headline inflation

With the White House and Republican leaders agreeing a deal on the debt ceiling at the weekend markets are now obsessing about whether the deal will get the necessary votes to pass into law, as partisan interests line up to criticise the deal.   With the deadline for a deal now said to be next Monday, 5th June a vote will need to go forward by the end of the week, with ratings agencies already sharpening their pencils on downgrades for the US credit rating. European markets sank sharply yesterday along with bond yields, as markets started to fret about a recession, while oil prices sank 4% over demand concerns. US markets also struggled for gains although the Nasdaq 100 has continued to outperform as a small cohort of tech stocks contrive to keep US markets afloat. As we look towards today's European open and the end of the month, we look set for further declines after Asia markets slid on the back of another set of weak China PMIs for May. We'll also be getting another look at how things are looking with respect to economic conditions in Europe, as well as an insight into some key inflation numbers, although core prices will be missing from this snapshot. French Q1 GDP is expected to be confirmed at 0.2% while headline CPI inflation for May is expected to slow from 6.9% to 6.4%. Italian Q1 GDP is also expected to be confirmed at 0.5, and headline CPI for May is expected to slow from 8.7% to 7.5%. We finish up with the flash CPI inflation numbers from Germany, which is also expected to see a slowdown in headline from 7.6% to 6.7% in May. While this is expected to offer further encouragement that headline inflation in Europe is slowing, that isn't the problem that is causing investors sleepless nights. It's the level of core inflation and for that we'll have to wait until tomorrow and EU core CPI numbers for May, which aren't expected to show much sign of slowing.   We'll also get another insight into the US jobs markets and the number of vacancies in April, which is expected to fall from 9.59m in March to 9.4m. While a sizeable drop from the levels we were seeing at the end of last year of 11m, the number of vacancies is still over 2m above the levels 2 years ago, and over 3m above the levels they were pre-pandemic. The size of this number suggests that the labour market still has some way to go before we can expect to see a meaningful rise in the unemployment rate off its current low levels of 3.4%. EUR/USD – slipped to the 1.0673 area before rebounding with the 1.0610 area the next key support. We need to see a rebound above 1.0820 to stabilise.   GBP/USD – rebounded from the 1.2300 area with further support at the April lows at 1.2270. Pushed back to the 1.2450 area and the 50-day SMA, before slipping back. A move through 1.2460 is needed to open up the 1.2520 area.   EUR/GBP – slid to a 5-month low yesterday at 0.8628 just above the next support at 0.8620. A move below 0.8620 opens up the December 2022 lows at 0.8558. Main resistance remains at the 0.8720 area.   USD/JPY – ran into some selling pressure at 140.90 yesterday, slipping back to the 139.60 area which is a key support area. A break below 139.50 could see a return to the 137.00 area, thus delaying a potential move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20.   FTSE100 is expected to open 22 points lower at 7,500   DAX is expected to open 64 points lower at 15,845   CAC40 is expected to open 34 points lower at 7,175

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

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

ECB Preview: Don’t look back in anger A 25bp rate hike looks like a done deal for next week’s European Central Bank meeting. However, with growth disappointing, the economic outlook getting gloomier and inflation dropping, arguments for several more rate hikes are becoming weaker. That said, the ECB is likely to ignore this.   Macro developments since the May meeting have clearly had more to offer the doves than the hawks at the ECB. Headline inflation has continued to come down but remains far off 2%, survey-based inflation expectations have also started to slow, growth has disappointed and confidence indicators seem to have peaked. In previous times, such a backdrop would have been enough for the ECB to consider pausing rate hikes and wait for the effects of the rate hikes so far to fully unfold. However, the ECB is fully determined right now to err on the side of higher rates.   Minutes of May meeting point to ongoing tightening bias This tightening bias was also reflected in the minutes of the ECB’s May meeting. The surprisingly weak Bank Lending Survey ahead of the last meeting clearly scared some ECB members enough to slow the pace of rate hikes but not enough to start thinking about an end to, or at least a pause in, the hiking cycle. In fact, a large number of ECB members assessed the risks to price stability as being clearly tilted to the upside over the policy-relevant horizon.   High underlying inflation and stubbornly high core inflation were the main reasons behind the ECB’s view that the conditions were not in place to “declare victory” or to be complacent about the inflation outlook.     Staff projections won't bring substantial change Next week’s meeting will also bring a new round of ECB staff projections. While gas prices have dropped further since the last projections in May, oil prices are broadly back at where they were in March. Market interest rates have also hardly changed and only the slightly weaker euro could technically add some inflationary pressure. At the same time, however, it will be interesting to see how the ECB is dealing with the disappointing soft and hard macro data of late.   Remember that back in March, the ECB expected eurozone GDP growth to return to its potential quarterly growth rate of 0.4% quarter-on-quarter from the third quarter of 2022 onwards. This was a surprising forecast given the delayed adverse impact from monetary policy tightening and ongoing structural transitions. It was also remarkable as at the same time, inflation was forecast to return to 2% by the end of 2025. An economy growing at full speed which also gradually allows inflation to disappear is a very unlikely phenomenon.     For next week, we expect slight downward revisions to the ECB’s GDP growth forecasts for this year and next but hardly any revisions to the inflation forecasts. This would mean that the ECB sticks to the 2025 forecast of 2.1% for headline and 2.2% for core inflation.     Hiking will continue, and not only next week Despite the recent decreases, actual headline and core inflation and expectations for inflation only to return to target in two years from now are clear arguments for the ECB to not only continue hiking by 25bp next week but to also keep the door open for rate hikes beyond then.   However, the eurozone economy has turned out to be less resilient than anticipated a few weeks ago and confidence indicators, with all the caveats currently attached to them, point to a weakening of growth momentum again. As headline inflation is gradually retreating, the risk increases that any additional rate hike could quickly turn out to be a policy mistake; at least in a few months from now. Still, the ECB simply cannot afford to get it wrong again.     This is why they are putting more than usual emphasis on actual inflation developments. Even if this completely contradicts forward-looking monetary policy, the ECB is in no position to take a chance and is not giving any impression that it might look back in anger.  

Hungarian inflation drops further than expected While we flirted with the idea of calling for negative monthly inflation in May, we've now seen a sharper drop than anybody expected. Non-core factors were the key drivers, and we now see the National Bank of Hungary sticking to its May playbook in easing.   A sharp drop in both headline and core inflation For Hungary, the potential of further easing in inflationary pressures in May has been on everyone's minds recently. We all saw last year’s speedy acceleration in inflation (especially in food products) and this time around, we knew that base effects would play a crucial role. The main question remained the month-on-month print.   The inflation print came in at –0.4% MoM in May, marking the first price drop since November 2020. With the help of base effects, headline inflation decelerated by 2.5ppt to 21.5% year-on-year. There is one exception in items where inflation hasn't eased, which also caused some downside surprises.     The details Food inflation came in at just 0.1% on a monthly basis, which reflects pricing changes in both unprocessed and processed food items. Here, the reading retreated to 33.5% YoY. This easing in price pressure is responsible for half of the deceleration in inflation from April to May. Both core and non-core items showed easing price changes, helping prompt the drop in core inflation. Motor fuel prices declined by 6.6% from April to May – slightly more sharply than our forecasts. A fixed price for almost the entire year in 2022 – thanks to the fuel price cap measure – also resulted in a significant reduction in the YoY inflation index. Household energy prices fell by 3% MoM, yet another downside surprise to our expectation of a weaker drop in prices. This easing price pressure is a result of an ongoing decrease in household energy consumption, combined with some seasonal factors as the heating season came to an end in May. This created a lower weighted average unit price of piped gas, the most important factor behind the drop. We'd also like to point out one exception where inflation wasn’t able to ease. For services, prices rose by 0.9% MoM on average in May, moving the yearly index up to 14.3% – though still a weaker acceleration than we expected. There is still a significant repricing of other services (financial and insurance services mostly), but holidays have also become more expensive, along with cultural and leisure services.     Underlying price pressures begin to calmThough the May deceleration of headline inflation was mostly driven by non-core factors, we saw some positive developments in underlying price pressures as well. This means falling inflation in durables, clothing, and processed food. As a result, core inflation came in at 0.5% MoM, the lowest repricing since autumn of 2021. Significant easing of monthly repricing is a result of collapsing domestic demand, with households facing the biggest drop in their purchasing power since the 2008-2009 crisis. Thus, the combination of the eased repricing and higher base ended up in a 2ppt lower YoY core inflation at 22.8%. Other underlying indicators – like declining sticky price inflation – are showing some promising signs that Hungary's economy could soon be out of the woods.       Further easing in price pressures ahead Moving forward, we expect both headline and core inflation to continue to retreat over the coming months – perhaps at a slightly slower pace without a significant downward impact on fuel. Domestic demand will remain constrained, especially given the shortfall in savings.   On the energy front, seasonality might help further reduce the average amount printed on overhead bills. The forint is getting stronger, which also helps to reduce imported inflation. The mandatory price cuts on some basic food items by large retailers could boost a reduction in food inflation – although we have some reservations about the overall impact, given the methodology of inflation calculation. Services might remain the only area where we can still expect some further acceleration in inflation.   Lower inflation forecast, no change in monetary policy view In light of today's surprise, a single-digit inflation rate at the end of the year seems almost certain. In fact, barring an energy and fuel price shock, a sub-10% rate could even be within reach by November. Considering the May inflation print, we have also revised our full-year inflation forecast for this year. We now expect the headline reading to be around 18% rather than 19% on average.   When it comes to the monetary policy implications of the May inflation reading, it will lend more confidence to the National Bank of Hungary to continue its gradual and cautious easing cycle. However, we maintain our view that the central bank will not change its playbook, and we expect to see a copy-and-paste version of the May rate decision on 20 June when decision makers gather for the June rate setting meeting.   This means that, in our view, the effective interest rate (the overnight quick deposit rate) could be cut by 100bp to 16%.

NOK: Inflation surprise adds to the need for more tightening We recently published an update of our Norges Bank and NOK calls, which is based on expectations for the central bank to bring rates to 3.75% or potentially even 4.0% in an effort to support the declining Norwegian krone. This morning, inflation numbers for May were released, and surprised on the upside. Both headline and underlying inflation accelerated to 6.7%, from a 6.4% and 6.3% April level, respectively. While the rate-setting model used by Norges Bank is rather mechanical and includes other factors (like trade-weighted NOK and oil prices), higher inflation may well be due to the substantial weakening of the krone and ultimately suggests there is some urgency to bring rates higher to support NOK. We still expect EUR/NOK to navigate troubled waters in the near term, but continue to target levels close to 11.00 by the end of the year thanks to NOK's strong fundamentals and our expectations for good sentiment for high-beta European currencies in the second half of the year.

The eurozone’s improving inflation outlook could leave the ECB behind the curve Slowly but surely, the inflation outlook for the eurozone is improving. Headline inflation is normalising, but persistent core inflation is complicating things. While this remains the case, the European Central Bank will continue hiking interest rates – but for how long?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply and is widely expected to continue to fall over the months ahead. The decline in natural gas prices has been remarkable over recent months, and while it would be naïve to expect the energy crisis to be completely over, this will result in declining consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there's more to come in terms of a downward impact on inflation. For food, the same holds true. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slowing increases. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Historical relationships and post-pandemic shifts As headline inflation looks set to slow down further – at least in the absence of any new energy price shocks – the question is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 80s are not available for many countries – but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 70s and 80s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   During previous supply-side shocks, core inflation did not remain elevated for much longer than headline inflation

To hike or to hold for the Fed this week     When the Federal Reserve last met at the beginning of May raising rates by 25bps as expected, the market reaction was relatively benign. There was little in the way of surprises with a change in the statement seeing the removal of the line that signalled more rate hikes were coming, in a welcome sign that the US central bank was close to calling a halt on rate hikes.     Despite this signalling of a possible pause, US 2-year yields are higher now than they were at the time of the last meeting.     This is primarily due to markets repricing the likelihood of rate cuts well into next year due to resilience in the labour market as well as core inflation. Some of the recent briefings from various Fed officials do suggest that a divergence of views is forming on how to move next, with a slight bias towards signalling a pause tomorrow and looking to July for the next rate hike.      At the time this didn't appear to be too problematic for the central bank given how far ahead the Federal Reserve is when it comes to its rate hiking cycle. The jobs market still looks strong, and wages are now trending above headline CPI meaning that there may be some on the FOMC who are more concerned at the message a holding of rates might send, especially given that the RBA and Bank of Canada both unexpectedly hiked rates this past few days.     With both Fed chair Jay Powell leaning towards a pause, and potential deputy Chair Philip Jefferson entertaining similar thoughts in comments made just before the blackout period, the Fed has made itself a hostage to expectations, with the ECB set to raise rates later this week, and the Bank of England set to hike next week, after today's big jump in wage growth.       This presents the Fed with a problem given that it will be very much the outlier if it holds tomorrow. Nonetheless there does appear to be increasing evidence that a pause is exactly what we will get, with the problem being in what sort of message that sends to markets, especially if markets take away the message that the Fed is done.     If the message you want to send is that another hike will come in July, why wait when the only extra data of note between now and then is another CPI and payrolls report. You then must consider the possibility that these reports might well come in weaker, undermining the commitment to July and undermining the narrative for a further hike that you say is coming, thus loosening financial conditions in the process.     While headline inflation may well be close to falling below 4% the outlook for core prices remains sticky, and at 5% on a quarterly basis, and this will be an additional challenge for the US central bank, when it updates its economic projections, and dot plots.   The Fed currently expects unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     As markets look to parse this week's new projections the key question will be this, is the US economy likely to be in a significantly different place between now and then, and if it isn't then surely, it's better to hike now rather than procrastinate for another 5 weeks, especially if you are, as often claimed "data dependant".       By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

The worst might be behind Hungary. Yes, the economy is still in a technical recession, but we see a way out from it by the second half of 2023. A key source of the recovery lies in the growing disinflation process.   The collapse of the domestic demand erases the repricing power of companies. Thus, we see a single-digit headline inflation by the year-end and further normalisation in 2024. This means a positive real wage growth yet again from late-2023. However, with depleted household savings and tighter fiscal headroom, we hardly see a boom in domestic demand. The recovery will be export driven, thus we see a quick return to surplus in the current account balance. Improving external financing needs and the new era of monetary policy (eg, persistent positive real interest rates from late-2023) lead us to be constructive towards Hungarian assets.

