inflation data

The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.   It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.   The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.     It is also worth noting a decrease in the long position on gold by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar. The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%.   Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator indicates that the fight against inflation is still far from over. In a 3-month annualized expression, the core PCE deflator stands at 4.3%, the same as in April 2022. The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."   The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely. Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements. EUR/USD The ECB maintains a firm stance on continuing rate hikes as part of its fight against inflation.   On June 1, preliminary inflation data for the Eurozone will be published, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data release aligns with expectations, it will lower the ECB rate forecasts and put additional pressure on the euro.   The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant reduction in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.     EUR/USD has predictably declined to 1.0730, where support held, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.   GBP/USD The decline in inflation in the UK is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of an aim than a reality. Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%.   If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected. Monday is a banking holiday in the UK, and there are no macroeconomic data expected this week that could influence Bank of England rate forecasts.   Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements. The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.     The pound has predictably moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the decline to continue, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for a resumption of growth.  

Unacceptably high core price dynamics will lend a helping hand to ECB officials pushing for a hawkish line The most likely outcome to this week's inflation releases, still unacceptably high core price dynamics, will lend a helping hand to ECB officials pushing for a hawkish line.   Warnings that hikes may have to continue until September will stand a better chance of pushing longer term rates higher even if a subdued economic outlook, and growing doubts about the strength of China's post Covid recovery, should prevent European rates from rising as quickly as their US peers in the coming weeks. Wider USD-EUR rates differentials should only be a temporary development, however, and one resulting from a rise in global rates.   Market participants who, like us, expect lower rates into year-end, should also consider the possibility of US rates falling faster than their European peers, perhaps to sub-100bp levels for 10Y Treasury-Bund spreads.   This is all the more true since European markets have to contend with another dollop of political uncertainty in the form of early Spanish general elections on 23 July. The prime minister called for a vote after local elections defeat at the weekend and the opposition party PP is on the front foot, although it would likely rely on a coalition with another party due to the fragmented nature of the Spanish political landscape.   Spain’s still wide budget deficit (the European commission forecasts 4.1% of GDP this year and 3.3% next) mean a period of uncertainty is an unwelcome development and could lead to underperformance of Spanish government bonds vs peers such as Portugal and Italy.   Early elections mean Spanish bonds are at risk of underperformance vs Italy and Portugal   Today's events and market view Spain kicks off this week’s inflation releases. This will come on top of Eurozone monetary aggregate data and the European Commission’s confidence indicators for the month of May. One theme in European macro releases has been the softening of survey-based data, such as Germany’s Ifo (see above).   US releases feature house prices, the conference board’s consumer confidence, and the Dallas Fed manufacturing activity index.   Bond supply will take the form of Italian 5Y, 10Y fixed rate bonds, as well as 5Y floating rate bonds.    

Why the Bank of England is unlikely to push back against lofty interest rate expectations Markets are pricing almost six more rate hikes from here, and while we doubt the Bank of England would endorse that, we don't think it will want to push back heavily either given the recent tendency for inflation data to come in above expectations. Expect a 25 basis-point rate hike next week and only vague guidance on what's likely to come next.   Our base case for Thursday's meeting A 25 basis-point rate hike, most likely backed by seven committee members, with two (Silvana Tenreyro and Swati Dhingra) voting for no change. A further 25bp hike in August is likely should the inflation data continue to come in hot.   Markets are pricing almost six more rate hikes After some unwelcome inflation and wage data, markets now expect the Bank of England (BoE) to take rates close to 6% over the coming months. That equates to almost six additional rate hikes and is very close to the highs we saw in the midst of the ‘mini budget’ crisis last year. The divergence between US and UK rate expectations for later this year has become equally magnified.   Back then, the Bank of England explicitly warned investors that rates were unlikely to go as high as markets were pricing. So the question for Thursday’s meeting, where a 25bp hike is highly likely, is whether the Bank offers up similar pushback against investor expectations.   We think it’s unlikely, for three reasons. Firstly, the circumstances surrounding the spike in yields are quite different to last autumn. Back then it was a byproduct of market stress/poor functioning; now, it’s largely a consequence of sticky inflation and wage data.   Secondly, and with that in mind, the Bank has little certainty over where short-term inflation data are likely to go. So it’s doubtful that policymakers will want to make a pre-commitment on policy, only to have to change tack if data continue to come in hot.   And finally, the Bank has had ample opportunity to sound the alarm over recent days and has opted against doing so. Unlike the Fed and ECB, the BoE typically offers very little commentary between meetings. Without additional guidance, markets have interpreted the recent wage/inflation surprises as requiring a significant monetary policy response.   Markets once again expect UK and US rates to diverge

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)

The Bank of England accelerated its tightening efforts after meeting this week, hiking rates by 0.5% in response to another raft of worrying inflation data.  And it's not just yesterday's CPI data that will have caused considerable discomfort for the MPC, the April figures were also far too high and wage numbers we've had in the interim suggest its becoming increasingly embedded. That had to have caused serious alarm within the BoE, within seven members of the committee anyway. Two policymakers voted to hold rates steady for the fourth meeting highlighting the widening gulf between the views on the MPC which may make finding a consensus going forward that much more challenging.  There's every chance that those backing 50 basis points did so in the hope that doing more now may necessitate the need to do less later on and for a shorter period of time. That's not how markets are initially perceiving it though, with the odds of Bank Rate rising above 6% increasing. It could get rather painful in inflation doesn't improve soon. The pound appears to be weighing up both of these considerations, as is evident in the very volatile response we've seen in the currency. Rate hikes are generally good for a currency but when they're rising to levels that could seriously threaten the economy, there's certainly an argument for the opposite to happen.     Turkish interest rates finally heading in the right direction  Another interest rate decision was announced alongside the BoE, with the CBRT reverting back to hiking interest rates aggressively in order to put a lid on inflation and steady the currency which has fallen another 15% in recent weeks.   President Erdogan won the election promising to defend lower interest rates having led a campaign of aggressive rate cuts under Governor Åžahap KavcıoÄŸlu, before immediately replacing him and the finance minister after the vote. A rate hike today was widely expected but the range of forecasts was vast and if anything, the 6.5% hike was at the lower end of the range.  Turkey faces many problems going forward as a result of the misguided policies over the last couple of years and that will likely warrant more aggressive tightening in the future. For now, investors may be mildly relieved that rates are heading in the right direction, if not fast enough. The risk is that Erdogan hasn't really hesitated to sack Governors that raise rates in the past so investors will never feel fully at ease as long as he's President.

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.  

Rates Spark: Whatever it takes, until it breaks The Bank of England showed that central banks will not be shy to tighten more if disinflationary dynamics don't materialize. A reaction function more geared to current data than to being forward looking biases yield curves flatter - until something breaks.   Deeper curve inversions highlight potential costs of tightening too far The initial market reaction to the Bank of England increasing key rates by a larger than anticipated 50bp increment to 5% was revealing. Yield curves twisted flatter, with outright drops in the 10y rate as the more aggressive approach by central banks is seen as coming with an increasing economic cost. Curves staked out new post-March lows although the move lower in long end rates later faded. What sticks is the sense that central banks will remain hawkish and won’t be shy to increase rates further should the lack of disinflationary dynamic warrant it. In any case markets think the BoE has shifted to a more aggressive reaction function, with an even greater focus on current inflation dynamics. After yesterday’s 50bp hike, another 50bp in August is seen as more likely than not. In total, a further 110bp of tightening is discounted in forwards, implying expectations that the BoE will take the terminal rate above 6% before year end. This is a view that our economist does not share, seeing only two more 25bp hikes eventually being realised.      The question remains how far central banks can credibly take the tightening, with record curve inversions pointing to stretched levels. Macro indicators such as, in the US, the Conference Board’s Leading Index are also signalling recession. Today’s release of the June PMI  flash estimates could also serve to highlight the growing discrepancy between the central banks' own optimistic macro outlooks and the softening data indicators, but they alone are unlikely to resolve the disconnect.    More front-loaded tightening seen after the BoE's hawkish surprise   Next week offers key inflation data Sticky core inflation could remain the key theme for next week. Even if there were some positive surprise, central banks have made it clear they want to see a trend for the better in inflation data. By definition that will take a couple of releases at least, but it won’t keep forward-looking markets from extrapolating any incoming data points. That difference can still keep a curve flattening bias in play.   In the US the key release to watch is the PCE inflation data at the end of the week. The headline rate is seen lower, but the consensus is looking for both the monthly and yearly core readings to remain unchanged, at 0.4% and 4.7%, respectively, after their upward surprise last month. Stickier core inflation could still validate the Fed’s hawkish case, but with a lower headline that might not be enough for markets to endorse the two more hikes implied by the FOMC's latest "dot plot". In the eurozone markets will be closely following first the individual country inflation data before we get the June CPI estimate for the block on Friday. The market eyes a decrease in the headline rate to 5.6% year on year, while our economists have pointed out that within core, services inflation continues to see some upside risk for the months ahead. Ahead of the these key releases central banks will have plenty of opportunity to lay out their current reaction function, with the ECB’s central banking forum in Sintra kicking off on Monday. The main event will be a policy panel attended by the ECB’s Lagarde, Fed’s Powell, BoE’s Bailey and BoJ’s Ueda.   Gilt yields higher, but Treasuries and Bunds still appear capped for now   Today's events and market views Through all the key central bank meetings of the last few weeks, it is notable that the trading ranges for longer-dated EUR and USD rates have held, resulting in the overall curve flattening move. The diffrence to the UK is that that, inflation-wise, things have been moving in the right direction, even if only slowly. Still, it does look as if there is a stronger will to test the upside and we would not exclude that 10Y UST yields hit 4% again before going lower.   For now, an eventful week will be capped off by the release of the June PMI flash estimates.  In the eurozone last month brought a pretty bleak report as the PMI indicated that services experienced slower growth and manufacturing experienced a sharper contraction. Consensus is looking for services growth to slow further, but the manufacturing slowdown to at least stabilise. Last month’s main upside was around fading inflation expectations. Central banks will want to rely on the actual inflation readings, where the UK has shown that in the current circumstances, one reading disappointing to the upside can make quite a difference. The next key inflation releases out of the US and eurozone are what markets can look forward to towards the end of next week.  

US While Europe appears at great risk for a recession as traders bet on aggressive rate rises by all the European central banks, the Fed is still expected to be nearing the end of their respective rate hiking campaign.  The focus in the US will fall on the PCE readings. If inflation comes down as expected, the swap futures might grow even more confident that the Fed will only deliver one more rate hike.  Wall Street will also pay close attention to the Conference Board’s consumer confidence reading, which is expected to show a modest rebound.  Friday’s Personal income and spending data will also be closely watched as incomes continue to grow, while spending softens. Fed’s Williams speaks at the Bank for International Settlements on Sunday.  Fed Chair Powell heads to Europe and speaks at the ECB’s global banking forum in Portugal.  The Fed will also release the results of their annual banking stress tests.   Eurozone There’ll be a lot of attention on ECB President Christine Lagarde’s appearances early in the week, particularly in light of what we’ve seen recently with central banks continuing to raise interest rates amid stubborn inflation. But it’s the flash HICP data on Friday that investors will be most interested in. The ECB recently warned that it will take a significant improvement in the data to avoid another rate hike next month and another repeat performance of the May report could be just that. Instead, we’re expected to see a small move in the other direction as base effects become less favourable for a couple of months, enabling the ECB to hike again in July before reassessing the situation in September. Inflation data from individual countries earlier in the week may offer some insight into what we can expect on Friday.   UK In light of the Bank of England decision to hike interest rates by 50 basis points last week, focus will be on what MPC members have to say. There’s been a lack of unity for months but that was increasingly evident at the June meeting. Going forward, the decisions aren’t going to get easier which means there’s likely to be less unity, rather than more. It won’t take many votes to pause the tightening cycle and so, despite the clear inflation problem, comments from MPC members will become increasingly scrutinized.   Russia A few data releases on the agenda next week including unemployment, retail sales, industrial output and monthly GDP.  

US While Europe appears at great risk for a recession as traders bet on aggressive rate rises by all the European central banks, the Fed is still expected to be nearing the end of their respective rate hiking campaign.  The focus in the US will fall on the PCE readings. If inflation comes down as expected, the swap futures might grow even more confident that the Fed will only deliver one more rate hike.  Wall Street will also pay close attention to the Conference Board’s consumer confidence reading, which is expected to show a modest rebound.  Friday’s Personal income and spending data will also be closely watched as incomes continue to grow, while spending softens. Fed’s Williams speaks at the Bank for International Settlements on Sunday.  Fed Chair Powell heads to Europe and speaks at the ECB’s global banking forum in Portugal.  The Fed will also release the results of their annual banking stress tests.   Eurozone There’ll be a lot of attention on ECB President Christine Lagarde’s appearances early in the week, particularly in light of what we’ve seen recently with central banks continuing to raise interest rates amid stubborn inflation. But it’s the flash HICP data on Friday that investors will be most interested in. The ECB recently warned that it will take a significant improvement in the data to avoid another rate hike next month and another repeat performance of the May report could be just that. Instead, we’re expected to see a small move in the other direction as base effects become less favourable for a couple of months, enabling the ECB to hike again in July before reassessing the situation in September. Inflation data from individual countries earlier in the week may offer some insight into what we can expect on Friday.   UK In light of the Bank of England decision to hike interest rates by 50 basis points last week, focus will be on what MPC members have to say. There’s been a lack of unity for months but that was increasingly evident at the June meeting. Going forward, the decisions aren’t going to get easier which means there’s likely to be less unity, rather than more. It won’t take many votes to pause the tightening cycle and so, despite the clear inflation problem, comments from MPC members will become increasingly scrutinized.

Potential Trigger On Wednesday, starting around 930am est, BOJ Governor Ueda will speak on an ECB forum panel with BOE Gov Bailey, ECB President Lagarde, and Fed Chair Powell.  Yen watchers are awaiting any sign that BOJ is getting ready to tweak its control of the yield curve. Quarter-end could also spark a reversal for the steadily weakening yen (132 to 144). Traders will also pay close attention to Friday’s US PCE data as softer inflation data could cement the market’s expectation that the Fed will be done after one more hike.   Key Levels Intraday moves have supported a steadily weakening yen, but it may have a neutral bias until we hear from BOJ Gov Ueda on Wednesday morning.  Upside resistance  may come from 144.70, which is the 70.7% Fibonacci retracement of the October high to January low move.  If a daily close occurs above the 145 level, further bullish momentum could target 146.11.  To the downside, 143.10 provides initial support.  Any hawkish fireworks from Ueda could support the case for a test of the 142.50 region. If Ueda stays the course, the yen could continue to weaken.  Japan intervened last fall when the yen weakened towards 145 and after prices breached 150.  Sustained weakness won’t be tolerated and expectations for action will grow if yen weakens beyond 145.  Everyone has their eye on the 150 level, so it will be interesting to see if that makes that barrier to hard to reach.      

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.

US It will be an eventful week, the ISM manufacturing report, the fourth of July Holiday, the Fed Minutes, and the nonfarm payroll report.  Wall Street is starting to believe in those Fed dot plots and this week’s economic data points may provide more evidence for the hawks.  The ISM manufacturing report is expected to show activity is stabilizing.  The Fed minutes will emphasize the fear that core inflation is proving to be stickier.  The June US jobs report is expected to show hiring cooled from the 339,000 pace to 200,000 jobs. The unemployment rate however is expected to improve from 3.7% to 3.6%.  Wage pressure is also expected to remain steady with a 0.3% increase from a month ago.    We will hear from a couple of Fed speakers this week. Williams participates in a moderated discussion at the 2023 annual meeting of the Central Bank Research Association at the New York Fed. Logan speaks on a panel about the policy challenges for central banks at the Central Bank Research Association annual meeting at Columbia University.     Eurozone Eurozone inflation data on Friday was very promising and while it likely won’t influence whether the ECB hikes or not in July – Lagarde previously strongly hinted they will – if followed by further signs of disinflation over the summer, it could see the central bank consider a pause in September.  Next week is a little short of tier-one releases but final PMIs on Monday and Wednesday will be of interest, as will another appearance by ECB President Christine Lagarde on Friday.   UK  Very little data of note next week with final PMIs the only highlight. That aside, central bank speak will be followed closely although in the absence of better inflation data, their hands are seemingly tied. The real question ahead of the next meeting is whether they’ll hike by 25 basis points or 50 again.   Russia A relatively quiet week with PMIs on Monday and Wednesday as the only notable releases. That aside there’s the Russian central bank financial congress on Thursday and Friday so we may hear from Governor Elvira Nabiullina.   South Africa The whole economy PMI is the only notable economic release or event next week.   Turkey With the CBRT pivoting toward more conventional monetary policy in the aftermath of the election, the economic data becomes increasingly relevant and next week we’ll get June inflation numbers on Wednesday. The CPI is expected to remain close to 40% but with the currency in freefall, the inflation outlook is likely to get worse before it gets sustainably better. The central bank has stepped back from burning through reserves to support the lira and effectively pay for bad policy choices and that has sent the lira to record lows, falling more than 20% in the last month, alone.

