Jobless Claims

Each country shares monthly, weekly and quarterly macroeconomic reports. The USA, as the largest economy in the world, also has individual indicators that are monitored by investors around the world. The most popular because it is published every week is Initial Jobless Claims. We can hear that in a given week the rod has been decreasing or, on the contrary - it has increased, but what does it mean?   Non-farm payrolls (NFP) - an important economic health measure The nonfarm payroll, or simply the NFP, is always an important and influential event in the economic calendar.   The nonfarm payroll (NFP) report is a key economic indicator for the United States and represents the total number of paid workers in the U.S. excluding those employed by farms. The NFP data is normally released on the first Friday of every month.   Private and government entities throughout the United States are surveyed about their wages. BLS publishes non-farm payroll data on a monthly basis through a closely tracked employment report.   NFP releases generally cause large movements in the forex market. This is because traders always monitor the indicators to identify trends in economic growth A higher wage rate is generally good for the US economy as it indicates more jobs and faster economic growth. The expected change in wage data causes mixed reaction in the currency markets.When the nonfarm payroll differs significantly from the forecast, there is usually a reaction in the markets. But how does NFP affect the Forex market specifically? The effects of the NFP tend to be limited to currency pairs which involve the US dollar. If the results come in higher than expected, this tends to have a strengthening effect on the USD whereas, if the result comes in lower than expected, the USD will often weaken. Industrial production (IPI) indicator explained Industrial production refers to the output of industrial establishments and covers sectors such as mining, manufacturing, electricity, gas and steam and air-conditioning. It also measures production capacity, an estimate of production levels that can be sustainably maintained.   Industrial production and capacity levels are expressed as an index level compared to the base year. In other words, they do not express an absolute volume or value of production, but a percentage change in production compared to 2021.   Industry-level data is useful for managers and investors in specific industries. Fluctuations in the industrial sector are responsible for most of the change in overall economic growth.   The difference between GDP and IPI in the field that GDP measures the price paid by the end user, and thus includes the added value in the retail sector, which the IPI ignores.   Capacity utilization is a useful indicator of the strength of demand. Low capacity utilization or overcapacity signals weak demand. Politicians could read this as a signal that a fiscal or monetary stimulus is needed. On the other hand, high capacity utilization may act as a warning of an overheating of the economy, suggesting the risk of rising prices and asset bubbles.   Initial Jobless Claims - how investors use it? Jobless claims measure how many people are out of work at a given time. Initial jobless claims represent new claimants for unemployment benefits. The claim requests a determination of basic eligibility for the Unemployment Insurance program. This report is published weekly.   Domestic unemployment claims are an extremely important indicator of macroeconomic analysis. As such, it is a good indicator of the US labor market. For example, when more people apply for unemployment benefits, it generally means that fewer people have jobs, and vice versa.   Investors can use this report to form an opinion on the country's economic performance. But this is often very volatile data as it is reported weekly. Markets can react strongly to the mid-month unemployment benefit report, especially if it shows a difference to the cumulative data of other recent indicators.   During the economic downturn caused by the spread of the COVID-19 virus, the weekly numbers of unemployed in the US rose to historic levels. We could observe that such a situation significantly influenced investors' decisions and market reaction. Source: investopedia.com, investing.com 

Rates Spark: Worries that more might be needed The Bank of Canada has resumed hiking after a pause, highlighting concerns that elsewhere more might be needed to bring inflation down even as the Fed is mulling a pause of its own. Market rates have adjusted higher again and look vulnerable to more upside in the near term, especially in the US, with supply looming early next week.   The Bank of Canada lends skip narratives globally more credibility If they need any evidence that the current tightening cycle is not of the usual type, rates markets only have to look at the Bank of Canada’s 25bp hike yesterday. It was a move that surprised the majority of economists and came after the bank stood pat since last hiking 25bp in January. The Bank of Canada has led Fed policy in many ways, when it came to starting quantitative tightening or reverting to larger hikes. Now it may well have jumped ahead with the “skip” narrative, just when FOMC members are mulling a pause of their own. While it was previously tempting for markets to read any pause already as the end of the tightening cycle, it shows that an adverse turn of the data can require central banks to tighten the policy screws further.   With regards to the markets’ pricing of the Fed, the implied probability of a hike next week increased moderately to 30%. The probability of a July hike briefly spiked above 90% before falling back to 80%, not far from where it sat before. Yet further out the SOFR OIS forwards for year-end are now back at their highest levels since March at just above 5%.   Inflation concerns and supply add near-term upside to yields   Supply remains a near term factor for rates However, it was longer rates in the 5- to 10-year area that underperformed, with 10Y USTs rising more than 12bp to close in on 3.8%. While the BoC’s decision delivered the decisive push, the rise in yields already started earlier. That may also be owed to the prospect of faster paced Treasury issuance after the lift of the debt ceiling weighing on markets.   True, the rebuild of the Treasury’s cash balance as indicated yesterday to US$425bn by the end of June will mostly come from additional bills issuance, but early next week markets also will face 3Y and 10Y Treasury auctions on Monday and a 30Y auction on Tuesday. It means the bond sales will come around the crucial US CPI release and just ahead of the FOMC decision, volatility events that may warrant additional price concessions.   The US Treasury is about to rebuild its cash account   Upside inflation risks outweigh softer data, also at the ECB In EUR rates markets as well, just ahead of the upcoming ECB meeting, worries about inflation continue to outweigh the impact of softer data. Market have been close to fully pricing a June hike for a while now and see at least one more hike until September. They see a 20% chance that we will have a third hike, reflecting the recent return of speculation that the ECB’s deposit rate could reach the 4% handle.   The ECB’s Schnabel and the Dutch central bank’s Knot were the latest to say more tightening was needed. Schnabel cautioned “given the high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much”. Our own economists also think a hike next week looks like a done deal. More interesting is what the ECB will signal around the further path ahead. Given the current tightening bias evident in minutes of the last meeting and recent commentary as well as the still painfully slow decline in inflation the door should be left open to deliver more. A second hike in July looks likely. A third in September is possible, but not yet the base case.   Today's data and market view The Bank of Canada’s resumption of rate hikes also lends credibility to the skip narrative that Fed officials have increasingly been pushing last week. Despite all positive signs on the inflation front and weaker data, the concern clearly is that central banks may still need to do more. Technical factors like the Treasury supply packed into early next week just ahead of the Fed decision can add a bearish tilt to the market until then, and at least to some added volatility. Main highlight on the data front are the weekly US initial jobless claims. Consensus here is for little change which would indicate a still relatively tight job market. In the eurozone we will get the final first quarter GDP figures. Supply certainly has been a theme in eurozone rates markets, too, especially with Spain printing a €13bn 10Y bond which added to the widening of periphery bond spreads. After recent busy primary markets, only Ireland is scheduled to be active - with two bond taps in the sovereign space today.  

FX Daily: Data sensitivity at its highest A jump in US jobless claims sent the dollar lower across the board yesterday, confirming how FX markets have an extremely elevated sensitivity to data in this moment. Quiet calendars in the US and eurozone mean we could see EUR/USD stabilise, but watch Canada’s jobs numbers. Elsewhere, higher inflation has endorsed our call for more Norges Bank tightening.   USD: Jobless claim jump hit the dollar Currency markets continue to show very elevated sensitivity to data: yesterday, the increase in US weekly jobless claims to 261k against a median estimate of 235k sent the dollar weaker across the board. Lay off numbers have been rising consistently over the past few months and we could now start to see those finally trickle through to the initial jobless claims data. We must remember that there is always a period of time between lay off announcements and the actual job being cut and often no claim can be made until all severance payments have been finalised.   The Fed funds futures curve shows that markets have only marginally scaled back rate expectations after the Bank of Canada's surprise hike triggered a fresh round of hawkish bets. There are currently 7bp priced in for June, and 19bp for July, around 3bp lower (for both meetings) compared to Wednesday.   Yet, if we exclude CAD – which is trading in tandem with USD at the moment – the dollar fell around 0.7%-1.0% against all G10 currencies yesterday. It is a testament to that big FX sensitivity to data and rate expectations, and one of the reasons behind our bearish USD view for the second half of the year, when we expect both data and rates to turn negative for the greenback.   The lack of data releases in the US may offer some stabilisation to the dollar around current levels today (hovering around the 103.50 handle in DXY). Elsewhere, it’s worth keeping a close eye on Canadian jobs numbers, now that a July back-to-back hike is a tangible possibility. Consensus is looking at a solid 21k headline read, but with unemployment ticking higher from 5.0% to 5.1% and wage growth cooling off marginally, in line with what we saw in the US May jobs figures.    

