inflationary pressures

Watch: The next steps for US interest rates The case for raising rates further seems to be building quickly in the US as inflation continues to run well above target. Developments in the debt ceiling stand-off and key data releases ahead of the upcoming Federal Reserve meeting will be pivotal – so what could be next? ING's James Knightley has a few answers To hike or not to hike? The next steps for US interest rates While the minutes of the latest FOMC meeting show a split as to whether there will be a need to raise interest rates further, the balance still leans more towards a pause in June. An impasse in debt ceiling negotiations, tight financial conditions, and forthcoming inflation data will all play a crucial role in determining the outcome.             .

EUR: Can China come to the euro's rescue? EUR/USD has quietly slipped below support at 1.0700/1.0720 and may be gently making its way to the March lows at 1.0515/0530. As we mentioned last week, we think   EUR/USD is relatively cheap given the massive reversal in energy prices over the last year and that, in time, the 1.05/1.07 area will come to be seen as a summer base.   Helping that proposition would be some kind of recovery in China. The release of the China Beige Book has shown some recovery in the China manufacturing sector in May.   Official May Chinese PMI figures are released later this week. A bounceback here, helping to reverse the recent run-up in USD/CNH, could provide the euro with some support.   For today, the eurozone focus will be on the release of industrial and consumer confidence figures for May. Consensus expects some further deterioration here and if so this should keep EUR/USD on the soft side. We will also hear from a raft of ECB speakers today.   Expect more hawkish rhetoric especially in advance of the May eurozone CPI data on Thursday. Consensus expects core eurozone CPI to edge lower to 5.5% year-on-year in May. Another upside surprise here – feeding the sticky inflation narrative – warns that investors could return to pricing a 4.00% ECB deposit rate.   - Chris Turner

Europe set for a mixed open, as debt ceiling deal heads towards a vote. By Michael Hewson (Chief Market Analyst at CMC Markets UK) With both the US and UK markets closed yesterday, there was a rather tepid response to the weekend news that the White House and Republican leaders had agreed a deal to raise the debt ceiling, as European markets finished a quiet session slightly lower. The deal, which lays out a plan to suspend the debt ceiling beyond the date of the next US election until January 1st 2025, will now need to get agreement from lawmakers on both sides of the political divide to pass into law. That could well be the hardest part given that on the margins every vote is needed which means partisan interests on either side could well derail or delay a positive outcome. A vote on the deal could come as soon as tomorrow with a new deadline of 5th June cited by US Treasury Secretary Janet Yellen. US markets, which had been rising into the weekend on the premise that a deal was in the making look set to open higher when they open later today, however markets in Europe appear to be less than enthused. That's probably due to concerns over how the economic recovery in China is doing, with recent economic data suggesting that confidence there is slowing, and economic activity is declining. Nonetheless while European stocks have struggled in recent weeks, they are still within touching distance of their recent record highs, although recent increases in yields and persistent inflation are starting to act as a drag. This is likely to be the next major concern for investors in the event we get a speedy resolution to the US debt ceiling headwind. We've already seen the US dollar gain ground over the last 3 weeks as markets start to price in another rate hike by the Federal Reserve next month, and more importantly start to price out the prospect of rate cuts this year. Last week's US and UK economic data both pointed to an inflationary outlook that is much stickier than was being priced a few weeks ago, with core prices showing little sign of slowing. In the UK core prices surged to a 33 year high of 6.8% while US core PCE edged up to 4.7% in April, meaning pushing back any possible thoughts that we might see rate cuts as soon as Q3. At this rate we'll be lucky to see rate cuts much before the middle of 2024, with the focus now set to shift to this week's US May jobs report on Friday, although we also have a host of other labour market and services data between now and then to chew over. The last few weeks have seen quite a shift, from the certainty that the Federal Reserve was almost done when it comes to rate hikes to the prospect that we may well see a few more unless inflation starts to exhibit signs of slowing markedly in the coming months. In the EU we are also seeing similar trends when it comes to sticky inflation with tomorrow's flash CPI numbers for May expected to show some signs of slowing on the headline number, but not so much on the core measure. On the data front today we have the latest US consumer confidence numbers for May which are expected to see a modest slowdown from 101.30 in April to 99, and the lowest levels since July last year. EUR/USD – has so far managed to hold above the 1.0700 level, with a break below arguing to a move back towards 1.0610. We need to see a rebound above 1.0820 to stabilise. GBP/USD – holding above the 1.2300 area for now with further support at the April lows at 1.2270. We need to recover back above 1.2380 to stabilise. EUR/GBP – currently struggling to move above the 0.8720 area, with main resistance at the 0.870 area. A move below current support at 0.8650 could see a move towards 0.8620. USD/JPY – having broken above the 139.60 area this now becomes support for a move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20. Further support remains back at the 137.00 area and 200-day SMA. FTSE100 is expected to open unchanged at 7,627 DAX is expected to open 17 points higher at 15,967 CAC40 is expected to open 30 points lower at 7,273

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

UK Mortgage Approvals (Apr) – 31/05 We've started to see a modest improvement in mortgage approvals since the start of the year, after they hit a low of 39.6k back in January, as the sharp rise in interest rates at the end of last year weighed on demand for property as well as house prices.   As energy prices have come down, along with lower rates, demand for mortgages has started to pick up again with March approvals rising to 52k, while net consumer credit has also started to improve after similar weakness at the end of last year.   With inflationary pressures starting to subside we could see this trend continue in the coming months, as long as energy prices remain at their current levels, and the Bank of England starts to signal it is close to being done on raising rates.     Manufacturing PMIs (May) – 01/06 Last week saw the latest flash PMIs show that manufacturing activity in France and Germany remained weak, while in Germany activity deteriorated further to its lowest levels since June 2020, when economies were still reeling from the effects of pandemic lockdowns.   We also found out that the German economy was in recession after Q1 GDP was revised lower to -0.3%. The UK and US on the other hand were able to see a modest pickup in economic activity. It is clear that manufacturing globally is in a difficult place, we're also seeing it in China, as well as copper and iron ore prices, which suggests that global demand is weakening sharply.   Italy and Spain economic activity is also expected to see further weakness in manufacturing when their latest PMIs are released later this week.

Yesterday, several entry signals were made. Let's look at the 5-minute chart to get a picture of what happened. I considered entering the market from the level of 1.2414. A fall and a false breakout generated a buy signal. The price rose by more than 50 pips. In the American session, the pair dropped after the publication of US labor market data, but the bulls still protected 1.2449. After another buy signal, the pair advanced by 65 pips. Short positions at 1.251 brought no desired result.     When to open long positions on GBP/USD In the UK, the manufacturing PMI kept contracting in May although at a slower pace than in April. The pair barely reacted to those results. At the same time, the ISM manufacturing PMI in the US triggered a mass sell-off of the greenback and boosted the pound. Today, GBP/USD will still be in demand. In the American session, data on the US labor market will be in focus. Therefore, buying at current highs will hardly be a good idea. Rather, positions should be opened when a bearish correction occurs.   If the bulls protect 1.2475 support and a false breakout follows, a buy signal will be generated with the target at 1.2543 resistance. An additional buy signal targeting 1.2576 will come after a breakout and consolidation above the mark on disappointing macro data in the US. The most distant target stands at 1.2607 where I will lock in profit. If the price goes toward 1.2506 and there is no bullish activity there, pressure on the pound will increase, and the bears will get a chance to stop yesterday's growth. In such a case, a sell signal will come after protecting 1.2475 and a false breakout. I will buy GBP/USD on a bounce from 1.2449, allowing a correction of 30-35 pips intraday.   When to open short positions on GBP/USD: After triggering a row of bearish Stop Losses yesterday, the bulls will likely build a new uptrend today. That is why bearish activity may only increase near 1.2543 resistance and after a false consolidation above this range. This will generate a sell signal and trigger a small correction to 1.2506 support. A breakout and an upside retest of this range will occur only if US macro data comes upbeat. GBP/USD will face pressure, producing a sell signal targeting 1.2475. The most distant target is still seen at a low of 1.2449 where I will lock in profits.   If GBP/USD goes up and there is no activity at 1.2543, the bull market will continue. I will open short positions after a test of 1.2576 resistance. A false breakout will create a sell entry point. If there is no bearish activity there either, I will sell GBP/USD on a bounce from a high of 1.2607, allowing a bearish correction of 30-35 pips intraday.     Commitments of Traders: The COT report for May 23 shows a decrease in both long and short positions. Last week, the pound was bearish. However, with a drop in both longs and shorts, a shift in trading powers seems minimal. Traders had to close positions fearing the US debt ceiling deal would not be reached. Moreover, recession risks were still weighing on them. They were also concerned about the Bank of England's monetary policy stance. The regulator said it might pause tightening although inflationary pressures in the UK were still high. According to the latest COT report, short non-commercial positions dropped by 7,181 to 57,614, and long non-commercial positions decreased by 8,185 to 69,203. The non-commercial net position fell to 11,059 from 12,593 a week earlier. The weekly price dropped to 1.2425 from 1.2495.       Indicators' signals: Moving averages: Trading is carried out above the 30-day and 50-day moving averages, which indicates a bullish continuation.     Note: The period and prices of moving averages are considered by the author on the H1 (1-hour) chart and differ from the general definition of the classic daily moving averages on the daily D1 chart. Bollinger Bands Support stands at 1.2475, in line with the lower band. Indicators: Moving average (MA) determines the current trend by smoothing volatility and noise. Period 50. Colored yellow on the chart. Moving average (MA) determines the current trend by smoothing volatility and noise. Period 30. Colored green on the chart. Moving Average Convergence/Divergence (MACD). Fast EMA 12. Slow EMA 26. SMA 9. Bollinger Bands. Period 20 Non-commercial traders are speculators such as individual traders, hedge funds, and large institutions who use the futures market for speculative purposes and meet certain requirements. Long non-commercial positions are the total long position of non-commercial traders. Non-commercial short positions are the total short position of non-commercial traders. Total non-commercial net position is the difference between the short and long positions of non-commercial traders.  

France: consumption plunges while inflation moderates The second quarter got off to a poor start in France, with household consumption falling for the third consecutive month in April, and the outlook has been revised downwards. Against a backdrop of falling demand, inflationary pressures are moderating more quickly than expected.   Consumption continues to plummet In April, for the third consecutive month, consumer spending on goods fell. This time, the fall was 1% over the month, following a 0.8% fall in March. Household consumption of goods is now 4.3% lower than a year ago and 6.3% below its pre-pandemic level. The fall is due to lower energy consumption (-1.9% over one month) and a further fall in food consumption. Food consumption is now 11% below its pandemic level.   The magnitude of the fall shows the significant impact of the inflationary context and the fall in purchasing power, which has led households to significantly alter their consumption habits.   These figures were eagerly awaited, as they are the first real activity data available for the second quarter. And we can now say that the second quarter got off to a poor start. It is clear that the French economy is slowing sharply. It is unlikely that consumption will make a positive contribution to GDP growth in the second quarter, especially as the slowdown is beginning to have an impact on the labour market, as suggested by the employment climate data published by INSEE last week.   The prospect of a recovery later in the year seems to be fading. This has led us to revise our growth outlook slightly downwards. We are now expecting GDP growth of 0.6% in 2023 and 0.7% in 2024, with the risks still tilted to the downside. Although France escaped recession last winter, today's indicators are a reminder that a recession in the coming months cannot be ruled out.   Strong moderation in inflationary pressures Against this backdrop of falling demand, inflationary pressures are moderating. As expected, the pace of consumer price inflation eased in France in May. Inflation stood at 5.1%, down from 5.9% in April, while the harmonised index, which is important for the ECB, reached 6% in May, compared to 6.9% in April. The good news is that the fall in inflation is now visible in all consumer categories. Energy inflation fell sharply to 2% year-on-year in May.   Unlike in other European countries, it remains positive, however, as the rise in household energy bills did only take place at the start of 2023, rather than in 2022, as a result of the "tariff shield" introduced by the government last year. Food inflation remains very high but is starting to fall, to 14.1% in May from 15% in April.   At 4.1% year-on-year, compared with 4.6% in April, growth in the prices of manufactured goods is also moderating, as is that of services, which stood at 3% compared with 3.2% in April. These last two developments are very good news, as they signal that the inflation peak is behind us, but also that inflation is likely to fall rapidly over the coming months. Indeed, the signs of moderation in inflationary pressures are mounting.   For example, tensions in supply chains have disappeared and the growth in industrial producer prices, which gives an indication of changes in production costs for the manufacturing sector, slowed sharply to 5% year-on-year in April (compared with 9.5% in March). Over one month, producer prices fell sharply, by 4.1%, after +1.2% in the previous month. This indicates that growth in the prices of manufactured goods is set to slow markedly over the coming months.   Furthermore, business forecasts for selling prices fell sharply in May, particularly in the industrial and construction sectors, but also in services. Inflation in services should therefore continue to weaken over the coming months.   Finally, given the fall in agricultural commodity prices on international markets and the weakness of demand, food inflation should continue to fall gradually, and more rapidly once the impact of the price agreement between food producers and big retailers has been absorbed, i.e. during the summer. Ultimately, inflation is likely to fall over the coming months, helped by weak demand. We are expecting inflation to average 4.7% over the year (5.7% for harmonised inflation).