Asia Morning Bites The RBA decision will be the main data release for the day as the US takes a holiday.   Global Macro and Markets Global markets:  Not surprisingly, it was a fairly moribund start to the week for US stocks ahead of today’s US holiday.  Both the NASDAQ and S&P 500 made small gains. There was more action on Chinese bourses, where the Hang Seng rose 2.06% and the CSI 300 rose 1.31%. US Treasury yields continued to rise with 2Y yields up a further 4bp but 10Y yields up just 1.8bp. EURUSD is largely unchanged at 1.0914. The AUD is looking a little stronger at 0.6675 ahead of the RBA later today (we expect no change from them, though the market is split).  Cable was little changed, but the JPY lost further ground rising to 144.64. In Asian Markets, the KRW and THB made some gains, but it was a lacklustre day for most currency pairs.   G-7 macro:  The US Manufacturing ISM index weakened further to 46.0 from 46.9, and the employment index dipped into contraction territory, falling from 51.4 to 48.1. New orders were slightly less bad at 45.6, up from 42.6, but still in contraction territory. The equivalent manufacturing PMI index produced by S&P also registered 46.0, though was flat from the previous month. US construction data was stronger than expected, rising 0.9% MoM, though there were a lot of downward revisions. Apart from German trade data, it is quiet for Macro today in the G-7.   Australia:  The RBA decision today has the market split. Of 32 economists surveyed by Bloomberg, 13 expect a rise of 25bp to 4.35%, while 19 (including ourselves) expect no change to the current 4.1% cash rate target. The main reasons for our decision are as follows: The RBA hiked in June, and although the data has been mixed, back-to-back hikes seem excessive with rates already at an elevated level. Moreover, the run of recent inflation data has been far more benign than was expected, and if last month’s finely balanced decision was pushed over the edge by higher-than-expected inflation, this month’s decision should result in no change by the same logic. See this note on the latest CPI data for more on this. Finally, there will be much better occasions for the RBA to hike in the months ahead if that remains necessary. September will be one of those, as the RBA can assess the impact of large electricity tariff increases which are due in July, and should be visible in CPI data by September. Also, favourable base effects drop out after July's CPI release for several months, so it is not inconceivable that we see some backing up of inflation over the third quarter before it dips again into the year-end.   South Korea: Consumer prices rose 2.7% YoY in June, slowing for a fifth month (vs 3.3% in May, 2.8% market consensus) as gasoline (-23.8%) and diesel (-35.2%) prices limited overall price increases. Excluding agricultural products and oils, core inflation also slowed to 4.1% from 4.3% in May. We believe that inflation will stay in the 2% range throughout the year, there will be some ups and downs, but inflation probably won’t return above 3%. KEPCO raised power bills from the middle of May leading utility fees to rise sharply (25.9%), but we don’t expect additional fee hikes throughout this year due to falling global commodity prices. Also, rent prices marked five monthly drops in month-on-month comparisons, and the declines are gradually increasing each month. As a result, we think that service prices will come down further in the coming months. Today’s data support our view that the Bank of Korea (BoK) will continue to stay on hold.  Now, the question is the timing of the first rate cut. We have pencilled in a 25bp cut in October as inflation is expected to head towards 2% while the economic recovery remains sluggish. The BoK may be concerned that rate cuts could cause a rebound of household borrowing, along with the recent easing of mortgage measures. At the same time, rising delinquency rates and default rates will also be a concern for the BoK as strict credit conditions have increased the burden on households.     What to look out for: RBA meeting South Korea CPI inflation (4 July) Australia RBA meeting (4 July) Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

Russia Inflation data on Wednesday is expected to show pressures heating up which may explain why the CBR has been hinting that the next interest rate move may be higher rather than lower. The extent to which the CPI number rises will likely determine the urgency with which the central bank will respond. The rouble remains under pressure and rate hikes may help to address both problems. South Africa No major economic data or events next week. Manufacturing production and the business confidence survey are the only notable releases. Turkey The lira remains under immense pressure after the government abandoned its unsustainable and unconventional policy of monetary easing and market interventions, which triggered an enormous spike in inflation. Inflation eased slightly last month but that won’t likely last as the currency has fallen to new record lows. Data next week include unemployment, industrial production, and current account.  Switzerland No major releases or events next week, with PPI on Friday as the only thing on the calendar

Last Friday, the GBP/USD pair tested the 1.2850 support level, which corresponds to the upper line of the Bollinger Bands indicator on the daily chart. From a formal point of view, the pound has renewed its multi-month price peak (the last time the pair was at this level was in April), but in reality, the situation doesn't look so rosy for buyers. Over the past three weeks, the pound has repeatedly approached the 1.2850 target, but each time it stopped just a few steps away from this price barrier.   Take a look at the weekly and daily GBP/USD charts: since mid-June, the pair has shown wave-like dynamics, as it repeatedly tries to overcome the stubborn resistance level. By the way, the last attempt also ended in failure.   At the start of the new trading week, sellers took the initiative again, pulling the price into the 27th figure range. A news catalyst is needed The pound needs a strong news catalyst to break through the defense (1.2850), approach the boundaries of the 29th figure, and in the future claim the heights of the 30th price level. Undoubtedly, such a scenario is possible in the case of a massive weakening of the greenback, but as practice shows, even in this case, the pound should play not the role of the follower, but the leader.   As already mentioned above, the GBP/USD pair has been moving in an uptrend since mid-June. Initially, support for the pound came from data on rising inflation in the UK. It turned out that the core consumer price index, excluding food and energy prices, jumped to 7.1% in May, while most analysts predicted it would fall to 6.7%. The indicator renewed a multi-year record - this is the strongest pace of growth of the indicator since 1992. Within the current year, the indicator demonstrates an uptrend for the second month in a row. This fact strengthened the pound's position, but its main "ally" turned out to be the Bank of England, which unexpectedly raised the interest rate by 50 basis points a few days after the release (the base forecast assumed a 25-point hike). Moreover, in its accompanying statement, the central bank did not soften its wording and hinted at further tightening of monetary policy.   The central bank, in particular, indicated that it will continue to "carefully monitor signs of inflationary pressure in the economy, including the labor market situation and wage dynamics, as well as inflation in the services sector." At the same time, the Bank warned that if signs of more persistent pressure are recorded in the future, a further increase in the interest rate will be needed. The events of the past month allowed buyers to cover almost a 500-point path: at the beginning of June, the price fluctuated at the base of the 24th figure, while on the wave of the upward momentum it grew to the middle of the 28th figure. But the 1.2850 target became a local price ceiling for the bulls.   In order to build an upward move, you need to experience a kind of deja vu: further inflation growth (this time in June) + hawkish results of the next BoE meeting. However, to successfully transfer to the price echelon 1.2850 - 1.3000, it is enough to fulfill only the first point of the "plan" (provided that the dollar index remains in its previous positions and does not strengthen after the release of US inflation data).   Important reports ahead The consumer price index in the UK for June will be published next week - July 19th. This will be key in the run-up to the next - August - BoE meeting. But in addition to the inflation report, one should also pay attention to another report - in the field of the UK labor market. It will be published on Tuesday. If the main components turn out to be in the green zone (especially the pro-inflation indicator), the pound will receive a kind of "advance assistance", which will be greatly enhanced in case of a strong inflation report. In other words, if both releases (labor market + inflation) are in the green zone, the probability of a rate hike in August will significantly increase, and this fact will support the British currency.   According to preliminary forecasts, the unemployment rate will remain at the same level (3.8%), the number of employed will increase by 20,000 (after falling by 13,000 in the previous month), and the wage component will show contradictory dynamics: with the payment of bonuses, the indicator will rise to 6.8%, without bonuses - it will decrease slightly, to 7.1%. Overall, if you trust the forecast estimates, Tuesday's reports can support the British currency.   If the indicators turn out to be in the green (especially the wage component of the report), buyers may again test the resistance level of 1.2850, which turned out to be a "tough nut to crack". But even in this case, the pound is unlikely to settle above this target and settle within the 29th figure. In my opinion, such a scenario is possible in case of an acceleration in the growth rate of the UK CPI and/or a large-scale weakening of the US currency. From a technical point of view, on the daily chart, the price is between the middle and upper lines of the Bollinger Bands, which speaks of the bullish bias.   On the daily and weekly charts, the Ichimoku indicator formed a bullish "Parade of Lines" signal, when the price is above all lines of the indicator, including above the Kumo cloud. This signal also indicates bullish sentiments. The nearest target is the aforementioned mark of 1.2850 (the upper line of the Bollinger Bands on D1). The next level of resistance (and, accordingly, the next target) is the 1.2950 mark - this is also the upper line of the Bollinger Bands indicator, but already on the weekly chart.

The recent retreat of gold prices to around $1,900 per ounce and silver prices to the area of $22 per ounce has sparked questions about the future direction of these precious metals. Market participants are eager to determine if gold and silver will find support at these levels, potentially leading to a rebound or a push towards historic highs. In seeking insights into this matter, we turn to the expertise of financial analyst Craig Erlam. According to Erlam, the expectations surrounding the actions of the Federal Reserve (Fed) play a significant role in shaping the outlook for both gold and silver prices. The impact of Fed decisions on yields and the value of the US dollar cannot be underestimated.   Erlam highlights the recent boost that gold and silver prices received following positive inflation data. This indicates that unless there is a substantial shift in the opposite direction, the current momentum could support prices in the short term. While economic data has been volatile, there is a growing sense of progress. The key lies in the policymakers' interpretation of this progress in the days ahead.       FXMAG.COM: The gold price has made a retreat to the vicinity of $1,900 per ounce. What's next for gold prices - will the King of Metals find support there from which to bounce? The silver price has made a retreat back to the area of $22 per ounce and what's next for the metal - does it have a chance to head toward historic highs?   Craig Erlam: In both cases, a lot comes down to what the Fed is expected to do, and what impact that has on yields and the dollar. As we've seen today, some very encouraging inflation data has given both gold and silver a big lift and unless we see a significant shift the other way, that could support prices in the near term. The economic data has been volatile but it does feel like we're finally seeing progress. We'll see from policymakers over the coming days whether they view recent progress to be substantial enough.

The retreat of the gold price to around $1,900 per ounce has sparked questions about its future trajectory. As market participants analyze the situation, they wonder whether the "King of Metals" will find support at this level, providing a springboard for a potential rebound. Seeking insights into this matter, we turn to the expertise of a Squared Financial analyst. Despite recent inflation data from the US showing a downward drift, there appears to be an unexpected push in the price of gold. This begs the question: Isn't gold traditionally considered a hedge against inflation? While it is, the analyst explains that the current movement is primarily driven by a weaker US dollar. Lower-than-expected inflation has led to a shift in market expectations regarding the Federal Reserve's future rate hikes. Consequently, the data suggests that the Fed's ability to implement further rate hikes may be limited. This dynamic is driving the upward momentum not only in gold but also in other commodities.     FXMAG.COM: The gold price has made a retreat to the vicinity of $1,900 per ounce. What's next for gold prices - will the King of Metals find support there from which to bounce?   Squared Financial analyst: The gold price has made a retreat to the vicinity of $1,900 per ounce. What's next for gold prices - will the King of Metals find support there from which to bounce? After yesterday's inflation data from the US, some traders might be confused about why Gold is pushing up despite the fact that inflation is drifting lower. Isn't Gold a hedge against inflation? Yes, it is, but the move is driven by a weaker dollar. Lower-than-expected inflation shifts the market's expectations about how many rate hikes are left from the Fed. After today's data, the Fed might not be able to do any more rate hikes, and this is what's driving Gold and other commodities. In the meantime, $1955 is a solid resistance, but it's safe to say that Gold will be able to advance toward $1970 in the coming weeks.  

The silver market has experienced a retreat, bringing its price back to the range of $22 per ounce. This has led to questions regarding the future trajectory of the metal and whether it has the potential to reach historic highs. Richard Snow, a strategist at DailyFX, highlights the current delicate position of silver. On one hand, it benefits from a weakened US dollar, driven by positive inflation data in the United States. On the other hand, as a non-interest bearing asset, it may face challenges as interest rates are expected to remain elevated until the second half of the following year. The direction of silver will ultimately be influenced by the dominant factor between these two, although recent trends have shown that silver is more sensitive to dollar declines rather than rising interest rates. This suggests a potentially positive outlook for silver's upside potential.   FXMAG.COM: The silver price has made a retreat back to the area of $22 per ounce. What's next for the metal - does it have a chance to head toward historic highs?   Richard Snow: Richard Snow, Strategist at DailyFX said, "One of the most traded commodities, Silver is in a precarious position currently. On the one hand it benefits from a lower US dollar after a string of encouraging inflation data in the US. On the other hand, the non-interest bearing metal could be overlooked as elevated interest rates are expected to remain in place until the second half of next year. The path for silver will be determined by the more dominant of these factors with recent history revealing greater sensitivity to dollar declines than rising interest rates – improving the outlook for silver's upside potential.  

USD/TRY: Pace of TRY depreciation moderates lately     Inflation data show that the downtrend since last October seems to have come to an end. We are likely to see an increase in the headline number ahead given the FX pass-through from recent lira weakness, continuing strength in demand and potential adjustments in administered prices. Given the current pace of fiscal spending, leading to a rapid widening in the budget deficit on a year-to-date basis, the government announced a number of measures to increase revenues and control the widening in the deficit. While FX reserve levels are quite low and require efforts to build up, there has been a rapid increase in recent weeks with less involvement by the central bank in the FX market. After a rapid increase following elections, USD/TRY gains have slowed.  

Output cuts and inflation data continue to boost crude prices Temporary disruptions could add to the bullishness Potential resistance around $83-$84   Oil is trading relatively flat today but has made tremendous gains over the last couple of weeks and could still add to that over the coming sessions. The price has risen more than 13% from the lows on 28 June and, despite appearing to struggle at times yesterday, still has plenty of momentum. The break above $80 was very significant after multiple efforts by Saudi Arabia and its allies to manipulate the price to more sustainable levels, from their perspective. Temporary output disruptions, like those currently in Libya and Nigeria, could further lift prices in the short term as potential tightness in the market on the back of cuts and economic resilience boost demand.   Key Resistance Lies Ahead Brent could face an interesting test around $83-$84 if it keeps rallying, with the boost from US inflation data and Saudi/Russian cuts potentially giving it an additional boost, as well as the psychological lift from this week’s breakout. Brent Crude Daily     The 200/233-day simple moving average has been a key zone of support and resistance previously and could prove to be so again. It hasn’t traded above here in more than a year so a break above would be significant. A move lower could draw attention back to $80 and whether we’ll get that confirmation of the initial breakout. A move below here wouldn’t necessarily be a particularly bearish move, with the 55/89-day SMA band around $76-$78 arguably more important, falling around the upper end of the descending channel. It could also fall around a key fib level depending where the price peaks first.   

UK: inflation data to determine size of August rate hike Whether the Bank of England hikes by another 50 basis points in August, or is content with a smaller 25bp move, will almost entirely hinge on next week’s inflation data. June’s meeting made it clear that the Bank is laser-focused on the CPI and wage numbers, and not a lot else. Next week, we should see headline CPI dip noticeably, though this is largely because last June’s near-10% surge in fuel prices won’t be matched – and in fact, petrol/diesel pump prices were down by 2.6% last month. Food inflation should also decline modestly too, not least because producer price inflation has been easing for several months now. Core inflation should inch slightly lower too, though it’s the services component that matters most to the Bank of England, and we expect this to stay at 7.4% - a post-Covid high. This is also the Bank of England’s expectation, according to the June meeting minutes. Assuming we’re right on services inflation, August’s meeting then becomes an extremely close call. The latest pay data came in hot but was balanced out by some better news on the supply of workers. A further rise in services CPI would probably cement another 50bp move, and a downside surprise would probably nudge the dial in favour of a 25bp move.  

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.  

China The housing price index (new home prices) for June will be released this Saturday, and it will be closely watched to monitor the financial health of Chinese property developers that are still suffering from a bout of debt overhang due to overleveraging in the past 5 years. In the prior month of May, average new home prices have managed to inch up 0.1% year-on-year after consecutive months of contractions since April 2022. On Monday, we will have the release of Q2 GDP, industrial production, retail sales, and unemployment data. Retail sales and the youth unemployment figures will be pivotal for gauging the current state of internal demand which has been lackluster since March. Growth in retail sales for June is expected to plummet to 3.2% year-on-year from 12.7% recorded in May. On the labor market front, the youth unemployment rate surged to a record high of 20.8% in May, that’s about four times above the nationwide unemployment rate. On Monday, China’s central bank, the PBoC will decide on its one-year Medium-Term Lending Facility Rate (currently at 2.65%) followed by Thursday’s decision on the one-year and five-year Loan Prime Rates (currently at 3.55% and 4.20%, respectively).  Given the latest policy pledge by PBoC to stabilize growth via utilizing its arsenal of monetary policy tools, there is a possibility that another round of interest rate cuts may be implemented in the coming week.   India No major key data releases.   Australia The RBA minutes of the last monetary policy meeting held on 4th July will be released on Tuesday. Market participants will be scrutinizing the details of the minutes for hints on whether the current official cash rate of 4.1% is the terminal rate for the current tightening cycle after the RBA chose to stand pat on 4th July.  Based on the RBA Rate Indicator as of 14th July, the ASX 30-day interbank cash rate futures for the August 2023 contract has priced in a 29% probability of a 25-bps hike to bring the cash rate to 4.35% at the next monetary policy decision on 1st August; that’s a decrease in odds from 52% seen in a week ago. Labor market conditions for June will be out on Tuesday; employment change is expected to be lower at 17,000 versus 75,900 in May while the unemployment rate is expected to hold steady at 3.6%.   New Zealand Q2 inflation data is due out on Wednesday. Expectations are for a cooler print of 5.9% year-on-year from 6.7% printed in Q1. On a quarter-on-quarter basis, it is expected to slide to 0.9% from 1.2% in Q1. If this cooler consensus turns out as expected, it will be the second (y/y) and third (q/q) consecutive quarters of an inflationary growth slowdown.   Japan Balance of trade data for June is due out on Thursday; growth in exports is expected to improve to 2.2% year-on-year from 0.6% in May while imports are expected to deteriorate further to -11.3% year-on-year from -9.9% in June.   Inflation data will then be released on Friday. The core inflation rate for June is expected to tick slightly higher to 3.3% year-on-year from 3.2% in May while June’s core-core inflation rate (excluding fresh food & energy) is expected to remain at an elevated sticky level of 4.3% year-on-year in May. If these inflationary prints come in as expected, it is likely to put more pressure on the Bank of Japan to bring forward monetary policy normalization, a tilt away from the current ultra-dovish stance.   Singapore The key data to note will be the balance of trade for June to be released on Monday; non-oil exports growth declined to -14.7% year-on-year in May, its 8th consecutive month of contraction. Another weak reading is expected for June due to a weak external environment, especially from China, one of its major trading partners.  

Output cuts and inflation data continue to boost crude prices Temporary disruptions could add to the bullishness Potential resistance around $83-$84   Oil is trading relatively flat today but has made tremendous gains over the last couple of weeks and could still add to that over the coming sessions. The price has risen more than 13% from the lows on 28 June and, despite appearing to struggle at times yesterday, still has plenty of momentum. The break above $80 was very significant after multiple efforts by Saudi Arabia and its allies to manipulate the price to more sustainable levels, from their perspective. Temporary output disruptions, like those currently in Libya and Nigeria, could further lift prices in the short term as potential tightness in the market on the back of cuts and economic resilience boost demand.   Key Resistance Lies Ahead Brent could face an interesting test around $83-$84 if it keeps rallying, with the boost from US inflation data and Saudi/Russian cuts potentially giving it an additional boost, as well as the psychological lift from this week’s breakout.     The 200/233-day simple moving average has been a key zone of support and resistance previously and could prove to be so again. It hasn’t traded above here in more than a year so a break above would be significant. A move lower could draw attention back to $80 and whether we’ll get that confirmation of the initial breakout. A move below here wouldn’t necessarily be a particularly bearish move, with the 55/89-day SMA band around $76-$78 arguably more important, falling around the upper end of the descending channel. It could also fall around a key fib level depending where the price peaks first.       

