July). Headline inflation was slightly higher than expectations due to energy price developments which increased by 3.2% month-on-month. This will fuel concern about inflation remaining more stubborn than anticipated. The overall trend in inflation remains cautiously disinflationary though as developments in goods and services inflation were more or less as expected. By country, we see that rising prices mainly came from France and Spain, while drops in the Netherlands and Italy kept inflation broadly in check. Energy effects and how they translate to consumer prices – look at rising regulated prices in France – were important drivers of differences this month. Looking ahead, more declines in inflation are in the making. In Germany, we expect a significant drop next month as base effects from government support drop from the data. Surveys also point to a sizable disinflationary effect for goods prices, while services inflation is set to fall more slowly thanks to higher wage costs. Indeed, wage growth is still trending above a level consistent with 2% inflation. For the European Central Bank, these August inflation data were among the most important data points ahead of the governing council meeting in two weeks’ time. While inflation remains stubborn enough to make ECB hawks uncomfortable, it does look like a further deceleration in inflation is in the making for the months ahead. Given the ECB mantra over recent months that doing too little is worse than doing too much in terms of hikes, we still expect another 25 basis point rate rise, despite this being a close call.
US Corn and Soybean Crop Conditions Decline, Wheat Harvest Progresses, and Weaker Grain Exports

Reserve Bank of Australia's Rate Decision and Asian Economic Outlook: A Week of Key Events

ING Economics ING Economics 31.08.2023 12:13
Asia week ahead: Reserve Bank of Australia to decide on rates Next week's data calendar features a rate decision by the Reserve Bank of Australia, plus we'll get August inflation readings from the region.   RBA to continue rate pause The Reserve Bank of Australia (RBA) will meet next week to decide if the current rate pause will continue. July’s CPI came in at 4.9% year-on-year, lower than June’s 5.4% and below the survey consensus of 5.2%. This is the lowest pace of inflation since it peaked last December at 8.4%. On top of cooling price growth, the latest unemployment rate also increased from 3.5% in June to 3.7% in July. As such, we expect the RBA to hold rates while looking for more signs that inflation is under control.   Caixin Services PMI to show slower expansion Caixin will release its service PMI for China next Tuesday. Taking our cues from the official non-manufacturing PMI released earlier this week, we should see a slower expansion of the service sector with the PMI falling to around 53.8.   Trade data in the region remain weak China’s imports and exports faced an unexpected plunge last month, with imports falling to 12.4% YoY and exports falling to 14.5% YoY. Both figures are lower than the consensus forecast. For the export side, weakness in global demand is likely to continue to weigh heavily. For imports, domestic demand has not shown any meaningful signs of improvement, so they are also likely to remain weak. Taiwan’s trade data might show some signs that the semiconductor cycle is troughing. Taiwan’s exports fell less than expected last month and we expect this slight improvement to carry on. For the Philippines, trade data will also be reported with exports posting another month of modest gains, but the overall trade balance will still likely settle at -$3.7bn.   High energy prices to affect region's CPI inflation Taiwan’s CPI inflation rate has been below the target range of 2% for two consecutive months, with the July inflation rate at 1.88% and core inflation at 2.73%. August inflation is likely to remain subdued, helped by high ongoing base effects for energy and food prices. Meanwhile, inflation in South Korea is facing upward pressure once again after falling to 2.3% last month. It is expected to rise to 2.6% in August with the main contributors being rises in transportation fees, pump prices and fresh food prices. The first two are associated with strong oil prices after recent supply cuts from OPEC+, while fresh food prices have been affected by Typhoon Khaun destroying agriculture yields. Lastly, Philippine inflation could pick up to 5.0% YoY from 4.7% in July. The recent uptick in energy and rice prices could offset slower inflation for select food items.   Singapore retail sales to extend gains The sustained increase in visitor arrivals to Singapore appears to be helping to support retail sales, in particular department store sales and services related to tourism activities. We expect retail sales to post a modest 2.0% YoY gain for the month.   Key events next week
Summer's End: An Anxious Outlook for the Global Economy

Poland Poised for Interest Rate Cut in September Despite Double-Digit Inflation

ING Economics ING Economics 01.09.2023 08:35
Poland set to cut interest rates in September despite double-digit inflation Even though latest figures show Poland's inflation is still in double digits, we think the country's central bank will start its easing cycle in September. CPI fell to 10.1% in August from 10.8% in July, Year-on-Year. It reflects lower food and energy prices. Core inflation's drop came in third place; we estimate that fell to 10% from 10.6%.   Polish headline CPI inflation fell from 10.8% YoY to 10.1% YoY in August, marginally above expectations (ING 10.0% YoY and consensus 9.9% YoY; the forecast range was 9.7 to 10.6%). Food price dynamics subtracted 0.8pp from the CPI, energy carriers 0.3pp and core inflation only 0.3pp. In contrast, fuel prices rose in August and added 0.6pp to the headline figure. The release of double-digit CPI means that one of the conditions for easing, which the National Bank of Poland Governor mentioned, has not been met. However, we still believe the MPC will cut rates in September. Here's why:  We are on the path to single-digit inflation in September; the data will be published after the September MPC meeting. The CPI path in 2H23 should be either close to or slightly lower than the NBP's July projection. The MPC should consider this as a disinflation scenario materialising.  The pace of GDP growth in 2Q23 was lower than the NBP's projection, and data on economic activity in Poland and Europe suggests pushing back the economic rebound instead to 4Q23, so the state of the economy in the second half of this year will still be weak. In the short term, monetary easing is supported by strong disinflationary trends in global supply chains, resulting in a large drop in companies' inflation expectations, and these trends are still stronger than the rebound in oil and wheat prices. So, we expect the NBP to cut rates by 50-75 basis points this year, and the easing cycle may well continue into 2024. However, the inflation picture in Poland is not unequivocally positive. Poland's core inflation rate is declining significantly slower than elsewhere in the region; a roughly 20% increase in the minimum wage is expected in 2024, and a sizeable fiscal loosening is planned. Once the favourable impact of falling external prices ends, it's going to be difficult to bring inflation back to target on a sustained basis. 
Assessing Energy Price Dynamics and Their Impact on Inflation in the Short and Medium Term

Assessing Energy Price Dynamics and Their Impact on Inflation in the Short and Medium Term

ING Economics ING Economics 01.09.2023 08:52
Energy prices Energy must be the starting point when thinking about a second wave. Our base case sees oil edging higher this year, and the risk is that we continue to see a lack of investment in upstream production while demand continues to move higher. That would point to an increasingly tight oil balance in the years ahead. Stricter legislation on new US oil/gas drilling, though unlikely, would be a key source of upside risk given America has been a major driver of supply growth over the last decade. That aside though, the US is largely energy-independent and that makes it far less exposed to 1970s-style shocks. Europe is more vulnerable, though the situation is evolving. National gas reserves are currently well filled and the eurozone looks better prepared to enter the winter heating season. Russian gas exports to Europe are marginal now, so any further supply cuts would be unlikely to take us back to 2022 highs. We’d also argue that natural gas demand has peaked and suspect it will be gradually lower over the next decade. RePowerEU, the bloc’s flagship energy strategy, puts emphasis on moving aggressively towards renewables. At the same time, last winter’s price spike appears to have resulted in a permanent demand loss in energy-intensive industries. Still, in the short to medium term, the continent is more reliant on liquefied natural gas (LNG). The combination of strike action at Australian producers and a colder-than-usual European winter could prompt a significant price response. So, too, would any disruption to Norwegian natural gas supply. For inflation though, remember that in Europe electricity/gas prices are still more than 50% higher than they were in 2021 in Germany, and roughly double in the UK, according to CPI data. Even if we got another 2022-style shock to wholesale prices, arithmetically, the scope for a similar shock to inflation at this point is more limited.  
Central and Eastern Europe Economic Outlook: Divergent Policy Responses Amidst Disappointing Activity

Central and Eastern Europe Economic Outlook: Divergent Policy Responses Amidst Disappointing Activity

ING Economics ING Economics 01.09.2023 09:51
Economic activity in the first half of the year has been disappointing across Central and Eastern Europe, leading us to expect a gloomier full-year outlook. Despite this synchronised bottoming, we see a divergence in economic policy responses, driven by country-specific challenges. Poland: A weak third quarter so far The Polish economy started the third quarter on a soft note. All real economy figures for July underperformed, showing generally lacklustre domestic demand, while global conditions remain unfavourable. This indicates that the recovery will be slow and more visible in the fourth quarter than in the third. This suggests downside risks to our 2023 GDP forecast of 1%. CPI inflation in July came in at 10.8% year-on-year (down from 11.5% YoY in June), largely owing to food (-0.6pp) and energy (-0.2pp) prices. Core inflation receded as well to 10.6%, but subtracted only 0.2pp from CPI. Compared to the CPI peak in February, CPI has already slowed by nearly 8pp, mainly due to fading external supply shocks. We estimate CPI will dip near 10% YoY in August, but not lower. It should decisively reach single digits in September and hover around 7% by the year-end. We expect the Monetary Policy Council to start its easing cycle in September, even without meeting the governor's guidance on CPI reaching single digits. The recent real economy data proved lacklustre, i.e. the second quarter GDP print of -0.5% YoY came in below the July National Bank of Poland projection (-0.1% YoY), and the outlook for the second half of the year is also subject to downside risks. At the same time, inflation is on a clear path to reach single-digit levels later in the second half of the year. Still, recent MPC statements do not indicate the Council is willing to cut rates by more than 25bp at a single meeting. Consequently, we look for two or three 25bp cuts in 2023. €/PLN remains range-bound against the euro and it’s unlikely to change prior to the mid-October general elections. The zloty remains supported by the trade surplus and presumably Ministry of Finance activity, which offsets rather unsupportive emerging market sentiment. The zloty may ease after the elections, as opinion polls suggest that the political set-up may prevent prompt access to the Recovery Fund. Moreover, we see domestic demand recovering gradually in the second half, which should trim Poland’s trade surplus, given limited external demand. We expect further Polish government bond curve steepening. The 2024 budget draft presents a strong rise (by 55%) in net borrowing needs (to PLN225bn vs. PLN143bn in 2023), while local banks may cover one-third of it in 2024 vs. two-thirds in 2023, and the Ministry of Finance should rely strongly on foreign demand. Also, core market developments are generally unsupportive for the local long end, while domestic data should maintain, or even strengthen, market views on central bank easing.  
Supply Risks and Volatility in the European Natural Gas Market

Global Energy Markets: Oil Strengthens, Natural Gas Volatile, and Metal Concerns Loom