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

A hawkish hold from the Bank of Canada next week We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.   Canadian resilience means a rate hike can't be ruled out The Bank of Canada last raised rates on 25 January and have held it at 4.5% ever since. The statement from the last meeting in April commented that global growth had been stronger than expected and that in Canada itself, “demand is still exceeding supply and the labour market remains tight”. The bank warned that it was continuing to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further” to ensure inflation returns to 2%.   Since then we have had additional warnings from Governor Tiff Macklem that the bank remains concerned about upside inflation risks with the latest CPI report showing a month-on-month increase in prices of 0.7% versus a consensus forecast of 0.4%, resulting in the annual rate of inflation rising to 4.4%. The economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. The resilience of the economy was then emphasised further by first quarter GDP growth coming in at 3.1% annualised, beating the 2.5% consensus growth forecast. Consumer spending was the main growth engine, rising 3.1%.     But we favour a hawkish hold – signalling action unless inflation softens again soon Nonetheless, the BoC accept that monetary policy operates with long and varied lags and continue to believe that “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year”. This will help to dampen inflation pressures and with commodity price softening we still believe that inflation can get close to the 2% target by the early part of 2024.   With the US economic outlook also looking a little uncertain, we doubt that the BoC will want to restart hiking interest rates unless it is certain that inflation pressures will not moderate as it has long been forecasting. Consequently we favour a hawkish hold, signalling that if there isn’t clearer evidence of softening in price pressures it could raise rates again in July.     The loonie's resilience can continue The Canadian dollar has been the best G10 performing currency in the past month, largely thanks to its high beta to the US economic narrative and a repricing of Canada’s domestic rate and growth story. These factors have outshadowed crude’s subdued performance in May and some risk sentiment instability.   A hawkish tone by the Bank of Canada at the June meeting is clearly an important element to keep the bullish narrative for CAD alive. As shown below, the recent repricing in Fed rate expectations caused a rebound in short-term USD swap rates relative to most currencies (like the euro), while the USD-CAD 2-year swap rate differential has remained on a declining path also throughout the second half of May.     As long as the BoC does not push back against the pricing for a hike in the summer, we expect CAD to remain supported. Some lingering USD strength in June can put a floor around 1.33/1.34 in USD/CAD, but we expect a decisive move to 1.30 in the third quarter and below then level before the end of the year.  

The Federal Reserve (Fed) refrained from raising interest rates at this week's monetary policy meeting. Yet the median forecast on the Fed's dot plot suggested that there could be two more rate hikes before the end of this year. That came as a slap on the face of those expecting a rate cut by the end of the year, even though, I think that the doves haven't said their last word just yet. The credit conditions in the US are tightening, inflation is falling. Yesterday's PPI data revealed a faster than expected contraction in producer prices in May, while both headline and core CPI figures continued to ease over the same month.    Why, on earth, has the Fed started playing a guessing game, instead of hiking the rates right away?   It is because the US policymakers know that the idea of a 25bp hike - or two 25bp hikes - is more powerful than a 25bp hike itself, as future rate hikes are more effective in managing market expectations. The market is keen to go back to pricing the end of rate hikes - and rate cuts - when they know that the Fed is coming toward the end of the tightening cycle. To avoid that end-of-tunnel enthusiasm from jeopardizing tightening efforts, the Fed keeps the tightening suspense alive, without however acting on the rates. If all goes well - if inflation continues easing, and tighter financial conditions begin weighing on US jobs market - the Fed will have the option to step back and simply... not hike.  But for now, 'nearly all policymakers' remain concerned with the moderate cooling in core inflation, and they don't see inflation going below 3% this year.       Mild reaction  The US 2-year yield continues pushing higher, while enthusiasm at the long end of the yield curve is lesser, as higher rates increase recession odds. The S&P500 hit a fresh high since last year but closed almost flat. The US dollar rebounded off its 100-DMA, and the EURUSD rallied above its own 100-DMA and holds ground above the 1.08 mark this morning, into the widely watched European Central Bank (ECB) decision.    A hawkish ECB hike?  The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.  Note that 500-billion-euro TLTROS will mature on June 28th and will pull a good amount of liquidity out of the market. While there is still around 4 trillion euros of excess liquidity in the financial system, the draining liquidity could cause anxiety among investors, especially if some European banks fail to find enough financing in the market to replace their TLTRO funding – a scenario which could sap investors' confidence and appetite in the coming weeks.     In this respect, Italian banks are under a close watch as they are behind their European pears in repaying their TLTRO and the funding through TLTROs are more than the excess cash its lenders parked with the ECB. That means that Italian banks must find money somewhere else – but where? – to repay their TLTROs.   I am not particularly worried about the stability of the European financial system, but I can hardly imagine European stocks extend rally in the environment of draining liquidity and rising rates. The Stoxx 600 index spiked above its 50-DMA yesterday, as a stronger euro may have reinforced appetite, yet European stocks will likely return to the 435-450 area.       China cuts.  In China, we have a completely different ambiance when it comes to inflation and monetary policy. The Chinese inflation remains flat and under pressure near 26-month lows, growth is not picking up the anticipated post-Covid momentum, and the People's Bank of China (PBoC) cut its one-year MLF rate by 10bp today, as broadly expected, to give a shake to the depressed Chinese economy. The problem is, there is now a talk that China could be entering a liquidity trap, meaning a period where lower rates fail to boost appetite and don't translate into faster growth.  

The European Central Bank (ECB) has recently made a surprising shift in its approach towards financial stability, signaling a departure from its historically dovish stance. This decision, prompted by the challenges posed by inflation, has significant implications for both the performance of individual economies and the overall prosperity of the European Union.   In this article, we had the opportunity to discuss the ECB's decision with Petr Ševčík, an analyst from BITMarkets, who shared valuable insights into the repercussions of this move. BITMarkets, a platform that has been closely monitoring the rise of cryptocurrency trading in Europe, has observed increased trading activity in this sector since the beginning of the year. Cryptocurrencies, known for their volatility, have gained attention as a potential refuge in times of economic uncertainty and hardship. As inflationary pressures continue to burden traditional industries such as housing and banking, some investors are turning to alternative assets like cryptocurrencies.   The impact of the ECB's decision is already being felt across various sectors, with construction and materials stocks experiencing a 0.8% drop and bank stocks dwindling by 0.7%. These developments are a natural consequence of higher borrowing costs, leading to a slowdown in loan growth. However, amidst these challenges, there are signs of resilience in certain areas. Media stocks, for instance, enjoyed a 0.7% upside following the news, indicating that the markets may begin to respond more favorably to individual performance rather than being solely influenced by widespread conditions.    FXMAG.COM: Could you please comment on the ECB decision?   It's crystal clear that the reluctant ECB is that of the past. Historically known for adopting a very dovish approach towards financial stability of the bloc by avoiding sharp interest hikes, its decision to bump rates again highlights the struggles caused by inflation which are burdening the performance of individual economies and corporations and the livelihood of individuals; on a macro scale, this has been hindering the prosperity of the European Union for a daunting lengthy period. BITmarkets has witnessed the rise of crypto trading since the start of the year, and a notable portion of increased trading activity has stemmed from Europe. Cryptocurrency assets are volatile and always have been, but they have been regarded as refuge by some in times of economic uncertainty and hardship. What's apparent is that the housing industry and the banking sector are among the industries which are being damaged the most, with construction and materials stocks dropping 0.8% and bank stocks dwindling 0.7% following the news. From a wider perspective, this is only natural as borrowing costs increased which attributes the slowdown of growth in loans.  While the news was not taken very lightly as the continent's most popular indices shed their prices, I don't project much more dismay for Europe with regards to economic stability. Media stocks enjoyed a 0.7% upside and that speaks a thousand words. Inflation is cooling down and markets may begin to behave based on performance rather than being continuously-succumbed to widespread conditions. The European financial market has been a victim of calamitous market conditions for years, but the latest ECB move is one that can ultimately bring the EU out of its shell.

In the ever-evolving landscape of financial markets, decisions made by major central banks have a significant impact on shaping trends. We recently had the opportunity to speak with Matthew Weller, an analyst at StoneX, to gain insights into the current state of affairs.   Read more   The European Central Bank (ECB) recently made headlines with its "Hawkish Hike," raising its key interest rate by 25 basis points to 3.5%. This move aims to combat the escalating inflation in the eurozone, marking the eighth consecutive rate hike since July 2022. The ECB's determination to bring inflation down from its current 6.1% to its target of 2% is evident. ECB President Christine Lagarde has hinted at the possibility of further rate hikes at the next meeting in July, emphasizing the need to tackle inflation head-on. Lagarde made it clear that the ECB has no plans to pause its rate hikes. While the ECB focuses on inflation control, other central banks, such as the US Federal Reserve, have taken a pause in their rate hikes to assess their impact on economic growth and employment. However, the Fed's projections indicate the potential for two more rate hikes this year. Similarly, central banks in Australia and Canada have resumed rate increases after a temporary pause, underscoring the global challenge of high inflation. The ECB's decision to raise rates comes at a time of economic uncertainty, influenced by factors such as the ongoing conflict between Russia and Ukraine and potential wage agreements that may further fuel inflationary pressures. The ECB acknowledges that short-term economic growth may remain subdued, but it expects improvements as inflation subsides and supply disruptions ease. While concerns persist regarding the potential negative impact of higher rates on the economy and the risk of a recession, the ECB remains committed to addressing inflation as a top priority   FXMAG.COM: Could you give as your point of view about how the gold prices would behave in next weeks? Is there a chance that there will be new ATH? Gold Consolidates Amid Hawkish Central Bank Actions   With major central banks continuing to tighten monetary policy and inflation still receding (if more gradually than before) gold prices are likely to remain on the back foot in the near term. As of writing, the yellow metal is trading in the mid-$1900s, where it has spent the last three weeks consolidating. Bulls will be looking for a break above the June high near $1990 to signal a potential retest of the record highs near $2075 as we move into July, whereas a confirmed break below $1930 could open the door for a retest of the 200-day EMA near $1900 next.

Oil remains choppy but flat and in lower range Oil prices are relatively flat today, mirroring yesterday’s session which was broadly choppy but ultimately directionless. Crude has rebounded strongly since falling toward its 2023 lows early last week but remains in its lower range, roughly between $70-$80 per barrel and it’s showing little sign of breaking that in the short term. While some believe the market will be in deficit later in the year, aided by the Saudi-driven OPEC+ cuts, which could support prices closer to what we saw late last year and early this, the economy remains one significant downside risk to this amid an adjustment in the markets toward higher rates for longer.   Gold drifting as we await more data Gold has started the week slightly softer but very little has changed, in that it remains in the $1,940-$1,980 range that it has spent the vast majority of the last month. It was a very quiet start to the week which is why gold has basically continued to drift and that may continue until we see a significant change in the data. The Fed last week made it perfectly clear that it doesn’t believe it’s done and its commentary this week, including Chair Powell’s appearing in Congress on Wednesday, isn’t likely to change in any significant way from that. It will be interesting to see if we get any response to UK inflation data as a potential signal of stickiness more broadly but then, there’s every chance it could be viewed as a UK issue, rather than an indication of something more, considering how much more the country has struggled until now.  