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

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.

Eurozone A 25 basis point rate hike from the ECB is almost entirely priced in ahead of the meeting on Thursday but what comes after is up for much more debate. Recent commentary from policymakers suggests a pause may very much be on the cards in September, on the back of some progress in the inflation data recently. The ECB has taken a hawkish stance after meetings until now but next week could see President Lagarde and her colleagues tweak the communication and leave the door open to a pause at the following meeting. The following day we’ll get some flash inflation data from member states including Germany, France and Spain while the week will start with flash PMIs from Germany, France and the eurozone. Finally, Spain goes to the polls this weekend in a highly unusual late summer snap election in which a party from the far left or right will probably be kingmaker. It promises to be an eventful week.   UK A very quiet week for the UK following one in which inflation was shown to be finally falling and interest rate expectations have been pared back. The focus this week will be on the PMI surveys and whether we can get any further signs of disinflationary pressures building and the economy cooling.  

Russia No major economic releases or events next week. Industrial output and central bank reserves are the only items on the agenda. South Africa The SARB paused its tightening cycle in July while stressing it is not the end – although it likely is as both headline and core inflation are now comfortably within its 3-6% target range – and that future decisions will be driven by the data. With that in mind, next week is looking a little quiet with the leading indicator on Tuesday and PPI figures on Thursday. Turkey Next week offers mostly tier three data, with the only release of note being the quarterly inflation report. Against the backdrop of a plunging currency and a central bank that finally accepts it needs to raise rates but refuses to do so at the pace required, it should make for interesting reading. Though it likely won’t do anything to restore trust and confidence in policymakers to fix the problems. Switzerland Next week consists of just a couple of surveys, the KOF indicator and investor sentiment. China No key economic data but keep a lookout for a possible announcement of more detailed fiscal stimulus measures in terms of monetary amount, and scope of coverage. Last week, China’s top policymakers announced a slew of broad-based plans to boost consumer spending and support for private companies in share listings, bond sales, and overseas expansion but lacking in detail. India No major key data releases. Australia Several pieces of data to digest. Firstly, flash Manufacturing and Services PMIs for July out on Monday. Forecasts are expecting a further deterioration for both; a decline in Manufacturing PMI to 47.6 from 48.2 in June, and Services PMI slip to contraction mode at 49.2 from June’s reading of 50.3. Secondly, the all-important Q2 inflation data out on Wednesday where the consensus is expecting a slow down to 6.2% year-on-year from 7% y/y printed in Q1. Even the expectation for the less volatile RBA-trimmed median CPI released on the same day is being lowered to 6% y/y for Q2 from 6.6% y/y in Q1. These latest inflationary data will play a significant contribution in shaping the expectations of the monetary policy decision outlook for the next RBA meeting on 1 August. Based on the RBA Rate Indicator as of 21st July, the ASX 30-day interbank cash rate futures for the August 2023 contract have priced in a 48% probability of a 25-bps hike to bring the cash rate to 4.35%, that’s an increase in odds from 29% seen in a week ago. Lastly, retail sales for June out on Friday where the forecast is expected a decline to -0.3% month-on-month from 0.7% m/m in May. New Zealand One key data to note will be the Balance of Trade for June out on Monday where May’s trade surplus is being forecasted to reverse to a deficit of -NZ$1 billion from NZ$ 46 million. Japan On Monday, we will have the flash Manufacturing and Services PMI for July. The growth in the manufacturing sector is expected to improve slightly to 50 from 49.8 in June while growth in the services sector is forecasted to slip slightly to 53.4 from 54.0 in June. Next up, on Friday, the leading Tokyo CPI data for July will be released. Consensus for the core Tokyo inflation (excluding fresh food) is expected to slip to 2.9% year-on-year from 3.2% y/y in June, and Core-Core Tokyo inflation (excluding fresh food & energy) is forecasted to dip slightly to 2.2% y/y from 2.3% y/y in June. Also, BoJ’s monetary policy decision and latest economic quarterly outlook will be out on Friday as well. The consensus is an upgrade of the FY 2023 inflation outlook to be above 2% and a Reuters report out on Friday, 21 July stated that it is likely no change to the current band limits of the “Yield Curve Control” (YCC) programme on the 10-year JGB yield based on five sources familiar with the BoJ’s thinking. Prior to this Reuters news flow, there is a certain degree of speculation in the market place the BoJ may increase the upper limit of the YCC to 0.75% from 0.50%. Singapore Two key data to watch out for. Firstly, inflation for June is out on Monday. Consensus is expecting core inflation to cool down to 4.2% year-on-year from 4.7% y/y in May. If it turns out as expected, it will be the second consecutive month of a slowdown in inflationary pressure. Next up, industrial production for June out on Wednesday, another month of negative growth is expected at -7.5% year-on-year but at a slower magnitude than -10.8% y/y recorded in May.  

Rates Spark: Don’t look down, yet Policy rates have practically peaked in the US and eurozone. Even if there is another hike it would be the final one. But market rates are not yielding to this. The US 10yr has re-hit 4%. The issue here is not the peak in policy rates, but the potential for cuts. Basically the market has reined back rate cut expectations, and that's keeping long rates elevated.   US 10yr makes the break to 4%. It should stay there for a while US market rates latched on to the strength in the activity data released on Thursday, rather than the calming in inflation data. Even if lower, the 3.8% on core PCE is still too high for comfort, and remains vulnerable to future upside should the economy continue to bubble as it has been doing. The release of decent consumer spending, a fall in jobless claims and firm durable orders all point to an economy that continues to defy the forces acting against it. For the 10yr Treasury yield, the issue remains that there is little room for lower yields if the terminal discount for the funds rate is not much below 4% in the medium term. The implied fed funds discount for Jan 2025 has in fact drifted higher, now up at 4.1%. Based off that the 10yr is in fact still arguably too low. We view the push up to the 4% area as perfectly valid, and indeed we anticipate that the 10yr yield remains above 4%, at least for as long as the medium-term discount for the fed funds rate also remains above 4%.   The ECB moves to 0% on excess reserves; don't worry, it's a move back to normalcy The European Central Bank (ECB) decision to pay 0% on excess reserves brings things back to where they were before the Great Financial Crisis (GFC). Regulatory reserves always paid zero percent. But since the GFC the ECB has remunerated reserves at the overnight deposit rate. This had to be done as else the banks would simply not hold them. The move back to 0% applies only to regulatory reserves, and not to excess reserves. It is a mild hit to banks, as they receive less interest income on reserves. But it is not dramatic, as the reserves held over and above the minimum will continue to get remunerated as normal. Latest data show that excess reserves across the banking system were running at EUR 3.6trn. These continue to get compensated at the deposit rate. Reserve requirements were running at an average of EUR 165bn. These will be compensated at zero percent. That represents about 5% of total reserves. It's not nothing, but it's also not terribly significant. This saves the ECB a few bob, but nothing more to it.   Today's events and market views Key US data on Friday includes the June PCE deflator. Look for a continuation of the deceleration in inflation, with the headline deflator set to ease down to 3% and the PCE core deflator to ease down in the direction of 4% (but likely to remain above). The University of Michigan Sentiment indicator for July is set to hold in the low 70's, which is below the average in the 85 area. It's been on a upward recovery, from around 60 in May. We'll also get the 5-10yr inflation expectation, which is expected to ease slightly to 3%. The eurozone will have a consumer price inflation focus, with the German lander CPI data to be followed by a country-wide one. A mild easing is expected, but still leaving inflation running uncomfortably high. We'll also see EU consumer confidence, which is likely to remain in the mid 90's, and below the benchmark reference of 100, signalling ongoing macro weakness.

ECB hikes rates by 25 basis points Signals the central bank may pause at the next meeting in September Euro slides as eurozone yields fall   The ECB raised rates for potentially the final time in the tightening cycle on Thursday, although it refused to give any indication of what will happen going forward. Instead, the central bank is insisting that decisions will be guided by the economic data and that interest rates will need to remain sufficiently restrictive for some time. This is consistent with what we heard from the Fed a day earlier and what most major central banks will be communicating soon enough if they aren’t already. We remain in a period of uncertainty on the economic data, despite the progress that has already been achieved and the further moves that are expected over the rest of the year. If the inflation data continues to improve as many expect, there’s every chance the ECB pauses in September and doesn’t then feel it necessary to hike further by October. There are, of course, an abundance of upside risks to the inflation data from the economy continuing to display significant resilience, as we’ve already seen this year, or fresh energy or food price shocks. These things and more could tempt the ECB to hike further later in the year.     Euro falls below 1.10 against the dollar The lack of commitment to further rate hikes from the ECB today weighed on the euro and saw eurozone yields decline. The single currency plunged against the dollar, slipping back below 1.10 after coming close to 1.1150 earlier in the day.       It would appear the ECB has failed to open the door to a pause without triggering too much excitement, as it would have preferred. President Lagarde was desperately trying to avoid doing so in the press conference, repeatedly referring back to previous comments rather than directly answering questions, and it seems in doing so, traders have instead opted to read between the lines. We may see efforts to correct this in the weeks ahead.  

The 20-day moving average has capped further upside in the USD/JPY so far since last Friday, 21 July. BoJ will release its monetary policy decision and latest quarterly outlook report tomorrow, 28 July. The consensus is an upgrade for its FY2023 consumer inflation forecast to be above 2% while maintaining the upper limit of the YCC at 0.50%. Recent minor downtrend phase from 21 July 2023 high of 141.95 to today, current intraday low of 139.38 may see a retracement. Key resistance zone at 140.70/142.50. The recent rebound of 456 pips seen in the USD/JPY from the 14 July 2023 minor swing low of 137.24 retested the downward-sloping 20-day moving average last Friday, 21 July that is acting as resistance around 142.10/142.50. Thereafter, the price actions of USD/JPY retreated twice so far this week at/near the 20-day moving average, declined by 254 pips to print a 5-day intraday low of 139.38 as of today, 27 July Asian session at this time of the writing. The current short-term weakness of the USD/JPY has materialized ahead of the Bank of Japan (BoJ)’s monetary policy decision tomorrow where the consensus is an upgrade of its consumer inflation forecast to be above 2% (above BoJ’s target) for FY 2023 for its latest economic quarter outlook, and no change on the upper limit of the Yield Curve Control (YCC) programme on the yield of the 10-year Japanese Government Bond (JGB) to capped at 0.50%. Interestingly, this upper limit of the YCC is a wild card for tomorrow as several ex-BoJ officials have advocated an upward revision to the 0.50% limit as the current economic conditions warrant it such as elevated sticky inflation conditions in Japan where the national-wide core (excluding fresh food), and core-core (excluding fresh food & energy) stood at 3.3% y/y, and 4.2% y/y for June; at a 31-year and 41-year high respectively. Before BoJ releases its monetary policy decision and updated quarterly projections, BoJ officials will have a chance to access the leading Tokyo area’s consumer inflation data for July which is being released three hours earlier tomorrow as a key input to debate and assess the suitability of a change to the limits of the YCC programme.       Price actions have traced out a potential medium-term bearish reversal “Head & Shoulders”     Fig 1:  USD/JPY medium-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart) The price actions of USD/JPY have evolved into a potential bearish reversal “Head & Shoulders” configuration since the high of 29 May 2023. The appearance of this potential “Head & Shoulders” suggests that the medium-term uptrend phase from the 16 January 2023 low of 127.22 to the 21 July 2023 high of 141.95 may have reached its terminal condition where a potential medium-term downtrend phase may materialize next, and a break below the 136.90 neckline support of the “Head & Shoulders” increases the odds.      Minor short-term downtrend from 21 July high reached an oversold condition     Fig 2:  USD/JPY minor short-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart)  The recent minor downtrend phase from the 21 July 2023 high of 141.95 to today, 27 July’s current intraday low of 139.38 has reached an oversold condition as indicated by the hourly RSI oscillator. This observation suggests the risk of a minor bounce to retrace a portion of the minor downtrend with the key resistance zone coming in at 140.70/142.50. Watch the 142.50 key medium-term pivotal resistance to maintain the short-term bearish bias and a break below the 139.15 near-term support exposes the next support at 137.65/136.90 (also the neckline of the “Head & Shoulders” & 200-day moving average). On the other hand, a clearance above 142.50 invalidates the bearish bias to see the next resistance coming in at 143.60.

Fed swaps show only an 18% chance of a hike in September (under 50% for November) FOMC to take data-dependent approach on future hikes Fed no longer forecasting a recession   The dollar declined as US stocks embraced a patient Fed Chair Powell that will remain dependent with the next two inflation reports before committing to what they will do in September.  The Fed is probably done raising rates and that is keeping soft landing hopes alive. Fed Decision The Fed raised rates by a quarter-percentage point, bringing the target range to 5.25% to 5.50%, a 22-year high.  This was an easy FOMC decision as economic growth remains impressive, which is why the Fed will try to keep the door open for one last hike. The US economy is starting to feel the impact of the Fed’s rate hiking campaign and unless the housing market continues to heat up, the disinflation process should help bring rates back to target.   FOMC Statement The statement did not deliver any surprises as the Fed emphasized that inflation remains elevated and they will continue to assess additional information and its implications for monetary policy.  Economic growth is softening as the June statement said economic activity is expanding at a modest pace, while now it is at a moderate one.  The Fed is keeping optionality for future rate increases but it probably won’t need them.  The disinflation process will remain as the economy is weakening and the corporate world should start feeling the impact of tighter credit conditions.    FOMC press conference Powell noted that the FOMC will take a data-dependent approach on future hikes.  He acknowledged the rebound with housing and highlighted that they are waiting for the full effects of their tightening.  Powell clearly stated that it is possible that they’d raise or hold in September if data warranted it.  The Fed is going to be locked in with all the key inflation data points.  The June CPI report was cooler-than-expected, so if that trend continues, the Fed will probably skip in September.  The Fed will have two inflation reports before it meets again, with the core remaining quite elevated.  The Fed clearly believes a soft landing is achievable as the staff no longer is forecasting a recession.   FX The dollar softened as the Fed signaled they will be patient with future rate hikes, which suggests if they deliver one more hike that will most likely be in November. The economy should weaken going forward and that should support a shifting of the focus from just inflation to also including recessionary fears.  Both the euro and pound rallied against the dollar as their respective central banks have clearly signaled more tightening will occur beyond the summer.  EUR/USD has clearly found support ahead of the 1.10 handle, which suggests prices could stabilize until we get to the ECB meeting.  The 1.1150 remains key short-term resistance.      

Reserve Bank of Australia takes another breather Pausing for a second consecutive meeting, today's rate decision is in line with some better inflation data this month and means the Bank can respond to future data events with less fear of overdoing the tightening.   Not clear why market was even looking for a hike It is a genuine mystery to us why there was a small majority of forecasters looking for a hike at today's meeting. We certainly were not. The June inflation data came in better than most of the expectations, including on the core measures. So that alone should have been enough to keep the RBA on hold. And none of the other data since the last meeting have been particularly alarming. Sure, the labour data wasn't exactly soft, but it wasn't super-strong either, and the unemployment rate while still very low, was stable from the previous month.  In the statement in July, Governor Philip Lowe noted that further tightening "will depend upon how the economy and inflation evolve", and in the event, the economy and inflation tended to indicate that they were on the right track. For a central bank that has been keen to give the economy a chance where at all possible, there was simply no good argument for a hike today.   There will be better excuses to hike than existed this month   More hikes are possible - probably one, maybe two That doesn't mean that there is no chance of any further tightening in this cycle. And while the June inflation figures were lower than expected, the month-on-month increase was not even close to what is required to get inflation back to target. And that will have to change. Today's statement notes that there is still a chance for some further tightening and that the RBA will "continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market"  We think that this broad assessment means the RBA can be a bit more choosy when it does decide to tighten again. If it responded to every tiny mishap in the data, then rates would rapidly rise, and by the time the economy did finally show more evidence of turning, the odds are that they would by then have gone too far. This way, they are giving a soft landing the best chance of happening.  Base effects will become far less helpful after the July CPI release later this month, and the July reading of CPI will also incorporate substantial electricity tariff hikes which means that inflation could backtrack higher for July and August readings. That puts a September rate hike firmly into the frame, and possibly leaves the door open for a further hike before the base effects should turn more helpful once more - absent seasonal supply chain shocks, which is harder to take for granted in these climate-changed times.     So we will be looking for one more rate hike to 4.35% at the RBA's next meeting in September. And we will be reserving judgement on another and hopefully final one in October or November, if the macroeconomy remains resilient and if inflation is making insufficient progress lower. The September meeting would be Lowe's last meeting as governor, as the new Governor, Michele Bullock, will take over from 18 September. It would be a nice handover gift if the tightening were largely completed before she takes the helm. 

