fomc meeting

Expect the Bank to drop its tightening bias

Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in.

If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this:

    Policy needs to stay

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FOMC helped Cryptos to hold important levels

Alex Kuptsikevich Alex Kuptsikevich 16.12.2021 08:33
Over the past 24 hours, total crypto market capitalisation rose by 2.1% to $2.24 trillion, recovering to the levels at the start of the week. Yesterday, the figure was close to the $2.0 trillion mark, but demand for risk assets recovery supported cryptos, providing around a 12% rise from the bottom to peak in the following four hours. On balance, the cryptocurrency fear and greed index reclaimed another point, rising to 29. The bulls seem to be putting in the necessary minimum effort to keep the positive picture on the charts of the major cryptocurrencies. But there isn’t much more to do now. Bitcoin is up 1.2% in the last 24 hours, trading at $48.7K. The bulls managed to push BTCUSD into the area above the 200-day moving average but are not getting away from it. Etherereum is adding 3.5%, clinging to the $4K. The strong market reaction after the FOMC pushed ETHUSD above this round level, but we saw some selling pressure in the morning. Short-term traders should closely watch whether the former support has turned into resistance. The pair of major cryptocurrencies appear to have been supported by a general increase in risk appetite in the markets following the FOMC announcements. However, investors should keep in mind that this upward move in traditional financial markets was more of a “buy the rumours, sell the facts” style reaction. Fundamentally, news about the faster QE tapering and greater willingness to raise rates has already been priced in during previous weeks. But at the same time, long-term investors should not lose sight of the natural tightening of financial conditions because of these moves, which will slowly but persistently reduce demand for risky assets. The main risk for the crypto market is that we have seen a monetary regime switch in the last couple of months, which promises to take some of the demand for crypto away..
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The Consequences Of FOMC (USD Index), US CPI Release And European Sentiment | Oanda: "Week Ahead – Volatile Markets"

Ed Moya Ed Moya 09.05.2022 06:48
Every asset class has been on a rollercoaster ride as investors are watching central bankers all around globe tighten monetary policy to fight inflation.  Financial conditions are starting to tighten and the risks of slower growth are accelerating.   The focus for the upcoming week will naturally be a wrath of Fed speak and the latest US CPI data which is expected to show inflation decelerated sharply last month. A sharper decline with prices could vindicate Fed Chair Powell’s decision to remove a 75 basis-point rate increase at the next couple policy meetings. A close eye will also stay on energy markets which has shown traders remain convinced that the market will remain tight given OPEC+ will stick to their gradual output increase strategy and as US production struggles to ramp up despite rising rig counts.  Energy traders will continue to watch for developments with the EU nearing a Russian energy ban.   US Market volatility following the FOMC decision won’t ease up anytime soon as traders will look to the next inflation report to see if policymakers made a mistake in removing even more aggressive rate hikes off the table over the next couple of meetings.  The April CPI report is expected to show further signs that peak inflation is in place.  The month-over-month reading is expected to decline from 1.2% to 0.2%, while the year-over-year data is forecasted to decrease from 8.5% to 8.1%. The producer prices report comes out the next day and is also expected to show pricing pressure are moderating.  On Friday, the University of Michigan Consumer Sentiment report for the month of May should show continued weakness. The upcoming week is filled with Fed speak that could show a divide from where Fed Chair Powell stands with tightening at the June and July meetings.  On Tuesday, Fed’s Williams, Barkin, Waller, Kashkari, Mester, and Bostic speak.  Wednesday will have another appearance by Bostic. Thursday contains a speech from the Fed’s Daly.  On Friday, Fed’s Kashkari and Mester speak.   EU The Russia/Ukraine war and the sanctions against Russia have dampened economic activity in the eurozone. Germany, the largest economy in the bloc has been posting weak numbers as the war goes on. With the EU announcing it will end Russian energy imports by the end of the year, there are concerns that the German economy could tip into a recession. On Tuesday Germany releases ZEW Survey Expectations, which surveys financial professionals. Economic Sentiment is expected to decline to -42.5 in May, down from -41.0 in April. On Friday, the Eurozone releases Industrial Production for March. The Ukraine conflict has exacerbated supply line disruptions, which is weighing on industrial production. The sharp drop in German Industrial Production (-3.9%), suggests that the Eurozone release will also show a contraction. The March estimate is -1.8%, following a gain of 0.7% in February. 
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Pound Sterling Offered Support After News That Boris Johnson Is Set To Step Down (EUR/GBP, GBP/USD), FED FOMC Meeting Minutes (EUR/USD), Japan’s Upper House Elections (USD/JPY)

Rebecca Duthie Rebecca Duthie 07.07.2022 16:36
Summary: ECB and FOMC meeting minutes release. UK Prime Minister set to step down. GBP is little changed. Japan’s upper house elections. Read next: Bearish Outlook For The EUR/USD Currency Pair, Euro & GBP Are Only Two Currencies Dominated By The US Dollar’s Strength (EUR/GBP, USD/JPY, EUR/JPY)  ECB & Fed FOMC meeting minutes. The market is reflecting bearish signals for this currency pair. The Euro has been under big pressure in the wake of global recessionary fears gripping the markets and causing its price to break below multi-decade lows. Earlier in Thursday's trading day, the Euro had managed to recover from some of the lows seen on Wednesday after the Federal Reserve's FOMC meeting minutes were released. Later on Thursday the meeting minutes of the last European Central Bank (ECB) meeting are due to be released and almost any hawkish rhetoric could benefit the Euro. EUR/USD Price Chart Boris Johnson set to step down The market is reflecting mixed signals for this currency pair. Boris Johnson is set to resign in the wake of many high-profile resignations within his government in protest of Boris Johnson’s continuing leadership, the current Prime Minister is set to address the media later on Thursday. This news has aided the EUR/GBP currency pair in its downward momentum. In addition, the Euro itself isn’t faring well amidst economic concerns, the potential for widening periphery bond spreads as the European Central Bank raises rates, and ofcourse the possibility of complications in restoring Russian gas inflows to Germany via Nord Stream 1 which is also due to undergo routine maintenance from next Monday until the 21st July. EUR/GBP Price Chart Strong US Dollar. The market is reflecting mixed signals for this currency pair. The US Dollar continues to strengthen in the wake of the Fed FOMC meeting minutes released late on Wednesday, and the continuing hawkish rhetoric. The GBP is little changed in most corresponding currency pairs. GBP/USD Price Chart Rising cost-of-living in Japan The market is reflecting bullish sentiment for this currency pair. The rising cost-of-living in Japan continues to squeeze domestic households' income ahead of Japan's upper house election on Sunday. The release of the Fed's FOMC meeting minutes has offered the US Dollar more support on Thursday whilst inflation is currently showing signs of becoming more politically based in Japan in the wake of the continuing cost-of-living squeeze. USD/JPY Price Chart Sources:,,  
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Bank of Canada Decision: A Close Call with Hawkish Expectations

ING Economics ING Economics 07.06.2023 08:45
FX Daily: A close call on the Bank of Canada today We expect a hawkish hold by the Bank of Canada today, but pressure on policymakers to hike has risen and it’s admittedly rather a close call. We don’t think it’s a make-or-break event for CAD – but we should keep an eye on the implications of a hike for the broader market and the dollar. In the CEE region, the main focus will be the NBP press conference.   USD: Lack of domestic factors A quiet data calendar has left the pricing for the Federal Reserve's June meeting little changed, with a 20-25% implied probability of a hike after the soft ISM services figures on Monday. That and the generally supported environment for equities haven’t triggered any substantial dollar correction though.   The market’s bearish mood on European currencies remains the prevailing theme, and the dollar’s resilience probably denotes reluctance to add dollar shorts ahead of the US CPI risk event on 13th June – which is still seen as having the potential to tilt the balance to a hike the following day.   We think markets will watch the Bank of Canada decision (which we discuss in detail in the CAD section below) with great interest today. Following the Reserve Bank of Australia rate hike yesterday, another hawkish surprise from a developed central bank in the run-up to the FOMC meeting could cause the revamp of some hawkish speculation, especially considering Canada’s economic affinity with the US.   Given the lack of other market-moving events today, a BoC hike could end up supporting the USD too. But, as discussed in our BoC preview, we expect a hawkish hold – in which case the spill-over into the dollar may not be very material given that should be insufficient to prompt markets to price out the implied chances of a Fed June hike currently embedded in the USD curve.
Bank of Canada Likely to Maintain Hawkish Stance: Our Analysis

Bank of Canada Likely to Maintain Hawkish Stance: Our Analysis

ING Economics ING Economics 07.06.2023 08:49
CAD: Our call is a BoC hawkish hold today The Bank of Canada moved considerably earlier than other central banks to the dovish side of the spectrum and has kept rates on hold since January. Now, stubborn inflation, an ultra-tight labour market and a more benign growth backdrop are building the case for a return to monetary tightening. Markets are attaching a 45% implied probability that a 25bp hike will be delivered today.   While admitting it’s a rather close call, we think a hawkish hold is more likely (here's our full meeting preview), as policymakers may want to err on the side of caution while assessing the lagged effect of monetary tightening. We still expect a return to 2% inflation in Canada in the early part of 2024 with the help of softer commodity prices. Developments in the US also play a rather important role for the BoC: recent jitters in the US economic outlook (ISM reports recently added to recession fears) and the proximity to a “toss-up” FOMC meeting would also warrant an extension of the pause.   Still, we expect another hold by the BoC to be accompanied by hawkish language. Markets are pricing in 40bp of tightening by the end of the summer, and we doubt policymakers have an interest in pushing back or significantly disappointing the market’s hawkish expectations given recent data. So, as long as a hold contains enough hints at potential future tightening, we think the negative impact on CAD should be short-lived and we keep favouring the loonie against other pro-cyclical currencies in the current risk environment.
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Navigating FX Markets: Late Cycle Dollar Strength Meets Carry Trade Amid Central Bank Battles and Volatility Decline

ING Economics ING Economics 09.06.2023 08:28
FX Daily: Late cycle dollar strength meets the carry trade We see two key themes driving FX markets near term. The first is central banks continuing to battle inflation, yield curves staying inverted, and the dollar continuing to hold gains. The second is cross-market volatility continuing to sink - generating greater interest in the carry trade. Expect these trends to hold into Fed, ECB and BoJ meetings next week.   USD: Late cycle dollar strength continues Yesterday's surprise rate hike by the Bank of Canada (BoC) triggered quite a clean reaction in FX markets. Of course, the Canadian dollar rallied on the view that the BoC had unfinished business when it came to tightening. But the broader reaction was for short-dated yields to rise around the world, for yield curves to invert further, and for the dollar to strengthen. USD/JPY rose about 0.8% after the BoC hiked. The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too.   This endurance of this late cycle dollar strength is therefore the key story for this summer. For the near term, it looks like the dollar can hold the majority of its recent gains into next Wednesday's FOMC meeting - though the release of the US May CPI next Tuesday will be a big market driver too. Our bigger picture call remains that the dollar will embark on a cyclical bear trend in 2H23 - probably starting in 3Q - though the risk is that this gets delayed.   This brings us to our second key observation which is that declining levels of cross-market volatility continue to favour the FX carry trade. Somewhat amazingly the VIX index - implied volatility for the S&P 500 equity index - has fallen below not just the 22 February pre-invasion levels but also below the March 2020 pre-pandemic levels.   As is the case with low rates and FX volatility, presumably investors believe that policy rates will not be moving too much this year - perhaps a little higher and then a little lower. Lower volatility levels are favouring the carry trade which in the EM world favours the Mexican peso and the Hungarian forint and in the G10 space - as Francesco Pesole points out - favours the Canadian dollar. An investor selling USD/MXN six months forward at the start of the year would have made close to 16% by now.   Expect these core trends to continue for the near term. The data calendar is light today and we suspect a slight pick-up in initial claims will not be enough to move the needle on the dollar. Expect DXY to linger around 104.
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Decisive Week Ahead: Central Banks, Inflation, and Rate Risks Take Center Stage

ING Economics ING Economics 09.06.2023 09:56
Rates Spark: Getting into position for a decisive week Featuring US CPI data, three major central bank meetings - if one adds the Bank of Japan - and substantial bond supply, next week should shape up to be a decisive one for rates markets. We see largest the upside risks to rate levels from a surprise hike by the Fed. On the other end the "skip" narrative should prevent markets from extrapolating a pause towards cuts.   Central banks to decide against backdrop of still high inflation but heightened macro uncertainty Markets are bracing for a decisive week which sees central bank decisions from both the Federal Reserve and the European Central Bank. The backdrop of late has been one of heightened macro uncertainty, but with inflation still running uncomfortably high.   Especially in the US, ambiguous signals from the jobs market have jolted rates markets around. Following a very strong payrolls number, we have now seen yesterday what could be the first signs of lay-offs feeding through to the weekly jobless claims data.   In the eurozone, final 1Q GDP data has now confirmed that the economy was in a (shallow) technical recession, while prospects for a notable uptick in the second quarter are dim. At the same time, the jobs market here remains resilient and inflation is still painfully slow in turning lower.   As central banks’ usual modelling has proven of limited use in the post-pandemic and geopolitical crisis-ridden world, they have become increasingly reliant on current data to guide their policies. Next week, that will mean an increased focus on Tuesday’s US CPI data just a day before the FOMC meeting. A core rate printing above the 0.4% month-on-month rate that the consensus is currently expecting could well swing the market back towards pricing in a hike. Note that in the week we will get more indications about pipeline price pressures from producer prices as well as import prices.   And at the end of the week looms the University of Michigan's consumer survey including inflation expectations.    
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Federal Reserve at a Crossroads: Will They Hold or Hike?

ING Economics ING Economics 09.06.2023 11:32
Fed likely to skip, but it's going to be close Market pricing has shifted massively over recent weeks, but we think the most likely outcome remains the Fed leaving policy rates unchanged on 14 June. There will be some dissent and a shock inflation reading could make it a very close decision. Either way, the Fed will leave the door open to further rate moves.   No change the most likely outcome Just over a month ago, Federal Reserve Chair Jerome Powell hinted that after 500bp of rate hikes over a 14 month period, interest rates may finally have entered restrictive territory and the Fed could pause at the June meeting to take some time to evaluate the effects. Markets took this as a signal that we may already be at the peak with the fear that the combination of high borrowing costs and tighter lending conditions could prompt a recession with inflation falling swiftly back towards target. On 4 May, Fed funds futures contracts were pricing in 86bp of interest rate cuts by year end and the target range heading below 4% at the January 2024 FOMC meeting.   Over the subsequent six weeks, activity has remained resilient, inflation continues to run hot, payrolls jumped 339,000 and the Australian and Canadian central banks surprisingly hiked rates. Hawkish comments from a few Fed officials have added to the sense that they may not be done. The result is that pricing for the June FOMC meeting is not far off a coin toss (just under 10bp priced) and July is looking a decent bet for a hike (21bp priced). Next Tuesday’s CPI report could see pricing move even further in favour of a hike – currently the consensus is for core CPI to come in at 0.4% month-on-month, but if we get a shock 0.5% that could be sufficient to convince enough FOMC members to vote for a hike.   That’s not our base case and we believe there will be a majority on the committee who think they have tightened policy a lot and it makes sense to wait. This was certainly the commentary from senior Fed officials such as Governor Philip Jefferson and Philadelphia Fed Governor Patrick Harker, that while “there is still significant room for improvement” the Fed is “close to the point where we can hold rates in place and let monetary policy do its work”. Moreover, recent data releases have been sending very mixed messages, which suggests it may make sense pause to evaluate.   Conflicting data makes life hard for the Fed Friday’s Labour report is a notable example. The establishment survey, which questions employers and generates the non-farm payrolls number, reported a jump of 339,000 in employment in May. However, the household survey, used to calculate the unemployment rate, showed employment declined 310,000 with unemployment rising 440,000. Then we have the manufacturing ISM reporting a rise in its employment survey yet the payrolls report stated there was a 2000 decline. Meanwhile, service sector payrolls rose 257,000 yet the ISM services employment index fell into contraction territory.   We see similar mixed messages within the GDP report. On an expenditure basis, GDP grew 1.3% annualised in 1Q 2023 and 2.6% in 4Q 2022. However, an alternative measure of US economic activity, Gross Domestic Income, which combines all the costs incurred and incomes earned in the production of GDP, contracted 2.3% annualised in 1Q 2023 after a 3.3% drop in 4Q 2022 and has declined in three out of the past four quarters. An average of the two series suggests the economy has flatlined since 3Q 2022.   Fed to leave the door open for further hikes Nonetheless, the Fed wants to see 0.2% month-on-month or below CPI readings to be confident inflation will return to 2%. We aren’t there yet so if they do hold rates steady, as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow – July is clearly a risk. We certainly acknowledge the risk that they hike rates 25bp, especially if Tuesday’s inflation data surprises to the upside, but doubt they will intensify the language on rate hikes so the “hawkish hike” scenario in the table above looks unlikely.
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Asia Morning Bites: China's Stimulus and FOMC Meeting Set Positive Tone for Risk Assets

