inflation expectations

10Y US Treasury yields are more than 60bp away from the peak they reached in early March, prior to the regional banking crisis. The Fed has been pushing a more hawkish line disappointed by the lack of progress on the inflation front, but end-2023 Sofr futures still price a rate that is 50bp below the early March peak.   At least so far, this doesn’t feel like a wholesale reappraisal of the market’s macro view although a more forceful Fed communication at the 14 June meeting, with potentially a hike and a higher end-2023 median dot, could push us closer to this year’s peak in rates.     ECB pricing is hard to move but markets look to the BoE for guidance In Europe, today’s inflation prints from France, Germany, and Italy will, in addition to yesterday’s Spanish release, give us a pretty good idea of where the eurozone-wide number will fall tomorrow. If the drop in Spain’s core inflation is any guide, EUR markets will struggle to follow their US peers higher.   Add to this that it is difficult for euro rates to price a path for policy rates that materially diverges from their US peers. Even if the Fed hikes in June or July, the EUR swap curve already prices ECB hikes at both meetings. Swaps assign a low probability to another hike in September for now.   That probability may well rise but we think any labour-market induced sell-off in US Treasuries will reflect, in part, in wider rates differentials between the two currencies.   It is difficult for euro rates to price a path for policy rates that materially diverges from their US peers  

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

Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Today's events and market view Ahead of Germany’s factory order and industrial production (IP) to be released tomorrow and Friday respectively, IP figures for France and Spain will be published this morning. Services PMI for Europe this morning are all second readings except for Italy and Spain. A further decline in the services index would undermine the ECB’s hawkish message, with employment and price components of particular interest. The ECB publishes its monthly consumer survey which includes questions on inflation expectations. The disinflation narrative should receive a boost from Eurozone PPI settling around negative values. US data consists of factory and durable goods orders. This will be followed by the minutes of the June FOMC meeting, where the Fed’s committee decided not to increase rates for the first time since early 2022. The Fed will be keen for markets to see the hawkish side of that decision and that it heralds a more protracted tightening cycle. The Fed’s dot plot still implies 100bp of cuts in 2024. Fed communication may well chip away at that message next. Bond supply consists of the UK selling 3Y debt.

After over 7 months without new contracts DataWalk informed that it signed three new agreements for a delivery of its analytical platform: (i) with Northern California Regional Intelligence Center, (ii) with selected units of Polish public administration, and (i) with Ally Financial (American bank) which is a contract extension actually. All 3 contracts will probably be settled in 2Q23, albeit this may not be enough to show a yoy improvement of revenues (2Q22 demanding base with 7 new contracts signed) and we forecast an 11% yoy decline of revenues in 2Q23.   On the other hand, during last conferences and in 1Q23 financial report the Company admitted that it managed to overcome most of the obstacles that hindered its growth last year. In particular, the Company’s engineers implemented the majority of drawn-out contracts signed in 2020 or 2021 which means that they will be able to handle the implementation of new pilot (pre-sales) and full (post-sales) projects. Additionally, the Company has already 4 fully trained system architects which should also expedite the implementations of the subsequent projects. This coupled with the sales funnel growth should translate into increasing dynamics of new contracts acquisition and implementation starting already from 2H23. Thus, we keep our revenue growth forecasts for 2023/ 2024/ 2025 at c. 20%/ 50%/ 70% implying that 2H23 revenues should grow c. 60% at least which we deem attainable given the relatively low base.   It is worth noting that the market sentiment for the growth companies operating in the field of data analysis has improved considerably in recent months thanks to the investors’ positive approach to AI issues and lower inflation expectations (and lower cost of money).   Since May when we issued DataWalk our last report, the Company’s peers median of EV/Sales multiples for 2023-25 has grown by 70% on average, which with the financial forecasts kept intact affects our 12M EFV assessment that rises by 67% to PLN 122 (from PLN 73) per share implying a c. 90% upside.   We would like also to indicate that DataWalk’s share price has not been the beneficiary of the above mentioned sentiment improvement yet. Given positive news from the Company, including an increase of engineering capacity, dynamic sales funnel growth, and new contracts signed we expect to see rising volumes and value of contracts in the near future and return of the Company’s sales to strong growths starting from 3Q23. Besides, we also assume that along with the inflow of news about new contracts DataWalk will experience the beneficial impact of the investors’ sentiment improvement for growth companies and the valuation gap will recede. Thats why we upgrade our recommendations: LT fundamental to Buy (from Hold) and ST relative to Overweight (from Neutral).   Financial forecast We keep our revenue growth forecasts for 2023/ 2024/ 2025 at c. 20%/ 50%/ 70% implying that 2H23 revenues should grow c. 60% at least which we deem attainable given the relatively low base. We also assume that DataWalk is able to deliver a revenue growth expected for 2024 with the current employment level, however in the subsequent years a dynamic increase in employment should follow to support further growth, therefore, we raise our costs estimates (and thus forecast higher ND) in 2023.   Dynamic growth of sales funnel value In 1Q23 financial report the Company informed that as of the day it was issued (May 18, 2023) the total value of sales funnel stood at US$ 41 million (up 11%/ 60% qoq/ yoy), which is the record high. We would like to note that a high level of the sales funnel may be to some extent related to current low revenues (as the Company is not completing the contracts that would have left the sales funnel otherwise). However, such a high dynamic of a sales funnel growth cannot be explained solely by this negative factor. In our view, a sales funnel growth confirms high interest in DataWalk’s product and also brings hope for a revenue growth in 2H23 (at the moment we assume it at c. 60% yoy after a slight decline in 1H23).   Valuation and recommendation Since May when we issued our last report, the Company’s peers median of EV/Sales multiples for 2023-25 has fallen by 70% on average, which with the financial forecasts kept intact affects our 12M EFV assessment that rises by 67% to PLN 122 (from PLN 73) per share implying a c. 90% upside. Given recent positive news from the Company, including an increase of engineering capacity, dynamic sales funnel growth, and new contracts signed we expect to see rising volumes and value of contracts in the near future and return of the Company’s sales to strong growths starting from 3Q23.   Besides, we also assume that along with the inflow of news about new contracts DataWalk will experience the beneficial impact of the investors’ sentiment improvement for growth companies and the valuation gap will recede. Thats why we upgrade our recommendations: LT fundamental to Buy (from Hold) and ST relative to Overweight (from Neutral).        

Rates Spark: The burning question is whether payrolls agrees with the ADP Moves yesterday took us to break-out levels for market rates. It does not feel like the move is over yet, and today's payroll report will have its say first. A weak report would look like a contradiction given the ADP, but payrolls are still the dominant driver. The market will also have an eye on US CPI next week.   A consensus-type outcome for payrolls will take market rates off their highs The latest report from ADP National Employment for June reported a 497k increase in US jobs. That is undoubtedly strong, and double the 250k average seen in recent months. Challenger job cuts also showed a slowdown in cuts, also pointing to resilience in the labour market. The American economy is fighting back, despite what the Fed has been up to. The 10yr is now at over 4%. We think it will stay above 4% over the coming weeks and potentially months. And the 2yr will hold on to a 5% handle, with a 100bp curve inversion being sustained. The inversion points to a reversal lower in market rates ahead, and a recessionary tendency. While that sounds unseemly given what we see in front of us, the rise in market rates will ultimately have its effect. But that’s not the focus for now – the focus is on taking out prior highs hit in this cycle for market rates. The Services ISM report confirmed that the situation popped higher in June. The employment component, which had dipped below 50 in the previous month, is now at 53.1. New orders rose to 55.5, and the overall index to 53.9. These are not particularly high readings, but importantly they are reversing some of the declines seen in previous months. Prices paid also eased lower, to 54.1. That in fact is a very tolerable outcome, as the long-run average for prices paid is 60. Market yields can be comforted by the calming in implied inflation expectations. But it can, at the same time, be a tad concerned that macro strength in the services sector could frustrate ambitions to get inflation materially lower in the coming months. So nothing here to reverse the tendency for yields to test higher. Get used to a 4% handle on the 10yr – it’s here to stay for a while. That said, we will need to see the payrolls report first. It's a June report, the same as the ADP. The question is whether it shows the same spurt that the ADP did. Often the correlation between the two is remarkably weak. But even if we get a consensus outcome in 200k plus territory that would not take market rates materially off their highs. For that, we'd need to see a material rise in the unemployment rate and a notable fall in wages inflation. Neither of these are expected. If we get a consensus-type report, it is possible that the market takes yields off their extremes into the weekend, but we'd still maintain that there has been enough in the past few days of data for any pullback to be reversed next week, and for the push higher in yields to continue.   2Y UST at 5%, 10Y at 4% and now eying cycle peaks   The week ahead will shine a light on the inflation side Data in the week ahead will shine a light on the inflation development in the US with CPI taking centre stage on Wednesday. The consensus is looking for the headline rate to drop to 3%, but given that this is mainly down to known base effects, it will likely be outweighed by core inflation remaining uncomfortably high at 5%. Persistent core inflation also means no let-up in Fed hawkishness. Nonetheless, there are also other indicators to watch which should point to declining pipeline pressures like the producer prices. Also, keep an eye out for the University of Michigan consumer sentiment survey and its inflation expectations measure.   In the eurozone, the main releases are the final CPIs as well as the European Central Bank accounts of the June meeting. Remember that the ECB all but preannounced another hike for this month. Given the disappointing macro backdrop and question marks surrounding the tenability of the ECB’s hawkish stance, markets will most likely scrutinise the accounts for any growing concerns about the underlying economy which could pave the way for a more heated debate between the hawkish and dovish camps. The balance sheet may feature given the targeted longer-term refinancing operations repayment, but we don’t suspect any discussion around extending quantitative tightening with asset purchase programme reinvestments having stopped just this month. UK jobs data, and in particular wages, will be a focus for sterling markets where the 6.50% terminal rate is now almost fully priced for the first half of 2024.   Today's events and market views All eyes are on US non-farm payrolls number today after the huge surprise in the ADP estimate. The consensus still stands at 230k, but Bloomberg’s whisper number, which compiles individual user estimates, has jumped to 270k. The unemployment rate is expected to ease back to 3.6% while average hourly earnings are seen to have risen by 0.3% month on month again. Unless there is a huge downside surprise, that would put the job market’s resilience into question. We think the 4% handle for the 10Y UST could accompany us for a while. The counter notion is that the sheer size of the move should call for at least some reversal, but if anywhere we would make that case for Bunds that got dragged higher alongside Treasuries. It also appears that fall-out for risk sentiment was more noticeable in EUR space, in sovereigns certainly with spread widening, which could add to the resistance against a further move higher.    

The ADP report on employment in the private sector, published a day before the non-farm payroll data release, was so shocking that it instantly raised expectations for the labor market as a whole, leading to rapid repositioning on Friday before the data release. However, the non-farm payroll figures were significantly weaker than expected, with 209,000 new jobs created (225,000 expected), and data for the previous two months were revised downwards by 110,000. Employment growth is slowing, but the pace remains high. As for wage growth, the figures were an unpleasant surprise for the Federal Reserve. In June, wages increased again by 0.4% instead of the expected 0.3%, and annual growth rates remained at 4.4%, which is higher than the 4.2% forecast. Steady wage growth does not allow inflation expectations to fall, the growth of real rates does not allow the Federal Reserve to start lowering the rate this year.       The U.S. inflation index, which will be published on Wednesday, is the main event of the week and the last important data before the Fed meeting at the end of July. The markets expect an 89% probability of a quarter-point rate hike. Furthermore, the probability of another increase in November has already exceeded 30%, and the first cut is now expected only in May of next year. The U.S. dollar fell after the data release and ended the week weaker than all G10 currencies. The growth of real rates in the current conditions makes a recession in the U.S. almost inevitable.   EUR/USD The Sentix Economic Index for the eurozone has fallen for the third time in a row to -22.5 points, a low since November 2022, and expectations also remain depressed. The eurozone economy has fallen into a recession as of early July. The situation in Germany is even more depressing – the index has fallen to -28.5 points, and the possibility of improvement is ephemeral.     The ZEW index will be published on Tuesday, and the forecast for it is also negative, with a decrease from -10 points to -10.2 points expected in July. On Thursday, the European Commission will present its forecasts. Bloomberg expects that industrial production in the eurozone fell in May from 0.2% y/y to -1.1% y/y, a sharp decline that characterizes the entire eurozone economy as negative and tending to further contraction.   Under the current conditions, the European Central Bank intends to continue raising rates, and even plans to shorten the reinvestment period of the PEPP program. If this step is implemented, a debt crisis, which will put strong bearish pressure on the euro, is inevitable in the face of capital outflows to the U.S. and an expanding recession.   The net long position on the euro has hardly changed over the reporting week and amounts to just over 20 billion dollars, positioning is bullish, there is no trend. However, the calculated price is still below the long-term average and is trending downward.     The euro attempted to strengthen on Friday in light of the news, but it was unable to rise beyond the borders of the technical figure "flag", let alone higher than the local high of 1.1012. We assume that the corrective growth has ended, and from the current levels, the euro will go down, the target is the lower boundary of the "flag" at 1.0730/50. GBP/USD Updated data on the UK labor market will be published on Tuesday. It is expected that the growth of average earnings including bonuses increased in May from 6.5% to 6.8%, and if the data comes out as expected, inflation expectations will inevitably rise. As will the Bank of England's peak rate forecasts. The NIESR Institute expects that further rate increases could trigger a recession.   The cost of credit is rising, and an increase in the volume of bad debts is inevitable in an economic downturn. Inflation did not decrease in May, contrary to expectations, and remained at 8.7%, even though energy prices significantly decreased. Food inflation on an annual basis reached 18.3%, and core inflation at 7.1% is at its highest since 1992. The labor force is decreasing, and if this trend is confirmed on Tuesday, it will almost inevitably result in increased competition for staff, which will mean, among other things, the continuation of wage growth. The Bank of England has already raised the rate to 5%, with forecasts implying two more increases. What does the current situation mean for the pound?   If the economy can keep from sliding into a recession, then in conditions of rising nominal rates, the yield spread will encourage players to buy assets, leading to increased demand for the pound and its strengthening. However, if signs of recession intensify, which could be clear as soon as Thursday when GDP, industrial production, and trade balance data for May will be published, the pound will react with a decrease, despite high rate expectations. After impressive growth two weeks ago, pound futures have stalled at achieved levels, a weekly decrease of just over 100 million has no significant impact on positioning, which remains bullish.  

If there’s a sliver of good news for policymakers, it’s that there are further signs that the UK’s worker shortage crisis is becoming less acute. The number of people inactive (neither employed nor actively seeking a job) has continued to fall. Where at one point there were more than half a million extra people inactive compared to pre-pandemic, that figure now sits at 173,000. That’s overwhelmingly because of a net influx of students to the jobs market, helping to offset elevated long-term sickness levels which haven’t improved at all. That, and a marked increase in economic migration this year, has helped lower the proportion of companies reporting that it is “much harder” to recruit in recent Bank of England surveys of Chief Financial Officers (CFOs). The latest jobs figures also contain further signs that the labour market is cooling, though it’s a gradual story. The unemployment rate ticked up to 4% in May, albeit the redundancy rate has barely budged over recent months. The reality though, as the Bank of England’s rate June decision made clear, is that these trends have been on display for several months now, and policymakers are losing confidence that they will translate into lower inflation. The BoE is focused squarely on the official pay and CPI data as it emerges.   Worker shortages have eased, but it varies by sector   The downside to that strategy of course is that wage growth is one of the most backward-looking indicators out there. And we think we should see pay pressure start to ease later this year – how quickly is up for debate. Bank of England modelling indicates that higher inflation expectations among consumers/businesses explain most of the previous rise in wage growth, and by that logic you’d expect pay pressures to abate a fair bit from here on. Consumers, and to a lesser extent businesses, are no longer expecting such aggressive price rises over the coming months. But as we discussed in more detail last month, we think that modelling underplays the role of worker shortages. In the UK jobs market – where only a minority of roles are linked to collective bargaining agreements/formal pay negotiations – it’s ultimately the ability (or threat) of workers quitting that keeps pay growth elevated. Higher inflation may incentivise workers to switch jobs more readily than they might otherwise, but the process relies on a strong underlying jobs market. Our tweaked version of that BoE modelling finds that post-pandemic shortages were a big driver of the wage pressure we’re seeing now. While those worker shortages are easing, the story varies considerably across sectors and at least some of these hiring challenges can be explained by structural rather than cyclical forces. Persistent staff shortages suggest the downtrend in wage growth, when it comes, is likely to be pretty gradual.

Historical tightly inverse correlation between gold (XAU/USD) and US Treasury 10-year real yield (TIPS) has started to wane in the past four weeks. An uptick in geopolitical risk may be the factor that is supporting a resilient movement in gold despite higher 10-year TIPS. Watch the US$1,940 key intermediate resistance on gold (XAU/USD) for a potential bullish breakout. In the past week, a higher momentum movement is seen in longer-term sovereign yields over their shorter-term durations where the US Treasury 10-year yield recorded a weekly gain of 23 basis points (bps) over a meager return of + 5 bps seen on the US Treasury 2-year yield. If we stripped out inflation expectations, the US Treasury 10-year real yield, derived from the 10-year Treasury Inflation Protected Securities (TIPS) yield has a higher momentum intensity over the US Treasury 10-year nominal yield.     US Treasury 10-year real yield has broken above its Oct 2022 major swing high     Fig 1: US Treasury 10-year real & nominal yields major trends of 11 Jul 2023 (Source: TradingView, click to enlarge chart) Based on last Friday, 7 July closing prices, the US Treasury 10-year real yield increased to 1.79% and broke above its prior October 2022 key major swing high of 1.69% while the 10-year nominal yield rose to 4.07% but still below its October 2022 key major swing high of 4.22%. Thus, given the higher positive momentum factor seen in the longer-term real risk-free interest rate; US Treasury 10-year real yield, the opportunity costs of holding other long-duration riskier assets in fixed income and equities have increased which reinforced their weak performances seen last week; iShares Investment Grade Corporate Bond ETF (-2.40%), iShares High Yield Corporate Bond ETF (-1.63%), and iShares PHLX Semiconductor ETF (-2.54%). Interestingly, another “competing” asset, gold priced in US dollars (XAU/USD) did not record a similar magnitude of loss last week. In contrast, spot gold (XAU/USD) recorded a gain of +0.31% for the week ending 7 July.   The prior high degree of inverse correlation between gold and 10-year TIPS has waned   Fig 2: US Treasury 10-year real yield correlation trend with Gold (XAU/USD) as of 11 Jul 2023 (Source: TradingView, click to enlarge chart) The correlation between gold (XAU/USD) and US Treasury 10-yield real yield (TIPS) tends to be tightly inversely correlated in the past ten years; when 10-year TIPS rose, the price of gold (XAU/USD) staged a decline and vice versus due to zero interest income earned from holding gold and as a hedge on US government bonds, as gold has no counterparty risk. The 20-period rolling correlation coefficient between gold and the 10-year TIPS has been reduced to -0.60 from a recent high level of -0.84 recorded in early May 2023. What causes the current breakdown in the historical long-term tightly inverse correlation between gold and 10-year TIPS? It is likely due to the geopolitical risk factor where the price of gold, acting as a safe haven asset tends to increase when geopolitical risk increases. Before the Russian invasion of Ukraine that occurred on 24 February 2022, in the prior two months, the high degree of indirect correlation between gold and 10-year TIPS have dissipated as both started to move in direct correlation.   Geopolitical risk has ticked up to an eight-month high     Fig 3: Geopolitical Risk Index as of 30 Jun 2023 (Source: MacroMicro, click to enlarge chart) Based on quantified measures of geopolitical risk, the latest reading of the Geopolitical Risk Index (GPR) for the month of June 2023 compiled by US Federal Reserve economists Dario Caldara and Matteo lacoviello has started to tick up above the 100 level to 103.10, its highest level in eight months. The GPR measures the social mood of impactful geopolitical events, threats, and conflicts since 1985 by counting the keywords used in the press.     Watch the US$1,940 key intermediate resistance on gold (XAU/USD) for potential bullish breakout   Fig 4: Gold (XAU/USD) medium-term trend of 11 Jul 2023 (Source: TradingView, click to enlarge chart) Thus, the recent resilient price movement of gold (XAU/USD) that has managed to hold at the US$1,913/1,896 key medium-term support despite the steep up move seen in the 10-year TIPS is likely attributed to an uptick in geopolitical risk. Based on technical analysis, clearance above the US$1,940 key intermediate resistance sees the next resistance coming in at US$1,990 in the first step supported by a positive momentum reading seen in the daily RSI oscillator. On the flip side, a break below the US$1,896 key medium-term pivotal support invalidates the bullish tone to expose the next support at US$1,856 (also the 200-day moving average).

