global inflation

Inflation outlook in Poland should improve, leading to rate cuts As expected, rates in Poland remained unchanged (reference rate still 6.75%). In the press release, the Council focused on 2H23 and 2024 – a period of more benign inflation prospects. The bank president should sound dovish at Friday's press conference, highlighting many disinflationary pressures and preparing the ground for rate cuts this year.   Communication by the central bank This month’s Monetary Policy Council statement is more concise than after the June meeting, but it speaks of a greater conviction about the decline in inflation in the second half of 2023 and 2024. Also, the MPC expresses its view that rate hikes are working and inflation is coming down to the target. National Bank of Poland President Glapiński is likely to speak in this vein tomorrow! The most important changes in the communication are: (1) a more optimistic picture of global inflation (2) more optimistic inflation trends in Poland - e.g. the sentences mentioning the still ongoing process of passing on high costs to prices have disappeared (3) a greater belief in the effectiveness of the monetary tightening, which has already started the process of bringing inflation down to the target: in the summary passage on future inflation, the MPC states that: "The Council assesses that the strong tightening of the NBP monetary policy is leading to a decline in inflation in Poland towards the NBP inflation target". Earlier, it had said that the strong tightening of the NBP's monetary policy made earlier would lead to a lowering of inflation. The statement also noted the low economic activity in the second quarter and elevated uncertainty in the global economy and the euro area. The decline in global inflation was highlighted, including a marked decline in producer price dynamics. Although still elevated CPI and core inflation was noted, there was mention that the latter is gradually declining. Regarding the domestic situation, the Council points out that the annual CPI fell once again to 11.5% year-on-year in June from 13.0% in May, while remaining unchanged for the second consecutive month in month-on-month terms. The Council estimates that core inflation also declined in June and notes a strong fall in PPI producer inflation, which will influence the CPI to fall further in future quarters.   New GDP and inflation projections In our view, the projections show a better inflation picture in the second half of the year and 2024, but the longer-term outlook is less optimistic: (1) the NBP’s CPI projection for 2023 remained unchanged, but for 2024 was revised down by 0.5 percentage points compared to the March publication, a short-term faster decline in inflation is emerging from these numbers, but the CPI projection for 2025, which has increased slightly, is of concern (see also below) (2) in our view, with average CPI projection for 2023 at 11.9% YoY, we still think that a decrease of headline CPI below 10% in August is still possible, which could lead to an interest rate cut after the summer. In contrast, annual GDP growth is expected to be -0.2 - 1.3% YoY this year (-0.1 - 1.8% assumed in March), 1.4 - 3.3% in 2024 (previously 1.1 - 3.1%) and 2.1 - 4.4% in 2025 (vs. 2.0 - 4.3%).\   National Bank of Poland projections   Our rate forecasts – we expect interest rate cuts in September and October The MPC is strongly focused on the second half of 2023 and 2024 – a period when the inflation situation looks better compared with the March projection, so we maintain our view that rate cuts are possible after the holidays, i.e. in September and October. Tomorrow, during its press conference the NBP President should sound dovish, highlighting many of the above-mentioned developments towards lower inflation and preparing the ground for rate cuts. In the longer term, we do not see a convincing weakening of inflationary pressures. With the CPI projection for 2024 at 5.3% YoY and a planned minimum wage increase of around 20%, the real minimum wage in 2024 will increase by more than 15%! We maintain our view that going down to the NBP's 2.5% target with such real wages will be difficult and long-lasting. Our models show core inflation stabilising at 5% YoY in 2024-25. At tomorrow's press conference by NBP Governor Adam Glapiński, we expect the tone to be more dovish than a month ago. It is possible that the governor will prepare the ground for interest rate cuts after the summer.