Late Friday US sell-off set to weigh on European open    By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to eke out some modest gains on Friday, at the end of what was a negative week overall as concerns over earnings guidance downgrades and rising long term yields weighed on broader market sentiment. A mixed US jobs report looked to have stabilised sentiment, pulling the DAX and FTSE100 off their lows of the week after another slowdown in jobs growth in July and downward revisions to previous months, spoke to the idea that central bank rate hikes have done their job, and that no more are coming. This uplift only lasted until just after European markets had closed with all the signs that US markets would be able to end a 3-day losing streak, however the early gains that we saw in the early part of the day soon evaporated with the Nasdaq 100 and S&P500 both posting their worst weekly performances since March.     In essence there was something for everyone in Friday's jobs report, weaker jobs growth, the unemployment rate inching lower, and robust wage growth. Ultimately it spoke to a resilient US economy, as well as a possible Fed pause in September, ahead of this week's CPI report, although there are some on the FOMC who are still on the "more rate hikes to come" line. One of these members is Governor Michelle Bowman who at the weekend expressed her view that more rate hikes were likely to be needed to return inflation to target. While this may now be starting to become a minority view on the FOMC, it merely serves to highlight the growing uncertainty that is not only starting to permeate central bank thinking but also investor sentiment more broadly, as well as raising broader questions. Has the Fed managed to engineer a soft landing, and should they cause a pause to allow more time to assess any lag effects on consumers as well as the broader economy. Or do they carry on hiking on the basis that we could have seen a short-term base when it comes to prices slowing down? While markets are still pricing in a 40% chance of one more rate hike before the end of the year, this figure could swing either way in the event of a hot CPI print later this week. If next month's jobs report is of a similar "goldilocks" variety then a pause seems the most likely outcome from the next Fed rate decision. Whichever way we go with the data in the coming weeks, a pause still seems the most plausible outcome. For the most part bond markets drove most of the price action in financial markets last week with sharp increases in longer term yields, despite the sharp falls on Friday, as the yield curve steepened sharply. Yields could be the main driver this week with the US set to issue $103bn across a range of maturities this week, in the wake of last week's credit rating downgrade by Fitch.   It's also worth keeping an eye on this week's China trade data for July, due tomorrow, and inflation date on Wednesday, against a backdrop of an economy that appears to be struggling with weak domestic demand, and where economic activity has been struggling. We also have preliminary Q2 GDP economic numbers for the UK at the end of the week as well as industrial and manufacturing production numbers for June.       EUR/USD – rallying off last week's lows just above the 1.0900 area, closing above the 50-day SMA in the process we need to see a move back above 1.1050 to have any chance of revisiting the July peaks at 1.1150.   GBP/USD – drifted down the 1.2620 area last week before rebounding strongly, but we need to see a 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 – feels like it wants to retest the 100-day SMA at 0.8680, having drifted back from the 0.8655 area last week. Support now comes in at the 0.8580 area, with the bias for a retest of the July highs at 0.8700/10. Below 0.8580 retargets the 0.8530 area.   USD/JPY – failed just below the 144.00 area last week, and has now slid back below the 142.00 area, which brings a move towards the 140.70 area into focus. Main resistance remains at the previous peaks at 145.00.   FTSE100 is expected to open 31 points lower at 7,533   DAX is expected to open 54 points lower at 15,898   CAC40 is expected to open 29 points lower at 7,296

China increased gold holdings for a ninth straight month in July Oil unfazed as Ukraine sea attack Russian oil tanker didn’t lead to a major disruption Dollar supported amidst bond supply concerns; 10-year Treasury yield rises 3.8bps to 4.074%   Oil Crude prices are lower following a surge in the US dollar and as Saudi Arabia anticipates a bumpy road for the crude demand.  The Saudis are raising prices across most of Asia and Europe, with the Arab light crude only being boosted by 30 cents, which was less than the 50-cent rise expected by traders. The initial rally from news that a Russian oil tanker was damaged  only provided a brief rally on Sunday night.  Unless we see a meaningful disruption to crude supplies, prices will remain  Also dragging oil prices down is the rising expectations that the US will see a recession by the end of 2024.  A Bloomberg investor poll showed two-thirds of 410 respondents expect a recession by the end of next year and 20% see one by the end of this year.    Gold Gold prices are struggling here on a strong dollar and as global bond yields rise and after an early round of Fed speak are still supporting the case for one more hike by the Fed. Wall Street is playing close attention to fixed income at the start of the trading week, which saw the bond market selloff cool at the end of last week after a mixed nonfarm payrolls report. If Treasury yields rally above last week’s high, that could trigger some technical buying and that could be very negative for gold prices.  For many traders, this week is all about inflation data and any hot surprises could prove to be short-term bearish for gold.  As earnings season wraps up, stocks have mostly posted better-than-expected results (excluding Apple) and that has hurt the gold’s safe-haven appeal.  At some point over the next few weeks, if the stock market rally can’t recapture the summer highs, a decent pullback could help trigger a big move back into gold.     

Markets are underestimating risks of more RBA tightening Put that all together, and we are not convinced by market pricing that shows only about a 20% chance of a further hike in rates in this cycle. Incoming Governor, Michele Bullock will preside over her first RBA rate meeting in October. But outgoing Governor, Philip Lowe may choose to deliver his final hike at the September meeting as a welcome gift to her, leaving her only to decide whether she needs to follow this up with another, and we would imagine by then, final hike if the inflation data fails to make further progress. We do get much more helpful base comparisons again in November and December, but these rely on the seasonal problems hitting agriculture and energy in Australia last year not being repeated. That seems like a fair call, but certainly not a risk-free one when one considers all the things that can go wrong: bushfires, floods, geopolitical interruptions to supply chains. So despite taking a more hawkish than consensus view on rates, we would argue that the risks to our forecasts remain skewed more on the upside.   Australia's inflation AUD: Ample room for a recovery The Australian dollar has been the worst-performing G10 currency in the past month, as it faced a combination of external headwinds coming from another round of Chinese growth repricing and the recent risk-off environment, as the two holds by the RBA cooling off domestic rate expectations. Much of the outlook for an ultra-sensitive currency to global risk sentiment like AUD remains strictly tied to external developments. As shown below, AUD/USD is the second most sensitive USD-cross in G10 to swings in global equity-related risk sentiment, while its correlation with US back-end rates is not higher than other cyclical currencies like NZD, EUR and GBP.   G10 correlations with risk sentiment and US yields   The recent rally in global equities (MSCI World up 7% in the past six months) clearly hasn’t been reflected in AUD price action. Our short-term fair value model – where MSCI World index performance is a variable – has been displaying an obvious tendency in AUD/USD to overshoot on the undervaluation side, which likely reflects the risk premium related to China’s re-rating of growth expectations. The persistence of that risk premium suggests that the Chinese growth disappointment factor is now largely priced into AUD, which could ultimately limit the scope for further downside. Incidentally, we estimate that AUD/USD remains around 18% undervalued in the medium term, according to our real BEER model mis-valuation results.   AUD/USD displaying persistent undervaluation   As highlighted above, we think the domestic picture will also improve for AUD, as the RBA may well have to hike again despite market’s flat rate expectations. The monetary policy story could potentially come through as a positive factor at a time (September, for example) when USD resilience hasn’t abated yet, meaning an RBA-driven bullish pocket for AUD could initially be mostly mirrored in relative strength against other pro-cyclical currencies rather than on AUD/USD. Still, in line with our bearish USD call for later in the year, we expect AUD/USD to rebound back to the June and July 0.69 peaks before year-end, and then find more support above 0.70 in the first half of 2024.  

AUD: Room for a big rebound We have just published an update of our macro and market views on Australia. As highlighted in recent commentary, we are very reluctant to align with the view that the Reserve Bank of Australia is done with monetary tightening, and think that the market is underestimating the risks of another rate hike, which is our base case. That should be driven by a surprise in the monthly inflation data, potentially already in September. This should pave the way for a recovery in the Aussie dollar, which currently is undervalued in the short and medium-term, having absorbed the negative implications of Chinese growth rerating and recent instability in global sentiment. We see substantial room for a recovery in AUD/USD before the end of the year, in line with our call for a USD decline, and target a return to the 0.69 July peak in the fourth quarter.  

India: RBI holds repo rate steady Not one of the 42 economists forecasting this Reserve Bank of India (RBI) meeting expected any change in the repurchase rate, and the RBI didn't disappoint. Things could get more interesting next month as food-price inflation surges.   Viewing the world through tomato-tinted glasses Although next week's inflation data for the July period will likely show Indian inflation surging above 8%YoY, the Reserve Bank of India left the policy repo rate unchanged at 6.5%.  There are some good reasons for that. Firstly, the coming inflation surge owes very considerably to tomato prices. Sure, other prices have also risen, but back-to-back monthly 100%+ increases in the price of tomatoes in June and July are doing all the damage on the upside.  The cause of these tomato-price surges? This year's Monsoon started late, with a drier than usual June but wetter than normal July. However, the average rainfall over this entire period has been close to normal. What seems to have undone things is the erratic nature of the rainfall, with some areas experiencing much more rain than normal, while for other areas, it has been much drier. Either extreme will mess up the growing season and lead to shortages and food price rises, which is what seems to have happened   Monsoon anomalies   What goes up... The good news here is that such seasonal shortages tend to be just that - seasonal. This will pass - unless there are further seasonal anomalies, which of course are becoming more common these days thanks to climate change.  Assuming that normality is resumed over the coming months, then we can expect prices to slowly subside and return to something a bit more normal over the coming months. So what is a big contributor to inflation currently, can turn into a similar-sized drag over the coming months.  We expect Indian inflation to peak in August at over 8.5%YoY before drifting back down through the end of the year. And while this is unlikely to require any offsetting rate action from the RBI, it may make it harder for them to begin easing rates as soon as we had previously thought. That now looks more likely to be a story for 2024.     

Romanian inflation finally dips into single digits After a couple of months of questionable inflation data, July confirmed that double-digit inflation prints are now safely behind us. However, consistently strong wage advances might complicate the disinflation story as the 2024 electoral year approaches.   The 9.44% July inflation print surprised marginally to the downside (vs our 9.60% estimate) due almost exclusively to lower electricity prices. Recently-adopted caps on the mark-ups of basic food products seem to be working already, slightly ahead of schedule, and might cause another downside surprise to August inflation, which we currently estimate at around 9.0%. To put a number on it, food prices decreased in July by 0.5% versus June (+16.3% year-on-year), which marks a return to more usual seasonal behaviour. Non-food items advanced by 0.25% (+4.3% YoY) with pretty well-behaved price dynamics across the subcomponents, while services remained a mild outlier, advancing by 1.00% monthly (+11.6% YoY), a slight upset in an otherwise positive inflation print. Perhaps the less-than-positive news for today comes from core inflation which proves to be quite sticky, falling to 13.2% in July from 13.5% in June. At this moment it is not certain that we will see core inflation below 10% this year, though our base case is that it will dip below in December. In any case, core inflation is probably less of a concern for the National Bank of Romania (NBR) right now, as it most likely wants to see headline inflation safely lower first.   Inflation (YoY%) and components (ppt)   Strong wage growth is here to stay The average net wage advance continues to impress, printing at +15.7% in June and it looks increasingly likely we'll see full-year average wage growth above 15.0% in 2023. Besides the usual sectors which have posted above-average wage advances lately (e.g. agriculture, IT services, transportation etc.), June saw a whopping 28.7% increase in the public education sector’s wage, boosting the general public sector average wage growth to 14.0%, not far from the 16.1% growth in the private sector. This trend is most likely to continue in the coming quarters, given recent and ongoing public wage demands and the approaching electoral year. The extent to which the strong wage advance will filter into inflation is still unclear, given that it overlaps a period of fiscal uncertainties, economic slowdown and still relatively high interest rates which are more stimulative for savers. However, it is also difficult to believe that it will have no effect either. As recently underlined by the NBR’s Governor, Mugur Isarescu, wage-led inflation might prove quite dangerous and tricky to control, given that it could require a further restriction of the aggregate demand via even higher interest rates.   Positive real wages to support consumption   We maintain our estimate of a 6.9% year-end inflation reading, though we admit that risks are mildly to the upside on the back of the recently announced (but not yet adopted) fiscal package. These risks have been clearly underlined by the NBR as well, as they indeed have the potential to derail the disinflation story. On the other hand, next year’s profile hasn’t changed much, as we see headline inflation below 7.0% (NBR’s key rate) in February 2024, followed by a gradual descent toward the 4.0% area by the year-end, where our projection also stabilises for the medium-term. All in all, we remain reasonably confident that the NBR will start the cutting cycle in the first half of 2024, with a total of 150bp cuts by the year-end. If anything, risks are for the cycle to be more backloaded rather than frontloaded. To the extent that the global risk sentiment will not worsen, it is likely that the accommodative liquidity conditions are here to stay for longer, though we tend to be increasingly cautious about this.

We expect the minutes from the July Federal Open Market Committee (FOMC) meeting will continue to exhibit hawkish sentiments with the Fed wary about signalling an imminent peak in US interest rates, with markets fully embracing the soft landing story. Meanwhile, in the UK, inflation and wage data will be released. US markets have fully embraced the soft landing story Markets have fully embraced the soft landing story in the United States whereby growth is respectable while inflation is slowing nicely, offering the Fed the opportunity to call time on interest rate hikes and eventually cut rates in early 2024 to cushion the economy from a hard landing, as high borrowing costs and tight lending conditions inevitably take their toll. There is a lot that could go wrong though, most notably the abrupt hard stop in credit expansion seen since March and its impact on economic activity – but that is a medium-term story. In the near term, the upcoming data is unlikely to support market sentiment, with retail sales looking set to post a decent figure thanks in part to Amazon Prime Day lifting spending, higher gasoline prices boosting the value of gasoline station sales, and vehicle sales ticking higher. However, there will be areas of weakness with chain stores seeing poor sales in recent months, suggesting a risk that the year-on-year rate of retail sales growth will slow to a crawl in the next couple of months. Meanwhile, the minutes of the July FOMC meeting will continue to exhibit hawkish sentiments with the Fed wary about signalling an imminent peak in US interest rates, fearing that this could intensify 2024 interest rate cut expectations and in turn trigger a sharp fall in Treasury yields that would be detrimental to the fight to get inflation back to target. Nonetheless, recent Fed comments have suggested that some members of the committee think they may have done enough with the latest inflation data likely to see more members thinking along those lines. The next big Fed event will be the Jackson Hole symposium between 24-26 August, where we expect to hear Fed Chair Jerome Powell give a bit more guidance on the potential near-term path for policy rates. Rounding out the numbers, we will likely see manufacturing production flat-lining after nine consecutive contraction prints from the ISM index. Industrial production overall may rise thanks to higher utility usage.   Retail sales vs weekly Johnson Redbook sales    

The week ahead features trade and inflation data from Japan, India and China. We'll also get a Philippine central bank decision and Australia’s unemployment data, which could influence India's move on rates later this month. Australia unemployment rate to increase slightly Australia’s unemployment rate came close to its all-time low of 3.4% last month, falling to 3.5%. Despite that, the Reserve Bank of Australia (RBA) kept rates unchanged last week as the inflation data was more favourable. Although labour data is an important input into the RBA’s reaction function, we think that the central bank will continue to be subordinate to the monthly inflation numbers, which must grapple with large electricity tariff hikes in July and then much less helpful base effects between August and October.     Japan to release GDP, trade and inflation data With modest improvement in net exports and a solid recovery in service activity, we expect second-quarter GDP growth to rise 0.6% quarter-on-quarter seasonally-adjusted (vs 0.7% in the first quarter). For inflation, we believe that private consumption has cooled moderately as the high prices in the second quarter put off consumption demand, though this is likely to be compensated by improved terms of trade as imports fell sharply due to falling global commodity prices. However, we should expect exports to record a contraction in July, particularly due to base effects. We believe Japan’s inflation should stay at the current level while core inflation is expected to accelerate further, as the previous Tokyo inflation outcome suggested. Philippine central bank to extend rate pause? The Philippines' central bank, Bangko Sentral ng Pilipinas (BSP), is likely to extend a pause, but persistent upside risks to the inflation outlook could give Governor Eli Remolona a reason to stay hawkish. Headline inflation has been trending lower and could be within target as early as September. This would be the main reason the BSP holds rates at 6.25%. However, with global grain and energy prices inching higher, a fresh round of upside risks to the inflation outlook has surfaced. Persistent upside risks will likely translate to the central bank remaining hawkish even if the BSP opts to extend its current pause. We expect the BSP to keep rates untouched but signal a strong willingness to tighten further should upside risks to the inflation outlook materialise. Inflation to surge in India India will release its July CPI next week, and we are expecting a steep climb to over 8%, breaching the upper end of the Reserve Bank of India's (RBI's) 2-6% target range. This is due to soaring food prices caused by the erratic monsoon rains: tomatoes experienced a whopping 200% month-on-month increase in July. But this should not bother the RBI too much as food price shocks like this come and go. The effect of food inflation has also spilled over to exports, where the Modi administration has announced an immediate ban on some non-basmati rice. As such, we are expecting a further decline in India’s export to -23.6%. Key data on industrial production and retail sales from China While China’s data has been disappointing lately, the summer season from July may usher in some better news. Data from China Railway show that there was a 14.2% increase in operating passenger trains compared to the same period in 2019. Flight numbers, on the other hand, experienced a slower recovery. They are currently running at about 48% relative to the same period in 2019, but this is still a 12% increase on a yearly and monthly basis. The rise in movement could provide a boost to consumption and strengthen retail sales. However, the effect is unlikely to spill over into industrial production, and we should continue to see weak growth here. Both the official and Caixin Manufacturing PMI released earlier this month showed that China’s recovery has yet to gain traction.   Key events in Asia next week    