US June CPI M/M: 0.3%e v 0.1% prior; Y/Y: 3.1%e v 4.0% prior; Core CPI (ex food and energy)M/M: 0.3%e v 0.4% prior; Y/Y: 5.0%e v 5.3% prior Microsoft gets go-ahead to buy Activision; prompts excitement for further deal making. Impressive demand for 3-year note auction US stocks rose as bond yields remained capped as Wall Street looks like it is ready to move beyond a pivotal inflation report that should suggest interest rates will stay higher for longer. ​ Headline CPI might fall to 2.9% and core could see the lowest reading since 2021, but sticky inflation signs will likely remain. ​ Stock market sentiment also got a boost as profit estimates for JPMorgan eye another strong quarter. ​ Citigroup and Wells Fargo are expected to post weaker profits. ​ Broadening strength is also exciting the stock market bulls as cyclicals performed well. ​ In order for stocks to continue on rising, Wall Street just can’t rely on the AI trade.   UK Wages are too hot ​The BOE is going to have a tough decision with the August 3rd policy meeting as hot wages should keep the bets going for further tightening. ​ Weekly earnings at 7.3% matched last month’s, which was also the record high seen in mid-2021. ​ The case for the BOE to hike by 50bps got a lot stronger and that has helped take the British pound to a 15-month high against the dollar. ​   Oil market to remain tight Crude prices are getting a boost as expectations grow for the oil market to remain tight despite all lingering growth concerns. ​ The IEA expects strong demand from China and developing nations. The short-term crude demand outlook shouldn’t be that bad as everyone is taking a vacation that requires some travel this summer. WTI crude has a solid floor in place and it will take a lot to go wrong for oil prices to lose its footing. ​   Gold tries to shine Gold hit a 3-week high but traders won’t see an extension of this rally until we get beyond the inflation report and possibly some bank earnings. ​ Gold bulls want to see inflation expectations to continue to tumble. ​ Tomorrow’s inflation report if cooler than expected could help gold find a home above the $1950 level. ​ ​ ​ What might prove troubling for gold is what is shelter disinflation. ​ Shelter prices are coming down, but not quickly enough and in several cities, rents are still increasing. ​ Gold will have to fight more hawkish Fed speak, but for now it seems the $1900 level could hold. ​  

Rates Spark: Are we there yet? The CPI surprise will not keep the Fed from hiking rates this month, but further hikes look less likely. Today's PPI may give markets another excuse to trade the easing inflation narrative, with front-end-led steepening sending end-of-cycle vibes. Today's ECB minutes will pit a hawkish stance against signs of easing inflation pressures.   US CPI surprise gives markets end-of-cycle vibes There was something in the air in the past few trading days. Just when 4% on the 10yr was looking comfortable, there was a pivot of attention towards yesterday's CPI report. Consensus pointed to a low 3% headline number. But we got better. Bang on 3%, so close to a break into a 2% handle. And, the core rate gets back below 5% for the first time in a year and a half. A good look for inflation overall, and correlating with market rates heading decisively lower. The 10Y US Treasury is now below 3.9% and the 2Y closer to 4.70%. The curve dis-inverted, this time in bull-steeping fashion as one would expect towards the end of a tightening cycle. Both real yields and inflation expectations ease lower. The 2Y breakeven rate has dipped back below 2%, a very comforting reading from the Fed’s perspective. The question now is whether the market continues to trade off the easing inflation narrative. There is an excuse to do so as today’s PPI report is also expected to be friendly. It’s quite a swing from the strong wage data last week into an easing inflation narrative for this week. Both are in fact backward looking, but the core inflation reading in particular is the dominant driver for market rates. If the market begins to believe that easing pipeline pressures and the pull of lower headline rates can dominate, then the strong labour market backdrop can be downsized as an issue. It is tough to make a conviction-directional view from here. We had been consistently looking for a break above 4% and to stay above that level for a while. But we are clearly back below, and with some reasonable justification.   Front-end led steepening signals end-of-cycle vibes

Recent macroeconomic readings, including data on wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators offer crucial information about the depth of the potential recession and the future course of action for the Bank of England (BoE). To shed light on these important developments, we reached out to Nick Cawley, Senior Strategist at DailyFX, for his expert analysis.   The persistent challenge faced by the BoE is the backdrop of persistently high inflation, which currently stands at 8.7%, well above the central bank's target of 2%. Simultaneously, the UK's economic growth remains lackluster, prompting the BoE to carefully assess the delicate balance between raising the borrowing rate to control inflation and avoiding a recession.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?    Nick Cawley, Senior Strategist at DailyFX said: This week's economic data continue to highlight the problems that the Bank of England (BoE) face. Against a backdrop of relentlessly high inflation -  8.7% against the central bank's 2% target – and tepid UK growth, the BoE will need to gauge how much further they can lift the borrowing rate without sparking a recession.   The UK labor market remains robust, although cooling, with wage growth near record levels last seen during the pandemic period. This week's data show the UK unemployment rate rising to 4% in April, from a prior month's 3.8%, a small positive for the BoE in its fight against inflation, but soaring wage growth will likely keep pressure on consumer prices.    The latest Office for National Statistics (ONS) data show UK GDP flatlining in the three months to May, and indeed UK growth has been fairly stagnant since the start of 2022, not helped in part by rising borrowing. While the UK has avoided a technical recession so far, the likelihood that UK GDP may turn negative in the coming months is growing.   Recent inflation and jobs data all but guarantee that the UK central bank will hike the Bank Rate by a further 50 basis points to 5.50% at the next monetary policy meeting on August 3rd. The question then is what happens at the next meeting in the economic calendar on September 21. Will inflation fall sharply, as suggested on many occasions by BoE governor Andrew Bailey, or will data show the accumulative effects of prior rate hikes is taking effect? Add into the mixture UK mortgage costs are hitting multi-year highs and the BoE have a testing few months ahead. 

Asia Morning Bites The RBA is to get a new Governor, Michelle Bullock, in September. In the US, James Bullard will step down from the St Louis Fed. More disinflationary pressure from June PPI data helps stocks to rally and the USD and US treasury yields to slide.   Global Macro and Markets Global markets:  Further disinflationary signs from US PPI data yesterday helped US Treasury yields to drop sharply. 2Y yields fell 11.6bp to 4.63%, while 10Y yields fell 9.4bp to 3.763%. This probably helped to spur further USD weakness. At 1.1224, it does really look as if the long-awaited USD turn has arrived. We haven’t seen levels like this since March 2022.  The AUD also made solid gains against the USD, rising to 0.6890. Cable too has surged, rising to 1.3131, and the JPY has plunged below 140 to 137.96. All Asian currencies were stronger against the USD yesterday, and it looks like a fair bet that this will be the theme in trading this morning. US stocks also seemed to like the additional disinflationary message from the PPI numbers. The NASDAQ rose 1.58% while the S&P500 rose 0.85%. Chinese stocks were also positive. The Hang Seng rose a very solid 2.6% while the CSI 300 rose 1.43%.   G-7 macro: US PPI rose just 0.1% MoM in June for both the headline and core measures. This resulted in a final demand PPI inflation rate of just 0.1%YoY, though the ex-food-and-energy PPI inflation rate was 2.4%YoY, down from 2.6% in the prior month. Initial jobless claims were a little lower though, so we shouldn’t get too carried away with the disinflationary theme.  Today, the US releases import and export price data, which should also indicate falling pipeline prices The University of Michigan confidence publication will also throw some light on inflation expectations, which are forecast to come down slightly on a 1Y horizon. There is May trade data out of the Eurozone. In Fed news, James Bullard, one of the FOMC hawks, and in this author’s view, one of the most thought-provoking and consensus-challenging members of the FOMC, is to step down to pursue a career in academia. Shame.  Meanwhile, Christopher Waller has said the Fed will need two more hikes to contain inflation because the negative impact of the banking turmoil earlier in the year has faded. Markets don’t agree.     Australia:  According to a Bloomberg article, the Reserve Bank of Australia’s Governor, Philip Lowe, will not be reappointed when his 7-year term ends on September 17. This may not come as a massive surprise following an independent review of the central bank, which criticized some of the RBA’s forward guidance on rates during Covid and the pace of the response to higher inflation. Lowe will be replaced by Michele Bullock, who is currently Deputy Governor.   China:  June FDI data is due anytime between now and 18 July. The last reading for May showed utilized FDI running almost flat from a year ago. Given the run of recent data, it is conceivable that we see a small negative number for June, indicating net FDI outflows.   India: Trade data took a sharply negative turn in May, and today’s June numbers, while likely to show exports still falling from a year ago, may have moderated slightly from the -10.3%YoY rate of decline in May. The trade deficit could shrink slightly from the May $22.12bn figure.     Singapore: 2Q GDP surprised on the upside and settled at 0.7%YoY compared to 1Q GDP growth of 0.4%YoY.  The Market consensus had estimated growth at 0.5%YoY. Compared to the previous quarter, GDP was up 0.3% after a 0.4% contraction in 1Q23. The upside surprise to growth may have been delivered by retail sales, with department store sales and recreational services supported by the return of visitor arrivals. Services industries as a whole expanded 3%YoY, much faster than the 1.8% gain reported in 1Q.  The rest of the economy, however, continues to face challenges with manufacturing down 7.5%YoY, tracking a similar downturn faced by non-oil domestic exports as global demand remains soft.    What to look out for: China FDI, India trade and US University of Michigan sentiment China FDI (14 July) Japan industrial production (14 July) India trade (14 July) US import prices and University of Michigan sentiment (14 July)

USD/CLP: Peso continues to lag   The Chilean peso is lagging the rally of its Latam peers. The fact that Chile could be the first of the big three in the region to cut rates may be no coincidence. Here June saw the central bank warn that the easing cycle could start in the ‘short term’. A 50-75bp rate cut is now expected at the 28 July rate meeting. The central bank will cite inflation expectations anchored at 3% as the reason for the cut – even though core inflation is still 9% YoY. Chile may prove a test case for Latam FX and easing cycles. Regarding Chile’s main export, copper – we see it at neutral $8300-8600/MT this year. And we think $/CLP stays near 800.  

  US Retail Sales (Jun) – 18/07 – US retail sales growth has been broadly steady for the most part during Q2, rising 0.4% in April and 0.3% in May. All the while consumer confidence has been increasing while inflation expectations have been falling. All of this should make for a more positive headwind for US consumer spending. Expectations for June retail sales are for a gain of 0.4%, against a backdrop of a still resilient jobs market, despite concerns that the manufacturing sector slowdown will start to act as a significant drag on the more resilient services sector. Ocado H1 23 – 18/07 – having narrowly avoided being relegated to the FTSE250 in the last reshuffle Ocado shares recently jumped to their highest levels in March, as chatter about a possible Amazon bid drove speculation in the share price. One of their largest shareholders Lingotto Investment Management increased its stake in the business to 5% fuelling speculation that something might be afoot, especially given the lack of any pushback on the speculation by either Amazon or Ocado. In Q1 Ocado reported revenues of £584m a rise of 3.4% on last year, while average orders per week have risen 3.6% to 381k. Average basket value remained flat, despite a fall in basket size and a rise in active customers to 951k, a rise of 13.8% year on year. This trend continues to show that with ever rising prices Ocado customers, like a lot of other retailers, are spending more money and getting less. Ocado kept its full year guidance unchanged.           

Menu du Jour  Anyway, today, Bank of America, Morgan Stanley and Lockheed Martin will be releasing their quarterly earnings. While BoFA and Morgan Stanley's investment branches may have taken a hit, investors will be looking at how well these banks benefited from rising rates. Lockheed Martin on the other hand will undoubtedly continue outperforming as war and geopolitical tensions only keep rising and increasing the defense budgets around the world.   On the macro calendar, the US retail sales will be in focus today, as the resilience of the US consumer spending is another headache in the Fed's fight against inflation, and the data could not surprise to the downside. According to Bank of America's card data, spending in June was down by 0.2% 'but not out' and the official numbers are expected to show a slow improvement. A better-than-expected read could fuel inflation expectations and slowdown the US dollar's selloff but unless we see seriously strong data, any improvement will unlikely to turn the bearish winds around in the medium run.      

Eurozone PMI suggests worsening economic conditions The eurozone PMI suggests contracting economic activity at the start of the third quarter. Overall, this fits a trend of weakening survey indicators over recent months and increases the recession risk for the bloc. The survey continues to suggest moderating price pressures, but the impact of wages on services will remain a concern for ECB hawks. Survey data became progressively bleaker during the second quarter and the July PMI continues that trend. The June composite PMI stood at 49.9, broadly signalling stagnation, but in July the PMI dropped to 48.9, indicating contraction. Demand in the eurozone is falling for both goods and services according to the survey, with services new orders dropping for the first time in seven months while the decline in new orders for manufacturing steepened further. France and Germany look particularly bleak with output PMIs signalling contraction, which is offset slightly by the rest of the eurozone. We don’t have more details yet, but this could be due to more tourism-dependent economies profiting from a somewhat stronger summer period. Still, the positive tourism effect doesn't seem strong enough to counter weakening in the economy elsewhere. We have previously argued that the eurozone economy has been in a stagnation-type environment, and the recent two quarters of minimal negative GDP growth should not be taken as a broad recession given the strength of the labour market. The July PMI suggests that recession risk has increased though. With expectations of output weakening further, the outlook for the coming months is sluggish at best. The inflation picture coming from the survey is very similar to recent months. Price pressures are cooling, but more so for goods manufacturers than services providers. Rising wages continue to keep price pressures elevated for services, resulting in a slower downward trend. Dropping input costs are helping to bring inflation expectations down much faster for goods at the moment. This confirms our view of a materially lower inflation rate towards the end of the year but keeps hawkish concerns about the effect of wages on inflation alive.

Microsoft falls, Google jumps, Fed decides Surprise, surprise: Microsoft failed to meet investor expectations when it announced its Q2 results yesterday. Both revenue and earnings beat expectations, but the company reported a decelerating demand for its cloud computing services to 26%, and projected Azure to grow between 25%-26% for the current quarter. We are far from the 35% growth that we got used to in the good old days. Microsoft stock plunged up to 4% in the afterhours trading. Alphabet on the other hand a strong quarter for its search business advertisement, hinting that Google search withstood so far with the AI competition and its cloud business posted a 28% growth, more than Microsoft's. Google shares jumped 6% after the bell. Elsewhere, Snap tanked almost 20% as the overall sales declined and the forecasts remained short of analyst expectations, while GM lost 3.50% yesterday after raising its earnings forecast. But there is a catch: the forecast holds only if the workers don't go on a strike, and according to Evercore ISI, the chances of a strike is about 50-50. Today, Meta, Coca-Cola and Boeing will be among the big names that will report their earnings. The S&P500 advanced to the highest levels since April 2022, while Nasdaq 100 was up by 0.73% yesterday.    IMF raises global growth outlook  Zooming out, the IMF raised its outlook for the world economy this year and it now expects the global GDP to expand 3% in 2023. But it also warned that Germany will probably be the only G7 economy to suffer an economic contraction this year. Of course, the IMF also warned that there are some risks to their optimistic forecast, including the higher interest rates, the Chinese recovery that doesn't come, the debt distress and shocks from war and climate related disasters. But all in all, the US economy will likely end this year as the champion of soft landing – if all goes well.   I insist - if all goes well - because PacWest has been the latest US regional bank to succumb to this year's bank stress and its shares plunged 27% after Banc of California agreed to buy it.     Decision time!  Anyway, positiveness around the US economy is obviously giving some hawkish ideas to the Federal Reserve (Fed), which will likely announce another 25bp hike today, and warn that there could be more in the store. The US 2-year yield is in a wait-and-see more near the 4.90% level, either it will go back above the 5% with a hawkish Fed statement or it will retreat toward the 50-DMA, near the 4.65%, with a reasonably hawkish Fed statement, if the Fed opts for another 'skip' for example. The US dollar index pushes higher as expectations for other central banks soften due to the softer-than-expected economic data suggesting softer action from the likes of European Central Bank (ECB) and the Bank of England (BoE) in the coming months. The EURUSD continued its nosedive yesterday on IMF's less than ideal Germany outlook and the news that corporate loan demand plunged by the most on record in Q2, as higher rates started to bite European businesses.   Unfortunately, however, inflation expectations are getting stronger globally as the rising energy and crop prices hint that the upcoming inflation figures won't be a piece of cake. The barrel of US crude flirted with the $80pb level on Chinese stimulus hopes and the pricing of a soft landing, while wheat futures continue rising along with the escalating tensions in the Black Sea and Danube. Corn and soybean futures rise as well as hot weather in the US belt is adding to the positive pressure for corn.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

BRL: 25bp or 50bp to start the easing cycle? There is fevered speculation that Brazil’s central bank, BCB, will start its easing cycle later today. Having been pressured by the Lula administration for most of the year to cut rates, it now seems the BCB has sufficient ammunition to deliver a credible rate cut. Brazil’s congress has passed important fiscal reforms (fiscal policy always proving Brazil’s Achilles Heel) and a sharp decline in inflation has allowed inflation expectations to drop close to BCB’s target near the 3.50% area. The only question it seems for the market is whether the BCB will kick off the cycle with a 25bp or 50bp cut. Historically, when BCB makes the decision to adjust policy, it moves in large increments. Equally, BCB has been fighting the government all year and with two new additions to its board may not want to be seen as acting overly aggressively. Even though BCB has not provided much signalling on this easing (unlike the recent telegraphed cuts in Chile), we would not rule out a 50bp rate cut. The interest rates market already prices close to 500bp of easing over the next year – so may not drop too much further – but we think the Brazilian real may not need to sell off too harshly. After all, real interest rates remain hugely in positive territory and a recent sovereign rating upgrade – and lower volatility – suggest the Brazilian real will continue to be a recipient of carry trade flow.  

Rates Spark: Action at both ends of the curve In the US, we reiterate the notion that the 10yr yield can't really break lower, as there is no room to do so. So it must, in effect, head higher. While long-end EUR rates are also looking up, the Bundesbank's cut to government deposit remuneration added a twist steepening as it pressured the front-end lower.   Continue to get comfortable with the US 10yr Treasury yield above 4% We maintain our view that the US 10yr Treasury yield can remain above 4% for now. The key rationale centres on the material change in the rate cut discount that had evolved once the mini banking crisis (kicked off by the fall of Silicon Valley Bank) had materially eased. Once those fears abated, the market effectively went risk-on, and lo and behold the macro data began to perk up through June and July. That prevented the discount for Fed rate cuts from becoming overly aggressive. Effectively the fund strip is discounting a move down to 4%, but not much below. That puts a floor on where the US Treasury yield can go when looking to the downside. Remember, when Silicon Valley Bank went down, that same market discount saw the funds rate getting cut to 2.75% in 2024. That provided much more room for the 10yr Treasury yield to fall, and it did fall (to 3.3%). Things are different now though. Until something materially breaks in the economy, there will be no elevation in the rate cut discount. And in that environment, there is a more credible path towards higher market rates. Just for now. It won’t last long. We could well see the prior high in the 4.25% area. But always remember that we are just one or two dodgy observations away in some key activity datasets for it to all come crumbling down. Payrolls have just past though, and that was not weak enough. So room to test higher.   The Bundesbank remunerates government deposits with 0% starting October Starting in October, government deposits held at the Bundesbank will no longer be remunerated. The Bundesbank’s decision has raised fears of renewed collateral scarcity – after all, it was the European Central Bank’s waiver of the 0% remuneration cap on government deposits that was needed to counter the severe distortions in 2022 when ECB policy rates were lifted into positive territory. The Bundesbank had signalled its desire to return to a 0% remuneration earlier, but expectations were generally for a more gradual return in line with the ECB’s incremental adjustments of the remuneration ceiling, rather than the one-time cut by effectively 345bp we are now seeing. Affected are only domestic government deposits which currently amount to around €50bn, and which could now push back into the market for high-quality liquid collateral. The impact reaction yesterday morning was for the Schatz asset swap to widen more than 6bp towards close to 80bp, but it has already partially faded. For one, the largest part in the adjustment of government deposits away from the central bank is already behind us, as it had reached levels of close to €250bn during the pandemic at the Bundesbank alone. The changes will take effect only in October after all, so until then that still leaves uncertainty on how collateral will eventually be affected.   Flight risk: Government deposits at the Bundesbank   Today's events and market view As outlined above, in the near term we continue to see steepening risks with the US 10Y Treasury maintaining the 4% handle, all the more with this week's US issuance slate. For European rates, the Bundesbank decision turned a bear steepening into a twist steepening as the German front end was pressured lower by renewed collateral fears. But the EUR long end is also seeing upward pressure as inflation swaps are marching higher. The EUR 5y5y inflation forward rose to 2.66% yesterday, the highest level since 2010. With the ECB having toned down its hawkishness at the last meeting, it has seemingly lost a grip on the market's long-term inflation expectations. But it is only one of many measures the ECB looks at to gauge expectations. Today the ECB publishes its consumer expectations survey, which also includes a survey on prices.  In primary markets, Austria reopens two bonds for €1.5bn and Germany issues €4bn in 5Y bonds. Later in the day, the US kicks off its quarterly refunding round with a new 3Y note issue of US$42bn.

EUR: Italian banks take a breather The ECB consumer expectations survey showed another decline in inflation expectations, with those for three years ahead easing from 2.5% to 2.3%, and those for one year ahead from 3.9% to 3.4% in June. This is a welcome indication for the ECB that its rate-hike cycle is having its effect, however: a) long-term inflation expectations remain above the 2.0% target, and b) market-based long-term inflation expectation measures have recently jumped. On this second point, we suspect ECB officials were looking with concern at the 5Y5Y EUR inflation swap forward rate touching 13-year highs on Monday at 2.67%. It has now eased by around 5bp, but remains worryingly high compared to the mid-July 2.50% level, and potentially inconsistent with the end of a tightening cycle. The eurozone calendar is quite light this week, but the euro felt some pressure yesterday as the Italian government announced a surprise windfall tax on bank profits, which hit sentiment in the European equity market. Some of the initial hit on bank stocks yesterday was due to a lack of clarity on the details of the new tax: this morning, it was confirmed that the levy won’t exceed 0.1% of each bank’s asset, which has been received as positive news by Italian bank stocks and helped the euro recover some ground. The decision by the Italian government follows unanswered calls by commercial banks to raise deposit rates. This follows a similar move by Spain last year, and discussions in other major European economies. This is one interesting thread to monitor, should the Italian government's decision fuel a bank profit windfall tax debate in other countries, and/or whether banks will pre-empt facing new taxation by raising deposit rates. The implications can be non-negligible from a monetary policy transmission perspective and for the euro. In the near term, the relevance of relative equity performance for EUR/USD should keep it quite sensitive to the matter. A return to 1.10 is possible today as global risk conditions improve and bank stocks appear to find some breathing room.