The Japanese yen faced considerable losses on Monday as USD/JPY surged to 146.23 during the North American session, marking a 0.57% increase for the day. The US dollar's strength has propelled it dangerously close to pushing the yen below the critical 146 line, a scenario witnessed last week when the robust US dollar drove the struggling yen to a nine-month low. Once synonymous with deflation, the Japanese economy has undergone a significant transformation in the era of high global inflation. With Japan's inflation hovering slightly above 3%, a level that many major central banks would eagerly welcome, the landscape has shifted. Notably, inflation remains relatively high by Japanese standards, as both headline and core inflation have consistently outpaced the Bank of Japan's (BoJ) 2% target. Japan's inflation data is closely scrutinized as the prospect of elevated inflation sparks speculations that the BoJ might need to tighten its lenient policy stance. Although the central bank has maintained that the high inflation is transitory, it's worth remembering that other central banks have made similar claims only to backtrack later. The Federal Reserve (Fed) and the European Central Bank (ECB) come to mind as examples. In the previous week, July's Consumer Price Index (CPI) remained steady at 3.3% year-on-year, while Core CPI experienced a slight dip to 3.1% year-on-year from the previous 3.3%. Looking ahead, Tuesday brings the release of BoJ Core CPI, the central bank's favored inflation metric, which is projected to decrease to 2.7% for July, down from June's 3.0%.   USD/JPY pushes above 146 line Bank of Japan’s Core CPI is expected to ease to 2.7% The Japanese yen has posted significant losses on Monday. USD/JPY is trading at 146.23 in the North American session, up 0.57% on the day. The US dollar has looked sharp and is within a whisker of pushing the yen below the 146 line, as was the case last week when the strong US dollar pushed the ailing yen to a nine-month low. The Japanese economy was once synonymous with deflation, but that has changed in the era of high global inflation. Japan’s inflation is slightly above 3%, a level that other major central banks would take in a heartbeat. Still, inflation is relatively high by Japanese standards and both headline and core inflation have persistently been above the Bank of Japan’s 2% target. Japan’s inflation reports are carefully monitored as higher inflation has raised speculation that the BoJ will have to tighten its loose policy. The central bank has insisted that high inflation is transient, but the BoJ wouldn’t be the first bank to make that claim and then backtrack with its tail between its legs. Remember the Fed and the ECB? Last week, July’s CPI remained unchanged at 3.3% y/y. Core CPI dropped to 3.1% y/y, down from 3.3%. On Tuesday, Japan releases BoJ Core CPI, the central bank’s preferred inflation gauge, which is expected to dip to 2.7% in July, down from 3.0% in June. China’s economic troubles have sent the Chinese yuan sharply lower, with the Chinese currency falling about 5% this year against the US dollar. A weak yuan makes Chinese exports more attractive, but this is at the expense of other exporters including Japan. As a result, there is pressure in Japan to lower the value of the yen in order to compete with Chinese exports.   USD/JPY Technical USD/JPY pushed above resistance at 145.54 earlier today. The next resistance line is 146.41 There is support at 144.51 and 143.64    

Inflation's second wave: Are we really watching a 70s rerun? Another wave of global inflation is far from inevitable. But there are good reasons to think inflation will be structurally higher and more volatile over the next decade than the last.   Are we heading for a 1970s re-run? Inflation has only been falling for a matter of months across major economies, but the debate surrounding a possible “second wave” is well underway. Social media is littered with charts like the ones below, overlaying the recent inflation wave against the experience of the 1970s. These charts are largely nonsense; the past is not a perfect gauge for the future, especially given the second 1970s wave can be traced back to another huge oil crisis. But central bankers have made no secret that nightmares of that period are shaping today's policy decisions. Policymakers are telling us they plan to keep rates at these elevated levels for quite some time.   Inflation: The 1970s versus today   Rewind 50 years and not only did inflation fail to return to prior lows in either the US or the UK after the initial 1974 spike, but both countries saw at least one additional spike over subsequent years. Germany fared better, but wages did respond to the second oil crisis, helping to push inflation up again.  The lesson was that for a second wave to really take off, you need a catalyst and an economic environment ripe for inflation to take hold. The twin oil price shocks in the 1970s fell on a US economy that was already running hot, a byproduct of persistent US trade and fiscal deficits that grew through the 1960s, aided by the often loose monetary policy of then-Federal Reserve Chair Arthur Burns. That excess demand helped end the Bretton Woods system of fixed currencies and the US dollar lost a quarter of its value between 1970 and mid-1973 as the agreement collapsed, amplifying the hit from higher energy costs. And all of this fell upon an economy that was much more manufacturing-centric than it is today, and it was also heavily unionised. Wage growth typically kept pace with inflation. Back to today, the economy looks very different. But we think there are valuable lessons, and these are our main conclusions:   A second wave isn’t inevitable, but we think there are good reasons to expect inflation to be both structurally higher and more volatile over the next decade. The same is true for central bank rates. The US is less vulnerable to energy shocks than in the 1970s, but further gas price spikes are possible, and that could prompt renewed waves of eurozone inflation. With prices still well above 2021 levels, a shock would likely be smaller. However, a second energy price shock could lead to more pronounced feedback between eurozone wages and inflation. Shortages of metals, be it due to lack of investment or geopolitics, are a growing inflation risk, especially amid the green transition. This probably wouldn’t generate a 2022-style inflation shock by itself, but it is likely to be a source of constant price pressure in future years. Extreme weather is also likely to make food prices more volatile. Unionisation is less widespread than in the 1970s, but there are signs that worker power is increasing amid structural worker shortages. The ability of workers to protect real wages in future inflation shocks is set to grow.  Tighter fiscal and monetary policy should act as a brake on inflation over the short-to-medium-term. Interest rates aren’t likely to return to pre-Covid lows in the foreseeable future, and quantitative easing is unlikely to be used as an economic bazooka. But Covid and the Ukraine war have lowered the bar to big government tax/spending intervention in future crises.   Like the 1970s, inflation is becoming more volatile Source: Macrobond, ING calculations