US Now that we heard from Fed Chair Powell at the Kansas City Fed’s Jackson Hole Symposium, the focus shifts back to the data. This week is filled with data that will outline how quickly the economy is weakening. Consumer data will show personal income growth is not keeping up with spending, while confidence holds steady. The Fed’s favorite inflation reading is also expected to show subdued growth is holding steady on a monthly basis. Friday’s NFP report will show private sector hiring is cooling.    Over the weekend, the spotlight will be on US-China relations.  US Commerce Secretary Gina Raimondo will meet with Chinese officials, striving to lower tensions between the world’s two largest economies.  The week will also be filled with Fed speak.  On Monday and Tuesday, Barr speaks about banking services. On Thursday, we hear from both Bostic and Collins, while Friday contains appearances by Bostic, a couple of hours before the NFP report, and Mester on inflation later in the morning.   Eurozone Next week is data-heavy but there are a few releases that stand out. The most notable is the HICP flash estimate for the eurozone on Thursday which is expected to drop slightly at the headline and core levels. There will be individual country releases in the days running up to this which may signal whether Thursday’s data will likely beat or fall short of expectations. ECB accounts are also released on Thursday which will be of interest considering markets now view the rate decision at the next meeting as a coin toss between 25 basis points and no change.    UK  The week starts with a bank holiday and it doesn’t get much more exciting from there. There are a few tier-three data releases and Huw Pill from the Bank of England will make appearances on Thursday and Friday. Russia A selection of economic data is on offer next week including unemployment on Wednesday, GDP on Thursday, and the manufacturing PMI on Friday.  South Africa No major events next week with PPI on Thursday the only notable release. It follows CPI data this past week which fell to 4.8%, well within the SARB 3-6% target range, following a much lower 0.9% monthly reading in July.  Turkey The CBRT surprised markets last week by hiking rates far more aggressively than expected, taking the repo rate to 25%, up from 17.5%. The move may cost people at the central bank their jobs if history is anything to go by, with President Erdogan openly no fan of higher rates. That said, he did employ these people shortly after his election victory so perhaps with that behind him, he may be more open to it while remaining vocally against. This week offers very little, with GDP on Thursday the only release of note. Switzerland Inflation data on Friday is expected to show prices rising 1.5% on an annual basis, slightly lower than in July and well below the SNB 2% target. The central bank hasn’t appeared satisfied though and markets are fully pricing in a hike in September, with 32% chance of it being 50 basis points. The manufacturing PMI will also be released on Friday, with retail sales on Thursday, and the KoF economic barometer and economic expectations on Wednesday. China Only three key economic releases to monitor for the coming week. First up, the NBS manufacturing and services PMIs for August will be out on Thursday. Another contractionary print of 49.5 is expected for the manufacturing sector, almost unchanged from July’s reading of 49.5. If it turns out as expected, it will be the fifth consecutive month of negative growth for manufacturing activities as China grapples with a weak external environment and domestic financial contagion risk that has been triggered by debt-laden property developers. Secondly, the NBS services PMI for August is forecasted to remain surprisingly resilient at 51, almost unchanged from 51.5 in July. The services sector is still in an expansionary mode albeit at a slower pace that is likely being supported by domestic tourism. Thirdly, the private sector-focused Caixin manufacturing PMI for August which consists of small and medium enterprises will be released on Friday, 1 September. Consensus is still expecting a contractionary reading of 49.5, almost unchanged from July’s print of 49.2. If it turns out as expected, it will be the second consecutive month of negative growth. A slew of key earnings releases to take note of starting this Saturday, 26 August will be China Merchants Bank, and Bank of Communications followed by; BYD (Monday, 28 August), Ping An Insurance, NIO, Country Garden (Tuesday, 29 August), Agricultural Bank of China (Wednesday, 30 August), ICBC, Bank of China, China Minsheng Bank (Thursday, 31 August). Also, market participants will be on the lookout for fiscal stimulus measures to defuse the $23 trillion debt bomb owed by local governments, financial affiliates, and property developers. On Friday, 25 August, China policymakers unveiled a further easing of its home mortgage policies that scrap a rule that disqualifies first-time homebuyers who had a mortgage that is fully repaid from being considered a first-time buyer in major cities in an attempt to boost up residential property transactions.  India Two key data to focus on. Q2 GDP on Thursday where the consensus is expecting a further economic growth expansion to 7% y/y in Q2, a further acceleration from 6.1% y/y recorded in Q1. Lastly, the manufacturing PMI for August will be released on Friday where it is being forecasted to come in at 57, almost unchanged from the July reading of 57.7 which will indicate a 26th straight month of growth expansion for manufacturing activities. Australia Retail sales for July will be out on Monday, with a recovery to 0.3% m/m from -0.8% m/m in June. On Wednesday, the important monthly CPI indicator for July will be out and the consensus forecast is another month of cooling to 5.2% from 5.4% in June. If it turns out as expected, RBA may have more reasons to justify its current pause at 4.1% for two consecutive meetings. Its next monetary policy meeting will be on 5 September, and as of 24 August, the ASX 30-day interbank cash rate futures have priced in a 12% chance of a rate cut to 3.85% (25 bps cut).  New Zealand A quiet week with the only focus on the ANZ business confidence indicator for August on Thursday followed by ANZ consumer confidence for August on Friday. Japan The action comes mid-week. Consumer confidence for August is released on Wednesday and is expected to be almost the same at 37.2 versus July’s 37.1. On Thursday, we will have retail sales and industrial production for July. Growth in retail sales is expected to slip slightly to 5.4% y/y from 5.9% in June. Meanwhile, industrial production is expected to contract to -1.4% m/m from 2.4% m/m in June, and -0.7% y/y is forecasted from 0% y/y recorded in June. Singapore The sole key data to monitor will be the producer prices index for July out on Tuesday with another month of negative growth forecasted at -9% y/y, a slower pace of contraction from -14.3% recorded in June. It would be the 7th consecutive month of decline.

Rates Spark: Losing buoyancy Weaker data is eroding the US narrative that has helped push yields higher over the past week. A lower landing zone for the Fed also means a lower floor to long-end rates. There is still more data and volatility in store this week, with the US jobs data looming large. EUR markets will look to the inflation data key input for the upcoming ECB meeting.   The Fed discount is eroding and so is the floor for the 10Y yield Recent data is eroding the narrative of US resilience that had supported the rise of 10Y yields to above 4.3% over the past weeks. Poor job openings data and dipping consumer confidence yesterday saw the 10y falling through 4.2% and then briefly further towards 4.1% overnight. Interestingly the move was largely in real rates, and it reversed all of the gains that they had managed after dipping on the weaker PMIs last week.   We had suspected that an elevated Fed discount would draw a floor under longer rates. But just as data had shifted this floor higher, data is now hacking away at that discount. The curve bull-steepened with 2Y SOFR swap rates dropping more than 12bp while the 10Y still dropped close to 10bp. Data this week holds more candidates to push yields around, especially with US jobs data out on Friday. The consensus is already looking for further cooling with the payroll increase decelerating to 170K, but the unemployment rate is seen steady at 3.5%. Keep in mind that the Federal Reserve itself – in comments and its June projections – has pointed to an unemployment rate of 4% and above as being necessary to cool inflation towards the target rate. The indications it got yesterday are going in the right direction.   A pause in September is widely seen as the base case, with markets firming their view as the discounted probability of a pause moves towards 90%. One final hike is still possible this year, but the discounted chances for that to happen have slipped from close to 70% to a coin toss. Our economist believes the Fed has already reached its peak.   Assessing the Fed's landing zone remains crucial to overall rates   Aiding the ECB decision process, first August CPI indicators from Spain and Germany European Central Bank President Lagarde did not provide any further guidance in Jackson Hole with regard to the upcoming meeting in September. From recent comments, it is clear that the hawks on the governing council would still like to see higher rates. Austria’s Holzmann had been quite explicit, saying he saw the case for a hike if there were negative surprises until then. Latvia’s Martins Kazaks also wants to err on the side of raising rates, while Bundesbank’s Joachim Nagel also says it is too early to consider a pause. In later comments, he seemed to soften his tone, suggesting to wait for the data. Following the dip in the wake of the PMIs, the market has slowly priced the probability of a hike back into the forwards, but still just below 50%. But further out, markets are back to seeing a 75% chance that a 25bp rate hike comes before the end of the year to take the ECB’s depo rate to 4%. We would focus more on the upcoming meeting, however. We also think a September hike at this stage could be more of a coin toss, but more importantly, we sense that the hawks will see it as a last chance to hike one final time. If there is no hike in September, rates will probably not rise any further. One key input to arrive at a final assessment is the inflation data this week, starting today with the preliminary readings from Spain and Germany.   Today's events and market view It appears that the tide has turned again for rates now that data is eroding the resilience narrative. The latest auction metrics, such as the strong 7Y UST sale last night, also suggest that levels had been pushed sufficiently high to attract demand again. But the key remains in the data, with the US jobs report looming large on Friday. Today, we will get the ADP payrolls estimate, with a consensus for a weaker 195K after 324K last month. The value of the ADP as a predictor for the official data is questionable, however, as was also evidenced early this month – a large upside surprise in the ADP was followed by a disappointing official payrolls figure. But today’s data and anecdotal evidence from the release can still offer insight into the health of the labour market where more signs of cooling have come to light. In other US data today, we will get the pending home sales and the second reading of second-quarter GDP growth. The main highlight for the EUR markets will be Spanish and German regional CPI data. The consensus is for Spanish headline inflation to tick higher from 2.1% to 2.4% year-on-year. For Germany, the headline is seen falling somewhat from 6.5% to 6.3% year-on-year, but the state of NRW numbers already came in slightly hotter this morning. Yesterday, supply had initially helped push yields higher before the US data turned the market. Today, we will see Germany tapping a 4Y green OBL for €1.5bn. Italy’s bond sales today include a new 10Y benchmark and will amount to up to €10bn in total.    

GBP: Unlucky bystander The lack of domestic data releases has left the pound moving merely in line with global dynamics. Yesterday’s drop in the dollar sent Cable above 1.2650, a smaller rally compared to other peers. This morning, GBP/USD is inching lower along with other dollar crosses, although it appears that the pound’s sensitivity to risk sentiment is a bit more limited at this moment. EUR/GBP is the pair to watch today as inflation data in the eurozone are released. The pair broke above 0.8600 yesterday, and signs of resilient inflation in Spain and Germany could see the rally extend to test the 0.8640 100-day MA.   On the UK side, it will be worth watching mortgage approval figures for July along with other credit statistics. Surging rates and declining demand for loans have already triggered a house price correction in the country.

Rates Spark: Different focus, different outcomes US data disappointments are still putting downward pressure on yields, and a busy calendar suggests more volatility ahead. EUR rates may detach from US dynamics as inflation data and European Central Bank minutes sharpen the focus on the upcoming ECB meeting.   The resilience narrative has driven US rates on the way up, and now down US Treasury yields remain under downward pressure as 10Y yields are trying to get a foothold at around 4.1% – early last week they had hit a high at 4.35%. Bund yields, on the other hand, have managed to bounce off the 2.5% level and as a result, the 10Y UST/Bund spread has tightened to 157bp. The narrative that has driven the wedge between the US and EUR rates is now narrowing it. That is also illustrated when looking at the market moves in real rates. They had been the driver of US rates going up and are now mostly the driver on the way down. 10Y real OIS rates have dropped some 17bp from the recent peak, although inflation swaps also slipped 8bp.       Real rates were the driver the UST/Bund gap, and also the latest retightening   Inflation remains the main preoccupation of EUR rates In Europe, the concerns have been more centred around inflation. Longer real rates never picked up and stuck to a tight range, reflecting the outlook for a longer period of stagnation that was also confirmed by the latest PMIs. Instead we had a slow grind higher in longer-term inflation expectations, picking up pace again with the second quarter. While the often cited 5y5y forward inflation has come off its recent highs, the market remains sensitive to the inflation topic, with the ECB now calibrating the final stage of its tightening cycle. The somewhat slower-than-anticipated decline in German inflation yesterday was important in keeping Bund yields off the 2.5% mark. It provided the ECB’s hawks with arguments for further tightening. Never mind that it could be the last burst of German inflation for a while, as our economist thinks – with the ECB’s current mindset being more focused on actual data than forecasts, that may well be all the more reason for the hawks to push for a hike in September and not wait any longer. It may be the last opportunity. Market pricing now sees the chances for a hike next month a tad above 50%, and 90% that we will see a hike by the end of the year.    Dynamics of inflation expectations played a larger role for EUR rates   Today's events and market view US data disappointments are still putting downward pressure on yields, having stalled any attempt to move these higher over the past sessions. A busy slate of US data featuring Challenger job cuts data, initial jobless claims, personal income and spending data, as well as the Federal Reserve's preferred inflation measure – the PCE deflator, which is seen slightly up this time – means there is plenty in store to push yields around again. EUR rates, however, may manage to detach from the US rates again as the focus turns to the flash eurozone CPI release and the ECB minutes of the July meeting. The latter may provide some more insight into any changes to the balancing of inflation versus macro risks and of course the growing debate between the Council’s hawks and doves. With Isabel Schnabel, there is also a prominent hawk slated to speak in the morning – she gives the opening remarks at a conference titled “Inflation: drivers and dynamics” and may well set the tone for the day. 

Rates Spark: Different focus, different outcomes US data disappointments are still putting downward pressure on yields, and a busy calendar suggests more volatility ahead. EUR rates may detach from US dynamics as inflation data and European Central Bank minutes sharpen the focus on the upcoming ECB meeting.   The resilience narrative has driven US rates on the way up, and now down US Treasury yields remain under downward pressure as 10Y yields are trying to get a foothold at around 4.1% – early last week they had hit a high at 4.35%. Bund yields, on the other hand, have managed to bounce off the 2.5% level and as a result, the 10Y UST/Bund spread has tightened to 157bp. The narrative that has driven the wedge between the US and EUR rates is now narrowing it. That is also illustrated when looking at the market moves in real rates. They had been the driver of US rates going up and are now mostly the driver on the way down. 10Y real OIS rates have dropped some 17bp from the recent peak, although inflation swaps also slipped 8bp.       Real rates were the driver the UST/Bund gap, and also the latest retightening   Inflation remains the main preoccupation of EUR rates In Europe, the concerns have been more centred around inflation. Longer real rates never picked up and stuck to a tight range, reflecting the outlook for a longer period of stagnation that was also confirmed by the latest PMIs. Instead we had a slow grind higher in longer-term inflation expectations, picking up pace again with the second quarter. While the often cited 5y5y forward inflation has come off its recent highs, the market remains sensitive to the inflation topic, with the ECB now calibrating the final stage of its tightening cycle. The somewhat slower-than-anticipated decline in German inflation yesterday was important in keeping Bund yields off the 2.5% mark. It provided the ECB’s hawks with arguments for further tightening. Never mind that it could be the last burst of German inflation for a while, as our economist thinks – with the ECB’s current mindset being more focused on actual data than forecasts, that may well be all the more reason for the hawks to push for a hike in September and not wait any longer. It may be the last opportunity. Market pricing now sees the chances for a hike next month a tad above 50%, and 90% that we will see a hike by the end of the year.    Dynamics of inflation expectations played a larger role for EUR rates   Today's events and market view US data disappointments are still putting downward pressure on yields, having stalled any attempt to move these higher over the past sessions. A busy slate of US data featuring Challenger job cuts data, initial jobless claims, personal income and spending data, as well as the Federal Reserve's preferred inflation measure – the PCE deflator, which is seen slightly up this time – means there is plenty in store to push yields around again. EUR rates, however, may manage to detach from the US rates again as the focus turns to the flash eurozone CPI release and the ECB minutes of the July meeting. The latter may provide some more insight into any changes to the balancing of inflation versus macro risks and of course the growing debate between the Council’s hawks and doves. With Isabel Schnabel, there is also a prominent hawk slated to speak in the morning – she gives the opening remarks at a conference titled “Inflation: drivers and dynamics” and may well set the tone for the day. 

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

Uncomfortably high inflation and wage growth should seal the deal on a September rate hike from the Bank of England. But emerging economic weakness suggests the top of the tightening cycle is near, and our base case is a pause in November. Markets have been reassessing Bank of England rate hikes Rewind to the start of the summer, and the view that the UK had a unique inflation problem had become very fashionable. At its most extreme, market pricing saw Bank Rate peaking at 6.5%, some 125bp above its current level. Since then, this story has begun to lose traction. The differential between USD and GBP two-year swap rates, a gauge of interest rate expectations, has halved. That reflects the growing reality that the UK inflation story looks less of an outlier than it did a few months back. Like most of Europe, food inflation has begun to slow, and further aggressive falls are likely judging by producer prices. Consumer energy bills fell by 20% in July, and another 5% decline is baked in for October. The Bank of England itself is now describing the level of interest rates as “restrictive” – a statement of the obvious perhaps, but nevertheless tells us that policymakers think they’ve almost done enough with rate hikes.   UK and US rate expectations have narrowed   A September hike is likely but November is less certain Still, we’re not quite there yet, and recent inflation data has continued to come in on the upside. Private sector wage growth – measured on a three-month annualised basis – is running at a cycle-high of 11%. Services inflation also edged higher in July, although this was partly attributable to some unusual swings in specific categories rather than broad-based moves. A September hike is therefore highly likely. Whether markets are right to be pricing another hike for November is less certain. We’ll only get one round of CPI and wage data between the September and November meetings. Wage growth is unlikely to have slowed much, but we’re hopeful for early signs that services inflation is inching lower. Various surveys suggest few service-sector firms are raising prices, and we think that reflects the sharp fall in gas prices. A lot also hinges on whether we continue to see signs of weakness in economic activity. Like Europe, the UK’s PMIs look worrisome and will have prompted some pause for thought at the Bank of England. The jobs market is also cooling, and the vacancy-to-unemployment ratio – which BoE Governor Andrew Bailey has consistently referenced – is closing in on pre-Covid highs. There’s also been an ongoing improvement in worker supply. We’re now at a point where survey numbers and various bits of official data suggest that both economic growth and inflation are losing steam. The inflation and wage growth figures aren’t there yet, but these are lagging perhaps most out of all economic indicators. A November pause isn’t guaranteed, but it remains our base case. To some extent, we’re splitting hairs. In the bigger picture, the Bank is becoming much more focused on how high rates need to go – and instead, the central goal will increasingly become keeping market rates elevated long after it stops hiking. Any further rate hikes should be seen as a means to that end.      