US inflation data gave investors a good reason to cheer up yesterday. The headline number fell more than expected to 4%, and core inflation met analysts' expectations at 5.3%. The biggest takeaway from yesterday's CPI report was, again, that easing in inflation was mostly driven by cooling energy prices, but shelter costs remained sticky – up by more than 8% on a yearly basis.   Yet because these shelter costs represent more than 40% of the core CPI, and private sector data is pointing at cooling housing costs, investors didn't see the sticky core inflation as a major issue. The producer price inflation data is due today, before the Federal Reserve's (Fed) policy decision, but the latter will unlikely change expectations for today's announcement. A softer-than-expected PPI number – due to soft energy and raw material prices, could, on the contrary, further soften the Fed hawks' hand.     In numbers, the expectation of a no rate hike at today's decision jumped past 90%, while the expectation of a no rate hike in July meeting rose from below 30% to above 35%. The S&P500 extended its advance to 4375, while Nasdaq 100 rallied past the 14900 level. Small companies followed suit, with Russell 2000 jumping to the highest levels since the mini banking crisis.     Tough accompanying talk?  The Fed's decision for today is considered as done and dusted with a no rate hike. But the chances are that Fed Chair Jerome Powell will sound sufficiently hawkish to let investors know that the war is not won just yet, because 1. Core inflation remains well above the Fed's 2% target, 2. US jobs market remains too strong to call victory on inflation, and 3. Equity valuations point at an overly optimistic market, at the current levels, the S&P500 trades at around 18 times its earnings forecast over the next year, and these levels are typically associated with times of healthy economic growth and rising corporate profits. But we are now in a period of looming recession odds, and falling profits.     Ouch, BoE!  Yesterday's jobs data in Britain printed blowout figures for April and May. The employment change rocketed to 250K in April, while the expectation was a fall from 180K to 150K. The unemployment rate unexpectedly dropped to 3.8%, and average earnings excluding bonus rose from 6.8% to 7.2%. Then, the jobless claims fell by more than 13K – while analysts expected a surge of more than 20K – hinting that the British job market will likely print solid figures for May as well.     While these are excellent news for Brits who could at least see their purchasing power partly resist to the terrible cost-of-living crisis – where eggs, milk and bread for example saw their prices rise by a whooping 30-and-something per cent, it makes the end of the BoE tightening look impossible for now.     The market prices in another 125bp hike this year, which will take the British policy rate to 5.75%, and there is around 20% chance for an additional 25bp by February next year.     And all this in a market where mortgage rates rise unbearably, and house prices tumble. The 2-year gilt yield took a lift yesterday and is preparing to flirt with the 5% mark. We are now at levels above the mini-budget crisis of Liz Truss, while the spread with the 10-year yield is widening, suggesting that the UK economy will hardly come out of this unharmed. On top, the FTSE 100 index has fallen well behind the rally recorded by the US and European stocks this month because of falling energy and commodity prices due to a disappointing Chinese growth. The only good news for the Brits is that the pound is being boosted by hawkish BoE expectations. Cable rallied past the 1.26 level and is slowly drilling above a long-term downtrending channel top. The trend and momentum indicators remain tilted to the upside, and the divergence between the Fed – preparing to call the end of its tightening cycle sometime in the coming meetings, and the BoE – which has no choice but to keep raising rates – remains supportive of further gains in Cable. We could see the pair regain the 1.30 level, last seen back in April 2022.      China cuts.  The People's Bank of China (PBoC) lowered its 7-day reverse repurchase rate by 10bp to 1.9% yesterday, a week after asking the state-run banks to lower their deposit rates. These are signals that the PBoC is preparing to lower its one-year loan rate tomorrow to give a jolt to its economy that has been unable to gather a healthy growth momentum after Covid measures were relaxed by the end of last year.     Copper futures jumped above their 200-DMA yesterday, though they remain comfortably within a broad downtrending channel building since the second half of January, while US crude rebounded from a two-week low yesterday but remains comfortably below its 50-DMA.     Final word.  Because the rally in tech stocks now looks overstretched and China is getting serious about boosting growth, we will likely start seeing investors take profit on their Long Big Tech positions and return to energy and mining sector to catch the next train which could be the one that leads to profits on an eventual Chinese reopening.   

As Fed delivers a "hawkish" pause, attention turns to the ECB  European markets closed the day higher yesterday, with the DAX making a new record high, ahead of last night's Fed decision, while US markets closed the session mixed after a choppy session, which saw the Fed deliver a hawkish pause to their rating hiking cycle.     Asia markets were mixed with the latest Chinese retail sales data for May coming in below expectations, rising by 12.7%, along with industrial production which gained 3.5%. The last few weeks have delivered plenty of evidence that headline inflation is slowing sharply, and while core prices are probably stickier than the Fed would like, the direction of travel with respect to PPI suggests that in a couple of months we could be looking at a very different outlook.   Having indicated that they would be looking to hike in July, after removing the line that signalled more rate hikes were coming at the May meeting, there was always a risk that this sort of pre-commitment might turn out to be problematic. So, it has proved, with many suggesting that they would be better off hiking today, and then playing a game of wait and see.   In any case with the Federal Reserve unwilling to step back from its commitment to a pause this month, and delivering on an expectation to keep rates unchanged, they compensated for that by raising their expectation this year for at least 2 more rate hikes, putting the terminal rate at 5.6%, with 12 Fed officials, projecting such a move.    This unexpected hawkish shift saw US 2-year yields spike sharply as the market priced out the prospect of rate cuts later this year, which was never likely anyway, however we also saw the US central bank change their forecasts for unemployment to rise to 4.1% by the end of this year, down from 4.6%, while tweaking its PCE forecast to 3.2% from 3.3%.     Unsurprisingly, the US dollar which had been in retreat, rebounded strongly and stock markets dropped back sharply, over concerns that the US central bank could be on the cusp of a policy mistake.  Once Powell started his press conference the initial moves started to unwind and markets attempted to absorb the message from last night's events, and whether the two more hikes guidance, was based on any type of empirical evidence, or merely a mechanism to steer market expectations, and keep last night's decision unanimous.   The tone of Powell's press conference suggests it was the latter While yesterday's post decision reaction shows that markets were caught the wrong side of last night's decision, the bigger test will be in the economic data. If inflation continues to slow and jobs growth remains steady, the question needs to be asked as to whether the Fed will really pull the trigger on more rate hikes? It seems unlikely.     Moving on from last night's decision, attention will now shift towards today's ECB rate decision.   There appears to be little doubt that we will probably see another 25bps rate hike from the European Central Bank at today's rate meeting.   Nonetheless this would be a notable shift from some of the recent narrative that has accompanied recent discussions about the likely rate path for the ECB. The change of emphasis appears to have come about because of recent sharp falls in the headline rate of CPI, as well as evidence that core prices may well have also seen a peak.   In the latest flash CPI numbers for May, headline inflation fell to 6.1%, a sharp fall from the 7% we saw in April, as well as the 9.2% we were seeing at the end of last year. The big concern in recent months has been core prices which hit a record high of 5.7% in March and fell to 5.3% in the most recent numbers released earlier this month. Based on these numbers alone one can understand the ECB's reluctance to stop hiking, however there are already risks emerging that might suggest the ECB could be close to its own pause moment.       These risks are sharp slowdowns in PPI, which tends to act as a leading indicator for future inflation trends with German PPI now in negative territory. The German economy is also in recession, along with the rest of the eurozone, and yet various ECB policymakers are still calling for several more rate rises, including the likes of Joachim Nagel head of the German Bundesbank, due to still high levels of CPI inflation.     This comes across as particularly risky at a time when we are starting to see increasing signs of deflation across the global economy. Whatever the ECB does today, and a hike is priced in, it is what comes next which is very much up for debate, where ECB President Christine Lagarde will need to tread carefully.     Will the hawks on the ECB maintain their hawkish narrative or will see those claws start to get reined in until we get a better idea of the cumulative effect that the current spate of rate hikes has had. Coming so soon after last nights Fed decision we get US retail sales for May and weekly jobless claims.   Retail sales for May are expected to decline by -0.2%, down from 0.4% in April, while weekly jobless claims which spiked up to 261k last week are expected to slip back to 245k.     The last time we spiked above 260k a few weeks ago it was revised away. Will the same thing happen today?   EUR/USD – pushed above the 1.0820/30 area yesterday and closing in on the 50-day SMA at 1.0880, with resistance now at 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – broke above trend line resistance from the 2021 highs at 1.2630 and testing above 1.2680 with the next resistance at 1.2760, which is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – still looking soft despite the key day reversal day earlier this week, but still above 0.8540 support. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – still trying to move through the 140.30 area with resistance behind that at the recent highs at 140.95.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,592     DAX is expected to open 12 points lower at 16,298     CAC40 is expected to open 15 points lower at 7,313  

It was mostly a good day for the global markets, except for Europe, which saw the European Central Bank (ECB) expectedly raise interest rates by 25bp, but unexpectedly raised inflation forecast, as well.   European policymakers now expect core inflation to average past the 5% mark, while in March projection this forecast was only at around 4.6%. This could sound a bit counterintuitive, because we have been seeing slower inflation and slower activity across the Eurozone countries, with the latest growth numbers even pointing at a mild recession. Yet the strength of the jobs market, and the stickiness of services and housing prices keep ECB officials alert and prepared for a further rate hike in July... and maybe another one in September.       Euro rallies  At the wake of the ECB meeting, the implied probability of a July hike jumped from 50% to 80%, sending the EURUSD rallying. The pair rallied well past its 50-DMA and hit 1.0950, and is up by more than 3% since the beginning of this month. The medium-term outlook remains bullish for the EURUSD due to divergence between a decidedly hawkish ECB, and exhausting Federal Reserve (Fed). The next bullish target stands at 1.12.  The US dollar sank below its 50-DMA, impacted by softening retail sales, rising jobless claims, slowing industrial production and perhaps by a broadly stronger euro following the ECB's higher inflation forecasts, as well.   Elsewhere, rally in EURJPY gained momentum above the 150 mark, as the Bank of Japan (BoJ) decided to do nothing about its abnormally low interest rates today, which seem even more anomalous when you think that the rest of the major central banks are either hiking, or say they will hike. The dollar yen is back above the 140 mark, as traders see little reason to buy the yen when the BoJ outlook remains blurred. Note that some investors expected at least a wider YCC policy to 1% mark, but the BoJ didn't even bother to make a change on that front.       Japanese stocks overbought near 33-year highs  Good news is, Japanese stocks benefit from softer yen and ample BoJ policy, and consolidate gains near 33-year highs. The overbought market conditions, and the idea that Japan will, one day in our lifetime, normalize rates could lead to some profit taking, but it's also true that companies in geopolitically sensitive sectors like defense and semiconductors have been major drivers of the rally this year, and there is no reason for that appetite to change when the geopolitical landscape remains this tense. The former US Secretary of State just said he believes that a conflict between China and Taiwan is likely if tensions continue their current course.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    

In the end it all boils down to data That tension between persistently high inflation and recession fears is of course a wider and ongoing market theme. Indeed, yesterday’s market reaction to the ECB and the quick fade was probably more down to mixed US data releases that came out just when Lagarde was set to speak.   More hints that US pipeline pressures are easing came from import prices falling faster than expected. And we also saw the weekly jobless claims grind higher again suggesting a softening of the jobs market. As our economist notes, probably not enough to deter the Fed from a potential hike in July following the hawkish pause this week, but enough to keep the market concerned about the outlook. As opposed to the bear flattening in EUR, the US curve bull flattened with the 10Y UST yield dipping towards 3.7% Overall, central banks this week have given themselves the flexibility and room to tighten policies further should data warrant it, keeping upward pressure on front-end rates. Yield curves could invert further but given how far they already stretch, long-end rates could still follow higher in the near term. Only the Bank of Japan (BoJ) bucked the hawkish trend set by the Fed and ECB (and likely continued by the BoE next week) today by leaving policy rates unchanged and dismissing calls for an adjustment higher of its yield curve control cap, currently standing at 0.5%. The lack of action today and the view put forward that the current spike in inflation will prove temporary leaves the market guessing about the timing of a potential normalisation of the BoJ's policy setting.   The long-end reflects markets skepticism with 2s10s curves inverting further Today's events and market view Some calm may return to markets after the key events of this week. It probably won't last too long with UK inflation and the Bank of England decision lined up for next week. And in the US we will also see Fed Chair Jerome Powell giving testimony to Congress.  As for today, in the eurozone we will see the release of the final inflation figures for May, but more attention should go to the usual flurry of ECB speakers in the wake of the meeting, though Lagarde pointed out the “broad consensus” around yesterday’s decision. And it seems the ECB has been successful in curbing the market's preoccupation with the terminal rate level and focussing it on a high-for-longer discussion – note the pricing out of future rate cuts as a driver of the front-end move higher since last week. The main US data release today is the University of Michigan consumer confidence survey, which also includes measures of longer-term inflation expectations. The consensus is for a slight downtick in the latter to 4.1% year-on-year for the 1-year horizon and to 3% for the 5 to 10-year inflation. But we will also see a number of Fed speakers for the first time after the FOMC meeting. In the end, the data will remain the key, for central banks to assess whether they have done enough on inflation, or markets to discern whether too much has been done already to hurt the economy.