The worst might be behind Hungary. Yes, the economy is still in a technical recession, but we see a way out from it by the second half of 2023. A key source of the recovery lies in the growing disinflation process. The collapse of the domestic demand erases the repricing power of companies. Thus, we see a single-digit headline inflation by the year-end and further normalisation in 2024.   This means a positive real wage growth yet again from late-2023. However, with depleted household savings and tighter fiscal headroom, we hardly see a boom in domestic demand. The recovery will be export driven, thus we see a quick return to surplus in the current account balance. Improving external financing needs and the new era of monetary policy (eg, persistent positive real interest rates from late-2023) lead us to be constructive towards Hungarian assets.   Forecast summary   Macro digest The Hungarian economy has been stuck in a technical recession for three quarters (3Q22–1Q23) due to sky-high inflation suffocating economic activity. Consumption has been markedly slowing down since last autumn, as households cope with double-digit price increases, resulting in deteriorating purchasing power. On top of this, the high interest rate environment prompted a collapse in private investment activity, coupled with the government’s mandated freeze on public investments.   The only silver lining has been net exports, recently. Export activity is helped by pent-up production in car and battery manufacturing, while imports slow on lower energy demand.   Contribution to YoY GDP growth (ppt)   We expect the economy to emerge from the technical recession in the second quarter of this year, although the year-on-year growth will remain negative. As most economic sectors are still struggling amid weak domestic demand, the one sector that stands out on the positive side is agriculture.   The reason for this lies in base effects, which this time will help a lot, as last year’s energy crisis and drought wreaked havoc on the performance of agriculture.   Though this year’s weather has been favourable as well. In this regard, the fate of the overall 2023 GDP growth rather depends on the performance of agriculture as domestic demand will remain weak for the remainder of the year, curbing industry, construction and services.   Key activity indicators (swda; 2015 = 100%) In parallel with an acceleration of the disinflationary process, we expect the economy to display a rebound from the third quarter, delivering growth in every aspect for the remainder of the year. However, we expect a modest growth rate of 0.2% for 2023 followed by a 3.1% GDP expansion next year, boosted by both returning consumption growth and rising investment activity next to positive net exports.   Headline and underlying measures of inflation (%YoY)     Headline inflation retreated to 21.5% YoY in May, after peaking in January, while core inflation has also improved, with services being the only component where we see upside risks in the short run. As for the other components, food inflation has moderated for five months, while both motor fuel and household energy prices have recently declined, supported by a fall in global energy prices and a stronger HUF. We expect inflation to continue to retreat gradually in the coming months, as demand is vastly constrained by the loss of household purchasing power. In addition, base effects are contributing significantly to this year’s disinflationary process, which will accelerate from the third quarter onwards, thus we see the year-end reading dipping comfortably below 10%. At the same time, we expect inflation to average around 18% for this year, with balanced risks to our forecast. However, after two years of double-digit average inflation figures, we expect the full-year average to come in at around 5% in 2024

Inflation is falling, just not in a straight line Australia introduced a monthly inflation series early this year, though many analysts still seem mistrustful of the data and even the RBA still tends to refer to the quarterly figures when talking about inflation. Like the US, Australian inflation ticked up slightly in April, and almost exclusively because the year-on-year comparison was an unfavourable one. Changes in the CPI index on a monthly basis were little different from previous months. This uptick was as predictable as it was irrelevant. Inflation will fall more rapidly in the coming months as it is unlikely that we will see the large monthly increases that characterised global prices in the aftermath of the Russian invasion of Ukraine.     The three-month annualised rate of inflation is a little over 4%, which equates to an average monthly increase of between 0.3% and 0.4%. Last year’s CPI index rose at a faster rate than this. So even if there is no further reduction in the current trend increases in prices, we should see inflation falling by just under one percentage point over the coming three months. That would take headline inflation down to about 5.8-5.9%. Progress after this could be a little more pedestrian for a while. But absent a repeat of the weather/energy supply shocks of last year, inflation should decelerate forcefully again at the end of 2023 and could slow around a further 1.5pp. This should happen even without assuming any further deceleration in the current trend increase in monthly prices and would take inflation down to the mid-4% level, from which a further decline towards the top end of the RBA’s 2-3% inflation target would be in sight.   Real and nominal cash rates (%)

Tesco maintains full year guidance   Since pushing up to 12-month highs back in May the Tesco share price has slipped back a touch, as the rally from the October lows ran into a little bit of profit taking.   The UK's number one supermarket, along with the rest of the sector has come under some criticism in recent weeks for a reluctance to cut prices amidst accusations of price gouging from politicians keen to divert criticism from their roles in the current crisis.   Even if some of these criticisms were valid, looking a little closer they don't stand up to any sort of scrutiny, but these sorts of details don't always resonate as they should in this post truth environment.   Talk of price caps on certain products from politicians keen to be seen to be doing something about the cost-of-living has only served to muddy the waters further as if somehow these will make things better. As with any problem, there's never a situation where a political intervention can't somehow make it worse.     Like most retailers Tesco has had to deal with rising costs, as have its suppliers at a time when food price inflation is trending at levels close to 20%, and headline inflation has only just dropped below 10%. Last year profits fell by 50% as Tesco was forced to absorb increased costs as well as looking to price match thousands of everyday products, with its nimbler competitors Aldi and Lidl.     When Tesco announced its full year numbers back in April the supermarket announced it was locking in the price of 1,000 other everyday products until July 5th, as it continues to increase the pressure on its competitors. Lower Clubcard prices are also available on over 8,000 lines.     Today's Q1 trading update has seen like-for-like sales in UK stores increase by 9% to £10.8bn with group retail revenues increasing by 8.2% to £14.83bn.   Its Booker business also continues to perform well with like for like sales increasing by 8% to £2.27bn.   Fuel was the only area which saw like for like sales decrease to the tune of 15.7% to £1.7bn.   On a positive note for consumers, Tesco did say that there were signs that inflation is starting to ease across the market.   On guidance Tesco remained optimistic that it would be able to deliver the same level of adjusted operating profit, as last year, despite the ongoing pressure on its margins, while keeping retail free cash flow in the region of £1.4bn to £1.8bn.        

Bank of England rate decision – 22/06 – this week's central bank rate decision is likely to see the implementation of at least another rate 25bps rate hike from Bank of England policymakers, with the usual suspects of Tenreyro and Dhingra expected to dissent once more, despite UK core inflation surging in April to 6.8% and its highest level since the early 1990's.    With this being Tenreyro's last meeting, she is being replaced by Megan Greene next month, the dissent on the MPC is likely to be much less over the coming months. With average wages surging by 7.2% in the 3-months to April, we saw yet another blow to the central bank's tattered credibility, prompting concern that the MPC might have a lot more to do on the rate front in the coming months.   The current terminal rate being priced by markets is for the UK base rate to top out at 5.75%, 125bps higher from where we are now, after the April wages and unemployment data. While that is probably overpriced, the fact we are at these levels is further evidence of the Bank of England's failure on the policy front. The day before this week's decision we will be getting the latest inflation numbers for May which are expected to show headline inflation decline further from the 8.7% we saw in the April numbers. While this was the lowest level since March last year, it remains painfully high when compared to the likes of the US and in Europe.   Core prices are also higher, as wages continue to exert upward pressure on service cost inflation. For months now Bank of England policymakers have consistently underestimated the persistence of current inflationary trends, consistently hiding behind the Russian invasion of Ukraine, even as commodity prices have fallen well below the levels they rose to in the aftermath of that invasion.   While they are not completely to blame, they have made any number of mistakes, which they seem incapable of acknowledging. Offering mea-culpas appears to be beyond them, with officials showing little indication that they would have done anything different. This is especially worrying given that an acceptance that they might have got things wrong might require some introspection with a view to making changes to ensure a better outcome the next time. If a central bank can't acknowledge its mistakes, how can it learn from them and do things better the next time. 

UK CPI (May) – 21/06 – when the April inflation numbers were released there was a widespread expectation that headline inflation would fall back sharply below 10% and to the lowest levels since March last year. That did indeed happen, although not by as much as markets had expected, falling to 8.7%. It was also encouraging to see PPI input and output prices slow more than expected in April on an annual basis, to 3.9% and 5.4% respectively.   Unfortunately, this is where the good news ended as while we saw inflation fall back in April it wasn't as deep a fall as expected with many hoping that we'd see headline inflation slow to 8.2%. The month-on-month figure was much hotter than expected at 1.2% and core prices surged from 6.2% to 6.8%, and the highest level since 1990. The areas where inflation is still looking hot is around grocery prices which saw an annual rise of 19.1%, only modestly lower than the 19.2% in March, while services inflation in hotels and restaurants slowed from 11.3% to 10.2%.   Since then, food price inflation has slowed to levels of around 17%, while this week's headline number is forecast to slow to 8.5%. More worryingly core prices aren't expected to change at all, remaining at 6.8%.      

RBA minutes state that the rate hike decision was close China’s central bank trims key lending rates The Australian dollar has hit a bump in the road and is down 1% this week. In the European session, AUD/USD is trading at 0.6795, down 0.80% on the day.   RBA minutes – rate decision was close The Reserve Bank of Australia has a habit of surprising the markets. The RBA’s rate hike earlier this month was a shocker, as the markets had expected rates to remain unchanged. The minutes of the meeting, released today, indicated that the decision was “finely balanced” between a pause and a hike. In support of a pause, members noted that the sharp increases in rates raised the possibility of the economy stalling. In the end, however, concerns over persistent inflation won the day as the Bank voted to hike rates by 0.25%. The takeaway from the dovish minutes is that the RBA was very close to taking a pause and will be open to holding rates at the July meeting, depending on the data, especially inflation. The Australian dollar has fallen sharply today as investors have lowered their expectations over future rate hikes. The RBA has backed up hawkish words with action, raising rates to 4.1%, the highest level since 2011. Still, inflation has been stickier than expected, and headline inflation jumped in April from 6.3% to 6.8%. The core rate fell from 6.9% to 6.5%, but that is incompatible with the target of 2%. The RBA has projected that inflation will not fall to 2% until mid-2025, which means more hikes are likely, barring a sharp drop in inflation. China’s central bank announced on Tuesday that it was cutting key lending rates, in a move to boost investment and consumption. The post-pandemic recovery has been slow, and soft demand for exports has been bad news for Australia, as China is a key trading partner. China posted 4.5% growth in the first quarter, which was better than expected, but key indicators such as retail spending and industrial output missed expectations in May. . AUD/USD Technical 0.6772 is under pressure in support. Below, there is support at 0.6668 0.6836 and 0.6940 are the next resistance lines        

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

UK inflation shock piles pressure on the Bank of England The bar is set pretty high for the Bank of England to accelerate the pace of rate hikes to 50 basis points this week. But another inflation shocker all but guarantees a 25bp hike tomorrow and another in August.   It’s another month where UK inflation has come in dramatically higher than expected, and that all but guarantees another rate hike from the Bank of England tomorrow. Headline inflation remained unchanged at 8.7% in May, and because the contribution from energy and food reduced, that means core inflation actually rose to 7.1% from 6.8% previously. Unfortunately, things look just as concerning when you look into the figures in more detail. The Bank of England is most focused on services inflation because it tends to exhibit more persistent and less volatile trends. And here we saw a further increase in the annual rate of inflation, and that means the contribution from services to overall headline CPI is about 0.3pp higher than the BoE had previously been forecasting. Crucially, this upside surprise doesn’t appear to be concentrated in any single category.   How May's inflation data compare to the BoE's forecast

Headline inflation should come down more noticeably over the next couple of months, owing to some pretty hefty base effects. Last June saw a near 10% spike in petrol prices, whereas prices are currently falling, and of course in July we’ll see a material fall in household electricity/gas bills. Core inflation we think should come lower too, though to a much lesser degree and mainly because of further renewed downward pressure from certain goods categories.     Headline CPI, we think, will be just below 7% by July and around 4.5% by year-end. Core inflation will probably end the year above 5%.   All of this makes life even harder for the Bank of England. We think the bar for another 50bp hike is set pretty high, but a 25bp hike is basically guaranteed, as is another in August. But markets are now fully pricing a 6% peak for the Bank rate, which implies six more rate hikes from current levels. That seems excessive, and we suspect the Bank of England would privately agree.   When rates got this high last November, the BoE offered some rare pushback against market expectations and signalled a lower peak for rates. But this time, with inflation consistently coming in hotter than expected, we suspect officials will be more reluctant to offer any firm guidance on what comes next. Policymakers won’t want to steer market rate expectations lower, only to find that further inflation surprises force it to go further than it would like over the coming months.    UK inflation should come in lower in June/July on energy base effects   Ultimately though, 6% rates would be extremely restrictive. The current structure of the mortgage market – whereby the vast majority of households are fixed for either two or five years – means rate hikes filter through to the economy fairly gradually. That means that the length of time rates stay restrictive is arguably more important these days than the absolute level interest rates reach over the shorter term. As the BoE itself has made clear, the impact of all those past hikes is still largely to hit the economy – and just taking rates to 5% and keeping them there would exert a large drag on the economy. We also expect the news on inflation to get a little better through the summer. The BoE’s survey measures of inflation have been improving, and forward-looking indicators like producer prices point to more noticeable declines in headline CPI later this year. Crucially, we think the fall in gas prices is good news for service sector inflation, and suggests we could get more noticeable disinflation in this sector, even if wage growth takes longer to ease.