Asia Morning Bites Asian markets digesting Friday's US labour report data and latest property support measures in China.   Global Macro and Markets Global markets: Friday’s soft US labour report got a mixed reception from equity markets, though stocks ended up virtually unchanged on the previous day’s close. Chinese stocks were also mixed, despite new measures to support the property market and the CNY. The Hang Seng fell 0.55%, while the CSI 300 gained 0.7%. Yields on US Treasuries dropped sharply following the labour report, but fully recovered and ended slightly higher. The 10Y yield rose 7.1bp to 4.179%. This feels like an odd move. What also looks a little strange is the USD strength that has taken EURUSD down to 1.0775. We also see USD strength against the AUD, which is down to 0.6452. Cable has dropped to 1.2590 and the JPY, which after strengthening to below 144.50 has weakened back above 146. Asian currencies were fairly range-bound on Friday, though will probably catch up with their G-10 counterparts in early trading today. It is a public holiday (Labor Day) in the US today.   G-7 macro: US payrolls for August rose by 187 thousand, a little more than the 170 thousand expected. But there were a net 110 thousand downward revisions to past months, so the trend growth rate looks a bit weaker than it did. Adding to the general sense that the labour market is finally showing some signs of softening, the unemployment rate rose from 3.5% to 3.8%, and the average hourly earnings rate fell slightly to 4.3%YoY from 4.4% alongside a slight rise in the participation rate. Offsetting the labour market data, the manufacturing ISM index was a bit stronger than expected, though still consistent with the sector contracting.    China:  Cuts to China’s FX reserve requirements on Friday helped the CNY to trade a bit stronger than it has done recently, and there may also have been support from new policy measures to support the property markets in Shanghai and Beijing. However, it is not clear how much additional demand will be generated from lower down payments for properties and encouragement for banks to lower mortgage rates further. It won’t hurt though. Country Garden has won acceptance for its plan to extend payment on its CNY3.9bn onshore bond, though the fate of the USD 22.5mn bond payment due on 6/7 September remains unclear.   What to look out for: Regional trade and inflation data out later in the week Japan monetary base (4 September) Australia Melbourne institute inflation (4 September) 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) China trade balance (7 September)  Australia 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)

US This week is all about the US CPI report and retail sales data. If the US demand for goods didn’t weaken that much and if inflation heated up, rate hike expectations for the November meeting might become the consensus.  The inflation report might not be as clear as headline inflation will obviously rise given the surge in gasoline prices, but core might deliver another subdued reading.  Moderation with consumer spending will be the theme as Americans deal with higher energy prices, rising debt levels, and as confidence softens.   Investors will also pay close attention to the University of Michigan’s inflation expectations on Friday. The 1-year outlook for prices may drop from the 3.5% August reading.  Fed speak will be nonexistent as the blackout period begins for the September 20th policy meeting.   Eurozone The European Central Bank meets next week and it’s not clear at this stage what decision they will come to. Refinitiv is pricing in around a 65% chance of a hold, which may signal the end of the tightening cycle – not that the ECB would in any way suggest that at this stage – but expectations do differ. There’s every chance the committee will push through one more, at which point the data is expected to improve regardless making a Fed-style exit all the more difficult. Ultimately, it will likely come down to the projections which will be released alongside the decision. ZEW surveys aside, on Tuesday, the rest of the week is made up of tier-three data. UK  Potentially a big week for the UK ahead of the next monetary policy meeting on 21 September. Andrew Bailey and his colleagues this past week hinted that the decision is in the balance and not the foregone conclusion many expect. Markets are pricing in a more than 70% chance of a hike and more than 50% of another after that by February. If what they said is true, then the labor market report on Tuesday could be hugely significant as further slack could give those on the fence the reassurances they need that past measures, among other things, are working and more may not be needed. Huw Pill also speaks on Monday while Catherine Mann will make an appearance in Canada on Tuesday. GDP on Wednesday could also be interesting, with the rest of the week made up of less influential releases. Russia The CBR is expected to leave the key rate unchanged at 12% on Friday. It hiked very aggressively at the last meeting – from 8.5% – so there is scope for another surprise, with inflation having risen again last month to 5.1%. The rouble has also been in steady decline after rebounding following the last announcement, to trade not far from its recent lows against the dollar.  South Africa A relatively quiet week ahead, with manufacturing figures due on Monday and retail sales on Wednesday. Turkey The CBRT is desperately trying to get inflation under control again with successive large interest rate hikes. In response the currency has stopped making new lows but it has drifted lower again over the last couple of weeks since the surprisingly large last hike. It’s sitting not far from the pre-meeting lows now and inflation data this past week won’t have helped, rising to 58.94% annually. More rate hikes are likely on the way. Next week the focus is on unemployment and industrial production figures on Monday. Switzerland A very quiet week to come, with PPI inflation the only economic release. We’ve been seeing some deflation in recent months in the PPI data which will be giving the SNB some comfort that price pressures are back under control. Another rate hike is no longer viewed as guaranteed, with markets slightly favoring a hold over the coming meetings but it is tight.  China The much sought-after consumer and producers’ price inflation data for August will be released this Saturday where market participants will have a better gauge of the current deflationary conditions in China. After a slight improvement in the two sub-components of August’s NBS Manufacturing PM where new orders and production rose to their highest level since March at 50.2 and 51.9 respectively coupled with an improvement in export growth for August that shrunk to a lesser magnitude of -8.8% y/y from -14.5% y/y in July, there are some signs of optimism that the recent eight months of deflationary pressures may have started to abate. The August CPI is expected to inch back up to 0.2% y/y from -0.3% y/y in July and the PPI is forecast to shrink at a lesser magnitude of -3% y/y in August versus -4.4% in July. If the PPI turns out as expected, it will be the second consecutive month of improvement from a persistent loop of deflationary pressure in factory gate prices since November 2022. Other key data to focus on will be new yuan loans and M2 money supply for August which will be released on Monday. It will provide a sense of whether China’s economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers. Lastly, the housing price index, industrial production, retail sales, and the unemployment rate for August will be released on Friday with both retail sales and industrial production expected to show slight improvement; 2.8% y/y for retail sales over 2.5% y/y recorded in July, 4% y/y for industrial production versus 3.7% in July. Market participants will be keeping a close eye on youth unemployment for August after July’s figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for the suspension. The youth joblessness data in China is of key concern after the youth unemployment rate skyrocketed to a record high of 21.3% in June, around four times more than the national unemployment rate of 5.3%. Lastly, China’s central bank, the PBoC, will announce its decision on a key benchmark interest rate, the 1-year medium-term lending facility rate on Friday and the expectation is no change at 2.50% after a prior cut of 15 basis points.  India Inflation and balance of trade for August will be the focus for the coming week. Inflation data is released on Tuesday and is expected to dip slightly to 7% y/y from 7.44% in July, the highest since April 2022. Balance of trade will be released on Friday and the expectation is for the deficit to widen slightly to -$21 billion from -$20.67 billion in July.   Australia On Monday, the Westpac consumer confidence change for September is expected to improve to 0.6% m/m from a reading of -0.4% m/m in August, following three consecutive interest rate pauses from RBA. The key employment change data for August will be released on Thursday with 24,300 jobs expected to be created, an improvement on the 14,600 reduction in July. Meanwhile, the unemployment rate is expected to slip to 3.6% from 3.7% in July. New Zealand Electronic retail card spending for August is due on Tuesday and is forecast to dip to 1.4% y/y from 2.2% in July. That would represent a declining trend in growth in the past five months. Next up, food inflation for August will be released on Wednesday; its growth rate is expected to slow to 7.8% y/y from 9.6% in July. That would be the slowest growth in food inflation since June 2022. Japan A couple of key data points to note for the coming week. Firstly, the Reuters Tankan Index on manufacturers’ sentiment on Wednesday; after a big jump to +12 in August – its highest level recorded so far this year – sentiment is expected to taper off slightly to +10 for September. Producers’ price index for August will be released on Wednesday and a slight dip is expected to 3.2% y/y from 3.6% in July. Lastly, on Thursday, we will have data on machinery orders from July with the consensus expecting a further decline of 10.7% y/y from -5.8% in June. Singapore One key data to focus on is the balance of trade for August which will be out on Friday. The trade surplus is being expected to increase slightly to $7 billion from $6.49 billion in July. That would be the fourth consecutive month of expansion in the trade surplus.  

US This week is all about the US CPI report and retail sales data. If the US demand for goods didn’t weaken that much and if inflation heated up, rate hike expectations for the November meeting might become the consensus.  The inflation report might not be as clear as headline inflation will obviously rise given the surge in gasoline prices, but core might deliver another subdued reading.  Moderation with consumer spending will be the theme as Americans deal with higher energy prices, rising debt levels, and as confidence softens.   Investors will also pay close attention to the University of Michigan’s inflation expectations on Friday. The 1-year outlook for prices may drop from the 3.5% August reading.  Fed speak will be nonexistent as the blackout period begins for the September 20th policy meeting.   Eurozone The European Central Bank meets next week and it’s not clear at this stage what decision they will come to. Refinitiv is pricing in around a 65% chance of a hold, which may signal the end of the tightening cycle – not that the ECB would in any way suggest that at this stage – but expectations do differ. There’s every chance the committee will push through one more, at which point the data is expected to improve regardless making a Fed-style exit all the more difficult. Ultimately, it will likely come down to the projections which will be released alongside the decision. ZEW surveys aside, on Tuesday, the rest of the week is made up of tier-three data. UK  Potentially a big week for the UK ahead of the next monetary policy meeting on 21 September. Andrew Bailey and his colleagues this past week hinted that the decision is in the balance and not the foregone conclusion many expect. Markets are pricing in a more than 70% chance of a hike and more than 50% of another after that by February. If what they said is true, then the labor market report on Tuesday could be hugely significant as further slack could give those on the fence the reassurances they need that past measures, among other things, are working and more may not be needed. Huw Pill also speaks on Monday while Catherine Mann will make an appearance in Canada on Tuesday. GDP on Wednesday could also be interesting, with the rest of the week made up of less influential releases. Russia The CBR is expected to leave the key rate unchanged at 12% on Friday. It hiked very aggressively at the last meeting – from 8.5% – so there is scope for another surprise, with inflation having risen again last month to 5.1%. The rouble has also been in steady decline after rebounding following the last announcement, to trade not far from its recent lows against the dollar.  South Africa A relatively quiet week ahead, with manufacturing figures due on Monday and retail sales on Wednesday. Turkey The CBRT is desperately trying to get inflation under control again with successive large interest rate hikes. In response the currency has stopped making new lows but it has drifted lower again over the last couple of weeks since the surprisingly large last hike. It’s sitting not far from the pre-meeting lows now and inflation data this past week won’t have helped, rising to 58.94% annually. More rate hikes are likely on the way. Next week the focus is on unemployment and industrial production figures on Monday. Switzerland A very quiet week to come, with PPI inflation the only economic release. We’ve been seeing some deflation in recent months in the PPI data which will be giving the SNB some comfort that price pressures are back under control. Another rate hike is no longer viewed as guaranteed, with markets slightly favoring a hold over the coming meetings but it is tight.  China The much sought-after consumer and producers’ price inflation data for August will be released this Saturday where market participants will have a better gauge of the current deflationary conditions in China. After a slight improvement in the two sub-components of August’s NBS Manufacturing PM where new orders and production rose to their highest level since March at 50.2 and 51.9 respectively coupled with an improvement in export growth for August that shrunk to a lesser magnitude of -8.8% y/y from -14.5% y/y in July, there are some signs of optimism that the recent eight months of deflationary pressures may have started to abate. The August CPI is expected to inch back up to 0.2% y/y from -0.3% y/y in July and the PPI is forecast to shrink at a lesser magnitude of -3% y/y in August versus -4.4% in July. If the PPI turns out as expected, it will be the second consecutive month of improvement from a persistent loop of deflationary pressure in factory gate prices since November 2022. Other key data to focus on will be new yuan loans and M2 money supply for August which will be released on Monday. It will provide a sense of whether China’s economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers. Lastly, the housing price index, industrial production, retail sales, and the unemployment rate for August will be released on Friday with both retail sales and industrial production expected to show slight improvement; 2.8% y/y for retail sales over 2.5% y/y recorded in July, 4% y/y for industrial production versus 3.7% in July. Market participants will be keeping a close eye on youth unemployment for August after July’s figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for the suspension. The youth joblessness data in China is of key concern after the youth unemployment rate skyrocketed to a record high of 21.3% in June, around four times more than the national unemployment rate of 5.3%. Lastly, China’s central bank, the PBoC, will announce its decision on a key benchmark interest rate, the 1-year medium-term lending facility rate on Friday and the expectation is no change at 2.50% after a prior cut of 15 basis points.  India Inflation and balance of trade for August will be the focus for the coming week. Inflation data is released on Tuesday and is expected to dip slightly to 7% y/y from 7.44% in July, the highest since April 2022. Balance of trade will be released on Friday and the expectation is for the deficit to widen slightly to -$21 billion from -$20.67 billion in July.   Australia On Monday, the Westpac consumer confidence change for September is expected to improve to 0.6% m/m from a reading of -0.4% m/m in August, following three consecutive interest rate pauses from RBA. The key employment change data for August will be released on Thursday with 24,300 jobs expected to be created, an improvement on the 14,600 reduction in July. Meanwhile, the unemployment rate is expected to slip to 3.6% from 3.7% in July. New Zealand Electronic retail card spending for August is due on Tuesday and is forecast to dip to 1.4% y/y from 2.2% in July. That would represent a declining trend in growth in the past five months. Next up, food inflation for August will be released on Wednesday; its growth rate is expected to slow to 7.8% y/y from 9.6% in July. That would be the slowest growth in food inflation since June 2022. Japan A couple of key data points to note for the coming week. Firstly, the Reuters Tankan Index on manufacturers’ sentiment on Wednesday; after a big jump to +12 in August – its highest level recorded so far this year – sentiment is expected to taper off slightly to +10 for September. Producers’ price index for August will be released on Wednesday and a slight dip is expected to 3.2% y/y from 3.6% in July. Lastly, on Thursday, we will have data on machinery orders from July with the consensus expecting a further decline of 10.7% y/y from -5.8% in June. Singapore One key data to focus on is the balance of trade for August which will be out on Friday. The trade surplus is being expected to increase slightly to $7 billion from $6.49 billion in July. That would be the fourth consecutive month of expansion in the trade surplus.  

Tesla fuels market rally By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    Tesla jumped 10% yesterday and reversed morose mood due to the Apple-led selloff. Tesla shares flirted with the $275 per share on Monday, thanks to Morgan Stanley analysts who said that its Dojo supercomputer may add as much as $500bn to its market value, as it would mean a faster adoption of robotaxis and network services. As a result, MS raised its price target from $250 to $400 a share.   Tesla rally helped the S&P500 make a return above its 50-DMA, as Nasdaq 100 jumped more than 1%. Apple recorded a second day of steady trading after shedding almost $200bn in market value last week because of Chinese bans on its devices in government offices, and Qualcomm, which was impacted by the waves of the same quake, recovered nearly 4%, after Apple announced an extension to its chip deal with the company for 3 more years. Making chips in house to power Apple devices would take longer than thought.   Speaking of chips and their makers, ARM which prepares to announce its IPO price tomorrow, has been oversubscribed by 10 times already and bankers will stop taking orders by today. The promising demand could also encourage an upward revision to the IPO price, and we could eventually see the kind of market debut that we like!    Today, at 10am local time, Apple will show off its new products to reverse the Chinese-muddied headlines to its favour before the crucial holiday selling season. The Chinese ban of Apple devices in government offices sounds more terrible than it really is, as the real impact on sales will likely remain limited at around 1%.   In the bonds market, the US 2-year yield is steady around the 5% mark before tomorrow's much-expected US inflation data. The major fear is a stronger-than-expected uptick in headline inflation, or lower-than-expected easing in core inflation. The Federal Reserve (Fed) is torn between further tightening or wait-and-see as focus shifts to melting US savings, which fell significantly faster than the rest of the DM, and which could explain the resilience in US spending and growth, but which also warns that the US consumers are now running out of money, and they will have to stop spending. So, are we finally going to have that Wile E Coyote moment? Janet Yellen doesn't think so, she is on the contrary confident that the US will manage a soft landing, that the Fed will break inflation's back without pushing economy into recession. Wishful thinking?   But everyone comes to agree on the fact that the Eurozone is not looking good. The EU Commission itself cut the outlook for the euro-area economy. It now expects GDP to rise only 0.8% this year, and not 1.1% as it forecasted earlier, as Germany will probably contract 0.4% this year. The slowing euro-area economy has already softened the European Central Bank (ECB) doves' hands over the past weeks. Consequently, the EURUSD gained marginally yesterday despite the fresh EU commission outlook cut and should continue gently drifting higher into Thursday's ECB meeting. There is no clarity regarding what the ECB will decide this week. The economy is slowing but inflation will unlikely to continue its journey south, giving the ECB a reason to opt for a 'hawkish' pause, or a 'normal' 25bp hike. 

China’s new yuan loans skyrocketed to 1.36 trillion yuan in August, much higher than the prior month’s 345 billion yuan. Optimism grows for China’s outlook as stimulus appears to filtering throughout the economy Dollar has biggest drop in two months as yen and yuan gain The big risk aversion trade over the summer has seen AUD/JPY consolidate around the 94.00 level.  A downbeat outlook for China kept the Australian dollar heavy, while US economic resilience has kept yen softer on a widening interest rate differential.  The AUD/JPY daily highlights a global growth picture that is either looking for a China rebound, which should help Australia’s growth momentum or a Japan recovery that is not on solid footing. The AUD/JPY daily displays a symmetrical triangle that shows price has converged towards the 94.00 region.  The bullish trend that started in the spring ended mid-June ahead of the 97.70 level.  Price is poised to either resume the longer-term bullish trend that started after the pandemic low was made in March 2020 or potentially show the start of a significant bearish reversal.                   The Australian dollar and Japanese yen seems likely to remain a key risk barometer, which means it could react strongly with what happens with this week’s US inflation data and with China’s decision on rates and their activity data.  If bullishness emerges, price could initially targets the 95.50 region, while downside support would come from the 200-day SMA level, which currently resides at the 92.00 level. This week the Australian economic calendar is filled with economic data that might take a backseat to everything that happens from the US and China.  The main Australian data release of the week is Australia jobs, which could show job growth rebounded, but will unlikely bring back rate hike expectations for the RBA  

EC downgrades eurozone growth for this year and next Will the ECB be deterred if their forecasts have similar downgrades? EURUSD slips below key support ahead of US inflation data and ECB   The European Commission downgraded its forecasts for the EU this year and next, weighed down by much weaker growth in Germany. The new forecasts won’t come as a major surprise and may even prove overly optimistic over time but they do come days ahead of the next ECB meeting and could tempt some policymakers into voting to pause the tightening cycle. ECB policymakers will obviously be armed with their own forecasts when it comes to the vote but it’s likely their growth expectations will be revised lower on the basis of recent releases. While markets are currently pricing in a pause this week, around 60/40 at the time of writing, I’m probably leaning more toward a final hike before pausing in October. It’s probably easier to justify a hike this week than it may be at the end of next month and I’m not sure there’s enough desire at the ECB to stop at the current rates. Weaker economic readings will probably drive a lively debate and they obviously won’t suggest, if they do hike, that it’s job done, rather more finely balanced. But they can’t ignore the progress in recent months, other economic indicators, and the lag effect of past moves.   A cautious breakout but perhaps still a significant one Recent strength in the US dollar has prompted a breakout against the euro in the last week which may prove to be very significant.   EURUSD Daily Source – OANDA on Trading View   While it continues to trade in a descending channel, the pair has broken below the 200/233-day simple moving average band for the first time since November. It then ran into support around 1.07 which has been a notable level of support in the past and the May low isn’t far below here. The interesting thing is that while the breakout hasn’t been the catalyst for a sharper move lower, yet, the decline isn’t lacking momentum. The MACD and stochastic are continuing to make new lows alongside price. Perhaps the MACD histogram is an exception but even this isn’t particularly clear. A break of the May low could confirm the move and see the sell-off accelerate. But with the US CPI to come on Wednesday and the ECB meeting on Thursday, there may be some apprehension among traders. That may even explain why it’s been more of a cautious breakout until this point.    