ING Economics ING Economics 01.09.2023 09:54
Oil prices have strengthened over the summer as fundamentals tighten, whilst natural gas prices have been volatile, with potential strike action in Australia leading to LNG supply uncertainty. Chinese concerns are weighing on metals, but grain markets appear more relaxed despite the collapse of the Black Sea deal.   Oil market tightness to persist Oil prices have strengthened over the summer, with ICE Brent convincingly breaking above US$80/bbl. The strength in the flat price has coincided with strength in time spreads, reflecting a tightening in the physical oil market. OPEC+ cuts, and in particular additional voluntary cuts from Saudi Arabia, mean that the market is drawing down inventories. We expect this trend will continue until the end of the year, which suggests that oil prices still have room to move higher from current levels. While the fundamentals are constructive, there are clear headwinds for the oil market. Firstly, it is becoming more apparent that the Fed will likely keep interest rates higher for longer and that, along with renewed USD strength, is a concern for markets. Secondly, Chinese macro data continues to disappoint, raising concerns over the outlook for the Chinese economy and what this ultimately means for oil demand. That said, up to now, Chinese demand indicators remain pretty strong. We expect the tight oil environment to persist through much of 2024 with limited non-OPEC supply growth, continued OPEC+ cuts and demand growth all ensuring that global inventories will decline. However, we could see some price weakness in early 2024, with the market forecast to be in a small surplus in the first quarter of next year before moving back into deficit for the remainder of 2024, which should keep prices well supported. The risks to our constructive view on the market (other than China demand concerns) include further growth in Iranian supply despite ongoing US sanctions and a possible easing in US sanctions against Venezuela, which could lead to some marginal increases in oil supply.  
AUD Faces Dual Challenges: US CPI Data and Australian Labor Market Statistics

Russia Extends Oil Export Curbs: Commodities Update and Natural Gas Inventory Surge

ING Economics ING Economics 01.09.2023 10:58
The Commodities Feed: Russia to extend oil export curbs Crude oil prices have been trading firm this morning after Russia confirmed that it will extend export curbs, although the details are still not available. US natural gas inventory continue to increase at a strong pace providing some comfort to the market on natural gas supplies, even as uncertainty about Australian LNG continues.   Energy – Russian oil export cuts to continue ICE Brent prices traded firm yesterday and continued the gains this morning after Russia announced an extension of export curbs. Russia’s Deputy Prime Minister Alexander Novak said in a televised meeting that the country has agreed to extend the export curbs, although the details haven’t been provided yet. Russia made a voluntary cut to its oil exports of around 500Mbbls/d for August and 300Mbbls/d for September. Saudi is also likely to extend the voluntary production cuts of around 1MMbbls/d for October as demand concerns remain. China has issued an export quota of around 12m tonnes for clean refined products including gasoline, jet fuel and diesel in its third quota release for the year. China has so far issued an export quota of around 40m tonnes for clean products in 2023 compared to around 37.25m tonnes of export quota allocated for the full year 2022. Slow domestic demand and a ramp-up in refining capacity have been creating a surplus of products in the Chinese market and a higher quota is aimed at reducing this surplus. Finally, the Energy Information Administration in the US reported that natural gas inventory in the country increased by 32Bcf over the last week taking total inventory to 3,115Bcf as of 25 August. US inventory of natural gas is higher by around 484Bcf compared to year-ago levels and around 249Bcf higher than the five-year average for this point in the season. Higher gas stocks in the US and Europe provide some comfort to the gas market when a short-term supply disruption from Australia cannot be ruled out. The uncertainty over the Australian gas supply from two LNG plants (Gorgon and Wheatstone) continues, with workers rejecting the latest pay package from the company with negotiations set to resume. Without an agreement in place, workers could initiate industrial action from 7 September.
Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.09.2023 12:11
Rising oil prices give off a foul smell.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the European services PMI data came in softer than expected in all major euro area locations. The data showed that services sector in Italy and Spain slipped into the contraction zone in August - a month of big summer holidays where people flock to Italian and Spanish cities and beaches. The soft PMI data fueled the European Central Bank (ECB) doves and pushed the EURUSD under a bus yesterday; the pair fell to the lowest levels since the beginning of June and flirted with the 1.07 support on idea that the ECB can't raise interest rates next week when the economic picture is souring at speed. But I believe that it can. The ECB can announce another 25bp hike when it meets next week, or a faster reduction of its balance sheet, or the end of remuneration of banks' minimum reserves to tighten financial conditions, because the latest inflation figures from the Eurozone showed stagnation, instead of further easing, and the ECB will allow economic weakness to some extent to fight inflation. The most recent inflation expectations in the Eurozone showed that the next 12-month expectations remained steady at 3.4%, but the three-year inflation expectations spiked to 3.4%, and there is no reason for inflation expectations to continue easing when energy prices are going up toward the sky.
Crude Conundrum: Will Oil Prices Reach $100pb Amid Supply Cuts and Inflation Concerns?

Crude Conundrum: Will Oil Prices Reach $100pb Amid Supply Cuts and Inflation Concerns?

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.09.2023 12:13
More cuts  Brent crude rallied past the $90pb yesterday, as US crude advanced above the $88pb mark as Saudi Arabia and Russia announce that they prolong their supply cuts. Saudi Arabia will continue reducing its own unilateral supply by 1mbpd to the end of the year, while Russia will be cutting 300'000 bpd. The kneejerk reaction to the news was a sharp jump in oil prices but the news was not a shocker per se, investors knew that something was cooking. What surprised the market, however, is the timeline: cuts are announced for another 3 months.   The million barrel question now is: is $100pb back on the table? It's unsure, and the road that could lead crude oil prices toward the $100pb psychological mark will likely be bumpy, because higher energy prices have already started being reflected in inflation and inflation expectations. As a result, the central banks, including the Fed, will have little choice but to keep their monetary policies sufficiently tight to prevent an uptick in inflation. That could mean further rate hikes, or keeping the rates at restrictive levels for longer, in which case, oil prices make a U-turn and cheapen due to recession and global demand concerns.   And when global demand worries kick in, and prices cheapen, Saudi will be losing money considering that the kingdom is shouldering the supply cut strategy for OPEC alone. For now, the demand outlook remains strong despite the slowing China and suffering Europe, but if it weakened, Saudi could easily change its mind, and the kingdom has a history of making sharp U-turns on its decision when winds turn against them. 
US Inflation Report Sets the Tone for Upcoming FOMC Meeting

Oil Market Surprises: Saudi and Russian Supply Cuts Extended

ING Economics ING Economics 06.09.2023 12:16
The Commodities Feed: Saudi and Russian oil cuts The oil market had largely expected the Saudis and Russians to extend supply cuts. What was unexpected was extending these cuts through until year-end.   Energy – Saudi extends cuts The oil market moved higher yesterday, with ICE Brent settling above US$90/bbl for the first time since November. Saudi and Russian supply cuts were the catalyst for the move higher. Saudi Arabia announced that it would extend its voluntary supply cut of 1MMbbls/d until the end of the year. Similarly, Russia said that it would extend its export cut of 300Mbbls/d through to year-end. While it was largely expected that these voluntary cuts would be extended, expectations were for a one-month extension rather than three months. This does leave the market with a deeper than expected deficit over the fourth quarter of 2023, which should continue to support prices. For now, we are reluctant to revise higher our price forecasts on the back of this extension, as demand concerns continue to linger and Iranian supply is rising. Iran is producing close to 3.1MMbbls/d and plans to pump around 3.4MMbbls/d. Meanwhile, our oil balance shows a small surplus in the first quarter of 2024, which should limit prices moving significantly higher. We continue to forecast that Brent will average US$92/bbl over the fourth quarter of this year. Looking further ahead, we would not rule out a further extension of these cuts (fully or partially) into early next year, given that our balance sheet shows that the oil market will be in a small surplus over the first quarter of next year. Any cuts will obviously depend on where oil is trading towards the end of the year and whether demand worries are still present.
Why India Leads the Way in Economic Growth Amid Global Slowdown

FX Markets React as Saudi Oil Cuts Boost Energy Prices

ING Economics ING Economics 06.09.2023 12:19
FX Daily: The Saudi squeeze brings energy back into the FX mix If the beleaguered euro and yen did not have enough to worry about already, they now have to cope with Brent oil trading above $90/bl as the Saudis extend their supply cuts through to year-end. Unless the US ISM services index somehow collapses today, expect the dollar to remain in demand. EUR/JPY, however, could start to turn lower based on positioning.   USD: ISM services the only threat to an otherwise bullish story The relentless rise of the dollar continues. The DXY yesterday pushed up to the highest levels since March as US yields once again edged higher. While the busiest day in US investment-grade corporate issuance in three years has surely been weighing on US treasuries, the FX market has also come under the spell of higher energy prices. The Saudis have this week confirmed their plan to roll over their 1mn barrels per day supply cut into December. This is keeping conditions tight in crude energy markets and now sees Brent trading over $90/bl. To FX markets, that provides an unwelcome reminder of the spike in energy prices last summer which had hit the energy-importing currencies in Europe and Asia. US energy independence and its net exporter status leave the dollar well-positioned for higher energy prices. It would seem the only real threat to the dollar in the near term would be some dramatic re-assessment of growth prospects. That brings us to the key piece of US data this week – today's release of the ISM services index for August. A sharp fall in this series did weigh on the dollar at the tail end of last year, but unless this really surprises with a sub-50 reading today, expect the dollar to hold onto recent gains and consolidate at these high levels before the US August CPI release this time next week. In terms of G3 currencies, we might see some re-adjustment, however. Speculators still seem to be holding onto long euro positions, while they continue to run very short positions against the yen on the carry trade. USD/JPY upside now looks more limited as rhetoric from Tokyo threatens imminent intervention. Positioning suggests EUR/USD support levels are more vulnerable. EUR/JPY may now struggle to get over the 158.50 area and may be about to embark on a correction to the 155 area.
Navigating the New Normal: Central Banks Grapple with Policy Dilemmas