Beyonce bounce keeps a floor under UK CPI Just when you think it can't get any worse, and we thought that UK inflation was on a downward track, UK core CPI goes and jumps to a new 30 year of 7.1%, while headline inflation remained steady at 8.7%. Today's numbers are a further headache for the beleaguered Bank of England monetary policy committee and yet another stick to beat them with.    For a central bank, whose inflation target is 2% and who for so long were insistent that inflation was transitory there is a real risk that anything the central bank does tomorrow will be ignored by financial markets. There is no doubt these numbers are bad news for households as well as the mortgage market, which is already showing signs of strain.   Today's ONS numbers did point to a rather large jump recreation and culture and specifically fees to live music events.   Last week Sweden blamed the "Beyonce" effect for a surprise rise in their own headline inflation rates, and the same thing appears to have happened here in the UK with tickets going on sale for live performances to see Taylor Swift and Beyonce, during the month of May.   Restaurants and hotels also saw a lift during May, and this could have been down to the Coronation and the two bank holidays which provided a lift to that sector.     Food price inflation slowed to 18.3%, however we already know from the latest Kantar survey that in June this slowed to 16.5%, however the process remains glacial, but should continue to slow. The biggest concern is the continued increase in core prices with services inflation remaining sticky, rising to 6.3% from 6% in April.   A lot of this increase in services price inflation will be down to the paying of higher wages to staff, but we can also blame the energy price cap, which has meant that consumers haven't seen sharp falls in the cost of their energy costs straightaway, forcing them to push for higher wages.   This is probably why UK inflation is stickier than its continental peers.   Natural gas prices are already back at levels 2 years ago, yet consumers haven't seen that in their energy bills yet, even as fuel pump prices have. The energy price cap will see a fall in July, and some energy providers are cutting the direct debt payments of their customers already, but it's all so slow.   Amidst all this gloom there is room for optimism if you look at the trends in PPI which tends to be an indicator of where we are heading.   In May input and output prices came in negative month on month to the tune of -1.5% and -0.5%, while China and Germany are also showing increased signs of deflation, which should bring inflation down in the second half of this year. These have been weak all year, however markets aren't looking at these yet, and perhaps they should be because it's likely we'll see inflation come in much lower.    UK gilt yields have jumped sharply on the back of these numbers, with 2-year yields back above 5% and their highest levels since 2008.   Today's numbers have also increased the prospect that we might get a 50bps rate hike, instead of 25bps from the Bank of England tomorrow, pushing bank rate to 5%, to try and get out in front of the narrative, and convince then markets of their determination to hit their 2% target.   Sadly, for the Bank of England that ship has sailed, as very few believe anything they have to say anymore, with financial markets pricing in the prospect of a 6% base rate by the end of this year. As for tomorrow's Bank of England rate decision we could well see the bank raise rates by 50bps instead of the 25bps which is expected.  If we do get 50bps it's quite possible, we may not need a rate hike in August, if the inflation data does start to show signs of easing.   In conclusion, while today's numbers are worrying it's also important not to implement a knee jerk response, when we know part of the reason inflation is sticky is due to the energy price cap. This will come down in July, and in all honesty should be consigned to the dustbin, as its not reactive enough when prices fall.     By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Asia Morning Bites Japanese core inflation excluding food and energy edges higher in May - tees up the Bank of Japan for a July tweak to policy.   Global Macro and Markets Global markets:  After several days of decline, US stocks turned around on Thursday, and equity futures indicate that they may have a little further to go today. The S&P 500 rose 0.37%, while the NASDAQ rose 0.95%. China was out for Dragon Boat Day and will be out today too.  US Treasury yields went higher again. The Yield on both the 2Y note and the 10Y bond rose 7.6bp, taking 10Y yields to 3.795%. 10Y UK Gilt yields fell 3.8bp after the larger-than-expected Bank of England hike. EURUSD pushed above 1.10 yesterday, despite the rise in US yields, but it could not hold on to its gains and has retreated back to 1.0956 – not much changed from 24 hours ago.  G-10 currencies including the AUD and JPY lost ground to the USD, but GBP was steadier, helped by higher rates. Most Asian currencies weakened against the USD yesterday. The THB rose to 35.075, and the SGD rose to 1.3447. USDCNH has risen to 7.1957 and topped 7.20 overnight.   G-7 macro: There were further hawkish comments from Jerome Powell overnight, who said that the US may need one or two more rate hikes. Barkin also indicated that he was happy to see rates go higher. The main macro release from the US for the day was existing home sales. Lack of supply seems to be helping house prices to remain supported, as James Knightley writes here. Initial jobless claims held on to the recent highs at 264K, though continuing claims drifted a little lower. Not quite a smoking gun for the labour market, but it is becoming a little more interesting. The Bank of England’s 50bp hike took markets by surprise. James Smith and Chris Turner write about it here. James notes, “We’re tempted to say that today’s 50bp move won’t become a new trend, but two further 25bp hikes seem like the most likely route after today’s meeting”. Today is another quiet day for macro releases, with nothing of note from the US and only retail sales from the UK to look at.   Japan:  May inflation data came out slightly higher than expected. The headline inflation rate was 3.2% YoY in May (vs 3.5% in April, 3.2% market consensus) but core (3.2%) and "core-core" (4.3%) inflation beat market expectations. Inflation excluding food and energy even rose from 4.1% in April. The headline CPI index was unchanged month-on-month, but goods prices fell 0.1% MoM sa, while service prices rose 0.1%. Housing, transportation, telecommunications, and entertainment prices continued to rise, while utilities fell again. We think there are signs of inflationary pressure building up on the supply side, but it is certainly not strong enough for the BoJ to bring about immediate tightening.Looking ahead, the current energy subsidy program will end in September and some power companies will begin to raise electricity fees again. Thus, we see headline inflation staying above 2% for a considerable time. We expect June Tokyo inflation, released next week, will also pick up again.  We think that the BoJ will upgrade its inflation outlook in July and a yield curve control (YCC) tweak is still possible despite the dovish comments from several board members. They will probably justify their action by saying that a YCC tweak is not a tightening, but instead, that it is done to improve market functionality. Another reason that we think a July tweak is possible is that a shift in YCC may need to come as a surprise to avoid a large bond selloff. Singapore:  May inflation is set for release today.  The market consensus points to a slight softening in inflation with core and headline inflation slipping to 4.7%YoY and 5.4%YoY, respectively.  Continued robust domestic demand is preventing price pressures from dissipating quickly.  Despite the dip in inflation, the MAS will likely be on notice monitoring price developments with core inflation still well above target.  

UK retail sales could surprise to the upside, flash PMIs in focus - By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets fell for the fourth day in succession yesterday, driven lower on worries that central banks will look through concerns over a slowdown in economic activity and prioritise the battle against inflation, and look set to open lower this morning.     These concerns have been magnified in recent days with last week's hawkish Fed meeting, followed by the bigger than expected 50bps rate hikes from the Bank of England and Norges Bank yesterday, as investors started to worry that creating a possible recession was likely to become a necessary side-effect in their willingness to push inflation back down to their 2% targets. Certainly, the sticky nature of core inflation is causing a great deal of anxiety not only on the part of central bankers, but also on the part of those who are due to come off fixed rate mortgages in the next 12 months. The hope is that this period of high rates could soon give way to a softening later in the year, however the big rise in core inflation suggests that we may have to endure them for quite a bit longer.     On the plus side the lowering of the energy price cap next month is already seeing energy companies writing to customers and lowering their monthly direct debits with gas prices now back at 2021 levels. This should start to see headline inflation continue to decline into the end of the year.       While concerns over a possible recession are increasing, a lot of the economic data so far thisyear has proved to be reasonably resilient, which makes the timing of yesterday's decision to be more aggressive by the Bank of England a little bit after the fact.   For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been surprising so far this year, with clothing retailer Next surprising the market earlier this week when it upgraded its full year profits forecasts on better-than-expected trading activity.   Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent increase in interest rate costs that are likely to act as a drag in H2 of this year. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February.   The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year.   For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns. We also have the latest flash PMI numbers for June which are likely to continue to exhibit one of the more notable trends we've seen in recent months, which has been an ongoing divergence between services sector activity and manufacturing activity.   This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Both of these are expected to remain close to current levels.   Services continue to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56. Again, these are expected to come in slightly weaker at 52.1 and 56.3.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling, coming at 47.1 in May, while services also slowed to 55.2 from 55.9. UK manufacturing is expected to soften to 46.8 and services to 54.8.     Lower fuel costs may offer some support here; however, most service providers are struggling with higher costs, which by and large they are having to pass on.    EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – spiked up to 1.2850 yesterday before slipping back, however it remained above the lows this week at the 1.2680/90 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510, but needs to clear 1.2850.      EUR/GBP – failed between the 0.8630/40 area before slipping back. The main support is at least weeks low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally cracked the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 27 points lower at 7,475     DAX is expected to open 120 points lower at 15,868     CAC40 is expected to open 53 points lower at 7,150

German Ifo index plunges in June The Ifo index has dropped or more accurately, collapsed, for the second month in a row, suggesting that the rebound of the German economy has ended before it ever really began.   In June, Germany’s most prominent leading indicator, the Ifo index, dropped for the second consecutive month, after a six-months expansion, coming in at 88.5 from 91.7 in May. The weaker-than-hoped-for Chinese reopening, a looming US recession and ongoing monetary policy tightening seem to be weighing on German company sentiment. Also, the growing feeling that Germany is in for a longer period of subdued growth seems to have reached German business. Both the current assessment and the expectations component fell. Expectations are now as low as at the end of last year.   Uncomfortable reality check We still don’t know what the best title for the current German economic situation should be: ‘The Great Decoupling’ or ‘The rebound that never came’ are clear favourites after today’s Ifo index release. Since last year, soft or leading indicators have become rather more 'soft' than 'leading'. Remember that the Ifo index had been on an upward trend since last autumn, while the economy actually shrank by 0.5% quarter-on-quarter in the fourth quarter of 2022 and 0.3% in the first quarter of 2023. An unprecedented war, energy crisis and fiscal stimulus have clearly weakened the relationship between soft and hard data - be it the 50 threshold of PMIs or the trend in other previously reliable indicators like the Ifo index or the European Commission’s economic sentiment index. At the current juncture, all traditional leading indicators have to be taken with a large pinch of salt.   Back to the German economy. What is clear is that the optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books, as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic changes, and the current energy transition will structurally weigh on the German economy in the coming years. However, all is not bleak. The stuttering Chinese rebound could easily bring some temporary positive surprises as well. Also, the drop in headline inflation and the actual fall in energy and food prices combined with higher wages should support private consumption in the second half of the year.   Today's disappointing Ifo index reading suggests that the hoped-for rebound of the German economy is nothing more than hope. Optimism is fading and the economy faces new growth concerns. We are not saying that the economy will be stuck in recession for the next couple of years, but with several short and long-term challenges, growth will remain subdued at best.

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

CAD: Inflation numbers in focus Markets are split around whether the Bank of Canada will follow up with another rate hike in July after resuming tightening in June. The CAD OIS curves is currently pricing in 15bp for the 12 July meeting, while fully factoring in a hike by September. Today’s inflation data in Canada will be key to driving market expectations for the July decision. Consensus is looking for a rather substantial slowdown in headline inflation from 4.4% to 3.4%, while the core measure should decelerate to around 4.0%. We are still inclined to think that the BoC will go for another hike in July, and it may take a sub-consensus read in underlying inflation today to convince them not to. Either way, with the Fed still threatening to tighten more, it seems hard to fully price out BoC tightening down the road, and CAD – which has the best volatility-adjusted carry in G10 – may not fall out of markets’ favours just yet. We still target sub-1.30 levels in the third quarter.

Spanish inflation falls below 2% for the first time in two years Spain's inflation outlook improved further in June. Headline inflation fell below 2% for the first time since March 2021. However, inflation is expected to pick up in the second half of the year due to several factors, including higher oil prices and the fading of favourable base effects.   Spanish inflation reaches 2% target The downward trend in Spanish headline inflation continues, falling to 1.9% year-on-year in June from 3.2% YoY in May. This month's sharp fall in inflation was expected given the jump in June last year. This marks the first time in about two years, since the start of the spike in inflation, that inflation is back in line with the ECB's 2% target. Headline inflation has now fallen to 1.9% YoY, after peaking at 10.8% in July 2022, while the HICP gauge stands at 1.6% YoY, down from its peak of 10.7% in July last year. Core inflation fell further to 5.9% in June from 6.1% in May, showing that disinflationary pressures are broadening.  

Korea trade and inflation data set for release Exports in Korea are expected to contract again in June. But due to strong auto and vessels exports, the contraction (-6.4%) should be quite a bit lower than the previous month of -15.2% YoY. We think vessel exports should be strong this year due to the imminent delivery of pre-order ships, considering that the shipbuilding period is at least two-to-three years. But since this does not reflect the current global demand cycle, it is necessary to focus more on exports excluding ship data to understand global demand conditions better. Meanwhile, we expect consumer inflation to decelerate quite sharply in June and reach the 2% range mainly due to the high base last year. The gains from utility fees should be partially offset by the decline in gasoline, fuel and rent prices.   Japan's Tankan survey to show economic recovery Business survey data will be released in Japan next week. Both Tankan and PMI surveys will show that the country’s economy is on the path to recovery, led by solid service activity in particular.   Inflation to moderate further in Indonesia and the Philippines Headline inflation is set to moderate further for both Indonesia and the Philippines. Inflation should remain within target in Indonesia, settling at 3.8%YoY, while core inflation could be flat at 2.7%YoY. Meanwhile, Philippine inflation should sustain its downtrend, with May inflation possibly slipping to 5.5%YoY from 6.1% previously. Slowing inflation should give both Bank Indonesia and the Bangko Sentral ng Pilipinas space to keep rates untouched in the near term.    Key events in Asia this week

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

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

EUR: Core inflation issues continue for the ECB The decrease in headline inflation in June was likely insufficient for the European Central Bank given the tick-up in core prices (from 5.3% to 5.4% for the whole euro area). With President Christine Lagarde having pre-committed to a July hike, the discussion is currently around a move in September. Markets are fully pricing in two final hikes, but not by September. Either way, the stickiness in core inflation will give the ECB hawks a chance to reinforce their message. With ECB members having had the opportunity to clarify their rhetoric at the Sintra symposium last week, this week’s speakers may not have a very strong impact on the euro, even though markets will be interested in comments following the inflation report for June. It seems likely that the USD leg will drive most of the EUR/USD moves this week, especially once US data starts to come in. There is some room for the pair to decline modestly on the back of some dollar strength, although a big drop below 1.0800 may be premature.

Inflation slips in Indonesia, but central bank expected to keep rates on hold Inflation in Indonesia fell to 3.5% year-on-year in June, from 4% in May, which was slightly below market expectations.   Headline inflation slipped to 3.5% year-on-year in June, down from 4.0%YoY in the previous month. The June reading was slightly below market consensus for a 3.6%YoY rise with prices up only 0.14% from May. Meanwhile, core inflation dipped to 2.6%, down from 2.7% in May.  A favourable base, in addition to moderating commodity prices, has helped steer prices back within target. We expect inflation to remain subdued in the near term, barring substantial supply-side shocks.   Inflation comfortably back within target     Bank Indonesia likely to extend pause Bank Indonesia (BI) hiked aggressively in late 2022 to help bring inflation back within target. However, despite price pressures abating, we do not expect the central bank to resort to rate cuts as it hopes to ensure continued support for the Indonesian rupiah.  Foreign exchange stability will likely determine any BI rate adjustment, and we expect Governor Perry Warjiyo to extend his pause until IDR stabilises.

For the global economy, the first half of the year was packed with action. The remainder of the year will see a further weakening of the global economy, a rapid fall in headline inflation, and a dearth of central bank rate cuts.   Our three calls for the remainder of 2023  It’s halftime for 2023 but not halftime like at the Super Bowl with Snoop Dogg, Shakira or Rihanna. It’s halftime of the economic year, and economists are taking a deep breath with no singing or dancing (even if some of us might have hidden talents). It is simply the moment to assess the first half of the year and to sharpen our minds (and calls) for the second half. For the global economy, the first half of the year was packed with enough action for an entire year. An energy crisis in Europe that was avoided thanks to a mild winter and fiscal stimulus. A reopening of China that is more sluggish and wobblier than hoped for. A banking crisis in the US and Switzerland which hasn’t ended in a global financial crisis as feared. Unprecedented central bank tightening and gradually retreating inflation, with the latter not necessarily the result of the former. Against this backdrop, the age-old question of whether the glass is half-empty or half-full comes to mind. Should we cherish the current resilience of many economies and the financial system as things could have become much worse? Or should we moan about the missed opportunities, lacklustre growth and a still very long list of potential risks? As is so often the case, the truth is probably somewhere in the middle.     Looking ahead, the risk for every forecaster is the temptation to spread optimism and predict an upturn of almost everything towards the end of the year (or the end of the forecast horizon as many traditional macro models do). We are more cautious. The fact that things didn’t get as bad as feared does not automatically lead to a return of optimism or a surge of economic activity. In fact, the structural themes of the last few years are still pressing and impacting the economic outlook. Think for example of geopolitical tensions, the war in Ukraine, demographics, climate change more generally and more specifically the energy transition, and high government debt. It is impossible to tell how and when exactly these factors will affect growth or an inflation forecast profile but we definitely know that these effects are here and they are here to stay. Let’s be a bit more precise and come back to economic developments in the second half of this year. Bold or not, we have three major calls for the remainder of the year: Further weakening and not strengthening of the global economy. Headline inflation will retreat faster than central banks currently think. Rate cuts are a 2024 but not a 2023 story. Let's look at these three calls in more detail. The global economy will further slow down and "slowcessions" are likely in several parts of the developed world. The Chinese reopening will continue to stutter, the US economy is likely to experience a winter recession and the eurozone will remain in this twilight zone between stagnation and recession. Besides negative base effects from energy and food prices, the cooling of many economies will lower wage pressure, reduce inflation pipeline pressures and will increasingly lead to price discounts. Headline but also core inflation are likely to come down faster than central banks anticipate towards the end of the year. The phenomenon of "slowcessions" is a new challenge for central banks. Reacting to a more pronounced cycle is much easier as it takes much longer to identify a "slowcession". Until central bankers have realised that we are in a "slowcession" for good, they will continue hiking rates, not cutting them. If we are right, central bankers will adjust to the new reality in the last months of the year, acknowledging weaker growth, broader disinflation and no further need for rate hikes. It might not be as eye-catching as Janet Jackson and Justin Timberlake, but it is definitely an exciting view of the global economy. Have a good summer.  