Rates Spark: Energy and food inflation is ringing more alarm bells Suddenly some inflation alarms are ringing again: energy and food prices are under rising pressure, as are market inflation expectations. We'll get US CPI today, which will paint a picture for July. What's beyond that is becoming a little more nuanced and troubling for bonds.   US inflation ahead is key, but so also are the wider impulses which can trouble bonds There is heightened discussion on where we are with inflation. While the US CPI reading is key for the near term, there is also an acknowledgement that inflation expectations coming from the market discount have become a little less anchored than they had been. The 5yr * 5yr inflation rate has returned to the 2.5% area, and the inflation swaps measure of the same has it up in the 2.7% area. These are not awful levels when you consider where inflation was, and at least these expectations are still comfortably below 3%. But it’s the path they’ve been on that creates the issue, as that path has been pointing upwards. At the same time, there is an ongoing rise in food and energy prices in play, which risks adding to headline pressure down the line. Given this backdrop, the US 10yr has managed to remain above 4%, and we think it should continue to do so. And remember, once we get through tomorrow’s US inflation report, we’ll likely see headline US inflation closer to 3.5% than 3% and core US inflation closer to 5% than 4%. There’s been progress made to the downside, but the burning issue for bonds is whether the inflation threat has actually been dealt a death blow. Based on the market expectations for inflation, it hasn’t. For that reason, we stick to our cautious approach to bonds, eyeing higher yields. We also remain under considerable supply pressure this week. Decent US 10yr auction yesterday. Minor tail, virtually none. High indirect bid, and reasonable cover. Not as good as the 3yr. But it did not tail, as some had feared. The 30yr auction is up next.   Market's long term inflation expectations still trended higher     Risk to inflation outlook also sets floor to EUR rates In the eurozone, the upward leg in the longer-term inflation swaps over the past weeks up until the latest correction has been even more striking. Although other measures, such as the European Central Bank surveyed consumer inflation expectations, have displayed further moves in the right direction earlier this week, the recent swings in the price for natural gas also highlight the lingering risk of supply disruptions to the more benign inflation dynamics of late. The ECB may have sounded less determined at the last meeting, not having pre-committed to a hike in September. But one should not underestimate the ECB’s resolve and persistence. Markets are still seeing a 70% chance for one more hike, even if a bit later than September. Further out, though, there is already a full discount of three 25bp cuts over 2024, which suggests not too much room for pricing in more.   Collateral scarcity remains a sensitive topic Bunds moderately cheapened relative to swaps on the back of an ICMA official’s opinion that the ECB would not follow the Bundesbank’s lead in cutting the remuneration of government deposits at the central bank to 0%. That would mean starting in October, only the roughly €50bn sitting at the Bundesbank would be impacted, but not the remaining around €200bn with other national central banks. Until October, the actual impact of the Bundesbank’s changes will remain a source of uncertainty and likely keep Bunds asset swap spreads elevated, but countering collateral scarcity fears are the ECB’s ongoing quantitative tightening, which was accelerated last month and the prospect of higher-than-anticipated issuance from Germany itself. Headlines to that end came from the government which announced yesterday that it was ramping up its climate fund from €30bn to €212bn from 2024 to 2027.      Bundesbank's government deposits are not the largest   Today's events and market view US CPI is key today. Expected are an increase to 3.3% in the headline and only a marginal decrease to 4.7% in the core year-on-year rates. This still means that the Fed’s inflation target is some distance away, although month-on-month readings of 0.2% for both headline and core point to more encouraging dynamics recently. The other release that has seen larger market reactions in the recent past is the initial jobless claims. Especially since the last official jobs data was a mixed bag, a more contemporaneous reading might get more weight to gauge the state of the jobs market. That said, consensus is looking for little change with 230k this week compared to last week’s 227k figure. Fed speakers Bostic and Harker are scheduled to speak on the topic of employment later today. In supply, the US Treasury caps off this week’s supply slate by auctioning US$23bn in a new 30Y bond.

New Zealand inflation expectations rise to 2.83% China’s inflation decreases for the first time since February 2021 The New Zealand dollar is showing limited movement on Wednesday, trading at 0.6060 in the European session. New Zealand inflation expectations nudge higher to 2.83% Like most major central banks, the Reserve Bank of New Zealand has been waging a long and tough battle against inflation by raising interest rates. CPI fell to 6.0% in the second quarter, down from 6.7%. That’s certainly good news, but let’s remember that inflation is still rising sharply and is much higher than the RBNZ’s 2% target. The central bank is also concerned about inflation expectations, which can become embedded when inflation is high and translate into even higher inflation. Wednesday’s 2-year inflation expectations release showed a rise to 2.83% in the third quarter, up from 2.79% in the second quarter. One-year inflation expectations fell to 4.17% in Q3, down from 4.17% in Q2. The data indicates that inflation expectations remain high, and that perception could make the life of policy makers more difficult in the fight to bring down inflation. The RBNZ has a long way to go before inflation falls to the 2% target, and that will likely mean further rate hikes unless inflation levels fall sharply. The RBNZ held rates at 5 .50% in July and meets next on August 16th.   China is experiencing a bumpy recovery, and that is bad news for the global economy. Commodity currencies such as the New Zealand dollar are sensitive to Chinese economic releases and a soft Chinese trade release on Tuesday sent NZD/USD lower by as much as 80 basis points. The bad news continued on Wednesday as China’s CPI for July declined by 0.3% y/y, down from 0.0% in June and just above the consensus estimate of -0.4%. This marked the first decrease in CPI since February 2021 and points to weakness in the Chinese economy, which will likely mean less demand for New Zealand exports, a negative scenario for the New Zealand dollar.   NZD/USD Technical NZD/USD continues to put pressure on support at 0.6031. Below, there is support at 0.5964 0.6129 and 0.6196 are the next resistance lines  

Rates Spark: Not enough yet for rates to fall There are good reasons to get hopeful that US inflation will continue to drop in the months ahead. But there are also good reasons for market rates not to get too carried away with this single input. Nothing has broken yet, and it probably has to before market rates can meaningly fall.   US CPI was good, but we can't get too comfortable just yet US CPI came in on track to a tad below expected. But we still have headline inflation above 3% and core inflation not significantly through 5%. The prognosis ahead is looking positive, but we need to see delivery. The jobless claims number was higher than expected, but still not at a level where we could conclude that something has broken. Given that, there remains a net impulse for market rates to rise some more. While this seems at odds with the notion that the Fed has likely peaked and the European Central Bank is not far behind, there is also an ongoing nagging elevation in inflation expectations. So, while inflation rates have certainly eased lower, and will likely continue to do so, market expectations coming from 5yr/5yr forward rates have in fact been edging higher. This may or may not manifest in a re-acceleration in actual inflation down the line, but it in any case presents an issue for central banks to keep an eye on. The US 30yr auction tailed by 1.4bp. Not great, especially as a concession has been built into the curve ahead of time. Cover was not great either, but perfectly acceptable. A decent indirect bid though. Overall not the best auction, but safely away. The 10yr US Treasury yield is managing to just about remain in the 4% area and the 10yr Bund yield is holding in the 2.5% area. Our central opinion here is for market rates to remain elevated, with a mild tendency to test higher. A lot of this is a reflection of US macro robustness and heavier US supply. While circumstances are weaker in the eurozone, the pull of Treasury yields should dominate, especially with the spread already at a wide enough 150bp between Bunds and Treasuries. We also note that this US macro robustness has acted to pare lower future rate cut expectations. This too is containing the degree to which longer tenor market rates can fall. In due course, the US economy is liable to break as the various pressures hitting it will cumulate and hurt. And this will ultimately correlate with market rates falling by the time we get to the fourth quarter of this year. As a guide, expect the US 10yr to remain above 4% for now with a tendency to edge higher, but then to be targeting the 3.5% area by the turn of the year. Eurozone market rates should follow a similar trend.   Net impulse is for US rates to rise more and EUR rates to feel it too   Today's events and market view The US CPI was broadly in line with expectations which feeds expectations that the Fed will stay on hold in September. To corroborate the unfolding goldilocks scenario, markets will look to the PPI release and the University of Michigan consumer sentiment survey today. The PPI headline is seen somewhat higher though, also on a month-on-month basis. The Michigan survey’s measured 1Y ahead inflation is seen a tad higher as well at 3.5%, while sentiment itself could ease lightly. After this morning's UK GDP figures, the eurozone will see the release of final July CPI data for France and Spain.  At the end of the day, it was the 30Y auction that nudged the 10Y UST yield more decisively above 4%. Looking into next week, we are spared further auction supply in the US. In data, markets are looking for a slightly firmer retail sales release and housing indicators. Markets will also parse the FOMC minutes against the background of the new data since the July meeting. Recent comments by the Fed's Bowman and yesterday by Daly bring back to mind that the Fed had indeed kept its bias to do more.

FX Daily: Dollar benefits from a lack of alternatives The US remains on an encouraging disinflation track, but the dollar is not turning lower. This is, in our view, due to a lack of attractive alternatives given warning growth signals in other parts of the world (such as the eurozone and China). Evidence of a US economic slowdown is needed to bring USD substantially lower.   USD: Disinflation not enough for the bears July’s US inflation numbers released yesterday were largely in line with expectations, reassuring markets that there are no setbacks in the disinflationary process for now. Core inflation inched lower from 4.8% to 4.7%, while the headline rate suffered a rebound (from 3.0% to 3.2%) due to a reduced base effect compared to previous months, which was still smaller than the consensus of 3.3%. With the exception of resilience in housing prices, price pressures clearly abated across all components. All in all, the US report offered reasons for the Fed and for risk assets to cheer, as the chance of another rate hike declined further. Equities rallied and the US yield curve re-steepened: the dollar should have dropped across the board in this scenario. However, the post-CPI picture in FX was actually more mixed. This was a testament to how currencies are not uniquely driven by US news at the moment. The Japanese yen drop was not a surprise, given abating bond and FX volatility, equity outperformance and carry-trade revamp, but FX markets seemed lightly impacted by CPI figures and the subsequent risk-on environment, as many high-beta currencies failed to hang on to gains. From a dollar point of view, we think the recent price action denotes a reluctance to rotate away from the greenback given the emergence of concerning stories in other parts of the world. This is not to say that the activity outlook in the US is particularly bright – jobless claims touched a one-month high yesterday, and the outlook remains very vulnerable to deteriorated credit dynamics – but if economic slowdown alarms are flashing yellow in Washington, they are flashing amber in Frankfurt and Beijing. Chinese real estate developer Garden reported a record net loss of up to $7.6bn during the first half of the year yesterday, at a time when China’s officials are trying to calm investors’ nerves about another potential property crisis. Back to the US, PPI and the University of Michigan inflation expectation figures out today will clarify how far the disinflation story has gone in July, but we still sense a substantial dollar decline is not on the cards for the moment, or at least until compelling evidence of slowing US activity makes the prospect of Fed cuts less remote. DXY may consolidate above 102.00 over the next few days.

Resilient US retail sales fuel inflation expectations, Fed hawks  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Americans continue spending and that's bad news for the entire world. Announced yesterday the July retail sales data came in better-than-expected in the US. Sales grew 0.7% on a monthly basis and more than 3% on a yearly basis - the biggest figure since January, when sales soared by 3% as well. Amazon's Prime day apparently helped boost online sales, while demand for bigger items including furniture and auto parts declined. But all in all, the American consumer spent 3% more compared to a year ago, Home Depot reported small earnings beat yesterday and its CEO confirmed that 'fears of a recession have largely subsided, and the consumer is generally healthy... while adding that 'uncertainties remain'. Uncertainties remain, yes, but the resilience of the US consumer spending sapped investor sentiment by fueling inflation expectations and Federal Reserve (Fed) hawks, yet again. The US 2-year yield spiked above the 5% mark, but bounced lower, certainly helped by a big drop in Empire State manufacturing in August, the 10-year yield flirted with 4.30%, while major stock indices fell. The S&P500 closed below the 50-DMA, which stands at 4446, Nasdaq 100 remained offered below its own 50-DMA, at 15175, while Russell 200 slipped below the 50-DMA.  In the FX, the strength of the US consumer spending is reflected as a stronger US dollar across the board. The US dollar index remains bid, while Cable bulls resist to the bears around the 1.27, and above the 200-DMA, which stands near 1.2620, as the data released yesterday showed that wages in Britain accelerated at a record pace. Happily, this morning's inflation data poured some cold water on the fire, as the CPI fell from 7.9% to 6.8% in July, as expected, yet core inflation remained steady at 6.9%, while the core PPI came in higher than expected. On the food front, grocery prices also fell more than 2 percentage points to 12.7%. But 12.7% is still a very high number. As a result, odds for a 50bp hike at the Bank of England's (BoE) September meeting is given a 1 over 3 chance, the 2-year gilt yield is back above 5%, and looks like it's there to stay, as the peak BoE rate is seen at 6%.       Across the Channel, the 10-year bund yield is also pushing higher near a decade high, and all eyes are on the European GDP and industrial production data this morning. The European economy is weakening due to the rising rates, tightening credit conditions and high energy prices, but the fact that the labour market remains tight in Europe as well remains a major concern for inflation expectations for the European Central Bank (ECB), which will let the economy sink further if it doesn't take further control over inflation. Therefore, the EURUSD will certainly react negatively to a weak European data set today, and the pair could re-test the minor 23.6% Fibonacci retracement level, at 1.0870, but figures more or less in line with expectations should not change the ECB's hawkish tilt. The problem is, there is nothing the ECB could do - other than restricting financial conditions - regarding the energy and gas prices – which move parallel to completely external factors like the Ukrainian war and labour strikes in Australia.   In this sense, the Dutch TTF futures were again up by 12% yesterday, while US crude tanked near the $80pb level, pressured lower by 1. the surprise Chinese rate cut's inability to spark interest in risk assets, 2. news that China's imports of sanctioned Iranian hit a record high of 1.5mbpd this month - that oil trading at around $10 discount to Brent and 3. the latest data from the API hinting at an almost 7mio barrel decline in US crude inventories last week. The more official EIA data is due today, and the consensus is a 2.4 mio barrel fall. US crude could well slip below the $80pb on slow growth concerns, but Saudis will fight to keep the price above $80pb in the medium run.     Back to the inflation talk, the recent rise in energy and food prices is concerning for the euro area's inflation in the next readings. Therefore, the falling inflation trend remains in jeopardy, as the discussion of an ECB pause on rate increases.     The Reserve Bank of New Zealand (RBNZ) held its cash rate unchanged for the 2nd consecutive month but warned that there is a risk that activity and inflation measures do not slow as much as expected, and that they won't be cutting rates until the Q1 of 2025. The kiwi extended losses against the greenback, but the selloff remained contained.      Due today, the FOMC minutes will likely show that the Fed officials remain cautious despite the latest fall in inflation numbers, for the same reasons: rising energy and food prices that are sometimes driven by geopolitical events and that the Fed could only watch and adopt. The Fed is expected to hold fire on its rates in the September meeting, but nothing is less guaranteed than the end of the tightening cycle before the year end.      

Rates Spark: Risk-off as a contributor Firm US retail sales were enough to cause the risk-off theme to sustain itself. And should we morph to risk-on, market rates are likely to come under upward pressure. Damned if you do, damned if you don't for market rates, at least for now.   Risk-off is managing to temper room to the upside for yields just for now The risk-off mode of late has become a central containment factor for US Treasuries. Had it not been for that, US Treasury yields would most likely have hit higher levels in the past few weeks. We also know there have been some solid inflows into Treasuries as a theme in the past month or so. There have also been ongoing and material inflows into money market funds. Against that backdrop there has been the build of a risk-off preference in both credit and equities. It’s not been severe, but it’s been there. US data released on Tuesday was all over the place. Yes, there was manufacturing survey weakness, but that’s not new. We’ve had that practically for a year now, and still no macro-wide recession. There was also a fall back in the housing market index. This had shown a remarkable tendency to rise in recent months, but then snapped back to its long-run average at around 50 for August. The big surprise though was retail sales, which were strong for July. Too strong for the Fed to consider easing up just yet. Hence the risk-asset heaviness. This week is shaping up as one that will likely see the US 10yr consolidate at comfortably over 4%. It’s been in the 4.15% to 4.20% area in the past couple of days, with mild breaks above. It may well consolidate a bit from here. Unlikely to break back below 4.1% for now, and more likely to trek up to the 4.25% area and then 4.3%. At that point the issue is whether it gets bought into enough to manifest in a rally, or whether it pushes on towards 4.5%. It’s still to early to look that far, but the odds currently remain in favour of the latter.   A drag on the latest leg higher in yields   FOMC minutes against the backdrop of brewing inflation expectations Officials’ views on what the next steps of the Fed ought to be had been more diverse of late, with some seeing the need for more hikes, others stressing a lot had been done already. But given the resilience of the US economy, especially the consumer, and the brewing of longer-term market inflation expectations over recent weeks, the discussion of whether enough has been done to tackle inflation may gain more traction. Yesterday, it was the Fed’s Neel Kashkari who posed that question more explicitly. A pause in September still remains the base case also for markets, especially after the latest benign inflation print. Rather than pricing in hikes, the question now is more about how long that pause will last. Obviously all eyes are on the upcoming Jackson Hole symposium starting on 24 August for the next policy directives. Today, we will get the minutes of the July FOMC meeting, in which the Fed hiked by 25bp and retained a bias to do more. If that hawkish sentiment is reflected in the minutes it may well resonate with current market sentiment.      Markets price a Fed on hold, followed by cuts starting in the first half of 2024 Today's events and market view Poor risk sentiment finally caught up with rates, but it also looked like investors were covering their short positions. Initially, yesterday's upside surprise in UK wage growth data set the bearish tone for rates, but dynamics switched after the strong US retail sales data. This morning's UK CPI figures surprised slighly to the upside again, but it appears the market's focus is shifting - with China risks top of mind and the recent rating agency warnings around US banks, this time from Fitch. Ahead of this evening's FOMC minutes, markets will also have US housing starts as well as industrial production data to digest. In Europe, we will see 2Q GDP readings and also industrial production data.  In primary markets, the focus is on Germany’s €2.5bn 30Y bond auctions

Philippines central bank carries out another hawkish pause Bangko Sentral ng Pilipinas kept policy rates unchanged amid slowing growth momentum.   BSP extends pause The Bangko Sentral ng Pilipinas (BSP) kept policy rates untouched at 6.25% today. Governor Eli Remolona was likely mindful of the slowing growth momentum after second-quarter GDP dropped to a disappointing 4.3% year-on-year pace (the market consensus was 6%). BSP expects inflation to slow further in the coming months with headline inflation expected to settle within target by the fourth quarter.  Remolona however retained his hawkish stance, reiterating his readiness to hike policy rates if necessary while remaining data-dependent. The BSP pushed up its inflation forecast, likely due to the developments in global energy and food prices. BSP now sees inflation settling at 5.6% (from 5.4% in June) for 2023 and 3.3% (2.9%) for 2024.   BSP keeps rates steady for third consecutive meeting   Despite pause, BSP retains its hawkish bias This was the first policy meeting of the newly-minted Governor Remolona. He decided to extend BSP’s pause for a third consecutive meeting, looking to balance out the need to support fragile growth momentum while also keeping rates at restrictive levels to fend off budding price pressures.  Despite the pause, Remolona made sure to retain his hawkish bias, vowing to quickly resort to potential rate hikes in order to help anchor inflation expectations. BSP will likely be monitoring the upside risks to the inflation outlook such as potential wage hikes, rice price adjustments and the rising cost of imported energy for future policy moves. Furthermore, we expect Remolona to be monitoring the spot market, given its potential pass-through impact on inflation.  We expect BSP to retain policy rates at these levels for the remainder of the year as the central bank looks to balance the risks to growth and inflation. However, we could see BSP considering a rate hike down the line should the US Federal Reserve opt to increase policy rates before the end of the year, in order to maintain interest rate differentials    

It seems that August this year will remain the worst August month in history. Since early 2023, positive sentiment in the markets has increased significantly on a wave of expectations that inflation this year will fall in the US to the target level of 2% and, in turn, the Federal Reserve will stop further rate hikes. In practice, it became clear by August that such expectations are still not justified. What is the underlying reason for the deterioration of market investor sentiment? The theme of inflation in the US, which is projected onto other countries and financial hubs, and the Federal Reserve's future monetary policy proceeding from this, remains the crucial negative factor.   Recently, a slight rebound was recorded in the annual rate of the consumer price index (CPI) from 3.0% in June to 3.2% in July that assured the US central bank to raise interest rates by another 0.25%. Then, in Fed Chairman Jerome Powell and some policymakers of the rate-setting committee signaled another increase in the federal funds rate, although before that the regulator had refrained from raising rates. Of course, investors could not ignore such prospects in monetary policy, which led to a protracted downward correction in the stock markets and enabled growth in Treasury yields. At the same time, the ICE dollar index continues to move in a sideways channel, albeit slightly declining since the beginning of this year. Since mid-July, the index has notably recovered after a local breakout of a strong support level of 100 points. So, the investor community lack understanding about what will happen to inflation in America, whether it will continue to grow or resume its decline. Besides, investors are discouraged by regular threats from Fed policymakers about the possibility of further interest rate hikes.   Therefore, a fog of uncertainty descended on the markets, which set the stage for the decline in local and global stock indices. We believe that until the publication of August data on consumer inflation, which will serve as a benchmark for the Federal Reserve, the current market environment will not change. In this case, we expect a lower corrective decline in the US benchmark stock indices.   Treasury yields are likely to continue their growth. However, but at the same time, the ICE US dollar index may remain in a rather narrow range of 101.00-105.00 until the end of the month, unless, of course, Powell will not tell the markets anything new regarding the prospects for monetary policy at the symposium in Jackson Hole, Wyoming, which will be held later this week. An unexpected message may come as a big surprise for investors, since in general they do not foresee anything from the Federal Reserve's leader yet.     Intraday outlook USD/JPY The currency pair is consolidating above the level of 145.00. If the price falls below this level, there is a possibility of a limited decline towards 144.20. XAU/USD The price of gold remains under pressure due to the general negative market sentiment and expectations of another Fed rate hike, but the instrument may grow locally if it does not slip below 1,884.00. In this case, we should expect gold to rise to 1,900.50. 8

Rates Spark: A wedge between US and EUR rates 10Y UST yields have tested 4.36%, with the gap to Bunds opening further. The flash PMIs today shine a light on the contrasting macro backdrops. This is also reflected in real rates having been the driver of the US dynamic of the sell-off, while inflation expectations have played a greater role in EUR.   PMIs today shine a light on the contrasting macro backdrops Upward pressure on rates remains persistent, keeping the 10Y UST yield above 4.3%. Yesterday we also saw the gap to 10Y Bunds widening somewhat, perhaps already in anticipation of the flash PMIs released today. They are set to highlight the contrasting macro backdrops between the US and the eurozone. The eurozone PMIs are expected to show that the economy is increasingly feeling the weight of the European Central Bank’s tightened monetary policy. And that weakness could spread to the services sector, which has so far been relatively resilient while the reading for the manufacturing sector has been in contractionary territory for a year now. A decomposition of the current upward leg in rates, i.e. the rise in 10Y nominal rates since around mid-July, highlights the different narratives underlying the moves in the US and Europe. While in the US the change was mainly driven by the real component, which also reflects expectations of growth, the more moderate rise in EUR rates was largely driven by the rise of the inflation component. That is also likely to cause some headaches at the ECB as it might call into question the bank’s inflation fighting credentials. It has to be seen whether the PMIs today can extend that theme of divergence after the 10Y UST/Bund spread has now widened to 167bp already. There have also been other factors such as supply driving the wedge. For the US that theme had shifted back into focus with the Fitch downgrade of the US and increased issuance prospects, and crystallised in the weak 30Y auction two weeks ago. Tonight the sale of a new a 20Y bond still looms large. But also in the eurozone supply activities are starting to emerge from the summer lull.   Unlike in the US, the sell-off in EUR rates was driven more by inflation   Today's events and market view The main event today is the publication of the preliminary PMIs for August. For the eurozone, the consensus expect the manufacturing PMI to remain unchanged in contractionary territory at 42.7. The services sector is seen further losing momentum with the PMI declining from 50.9 to 50.5. In The US we will also see new home sales data being released. In European primary markets Germany will auction €3bn in 7Y Bunds. Finland will sell a new 5Y bond via syndication. Supranational, Sovereigns and Agencies will see the EFSF tapping a 3Y bond and sell €2bn in a  new 15Y bond. The main focus, as the US remains at the helm of the push higher in rates, will be the new US$16bn 20Y bond sold by the US Treasury tonight. Shortly before that the Treasury will also sell a 2Y floating rate note.