Risk takers are not out dancing on the Wall Street this week before the Federal Reserve (Fed) President Powell's semiannual congressional testimony scheduled for today and tomorrow. Equities are down, oil is down, sovereign bonds are up. And the rally in equities versus a selloff in sovereign bonds is a pattern that we have been seeing since the rebound following the mini banking crisis, and the correlation between stocks and sovereign bonds are reestablished, again, after last year's visit to the positive territory.   This – the return of negative equity-bond correlation - is what we expected to happen this year, but for the exact opposite reason. We were expecting the sovereign bonds to recover, as the US was supposed to be in recession by now, whereas the sovereign bonds were supposed to find buyers as a result of softening, and even reversing Fed policy. But none of it happened. Equities rallied, the Fed became more aggressive on tightening its monetary policy, and now the American housing market starts printing surprisingly positive data, with housing starts and building permits flashing strong figures for May, defying the rising mortgage rates in the US due to the rising Fed rates. I mean housing starts jumped more than 20% in May, but loans for residential real estate slumped. We no longer know what to do with this data, and that's a cause for concern per se... not understanding the data.     What we know and understand very well, however, is, a strong housing market and tight jobs market will encourage Fed to hike more, and encourage other central banks to do more, as well. But not everyone is as lucky as Powell, because in Britain, the skyrocketing mortgage rates are turning into a serious headache that no one can solve for now. The UK home-loan approvals have been dropping after a post-pandemic peak, the refinancing costs took a lift, and political dispute is gaining momentum with Liberal Democrats asking for a £3 billion mortgage protection package to help people keep their homes, and their mortgages, while Jeremy Hunt says there is no money in the coffers for such fiscal support. The 2-year gilt yield slid below 5% yesterday, as a result of a broad-based flight to safer sovereign bonds, but the relief will likely remain short-lived and the outlook for Gilt market will likely remain negative with further, and significant rate hikes seen on the BoE's horizon.   Released this morning, the British inflation was expected to ease from 8.7% to 8.4% but did not ease... while core inflation unexpectedly jumped past the 7% mark again. These numbers warn that inflationary pressures in the UK are not under control and call for further rate hikes which will further squeeze the British households, without a guarantee of easing inflation. We will see what the BoE will do and say tomorrow, but we know that they now have a few doubts regarding the reliability of their inflation model which was pointing at a steep fall in H2 this year – a scenario that is unlikely to happen.   Cable jumped past the 1.28 mark following the inflation data, then rapidly fell back to the pre-data levels. The short-term direction will depend on a broad US dollar appetite, yet the medium-term outlook for the pound-dollar remains positive on the back of more hawkish BoE expectations, compared to the Fed's, and an advance toward the 1.30 is well possible, especially if the dollar appetite remains soft.     In the US, profit taking and flight to safety before Powell's testimony sent the S&P500 and Nasdaq stocks lower yesterday. The S&P500 slipped below the 4400 mark, while Nasdaq 100 tipped a toe below the 15000 mark but closed above this level.    The US dollar index traded higher for the 3rd session and is now testing the 50-DMA to the upside, while gold pushed below the 100-DMA as rising US yields and stronger dollar weigh on appetite for non-interest-bearing gold.    Yet, any hawkishness from Powell's testimony will likely be tempered by counter-expectation that the Fed may be going too fast too far, and could stop hiking before materializing the two rate hikes they revealed last week in their dot plot. It's true that the surprising data on housing and jobs front don't give a respite to the Fed, but a part of it is still believed to be the post-pandemic effect. For housing for example, insufficient number of homes due to the rising WFH demand, the retreat in material costs that exploded during the pandemic and the fading supply chain pressures help to explain why the market is not responding to the skyrocketing mortgage rates.   But the risk is there – it's not even hidden, and the meltdowns tend to happen without telling.   I mean, no one could tell that the US regional banks would go bankrupt a week before they did! Anyway, the risks are there, but the resilient eco data hints that Jerome Powell will confidently remain hawkish, and that could lead to some further downside correction in US big stocks which are now in overbought market. 

UK inflation has come in dramatically higher than expected yet again. As concerns over the rising threat of recession build, all eyes will be focused on the Bank of England's rate decision tomorrow – so what could be next for the central bank? ING's James Smith has a few answers.   UK inflation troubles weigh on the Bank of England UK inflation troubles weigh on the Bank of England Questions over the UK's persistent inflation problem and unfavourable comparisons with both the US and the eurozone are gaining momentum. As Bank of England officials find themselves in an increasingly difficult position, here's what could be next for UK interest rates    

SNB hikes rates by 25bp and signals further tightening still to come The SNB raised its policy rate by 25 basis points as expected, while at the same time sending out a very hawkish signal. With the central bank expecting inflation to remain persistent for some time, another 25bp move is expected for September.   25bp rate hike as expected As expected, the Swiss National Bank has raised its key interest rate by a further 25 basis points to 1.75%. This brings the total amount of rate hikes in this cycle to 250 basis points in one year, well below the European Central Bank's 400bp and the Federal Reserve's 500bp. At the same time, the SNB continues to intervene in the foreign exchange market by selling currencies, thereby strengthening the Swiss franc and bringing down imported inflation. After years of foreign currency purchases, this reduces the size of the SNB's balance sheet and is therefore a particularly effective form of quantitative tightening against inflation.   Long-term inflation concerns This rate hike comes against a backdrop in which inflation remains above the SNB's inflation target of between 0 and 2% – although it has fallen sharply. It reached 2.2% in May, a steady decline from the 3.4% reached in February 2023. Core inflation fell below 2% to 1.9% in May. Thanks to lower energy prices and the appreciation of the Swiss franc, the SNB expects inflation to continue to fall to 1.7% in the third quarter.   Despite this encouraging decline, the SNB continues to see inflation as a problem and expects it to strengthen over the coming winter due to second-round effects. Inflation is also expected to become increasingly domestic, and therefore less easily combatted by strengthening the exchange rate. Of particular concern is an expected rise in rents, which account for 16% of the consumer basket and are indexed to interest rates in Switzerland.   In light of this situation, the SNB has revised up its inflation forecasts for the next few years and now expects inflation to remain above 2% until the end of the forecast horizon in the first quarter of 2026. It's expected to average 2.2% in 2023, 2.2% in 2024 and 2.1% in 2025. In other words, aside from the fall expected this autumn, the SNB does not expect any moderation in inflationary pressures and believes that the current situation is likely to persist. This signal growing concerns about the long-term outlook for inflation.   Another hike expected in September This upward revision of forecasts is a particularly hawkish signal and suggests that the SNB will raise rates again. President Thomas Jordan almost pre-announced this at the press conference, stating that tighter monetary policy will be necessary to bring down inflation. As a result, we are now expecting another rate hike of 25 basis points in September.   At a time when other central banks seem to have lost confidence in their models and are looking primarily at the actual rate of inflation, the SNB seems to be taking a different approach by focusing primarily on inflation forecasts. The fact that the ECB is likely to be more aggressive than previously expected – probably raising rates again in July and September – should further reinforce the SNB's decision. After September, the SNB rate is likely to remain at 2%, with a rate cut looking unlikely between now and 2026.

UK Q1 GDP final – 30/06 – in the recent interim Q1 GDP numbers the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on Q1's 0.1% expansion.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%. There is a risk that this modest expansion could get revised away, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile. US Q1 GDP final – 29/06 – the first iteration of US Q1 GDP was disappointing with the economy growing by 1.1%, slowing by more than expected, largely due to a bigger than expected scaling down in inventories. This was subsequently revised up to 1.3%, helped by an upward revision to 3.8%, which was a strong rebound from 1% in Q4, as US consumers went out on a New Year splurge. Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We're not expecting to see much of a change in this week's revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. US Core PCE Deflator (May) – 30/06 – this week's core PCE deflator numbers could go some way to pouring further cold water on the Fed's claims that it has another 2 rate rises in its locker. A couple of weeks ago the US central bank warned that while it had taken the decision to implement rate increase pause, it still felt that inflation risk was skewed to the upside and that the market should prepare itself for a terminal rate of 5.6%. This was a little unexpected given the current direction of travel we've been seeing over the past few months, when it comes to prices. When the Core PCE Deflator numbers were released in April headline inflation did edge up from 4.6% to 4.7%, while the deflator itself pushed up to 4.4% from 4.2%, begging the question as to whether central bank officials are right to be cautious. This week's core PCE numbers, along with personal spending numbers ought to offer markets an additional insight as to whether these concerns are valid, or whether the Fed's recent hawkishness is justified.   UK Mortgage Approvals (May) - 29/06 - since the start of the year we've seen a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest which weighed on demand for property as well as house prices. As energy prices have come down, along with lower rates, demand for mortgages picked up again with March approvals rising to 51.5k, before slipping back to 48.7k in April. This could well be as good as it gets for a while with the renewed increase in gilt yields, we've seen in the past few weeks, prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness. Although inflationary pressures are starting to subside, the increase in wages is prompting concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021.   By Michael Hewson (Chief Market Analyst at CMC Markets UK)

According to the CME FedWatch tool, markets are currently seeing a ~74% probability that a hike will not take place at the Fed monetary policy committee meeting in June. In addition, expectations of future rate cuts closer to the end of 2023 and continued rate cuts through 2024 are increasing, further boosting investor sentiment, supporting valuations of technology companies, growth sectors in general and contributing to the upward trajectory of the market.   Lower inflation has also played a role in the positive market performance. Inflationary pressures continue to fall, allowing consumers to maintain their purchasing power and businesses to plan for the future with greater certainty, removing uncertainty about inflation. This favourable inflation environment has strengthened investor confidence in the resilience of the economy in the 2nd half of the year, given the expected policy shift from the Fed. Moreover, the US economy has demonstrated its resilience, continuing to show growth despite relatively high interest rate levels. Key economic indicators such as GDP growth, employment figures, labour market strength and consumer spending are showing signs of stability, indicating sustained and balanced economic growth. Expectations of a soft economic landing have allayed fears of a prolonged recession and laid a solid foundation for market recovery.

Moderate outlook From a sectoral point of view, the strength of demand for tourism-related activities and the high level of bookings for this summer should support French economic activity in the third quarter, but the support should diminish thereafter. At the same time, the industrial sector is suffering from weakening global demand. According to survey results, business leaders' assessment of order books has remained very weak for several months. At the same time, inventories of finished products remain high. This means that production is likely to decline over the coming months, as companies see no new orders coming in and have to clear their inventories. The PMI indices for the manufacturing sector have been in contraction territory (below 50) since January. In short, the growth outlook for the French economy is moderate. Growth in the second quarter will be weak, with a fall in GDP remaining a risk. Growth in the third quarter should be slightly better, supported by the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. But this is likely to lose momentum in the fourth quarter, and the end of 2023 and 2024 look weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are expecting growth of around 0.5% this year. For 2024, the gradual recovery in household purchasing power thanks to lower inflation is likely to be offset by even weaker global demand. As a result, we are less optimistic than the central banks and are forecasting French GDP growth of 0.6% in 2024 (compared with a forecast of 1% by the Banque de France).     The trend toward disinflation has begun and will continue Inflation in France stood at 4.3% in June, compared with 5.1% in May, thanks to a fall in energy prices and slower growth in food prices. The fall in inflation is set to continue over the coming months. Growth in producer price indices has slowed markedly. In addition, business price intentions are moderating sharply: price intentions in the manufacturing sector are at their lowest since early 2021, while in the services sector they are at their lowest since November 2021. These figures are in addition to those for the prices of agricultural products, which are falling sharply, which should lead to a sharp fall in food inflation over the coming months. The trend toward disinflation is therefore clearly underway and will continue. However, this trend will probably be slower in France than in other countries, due to less favourable base effects for energy. The tariff shield and fuel rebates prevented a sharp rise in energy prices over the summer and autumn of 2022. As a result, energy inflation is likely to return to positive territory in France in the coming months, with energy prices for the remainder of 2023 likely to remain higher than their levels in 2022, unlike in other countries. This will probably keep overall inflation higher in France than elsewhere this autumn and at the end of 2023. But this does not change the overall picture: ultimately, although less visible than elsewhere, disinflation is well underway and will continue to be seen in France over the coming months. While this trend is clearly encouraging, it does not mean that the problem of inflation is completely over. There is still a major risk pocket, namely services inflation, which is likely to increase in the months ahead and will probably become the main contributor to French inflation by the end of the year. The successive increases in the minimum wage, particularly in January and May 2023, which are being passed on to all wages, will continue to push up the price of services. The Banque de France estimates that negotiated pay rises will average 4.4% in 2023 (compared with 2.8% in 2022 and 1.4% in 2021), often supplemented by a one-off bonus. Salary increases are more pronounced in sectors where recruitment difficulties are greatest. As we expect the labour market to remain tight over the coming quarters despite the economic slowdown, wage increases are likely to strengthen further. However, given the lower price intentions and sluggish demand we expect in the coming quarters, it is likely that wage increases will not be fully passed on to selling prices, weighing on margins. Therefore, inflationary pressures, including in the services sector, should eventually subside. We expect CPI inflation to average 4.6% in 2023 (5.6% for the harmonised index) and 2.1% in 2024 (3.1% for the harmonised index).   The French economy in a nutshell (%YoY)  

  In analyzing the state of the British economy, this week's macroeconomic readings have provided a mixed outlook. With indicators such as wages, GDP, and industrial production under scrutiny, market observers are eager to gain insights into the potential depth of the recession and the Bank of England's (BoE) approach to interest rates.   Examining the released figures, renowned economist Walid Koudmani highlights the various nuances in the current economic landscape. Wages in the UK continue to rise, with average earnings for a 3-month period surpassing expectations at a 6.9% year-on-year (YoY) growth rate, slightly higher than the previous level of 6.7% YoY. However, the number of unemployment benefit claims has seen a significant increase of 25.7k, reversing the prior decline of 22.5k. Additionally, the quarterly change in employment of 102 thousand falls short of the previous level of 250k, although it exceeds expectations set at 85k.     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?   Walid Koudmani The macroeconomic readings released this week paint a mixed picture of the British economy. Wages in the UK continue to rise with average earnings for a 3-month period increasing by 6.9% year-on-year (YoY), slightly higher than the expected 6.8% YoY and the previous level of 6.7% YoY.  However, the number of unemployment benefit claims increased by 25.7k, reversing the previous decline of 22.5k. The quarterly change in employment amounted to 102 thousand, surpassing the expected 85k but lower than the previous level of 250k. The rise in wage growth is a concern as it could indicate persistent inflationary pressures to come which could lead to a decline in consumer spending, leading to a negative impact on economic growth.  Overall, the macroeconomic readings released this week do not provide a clear picture of the state of the British economy. However, they do suggest that the economy could be facing some headwinds, such as rising inflation and slowing growth. It is too early to say whether the UK will experience a deep recession, but the BoE is likely to continue raising rates in an effort to combat inflation and expectations for those rates continue to increase. While the Pound has benefited from this news, there could be a noticeable pressure on stocks as the cost of money continues to rise and investors are left with less resources to allocate. In addition to this, there are several other factors which may influence the British economy including the outcome of the war in Ukraine, the pace of global economic growth, and the direction of commodity prices. 