European Central Bank The message from the ECB since the June meeting has been clear: the job is still not done and more rate hikes will follow. Despite a weakening growth outlook and headline inflation coming down, the ECB doesn’t want to take any chances. The Bank has to be sure that it has slayed the inflation dragon before considering a policy change. This is why it is putting more emphasis on actual inflation developments, and why it will rely less on forecasts than in the past. This is a big risk as we still think the ECB is too optimistic about the eurozone’s growth outlook. Historic evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. Against this backdrop, further rate hikes increase the risk of a more significant slowing of the economy further down the road. If we are right and the economy remains weak, the disinflationary process gains momentum and core inflation starts to drop after the summer, the ECB’s hiking cycle should end with the September meeting, though the Bank might wait until the December meeting to officially declare it over.    

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

The services sector is still thriving, however, and enjoying the post-pandemic shift from goods to services. Services most affected by lockdowns are currently experiencing much faster price growth than other services or goods. While the upcoming summer holiday period could still fuel service price inflation, we did see a decline last month. The drop was largely due to cheaper public transportation tickets in Germany, however, so it seems too early to call a significant improvement in services inflation just yet. Finally, services inflation traditionally shows a much stronger correlation with wage growth than goods inflation. With wage growth trending up and probably coming in at around 5% year-on-year in the eurozone, services inflation remains the largest problem for core inflation and the ECB.   Still, a key question remains over how long the divergence between goods and services inflation can last. Historically, we don’t see much evidence of an extended difference between the two. Goods inflation typically leads services inflation by approximately six months, which means that the peak in the former from February suggests that the latter is unlikely to remain elevated for the rest of the year. If we are right and the post-pandemic shift ends after the summer holiday period, we could see services inflation starting to come down before the end of the year.   Core inflation set to trend down from here on out While services inflation continues to see some upside risk for the months ahead, core inflation overall looks set to trend down on the back of slowing goods prices. Even services inflation could already be trending down, but perhaps not as fast as policymakers would like it to. When looking at selling price expectations for sectors that sell most to consumers, we see that there has been a steady downturn in the number of businesses intending to raise prices. This generally correlates fairly well with core inflation developments seven months later, which would point to a significant slowdown in the core rate. At the current juncture, experts and central bankers will be hesitant to make an outright call for a sharp drop in inflation. The latest track record of inflation forecasting is simply not on their (or our) side. Nevertheless, as much as it was once obvious that the era of low inflation had to end at some point, it's now clear that the short period of surging inflation will also cease sooner or later. Historical evidence and the latest developments in both goods and services give enough comfort to expect both headline and core inflation to decline. We currently expect core inflation to drop below 4% at the end of the year and for it to fall to 2.5% by mid-2024. The risks to that outlook seem to be fairly balanced, with more stubborn core inflation on the back of faster wage growth and a faster drop on the back of weak goods inflation both decent possibilities.        

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

ING’s July Monthly: The economic twilight zone. Following an action-packed first half of the year, the remainder of 2023 will see a further weakening of the global economy, a rapid fall in headline inflation, and a dearth of central bank rate cuts.   Executive summary For the global economy, the first half of the year was packed with enough action for an entire year. An energy crisis in Europe that was avoided thanks to a mild winter and fiscal stimulus. A reopening of China that is more sluggish and wobblier than hoped for. A banking crisis in the US and Switzerland which hasn’t ended in a global financial crisis as feared. Unprecedented central bank tightening and gradually retreating inflation, with the latter not necessarily the result of the former. Against this backdrop, the age-old question of whether the glass is half-empty or half-full comes to mind. Should we cherish the current resilience of many economies and the financial system as things could have become much worse? Or should we moan about the missed opportunities, lacklustre growth and a still very long list of potential risks? As is so often the case, the truth is probably somewhere in the middle. Looking ahead, the risk for every forecaster is the temptation to spread optimism and predict an upturn of almost everything towards the end of the year (or the end of the forecast horizon as many traditional macro models do). We are more cautious. The fact that things didn’t get as bad as feared does not automatically lead to a return of optimism or a surge of economic activity. We have three major calls for the remainder of the year: Further weakening and not strengthening of the global economy. Headline inflation will retreat faster than central banks currently think. Rate cuts are a 2024 but not a 2023 story. Catch all of the details from our global team of economists and analysts in our latest Monthly Economic Update for an insight into what could be next for the global economy over the second half of the year.  

For the global economy, the first half of the year was packed with action. The remainder of the year will see a further weakening of the global economy, a rapid fall in headline inflation, and a dearth of central bank rate cuts   Our three calls for the remainder of 2023 It’s halftime for 2023 but not halftime like at the Super Bowl with Snoop Dogg, Shakira or Rihanna. It’s halftime of the economic year, and economists are taking a deep breath with no singing or dancing (even if some of us might have hidden talents). It is simply the moment to assess the first half of the year and to sharpen our minds (and calls) for the second half.   For the global economy, the first half of the year was packed with enough action for an entire year. An energy crisis in Europe that was avoided thanks to a mild winter and fiscal stimulus. A reopening of China that is more sluggish and wobblier than hoped for. A banking crisis in the US and Switzerland which hasn’t ended in a global financial crisis as feared. Unprecedented central bank tightening and gradually retreating inflation, with the latter not necessarily the result of the former   Against this backdrop, the age-old question of whether the glass is half-empty or halffull comes to mind. Should we cherish the current resilience of many economies and the financial system as things could have become much worse? Or should we moan about the missed opportunities, lacklustre growth and a still very long list of potential risks? As is so often the case, the truth is probably somewhere in the middle.   Looking ahead, the risk for every forecaster is the temptation to spread optimism and predict an upturn of almost everything towards the end of the year (or the end of the forecast horizon as many traditional macro models do). We are more cautious. The fact that things didn’t get as bad as feared does not automatically lead to a return of optimism or a surge of economic activity.   In fact, the structural themes of the last few years are still pressing and impacting the economic outlook. Think for example of geopolitical tensions, the war in Ukraine, demographics, climate change more generally and more specifically the energy transition, and high government debt. It is impossible to tell how and when exactly these factors will affect growth or an inflation forecast profile but we definitely know that these effects are here and they are here to stay   Let’s be a bit more precise and come back to economic developments in the second half of this year. Bold or not, we have three major calls for the remainder of the year: • Further weakening and not strengthening of the global economy. • Headline inflation will retreat faster than central banks currently think. • Rate cuts are a 2024 but not a 2023 story.     Let's look at these three calls in more detail. The global economy will further slow down and "slowcessions" are likely in several parts of the developed world. The Chinese reopening will continue to stutter, the US economy is likely to experience a winter recession and the eurozone will remain in this twilight zone between stagnation and recession.   Besides negative base effects from energy and food prices, the cooling of many economies will lower wage pressure, reduce inflation pipeline pressures and will increasingly lead to price discounts. Headline but also core inflation are likely to come down faster than central banks anticipate towards the end of the year.   The phenomenon of "slowcessions" is a new challenge for central banks. Reacting to a more pronounced cycle is much easier as it takes much longer to identify a "slowcession". Until central bankers have realised that we are in a "slowcession" for good, they will continue hiking rates, not cutting them. If we are right, central bankers will adjust to the new reality in the last months of the year, acknowledging weaker growth, broader disinflation and no further need for rate hikes.   It might not be as eye-catching as Janet Jackson and Justin Timberlake, but it is definitely an exciting view of the global economy. Have a good summer.

The resilience of the US economy makes a July rate hike look a certainty, with the market sensing a strong chance that we get another before the year's end. In the UK, the size of the August rate hike seems to be dependent on wage inflation data. US: July rate hikes look certain The resilience of the US economy has seen market interest rate expectations push higher with the yield on the 10Y Treasury bond breaking above 4%. A July rate hike looks certain, with the market sensing a strong chance that we get another hike, as suggested by the Federal Reserve, before year-end. The upcoming data flow centres on inflation and here we expect to see some good news, with lower energy costs, softening food prices, a topping out in housing rents and falling vehicle prices set to partially offset strength in the core services ex-housing component that the Fed is so fearful of. A 0.3% month-on-month reading for headline and core inflation would see the annual rate of headline inflation slowing to 3.1% from 4% and core (ex-food and energy slowing to 5% from 5.3%). While this will do little to alter the likelihood of a July hike, it could at the margin provide a little relief and see longer-dated interest rate expectations tick a little lower. Pipeline price pressures are set to offer more encouragement that inflation can continue slowing, with the PPI report set to show annual increases in producer prices slowing to just 0.4%YoY with the core PPI rate slowing to 2.5%. We will also be closely following the National Federation of Independent Businesses’ pricing intentions survey. A further decline in company appetite to hike prices would offer encouragement that we will also start to see more of an easing in service sector inflation.    

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

New Zealand’s central bank takes a pause after 12 consecutive hikes New Zealand Manufacturing PMI expected to show manufacturing is stalled US inflation expected to decline to 3.1% The New Zealand dollar showed some gains after the Reserve Bank of New Zealand paused rates, but has given up most of those gains. In the European session, NZD/USD is trading at 0.6206, up 0.14%.   RBNZ takes a breather There was no dramatic surprise from the RBNZ, which kept interest rates on hold at Wednesday’s meeting, as expected. The central bank has been aggressive, raising rates 12 straight times since August 2021 until Wednesday’s meeting. This leaves the cash rate at 5.50%. The RBNZ had signalled that it would take a break, with Deputy Governor Hawkesby stating last month that there would be a “high bar” for the RBNZ to continue raising rates. Today’s rate statement said that interest rates were constraining inflation “as anticipated and required”, adding that “the Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range.” The RBNZ did not issue any updated forecasts or a press conference with Governor Orr, which might have resulted in some volatility from the New Zealand dollar. The central bank has tightened rates by some 525 basis points, which has dampened the economy and chilled consumer spending. Is this current rate-tightening cycle done? The central bank would like to think so, but that will depend to a large extent on whether inflation continues to move lower toward the Bank’s inflation target of 1-3%. The pause will provide policymakers with some time to monitor the direction of the economy and particularly inflation. If inflation proves to be more persistent than expected, there’s every reason to expect the aggressive RBNZ to deliver another rate hike later in the year. New Zealand releases Manufacturing PMI for June on Wednesday after the rate decision. The manufacturing sector has contracted for three straight months, with readings below the 50.0 line, which separates contraction from expansion. The PMI is expected to rise from 48.9 to 49.8, which would point to almost no change in manufacturing activity. The US will release the June inflation report later in the day. Headline inflation is expected to fall from 4.0% to 3.1%, but core CPI is expected to rise to 5.3%, up from 5.0%. If core CPI does accelerate, that could raise market expectations for a September rate hike. A rate increase is all but a given at the July 27th meeting, with the probability of a rate hike at 92%, according to the CME FedWatch tool.   NZD/USD Technical 0.6184 is a weak support level. Below, there is support at 0.6148 0.6260 and 0.6383 are the next resistance lines  

A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than-hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024. Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural. Fiscal and monetary austerity will extend economic stagnation With the economy on the edge of recession, the government’s decision to return to (almost) balanced fiscal budgets next year is a bold move. No doubt, after years of zero and sometimes even negative interest rates, Germany’s interest rate bill is increasing and there are good reasons to stick to fiscal sustainability in a country that will increasingly be affected by demographic change (and its fiscal impact). Nevertheless, the last 20 years have not really been a strong argument for pro-cyclical fiscal policies. With both fiscal and monetary policy becoming much more restrictive, the risk is high that the German stagnation will become unnecessarily long. Waiting for 'Agenda 2030' In the early 2000s, the trigger for Germany to move into the final stage of change management, 'acceptance' (and solutions), was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. In fact, a protracted period of de facto stagnation without a severe recession may reduce the sense of urgency among decision-makers and suggests Germany could be stuck in the stages of denial, anger, bargaining and possibly depression for a long time. Two decades ago, it took almost four years for Germany to go through the five stages of change. We hope this time that history will not be repeated.   German economy in a nutshell (%YoY)  

Tourism will be the main growth driver this year The slowdown in the Spanish economy can be attributed to the overall deceleration of the global economy. Nevertheless, Spain is poised to become the best-performing economy among the larger eurozone countries this year. We forecast average growth of 2.2% for Spain this year, well above the eurozone average of 0.4%. Continued growth in the tourism sector will be the main driver of Spain's higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year. In May, the number of international visitors had already risen to 104% of the pre-pandemic level, compared with 88% in May 2022. Strong travel demand points to a promising tourist season ahead. Contributing about 15% to GDP, the tourism sector will remain one of the main catalysts for economic growth throughout the year.   The number of foreign tourists increased above pre-Covid levels in April and May (in millions)     Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   Spanish economy in a nutshell (%YoY)  

While other eurozone countries are recording significant declines in headline inflation, the downward trend in Austrian inflation is, optimistically speaking, sluggish. This decreases Austria's attractiveness, both in terms of industry and tourism, and will ultimately lead to a decline in the country's competitiveness   Better than expected, but far from good After the first flash estimates indicated that the Austrian economy had contracted slightly by 0.3% quarter-on-quarter in the first quarter of 2023, the final revision revealed a small increase of 0.1% quarter-on-quarter, which could be considered stagnation rather than growth. While the construction sector and other economic services supported economic activity in the first three months of 2023, the slowdown in activity in the manufacturing, trade and transport sectors had a negative impact. As in the rest of the eurozone, Austria is witnessing a divergence between industry and services. Looking ahead, however, this divergence doesn’t look sustainable. In fact, due to the loss of consumers' purchasing power and accelerating service inflation, the outlook for the services sector is also expected to become gloomier. Sticky inflation to weigh on services sector While other eurozone economies have recorded significant declines in headline inflation, the downward trend in Austrian inflation has been sluggish so far. In June, headline inflation in Austria came in at 7.8% year-on-year, against 5.5%YoY in the eurozone. Compared with the peak reached in October last year, headline inflation in the monetary union fell by 5.1 percentage points. In Austria, the decline in headline inflation between October 2022 and May this year was 3.8 percentage points only – the disinflationary trend beginning to unfold in other eurozone economies is being sought in vain in Austria. This will affect the service sector in two ways. First, private consumption will suffer from persistently high price levels, especially since part of the cost of living is determined by administered prices, which in Austria are mostly indexed and thus increased based on inflation. This applies, amongst others, to public services, the rent of social housing or telecommunications. Moreover, services inflation is tending to accelerate, and there is no sign of an easing of price pressures in the sector. Second, persistently high inflation will cause Austria's tourism sector to lose competitiveness. The hotels and restaurants component of the inflation basket recently became 13.1% more expensive year-on-year, and recreation and culture went up by 7%. In the eurozone, inflation in these categories was 8.4% and 5.7% respectively. If tourism in Austria becomes significantly more expensive than in other eurozone countries, tourists might switch to other holiday destinations. Inflation in the services sector is also likely to be amplified by wage increases. Wages in the Austrian accommodation and food services sector increased by around 28% between the fourth quarter of 2019 and the first quarter of 2023. In the eurozone, wages in the sector came up by 16% over the same period. Strong wage growth in this sector was probably the result of a particularly high lack of skilled workers.