US Treasury yields continue to rise, with 2-year bonds exceeding 2% for the first time since 2009, the 10-year rate at its highest since 2007, and 30-year T-bonds setting a record.   On the one hand, the increase in Treasury yields indicates a decrease in risks, as a sell-off in bonds means a sell-off in risky assets. On the other hand, the burden on the US budget increases, and inflation expectations can grow again at any time. The risks on the path of inflation moving to the target level remain high.   The main threat to New Zealand and Australia is China's economic slowdown. Financial stress is increasing, and there are signs that China is heading towards a full-blown financial-economic crisis. The Chinese authorities have tools to prevent such an outcome, but a slowdown in GDP growth is almost inevitable, resulting in a decrease in foreign trade volumes. NZD/USD As expected, the Reserve Bank of New Zealand left the rate at 5.5% at the meeting that ended last week. The tone of the accompanying statement unexpectedly gained an additional hawkish tilt due to a slight increase in the rate forecast (by 9bps). The GDP and inflation forecasts changed little, but the updated OCR track from 0.25% indicates that the RBNZ does not consider the current level as sufficiently restrictive as it did three months ago.     The risks for the New Zealand economy are diverse and to some extent offset each other, but in some cases, they intensify. High net migration is a good thing for the labor market, as the increase in labor supply will raise the unemployment rate but simultaneously allow wage growth to be contained, an essential criterion in the fight against inflation. At the same time, domestic demand is getting weaker, despite the influx of migrants. Exports fell by 14% YoY in July, while a decrease of only 4% was expected.   Imports fell by 15% (forecast 8%), partly due to lower global commodity and goods prices. On Thursday, a quarterly retail trade report will be published, which will serve as the basis for the forecasts for consumer demand. The net short position in the NZD increased by $123 million during the reporting week to -$145 million. Market positioning remains neutral with a slight bearish bias. The price is certainly falling, with no signs of a reversal.   A week earlier, we identified the support zone of 0.5870/5900 as a target, the pair has reached this target, and from a technical perspective, a bullish correction is possible. The nearest target is 0.5975, followed by 0.6010. At the same time, the primary trend remains bearish, so in the long term, after the corrective phase has ended, we expect another wave of sales, with the target being the support zone of 0.5830/50.     AUD/USD Australia's economic calendar for the week is calm, with no significant economic reports to take note of. The next week will be much more saturated - on August 29, Reserve Bank of Australia Deputy Governor Michele Bullock will speak, and we can look forward to several reports, including the monthly Consumer Price Index for July, retail sales, and investment dynamics for the 2nd quarter, which will allow a preliminary assessment of GDP growth rates. The RBA rate forecast assumes another increase in November, as the RBA will likely respond to rising business costs, rent, and energy prices. Inflation is declining more slowly than in the United States. The net short position in the AUD increased by an impressive $620 million over the reporting week and reached -$3.45 billion, with market positioning firmly bearish. The price is below the long-term average but has lost momentum, suggesting an attempt at a corrective phase.  

TRY: Will 250bp of CBT tightening be enough? The Central Bank of Turkey (CBT) meets today to set interest rates. In focus will be the pace at which monetary policy is tightened as new central bank governor Hafize Gaye Erkan pursues more orthodox monetary policy. So far, it is fair to say that the pace of policy tightening over recent months (900bp) has disappointed market expectations. And another 250bp rate hike to 20% in the one-week repo today would still leave real rates deeply in negative territory given inflation is running at close to 50%. As ING's Chief Economist Muhammet Mercan writes in his detailed preview of the meeting, the more modest tightening can perhaps be explained by the central bank looking at a variety of adjustments in the unorthodox tools and quantitative tightening to complement the rate hikes. There is also some speculation that the pace of rate hikes could possibly quicken given three newly appointed members to the Monetary Policy Committee. What does this all mean for the Turkish lira? While 35% implied yield through the three-month forwards does make the lira a high yielder, it does not seem as though the lira has yet attracted international demand for the popular carry trade. If the central bank can bring inflation and inflation expectations down, making real rates far less negative, then the lira could start to find some broader support. Otherwise, gradual depreciation on the back of high inflation looks to be the most likely path.

Asia Morning Bites Tokyo inflation for August dips slightly on base effects. Asian markets await the outcome of Powell's Jackson Hole speech.   Global Macro and Markets Global markets:  Pre-speech nerves? US equities reversed Wednesday’s gains on Thursday. The S&P 500 dropped by 1.35% while the NASDAQ fell 1.87%. Equity futures are non-committal ahead of Powell’s speech today.  Chinese stocks put in a rare up-day on Thursday. The CSI 300 rose 0.73%, and the Hang Seng index rose 2.05%, though this may have been following the earlier US lead, and could reverse today. US Treasury yields moved a little higher yesterday after Wednesday’s large falls. The 2Y yield is back above 5% now at 5.023%, while the 10Y yield regained 4.5bp to reach 4.237%. That’s still about 13 bp off the recent high.  The increase in yields was enough to push the USD stronger against the G-10 currencies yesterday, and EURUSD is now down to 1.0799. The AUD reversed all of Wednesday’s gains falling to 0.6415, Cable has dropped below 1.26 and the JPY is back up again to just under 146. In Asia, the KRW benefited from the BoK’s hawkish pause, and has gapped down more than a per cent to 1322.35. The TWD was also among the gainers, moving down to 31.786. The VND was weaker again yesterday, rising to 24008 as it looks to recalibrate against the CNY against which it has appreciated this year. The CNY was roughly unchanged on the day at just under 7.28.   G-7 macro:  Today’s Powell speech will get a great deal of scrutiny and there has already been a lot written about what he will say, with the majority view being that he will tread a cautious path with respect to any further potential tightening, looking for confirmation from the totality of the data before committing to any additional hikes. Lots of comparisons to the Greenspan “risk management” era are being wheeled out. At the same time, the Fed pundits are also saying that he will not want to suggest that there is any pre-set path for easing. We will know soon enough how well markets take his comments. The fact that this speech is scripted, and there is no Q&A means that room for going "off-piste" is limited. Besides this, and all the other Fed speakers this weekend, the University of Michigan publishes its August consumer confidence and inflation expectations surveys. Sentiment has been picking up recently, while the inflation expectations numbers have eased back slightly. Yesterday’s data was mixed. Weaker durable goods figures but lower jobless claims.   Japan: Tokyo inflation eased to 2.9% YoY in August (vs 3.2% July, 3.0% market consensus) mainly due to base effects and lower energy prices. Utility prices dropped to -15.0%YoY from the previous month’s -10.8%. However, core inflation excluding fresh food and energy stayed at 4.0%YoY as expected for the second month, the highest level for decades. Demand side pressures are clearly building up, suggested by inflation increases in entertainment (5.7%), transport & communication (3.6%), and medical care (2.8%). On a monthly comparison, goods prices dropped -0.1% MoM sa while services prices stayed flat. Also, higher than expected PPI services inflation (1.7% YoY in July vs revised 1.4% June, 1.3% market consensus) also reinforced the same message.   There are risks on both sides in the near future. On the downside, entertainment price pressures will be partially reduced as the summer holiday season ends. On the upside: The energy subsidy program will come to an end by September; Recent renewed JPY weakness; and rises in pipeline service prices. We believe that upward pressures will likely build a bit more significantly at least for the next few months and push up inflation again. We think inflation will exceed the BoJ’s outlook for this year and next year and core inflation excluding fresh food and energy will likely stay in the 3% range by the end of this year.   Singapore:  July industrial production is set for release today.  We expect another month of contraction, tracing the struggles faced by non-oil domestic exports, which were down 20.2%YoY for the same month.  We can expect industrial production to stay subdued until we see a turn in NODX, which should also weigh on 3Q growth.   What to look out for: Jackson Hole conference Malaysia CPI inflation (25 August) Singapore industrial production (25 August) US Univ of Michigan Sentiment (25 August)

Powell signals Fed to tread carefully, but that rates will stay high Chair Powell acknowledges that monetary policy is “restrictive” and that policymakers will “proceed carefully” in determining whether to hike rates further. September is set for a pause, but robust growth means the door remains ajar for a further potential hike. Markets see a 50-50 chance of a final hike while we think rates have most probably peaked. 2% remains the target with the Fed prepared to hike further In his Jackson Hole address, Federal Reserve Chair Jerome Powell reaffirmed that the Fed remains focused on hitting the 2% inflation target and keeping it there. He spends a considerable amount of time breaking down inflation into different components and explaining the drivers, but as is usually the case, emphasises the non-energy, non-housing services. This remains the stickiest portion given relatively high labour input costs in a tight jobs market environment. Here, “some further progress… will be essential to restoring price stability”, but the expectation is that “restrictive monetary policy” will bring supply and demand into better balance and it will come down. In fact, the description “restrictive” with regards to monetary policy is used on seven occasions in his speech with higher borrowing costs and tighter lending conditions acknowledged as factors that will act as a brake on the economy and slow inflation to 2% over time. But Powell is wary the recent strength in activity data mean that the “economy may not be cooling as expected”. In turn, this “could put further progress on inflation at risk and could warrant further tightening of monetary policy.” As a result, the Fed "are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective". Monetary policy signalled to stay tight Nonetheless, he acknowledges that monetary policy assessment is “complicated by uncertainty about the duration of the lags” between implementation and the real world impact. With real interest rates “well above mainstream estimates for the neutral policy rate” there is clearly a concern that the Fed don’t want to tighten too much. This view point was echoed in the minutes to the July FOMC meeting that said  “a number of participants judged that… it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening”. With Chair Powell concluding that “we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data” we expect the Fed to leave the Fed funds target range unchanged at 5.25-5.5% at the September meeting. However, given the tight jobs market and strong third quarter activity the Fed will continue to signal the potential for one further rate rise before year-end in their forecast update, and will likely scale back the median forecast for 100bp of rate cuts in 2024 that it published in June.   We think rates have peaked and cuts will come in 2024 We don't think it will carry through with that final forecast hike though. The combination of higher borrowing costs, which is resulting in mortgage rates, credit card, auto loan and personal loan borrowing costs hitting two-decade plus highs, together with less credit availability, pandemic-era savings being run down and student loan repayments restarting should intensify the financial squeeze in the fourth quarter and beyond. So while the US economy may well expand at more than a 3% annualised rate in the current quarter, we expect to see a weaker performance in the fourth quarter together with further significant progress on inflation returning towards target. Our base case continues to be interest rate cuts through 2024 as monetary policy is relaxed to a more neutral footing.

Here, get more stimulus!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech was boring, wasn't it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed's will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell's comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia's stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.   What's up this week?  This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone's CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell's Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor's relaxed view on price growth – which remains slower than the BoJ's goal, but the possibility of a direct FX intervention to limit the USDJPY's upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ's incredible policy divergence versus the rest of the developed nations.   Here, get more stimulus!  The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That's lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country's biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.  Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That's partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.    

Central banks The situation with central banks looks decidedly different to the 1970s, for two key reasons. First, while the response to the initial Covid wave was huge – and in hindsight probably too aggressive – policymakers have not shied away from applying the brakes ever since. No central banker wants to be remembered as the modern-day Arthur Burns, and there’s a clear incentive to err on the side of keeping rates too high for too long. While we expect rate cuts in 2024, it’s highly unlikely that rates will return to the ultra-low levels seen before the Covid pandemic. Meanwhile, central bank balance sheets are increasingly likely to be used for targeted financial stability interventions rather than to deliver large monetary stimulus.   The other major difference is that central banks are now independent, whereas with the exception of the German Bundesbank, that largely wasn’t the case in the 1970s. This independence, as well as monetary tightening in the 1980s, laid the basis for lower inflation expectations. Since the 1980s, central bank credibility has become an important asset in the fight against inflation. Therefore, central banks will be less inclined to ease monetary policy when inflation expectations are still high. Will that change? It’s unlikely, and independence has so far survived the era of populism relatively unscathed, at least among G10 economies. High interest rates are likely to be a key topic going into elections in the US and UK, among others, in 2024. But ultimately, central banks will be reluctant to return to the days of ultra-low rates.

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. 

Food inflation finally cools in Europe after a long hot summer Food price rises are finally subsiding in Europe. We saw the first Month-on-Month decline in almost two years in July. Many branded food manufacturers, however, are reporting lower sales as shoppers turn to more affordable goods. And a combination of high food prices and sluggish growth means those volumes won't be returning anytime soon.   Extraordinary rally in consumer food prices comes to an end Food inflation rates have been cooling for the past couple of months, and July’s inflation figures even showed a small Month-on-Month decrease in the European Union. That said, food prices remain at high levels. A typical EU consumer currently pays almost 30% more for groceries compared to the start of 2021, with some considerable differences across the continent. In Hungary, prices have gone up by more than 60% since January 2021, while food prices in Ireland went up by ‘only’ 19%. Across Europe, consumers reacted by buying less, shopping more at discount supermarkets and favouring private label products over brands. The trend in the US looks fairly similar. The main difference is that 'cooling down' set in a little earlier, and the relative increase was lower compared to Europe. That's partly explained by the fact that US food makers are less exposed to the energy price shock compared to their peers in Europe. American food prices started to move sideways in the first quarter of this year; a typical American consumer currently pays 20% more for groceries compared to the start of 2021.   Food inflation reaches a plateau in the EU and the US Consumer price index for food, 2020 = 100   Is Germany really leading the way on prices? Within the eurozone, Germany has been the only country seeing consumer food prices drop for several months in a row. According to Eurostat data, prices of food and non-alcoholic beverages in Germany were 1.4% lower in July compared to their peak in March this year. This is largely the result of lower prices for dairy products, fresh vegetables, margarine and sunflower oil.   What distinguishes the German food retail market from most other European countries is that discounters have a relatively large market share. Schwarz Group (Lidl) and Aldi have a combined market share of around 30%, and other major retailers such as Edeka and Rewe also own discount subsidiaries. Given the large and competitive German market, food retailers seem to have negotiated more strongly with suppliers than their counterparts in other European countries, even at the risk of losing those suppliers. As a result, retail food prices started to drop earlier. Also, the highly competitive market delivered special sales offers for consumers since the spring. For now, German consumers are benefiting from a reversal of the price trend, and consumers in other European countries might experience a similar trend in the months ahead. However, we believe that consumers shouldn’t get their hopes up too high given that some inflationary trends in the cost base of food manufacturers and retailers are still present. That’s also why we deem it too early to forecast a prolonged period of decreasing food prices.   Modest drop in German consumer prices due to lower dairy, vegetables and margarine prices Consumer price index, 2020 = 100   Underlying costs for food manufacturers show a mixed picture Throughout 2022, almost all of the costs for food manufacturers moved in one direction, and that was up. That picture has changed when we look at some important types of costs.   Input costs are by far the most important cost category, and agricultural commodities are a major part of these inputs. Prices for agricultural inputs are moving in different directions. World market prices for wheat, corn, meat, dairy and a range of vegetable oils are down year on year, which is partly on the back of reduced uncertainty around the war in Ukraine. However, prices for commodities such as sugar and cocoa rallied considerably in 2023. The prospects of the El Niño weather effect potentially upsetting the production of commodities like coffee and palm oil in Southeast Asia alongside India’s partial export ban on rice have given rise to new concerns.We estimate that energy costs make up about 3 to 5% of the costs of food manufacturing, but this will also depend on the subsector and the type of energy contracts. Current energy prices in Europe are much lower compared to their peak in 2022, but they are still much higher compared to their pre-Covid levels. Volatility continues to linger, in part because more exposure to global LNG (Liquified National Gas) markets makes European gas markets more susceptible to price fluctuations. Uncertainty about where energy costs will be headed over winter can make food manufacturers more reluctant to reduce prices.Continuing services price inflation means companies along the food supply chain will face higher fees for the services they contract, such as accounting services and corporate travel.     Wages account for a bit more than 10% of the costs of a typical food manufacturer in the EU (excluding social security costs). Both the spike in inflation in 2022 and 2023 and the continued tightness in labour markets are leading to a series of wage increases in food manufacturing and food retail. In our view, wages will be an important driver for the production costs of food and for consumer prices over the next 18 months, given that wages go up in subsequent steps. Examples of wage increases in the food industry In the German confectionery industry, 60,000 employees get an inflation compensation of €500 in 2023 and 2024 on top of a 10-15% increase in regular wages. We see similar patterns for wage agreements at individual companies, such as for the German branch of Coca-Cola Europacific Partners. In the Dutch dairy industry, wages will increase by 8% in 2023 and another 2.65% in 2024, while the collective labour agreement in the Dutch meat industry contains a three-tiered increase of 12.25% in total between March 2023 and 2024. In France, it's expected that average wages in the commercial sector will rise by 5.5% in 2023 and 4.2% in 2024. This also gives an indication for wage development in industries such as food manufacturing.   Wages make up 13% of German food manufacturers' costs with some variation between subsectors Wage costs as a percentage of total costs, 2020     Adverse weather pushes up prices for potatoes and olive oil Following the warmest July on record, it’s evident that people are wondering to what extent weather will push up food inflation in the months ahead. The most recent monthly crop bulletin from the European Commission notes that weather conditions were on balance negative for the yield outlook of many crops and thus supportive for prices. Although the picture can be different from crop to crop and from region to region, there are certain food products where inflation is accelerating due to weather. One of the biggest victims of unfavourable weather in Europe this year is olive oil. The continued drought in Spain, and particularly a lack of rain during spring, leads to estimates that olive oil production will be down by 40% this marketing year. It will be quite difficult to find enough alternative supplies outside the bloc, given that the EU is the top exporter of olive oil. This is also the case for potatoes and potato products. Here, a wet start of the year in northwestern Europe followed by dry weather in May and June and abundant rain in July means conditions have been very unfavourable for potato yields and quality.   Food prices are likely to hover around their current levels for a while The developments in underlying costs for food producers lead us to the view that consumer food prices will likely hover around their summer levels for a while. When there are decreases in general prices, those will be the result of trends in specific categories, such as dairy, rather than being widely supported across all categories. This view is also supported by business surveys which show that sales price expectations of food manufacturers are now clearly past their peak, as you can see in the chart below.  Multiple major food companies, including Danone, Heineken and Lotus Bakeries, have signalled in their second-quarter earnings calls that there will be less pricing action in the second half of this year. However, some companies are indicating that they’re not yet done with pricing through their input cost inflation. Unilever, for example, reported that we should expect moderate inflation in ice cream in the second half of the year, for instance. In any case, we do see a likely increase in promotional activity as brands step up their efforts to re-attract consumers and boost volume growth. But given the elevated price levels and the muted macro-economic outlook, it’s likely to take a while before volumes fully recover.   European food manufacturers expect fewer price increases in the months ahead Sales price expectations for the months ahead, balance of responses       Price negotiations remain tense Food manufacturers have fought an uphill battle to get their higher sales prices accepted by their customers, such as food retailers. Negotiations in the current phase won’t be easy either because food and beverage makers will be heavily pushed by major retailers to reduce prices. Retailers that lost market share will be especially looking to secure better prices in a bid to re-attract consumers. Whether there is room for price reductions will vary from manufacturer to manufacturer depending on the agricultural commodities they rely on, the energy contracts they have and cross-country differences in wage developments. As such, explaining why prices still need to go up, cannot go down (yet) or can only go down by so much will be a significant task for food manufacturers in the coming months.

Poland set to cut interest rates in September despite double-digit inflation Even though latest figures show Poland's inflation is still in double digits, we think the country's central bank will start its easing cycle in September. CPI fell to 10.1% in August from 10.8% in July, Year-on-Year. It reflects lower food and energy prices. Core inflation's drop came in third place; we estimate that fell to 10% from 10.6%.   Polish headline CPI inflation fell from 10.8% YoY to 10.1% YoY in August, marginally above expectations (ING 10.0% YoY and consensus 9.9% YoY; the forecast range was 9.7 to 10.6%). Food price dynamics subtracted 0.8pp from the CPI, energy carriers 0.3pp and core inflation only 0.3pp. In contrast, fuel prices rose in August and added 0.6pp to the headline figure. The release of double-digit CPI means that one of the conditions for easing, which the National Bank of Poland Governor mentioned, has not been met. However, we still believe the MPC will cut rates in September. Here's why:  We are on the path to single-digit inflation in September; the data will be published after the September MPC meeting. The CPI path in 2H23 should be either close to or slightly lower than the NBP's July projection. The MPC should consider this as a disinflation scenario materialising.  The pace of GDP growth in 2Q23 was lower than the NBP's projection, and data on economic activity in Poland and Europe suggests pushing back the economic rebound instead to 4Q23, so the state of the economy in the second half of this year will still be weak. In the short term, monetary easing is supported by strong disinflationary trends in global supply chains, resulting in a large drop in companies' inflation expectations, and these trends are still stronger than the rebound in oil and wheat prices. So, we expect the NBP to cut rates by 50-75 basis points this year, and the easing cycle may well continue into 2024. However, the inflation picture in Poland is not unequivocally positive. Poland's core inflation rate is declining significantly slower than elsewhere in the region; a roughly 20% increase in the minimum wage is expected in 2024, and a sizeable fiscal loosening is planned. Once the favourable impact of falling external prices ends, it's going to be difficult to bring inflation back to target on a sustained basis. 