Navigating the New Normal: Central Banks Grapple with Policy Dilemmas

ING Economics ING Economics 08.09.2023 10:33
A period of policy stasis wouldn't go amiss from central banks this month By Michael Hewson (Chief Market Analyst at CMC Markets UK) For all of August and most of the summer, attention has been fixed on this month's central bank rate meetings for clues as to how close we are to the end of the current central bank rate hiking cycle, as we look towards year end.     The Federal Reserve would like to have you think it will raise rates again before the end of this year, while the Bank of England is currently priced for the possibility of another two rate increases due to much higher core inflation. This week we saw the Reserve Bank of Australia, as well as the Bank of Canada, kick off an important 3 weeks for central bank policy meetings, with investors set to hang on to every nuance of this month's meetings to determine the next move when it comes to interest rates.     The RBA kicked things off on Tuesday by keeping rates unchanged at 4.1%, while maintaining its guidance that inflation remains elevated, and the central bank will do whatever is required to return inflation to target. The central bank also maintained its forecast that inflation is unlikely to return to target of between 2% and 3% by late 2025. The Bank of Canada also mirrored this narrative in keeping its own central rate unchanged at 5%, while pledging to act further if required.     As we look towards next week's ECB meeting, opinion is split on whether the governing council will follow this narrative, or whether they will go for one more rate hike of 25bps. The hawks on the governing council appear committed to such a move, with the likes of Bundesbank President Joachim Nagel, as well as Isabel Schnabel, along with the likes of Pierre Wunsch of the Belgian Central Bank, and Klaas Knot of the Netherlands central bank. The hawkish nature of German central bankers may come across as surprising given the state of the German economy, which is currently on its knees, as shown by this week's horrific factory orders data for July, and the further deterioration in last month's PMIs as services followed manufacturing into contraction territory.     This pathology comes from Germany's historical fear of inflation and is unlikely to change given that German CPI is currently at 6.3%, although it is fallen from its peaks. Even so, when faced with such awful economic data across the entire economy, one must question what might prompt a little bit of self-reflection on the part of the inflation hawks. On the more dovish side we have the likes of the National Bank of Greece's Stournaras, and Italy's Visco pushing for restraint. ECB President Christine Lagarde's comments at the July press conference were particularly telling when she undermined the central message of optionality in keeping the ECB's options open when it comes to a September hike, and being data dependant, by concluding that she doesn't think that the ECB has more ground to cover when it comes to further hikes.     If this week's data are any guide perhaps wiser heads will prevail with a pause seemingly the most likely outcome next week. Lagarde's recent tone suggests that given the nature of recent economic data the ECB could well be done when it comes to rate hikes, and that the next move could well be a rate cut, if the data continues to look ugly, although when that might happen is anybody's guess.      Assuming we get no change next week from the ECB, then it's more than likely that we could see the Federal Reserve go down the same route with another pause to their own rate hiking cycle, if recent comments from Fed governor Christopher Waller are any guide, although recent strong economic data might suggest the Fed might need to move in November, especially after this week's strong ISM services numbers. US policymakers do have one more rate hike in their forward guidance with a terminal rate of 5.6% by year end, with markets currently pricing that for November, assuming it happens at all. If we get no change from the ECB, as well as the Federal Reserve, that will likely take the pressure off the Bank of England to hike again, even though market pricing is for at least one or possibly two more hikes this year.     The dynamics here are especially interesting given the pricing on the number of UK rate hikes over the summer has been much higher than other central banks. We've already seen pricing on that shift considerably where we were over a month ago when the market was pricing the eye-watering notion of a terminal rate of over 6%. This never seemed remotely credible given the inevitable consequences for financial stability and the housing market of such rate moves. Inevitably this pricing has started to come in and could come in some more given recent comments from senior Bank of England officials. In the last 2 weeks we've heard from Bank of England Deputy Governor Ben Broadbent, as well as Chief Economist Huw Pill arguing that monetary policy is already restrictive enough, and with 14 consecutive rate hikes behind them that would suggest a pause is well overdue.     This appears to be the direction Governor Andrew Bailey is leaning as well if his comments this week to MPs are any guide. This suggests that senior Bank of England officials are softening the market up for a rate pause this month, an outcome markets seem reluctant to price. The biggest challenge for the bank is communicating this shift to markets without tanking the pound. Based on previous experience that might be a tall order, however given what's happening right now a pause would be the right move to make, and then reassess in November when they update their economic projections.  As far as the data is concerned the argument for a pause outweigh the risks of hiking further, however the fear is they may decide to hike again as they attempt to compensate for being late into the hiking cycle.     Certainly, a period of policy stasis from central banks wouldn't go amiss right now, even allowing for the risks of rising oil prices which threaten to make inflation a lot stickier than it could be. That said it's hard to see how more rate hikes would help a consumer being squeezed by higher energy prices, as both factors suck demand out of the economy.   Even though markets aren't currently pricing a series of rate pauses this month, that's what we might get, especially when you look at what is driving the current sticky nature of price inflation. We've already found out that the UK isn't the international outlier when it comes to GDP, after the recent recalculations from the ONS, and the only reason inflation here is higher than elsewhere is because of the ridiculous energy price cap, which has served to keep core inflation higher than it should be and could well continue to do so with oil prices on the rise again.     With the Swiss National Bank and the Bank of Japan also set to meet in the same week as the Fed and the Bank of England, the next few weeks may have the potential to spring a few surprises, with perhaps central banks adopting policy stasis as a default position given the uncertainty around how much of a lag there is when it comes to recent increases in interest rates.      While central banks received a lot of criticism for being asleep at the wheel when it came to recognising that inflation wasn't as transitory as they thought, they are now running the risk of overcompensating in the other direction, and hiking too aggressively to combat a problem which already appears to be dissipating.     The only outlier to that is the Bank of Japan which could tweak its policy settings further when it comes to YCC, as it looks to combat a problem of an ever-weakening currency and high core inflation. This could be an area where we might see further volatility given that USD/JPY is once again approaching the 150.00 area.  
Behind Closed Doors: The Multibillion-Dollar Deals Shaping Global Markets

A Week Ahead: Market Insights and Key Events with Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.09.2023 10:54
A busy week ahead By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The S&P500 ended last week on a meagre positive note, as the selloff in Apple shares slowed. Apple will be unveiling the new iPhone15 after the Chinese storm. Last week's selloff was certainly exaggerated. Once the Chinese dust settles, Apple's performance will continue to depend on the overall sentiment regarding the tech stocks, which will in return, depend on the Federal Reserve (Fed) expectations, the rates, energy prices, Chinese property crisis, deflation risks, and how that mix affects the global price dynamics.   China announced this morning that consumer prices rose by 0.1% y-o-y in August, slower than 0.2% penciled in by analysts and after recording its first drop in over two years of 0.3% a month earlier. Core inflation, excluding food and energy prices, rose 0.8% y-o-y, at the same speed as in July, and remained at the fastest pace since January. The numbers remain alarmingly low, and the recent stimulus measures announced by the government did little to boost investors' appetite. The CSI 300 was thoroughly sold on the rallies following stimulus news. And the yuan continued trending lower against the US dollar.  The US dollar is under a decent selling pressure this morning, particularly against the yen, after comments from the Bank of Japan (BoJ) Governor Ueda were interpreted as being 'hawkish'. Ueda said that 'there may be sufficient information by the year-end to judge if wages will continue to rise', and that will help them decide whether they would end the super-loose monetary policy and step out of the negative rate territory. The remarks were disputably hawkish, to be honest, but given how negatively diverged the Japanese monetary policy is, any hint that the negative rates could end one day boosts hope. The 10-year JGB yield jumped 5bp to 70bp on the news, and the USDJPY fell to 146.30. The USDJPY has a limited upside potential as the Japanese officials have been crystal clear last week that a further selloff would be countered by direct intervention. But the pair has plenty of room to drop significantly, when the BoJ finally decides to jump and leave the negative rates behind.   This week, the US inflation numbers will give the dollar a fresh direction, and hopefully a softish one. The headline inflation is expected to tick higher from 3.2% to 3.6% in August, on the back of rising energy prices, while core inflation may have eased from 4.7% to 4.3%. 'We've gotten monetary policy in a very good place' said the NY Fed President Williams last week. Indeed, the Fed hiked the rates by more than 500bp and shed its balance sheet by $1 trillion, while keeping the GDP around 2%, as inflation eased significantly from the 9% peak last summer to around 3% this summer. But crude oil cheapened by more than 40% between last summer and this spring, and the prices are now up by nearly 30% since then. The Fed will likely hold fire when it meets this month, but nothing is less sure for the November meeting. This week's inflation data will be played in terms of November expectations.   For the European Central Bank (ECB), the base case scenario is a no rate hike at this week's monetary policy meeting, but the European policymakers could announce a 25bp hike despite the latest weakness in economic data. The EURUSD is slightly better bid this morning, expect consolidation and minor correction toward the 200-DMA, 1.0823, into the meeting. The ECB, unlike the Fed, is not worried about surprising the market, on one side or the other. A no rate hike – even if it's a hawkish pause - could push the EURUSD to below 1.0615, the major 38.2% Fibonacci retracement, into a medium term bearish trend whereas a 25bp hike should trigger a rally toward the 1.09 level.   On the corporate calendar, ARM will go public this week, in what is going to be this year's biggest IPO. The company is expected to price on the 13th of September with a price range of $47-51 per share, and will start trading on Nasdaq the following day. ARM is expected to be valued at around $52bn, roughly 20 times its last disclosed annual revenue on expectation that the chips needed to power the generative AI will make ARM a sunny to-go place. Hope it won't be stormy.  
August CPI Forecast: Modest Inflation Increase Expected Amidst Varied Price Trends

August CPI Forecast: Modest Inflation Increase Expected Amidst Varied Price Trends

FXMAG Team FXMAG Team 14.09.2023 08:50
A 0.45%MoM increase in shelter prices, similar to in July Primary rents and owners’ equivalent rent should continue to slow modestly in August, with a 0.44% increase in primary rents and 0.46% OER in our forecast. Current shelter prices in CPI will reflect the easing in rents and house prices that already occurred in 2022/early-2023 and we expect prices to slow to around ~0.3%MoM by the end of the year. But we would caution that the quick and substantial rebound in home prices over the last few months could limit how much shelter prices will slow and could even suggest upside risks in the second half of 2024. This would be particularly true for owners’ equivalent rent, which could remain stronger than primary rents as in July data. Higher home prices should imply upward pressure on rents for single family homes, which will reflect the majority of the OER sample.   - We have penciled in a modest 0 4% increase in lodging away from home in August although with possible downside risks. There appears to be some modest residual seasonality leading to weaker hotel prices in the summer months, but we would still see strong travel demand, especially into the holiday season of greater domestic travel, as putting upward pressure on hotel prices.   A stronger 0.39% increase in core non-shelter services prices The key difference between our August CPI forecast and the 0.16%MoM core prints of June and July is an expectation for a bounce-back in airfares. Admittedly, we have been expecting a rebound in airfares for a number of months that has yet to materialize, with 8% monthly declines in June and July. We suspect this has been due to a combination of a number of factors including 1) falling energy prices, 2) a shift in usual seasonal patterns for travel and booking of travel, 3) a selection of flights in the CPI sample that could be somewhat stale to reflect current travel patterns. In August, both factors 1 and 2 would suggest stronger airfares, with energy prices rising again and a large positive seasonal factor. Given already substantial declines in July, an expectation that prices will not fall as much in August leads us to pencil in a 4% seasonally adjusted increase. Other transportation services prices apart from airfares could also be somewhat stronger in August, including an increase in car rental prices after months of declines and a increase in intracity transportation, with further upside in September, reflecting New York City area fare increases. Headline CPI should rise a substantial 0.6%MoM and 3.7%YoY, largely reflecting the increase in retail gas prices.    
Assessing the Path: Goods and Shelter Inflation and the Fed's Pause Decision