Germany needs an ‘Agenda 2030’. A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda   As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than- hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024.   Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural.

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

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

Bank of Canada raises rates by 0.25% US inflation falls to 3.0%, lower than expected The Canadian dollar has posted strong gains in Wednesday’s North American session. In the North American session, USD/CAD is trading at 1.3146, down 0.63%. On the economic calendar, it has been a busy day, with the Bank of Canada raising interest rates and US inflation falling lower than expected.   Bank of Canada hikes by 0.25% The Bank of Canada raised rates by 0.25% on Wednesday, bringing the cash rate to 5.0%. The BoC has delivered 475 basis points in hikes since March 2022 and the aggressive tightening has sent inflation lower. Still, the BoC’s rate statement noted that it remains concerned that progress towards the 2% target could stall and that it does not expect to hit the target before mid-2025. This can be considered a hawkish hike and the Canadian dollar has responded with strong gains on Wednesday.   US inflation falls more than expected Wednesday’s US inflation report should please the Federal Reserve, which has circled high inflation has enemy number one. The June release showed headline inflation falling to 3.0%, down from 4.0% in May. This beat the consensus estimate of 3.1% and was the lowest level since March 2021. Even more importantly, the core rate fell from 5.3% to 4.8%, below the consensus estimate of 5.0%. On a monthly basis, both the headline and core rate came in at 0.2%, below the consensus estimate. The inflation release was excellent news, but isn’t expected to change the Fed’s plans to raise rates at the July 27th meeting. The inflation data didn’t change market pricing for the July meeting (92% chance of a hike), but did raise the chances of a September hike from 72% prior to the inflation release to 80% after the release. Although the jobs report on Friday showed nonfarm payrolls declining considerably, wage growth was higher than expected and likely convinced the Fed to raise rates at the July 26th meeting before taking a pause.   USD/CAD Technical There is resistance at 1.3191 and 1.3289 1.3105 and 1.3049 are providing support    

RBA Governor Lowe announces major changes at RBA Board US inflation expected to decline The Australian dollar was sharply higher on Wednesday but could not consolidate these gains. AUD/USD is unchanged in Europe, trading at 0.6691.   Will RBA Governor be replaced? Reserve Bank of Australia Governor Lowe spoke on Wednesday and announced key changes to the RBA Board. The moves were in response to a scathing review that called for major changes in how the RBA Board operates. Lowe announced that the RBA Board would meet eight times a year rather than the current eleven times, although each meeting would be longer. The RBA Governor will hold a press conference after every meeting to explain the Board’s interest rate decision. As well, the rate statement announcing the decision will be issued by the Board, rather than the governor as is currently the case. The RBA and particularly Governor Lowe have faced intense criticism over their rate decisions, in particular Lowe’s promise as late as November 2021 that he would not raise rates until 2024. This resulted in households borrowing heavily, only to be whacked with an aggressive rate-tightening campaign in early 2022. Lowe later claimed that he had not made such a promise but the damage was done and it’s a strong possibility that he may be replaced as RBA Governor- a decision could be made in the next few days. Lowe has indicated he would be happy to remain at the helm of the RBA. Lowe’s speech also touched on policy but didn’t add anything new. Lowe said that the full effects of high rates were yet to be felt and it remained to be seen if more hikes would be required. Lowe said the situation remains complex, which is very much the case both for the Australian economy and his role as Governor.   US inflation expected to drop All eyes are on the US June inflation report, which will be released later on Wednesday. Headline inflation is expected to drop to 3.1% y/y, down from 4.0%. That would be good news, but the Fed will be more interested in how the core rate performs. Core CPI is expected to fall from 5.3% y/y to 5.0%, and on a monthly basis from 0.4% to 0.3%. If the core rate is higher than expected, we could see market pricing rise with regard to a September hike. A rate hike at the July 27th meeting is widely expected, but the key question is what is the Fed planning after that, and today’s inflation release could help answer that question. . AUD/USD Technical AUD/USD is testing support at 0.6666. This is followed by support at 0.6623 0.6732 and 0.6838 are the next resistance lines  

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.  

USD/CAD approaches key support The Canadian dollar initially weakened after headline inflation fell to a 27-month low, dropping from 3.4% to 2.8%, more than the eyed 3.0% consensus estimate.  The rates that the BOC focuses on, the so-called trim and median core rates, were a little sticky, which could suggest underlying price pressures are still too high.  The Canadian dollar has been rallying but if global slowdown fears increase, that could keep the Loonie locked in its longer-term consolidating range. The Canadian dollar has major support from the trendline beginning last June.  If price breaks below the upward sloping trendline, bearish momentum could target the 1.3020 level.  A daily close below 1.2950 could open the door for selling momentum to target the 1.2750 area. Inflation is making its way towards the BOC’s 2% inflation target, but it seems more tightening might not be needed to get inflation there. If Friday’s retail sales report shows the consumer remains resilient, that could trigger further Canadian dollar strength.  

Canada’s inflation expected to ease US retail sales projected to improve The Canadian dollar is almost unchanged on Tuesday, trading at 1.3204. USD/CAD should show some life in the North American session, with the release of Canadian inflation and US retail sales.     Will Canada’s core inflation fall? Canada releases the June inflation report later today, and the Bank of Canada will be hoping for good news. On an annualized basis, headline inflation is expected to drop to 3.0%, down from 3.4% in June, while the core rate is projected to fall from 3.7% to 3.5%. On a monthly basis, the markets are expecting mixed news. CPI is expected to tick lower to 0.3%, down from 0.4% but core CPI is projected to rise from 0.4% to 0.5%. The Bank of Canada raised rates by 0.25% last week, which brought the benchmark cash rate to 5.0%. The BoC will have some time to monitor the economy, with the next rate meeting on September 6th. The BoC would like to take a pause in September but may have to wait until later in the year if the economy does not show further signs of cooling before the September meeting.   US retail sales expected to climb The US economy is by and large in good shape, despite aggressive tightening by the Federal Reserve in order to curb high inflation. A key driver behind the economy’s strong performance has been consumer spending, which accounts for two-thirds of economic activity. The US releases the June retail sales report later today, with expectations that consumers remain in a spending mood. The consensus estimate for headline retail sales is 0.5% m/m, up from 0.3%, and the core rate is expected to rise 0.3%, up from 0.1%. The retail sales release is unlikely to change expectations that the Fed will raise rates at the July 27th meeting, with a 96% chance of a hike, according to the CME Tool Watch. However, an unexpected reading could lead to a repricing of a September rate hike, which has just a 14% probability. . USD/CAD Technical There is resistance at 1.3205 and 1.3318 1.3106 and 1.3049 are providing support    

It's been a long time coming but inflation in the UK is finally on the decline and in a rare show of good news, it's falling at a faster pace than expected on both the headline and core levels.  We haven't been treated to many reports like this over the last couple of years, and even when we have any enthusiasm has quickly been extinguished. But this feels different. Without wanting to fall victim to the "this time it's different" mantra that often precedes a terrible turn of events, there is something more promising about this shift. It follows similar declines in the US and the eurozone in recent months, both of which were sharper than expected and at the headline and core level. Unless this is a blip across the board, which is possible, it may be a sign that inflation is on a path to more modest and sustainable levels.  Of course, there's still an awfully long way to go and the central bank is not going to declare victory on the back of one release. But those wild interest rate forecasts of 6.5%+ that we've been seeing may start to be pared back, perhaps quite significantly as it becomes clear that favourable base effects combined with lower energy and food inflation and the impact of past hikes start to have a substantial impact on the data.  The pound has fallen quite heavily on the back of the release which probably reflects those expectations now being pared back. I don't want to get too carried away but peak rate expectations may now be behind us which could make for a more hopeful second half of the year.  I say I don't want to get carried away but then, upon seeing the release, I was immediately reminded of the famous Office US "It's happening!" scene that is so often widely circulated on social media so perhaps I also, in the words of Michael Scott, need to stay calm.   Oil flat but recent developments have been positive Oil prices are a little flat early in the European session after bouncing back a little on Tuesday. Since breaking above the recent range highs late last week, oil prices have been a little choppy although importantly they have held above that prior range and, in the case of Brent crude, seen support around the previous highs. That could be viewed as a bullish technical signal, although that will naturally depend on a number of other factors including the economic data and what producers are doing. Both have been favourable for prices recently, helping Brent break back above $80 for the first time in almost three months.   Gold eyeing another move above $2,000?  Gold broke higher again on Tuesday after briefly paring gains late last week and early this. Lower yields and a weaker dollar are continuing to boost its appeal on the back of some more promising inflation data and lower interest rate expectations. The yellow metal broke above $1,960 yesterday before running into some resistance around $1,980. It's now closing in on $2,000 which is the next major barrier to the upside, a break of which may suggest traders have turned bullish on gold after two months of declines.   Is bitcoin looking vulnerable after yesterday's break?  Bitcoin is back above $30,000 today but looking vulnerable to another dip below. Broadly speaking, the cryptocurrency has been range-bound over the last month but it has drifted toward the lower end of this and the move below $30,000 yesterday may have made some nervous. If we do see a significant break lower, the next key area of support may be found around $28,000.

The Mexico 10yr rate spread to the US looks quite tight versus the central banks rate spread     Material and ongoing falls in Mexican inflation pushes in the same direction, with the fall in the headline rate from almost 9% to 5% facilitating the material falls seen in longer tenor market rates. As Mexican inflation falls and the policy rate rises and remains elevated, the result is a significant rise in real rates. The chart below shows the Banxico real rate alongside the Fed funds real rate (based off headline inflation). There is a 4% real rate differential in favour of Mexico. This is quite a comfort blanket. Recent MXN appreciation, in turn, is in part a manifestation of policy comfort built in real rates space.   The Banxico rate is well above inflation, a high implied real rate   One implication of this has been the evolution of quite a pronounced inversion of the 2/10yr curve. The US curve is extremely inversed. But the inversion on the MXN curve is even more pronounced. The big question is when are these curves set to materially dis-invert. The US curve is not quite ready yet, as the Fed continues to hike. But the MXN curve has enough front-end comfort to begin the dis-inversion process sooner. Typically it does not stray too far from the US curve, but this time we think it can.

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

The Bank of Japan meeting could be a close call, while Bank Indonesia is likely to extend its pause. Meanwhile, Korea reports GDP figures and Singapore reports inflation Australia's second quarter CPI data are a key variable for the central bank The highlight for the week will be the second quarter CPI release in Australia on Wednesday. The inflation outlook will help determine whether the Reserve Bank of Australia (RBA) hikes rates again in the second half of the year. The unemployment data released earlier today showed that the unemployment in June stood at 3.5%, slightly lower than the consensus of 3.6%. The improvement in the labour market could point to solid economic activity despite the recent string of tightening. As such, CPI for the second quarter is likely to remain elevated but lower compared to the first quarter. Taiwan's industrial output to continue decline Given the poor performance of China’s second-quarter data, industrial output in export-reliant Taiwan is likely to have remained in contraction last month. Semiconductor production plays an integral role in Taiwan’s industrial output. A report released by TrendForce recently showed that global foundry sales will decrease by 4% year-on-year in 2023, with many major firms suggesting no significant rebound in orders. Korea’s GDP to pickup Korea’s GDP growth in the second quarter is expected to accelerate to 0.5% quarter-on-quarter seasonally-adjusted compared to the first quarter’s 0.3%. The improvement in net export contributions is likely to have driven overall growth on the back of a sharp decline in imports, while private consumption growth will probably remain flat. Monthly activity data should stay soft with construction and service activity declining in June. BoJ meeting to be a close call? The Bank of Japan (BoJ) will meet on Friday and we believe that recent swings in the FX and Japanese government bond markets reflect market expectations for policy adjustment. It is a close call, but we still think yield curve control (YCC) tweaks are possible, given that recent data support steady inflation growth and a sustained economic recovery. BI expected to pause Bank Indonesia (BI) is set to extend its pause, keeping policy rates at 5.75%. Inflation has returned to target but pressure on the Indonesian rupiah (IDR) of late may give Governor Perry Warjiyo reason to keep rates steady. We expect BI to stay on hold for a couple more meetings and only consider a potential rate cut once the IDR stabilises. Singapore inflation to slow Favourable base effects and moderating commodity prices could help both headline and core inflation dip in Singapore. Headline inflation may edge lower to 4.6% YoY with core inflation also expected to slow. The Monetary Authority of Singapore will be weighing the upside GDP growth surprise alongside the improving price outlook for its meeting later this year.   Key events in Asia next week    

Weaker than expected Italian GDP may help disinflation process The surprising contraction in GDP in the second quarter was driven by domestic demand. This could well have affected services, as July inflation data shows. Based on business confidence and labour market data, we believe that another contraction in GDP should be avoided in the third quarter.   After posting a surprisingly strong 0.6% quarterly expansion in the first quarter, Italian GDP contracted by 0.3% in the second, doing worse than expected. The succinct press release by Istat indicates that the quarterly decline was driven by domestic demand (gross of inventories), while net exports were growth neutral. From the supply side, Istat notes that value added contracted in both industry and agriculture and expanded marginally in services. We anticipated that the very positive first quarter would be difficult to replicate in the second, but thought that resilience in services could manage to marginally compensate for the contraction in industry. Apparently, this was not the case. On the demand front, we suspect that soft private investment and inventories might have been at the heart of the negative surprise, while private consumption could have managed to remain in positive territory courtesy of a still resilient labour market and decelerating inflation. After the preliminary estimate for the second quarter, the statistical carryover for full-year GDP growth stands at 0.8%. Our base case forecast for average GDP growth is currently 1.2%, but today’s disappointing release adds downside risks. Still, we believe that a technical recession could still be avoided in 3Q23. July business confidence data were a mixed bag, with another decline in manufacturing and improvements in services (tourism and transport) and construction (specialised works). We believe such a pattern is still compatible with a return to modest positive growth in the third quarter. The weakening economy possibly helped to cool inflation in July. Preliminary inflation data, also released today, confirms that the disinflationary path is still in place, both for the headline and core measures. Headline inflation was down to 6% (from 6.4% in June), mostly driven by the deceleration in transport services and non-regulated energy goods. The deceleration of core inflation to 5.2% (from 5.6% in June) is a comforting factor on its own, helped by a decline in services, but a similar rate of decline over the second half of the year cannot be taken for granted. Indeed, the recent acceleration in hourly wages (at 3.1% in June from 2.4% in May) will filter through the price pipeline, possibly showing up in services inflation over the next few months. Today’s inflation release still fits with our current projected profile, which points to an average headline reading of 6.5% for 2023.