ING Economics ING Economics 14.06.2023 08:27
Asia Morning Bites China's monetary stimulus and lower US inflation provide a positive backdrop for risk assets ahead of tonight's FOMC meeting.   Global Macro and Markets Global markets:  Equities seemed to like the continued decline in US inflation yesterday, as it bolsters the case for a pause from the Fed (next decision at 02:00 SGT Thursday). The S&P500 rose 0.69% yesterday, and the NASDAQ added another 0.83%. Chinese stocks also rose, helped by yesterday’s unexpected PBoC rate cut. Still, despite the lower inflation print, US Treasury yields rose some more – the yield on 2Y notes rose 8.9bp to 4.666%, and the 10Y bond yield rose 7.8bp to 3.813%. Once the Fed is out of the way, and the market has settled, perhaps with an even slightly higher bond yield, this might well feel excessively high, given that inflation for July will probably come in at the low 3% level. EURUSD rose a little yesterday, reaching 1.0789, Other G-10 currencies also made gains, though the JPY continues to look soft at 140.18.  The KRW was the standout in Asia yesterday, gapping lower to 1271.50, possibly helped by hawkish comments from the latest BoK minutes. Strong labour data just out will also likely help (see below).   G-7 macro: Yesterday’s US inflation figures for May came out more or less in line with expectations. Headline inflation dropped to just 4.0% from 4.9%, while the core fell a little less, reaching 5.3% (it was 5.5% previously). James Knightley’s note on what this means is worth a close read. But the short version is that it boosts the chances of a Fed pause tonight – even if they indicate further hikes in the dot-plot (we don’t think they will ultimately deliver).  US May PPI data due out should add to the case for falling pipeline inflation pressures. UK April industrial production will not make pleasant reading, though the index of services could be a bit stronger. The ECB meets to decide on rates tomorrow. There is a wide consensus for a further 25bp of tightening.   South Korea: The jobless rate unexpectedly fell to 2.5% in May (vs 2.6% in April, 2.7% market consensus). Employment of services such as whole/retail sales, recreation, and transportation, led the improvement. One interesting thing is that job growth in ICT and professional, scientific& technical activities has been particularly strong over the past several months, despite the recent weakness in the semiconductor business. We think this is not directly related to semiconductor manufacturing itself but more related to platform services and software development, including AI technology. We believe that the tech sector has held up relatively well. Meanwhile, the construction industry shed jobs for the second consecutive month, and real estate also cut jobs.  We think that despite weakness in manufacturing and construction, service-led labour market improvements have continued, and this probably supports the hawkish tone of the BoK. In a separate data release, import prices dropped significantly to -12.0% YoY in May (vs -6.0% in April), mostly due to falling commodity prices. We expect consumer inflation to decelerate further in the coming months and to reach the 2% range as early as June.     What to look out for: FOMC meeting South Korea unemployment (14 June) India Wholesale prices (14 June) US PPI inflation and MBA mortgage applications (14 June) FOMC policy meeting (15 June) New Zealand GDP (15 June) Japan core machine orders (15 June) Australia unemployment (15 June) China industrial production and retail sales (15 June) Indonesia trade (15 June) India trade (15 June) Taiwan policy meeting (15 June) ECB policy meeting (15 June) US retail sales and initial jobless claims (15 June) Singapore NODX (16 June) BoJ policy meeting (16 June) US University of Michigan sentiment (16 June)
Decoding Curve Flattening: Exploring the UK's Inverted Yield Curve and Rate Cut Expectations

Decoding Curve Flattening: Exploring the UK's Inverted Yield Curve and Rate Cut Expectations

ING Economics ING Economics 14.06.2023 13:58
Unlike previous instances of hawkish re-pricing, the rise in front-end rates has struggled to propagate to longer maturities. The resulting curve flattening means the UK curve is fast catching up to the inverted levels of its US equivalent. The limited level of inversion has long been a puzzle to us, given UK policy rates are already significantly in restrictive territory, and as the UK is facing similar growth headwinds to its developed market peers, thus justifying commensurate rate cut expectations.   One possible reason for the lack of flattening was fears that active quantitative tightening – outright gilt sales – were putting comparative steepening pressure on the curve. Another potential explanation could also have been expectations that, once at their peak, policy rates would need to be held there for longer. We have more sympathy for the former explanation, especially now that more inflationary data is finally resulting in curve flattening.   The upshot is a more inverted curve in the UK for longer than in the US in particular, where we can point to (a) more progress against the Fed’s inflation target and (b) a clearer list of catalysts for inflation to revert to target.   Sterling rates now price higher rates for longer at the Bank of England than at the Fed   Today's events and market view The European releases calendar is thin with only eurozone industrial production expected to rebound in April from a dismal print in March. Bond supply mostly consists in Germany adding a 10Y auction to an already busy week on the supply front (it launched a new 30Y green bond as well as auctioned 5Y debt yesterday).   The June FOMC meeting looms large on today’s markets. Consensus (6 out of 108 respondents favour no change in Bloomberg’s survey) and market expectations (a 25bp hike is priced with a less than 10% probability) are for no change in rate at this meeting after the May CPI report came in roughly in line with estimates yesterday. The lack of rate action will likely be offset by a more hawkish tone, including confirmation that a July hike is possible.   Ahead of the Fed, the US release calendar features PPI, which is expected to continue showing deflationary forces at play.
Key Economic Events and Earnings Reports to Watch in US, Eurozone, and UK Next Week

Key Economic Events and Earnings Reports to Watch in US, Eurozone, and UK Next Week

Craig Erlam Craig Erlam 17.07.2023 08:57
US The week before the July 26th FOMC meeting will contain a handful of key economic reports and several key earnings results. The initial assessment of the economy is somewhat upbeat as CEO Jamie Dimon noted that the US economy continues to be ‘resilient’. Next week’s big earnings include Goldman Sachs, Tesla, Netflix, Morgan Stanley, and American Express.   On Monday, the ISM manufacturing report will show activity is slowing down, with the headline reading expected to fall back into contraction territory.  On Tuesday, the June retail sales report is expected to show strength, as major car discounts encouraged buying.  Demand for services might still remain strong but is expected to weaken once we get into the fall.  Industrial production probably won’t impress given the weakness we saw with the PMI readings.  On Wednesday, both building permits and housing starts should show some weakness.  Thursday’s releases include jobless claims which might only show modest labor market sluggishness and some weaker existing home sales.  Eurozone President Christine Lagarde’s comments at the ECB conference in Frankfurt on Monday may be the highlight next week as traders try to better understand whether the central bank is as close to the end of its tightening cycle as they think. The ECB has pushed back before but the data is looking on a much better trajectory. Final HICP inflation figures will also be released on Wednesday. UK  UK inflation data on Wednesday is undoubtedly the one to watch next week. It seems we’re seeing progress on inflation everywhere except the UK at the moment. The headline is expected to fall back to 8.2% for June, with core staying at 7.1%. But both have surpassed expectations on numerous occasions recently as inflation has remained stubbornly high. Are better readings from the US and eurozone a sign of things to come for the UK, finally? Retail sales will also be released on Friday.  
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Goldman Sachs Predicts Significant Crude Deficit, Markets Price in Fed Rate Cut, and Bitcoin ETF Awaited

Craig Erlam Craig Erlam 18.07.2023 08:20
Goldman Sachs eyes a significant crude deficit in the second half of the year Markets price in 25% chance Fed cuts at December 13th FOMC meeting Bitcoin supporter Novogratz expects Bitcoin ETF gets done by end of year   Oil Crude prices are lower as China’s economic recovery stalled and as Libya resumed production at key oil fields.  Oil won’t catch a bid unless China finally unleashes meaningful stimulus that propels large parts of the economy.  Little rate cuts here and there and support for property markets won’t do the trick for revitalizing the China recovery trade.   If China doesn’t appear strong the global growth outlook will get slashed and that could keep oil prices heavy a while longer. WTI crude has major support at the $70 level and should consolidate above here until we hear from Chinese officials at the end of the month.       Gold Gold’s rebound will have to take a break until we know for sure if the Fed is done raising rates at the July 26th FOMC meeting.  The labor market is still hanging in there, but expectations remain for it to gradually weaken.  Earnings season will be key for the precious metal because more Fed tightening might need to get priced in if corporate America is too optimistic about both a recession being avoided and that consumer resilience will remain. Gold may start to form a broadening formation here between the $1945 and $1965 range.   Bitcoin Bitcoin remains anchored until the cryptoverse gets an update with any of the latest bitcoin exchange-traded-fund (ETF) applications. We are approaching crunch time for getting the final comments from all the top Bitcoin ETF applications.  There has been some progress in small crypto companies finding banks that can help facilitate transactions, as Customers Bancorp has emerged as the winner from the downfall of Signature Bank and Silvergate Capital Corp. Bitcoin’s range of $29,500 and $31,500 may hold until we get a major crypto headline.  
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FX Daily: Dollar Risk Premium Consolidating Amid Chinese Data Disappointment

ING Economics ING Economics 18.07.2023 11:57
FX Daily: Dollar risk premium consolidating Chinese data disappointment was not enough to trigger a broad-based rebound in the dollar, which continues to show some disinflation risk premium (i.e. short-term undervaluation). We’ll monitor some US releases including retail sales today, on an otherwise very quiet day data-wise. In Australia, RBA minutes reiterated openness to another hike.   USD: No real benefit from China's data disappointment This week had started with the question of whether the dollar could still suffer from the residual effect of the disinflation surprise amid a quiet data calendar and with the FOMC meeting (26 July) drawing closer. Yesterday’s price action in FX saw a relatively sanguine reaction to the disappointing growth numbers out of China: the highly exposed AUD and NZD declined, but EUR/USD was unchanged despite European stocks’ underperformance. The lack of larger-scale dollar gains on the back of deteriorating Chinese sentiment indicates that markets remain reluctant to build back USD long positions for now. That must be weighed – however – with indications that the dollar is undervalued in the short-term vs some major currencies (excluding JPY): it may be a matter of time, or a simple lack of catalyst, to see some convergence of the dollar with its short-term drivers. As discussed in yesterday’s FX Daily, we may well see the dollar recover a bit of ground, although the mis-valuation gap can also be closed by a move in other market drivers. Today, the market’s focus will be on June’s retail sales figures out of the US (expected to be quite strong), as well as industrial production, some housing data and TIC flows. These releases normally do not trigger wide market reactions by themselves, although a combined positive data flow today could at least help keep the dollar losses capped for now.  
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EUR/USD Faces Overbought Conditions as ECB Rate Hike Expectations Shift, Focus on Euro-Area Inflation

Ed Moya Ed Moya 19.07.2023 08:22
EUR/USD excessively overbought? The euro-dollar ascent was mostly a one-way move for most of July.  After inflation eased to the slowest pace in more than two years, the dollar tumbled.  With the Fed entering their blackout period before the July 26th FOMC meeting, the lack of hawkish pushback has allowed the dollar to remain vulnerable to further pain just ahead of the 1.1300 handle.  Bullish momentum has cleared multiple hurdles but the 1.1350 level should prove to be rather strong. While the end of the Fed’s tightening cycle appears to be in place, expectations are shifting that the ECB might not be that far from pausing their rate hiking cycle.  Today’s comment from ECB’s Knot, a well-known hawk, suggested that they could be ready to pause in September and that it might hinge on the inflation data going forward. All eyes will be on the Wednesday’s second reading of euro-area inflation. The EUR/USD daily chart displays a potential bearish butterfly pattern. Point D is targeted with the 1.414 1.414% Fibonacci expansion level of the X to A move and the B to C leg.  If dollar strength emerges here, downside could target the 1.1050 level. If invalidated, bullish momentum could surge above the 1.1300 region, potentially targeting the 1.1450 resistance zone.     USD/JPY dead-cat-bounce or sustainable rally? The plunge for dollar-yen accelerated after last week’s cooler-than-expected inflation report shifted Fed rate hike expectations. The macro backdrop has mostly seen investors calling for pain for the Japanese yen since 2021.  Hedge funds ramped up bearish yen bets(according to the COT report for the week through July 11th), taking their net short positions to the largest level since last May. Now the focus also includes the BOJ, which includes some disappointment with keeping the BOJ keeping Yield Curve Control intact. Yen volatility could remain excessive if the Fed signals more tightening might need to be done after the July 26th FOMC meeting and if BOJ doesn’t tweak their policy. Over the next couple of weeks, it seems that the yen rally will either cool towards 141.50 (a temporary recovery) or we will see it surge below 136.00 (the downtrend remains in place).        
Dollar Strength Continues as 10-year Treasury Surges to 4.34%, Reaching Highest Levels Since Financial Crisis

Repricing the Pound: UK Inflation Slows, Bank of England Tightening Expectations Adjusted

ING Economics ING Economics 19.07.2023 10:06
FX Daily: The pound's big repricing is finally happening UK inflation slowed more than expected in June, triggering a large dovish repricing in Bank of England tightening expectations and hitting the overbought pound. We now think a 25bp hike looks more likely than a 50bp move in August. GBP may stay under pressure, especially against the dollar – which we still expect to recover some ground into the FOMC meeting.     USD: Slowly regaining ground? The round of US data releases was quite mixed yesterday, and as discussed by our US economist in this note, likely supported the case for a pause after a July hike by the Federal Reserve. June’s headline retail sales came in a bit softer than expected (0.2% month-on-month) but the control group which excludes some volatile components actually beat consensus (0.6% MoM). The real data miss came on the industrial production side, which confirmed the negative indications of a contracting ISM index and fell 0.5% MoM in June, despite expectations of 0% growth. All in all, markets aren’t lacking evidence of slowing activity in the US, and the addition of the favourable disinflationary backdrop now weakens the case for another hike beyond July. The lagging unemployment remains the last piece of the puzzle to smoothen the transition to a more dovish rhetoric, and one that may keep the Fed leaning on the hawkish side by keeping all options open in July. From an FX perspective, next week’s FOMC meeting could be the opportunity to recover some lost ground. We cannot exclude the possibility that markets will position ahead of the meeting by closing some freshly-built speculative dollar shorts, which could help close the short-term USD undervaluation gap against the euro. Today, some housing data and MBA mortgage applications will be in focus and we still see room for some marginal dollar recovery. One pair that remains overvalued despite recent USD-negative swings is USD/JPY, and we have been observing fresh weakness in the yen during the late US session and throughout the Asian session following dovish comments by Bank of Japan Governor Kazuo Ueda. With a little over a week to go before the BoJ rate announcement, Ueda said it would take a shift in the assessment to achieve its inflation targets in order to change the ultra-accommodative monetary policy stance. We should note that these remarks by Ueda are quite in line with his recent efforts to carefully manage expectations on the dovish side. We don’t necessarily see indications that would significantly lower the chances of a policy shift in July. As noted by Ueda in recent comments, the new projections will remain the key factor next week. Market reaction has likely been heightened by the proximity to the meeting. Not too far from Japan (relatively speaking), New Zealand saw the release of second-quarter inflation overnight. Headline CPI slowed from 6.7% to 6.0% year-on-year, slightly above the 5.9% consensus but still below the bank’s 6.1% forecast. One important caveat: non-tradeable inflation (watched closely by the Reserve Bank of New Zealand) slowed less than the bank’s forecasts, and the RBNZ-issued core inflation gauge remained unchanged from the first to second quarter at 5.8% YoY. Markets now price in 50-60% chance of a hike by November, which looks about right in our view, even though NZD’s near-term outlook remains much more driven by external factors.
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.
EUR: Testing 1.0700 Support Ahead of ECB Meeting