Risk Sentiment Shifts: Key Indicators and Impact on G10 Currencies

FXMAG Team FXMAG Team 14.09.2023 08:55
At -0.78 (vs -0.83 last week) our Risk Index has pulled back a little from elevated levels indicating significant risk-seeking behaviour by investors. The downward trend in the Index is decelerating. The pillars of the recent improvement in risk sentiment are (1) slowing US inflation and (2) investors’ hope that the Fed is likely finished hiking rates or very close to the end of its tightening cycle. Some recent events have dented this hope, including rising food prices on the back of El Nino and higher oil prices on the back of Saudi Arabia & Russia deciding to extend their voluntary production cuts. Higher food & energy prices threaten a re-acceleration in inflation and at the very least high rates for longer or worse a return to Fed rate hikes. Today’s US headline inflation data will be supported by higher energy prices, which will leave investors focusing on the core inflation data for evidence of further deceleration in inflation. Investors are understandably nervous ahead of this data release. The largest contributors to the rise in our Risk Index were rising Sovereign-EM spreads as well as the outperformance of cyclical stocks by defensive stocks. Rising FX market volatility also contributed to the rise in the Index. Falling credit spreads and gold prices restrained the rise in our Risk Index. The CAD is the G10 currency most sensitive to our Risk Index, followed by the GBP and EUR. These currencies are negatively correlated with the Index. The JPY & SEK are the most positively correlated currencies with the Index.      
Recent Economic Developments and Upcoming Events in the UK, EU, Eurozone, and US

Recent Economic Developments and Upcoming Events in the UK, EU, Eurozone, and US

FXMAG Team FXMAG Team 14.09.2023 08:56
Economic data, news & events ■ UK: Monthly GDP contracted by 0.5% mom in July, reversing the rise of 0.5% in the prior month. The main downward contribution came from services, where output fell 0.5% mom in July. Within services, the largest downward contribution came from healthcare activity, where industrial action increased. But there were also falls in industrial production and construction in July. Monthly GDP has been particularly volatile recently due to: 1. an additional bank holiday in May; 2. exceptionally warm weather in June, which boosted hospitality, tourism and construction; and 3. Industrial strike action. Looking instead at the less volatile 3M/3M growth rate, GDP rose 0.2% in July, unchanged from June. We continue to expect the economy to enter a recession around the turn of the year. ■ EU: Today, European Commission President von der Leyen will deliver her speech on the State of the Union 2023 during the European Parliament plenary session in Strasbourg. She is expected to outline the main priorities and flagship initiatives for the year to come, based on the EU’s achievements of the past years (9:00 CET). ■ Eurozone: We forecast a 0.7% mom decline in industrial output for July, following a contraction of 1% qoq in 2Q23. The expected contraction will have come about in a difficult environment for the industrial sector, which faces weak global demand for goods and fading support from backlogs of orders. The latest surveys of industrial activity do not point to a turnaround any time soon. The manufacturing PMI and its gauges of output and new orders remain stuck far below the expansion threshold (11:00 CET). ■ US: Headline monthly CPI inflation likely jumped to 0.6% mom in August, from 0.2% mom in July. In yearly terms, CPI inflation likely rose to 3.6%, from 3.2%. Such an acceleration was likely entirely driven by energy prices, as we estimate that gasoline prices rose by around 10% mom in seasonally adjusted terms and utility (piped) gas prices probably followed wholesale prices higher. Core inflation, on the other hand, is likely to come in at 0.2% mom for a third consecutive month, taking the yoy rate down to 4.4% from 4.7% in the prior month. We expect the disinflation process continued in housing, while inflation for core-goods and for non-housing core services (referred to as supercore) likely continued to moderate (14:30 CET).
Market Focus: Economic Data and Central Banks' Policies

Market Focus: Economic Data and Central Banks' Policies

FXMAG Team FXMAG Team 14.09.2023 08:58
EGB curves bear-flattened yesterday, with investors adjusting their positions ahead of upcoming macro events. Gilts were the stars of the day, with their yields declining after July jobs data confirmed a softening of the labor market, while USTs were little changed. European stocks edged moderately lower. Brent rose by 1.5% to USD 92/bbl   Caution has prevailed overnight, as highlighted by the weak performance of Asian stocks as well as US and European stock futures. While USTs are little changed, Bund futures have edged lower following a Reuters report that the ECB might raise its inflation projection for next year to above 3%. EGBs are set to open the trading session under pressure. In FX, EUR-USD has risen towards the 1.0750 area and USD-JPY has reached 147.40. EGB issuance activity will be quite lively today, with Italy, Germany and Portugal selling a total of EUR 13bn. Focus will be on the new 7Y BTP, the fourth and last new benchmark to be issued by Italy in 3Q23. With respect to the macro data, investor focus will be on US CPI data. The inflation report precedes the FOMC meeting by a week and will probably affect the Fed’s decision and, to a lesser extent, the updated economic projections that will be published next Wednesday. August CPI data are expected to show a mixed picture, with headline inflation likely having increased due to higher energy prices (in August, the average oil price was 6% higher than in July), while core inflation probably softened further. If data come in line with our estimates and consensus, the impact on fixed-income securities will probably be negligible as there seems to be consensus among analysts. Although market-based inflation expectations have already risen due to higher energy prices, especially at shorter tenors, their increase has been limited and breakeven rates have remained within the trading ranges of the last three months. Since 10 August, when July CPI data were published, the 10Y UST yield has risen by 20bp, with the real yield component, now close to 2%, contributing almost 100%. This move shows that inflation expectations remain anchored and that the re-acceleration of headline inflation in August is not seen as a major concern for investors or the Fed. On the other hand, the fresh increase in real yields seems to suggest that investors are continuing to reduce their expectations of a recession in the US and a rapid shift towards a looser monetary policy by the Fed. We see credit starting on a more cautious tone today ahead of the release of US CPI data in the afternoon and higher oil prices are weighing on equity markets. The sentiment on the Swedish residential property market declined again in September with more respondents in the monthly SBAB house price survey now seeing prices falling. The market expectation of a further rate hike by the Swedish central bank indicates expectations that further rising borrowing costs and inflation will lead to accommodation becoming less affordable. Swedish residential property prices are around 10% below their peak in March 2022 and market commentators see overall price declines of 20% as possible. For Swedish banks we see a further decline as still manageable given that average LTVs are in the 50-60% rang   Today and tomorrow are set to be two crucial days for the FX market US CPI inflation for August is the key release early this afternoon, but the USD reaction might prove to be complicated. This is because the US data will likely be mixed. We expect a rise in the headline index and a further decline in the core rate. This might spark some USD swings when the data are published but FX majors will probably end today’s session not far from current levels, given the ECB decision tomorrow. For there to be a more directional reaction, both headline and core inflation would have to surprise to the upside or the downside. Since a steady FOMC meeting outcome on 20 September is highly likely at this point, we expect the market reaction to be asymmetric and think that softer-than-expected data (even in the headline component) are unlikely to dent the current USD strength too much. On the other hand, an unexpected and sharp acceleration in the core index is probably needed to force investors to return to pricing in a higher chance of another rate hike in the US next week, which would drive the dollar index (DXY) back towards the recent peak of 105.15. In our view, EUR-USD is set to remain close to 1.0750, after press report suggesting that the ECB expects inflation to remain above 3% next year. Recent lows of around 1.0690 and 1.0770-1.08 are thus the key levels to monitor. Meanwhile, bad economic data in the UK early this morning will likely keep GBP-USD below 1.25. The return of USDJPY to 147 makes it clear that the debate on policy normalization in Japan is not enough to convince investors to ride a yen recovery, while USD-CNY and USD-CNH are likely to remain below 7.30 amid higher funding costs in the offshore market. Early tomorrow morning the decline that we expect in both headline and core inflation data in Sweden is unlikely to prevent another 25bp rate hike by the Riksbank next week. Still, the data will probably weigh somewhat on the SEK at the start of the European session. The PLN looks set to continue to suffer from the NBP’s bold rate cut last week. The HUF will likely trade close to 385 against the EUR after Hungarian Economic Development Minister Nagy hinted at stagnant growth for Hungary this year, while the NBH confirmed that the base rate (now 13%) will replace the 1D depo rate (now 14%) from 1 October. Lastly, the RUB steadying around 95 against the USD further suggests a steady outcome to the CBR meeting on Friday.
Market Risk Sentiment Adjusts as Investors Eye US Inflation Data

Market Risk Sentiment Adjusts as Investors Eye US Inflation Data

FXMAG Team FXMAG Team 14.09.2023 09:01
At -0.78 (vs -0.83 last week) our Risk Index has pulled back a little from elevated levels indicating significant risk-seeking behaviour by investors. The downward trend in the Index is decelerating. The pillars of the recent improvement in risk sentiment are (1) slowing US inflation and (2) investors’ hope that the Fed is likely finished hiking rates or very close to the end of its tightening cycle. Some recent events have dented this hope, including rising food prices on the back of El Nino and higher oil prices on the back of Saudi Arabia & Russia deciding to extend their voluntary production cuts. Higher food & energy prices threaten a re-acceleration in inflation and at the very least high rates for longer or worse a return to Fed rate hikes. Today’s US headline inflation data will be supported by higher energy prices, which will leave investors focusing on the core inflation data for evidence of further deceleration in inflation. Investors are understandably nervous ahead of this data release. The largest contributors to the rise in our Risk Index were rising Sovereign-EM spreads as well as the outperformance of cyclical stocks by defensive stocks. Rising FX market volatility also contributed to the rise in the Index. Falling credit spreads and gold prices restrained the rise in our Risk Index. The CAD is the G10 currency most sensitive to our Risk Index, followed by the GBP and EUR. These currencies are negatively correlated with the Index. The JPY & SEK are the most positively correlated currencies with the Index.        
Fed's Watchful Eye on Inflation Expectations Amid Rising Energy Prices

Fed's Watchful Eye on Inflation Expectations Amid Rising Energy Prices

FXMAG Team FXMAG Team 14.09.2023 09:05
Fed to focus on core, but sustained higher energy prices could jeopardize inflation expectations: A jump in gasoline prices over August should drive headline CPI to its highest m/m print since June 2022’s blowout 1.2% gain. Given our house forecast for WTI oil at USD77/barrel by year-end and USD81/barrel by end-2024, we do not envisage significant further upside in gasoline prices. That said, Fed officials will keep close watch on inflation expectations amid energy- and gasoline-price increases. As Powell has stated in the past, as long as inflation remains high, price expectations remain at risk. At the moment, medium- and longer-run inflation expectations have generally stayed anchored, albeit at the upper ends of their recent ranges.   Risks tilted to upside on less scope for “revenge spending” price declines: Of 61 forecasts for August CPI, 45 economists expect a core print of 0.2% m/m, versus 14 at 0.3% and 1 each for 0.1% and 0.4%. We agree that the risks to the core forecast likely tilt to the upside – indeed, our core CPI forecast on an unrounded basis stands at 0.24% m/m. The skew of risks in our view comes by virtue of less scope for downside from several “revenge spending” categories that comprise non-housing services. For example, we think it is unlikely that airfares will post a third consecutive 8% m/m decline, particularly with jet fuel prices increasing for the month (indeed, we pencil in a small rise here)  
Central Bank Policies: Hawkish Fed vs. Dovish Others"

Central Bank Policies: Hawkish Fed vs. Dovish Others"

