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Australia's labour market report is due out soon. Later today, the ECB meeting and US retail sales numbers should give investors more to ponder after yesterday's upside inflation misses.

 

Global Macro and Markets

    Global markets: We will start with Treasury yields today since they were most at risk from an upside miss to the inflation numbers, which we got on both the core and headline measures yesterday. But, contrary to everything you thought you knew about how markets worked, yields fell. The 2Y yield dropped by 5.1bp to 4.969%, and the 10Y yield fell by 3.2bp to 4.248%. Those declines in yield have had no impact on major FX rates. EURUSD remains roughly unchanged at about 1.0733 ahead of the ECB decision today, which still hangs in the balance. The AUD is also more or less unchanged at 0.6423, though it did have a look at sub-64 cent levels at one stage yesterday before recovering. Sterling is also about the same at 1.2491, though the JPY continued to no

Only Ugly US Data Could Reverse Sentiment | Gilt Yields In UK Were Steady To Lower

ING Economics: "Rates and FX are waking up to a less hawkish Bank of England reality"

ING Economics ING Economics 28.04.2022 15:36
Markets are expecting too much tightening from the Bank of England and are slowly waking up to a less hawkish reality. This means gilts will struggle to follow Treasury and Bund yields higher, and the curve should price out hikes. Sterling has started to react to the weaker consumer data and, barring a very hawkish surprise, risks look skewed to the downside In this article The gilt canary in the coal mine Click to scroll down FX: Waiting for the penny to drop We're expecting the Bank of England to hike in May and June, but the tone is turning more cautious. The BoE's voting pattern and lower growth forecast should be hints that hike expectations at the front-end of the curve are excessive. As the central bank hits the pause button in the summer, we expect markets to wake up to the less hawkish reality. The gilt canary in the coal mine After months of being at the forefront of the core rates market sell-off, with a clear underperformance in the second half of 2021 relative to US Treasuries and German Bund when the BoE ramped up its hawkish message, gilts are now warning that the sell-off is running out of steam. A string of weak sentiment data had the market re-rate recession probabilities and gave weight to the comparatively cautious tone adopted by the BoE.Breaking 2% to the upside remains a possibility for 10Y gilts but we expect them to continue to lag Bund and USTs if bond selling resumes. We foresee yields ending 2022 at 1.8% and the rally should accelerate next year. We also caution that impaired liquidity conditions in the gilt market make outright selling by the BoE less likely in the near term. Source: Refinitiv, ING The UK is far from being the only economy with a worrying growth trajectory, and we should eventually see German Bund and US Treasuries catch up to the gilt rally. Our best guess is that will happen in the third quarter this year once the Federal Reserve has a few hikes under its belt and once inflation has stabilised. It is however noteworthy that, after being ahead of the pack when it came to tightening, it now looks as if the BoE has the luxury to adopt a more prudent approach when inflicting more policy tightening on its domestic economy. Source: Refinitiv, ING We have been warning for months that the policy rate path implied by GBP swaps looked too aggressive, but that a turnaround was only likely once the BoE tightening cycle is well underway. "The gilt curve should re-steepen helped by deflating rate hike expectations" Hike expectations have now started to come off, but we think this is only the beginning of the adjustment lower. This has started a race between front and back end rates. We think curve dynamics will depend on when global yields peak. If we’re right in seeing a few more months of global bond sell-off, then the gilt curve should re-steepen during the same period, also helped by deflating rate hike expectations. Our four scenarios for the May BoE meeting and expected market reactions   FX: Waiting for the penny to drop Sterling has had a bad week at the office. The Bank of England's broad trade-weighted measure of the pound has sold off 2% over the last week due to a combination of weak UK consumer data and a much tougher risk environment on the pincer movement of higher US real rates and weaker Chinese growth prospects. Incidentally, GBP/USD has had one of the highest G10 FX correlations with global equities over the last few months. "Sterling has had a bad week at the office" In looking at the various EUR/GBP reactions to the four BoE scenarios outlined above, we have used our Financial Fair Value (FFV) model as a guide. This identifies key drivers of EUR/GBP pricing such as yield differentials, the shape of the UK yield curve, and the equity environment as inputs. The problem is those yield differentials have lost some of their explanatory power recently. In fact, one has to go back to earlier in 2021 when say a 5bp move in the GBP/EUR yield two-year differential was worth about a 1% move in EUR/GBP. A repricing lower of hike expectations means GBP could take a leg lower Source: Refinitiv, ING Assuming that the beta on the yield differential driver is lower, we present more conservative EUR/GBP levels in our scenario analysis above. Our baseline scenario sees some modest GBP weakness, for example, EUR/GBP to 0.8450 on the BoE event risk. But James Smith has been making his case that the BoE Bank Rate will end the year at 1.25% as opposed to the 2.15% currently priced by the market. If and when that penny drops, GBP could take another large leg lower and GBP/USD may end up far closer to the 1.20 level than we had originally forecast. TagsSterling | Interest Rates | Fx | Bank Of England DisclaimerThis publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more (link to: https://think.ing.com/about/content-disclaimer/)
Tropical Tides: Asian Central Banks Set to Determine Policy Next Week