A Week of Earnings and Central Bank Decisions: Fed, ECB, and BoJ Meetings in Focus

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.07.2023 10:20
A week packed with earnings and central bank decisions Last week ended on a caution note after the first earnings from Big Tech companies were not bad, but not good enough to further boost an already impressive rally so far this year. The S&P500 closed the week just 0.7% higher, Nasdaq slipped 0.6%, while Dow Jones recorded its 10th straight week of gains, the longest in six years, hinting that the tech rally could be rotating toward other and more cyclical parts of the economy as well.   This week, the earnings season continues in full swing. 150 S&P500 companies are due to announce their second quarter earnings throughout this week. Among them we have Microsoft, which is pretty much the main responsible of this year's tech rally thanks to its ChatGPT, Meta, Alphabet, Visa, GM, Ford, Intel, Coca-Cola and some energy giants including Exxon Mobil and Chevron.   On the economic calendar, we have a busy agenda this week as well. Today, we will be watching a series of flash PMI figures to get a sense of how economies around the world felt so far in July, then important central bank meetings will hit the fan from tomorrow. The early data shows that both manufacturing and services in Australia remained in the contraction zone, as Japan's manufacturing PMI dropped to a 4-month low in July. German figures could also disappoint those watching the EZ numbers.   On the central banks front, the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ) will meet this week, and the first two are expected to announce 25bp hike each to further tighten monetary conditions on both sides of the Atlantic.     Zooming into the Fed, activity on Fed funds futures gives almost 100% chance for this week's 25bp hike. But many think that this week's rate hike could be the last of this tightening cycle, as inflation is cooling. But the resilience of the US labour market, and household consumption will likely keep the Fed cautiously hawkish, and not announce the end of the tightening cycle this Wednesday. There is, on the contrary, a greater chance that we will hear Fed Chair Jerome Powell rectify the market expectations and talk about another rate hike in September or in November. Therefore, the risks tied to this week's FOMC meeting are tilted to the hawkish side, and we have more chance of hearing a hawkish surprise rather than a dovish one. Regarding the market reaction, as this week's Fed meetings falls in the middle of a jungle of earnings, stock investors will have a lot to price on their plate, so a hawkish statement from the Fed may not directly impact stock prices if earnings are good enough. Bond markets, however, will clearly be more vulnerable to another delay of the end of the tightening cycle. The US 2-year yield consolidates near the 4.85% level this morning, and risks are tilted to the upside. For the dollar, there is room for further recovery as the bearish dollar bets stand at the highest levels on record and a sufficiently hawkish Fed announcement could lead to correction and repositioning.  Elsewhere, another 25bp hike from the ECB is also seen as a done deal by most investors. What investors want to know is what will happen beyond this week's meeting. So far, at least 2 more 25bp hikes were seen as almost certain by investors. Then last week, some ECB officials cast doubt on that expectation. Now, a September rate hike in the EZ is all but certain. The EURUSD remains under selling pressure near the 1.1120 this morning, the inconclusive Spanish election is adding an extra pressure to the downside.   Finally, the BoJ is expected to do nothing, again, this week. Japanese policymakers will likely keep the policy rate steady in the negative territory and the YCC policy unchanged. The recent U-turn in BoJ expectations, and the broad-based rebound in the US dollar pushed the USDJPY above the 140 again last Friday, and there is nothing to prevent the pair from re-testing the 145 resistance if the Fed is sufficiently hawkish and the BoJ is sufficiently dovish.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
China Continues to Increase Gold Reserves, While Base Metals Face Mixed Fortunes

US Fed Set to Resume Rate Hikes Amidst Mixed Economic Data: A Look at Key Indicators and Earnings Ahead

Ed Moya Ed Moya 24.07.2023 10:57
US The Fed is expected to resume raising rates at the July 26th FOMC meeting.  Fed funds futures see a 96% chance that the central bank will deliver a quarter-point rate rise, bringin the  target range to between 5.25% and 5.50%, almost a 22-year high. The Fed delivered 10 straight rate increases and then paused at the June FOMC meeting.  The Fed is going to raise rates on Wednesday and seems poised to be noncommittal with what they will do in September.  The economic data has been mixed (strong labor data/cooling pricing pressures) and that should support Powell’s case that they still could deliver a soft landing, a slowdown that avoids a recession.  This seems like it will be the last rate hike in the Fed’s tightening cycle, but we will have two more inflation reports before the Fed will need to commit that more rate hikes are no longer necessary. The Fed will steal the spotlight but there are several other important economic indicators and earnings that could move markets.  Monday’s flash PMI report should show both the manufacturing and service sectors continue to soften, with services still remaining in expansion territory. Tuesday’s Conference Board’s consumer confidence report could fuel expectations of a soft landing. Thursday’s first look at Q2 GDP is expected to show growth cooled from 2.0% to 1.8% (0.9%-2.1% consensus range) as consumer spending moderated.  Friday contains the release of personal income and spending data alongside the Fed’s preferred inflation and wage gauges. The Q2 Employment Cost Index (ECI) is expected to dip from 1.2% to 1.1%. The personal consumption expenditures price index is expected to cool both on a monthly and annual basis (M/M: 0.2%e v 0.3% prior;Y/Y: 4.2%e v 4.6% prior). Earnings will be massive this week as we get updates from 3M, AbbVie, Alphabet, Airbus, AstraZeneca, AT&T, Barclays, BASF, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Chevron, Chipotle Mexican Grill, Comcast, Exxon, Ford Motor, General Electric, General Motors, GSK, Hermes International, Honeywell International, Intel, Mastercard, McDonald’s, Meta Platforms, Microsoft, Nestle, PG&E, Procter & Gamble, Raytheon Technologies, Samsung Electronics, STMicroelectronics, Texas Instruments, Thermo Fisher Scientific, UniCredit, Unilever, Union Pacific, Verizon Communications, Visa, and Volkswagen
Assessing the Future of Aluminium: Key Areas to Watch

Asian Markets Await Detailed Plans After Politburo Pledges Support for China's Economy

ING Economics ING Economics 25.07.2023 08:17
Asia Morning Bites Politburo pledges support for China's economy - we await detailed plans.   Global Macro and Markets Global markets:  US equity markets made small gains yesterday, though the price action was far from conclusive. The S&P settled 0.4% higher than the previous day while the NASDAQ rose just 0.19%. Chinese stocks fell. The Hang Seng was down 2.13% and the CSI 300 fell 0.44%. That might change today after a Chinese Politburo meeting yesterday vowed to provide more aid for the property sector as well as boost consumption and tackle local government debt issues. Equity futures are positive, but we will reserve judgement until we hear some details. We have had plenty of vague promises already, which don’t amount to a great deal so far. US Treasury yields seem to have decided that this week’s FOMC meeting will be hawkish, and 2Y yields jumped up 8.2bp to 4.919% yesterday. The yield on 10Y bonds rose just 3.8bp to 3.872%. EURUSD fell again yesterday, dropping to 1.1063. The AUD was flat at 0.6734, Cable dipped to 1.2816, and the JPY remained stable at 141.59. Asian FX didn’t move much yesterday. The TWD fell 0.39% after industrial production fell slightly more than expected. At the other end of the spectrum, the KRW made gains of 0.28%. The CNY was unchanged. G-7 macro:  PMI data yesterday was weaker across much of the Eurozone, and the aggregate composite PMI dropped a full point to 48.9, with very weak manufacturing (42.7 from 43.4) and a slowdown in service sector growth (51.5 from 53.7). The equivalent US series showed a smaller manufacturing contraction (49.0) but also showed service sector growth slowing (52.4 from 54.4). Today, Germany’s Ifo survey will add more detail on the German situation. The US releases house price data (S&P CoreLogic numbers as well as FHFA data). And the US Conference Board releases its July confidence data. South Korea: Korea’s real GDP rose 0.6% QoQ sa in 2Q23 (vs 0.3% in 1Q23, 0.5% market consensus). 2QGDP was up from the previous quarter and slightly higher than the market consensus, but the details were quite disappointing. Net exports contributed to the growth (+1.3pt) but it was mainly because the contraction of imports (-4.2%) was deeper than that of exports (-1.8%). Looking ahead, we think that GDP in 2H23 will slow down again, as forward-looking data for domestic demand indicates a further deterioration. Please see our 2H23 outlook details here.  We think today’s data should be a concern for the Bank of Korea as exports remain sluggish amid expectations of a further worsening of domestic growth. Also, this year’s fiscal support is likely to remain weak, considering the tax revenue deficit and normalization of covid related fiscal spending. Thus, the BoK’s policy focus will gradually shift from inflation to growth over the next few months as we expect inflation to stay in the 2% range most of the time in 2H23. Indonesia:  Bank Indonesia meets today to decide on policy.  BI is widely expected to keep rates untouched at 5.75% to help shore up the IDR and ensure FX stability.  Previous dovish comments from BI Governor Warjiyo suggesting rate cuts could be considered have been set aside for now and we could see an extended pause from BI with any rate cut only considered later on.     What to look out for: Central bank decisions Bank Indonesia policy meeting (25 July) Hong Kong trade (25 July) US Conference board consumer confidence (25 July) Australia CPI (26 July) Singapore industrial production (26 July) US new home sales (26 July) US FOMC decision (27 July) China industrial profits (27 July) ECB policy decision (27 July) US personal consumption, durable goods orders initial jobless claims (27 July) South Korea industrial production (28 July) Japan Tokyo CPI and BoJ policy (28 July) Australia PPI (28 July) US personal spending, core PCE, University of Michigan sentiment (28 July)
Hungary's Economic Outlook: Anticipating Positive Second Quarter GDP Growth

Asia Morning Bites: Politburo's Economic Support and Global Market Analysis

ING Economics ING Economics 25.07.2023 08:20
Korea: 2Q23 GDP improved but with disappointing details South Korea’s real GDP accelerated to 0.6% QoQ (sa) in 2Q23 from 0.3% in 1Q23, which was slightly higher than the market consensus of 0.5%. However, the details were quite disappointing with exports, consumption, and investment all shrinking. We expect growth to slow in 2H23.   Net exports contributed positively to overall growth The upside surprise mainly came from a positive contribution from net exports (+1.3pt). However, we do not interpret this in a positive light, because it was not driven by an improvement in exports, but rather by a contraction of imports (-4.2%), which was deeper than that of exports (-1.8%). By major item, exports of vehicles and semiconductors rose as global supply conditions improved and global demand remained solid. But, exports of petroleum/chemicals and shipping services declined further with unfavourable price effects weighing. Falling commodity prices have had a positive impact on Korea's overall terms of trade, having a greater impact on imports, but "processed" exports such as petroleum/chemicals and shipping took more of a hit.   Net exports led growth but due to sharper decline of imports than exports   Meanwhile, domestic demand dragged down overall growth by -0.6pt As monthly activity and sentiment data already suggested, private consumption was down -0.1% with declining service consumption, while investment – both construction (-0.3%) and facilities (-0.2%) – contracted. Also, government expenditure dropped quite sharply (-1.9%) as spending on social security declined. We believe that the reopening boost effects on consumption have finally faded away, while tight credit conditions have also dampened investment. R&D investment (0.4%) was an exception, rising for the second consecutive quarter on the back of continued investment in new technologies.   GDP in 2H23 will likely decelerate again Forward-looking data on domestic demand indicates a further deterioration in domestic growth. Construction orders, permits, and starts have been declining for several months, while capital goods imports and machinery orders have also trended down recently. With continued market noise surrounding project financing and growing uncertainty over global demand conditions, business sentiment for new investment is very weak. This year’s fiscal spending will also not support the economy meaningfully, considering the tax revenue deficit and normalization of covid related spending. However, we think trade will take the lead in a modest recovery. We believe that exports will rebound by the end of the third quarter with support from improved vehicle demand, semiconductors, and machinery (despite the global headwinds). Please see our 2H23 outlook details here.   Korea's GDP is expected to slow down in 2H23     Although 2Q23 GDP was higher than expected, the details suggest a weaker-than-expected recovery in 2H23, together with weak forward-looking data, thus we keep our current annual GDP forecast for 2023 unchanged at 0.9% YoY.   The Bank of Korea watch We think today’s data should be a concern for the Bank of Korea (BoK). The BoK forecast growth to accelerate in 2H23 on the back of better exports. We agree that export conditions will improve, but we don't think they will be strong enough to dominate weak domestic growth, and today’s data also suggests that growth will slow down in the near future. Thus, the BoK’s policy focus will probably gradually shift from inflation to growth in 4Q23. In 3Q23, we believe that the BoK will continue to keep its hawkish stance while keeping a close eye on other major central banks’ monetary policies. Also, inflation may fluctuate a bit over the Summer season due to soaring fresh food prices amid continued severe weather conditions. However, if inflation stays in the 2% range for most of 2H23, then the BoK’s tone should shift to neutral and eventually revert to an easing cycle.
The Euro Dips as German Business Confidence Weakens Amid Soft Economic Data

FX Daily: European Pessimism and Chinese Optimism Influence Currency Pairs

ING Economics ING Economics 25.07.2023 09:03
FX Daily: European pessimism, Chinese optimism In quiet markets ahead of G3 central bank meetings later this week, currency pairs are being driven by the soft set of eurozone July PMIs and also the prospect of some renewed Chinese stimulus after China's Politburo promised 'counter-cyclical' measures. These look like short-term trends. We would wait for the policy meetings to set the true FX tone.   USD: China stimulus – here we go again In quiet markets ahead of G3 central bank meetings, the FX market's focus has once again fallen on China. Having broadly disappointed investor expectations this year, China's economy is seen as enjoying a lift after China's Politburo yesterday promised 'counter-cyclical' measures. These follow a drip feed of support measures over recent weeks, such as the easing of restrictions in the mortgage sector, the encouragement to buy cars and electronics, and perhaps some support to local governments saddled with debt. None of these seem to be a game-changer so far, but the market optimists are hoping that this new directive from the Politburo will be turned into powerful stimulus at the State Council level.  Tellingly, USD/CNH did not move much when these measures were announced during the European session yesterday, but Asian investors are running with the story and driving the renminbi some 0.6% higher this European morning. Chinese equities are having a decent run too. These short-term trends may well fizzle out – we've been here before with prospects of China stimulus – but they could provide some mild support to emerging market and commodity currencies through the session. The reason why we warn against pursuing a full 'risk-on' rally in Rest of World (RoW) currencies is that the European economy looks weak and tomorrow's FOMC meeting will probably see the Fed's foot remaining firmly on the monetary brakes. Additionally, there was an overnight Wall Street Journal article by Fed watcher Nick Timiraos entitled: 'Why the Fed isn't Ready to Declare Victory on Inflation' – perhaps a nod to a still hawkish FOMC statement tomorrow.  Today's US data releases are second tier, but the consensus is expecting a decent tick-up in the July consumer confidence reading. As in the UK, there is a growing sense that consumers have so far been able to handle the pain of higher rates, diluting the case for any early easing cycles.   DXY can trade a tight 101.00-101.50 range ahead of tomorrow's Fed meeting.
Riksbank's Role in Shaping the Swedish Krona's Future Amid Economic Challenges

Rates Spark: Fed Set to Keep Pressure on Amid Consumers' Confidence and Upward Yield Trend