Moderate outlook From a sectoral point of view, the strength of demand for tourism-related activities and the high level of bookings for this summer should support French economic activity in the third quarter, but the support should diminish thereafter. At the same time, the industrial sector is suffering from weakening global demand. According to survey results, business leaders' assessment of order books has remained very weak for several months. At the same time, inventories of finished products remain high. This means that production is likely to decline over the coming months, as companies see no new orders coming in and have to clear their inventories. The PMI indices for the manufacturing sector have been in contraction territory (below 50) since January. In short, the growth outlook for the French economy is moderate. Growth in the second quarter will be weak, with a fall in GDP remaining a risk. Growth in the third quarter should be slightly better, supported by the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. But this is likely to lose momentum in the fourth quarter, and the end of 2023 and 2024 look weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are expecting growth of around 0.5% this year. For 2024, the gradual recovery in household purchasing power thanks to lower inflation is likely to be offset by even weaker global demand. As a result, we are less optimistic than the central banks and are forecasting French GDP growth of 0.6% in 2024 (compared with a forecast of 1% by the Banque de France).   The trend toward disinflation has begun and will continue Inflation in France stood at 4.3% in June, compared with 5.1% in May, thanks to a fall in energy prices and slower growth in food prices. The fall in inflation is set to continue over the coming months. Growth in producer price indices has slowed markedly. In addition, business price intentions are moderating sharply: price intentions in the manufacturing sector are at their lowest since early 2021, while in the services sector they are at their lowest since November 2021. These figures are in addition to those for the prices of agricultural products, which are falling sharply, which should lead to a sharp fall in food inflation over the coming months. The trend toward disinflation is therefore clearly underway and will continue. However, this trend will probably be slower in France than in other countries, due to less favourable base effects for energy. The tariff shield and fuel rebates prevented a sharp rise in energy prices over the summer and autumn of 2022. As a result, energy inflation is likely to return to positive territory in France in the coming months, with energy prices for the remainder of 2023 likely to remain higher than their levels in 2022, unlike in other countries. This will probably keep overall inflation higher in France than elsewhere this autumn and at the end of 2023. But this does not change the overall picture: ultimately, although less visible than elsewhere, disinflation is well underway and will continue to be seen in France over the coming months. While this trend is clearly encouraging, it does not mean that the problem of inflation is completely over. There is still a major risk pocket, namely services inflation, which is likely to increase in the months ahead and will probably become the main contributor to French inflation by the end of the year. The successive increases in the minimum wage, particularly in January and May 2023, which are being passed on to all wages, will continue to push up the price of services. The Banque de France estimates that negotiated pay rises will average 4.4% in 2023 (compared with 2.8% in 2022 and 1.4% in 2021), often supplemented by a one-off bonus. Salary increases are more pronounced in sectors where recruitment difficulties are greatest. As we expect the labour market to remain tight over the coming quarters despite the economic slowdown, wage increases are likely to strengthen further. However, given the lower price intentions and sluggish demand we expect in the coming quarters, it is likely that wage increases will not be fully passed on to selling prices, weighing on margins. Therefore, inflationary pressures, including in the services sector, should eventually subside. We expect CPI inflation to average 4.6% in 2023 (5.6% for the harmonised index) and 2.1% in 2024 (3.1% for the harmonised index).   The French economy in a nutshell (% YoY)

Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024. More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024.   Falling producer prices, but wages rise

Fed, ECB and BoJ all meet this week Weak PMIs point to further cooling in the economy NAS100 nears channel lows  Equity markets are treading water at the start of what is going to be a very lively week. There are some huge central bank meetings this week, the most notable naturally being the Federal Reserve on Wednesday. Interest rates are finally at or very close to their peaks and this week could see the Fed and ECB announce the last rate hike in their tightening cycles. And a look at the PMI data may help to explain why, with economies around the world cooling at a decent rate. Inflation is also falling, primarily driven by favourable base effects at this stage, as well as falling energy prices and decelerating food costs. The PMIs from the eurozone, the UK, and the US today all tell a pretty similar story. Manufacturing is continuing to struggle – although not as much as expected in the US – while services growth expectations are slowing. There are clear signs in the surveys of more cooling on the horizon, fewer inflationary pressures, and weaker hiring. Central banks will be relieved, though almost certainly not enough to claim victory or explicitly declare the end of the tightening cycle. Policymakers will proceed with extreme caution, albeit very much buoyed by the data they’ve seen over the last month or two.     NAS100 nears channel lows ahead of the Fed The NAS100 pulled back over the last couple of sessions after coming close to 16,000, a level it hasn’t traded at since the start of last year. It was previously a notable level of support and resistance as well, which may explain why we’ve seen some profit-taking. It’s now pulled back to 15,250-15,500 where it saw plenty of resistance over the last couple of months and now coincides with the bottom of the rising channel. A break of this could be a bearish development after such a strong recovery this year.      

Inflation’s here to stay, say European consumers Inflation is a major concern for consumers, and policymakers should worry that they think it's a long-term problem. Our latest ING Consumer Research survey indicates that people in eight European countries not only expect inflation to stay high for at least three more years but also expect those same goods to keep getting more expensive.   Food and energy prices top list of perceived inflationary pressures Households across Europe are worried that the so-called 'cost of living crisis' is here to stay. That's despite inflation rates in most European countries recently coming down, not least on the back of base effects and subsiding food and energy price pressures. Economists expect prices to fall further, but the consumers we've been speaking to in Germany, Belgium, the Netherlands, Spain, Luxembourg, Poland, Romania and also Turkey beg to differ. Most expect prices to stay well above what they consider 'stable' for at least three more years. And they also assume their inflationary pain points will stay the same.   These perceptions are concerning as far as they relate to future spending. We'll dive into the figures shortly, but our survey suggests three-quarters of people whose saving habits were impacted by inflation say they're saving less because they can't afford to or they're saving more to be prepared for future price increases. So, this should have a negative impact on discretionary spending. Only one in eight say they're saving less to spend their money now.  In a survey for ING Consumer Research, consumers were asked to compare the percentage of their net income they now spend on various groups of goods to what percentage they had been spending 5 years ago. Unsurprisingly, food and energy top the list; these items have also been leading official inflation statistics. This picture is roughly the same across participating countries, with Belgium and the Netherlands consistently producing some of the lowest numbers. In most eurozone countries, spending on savings and retirement provision suffered, whereas the non-eurozone countries had considerably larger fractions reporting increases rather than decreases.   Compared to 5 years ago, I now spend on:    

Consumers expect more of the same We asked consumers to make an assumption about the percentage of income they'd be spending five years down the line compared with today. And this column chart looks remarkably similar across the countries we surveyed. Most consumers do not appear to believe in any sort of base effect. Instead, they expect to spend more of their income on those categories that have already seen the largest increases.   5 years ahead compared to now, I assume I will spend this much on...     Many can't afford to save anymore More than 80% of consumers reported changes in their savings behaviour, with the vast majority being related to rising prices. Being forced to reduce the amount that goes into savings was by far the most-selected answer in all countries. Depending on the circumstances, it might also make sense from an economic point of view to save less and spend the money on goods before they become even more expensive. But this is not a popular choice among consumers, who instead prefer to save more in order to be better prepared for rising prices. More than 20% in Turkey reported this. So, while spending on basic needs is likely to simply go up or down with prices and stay more or less constant in real terms, discretionary spending is going to be hit. If prices do come down faster than consumers expect, we might see a bit of a spending spree from those who were able to build up savings in preparation for higher prices that never came. But that's unlikely to affect the overall picture.     Which of the following statements best describes the influence that inflation has had on your saving habits?     Inflation is believed to stay high for longer, especially in Turkey Turkish consumers have a different kind of experience with inflation than the rest of Europe. So, it doesn’t come as a surprise that only 10% do not have an opinion as to when inflation numbers will come down to a level of price stability; at least 18% selected “I don’t know” in all other countries. Some Turkish consumers are sceptical; others are fatalistic. The number of 35% for “5 years or more from now or never again” is the survey’s largest, and so are the 10% who already consider current inflation levels to mean price stability, as they are at least a bit removed from 2022’s record levels.   When do you think official headline inflation in your country will come back down to a level that you would consider price stability?   Consumers' assessment of their financial situation shows little signs of improvement If you don’t believe that the most pressing economic issue will subside anytime soon, you most likely won’t expect things to get better, and European consumers don’t either. Ratings of their own current financial situation on a scale from 1 to 10 compute to an average of 5.4, ranging from 4.6 in Turkey to 6.2 in the Netherlands. Looking back on their situation five years ago, consumers give an average score of 5.9, with every country seeing a drop of at least 0.1. And the outlook is bleak: Consumers’ expectations for their situation in 5 years average out at 5.2, with no country expecting an upswing.   How would you rate the following?   Consumers were also asked to rate the financial situation of their own peer group and that of their country’s general population over the same time span. Their peers' finances rank a bit lower than their own, with lower percentages for the extreme ends of the scale and a higher one for “I don’t know”. But the nationwide picture looks alarming: Consumers rate their fellow countrymen’s finances five years ago at just a bit lower than their own. But the current situation and the future look much worse to them, with a drop twice as big as the one they experienced themselves. What’s striking about this finding is that consumers’ individual perceptions and expectations about inflation don’t appear to tally with what they expect for their economies as a whole. Inflationary pressures, not least in food and energy, have been dominating global news headlines since the war in Ukraine started. That sustained media focus on people’s troubles may well explain the discrepancy.

AUD/USD touches 9-month low Australian job growth slips Fed minutes note concern about inflation The Australian dollar has been on a nasty slide. Earlier, AUD/USD fell as low as 0.6364, a nine-month low, before recovering. In the European session, AUD/USD is trading at 0.6433, up 0.16%. Australia’s job growth slides Australia’s labour market has been surprisingly robust in the face of the central bank’s aggressive tightening, but cracks have finally appeared. Employment in Australia fell by 14,600 in July, compared to a downwardly revised gain of 31,600 in May and missing the consensus estimate of 15,000. The unemployment rate rose to 3.7% in July, up from the previous reading of 3.5% and above the estimate of 3.6%. This is the highest level since April. The Reserve Bank of Australia has repeatedly stated that its rate decisions will be based on the data, and inflation and employment reports are likely the most critical readings for the RBA. July’s soft jobs report has dragged the Aussie lower and should cement a third successive pause from the RBA at the September meeting. The benchmark cash rate currently stands at 4.10% and the futures markets have priced in a 50-50 chance of one more quarter-point hike before the end of the year. If inflation continues to head lower, the RBA will be able to look at trimming rates sometime in 2024. The Federal Reserve remains concerned about high inflation and said that additional rate hikes might be needed, according to the minutes of the July meeting. At the meeting, the Fed raised rates by 0.25%, a move that was widely anticipated. Most members “continued to see significant upside risks to inflation, which could require further tightening of monetary policy”.       Inflation has fallen to 3.2%, but members agreed inflation is “unacceptably high”. Most members saw a  significant upside risk to inflation, but interestingly, the minutes noted that there is uncertainty over the future rate path since there were also signs that inflationary pressures could be easing. . AUD/USD Technical AUD/USD is testing support at 0.6402. This is followed by support at 0.6319 0.6449 and 0.6532 are the next resistance lines

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

US banks fall on fresh rating downgrades, Nvidia earnings in focus  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     The market mood turned sour again, and the S&P500 fell after a short relief. S&P's bank rating downgrades – which came a few days after Moody's downgraded some US small and mid-sized banks and Fitch downgraded the US' rating, came as a reminder that the rising rates won't be benign for banks as depositors move their funds into higher interest-bearing accounts, increasing banks' funding costs. The decline in bank deposits squeezes liquidity, while the value of securities that they hold in their portfolios decline. Plus, regional banks continue to face the risk of a sharp decline in commercial real estate loans. As a result, the S&P500 fell 0.28% on Tuesday, Invesco's KBW bank ETF dived more than 2.50%.       Elsewhere, the rising rates and declining purchasing power finally start showing in some retailers' quarterly announcements. Macy's for example sank 14% yesterday on rising credit card delinquencies and Dick's Sporting Goods slumped more than 24% on 'elevated inventory shrink – in particular theft. Both companies gave a morose outlook for consumer demand moving forward. Could that be a sign of potentially slower consumer spending in the next few months? We will see that. For now, the latest US data remains strong, the Fed expectations are hawkish, no one sees Jerome Powell back off with the Fed's tightening policy, and the US yields are rising. The US 2-year yield pushes higher above the 5% mark, while the 10-year yield struggles near 4.30%, where it sees decent resistance. In one hand, there is a strong demand for US 10-year papers at these levels as many asset managers consider that the levels are good entre points. On the other hand, the hawkish Fed expectations, prospects of – maybe – higher rates, which will be held for a prolonged period of time continue pressuring the yields higher along with the US Treasury's plan to issue more bonds in H2 – as they issued too many T-bills so far to fund their deficit.       And there is one more thing weighing on US treasuries and that's China. Yes, the sluggish Chinese growth is tempering energy and commodity prices and doesn't add to inflationary pressures. But Beijing adds on the US Treasury selloff as it fights against a softer yuan. The People's Bank of China (PBoC) set its daily yuan fixing surprisingly higher than expected this week in a move that Bloomberg described as the most forceful on record.       When the USD/CNY rallies due to higher US and lower Chinese yields, the Chinese sell their US denominated assets to defend yuan. And doing so, they contribute to the further strengthening of the US yields, and the US dollar is pressured higher on the back of stronger yields. Then, the cycle starts all over again. A stronger dollar, and weaker yuan forces the PBoC to sell USD assets. The UST selloff pushes US yields higher and strengthens the dollar and the yields.   