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
Hawkish Fed vs. Dovish others  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Swiss National Bank (SNB) and the Bank of England (BoE) surprised by maintaining their rates unchanged at yesterday's trading session. The Bank of Japan (BoJ) surprised by maintaining its ultra-lose monetary policy stance unchanged. Combined with a hawkish pause earlier this week, the major currencies further sank against the greenback. The USDCHF advanced past the 200-DMA, and Cable slipped to 1.2232, a fresh low since March, and whispers of a potential return to parity against the US dollar sparked, yet again. Reasonably, the pound-dollar could return to 1.20, and below, if the major 38.2% Fibonacci support – which stands at 1.2080 is pulled out and lets the pair slip into a medium-term bearish consolidation zone. But we will likely see the Federal Reserve (Fed) soften its tone before we start talking about parity in Cable.   Now, looking at what the BoE did, you know that I was surprised, and intrigued with the decision. In Switzerland for example, inflation – official inflation – steadied below the SNB's 2%, target. The latest data shows that the Swiss CPI is at no higher than 1.6% - even though we are expecting a monstrous rise in health insurance costs, and another 20% rise in average in electricity costs that will certainly drill holes in our pockets at the start of next year, but for now inflation is at 1.6%, say the numbers, and alone, it justifies a SNB pause. But in Britain, the no action is quite premature. Inflation in Britain is almost at 7%, the energy prices are rising, the war in Ukraine is nowhere close to being over, sterling pound is now losing value, which means that whatever the Brits will import from now will cost them more than during the last months, when the pound was appreciating. It's hard to see how, with all these developments, the BoE won't be obliged to hike, again. The only way is a really bad economic performance.  
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
A bright spot If there is one bright spot in Britain with all this, it is the FTSE100. First, the rising energy prices are good for the energy-rich FTSE100. Second, softer sterling makes these companies more affordable for international investors, who should of course think of hedging their sterling exposure, and third, more than 80% of the FTSE100 companies' revenues come from oversees, which means that when they convert their shiny dollar revenues back to a morose sterling, well, they can't really complain with a stronger dollar. Consequently, if a more dovish BoE is bad for sterling, the combination of a hawkish Fed and a dovish BoE and a pitiless OPEC is certainly good for the FTSE100. The index has been left behind the S&P500 this year, as the tech rally is what propelled the American index to the skies, but that technology wind is now turning direction. The FTSE 100 broke its February to September downtrending trend to the upside and is fundamentally and technically poised to gain further positive traction, whereas, the S&P500 is heaving a rough month, with technology stocks set for their worse performance this year, under the pressure of rising US yields, which make their valuations look even more expensive.   Interestingly, the US 2-year yield peaked at 5.20% after the Fed's hawkish pause this week and is back headed toward the 5% mark, but the gap between the US 2-year yield and the top range of the Fed funds rate is around 40bp, which is a big gap, and even if the Fed decided not to hike rates, this gap should narrow, in theory. If it does not, it means that bond traders are betting against the Fed's hawkishness and think that the melting savings, the loosening jobs market, tightening bank lending conditions and strikes, and restart of student loan repayments and a potential government shutdown could prevent that last rate hike to happen before this year ends. And indeed, activity on Fed funds futures gives more than 70% chance for a third pause at the FOMC's November meeting, and Goldman Sachs now sees the US expansion slow to 1.3% from 3.1% printed in the Q3. KPMG also warned that a prolonged auto stoppage may precipitate contraction. And if no deal is inked by noon today, the strikes will get worse.   One's bad fortune is another's good fortune  The Japanese auto exports surged big this year, they were 50% higher in yen terms. The yen is certrainly not doing well, but yes, you can't have it all. That cheap yen is one of the reasons why the Japanese export so well outside their country. And in case you missed, the BoJ did nothing today to exit their hyper-ultra-loose monetary policy. They didn't even give a hint of normalization, meaning that the yen will hardly strengthen from the actual levels. In the meantime, Toyota, Mitsubishi and Honda shares are having a stellar year, and the US strikes will only help them do better. 
Oil Price Impact on Inflation Forecasts: A Closer Look

Oil Price Impact on Inflation Forecasts: A Closer Look

ING Economics ING Economics 26.09.2023 14:52
How do current oil prices change our inflation forecast? Despite this not being the 1970s, expectations of further disinflation will be impacted by higher oil prices. This could result in a slower decline of inflation to 2%. Given that our expectations for oil prices do include a drop in the first half of 2024 again, the effect on our own forecast is rather moderate. Plus, a smaller decline in energy prices has materialised this year compared to expectations (which impacts next year’s base effects). Assuming oil prices stay at 95 USD/b for all of 2024, however, the headline figure would rise by 0.3 pp next year, with a peak of the energy price contribution of 1 ppt in the second quarter. At the same time, higher oil prices would probably further dent consumer confidence and spending, thereby contributing to the current disinflationary trend due to weaker demand. Indeed, the big question is whether the higher oil price will once again result in broad-based second-round effects like we saw last year. A lot of drivers of core inflation are at this point still disinflationary, with manufacturing businesses still indicating that input costs are falling despite higher wages and energy prices. And as new orders are weakening, deflation for non-energy industrial goods is realistic towards the end of the year. For services, weaker demand is also contributing to slowing inflation despite higher wage costs, according to the September PMI. Our expectations are that core inflation will slow significantly from the 5.3% August reading towards the end of the year. Still, if the labour market remains as tight as it is now and the economy bounces back a bit in early 2024, there is a risk that higher energy input costs would also put core inflation further above 2%. A lot depends on the strength of the economy in the months ahead, adding uncertainty for the ECB.   Pressure on the ECB to continue hiking Prior to the pandemic, most central banks would probably have looked past surging oil prices. Some even considered rising oil prices to eventually be deflationary, undermining purchasing power and industrial competitiveness. However, we are no longer in the pre-pandemic era, but the era of returned inflation. The ECB has emphasised in recent months that doing too little is more costly than doing too much in terms of rates. For the ECB, the recent staff projections were based on the technical assumption of an average oil price of 82 USD/b in 2024. If oil prices were to average 95 USD/b next year, this would probably push up the ECB’s inflation forecasts to 3.3% for 2024 (from 3.2%) and more importantly to 2.4% in 2025 (from 2.1%). As a result, the return to 2% would be delayed to 2026. The delayed return to 2% would not be the only reason for the ECB to consider further rate hikes. Even though the ECB would still acknowledge the deflationary nature of a new oil price shock, the risk that this new oil price shock could lead to a de-anchoring of inflation expectations will definitely add to the ECB’s concerns, making not only an additional rate hike more likely, but also that they stay higher for longer.
Stocks Down, USD Up Amid Looming Government Shutdown Concerns

Stocks Down, USD Up Amid Looming Government Shutdown Concerns

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.09.2023 13:04
Stocks down, USD up By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     Investors continue to dump stocks and buy US dollars on looming uncertainty regarding whether the US government will be shut in three days. There is progress regarding a 6-week short-term funding deal, but getting an approval from the Senate will be a challenge. In the meantime, falling savings, rising theft and delinquencies hint at the growing cost-of-living crisis whereas the central banks' inflation fight is certainly not over just yet.  The looming government shutdown talks continue feeding into a stronger US dollar. US politicians have agreed to a 6-week short-term funding to keep the government running for another month and a half, but getting approval from the full Senate will be a challenge with far-right Republicans' determination to 'shoot it down if it reaches the floor'.   The S&P500 fell to the lowest levels since the beginning of June and the Stoxx 600 could slip below 445 due to slowing European activity, waning Chinese demand, the European Central Bank's (ECB) pledge to keep the monetary policy tight until inflation comes down significantly. The euro's depreciation makes inflation harder to ease along with rising energy prices.     After a few sessions of consolidation, and despite a more than 1.5-mio-barrel build in US crude inventories last week, US crude is upbeat this morning, again. The barrel of American crude is trading above the $92 level, as the European nat gas futures flirt with the 200-DMA. The EURUSD lost around 6.5% since the July peak. Oversold market conditions call for consolidation, or recovery, yet appetite in the US dollar remains too strong to let the other currencies breathe. And if this is not enough bad news, the EU is now investigating the degree to which China has subsidized EV manufacturers. Tesla is clearly in a hot seat, but not only. Some European carmakers including Renault and BMW also have joint ventures in China and will be probed. The cherry on top, VW announced to cut EV output at German sites due to lacking demand. All this to say, there is little place to go in the market other than the FTSE 100, which could at least take advantage of the energy rally.     The combination of higher energy and stronger dollar has well pushed inflation in Australia to 5.2% in August, up from 4.9% printed a month earlier -which was a 17-month low. We could see a similar upturn in global inflation metrics due to rising oil prices. The Eurozone data will soon be coming in. Unfortunately for the Aussie, the uptick in inflation won't prevent it from getting smashed against the US dollar. The pair will likely test and take out the September support of 0.6360
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Holding Pattern: ECB's Dovish Stance Sets the Tone Amidst Global Rate Uncertainty

ING Economics ING Economics 27.10.2023 14:57
Rates Spark: We’re now in a holding pattern The ECB keeping rates on hold reflects what will likely be a common theme at next week's Fed and BoE meetings, and its dovish tone will find affirmation in upcoming inflation and growth data. But longer-end rates remain under the spell of US Treasuries, where supply is also a key driver.   The ECB delivers a dovish hold The European Central Bank kept interest rates on hold as widely anticipated but struck a slightly more dovish tone than expected. Importantly, the ECB refrained from shifting the focus to the balance sheet now rates are deemed sufficiently high. According to President Christine Lagarde, both the PEPP and the minimum reserve requirement were not even discussed.   Lagarde highlighted again that data dependency also means rate hikes could not be excluded, but she said any discussion about cuts was “totally premature”. That said, the undertone regarding the economy has become more cautious. Also, with regard to a potential spike in energy prices, she highlighted the uncertainty of their medium-term impact on inflation. Overall, market reaction in outright rates is more difficult to disentangle given the release of US data just ahead of the press conference. Very front-end rates, which should be less influenced by US spillovers, reflected the somewhat more dovish take and a firming notion that the ECB has reached peak rates already. The already minimal hike speculation reflected in ECB-dated OIS forwards for December was further trimmed, and the strip is downward sloping from then onwards to fully discount a rate cut by June next year.    Sovereign spreads initially reacted with relief, with the key spread of 10Y Italian government bonds versus Bunds briefly narrowing back below 200bp. Obviously, it is unlikely to be the end of the story, and the ECB could pick up the discussion at some point. Indeed, Reuters later reported that policymakers agreed to postpone the debate until the winter. and a discussion on minimum reserves was reported to come as part of the operational framework review.  
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Day of Reckoning: Anticipating a Cutting Cycle as Czech National Bank Gears Up for November Meeting