ING Economics ING Economics 26.07.2023 08:30
Rates Spark: The Fed set to keep the pressure on A key driver of market rates of late has not been the projection for the July FOMC meeting, but rather the projection for where the Fed gets to at the end of the rate cutting cycle to come. The market has been busy pricing out future rate cuts as a reflection of residual macro robustness. That's helping to elevate long dated rates, and we expect that to continue.   Consumers show confidence and yields head higher In the US, a lot of the macro oomph that was seen through much of the June data is continuing to show up in the July readings. A case in point was yesterday's consumer confidence number. It had been slipping through to May, and looked at that point that it could easily lurch lower. But from around 102 (vs a reference of 100), it popped up to 110 for June, and then to 117 for July. That's now running at 17% above average, which is remarkable for an economy that is being (apparently) battered by higher interest rates, high inflation and a weak international backdrop.   These types of data keep the pressure on the Federal Reserve to maintain a hawkish tilt to policy. Yes, the manufacturing PMI and other survey evidence points to a recessionary tendency in the US ahead. But at the same time such warning flags have been flying for over a year now, and here we are with the consumer seemingly getting more optimistic. We doubt very much that this lasts, as the headwinds of tighter financial conditions should ultimately bite harder than currently being seen. Similarly, the tightening in financial conditions seen in Europe is having a significant dampening effect on the takedown of credit, as the latest ECB survey shows.   That said, we continue to identify net upward pressure on market rates in the immediate few weeks ahead. We note that the Jan 2025 fed funds implied rate is only just under 4%. This was closer to 3% when Silicon Valley Bank went down. That paved a route, at the time, for the 10yr Treasury yield to trend in the same direction – towards 3%. But not, that route is being obstructed by a markedly lower rate cut discount for the Federal Reserve through 2024 and into 2025. For that reason, and despite the macro headwinds ahead, we continue to remain positive for the US 10yr Treasury yield to head back up to a 4% handle.   Auctions have been heavy as interest has been drying up in Treasuries Yesterday's 5yr auction in the US tailed, meaning that the yield at auction was higher than the market yield at the point of issue. And this was at a point where market yields were on the rise. Typically tailed auctions happen when yields are falling, or when there is underwhelming demand. The latter was applicable to yesterday's auction. The bond was well covered and had a reasonable indirect bid (often representing players like central banks). But it just was not that firm in terms of overall tone. The 2yr auction on the previous day was also well covered, but it took the highest yield since 2007 at auction to get the paper away. Flows in previous week had been high on long duration and quite impressive. But flows in the past week or two have been less impressive. If this continues, market yields will likely continue their drift higher. We have a 7yr auction today. The good thing is its not in as rich a spot of the curve as the 5yr is. But it's still below the 2yr yield, and requires a bit of an appetite for duration.   Today's events and market views The big event today is the Federal Open Market Committee outcome, from which a 25bp hike looks to be virtually guaranteed (as a zero or 50bp hike is quite unlikely). A 25bp hike is 97% priced in, so that is what the Federal Reserve is likely to deliver. The question is what Chair Powell will say, and ahead of that, the tone from the FOMC statement. In all probability that tone and Chair Powell's phraseology will be hawkish. He has little to gain from showing even a smidgen of reduced hawkishness. The Fed will feel they need to keep the pressure on, and especially during a period that has been as risk-on as we've seen of late. In the eurozone we have to wait till Thursday for the European Central Bank decision (should be a 25bp hike), while no change is expected from the Bank of Japan at this juncture. More on that tomorrow.
Hungary's Economic Outlook: Anticipating Positive Second Quarter GDP Growth

The Commodities Feed: All Eyes on the Fed for Energy Market Direction

ING Economics ING Economics 26.07.2023 08:32
The Commodities Feed: All eyes on the Fed The Federal Reserve is expected to raise rates by 25bp today, and markets will be on the lookout for any signals suggesting this could be the central bank's final hike or whether there could be more still to come.   Energy – Fed key for short term price direction Sentiment in the oil market has improved with ICE Brent settling a little more than 1% higher yesterday. The market is more optimistic following China’s Politburo meeting,  where there were promises for more support measures for the domestic economy. However, up until now, there haven't appeared to be any actual policies that have been announced. Overnight, the API also released US inventory numbers which showed that US crude oil inventories increased by 1.32MMbbls, whilst crude stocks at Cushing fell by 2.34MMbbls. On the product side, gasoline inventories fell by 1.04MMbbls, whilst distillate stocks increased by 1.61MMbbls. The report was a bit of a mixed bag, with little in the way of a strong takeaway from the numbers. The more widely followed EIA report will be out later today. The market will be watching closely the outcome of the FOMC meeting later today. Expectations are that the Federal Reserve will hike rates by 25bp, which could very well be the last hike in this cycle. However, any signal from the Fed that they have more to do will likely put some downward pressure on risk assets, including oil. The Saudis will be happy to see Brent trading back above US$80/bbl with their additional voluntary cut of 1MMbbls/d starting to have its desired effect. However, the broader OPEC+ cuts are leading to some distortions within the market (tightness in medium sour crudes) and this is evident in the unusual discount that Brent continues to trade at relative to Dubai. However, the decision that Saudi Arabia will need to make in the coming weeks is whether they will roll this additional cut into September or start to unwind it. The recent price strength might give the Saudis the confidence to start unwinding these cuts, but expectations will have to be managed and they will have to be careful how they go about it – too aggressively and it could put renewed pressure back on the market.
Portugal's Growing Reliance on Retail Debt as a Funding Source and Upcoming Market Events"

China's Politburo Meeting Sparks Positive Sentiment in Markets and Affects Yuan's Performance

Kelvin Wong Kelvin Wong 28.07.2023 08:48
The press release of the recently concluded China’s Politburo meeting consisted of a more expansionary tone such as the implementation of “counter-cyclical” measures. A dovish tilt is now being priced in by interest rates futures after yesterday’s FOMC meeting. Based on the CME FedWatch tool, the odds have increased to bring forward the expected first Fed Funds rate cut to March 2024 from May/June 2024. This latest set of dovish expectations on the future path of the Fed’s monetary policy has negated the prior steep depreciation of the yuan against the US dollar. Short-term positive animal spirits have been revived in China equities, and its proxies (the Hang Seng Indices) ex-post Politburo & FOMC.   The market’s reaction so far has been positive in terms of risk-on behaviour toward China equities and their proxies (Hang Seng Index, Hang Seng TECH Index & Hang Seng China Enterprises Index) ex-post press release on the outcome of the July’s Politburo meeting that concluded on Monday, 24 July after the close of the Asian session as well as yesterday’s ex-post US central bank, Federal Reserve’s FOMC meeting on its interest rate policy. The Politburo is a top decision-making body led by President Xi that set key economic policy agenda for China, and Monday’s meeting set the agenda for the coming months to implement expansionary policies to address the current weak internal demand environment. It vowed to implement a counter-cyclical policy to boost consumption, more support for the property market, and ease local government debt. The share prices of China ADR listed in the US stock exchanges have a remarkable intraday performance on Monday, 24 July US session. China’s Big Tech such as Alibaba (BABA), and Baidu (BIDU) ended the US session with gains of around 5%. A basket of China stocks listed as exchange-traded funds in the US soared as well, the KranShares CSI China Internet ETF (KWEB), and Invesco Golden Dragon China ETF (PGJ) rallied by +4.5% and +4% respectively, notched their best single day return since May 2023. Even though the press release lacks the details of the implementation of upcoming fiscal stimulus measures (again), and refrains from enacting major stimulus measures that increase the risk of debt overhang in the property sector, it is the choice of words, and tonality used that sparked the risk-on behaviour. Firstly, President Xi’s key phrase on China’s housing market, houses are for living, not for speculation” has been omitted for the first since mid-2019” which suggests that more leeway to negate the ongoing weakness in houses prices such as easing home buying restrictions in major cities such as Shanghai and Beijing. Secondly, the term “counter-cyclical” measures are being emphasized which suggests that boosting domestic demand takes priority over infrastructure spending. Given the heightened risk of a deflationary spiral taking shape in China and a “liquidity trap” situation where more accommodative monetary policy may lead to lesser marginal economic growth, the key solution to break the adverse deflationary spiral and its liquidity trap aftereffects is to shore up consumer confidence via expanding domestic demand actively.     Outperformance of China ADR exchange-traded funds supported by a stronger yuan     Fig 1: Relative momentum of China ADRs ETFs vs. MSCI All Country World ETF of 26 Jul 2023 (Source: TradingView, click to enlarge chart) Overall, short-term sentiment seems to have turned bullish for China equities where China ADR ETFs have outperformed major US benchmark US stock indices on a month-to-date horizon as of yesterday, 26 July 2023; the KranShares CSI China Internet ETF (KWEB), and Invesco Golden Dragon China ETF (PGJ) gained by +12% and +13.14% respectively over S&P 500 (+2.61%), and MSCI All Country World Index ETF (+2.97%). Also, yesterday’s Fed Chair Powell ex-post FOMC press conference indicated that the Fed will be data-dependent in deciding whether to pause or hike the Fed Funds rate at its next FOMC meeting on 20 September. This implies that the Fed is likely not in a mode of raising interest rates at every other meeting after yesterday’s expected 25 basis points hike to bring the Fed Funds rate to a 22-year high at 5.25% to 5.50%. Markets seem to be pricing in a more dovish tilt on the expected start of the first Fed Funds rate cut. Based on the CME FedWatch tool derived from the 30-day Fed Funds futures pricing data, the odds have increased for the first expected cut to occur on the 20 March 2024 FOMC meeting with a combined probability of 56.07%. Previously, before yesterday’s FOMC, higher odds for the expected first-rate cut were clustered between the 1 May and 19 June 2024 FOMC meetings. The current dovish tilt on the expected future trajectory of the Fed Funds rate has negated further upside yield premium of the US’s 2-year Treasury note over China’s 2-year sovereign bond. Since Monday, 24 Jul, the yield premium has narrowed by 11 bps to 2.75% from 2.86% as of today at this time of the writing which in turn supported the yuan from a further deprecation against the US dollar. USD/CNH (offshore yuan) remained below its 20-day moving average     Fig 2: USD/CNH medium-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart) The yuan has started to strengthen against the US dollar in the short-term horizon since last Thursday, 20 July which in turn created a positive feedback loop back that reinforces the bullish sentiment towards China equities. The USD/CNH (offshore yuan) has failed to break above its 20-day moving average, acting as a key intermediate resistance at 7.2160 with a bearish momentum reading seen on its daily RSI oscillator. Hence, further potential weakness in the USD/CNH is likely to be able to kickstart short-term uptrend phases for China equities and its proxies.
Bank of England: Falling Corporate Price Expectations May Signal Peak in Rate Hike Cycle

Diverging G3 Trends Dominate: USD Steady on US Data, JPY Stronger as BoJ Softens YCC, EUR Weaker on Doubtful September Rate Hike

ING Economics ING Economics 28.07.2023 10:40
FX Daily: Diverging G3 trends dominate Closing the week, we have the Japanese yen a little stronger as the BoJ softens up YCC control, the dollar is steady-to-stronger on good US activity data, and the euro is weaker as the ECB throws a September rate hike into doubt. After the BoJ press conference, today's highlight will be the US Employment Cost Index data. A soft number could hit the dollar.   USD: The ECI will be in focus today The combination of some stronger US activity data and some independent euro weakness on the back of yesterday's ECB meeting has seen the trade-weighted DXY dollar push a little higher. DXY would be even higher were it not for the lower USD/JPY we have seen today on the back of the Bank of Japan's tweak to its Yield Curve Control (YCC) target.  Regarding the BoJ, we think the market is right to have taken USD/JPY a little lower after this surprise adjustment to how it manages its 10-year Japanese government bond (JGB) yield target. What has probably prevented USD/JPY from dropping harder are the new BoJ core CPI forecasts, where FY24 and FY25 CPI are still only forecast at 1.9% (April forecast 2.0%) and 1.6% (1.6%) respectively. This hardly provides a firm foundation to conclude that CPI will now sustainably run near 2.0%. Instead, the tweak to the YCC programme may reflect BoJ Governor Kazuo Ueda's preference to take baby steps away from the heavy control of the JGB market - i.e. maybe he's more of a free marketeer.  However, we do think the drop in USD/JPY might get some support from the dollar side today. Undoubtedly, US activity data has been holding up well, and based purely on the activity data alone one would argue that the Fed had the strongest case for another rate hike, yet Fed Chair Jerome Powell acknowledges that US monetary policy is already in restrictive territory and the focus is on disinflation.  On Wednesday, Powell said there would be important data prints before the September FOMC meeting – two CPI prints, two jobs reports and the Employment Cost Index (ECI). Well the second-quarter ECI figure is released today and is expected at 1.1% – a drop from 1.2% in the first quarter and a peak of 1.4% in the first quarter of 2022. My colleague James Knightley thinks the risks are skewed to a sub-consensus 1.0% reading today given the softer average hourly earnings and survey evidence both from the Fed's Beige Book as well as the NFIB data that the US labour market is coming better into balance. A soft ECI number can wipe out the final 8bp that is priced for the US tightening cycle this year and will probably knock the dollar 0.5-1.0% lower. This would be a good story for risk assets, where both the Fed and seemingly the ECB would be closer to ending tightening cycles. If we are right with our call on the ECI, DXY could head back to yesterday's low near 100.50.
Metals Exchange Inventories in China Decline: Copper, Aluminium, and Nickel Stocks Fall

Turbulent Times Ahead: US Inflation on the Rise Ahead of September FOMC Meeting

ING Economics ING Economics 11.09.2023 10:35
Next week in the US, the last major reports will be released ahead of the September FOMC meeting. The general theme is likely to be higher inflation than seen as of late. All eyes will also be on UK wage data, which will be key for locking in another rate hike from the Bank of England. In Poland, we expect to see CPI to drop below 9%   US: The general theme likely to be higher inflation It is a very big week for US data as the last major reports ahead of the Federal Reserve’s September FOMC meeting come in. Consumer and producer price inflation, retail sales and industrial production are all due, with the general theme likely to be higher inflation than seen of late versus weaker activity relative to recent trends. Nonetheless, Federal Reserve officials are seemingly of the mindset that they will likely pause interest rate hikes again and re-evaluate in November with just 2bp of policy tightening priced for later this month. For inflation, we look for fairly big jumps in August’s month-on-month headline readings with upside risk relative to consensus predictions. Higher gasoline prices will be the main upside driver, but we also see the threat of a rebound in airfares and medical care costs, plus higher insurance prices. These factors are likely to also contribute to core CPI coming in at 0.3% MoM rather than the 0.2% figures we have seen in the previous two months. Slowing housing rents will be evident, but it may not be enough to offset as much as the market expects. Nonetheless, the year-on-year rate of core inflation will slow to perhaps 4.4%. We are hopeful we could get down to 4% YoY in the September report and not too far away from 3.5% in October. We would characterise these relatively firm MoM inflation prints as a temporary blip in what is likely to be an intensifying disinflationary trend. Indeed, it was interesting to see the Fed’s Beige Book characterise recent consumer spending strength as being led by tourism expenditure, which had been "surging". But the general sense was that this would be "the last stage of pent-up demand for leisure travel from the pandemic era". Moreover, other spending was softer, "especially on non-essential items". This may well show up in the retail sales report. We already know that auto volume sales fell quite heftily too, but remember this is a value figure and that higher prices, particularly for gasoline, will help keep overall retail sales just about in positive territory. But with savings being rapidly exhausted and credit card delinquencies on the rise, there are concerns that weaker numbers are coming – particularly with student loan repayments restarting, which will add to financial stresses on the household sector. Rounding out the reports, we expect industrial production to be much softer than the 1% jump seen last month. Manufacturing surveys continue to point to contraction, and weakness in the component could offset a bit of firmness in utilities and mining/drilling activities.      
Sticky US Inflation Expected to Maintain Dollar Strength Ahead of FOMC Meeting

Sticky US Inflation Expected to Maintain Dollar Strength Ahead of FOMC Meeting

ING Economics ING Economics 13.09.2023 08:52
FX Daily: Sticky US inflation to keep dollar bid Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative.   USD: CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.
US Inflation Report Sets the Tone for Upcoming FOMC Meeting

US Inflation Report Sets the Tone for Upcoming FOMC Meeting

ING Economics ING Economics 14.09.2023 08:39
Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative USD CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold  out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.   Chris Turner.
Senior Fed Officials Signal Rate Hike Pause as Key Economic Indicators Awaited