German inflation in focus, ahead of US Q1 GDP       Having stopped the rot on Tuesday, ending a 6-day losing streak, European markets saw another positive session yesterday, although gains were tempered by remarks from Fed chairman Jay Powell who warned that several more rate hikes could be expected in the coming months, in comments made in an ECB panel discussion in Sintra, Portugal.     US markets finished the day mixed with little in the way of direction, as they digested the various remarks from central bankers, as they all peddled a similar narrative, of further rate rises to come. The Japanese yen continued to decline, already at record lows on a trade-weighted basis, Bank of Japan governor Kazuo Ueda gave little indication that officials were any close to stemming the recent losses. The subdued finish in the US is likely to translate into a flat European open.     There is the hope that upcoming data could prompt a softening of this hawkish message starting today with the latest June inflation numbers from Germany. We've seen a sharp deceleration in the last few months, falling from 7.6% in April to 6.3% in May. Today's June numbers could see a modest increase to 6.8%, which will do little to assuage ECB concerns that inflation is falling back sharply. In the UK the sharp rise in gilt yields in the wake of surging inflation is prompting concerns about the housing market, and more specifically the ability of consumers to pay their existing mortgage or take out new ones.        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 rates which weighed on demand for property, as well as weighing on house prices.     As energy prices have come down, along with lower rates at the start of the year, 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 unlikely to offset 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.     We also have the final iteration of US Q1 GDP, which was revised up to 1.3% from 1.1% a few weeks ago. The main drag was down to a bigger than expected scaling down in inventories, as well as an upward revision to personal consumption to 3.8%, which was a significant improvement 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 today'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. Weekly jobless claims are expected to come in unchanged at 265k.   EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area, but unable to move through the 1.1000 level. The main resistance remains at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.   GBP/USD – slid back sharply below the 1.2670 area, now opens a move towards the 50-day SMA at 1.2540. If this holds, we remain on course for a move towards the 1.3000 area.    EUR/GBP – broken above 0.8630, heading towards the 50-day SMA at 0.8673, which is the next resistance area. Support comes in at the 0.8580 area.   USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 2 points higher at 7,502   DAX is expected to open 7 points higher at 15,956   CAC40 is expected to open 10 points higher at 7,296   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

But there are also more cautious voices on the topic. Just as Lagarde pointed out in yesterday’s panel, interest rates remain the ECB’s primary monetary policy tool. In another background report by Econostream released in the afternoon, ECB officials signalled that the current passive run-off was sufficient, and especially speeding it up via the changes to the PEPP guidance and/or reinvestments would unnecessarily risk financial stability.   After all, the possibility to flexibly reinvest PEPP holdings is one of the main tools that the ECB still has to quickly react to spread widening pressures in bond markets. At some point the ECB has to decide on the balance sheet size it wants to target, which goes hand-in-hand with an ongoing review of the ECB’s operational framework. Yesterday, Lagarde flagged that this work could hopefully be completed in the next “six to nine months”. This indicates some upside risk to previous communication which saw the review being concluded by the end of the year.   Today's events and market view Inflation remains the central banks’ one needle in the compass that dictates their policy nowadays. This puts the focus squarely on today’s inflation readings out of Germany and Spain. German headline and core rates are seen higher on the back of base effects and statistical tweaks. Spain’s headline rate is seen falling below the 2% level but, more importantly, the core rate is seen to come down only marginally.   Alongside Italy’s data from yesterday this should already give a good idea of where tomorrow’s eurozone reading is headed – and it should signal no let up in the pressure on central banks to continue to act forcefully.   In this set-up yield curves will remain inverted for some time. Markets will see the softness in wider data, such as in yesterday’s eurozone credit growth which shows that policy transmission is working. Still, if there is anything that could turn the market it is surprises in the inflation data, which markets might be quicker to extrapolate even if central banks themselves might want to see confirmation from more than just one reading.   In other data we will get the initial jobless claims out of the US, pending home sales, as well as a third reading for first quarter GDP growth.

Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that 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 the quarter overall.   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 this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      

Economic data released in the US yesterday further fueled the hawkish Federal Reserve (Fed) bets. The US Q1 GDP was revised up from 1.3% to 2%, while analysts had penciled in an improvement to 1.4%. The surprise jump came from a quickened growth in exports and consumer spending, which jumped 4.2% in the Q1. 4.2%! Corporate profits fell, but they fell less than expected, as initial jobless claims fell by the most since 2021.   The only good news for the Fed, and its inflation battle, was a slightly softer than expected core PCE figure, which extended to 4.9%, a bit less than 5% expected by analysts. But the rest of the data pointed in the same direction than in the past days and weeks: the US economy seems to be doing FINE! Combined with the Fed's bank stress test results comforting that the big US lenders are in a position to shoulder further shocks, like recession and chaos in real estate, the US 2-year yield jumped more than 3% to 4.90% for the first time since the mini banking crisis. The probability of a 25bp hike from the Fed in the July meeting jumped to 87%, while the pricing in the market suggests that the Fed's two rate hikes are now likelier than not.   And perhaps because the aggressive Fed tightening doesn't impact economic strength as badly ass expected, stock investors saw no urgence in selling their stocks on rising hawkish Fed expectations. The S&P500 advanced 0.45%, Nasdaq was slightly lower, as the small caps of Russell 2000 outperformed with a 1.23% rise yesterday. The US dollar index rallied past its 100-DMA and broke above a one-month descending channel top. Trend and momentum indicators turned positive hinting that a further advance in the US dollar is likely against major currencies in the run up to next week's all important jobs report, especially if today's PCE data, the Fed's gauge of inflation, shows further advance in inflation from 4.4% to 4.6%.   Yet, a further rise in US yields could weigh on stock appetite before the weekly closing bell.   In the Eurozone, investor mood was a bit tricky because inflation data released this week in the Eurozone revealed that inflation in Italy eased more than expected, inflation in Spain eased below the European Central Bank's (ECB) 2% policy target, but inflation in Germany ticked higher this month, to 6.8%, because of an unfavourable base effect from last year, when Germany offered its citizens ultra-cheap rail tickets. French, and the eurozone's aggregate preliminary inflation data for June is due today.   The EZ inflation is expected to have eased to 5.6%, and the divergence between Germany and the others may not be a long-term concern, but the ECB will certainly remain well alert, and well hawkish into this summer.   More importantly, the end of ECB's cheap loans should increase the yield spread between the Eurozone's core and periphery and weigh on the EURUSD. The pair is now testing the 50-DMA to the downside, and if the Fed hawks continue gaining field, which seems to be the most likely scenario before next week's US jobs data, we could see the pair correct deeper toward the 1.08/1.0820 region.   In China, the latest economic data didn't enchant investors. Chinese manufacturing PMI remained below 50, in the contraction zone, for the third consecutive month, despite recurrent policy easing from the People's Bank of China (PBoC). Nothing seems to be boosting the Chinese recovery because consumer and investor confidence have been severely damaged as a result of government crackdowns and Covid.   The initial forecast for this year - US recession and Chinese rebound - is not happening. On the contrary, the US is growing, and China is slowing. At this point, the Chinese government has no choice but to regain people's and investors' confidence if it doesn't want to become too old before becoming rich enough.  