Another wave of global inflation is far from inevitable. But there are good reasons to think inflation will be structurally higher and more volatile over the next decade than the last   Are we heading for a 1970s re-run? Inflation has only been falling for a matter of months across major economies, but the debate surrounding a possible “second wave” is well underway. Social media is littered with charts like the ones below, overlaying the recent inflation wave against the experience of the 1970s. These charts are largely nonsense; the past is not a perfect gauge for the future, especially given the second 1970s wave can be traced back to another huge oil crisis. But central bankers have made no secret that nightmares of that period are shaping today's policy decisions. Policymakers are telling us they plan to keep rates at these elevated levels for quite some time.   Inflation: The 1970s versus today Rewind 50 years and not only did inflation fail to return to prior lows in either the US or the UK after the initial 1974 spike, but both countries saw at least one additional spike over subsequent years. Germany fared better, but wages did respond to the second oil crisis, helping to push inflation up again. The lesson was that for a second wave to really take off, you need a catalyst and an economic environment ripe for inflation to take hold. The twin oil price shocks in the 1970s fell on a US economy that was already running hot, a byproduct of persistent US trade and fiscal deficits that grew through the 1960s, aided by the often loose monetary policy of then-Federal Reserve Chair Arthur Burns. That excess demand helped end the Bretton Woods system of fixed currencies and the US dollar lost a quarter of its value between 1970 and mid-1973 as the agreement collapsed, amplifying the hit from higher energy costs. And all of this fell upon an economy that was much more manufacturing-centric than it is today, and it was also heavily unionised. Wage growth typically kept pace with inflation.   Back to today, the economy looks very different. But we think there are valuable lessons, and these are our main conclusions: A second wave isn’t inevitable, but we think there are good reasons to expect inflation to be both structurally higher and more volatile over the next decade. The same is true for central bank rates. The US is less vulnerable to energy shocks than in the 1970s, but further gas price spikes are possible, and that could prompt renewed waves of eurozone inflation. With prices still well above 2021 levels, a shock would likely be smaller. However, a second energy price shock could lead to more pronounced feedback between eurozone wages and inflation. Shortages of metals, be it due to lack of investment or geopolitics, are a growing inflation risk, especially amid the green transition. This probably wouldn’t generate a 2022-style inflation shock by itself, but it is likely to be a source of constant price pressure in future years. Extreme weather is also likely to make food prices more volatile. Unionisation is less widespread than in the 1970s, but there are signs that worker power is increasing amid structural worker shortages. The ability of workers to protect real wages in future inflation shocks is set to grow. Tighter fiscal and monetary policy should act as a brake on inflation over the short-to-medium-term. Interest rates aren’t likely to return to pre-Covid lows in the foreseeable future, and quantitative easing is unlikely to be used as an economic bazooka. But Covid and the Ukraine war have lowered the bar to big government tax/spending intervention in future crises.            

EUR/USD On Thursday, the euro dipped a bit further and reached the target level of 1.0692. The convergence between the price and the Marlin oscillator on the daily chart is getting stronger and becoming more pronounced.     Now, the main concern is on inflation figures in China and the US, which is related to the global inflation issue. This is because a spike in oil prices is preventing a significant decline in inflation. There is talk about a stagflation looming over the world. Investors will pay attention to China's CPI figures, to be released on Saturday, and the main event will be the US inflation data for August on Wednesday.   It's possible that oil prices have not yet been included in the CPI (although they have already affected producer prices), in which case it may create the impression that concerns about stagflation are exaggerated. Today, for instance, the forecast for Germany's CPI is a drop from 6.2% YoY to 6.1% YoY. As a result, the dollar may weaken and we might see a corrective growth in the euro. This could persist until the next Federal Reserve meeting. On the 4-hour chart, the price and the oscillator have formed a convergence. The euro started to rapidly rise, and we have all the conditions for the pair to reach the first target at 1.0774. The MACD indicator line is approaching this level. Overcoming it may provide additional strength for the upward movement. Let's also take a look at the weekly chart. The pair has continued to fall for the eighth consecutive week, and the current candle is on the 5th Fibonacci timeline. Two scenarios are possible: either it continues to fall for another 2-3 candles (making it 11 candles in total), or the next candle and the following ones (up to the 6th line) will be white.            

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

The Finish Line By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in the Q3. We were expecting the Chinese post-Covid reopening to boost the Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.  The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.   Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.   The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024. T  The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12-months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.    For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.  In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.  In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year.