Asia Morning Bites US inflation report out tonight could see Asian markets mark time today.   Global Macro and Markets Global markets:  US stocks are up one day, down the next at the moment. Yesterday, it was time for some losses led by tech stocks following an Apple event to launch the iPhone 15. The S&P 500 dropped 0.57% while the NASDAQ lost 1.04%. This was actually in line with the steer from equity futures yesterday. But today, they are giving little away. Chinese stocks fell also. The Hang Seng was down 0.39% and the CSI 300 was down 0.18%. 2Y US Treasury yields nosed up 2.9bp to 5.02%, while the 10Y Treasury yield was marginally lower by 0.8bp taking it to 4.28%. EURUSD is slightly higher at 1.0758, but spent a lot of time yesterday exploring the downside before recovering. This hasn’t helped the AUD, which has been steady to slightly weaker over the last 24 hours, sitting at 0.6427 currently. Cable also slid yesterday and made a less robust recovery than the euro, leaving it at 1.2492 currently. And the JPY is also softer, rising to 147.126.  The PBoC’s recent browbeating of the market still seems to be keeping a lid on the CNY, which remains at 7.2923. We’d expect it to test the 7.30 level again in the coming days, though tomorrow’s data dump will need to be taken into account – we think it might be slightly less negative than in recent months…The KRW had a positive day, rising 0.28% to 1327.64, and the THB weakened 0.38% to 35.640, but there were few other notable movements in the rest of the Asia FX pack.   G-7 macro:  Today, we get August inflation data from the US. And the news will be mixed. Headline inflation will likely rise from 3.2% to 3.6%YoY - all the helpful base effects that helped lower inflation in the first half of the year are used up now, and the month-on-month rate at 0.6% (expected), is still far too high to result in anything other than an inflation increase. But it is exactly the opposite story for core inflation, which has been much stickier, but could now benefit from more helpful base effects, and the fact that most of the price increases are in the non-core food and energy sectors. We should see core inflation falling to 4.4% (consensus 4.3%) from 4.7% YoY. Exactly how the market takes this mix of data is difficult to judge in advance, and could come down to small deviations from the consensus numbers on both figures. Other than this, the UK releases a raft of production, trade, construction and monthly GDP data for July.   India: Trade balance data for August will likely show the deficit in the -USD20bn to -USD21bn range. Export growth has been on a slow but steady decline for a long time, and was -15.86%YoY in July. Looked at in USD levels terms, exports are still trending slightly lower, but the rate of annual decline should moderate to low single digits this month. Inflation data released yesterday evening came in at 6.83%, only slightly higher than our 6.7% forecast, and slightly lower than the consensus 7.1% estimate.   South Korea: The jobless rate unexpectedly declined to 2.4% in August (vs 2.8% July, 2.9% market consensus). The construction sector added jobs for the first time in six months but manufacturing shed jobs for a second month. With summer holidays underway, hotels and restaurant jobs gained. Rising pipeline inflation raised concerns that consumer prices could rise more than expected in the coming months. Import prices surged 4.4% MoM nsa (0.2% in July), the largest increase in 17 months, but due to base effects the YoY growth still fell -9.0%YoY (vs -13.6% in July). Weak currency and strong commodity prices are the two main reasons for the price increases. The KRW is hovering above the 1,300 level and oil prices continue to rise. We are concerned that consumer price inflation may rise more than expected. The tighter job market and rising prices will support the BoK’s hawkish stance. But we still don’t think this will push them to deliver additional hikes by the end of this year given sluggish exports and weak investment.   What to look out for: US CPI inflation and China data South Korea unemployment (13 September) Japan PPI inflation (13 September) India trade balance (13 September) US CPI inflation (13 September) Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)

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

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.

In this market pulse, we delve into the complex terrain of China's property debt overhang, examining the challenges faced by giants like Evergrande. We also assess the current economic momentum, highlighted by positive indicators and upcoming Purchasing Managers' Index (PMI) data releases. Moreover, we emphasize the pivotal role of impending crucial meetings, including the Third Plenary Session and the 6th National Financial Work Conference, in shaping China's economic policies.   Key Points: Examining the enormity of China's property debt crisis, including Evergrande's challenges. Highlighting recent signs of recovery and the significance of the upcoming PMI data. Previewing the upcoming Third Plenary Session and 6th National Financial Work Conference. Introduction China Evergrande's ongoing financial troubles and defaults have once again taken center stage, casting a dark cloud over the equity market. Meanwhile, China's economic recovery is showing signs of life, with attention turning to key economic indicators like the Purchasing Managers' Index (PMI). In addition to these economic developments, several crucial meetings on China's economic and financial policies are on the horizon. This article will delve into these topics, providing an analysis of the current situation and what lies ahead. China Property Developer Debt Overhang China Evergrande, one of the nation's largest property developers, has recently made headlines due to its inability to meet regulatory qualifications for issuing new debt. This situation escalated when its mainland unit, Hengda Real Estate Group, failed to make a scheduled payment of RMB4 billion in principal and interest. The broader issue here is the massive debt overhang in the Chinese property sector, totaling RMB60 trillion. A significant portion of this debt, RMB40 trillion, consists of mortgage debts that are relatively less risky for banks as long as the pre-sold units are completed and delivered to buyers. The focus for Chinese authorities is to resolve these pre-sold units to ensure contractors get paid and homebuyers receive their properties. The completion of unfinished housing projects requires substantially additional funds, estimated to be over RMB2 trillion, which may be shared by state-owned enterprises that take over the projects, local governments, and the central government. However, the more problematic area is the RMB20 trillion in property developer debts. It's highly unlikely that China will bail out insolvent property developers. Instead, these developers and their banks will likely sell encumbered projects, along with their loans, to stronger entities, often state-owned enterprises with government backing. The recent regulatory easing on housing demand may stabilize the housing market to some extent. Still, the overhang of housing inventories in lower-tier cities facing population decline will persist for several years. This will lead to more headlines about defaults, restructuring, and liquidation of insolvent developers, causing losses for shareholders, bondholders, banks, and investors in trust and wealth management products tied to property projects. Some trust companies and private equity funds in the shadow banking sector may be subject to losses detrimental to their financial viability. While the banking sector, which holds around 75% of the RMB20 trillion developer debts, has sufficient capital buffers to absorb losses, the extent of the impact will depend on the successful liquidation of housing inventories by insolvent developers to stronger entities, likely brokered by local governments. This process is expected to negatively affect the profitability of banks in China. Economic Momentum and PMI Data Recent economic indicators have shown signs of improvement in the Chinese economy. The Citi China Economic Surprise Index (Figure 1) has rebounded, indicating fewer instances of economic data falling below expectations. As discussed in last week's Market Pulse note, retail sales, industrial production, trade, and inflation data improved in August.    The release today of a bounce in August industrial profit growth to 17.2% YoY (Figure 2), the first monthly year-on-year growth since June of last year, provides additional support for the pick-up in growth found in the industrial production released last week.    

RBNZ inflation forecasts still look like a gamble The RBNZ’s latest inflation projections – from the August Monetary Policy Statement – show an optimistic scenario for disinflation, largely based on assumptions about the impact of restrictive monetary policy and slowing domestic as well as external demand. Those assumptions are, however, met with the risks associated with: a) the extra spending deployed by the government from May, b) the recent spike in oil prices, c) residual supply-related inflationary effects of severe weather events, and d) the still unclear impact of booming net migration on wages and prices (easing labour supply, but raising demand for housing and other services). We think that the RBNZ will continue to acknowledge those risks to inflation and strike a generally hawkish tone this week, with the aim of keeping inflation expectations capped. However, a rate hike seems unlikely a week before the elections and before having seen official CPI and jobs data. Once inflation figures are out, the RBNZ may tolerate a slightly higher-than-anticipated third quarter headline CPI (the projection is for 6.0% YoY), but expect greater scrutiny on non-tradable inflation (projected at 6.2%).    RBNZ inflation forecasts   Polls point to a National-led coalition Advance voting in New Zealand has already been going on for a couple of days, while physical election day will take place on Saturday 14 October, with the preliminary results starting to be released from 7PM local time. Latest opinion polls suggest that the incumbent Labour Party (of former Prime Minister Jacinda Ardern) should lose its parliament majority to the opposition National Party. A centre-right coalition, led by the National Party and supported by the right-wing ACT New Zealand is currently projected to secure somewhere between 45% and 50% of parliament seats, possibly short of a majority. A coalition may need to include the nationalist NZ First to secure enough seats: latest polls give NZ First just above the 5% threshold required to enter parliament without winning a single-member seat.   Single party and coalition opinion polls ahead of the 14 October election   The monetary policy implication of a potential shift in government First of all, the past few years have taught to take pre-election polls with a pinch of salt. Secondly, the impact of politics on NZD are generally quite limited. This time though, a change of government (assuming the polls are right and NZ First joins a National-led coalition) might have some implications for the RBNZ further down the road. The National Party recently published its pre-election fiscal plan, where it pledged more fiscal discipline compared to Labour. Specifically, National said it would spend around NZD3bn less than Labour over four years, with the aim of reducing debt at a faster pace. If the RBNZ links any rebound in CPI to additional fiscal spending, the change in government could suggest a less hawkish RBNZ in the longer run. Another aspect to consider is the RBNZ remit. Over the summer, the National Party Finance spokeperson Nicola Willis pledged to restore the central bank’s sole focus on the inflation target. This would imply removing the RBNZ’s dual mandate (maximum sustainable employment) and potentially reviewing the additional housing stability objective that were added in 2018 and in 2021 respectively. The first – and more impactful – effect would suggest higher RBNZ rates in the medium and long term; while removing housing affordability objective would in theory be a dovish argument, the stricter inflation target would likely overshadow any housing-related considerations.   FX: Domestic factors can determine relative NZD performance The Kiwi dollar has resisted USD appreciation better than other commodity currencies in the past month, and we have seen AUD/NZD fall from the recent 1.0900 peak to below 1.0700 – also thanks to the Reserve Bank of Australia hold this week. We think that the RBNZ will continue to signal upside risks to their inflation forecasts and keep the door open to more tightening if needed this week, but it is very likely that November will be a much more eventful policy meeting for NZD, with new rate and economic projections being released and after the inflation and jobs data for the third quarter are released. Expect some significant NZD volatility around the two data releases this month: we are still of the view that inflation can surprise to the upside, so expect some positive impact on NZD. Markets are currently pricing in 15bp of tightening by November. When it comes to the election outcome, a hung parliament with parties failing to find a working coalition would be the worst scenario for NZD. Should either Labour or National manage to lead a government after the vote, we expect the market implications to be mostly bonded to those for the RBNZ remit (and less so to fiscal spending). So, very limited in the event of Labour staying in power, and moderately positive for NZD (negative for NZ short-dated bonds) in a win by the National Party as markets may speculate on the remit being changed to focus solely on a strict inflation target. The chances of a hike in November will, however, depend almost entirely on CPI and jobs data, not on the vote.   Expect any meaningful swing in NZD to be mostly visible in the crosses, especially in the shape of relative performance against other commodity/high-beta currencies. A combination of National electoral win (and workable coalition) and CPI surprise could make AUD/NZD re-test the 1.0580 May low and slip to 1.0500. NZD/NOK is another interesting pair, with more room to recover after a large summer slump: a return to 6.60 is possible in the above scenario. When it comes to NZD/USD, the swings in USD continue to be an overwhelmingly dominant driver. With US 10-year yields still moving higher and our rates team pointing at 5.0% as a potential top, we see more downside for NZD/USD in the near term. NZD-positive developments domestically would not prevent a drop to 0.5800 if US bonds remain under the kind of pressure we have seen in recent weeks. In the medium run, we still expect US data to turn negative and the Fed to start cutting in first quarter 2024, which should pave the way for a sustained NZD/USD recovery.

RBA hikes rates - market reaction is curious Although the RBA hike was expected by the majority of the forecast community, markets were not completely sold on the idea, which is why it is curious that the AUD weakened on the decision and that bond yields fell.   RBA hikes but AUD softens It was no surprise that the RBA hiked the cash rate by 25bp today. Only three of the Bloomberg consensus expected the RBA to hold rates steady today. We were not among them. However, the market pricing was more circumspect, with only about a 59% probability of a hike priced in to today's meeting.  All of which makes the subsequent market reaction quite strange.  The AUD made a very brief run stronger on the announcement, but almost immediately fell back, dropping to about 0.643 from about 0.652 prior to the announcement.  Australian government bond yields also declined. 10Y government bond yields fell from about 4.76% to 4.70% and yields on 2Y government bonds fell from 4.37% to 4.31%. There was a slight decline in US Treasury yields at the same time, which may have influenced things, but it isn't a particularly satisfactory explanation.      RBA statement was reasonably hawkish This market reaction cannot either be put down to the accompanying statement by the RBA, which in our view leant in a hawkish direction.  The justification the RBA gave for today's hike was the slow progress being made towards their target inflation range, the arrival at which was put back to late 2025. The RBA also judged that the weight of information received since the previous meeting raised the chances that inflation would remain higher for longer.  The RBA's statement also kept the door open to the possibility of further hikes, saying that "Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks". Thanks to base effects, next month's inflation data will probably show another increase (see chart above). However, we don't think the RBA will respond again so soon if inflation does indeed rise. After that, when the November and December figures are released, absent the floods and energy shortages of last year, we should see inflation resume its downward trend, which may be enough to cement the view that this was the last hike this cycle after all.  The risk to this view comes from the current run rate for inflation. For the last 2 months, the CPI index has risen by 0.6% MoM. This isn't consistent with an inflation rate between 2-3% but rather one closer to 7%. So this also needs to slow down considerably over the coming months. If it doesn't, then instead of the rate cuts that we expect could be on the radar by mid-2024, we might still be looking at some further tightening before we can call this rate cycle truly over. As the RBA notes in their statement, "There are still significant uncertainties around the outlook".  

US could soon see 2% inflation After encouraging inflation data in early summer, progress stalled in August and September amid robust consumer activity. But with tighter financial and credit conditions set to weigh further on corporate pricing power, supplemented by slowing rents and falling gasoline and used car prices, we expect to see inflation move close to 2% in 2Q.   Progress being made, but the Fed wants much more At the recent FOMC press conference, Federal Reserve Chair Jerome Powell said that the economy has “been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that has been very typical of rate hiking cycles like this one”. Nonetheless, there was the acknowledgement that “the process of getting inflation sustainably down to 2% has a long way to go”. Headline US consumer price inflation has indeed fallen sharply from a peak of 9.1% year-on-year in June 2022, hitting a low of 3% in June 2023. However, this stalled in August and September with the annual rate rebounding to 3.7% as higher energy costs and resilience in some of the core (ex-food and energy) components re-emerged amid a strong summer for consumer spending. The annual rate of core inflation has continued to soften from a peak of 6.6% in September 2022 to 4.1% currently, but it is still running at more than double the 2% target. In an environment where the economy has just posted 4.9% annualised GDP growth in the third quarter and unemployment is only 3.9%, there are several hawks on the FOMC who continue to make the case for additional interest rate rises, arguing that they cannot take chances and allow any opportunity for inflation pressures to reignite.   Contributions to US annual consumer price inflation (YoY%)   But the Fed's work is most probably done The Fed is still officially forecasting one further 25bp interest rate rise this year, but we doubt it will follow through. The Fed last hiked rates in July and since then financial and credit conditions have tightened, with residential mortgages and car loans now having 8%+ interest rates while credit card borrowing costs are at all-time highs and corporate lending rates are moving higher. It isn’t just the rise in borrowing costs that will act as a brake on economic activity and constrain inflation pressures. The Federal Reserve’s Senior Loan Officer Opinion survey shows that banks are increasingly reluctant to lend. This combination of sharply higher borrowing costs and reduced credit availability tends to be toxic for growth. The Fed itself has reported significant weakness in loan demand while commercial bank lending data shows a clear topping out in the amount of borrowing conducted by households and businesses. With real household disposable incomes falling for the past four months amid evidence of increasing numbers of households having exhausted pandemic-era savings, we expect to see GDP contract in at least two quarters in 2024. In this environment, we see the slowdown in inflation regaining momentum in early 2024.   Corporate pricing power is waning With business attitudes becoming more cautious on the economic outlook we are seeing a reduction in price intention surveys. The chart below shows the relationship between the National Federation of Independent Businesses' (NFIB) survey on the proportion of members expecting to raise prices in coming months and the annual rate of core inflation. It suggests that conditions are normalising, with core inflation set to return to historical trends.   NFIB price intentions surveys suggest corporate pricing power is normalising   While concerns about the outlook for demand are a key factor limiting the desire for companies to raise prices further, a more benign cost backdrop has also helped the situation. The annual rate of producer price inflation has slowed from 11.7% to 2.2%, having dropped to just 0.3% year-on-year in June while import prices are falling outright in year-on-year terms. There are also signs of labour market slack emerging, with unemployment starting to tick higher and average hourly earnings growth slowing to 4.1% from near 6% just 18 months ago. Perhaps more importantly, non-farm productivity surged in the third quarter with unit labour costs falling at a 0.8% annualised rate. With cost pressures seemingly abating from all angles, this should argue for core services ex-housing, a component that the Fed has been keeping a careful eye on, to soften quite substantially over coming months.   Fed's "supercore" inflation should slow more rapidly   Energy and vehicle price falls to depress inflation Another area of recent encouragement is energy prices. The fear had been that the conflict in the Middle East would have consequences for energy markets but, so far, we have seen energy prices soften. Gasoline prices in the US have fallen 50 cents/gallon between mid-September and early November, leaving prices at the lowest level since early March. Gasoline has a 3.6% weighting in the CPI basket. Our commodity strategists remain wary, warning of the risk that an escalation in the conflict could lead to oil and gas supply disruptions from some key producers in the region, most notably Iran. For now though, energy prices will depress inflation rates and could mean at least one or two month-on-month outright declines in headline prices with lower energy prices limiting any upside potential from airline fares (0.5% weight in the CPI basket). On top of this, we expect to see new and used vehicle prices (combined 6.9% weighting in the CPI basket) being vulnerable to further price falls in an environment where car loan borrowing costs are soaring. New vehicle prices have risen more than 20% since 2020 amid supply problems and strong demand while used vehicle prices rose more than 50%, according to both the CPI measure and Manheim car auction prices. Prices for used cars have fallen this year but still stand 35% above those of 2020. Experian data suggests the average new car loan payment is now around $730 per month while for second-hand cars it is now $530 per month. With car insurance costs having risen rapidly as well (up 18.9% YoY with a 2.7% weighting in the CPI basket), the cost of buying and owning a vehicle is increasingly prohibitive for many households and we suspect we will see incentives increasingly capping the upside for vehicle prices. It is also important to remember that the surge in insurance costs is a lagged response to the higher cost of vehicles – and therefore insured value – and that too should slow rapidly (but not fall) over coming months.   Gasoline prices and oil prices surprise to the downside   Rent slowdown will be the big disinflationary force in early 2024 The big disinflationary influence should come from housing over the next couple of quarters. The chart below shows the relationship between Zillow rents and the CPI housing components. This is important because owners’ equivalent rent is the single biggest individual component of the basket of goods and services used to construct the CPI index, accounting for 25.6% of the headline index and 32.2% of the core index. Meanwhile, primary rents account for 7.6% of the headline index and 9.6% of the core. If the relationship holds and the CPI housing components slow to 3% YoY inflation, the one-third weighting that housing has in the headline rate and 41.8% weighting in the core will subtract around 1.3 percentage points of headline inflation and 1.7ppt off core annual inflation rates.   Rents point to major housing cost disinflation   On track for 2% inflation next summer There are some components on which there is less certainty, such as medical care, but we are increasingly confident that inflationary pressures will continue to subside and this means that the Federal Reserve will not need to raise interest rates any further. Next week’s October CPI report may not show huge progress with headline CPI expected to be flat on the month and core prices rising 0.3% month-on-month, but we expect headline inflation to slow to 3.3% in the December report with the annual rate of core inflation coming down to 3.7%. Sharper declines are likely in the first half of 2024. Chair Jerome Powell in a speech to the Economic Club of New York acknowledged that “given the fast pace of the tightening, there may still be meaningful tightening in the pipeline”. This will only intensify the disinflationary pressures that are building in an economy that is showing signs of cooling. We forecast headline inflation to be in a 2-2.5% range from April onwards with core CPI testing 2% in the second quarter. With growth concerns likely to increase over the same period, this should give the Fed the flexibility to respond with interest rate cuts. We wouldn’t necessarily describe it as stimulus, but rather to move monetary policy to a more neutral footing, with the Fed funds rate expected to end 2024 at 4% versus the consensus forecast and market pricing of 4.5%.   ING CPI forecasts (YoY%)