Central banks The situation with central banks looks decidedly different to the 1970s, for two key reasons. First, while the response to the initial Covid wave was huge – and in hindsight probably too aggressive – policymakers have not shied away from applying the brakes ever since. No central banker wants to be remembered as the modern-day Arthur Burns, and there’s a clear incentive to err on the side of keeping rates too high for too long. While we expect rate cuts in 2024, it’s highly unlikely that rates will return to the ultra-low levels seen before the Covid pandemic. Meanwhile, central bank balance sheets are increasingly likely to be used for targeted financial stability interventions rather than to deliver large monetary stimulus.   The other major difference is that central banks are now independent, whereas with the exception of the German Bundesbank, that largely wasn’t the case in the 1970s. This independence, as well as monetary tightening in the 1980s, laid the basis for lower inflation expectations. Since the 1980s, central bank credibility has become an important asset in the fight against inflation. Therefore, central banks will be less inclined to ease monetary policy when inflation expectations are still high. Will that change? It’s unlikely, and independence has so far survived the era of populism relatively unscathed, at least among G10 economies. High interest rates are likely to be a key topic going into elections in the US and UK, among others, in 2024. But ultimately, central banks will be reluctant to return to the days of ultra-low rates.  

New Zealand business confidence rises ADP Employment Change falls to 177,000 The New Zealand dollar is almost flat on Thursday, trading at 0.5958 in Europe.   New Zealand Business Confidence improves again New Zealand’s ANZ Business Confidence index accelerated for a fourth straight month in August. The index improved to -3.7, up from -13.1 in July. Business Confidence has been in negative territory for 26 consecutive months, but the August print was the highest since June 2021. The consensus estimate stood at -1.9 and the New Zealand dollar didn’t react. If the upswing continues, we should see a positive reading in the next month or two, which would be a milestone and likely give a boost to the New Zealand dollar. The business confidence report noted that inflation expectations dipped very slightly, from 5.14% to 5.06%. This is clearly incompatible with a 2% inflation target but the key question is whether the Reserve Bank of New Zealand will pause for a third straight time in October, in the hope that the benchmark rate of 5.50% will further cool the economy and push inflation lower. The RBNZ doesn’t meet until October 4th, with only one tier-1 event prior to the meeting, which is GDP on September 20th. The central bank will also be keeping a close eye on events in China, where the economy has been deteriorating. On Thursday, China’s Manufacturing PMI rose in July to 49.7, up from 49.3 in June, but this marked a fifth straight contraction.   In the US, the markets await the non-farm payrolls release on Friday. The ADP employment report fell sharply to 177,000, down from an upwardly revised 371,000 and shy of the estimate of 195,000. The ADP release isn’t a reliable precursor to nonfarm payrolls but still attracts attention as investors hunt for clues ahead of the nonfarm payrolls release. The markets are expecting nonfarm payrolls to fall to 170,000 in August, compared to 187,000 in July. . NZD/USD Technical There is support at 0.5927 and 0.5866 0.5968 is a weak resistance line. Above, there is resistance at 0.6029        

GBP: A welcome revision to GDP The UK national data office – the Office for National Statistics (ONS) – gave UK policymakers a welcome boost on Friday by revising up GDP growth in 2021 by 1.7%. That means that the UK returned to pre-pandemic growth much earlier than believed and that the revision leaves Germany exhibiting the weakest post-pandemic performance in the G7. The revision could also provide a little more fiscal headroom for the government, and we would not be surprised if speculation grew over some fiscal giveaways in the Chancellor's Autumn statement due in November.  Sterling has turned marginally better bid against the euro over recent days. Expect it to trade towards the lower end of a 0.8500-0.8600 range in the near term. It is a quiet week for UK data, but there may be some interest in Thursday's release of the Bank of England Decision Make Panel survey. Lower inflation expectations would be welcome but will not be enough to prevent the BoE from hiking 25bp on September 21st.      We do still, however, believe that the market prices about 20bp too much into the BoE tightening cycle and that sterling can soften a little in the fourth quarter. Chris Turner

Philippines: Crucial 3 could drive renewed acceleration of inflation August inflation surges to 5.3%YoY from 4.7% in previous month.   Usual suspects August inflation rose to 5.3% YoY, settling much higher than market expectations for a 4.7% YoY rise.  The usual suspects of rice and transport costs tag-teamed to help reverse a 6-month downward trend.  Rice inflation jumped to 8.7% YoY, up sharply from 4.2% YoY due to supply shortages.  Other food items also contributed to the resurgence in inflation with fish prices rising 6.9% YoY, fruits up 9.6% YoY and vegetables surging 31.9% YoY due to storm damage.  Meanwhile, transport costs, which had been a major source of downward pressure on inflation over the past 6 months, shifted back into inflation (0.2%) after posting 3 straight months of declines.  Meanwhile, inflation for services such as restaurants & accommodation, personal care and other services all posted slower inflation likely due to the lagged impact of BSP policy tightening carried out over the past few months.   Watch the Crucial 3: Rice Transport and Electricity   BSP on notice The recent uptick in inflation reverses what was a steady streak of slowing inflation.  However, with supply shocks to important food items and imported energy, we could see a resumption of price pressures building up.  President Marcos has implemented a price cap on retail rice prices in a bid to curb the surge in prices while also lowering tariffs for rice imports.  We previously noted the importance of inflation for three key commodities, namely rice, electricity and transportation and we believe the inflation path will be driven largely by how inflation for these items behaves.  The August upside surprise now has Bangko Sentral ng Pilipinas (BSP) on notice although we doubt one data point will be enough for Governor Remolona to flip back into tightening mode.  However, should inflation for these key commodities accelerate further, we believe Governor Remolona will not hesitate to hike further to get a hold of inflation expectations.    

Rates Spark: Close calls EUR rates have drifted higher, contemplating the chances of further ECB tightening. Returning US markets today could extend the momentum of the late Friday sell-off while busy issuance could add to the upward pressure. Eventually data decides for how long 10Y UST yields can be supported in the 4 to 4.25% area, with eyes this week on tomorrow's ISM services.   With the US out for Labor Day, EUR rates drifted higher at the start of the week with the usually more policy-sensitive belly of the curve in the lead. European rates' main focus remains the ECB, given the proximity of the next meeting and given that it's the final chance officials have to communicate their policy preferences ahead of the quiet period. ECB President Lagarde’s speech yesterday yielded little concrete information regarding the ECB's  next steps –  even though the speech centred around the importance of communication. She did remark that “action speaks louder than words”. While she was arguably talking more about what the ECB has already achieved, hiking rates by 425bp over a relatively short time span of 12 months, the comment surely resonates with the ECB’s hawks' current thinking about the upcoming decision. Over the weekend the ECB’s Wunsch already opined that "a bit more" tightening was necessary. Bundesbank’s Nagel delved into more technical matters around the ECB’s decision to end the remuneration of banks' minimum reserves. He argued that more should be done on reserves – if via not rates, it seems some hawks are ready to consider other options for tightening financial conditions. Important inputs to the upcoming decision are measures of expected inflation. Market based measures, such as the 5y5y forward inflation swap, have recently come off their peaks but remain mired in relatively elevated territory. The aforementioned 5y5y forward is still close to 2.6%. As ECB's Schnabel noted in last week's speech this is also a reflection of growing uncertainty surrounding the longer inflation outlook and could in turn reflect slowly eroding credibility of the ECB’s commitment to get inflation to 2%. Today the ECB will release its consumer survey which has seen 3y median inflation expectations already drop from 3% at their peak to 2.3% as of June. That is also ready close to 2%, but before the turmoil of 2022 median expectations were usually even closer to 2%. The June survey results also pointed to a more pronounced tail in the distribution, towards higher inflation outcomes.   The last ECB hike had little traction further out the curve

Rising oil prices give off a foul smell.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the European services PMI data came in softer than expected in all major euro area locations. The data showed that services sector in Italy and Spain slipped into the contraction zone in August - a month of big summer holidays where people flock to Italian and Spanish cities and beaches. The soft PMI data fueled the European Central Bank (ECB) doves and pushed the EURUSD under a bus yesterday; the pair fell to the lowest levels since the beginning of June and flirted with the 1.07 support on idea that the ECB can't raise interest rates next week when the economic picture is souring at speed. But I believe that it can. The ECB can announce another 25bp hike when it meets next week, or a faster reduction of its balance sheet, or the end of remuneration of banks' minimum reserves to tighten financial conditions, because the latest inflation figures from the Eurozone showed stagnation, instead of further easing, and the ECB will allow economic weakness to some extent to fight inflation. The most recent inflation expectations in the Eurozone showed that the next 12-month expectations remained steady at 3.4%, but the three-year inflation expectations spiked to 3.4%, and there is no reason for inflation expectations to continue easing when energy prices are going up toward the sky.

Rates Spark: Dis-inversion from the back end We rationalise why US longer tenor rates are rising – basically, the curve is inverted and getting used to discounting structurally higher rates. If so, reversion to a normal curve must mean dis-inversion from the back end. When something breaks, that will change. But for now, it's more of the same: upward pressure on long yields.   The US curve can't stay inverted forever. So if rates don't get cut, long rates must rise There are many theories swirling around as to why the US 10yr yield did an about-turn on Friday, post-payrolls. It had initially lurched towards 4%. But in a flash, it was heading back towards 4.25%. We rationalise this based on two factors. First, the curve remains very inverted, with longer tenor yields anticipating falls in official rates in the future. That’s a normal state of affairs. But as long as the economy continues to motor along, the wisdom of having many rate cuts at all is being questioned by the market. Less future rate cuts raise the implied floor being set by the Fed funds strip. That floor continues to edge higher. That’s the second (and related) rationale. Friday’s payroll report was not one that suggested anything had broken. Rather, it hinted at more of the same ahead. There are lots of stories floating around about the rise in the oil price and heavy primary corporate issuance, but we’re not convinced they are the dominant drivers. They certainly push in the same direction, but that's all – contributory rather than driving. Until activity actually stalls, there is no imminent reason for the Federal Reserve to consider rate cuts, and as that story persists, the floor for market rates is edging higher and becoming more structural at higher levels. In that environment, the only way for the curve to dis-invert is from longer maturity yields coming under rising pressure as shorter-tenor ones just hold pat. Something will break eventually, but so far it hasn’t. The path of least resistance therefore remains one for a test higher in longer tenor market rates.   Accommodating structurally higher rates as the Fed stays pat   Today's events and market views Rates are drifting higher and a busy primary market is a technical factor – though usually fleeting – that has added to the upward pressure. But it is the data that has provided markets with the waymarks, although first impressions can prove deceptive.  Today’s key data is the ISM services which is expected to soften marginally, suggesting the sector is losing momentum towards the fourth quarter. For now, it would not meaningfully alter the overall situation. Susan Collins, president of the Boston Fed, is scheduled to speak on the economy and policy. Later tonight, the Fed will also release its Beige Book with anecdotal information on current conditions in the Fed districts. In the eurozone, we will get retail sales data for July. Yesterday, the European Central Bank’s surveyed consumer inflation expectations saw a slight uptick, but this was balanced by downwardly revised final PMIs – the net impact on market pricing for the September ECB meeting was marginal. No ECB speakers are scheduled for today. In government bond primary markets, Germany taps its 10Y benchmark for €5bn. The Bank of Canada will decide on monetary policy today with no change widely expected after the economy surprisingly contracted in the second quarter.  

EUR/USD declines to two-month low Eurozone, Germany Services PMIs indicate contraction Eurozone inflation expectations steady at 3.4% The euro is back to its losing ways on Tuesday, after holding steady a day earlier. In the North American session, EUR/USD is trading at 1.0745, down 0.48%. The euro has faltered badly, losing about 2% since Wednesday and trading at its lowest level since July. Eurozone inflation expectations edge higher ECB Christine Lagarde has been talking about the importance of beating inflation but has shrugged when asked about interest rate policy. Lagarde spoke in Jackson Hole in late August and again on Monday in London, hammering home the messsage that inflation remains too high and the ECB will maintain high rates for as long as necessary in order to bring inflation back to the 2% target. Lagarde’s hawkish message in these speeches gave no hints as to whether the ECB would raise rates at its meeting on September 14th. Perhaps she is keeping the markets guessing, but another reason could be that the ECB hasn’t yet decided whether to hike or hold, with doves and hawks at the ECB strongly divided on the next move. Inflation remains high at 5.3% but another hike increases the risk of tipping the weak eurozone economy into a recession. Lagarde stressed on Monday that it was critical for the ECB to keep inflation expectations firmly anchored. I can only imagine her frustration today on reading the ECB monthly survey which indicated that inflation expectations for the next 12 months remained at 3.4% in July, and rose from 2.3% to 2.4% for three years ahead. Eurozone inflation has been moving in the right direction, but it appears that bringing it back down to target could take years.   Eurozone, German services PMI indicate contraction The services sector has helped carry the eurozone economy at a time when manufacturing continues to decline. However, the expansion in services came to a crashing halt in August as indicated in today’s PMIs for the eurozone and Germany. The 50.0 line separates contraction from expansion. The eurozone Services PMI for August was revised to 47.9 from a preliminary 48.3 points. This marked the first contraction in services activity this year and was the weakest reading since February 2021. The news wasn’t much better from Germany, the bloc’s largest economy. The Services PMI was confirmed at 47.3, the first contraction in eight months and the lowest level since November 2022. The euro has fallen about 0.50% in response to the weak services data, another painful reminder of the fragility of the eurozone economy.   EUR/USD Technical EUR/USD is testing support at 1.0716. Below, there is support at 1.0658 There is resistance at 1.0831 and 1.0889    

A sharp start to the easing cycle in Poland The direction is not a surprise, but its scale clearly is (75bp vs an expected 25bp cut). Poland joins other emerging markets in easing, despite a more risky inflation backdrop.   A 75 basis point cut On the anniversary of the last interest rate hike, the Monetary Policy Council (MPC) cut rates by 75bp. The direction is not a surprise, but its scale clearly is (we expected a 25bp cut). The MPC did not wait for inflation to fall to single-digit levels, despite this being a condition set by the National Bank of Poland (NBP) president. Also contrary to earlier declarations, the MPC did not start the cycle gradually.   A weaker GDP outlook, lower demand pressure and inflation expectations but important inflation risks omitted The main message from the post-meeting statement is that given a weaker global and Polish economic situation, the Council expects inflation to return to the NBP's target quicker than previously expected. The MPC pointed to lower demand pressures and a decline in inflation expectations. In our opinion, the Council overlooks many risks: expansionary fiscal policy, high wage growth, and the worrisome structure of core inflation (rapidly rising service prices). In addition, the post-meeting statement underlined that "a faster reduction in CPI would be supported by strengthening of the zloty", but today's decision results in the opposite move.   Thursday's press conference should provide guidance on the easing cycle The press conference by NBP President Glapiński on Thursday should underline the strategy behind the rate cut today. This may either be a one-time adjustment (the market had priced in about a 125bp cut by the end of the year prior to the decision), followed by a pause, or it is the decisive start of a longer cycle of interest rate cuts. The NBP's past track record disallows that to be settled today. Investors were surprised, as seen in the rapid zloty easing, just after the NBP decision was announced.   Short-term disinflation should continue, medium-term risks arise In theory, Poland joins the group of emerging markets that are starting to ease, but it is very different from them: core inflation is falling more slowly than in other Central European countries, while LATAM economies first brought real rates to very positive before launching their easing cycles. In the short term headline inflation should keep decreasing, but the medium-term outlook is more uncertain. The decline in inflation is due in large part to the receding of the earlier energy shock, but the deceleration in core inflation has been slow. So a further decline in inflation toward the NBP target in the medium term is not clear in our view. The labour market remains tight, resulting in upward pressure on wages. Fiscal policy also remains expansionary. In this context, we perceive the Council's decision as risky from the point of view of restoring price stability in the medium term.

Next to Italy, Portugal has also been ramping up its funding via the retail sector, although to a greater degree via short-dated instruments – savings certificates. From mid-2022 until mid-2023, their outstanding amount has increased from just over €30bn to almost €46bn. That does not appear much in absolute terms, but it means that the retail segment went from making up 11% to 15.6% of direct state debt. The last time we observed a share that high was in 2008.   Portugal ramped up its share of (short-term) retail debt instruments   It is likely no coincidence that the outperformance of Portuguese government bonds versus Spanish bonds or the overall resilience of Italian spreads versus Bunds occurred alongside a larger reliance on domestic households for funding. To be sure, it is not the only driver as for instance in the summer of 2022, the European Central Bank also revealed its Transmission Protection Instrument. But it can also be a supportive factor going into a renewed debate around the speed of the ECB's quantitative tightening.     Next week: ECB meeting and US inflation Next week is a busy one for markets, the key event being the ECB meeting on Thursday. It will be a close call, but overall we think the chance that we get another hike is greater than markets think. The upside for rates still seems somewhat limited, because it would be pulling forward the hike that markets currently view as happening before year-end with a chance of roughly 70%. We doubt that markets would readily embrace the idea of further tightening on top of that. They could sense that this is the likely end of the cycle as concerns about macro weakness gain more weight, also in the ECB’s own deliberations. Still, the ECB will probably want to counter the notion that this is the definitive end. The degree to which this is successful will determine how much of a bear flattening we could get in the case of a hike. A renewed focus on QT, in particular, could help prop up longer rates. In the US, the upcoming week will be about inflation dynamics. The CPI release is the key event here ahead of the FOMC meeting the following week. The headline is seen picking up to 3.6%, but we think that is largely in the price already. More important is what happens to the core rate, which is seen dropping to 4.3% from 4.7% year-on-year, with the month-on-month rate steady at 0.2%. We will also see the release of producer and import prices as well as the University of Michigan consumer sentiment survey with its reading on inflation expectations. The ISM services this week has highlighted lingering inflation risks, even if the overall dynamics are gradually improving. In terms of market impact, the inflation narrative seems to be driving the curve more from the front end as it determines whether more near-term action from the Fed is required.   Today's events and market view The ECB is already in its pre-meeting blackout period, and the Fed will follow this weekend. The data calendar is light today which may leave markets with more room to contemplate the busy week ahead with a US inflation theme and the chance for another, possibly final ECB hike. We think markets are still trading with an upward bias to rates. The different backdrops against which the next policy meetings are held, a position of macro strength versus a position of growing weakness, has seen UST rates more buoyant again, with the 10-year yield gap over Bunds creeping wider again to 166bp.   

GBP: Rolling lower As we discussed in yesterday's FX Daily, the market did read the latest wage developments slightly dovishly and re-priced both the Bank of England tightening cycle and sterling lower. It is quite incredible to see the Bank Rate now priced just above 5.50% next February. This terminal rate had been priced close to 6.50% just a few months ago. If we are right with our call for an ECB rate hike tomorrow, EUR/GBP could edge up towards the 0.8670 area. And given that we like a continued strong dollar in the short term, expect GBP/USD to press the 200-day moving average at 1.2430. Recall that based on speculative positioning data, both the euro and sterling look the most vulnerable to further dollar strength.

KEY MESSAGES  We think a third straight 0.2% m/m core CPI print that lowers the y/y rate to 4.3% (from 4.7%) will help firm up a pause at the coming September FOMC meeting.  While Fed officials will likely look through a gasoline-driven 0.6% m/m rise in headline CPI, higher energy prices could risk amplifying inflation expectations, which generally remain anchored but at the high end of their ranges.  We expect a continued moderation in shelter inflation and another contraction in goods prices to keep core inflation relatively subdued. We anticipate little (if any) improvement in non-housing services inflation, which we see continuing to move sideways on a y/y basis.  We see a 0.3% m/m core CPI print as more likely than 0.1%, given large contractions in several “revenge spending” categories such as airfares over the past couple of months that we think will be hard to repeat in August.   Finally, a cool summer on the inflation front Summer 2023 has been one of cooling rather than heating, at least when it comes to inflation. With core CPI having increased by annualized rates of 1.9% in both June and July, a third straight such print should help firm up policymakers’ confidence in an emerging disinflationary trend. As in June and July, we expect goods and shelter inflation to help moderate core inflation for August. Wholesale usedvehicle prices are pointing to another decline for retail prices, while higher inventory levels suggest more downside for nonvehicle core goods inflation. Meanwhile, the slowdown in market rents should continue to feed into overall shelter inflation.   On the mend, but a “long way to go”: Though moderation in these two categories – goods and shelter – may persist in August, we expect little to no improvement in the key non-housing services inflation subset. Specifically, we look for another 0.3% m/m print that should leave the y/y rate steady at 5.3%.   We do not anticipate material improvement in non-housing services inflation without a corresponding softening in the labor market. Evidence is accumulating in that direction – e.g. openings are falling as wage growth is slowing – but we think further material loosening is needed before clearing disinflation for this sticky subset of prices takes hold. Fed Chair Powell hinted at a similar view in his Jackson Hole speech, noting that while the unwindings of both pandemicrelated demand and supply distortions “are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.”    

Euro tanks after 25bp hike, Lagarde goes unheard By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Investors didn't buy the rumour of a European Central Bank (ECB) rate hike but heavily sold the ECB's intention to stop hiking the rates in the close future. The ECB raised the rates by 25bp yesterday and said that it 'now considers that the key ECB rates reached levels that, maintained for sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target'. And that was it for the euro bears. ECB Chief Christine Lagarde tried to convince investors that the ECB rates are not necessarily at their peak and that the future decisions will depend on the incoming data. But in vain. The EURUSD sank below 1.07 after the decision and the EZ yields melted as many were rubbing their eyes to understand why a 25bp hike didn't even spark a minor rebound given that the decision was not warranted, on the contrary, the expectations were mixed into the meeting!   In fact, many euro bears also jumped on a trade yesterday as Lagarde announced that the ECB significantly pulled its economic projections to the downside. BUT, in the meantime, the ECB revised its inflation expectations higher as well. Therefore, it's naïve to think that the ECB can't continue hiking rates with such a sour economic outlook. They can. They can, because they have a single mandate – price stability. As such, the market certainly remains too enthusiastically, and unrealistically dovish about the ECB. When I hear 'data dependency', I immediately look at energy prices and you know what I see there: further inflation pressures and a real possibility for further rate hikes.   Oil extends gains The barrel of US crude traded past $91 yesterday, and Brent is getting ready to test the $95pb level. The better-than-expected industrial production, retail sales data from China this morning and news that the People's Bank of China (PBoC) cut the required reserves for banks for the second time this year to boost market liquidity are giving a further support to the oil bulls looking for reasons to ignore the overbought market conditions.   But the rising oil prices are not benign, and the hawkish ECB is not necessarily positive for the euro, and here is why: the data released in the US yesterday showed that both retail sales and PPI got a decent boost because of higher gasoline prices in August. But it also showed that spending more on gasoline didn't get Americans to spend less elsewhere. And that's inflationary. Consequently, the latest developments will, at some point, awaken the Federal Reserve (Fed) hawks, and increase the risk of a further selloff for the EURUSD. There is no chance that Jerome Powell will announce the end of the rate hikes next week. He will only say that the trajectory of core inflation is soothing, but rising energy prices is a risk that they must manage. The dollar index could soon take out a major Fibonacci resistance, the 38.2% retracement on last year's meltdown (near 105.40), and step into the medium-term bullish consolidation zone. Hence the EURUSD could well be forced below a critical Fibonacci retracement, its own 38.2% level, near 1.0615.   PS: US government drama and shutdown risk could eventually soften US outlook and temporarily prevent the Fed hawks from forcefully coming back.   ARM gains 25%   In the equity markets, ARM went public yesterday, and nailed its first day on Nasdaq. The share price rose 25% and closed above $63. It wasn't as impressive as Rivian, for example which had jumped more than 50% during its first hours of trading, But hopefully, ARM will have a more stable cruise. Arm currently estimates that '70% of the world's population uses Arm-based products', in their PCs, cars, smartphones and so. And growth is the only possible direction for the chip designer with AI's sudden arrival to our lives. 