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

UK Services PMI falls to 48.7 (50.8 expected, 51.5 in July) UK Manufacturing PMI falls to 42.5 (45 expected, 45.3 in July) Cable tests support but rebounds for the third time The UK services and manufacturing PMI surveys fell well short of forecasts this morning, the former deep into contraction territory. What’s more, the weakness was widespread from new orders to hiring and prices paid, which suggests we’re not just talking about a blip in the data, but rather the prospect of a recession in the second half of the year. From the Bank of England’s perspective, there’s a lot within the data that will be viewed as encouraging, with slower employment resulting in less tightness in the labor market and lower prices paid across manufacturing and services sectors indicating easing inflationary pressures, in theory at least. The surveys alone won’t be enough to convince the MPC and another rate hike in September looks a near-certainty but beyond that, traders have been paring back expectations on the back of these releases, with only one more then priced in this year.   A bearish or bullish signal for cable? The pound headed lower after the report having drifted higher over the last week or so but once again it ran into trouble around a previous support level.       That level is just above 1.26 where it also rebounded off a little over a week ago and a little over a week before that. This is clearly now a very notable support level, one which if broken could send a strong bearish signal. What’s interesting is that it’s now rebounded back into the 55/89-day simple moving average band and a close within this would further suggest there’s still plenty of support around this important support zone too. This was a crucial support zone a few months ago and it’s proving so again. To the upside, 1.28 continues to look significant, having provided plenty of resistance over the last few weeks and it also roughly coincides with the 38.2% Fibonacci retracement level.  

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

Governor Thedeen say krona is fundamentally undervalued Markets fulling pricing in September Riksbank quarter-point rate hike Sweden’s government expects economy shrink by -0.8% in 2023 (previously eyed -0.4%) Sweden’s krona has been punished as the economy appears to be headed for a tough recession. Core inflation is coming down too slowly and that will keep the Riksbank hiking even as expectations grow for a lengthy recession.  The krona has not been getting any relief as many Swedes have started to embrace holding euros given the krona’s record plunge this year. Riksbank Governor Thedeen Riksbank governor Thedeen said that “the krona is too weak and it is fundamentally undervalued.” He added that “it should strengthen and we think that it will, but we know that it is almost impossible to predict currency moves over the short and medium term.” It is tough to call for a reversal after watching the krona fall to a fresh all-time low against the euro.  The current market expectations for the September meeting is to see the Riksbank raise rates by 25bps to 4.00%.  A freefalling krona is complicating the inflation fight, but that could see some relief as the outlook for the eurozone deteriorates. Expectations for the Sweden’s GDP are not seeing a strong consensus emerge.  Given the currency and inflation situation, it seems that the economy could be entering a recession that last more than a handful of quarters. The Swedish government is expecting a 0.8% decline in 2023 and a 1.0% growth for 2024.  It seems hard to believe that households will be a better position anytime soon, so a recession extending beyond 2024 seems likely.   The EUR/SEK weekly chart     EUR/SEK (weekly chart) as of Thursday (8/24/2023) shows the uptrend to record high territory is showing overbought conditions have arrived.  If the krona is able to firm up here, a mass exodus of EUR/SEK bullish bets could see price action tumble towards the 11.7118 region. If the plunge deeper into record low territory continues, EUR/SEK could make an attempt at the 12.000 which is just below the 141.% Fibonnaci expansion level of the 2020 high to 2021 low move. Last week, the krona was the most volatile G10 currency, so we should not be surprised if that volatility extends further given the chaos in the bond markets.    

In a world where economic indicators and market movements can shift with the blink of an eye, staying updated on the latest offerings and promotions within the financial sector is crucial. Today, we delve into one such noteworthy development that has emerged on the horizon, enticing individuals to explore a blend of banking and insurance services. As markets ebb and flow, being vigilant about trends and opportunities can lead to financial benefits. Let's explore this exciting promotion that brings together the worlds of banking and insurance to offer a unique proposition for consumers.     By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Aug) – 01/09 – the July jobs report saw another modest slowdown in jobs growth, as well as providing downward revisions to previous months. 187k jobs were added, just slightly above March's revised 165k, although the unemployment rate fell to 3.5%, from 3.6%. While the official BLS numbers have been showing signs of slowing the ADP report has looked much more resilient, adding 324k in July on top of the 455k in June. This resilience is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI, while on the BLS measure average hourly earnings remained steady at 4.4%. This week's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 160k jobs added, with unemployment remaining steady at 3.5%. It's also worth keeping an eye on vacancy rates and the job opening numbers which fell to just below 9.6m in June. These have consistently remained well above the pre-Covid levels of 7.5m and have remained so since the start of 2021. This perhaps explain why the US central bank is keen not to rule out further rate hikes, lest inflation starts to become more embedded.                          US Core PCE Deflator (Jul) – 31/08 – while the odds continue to favour a Fed pause when the central bank meets in September, markets are still concerned that we might still see another rate hike later in the year. The stickiness of core inflation does appear to be causing some concern that we might see US rates go higher with a notable movement in longer term rates, which are now causing the US yield curve to steepen further. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%. This week's July inflation numbers could prompt further concern about sticky inflation if we get sizeable ticks higher in the monthly as well as annual headline numbers. When we got the CPI numbers earlier in August, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. We can expect to see a similar move in this week's numbers with a move to 3.3% in the deflator and to 4.3% in the core deflator.       US Q2 GDP – 30/08 – the second iteration of US Q2 GDP is expected to underline the resilience of the US economy in the second quarter with a modest improvement to 2.5% from 2.4%, despite a slowdown in personal consumption from 4.2% in Q1 to 1.6%. More importantly the core PCE price index saw quarterly prices slow from 4.9% in Q1 to 3.8%. The resilience in the Q2 numbers was driven by a rebuilding of inventory levels which declined in Q1. Private domestic investment also rose 5.7%, while an increase in defence spending saw a rise of 2.5%.             UK Mortgage Approvals/ Consumer Credit (Jul) – 30/08 – while we have started to see evidence of a pickup in mortgage approvals after June approvals rose to 54.7k, this resilience may well be down to a rush to lock in fixed rates before they go even higher. Net consumer credit was also resilient in June, jumping to £1.7bn and a 5 year high, raising concerns that consumers were going further into debt to fund lifestyles more suited to a low interest rate environment. While unemployment remains close to historically low levels this shouldn't be too much of a concern, however if it starts to edge higher, we could start to see slowdown in both, as previous interest rate increases start to bite in earnest.            EU flash CPI (Aug) – 31/08 – due to increasing concerns over deflationary pressures, recent thinking on further ECB rate hikes has been shifting to a possible pause when the central bank next meets in September. Since the start of the year the ECB has doubled rates to 4%, however anxiety is growing given the performance of the German economy which is on the cusp of three consecutive negative quarters. On the PPI measure the economy is in deflation, while manufacturing activity has fallen off a cliff. Despite this headline CPI is still at 5.3%, while core prices are higher at 5.5%, just below their record highs of 5.7%. This week's August CPI may well not be the best guide for further weakness in price trends given that Europe tends to vacation during August, however concerns are increasing that the ECB is going too fast and a pause might be a useful exercise.     Best Buy Q2 24 – 29/08 – we generally hear a lot about the strength of otherwise of the US consumer through the prism of Target or Walmart, electronics retailer Best Buy also offers a useful insight into the US consumer's psyche, and since its May Q1 numbers the shares have performed reasonably well. In May the retailer posted Q1 earnings of $1.15c a share, modestly beating forecasts even as revenues fell slightly short at $9.47bn. Despite the revenue miss the retailer reiterated its full year forecast of revenues of $43.8bn and $45.2bn. For Q2 revenues are expected to come in at $9.52bn, with same store sales expected to see a decline of -6.35%, as consumers rein in spending on bigger ticket items like domestic appliances and consumer electronics. The company has been cutting headcount, laying off hundreds in April as it looks to maintain and improve its margins. Profits are expected to come in at $1.08c a share.        HP Q3 23 – 29/08 – when HP reported its Q2 numbers the shares saw some modest selling, however the declines didn't last long, with the shares briefly pushing up to 11-month highs in July. When the company reported in Q1, they projected revenues of $13.03bn, well below the levels of the same period in 2022. Yesterday's numbers saw a 22% decline to $12.91bn with a drop in PC sales accounting for the bulk of the drop, declining 29% to $8.18bn. Profits, on the other hand did beat forecasts, at $0.80c a share, while adjusted operating margins also came in ahead of target. HP went on to narrow its full year EPS profit forecast by 10c either side, to between $3.30c and $3.50c a share. For Q3 revenues are expected to fall to $13.36bn, with PC revenue expected to slip back to $8.79bn. Profits are expected to fall 20% to $0.84c a share.         Salesforce Q2 24 – 30/08 – Salesforce shares have been on a slow road to recovery after hitting their lowest levels since March 2020, back in December last year, with the shares coming close to retracing 60% of the decline from the record highs of 2021. When the company reported back in June, the shares initially slipped back after full year guidance was left unchanged. When the company reported in Q4, the outlook for Q1 revenues was estimated at $8.16bn to $8.18bn, which was comfortably achieved with $8.25bn, while profits also beat, coming in at $1.69c a share. For Q2 the company raised its revenue outlook to $8.51bn to $8.53bn, however they decided to keep full year revenue guidance unchanged at a minimum of $34.5bn. This was a decent increase from 2023's $31.35bn, but was greeted rather underwhelmingly, however got an additional lift in July when the company said it was raising prices. Profits are expected to come in at $1.90c a share. Since June, market consensus on full year revenues has shifted higher to $34.66bn. Under normal circumstances this should prompt a similar upgrade from senior management.   Broadcom Q3 23 – 31/08 – just prior to publishing its Q2 numbers Broadcom shares hit record highs after announcing a multibillion-dollar deal with Apple for 5G radio frequency components for the iPhone. The shares have continued to make progress since that announcement on expectations that it will be able to benefit on the move towards AI. Q2 revenues rose almost 8% to $8.73bn, while profits came in at $10.32c a share, both of which were in line with expectations. For Q3 the company expects to see revenues of $8.85bn, while market consensus on profits is expected to match the numbers for Q2, helping to lift the shares higher on the day. It still has to complete the deal with VMWare which is currently facing regulatory scrutiny, and which has now been approved by the UK's CMA.

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.

In short, regardless of whether unionisation increases over the coming years, the pandemic has shown that wage growth can still rise quickly if there are widespread worker shortages. This is changing, and most countries have seen participation rates return to pre-Covid levels. And even where they haven’t (as in the UK), there are signs that worker supply is improving. We think economic slack will increase as rate hikes increasingly begin to bite. Still, the pandemic also gave us a flavour of how the ageing populations we see in many developed economies could actually be inflationary in the medium term. In the US in particular, we saw millions of people retire in a very short amount of time. And that undoubtedly contributed to worker shortages which fed through to higher wage growth. Many economies were already starting to see this in certain industries (e.g. long-distance lorry driving) before Covid-19, and worker shortages are likely to become a persistent issue over the coming years. The ability of workers to protect real wages in future inflation shocks may well increase. That said, it’s possible that some of the labour scarcity associated with ageing will be countered by technological advances, not least Artificial Intelligence.   Strike days in the US/UK are at multi-year highs

French inflation back on the rise Inflation rose again in August, after falling for three consecutive months, due to higher energy prices. Despite a rebound in household consumption of goods, French domestic demand remains very weak, and a quasi-stagnation of GDP in the second half of 2023 seems the most likely economic scenario. Sharp rise in inflation After falling for three months in a row, inflation in France rose sharply again in August, to 4.8%, compared with 4.3% in July. The harmonised index, which is important for the European Central Bank, stood at 5.7% compared with 5.1% in July. August's rebound was entirely caused by the rise in energy prices, due to higher oil prices and electricity tariffs. Over a year, energy prices have increased again (+6.8% in August), whereas they had been falling in previous months. It should be noted that, because of the tariff shield and fuel price rebates, energy prices rose less dramatically in France than in other European countries last year. The starting point is therefore much lower, and energy inflation will be more of a problem in France than elsewhere in the coming months. Apart from the rebound in energy inflation, the details suggest that inflationary pressures are moderating. Food inflation continues to ease, coming in at 11.1% in August, compared with 12.7% in July. This trend is likely to continue in the months ahead, albeit slowly. We will probably have to wait until 2024 for food prices to stabilise in terms of annual growth. The details of underlying inflation have not yet been published, but they should point to a decline. Prices of manufactured goods slowed to 3.1% in August from 3.4% in July. Given that producer prices are continuing to fall and are now down year-on-year (-1.5% in July compared with +1% the previous month), this trend is likely to continue over the coming months, especially as selling price expectations continue to fall across all sectors. Finally, despite wage increases, services inflation is also continuing to moderate (2.9% compared with 3.1% in July), which is encouraging. Although service inflation is likely to become the main contributor to inflation in the coming months, the risk of an explosion in service prices appears to be limited, in the context of weak economic growth. The trend towards disinflation should therefore resume from September onwards, although it will probably be slower in France than in neighbouring countries. We are expecting inflation, according to the national definition, to reach 4.6% in 2023 on average. We will probably have to wait until the second half of 2024 for inflation to return to 2%.