Senior Fed Officials Signal Rate Hike Pause as Key Economic Indicators Awaited

FXMAG Team FXMAG Team 14.09.2023 08:46
This week saw a flurry of remarks from senior Fed officials, including Fed Governor Christopher Waller on 5 September and NY Fed President John Williams on the 7th. Waller said recent economic news will allow the Fed to "proceed carefully" and that "there's nothing that is saying we need to do anything imminent anytime soon," suggesting the FOMC may skip a rate hike in September. Senior Fed officials signal rate hike pause in September However, he was less definitive about the need for further hikes, saying "we have to wait and see" if current trends such as slowing inflation continue. Governor Williams also hinted at a pause, saying that monetary policy was having the expected effects, but that it was "an open question" as to whether further rate hikes were needed. We see these remarks essentially as advance notice ahead of the blackout period before the FOMC which starts from this weekend. This has worked to pause the rise in UST yields and dollar strength ahead of the weekend. However, the CPI for August, retail sales, and other economic indicators will be announced next week, and these will be key for the Fed's monetary policy decisions due to its data dependent stance. We do not expect such data to change the trend of the foreign exchange market unless the results differ significantly from market forecasts given the FOMC meeting is scheduled for the following week, and the focus of the FOMC has shifted to whether the Fed will raise rates and the forecast of the rate cuts in 2024 which is expected to be shown in the dot plot. Naturally, now that expectations of prolonged monetary tightening are emerging due to the improvement in the US economy and the recent rise in oil prices, if economic indicators exceed expectations, the dollar is likely to strengthen and this would overshadow risk to the downside.
USD/JPY Climbs to Multi-Year High as BOJ Stands Firm on Policy

A Week of Central Bank Meetings and Currency Moves: FX Daily Insights

ING Economics ING Economics 18.09.2023 09:33
FX Daily: Up and down - a big week for policy rates and currencies There are a plethora of central bank policy rate meetings this week across the developed and emerging market economies. Rates could be raised as much as 500bp in Turkey, cut 50bp in Brazil, raised 25bp in four G10 economies, and left unchanged in the US. Our baseline assumes that the dollar holds onto its strength through the week.   USD: Dollar looks likely to hold gains It is a big week for policy rate meetings, with six of the G10 central banks in action. Setting the tone for global markets will be Wednesday's FOMC meeting. Here, our team sees a resolutely hawkish Federal Reserve, where despite unchanged rates the Fed, through its statement and dot plots, will hold out the possibility of one further hike to the 5.50-5.75% range later this year.  Even though we should see 25bp rate hikes across four European central banks through the week - see below - we doubt the dollar has to lose much ground - if any. The prospect of a prolonged period of unchanged rates is depressing US interest rates and cross-market volatility and leaving carry trade strategies very much en vogue. This - plus Brent trading close to $95/bbl - is keeping the likes of USD/JPY bid and few expect any substantial move in Bank of Japan policy this Friday. If there is to be a further move from Japan - it will likely come in late October when new economic forecasts are released. It is also a big week for policy rate meetings in emerging markets. In EMEA, the highlight will be whether the Central Bank of Turkey delivers another large hike on Thursday (+500bp expected) in a continuing return to policy orthodoxy, while Brazil should cut rates another 50bp in line with recent guidance. Given the strong interest in the carry trade this year, both the Turkish lira and Brazilian real could stay supported despite these diverging rate stories.  Elsewhere, Asia sees several rate meetings this week, but change is expected in neither China's Loan Prime Rates nor policy rates elsewhere in the region. DXY remains relatively strong and there does not seem a case for a decisive turn lower this week - unless we are all surprised by the Fed. There is a strong band of resistance in the 105.40/80 area, which may well cap this week. But equally, DXY should continue to find decent demand below 105.00. 
US Housing Market Faces Challenges Due to Soaring Mortgage Rates

US Housing Market Faces Challenges Due to Soaring Mortgage Rates

ING Economics ING Economics 25.09.2023 11:04
US housing feels the squeeze from high mortgage rates A tripling of US mortgage rates constrained both the demand and supply of housing, leaving existing home sales at post-GFC lows. Mortgage rates will rise further in the wake of the market's reaction to yesterday's Fed forecasts, further constraining activity.   Market acknowledges the risk of a final hike, but it will depend on the data The Fed's messaging of higher for longer interest rates has been taken on board by financial markets, with the dollar strengthening and the yield curve shifting higher in the wake of yesterday's decision. Nonetheless, the market remains somewhat sceptical on the prospect of the final 25bp interest rate rise that the Fed's forecasts signalled for this year, with the pricing for November's FOMC meeting only being 8bp with 13bp priced by the time of the December meeting. The jobs market remains tight, as highlighted by low jobless claims numbers today, but we continue to believe that core inflation pressures will slow meaningfully, the economic outlook will soften, and the Fed won't end up carrying through. The jobs market is always the last thing to turn lower in a downturn and there are areas of more obvious weakness.  For example, US existing home sales fell 0.7% MoM in August to a level of 4.04mn rather than rising the 0.7% MoM as the market expected. This is due not only to weakness in demand but also a complete collapse in properties available for purchase. The affordability issue is front and centre here, with prices having risen nearly 50% nationally during the pandemic, but demand has obviously been crushed by the fact that mortgage rates have tripled since the Federal Reserve started hiking interest rates. But this surge in borrowing costs is constraining the supply of homes for sale as well - people who are locked in at 2.5-3.5% mortgage rates cannot afford to give them up. They can't take the mortgage with them when they move home, so even if you downsize to a smaller, cheaper property, you are, in all likelihood, going to end up paying a higher monthly dollar mortgage payment.   We're in a crazy-sounding position Consequently, we are in a crazy-sounding position whereby the number of housing transactions is on a par with the lows seen during the global financial crisis, yet home prices are rising. This should be a boon for home builders, but note the big drop in sentiment and housing starts seen earlier in the week. The drop-off in prospective buyer traffic is making builders cautious. Mortgage rates at 7%+ will obviously do that over time, but it may be another sign of the household sector starting to pull back at the margin now that the Fed believes pandemic-era savings are close to being exhausted.   Existing homes sales transactions and home prices   Leading index still indicates recession can't be ruled out Meanwhile, the US leading economic indicator, which combines a range of other numbers, including jobless claims, orders, average work week, the yield curve and credit conditions, posted its 17th straight monthly decline. As the chart below shows, the index at these sorts of levels has been a clear recession indicator in the past, but for now, GDP growth is strong.   Leading index versus GDP (YoY%)   Our view remains that this strength in activity has been caused primarily by households running down pandemic-era accrued savings aggressively and borrowing more on credit cards. But with savings obviously being finite - note the Fed's Beige Book citing evidence of the "exhaustion" of these savings - and consumer credit harder to come by and certainly less affordable than it was, the cashflow required to finance ongoing increases in spending will have to increasingly come from rising real income growth. Rising gasoline prices will erode spending power while student loan repayments, strikes and the prospect of a government shutdown will add to the financial stresses on millions of households, so we will need to see substantial wage increases for everyone - not just auto workers - to keep this growth engine firing.  Given this situation, we not only think the Fed will leave rates at their current levels, we also see the potential for more rate cuts next year than the 50bp currently being signalled by the Federal Reserve.
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. 
National Bank of Romania Maintains Rates, Eyes Inflation Outlook

US 3Q GDP Surpasses Expectations, Yet Supply Concerns Cast Shadows on USTs

ING Economics ING Economics 27.10.2023 14:58
US 3Q GDP beats, but supply remains a key driver for the USTs Just ahead of the ECB, the US 3Q GDP data showed the economy expanded by 4.9%, beating expectations. Markets, though, know that this is hardly sustainable and had more of an eye for the cooler-than-expected quarterly core PCE figure coming in at 2.4% versus 2.5%. This means a downside to the consensus that currently sees a hotter September figure. In other data, we note that initial jobless claims were only a tad higher, but continuing claims have extended the past month’s steady move higher.  It was interesting to see a bull steepening of the US Treasury curve again. Since the Fed has started to indicate that long-end rates were doing part of the Fed’s work, we have seen more instances of bull steepening. But a bull flattening soon followed: A solid 7Y auction had triggered an outperformance of long-end bonds. This reaction serves to highlight the sensitivity to US supply concerns, seen as a key driver of rising term premium. The next key event here is the upcoming quarterly refunding.       Today's events and market view The ECB played out slightly more dovish than anticipated. In the coming days, ECB officials will add their personal flavours to the event as usual. But more importantly, next week’s data including the flash CPI for October as well as Q3 GDP growth, could help underpin the dovish tone early in the week.     However, in longer tenors, US rates should remain in the driving seat. And here there will be a lot to digest starting mid-week with the FOMC meeting, quarterly refunding announcement, ISMs and jobs data. As for today’s data, the focus is on US personal income and spending data and the PCE deflator, but much can already be backed out of yesterday’s GDP data.
Tesla's Disappointing Q4 Results Lead to Share Price Decline: Challenges in EV Market and Revenue Miss

Asia Morning Bites: BoJ Policy Speculation and Chinese PMI Data in Focus

ING Economics ING Economics 02.11.2023 11:49
Asia Morning Bites Following rising speculation, will the BoJ tweak policy today? Chinese PMI data also due. Global Macro and Markets Global markets:  US stocks bounced off recent lows on Monday. Both the NASDAQ and S&P 500 gained more than a per cent ahead of this week’s expected no-change  FOMC meeting. Equity futures suggest that today’s open may take back some of these gains. Chinese stocks also had a reasonable day. The CSI 300 rose 0.6%, but the Hang Seng was more or less unchanged on the day. US Treasury yields also rose on Monday. 2Y UST yields rose 5.2bp to 5.054%, while 10Y yields rose 6bp to 4.894%. There was no macro data of note for the US on Monday driving these moves, and this close to the FOMC meeting, no Fed speakers either due to the blackout period. Despite the rise in yields, the USD had a softer day. EURUSD rose to 1.0613 in spite of weak GDP and inflation figures (see below) and also the failure of the EU and Australia to agree on a free trade deal due to disagreements over agriculture access. The AUD rose to 0.6366, Cable rallied to 1.2165, and the JPY dropped back briefly through 149 on speculation of further tweaks to BoJ policy at today’s meeting (see below), though it is currently 149.14. Other Asian FX also rallied against the USD on Monday. The THB and KRW led gains. The CNY dropped to 7.311. G-7 macro:  German GDP was slightly less awful in 3Q23 than expected, but still fell 0.1%QoQ (see here for more by Carsten Brzeski). The flip side of this is that this economic weakness is weighing on inflation, which fell to 3.8% YoY in October, down more than expected from the September rate of 4.5%. Eurozone GDP and inflation are released today, so with the German figures already out, there is some chance of an undershoot to the respective consensus expectations of 0.0% QoQ and 3.0%YoY for these figures. House price data and the Conference Board’s consumer confidence survey are today’s US data offerings. None of these releases look likely to alter the expectation for a pause at the Fed’s 2 November meeting. China:  Official PMI data is due at 0930 (HKT/SGT) today. Both manufacturing and non-manufacturing surveys are expected to confirm the slight firming in activity suggested by other recent activity data. Japan:  The BoJ has its policy meeting today. Speculation has been growing over the last couple of days that they may take steps to relieve pressure on Japanese government bonds (JGBs) and the JPY. Yesterday, local news media Nikkei, reported that the BoJ may allow the upper limit for 10Y JGBs to rise above 1% and also make some adjustments to their bond purchase operations. The latest quarterly outlook report will also be closely watched. We think that the BoJ will revise up its FY24 inflation forecast to above 2%, but leave untouched the FY25 forecast number. That way, they can maintain that sustainable inflation is not yet reached or that they are not yet confident about reaching the sustainable inflation target, which will buy them some more time to keep their negative interest rate policy until next year. Still, if FY24 inflation is above 2% then the market’s expectations for a policy change in early 2024 will rise. Japan's September monthly activity data was a bit soft.  September industrial production (IP) rebounded less than expected (0.2% MoM sa vs -0.7% in August, 2.5% market consensus) while retail sales unexpectedly dropped -0.1% (vs revised 0.2% in August). As September IP and retail sales were softer than expected, we think 3Q23 GDP is likely to record a small contraction. However, labour market conditions remained tight and showed some improvement. The jobless rate edged down to 2.6% in September (vs 2.7% in August, 2.6% market consensus) and labour participation rose to 63.3% from the previous month’s 63.1%. Also, the job-to-applications ratio was unchanged at 1.29. South Korea:  Monthly activity data was solid as suggested by 3Q23 GDP (0.6% QoQ sa). All industry industrial production (IP) rose for a second month (1.1% MoM sa) in September with manufacturing (1.9% MoM sa), services (0.4%), construction (2.5%), and public administration (2.3%).  Among manufacturing industries, semiconductors (12.9%) and machinery (5.1%) were big gainers, offsetting a big drop in motor production (-7.5%). Solid demand for high-end chips, which are higher value-added and have higher prices than legacy chips, is the main reason for the rise in chip production. Meanwhile, production cuts in legacy chips continued as inventory levels came down, and we believe that this differentiated trend will continue for the time being. We think October exports will finally bounce back after twelve months of year-on-year declines on the back of a recovery in semiconductors. Other activity data also made gains. Retail sales (0.2%) rebounded marginally after having fallen for the previous two months. Equipment investment gained (8.7%) with increases in transportation (12.6%) such as aircraft, and special machinery (7.3%) such as semiconductor manufacturing machines. Construction also rose 2.5% despite the contraction in residential building construction as civil engineering rose solidly (20.0%). September monthly activity data showed some recovery in the domestic economy but forward-looking data such as machinery orders (-20.4% YoY) and construction orders (-44.1%) all fell, suggesting a cloudy outlook for the current quarter and we expect 4Q23 GDP to decelerate.   What to look out for: BoJ meeting and China PMI reports South Korea industrial production (31 October) BoJ meeting, Japan retail sales, industrial production and labour data (31 October) China PMI manufacturing and non-manufacturing (31 October) Taiwan GDP (31 October) Philippines bank lending (31 October) US Conference board confidence (31 October) Australia Judo PMI manufacturing (1 November) South Korea trade (1 November) Regional PMI manufacturing (1 November) Indonesia CPI inflation (1 November) US ISM manufacturing, ADP report, JOLTS report (1 November) FOMC decision (2 November) South Korea CPI inflation (2 November) Australia trade balance (2 November) Malaysia BNM policy (2 November) US factory orders and initial jobless claims (2 November) Australia retail sales (3 November) China Caixin PMI services (3 November) Singapore retail sales (3 November) US NFP and ISM services (3 November)
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Rates Spark: US Treasuries Face Supply Test Amid ECB Dovish Tone and Eurozone Data; Long-Term US Deficit Concerns Linger

