inflation growth

Despite the fact that the European Central Bank has much more reasons to consider lowering interest rates compared to the Federal Reserve, the ECB not only raised the refinancing rate but Lagarde practically stated that there would be another rate hike in July. This decision not only contradicts expectations but also goes against common sense to some extent. Of course, this resulted in the dollar's decline, thereby reducing the pressure caused by its apparent overbought condition. However, the European economy is facing serious difficulties associated with the increased cost of energy resources.   The European industry suffers the most. Many, including in the West, are already openly calling what is happening the deindustrialization of Europe. And a strong dollar may somewhat alleviate this negative trend. So, the decisions and intentions of the ECB are more harmful than beneficial to the European economy. Especially considering that inflation in the euro area is slowing down as fast as in the United States. Today's inflation report should confirm the fact of its slowdown from 7.0% to 6.1%. And don't think that the ECB was unaware of this yesterday because we are talking about final data.   The preliminary assessment was already available two weeks ago. In such a situation, the most reasonable approach would have been not to touch interest rates and observe the developments for at least two or three months.   Frankly speaking, the ECB's actions are raising more and more questions. And this naturally leads to an increase in concerns, which are usually referred to as uncertainty risks. Investors typically try to stay away from such risks. Therefore, the euro's substantial growth, which pulled the pound along, is likely to be unsustainable and probably won't last long. The GBP/USD pair has surged in value by nearly 300 pips since the beginning of the trading week.     This movement has resulted in the extension of the medium-term uptrend. Take note that such an intense price change has triggered a technical signal of the pound's overbought conditions. On the four-hour chart, the RSI is at its highest level since autumn 2022, indicating a technical signal of overbought conditions.   On the same timeframe the Alligator's MAs are headed upwards, which points to an upward cycle. Outlook In this case, speculators are disregarding the overbought status, as evidenced by the sustained momentum and the absence of a proper correction. However, this process cannot persist indefinitely, and sooner or later, there will be a liquidation of long positions, leading to a pullback. Until then, traders will consider the psychological level of 1.3000 as the main resistance level.  

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

Japanese data improves but we still don’t expect a BoJ policy shift this month Although third-quarter GDP was revised down unexpectedly, the improved current account and cash earnings suggest a rebound in growth in the current quarter. Market speculation about the Bank of Japan's possible policy turnaround at the December meeting has been amplified after recent remarks from Governor Kazuo Ueda and Deputy Governor Ryozo Himino.   GDP contraction deepened in 3Q23 Third-quarter GDP was unexpectedly revised down to -0.7% quarter-on-quarter (seasonally adjusted) compared to the flash estimate and market consensus of -0.5%. The largest revision came from private consumption, which fell 0.2% (vs 0.0% in the flash estimate) and the inventory contribution to GDP, which was down by 0.2% ppt. The negative contribution of inventory should be a good sign for the inventory restocking cycle. But household spending still lagged amid high inflation despite relatively healthy labour market conditions, which should be a real concern for the Bank of Japan. We think that weaker-than-expected GDP could justify the Bank of Japan's current easing policy at least for now.   Meanwhile, GDP for the first quarter was revised up meaningfully from 0.9% to 1.2% resulting in an upward revision to annual GDP. Thus, now we expect 2023 GDP to rise 2.0% year-on-year.    However, other data releases today - labour cash earnings, household spending, and current account - point to a rebound in growth in the fourth quarter, thus we believe that the BoJ will shift its policy early next year.   Contraction deepened in 3Q23   Labour cash earnings rose in October Labour cash earnings rose 1.5% YoY in October (vs 1.2% in September, 1.0% market consensus) beating the market consensus. Contractual earnings gained steadily by 1.3% (vs 0.9% in September) while volatile bonus earnings (7.5%) rebounded after two months of declines. Also, hours worked bounced back 0.7% for the first time in four months, thus overall labour market conditions and earnings appear to have recovered in October. However, wage growth was still short of inflation growth, thus real earnings dropped 2.3% in October, although at a slower pace than the previous month's -2.9%.  Nominal wage growth continues and is clearly faster than the previous year. Also, there are several news reports that big companies plan to raise wages above this year's level of growth. Thus, we believe that next year's wage growth should accelerate a bit more than the current year.    Cash earnings and household spending improved in October   Current account surplus widened in October In a separate report, the current account surplus widened more than expected in October to JPY 2.6tn (vs 2.0 in September, 1.8 market consensus). Despite the global headwinds, the current account surplus will likely widen in the coming months. Due to falling commodity prices, the merchandise account will turn to surplus while an influx of foreign tourists will help the travel account to remain in surplus. We expect the trade of goods and services to improve in the current quarter.    Current account surplus in October led by service (travel)   BoJ preview Several remarks by the Bank of Japan, including Governor Ueda, have shaken the FX market quite strongly. Deputy Governor Himino said that ending the negative interest rate policy would have only a limited impact on the economy and Governor Ueda yesterday met with the prime minister, highlighting the importance of sustainable wage growth and inflation, which led to a fairly rapid shift in market sentiment betting on the Bank of Japan's policy tightening. Dollar weakness is also supporting the sudden move of the yen partially, especially ahead of today's release of the US nonfarm payrolls data.   It seems like the BoJ is paving the way to a gradual normalisation and giving the market a signal that the time is approaching. However, since these comments were made outside of the BoJ meeting, any sudden major change of policy is not expected this month. Yes, we remember that Governor Kuroda surprised the market with a yield curve control tweak last December, but we believe Governor Ueda is unlikely to adjust policy without prior communication. Thus, we expect some changes in the statement and dialogue from Governor Ueda at the BoJ meeting on 18-19 December.    As we have previously argued, we think the Bank of Japan's rate hike will come in 2Q24, most likely at its June meeting. By then, the BoJ will be able to confirm a solid wage increase with Shunto's results. In terms of inflation, it will trend down early next year, but still core inflation, excluding fresh food, is expected to remain above 2%. Even if the BoJ carries out a rate hike, we believe that the Bank's JGB buying operation will continue in order to avoid a rapid rise in long-term yields.