Services PMIs and Fed minutes in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) In the absence of US markets yesterday, European markets underwent a modestly negative session on a fairly quiet day, and look set to open modestly lower this morning, with Asia markets drifting lower. For the past few days, markets have been trading in a broadly sideways range with little in the way of momentum, as investors weigh up the direction of the next move over the next quarter.   The last few weeks have been spent obsessing about the timing of a possible recession, particularly in the US, with the timing getting slowly pushed back into 2024, even as bond markets flash warnings signs that one is on the horizon.     As we look ahead to Friday's US payrolls report, speculation abounds as to how many more central bank rate hikes are inbound in the coming weeks, against a backdrop of economic data that by and large continues to remain reasonably resilient, manufacturing notwithstanding.     Despite the dire start of manufacturing activity as seen earlier this week, services have held up well, although we are now starting to see some pockets of weakness. A few days ago, in the flash numbers France saw a sharp fall in economic activity, sliding from 52.5 to 48 for June, although activity in the rest of the euro area remains broadly positive.     This is an area of the economy that could help boost economic activity, particularly in Italy and Spain now we're in the holiday season and has seen these two countries perform much better in recent months. The outperformance here could even help avert a 3rd quarter of economic contraction for the euro area.       Expectations for Spain and Italy are 55.7, and 53.1, modest slowdowns from the numbers in May, while France and Germany are expected to slow to 48 and 54.1.     We're also expected to see a positive reading from the UK, albeit weaker from the May numbers at 53.7. US PMI numbers are due tomorrow given the July 4th holiday yesterday.     Later today with the return of US markets, we get a look at the most recent Fed minutes, when the FOMC took the collective decision to keep rates on hold, with the likelihood we will see a resumption of rate hikes later this month.     In the lead-up to the decision there had been plenty of discussion as to the wisdom of pausing given how little extra data would be available between the June and July decisions. The crux of the argument was if you think you need to hike again, why wait until July when the only data of note between the June and July decisions is one payrolls report, and one set of inflation numbers.     All of that is now moot however and while inflation has continued to soften, the labour market data hasn't. Here it remains strong with tomorrow's June ADP report, the May JOLTs report, weekly jobless claims, as well as Friday's June payrolls numbers.     Tonight's minutes may offer up further clues as to the Fed's thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.     A few members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July now almost certain. This stance caught markets off guard given that pricing had been very much set at the prospect of one more rate hike, before a halt.     A key part of the thinking may have been the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets.     This has now been largely priced out, so in this regard the Fed has succeeded,   The key now is to make sure that the Federal Reserve, along with other central banks, while prioritising pushing inflation down, don't break something else, and start pushing the rate of unemployment sharply higher.   This is the balancing act central banks will now have to perform, and here it might be worth them exercising some patience. Given the lags being seen in the pass through of monetary policy it may be that a lengthy pause after July, keeping rates at current levels for months, is a wiser course of action than continuing to raise rates until the tightrope snaps, and the whole edifice comes tumbling down.       Today's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of this balance of risks.             EUR/USD – remains range bound with support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still looking well supported above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently it has resistance at 1.2770.       EUR/GBP – rolling over again yesterday, sliding below the 0.8570/80 area, and looks set to retarget the 0.8520 area. Resistance remains at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.     USD/JPY – currently capped at the 145.00 area, with support at the 144.00 area this week.  The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 5 points lower at 7,514     DAX is expected to open 28 points lower at 16,011     CAC40 is expected to open 23 points lower at 7,347

Asia Morning Bites Australia reports trade this morning, and Taiwan releases June inflation data. US Fed minutes showed officials in favour of additional rate hikes. Busy day for US data ahead of Friday's payrolls.   Global Macro and Markets Global markets:  It was the turn of the back end of the yield curve to rise yesterday. 10Y US Treasury yields rose 7.7bp to 3.932%. But despite some fairly hawkish Fed minutes, the front end didn’t move much. 2Y yields rose only 0.9bp to 4.945%. US equities opened lower yesterday, but after a choppy day which lacked direction, finished only slightly down. The S&P 500 ended 0.2% lower while the NASDAQ fell 0.18%. The USD continued to find support from the Fed outlook, and EURUSD moved down to 1.0855. Other G-10 currencies also lost ground.  The JPY remains at 144.43, similar to this time yesterday, though it has been quite volatile. Most of the Asian FX pack lost ground to the USD yesterday. The CNH has traded back up above 7.26. G-7 macro:  Despite what was clearly a meeting with considerable differences of opinion, and very low conviction on the way forward, the key element to the June FOMC minutes seems to be that “almost all” officials thought more tightening would be needed this year. Here’s a link to the transcript. Today, we have the ADP survey of employment, jobless claims, and the service sector ISM survey, all coming ahead of tomorrow’s payrolls. Taiwan: June inflation data will remain subdued, with consensus estimates targeting a 1.8%YoY inflation rate, slightly down from the 2.02% reading in May. Core CPI is running slightly higher, but not much, and could also decline slightly from the 2.57% May reading. This all suggests that Taiwan’s central bank need not follow the Fed if they decide to hike rates again this month, as now looks likely.   What to look out for: US ADP and Australia trade Australia trade (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

US ADP and JOLTs data a key focus today. European markets have fallen every day this week, although yesterday's losses were by far the worst, and look set to continue again today. US markets also struggled yesterday, although their losses have been much more modest. Yesterday's weakness was driven by concerns over softer than expected Chinese as well as European services PMIs, which fed into increased slowdown worries, as well as rising interest rate risk, which fed into weakness in basic resources, energy and financials, and has translated into further weakness in Asia markets.     Today's Germany factory orders numbers for May could signal a brief respite after 2 months of weakness with a rebound of 1%, up from -0.4% in April, although on an annualised basis it is expected to decline by -9.7%, the 15th month in a row it's been in negative territory.       The release of last night's Fed minutes showcased some significant splits amongst policymakers over the decision to signal a rate pause in June, citing "few clear signs" of progress that US inflation was falling quickly enough.     Some officials wanted to carry on with rate hikes of 25bps but given the "uncertainty" about the outlook it was decided a pause would be preferable, just so long as it was made clear that the door to a July hike, as well as further hikes was pushed to the top of the narrative. This helps to explain the very hawkish guidance with no rate cuts expected by Fed officials until 2024.     The publication of the minutes, and the clear willingness amongst many members to do more on rates saw US 2-year yields close higher on the day, wiping out their early declines.     The committee noted the strength of the US labour market saying it "remained very tight" evidence of which is likely to be borne out by today's data from the JOLTS data for May, the latest weekly jobless claims and the June ADP payrolls report, as well as the latest ISM services numbers.     The resilience of the US labour market was no better illustrated than in the April JOLTS report which saw vacancy numbers surge back above 10m from 9.7m in March. Today's May numbers are expected to see this number drop back to 9.9m, still an eye wateringly higher number, and well above the levels we saw pre-pandemic.     Weekly jobless claims also appear to have hit a short-term peak sliding back from 265k to 239k last week and are expected to edge higher to 245k. While weekly claims have been rising in recent weeks continuing claims have been falling, slipping to a 3-month low last week of 1,742k.     Today's ADP payrolls report is expected to see another solid number of 225k, down slightly from 278k.     While the number of job vacancies available remains at current levels it's hard to imagine a scenario where we might see a weak jobs report in the coming months, which means that its unlikely to be the labour market that prompts the Fed to signal a pause in the near term.     Services inflation has been the one area which the Fed has expressed concern that it might be stickier than it needs to be.     Today's ISM services report is expected to see headline activity edge higher to 51.3, while a close eye will be kept on prices paid which slowed to 56.2 in May, and a 3-year low.        EUR/USD – looks set for a test of support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.   GBP/USD – still in a tight range with support above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently have resistance at 1.2770.     EUR/GBP – looks set to retarget the 0.8515/20 area and June lows, while below resistance at the 0.8570/80 area. Below 0.8510 targets the 0.8480 area. We also have resistance remaining at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.   USD/JPY – looks set for a test of the 143.80 area, while below the key resistance at 145.20. A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.    FTSE100 is expected to open 30 points lower at 7,412   DAX is expected to open 84 points lower at 15,853   CAC40 is expected to open 50 points lower at 7,260

The ECB is holding its hawkish line The Bundesbank’s Joachim Nagel, one of the more prominent hawks of the European Central Bank, has been on the wires over the past few days pushing the known narrative that rates need to rise further and that the fight against inflation was more akin to a long distance run than a sprint. The transmission of monetary policy seems to be working with the latest ECB bank interest statistics showing a strong pass-through. On the inflation front there are also some more encouraging disinflationary signs. The PPI dipped into negative territory yesterday coming in lower than expected and pointing to lessening pipeline pressure. The ECB’s own consumer survey also saw a further drop in inflation expectations. At the same time the macro backdrop is getting gloomier, with the final PMIs having been revised lower just this week. Some will caution that the ECB models are not as reliable nowadays as before, so there has to be an increasing focus on current inflation dynamics. While falling price expectations of consumers are positive, they are usually closely correlated to what happens with current inflation. Some more dovish ECB members, such as Italy's Visco, have spoken out against the hawks' calls to err on the side of doing too much on rates.  For now the market is still buying into the story that more hikes are needed and is now fully discounting two more rate hikes from the ECB by the end of the year. But there are also question marks, and these will only get larger with more disappointing data, as to how tenable that hawkish ECB position is. Markets are discounting the first rate cut by summer 2024, though not yet fully discounting three cuts from the peak in total by the end of 2024.  The longer outlook is showing growing cracks. Its not just that the curve remains deeply inverted. Its also real rates for instance that have not really recovered from their 40bp slump in late May to late June. Hitting a low around zero, the 5y5y real ESTR OIS is still below 10bp. The flipside though is a 5y5y inflation forward still at 2.55%, and still on an unbroken, general upward trend since mid-2020. This is something the ECB will be watching more closely.   Today's events and market views US data remains the main focus. At the start of the week the ISM manufacturing again painted a gloomy picture, but the ISM for the services sector out today represents the larger share of the economy. Here the consensus is to see a rebound from the dip to the 50 level, and we think this should help a great deal in getting 10Y UST yields to 4%. Ahead of tomorrow's official US jobs report the ISM's employment sub component will also get more scrutiny – it had dipped below 50 last month, contrasting with the later strong payrolls number. Of course, the ADP estimate will also have some (limited) bearing on expectations tomorrow, while the initial jobless claims and JOLTs job openings data should allow a more contemporaneous sense of the current labour market situation in the US. So far it has been surpringly resilient. The main data event in the eurozone are the retail sales numbers following Germany's factory orders this morning. The Bundesbank's Nagel has his fourth scheduled appearance this week. Sovereign bond supply will come from France and Spain today. Being geared to the longer end of curves supply may have helped the curve bounce off the extreme lows in past sessions. 

Federal Reserve policymakers may well be dreading tomorrow’s jobs report now after today’s ADP number once again obliterated estimates, coming in more than double the consensus forecast. That’s almost become the norm on payrolls day but FOMC policymakers, along with investors, may have been hoping the tide would now turn after such as intense tightening cycle over the last 18 months. But if the ADP report is anything to go by, we’re headed for another red-hot jobs report. If a rate hike this month wasn’t already nailed on, it probably is now. The ADP isn’t often a great precursor to the NFP number but this is a report you simply can’t ignore. I’m sure everyone will be revising up their expectations on the back of it and wondering just how much longer this labour market resilience can last. How high must rates go? Jobless claims crept up again but were just about in line with expectations and still probably lower than what many will have anticipated at this stage. Next up is JOLTS and it will take something seriously shocking to bring balance back to this debate. It’s no longer a question of if the Fed hikes this month but how many more after that?