Rates Spark: Transitioning from level to duration The European Central Bank has entered the next stage - rates markets are starting to look beyond the peak, with macro concerns guiding rates lower and the curve flatter. This is in contrast to the US where macro resilience holds hawkish tail risks for the Fed, but for now also gradually lifts the floor for longer rates.   Dovish relief with the ECB peak being reached The ECB delivered a dovish 25bp hike – and, a more mechanical increase in very front-end rates aside, the rest of the curve rallied. The decision was supported by a “solid majority” of the Council. The first reason for that reaction was that the ECB basically said that it has reached the terminal rate. The ECB does add the caveat that this applies given the current assessment of all data and data dependency could still mean that rates will increase –  President Lagarde did add that one could not say key rates reached their peak. Indeed, markets are also discounting tail risks of another hike over the coming months. But for all practical purposes the ECB no longer has a bias in rates and we are at the peak as long as there no larger surprises to the underlying scenario.    The other reason for the curve flattening is that the ECB did not offer anything to prop up longer rates. As Lagarde remarked during the press conference, neither outright asset purchase programme asset sales nor shortening the pandemic emergency purchase programme reinvestment period was discussed at any point. Riskier assets reacted with relief, in particular spreads of Italian government bonds over German Bunds saw a considerable tightening with the key 10Y spread tightening more than 4bp. That still leaves it somewhat wider compared to the end of last week with the Italian government’s growing budget deficits having come under increased scrutiny. Widening risks linger, but at least the ECB is not adding to those concerns for now.   The EUR curve may flatten relative to USD Going into next week’s Fed meeting we have already seen different narratives unfolding across USD and EUR rates. After initial oscillations rates took different directions – 10Y Bund yield closing down 6bp while the 10Y Treasury rose 3bp. While EUR markets were digesting the potential end of the tightening cycle amid growing concerns surrounding the growth outlook, the US was confronted with another slate of better-than-expected data. US CPI data earlier this week had seen some of the hawkish Fed tail risk being priced out. This was now reversed with the 2Y rate crossing above 5% again, and the curve a tad flatter. It is widely anticipated that the Fed will hold next week, but at the same time it will keep another hike on the table. While cooling, for now the data does not show any signs of the economy really toppling over. It may still mean that next week will likely be the last hike of the Fed's cyclce, but at the same time staying pat for longer amid resilient data will mean that gradual steepening pressure from the back end of the curve can take over again.     Today's events and market view The post ECB meeting period is usually marked by more background reporting on the Council’s decision and members giving their personal flavours surrounding the decision. Here we will be looking in particular at any differing assessments of  inflation versus growth concerns, and indeed in a first FT article some ECB hawks have warned taht a hike is still possible if inflation and wages stay hot. But overall the ECB has been quite clear in signalling that it has now entered the next stage, shifting the focus from the level of rates towards the duration that they will now be held steady to achieve its inflation target.   In the US, before we get back to a broader bear steepening theme the market may well want to first digest the import prices as well as the University of Michigan consumer sentiment survey and its inflation expectations component to round off its assessment of inflationary tail risks. Other US data to watch are industrial production and the Empire manufacturing index.  

Markets leaning towards possibly one last BOE rate hike (implied rate peak of 5.527% at Feb 1st 2024 meeting) UK house prices tumble to lowest levels since 2009 Doji pattern possibly invalidated as bearish momentum remains   The British pound is declining as expectations grow that for the BOE to deliver one last hike as the consumer is quickly weakening.  Stagflation risks are here as housing market concerns worsen and are now accompanied with a cautious consumer who is battling rising inflation expectations. Any lessons learned from the ECB could be that the BOE will have a much worse growth outlook. The latest update from retailer, John Lewis and Waitrose signaled a tough environment as the consumer struggles with inflation and becomes cautious with big-ticket goods.  John Lewis was expected to deliver a major overhaul, but a 4% drop with online sales means they won’t be turning profitable anytime soon.  If they have to wait till 2028 to turn a profit, investors might become more skeptical about the UK consumer spending trends. Housing Woes A key UK house price index fell to a 14-year low reinforced the belief that the property slump will not be improving anytime soon given how high mortgage rates have risen and over a deteriorating outlook. Both Halifax and Nationwide are highlighting falling house prices and that trend will likely continue.   GBP/USD Daily Chart   The GBP/USD (daily chart) as of Thursday (September 14th 2023) has made a significant breakdown below multiple support levels, indicating a potential acceleration for the pair.  Price action has fallen below the 200-day SMA and could target the June low at around the 1.2310 level.  Given the recent string of upbeat US economic data points, king dollar might have one major rally before exhaustion settles in. To the upside, the downward sloping trendline that started in the middle of July provides major resistance. If price is able to close above the 1.2550, further upside could be targeted if Wall Street is convinced that the Fed has a peak in place for rates.    

FX Daily: A dovish hike ahead of a hawkish hold The ECB hiked rates yesterday but offered enough hints to convince markets this is the end of the tightening cycle. EUR/USD sensitivity to the dollar leg and – by extension – US activity data should be even higher at this point. Elsewhere, some BoJ members have reportedly pushed back against hawkish interpretations of Ueda’s comments earlier this week. USD: Starting to gear up for a hawkish Fed meeting The dovish ECB hike (more in the EUR section below) and another round of strong US activity data sent the dollar on another rally yesterday. US August retail sales rose more than the consensus (0.6% month-on-month), even though the bulk of spending growth was due to higher gasoline prices. When stripped of fuel sales, the print was a more modest 0.2%, although still higher than expected. PPI was also higher than expected, while initial jobless claims were slightly changed (216k to 220k) after last week’s big drop. With the ECB meeting now past us, market attention will shift to next Wednesday’s FOMC announcement. Evidence of slower disinflation has provided an incentive to keep one hike in the dot plot projections for the end of 2023, while resilient US data may well see a revision higher of the 2024 median plot (currently embedding 100bp of easing). We doubt that sort of adjustment would come as a shock to markets, but would further discourage bearish positioning on the dollar. Today will see the final bits of data that can move markets before the Fed meeting. The University of Michigan's sentiment indicators are expected to decline, but inflation expectations remain unchanged. Empire Manufacturing is improving, while industrial production should slow down on the month-on-month read. It looks unlikely that these releases can materially affect expectations for next week’s meeting when a hold appears a done deal, and all focus will be on new projections and forward-looking language. The next resistance for DXY is the 105.85 March high: beyond that, it would explore levels last seen in November 2022. Today is starting on a more risk-supportive tone in FX, as China’s August industrial production and retail sales both surprised to the upside, fuelling expectations that the worst may be behind us on the Chinese data flow. The dollar may correct a bit lower today, but the risks remain skewed towards further strengthening in the near term, or at least until the US activity picture starts to show some cracks.  

US industry posts solid gains, inflation expectations plunge Another respectable industrial production report while the University of Michigan reported a big plunge in inflation expectations. All this should be music to the ears of the Federal Reserve as it seeks a soft landing for the economy and a return to 2% inflation.   Decent industrial output, but strike action could weigh in coming months As with the retail sales report, the US industrial production number beat expectations in August, but the downward revisions to July means that on balance the level of activity is broadly in line with what was expected. This has been a bit of a trend of late with big prints subsequently getting some chunky downward revisions, be it in manufacturing, consumer spending, jobs or GDP. In terms of today’s numbers, US industrial production rose 0.4% in August versus the 01% expected, but there was a 0.3pp downward revision to July's growth (from 1% to 0.7%). Manufacturing rose 0.1% as expected, but there was a 0.1pp downward revisions to July from 0.5% to 0.4% growth. Auto output fell 5% month-on-month after a 5.1% jump the previous month with manufacturing ex vehicles rising 0.7%, led by a 2% jump in machinery manufacturing. Outside of manufacturing, which makes up 74% of total industrial output, utilities output rose 0.9% while mining increased 1.4%.  On balance the report is OK and is stronger than what is implied by the manufacturing ISM report, which has been in contraction territory for 10 consecutive months. However, auto output is up near record highs. Strip this out and the chart below shows there is a much tighter relationship between the ISM and non-auto related manufacturing. Today’s report won’t swing the Fed debate in either direction meaningfully. The key story for manufacturing next month will be how much the UAW strike action hits output. So far it is starting out modestly with just 12,700 on strike, but could quickly escalate and hit output hard.   ISM manufacturing index versus non-auto manufacturing output (YoY%)   US consumer inflation expectations fall sharply University of Michigan confidence fell more than expected to 67.7 from 69.5 (consensus 69.0). The perception on current conditions fell six points while expectations rose 0.8 points. Remember this index is much more responsive to inflation-related issues while the Conference Board measure of confidence is more reflective of the labour market (hence why the Conference Board suggests everything is great, with unemployment below 4%, yet the University of Michigan measure of sentiment suggests the world is on the cusp of falling apart).   Rising gasoline prices are the likely culprit depressing today's report as households feel the hit to spending power it generates elsewhere. Yet, rather bizarrely, we have some big declines in inflation expectations which should be music to the ears of the Fed. 1Y inflation expectations are down to 3.1% from 3.5% – it is actually below the current level of inflation – while 5-10Y expectations dropped from 3% to 2.7%. Both are really big surprises, but the usual caveat applies that they use fairly small sample sizes and things can swing. Nonethless, on balance this is further evidence that backs the Federal Reserve's claims that it can achieve a soft landing for the economy while returning inflation sustainably to target.

The Australian dollar continues to drift as we start the new trading week. In Monday’s European session, AUD/USD is trading at 0.6438, up 0.11%. The Reserve Bank of Australia releases its minutes of this month’s meeting. The RBA extended a pause in rates for a third month, holding the official cash rate at 4.10%. This was ex-Governor Philip Lowe’s final meeting. Lowe noted that “passed its peak” but was “still too high and will remain so for some time yet”, as he kept the door open to further rate hikes. The markets are more dovish and are looking ahead to the RBA trimming rates sometime in 2024. Investors will be looking for clues in the minutes with regard to future rate moves. Michelle Bullock takes over today as the new Governor of the RBA. Bullock is not expected to make any major policy shifts and has stated that the upcoming rate decisions will be data-dependent. The new governor will have her hands full with implementing major changes at the bank, after a government committee urged an overhaul at the central bank which is intended to streamline the Bank’s activities and create greater transparency. The US ended last week on a mixed note. The Empire State Manufacturing Index surprised to the upside, jumping to 1.9 in September from -19 in August, above the market consensus of -10. The UoM consumer sentiment index slowed to 67.7 in September, down from 69.5 in August and shy of the market consensus of 69.1 points. Inflation Expectations fell to 3.1% in August, down from 3.5% in July and the lowest level since March 2021. This is another sign that inflation is weakening and supports a pause at the Federal Reserve meeting on Wednesday. The markets have priced in a pause at 99%, according to the CME FedWatch tool, up from 92% one week ago.   AUD/USD Technical AUD/USD tested support at 0.6428 earlier. The next support line is 0.6381 0.6477 and 0.6524 are the next resistance lines  

US dollar weakness emerges on as inflation expectations fall to lowest levels in over two year; November Fed rate hike odds remain a coin flip Oil rallies for a third straight week on tightness concerns US oil rig count rises by 2 to 515 The one-way move with oil prices has finally started to provide some underlying support for the Canadian dollar.  The Canadian currency however is starting to show some signs of exhaustion as short-term risks to the outlook grow.  The short-term crude demand outlook might be poised to take a big hit but it won’t matter as the global market supply deficit will keep oil above the $90 level throughout the rest of the year.  Unless sentiment deteriorates significantly for the Canadian economy, loonie strength could persist. USD/CAD should have decent support from the 200-day SMA which resides at the 1.3465 level. Canadian Economic Data/News: Canadian house prices declined again as the impact from the BOC’s tightening cycle continues to weigh on the housing market.  Existing Canadian home sales dropped 4.% in August from July, much worse than the expected 0.2% dip.  Housing shortages however kept home prices supported, rising 0.4% to C$757,600. The Canadian economy will likely see greater efforts by the PM Trudeau to address affordability concerns.  On Thursday, the PM unveiled plans to cut federal sales tax on construction of new apartment buildings.  Canada’s economy is softening, but optimism still remains weakness will happen in an orderly fashion.       Oil After a third week of gains, crude prices are not seeing the typical profit-taking as the short-term crude demand outlook gets a boost from improving US and Chinese economic data.  Oil is surging but so far it really has been passed on to the consumer as gas prices are still below $3.90 a gallon. $100 oil is not that far away, but that might not be a one-way trade as short-term risks to the outlook could shift consumer views and attitudes. The oil market is going to stay tight a while longer, but we might need to see a fresh catalyst to send oil to triple digits.    

Rates Spark: Hawkish tail risks The week kicked off with a bearish tone in rates markets, with key central bank decisions just ahead. Ever-rising energy costs only add to fears that the inflation fight is not yet decided. ECB hawks offered more pushback against an overly dovish interpretation of last week's hike, and the focus is shifting to other means of policy tightening than just rates.   A bearish tone in markets to start the week, and a renewed discussion of the ECB balance sheet Ahead of the key Fed and Bank of England meetings, the week kicked off with a bearish tone in rates. It was, in particular, the front end that showed weakness in the US, with the 2Y US Treasury rate pushing further above 5%. The outlier was the UK, where it was more the belly of the curve and rates further out that led rates higher – perhaps it is the “Table Mountain” comparison used by the BoE’s Chief economist gaining more attention. But more broadly speaking, it could also be markets bracing for more hawkish tail risks to their longer views. With a view to the European Central Bank, which had signalled that rates had reached a level which, if held long enough, would make a “substantial contribution” to reaching the inflation goals, markets are having second thoughts about their initial dovish interpretation. Oil prices are pushing higher, EUR market-based inflation expectations, i.e., longer-term inflation swaps, are not coming down, and real interest rates still remain well below the July highs. The decline of the latter, Isabel Schnabel had cautioned ahead of the European Central Bank's meeting, could counteract the ECB’s inflation-fighting efforts. So it may not be all that surprising to see the ECB’s hawks come to suggest it was too early to call the peak, with some also suggesting now is the time to think about speeding up the reduction of the balance sheet. If rates contribute substantially to reaching the inflation target, can the balance sheet provide the minor remainder that is needed?   Next to the ECB officials’ remarks, the key piece of news yesterday was a Reuters background story that the ECB wants soon to tackle the high level of excess reserves in the banking system. Basically, there are two ways this could be done, either via raising the minimum reserve requirement for banks or via the speeding up of quantitative tightening.      According to the article, several policymakers favour raising the reserve ratio from the current level of 1%, which currently is equivalent to around €165bn, to closer to 3% or 4%. As the ECB recently also decided to drop the remuneration of required reserves to 0%, it would also have the benefit of reducing the ECB’s interest rate costs. Most saw room to phase out the Pandemic Emergency Purchase Programme (PEPP) by ending the portfolio’s reinvestments earlier. But all were 'nervous' about the potentially negative impact on sovereign spreads. The argument against outright selling of the other portfolios under the Asset Purchase Program (APP) was that it would crystallise mark-to-market losses, highlighting the ECB’s concern with interest rate costs. Perhaps the article's main take-away on quantitative tightening is that any decision might not come this year and would take effect only in “early 2024 or even later in the spring”.   The ECB still has work to do   Today's events and market view In terms of outright direction, the sell-off in Bunds could slow with 10y yields having pushed above 2.70%, which could also mean that the curve flattening has more room yet. Elsewhere, US politics, with a potential government shutdown and strike action, is muddying the outlook for US rates. It could also imply a bit more caution from the Fed. Data today includes final CPI data out of the eurozone and in the US housing starts and building permits data for August. In government bond primary markets, Finland will tap 7y and 10y bonds for €1.5bn in total. Outside the eurozone, the UK will tap the 30Y Gilt for £2.75bn and later in the day, the US Treasury taps the 20Y bond for US$13bn.    

Bullish tone dissipated last Friday, 15 September ex-post Arm’s IPO spectacularly first-day positive performance as the Nasdaq 100 had a weekly close below the 50-day moving average for the 4th time in the past six weeks. Rising market-based inflationary expectations in line with recent magnificent rallies seen in oil prices may cause the Fed to be less dovish on the timing to enact the first interest rate cut in 2024. 15,540 is the key short-term resistance to watch. This is a follow-up analysis of our prior report, “Nasdaq 100 Technical: Bearish momentum reasserts” published on 25 August 2025. Click here for a recap. The price actions of the US Nas 100 Index (a proxy for the Nasdaq 100 futures) have whipsawed in the past four weeks, it cleared above the 15,135 short-term resistance (also the 20-day moving average) as highlighted in our previous report but the bulls failed to make any headway above the 15,460/15,540 medium-term resistance and staged a weekly close below its 50-day moving average on last Friday, 15 September. Last week’s bullish hesitancy is primarily driven by the fears that the US central bank, the Fed in the upcoming FOMC meeting this coming Wednesday, 20 September together with the latest “dot-plot” release may indicate a stance or guidance that a higher level of interest rate can persist for a longer period of time after the last hike on the Fed funds rate in 2023 (either in the November or December FOMC based on interest rates futures data from CME FedWatch tool as of 18 September 2023). Rising market-based inflationary expectations may catch dovish market participants off guard Fig 1: Correlation between WTI crude oil and US 5-year & 10-year breakeven inflation rates as of 19 Sep 2023 (Source: TradingView, click to enlarge chart) A potential Fed’s guidance that indicates a persistent longer period of higher interest rates for next year that stretches beyond Q2 of 2024 due to higher oil prices that have driven up market-based inflationary expectations (5-year & 10-year break-even inflation rates) may catch the market off guard as there is a high chance of 55% for the Fed to enact its first interest rate cut in June 2024 FOMC as inferred from the CME FedWatch tool. The US Nas 100 Index falls under the “long-duration” risk asset classification that is vulnerable to a higher interest rates environment that persists for a longer-term horizon where profit margins of the top component stocks; the magnificent seven mega-caps (Apple, Amazon, Alphabet, Meta, Microsoft, Tesla & Nvidia) are primarily dependent on longer-term revenues or cash inflows that are likely to be received further far out in the future which in turn tend to have lower present values if discounted by a higher interest rate factor, hence higher opportunity costs for holding such mega-cap stocks. To offset such potentially higher opportunity costs, the current lofty valuations (forward price to earnings ratios) of these mega-cap stocks need to come down considerably either by higher earnings growth or lower share prices. If the global demand environment remains lackluster or even slips into a recession or stagflation in 2024, the latter is more likely to occur which can put downside pressure on the US Nas 100 Index. Medium-term momentum remains bearish Fig 2: US Nas 100 medium-term trend as of 19 Sep 2023 (Source: TradingView, click to enlarge chart)   Last week’s close below the 50-day moving average of the US Nas 100 Index has occurred in conjunction with a bearish momentum condition reading as indicated by the daily RSI. The daily RSI has inched downwards and shaped a “lower low” right below a former key parallel ascending support now turns pull-back resistance at the 60 level which suggests a potential resurgence of medium-term bearish momentum. Price actions have broken down below the 20-day moving average Fig 3: US Nas 100 minor short-term trend as of 19 Sep 2023 (Source: TradingView, click to enlarge chart) Last Friday’s 15 September price actions of the Index staged a bearish breakdown below its 20-day moving average and yesterday’s 18 September minor rebound seen at the start of the US session has halted at the 20-day moving average. These observations suggest that short-term bearish momentum remains intact. Watch the 15,540 key short-term pivotal resistance and a break below 15,085 may trigger a further slide towards the next intermediate support at 14,750 in the first step. On the other hand, a clearance above 15,540 invalidates the bearish tone for the next intermediate resistance to come in at 15,800 (27 July/ 29 July 2023 minor swing highs).    

... as well as in EUR The bear steepening is not confined to the US. In Europe the 10y Bund yield briefly pushed past 2.8% and the 30y hit 3%. Interesting to note is that this happened with longer term inflation expectations actually dropping, so entirely real rate driven. Risk assets of course are not liking it. In European sovereign space this has seen Italian bond spreads over Bunds prolonging their widening leg, taking the 10y spread to 186bp today. But overall widening was a moderate 2bp in relation to the 5bp outright move today, also considering it was largely directional widening since the start of this month. But at the same time that widening over the past week also happened alongside implied rates volatilities coming down, which should normally support spread products. Implied volatility has picked up a tad over the past few sessions but still remain at their lowest since June. In part, it may be the explanation why Bund asset swap spreads (ASW) have remained relatively tight as they mirrored that broader move. That is still notable though, as a lot of the factors traditionally driving the Bund ASW are on the move, and pulling in different directions. Risk sentiment as measured by sovereign spreads has been one factor, but its influence seems muted, with other risk measures like volatility being down. The European Central Bank’s chatter about quantitative tightening has become louder, but the additional effective net supply that a speedier unwinding of the ECB’s bond portfolios implies may take more time to actually realise. More near term, supply could actually still drop, when the German debt agency updates its quarterly funding plan today. And starting next week government deposits currently still sitting on the Bundesbank’s balance sheet will no longer be remunerated and could hence push into the market for high quality collateral.   10Y yields are on long term highs, but the curves still have room   Today's events and market views The data calendar for the US already gets busier with the releases of house price data, new home sales numbers and the Conference Board consumer confidence survey as highlights today. The European data calendar has less on offer but we will see quite a few ECB officials making public appearances, including chief economist Lane and Austria’s Holzmann. Government bond primary markets will stay busier with a 10Y tap out of the Netherlands, a 5Y tap from Germany and Italian short term plus linker auctions. The main highlight will probably be the release of the German fourth quarter funding plan with cuts to the issuance target expected. The UK taps its 10y green Gilt and the US Treasury sell a new 2Y note.