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.

The US confounded 2023 expectations that it would fall into recession as households used pandemic-era savings and their credit cards to maintain lifestyles amidst a cost-of-living crisis. But with loan delinquencies on the rise, savings being exhausted, credit access curtailed and student loan repayments restarting, financial stress will increas.   Robust resilience in the face of rate hikes At the beginning of the year, economists broadly thought the US economy would likely experience a recession as the fastest and most aggressive increase in interest rates inevitably took its toll on activity. Instead, the US has confounded expectations and is on course to see GDP growth of 3%+ in the current quarter with full-year growth likely to come in somewhere between 2% and 2.5%. What makes this even more surprising is that this has been achieved in the face of banks significantly tightening lending conditions while other major economies, such as China, are stuttering and even entering recessions, such as in the eurozone.   Consumers still happy to spend with the jobs market looking so strong So why is the US continuing to perform so strongly? Well, the robust jobs market certainly provides a strong base, even if wage growth has been tracking below the rate of inflation. Maybe that confidence in job security has encouraged households to seek to maintain their lifestyles amidst a cost-of-living crisis by running down savings accrued during the pandemic and supplementing this with credit card borrowing. The housing market was another source of concern at the start of the year, but even with mortgage rates at 20-year highs and mortgage applications having halved, prices have stabilised and are now rising again nationally. Home supply has fallen just as sharply, with those homeowners locked in at 2.5-3.5% mortgage rates reluctant to sell and give up that cheap financing when moving to a different home and renting remains so expensive. This has helped lift new home construction at a time when infrastructure projects under the umbrella of the Inflation Reduction Act are supporting non-residential construction activity.   But lending is stalling and savings have been run down The Federal Reserve admits monetary policy is now restrictive, and while it could raise interest rates further, there is no immediate pressure to do so. With inflation showing encouraging signs of slowing nicely, this is fueling talk of a soft landing for the economy. With less chance of an imminent recession, financial markets have scaled back the pricing of potential interest rate cuts in 2024, with the resiliency of the US economy prompting a growing belief that the equilibrium level of interest rates has shifted structurally higher. This resulted in longer-dated Treasury yields hitting 15-year highs earlier this month.   Outstanding commercial bank lending ($bn)   Nonetheless, the threat of a downturn has not disappeared. We estimate that around $1.3tn of the $2.2tn of pandemic-era accumulated savings has been exhausted and at the current run rate all will be gone before the end of the second quarter of 2024. At the same time, banks are increasingly reluctant to lend to the consumer with the stock of outstanding bank lending flat lining since the banking stresses in March, having increased nearly $1.5tn from late 2021. We suspect that financial stresses have seen middle and lower income households accumulate the bulk of the additional consumer debt and have run down a greater proportion of their savings vis-à-vis higher income households so a financial squeeze for the majority is likely to materialise well before the second quarter of 2024.   Rising delinquencies will accelerate as student loan repayments resume Indeed, consumer loan delinquencies are on the rise, particularly for credit card and vehicle loans with the chart below showing data up until the second quarter of this year. Since then the situation has deteriorated further based on anecdotal evidence with Macy’s CFO expressing surprise at the speed and scale of the rise in delinquencies experienced through June and July on their own branded credit card (Citibank partnered). With credit card interest rates at their highest level since 1972 and with household finances set to become more stressed with the imminent restart of student loan repayments, something is likely to give. We see the risk of a further increase in delinquencies, which will hurt banks and lead to even further retrenchment on lending, together with slower consumer spending growth and potentially even a contraction.   Percent of loans 30+ days delinquent   Downturn delayed, not averted The manufacturing sector is already struggling and we see the potential for consumer services to come under increasing pressure too. On top of this there are the lingering worries about the demand for office space and the impact this will have on commercial real estate prices in an environment where there is around $1.5tn of loans needing to be refinanced within the next 18 months. With small banks the largest holder of these loans, we fear we could see a return to banking concerns over the next 12 months. Consequently, we are in the camp believing that it's more likely that the downturn has been delayed rather than averted. Fortunately, we think inflation will continue to slow rapidly given the housing rent dynamics, falling used car prices and softening corporate pricing power and this will give the Federal Reserve the flexibility to respond swiftly to this challenging environment. We continue to forecast the Federal Reserve will not carry through with the final threatened interest rate rise and instead will switch to policy loosening from late first quarter 2024 onwards.  

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

US spending surges, but it’s not sustainable US consumer spending is on track to drive third quarter GDP growth of perhaps 3-3.5%. However, this is not sustainable. American consumers are running down savings and using their credit cards to finance a large proportion of this. With financial stresses becoming more apparent and student loan repayments restarting, a correction is coming.   Inflation pressures are moderating Today’s main data release is the July personal income and spending report and it contains plenty of interesting and highly useful information. Firstly, it includes the Federal Reserve’s favoured measure of inflation, the core Personal  Consumer Expenditure deflator, which is a broader measure of  prices than the CPI measure that is more widely known. It rose 0.2% month-on-month for the second consecutive month, which is what we want to see as, over time, that sort of figure will get annual inflation trending down to 2% quite happily.   Services PCE deflator (YoY%)   The slight negative is the core services ex housing, which the Fed is watching carefully due to if being more influenced by labour input costs. It posted a 0.46% MoM increase after a 0.3% gain in June so we are not seeing much of a slowdown in the year-on-year rate yet as the chart above shows. With unemployment at just 3.5% a tight jobs market could keep wage pressures elevated and mean inflation stays higher for longer so we could hear some hawkishness from some Fed officials on the back of this. Nonetheless, the market is seemingly shrugging this off right now given signs of slackening in the labour market from the latest job openings data and the Challenger job lay-off series.

Production measures also looking promising GDP, or more precisely GVA (gross value added) measured in terms of industrial sector production, is also with a quick look.  Here, we see that the main engine for growth is not industry, which has slowed a little, but the service sector. And that ties in with the consumer spending observation we made earlier. Agriculture contributed a little less this quarter - perhaps reflecting the erratic monsoons we have seen this year.    GVA by sector (contribution to growth pp)   RBI easing not a priority Putting all of this together, it looks like the Reserve Bank of India (RBI) will be in no hurry to cut rates. Growth is clearly very strong and it looks like it will remain so in the quarters ahead. A growth rate of about 7% for the full calendar year looks probable, and something in the 6-7% range for next year is also looking likely.  The recent upward spike in inflation is, for now, almost entirely food price-driven, and there are already signs that the worst increases in tomatoes and onions are behind us, so there is equally little need for the RBI to tighten rates in response to this growth backdrop. The 6.5% policy rate will already look quite restrictive once the inflation numbers settle down again, which we believe they will do soon. Rate cuts are most likely the next direction for the RBI, but these can wait until next year. 

Swiss economy slows sharply Switzerland's GDP stagnated in the second quarter, with its industry suffering from the global economic slowdown. While inflationary pressures continue to ease, the Swiss economy is likely to remain sluggish over the next few quarters.   Swiss industry suffers Switzerland's GDP stagnated in the second quarter, following growth of 0.9% in the first quarter (adjusted for sporting events). This marked slowdown is primarily due to the downturn in manufacturing (-2.9% over the quarter), with the cyclical sectors suffering from the global economic slowdown. In addition, after years of very strong growth, the chemical-pharmaceutical industry is also contracting. This is weighing on Swiss exports of goods (-1.2% over the quarter). Meanwhile, the construction sector is being battered by rising interest rates. Investment in construction fell over the quarter (-0.8%), as did investment in capital goods (-3.7%). Private consumption remained strong (up 0.4% over the quarter), still buoyed by the post-pandemic rebound in the consumption of services, particularly in the hotel and catering sectors. Exports of services have also rebounded.   Headwinds likely to intensify Ultimately, while the Swiss economy has largely outperformed its European neighbours since the pandemic (Swiss GDP has risen by 5.6% since the end of 2019, compared with 3.1% for the eurozone), it now seems to have been caught up by major headwinds, namely the global economic slowdown and interest rate rises. It is only the strength of the service sector caused by the post-pandemic recovery, and in particular tourism, that has enabled Switzerland to avoid a contraction in GDP in the second quarter. The Swiss economy is likely to remain sluggish over the next few quarters, with all the leading indicators pointing to a continued slowdown. In particular, the PMI index for the manufacturing sector fell below 50 in December 2022 and has continued to decline since then, now reaching 39.9, its lowest level since 2008. Businesses are less confident and their order books are shrinking, while consumer confidence remains at a very low level. The Swiss economy is therefore likely to remain close to stagnation over the next few quarters. Ultimately, thanks to the strong start to the year, we are expecting growth to average 0.7% in 2023, compared with 2.7% in 2022. Growth in 2024 should remain weak and below the long-term average, at 0.6% for the year.   Inflationary pressures increasingly subdued Against this negative backdrop, one more positive factor remains. Inflationary pressures in Switzerland continue to moderate, and the loss of household purchasing power is smaller than elsewhere. In August, consumer price inflation stood at 1.6%, the same level as in July and slightly lower than in June (1.7%). For the past three months, Swiss inflation has therefore remained below 2%, in line with the Swiss National Bank's (SNB's) target. With wage growth remaining moderate, producer price growth back below 2%, import prices down year-on-year and the economy slowing, a sharp pick-up in inflation over the next few months seems unlikely. By intervening in the foreign exchange market to stabilise the overall effective exchange rate, as it did extensively in 2022, the SNB is able to control external inflationary pressures fairly easily. The only risk lies in rising rents, which in Switzerland are often indexed to the central bank's key rates, and could push inflation up a little in early 2024.   An uncertain central bank meeting Against this backdrop, the outcome of the SNB's monetary policy meeting scheduled for 21 September remains uncertain. It is not impossible that the SNB decides to make a final rate hike, focusing on the risks to inflation in the medium term and choosing to seize the opportunity as the end of the global rate hike cycle approaches. This would take the key rate to 2%, a total increase of 275 basis points since 2022, compared with 500 points for the Fed and 450 points expected for the ECB over the same period. However, with inflationary pressures moderating and the economy slowing, the likelihood of a further rate hike has clearly diminished.