ADP shows 497,000 jobs created in June, biggest gains in over a year ISM Services Index makes 4-month high ISM Prices paid declined from 56.2 to 54.1, lowest since March 2020 US stocks extend losses after a hot ADP report and impressive ISM services report raised the odds the Fed might have to do deliver more rate hikes beyond the July FOMC meeting. The dollar pared losses as Fed rate hike odds rose on expectations the NFP report will deliver its 15th straight beat.   ADP The labor market is not loosening at all according to this ADP report.  The headline gain of 497,000 jobs was much higher than the forecast of 225,000 and well above the downwardly revised prior reading of 267,000 jobs.  Leisure and hospitality jobs surged 232,000 as summer job hiring supports the narrative that Americans will be vacationing a lot this summer.  The Fed’s rate hiking campaign is not yet crippling small and medium size businesses, but that should change going into the fall.  ADP Chief Economist Richardson noted, “Consumer-facing service industries had a strong June, aligning to push job creation higher than expected. But wage growth continues to ebb in these same industries, and hiring likely is cresting after a late-cycle surge”. The ADP report also includes coverage on wages, which showed year-over-year pay increase of 6.4%, which was down from 6.6% in May.    Jobless Claims Initial jobless claims for the week ending July 1st rose from 236,000 to 248,000, which was higher than the 245,000 consensus estimate.  Traders might not put a lot of weight with this weekly jobless claims report as it includes noise from the Juneteenth holiday and the summer auto closures.    Trade Data The May trade data showed the deficit narrowed from $74 billion to $69 billion as imports dropped 2.3% and exports weakened by 0.8%. The trade deficit won’t get a lot of attention but it does support the narrative that the economy is slowing down.    Fed Fed’s Logan noted that more rate hikes are necessary to combat inflation. Adding that a challenging and uncertain environment enabled a June pause. The data-dependent Fed will look at the labor market and that should support the case for much more tightening.   JOLTS The JOLTS report suggests the labor market is slowly weakening as job openings fell from 10.3 million to 9.824 million. The quits rate increased from 2.4% to 2.6%, which suggests people are confident they can get new work.   ISM Services Index The ISM Services report showed last month’s soft reading was not the beginning of a deteriorating trend. The ISM Services Index surged in June, rising to 53.9, significantly better than the prior reading of 50.3 and a 51.2 consensus estimate. Prices paid eased from 56.2 to 54.1. The employment component returned to expansionary territory at 53.1. This data suggest the economy still has a lot of strength. Treasury yields surged after the impressively strong ADP report and kept those gains post ISM services.     

Analyzing Monday's trades: GBP/USD on 30M chart     The GBP/USD pair managed to both rise and fall on Monday. The pound sterling corrected against Friday's decline, but in the second half of the day, it traded higher again, which corresponds to the current trend. There were no important economic reports in the UK or in the US.   Three representatives of the FOMC spoke in the US, and Bank of England Governor Andrew Bailey is usually speaking in the UK around this time. For obvious reasons, Bailey's speech could not have any influence on the pair's movements during the day. And the FOMC members' speeches took place in the evening, so they also could not have provoked either the morning fall or the afternoon rise.   However, volatility was over 100 points, which is quite a lot for a Monday. The uptrend persists, and we have to point out that the growth is groundless, but there's nothing we can do if the market wishes to buy the pair, regardless of the fundamental background.   GBP/USD on 5M chart   Several entry points materialized on the 5M chart. First, the pair bounced twice from the level of 1.2801 (buy signals duplicated each other), but it only rose by 13 pips. It was impractical to work out these signals, as there was a high probability of a flat on Monday, and the Stop Loss on the deal should have been set below the level of 1.2779. When a sell signal was formed in the form of overcoming the area of 1.2779-1.2801, it was already clear that there would be no flat, so the deal could be worked out, but it did not bring profit, it closed at a break-even stop loss. The next buy signal could have been executed, and it would have brought a profit of 30 pips. In general, the pair changed its direction of movement several times on Monday, which is always bad for intraday trading.   Trading tips on Tuesday: As seen on the 30M chart, the GBP/USD pair continues to form a new uptrend. The pound can still rise even on those days when there is no fundamental background. Therefore, purely technically, GBP may extend its upward movement, but fundamental factors are still very doubtful. The key levels on the 5M chart are 1.2538, 1.2597-1.2605, 1.2653, 1.2688, 1.2748, 1.2779-1.2801, 1.2848-1.2860, 1.2913, 1.2981-1.2993. When the price moves 20 pips in the right direction after opening a trade, a stop loss can be set at breakeven. On Tuesday, the UK will release reports on jobless claims, unemployment, and wages. In the US, Federal Reserve official James Bullard will speak. Basic trading rules: 1) The strength of the signal depends on the time period during which the signal was formed (a rebound or a break). The shorter this period, the stronger the signal.     2) If two or more trades were opened at some level following false signals, i.e. those signals that did not lead the price to Take Profit level or the nearest target levels, then any consequent signals near this level should be ignored.     3) During the flat trend, any currency pair may form a lot of false signals or do not produce any signals at all. In any case, the flat trend is not the best condition for trading.     4) Trades are opened in the time period between the beginning of the European session and until the middle of the American one when all deals should be closed manually.     5) We can pay attention to the MACD signals in the 30M time frame only if there is good volatility and a definite trend confirmed by a trend line or a trend channel.     6) If two key levels are too close to each other (about 5-15 pips), then this is a support or resistance area.    

5M chart of GBP/USD   The GBP/USD jumped solidly upwards on Monday, with volatility exceeding the 100-point mark. A speech by Bank of England governor Andrew Bailey was scheduled in the UK yesterday, but it was planned for the evening, so it couldn't have any influence on the pair's movement during the day. Nevertheless, in the second half of the day, the dollar slumped, which we can associate with the upcoming US inflation report, which already suggests a sharp slowdown to 3.1%. If the forecasts come true, then this report is already accounted for, and the likelihood of two more rate hikes in 2023 will drastically decrease. Theoretically, the broad US dollar weakness is logical, but let's also remember that this pattern is not always observed.   The market still uses any excuse to buy the pair. The momentum persists. There was only one entry point yesterday. At the beginning of the US session, the pair bounced off the 1.2762 level and the Kijun-sen line of the Ichimoku indicator, afterwards it rose to the 1.2863 level. The long position should have been closed manually closer to the evening, so the profit on it was about 70 points. An excellent trading day!   COT report:     The GBP/USD jumped solidly upwards on Monday, with volatility exceeding the 100-point mark. A speech by Bank of England governor Andrew Bailey was scheduled in the UK yesterday, but it was planned for the evening, so it couldn't have any influence on the pair's movement during the day. Nevertheless, in the second half of the day, the dollar slumped, which we can associate with the upcoming US inflation report, which already suggests a sharp slowdown to 3.1%.   If the forecasts come true, then this report is already accounted for, and the likelihood of two more rate hikes in 2023 will drastically decrease. Theoretically, the broad US dollar weakness is logical, but let's also remember that this pattern is not always observed. The market still uses any excuse to buy the pair. The momentum persists.   There was only one entry point yesterday. At the beginning of the US session, the pair bounced off the 1.2762 level and the Kijun-sen line of the Ichimoku indicator, afterwards it rose to the 1.2863 level. The long position should have been closed manually closer to the evening, so the profit on it was about 70 points. An excellent trading day!       In the 1-hour chart, GBP/USD maintains a bullish bias. The ascending trend line serves as a buy signal. So, traders are opening new long positions. However, the pound sterling is overbought. It is likely to decline in the medium term. Yet, it surpassed the descending trend line. Hence, it could move to new highs.   Yet, it surpassed the descending trend line. Hence, it could move to new highs. According to the technical analysis, the pound sterling has drivers for a further increase. And the market is happy to take any opportunity to sell the dollar. On July 11, trading levels are seen at 1.2349, 1.2429-1.2445, 1.2520, 1.2598-1.2605, 1.2693, 1.2762, 1.2863, 1.2981-1.2987. Senkou Span B (1.2714) and Kijun-sen (1.2719) lines can also provide signals, e.g. rebounds and breakout of these levels and lines. It is recommended to set the Stop Loss orders at the breakeven level when the price moves in the right direction by 20 pips.   The lines of the Ichimoku indicator can move during the day, which should be taken into account when determining trading signals. There are support and resistance levels that can be used to lock in profits. On Tuesday, the UK will publish at least three reports that could stir some market reaction. Jobless claims, unemployment and payrolls. We believe that the unemployment data may have an impact on the traders' mood. If they turn out to be optimistic, the pound will receive a new opportunity to extend its upward movement. Indicators on charts: Resistance/support - thick red lines, near which the trend may stop. They do not make trading signals. The Kijun-sen and Senkou Span B lines are the Ichimoku indicator lines moved to the hourly timeframe from the 4-hour timeframe.   They are also strong lines. Extreme levels are thin red lines, from which the price used to bounce earlier. They can produce trading signals. Yellow lines are trend lines, trend channels, and other technical patterns. Indicator 1 on the COT chart is the size of the net position of each trader category. Indicator 2 on the COT chart is the size of the net position for the Non-commercial group of traders.    

GBP/USD GBP/USD (4-hour chat) has been in a general rally for the past two days, but that could be coming to an end if a bearish butterfly pattern forms. The headlines have been mostly bullish for the pound, but that could be reaching an inflection point. Inflation is forcing the BOE to be extremely hawkish and that could soon lead to a significant economic downturn.  Many traders are focusing on today’s UK wage growth, as it posted the biggest rise outside the pandemic period, but jumps in jobless claims suggest the labor market is cooling. If the pound-dollar bullish trend respects the psychological 1.3000 resistance, some bullish bets might get taken down.  The four-hour GBP/USD is displaying a potential bearish butterfly pattern.  If this technical reversal pattern holds, a moderate decline could see downward momentum target the 1.2800 region. If a dramatic move triggers a rally above the 1.3000 level, the bearish reversal pattern could be invalidated.  Further upside targets include the 1.3250 region.  