How do current oil prices change our inflation forecast? Despite this not being the 1970s, expectations of further disinflation will be impacted by higher oil prices. This could result in a slower decline of inflation to 2%. Given that our expectations for oil prices do include a drop in the first half of 2024 again, the effect on our own forecast is rather moderate. Plus, a smaller decline in energy prices has materialised this year compared to expectations (which impacts next year’s base effects). Assuming oil prices stay at 95 USD/b for all of 2024, however, the headline figure would rise by 0.3 pp next year, with a peak of the energy price contribution of 1 ppt in the second quarter. At the same time, higher oil prices would probably further dent consumer confidence and spending, thereby contributing to the current disinflationary trend due to weaker demand. Indeed, the big question is whether the higher oil price will once again result in broad-based second-round effects like we saw last year. A lot of drivers of core inflation are at this point still disinflationary, with manufacturing businesses still indicating that input costs are falling despite higher wages and energy prices. And as new orders are weakening, deflation for non-energy industrial goods is realistic towards the end of the year. For services, weaker demand is also contributing to slowing inflation despite higher wage costs, according to the September PMI. Our expectations are that core inflation will slow significantly from the 5.3% August reading towards the end of the year. Still, if the labour market remains as tight as it is now and the economy bounces back a bit in early 2024, there is a risk that higher energy input costs would also put core inflation further above 2%. A lot depends on the strength of the economy in the months ahead, adding uncertainty for the ECB.   Pressure on the ECB to continue hiking Prior to the pandemic, most central banks would probably have looked past surging oil prices. Some even considered rising oil prices to eventually be deflationary, undermining purchasing power and industrial competitiveness. However, we are no longer in the pre-pandemic era, but the era of returned inflation. The ECB has emphasised in recent months that doing too little is more costly than doing too much in terms of rates. For the ECB, the recent staff projections were based on the technical assumption of an average oil price of 82 USD/b in 2024. If oil prices were to average 95 USD/b next year, this would probably push up the ECB’s inflation forecasts to 3.3% for 2024 (from 3.2%) and more importantly to 2.4% in 2025 (from 2.1%). As a result, the return to 2% would be delayed to 2026. The delayed return to 2% would not be the only reason for the ECB to consider further rate hikes. Even though the ECB would still acknowledge the deflationary nature of a new oil price shock, the risk that this new oil price shock could lead to a de-anchoring of inflation expectations will definitely add to the ECB’s concerns, making not only an additional rate hike more likely, but also that they stay higher for longer.

In order to understand how the Bank of England is going to act at the remaining two meetings in 2023, we need to consider its potential for raising interest rates. The first and most crucial indicator that the central bank (and the markets) has been relying on for some time is inflation. However, as of September, inflation remains extremely high, well above the target level. One might assume that the BoE will continue to hike rates, but in September, it took a pause. A pause can only mean two things: either the BoE is preparing to end the tightening process, or it has already completed it     BoE Governor Andrew Bailey and some other members of the BoE's Monetary Policy Committee have mentioned that they expect inflation to drop to 5% by the end of the year. A 5% inflation rate is still very high, 2.5 times above the target. If the BoE is already prepared to conclude its tightening, it may not achieve the target. Furthermore, there's no guarantee that inflation won't start accelerating again.   For instance, US inflation has been rising for the past two months. All I want to convey with these arguments is that it's still too early to assume that inflation can return to 2% at the current interest rate level. Based on that, I believe that the BoE has exhausted its potential for rate hikes, and this is the main reason for the pause in September. Now, the central bank will only raise rates if inflation starts to accelerate significantly. And in that case, the 2% target may be forgotten for several years even with a peak rate, but we could still see 1-2 more emergency rate hikes. I also want to note that the BoE (like the European Central Bank) is counting on holding rates at the peak level for an extended period to bring inflation back to 2%. This was mentioned after last week's meeting.   The Monetary Policy Committee expects inflation to slow down further, but Bailey says cutting rates would be "very premature". Four out of nine committee members voted for a rate hike at the previous meeting. In addition, the Monetary Policy Committee said its balance sheet of government debt will shrink by £100 billion. Based on the analysis conducted, I came to the conclusion that a downward wave pattern is being formed.   I still believe that targets in the 1.0500-1.0600 range for the downtrend are quite feasible, especially since they are quite near. Therefore, I will continue to sell the instrument. Since the downward wave did not end near the 1.0637 level, we can expect the pair to fall to the 1.05 level and slightly below. However, the second corrective wave will start sooner or later.     The wave pattern of the GBP/USD instrument suggests a decline within the downtrend. At most, the British pound can expect the formation of wave 2 or b in the near future. However, even with a corrective wave, there are still significant challenges. At this time, I would remain cautious about selling, as there may be a corrective upward wave forming in the near future, but for now we have not seen any signals for this wave yet.  

US and European equity futures trade mixed following Tuesday's US technology stocks led weakness after consumer confidence dropped to a four-month low and the expectations index fell below a level that in the past has signaled an incoming recession. The S&P 500 dropped to a June low as the Fed’s higher for long message drove US 10-year yields to a fresh 16-year high while the Dollar index reached a fresh year-to-date high. Overnight equities in Hong Kong gained with those on the mainland cooling after sharp gains earlier as China reported improved industrial profits Crude oil prices remain elevated adding to inflation concerns while gold trades soft near $1900. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events. Equities: The relentless rise in long-end US Treasury yields saw selling accelerate across US stocks on Tuesday with the S&P 500 dropping 1.5% to hit the lowest level since June 7. Technology stocks, which led the rally earlier this year, has been challenged all month on concerns the Fed’s higher for longer message is starting to hurt consumer confidence. A message that was strengthened after the Consumer Expectations Index declined below 80, the level that historically signals a recession within the next year. The S&P 500 will be looking for support around 4,200, the 50% correction of the March to July rally and the 200-day moving average. FX: The DXY dollar index broke higher to fresh YTD highs, having taken out the 105.80 resistance, as long-end Treasury yields continued to rise. Data remained soft, helping keep the short-end yields capped but Fed member Kashkari, who is usually a dove, noted he puts a 40% probability on a scenario where Fed will have to raise rates significantly higher to beat inflation and a 60% probability of a soft landing. USDCAD rose to 1.3528 while GBPUSD slid below 1.2150 and next target at 1.20. EURUSD plunged further to lows of 1.0556 while USDJPY is hovering close to the 150-mark as verbal jawboning continues to have little effect. Commodities: Crude oil remains rangebound with tight market conditions, as seen through the highest premium for near-term barrels in more than a year, being offset by a stronger dollar and the general risk-off tone. API inventory data showed a crude build of 1.6m barrels vs expectations of a 1.7m drop. Gold trades below $1900 on continued dollar and yield strength with focus on $1885 support while China property market concerns sees copper traded near a four-month low. Meanwhile in agriculture, El Nino has been confirmed, and it could be a strong one, potentially impacting food inflation from rising risks of droughts in Southeast Asia, Australia and Brazil-Columbia. Fixed Income. The Federal Reserve’s higher-for-longer message reverberates through higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly, or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening and less foreign investors demand, it’s not unlikely to see yields to continue to rise towards 5% until something breaks. This week, our attention turns to US PCE numbers and Europe CPI data and US Treasury auctions. Yesterday’s 2-year notes auction received good demand while offering the highest auction yield for that tenor since 2006. Yet, our focus is on the belly of the yield curve with the Treasury selling 5- and 7-year notes today and tomorrow. If demand is poor, it might mean that the yield curve is poised to bear-steepen further. Overall, we continue to favour short-term maturities and quality. Volatility: The CBOE Volatility Index jumped 2 on Tuesday to close at 18.94%, a four-month high after the underlying SPX index lost 1.5% to settle at the lowest level since June Macro: US consumer confidence fell for a second consecutive month to 103.0 from 108.7 (upwardly revised from 106.1) and beneath the expected 105.5. Present Situation Index marginally rose to 147.1 (prev. 146.7), while the Expectations Index declined further to 73.7 (prev. 83.3), falling back below 80 - the level that historically signals a recession within the next year. Inflation expectations for the 12 months ahead were unchanged at 5.7% in September. New home sales in the US fell 8.7% to 675k from 739k (upwardly revised from 714k), shy of the consensus 700k. Fed's Kashkari has published an essay where he says there is a 60% chance of a soft landing with a 40% chance the Fed will have to hike 'significantly higher'. In the news: FTC Sues Amazon, Alleging Illegal Online-Marketplace Monopoly (WSJ), Foreign brands including Tesla to face scrutiny as part of EU probe into China car subsidies (FT), Senate leaders agree on a short-term spending bill, aiming to avert a shutdown, extending government funding until November 17, pending House approval (CNN). What ‘peak oil’ will mean for China (FT), Americans finally start to feel the sting from the Fed’s rate hikes (WSJ), Exclusive: German economic institutes forecast 0.6% GDP contraction this year – sources (Reuters) Technical analysis: S&P 500 downtrend support at 4,200. Nasdaq 100 support at 14,254. DAX downtrend support at 14,933. EURUSD downtrend support at 1.05. GBPUSD below support at 1.2175, oversold, next support 1.2012. USDJPY uptrend stretched but could reach 150. Gold bearish could drop to 1,870. Brent and WTI Crude oil resuming uptrend. US 10-year T-yields uptrend expect minor correction Macro events: US Durable Goods Orders (Aug) est –0.5% vs –5.2% prior (1230 GMT), Feds Kashkari Speaks on CNBC (1200 GMT), EIA’s Weekly Crude and Fuel Stock Report (1430 GMT)

The S&P 500 and Nasdaq 100 fell 1.5% amid weaker new home sales, consumer confidence, and elevated bond yields. Amazon dropped 4% due to an antitrust lawsuit. The DXY dollar index reached YTD highs above 105.80. USDCAD rose to 1.3520 while GBPUSD slid below 1.2150 and the next target at 1.20. Gold tested $1900 amid rising yields, while Copper hit 4-month lows. The Hang Seng Index and CSI300 declined as news of China Evergrande's bond repayment failure weighed. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.      US Equities: The S&P 500 and Nasdaq 100 tumbled by 1.5% due to softer readings on new home sales and the Conference Board consumer confidence survey, triggering selling in consumer discretionary and information technology. Amazon, impacted by news of an antitrust lawsuit, plummeted by 4%. Elevated bond yields also continued to weigh on market sentiment.     Fixed income: Treasury yields continued to hover at elevated levels, with the 30-year yield edging up by 2bps to 4.68%, while the 2-year and 10-year yields held steady at 5.12% and 4.54%, respectively. The selling pressure was particularly concentrated in the longer end of the curve as the high yield levels attracted strong demand in the 2-year auction.     China/HK Equities: The Hang Seng Index and CSI300 sank once again. The news that Hengda Real Estate Group, the mainland unit of China Evergrande, failed to make payments of RMB4 billion in principal and interest due yesterday further dampened market sentiment. The Hang Seng Index plummeted 1.5% to 17,467, marking a new low in 2023. The CSI300 slid 0.6%.     FX: The DXY dollar index broke higher to fresh YTD highs, having taken out the 105.80 resistance, as high-end Treasury yields continued to rise. Data remained soft, helping keep the short-end yields capped but Fed member Kashkari, who is usually a dove, noting he puts a 40% probability on a scenario where Fed will have to raise rates significantly higher to beat inflation and a 60% probability of a soft landing. USDCAD rose to 1.3520 while GBPUSD slid below 1.2150 and next target at 1.20. EURUSD plunged further to lows of 1.0562 while USDJPY is hovering close to the 150-mark and verbal jawboning continues to have little effect.     Commodities: The message on higher-for-longer was felt in the crude market as oil prices dipped earlier in the session with WTI falling to lows of ~$88/barrel and Brent going below $92. API inventory data also showed a crude build of 1.586 million barrels last week vs. expectations of a 1.65 million drop, but oil prices recovered later. Gold tests $1900 amid yield surge and Copper down to fresh 4-month lows at $3.62.     Macro: US consumer confidence fell for a second consecutive month to 103.0 from 108.7 (upwardly revised from 106.1) and beneath the expected 105.5. Present Situation Index marginally rose to 147.1 (prev. 146.7), while the Expectations Index declined further to 73.7 (prev. 83.3), falling back below 80 - the level that historically signals a recession within the next year. Inflation expectations for the 12 months ahead were unchanged at 5.7% in September. New home sales in the US fell 8.7% to 675k from 739k (upwardly revised from 714k), shy of the consensus 700k. Fed's Kashkari has published an essay where he says there is a 60% chance of a soft landing with a 40% chance the Fed will have to hike 'significantly higher'. Macro events:  BoJ Minutes (Jul), US Durable Goods (Aug)     In the news: FTC Sues Amazon, Alleging Illegal Online-Marketplace Monopoly (WSJ) Foreign brands including Tesla to face scrutiny as part of EU probe into China car subsidies (FT) Senate leaders agree on a short-term spending bill, aiming to avert a shutdown, extending government funding until November 17, pending House approval (CNN). For all macro, earnings, and dividend events check Saxo’s calendar.  

Saudi's commitment is not written into a law By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Markets are on an emotional rollercoaster ride this week. The slightest data is capable of moving oceans. Yesterday, the significantly softer-than-expected ADP report, and the announcement that 75'000 healthcare workers at Kaiser went on strike sparked a positive reaction from the market in a typical 'bad news is good news' day. The US economy added only 89K new private jobs in September, much less than 153K penciled in by analysts. It was also the slowest job additions since January 2021. The rest of the data was mixed. US factory orders were better than expected in August, but the services PMI came close to slipping into the contraction zone, and the ISM's non-manufacturing component also hinted at slowing activity. Mortgage activity in the US fell to the lowest levels since 1995, as the 30-year mortgage rates spiked higher toward 8%. Housing and services are among the biggest contributors to high inflation besides energy prices, therefore, seeing these sectors cool down has a meaningful impact on inflation expectations, hence on Federal Reserve (Fed) expectations. As such, yesterday's soft-looking data tempered the Fed hawks, after the stronger-than-expected JOLTs data triggered panic the day before. The US 2-year yield took a dive toward the 5% mark, the 10-year yield bounced lower after flirting with the 4.90% level, while the 30-year hit 5% for the very first time since 2007 before bouncing lower on relieving news of soft job additions. Hallelujah.  The US dollar index retreated across the board, and equities rebounded. The S&P500 jumped from the lowest levels since the beginning of June. The score is now one to one. One good news for the US jobs market, and one bad news. Everyone is now holding his or her breath into Friday's jobs data, which will determine whether we will end this week with a sweet or a sour taste in our mouth. Sweet would be loosening jobs data, sour would be a still-strong jobs data which would fuel the hawkish Fed expectations and further boost US yields while the US yields are at a critical moment.   For the first time since 2002, the US 10-year yield comes at a spitting distance from the S&P500 earnings. The index is just about 60 points above its critical 200-DMA. Looking at the seasonality chart, the S&P500 could dip at about now. In this context, there is a chance that soft jobs data from the US marks a dip in the S&P500 selloff. But one thing is sure: the yields and the US dollar must come down to keep the S&P500 on a rising path. Profits at the S&P500 companies are inversely correlated with the US dollar as their international profits account for about a third of the total. If the yields and the US dollar continue to rise, the S&P500 will face severe headwinds into the year end.    Oil fell nearly 6%!  Rising suspicions that the global economy is headed straight into a wall didn't spare oil bulls yesterday. The barrel of American crude dived almost 6%, slipped below the 50-DMA ($85pb), and below the positive trend base building since the end of June. The 6.5-mio-barrel build in gasoline stockpiles last week helped bring the bears back to the market even though the data also showed a more than 2-mio-barrel draw in crude inventories over the same week.   Yesterday's move shows that what matters the most for intraday moves is the rhetoric. This summer, the market focus was on the tightening global oil supply and how the US will 'soft land' despite the aggressive Fed tightening. Now we start talking about slowing economies and recession worries.   OPEC decided to maintain its oil production strategy unchanged at yesterday's decision. Saudi and Russia repeated that they will keep their production restricted to maintain the positive pressure on oil. But if global demand cools down and volumes fall, both Saudi and Russia will be tempted to increase profits by selling more oil at a cheaper price. Saudi Arabia shouldering all the production cuts for OPEC is not written into a law, it could become uncertain if market conditions turn sour.

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

How elections and the RBNZ disinflation gamble can steer the Kiwi dollar The Reserve Bank of New Zealand is widely expected to keep rates on hold this week while awaiting new data and given the pre-election environment. The RBNZ’s assumptions on disinflation are quite optimistic, and there are risks of a November hike. Polls suggest a National-led coalition may win: NZD might benefit from a promised change in the RBNZ remit.   Growth and housing outlook not as bad as expected This week’s RBNZ announcement is widely expected to see another hold by New Zealand policymakers. A key reason is that the Bank still hasn’t seen the third-quarter inflation and jobs data, which will be released on the 16th and 31st of October, respectively. The New Zealand data calendar hasn’t, however, been totally quiet since the August RBNZ meeting. Growth figures were quite surprising: showing activity rebounded 0.9% quarter-on-quarter in the second quarter, more than doubling consensus expectations, and significantly above the 0.5% projected by the RBNZ. Also, a revision of first quarter figures indicated the country had not actually been in a recession into March.   Growth should cool again in the second half of the year, but the RBNZ’s projections of two negative QoQ GDP readings in the third and fourth quarters by the RBNZ may be overly pessimistic. The Treasury, which has generally been quite more upbeat than the RBNZ, currently forecasts no more negative quarterly GDP reads.   The house price correction, which has been a major cause for concern and might have argued for less restrictive monetary policy, has eased, largely in line with the revised RBNZ August projections. Latest monthly figures showed the house price index having declined by only 0.2% MoM, and 8.7% year-on-year, reinforcing the view that the worst of the housing correction is past us.   Housing correction has cooled off in New Zealand

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.

Rates Spark: Turning into a rout This bond bear steepening market is being driven by Treasuries, and more specifically by higher longer tenor real rates. This is painful for corporate borrowers, as higher real rates cannot be diversified away through higher prices (as could be the case if driven by inflation expectations). This puts pressure on credit markets as a result.   Too far, too fast? It's messy out there. It's not often you get a 10bp uplift in the 10-year yield in one day. We had one yesterday. And we've had over a 50bp upmove in the past three weeks. It's now at 4.8%, and looking like it's gone too far too fast. But if we don't look down, that 5% level could be with us quite quickly. It's clear also that Treasuries are a dominant driver out there. It's pulling other yields higher, is hurting equities, and is pretty immune to influence from risk off. Typically, a severe enough risk-off event would put some counterflows back into Treasuries. And there have been some. Right through the rise in yields in the past couple of months there have, in fact, been net inflows into Treasuries. But this has not been enough to dominate price action. In fact, prices have moved first, not so much in reaction to flows, but in anticipation of them. And of course in reaction to data that continues to show the US economy continuing to defy recession worries. The JOLTS data are a case in point. This measure of "job openings" had been coming off the pandemic sugar high which saw them peak out in the 12 million area. A huge level. It compares with a long-run average in the 2.5 million area. It had been falling since mid-2022, and got to below nine million last month. But the latest month shows a pop back up towards 10 million (9.6m). That's a remarkable move in light of the inflation/rates/sentiment headwinds that arguably should be impacting the economy more. And the curve continues to pull steeper (dis-inversion). As we ended the summer, the 2/10yr was in the -75bp area. It's now half that, and just 35bp away from breaking back above zero into positive territory. It's been pulled there by higher longer tenor real rates. The 10-year real yield is now knocking on the door of 2.5%, having been below 2% only a few weeks back. And importantly, inflation expectations are broadly steady. This angst mode has been driven entirely by higher real rates, and signs of underlying macro strength. Note, however, that higher real yields are also more painful than ones driven by higher inflation. The latter can be passed on through higher prices at the corporate level. But higher real rates are more difficult to "pass on". They are essentially a tax on the borrower that must be paid to get any type of re-funding done. That is arguably where the next vulnerability lies. Risk assets are reacting to this, but there is the potential for more pain here ahead, especially in the guise of wider credit spreads.   Real rates are pushing higher

Czech National Bank review: Staying on the safe side The CNB decided to wait for the start of the cutting cycle due to concerns about the anchoring of inflation expectations, high core inflation in its forecast and possible spillover into wage negotiations. The December meeting is live, but we slightly prefer the first quarter of next year. Economic data will be key in coming months.   Rates remain unchanged for a little longer The CNB Board decided today to leave rates unchanged despite expectations of a first rate cut. Five board members voted for unchanged rates at 7.00% and two voted for a 25bp rate cut. During the press conference, Governor Michl justified today's decision on the continued risk of unanchored inflation expectations, which may be threatened by the rise in October inflation due to the comparative base from last year. This could seep into wage negotiations and threaten the January revaluation, according to the CNB. At the same time, the board still doesn't like to see core inflation near 3% next year. So overall, it wants to wait for more numbers from the economy and evaluate at the December meeting, which the governor said could be another decision on whether to leave rates unchanged or start a cutting cycle   New forecast shows weaker economy and more rate cuts The new forecast brought most of the changes in line with our expectations. The CNB revised the outlook for GDP down significantly and the recovery was postponed until next year. Headline inflation was revised down slightly for this year but raised a bit for next year. The outlook for core inflation will be released later, but the governor has repeatedly mentioned that the outlook still assumes around 3% on average next year. The EUR/CZK path has been moved up, but slightly less than we had expected. 3M PRIBOR has been revised up by a spot level from the August forecast, implying now the start of rate cuts in the fourth quarter of this year and a larger size of cuts next year. For all of next year the profile is 30-65bp lower in the rate path, indicating more than 100bp in cuts in the first and second quarter next year.   New CNB forecasts   First cut depends on data but a delay until next year is likely Today's CNB meeting did not reveal much about what conditions the board wants to see for the start of the cutting cycle and given the governor's emphasis on higher inflation in the next three prints, we slightly prefer February to December. The new inflation forecast indicates 8.3% for October and levels around 7% in November and December. The last two months seem too low to us, but given the announced energy price cuts, this is not out of the question. So this is likely to be a key indicator looking ahead as to whether or not it will give enough confidence to the board that inflation is under control. Another key question is whether the CNB will move up the date of its February meeting so that it has January inflation in hand for decision-making.   What to expect in FX and rates markets EUR/CZK jumped after the CNB decision into the 24.400-500 band we mentioned earlier for the unchanged rate scenario after the decision. For now, the interest rate differential does not seem to have changed much after today's meeting, which should not bring further CZK appreciation. On the other hand, the new CNB forecast showed EUR/CZK lower than we expected and the board seems more hawkish. Therefore, we could see EUR/CZK around these levels for the next few days if rates repricing remains roughly at today's levels. However, we expect pressure on a weaker CZK to return soon as weaker economic data will again increase market bets on a CNB rate cut, which should lead EUR/CZK to the 24.700-24.800 range later. In the rates space, despite the high volatility, the market did not change much at the end of the day. The very short end of the curve (FRAs) obviously repriced the undelivered rate cut, however the IRS curve over the 3Y horizon ended lower, resulting in a significant flattening of the curve. The market is currently pricing in more than a 150bp in cuts in a six-month horizon, which in the end is not so much given the possible acceleration of the cutting pace after the January inflation release. Even though the CNB didn't deliver today's rate cut, we think the central bank is more likely to catch up with the rate cuts next year rather than the entire trajectory shifting. Therefore, we see room for the curve to go down, especially in the belly and long end.