ING Economics ING Economics 27.10.2023 15:02
Czech National Bank Preview: Day of Reckoning We expect the CNB to start the cutting cycle with a 25bp move at the November meeting. The central bank will also unveil a new forecast with a significant revision in the dovish direction. We see the geopolitical situation and the impact on energy prices and EUR/CZK as the main risk to our call at the moment.   Cutting cycle starts The Czech National Bank will meet on Thursday next week when it will present its last forecast published this year. We go into the meeting expecting the first rate cut of 25bp to 6.75%, a view we have held since June. On the data front, a lot has changed in the economy since the CNB's August forecast, and almost everything is pointing in a more dovish direction. GDP is expected to be revised significantly downwards, especially for the first half of the next year and not only because of domestic weakness but also the outlook for abroad. The labour market, while still tight, is showing slower wage growth than the CNB expected in August. Most importantly, inflation is below the central bank's forecast. Headline inflation for Q3 came in at 0.1pp, and core inflation at 0.3pp on average below expectations. Add to that, energy prices! They look set to fall faster than expected in the coming months and in January.   New forecast will convince the undecided votes Moreover, the CNB is already behind the curve, given that the Bank's model indicates rate cuts earlier. This, combined with other deviations from the forecast, should lead to a significant revision in the path of interest rates of around 50bps on average over the forecast horizon. On the other hand, this is countered by a weaker CZK, which the CNB expects to reach current levels only in Q1 next year. However, the board's communication seems to suggest that the weaker koruna is not a problem for now. We believe the pain threshold for delaying a rate cut would be the 25.0 EUR/CZK level, which we don't see on the table for now. Board members are basically unanimous in their statements that the November meeting is the first live one for a rate cut and we believe the new forecast will convince the undecided votes. Otherwise, we believe a rate cut will be delayed only until December, but next week's meeting should already show some votes for a rate cut. In general, we see the main risks more at the global level, especially the impact on energy prices and EUR/CZK, which is probably the CNB's main focus these days.    
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ECB Maintains Status Quo: Lagarde's Rhetoric and Euro Dynamics Unveiled

InstaForex Analysis InstaForex Analysis 27.10.2023 15:21
"Now is not the time to talk about future prospects". That was the tone of the European Central Bank's October meeting, the results of which were revealed on Thursday. Overall, the central bank made the expected decision to maintain interest rates as they were. The likelihood of this scenario being realized was 100%, so the market paid little attention to the formal outcomes of the meeting. The EUR/USD pair remained in a standstill, awaiting ECB President Christine Lagarde's press conference. Lagarde slightly stirred the pair with her rhetoric, and the dynamics initially favored the euro. The bulls pushed toward the boundaries of the 1.6-figure but hesitated to attack that target due to weak fundamental arguments. It's worth noting that in the lead-up to the October meeting, most experts were confident that the ECB would keep not only monetary policy unchanged but also the main formulations of the accompanying statement unchanged. According to their forecasts, Lagarde was also expected to reiterate the main theses outlined after the previous meeting - that the ECB was unlikely to raise rates in the foreseeable future but would commit to keeping them at the current level for a long time. In addition, some experts considered the possibility that the Bank would reduce interest rates in the first half of 2024, given the drop in overall and core inflation in the eurozone and the weak 0.1% growth in the European economy in the second quarter.   However, the ECB did not present any hawkish or dovish surprises. Admittedly, Lagarde did tweak the tone of her rhetoric, offering some support for the euro, but these remarks failed to impress the market. In general, the ECB head merely dispelled rumors that the central bank is ready to discuss the timing and conditions of monetary policy easing. According to her, the issue of lowering interest rates was not discussed at the recent meeting as "it would be premature." She also said that the ECB had not discussed the possibility of changing the terms of the PEPP asset purchase program, which had been rumored in October. Lagarde emphasized that the central bank would reinvest all the cash it receives from maturing bonds it holds under the program, at least until the end of 2024. Regarding the fate of interest rates, on one hand, the ECB head reiterated that "rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target." But on the other hand, she listed inflationary risks. Among these are the recent sharp rise in energy prices due to geopolitical tensions in the Middle East, the possible increase in food prices, and active wage growth in eurozone countries. Lagarde emphasized that internal price pressures remain strong, and "the risks to economic growth remain tilted to the downside." Such rhetoric does not indicate that the ECB is ready to return to raising rates in the near future. But at the same time, Lagarde effectively refuted rumors that the central bank is considering easing the terms of its APP in the near term. Her statement that "now is not the time for forward guidance" can be interpreted in different ways, either in the context of potential future policy tightening or easing. However, if we compile the main theses voiced by Lagarde, we can conclude that the ECB has primarily distanced itself from the scenario of lowering interest rates in the near future. Thus, the ECB, while not providing substantial support to the euro, also did not exert significant pressure on the single currency. The ECB's meeting did not meet the doves' expectations (as there were no hawkish expectations). We can assume that the market will shift its focus to American events starting on Friday. The main focus will be on the PCE index. The U.S. economy expanded at a robust 4.9% annual rate in the third quarter, the highest growth rate since the fourth quarter of 2021, compared to a mere 2.1% growth in the U.S. economy in the second quarter. If the primary personal consumption expenditure index reaches the forecast level (not to mention the "red zone"), the dollar could come under significant pressure as risk appetite may increase in the market. Signs of slowing inflation amid strong GDP growth are likely to contribute to a decline in Treasury yields, and consequently, the greenback
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French Inflation Retreats to 4% in October, Signaling a Disinflation Trend with Possible Stabilization Ahead

ING Economics ING Economics 02.11.2023 12:07
French inflation falls in October, but should soon stabilise Inflation in France fell to 4%, compared with 4.9% in September. The trend towards disinflation is well underway in France, but it will take time. The fall in inflation is likely to be much smaller in the coming months.   Inflation falls to 4% in October Consumer price inflation stood at 4% in October, compared with 4.9% in September. This fall in inflation can be attributed to a slowdown in the prices of food (7.7% in October, compared with 9.7% in September), manufactured goods (2.3%, compared with 2.8%) and energy (5.2%, compared with 11.9% in September). Unlike in other European countries, energy inflation continued to make a positive contribution to French inflation in October, due to last year's tariff shield and the reduction in fuel prices, which had kept energy prices lower in France than elsewhere. On the other hand, service prices accelerated again, rising by 3.2% year-on-year in October, compared with 2.9% in September, a sign that the repeated increases in the minimum wage are continuing to drive up prices in the service sector. Inflation according to the harmonised index, which is important for the ECB, stood at 4.5%, down from 5.7% in October.   Disinflation will take time Overall, this data confirms the findings of previous months. The trend towards disinflation is well underway in France. Nevertheless, disinflation will not be a smooth ride and will take time. Inflation is likely to remain close to 4% for the next few months. Given the various government interventions on energy prices over the past year, the base effects of energy inflation are less favourable in France than elsewhere. What's more, is that the recent rise in oil prices means that the trend will be less clear-cut than expected and that further spikes in inflation caused by energy inflation cannot be ruled out in the coming months. Despite weakening demand, the indexation of minimum wages to inflation is likely to maintain strong momentum in services prices, which could become the main contributor to inflation over the months ahead. On the other hand, inflation in food and manufactured goods should continue to fall as a result of falling global demand, high inventories and lower production costs.  Given the latest geopolitical developments and their impact on energy prices, inflation should continue to fall over the coming months – albeit more slowly than previously forecast. In its latest forecasts published in September, the Banque de France expects inflation according to the harmonised index to return to 2.2% at the end of 2024 and 1.6% at the end of 2025. However, we will probably have to wait longer to see inflation return to these levels. We are expecting inflation according to the harmonised index to be 2.5% at the end of 2024 and 1.9% at the end of 2025.
Shift in Central Bank Sentiment: Czech National Bank Hints at a 50bp Rate Cut, Impact on CZK Expected

Czech Inflation Inches Up: Analyzing the Numbers and Future Rate Cut Prospects

ING Economics ING Economics 10.11.2023 11:24
Czech inflation rises on base effects Inflation rose in October, as expected, due to the effect of government measures last year. However, the trend remains disinflationary. Inflation will fall again in November and we are likely to approach inflation targets in January. However, the central bank will probably want to have the January number in hand before cutting rates.   Seasonal effects kick-started inflation again Headline inflation accelerated again from -0.7% to 0.1% month-on-month in October, which translated into a rise from 6.9% to 8.5% year-on-year due to the base effect from last year when the government introduced measures to reduce household energy prices. The statistical office mentions that without this effect, inflation in October would have been 5.8% YoY. The result was 0.1ppt above the market's and our expectations and 0.2ppt above the Czech National Bank's forecast. However, the range of estimates was very wide and biased towards higher numbers this time.   Food prices rose for the first time since May, up 0.8% MoM, which was an expected seasonal rebound but we had expected a smaller increase. Housing prices fell 0.5% MoM dragged down by energy prices, in line with our forecast. Fuel prices were flat for the first time after a large increase in recent months. And clothing prices rose 2.4% MoM, in line with seasonal expectations.   Headline inflation breakdown (pp)   Above the CNB forecast but still close Core inflation fell from 5.0% to 4.5% YoY, according to our calculations. The CNB expects 4.0% on average for the fourth quarter, implying that today's number should be close to the central bank's forecast. However, as always, we will see the official numbers later today. Our fresh nowcast indicator for November shows 7.3% YoY, which would again be slightly above the CNB's forecast (7.1%) but less than we expected earlier. Surprisingly for us, the central bank left rates unchanged in November and, as we mentioned in the CNB review, the board seems to be more cautious than we expected. So today's numbers will not be a game changer and as we mentioned earlier, for now, we see February as the more likely opportunity for a first rate cut given that we are unlikely to see much information changing the overall picture until the December meeting.
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Poland's Inflation Prospects Amid Sharp Commodity Price Drops: A Balancing Act for Monetary Policy

ING Economics ING Economics 16.11.2023 11:30
Poland’s uncertain inflation prospects as commodity prices drop sharply October CPI inflation was revised to 6.6% YoY, against a preliminary estimate of 6.5%. The inflation outlook is exceptionally uncertain due to administrative decisions. Our baseline scenario assumes 2024 CPI as high as 6%, leaving no room for additional NBP rate cuts. Food and non-alcoholic beverage price growth in Poland was revised from 0.4% MoM to 0.5%. Commodity prices rose 5.7% YoY, while service prices increased 9.3% YoY, compared to 7.6% and 9.7%, respectively, in September. The deceleration of services price inflation is noticeably slower than that of goods prices. The biggest contributors to last month's decline in the annual inflation rate, relative to September, were a further slowdown in food price growth (7.6% in October vs. 10.1% YoY in September), a deeper decline in fuel prices than a month ago (-14.4% vs. -7.0% YoY) and slower growth in energy prices (8.3% vs. 9.9% YoY). We estimate that core inflation, excluding food and energy prices, declined to around 8.0% from 8.4% in September. On a monthly basis, however, we saw a high increase in core prices (about 0.6% MoM). The inflation outlook is exceptionally uncertain due to the lack of any final decision on the zero VAT rate on food and support measures in the energy market, as well as a decision on electricity and gas prices for households in 2024. Based on past declarations by representatives of the future government coalition, we assume that the VAT rate on food will be raised from January 1, 2024, and electricity prices will be frozen until the middle of next year. In such a scenario, average annual CPI inflation in 2024 could be as high as 6%, leaving no room for interest rate cuts. We forecast that they will remain unchanged until the end of next year (the main NBP rate at 5.75%).
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German Economy Faces Persistent Stagnation: Factors, Challenges, and Uncertainties