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

Rates Spark: Don’t get carried away Easing US inflation remains the key theme of the week, and we'll see more of that today as trade price data remains negative. This theme is currently dominating the direction for rates – but economic resilience is also having an impact, upping the market discount for how low the funds rate can get. That in turn limits how far the 10yr yield can fall.   Falling inflation helping to bring rates down, but a firm labour market limits how far they can fall June data continues to produce some remarkable outcomes. Most of the activity readings have been good, while inflation readings have been subdued. Following on the heels of a taming in consumer price inflation, yesterday's producer price inflation report had more good news. For June, PPI was running at a very subdued 0.1% on the month and at around a tame 2.5% year-on-year. Market rates are really latching on to the deceleration in the inflation theme, especially with data coming in better than expected. With respect to activity data, the latest jobless claims fell to 237k, showing the labour market still holding up quite well. It's been clear in the past few days that the market has been more willing to believe in the lower inflation risk coming from realised falls in key readings than the higher inflation risk coming from the tightness of the labour market. Yesterday's 30yr bond auction tailed, just as the 10yr did, indicative of poor reception. But tailing into falling yields is no disgrace. In fact, there has been decent underlying demand. At the same time, note that the market has also priced in a much higher terminal rate for Fed funds when you look out a few years. That’s in the sub-4% area, but not that far below the 4% mark. If you take this, and then look at the 10yr yield at 3.8%, there is no glaring value in the latter. We think that’s a reason not to get too carried away with the downside for the yields story – at least not just yet, anyway. We’ve clearly moved back below 4%, but breaking down to prior lows at sub-3.5% is not entirely probable. The firm labour market data is acting to keep rate cut cycle terminal rates relatively high. That’s the important counter to the falling yields narrative coming from realised falls in inflation.   Fed pricing has shifted significantly lower with the CPI release   Calmer waters in the week ahead, with some exceptions Tomorrow, the Fed will enter into its blackout period ahead of the July meeting. In US data the highlights are retail sales and industrial production, which can shed more light on the resilience of the economy. At least for industrial data, the ISM manufacturing survey does not bode well. We will also see a slate of housing-related data. The greater focus is likely to be on European Central Bank (ECB) communication with one more week to go before the blackout period. Yesterday’s ECB minutes of the June meeting underscored the bank’s determination to extend the hiking cycle beyond its upcoming meeting. At the same time, there are signs that the discussion about how much more is actually needed was already picking up. Yesterday saw Governor of the Bank of Greece’s Yannis Stournaras even put a small question mark behind the July hike pointing to weaker data, but the September hike should not be taken as a given in his view. Relevant for Sterling rates will be next week’s UK CPI figures, which could be pivotal for the size of the next interest rate hike. For now, the Bank of England is still seen more likely than not to hike by 50bp in August, although terminal rate pricing which had seen rate expectations go up to 6.5% in the wake of the wage data has now eased back towards 6%.   Today's events and market view The 10Y US Treasury yield has now come off more than 30bp from its recent peak, which takes it well into to the trading range that held until late June. We'll also see US import prices and the University of Michigan consumer sentiment survey, which could feed the narrative of easing inflation, although we don't see these releases adding any kind of new spin to the narrative.  The only data to note for today in the eurozone is the trade balance for May.

US The week before the July 26th FOMC meeting will contain a handful of key economic reports and several key earnings results. The initial assessment of the economy is somewhat upbeat as CEO Jamie Dimon noted that the US economy continues to be ‘resilient’. Next week’s big earnings include Goldman Sachs, Tesla, Netflix, Morgan Stanley, and American Express.   On Monday, the ISM manufacturing report will show activity is slowing down, with the headline reading expected to fall back into contraction territory.  On Tuesday, the June retail sales report is expected to show strength, as major car discounts encouraged buying.  Demand for services might still remain strong but is expected to weaken once we get into the fall.  Industrial production probably won’t impress given the weakness we saw with the PMI readings.  On Wednesday, both building permits and housing starts should show some weakness.  Thursday’s releases include jobless claims which might only show modest labor market sluggishness and some weaker existing home sales.  Eurozone President Christine Lagarde’s comments at the ECB conference in Frankfurt on Monday may be the highlight next week as traders try to better understand whether the central bank is as close to the end of its tightening cycle as they think. The ECB has pushed back before but the data is looking on a much better trajectory. Final HICP inflation figures will also be released on Wednesday. UK  UK inflation data on Wednesday is undoubtedly the one to watch next week. It seems we’re seeing progress on inflation everywhere except the UK at the moment. The headline is expected to fall back to 8.2% for June, with core staying at 7.1%. But both have surpassed expectations on numerous occasions recently as inflation has remained stubbornly high. Are better readings from the US and eurozone a sign of things to come for the UK, finally? Retail sales will also be released on Friday.  

Rates Spark: The stretch before two key central bank meetings There was some selling of bonds yesterday, and it feels a bit vulnerable here considering the decent total returns recorded year-to-date against all odds given monetary tightening and the future recession risk. There is also a pre-FOMC and pre-ECB theme in the air. Many will wait to get the central bank(s) assessment of things before pulling the trigger.   Long duration buying in the past month morphs to a selling tendency Most of the past month has been dominated by bond buying, typically long duration in nature. The same has been seen in corporates, and there has also been a decent bid into high-yield bonds. A glance at total return year-to-date show some impressive bond market performances, led by higher beta products. There are always profit-taking risks attached to this. A lot of the buying in the past month or so had helped to keep core yields from getting too carried away to the upside. But yesterday more selling than usual was seen for a change, in particular out of Asia. This was a factor in unleashing Treasury yields higher. The low jobless claims number pushed in the same direction, but would not have been enough as a stand-alone to push the 10yr yield from 3.75% to 3.85%. And other data today has in fact been quite muted or negative for the economy. The terminal discount for the funds rate also remains elevated, with the Jan 2025 future still above 3.75%. That keeps the pressure focused on the upside for market rates. The 4% level for the 10yr Treasury yield is firmly in focus here, likely post next week's FOMC outcome; at least we'll likely need to get through that first.   Closing in on cycle peaks With inflation dynamics looking more encouraging, the general notion is that central banks are close to their cycle peaks in terms of tightening. If we look at current pricing, the market is seeing a good chance that the Fed will deliver its final hike of the cycle next week. Historical patterns suggest that a re-steepening of the yield curve led by the front end then followed as recession eventually ensued. And indeed, if it were to go by the Conference Board's Leading indicator, which posted another drop yesterday, we would have been in recession for a long time already.  However, the context looks somewhat different this time, as some parts of the economy still look unusually resilient. And markets are seeing a growing likelihood of a soft landing, which itself limits the drop in front-end rates as less aggressive rate cuts are then needed. On the flip side, that resilience continues to harbour potential upside risks to inflation. And central banks will therefore tread more cautiously and not take any chances. They are sensitive to their poor track records of forecasting inflation in the past and are basing their policies on current inflation dynamics rather than their models.   Curves have reflattened over past weeks, a clear steepening signal remains elusive      

Rates Spark: Can Christine sound as calm as Jerome? The more Chair Powell spoke yesterday, the more he meandered into less hawkish territory. But he did not stray too far. Next up is the ECB's Lagarde, who is more prone to deviate. The 25bp hike is not the point. The tone is. We show that the US 10yr yield looks low relative to the strip, while in fact the 10yr Euribor rate looks if anything high versus its strip.   The Fed cements a mild rate cutting discount ahead, keep upward pressure on Treasury yields From a market rates perspective one of the key things to watch from the Federal Open Market Committee (FOMC) outcome was how the Fed decision and subsequent commentary might affect the Fed funds strip. In particular, beyond the hiking and into the discounting completion of the rate cutting phase. This is important, as where the fed funds strip sits in 2025 has a material effect on longer-dated Treasury yields, as, say the 10yr yield, really should not trade much through the longer dates on the strip. In fact they should trade at a 30bp premium to it (above it). We went into the FOMC with the Jan 2025 implied rate at just under 4%. It’s still there post the meeting, but closer to 3.9% now (as it jumps around, typically on low volumes). Remember this was down in the 3% area when Silicon Valley Bank went down. The fact that its some 100bp higher now limits the extent to which the 10yr Treasury yield can fall. In fact it should rise, and we continue to target it to get to the 4% area in the coming weeks, versus a current level of around 3.9%. That is broadly flat to the implied funds rate in Jan 2025. That’s too low for the 10yr yield, as it implies no curve just as the Fed has completed it rate cutting cycle.     We are not agreeing with the market discount per se, but where it sits is important in terms of framing the here and now for the 10yr Treasury yield, and in that way helps to add context to the immediate few weeks ahead. Meanwhile, the Fed continues to gradually tighten through its bond roll-off programme. Most of the impact of this has been in lower volumes going back to the Fed on the reverse repo facility. Bank reserves have in fact held steady. This allows the Fed to keep the tightening pressure on. It also keeps bills rates under elevation pressure, and prevent the bills curve from moving to a state of material inversion. At least not just yet. And, all other key rates are up by 25bp too, including the reverse repo rate now at 5.3%. The ECB to match the Fed, but the 10yr Euribor rate trade with more of a cushion It's the European Central Bank's turn on Thursday, with a 25bp hike anticipated. Delivery will see the Refi rate get to 4.5% and the Deposit rate to 3.75%, with the latter still heavily influential with respect to where front end Euribor rates are actually pitched. The current 3mth Euribor rate is pitched at just over 3.7%, at or about the level of the deposit rate. And the Euribor strip has it extending up to 3.9%, and so just about discounting one more 25bp hike.   The biggest attention will be centered on the words coming from President Lagarde. Chair Powell post the FOMC outcome started off sticking to script, but slowly morphs to an acknowledgement that inflation has indeed fallen, the real rate had risen and was indeed in a restrictive state. As the conference went on he was almost on the verge of a nod towards an eventual rate cutting track down the line. Lagarde will need to be a bit more careful. Chair Powell tends not to stray too far from script, while Lagarde can deviate far more. If we look out along the Euribor strip, the 3mth rate is discounted to be below 3% by the middle of 2025, and it stays below, getting down to 2.7%. There is a gap between that and where the 10yr Euribor rate currently sits at around 3.6%. Here there is a difference relative to the US, there the 10yr Treasury yield is already flat to or below where the fed funds strip is pitched. Part of this is reflective of the tendency of the deposit rate to have an outsized influence, but it's not all that. Optically there is more value in 10yr Euribor on this simple measure.   Today's events and market views Ahead of the ECB meeting, we'll have some regional consumer confidence, produce price inflation and retail sales. But nothing that is likely to move the market in any material fashion. More influential will be the US data. US GDP data for the second quarter is expected to confirm that the US economy continued to growth at a pace of almost 2%, while the GDP price index is set to fall to about 3%. The latter is a good look, and a reminder of the recent CPI number at the same rate. The core PCE index should be more influential though. It too should fall, but to a still elevated 4%. We'll also get durable orders, which should see a calming in the ex-transportation reading. But still far from a recesionary-type number. The headline should remain elevated, in the area of 1.3% helped by airline orders. We'lll also get another helping of weekly jobless claims, expected to be still in the 230k area, and still well below average. And then there are inventories data which should not be very market moving. Home sales data is expected to be weak, but has had a tendency to surprise to the upside of late. And the the Kansas City Fed Index should be weak too, especially given its aimed at the manufacturing sector where weakness has been in the waters for quite some time now.