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

All eyes on US inflation and the government's funding deadline  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   What everyone – most investors, every household and every politician want to see and to sense right now is the end of the global monetary policy tightening cycle, and the beginning of the end starts mostly with the Federal Reserve (Fed).   Until the beginning of this month, we have seen a pricing that reflected the market's belief that the Fed is going to keep the rates high for long because the world is now braced for an extended period of high inflation. And the rapid rise in the US long term yields because of this very belief that the Fed will keep rates high for long helped the Fed keep its rates steady, at least at the latest meetings. The US 10-year yields spiked above the 5% mark in the second half of October, stagnated close to this peak for a week.   Then, a sufficiently soft set of jobs data from the US at the start of the month, combined with a record but lower-than-expected Treasury borrowing plans slowed down the sharp selloff in US Treasuries and reversed market sentiment. Investors, since the beginning of this month, began flocking back into the US long-term papers. The US 10-year yield tipped a toe below the 4.50% level, this time. We are talking about a plunge of more than 50bp for the 10-year paper in about two weeks.   And finally, last week, two bad 10- and 30-year bond auctions in the US, and Fed Chair Powell's warning that the Fed could opt for more rate hikes if needed, brought bond investors back to earth. And the 10-year yield rebounded from a dip. This is where we are right now – a period of heavy treasury selloff, followed by significant inflows, and uncertainty.   The uncertainty regarding when the Fed will be done hiking the rates is killing everyone, but even the Fed itself doesn't know when tightening will/should end. It will depend on crucial economic data, like inflation, jobs, and growth figures. The US jobs data is giving signs that the US labour market has started loosening. The US growth numbers are off the chart, but spending isn't necessarily sitting on solid ground, as the US credit card loans go from peak to peak and the credit card delinquencies have taken a lift. The delinquency rate is above the pre-pandemic levels, and just around the post-GFC levels – this means that the Americans spend on debt that they can't pay back anymore. And the US government debt is – as you know - growing exponentially, and Americans pay significantly higher interest on their debt because the rates went from near zero to above 5% in less than two years.  But uncertainty regarding the US debt does not mean that the US Treasuries will fall off grace, because there is nothing comparable to the US Treasuries that could replace US treasuries in a portfolio for low-risk allocations.   Volatility in this space is however unavoidable. This week, we will plunge back into the US political saga, as the government short-term funding deadline is due 17th of November and not much progress has been made to seal a fresh deal. And remember this, the last time the US politicians agreed on a short-term relief package, Joe Biden was forced to leave the funding for Ukraine outside of it. Since then, a new war in Gaza popped up, and the US is now expected to bring financial contribution there, as well.   We could see the US long-term yields recover from the past weeks' decline. Depending on the new funding resolution – or the lack thereof – we could see the US 10-year yield return above 4.80%.   Happily, slower inflows into US treasuries will be a relief for the Fed, which needs the yields to remain high enough to restrict the financial conditions without the need for more action. But the US political shenanigans are only one part of the equation. The other part is...economic data.   The all-important inflation data due Tuesday is going to impact the inflow/outflow dynamics in US Treasuries before the worries grow into the Friday funding deadline. A sufficiently soft inflation read should keep bond traders in appetite for further purchases and mask a part of the political worries, while disappointment could keep buyers on the sidelines and amplify a potential political-led selloff. The good news is that the US headline inflation is expected to have eased to 3.3% in October, from 3.7% printed a month earlier. Core inflation is seen steady around the 4.1% level. The bad news is, the expectation is soft and could be hard to beat.   The US dollar sees resistance at around the 50-DMA, the US stocks continue to cheer the latest pullback in the US yields. The S&P500 closed last week with a beautiful rally, that led the index to above its 100-DMA for the weekly close. The big tech remains the driver of the S&P500 gains as Microsoft hit a fresh high on Friday and Nvidia remained bid a few points below its ATH on news that Chinese AI startup bought enough Nvidia chips before the US exports curbs kicked in. This week, US big retailers will announce their Q3 results and will give a hint on the US consumer trends, health and expectations. Earnings could be mixed but the overall outlook will likely be morose.   

US inflation slowdown has much more to go US consumer price inflation slowed more than expected in October. Higher borrowing costs will increasingly weigh on activity and corporate pricing power while slowing housing rents will be the main driver of disinflation over the next two quarters. With 2% inflation looking possible by next summer the pricing of rate cuts will intensify.   Inflation pressures are subsiding US October CPI has undershot market expectations for both headline and core inflation. The headline rate is 0% month-on-month/3.2% year-on-year versus consensus predictions of 0.1%/3.3% while core (ex-food and energy) is 0.2%/4.0% versus predictions of 0.3%/4.1%. The biggest component, owners’ equivalent rent, cooled to 0.4% MoM from 0.6% MoM, but we are hopeful of much more to come. Energy fell 2.5%, led by a 5% MoM drop in gasoline while both used and new car prices fell  (-0.1% and -0.8%, respectively) and airline fares fell 0.9% with hotel prices dropping 2.9%. The big uncertainty ahead of time was medical care costs and changes to methodology and history, but it doesn’t appear to have been as big a story as feared, with prices up 0.3% MoM, though still down -0.8% YoY. CPI ex food and energy MoM, 3M annualised & YoY%

By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Nov) – 08/12 – last month's October jobs report was the first one this year when the headline number came in below market expectations, though not by enough to raise concerns over the resilience of the US economy. Unlike September, when US jobs surged by 297k, jobs growth slowed in October to 150k, while the unemployment rate ticked higher to 3.9%, in a sign that the US economy is now starting to slow in a manner that will please the US central bank. Combined with a similarly weak ADP report the same week, where jobs growth slowed to 113k, and a softer ISM services survey yields have slipped back significantly from their October peaks, as well as being below the levels they were a month ago in a sign that the market thinks that rate hikes are done and has now moved on to when to expect rate cuts. This is the next challenge for the US central bank who will be keen to continue to push the higher for longer rates mantra. It's also worth noting that JOLTS job openings are still at elevated levels of 9.55m, and weekly jobless claims continue to trend at around 210k which means the Fed still has plenty of leeway to push back on current market pricing on rate cuts. Expectations are for 200k jobs to be added in November; however, it should also be remembered that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.          Services PMIs (Nov) – 05/12 –while manufacturing activity in Europe appears to be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation, which is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4. The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The UK economy appears to be more resilient where was saw a recovery into expansion territory in the recent flash numbers to 50.5. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have gone after Italy fell sharply in October to 47.7, while Spain was steady at 51.1.  

RBA rate decision – 05/12 – back in November the RBA took the decision diverge from its peers and hike rates again, by 25bps to 4.35%, after 5 months of keeping it at 4.10%. In a sign that this could well be the last hike the guidance was tweaked from "further monetary tightening may be required" to "whether monetary tightening may be required" which at the time sent the Australian dollar sharply lower, although the recent weakness in the US dollar has seen the Aussie recover since then. Despite increasing evidence that inflation is slowing in the global economy the RBA clearly felt it necessary to close the gap on its peers when it comes to rate policy, in a sign that perhaps they are concerned about domestic price pressures. That said we are already seeing the economic numbers in China starting to respond to the piecemeal measures by authorities there to stimulate the economy, although the improvements have been fairly modest. We also saw another upside surprise in headline CPI, while Q2 GDP came in at 0.4%, above forecasts of 0.2% to the economy continues to remain resilient. No changes to policy are expected this week, however some ex-RBA staffers have suggested that we could see another rate hike if wages growth continues to remain strong.   China Trade (Nov) – 07/12 – the recent set of Chinese Q3 GDP numbers pointed to a modest pickup in economic activity over the quarter in a sign that we are starting to see an improvement in the underlying numbers underpinning the Chinese economy. The recent October trade numbers helped to support the idea of a modest improvement however they don't change the fact that the economy still has some way to go when it comes to domestic demand which has remained subdued over the last 6 months. In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline. Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon.       

Unlike the euro, the pound has returned to the levels it was at before the release of preliminary inflation data in the eurozone. This is somewhat logical due to the fact that the data mounted pressure on the euro, while there were no economic reports or news from the UK. Today, the situation is quite similar. The economic calendar is basically empty, and only European Central Bank President Christine Lagarde's speech can affect the market. Primarily, it will affect the euro.   The impact on the pound will be significantly less noticeable. The question is, where will all this lead? Most likely, Lagarde will take note of the slowdown in inflation and maybe even suggest the possibility of a rate cut. Of course, she will not mention any specific timing. But it could be clear that she is already starting to make a hint in December. The euro will fall further, pulling the pound along with it. However, the decline in the British currency will be much less pronounced and possibly short-term.   Last Friday, the GBP/USD pair managed to recover relative to the recent corrective move. A s a result, the quote returned to the area of the resistance level of 1.2700. On the four-hour chart, the RSI technical indicator is hovering in the upper area of 50/70, thus reflecting bullish sentiment among traders. On the same chart, the Alligator's MAs are headed upwards, which corresponds to the upward cycle. Outlook The EUR/USD kicks off the new week with a decrease in the volume of long positions, accompanied by a rebound from the level of 1.2700. In this case, hitting the 1.2700 mark indicates a prevailing bullish sentiment. In perspective, this could extend the upward cycle in case the pair tests last week's high. The bearish scenario will come into play in case the pair trades sideways between the levels of 1.2600/1.2700. Comprehensive indicator analysis indicates a downward cycle in the short term due to the rebound. Meanwhile, the bullish sentiment remains in force in the intraday and medium-term periods.   Read more: https://www.instaforex.eu/forex_analysis/362129

Rates Spark: Does the Fed know something we dont? The surprise from the FOMC was partly the extra 25bp implied cut added to 2024, but it was more the lack of pushback from Chair Powell on the 2024 rate cut narrative. He almost endorsed it, which leads us to question whether he knows something of significance that we don't. Today's focus is on the ECB and BoE policy meetings.   Chair Powell validates the move from 5% to 4% on the 10yr yield Such was Federal Reserve Chair Jerome Powell's phraseology at the press conference that one must suspect that he knows more than we know. And its not about the macro data. We can see that. It's more about what the Fed might be seeing under the hood. Perhaps in commercial real estate, or single family residential rentals or private credit, or another other area of the system that might find itself overexposed to rate hikes delivered, under water and vulnerable to breaking. We don't know of course, but a Fed chair that stands up asserts that he understands the dangers they run by keeping rates too high for too long is one that looks like he's ringing alarm bells. Along with the Fed, the market too has added an additional 25bp rate cut for 2024, now at 150bp cumulative. The entire curve has shifter lower, led by real rates. The 2/10yr curve has gapped steeper too. This is a meaningful outcome. The question now is whether the 2yr can really break free and head lower as a driver of the yield curve, steepening it out from the front end. That traditionally happens on a three month run in ahead of an actual rate cut. We’re on the cusp if this, but not quite there just yet. It’s been a remarkable ongoing market move, especially as it has been interlaced with some tailed auctions, indicative of resistance to the falling market rates narrative (in the long end). But there’s been little from Chair Powell and the FOMC to stand in the way of this. Recent data has not really validated the dramatic fall in yields. But today the Fed has helped to do so. A far more hawkish Fed had been anticipated. The question ahead is where is fair value for the 10yr. We think it’s 4%. It’s premised off the view that the funds rate gets to 3% and we are adding a 100bp curve to that. We are about to sail below 4% though as a theme for 2024, with 3.5% the target. But the move below 4% towards 3.5% will be an overshoot process. If something breaks, we fast track all of that and jump to a new environment. That has not happened as of yet, but we think the stakes have risen.   ECB to push back against early cut expectations With a first rate cut more than fully discounted by April and on overall anticipated easing of 135bp over 2024, the market’s expectations of European Central Bank policy stand in stark contrast to the official line of rates having to remain high for longer. But since the last meeting in particular the inflation data has surprised to the downside, which even influential ECB officials like Isabel Schnabel had to acknowledge. The prospect of further hikes is clearly off the table, but she warned that central banks will have to be more cautious. That also meant that the ECB should be more careful with regards to making statements about what will happen in the next six months. The ECB’s new growth and inflation forecasts will have to be lowered, the crucial question is just by how much. Also taking it from Schnabel, the ECB is unlikely to give any longer rate guidance, which would only mean a truer meeting-by-meeting and data dependent approach. Still, the ECB is unlikely to endorse the aggressive market pricing, especially that of cuts already early in the year. So far the communication has been that one is particularly concerned about the development of upcoming wage negotiations which makes pricing for March rate cuts look premature. But how can the ECB still convey a hawkish tilt? One possibility is using communication about plans to shrink the balance sheet. We do not think there will be concrete decisions yet, but the ECB could state that it has begun discussing to potentially end PEPP reinvestments earlier than planned.   BoE likely reiterate rates will stay restrictive for an extended period Expectations of policy easing have further deepened ahead of today’s Bank of England monetary policy committee meeting. A first rate cut is now fully discounted by June with an overall expected easing of close to 100bp over 2024. One reason for growing expectations was a downside surprise in wage growth which saw private sector regular pay growth fall to 7.3% year-on-year from 7.8% YoY. Another trigger was yesterday’s disappointing GDP growth for October which means we are potentially on track for a fractionally negative overall fourth quarter figure. The BoE is likely to reiterate the guidance from November, where it said it expected rates to stay restrictive for “an extended period.  A hold is also widely anticipated by the market, but the recent data could convince some of the three MPC’s hawks who had still voted for a hike in November to back down from that position toward a ‘no change’.    Today's events and market view The central bank meetings are clearly the focus today given how far market expectations of policy easing have come. There may well be some disappointment in store for pricing of rate cuts as early as March. But further out we must acknowledge that the shift lower in rates is also driven by a drop in inflation expectations. The 10Y EUR inflation swap for instance has come down all the way from levels closer to 2.6% in October to currently 2.15%. Even central banks themselves have become more positive about the disinflationary tendencies taking hold. On the heels of the FOMC meeting rates markets in the US will look out for the initial jobless claims as well as retail sales data today. we will also get import and export prices.

GBP: Eyes on inflation this week This week, the focus in the UK will be on CPI data for November out on Wednesday. As usual, we'll be paying attention to services inflation, which we estimate to come in at 6.6%, showing little near-term progress. That may help markets ease some of the rate cut bets in the UK and help the pound. Markets are still pricing in four rate cuts by the Bank of England this week despite the Bank’s attempt to discourage dovish bets via in-meeting communication. We still think services inflation in the UK will ease to around 4% by next summer, allowing the BoE to start cutting, but the pound has decent room to benefit from some hawkish repricing in the short run. Last week’s 0.8550 lows in EUR/GBP may well be retested by the end of December.

Interest rates remain in focus after central bank decision week Following an intense week of central bank decisions with most of them being in line with expectations of keeping rates unchanged, it's become evident over the past few months that financial markets are aligned in the belief that UK interest rates have reached their peak and it would be surprising if the Bank of England were to implement an increase in UK interest rates in the near future, with such a decision likely only occurring in response to a substantial shock in inflation data. Meanwhile, predicting the timing of the initial interest rate cut, which would mark the first fall in UK interest rates since March 2020, is more challenging.  One thing that remains clear is that the UK economy is in a much worse position than both its European and US counterparts as GDP forecasts continue to indicate the potential for a recession which may trigger a response from the central bank. The BoE has also appeared to follow the US central bank (Federal Reserve) in its footsteps and may await the signal from it before starting its own rate cut cycle as rates are also expected to start falling in early 2024. In either case, new Bloomberg projections point to the possibility of the first rate cut being implemented by the Bank of England in the first quarter of 2024, followed by a gradual fall in rates throughout the following meetings with the target being reached in the coming years.      

CEE: Sinking beacon of hope After a very busy calendar last week, this week we take a little break in the CEE region. The final December inflation numbers in Poland will be released today and core inflation tomorrow. We do not expect any changes in the headline rate and anticipate a drop in core from 7.3% to 6.9% year-on-year. On Wednesday, we will see PPI numbers in the Czech Republic, one of the last numbers before the February Czech National Bank meeting. Thursday will see the release of industrial production in Romania and PPI in Poland on Friday. Otherwise, we will continue to monitor the dynamic political situation in Poland. The state budget draft for this year will be discussed this week in parliament. In the Czech Republic, we are getting closer to that CNB meeting and we should hear more from the board in the next two weeks before the blackout period begins. After surprisingly low inflation for December, there is the possibility of a rate cut of 50bp instead of 25bp, which is our base case scenario here for now. CEE FX remains the last island of resistance within the EM space, which is under selling pressure this year. However, last week proved that the CEE region is not the exception and bearish sentiment has arrived here, too. The market is starting to price in more cutting than we expect, not only due to global direction but also inflation surprising to the downside. And even in Poland, where the central bank continues its hawkish tone, FX has not escaped losses. Despite the inflation surprise in the Czech Republic, we believe the koruna will remain resilient and should not go to the 24.700-800 range. On the other hand, Hungary's forint has been ignoring rapidly falling rates for some time, which we believe leaves HUF vulnerable, and we expect rather weaker levels this week above 380 EUR/HUF. Poland's zloty remains the only currency in the region supported by a higher interest rate differential. However, political noise seems to be entering the market and PLN is rather weaker. Therefore, we see EUR/PLN around current levels for the next few days despite positive market conditions.

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.