ING Economics ING Economics 27.11.2023 14:17
Contraction of German economy in the third quarter confirmed The German economy remains stagnant - the recent fiscal turmoil will do little to change this any time soon. The second estimate of German GDP growth in the third quarter confirmed the minor drop in economic activity and came in at -0.1% quarter-on-quarter, from +0.1% QoQ in the second quarter. On the year, the German economy shrank by 0.4%. The German economy remains stagnant. In fact, since the war in Ukraine started, the German economy has grown in only two out of the last six quarters. What's even worse is that the economy currently remains barely above its pre-pandemic level more than three years later. While private consumption was a drag on growth in the third quarter (-0.3% QoQ), government consumption (+0.2% QoQ) and investments (+1.1% QoQ) supported economic activity.   Ongoing stagnation Today’s data will do very little to end the debate on whether or not the German economy is again the sick man of Europe. In any case, the German economy has become one of the growth laggards of the eurozone. This weak growth performance has a long list of explanations: there is the cyclical headwind stemming from inflation, still elevated energy prices and energy uncertainty, higher interest rates and China’s changing role from being a flourishing export destination to being a rival that needs fewer German products. But there are also well-known structural challenges, ranging from demographics to energy transition and not enough investment. The recent ruling of Germany’s Constitutional Court has exposed two new risk factors for the German economy: fiscal austerity and political uncertainty. Together with the well-known cyclical and structural headwinds, the ongoing pass-through of the European Central Bank's monetary policy tightening, still no reversal of the inventory cycle and new geopolitical uncertainties, it is hard to see Germany’s economic stagnation ending any time soon.
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Eurozone Inflation Drops to 2.4%, ECB Faces Divergence with Market Expectations

Kenny Fisher Kenny Fisher 04.12.2023 15:04
Eurozone inflation falls to 2.4% US ISM Manufacturing PMI expected to improve to 47.6 Fed Chair Powell will deliver remarks in Atlanta The euro is showing limited movement on Friday. In the European session, EUR/USD is trading at 1.0897, up 0.09%. Eurozone inflation falls more than expected Eurozone inflation has been falling and the November report brought good tidings. Headline inflation ease to 2.4% y/y, down from 2.9% in October and below the market consensus of 2.7%. A sharp drop in energy prices was a key driver in the significant decline. Core inflation, which is running higher than the headline figure, dropped to 3.6%, down from  4.2% in October and below the market consensus of 3.9%. The soft inflation report sent EUR/USD lower by 0.74% on Thursday, but ECB policy makers are no doubt pleased by the release, as it indicates that the central bank’s aggressive tightening continues to curb inflation. Headline CPI has dropped to its lowest level since July 2021 and is closing in on the 2% inflation target. Still, core CPI, which excludes food and energy and is a better gauge of inflation trends, will need to come down significantly before the ECB can claim that the battle against inflation is over. The ECB has signalled a ‘higher-for-longer policy’, and hasn’t given any indications that it plans to cut rates anytime soon. This has resulted in a significant disconnect with the financial markets, as traders believe that the ECB will have to respond to falling inflation and weak growth by trimming rates. The markets have brought forward expectations of a rate cut to April due to the soft inflation report. Just one month ago, the markets had priced in an initial rate cut in July. It will be interesting to see if ECB President Lagarde clings to the higher-for-longer stance or will she acknowledge the possibility of rate cuts in 2024. The US wraps up the week with the ISM Manufacturing PMI. The manufacturing sector has been in a prolonged slump and the PMI has indicated contraction for twelve consecutive months. The PMI is expected to improve to 47.6 in November, compared to 46.7 in October. A reading below 50 indicates contraction.   Investors will be listening closely to Jerome Powell’s remarks today, looking for hints about upcoming rate decisions. Powell has stuck to his script of a ‘higher for longer’ rate policy, but the markets have priced in a rate cut in May at 84%. . EUR/USD Technical There is resistance at 1.0920 and 1.0986 1.0873 and 1.0807 are the next support levels
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Prolonged Softness in Services PMIs Amid Unchanged RBA Rates: Insights by Michael Hewson

Michael Hewson Michael Hewson 06.12.2023 12:08
Services PMIs expected to remain soft, as RBA leaves rates unchanged By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a rather lacklustre start to the week, weighed down by a rebound in the US dollar as well as weakness in basic resources and energy prices, as investors took a pause after the gains of the past couple of weeks.  US markets fared little better, sliding back in the face of a modest rebound in yields as investors hit the pause button ahead of this week's jobs data, which is due at the end of the week, with markets in Europe set to open slightly weaker this morning.   Earlier this morning the RBA left rates on hold at 4.35% after last month's decision to raise rates by another 25bps. Despite last month's surprise decision to raise rates today's decision acknowledged that inflation was now starting to moderate in goods even as concerns remained about services inflation. Nonetheless, despite this acknowledgement that inflation appears to be slowing there was little indication that the central bank was considering another rate move in the near term. Last month's decision to raise rates was driven by concern about domestic price pressures and while today's decision to hold was a relief there was little sign that a policy change in either direction was being considered with Governor Bullock acknowledging significant uncertainties around the outlook.   Nonetheless today's decision to hold came against a backdrop of a month which has seen 2-year yields decline almost 40bps from their 4.52% peaks on the 1st November, as markets surmised the central bank is now done, with the Australian dollar falling sharply.   The recovery in US yields yesterday appeared to be because of the possibility that the declines seen over the past few days may have been a little too much too quickly, given Powell's comments on Friday last week when he pushed back on the idea that rate cuts were on the cards for the first half of 2024.   There is certainly an element of the market getting ahead of itself when you look at a US economy that grew at 5.1% in Q3 and still has an unemployment rate of 3.9%. The same sadly cannot be said for Europe where the French and German economies could well already be in recession.   While recent manufacturing PMI data in Europe suggests that economic activity might be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation. This in turn is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4.   The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have declined after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today's November numbers with a rise to 48.3 and 51.6 respectively.   The UK economy also appears to be showing slightly more resilience where there was saw a recovery into expansion territory in the recent flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales numbers for November, which showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like for like sales in November rose 2.6%, the same as the previous month, with sales of high value goods remaining soft, with consumers preferring to go with lower ticket and essential items spend of food and drink, health and personal care.      In the US we also have the latest October JOLTS job opening numbers which are expected to show vacancies slow from 9.5m to 9.3m, while the latest ISM services survey forecast to show a resilient economy.   The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday period hiring. Gold prices are also in focus after yesterday's new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce in the absence of a rebound.     EUR/USD – continues to look soft dropping below the 200-day SMA at 1.0825, with a break of the 1.0800 having the potential to retest the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 area has seen the pound slip back with support at the 1.2590 area currently holding. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – found support at the 0.8555 area for the moment, but while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – found some support at the 146.20 area in the short term, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 15 points lower at 7,498   DAX is expected to open 9 points higher at 16,413   CAC40 is expected to open 3 points lower at 7,329
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Dovish Outlook: Global Central Banks Soften Stance Amid Falling Energy Prices

ING Economics ING Economics 12.12.2023 13:11
Too dovish Falling energy prices help softening global inflation expectations and keep the central bank doves in charge of the market, along with sufficiently soft economic data that points at the end of the global monetary policy campaign. This week, the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) kept rates unchanged – although the RBA said that they could hike again if home-grown inflation doesn't slow. But overall, the Federal Reserve (Fed) is expected to cut as soon as in May next year, and the European Central Bank (ECB) is expected to announce six 25 basis point cuts next year. If that's the case, the ECB should start cutting before the Fed, sometime in Q1. It sounds overstretched to me.   Data released earlier this week showed that French industrial production fell unexpectedly for the 3rd straight month in October, Spanish output declined, and German factory orders fell 3.7% in October versus a 0.2% increase penciled in by analysts. The slowing European economies and falling inflation help building a case in favour of an ECB rate cut, but I don't see the ECB cutting rates anytime in the H1. Remember, economic slowdown is the natural response that the ECB was looking for to slow inflation. Now that it happens, the bank won't leave the battlefield before making sure that inflation shows no sign of life. But the EURUSD is understandable extending its losses within the bearish consolidation zone, as the German 10-year yield sinks below the 2.20% level. The EURUSD is now testing the 100-DMA to the downside. Trend and momentum indicators are comfortably bearish and the RSI hints that we are not yet dealing with oversold market conditions. Therefore, the selloff could deepen toward the 1.07/1.730 region.  The direction of the EURUSD is of course also dependent on what the USD leg of the pair will do. We see the dollar index recover this week despite the falling yields driven lower by a soft set of US jobs data released so far this week. The JOLTS data showed a significant fall in job openings in October, while yesterday's ADP print revealed around 100K new private job additions last month, much less than 130K penciled in by analysts. There is no apparent correlation between this data and Friday's official NFP read, but the fact that independent data point at further loosening in the US jobs market comforts the Fed doves in the idea that, yes, the US jobs market is finally giving in. On the yields front, the US 2-year yield remains steady near 4.60%/4.65% region, while the 10-year yield fell to 4.10% yesterday, from above 5% by end of October. This is a big, big decline, and it means that investors are now ramping up the US slowdown bets. That's also why we don't see the US stocks react to the further fall in yields. The S&P500 and Nasdaq both fell yesterday, while their European peers extended gains regardless of the overbought conditions. The Stoxx 600 closed yesterday's session above the 470 level. The softening ECB expectations are certainly the major driver of the European stocks toward the ytd highs; German stocks hit an ATH yesterday despite the undoubtedly morose economic outlook. Actual levels scream correction.      
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Navigating the Shifting Tides: Assessing the Oil and Gas Sector's Trajectory After a Year of Profit Fluctuations