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

Europe set for lower open after strong US session, China trade disappoints   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   It was a rather subdued start to the trading week in Europe yesterday with little in the way of positive drivers although we managed to hold on most of the rebound that we saw on Friday in the wake of the July jobs report out of the US. US markets on the other hand enjoyed a much more robust start to the week, ending a 4-day decline and reversing the losses of the previous two sessions, as bargain hunters returned.   The focus this week is on Thursday's inflation numbers from the US, which could show that prices edged up in July, however it is the numbers out of China tomorrow which might be more instructive in respect of longer-term trends for prices, if headline CPI follows the PPI numbers into deflation.       Earlier this morning the latest China trade numbers for July continued to point to weak economic activity and subdued domestic demand. The last 2 months of Q2 saw sharp declines in exports, with a -12.4% fall in June. There was little let-up in this morning's July numbers with a bigger than expected decline of -14.5%, the worst performance since February 2020, with global demand remaining weak. Imports have been little better, with negative numbers every month this year, and July has been no different with a decline of -12.4%, an even worse performance from June's -6.8%, with all sectors of the economy showing weakness. With numbers this poor it surely can't be too long before Chinese policymakers take further steps to support their economy with further easing measures, however, there appears to be some reluctance to do so at any scale for the moment, due to concerns over capital outflows.     Today's European market open was set to be a modestly positive one, until the release of the China trade numbers, however we now look set for a slightly lower open, with the only data of note the final German CPI numbers for July which are set to show that headline inflation slowed modestly to 6.5% from 6.8% in June.   It's also set to be another important week for the pound ahead of Q2 GDP numberswhich are due on Friday. Before that we got a decent insight into UK retail sales spending earlier this morning with the release of two important insights into consumer behaviour in July.   The BRC retail sales numbers for July showed that like for like sales slowed during the month, rising 1.8%, well below the 3-month average of 3.3%. Food sales performed particularly well, but at the expense of online sales of non-food items like clothes which showed a sharp slowdown.     It is clear that consumers are spending their money much more carefully and spending only when necessary, as Bank of England rate hikes continue to bite on incomes. With some consumers approaching a cliff edge as their fixed rate terms come up for expiry, they may well be saving more in order to mitigate the impact of an impending sharp rise in mortgage costs. That said in a separate survey from Barclaycard, spending on entertainment saw a big boost of 15.8% even as clothing sales declined.     Bars, pubs, and clubs saw a pickup in spending as did the entertainment sector as Taylor Swift did for July, what Beyonce did for May. The release of a big slate of summer films may also have offered a boost with the latest Indiana Jones film, along with Mission Impossible Dead Reckoning, Barbie and Oppenheimer prompting people to venture out given the wetter weather during the month.       EUR/USD – not much in the way of price action yesterday although the euro managed to hold onto most of the rally off last week's lows just above the 1.0900 area. We currently have resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150.     GBP/USD – another solid day yesterday after the rebound off the 1.2620 area last week. We need to see a move back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – struggling to rally beyond the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – failed just below the 144.00 area last week but has rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.       FTSE100 is expected to open 8 points lower at 7,546     DAX is expected to open 16 points lower at 15,936     CAC40 is expected to open unchanged at 7,319      

US inflation boosts case for no further rate hikes A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centred on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materialises.   US inflation pressures continue to ease The US consumer price inflation report showed that prices rose 0.2% month-on-month at both the headline and core (ex food and energy) level as was expected. To two decimal places it was even better at 0.17% and 0.16% respectively, which meant that the annual rate of headline inflation came in at 3.2% rather than 3.3% (versus 3% in June). Core inflation slowed to 4.7% from 4.8% as expected. A decent drop in used car prices helped (-1.3% MoM), but a second consecutive large decline in air fares (-8.1%) is a bit of a surprise. With medical care (-0.2%), recreation (0.1%), education (0%) and other goods and services (0.1%) all very subdued the Federal Reserve has got to be pretty happy with this. That so-called 'supercore' services (services ex energy ex housing) looks like it comes in at around 0.2% MoM, although the year-on-year rate ticks higher a little due to base effects.   Supercore services on the right path (YoY%)   Housing costs rose more than we thought though, with owners’ equivalent rent (the largest CPI component with a 25% weighting) rising 0.5% MoM/7.7% YoY but all in this report supports the nice golidlocks scenario of a slowdown in inflation allowing the Fed to stop hiking and eventually cut rates next year, which catches the slowing economy in time to prevent a recession. Obviously a lot can go wrong and we think it probably will given the worries about the abrupt slowdown in credit growth, but for now this data is encouraging   Housing components of CPI set to slow in line with rents   Headline may tick higher on energy but core will slow much further Unfortunately we are likely to see headline annual inflation rise further in YoY terms in August, albeit modestly. This will largely reflect higher energy costs, but we suspect it will resume its downward path again by October. Core inflation won't have this problem as the 0.6% MoM prints for August and September last year will drop out of the annual comparison to be replaced by 0.2% readings we predict, allowing annual core inflation to slow to below 4% by September. This is going to be increasingly driven by the all-important housing components, which are set to slow sharply based on observed rents while used car prices are set to fall further based on auction prices. Consequently we are increasingly confident of a sub 3.5% YoY core CPI print by year-end. We had been hoping that headline inflation could be around 2.5%, but the rise in oil and gasoline prices over the last couple of months makes this look less achievable.   Higher energy costs can be viewed like a tax – no need for the Fed to hike further In fact there has been some talk that the rise in energy costs will make the Fed more inclined to hike rates since it will push up inflation with rising costs potentially passed onto other components such as logistics and airline fares. We are not that concerned though since it can have a disinflationary effect elsewhere because higher energy prices can be viewed similarly to a tax. You can't avoid filling up your car with gasoline and you can't not heat your home etc so it effectively means you have less money at the end of the day to spend on other goods and services. It hurts economic activity and effectively intensifies disinflation in other components over time. As such the Fed will be watching and waiting to see what happens rather than any knee-jerk hike action.   NFIB survey points to weakening corporate pricing power and lower core CPI     Moreover, business surveys continue to point to weakening pricing power, such as the ISM services index being consistent with 1% headline CPI and the National Federation of Independent Business survey pointing to core inflation heading to 3% by year-end. Such an inflation backdrop should allow the Fed to respond to any recession threat with interest rate cuts next year.

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

German stagnation in the second quarter confirmed The second estimate of second-quarter GDP growth confirms the stagnation of Europe's largest economy and will do very little to end the 'sick man of Europe' debate.   Finally, a quarter without any statistical revision. The just-released second estimate of German GDP growth in the second quarter confirmed the economy's stagnation. The second estimate doesn't show the German economy in a better state and does little to shut down the current debate about Germany once again being the "sick man of Europe". According to the just-released data, the German economy stagnated in the second quarter, after two quarters of contraction. On the year, GDP growth was down by 0.6% or 0.2% if corrected for working days. The question remains whether technically speaking a stagnation after two quarters of contraction is actually the end of a technical recession or a prolongation. What is new in today’s data are the GDP components. While private consumption stagnated and public consumption increased marginally (+0.1% quarter-on-quarter), net exports were a drag on growth. The positive growth contribution from inventories reflects the ongoing inventory build-up, which doesn't bode well for the coming quarters.   Stagnation remains our base case Both the short-term and the longer-term outlook for Germany looks anything but rosy. Recently released sentiment indicators do not bode well for economic activity in the coming months. Weak purchasing power, thinned-out industrial order books, the ongoing weakness of the Chinese economy as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy, all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic changes, the current energy transition as well as the lack of new investment in digitalisation, infrastructure and education will structurally weigh on the German economy in the coming years. However, all is not bleak. The drop in headline inflation and the actual fall in energy and food prices, combined with higher wages, should support private consumption in the second half of the year. We continue to see the German economy being stuck in the twilight zone between stagnation and recession.

Tokyo Core CPI expected to tick lower to 2.9% US to release jobless claims and durable goods orders later on Thursday USD/JPY put together a mid-week rally with gains of 1% but is considerably lower on Thursday.  In the European session, USD/JPY is trading at 145.72, up 0.60%.   Markets eye Tokyo Core CPI Japan releases Tokyo Core CPI on Friday, the third inflation report in just over a week. The previous two releases were for July, but Tokyo Core CPI is the first indicator of August inflation, hence its importance. The Bank of Japan closely follows core inflation, which excludes fresh food, as it is considered a more accurate estimate of underlying price pressures than headline inflation.  But which way is core inflation headed? Last week, National Core CPI eased to 3.1% in July, down from 3.3% in June.  However, BoJ Core CPI followed this week with a gain of 3.3%, up from 3.0%. Tokyo Core CPI eased to 3.0% in July, marking the 14th consecutive month above the Bank of Japan’s 2% target.  This is a sign that inflationary pressures remain strong.  Little change is expected for August, with a consensus estimate of 2. The BoJ has insisted that inflation is transient and that without evidence that high inflation is sustainable, such as stronger wage growth, it will not tighten policy. Still, there is speculation that unless inflation falls significantly, we could see the central bank make a shift in policy, especially if the yen remains at such low levels.     USD/JPY Technical USD/JPY is testing resistance at 145.54. Above, there is resistance at 146.41 There is support at 144.51 and 143.64

EUR: Spain and Germany release inflation figures The first round of inflation figures out of the eurozone will see the release of Spanish and German CPI this morning. In Spain, headline inflation should rebound marginally from low levels (2.3%), but all eyes will be on core inflation, which remains elevated. The consensus is for a slowdown from 6.2% to 6.0%. German’s figures will likely have the largest market impact: consensus is also centred for a deceleration from 6.2% to 6.0%. It is a crucial juncture for the euro. Markets approach the key risk event pricing in just slightly below 50% implied probability of another rate hike in September and 15bp in total. The EUR curve appears to largely agree with our view that if the ECB skips the September meeting, it will find it increasingly hard to raise rates again at all given the deterioration in the eurozone economic outlook. We expect markets to be very sensitive to even the smallest deviations from consensus, especially in Germany’s figures and the eurozone-wide numbers released tomorrow. We admit it’s a very close call, but our economists expect this week’s inflation reports to signal that core inflation remains too high for comfort and lead the ECB to one last rate hike in September. In our base case scenario, we see EUR/USD rally into the 1.0900-1.0950 area into the US payrolls on Friday.

Australian inflation falls to 4.9% US GDP expected to rise to 2.4% The Australian dollar has edged lower on Wednesday after sharp gains a day earlier. In the European session, AUD/USD is trading at 0.6473, down 0.10% on the day.   Australia’s inflation slips to 4.9% There was good news on the inflation front as July CPI fell to 4.9% y/y, down from 5.4% in June and below the consensus estimate of 5.2%. Inflation has now fallen to its lowest level since February 2022. Core inflation, which has been stickier than headline inflation, gained 5.8% in July, down from 6.1% in June. The markets are widely expecting the Reserve Bank of Australia to hold rates at the September 5th meeting and the drop in the headline and core inflation readings could well cement a pause. Inflation remains well above the RBA’s 2% target, but it is an encouraging sign that inflation continues to move in the right direction.   Soft US numbers send Aussie sharply higher The Australian dollar sparkled on Wednesday, climbing 0.80% and hitting a one-week high. The uptick was more about US dollar weakness than Aussie strength, as the US posted softer-than-expected consumer confidence and employment data on Wednesday. US consumer confidence took a hit as the Conference Board Consumer Confidence Index fell to 106.1 in July. This was a sharp drop from the August reading of 116.0 and marked a two-year low. JOLTS Job Openings fell to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. This was the sixth decline in the past seven months, another sign that the strong US labour market is showing cracks.

Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  

EUR: Focus on the eurozone August CPI Flash August CPI data for the eurozone is released at 11:00 am CET today and is expected to show a gradual decline in both headline and core YoY readings to 5.1% and 5.3%, from 5.3% and 5.5% respectively. However, the decline is proving gradual and we are actually starting to see expectations of one more rate hike from the European Central Bank firm up a little. These peak at around 21bp of tightening priced in for January next year. Our macro team feels that the chances of a September rate hike are under-priced (now a 43% probability) meaning that EUR/USD could get a little support from the ECB story over the coming weeks. Today, also look out for a 09:00 am CET speech from ECB hawk Isabel Schnabel, speaking at a conference on 'Inflation: Drivers and Dynamics'. We will also see the ECB minutes for the July policy meeting released at 1:30 pm CET. EUR/USD has turned a little more bid over the last few days as US jobs data has softened the front end of the US yield curve and sticky inflation has kept EUR short-dated interest rates supported. Our short-term Financial Fair Value model sees EUR/USD fairly priced near 1.0900 - suggesting a probably range-bound session into tomorrow's US NFP release. Elsewhere, we note that Switzerland is planning some new large-scale Anti Money Laundering measures for 2024. This may be a slow-burn story, but one which may ultimately weigh on the Swiss franc in 2024.

Previewing the ECB's September meeting The countdown is on until the next ECB meeting. Every day new macro information and/or comments by ECB officials fuel questions about whether or not there'll be another hike at the September meeting. To tell you the truth, as much as we would like to provide certainty of what will happen, the ECB itself will probably only know on the day of the next meeting what to do. Macro developments over the summer have caused further complications for the ECB. While the rapid worsening of the economy should come as a surprise, at least judging from overly optimistic ECB growth forecasts so far, the speed with which headline inflation is coming down should still leave the central bank uncomfortable. Despite today’s drop, core inflation remains too high and wage growth up until now signals that even without excessive wage settlements core inflation could stay higher for longer. We still expect headline inflation to come down significantly after the summer, mainly on the back of German headline inflation falling. We also expect the ECB’s September macro projections to bring downward revisions to both the short-term growth and longer-term inflation outlook. After a total of 425bp rate hikes in slightly more than a year, a pause in the ECB’s hiking cycle at the September meeting would make perfect sense. However, times at the ECB have changed. Today’s minutes stress that the central bank is sticking to its stance of putting more emphasis on actual data rather than on expected data, that it still sees a higher risk of stopping tightening too early rather than going too far, and that it seems to have a higher tolerance for negative growth surprises than for unexpected inflation developments. Also, for the hawks, the risk might be too high that a pause could actually transform into an actual full stop. This is why we think the hawks will have their final say and push the ECB for a final dovish hike at the September meeting. A last one for the road, even if it remains a very close call.