Goldilocks GDP feeds the US soft landing narrative GDP growth was a little stronger than expected in 2Q 2023, but inflation pressures continue to moderate, supporting the soft landing narrative. The Fed will leave the door open to further rate hikes, but the legacy of past rate hikes and tighter lending conditions will restrain activity and dampen price pressures, negating the need for further action.     Not too hot inflation, not too cold growth We’ve got a nice combination on the US data front this morning for risk assets. Second-quarter GDP growth is stronger than expected (2.4% vs 1.8% consensus), led by consumer spending and investment with inventories not being as important a growth driver as thought likely. Meanwhile, the core PCE price deflator slowed to 3.8% annualised from 4.9% (consensus 4%). So we’ve got decent growth with slowing inflation while jobless claims fell to 221k from 228k and continuing claims dropping to 1,690k from 1,749k, which have further helped to boost the soft landing narrative. At the same time June durable goods orders jumped 4.7% month-on-month thanks to strong Boeing orders boosting civilian aircraft orders by 69.4%. Non-defense capital goods orders ex aircraft remain subdued though at 0.2% MoM – a little better than expected, but there were downward revisions.   Contributions to US quarterly annualised GDP growth (%)   Focusing on GDP, the 1.6% gain in consumer spending was slower than the warm-weather-boosted 4.2% surge in the first quarter, but it was better than the 1% figure we expected to see and points to some upward revision to the monthly profile in tomorrow’s personal income and spending report. Fixed investment was also better than predicted, rising 4.9%, led by a 10.8% jump in equipment and software investment after a couple of negative quarters. Government expenditure was also robust, rising 2.6%. The main drags were inventories, which weren’t rebuilt as much as expected while net trade was disappointing, subtracting 0.12 percentage points from headline growth with exports plunging 10.8% and imports falling 7.8%.   GDP continues to run below pre-Covid trend   GDP below pre-Covid trend, suggesting inflation still largely a supply side story If we look at the levels of GDP we see that while today’s growth number was better than expected, output is still around 2 percentage points below where we would have been had the economy remained on its pre-pandemic track. This suggests that supply side constraints continue to have an important legacy impact on inflation and additional rate hikes to dampen growth and get inflation sustainably back to target are not necessary. This view gets some support from that lower-than-expected core PCE deflator which at 3.8% annualised is the slowest rate of price increase since the first quarter of 2021. The headline PCE deflator slowed to 2.6% annualised.   Leading indicators still point to downside risk for GDP growth   Recessions risks linger on In terms of the outlook, we remain concerned that the cumulative effect of tighter monetary policy plus tighter lending conditions will increasingly restrain economic activity and growth will slow and possibly contract from the fourth quarter. Certainly the leading economic indicator suggests that the risks are skewed to the downside for economic activity. This should result in weaker employment numbers through the second half of this year and into 2024, which will further dampen price pressures, As such, we continue to believe that while the Fed will leave the door open to further interest rate hikes, there is less urgency to do so and that yesterday’s rate hike to 5.25-5.5% will end up marking the peak for US interest rates.

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

Bank of England set to raises rates to a new 15 year high European markets underwent another negative session yesterday, clobbered by concerns over weaker than expected economic activity, which in turn is raising concern for earnings growth heading into the second half of the year. Throw in a US credit rating downgrade from Fitch and the catalyst for further profit taking after recent record highs for the DAX completed the circle of negativity.     US markets also underwent a negative session, with the Nasdaq 100 undergoing its worst session since February, while the US dollar acted as a haven and the yield curve steepened. As a result of the continued sell-off in the US, and weakness in Asia markets, European markets look set to open lower later today, and while the Fitch downgrade doesn't tell us anything about the US political governance that we don't already know investors appear to be looking to test the extent of the downside in the market.     Earlier this week we saw some poor manufacturing PMI numbers which showed that the European economy was very much in recession, with disinflation very much front and centre. This has raised questions as to whether the services sector will eventually succumb to similar weakness. There has been some evidence of that in recent readings but by and large services activity has been reasonably robust. In Spain services activity is expected to remain steady at 53.4, along with Italy at 52.2. The recent flash numbers from France saw further weakness to 47.4, while in Germany we can expect to see a resilient 52, down from 54.1.         EU PPI for June is expected to slip further into deflation to -3.2% year on year. In the UK services activity is expected to slow to 51.5 from 53.7. With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure on the Bank of England to hike by another 50bps has eased somewhat, especially since the Fed and the ECB both hiked by 25bps last week.     Having seen core CPI slow by more than expected to 6.9% forward rate expectations have eased quite markedly in the past few weeks. Forward market expectations of where the terminal rate is likely to be, have slipped from 6.5%, to below 6%. It's also likely that inflation for July will slow even more markedly as the effects of the energy price cap get adjusted lower which might suggest there is an argument that we might be close to the end of the current rate hiking cycle.     The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the MPC to err towards the hawkish side of monetary policy and raise rates by 50bps, with a view to suggesting that this could signal a pause over the coming weeks as the central bank gets set to consider how quickly inflation falls back over the course of Q3. Such an aggressive move would be a mistake given that a lot of the pass-through effects of previous rate increases haven't fully filtered down with some suggesting that the Bank of England should pause. In the current environment this seems unlikely given a 25bps is priced in already.       In a nutshell we can expect to see a hawkish 25bps as a bare minimum, and we could also see a split with some pushing for 50bps. We could also get an insight into how new MPC member Megan Greene views the current situation when it comes to casting her vote. One thing seems certain, she is unlikely to be dovish as Tenreyro whom she replaced on the MPC.     We'll also get a further insight into the US labour market after another bumper ADP payrolls report yesterday which saw another 324k jobs added in July. Weekly jobless claims are expected to come in at 225k, while we'll also get an insight into the services sector with the ISM services index for July which is expected to come in at 53. The employment component will be of particular interest, coming in at 53.1 in June, having jumped from 49.2 in May.       EUR/USD – managed to hold above the 50-day SMA for the time being, with a break below targeting further losses towards 1.0830. Resistance currently at last week's high at 1.1150.     GBP/USD – also flirting with the 50-day SMA with a clean break targeting a move towards the 1.2600 area.  Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to edge higher drifting up to the 0.8630 level before slipping back, although it is now finding some support at the 0.8580 area. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to look well supported above the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 10 points lower at 7,551     DAX is expected to open 22 points lower at 15,998     CAC40 is expected to open 15 points lower at 7,297   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

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

FX Daily: Is disinflation enough to get the dollar lower? Today's release of US July CPI data will be the highlight of a quiet week. Consensus expects well-behaved 0.2% MoM readings at both the headline and core levels, providing more evidence for the Fed that inflation is coming under control. But robust US activity data and a poor overseas environment question whether the data will drag the dollar lower.   USD: Price action will be telling It has been a quiet week for global financial markets. Last week's concerns about the quarterly US Treasury refunding seem to have dissipated after the three and ten-year auctions went well. In fact, last night's $38bn 10-year auction was awarded at 3.99% - i.e. investors were prepared to accept sub 4% ten-year yields after all to fund the US government deficit. Today's $23bn 30-year auction could be a little trickier. However, successful auctions and lower interest rate volatility have favoured a return to the FX carry trade. Here the world's favourite benchmark for the carry trade - MXN/JPY - is up about 1.7% since the start of the week. Whether these benign conditions continue will be determined by today's release of US July CPI. Recall that the soft CPI releases late last year broke the back of the dollar's eighteen-month rally. Consensus expects 0.2% MoM readings for both headline and core today - consistent with inflation running closer to the Fed's 2% target. Normally we would say that this outcome would be a dollar negative - questioning whether the Fed needs to keep rates at these restrictive 5%+ levels for an extended period after all.  However, US activity data - especially the labour market and consumption data - have been stronger than expected and are likely to keep the Fed on guard for longer. And FX price action after the recent soft 2Q23 Employment Cost Index release hinted that disinflation may not be enough to take the dollar lower on a sustained basis.  For that to happen it looks like we will need to see both softer US activity data (look out for jobless claims today)  and a much more attractive overseas investment environment than currently on offer in China or Europe today. Expect DXY to continue to trade within a 101.80-102.80 range. Elsewhere today, look out for a Banxico policy meeting. This follows larger-than-expected cuts in Brazil and Chile over recent weeks. No change is expected, but investors are on the lookout for any hints of easing later this year. November is seen as a popular month for the first cut, but market pricing for the Banxico easing cycle is already fairly aggressive at 300bp+ for the next two years. The peso should continue to perform well, however,

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

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

FX Daily: Someone is still hiking The July FOMC minutes signalled clear openness to more tightening, but market pricing did not move a lot. The FX markets seemed more sensitive to that, and the dollar is enjoying some good momentum. Meanwhile, Norges Bank should hike by 25bp today, and this may not even be their last move; we still see NOK gains ahead. USD: Hawkish minutes, reluctant pricing The minutes of July’s FOMC policy meeting released yesterday showed the majority of members kept seeing upside risks to the inflation outlook and left the door open for more tightening. That mirrors what was previously indicated in the dot plot projections, but we think that the encouraging developments on the disinflation side mean the Fed won’t have to hike again and will instead opt for a long pause before cutting in 2024. The dollar found some support after the release of the minutes, although the Fed Funds Futures did not move significantly, still pricing in a 30% probability of another Fed hike. The reluctance to price in a greater probability is keeping the dollar’s gains limited. On the data side, our US economist debriefs yesterday’s set of releases here. Mortgage rates are hitting fresh highs, but that is failing to trigger the kind of house price correction we see elsewhere in the world, as crushed supply keeps prices elevated. Ultimately, Fed rate cuts next year could be the trigger for a real estate price correction should that allow a rebound in supply. On the industrial production side, a strong read for July contradicted the ISM manufacturing index, which had suggested the sector has been contracting for nine consecutive months. Today, the jobless claims will be watched closely after a surprise jump last week, and the calendar also includes the Philadelphia Fed Business Outlook for August and July’s Leading Index. The dollar is enjoying some modest bullish momentum – also helped by more worrying news from China’s real estate sector - but it may be lacking a clear catalyst to break above 104.00 (DXY) before the end of the week.