Michael Hewson Michael Hewson 27.12.2023 15:01
What next for UK oil and gas after a year of lower profits  By Michael Hewson (Chief Market Analyst at CMC Markets UK) In contrast to the strong gains seen in 2022 the oil and gas sector has had a much more mixed year as a sharp fall in natural gas prices, and a slowdown in oil prices saw profits return to more normal levels for the sector. In 2022 the likes of Exxon Mobil and Shell saw share price gains in excess of 60%, as both oil giants reaped the benefits of higher margins as they bounced back from the huge losses posted during the Covid pandemic. As a whole the sector posted losses of $76bn with around $70bn of that amount as a result of write-downs and impairments on unviable or stranded assets. As with last year the challenge for the likes of Exxon Mobil, BP and Royal Dutch Shell remains in how they transition towards a renewable future without hammering their margins, and while we've seen a period of share price consolidation this year, we've also seen a shift in tone away from keeping the green lobby happy. There now seems to be a more hard-nosed and pragmatic approach, which has helped both Exxon and Shell's share price make new record highs over the second half of the year, although as oil and gas prices have declined so have share prices.   Consolidation year for BP and Shell As a whole the sector saw demand and prices collapse during that Covid period and it would appear that those experiences during that time may have shaped OPEC's response to this year's supply and demand concerns. Fearing another oversupply issue OPEC and Russia have kept much tighter control over production output, announcing cuts in April and then continuing those caps through the summer and into next year in an attempt to keep a floor under prices.   Along with further geopolitical uncertainty on top of Russia's war in Ukraine, in October we also had to contend with the Hamas savage attack on Israel's northern border, and Israel's response which prompted concerns over transit routes around the Gulf region.   With inflationary pressures subsiding and energy prices stabilising at lower levels the oil and gas sector for now appears to focussing on what it does best in generating cash, with new CEOs for both Shell and BP marking a potential shift in thinking when it comes to renewables. Under their previous incumbents, Shell's Ben Van Buerden and BP's Patrick Looney the focus was very much on transitioning away from oil and gas and towards a much lower margin future of renewable energy.    While a laudable goal it soon became apparent that while the politics was very much geared to that, there was a growing realisation that it couldn't be done cheaply and not without enormous damage to the energy and economic security of everybody. When Wael Sarwan took over as CEO of Shell he recognised this reality quickly, pushing back against the prevailing narrative and outright hysteria of politicians and activists that it could be done cheaply and easily.   In June he pushed back by saying that "We need to continue to create profitable business models that can be scaled at pace to truly impact the decarbonisation of the global energy system. We will invest in the models that work – those with the highest returns that play to our strengths" in a broadside at some of the recent reckless narrative and almost hysterical calls to cut back on fossil fuel use whatever the cost. While this has caused some unease in some parts of the Shell business it appears to be an acknowledgment of the reality that the transition to renewables will be a gradual process especially given the current levels of geopolitical uncertainty that are serving to drive the costs of the energy transition ever higher.   It is a little worrying that politicians have been unable to grasp this reality, continuing to push the myth that wind power is cheap, as the silent majority push back over the reality that the transition will be ruinously expensive if done too quickly.   When Shell reported its Q2 numbers in July profits fell short of expectations due to the sharp falls in both natural gas and crude oil prices that occurred over that quarter. The rally in oil and gas prices since then has ensured that this didn't happen in Q3 with profits coming in line with forecasts, which given that all its peers saw their numbers come in light was particularly notable.   Q3 profits came in at $6.22bn, in line with expectations helped by improvements in refining margins as well as higher oil and gas prices and a better performance in its trading division. The integrated gas part of the business saw profits remain steady and were in line with Q2 at $2.5bn.   Upstream saw a solid improvement on Q2's $1.68bn, rising to $2.22bn, although we've still seen a steep fall from the same quarter last year. On renewables we saw that part of the business sink to a loss of -$67m, due to lower margins and seasonal impacts in Europe, as well as higher operating expenses. Shell's chemicals and products division also did much better in Q3, its profits rising to $1.38bn helped by an improvement in refining margins due to lower global product supply as well as higher margins in trading and optimisation, although chemicals were still a drag on profitability overall.   On the outlook Shell nudged the upper end of expectations for capital expenditure down by $1bn to between $23bn to $25bn, as well as increasing the buyback to $3.5bn. While Shell's share price has held up reasonably well the same can't be said for BP which while holding onto last year's gains has lagged behind Shell, although BP was able to get close to its February highs in the middle of October.  
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German Economy Faces Recession: 2023 Shrinkage Confirmed and Bleak Outlook for 2024

ING Economics ING Economics 16.01.2024 12:28
German economy shrank in 2023 Now it's official. The German economy shrank by 0.3% year-on-year in 2023. What's worse, however, is that there is no imminent rebound in sight and the economy looks set to go through the first two-year recession since the early 2000s. The year 2023 was the first full year since 2020 in which the German economy contracted. According to a just-released preliminary estimate by the German statistical office, the economy shrank by 0.3% year-on-year. Based on a very tentative first estimate, the economy shrank by 0.3% quarter-on-quarter in the fourth quarter of 2023. However, don't forget that this estimate was derived without any hard economic data for the month of December and could still be subject to revisions, probably rather to the downside than the upside.   We expect the German economy to shrink again in 2024 The year 2023 was another turbulent one, with the economy in permanent crisis mode. In fact, since 2020, there has been a long list of crises and challenges facing the German economy: supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy, China’s changing role from being a flourishing export destination to being a rival that needs fewer German products, and several structural shortcomings. A combination of geopolitical risk events, cyclical headwinds but also homemade deficiencies. In light of so many challenges, some take comfort in the fact that the economy is “only” stuck in stagnation and has avoided a more severe recession. And, indeed, things could have been worse. But this should be no reason for any complacency. On the contrary, even if the worst of the weakening in sentiment seems to be behind us, the hard economic reality does not look pretty. In fact, looking ahead, at least in the first months of 2024, many of the recent drags on growth will still be around and will, in some cases, have an even stronger impact than in 2023. Just think of the still-unfolding impact of the European Central Bank's monetary policy tightening, the potential slowing of the US economy, new uncertainty stemming from recent fiscal woes or new supply chain frictions as a result of military conflict in the Suez Canal. A recent illustration of the longer-term impact of energy prices, higher interest rates and changing economic structures is the gradual increase in insolvencies since mid-2022. On a more positive note, what could lift economic sentiment and growth are positive real wage growth, a rebound in Asia and further down the road some rate cuts from the European Central Bank. Also, a turn in the inventory cycle could bring some relief in early 2024, although this turn has not yet happened and would probably only be short-lived. All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% YoY this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.
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CEE Region's Borrowing Outlook: Lower Needs, Broader Sources, and FX Market Dynamics

ING Economics ING Economics 25.01.2024 16:36
Borrowing needs will fall this year, meaning a lower supply of LCY bonds, but there is still a long way to go given the slow fiscal consolidation. Central and Eastern Europe should remain more active in the FX market than pre-Covid, while a busy January and the broadening of funding sources offer flexibility for the rest of the year Borrowing needs this year will be down on last year in the whole CEE region, with the exception of Poland. The decline is due to both lower budget deficits and redemptions. In contrast, in Poland, both have increased year-on-year. Overall, the supply of local currency bonds should fall but remain well above pre-Covid levels. Given lower yields, this supply may prove more difficult to place in the market compared to last year, which saw strong market demand despite record supply. This time is different, and we expect financial markets to be tougher and punish more budget overruns and additional issuance. Local currency issuance: Improvement but still a long way to go From a positioning perspective, we find the Romanian government bond (ROMGBs) market to be overcrowded after the significant inflows last year. On the other hand, the significantly underweight Polish government bond (POLGBs) market should help cover the historically record borrowing needs. Czech government bonds (CZGBs) and Hungarian government bonds (HGBs) remain somewhere in between with steady foreign inflows into the market. On the sovereign ratings side, all the obvious changes happened last year and should stabilise this year with only some adjustments in outlooks in the pipeline, unless a more significant shock arrives. On the local currency supply side, we see a clear improvement from last year in the Czech Republic, as it was a bright spot in the CEE region with credible public finance consolidation. In addition, we see it as the only country in the region with positive risks of a lower supply of CZGBs than the Ministry of Finance indicates. Hungary has also made great progress here, of course, with the traditional broad diversification of funding sources that should keep the pressure off the HGB market in the event of an overshoot of the projected deficit. In contrast, we see only a relatively small improvement in Romania, where the supply of ROMGBs will fall only a little. The supply of Polish government bonds, meanwhile, was already at a record-high last year and is set to rise a little more this year. In addition, the use of additional sources to avoid flooding the local currency bond market will increase significantly, which we believe represents the biggest challenge for the bond market in the CEE region this year.   FX issuance: Fast start and diverse funding sources offer flexibility On the FX side, CEE sovereigns are set to remain active in the Eurobond primary market in 2024 and beyond, with the overall trend driven by recent external shocks from Covid and surging energy prices, along with structural factors such as the energy transition in Europe. A key theme that unites regular issuers Romania, Poland, and Hungary is the diversification of funding sources, with more consistent interest in the US dollar, as well as alternative currencies such as the Japanese yen and Chinese yuan, alongside the more traditional euro for the region. The growing green bond market is also an area of focus, with Hungary leading the way, and Romania set to follow this year. At the same time, 2024 should see some divergence, with Poland taking the lead in the region for Eurobond issuance and set to be one of the largest EM sovereign issuers globally this year. Hungary should see a slight reduction in Eurobond supply compared to recent years, with its strategy of diversifying funding sources and front-loading supply providing plenty of flexibility for the rest of the year. Romania should retain its position as a regular issuer, although net supply will be lower this year, while catching up with Poland and Hungary in terms of diverse funding sources via green issuance and alternative currencies. A strong start to the year, with almost $15bn in issuance for CEE in January so far, should mean less pressure on the region to issue later in the year if market conditions turn.  
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Japanese Yen Drifts as Tokyo Core CPI Falls to 1.6%

Kenny Fisher Kenny Fisher 26.01.2024 14:41
The Japanese yen is drifting on Friday. In the European session, USD/JPY is trading at 147.80, up 0.10%. Tokyo Core CPI falls to 1.6% Tokyo Core CPI reached a significant milestone today, falling to 1.6% y/y in January, after a December reading of 2.1%. This was the first time the indicator dropped below the Bank of Japan’s 2% target since May 2022. The main driver of the decline was lower energy prices. Tokyo Core CPI excludes fresh food but includes fuel. The Tokyo core-core index, which excludes fresh food and fuel prices, rose 3.1% y/y in January, down from 3.5% in December. The drop in inflation reinforces the BoJ’s view that cost pressures are gradually being replaced by rising service prices as the main driver of inflation. This is hugely significant, as it points to inflation being more sustainable, which is a requirement for the BoJ before it tightens its ultra-loose policy. Japan also released corporate service inflation for December which held steady at 2.4%, a nine-year high. That reading underscores that service prices remain high a companies continue to pass on their costs. BoJ Governor Ueda stated at this week’s policy meeting that progress is being made towards the target of 2% sustainable inflation, and that has the markets speculating that the BoJ could make a major policy shift in April or June. The BoJ wants to see higher wages as evidence that inflation is sustainable and the national wage negotiations in March are expected to provide higher wages for workers.   In the US, the first-estimate GDP for the fourth quarter smashed above expectations, but the US dollar didn’t show much interest. GDP growth rose 3.3% y/y, below the 4.9% gain in the third quarter but well above the consensus estimate of 2.0%. The US economy continues to produce stronger-than-expected data and that has the markets paring expectations for a rate cut in March. The probability of a March cut has fallen to 48%, down sharply from 70% one month ago, according to the CME’s FedWatch tool. . USD/JPY Technical USD/JPY tested support earlier at 147.54. Below, there is support at 146.63 There is resistance at 148.44 and 149.35

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