Asia Morning Bites Korean inflation surprises on the upside as bad weather causes food prices to spike. Lowe's last meeting as RBA Governor is likely to be uneventful.   Global Macro and Markets Global markets:  With the US out for Labour Day on Monday, there isn’t much market action to report. Equity futures aren’t providing much insight into today’s open either. Chinese stocks had a good start to the week, buoyed by further reductions in down payments for mortgages across a number of Chinese cities and the Country Garden debt repayment deal. The CSI 300 rose 1.52% and the Hang Seng rose 2.51%. European bond yields rose slightly, The yield on German 2Y and 10Y government bonds rose by about 3bp. EURUSD had a quiet day and remains below 1.08. The AUD was also steady ahead of today’s likely no-change RBA meeting. Sterling made some small gains taking it back above 1.26 and the JPY drifted fractionally higher to 146.49. There was very little action in Asian FX markets, besides the THB, which weakened to 35.235   G-7 macro:  With the US out on vacation, there was nothing of note on the G-7 calendar yesterday.  Final service sector and composite PMIs are out today in Europe. No changes are expected.  Final US durable goods orders and factory orders are due for July. Factory orders will likely reverse the 2.3% gain in June with a 2.5% decline. The ECB’s Lagarde gave nothing away about next week’s rate meeting in a speech yesterday in London. But the Bundesbank President, Joachim Nagel, suggested raising reserve requirements to “tackle the excess liquidity story”. Australia: The Reserve Bank of Australia (RBA) meeting today is Governor Philip Lowe’s last, and it should be an uneventful one. The surprise drop in inflation in July from 5.4% to 4.9% should be enough to keep rates on hold at this meeting. And indeed, we may have seen the peak in rates from the RBA as Michele Bullock takes over. However, the next three months’ base effects are far less helpful than they have been in the prior 6 months, and we may see inflation’s progress stall or even backslide. So, while the chances of another and almost certainly final rate hike have diminished, we aren’t totally ruling out one more before the year-end.   Singapore: Retail sales for July are set for release this afternoon. We expect another month of modest gains with retail sales up roughly 2%YoY.  The steady increase of visitor arrivals is likely supporting department store sales and services related to rest and recreation.  Retail sales have been one of the few bright spots for the economy this year with both trade and manufacturing struggling.      South Korea: Consumer price inflation reaccelerated in August after six months of cooling, recording a 3.4% YoY gain (vs 2.3% in July and the market consensus of 2.9%). The main upside surprises came from fresh food and pump prices, which rose more than expected due to bad weather and the recent pick-up in global oil prices. However, core inflation (excluding food and energy) stayed at 3.3% for a second month. Although the pace of inflation sped up again, it does not deviate much from the BoK’s own inflation projection and it is likely to be considered a temporary pick-up only. Also, with weaker-than-expected monthly activity data, domestic growth conditions are expected to deteriorate further in 2H23, so it is unlikely that the Bank of Korea (BoK) will respond with an additional rate hike. Looking ahead, we believe headline inflation will calm down after Chooseok holiday, but core inflation will likely accelerate again over the next couple of months which will support the BoK’s hawkish tone throughout the year. Based on today’s results, we have revised up our annual CPI forecast from 3.3% YoY to 3.5% for 2023 and 1.8% to 2.0% for 2024. Also, given inflation will likely remain above the BoK’s target until the end of this year, we have pushed back our forecast for the BoK’s first cut from 4Q23 to 2Q24.    Philippines: August inflation is set for release today. The market consensus is for inflation to be flat at 4.7%YoY.  We expect, however, the impact of accelerating prices for rice and energy-related commodities to push headline inflation to 5.0%YoY.  Crop damage and low production due to the onset of El Nino have pushed up retail prices for rice, which counts for 9% in the CPI basket. What to look out for: RBA decision South Korea GDP and CPI inflation (5 September) Japan Jibun PMI services (5 September) Regional PMI (5 September) China Caixin PMI services (5 September) Philippines CPI inflation (5 September) Thailand CPI inflation (5 September) Australia RBA decision (5 September) Singapore retail sales (5 September) US factory orders and durable goods orders (5 September) Australia GDP (6 September) Taiwan CPI inflation (6 September) US trade balance and ISM services (6 September) Australia trade balance (7 September) China trade balance (7 September) Malaysia BNM policy (7 September) US initial jobless claims (7 September) Japan GDP (8 September) Philippines trade balance (8 September) Taiwan trade balance (8 September) US wholesale inventories (8 September) Meanwhile, resurgent global energy costs have filtered through to higher domestic fuel prices. With inflation flaring up again, we could see Bangko Sentral ng Pilipinas forced to put off their rate cuts, possibly into mid-2024. 

Temporary slowdown in Hungarian disinflation The expiry of food price caps and soaring fuel prices gave a temporary boost to Hungary's monthly inflation in August. Developments in core inflation look more encouraging, especially in services.   Disinflation is getting more widespread with some exceptions As expected, the disinflationary process in Hungary continued in August, albeit at a slightly slower pace. Headline inflation decreased to 16.4% year-on-year. Base effects helped to cover the pick-up in month-on-month inflation, which came in at an above-consensus 0.7%. The last time monthly price pressures were this high was in April earlier this year. It is also important to note that August typically shows a slightly negative monthly repricing based on the historical average. Against this backdrop, we can say that the monthly price momentum was strong in August 2023 – but the vast majority of this momentum stems from one-off elements.   Main drivers of the change in headline CPI (%)   The details In August 2023, the government abolished food price caps, which set the prices of some selected basic foodstuffs at the level of October 2021. It is therefore not surprising that food prices rose again on a monthly basis. However, given the general price pressure on food last year, the base effect still helped to reduce the YoY increase to below 20%. Another major factor behind the strong monthly repricing is fuel. The strengthening of the dollar resulted in a much higher USD/HUF level (roughly 7% versus mid-July), while oil prices edged up as well. As a result, fuel prices jumped by 8.2% MoM in August, putting the brakes on the general disinflation process in the yearly-based headline print. The global disinflationary trend helped with a minor retreat in the average prices of durable goods (-0.1% MoM), counterbalancing the volatile movements in the forint. Falling consumption and fierce competition are also key players here as the real disposable income of households continues to shrink. Last but not least, the real downside surprise was the yearly-based inflation in services, which slowed to 13.2% and broke a 13-month uptrend. It seems that the collapse in domestic demand has started to impact the repricing power of service providers. Even if we exclude the effects of the one-off price cut in telephone and internet services in August, the monthly repricing in services is lower than usual.   The composition of headline inflation (ppt)      

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

Fed expected to keep rates on hold on September 20th 10-year Treasury yield eases back to 4.248% as 4.36% remains key resistance US retail sales are expected to weaken and the US inflation report will be mixed (core steady, headline rises)   The US dollar rally may have to wait till next week’s inflation and retail sales data. The dollar is slightly softer across the board as Treasury yields soften. It was a rather quiet day in the US as most of the attention stayed on Apple shares and another earnings report that supported the resumption of the disinflation process.  Kroger’s earnings release stated, “we believe inflation will continue to decelerate and the environment will remain challenging for consumers.” Today, we didn’t learn anything new about the short-term direction of inflation and the US economy.  Next week, will either bolster up the Fed hawk argument that more tightening might be needed in November or show the consumer is finally feeling the impact of the Fed’s tightening cycle, as financing costs surge, student-loan repayments come due, and as households run out of excess savings.   USD/CHF Daily Chart       USD/CHF (a daily chart of which is shown) as of Friday (September 8th 2023) has shown the bullish move that started in the middle of July is running out of steam.  Price action in September recaptured both the 50- and 100-day SMAs.  The strong bearish trend that has been in place since last November is being tested and bullish momentum could thrive over the short-term if price is able to recapture the 200-day SMA, alongside making its first higher high since late last year. The bearish case for USD/CHF however could unfold over the coming months.  The cost of capital will clearly be much higher and that will take a major toll on just personal consumption but also corporate spending.  When risk aversion runs wild, USD/CHF may return quickly.  Right now the market is pricing in a soft landing that includes orderly weakness, but that could get rattled if geopolitics deliver a couple shocks to risk appetite.  

It was a weak session in Asia as higher oil prices and UST yields sapped investors’ enthusiasm for risk. UST yields were pushed higher by concerns about US inflation ahead of the August CPI release later today. Indeed, a 10Y UST auction drew its highest yield since 2007. Asian technology shares were also hurt by a weak investor reception of Apple’s launch of its iPhone 15. At the time of writing, most Asian bourses as well as S&P 500 futures were trading in the red. Higher UST yields and risk-off trading led to a modestly stronger USD with the AUD and JPY leading the declines against the USD. G10 FX is trading cautiously and in tight ranges ahead of the US inflation data release later today.   USD: of (headline) inflation and head fakes Ahead of the US CPI data, our US economist is looking for the headline print to reaccelerate to 3.7% YoY in August, up from 3.2% previously (and above the consensus expectation of 3.6%). In contrast, core inflation is expected to slow down to 4.2% YoY in August, down from 4.7% in July. The mix of accelerating headline and decelerating core inflation highlights that the main driver of the latest price developments is the renewed rebound of energy prices. Fed Chair Jerome Powell signalled back in July that the August CPI is the final of the five key data points that will inform the outcome of next week’s policy meeting. In that, we believe that the Fed may decide to look past the revival of cost-push inflation and focus instead on the persistent drop of core inflation. If confirmed, today’s data could therefore confirm market expectations of a Fed pause in September. Turning to the FX market reaction, the USD will likely take its cue from the US rates markets. We further note that while today’s CPI print may not reignite the Fed rate hike expectations, it could still encourage investors to push back on their rate cut expectations and thus boost the USD rate appeal especially if the (headline) inflation print overshoots market expectations. In addition, the safe-haven USD could continue to draw support from the market’s fragile risk sentiment.

US retail sales, PPI accelerates New Zealand to release Manufacturing PMI on Friday China to release retail sales and industrial production on Friday The New Zealand dollar is in negative territory on Thursday. NZD/USD is trading at 0.5904 in the North American session, up 0.12%.   Markets eye Manufacturing PMI, Chinese data New Zealand releases the Manufacturing PMI on Friday. Manufacturing across the globe has been hard-hit by weak demand and New Zealand has not been immune. The Manufacturing PMI has contracted for five straight months, falling from 47.5 to 46.3 in July. The downswing is expected to continue, with a forecast of 46.0 for August. The markets will also be keeping an eye on Chinese releases on Friday. China is New Zealand’s largest trading partner and weak Chinese data has weighed on the New Zealand dollar, which plunged 3.90% against the US dollar in August. Chinese retail sales are expected to rise in August from 2.5% to 3.0%, and industrial production is projected to rise to 3.9% in August, up from 3.7% in July. If China’s numbers improve, it could provide a boost for the New Zealand dollar.   US posts strong retail sales, PPI US retail sales climbed in August to 0.6% m/m, higher than the consensus estimate of 0.2% and a notch higher than the 0.5% gain in July. The main factor behind the upswing was gasoline prices, which jumped over 10% in August (that increase was a key factor in headline inflation rising in August). Producer prices followed the pattern of the August CPI data, with the headline reading rising while the core rate declined. PPI climbed 0.7% in August, higher than the July read of 0.4% and the market consensus of 0.3%. Core PPI dropped to 0.2%, down from a revised 0.4% in June and matching the consensus estimate. On an annualized basis, headline PPI rose from 0.8% to 1.6% (1.2% est.) while the core rate dropped from 2.4% to 2.2% (2.2% est.).   NZD/USD Technical NZD/USD tested resistance at 0.5944 but has retreated. The next resistance line is 0.6003 There is support at 0.5901 and 0.5842    

Australia posts strong job gains, but mostly part-time jobs US retail sales and PPI accelerate, core CPI eases The Australian dollar climbed higher after the solid Australian employment release but has pared these gains following the US retail sales and producer prices reports. In the North American session, AUD/USD is trading at 0.6440, up 0.28%   Australia’s labour market flexes its muscles Australian job creation sparkled in August. The economy added 64,900 jobs, blowing past the consensus estimate of 25,000 and rebounding from a revised decline of 1,400. However, the gains were almost exclusively in part-time roles, with full-time employment rising by only 2,800. The unemployment rate remained unchanged at 3.7%. The Australian dollar responded by rising as high as 0.6454, a nine-day high. The Reserve Bank of Australia has held rates for three straight times and this has contributed to today’s positive employment numbers. The extended pause has raised expectations that the RBA is close to wrapping up its rate-tightening cycle, but given that inflation is at 6%, double the upper range of the RBA’s target, the door is still open for one more rate hike in the fourth quarter. New RBA Governor Michelle Bullock has said rate decisions will be made based on the data, which means the markets won’t be able to rely on any forward guidance from the RBA. US retail sales, PPI beat estimates US retail sales accelerated in August to 0.6% m/m, higher than the consensus estimate of 0.2% and a notch higher than the 0.5% gain in July. The main driver of the strong release was gasoline prices, which jumped over 10% in August (that increase was a key factor in headline inflation rising on Wednesday). Producer prices mirrored the August CPI data, with headline PPI rising while the core rate declined. PPI climbed 0.7%, higher than the July read of 0.4% and the market consensus of 0.3%. Core PPI dropped to 0.2%, down from a revised 0.4% in June and matching the consensus estimate. On an annualized basis, headline PPI rose from 0.8% to 1.6% (1.2% est.) while the core rate dropped from 2.4% to 2.2% (2.2% est.).   AUD/USD Technical AUD/USD tested resistance at 0.6453 earlier. The next resistance line is 0.6528 0.6405 and 0.6330 are providing support  

CAD: Inflation data important after strong jobs numbers The second quarter growth figure shock seemed to have put an end to the Bank of Canada’s mid-2023 tightening reboot. The BoC did leave the door open for more hikes if needed on 6 September, but the deterioration in the economic outlook and less concerning inflation picture all pointed to an extended pause. The August jobs figures were, however, very strong: a 40k employment jump (twice the consensus number), an unchanged unemployment rate after three consecutive months where it inched higher, a big rise in full-time hiring and accelerating wage growth. With gasoline prices having risen, headline inflation is expected to have accelerated from 3.3% to 3.8% in August. Markets and the BoC will look at the trim and median measures, which are seen stabilising around 3.7%. Any upside surprise in the inflation figures would likely put a BoC rate hike back on the table, even though it is not our base case at the moment to see another BoC move. Markets are pricing in 15bp to a peak, and we could see that being pushed to 20bp or higher after a strong CPI read today. Given its stretched overvaluation, we had been calling for a correction in USD/CAD for a while: the pair is reconverging (i.e., dropping) with short-term fundamentals now, and a potential post-CPI rally could see it slip further to 1.3400.

ECB still rather safe than sorry on inflation, Italian spreads recover on retail bond sale The European Central Bank’s Vice President Luis de Guindos basically confirmed this position in an interview yesterday. Starting to talk about rate cuts was premature, he argued. While (headline) inflation has been brought down from over 10% to 4.3%, the final stretch will be the most difficult one. And he also pointed to the increased oil price posing a potential challenge if it feeds through to inflation expectations for households and corporates. We would note that, as far as market expectations are concerned, there has been some easing in longer dated inflation swaps. The 5y5y inflation forward has dropped to the lowest levels since July. While he also suggested the ECB was content with the level in interest rates it had reached he alluded to ending the reinvestments of the pandemic emergency purchase programme (PEPP) portfolio as a next step. While there has not been a formal discussion in the Council, this “will arrive sooner or later”.  But the ECB is aware of the backstop the flexible reinvestments of the PEPP still pose for sovereign spreads as a first line of defence, and the temporary widening of the key 10Y spread of Italian government bonds over Bunds to over 200bp will have had ECB officials looking up. That said, Italian government bond spreads have recovered over yesterday's session despite overall market rates rising, thus budging the recent directionality of the spread. The spread fell below 190bp, tightening close to 6bp versus Friday’s close. One reason cited is the strong showing of the BTP Valore sale on its first day, attracting demand of close to €5 billion, which suggests the overall size could rise towards €15 billion over the course of the next few days   Today's events and market view The bear-steepening momentum seems unbroken and is only accelerated by better-than-expected data, such as yesterday's ISM manufacturing. Today's main data release is the US job opening numbers (JOLTS), an important gauge for the health of the labour market. There is no data of note to be released in the eurozone, but we will have public appearances by ECB officials Philip Lane and Francois Villeroy de Galhau. Note that Germany also observes its reunification national holiday. In government bond primary markets, Austria sells 10Y and 30Y bonds today, while the UK sells 30Y green gilts.