ING Economics ING Economics 02.11.2023 12:00
Rates Spark: US Treasuries brave the first supply test First country inflation and growth indications ahead of today's aggregate eurozone data have already confirmed the ECB's more dovish tone of the last meeting. Meanwhile, markets' worst fears have not materialised in the Treasury's quarterly borrowing announcement, although concerns about the overall US debt trajectory remain unaddressed.   Bund curve steepens on dovish data and improving risk sentiment The first eurozone inflation readings confirmed the European Central Bank’s somewhat more dovish tone and decision to hold rates at the recent meeting. German inflation dropped to 3% year-on-year, noticeably cooler than the 3.3% the market was looking for. Similarly, Spanish inflation also came in cooler.       ECB officials have tried to limit the downside in rates. The ECB’s Kasimir and Simkus both dismissed any notion of the ECB cutting rates already in the first half of next year. They were not the first ones to spell out how 'high for longer' should be interpreted. Two weeks ago Klaas Knot had pointed to holding key rates for at least a year. However, even though the early rally in rates started to fade they could not entirely prevent a slight bull steepening of the curve.   The second feature of the European session was a backdrop of improving risk sentiment that also exerted upward pressure on rates to fade the initial rally. That change of tone was especially felt by Italian sovereign bond spreads with the key 10Y spread over German Bunds tightening towards 190bp, its tightest since early October. However, it was the ECB not having discussed the possible slowing of pandemic emergency purchase programme reinvestments – although that debate has only been postponed – as well as rating affirmations last week by DBRS and earlier by S&P that have laid the basis for this tightening.   US borrowing for Q4 lower than expected, but Q1 somewhat higher US rates moving higher in anticipation of the Treasury’s borrowing estimates were a third factor that also pulled EUR rates up from the day’s lows. In the end the Treasury lowered the fourth quarter borrowing estimate to US$776bn from the guidance of US$852bn which it had provided in August. This also helped dampen the impact of the initial borrowing guidance for the first quarter of next year coming in at US$816bn, which was toward the higher end of market expectations. The market’s worst fears have not materialised and the yield increase on the day was thus modest with 10Y UST yields staying below 4.9% in the wake of the announcement. The relief in very long-end rates resulted in a 2bp flattening of the 10s30s curve while 2s10s ended little changed. The market is still waiting for the maturity split of the funding which will be announced on Wednesday. And while the quarterly funding may have come in a bit lower, concerns surrounding the longer term trajectory of the US deficit remain unaddressed.   Today's events and market view A fourth overarching factor leading to wider upward pressure on rates were reports in the lead up to the Bank of Japan meeting that hinted of possible tweaks of the yield curve control framework to potentially allow the 10Y JGB yield to rise above 1%. in the end it was only a slight tweak, the upper 1% threshold was rephrased to be reference point, thus allowing more flexible approach to controlling the yield. The 10Y UST yield eased back towards 4.86% after the decision.  Main events over today’s session are the CPI flash estimate and third quarter GDP data for the eurozone. The indications from yesterday’s country data point to cooler inflation than consensus has forecasted while the growth figures should point to an economy mired in stagnation. This should come as affirmation of 10Y UST-Bund spread at its currently elevated levels of above 200bp. While the next US main events are lined up for tomorrow with the quarterly refunding announcement and the FOMC meeting, today’s quarterly employment cost index should not be dismissed. After all it is the Fed’s preferred wage metric, and is expected to come in at 1% quarter-on-quarter. We will also get house price data and the Conference Board’s consumer confidence index.    Today’s government bond supply will come from Italy, which sells 4Y, 6Y and 10Y bonds as well as floating rate notes for up to €8.75bn in total.
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Rates Rally: Examining the Factors Behind the Surge and What Lies Ahead

ING Economics ING Economics 02.11.2023 12:28
Rates Spark: Don’t dismiss the remaining yield upside just yet The US borrowing estimate and the BoJ were not the drivers of another leg higher in rates as many had feared. While it's unlikely to be the end of the supply story and we still await the quarterly refunding announcement, markets will also focus on the data and the Fed meeting again. After all, economic resilience was the other factor of higher rates.   The long end took its cues from lower US borrowing and more cautious tweaks from the BoJ Long-end rates took their cues for yesterday’s trading from the somewhat lower-than-expected US Treasury borrowing estimate as well as the Bank of Japan (BoJ) decision to only slightly adjust its yield curve control policy. In essence, two of the factors that many, including us, had seen as potential drivers of a renewed attempt at taking on the 5% threshold in 10Y UST yields proved to be duds. The UST curve kicked off with a bull flatteneing which also spilled over into other rates markets.   However, especially with a view on supply it is unlikely to be the end of the story. Markets are still awaiting the quarterly refunding announcement and the maturity split of the upcoming issuance today. Some had flagged the possibility of a more cautious approach focusing any increase on shorter-dated issues. But following the lower borrowing requirement, the US Treasury might feel less pressed on this topic. More importantly, the overarching concerns surrounding the medium- to long-term trajectory of the US deficit have not been addressed.   US economic resilience remains an important factor in keeping rates elevated as well Yesterday’s quarterly employment cost index rising to 1.1% should also remind us that the other important driver of higher long-end rates was the resilience of the economy and the job market in particular. It was in fact the faster wage growth figure managed to turn around the bullish dynamic yesterday and point yields higher again. The Federal Reserve has guided markets to firmly expect a hold at tonight’s FOMC meeting despite the more benign inflation backdrop, third-quarter GDP growth coming in hot, the jobs market remaining tight and inflation remaining well above the 2% target. But it has done so by pointing out that the higher long-end rates are now doing part of its job. That said, European rates markets were confronted with a more dovish data set as the eurozone flash CPI slipped below 3% and 3Q GDP growth came in with a negative sign. Yesterday's bull flattening was probably still more inspired by the overall direction given US and Asian events rather than the domestic data. That said, European Central Bank (ECB) officials are still attempting to anchor front-end rates by emphasising the outlook of keeping rates high for longer.     The US yield increase is stalling, but curves remain steeper   Today's events and market view The BoJ and US borrowing announcements have proved more benign for rates than anticipated with the 10Y UST yield dropping towards 4.8% before moves were reversed in month-end flows. Especially on the supply side, it is unlikely to be the end of the story with the refunding announcement coming today. But economic resilience should also not be dismissed as a potential driver of another leg higher in rates. To that end, we will get the  ADP payrolls estimate today ahead of the key jobs data on Friday. Also on today’s agenda are JOLTs jobs opening numbers as well as the ISM manufacturing. The key event for the day is the FOMC meeting tonight, although a hold has been well-flagged. The Fed is still likely to keep its bias for further tightening in place.  All Saints Day is observed in large parts of Europe. In today’s government bond primary markets, Germany will tap its 7Y bond for €3bn
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Immobile Fed: Anticipating a Pause with a Nod to Higher Yields

ING Economics ING Economics 02.11.2023 12:28
FX Daily: Immobile Fed to give a nod to higher yields We expect the Fed to pause today, in line with expectations. There is a mild risk of a dollar correction, but that should be short-lived. Japanese authorities are stepping up efforts to contain unwanted volatility in rates and FX, but we suspect markets will keep pushing USD/JPY higher and into the new intervention level.   USD: A quiet Fed meeting The Federal Reserve is in a desirable position as it prepares to announce policy this evening thanks to the combined effect of rate hikes and higher Treasury yields keeping pressure on prices. The economy has proven resilient so far. In the art of central banking, inaction is action, and inaction is broadly what we expect from the Fed today as we discuss in our preview. A pause is widely expected by markets and economists, as numerous FOMC members signalled higher Treasury yields were adding enough extra tightening of financial conditions to stay put. One question for today is to what extent the statement and Fed Chair Jerome Powell will acknowledge this non-monetary tightening of financial conditions. It’s unlikely the Fed wants to drop any dovish hints at this stage, but a market that is well positioned for a broadly unchanged policy message could be rather sensitive to the wording on this topic and may interpret an “official” recognition of tighter financial conditions as an implicit signal more tightening is off the table. The typically cautious Powell may anyway try to mitigate any dovish interpretation of the statement during the press conference. After all, the Fed dot plot still says one more hike by year-end and has a strong commitment to higher rates for longer. The first of these two statements was never taken at face value, but the latter is what is contributing to higher yields. Expect no divergence from it. The Fed isn’t the only event in the US calendar today, and markets will likely move on the ADP payrolls release (although these are unreliable), JOLTS jobs openings and the ISM manufacturing figures for October. There is room for a short-lived dollar correction today as markets will be on the hunt for implicit admissions that another hike is actually off the table with higher yields. Positioning adjustments have favoured some dollar slips recently but they have not lasted, as the overall message by the Fed has been one of higher for longer with a hawkish bias. That message won’t change today (barring any great surprises) and we think that buying the dips in any dollar correction will remain a popular trade, especially given the more and more unstable ground on which other major currencies (JPY, EUR) are standing.
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Federal Reserve Holds Rates with Hawkish Tone: Navigating Peaks, Pitfalls, and Dollar Dynamics

ING Economics ING Economics 02.11.2023 12:36
US Federal Reserve keeps its options open with another hawkish hold The Fed funds rate target range was held at 5.25-5.5% by a unanimous vote, with a hawkish tone retained to ensure financial conditions remain tight and aid in the battle to constrain inflation. Higher household and corporate borrowing costs are starting to bite though and we don’t expect any further hikes this cycle.   Rates held with a hawkish bias retained No surprises from the Federal Reserve today with the Fed funds target range held at 5.25-5.50% for the second consecutive meeting – the longest period of no change since before the tightening cycle started in early 2022. The accompanying statement acknowledges the “strong” economic activity – a slight upgrade on the “solid” description in September while there was explicit mention of “tighter financial and credit conditions”, which will weigh on the economy. Nonetheless, in the press conference Chair Powell recognises that the economy is starting to see the effects of tighter monetary policy, but that the committee still has a bias towards more hikes rather than seeing the prospect of cuts on the horizon. This is understandable since the Fed does not want to give the market the excuse to significantly backtrack on the recent repricing of “higher for longer” policy interest rates. While there does appear to be a slight softening in the degree of hawkishness the Federal Open Market Committee (FOMC) is expressing, they are careful not to provide a signal that policy has peaked, which could tempt traders to drive market rates lower in anticipation that the next move would be rate cuts. Such action could potentially reignite inflation pressures, but we doubt it.   Peak rates with cuts on the horizon for 2024 The surprise surge in longer-dated Treasury yields and the tightening of financial conditions it’s prompted will inevitably create more headwinds for activity in an environment where mortgage and car loan rates are already above 8% and credit card interest rates are at all-time highs. With Treasury yields staying at elevated levels, the need for further policy rate hikes is dramatically reduced and we do not expect any further Fed rate hikes. Consumer spending remains the most important growth engine in the economy, and with real household disposable income flat-lining, savings being exhausted and consumer credit being repaid – and this is before the recent tightening of lending and financial conditions is fully felt – means we see the primary risk being recession. If right, this will depress inflation pressures even more rapidly than the Fed is anticipating, giving it the scope to cut policy rates in the first half of next year.   Bond yields falling into the Fed meeting more to do with less (relative) supply pressure on the long end The bond market went into the FOMC meeting in a decent mood. The refunding announcement was deemed tolerable, partly as the headline requirement of US$112bn was US$2bn lower than the market had expected. Note, however, that 10yr issuance increases by US$5bn (to US$40bn) and 30yr issuance increases by US$4bn (to US$24bn), while 3yr issuance increases by just US$2bn (to US$48bn). As a stand-alone that is negative for the long end. But it’s the new December projections that has the market excited, as both 10yr and 30yr issuance is projected to fall by US$3bn (to US$37bn and US$21bn, respectively). In contrast, 2yr, 3yr and 5yr issuance volumes are to increase by US$8bn. So the issuance pressure morphs more towards shorter maturities and away from longer maturities as we head through the fourth quarter. Yields are down. The 10yr now at just under 4.8%. It has not materially broken any trends though. The big bond market story from the FOMC outcome is an underlying continuation theme. Higher real rates have been a feature since the last FOMC meeting, and the one before. And the Fed knows that this has a clear tightening effect. It’s a rise in market rates that cannot be easily diversified away by liability managers that need to re-finance in the coming few quarters. The Fed knows that both floating rate debt and all types of re-financings will amplify pain as we progress forward. Given that, it can let the debt markets do the last of the pain infliction for them. The rise in real yields has helped to push the curve steeper, and the 5/10yr has now joined the 10/30yr with a positive upward sloping curve. Only the 2/5yr spread remains inverted. This overall look does suggest the bond market is positioning for a turn in market rates ahead. The big move will come when the 2yr starts to anticipate cuts. We are not there quite yet; hence the 2/5yr inversion hold-out. That all being said, there is enough from the Fed today for the market to use the opportunity to test lower in yields. We still think we need to see the payrolls report first. If that is close to consensus then there is likely not enough to make the break materially lower. It is true that Powell has pointed to higher long rates as a pressure point. But does not have to mean that upward pressure on long rates suddenly goes away. There is still a path back up to 5% if the market decides not to use the double positive today of lower long-end supply (in relative terms) and a Fed that is pointing at long yields as something to get concerned by. We still feel that pressure for higher real rates remains a feature, despite the easing off on longer tenor issuance pressure. We need to see the economy really lurch lower, in particular on the labour market, before the bond bulls take over. The Fed is not quite pointing towards this just yet either.   FX: Too little to reverse the dollar momentum Markets perceived today’s Fed announcement and press conference as moderately dovish, and the drop in Treasury yields would – in theory – point to a softer dollar. The 2-year EUR-USD swap rate differential is around 8bp tighter than pre-meeting, but remains considerably wide at -128bp. As shown in the chart below, such a differential is consistent with EUR/USD trading around 1.05-1.06 and, despite the acknowledgement that financial conditions have tightened, there weren’t enough dovish elements to trigger a material dollar correction.   EUR/USD and 2Y swap rate gap     Looking ahead, we remain of the view that the dollar’s direction will be set by US data as the Fed’s reiteration of its higher for longer approach and threat of another hike still keep the big bulk of the bullish dollar narrative alive. Barring a negative turn in US activity data, our 1.06 EUR/USD year-end target remains appropriate. There are probably more downside risks in the month of November, although in December the dollar has negative seasonality.
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The Bank of England's Decision Amidst Central Bank Uncertainty

Michael Hewson Michael Hewson 02.11.2023 12:40
Bank of England set to hold but we could see another split vote  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a solid start to the month, helped by weaker economic data, and a slide in yields which raised the prospect that central banks could well be done when it comes to further rate hikes.   Nonetheless after such a poor performance during October there is a sense that what we saw yesterday was nothing more than a relief rally, although it's no less welcome for that.   As expected, the Federal Reserve kept rates unchanged for the second meeting in a row. At the ensuing press conference Fed chairman Jay Powell went on to state that no decisions had been made on whether more rate hikes were coming. He went on to say that while financial conditions had tightened, policymakers weren't confident that policy is sufficiently restrictive, although they had come a long way.     While on the face of it, Powell was trying to come across as hawkish, markets weren't buying it especially since yesterday's economic data showed that the US economy appeared to be slowing. As with anything it's a balancing act for Powell as well as the rest of the FOMC, and with this meeting out of the way the way is now clear for the rest of the committee to show their hands given the sharp fall in bond yields yesterday which indicated that markets feel the Fed is done.   US markets finished the session higher, while the slide in yields which we saw prior to the European close continued in the wake of the Powell press conference and looks set to see European markets carry on that momentum this morning with a higher open.   Today it's the turn of the Bank of England to come to its own decision on whether to raise rates and while we can expect to see a similar decision to hold rates as the Fed yesterday, the nuances of any decision are likely to be starkly different, although we can be fairly confident that the UK central bank is down when it comes to further rate hikes. Having hiked 14 times in a row it seems certain that the bar to further hikes is high, and as such we've seen a switch in narrative that articulates a policy of higher for longer.     There is certainly concern among some of the more hawkish members of the MPC that higher rates are needed, and we can expect the likes of Catherine Mann to push this line. She is likely to be in a minority in the short term if inflation continues to look sticky, however if as expected inflation slows further when the October numbers are released later this month, the prospect of further rate hikes is likely to diminish further.   We need to remember that the energy price cap comes down again in October, and on that comparative alone there should be a sharp drop from where we were a year ago. Sticky wage growth is likely to be a concern for the central bank, however even here there is a sense that this has seen a peak, remaining at 7.8% for the last 3-months, even as headline inflation continues to slow, while next week's Q3 GDP numbers are likely to reinforce concerns about a weaker UK economy.   There ought to be enough evidence today for a majority decision to hold rates, with perhaps one or two of the 4 hawks who voted for a hike in September deciding to uphold the status quo, while downgrading their GDP forecasts.     The most likely to switch to a hold would probably be external members Megan Greene and possibly Jonathan Haskel, although it has been suggested that the lone dove on the MPC, Swati Dhingra could lean towards a rate cut, which really would put the fox in the hen house as far as the pound is concerned. Given how sticky inflation currently is that would be a huge mistake and in all honesty I'm not sure it's necessary when it comes to looking at UK gilt yields which have already fallen quite sharply from their summer peaks. On the economic data front we'll also get to see further evidence that the ECB has overplayed its hand on the rate hike front when we get the latest manufacturing PMI numbers from Spain, Italy, France and Germany, all of which are expected to remain firmly in contraction territory.     Spain is expected to slow to 47, from 47.7, Italy to 46.3, from 46.8, France to slow to 42.6 from 44.2, while Germany is expected to edge higher to 40.7 from 39.6.               EUR/USD – slipped back to the 1.0520 area and last week's lows before rebounding again. We seem to be range bound between the 1.0700 area and the 50-day SMA. Below 1.0520 targets the 1.0450 level   GBP/USD – still trading below trend line resistance from the July peaks which is capping the upside, now at 1.2200. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – continues to slip towards trend line support from the August lows which is now at 0.8650. A move below 0.8680 targets the 0.8620 area.   USD/JPY – failed just shy of the highs last year at 151.95, sliding back from that key resistance. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.   FTSE100 is expected to open 33 points higher at 7,375   DAX is expected to open 87 points higher at 15,010   CAC40 is expected to open 40 points higher at 6,972  
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FX Daily: Fed's Hawkish Hold Spurs Renewed Interest in Carry Trade as Rate Volatility Drops