We expect the current account to be in surplus in 2023 As economic activity has been weakening, the collapse in domestic demand is rapidly reducing the need for imports. In addition, as the energy issue appears to be easing this year, the pressure on the trade balance from the import side is easing significantly. Conversely, the export side is still supported by new EV battery plants, while carmakers are still dealing with some backlogs. Taking all these factors into account, it is hardly surprising that the trade balance has been in surplus for five months, while the current account also posted a surplus in the second quarter, according to preliminary data. Against this backdrop, we lift our forecast and now see the current account balance reaching a surplus of 0.3% of GDP in 2023. However, a further slowdown in the global economy could weaken export prospects, limiting the upside to this forecast.     Trade balance (three-month moving average)   Inflation will fall below 8% by December, but 2024 brings challenges Headline inflation sank to 17.6 % YoY in July, mainly on base effects, while prices rose by 0.3% compared to June. At the component level, food inflation continued to moderate, while the slump in domestic demand was reflected in both durable and non-durable goods prices. In our view, the rapid deterioration in firms' pricing power is evident and will only accelerate going forward as competition among retail outlets for households' overall shrinking disposable income intensifies. We expect headline inflation to fall below 8% by December, but next year brings a number of upside inflationary pressures, such as the increase in excise duty on fuel prices and a possible 10% minimum wage increase. In addition, this year's budget revision, due in September, will include some tax increases, which we believe will pose further second-round inflationary risks.   Inflation and policy rate   Our interest rate forecast has changed due to recent hawkish message At the August meeting, policy normalisation continued as the National Bank of Hungary (NBH) cut the effective interest rate by a further 100bp to 14%. The main takeaway from the meeting was that the autopilot will be switched off after the September rates conversion, a clear hawkish pushback against "excessive rate cut expectations". With a data-dependent approach, the NBH will focus on both the inflation outlook and maintaining market stability, so nothing is set in stone. Moreover, the plan to manage the highest positive real interest rate in the region will shape the NBH's decision-making function, which will both strengthen disinflation and make HUF assets more attractive. In our view, the second phase of monetary policy normalisation will bring a first rate cut in December, with a 100bp step. As for October and November, we currently expect a pause, as the NBH will continuously assess the risk environment, paying special attention to the uncertainty surrounding the EU funds and pro-inflationary risks going into 2024.   Real rates (%)    

RBA expected to pause US nonfarm payrolls rise slightly to 187,000 The Australian dollar has started the week with slight gains. In Monday’s European session, AUD/USD is trading at 0.6464, up 0.21%.   RBA expected to pause The Reserve Bank of Australia is expected to hold interest rates at 4.10% when it meets on Tuesday and a rate hike would be a huge surprise. The central bank has paused for two straight meetings and the odds of a third pause stand at 86%, according to the ASX RBA rate tracker. The most important factor in RBA rate policy is of course inflation. In July, CPI fell to 4.9% y/y, down from 5.4% y/y and better than the consensus of 5.2% y/y. Inflation is moving in the right direction and has dropped to its lowest level since February 2022. A third straight pause from the RBA will likely raise expectations that the current rate-tightening cycle is done but I don’t believe we’re at that point just yet. This is Governor Lowe’s final meeting and he is expected to keep the door open to further rate hikes. Incoming Governor Bullock stated last week that the RBA “may still need to raise rates again”, adding that the Bank will make its rate decisions based on the data. The RBA isn’t anywhere near declaring victory over inflation and has projected that inflation will not fall back within the 2%-3% inflation target until late 2025.   The week wrapped up with the US employment report for August. The Fed will be pleased as nonfarm payrolls remained below 200,00 for a third straight month, rising from a revised 157,000 to 187,000. Wage growth fell to 0.2% in August, down from 0.4% in July and below the consensus of 0.3%. The data cements a rate hold at the September 20th meeting, barring a huge surprise from the CPI report a week prior to the rate meeting. . AUD/USD Technical AUD/USD is testing resistance at 0.6458. Above, there is resistance at 0.6516 There is support at 0.6395 and 0.6337    

In a pivotal decision, the Bank of Canada has chosen to maintain its benchmark interest rate at 5%, opting for stability amidst a backdrop of increasing uncertainty in the global economy. This move underscores the delicate balancing act that central banks worldwide are currently navigating as they seek to foster economic growth while mitigating the persistent threat of inflationary pressures.   At the Heart of the Matter The Bank of Canada's steadfast commitment to keeping interest rates at their current level is emblematic of the institution's concerns regarding the fragility of the global economic recovery. While inflation remains a prevalent worry, policymakers are treading cautiously to avoid the potential adverse consequences of premature rate hikes.   A Global Ripple Effect The Bank of Canada's stance on interest rates carries significant implications that extend well beyond its borders. As one of the world's leading economies, Canada's monetary policy decisions hold the power to influence the strategies adopted by central banks in other nations. Additionally, these decisions reverberate through global financial markets, shaping investor sentiment and influencing asset prices. In a rapidly evolving economic landscape, the Bank of Canada's decision to maintain interest rates provides a snapshot of the nuanced considerations faced by central banks worldwide. As they grapple with uncertainty and attempt to strike a delicate balance between economic growth and inflation control, the world watches with keen interest, cognizant of the potential ripple effects that each policy move may bring.   This article aims to provide readers with a succinct yet comprehensive overview of the Bank of Canada's recent interest rate decision and its broader implications within the global financial landscape. Optimized for SEO, it offers valuable insights into the current challenges facing central banks and the evolving dynamics of the global economy.   The decision by the Bank of Canada to maintain interest rates at 5% highlights the central bank's cautious approach to addressing economic challenges. In the face of uncertainties such as the ongoing global supply chain disruptions and the potential impact of new variants of the COVID-19 virus, central banks worldwide are opting for prudence. By holding the benchmark rate steady, the Bank of Canada aims to support domestic economic recovery while closely monitoring inflationary pressures. This stance reflects a broader trend among central banks, as they grapple with the complexities of an ever-evolving economic landscape.   The Bank of Canada's decision will undoubtedly be scrutinized by economists, policymakers, and financial markets, as it provides valuable insights into the delicate balancing act of managing economic growth and inflation in a post-pandemic world. In this interconnected global economy, the implications of such decisions ripple across borders, affecting businesses, investors, and individuals alike.   As economic conditions continue to evolve, central banks remain at the forefront of efforts to navigate the path forward, seeking to foster stability and sustainable growth in an uncertain world. In a rapidly shifting economic landscape, the Bank of Canada's choice to maintain interest rates provides a snapshot of the multifaceted considerations confronting central banks worldwide. As they grapple with an atmosphere of uncertainty and endeavor to strike an intricate balance between stimulating economic growth and effectively managing inflation, the world watches with acute interest. It is well aware of the potential far-reaching consequences that each policy decision can bring.  

At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior”. In order to pull Japan completely out of deflation, the BoJ seems ready to be one policy cycle behind key central banks in starting the normalisation process. We expect the government to maintain its commitment to the current accommodative fiscal/monetary policy framework even after the PM Fumio Kishida reshuffles the cabinet and LDP leadership. The government will likely maintain its accommodative fiscal policy stance under the banner of “new capitalism” to further stimulate investments and in turn economic growth. With the government maintaining a strong commitment to the Abenomics policy framework, the BoJ will likely remain cautious of any major policy changes in order to not repeat past mistakes of premature policy tightening. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in 2024 under the assumption that the global economy will continue to remain strong.   At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior”. In order to pull Japan completely out of deflation, the BoJ seems ready to be one policy cycle behind key central banks in starting the normalisation process. As long as markets are pricing in a Fed rate cut sometime next year, the BoJ will likely continue with the current monetary easing policies. We continue to expect the BoJ will likely start the normalisation process by exiting from the YCC framework in 2025, once the global economy enters the next cyclical recovery. Meanwhile, we expect the government to maintain its commitment to the current accommodative fiscal/monetary policy framework even after the PM Fumio Kishida reshuffles the cabinet and LDP leadership. The government will likely maintain its accommodative fiscal policy stance under the banner of “new capitalism” to further stimulate investments and in turn economic growth. With many key ministers having experienced posts within METI, the government’s fiscal policy stance will likely focus on stimulating the economy rather than balancing the budget. With the government maintaining a strong commitment to the Abenomics policy framework, the BoJ will likely remain cautious of any major policy changes in order to not repeat past mistakes of premature policy tightening. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in 2024 under the assumption that the global economy will continue to remain strong.   The main scenario is that the central bank policy tightening cycle is approaching its end and the global economy will show stronger signs of slowing down as the cumulative effects of policy rate hikes so far suppress demand and dampen inflationary pressures. An economic slowdown and expectations for interest rate cuts by key central banks including the Fed will likely strengthen downward pressure on global bond yields and give the BoJ room to reduce its JGB purchases while maintaining the current YCC framework.   Based on the latest US financial accounts, the household savings rate (net asset change as percentage of GDP) seems to have bottomed out at around 2.2% of GDP in Q422, and has increased since then to 4.4% as of Q223. The household savings rate rising again combined with economic data showing signs of weakness and weaker inflationary pressures is likely the basis in which many market participants continue to see a soft-landing scenario as their main scenario.   The upside risk scenario is that the global economy remains resilient and inflationary pressures remain. Under such a scenario, central banks will be forced to continue tightening monetary policy and market expectations of a policy rate cut in 2024 would disappear. In such a scenario, upward pressure on JGB yields would strengthen and the JPY would weaken further. The BoJ will likely be forced to adjust or abandon YCC in such a scenario. However, to finance the continued increase of consumption activities, households will be forced to sell assets which will likely lead to a peak in asset prices. Combined with higher policy rates, the economy could face strong headwinds in such a scenario and an upside risk scenario could be followed by a hard landing scenario   The downside risk scenario is that the effect of cumulative rate hikes by central banks so far appears much stronger than anticipated. Under such a scenario, businesses will likely strengthen their cautious attitudes and lead to a much stronger-than-expected deleveraging move. Central banks will likely be forced to respond by cutting policy rates at a much faster pace than anticipated. In such a world, the JPY would likely appreciate significantly and the risk that Japan falls back into deflation will likely strengthen. The BoJ will likely be forced to respond by implementing additional easing measures, such as further cuts to its negative interest rate policy, while implementing measures to alleviate the side effects of further easing policies simultaneously. Under such a scenario, the global economy could fall back into a deflationary state but we believe the likelihood of such a scenario materialising at this juncture remains small        

Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative USD CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold  out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.   Chris Turner.

The timing of the BoJ’s start to the normalisation process will likely depend on whether the Bank of Japan moves quickly or slowly to normalise its monetary policy and on the expectation of whether the Fed will move to cut rates next year. The main scenario for the US is that the central bank policy tightening cycle is approaching its end and the global economy will show stronger signs of slowing down as slows the cumulative effects of policy rate hikes so far to suppress demand and dampen inflationary pressures. An economic slowdown and expectations for interest rate cuts will likely strengthen downward pressure on global bond yields and give the BoJ room to reduce its JGB purchases while maintaining the current YCC framework. Based on the latest US financial accounts, the household savings rate (net asset change as a percentage of GDP) seems to have bottomed out at around 2.2% of GDP in Q422, and it has increased since then to 4.4% as of Q223. The household savings rate rising again combined with economic data showing signs of weakness and weaker inflationary pressures is likely the basis for many market participants continuing to see a soft-landing scenario as their main scenario. As long as markets are pricing in a Fed rate cut sometime next year, the BoJ will likely continue with its current monetary easing policies. We continue to expect the BoJ to likely start the normalisation process by exiting from the YCC framework in CY25, once the global economy enters the next cyclical recovery.   At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan’s economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms’ wage- and price-setting behavior”.   The BoJ will likely remain cautious of any major policy changes as long as the central bank holds such views, so as to not repeat past mistakes of premature policy tightening, especially as the government is maintaining a strong commitment to the Abenomics policy framework to pull Japan completely out of deflation. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in CY24 under the judgement that the global economy will remain strong  

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.”    

AUD: Stronger than expected employment gains The Aussie dollar is trading on the strong side this morning after a stronger-than-expected August jobs report in Australia. Employment rose 64.9k after July’s negative reading, and the unemployment rate was unchanged at 3.7%. As explained by our economist in this note, the hiring spike was almost entirely related to part-time jobs. Still, some of those jobs will become full-time in the coming months, which can also push wages higher. We remain reluctant to pencil out another hike by the Reserve Bank from our forecasts, and still narrowly favour one last rate increase to 4.35% by year-end. The new Governor, Michele Bullock, may want to convey the message she is serious about bringing inflation down, and if inflationary pressures show some resilience, she could deliver a final hike at one of the three remaining meetings of 2023. Markets are pricing in a mere 9bp of tightening to the peak, even after the strong jobs figures, meaning there is ample room for a hawkish repricing and AUD to benefit from it. Still, the USD/US activity data story remains much more important for AUD/USD, and we see the pair being capped below 0.6500 for the remainder of September as the USD remains supported post-Fed.  

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.  

French business climate deteriorates again, inflationary pressures remain high The business climate in France has deteriorated again in November, a further sign of the worsening outlook for activity over the coming months. Growth is expected to slow. At the same time, the PMI indices indicate that inflationary pressures remain high and that disinflation will take time.   Further deterioration in the business climate In detail, according to the data published by INSEE, the business climate indicator reached 97 in November, down by one point over one month, and reaching its lowest level since April 2021. The deterioration in the French business climate is mainly the result of a more unfavourable conjunctural situation in both wholesale and retail trade, where order intentions and the volume of past sales are down. The business climate is also less favourable in the construction sector, due to a marked fall in the balance of opinion on planned staffing levels. By contrast, business sentiment remained stable in both industry and services.   Labour market continues to cool Furthermore, the employment climate confirms the cooling in the labour market, with the indicator dropping two points over the month to its lowest level since spring 2021. This suggests that the rise in the unemployment rate seen in the third quarter is likely to continue in the coming quarters, due to the weaker economic outlook, but also due to the expected increase in the labour force as a result of the rise in the retirement age. We are forecasting an unemployment rate of 7.6% at the end of 2023 and 7.9% at the end of 2024, compared with 7.4% at present. Interestingly, the deterioration in the employment climate is coming mainly from the services sector, where companies are much less optimistic about future headcount. This seems to indicate that the economic slowdown is no longer confined solely to the industrial and construction sectors, but has reached the services sector, which is likely to perform much less favourably over the coming quarters.    