Equity Rotation Impact: EUR/USD Nudges Higher Amid Dollar Softness

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

ECB Decision Dilemma: Examining the Hawkish Hike and Its Potential Impact on Rates and FX

ING Economics ING Economics 12.09.2023 08:54
ECB cheat sheet: Is a hike hawkish enough? Markets are torn. Will the ECB hike this week or not? We think it will, but we look at how different scenarios can impact rates and FX. Even in our base case, we suspect that convincing markets that this is not the peak will be very hard, and dovish dissenters may get in the way. The upside for EUR rates and the euro may not be that big and above all, quite short-lived.       As discussed in our economics team’s European Central Bank meeting preview, we narrowly favour a rate hike this week. The consensus of economists is slightly tilted towards a hold, and markets also see a greater chance of no change (60%). In the chart above, we analyse four different scenarios, including our base case, and the projected impact on EUR/USD and 10-year bunds. We expect to see a more fragmented than usual Governing Council at this meeting. Whichever direction the ECB decides to take, the debate will likely be fiercer than in previous meetings, as lingering core inflationary pressure is being counterbalanced by evidence of rapidly worsening economic conditions in the euro area. Accordingly, expect the overall messaging by the ECB to be influenced not only by the written communication but also by: a) how much President Christine Lagarde manages to conceal growing division and disharmony within the Governing Council during the press conference and; b) any post-meeting “leaks” to the media, which could be used by dissenters to influence the market impact.        
ECB Meeting Uncertainty: Rate Hike or Pause, Market Positions Reflect Tension

Global Market Insights: ECB Meeting, US Retail Sales, and Australia's Labor Report on the Radar

ING Economics ING Economics 14.09.2023 08:05
Asia Morning Bites Australia's labour market report is due out soon. Later today, the ECB meeting and US retail sales numbers should give investors more to ponder after yesterday's upside inflation misses.   Global Macro and Markets Global markets: We will start with Treasury yields today since they were most at risk from an upside miss to the inflation numbers, which we got on both the core and headline measures yesterday. But, contrary to everything you thought you knew about how markets worked, yields fell. The 2Y yield dropped by 5.1bp to 4.969%, and the 10Y yield fell by 3.2bp to 4.248%. Those declines in yield have had no impact on major FX rates. EURUSD remains roughly unchanged at about 1.0733 ahead of the ECB decision today, which still hangs in the balance. The AUD is also more or less unchanged at 0.6423, though it did have a look at sub-64 cent levels at one stage yesterday before recovering. Sterling is also about the same at 1.2491, though the JPY continued to nose higher and is now 147.28. In Asian FX, the main standout is the CNY, which is now down to 7.2717, in contrast to expectations for it to push above 7.35 which looked more likely only a few days ago. The PBoC is now using higher CNY funding costs in its battle to prop up the yuan, and right now, it seems to be working. Our end-of-month and quarter 7.25 forecast no longer looks quite so silly. This could change very rapidly though, and we have the China data dump tomorrow, though we are half-expecting this to be a little less negative than some of the recent data releases. The TWD was dragged stronger by the CNY, as was the SGD. SE Asian FX tended to lose ground yesterday, and the THB propped up the bottom of the table declining 0.34%. G-7 macro: The US CPI inflation release for August saw upside misses on both the headline inflation rate (3.7%YoY, up from 3.2%, and 3.6% expected) and the month-on-month figure for the core rate ex-food and energy, which rose 0.3% against expectations for a 0.2% rise. That still left core inflation falling to 4.3% which was in line with expectations, but progress in reducing core inflation will only be assisted by base effects for so long before it too will need to see the monthly rate need to drop to 0.1-0.2 to deliver a 2% target rate. James Knightley adds more detail in this note. It is also the ECB meeting today, and while we are looking for one, final rate hike, the market is totally split, and this decision could almost as easily result in no change. Our FX and rates strategists have put this cheat sheet together to highlight the potential market scenarios depending on what the ECB does, and more importantly, how it delivers its decision. We also get the August retail sales numbers for the US out today. The consensus expectation for the headline figure is 0.1%MoM, down from 0.7%MoM in July. We are beginning to see delinquencies on credit cards rising (as well as student loans and mortgages), and the latest consumer credit figures were also softer, so a bit more evidence of a consumer slowdown would vindicate the markets’ move to ignore the inflation figures overnight. The control group of spending is expected to decline 0.1% MoM after its 1.0% rise in July. US PPI data for August and weekly jobless claims round out the day. Australia:  August’s labour report remains an important piece of data while there remains some lingering doubt about whether or not the Reserve Bank of Australia has already delivered peak cash rates, or, as we suspect, maybe has one last hike left in the chamber to deliver before we can declare “job done”. And as ever, the outcome of this report is virtually impossible to call. We tentatively expect some unwinding of recent moves, with some modest job creation in the full-time segment, though this may be offset by some part-time employment declines, to deliver a +15K overall employment gain. This is a bit lower than the consensus +25K call. We are, however, in agreement that this will result in a drop back of the unemployment rate to 3.6% after the jump to 3.7% last month. What to look out for: ECB meeting and US retail sales Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)

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