Strong Tokyo CPI will likely put pressure on the Bank of Japan The Bank of Japan should be concerned about whether 'higher for longer' inflation could hurt the economic recovery.   Headline inflation in Tokyo topped 3% again in three month Tokyo inflation climbed up to 3.3% YoY in October (vs 2.8% in September, market consensus). Upside surprises came from: Higher than expected pick up in utilities with a reduction of government subsidies and A solid rise in entertainment prices. More importantly, the BoJ's preferred measures of inflation, core CPI excluding fresh food (2.7% vs 2.5% in September & market consensus) and core-core CPI excluding fresh food and energy (3.8% vs revised 3.9% in September, 3.7% market consensus) came out higher than market consensus. Since Tokyo inflation is a leading indicator for nationwide inflation, today's readings showed that inflation has been clearly overshooting the BoJ's projections.  On a monthly comparison, CPI soared 0.9% MoM, seasonally adjusted, in October, with both goods and services prices rising by 1.6% and 0.4% each   Tokyo's inflation reaccelerated in October   Utilities and fresh food prices rose the most, but prices of all other major items gained. In particular, the weak JPY has accumulated pressure on the imported goods prices, and this prolonged pressure pushed up prices of household goods, apparel, and transportation. The rise in entertainment is mostly driven by strong demand from foreign and domestic tourists. Going forward, we expect that base effects will kick in and suppress the headline inflation again by the end of the year, but we will likely witness a stickier than expected inflation trend throughout next year.   Overheated inflation is a risk for the recovery Today’s hotter-than-expected Tokyo CPI reading will likely be a warning to the Bank of Japan. It may still rule out a policy change at its October meeting, but at least we expect the BoJ to change its view on inflation. It is clearer that companies are shifting the pressure of rising input costs to consumers, and the weak JPY is partially contributing to the added pressure on input costs. Also, demand-led price hikes continued on the back of a solid recovery in service activity despite a fall in real wage growth. But, if the yen weakens further and brings about overly heated inflation for longer, it will eventually hamper private consumption even before the BoJ's long-awaited goal of sustainable inflation is accomplished, which is the biggest risk for the BoJ. We are sticking to our call that the BoJ will deliver a policy tweak and revise the inflation outlook meaningfully for FY 23 and 24. And today's outcome has slightly increased our confidence in our non-consensus view. There are more details about the BoJ's next moves in our article earlier this week;  Source: CEIC

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

Italian inflation sees a sharp fall on favourable energy base effects The decline in Italian inflation in October was stronger than expected, bringing the headline inflation rate temporarily below the 2% threshold. While we could see a rebound over the winter, this is good news for real disposable income developments.   Headline inflation surprises to the downside, driven by a favourable base effectWe had anticipated a steep fall in Italian headline inflation for October – but the actual data has turned out even stronger than expected. The preliminary estimate disclosed by the Istat shows that headline inflation fell to 1.8% year-on-year (from 5.3% in September), the lowest level since July 2021 and helped by huge base effects in the energy components. The bulk of the decline is explained by non-regulated (to -17.7% from +7.5% YoY) and regulated (-32.9% from -32.7% YoY) energy goods, but food components also provided a solid contribution. These falls trumped the increases in housing and transport services. Core inflation (which leaves out energy and fresh food) also decelerated to 4.2% from 4.6% in September, and now lies well above the headline measure as expected. Behind this, there is a re-widening between services inflation at 4.1% and goods inflation (+0.1%).   Inflation to return above 2% over the winter Looking ahead, the energy component will unlikely be able to act any further as a drag and we expect inflation to return back above 2% over the winter. The pace at which the core component will be able to decelerate will crucially depend on consumption developments. As shown by the preliminary estimate of third-quarter GDP also released this morning, the Italian economy stalled over the quarter, with a negative contribution of domestic demand (gross of inventories) compensated by net exports. Thanks to a resilient labour market and decent wage growth, we suspect that consumption might not have acted as a drag in the third quarter, and could gain potential support over the winter from the impact of declining inflation on real disposable income. This could potentially slow the decline in core inflation through the services component. All in all, after today’s release we're revising down our inflation forecasts to 5.9% for 2023 and 2.3% for 2024.

By Michael Hewson (Chief Market Analyst at CMC Markets UK) UK Wages (Sep) /UK CPI (Oct) – 14 and 15/11 – last week's Q3 GDP numbers showed how much pressure the UK economy is under despite the continued slowdown in headline inflation we've seen over the past few months. Despite this slowdown headline inflation remains well above its peers in Europe and the US mainly due to the impact of the energy price cap which has kept prices in this area artificially high.   One major plus point has been wages growth which has taken some of the edge off, but which now looks as if it might have peaked. The last 3-months has seen earnings excluding bonuses remain steady at record highs of 7.8%, although including bonuses we're still above 8%. At the most recent Bank of England meeting interest rates were kept unchanged and a further sharp slowdown in headline inflation in October could reinforce the idea that the Bank of England is done when it comes to further rate hikes. September CPI came in higher than expected at 6.7%, with most of the increase being driven by higher petrol prices, which offset a modest fall in food prices.   Core prices eased slightly to 6.1% however services-based inflation rose from 6.8% year on year to 6.9%, and this is the area where the BOE has some concerns. That said this week's October inflation numbers should see another big slowdown given that the energy price component is expected to fall sharply from the same period last year, when the price cap jumped sharply. With energy prices now much lower, we can expect to see another sharp fall in this component which in turn should see a commensurate fall in the headline rate with expectations for a sharp slowdown to 4.8%, from 6.7%. Core CPI is expected to slow to 5.7%, from 6.1%.   US CPI (Oct) – 14/11 – having found a short-term base in June at 3%, US headline inflation has spent the last 3 months edging higher, although core CPI has still been slowing at a steady rate. Core prices slowed to 4.1% from 4.3% while there was a modest upside surprise in the headline number caused mainly by higher rent and fuel prices, and which did raise concerns that the Fed may well go with another rate hike between now and the end of the year.   These concerns have eased in recent days after a weaker than expected October jobs report, while retail sales in the US have also slowed. If we see further evidence of core prices slowing in October, then it could add fuel to the idea that the Fed might forego a pre-Christmas rate hike and leave policy as is. US CPI is expected to slow from 3.7% to 3.3%, with core prices expected to come in unchanged at 4.1%.   China Retail Sales (Oct) – 16/11 – last month China reported that its economy expanded by 1.3%, helped by a more resilient consumer, after retail sales rose by 5.5% in September, while industrial production rose by 4.5%. Industrial production has been steadily consistent over the third quarter; however, consumer spending has been much more constrained since the post Covid lockdown spike we saw at the start of the year.   One of the more consistent narratives of the last few months has been various luxury as well as other retailers who have reported a sharp slowdown in Chinese consumer spending, a trend that doesn't appear to be being reflected in the official Chinese data. The Q3 months have seen retail sales slow sharply, with gains of 2.5% and 4.6% in July and August, rounded off by 5.5% in September. While today's numbers do suggest a modest improvement in Q3 the extent of the rebound does raise questions given the weakness of recent trade data, as well as PMIs. For October retail sales are expected to show an increase of 7%, with industrial production remaining steady at 7%

Slowing inflation points to rate cuts next year. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   Back in June when the Bank of England unexpectedly raised rates by 50bps to 5% on the back of much more hawkish commentary from the likes of the Federal Reserve, as well as the ECB market pricing for UK rates rose to 6.25%, in a move that looked clearly overpriced.   UK 2-year gilt yields spiked up to 5.56% and their highest levels since 2008 as markets grew concerned that further aggressive moves on rates would be needed to contain the inflation genie, which in the UK was proving to be much stickier than expected.   At the time I suggested that these concerns were overstated given the direction of travel on headline inflation in the US, as well as in Europe, which was already slowing sharply, not to mention what we were also seeing in China where we were seeing clear evidence of deflation. Other warning signs of sharply slowing inflation were evident in the PPI numbers which in Europe have been negative for over a year now, and which in the UK have been negative, or close to negative since July.   Yesterday US CPI for October also confirmed that inflation was heading lower, slowing from 3.7% to 3.2%, while core prices slipped from 4.2% to 4.1% in a sign that price pressures were continuing to slow.   More importantly super core inflation which the Fed monitors closely also slowed as well, and with the risk of a US government shutdown this weekend postponed until January next year, the economic risks to the US economy appear to have diminished further.   Bond markets are already reflecting this narrative even as central bankers continue to push the higher for longer narrative, with US 10-year yields falling to their lowest levels since September, below 4.5%, having risen as high as 5.01% in October.   Today UK headline inflation showed another sharp slowdown, dropping form 6.7% in September to 4.6% in October as the effects of the energy price cap fell out of the headline number for the second time this year.

Singapore inflation rises more than expected Headline inflation heated up to 4.7% year-on-year compared to expectations of a 4.5% rise.   October inflation heats up more than expected Singapore's headline inflation rose to 4.7% YoY, higher than the median forecast of a 4.5% increase from October last year. Prices were up 0.2% from the previous month. Core inflation, which is the preferred measure of the Monetary Authority of Singapore (MAS), rebounded to 3.3% YoY, up from the previous month's 3.0% gain. The central bank was expecting some upside pressure on prices in the near term owing to higher energy prices and utilities but the acceleration in October was more than market participants were anticipating.  As expected, transport costs picked up (8.4% YoY vs 6.3% previous) as did healthcare (5.2% YoY) and housing & utilities (3.9% YoY). Meanwhile, items related to recreation & culture saw prices increase 5.8% YoY (vs 4.3% previous), reflecting still robust domestic spending, which figured in the latest 3Q GDP report.  For the year, the MAS expects headline inflation to average roughly 5% YoY while core inflation is forecast to settle at between 2.5-3.5% YoY.            Inflation picks up more than expected in October

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

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.

The Norwegian krone appreciated against the euro last week, and was by far and away the best performer among the G10 currencies. We largely attribute this outperformance to the increase in global oil prices. Brent crude futures rose above the $80 a barrel level for the first time this year at one stage last week, which is clearly bullish for the Norwegian currency due to its dependence on the commodity.     Wednesday's inflation data also provided some modest support for NOK, as this provided some support for the aggressive stance taken by Norges Bank. Headline inflation remained unchanged at 4.8% in December, remaining at its highest level in three months and in line with market expectations, while core inflation fell to 5.5%. Despite the drop in underlying inflation, it is still too high to be consistent with the central bank's target, supporting the notion that rates are likely to remain high for some time, as warned by Norges Bank in December.

Bank of Canada preview: Too early for a radical pivot Core inflation came in hotter than expected in December which rules out the Bank of Canada shifting meaningfully in a dovish direction at the January meeting. However, higher interest rates are biting and we continue to look for rate cuts from the second quarter onwards. US-dependent BoC rate expectations and the Canadian dollar may not move much for now.   Hot inflation warrants caution before dovish turn The Bank of Canada is widely expected to leave the target for the overnight rate at 5% when it meets next week. Policymakers continue to talk of their willingness to “raise the policy rate further if needed”, and inflation does indeed continue to run hotter than the BoC would like, but we see little prospect of any additional policy tightening from here. Instead, the next move is expected to be an interest rate cut, most probably at the April meeting. The latest BoC Business Outlook Survey reported softening demand and “less favourable business conditions” in the fourth quarter with high interest rates having “negatively impacted a majority of firms”, leading to “most firms” not planning to “add new staff”. Job growth does appear to be cooling and the Canadian economy contracted in the third quarter and is expected to post sub 1% growth for the fourth quarter. Also remember that Canadian mortgage rates will continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. This will intensify the financial pressure on households, dampening both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high immigration and population growth rates. Given this backdrop, we expect Canadian headline inflation to slow to 2.7% in the first quarter and get down to 2% in the second versus the consensus forecast of 2.6%. As such, we see scope for the BoC to cut rates by 25bp at every meeting from April onwards – 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing.   Rate expectations in US and Canada   Fighting market doves is still hard Markets currently price in 95/100bp of easing by the Bank of Canada this year. As shown in the chart above, the pricing for rate cuts in the US and Canada has followed a very similar path. The implied timing for the first rate cut is also comparable: May for the Fed (March is 50% priced in), June for the BoC (April is 45% priced in). That is despite the communication by the Federal Reserve which has already pivoted (via Dot Plots) to the easing discussion while the BoC officially still retains a tightening bias. In practice, even if the BoC chooses – as we suspect – to delay a radical dovish pivot and stay a bit more hawkish than the Fed, pricing for the BoC will not diverge too much from that of the Fed. So, the room for a rebound in CAD short-term rates appears more tied to USD rates than BoC communication.     FX: USD/CAD to stabilise In FX, the story isn’t much different. The Canadian dollar has been a de-facto proxy for US-related sentiment, acting less and less as a traditional commodity currency – that would normally be hit by strong US data – thus outperforming the rest of high-beta G10 FX since the start of the year. The rebound in USD/CAD to 1.35 is in line with a restrengthening of the USD primarily due to risk sentiment, positioning and seasonal factors, rather than a divergence in Fed-BoC policy patterns. In fact, the USD-CAD two-year swap rate gap has widened further in favour of CAD so far in January, from 20bp to 32bp.   We expect the impact on CAD from this BoC policy meeting to be modestly positive as expectations of a radical dovish shift are scaled back. However, Governor Tiff Macklem already introduced the idea of rate cuts in a speech this month and will need to acknowledge the downward path for the policy rate to a certain extent. While waiting for the Fed meeting a week later and the crucial US CPI numbers for January, US-dependent rate expectations in Canada may not move much. USD/CAD may trace back to 1.34, but we don’t see much further downside for the pair this quarter as USD shows the last bits of strength.    

Singapore's central bank likely to stand pat after inflation picks up Stubborn inflation points to the Monetary Authority of Singapore standing pat at its 29 January meeting.   December inflation picks up to 3.7% Singapore’s December inflation quickened to 3.7% year-on-year, faster than markets had forecasted (3.5% YoY) and up from the 3.6% YoY reported in the previous month. December saw food inflation moderate to 3.7% YoY (from 4% YoY) while clothing inflation fell 1% YoY.  Forcing headline inflation higher were faster prices increases for transport (3.9% vs 2.8% YoY) and recreation and culture (6.3% vs 5.6% YoY previously). Meanwhile, core inflation, which is the price measured more closely followed by the Monetary Authority of Singapore (MAS), rose to 3.3% YoY – much higher than expectations of a 3% YoY rise. December’s core inflation was faster than the 3.2% YoY gain recorded in November.   We expect inflation to remain elevated in the near term, with Singapore implementing the second round of increase for the goods and services tax (GST). On top of this, a potential increase in global shipping costs due to issues on security at important shipping lanes could mean that inflation remains sticky in 2024.       Inflation comes in higher than expected, pointing to MAS keeping setting untouched     Faster inflation points to MAS standing pat MAS recently switched to conducting four policy meetings per year, with the first policy meeting for 2024 set for 29 January. With inflation accelerating more than expected and price pressures remaining elevated due to the implementation of GST and potential spikes in global shipping costs, we expect the MAS to retain all policy settings at its upcoming meeting. Furthermore, we believe the MAS will likely want to retain their hawkish bias until they are convinced that core inflation will remain under control.