PMI indices point to continued strong inflationary pressures The PMI indices for November, also published this morning, also point to a deterioration in the economic outlook. The composite index fell in November to 44.5, compared with 44.6 in October. For the sixth month in a row, the index is below the 50 threshold. According to the survey, it was manufacturing that was the main drag on activity, with manufacturers recording their sharpest fall in production since May 2020. Order books and business expectations are down in both the services and manufacturing sectors. Worryingly, the survey continues to point to significant inflationary pressures, particularly in the services sector, where inflation has accelerated compared with October.   This is obviously bad news for the European Central Bank as this indicates that disinflation will take time in France. Inflation is likely to remain close to 4% for the next few months, and it will probably be 2025 before consumer price inflation in France returns to 2%. We expect inflation, according to the harmonised index, to be 2.5% at the end of 2024 and 1.9% at the end of 2025.      GDP expected to stagnate in the fourth quarter Ultimately, the activity indicators published so far for the fourth quarter are weak and suggest that French economic growth is likely to continue slowing at the end of 2023. After GDP growth of +0.1% quarter-on-quarter in the third quarter, a rebound in the fourth quarter seems highly unlikely. We expect GDP to stagnate over the quarter, which would bring average growth for 2023 to 0.9%.   We believe that the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by monetary policy that remains very restrictive. Given the low starting point for the year, average growth in 2024 is likely to be weak, and well below the government's forecast of 1.4%. Our forecast for average French GDP growth in 2024 is 0.6%.

No surprise in November The National Bank of Hungary (NBH) reduced its base rate by 75bp to 11.50% at its November rate setting meeting. At the same time, the entire interest rate corridor was lowered by 75bp, maintaining the symmetry of the +/- 100bp range. Although this was again a unanimous decision, the menu seen in October was also present at this rate-setting meeting. That is, the Monetary Council decided between a 50, 75 or 100bp cut. The statement and press conference made it clear what the reasoning was for sticking with the proverbial golden mean.   The pros and cons canceled each other out A hawkish shift compared to the October meeting was dropped due to favourable incoming macroeconomic data. Hungarian inflation returned to single-digit territory, with the underlying monthly repricing pattern showing similarities to 2019-2020 (pre-shock pattern). The improvement in the external balance continued on the back of rising export capacity, supported by shrinking domestic demand, which reduced import needs and the energy balance also improved. Last but not least, together with the ongoing disinflation, the Hungarian economy exited the recession and the incoming high-frequency data suggest that the year-on-year print could return to positive territory from the fourth quarter of 2023. However, all these positive changes have been accompanied by significant external risks. Geopolitical tensions and sanctions are still with us, and we can't rule out another shock to energy and commodity markets as a result. The armed conflicts in Ukraine and Gaza keep the economic landscape highly unpredictable. On the macroeconomic side, there are ongoing labour market tensions and recessionary fears in the international environment. Against this background, the Monetary Council decided to maintain its cautious approach and closed the door on the dovish 100bp easing option.   Steady as she goes Even before today's official and explicit forward guidance, we expected the National Bank of Hungary to stick to the recent step size as the baseline pace of further rate cuts. During the background discussion, Deputy Governor Virág made it clear that – based on the latest information – the policy rate could fall below 11% by the end of the year and reach single digits in February 2024. We wouldn't go so far as to say that this is a pre-commitment, but it's certainly the closest thing to it. Such a rate path would imply a continuation of 75bp rate cuts up to (and including) the February rate-setting meeting. In general, the statement and the press conference did not bring any changes either in the tone of monetary policy or in the main functions that influence monetary policy decisions. As a result, today's rate-setting meeting can be described as a well-managed non-event.   Our market views After the NBH meeting, everything seems to be in line with market expectations and rates have not moved much. This is good news for the HUF, which has re-established a relationship with rates over the last three days and has weakened to 380 EUR/HUF before the meeting. Still, the recent rally in rates points to weaker HUF levels, but this will probably not be the case for now. A stable NBH and higher EUR/USD could offset this, plus we could see some progress in negotiations with the EU in the near term. Overall, today's meeting thus seems to be positive for HUF, which will halt the weakening from recent days. In the short term we probably need to see some catalysts for new gains, e.g. the EU story, but overall we remain positive on the HUF. If everything goes in a positive direction, then we believe EUR/HUF will move into the 370-375 range before the year ends. On the other hand, the current weakness probably hasn't changed the market's long positioning much and we should still keep that in mind if bad news comes. Rates have rallied a lot in recent weeks and have closed the biggest gaps between market pricing and our forecast. But something is still missing to perfection and we still see the whole curve lower but rather flatter later. At the short end of the curve, we think the market needs to accommodate the set pace of 75bp rate cuts as the central bank confirmed today, while the long end remains significantly elevated also because of high core rates. Thus, as we mentioned earlier, the long end in our view has more potential to rally further and the curve has steepened too early and too quickly, closing the gap with the region.

UK Mortgage Approvals/Consumer Credit (Oct) – 29/11 – the first half of this year saw a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest rates which weighed on demand for property as well as house prices. As energy prices have come down, along with lower rates, demand for mortgages picked up again peaking in June as approvals rising to 54.6k. It's been downhill since then with the sharp rise in rates during the summer months, prompting a sharp fall-off which saw approvals fall to 43.3k in September, and the lowest number this year. We have seen interest rates come down since the summer which might offer some respite to the housing market, however recent housing data would appear to suggest that consumers are holding back when it comes to the purchase of a new house. Net consumer credit has been slightly more resilient coming in at £1.4bn in September, which hasn't been dissimilar to previous months. Although we are seeing inflationary pressures continuing to subside, wages have been holding up well, although the resilience in these numbers might suggest that consumers are adding to their levels of debt just to get by.

What next for UK oil and gas after a year of lower profits  By Michael Hewson (Chief Market Analyst at CMC Markets UK) In contrast to the strong gains seen in 2022 the oil and gas sector has had a much more mixed year as a sharp fall in natural gas prices, and a slowdown in oil prices saw profits return to more normal levels for the sector. In 2022 the likes of Exxon Mobil and Shell saw share price gains in excess of 60%, as both oil giants reaped the benefits of higher margins as they bounced back from the huge losses posted during the Covid pandemic. As a whole the sector posted losses of $76bn with around $70bn of that amount as a result of write-downs and impairments on unviable or stranded assets. As with last year the challenge for the likes of Exxon Mobil, BP and Royal Dutch Shell remains in how they transition towards a renewable future without hammering their margins, and while we've seen a period of share price consolidation this year, we've also seen a shift in tone away from keeping the green lobby happy. There now seems to be a more hard-nosed and pragmatic approach, which has helped both Exxon and Shell's share price make new record highs over the second half of the year, although as oil and gas prices have declined so have share prices.   Consolidation year for BP and Shell As a whole the sector saw demand and prices collapse during that Covid period and it would appear that those experiences during that time may have shaped OPEC's response to this year's supply and demand concerns. Fearing another oversupply issue OPEC and Russia have kept much tighter control over production output, announcing cuts in April and then continuing those caps through the summer and into next year in an attempt to keep a floor under prices.   Along with further geopolitical uncertainty on top of Russia's war in Ukraine, in October we also had to contend with the Hamas savage attack on Israel's northern border, and Israel's response which prompted concerns over transit routes around the Gulf region.   With inflationary pressures subsiding and energy prices stabilising at lower levels the oil and gas sector for now appears to focussing on what it does best in generating cash, with new CEOs for both Shell and BP marking a potential shift in thinking when it comes to renewables. Under their previous incumbents, Shell's Ben Van Buerden and BP's Patrick Looney the focus was very much on transitioning away from oil and gas and towards a much lower margin future of renewable energy.    While a laudable goal it soon became apparent that while the politics was very much geared to that, there was a growing realisation that it couldn't be done cheaply and not without enormous damage to the energy and economic security of everybody. When Wael Sarwan took over as CEO of Shell he recognised this reality quickly, pushing back against the prevailing narrative and outright hysteria of politicians and activists that it could be done cheaply and easily.   In June he pushed back by saying that "We need to continue to create profitable business models that can be scaled at pace to truly impact the decarbonisation of the global energy system. We will invest in the models that work – those with the highest returns that play to our strengths" in a broadside at some of the recent reckless narrative and almost hysterical calls to cut back on fossil fuel use whatever the cost. While this has caused some unease in some parts of the Shell business it appears to be an acknowledgment of the reality that the transition to renewables will be a gradual process especially given the current levels of geopolitical uncertainty that are serving to drive the costs of the energy transition ever higher.   It is a little worrying that politicians have been unable to grasp this reality, continuing to push the myth that wind power is cheap, as the silent majority push back over the reality that the transition will be ruinously expensive if done too quickly.   When Shell reported its Q2 numbers in July profits fell short of expectations due to the sharp falls in both natural gas and crude oil prices that occurred over that quarter. The rally in oil and gas prices since then has ensured that this didn't happen in Q3 with profits coming in line with forecasts, which given that all its peers saw their numbers come in light was particularly notable.   Q3 profits came in at $6.22bn, in line with expectations helped by improvements in refining margins as well as higher oil and gas prices and a better performance in its trading division. The integrated gas part of the business saw profits remain steady and were in line with Q2 at $2.5bn.   Upstream saw a solid improvement on Q2's $1.68bn, rising to $2.22bn, although we've still seen a steep fall from the same quarter last year. On renewables we saw that part of the business sink to a loss of -$67m, due to lower margins and seasonal impacts in Europe, as well as higher operating expenses. Shell's chemicals and products division also did much better in Q3, its profits rising to $1.38bn helped by an improvement in refining margins due to lower global product supply as well as higher margins in trading and optimisation, although chemicals were still a drag on profitability overall.   On the outlook Shell nudged the upper end of expectations for capital expenditure down by $1bn to between $23bn to $25bn, as well as increasing the buyback to $3.5bn. While Shell's share price has held up reasonably well the same can't be said for BP which while holding onto last year's gains has lagged behind Shell, although BP was able to get close to its February highs in the middle of October.  

UK wages/UK CPI (Dec) – 16/01 and 17/01 Since March of last year headline CPI in the UK has more than halved, slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. The decline in headline inflation is very much welcome, however most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing. Food price inflation for example is still much higher, slowing to 6.6% in December, while wage growth is still trending above 7% at 7.2%. Services inflation is also higher at 6.3% while core prices rose at 5.1% in the 3-months to November.   This week's wages and inflation numbers are likely to be key bellwethers for the timing of when the Bank of England might look at starting to reduce the base rate, however the key test for markets won't be on how whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers. Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 7% is likely to stay the Bank of England's hand when it comes to looking at rate cuts. It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike. That means it will take more than a further slowdown in the headline rate for these 3 MPC members to reverse that call, let alone call for rate cuts. Expectations are for wages to slow to 6.7% and headline CPI to come in at 3.8%.  

ECB keeps rates and communication unchanged, discussion of rate cuts premature European Central Bank President Christine Lagarde stressed during the press conference that any discussion on rate cuts was still premature.   At today’s meeting, the European Central Bank kept everything unchanged: both policy rates and communication. The press release with the policy announcements is almost a verbatim copy of the December statement. The ECB only dropped two phrases that could be interpreted as opening the door to rate cuts very softly: the December comments on domestic price pressure being elevated, and the temporary pick-up in inflation. The fact that these two phrases were dropped, however, could also simply be linked to the fact that there are no new forecasts. And during the press conference, ECB President Lagarde mentioned that observers shouldn’t pay too much attention to subtle changes in the text. Admittedly, we don’t know what to do with this comment, bearing in mind that central bankers are normally known for weighing every single word and comma in their communication. Also during the press conference, Lagarde stressed that the Governing Council had concluded that any discussion on rate cuts was currently premature. She repeated the importance of wage developments in the coming months for the next ECB steps, pointing to some indicators that already show some slowing in wage growth. While this could be seen as a very tentative shift towards more dovishness, Lagarde also emphasised the need for inflation to be on a sustainable downward trend. Asked whether she would repeat her statement from last week in Davos that rate cuts by the summer were likely, Lagarde replied that she always stood by what she had said. Even though we today learned that we shouldn’t pay too much attention to every single word, we do remember that Lagarde said in November last year that the ECB wouldn’t cut rates in the next couple of quarters. Combining these two comments would imply that a first rate cut could not come in June but only in July at the earliest. However, past experience has shown that the ECB president is not necessarily the best ECB forecaster.   We stick to our call of a June cut Looking ahead, today’s meeting once again stressed that the ECB is in no position to start cutting rates soon. In any case, even if actual growth continues to turn out weaker than the ECB had expected every single quarter, as long as the eurozone remains in de facto stagnation mode and doesn’t slide into a more severe recession, and as long as the ECB continues to predict a return to potential growth rates one or two quarters later, there is no reason for the ECB to react to more sluggish growth with imminent rate cuts. Also, the job of bringing inflation back to target is not done yet. In the coming months, inflation developments will be determined by two opposing trends: more disinflation and potentially even deflation as a result of weaker demand, but also new inflationary pressures due to less favourable base effects, new inflationary pressure as a result of the tensions in the Suez Canal as well as government interventions in some countries, above all Germany. As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue to believe that a first rate cut will not come before June.