EUR: The market has closed the door on further ECB hikes Overnight, the European Central Bank's Isabel Schnabel said the ECB cannot close the door on further rate hikes, citing fragile inflation expectations and the risk of more geo-political supply shocks. However, the market has priced out any further rate hikes and is firmly looking at the 2024 easing cycle. This means that despite lower US rates recently, two-year EUR:USD swap differentials have not narrowed meaningfully and probably explains why EUR/USD is struggling to take advantage of the softer dollar environment.  For reference, EUR/AUD has fallen 1% this week and macro traders will be looking for a big move lower here when they become confident of bullish steepening in the US curve. Given global conditions, however, we would favour EUR/USD towards the 1.0675/1.0700 today area unless US jobs surprise on the upside. Chris Turner In Sweden, the Riksbank will release FX hedging figures for the week 16-20 October this morning. FX sales numbers have been quite volatile and declined sharply from nearly USD 1bn to around USD 450mn total in last Friday’s report. We expect another uptick in FX sales today on the back of SEK underperformance in the week 16-20 October, which we think pushed the Riksbank to increase interventionism in the FX market. High FX sales are a SEK negative, and can favour another leg higher in EUR/SEK: we now see risks skewed to 11.85-11.90 in the near term.

Rates Spark: A 30yr headache The tail on the US 30yr auction was big. Effectively a 5bp concession to secondary was required to get the paper away. Hence the ratchet higher in yields. The front end too is feeling renewed pressure from the Fed. No easy ride here for players tempted to trade this from the long side post payrolls. We maintain a non-conviction preference to go the other way.   Difficult to ignore a 5bp tail at auction The US 30yr auction tailed dramatically – by over 5bp. The tail on the 10yr on the previous day was largely ignored, at least initially. But a tail this big could not be. Still the reaction was quite spectacular. Things, however, calmed after the impact break back above 4.8%. But still, we now have the 30yr yield in the 4.75% area and the 10yr in the 4.65% area, with the latter well back above the 4.5% level that has acted as a bit of a floor since hitting it after payrolls. In fact, we are now back in the area we were at just before last Friday’s payrolls report.   Excess liquidity falling, but value in the 2yr now at above 5% And as expected, no surprises from Powell at the IMF conference. It’s clear that the Federal Reserve wants to maintain a tightening impulse. This makes sense, as any hint of neutrality would hasten a market dash to discount rate cuts. There is also the risk that the Fed is not just saying stuff, but could in fact hike again if needed. Next week’s CPI report is likely to show that headline inflation is homing in on 3%, but the issue is core which will still be in the 4% area, as is core PCE. With inflation here, the Fed is nowhere near caving into the rate hike talk. The 2yr US yield popped back above 5% following Powell's speech. But if there was an area of the curve where we feel relatively comfortable to be long it’s a 5% handle on the 2yr. The funds rate today is 5.33%, only slightly above. And even if there were one more hike, the bigger moves would be to the downside on a one year forward basis. If the Fed gets to 3% by mid-2025 (our view), then the breakeven US 2yr yield is 4.5%. Given that, the 5% handle on the 2yr looks generous, and incorporates much less interest rate risk than longs right out the yield curve. On the front end, we also saw an historic day of sorts, as the cash going back to the Federal Reserve on the reverse repo facility dropped below US$1trn. That is still a large volume of excess liquidity in the system, but it has come down from the US$2.25trn area since the summer is a precipitous manner. A lot of this reflects the build in the Treasury cash balance, from close to zero in the summer before the debt ceiling was lifted, to near US$800bn now. Going forward, the bulk of the fall in usage of the reverse repo facility will come from ongoing quantitative tightening.   The deterioration in Treasuries liquidity is worth noting and it is worrying Even though we still have ample liquidity conditions based off these measures, and some US$3.3trn of bank reserves, there has been a material deterioration in liquidity in US Treasuries. The Bloomberg measure of Treasury market liquidity based off persistent dislocations from fair value is at an extreme right now. It is even more extreme than seen during the pandemic. The big movements seen in long dated yields is reflective of this too, where volumes have been less impressive than the big price movements might suggest. It is tough to stay in the trades in long dates in these circumstances. Given that the 4.5% level has not been crashed though, we maintain a preference for a heavy market here where yields can test the upside. Part of the reasoning here is a lack of rationale to capitulate lower in long dated yields. That will come, but it’s not yet a conviction bet.   The day ahead The day ahead is light for data. The main focus ahead of the weekend will be on the University of Michigan readings. Expectations are well below average, and are expected to remain so. Inflation expectations are expected to remain on the high side though, with the 1yr inflation expectation at 4% and the 5-10yr expectation at 3%. There are a few Fed speakers too to be aware of, with Logan, Bostic and Daly due to speak. And in the eurozone we expect to hear from Lagarde and Nagel. We are not expecting a lot of fireworks from this lot at this juncture. The (net) hawkish pressure will be sustained.

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%

Asia Morning Bites Asian highlights today include Singapore's October inflation and the Bank of Indonesia (BI) policy meeting. Markets may well be quiet with the US out for Thanksgiving.   Global macro and markets Global markets:  It was another quiet day in markets ahead of what will be an even quieter one today thanks to the US Thanksgiving holidays. This may well stretch to the weekend as Turkey-stuffed US traders may extend their time off to Friday too. Treasury yields rose slightly on Wednesday. The 2Y yield went up 2.7bp to 4.95%, while the 10Y yield barely rose, going up just 1.2bp to 4.404%. EURUSD retraced some of its recent rises, dropping back to 1.0887. The AUD was also slightly softer, at 0.6542, and Cable had a sharp dip in late trading, before partially recovering to 1.2493. The JPY crept higher and is back up to 149.49 now. Other Asian FX pairs were also mostly weaker against the USD. The KRW, IDR and TWD were between -0.49% and -0.87% softer. USDCNY was 0.33% weaker, and moved back up to 7.1648. US stock markets had a modestly positive day, with both the S&P 500 and NASDAQ rising a bit more than 0.4%. Chinese stocks were flat to down. The Hang Seng was unchanged on the day. The CSI 300 fell 1.02% and is down 8.45% year-to-date. G-7 macro:  It was not a particularly exciting day for Macro on Wednesday. The US Durable goods orders numbers came in softer than had been expected. But there was some better news from the University of Michigan consumer sentiment survey, although the inflation expectations surveys it contains were a bit higher than had been expected. US jobless claims also dropped, following their recent jump, which now looks as if it was just noise. The UK Chancellor, Jeremy Hunt, delivered a GBP21bn stimulus to the UK economy in his Autumn Statement yesterday, estimated to deliver a 0.3pp boost to GDP growth over the coming 5 years. The boost was more than had been expected and has raised concern that the Bank of England may not ease next year as soon or as fast as had previously been imagined. Today we get some preliminary PMI data out of the Eurozone. Singapore: October inflation is set for release today.  Inflation is expected to pick up to 4.5%YoY (from 4.1% previous) for headline while core inflation could move higher to 3.1%YoY (from 3.0% previous).  Although price pressures have moderated over the past few months, core inflation remains above the MAS' inflation target which suggests they could extend their current policy stance well into 2024.      Indonesia:  Bank Indonesia (BI) meets to discuss policy today.  Although BI is tipped to keep rates unchanged, IDR slipped by roughly 0.9% yesterday, which could provoke a surprise rate hike from BI.  BI was also expected to pause at their October meeting but substantial pressure on the IDR the day ahead forced Governor Warjiyo to hike rates to 6%. We would not rule out a rate hike if pressure on IDR persists today.  What to look out for: Bank Indonesia policy meeting and Singapore inflation Singapore CPI inflation (23 November) Bank Indonesia policy (23 November) Japan CPI inflation (24 November) Singapore industrial production (24 November)

Disinflation is on this year's Thanksgiving menu The US dollar index rebounded yesterday, and the rebound was on the back of some data points that cooled down the Fed doves' enthusiasm. First, the short-term inflation expectations advanced to a seven-month high in November, with Americans expecting a 4.5% jump in prices over the next year. Then, the University of Michigan's sentiment index improved more than expected, and the weekly jobless claims fell the most since June – all negative for the Federal Reserve (Fed) doves.   Adobe Analytics said that Thanksgiving shopping will be up by 5.4% this year, and no it is not because of inflated prices. On the contrary, according to Adobe e-commerce prices fell for the 14th straight month, by 6% from last October to this October and if we factor in the online deflation, the Thanksgiving spending growth would be an eye-popping 12%. But it's always the same old story. Americans spend, but they spend their savings, and worse, they spend on debt. In this context, the use of buy now spend later options has jumped by 14.5% since last year – and it will certainly hit back, one day. For now, the US 2-year yield remains real steady around the 4.90% level, the US 10-year is headed back to fresh lows since this fall, after a short attempt for a rebound yesterday and the dollar index is back to testing the 200-DMA to the downside.  Happily, for the American people, the Fed doves and all of us, disinflation is on the menu of this Thanksgiving. Turkey prices cost around 5.6% less than last year, stuffing mix costs nearly 3% less, pie crusts are nearly 5% cheaper and cranberry prices are down by more than 18%. It is said that an average 10 people Thanksgiving feast would cost less than $62 - that's less than $6.2 per person, down from around 4.5% compared to last year.   Last word  Thanksgiving is one of the calmest trading days of the year. Expect thin trading volumes and higher volatility.  

FX Daily: No turkey for dollar bears The Thanksgiving holiday means thin volumes and no US data releases today. We expect some stabilisation in EUR/USD after strong jobless claims fuelled the dollar rebound. Still, eurozone PMIs might trigger some fresh position-squaring events. In Sweden, we are slightly in favour of a Riksbank hike today, but it is a very close call given krona strength.   USD: Stronger into the Thanksgiving holiday The dollar rose for a second consecutive session yesterday, this time helped by a surprise drop in initial jobless claims to 209k from 233k: an indication of good labour market resilience ahead of the 8 December payrolls data, which will be key in setting the tone for FX into Christmas. University of Michigan inflation expectations were revised higher, although durable goods orders came in softer than expected in October, which probably limited the scope of the market impact of jobless claims. Today, FX flows will be subdued due to the Thanksgiving holiday. Equity and bond markets are closed, and there are no data releases in the US. Part of the rebound in the dollar observed over the past two sessions (especially on Tuesday) may well be related to some profit-taking on risk-on trades and more defensive positioning ahead of Thanksgiving. We think DXY can find some stabilisation around 104.00 into the weekend amid thinner trading volumes and a lack of market-moving data releases in the US.  

SEK: Riksbank at a crossroads Today’s Riksbank rate announcement is as close to a 50/50 hike/hold decision as it can get. The Bank has been hugely focused on the krona’s levels recently, and the recent good performance of SEK has prompted markets to lean on the dovish side (70% implied probability of a hold). One major counterargument is that the recent SEK strength has been somewhat “artificial”, given it has been driven by some rather aggressive FX selling via hedging operations by the Riksbank itself. On the inflation side, core and headline price pressures have abated faster than expected, although the CPIF excluding energy is still at 6.1% YoY, and the Prospera surveys suggested inflation expectations have remained quite sticky. What we see as a major point in favour of a hike is timing. The Riksbank’s next policy meeting is in February, when the economic slack will have likely materialised more clearly in Sweden and abroad and it will be considerably harder to hike rates. If the intent is to provide more support to SEK, the Riksbank may take into account that FX sales (i.e. the “artificial” support to SEK) should terminate around the end of January/early February if the current weekly pace is sustained, and be encouraged to hike now rather than later, when economic conditions likely won’t allow it. All in all, we are slightly leaning in favour of a rate hike today, even though we admit it is a very close call. A hold may be accompanied by an acceleration in quantitative tightening. The FX impact won’t just depend on the outcome, since there is a tangible risk of a split board, which could limit the upside potential for SEK in the event of a hike.

GBP: ECB vs. BoE story dominates Dovish commentary from the ECB has now seen investors pricing ECB rate cuts several months ahead of the Bank of England (BoE) next year and expectations build of a deeper easing cycle in the Eurozone than in the UK. We disagree with that pricing and think the BoE will deliver more hikes than the ECB next year. This probably means that EUR/GBP does not need to spend too much time below 0.8600. Indeed, 0.8500 represents very strong support and we remain happy with our forecasts of EUR/GBP edging up to the 0.88/0.90 area into next year. The UK data calendar is very quiet this week, with just Friday's release on inflation expectations of note. The bigger driver of EUR/GBP this week will be any ECB pushback against dovish pricing of their 2024 policy cycle.

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

FX Daily: Yen bulls turn to US payrolls The big yen rally has been exacerbated by positioning factors, but markets may keep speculating on a BoJ December hike unless Japanese officials protest against hawkish bets before the meeting. A bigger upside risk for USD/JPY is today’s US payrolls, which could paint a still resilient jobs market picture, and help the dollar.   USD: Payrolls may ruin the party for the yen The exceptional rally in the yen remains the biggest story in FX at the moment. The size of the drop in USD/JPY and the volatile intraday price-action are a clear consequence of the heavy short positioning on the yen into this round of hawkish speculation on Japanese rates. USD/JPY net longs amounted to 42% of open interest on 28 November, as per the latest CFTC data. Despite technical factors such as positioning having exacerbated the yen moves, we’d be careful to call for a peak in the JPY rally just yet. First, because there is likely a lot more bearish JPY positioning to be scaled back by speculators, second – and most importantly – because markets may not have many incentives to unwind bets on a December BoJ hike unless Japanese or central bank officials step in to tame the speculation before the meeting. Our view remains that the BoJ would prefer to exit negative rates policy at either the January or April meeting, when the Outlook Report accompanies the policy decision and Governor Kazuo Ueda can use an upside revision in inflation to justify a rate hike. Incidentally, the final release of 3Q GDP in Japan signalled a worse economic contraction (-0.7% QoQ) than previously estimated. We’ll be looking at USD/JPY closely today not only to gauge how much markets continue to speculate on BoJ tightening but also in relation to US risk events. The US jobs figures for November are a key turning point for markets' ongoing speculation on Federal Reserve easing in 2024. The payrolls’ consensus number is 183k, but soft JOLTS job openings and ADP payrolls (despite the latter having no predictive power for official figures) suggest markets may be positioned for a weaker reading. Our economics team forecasts 180k, and we suspect the US jobs market may still prove a bit more resilient than expected – triggering some unwinding of dovish Fed bets and supporting the dollar. The US calendar also includes the December University of Michigan surveys; markets will mostly be moved by the inflation expectations numbers, which are expected to have declined. All in all, we see some upside risks for the dollar today. The high sensitivity of USD/JPY to US rates means that US payrolls could trigger a rebound in the pair. That said, the ongoing bullish momentum in the yen on the back of hawkish domestic bets means sellers of USD/JPY may re-emerge around the 145.0 area.  

Philippines central bank leaves key rate untouched to close out the year BSP kept policy rates unchanged at 6.5% at their last meeting for the year.   BSP maintains policy rate at 6.5% The Bangko Sentral ng Pilipinas (BSP) retained policy rates at 6.5% today, in line with market expectations. The BSP continues to use the “risk-adjusted” forecast as opposed to the baseline inflation forecast, which was lowered to 4.2% (from 4.4% previously). For 2025, thecentral bank expects inflation to settle within target at 3.4%.  BSP Governor Eli Remolona indicated that risks to the inflation outlook remain “substantially tilted to the upside” while also sharing that growth prospects for next year remain “firm”.  Remolona indicated that inflation expectations are now anchored, citing their private sector analysts survey. Previously, the BSP justified their off-cycle rate hike by indicating that consumer expectations for inflation were elevated.    BSP keeps policy rates untouched as inflation moderates   BSP on hold but not likely to cut anytime soon Remolona indicated that they would be monitoring the response of households and firms to tighter monetary policy, suggesting they would be waiting to see the impact of previous rate hikes on the inflation path. The central bank will likely extend its pause until inflation is “well-within” target and until inflation expectations are anchored.  We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year.  

FX Daily: Asia in the driver's seat The dollar is softer and pro-cyclical currencies are following the yuan higher after news that China is preparing a CNY 2tn rescue package for the stock market. The BoJ revised inflation expectations lower but signalled further progress towards the target, keeping anticipation for a hike in June alive. We expect New Zealand CPI to be soft tonight.   USD: China and Japan in focus The dollar has been mostly moved by developments from outside of the US since the start of the week. China remains the centre of attention before key central bank meetings in the developed world. Risk sentiment was boosted overnight as the Chinese government is reportedly considering a large CNY 2tn package to support the struggling stock markets. The rescue plan should be mostly targeted to the Hang Seng stock exchange, which has sharply underperformed global equities of late. This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration. It does appear a temporary solution, though. Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks. For now, the FX impact has been positive; USD/CNY has dropped to 7.16/7.17 and we are seeing gains being spread across pro-cyclical currencies as safe-haven flows to the dollar are waning. Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for an outperformance of China-linked currencies (like AUD and NZD) and softening in the dollar on the back of this morning’s headlines. Another important development in Asian markets overnight was the Bank of Japan policy announcement. In line with our expectations and market consensus, there were no changes to the yield curve control, and forward guidance remained unchanged. Inflation projections were revised lower from 2.8% to 2.4% for the fiscal year starting in April. The revision was mostly a consequence of declining oil prices, and the inflation path continues to show an overshoot of the target for some time. All this was largely expected, and markets are focusing on Governor Kazuo Ueda’s claim that Japan has continued to inch closer to the inflation goals, keeping expectations for an eventual end to the ultra-dovish policy stance some time this year. The yen is experiencing a rebound which is likely boosted its oversold conditions. Money markets currently price in a 10bp rate hike in June. Extra help from a declining USD this morning might push USD/JPY a bit lower (below 147) today, but we suspect that markets may favour defensive USD positions as the Fed meeting approaches. Domestically, the only release to watch today in the US is the Richmond Fed Manufacturing index, which will give some flavour about the state of the sector ahead of tomorrow’s S&P Global PMIs. DXY may stabilise slightly below 103.00 once the China-led risk rally has settled.

Asia Morning Bites South Korea's inflation comes in below expectations. US non-farm payroll release later tonight. Powell slated to speak again at the weekend.   Global Macro and Markets Global markets:  Despite some reasonably strong data, US Treasury yields dipped slightly on Thursday. 2Y yields were down less than a basis point, but only after dropping below 4.14% and then recovering later on. 10Y yields followed a similar pattern of decline and recovery taking them down 3.2bp to 3.97%. Jerome Powell has a TV interview scheduled for the weekend, which could be interesting if he deviates from the recent message at the FOMC. Currencies also had a choppy day. EURUSD dropped below 1.08 at one point but is back up to 1.0874 now. Likewise, the AUD came close to dropping through 65 cents but has recovered to 0.6575 now. Cable did even better, finishing up on the day after a less dovish than expected Bank of England meeting. The JPY was roughly unchanged at 146.47. Other Asian FX were evenly split with half making small gains, led by the PHP and THB, and half making small losses. The CNY has drifted up to 7.1805. US equities recovered their losses from the previous day. The S&P 500 rose 1.25%, while the NASDAQ gained 1.3%. Equity futures also look quite positive. Chinese stocks had a slightly more positive day. The Hang Seng rose 0.52%, but the CSI only managed a 0.07% gain. G-7 macro: It was an interesting day for US macro yesterday, delivering support for both hawks and doves on the rates outlook. On the dovish side, non-farm productivity rose, and there was also a slight increase in jobless claims figures. On the other hand, the manufacturing ISM rose strongly, even though it remained below the breakeven 50 level and there was a jump in the prices paid component too which jumped up to 52.9 from 45.2. The new orders index was also strong. Later today, there is the US labour report. Following the soft ADP figure earlier this week, there may be some downside risk to the consensus view of a decline in employment growth from 216K in December to 185K in January.    South Korea:  Consumer inflation eased to 2.8% YoY in January (vs 3.2% in December, 2.9% market consensus), back to the 2% level for the first time in six months. But the decline was mainly due to base effects, caused by a one-off energy bill hike last January. Core inflation, excluding agricultural products and oils, also levelled down to 2.6% (vs 3.1% in December). In a monthly comparison, inflation rose 0.4% MoM nsa in January after staying flat in December. Fresh food, utility, and service prices rose, more than offsetting the decline of manufactured food and gasoline prices. The government has decided to freeze utility fees at least for the first quarter of the year and offered some tax cuts on imported goods. If the conflict in the Red Sea escalates further, the fuel subsidy program could be extended beyond March, so the upside risk is quite limited in the near term. Today’s slower-than-expected inflation probably won’t change the BoK’s hawkish stance any time soon. As mentioned earlier, if there were no government subsidies on energy and public services, CPI inflation would have been higher than it is today, and once these programs end, there may be a price spike later this year. So, choppy inflation ahead is expected. The BoK will likely take a wait-and-see approach to gather more evidence about the continued cooling of inflation.