ING Economics ING Economics 02.11.2023 14:45
FX Daily: Fed pause renews interest in the carry trade Even though it was a hawkish hold, the Fed's decision to leave rates unchanged for a second meeting in a row has seen interest rate volatility drop and high-yielding currencies start to perform well again. This may be an emerging trend, especially if tomorrow's jobs data isn't too hot. The focus today is on rate meetings in the UK, Norway and the Czech Republic.   USD: Investors look set to explore the Fed pause The dollar has been a little weaker over the last 24 hours. Helping the move has likely been the rally in the US bond market, supported by a lower-than-expected quarterly refunding announcement, the soft manufacturing ISM and then the FOMC meeting. Despite the Fed retaining a tightening bias, it seems investors are more interested in reading and trading a Federal Reserve pause. This has seen interest rate volatility drop and triggered renewed demand for high-yielding FX through the carry trade. Calmer market conditions have gone hand in hand with the re-pricing of the medium-term Fed cycle. Recall that last month, the story was very much 'higher for longer' and rather incredibly, the low point for the Fed cycle over the coming years was priced at just 4.50%. That pricing has now adjusted 60bp lower over the last few weeks and has even seen yields at the short end of the US Treasury curve start to move lower, e.g., sub 5% again. It may be too early to expect these short-end rates to go a lot lower just yet, but it does seem as though investors are a little more open to the prospect of weaker data knocking the dollar off its perch. Without that confidence that US growth will decelerate this quarter, the Fed's pause can, however, see further demand for carry. In the EM space, it has been a good week for currencies in Chile, South Africa and Mexico, while in the G10 space, the under-valued Australian dollar is doing well. We continue to see upside potential for AUD/CNH. This would normally be a weak environment for the yen as well, meaning that we cannot rule out USD/JPY retesting 152. US data will determine whether the dollar can generally hold steady in this carry trade environment or whether weaker US data finally triggers a more meaningful and broad-based dollar correction. For today, the focus will be on the weekly jobless claims data – where any decent jump higher can knock the dollar – and the volatile Durable Goods Orders series. Do not expect big moves before tomorrow's US jobs report, but we would say the dollar's downside is vulnerable today. DXY to drift towards 106.00.
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FX Daily: Yen Back in the Spotlight Amid Bank of Japan Speculation

ING Economics ING Economics 12.12.2023 13:18
FX Daily: Yen back in the spotlight Ahead of tomorrow's US jobs data release, the short-term highlight in the FX market is the continued outperformance of the yen. This has nothing to do with a risk-averse environment (asset markets are bid) and everything to do with the Bank of Japan potentially ending its negative interest rate policy. It looks like the yen can hold its gains near term.   USD: Mixed environment, yen strength stands out FX markets remain relatively calm. One anomaly is that global risk assets (both bonds and equities) are doing quite well, but the dollar is staying quite bid. Normally one might expect the dollar to be easing gently lower in an environment like this. One explanation for this is that while interest rates are falling around the world (risk positive) they are actually falling faster overseas (especially in Europe) than in the US. Notably, EUR versus USD swap differentials are at the widest of the year and exposing the soft underbelly of EUR/USD. But the short-term highlight is the outperformance of the yen. The focus here, once again, is whether the Bank of Japan (BoJ) plans to end eight years of negative interest rates when it meets on 18/19 December. The FX market has been here many times before with this story - only to be rudely disabused of its speculation every time. However, at ING we have pencilled in a BoJ rate hike in the second quarter of next year. Our suspicion is that speculation of a BoJ move at the 18 December meeting is premature since there is no accompanying Outlook Report - a report that could show CPI sustainably hitting 2% and justifying an end to negative rate policy. That said, USD/JPY could still drift to the 144.50/145.00 area over the next week as speculation continues to build about a December BoJ move. The underlying dollar story, however, will be determined, by tomorrow's US jobs report and next week's FOMC meeting. It looks like the US bond market is already pricing in a soft number - which warns perhaps of a firmer dollar if the data is not too weak. Yet we suspect that investors are in the mood to put money to work - noting a major pro-risk turning in the inflation and interest rate cycle - such that the dollar gets sold into any rally tomorrow.  For today, we doubt jobless claims will be a big driver of price action today. We will be interested to look at the October US consumer credit data after the close today to see whether record-high credit card interest rates are finally taking their toll on the US consumer.  DXY has been performing better this week, but we see a scenario where it stalls in the 104.25/50 area.    
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Bond Market’s Quest for Validation: Analyzing the Impact of US Payrolls on Rates

ING Economics ING Economics 12.12.2023 14:03
Rates Spark: A bond market looking for validation Payrolls day is usually pivotal. This one more than most, as the US 10yr has fallen sharply from 5% down towards 4% without material evidence of any labour market recession. We don't have to have one, of course, as lower yields can also be validated by lower inflation expectations. But in the end, it probably does have to happen, or else bonds have issues ... The key event for the day is the US jobs report, the nonfarm payrolls Source:   Today's payrolls report will set the scene for the rest of 2023 It’s payrolls day! And it’s a key one. The US 10yr has moved sharply from 5% down to approaching 4%. It really needs some validation of that move from today’s report. Or to reverse engineer this, the Treasury market is telling us the number will be weak. But what is weak? The key reference is 150k. That’s the replacement rate. Average payrolls in the past few decades have been 130k per month. Anything below these numbers would be “weak”, as it would begin to signal a growth recession. This month’s number is bolstered by returning strike workers so that the consensus of 190k actually translates to something close to 150k – bang on the crossover point. Whatever happens, it will set the scene for the week ahead, one that kicks off with supply, featuring the 30yr auction which has had a habit of tailing. Any kind of payrolls “strength” would have to be a problem for this bullish bond market.   And then we have the Fed next week. Payrolls are likely more important We also have the Fed next week. There may be some interest in the press on money market conditions following the spikes seen in repo around month end and reverberating into the early part of December. This comes against a backdrop where banks' reserves are ample, in the US$3.3tr area. The last time the Fed engaged in quantitative tightening, bank reserves bottomed at a little under US$1.5tr and there was a material effect felt on the money markets. It’s unlikely that we'll get anywhere near that this time around. Bank reserves will almost certainly get below US$3tr and possibly down to US$2.5trn. The Fed will want to get liquidity into better balance as a first port of call, but beyond that, it won’t want to over-tighten liquidity conditions. Taking this into account, QT is likely to end around the end of 2024. In the meantime, the clearest manifestation of quantitative tightening is to be seen in falling liquidity volumes going back to the Fed on the overnight reverse repo facility. This is now at US$825bn, but is set to hit zero in the second half of 2024. Whether Chair Powell gets drawn into this will likely be down to whether the press wants him to - they will probably have to ask the questions(s). In terms of expectations for market movements, we doubt there will be much from the FOMC alone. If, as we expect, the Fed sticks to the hawkish tilt, and does not give the market too much to get excited about, then expect minimal impact. As it is, the structure of the curve, as telegraphed by the richness of the 5yr on the curve, is telling us that a rate cut is not yet in the 6-month countdown window. That will slowly change, and we’ll morph towards a point where we are three months out from a cut and the 2yr yield really collapses lower. It's unlikely the Fed will change that at this final meeting of 2023, though, and they won’t want to. Expect much more reaction from today’s payrolls report Today's events and market view The key event for the day is the US jobs report. The consensus for the change in non-farm payrolls has slipped somewhat to 183k, which compares to the 150k reported last month. The unemployment rate is seen staying at 3.9%. The other release to watch today is the University of Michigan consumer sentiment survey. It is seen improving marginally, while the inflation survey is expected to ease to 4.3% on the 1Y horizon and 3.1% on the 5-10Y. There is not much on the eurozone calendar, but the ECB will reveal how much of their outstanding TLTROs banks choose to repay ahead of time at the end of this month on top of the €37bn that will mature.
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Federal Reserve Outlook: Navigating Monetary Policy in the Face of Market Expectations and Economic Signals

ING Economics ING Economics 12.12.2023 14:11
We expect another Fed hold, but with pushback on rate cut prospects The Fed last raised rates in July and we think that marked the peak. There is growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, the Fed will not want to endorse the market pricing of significant rate cuts until they are confident price pressures are quashed   Fed to leave rates unchanged, oppose market pricing of cuts The Federal Reserve is widely expected to leave the fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign MoM% inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here.   Markets pricing 125bp of cuts, the Fed will likely stick to 50bp prediction There has been a big swing in expectations for Federal Reserve policy since the last FOMC meeting, with markets firmly buying into the possibility of some aggressive interest rate cuts next year. Back on November 1st, after the Fed held rates steady for the second consecutive meeting, fed funds futures priced around a 20% chance of a final hike by the December FOMC meeting with nearly 90bp of rate cuts expected through 2024. Today, markets are clearly of the view that interest rates have peaked with 125bp of rate cuts priced through next year. Underscoring this shift in sentiment, we have seen the US 10Y Treasury yield fall from just shy of 5% in late October to a low of 4.1% on December 6th.   Federal Reserve rhetoric has certainly helped the momentum of the moves. Chief amongst them is the quote from Fed Governor Chris Waller suggesting that if inflation continues to cool “for several more months – I don’t know how long that might be – three months, four months, five months – that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower”. The real Fed funds rate (nominal rate less inflation) is indeed now positive and we expect it to move above 3% as inflation continues to fall. Does it need to be this high to ensure inflation stays at 2%? We would argue not, and so too, it appears, do some senior members of the Fed. Other officials, such as Atlanta Fed president Raphael Bostic, suggest that the US hasn’t “seen the full effects of restrictive policy”. However, there are still some residual hawks. San Francisco Fed President Mary Daly is still contemplating “whether we have enough tightening in the system”.   ING's expectations for what the Federal Reserve will predict   Fed to talk up prolonged restirctive stance In that regard, the steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year. For example, mortgage rates have been swift to respond, with the 30Y fixed-rate mortgage dropping from a high of 7.90% in late October to 7.17% as of last week. With inflation still well above the 2% target despite recent encouraging MoM prints, we expect the Fed to be wary of anything that could be interpreted as offering an excuse to price in even deeper Fed rate cuts for next year and result in even lower longer-dated Treasury yields.   Consequently, we expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen.Fed Chair Jay Powell’s assessment in a December 1st speech is likely to be the template for the tone of the press conference. There, he argued, “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so”. Similarly, NY Fed president John Williams expects “it will be appropriate to maintain a restrictive stance for quite some time”.   But the Fed will eventually turn dovish We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. The consumer is key, and with real household disposable incomes flatlining, credit demand falling, and pandemic-era accrued savings being exhausted for many, we see a risk of a recession during 2024. Collapsing housing transactions and plunging homebuilder sentiment suggest residential investment will weaken, while softer durable goods orders point to a downturn in capital expenditure. If low gasoline prices are maintained, inflation could be at the 2% target in the second quarter of next year, which could open the door to lower interest rates from the Federal Reserve from May onwards – especially if hiring slows as we expect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.   The Fed will try to keep the market rates impact to a minimum There may be some interest from the press on money market conditions following the spikes seen in repo around the end of the month and reverberating into the early part of December. It comes against a backdrop where banks' reserves are ample, in the US$3.3tr area. The last time the Fed engaged in quantitative tightening, bank reserves bottomed at a little under US$1.5tr and there was a material effect felt on the money markets. It’s unlikely that we'll get anywhere near that this time around. Bank reserves will certainly get below US$3tr and possibly down to US$2.5trn. The Fed will want to get liquidity into better balance as a first port of call, but beyond that, it won’t want to over-tighten liquidity conditions. Taking this into account, QT likely ends around the end of 2024. In the meantime, the clearest manifestation of quantitative tightening is to be seen in falling liquidity volumes going back to the Fed on the overnight reverse repo facility. This is now at US$825bn but will hit zero in the second half of 2024. Whether Chair Powell gets drawn into this will likely be down to whether the press wants him - they'll need to ask the question(s)! In terms of expectations for market movements, we doubt there will be much. If, as we expect, the Fed sticks to the hawkish tilt and does not give the market too much to get excited about, then expect minimal impact. As it is, the structure of the curve, as telegraphed by the richness of the 5yr on the curve, is telling us that a rate cut is not yet in the 6-month countdown window. That will slowly change, and we’ll morph towards a point where we are three months out from a cut and the 2yr yield really collapses lower. It's unlikely the Fed will change that at this final meeting of 2023, though, and they won’t want to.   Fed pushback could dent recent high-yield FX rally As mentioned above, a Fed pushback against market pricing of the easing cycle in 2024 should be mildly supportive of the dollar. Even though EUR/USD has performed poorly through the start of December and could get some mild support a day later from the ECB, this FOMC meeting could prompt losses to the 1.0650 area. We have had 1.07 as a year-end target for a few months now and expect the more powerful, dollar-led, EUR/USD rally to come through in 2Q when we expect those short-dated US yields to collapse. Perhaps more vulnerable to a decent Fed pushback against lower rates might be what we call the 'growth' currencies, such as the high beta currencies in Scandinavia and the commodity sector (Australian and Canadian dollars). These currencies have had a good run through November on the lower US rate environment. However, as per our 2024 FX Outlook, these currencies are our top picks for next year and should meet good demand on pullbacks this month. As to the wild ride that is USD/JPY, higher US yields could provide some temporary support. However, we doubt USD/JPY will sustain gains above the 146/147 area as traders re-adjust positions for a potential change in Bank of Japan (BoJ) policy on December 19th. We suspect that USD/JPY has peaked, however, and are happy with our call for USD/JPY to be trading close to 135 next summer after the BoJ starts to dismantle its ultra-dovish policy in the first half of next year. 
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Key Developments in Developed Markets: Fed's Potential Pushback and Rate Cut Expectations"

ING Economics ING Economics 12.12.2023 14:18
Key events in developed markets and EMEA next week There's growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, neither the Federal Reserve nor Bank of England will want to endorse the recent ramping up of rate cut expectations in financial markets as both prepare to release decisions next week.   US: Pushback from the Fed The Federal Reserve is widely expected to leave the Fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here. The steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year.  We expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen. We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.
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Turbulent Gold Market: Dovish Fed Fuels Rate Cut Expectations, Sparking Recession Concerns

8 eightcap 8 eightcap 18.12.2023 14:18
An increase in dovish expectations on a rapid pace of Fed funds rate cuts projected for 2024 indicates a potential impending recession. An uptick in recession risk may see a further deterioration in the US 10-year Treasury real yield which reduces the opportunity costs for holding Spot Gold (XAU/USD). Spot Gold (XAU/USD) has managed to trade back above its 20-day moving average. This is a follow-up analysis of our prior report, “Gold Technical: Extension of corrective decline ahead of FOMC” published on 11 December 2023. Click here for a recap. The price actions of Spot Gold (XAU/USD) have shaped the extended corrective decline to print an intraday low of US$1,973 on 13 December during the European session ahead of the FOMC meeting announcement on the same day which was just a whisker away from the US$1,955 support highlighted in our previous analysis. All in all, it has shed -8.2% from its current all-time high of US$2,149 printed on 4 December 2023 which represents a retracement of close to 50% of its ongoing medium-term uptrend phase in place since the 6 October 2023 low of US$1,810. The US Federal Reserve unleashed its dovish pivot last Wednesday, 13 December where its latest “dot plot” projection for the trajectory of the Fed funds rate has indicated a total of three rate cuts (75 basis points) pencilled in for 2024, upped from two projected rate cuts in the prior September’s dot plot which in turn led to an increased in dovish expectations of market participants to price in six rate cuts, a total of 150 bps in 2024 via the 30-day Fed funds rate futures calculated by the CME FedWatch tool. This kind of dovish expectation that has skewed towards a rapid pace of the Fed funds rate cuts projection in the upcoming monetary easing cycle seems to indicate an impending recessionary scenario in 2024 that may put further downside pressure on the US 10-year Treasury real yield. US 10-year Treasury real yield broke below the 200-day moving average   Fig 1: US 10-year Treasury real yield medium-term trend as of 18 Dec 2023 (Source: TradingView, click to enlarge chart) The price movement of the US 10-year Treasury real yield has broken down below a major support zone of 1.82%/1.73% (also the 200-day moving average) which room for further downside potential with the next intermediate support coming in at 1.38%. Based on intermarket analysis, a further deterioration in the US 10-year Treasury real yield may support another round of potential impulsive upmove sequence in gold prices due to lower opportunity costs as gold does not produce “fixed coupons income streams” like bonds.  
UK Inflation Dynamics Shape Expectations for Central Bank Actions

Taming the Rates: Analyzing the Impact of Recent Developments on the US 10yr Yield

ING Economics ING Economics 03.01.2024 14:34
Rates Spark: Enough to hold rates down The US 10yr yield remains below 4%. However that's not been validated by the data as of yet. Friday's payrolls report can be pivotal here, but based off consensus expectations the market will remain without validation from the labour market. Also, the Fed's FOMC minutes due on Wednesday are unlikely to be as racy as Chair Powell was at the press conference.   Sub 4% on the US 10yr to hold at least till we see Friday's payrolls outcome The 13 December FOMC meeting outcome remains a dominating impulse for the rates market. The US 10yr yield shot to below 4% on that day, and has broadly remained below 4% since. It was briefly below 3.8% over the holiday period, but now at closer to 4% it is looking for next big levels. The thing is, validation of the move of the 10yr Treasury yield from 5% down to 4% came from the Fed, but not so much from the macro data. We can reverse engineer this and suspect that the Fed has either seen something, or fears that it will see something that will require lower official rates. In consequence, data watching ahead remains key. In that respect, we are days away from a key reading on the labour market as December’s payrolls report is due on Friday. A consensus outcome showing a 170k increase in jobs, unemployment at 3.8% and wage growth at 3.9% would leave us still lacking validation for lower market rates from the labour market data. We have it from survey evidence, and from scare stories on credit card debt and commercial real estate woes. But it's the labour market that is really pivotal. Risk assets struggled a tad yesterday, and that makes a degree of sense given the complicated back story, and the remarkable rally seen into year end. While a one-day move cannot be simply extrapolated, there are reasons to be a tad concerned on the risk front at this early phase of 2024. Geo-political concerns have not abated, and in fact if anything are elevating. Europe is closest to many of these risks, and the economy has been faltering for at least a half year now. Yes the market is expecting rescue rate cuts, but the European Central Bank is yet to endorse those expectations. An elevation of stress without the prospect of near term delivery of rate cuts can be an issue for risk assets. For market rates, this combination maintains downward pressure. The only issue is how far we’ve come so fast. We remain of the view that the US 10yr fair value level is around 4%, but that we will likely overshoot to the downside to 3.5% in the coming months. Our fair value comes of a forward 3% floor for the funds rate plus a 100bp curve. See more on that here.   Today's events and market views It's quiet in Europe for data through Wednesday. The bigger focus for Europe will be on regional inflation readings for December due on Thursday, along with a series of December PMI readings. The likelihood is for some stalling on inflation reduction alongside confirmation of ongoing manufacturing and business weakness. In the US on Wednesday we get ISM readings that will also show a degree of pessimism in US manufacturing. The job openings data will also be gleaned, but the bigger market impulse can come from the FOMC minutes, ones that will refer back to the pivotal 13 December meeting. The odds are they won’t be nearly as dovish as Chair Powell was at the press conference.
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This Week's Focus: US Jobs Report Signals Economic Uncertainty, Turkey Anticipates Annual Inflation at 65.1%

ING Economics ING Economics 03.01.2024 14:45
Key events in developed markets and EMEA this week This week, the main focus in the US will be the jobs report which is expected to indicate that hiring is slowing more meaningfully as economic uncertainty increases. In Turkey, all eyes will be on the release of December annual inflation which we expect to come in at 65.1%.   US: Jobs report expected to indicate that hiring is slowing more meaningfully After the dovish shift from the Federal Reserve at the December FOMC meeting, markets continue to price six 25bp rate cuts for 2024, in line with our long-held view. There are several key data releases that will give the markets food for thought as to what the risks are to this assessment. The ISM reports will give us an update on how businesses are seeing the situation and we expect them to indicate an ongoing soft trend in growth rather than clear evidence of a downturn. The jobs report will be the focus though and that is expected to indicate that hiring is slowing more meaningfully now as economic uncertainty increases. The unemployment rate is likely to tick slightly higher to 3.8% from 3.7%. Markets are on the verge of pricing the first rate cut for March, but we think the Fed is more likely to wait until May. Turkey: Annual inflation expected to increase to 65.1% In December, we expect annual inflation to increase to 65.1% (with a  3.2% month-on-month reading) from 62.0% a month ago, in line with the forecast presented in the latest inflation report of the Central Bank, while core inflation will remain elevated at around 72%. Inertia in services inflation, along with administered price and wage adjustments will likely remain as the major drivers of the inflation outlook in the near term. Key events in developed markets this week Source: Refinitiv, ING Key events in EMEA this week Source: Refinitiv, ING
Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

ING Economics ING Economics 26.01.2024 14:21
Federal Reserve to downplay chances of imminent action while holding rates steady The dovish shift in Fed forecasts in December – with three rate cuts pencilled in for 2024 – incentivised the market to push even more aggressively in pricing cuts. However, they appear to have gone too far too fast for the Fed’s liking, even though inflation is almost back to target.   Expect more pushback against a March rate cut The Federal Reserve is widely expected to keep the Fed funds target range unchanged at 5.25-5.50% next Wednesday while continuing the process of shrinking its balance sheet via quantitative tightening – allowing $60bn of maturing Treasuries and $35bn of agency mortgage backed securities to run off its balance sheet each month.  At the December Federal Open Market Committee meeting there was undoubtedly a dovish shift. We got an acknowledgement that growth "has slowed from its strong pace in the third quarter" plus a recognition that "inflation has eased over the past year". With policy regarded as being in restrictive territory, the updated dot plot of individual forecasts indicated the committee was coalescing around the view that it would likely end up cutting the policy rate by 75bp this year.  This was interpreted by markets as giving them the green light to push on more aggressively. Given the Fed’s perceived conservative nature the risks were skewed towards them eventually implementing even more than it was publicly suggesting. At one point seven 25bp moves were being priced by markets with the first cut coming in March. A March interest rate cut looked too soon to us given strong growth and the tight jobs market, so the recent Fed official commentary downplaying the chances of an imminent move hasn’t come as a surprise. Markets are now pricing just a 50% chance of such a move with nothing priced for the 31 January FOMC.   Fed funds target rate (%) and the period of time between the last rate hike and first rate cut in a cycle   But the statement will shift to neutral In terms of the accompanying statement we do expect further changes. The December FOMC text added the word “any” to the sentence “in determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time”, offering a clear hint that that interest rates have peaked. The commentary ahead of the blackout period had suggested the Fed saw no imminent need for a rate cut, so we expect it to continue to push back against an early move, but continuing talk of rate hikes in the press statement is not going to look particularly credible to markets. The Fed could choose to go back to its previous stock phraseology (used in January 2019 when it held policy steady after it had hiked rates one last time in December 2018) that “in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective”.   And rate cuts are coming... Despite this, we believe the Fed will end up delivering substantial interest rate cuts. We continue to see some downside risks for growth in the coming quarters relative to the consensus as the legacy of tight monetary policy and credit conditions weighs on activity and Covid-era accrued household savings provide less support. Inflation pressures are subsiding with the quarter-on-quarter annualised core personal consumer expenditure deflator effectively saying 'job done' after two consecutive quarters of 2% prints. The Fed’s current view is that the neutral Fed funds rate is 2.5%, signalling scope for 300bp of rate cuts just to get us to 'neutral' policy rates. Moreover, the 'real' policy rate, adjusted for inflation, will continue to rise as inflation moderates. We believe the Fed will choose to wait until May to make the first move, with ongoing subdued core inflation measures giving it the confidence to cut the policy rate down to 4% by the end of this year versus the 4.5% consensus forecast, and 3% by mid-2025. This will merely get us close to neutral territory. If the economy does enter a more troubled period and the Fed needs to move into 'stimulative' territory there is scope for much deeper cuts.   The Fed is knee-deep in technical adjustments, and there's likely more to come on the QT front One item has already been dealt with ahead of the FOMC meeting – the end of the Bank Term Funding facility. See more on that here. One of the takeaways is the notion that the Fed is comfortable with the system. That at least sends a comfort signal to the market. In that vein, the Fed ignited an accelerated discussion on potential tapering of the its quantitative tightening (QT) agenda ahead. Currently the Fed is allowing some $95bn of bonds to roll off its balance sheet on a monthly basis. So far this has not pressured bank reserves, which are in the $3.5bn area. The Fed has been quoted as viewing this as comfortable, with the implication that they can fall, but not by too much. The 10% of GDP back-of-the-envelope target would be in the area of $3tn. Most of the pressure from QT programme is being felt through lower reverse repo balances going back to the Fed on the overnight basis. Ongoing balances there are running at around $550bn, down by some $1.8tn since March 2023. That pace of fall is in excess of the monthly pace of QT. The residual is accounted for by a rise in the US Treasury cash balances at the Fed. Bottom line, there are two sources of comfort here. First, room from the reverse repo balance of $550bn. That can get to zero without a material impact on bank reserves. Second, the fact that bank reserves themselves have a $500bn comfort factor between $3.5tn now to the $3tn area neutral. There is no urgency for Fed to set a plan in place, but it seems they want to get cracking on it. It’s likely the Fed formulates a plan to slow the pace of QT over the second half of the year, as by mid-year we expect to see the reverse repo balances pretty close to zero. Maybe cut it by a third for starters. We’d then be on a glide path over the second half of 2024 where bank reserves would begin to ease lower. We’d then expect QT to have concluded by year-end. Over to the Fed to see how they deal with it.   Dollar bears require patience We feel it is a little too early for the Fed to pump more air into the easing narrative and would probably prefer to let the data do the talking. However, the conviction is there in markets that the Fed and other major central banks will be in a position to cut later this year. This suggests that the dollar does not have to rally too far on any Fed remarks seen as less than dovish. For the time being we see no reason to argue with seasonal factors which normally keep the dollar strong through the early months of the year. We retain a 1.08 EUR/USD target for the end of the first quarter, but expect a clearer upside path to develop through the second quarter once the first Fed cut looks imminent.   
All Eyes on US Inflation: Impact on Rate Expectations and Market Sentiment

Federal Reserve's Stance: Unchanged Rates and the Lingering Dovish Shadow

ING Economics ING Economics 26.01.2024 14:24
US: Federal Reserve expected to keep the Fed funds target range unchanged at 5.25-5.50% The Federal Reserve is widely expected to keep the Fed funds target range unchanged at 5.25-5.50% on Wednesday while continuing the process of shrinking its balance sheet via quantitative tightening. At its December FOMC meeting we saw a dovish shift from the Fed, signalling that it expected to cut the policy rate by 75bp this year. Given the perception that the Fed always starts out conservatively and typically ends up shifting policy by more than initially suggested, this was interpreted by markets as giving them the green light to push on more aggressively. Just a few weeks ago seven 25bp moves were being priced by markets for this year with the first cut coming in March, but recent strong jobs and activity data have since scaled that back to a 50-50 call while Fed commentary has also suggested that FOMC members are not in a hurry to cut. Nonetheless, inflation pressures continue to softenc, with the Fed’s favoured measure of inflation, the core PCE deflator, running at 2% annualised for two consecutive quarters. We think it is only a matter of time before they do indeed cut interest rates, but we think the starting point will be in May. We continue to see some downside risks for growth in the coming quarters relative to the consensus as the legacy of tight monetary policy and credit conditions weighs on activity and Covid-era accrued household savings provide less support. Our forecast is for the Fed funds target range to be cut to 3.75-4% by the end of this year. On Friday, we have the US jobs report for January. It does feel as though there have been a growing number of job lay-off announcements, but this is not apparent in jobless claims data. We have little survey data to go on at this stage, but given the strength in activity numbers, there seems little reason to expect the jobs market to roll over. We look for payrolls growth of around 200,000, once again led by government, leisure and hospitality and education and healthcare services. Nonetheless, the household survey is expected to show the unemployment rate ticking a little higher to 3.8%.  
Bank of England's February Meeting: Expectations and Market Impact Analysis

Bank of England's February Meeting: Expectations and Market Impact Analysis

ING Economics ING Economics 26.01.2024 14:50
Expect the Bank to drop its tightening bias Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in. If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this: Policy needs to stay “sufficiently restrictive for sufficiently long.” It’s likely to stay restrictive for “an extended period of time.” “Further tightening” is required if evidence of “more persistent inflationary pressures.” We think the baseline assumption going into this meeting is that the last of those sentences gets dropped and that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive. There’s also a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though our base case is a unanimous decision to keep rates unchanged (6-3 previously).     Markets seem more sensitive to dovish nuances of late The market discount for BoE rate cuts has moderated. At the end of last year, a first cut by May was still fully discounted, and overall more than six cuts were fully priced in for 2024. This has come back towards slightly more than 50% implied probability of a May cut and four cuts overall being priced in. These are not unplausible scenarios but are obviously dependent on data and, for instance, the government's tax plans. But looking at markets more globally, they appear more sensitive to softer data and any dovish nuances provided in communications. As such, we do see a possibility for front-end rates to tick slightly lower if the MPC, for instance, removes its hike bias - in its commentary as well as the voting split. Further out the curve 10Y gilt yields have risen back towards 4% from around 3.5% at year-end. But yields appear capped at 4%, facing resistance to move higher. If we take a simple modelling approach, augmenting a short-term money-market-based estimate of the 10Y gilt with yields of its US and German bond peers, we conclude that gilts see slightly too high yields already. Keep in mind that the BoE meeting is flanked by the Fed meeting, jobs data in the US, and the CPI release in the eurozone, which should be crucial in driving wider sentiment. When it comes to FX markets, sterling has been the best-performing G10 currency against the dollar this year. Its implied yield of 5.2% means that it is the only G10 currency up against the dollar on a total return basis this year. As above and given that the market is minded to look for the more dovish interpretation of central bank communication in what should be a year of disinflation, the idea of the BoE playing dovish catch-up with the Fed and the ECB could be a mild sterling negative.  That probably means that EUR/GBP will struggle to maintain any break below strong support at 0.8500 in the near term, and the BoE event risk means EUR/GBP could start to trade back over 0.8600.  However, our end-quarter target of 0.8800 looks too aggressive now. Scope for tax cuts in early March, sticky services inflation and composite PMI readings comfortably above 50 in the UK could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. For GBP/USD, the FX options market currently prices a very modest 42 USD pips of day event risk around the Wednesday FOMC/Thursday BoE meeting. Our baseline scenario assumes GBP/USD could trade back down to/under 1.2700 on Thursday, especially should the FOMC meeting have disappointed those looking for a March rate cut from the Fed.

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