Asia Morning Bites BoK and BI meet today to discuss policy. G-7 PMI data undermine the higher-for-longer narrative.   Global Macro and Markets Global markets:  US stocks moved higher on Wednesday despite the backdrop of a thin macro calendar and anxiety ahead of the Jackson Hole symposium. The main catalyst for the move seems to have been some capitulation by bond bears, as bond yields tumbled. Yields were down in Europe after some weaker-than-anticipated PMI figures and were matched by falls in US yields as US PMI data also undershot expectations. The 2Y Treasury yield fell 7.9bp to 4.967%, and the 10 Treasury yield fell 13.2bp to 4.192%. So far, with bond yields down across the board, it hasn’t done too much to FX relativities. EURUSD remains roughly unchanged at 1.0863, though the AUD has caught some support from the drop in US yields, and is up to 0.6479 now. Cable dropped sharply in late trading yesterday before recovering most of the ground lost taking it back to 1.2718, and the JPY is looking stronger today at 144.67.  Asian  FX was mixed. The gainers included the CNY, where the PBoC seems to be winning the war of attrition with markets for the moment, and taking the CNY to 7.2786. After their earlier spike, CNH tomorrow next forward points have dropped back, suggesting the short squeeze from higher funding costs has done its work for now. The CNY’s gains have helped lift currencies across the region, including the SGD and VND. Propping up the bottom of the pack, the PHP and THB both weakened against the USD yesterday.   G-7 macro:  Big drops in Europe’s service sector PMI for August yesterday started the ball rolling for markets. The headline service sector index dropped from 50.9 to 48.3, a contractionary reading, offsetting the slightly higher but still recessionary manufacturing gain from 42.7 to 43.7. The US PMIs released later showed a similar pattern, though the drop in the US service sector PMI to 51.0 from 52.3 still leaves it in weak expansion territory, not recession. There was no respite for the US  manufacturing PMI though, which dropped further from 49.0 to 47.0. If soft survey data like this is backed up shortly by "hard" activity data and labour market figures, then the market's higher-for-longer belief will come under substantial pressure, with negative implications for both bond yields and the USD. That’s still a big if, but the probability has been nudged a little following these numbers. It is also going to make it harder for Jerome Powell to get the nuance right in his Friday speech. If he talks up the data-dependency of policy, then these recent softer releases must play into a less hawkish outlook…? Today’s data isn’t terribly exciting. Jobless claims and durable goods are the main US releases.   South Korea:  The Bank of Korea will meet this morning. We are in line with the market view expecting another “hawkish pause”. At today’s meeting, we think that the BoK will likely strengthen its hawkish stance because inflation will likely reaccelerate in the coming months.  This will be reinforced by the fact that the KRW has also been quite volatile and because household debt is increasing again. The updated economic outlook will be released after the announcement of the policy rate decision. We expect a small downward revision to the GDP forecast mainly due to rising concern over China’s slowdown and the sluggish export recovery. The inflation forecast is likely to remain unchanged, which will support the Bank of Korea’s hawkish stance on monetary policy.   Indonesia:  Bank Indonesia (BI) meets today to discuss policy.  Market expectations point to BI keeping rates unchanged at 5.75% today despite moderating inflation.  Pressure on the IDR is one reason why the central bank could opt for a pause.  But we would not rule out a surprise hike from Governor Warjiyo since the trade surplus, a key source of support for the IDR, has narrowed significantly this year.  A rate hike from BI could help steady IDR now that interest rate differentials have collapsed to a mere 25bps.      What to look out for: BoK and BI meetings, Jackson Hole conference on Friday South Korea PPI inflation and BoK policy meeting (24 August) Indonesia BI policy meeting (24 August) Hong Kong trade balance (24 August) US initial jobless claims and durable goods orders (24 August) Japan Tokyo CPI inflation (25 August) Malaysia CPI inflation (25 August) Singapore industrial production (25 August) US Univ of Michigan Sentiment (25 August)

US The month started with a bang with the US jobs report but the following week is looking a little more subdued, starting with the bank holiday on Monday. Economic data is largely made up of revisions and tier-three releases. The exceptions being the ISM services PMI on Wednesday and jobless claims on Thursday. That said, revised productivity and unit labor costs on Thursday will also attract attention given the Fed’s obsession with input cost, wages in particular. We’ll also hear from a variety of Fed policymakers including Susan Collins on Wednesday (Beige Book also released), Patrick Harker, John Williams, and Raphael Bostic on Thursday, and Bostic again on Friday.  Eurozone Next week is littered with tier-three events despite the large number of releases in that time. Final inflation, GDP and PMIs, regional retail sales figures and surveys, and trade figures make up the bulk of next week’s reports. Not inconsequential, per se, but not typically big market events unless the PMI and CPI reports bring massive revisions. We will hear from some ECB policymakers earlier in the week which will probably be the highlight, including Christine Lagarde, Fabio Panetta, Philip Lane, and Isabel Schnabel. UK  Next week offers very little on the data front but the Monetary Policy Report Hearing in front of the Treasury Select Committee on Wednesday is usually one to watch. While the committee’s views are typically quite polished by that point, the questioning is intense and can provide a more in-depth understanding of where the MPC stands on interest rates.  Russia Inflation in Russia is on the rise again and is expected to hit 5.1% on an annual basis in August, up from 4.3% in July. That is why the CBR has started raising rates aggressively again – raised to 12% from 8.5% on 15 August. Even so, the ruble is not performing well and isn’t too far from the August highs just before the superhike. We’ll hear from Deputy Governor Zabotkin on Tuesday, a few days before the CPI release. South Africa Further signs of disinflation in the PPI figures on Thursday will have been welcomed by the SARB but they won’t yet be declaring the job done despite the substantial progress to date. The focus next week will be on GDP figures on Tuesday, with 0.2% quarterly growth expected, and 1.3% annual. The whole economy PMI will be released earlier the same day. Turkey CPI inflation figures will be eyed next week, with annual price growth seen hitting 55.9%, up from 47.8% in July. The CBRT is all too aware of the risks, hence the surprisingly large rate hike – from 17.5% to 25% – last month. The currency rebounded strongly after the decision but it has been drifting lower since, falling back near the pre-meeting levels. There’s more work to be done. Switzerland Another relatively quiet week for the Swiss, with GDP on Monday – seen posting a modest 0.1% quarterly growth – and unemployment on Thursday, which is expected to remain unchanged. Neither is likely to sway the SNB when it comes to its next meeting on 21 September, with markets now favoring no change and a 30% chance of a 25 basis point hike. China Two key data to focus on for the coming week; the non-government compiled Caixin Services PMI for August out on Tuesday which is expected at 54, almost unchanged from July’s reading of 54.1. If it turns out as expected, it will mark the eighth consecutive month of expansion in China’s services sector which indicates resilience despite the recent spate of deflationary pressures and contagion risk from the fallout of major indebted property developers that failed to make timely coupon payments on their respective bonds obligations. Next up will be the balance of trade data for August on Thursday with export growth anticipated to decline at a slower pace of 10% y/y from -14.5% y/y recorded in July. Imports are expected to contract further by 11% y/y from -12.4% y/y in July.   Interestingly, several key leading economic data announced last week have indicated the recent doldrums in China will start to stabilize and potentially turn a corner. The NBS manufacturing PMI for August came in better than expected at 49.7 (consensus 49.4), and above July’s reading of 49.3 which makes it three consecutive months of improvement, albeit still in contraction.   In addition, two sub-components of August’s NBS manufacturing PMI; new orders and production are now in expansionary mode with both rising to hit their highest level since March 2023 at 50.2 and 51.9 respectively. Also, the Caixin manufacturing PMI for August has painted a more vibrant picture with a move back into expansion at 51 from 49.2 in July, and above the consensus of 49.3; its strongest pace of growth since February 2023. Hence, it seems that the current piecemeal fiscal stimulus measures have started to trickle down positively into China’s economy. India The services PMI for August will be released on Tuesday where the consensus is expecting a slight dip in expansion to 61 from 62.3 in July, its highest growth in over 13 years. Capping off the week will be August’s bank loan growth out on Friday. Australia The all-important RBA monetary policy decision will be released on Tuesday. A third consecutive month of no change in the policy cash rate is expected, at 4.1%, as the recently released monthly CPI indicator has slowed to 4.9% y/y from 5.4% y/y, its slowest pace of increase since February 2022 and below consensus of 5.2% y/y. Interestingly, the ASX 30-day interbank cash rate futures on the September 2023 contract have indicated a 14% chance of a 25-basis point cut on the cash rate to 3.85% for this coming Tuesday’s RBA meeting based on data as of 31 August 2023. That’s a slight increase in odds from a 12% chance of a 25-bps rate cut inferred a week ago. On Wednesday, Q2 GDP growth will be out where consensus is expecting it to come in at 1.7% y/y, a growth slowdown from 2.3% y/y recorded in Q1. To wrap up the week, the balance of trade for July will be out on Thursday where the consensus is expecting the trade surplus to narrow to A$10.5 billion from a three-month high of A$11.32 billion recorded in June.  New Zealand Two data to watch, Q2 terms of trade on Monday and the global dairy trade price index on Tuesday. Japan A quiet week ahead with the preliminary leading economic index out on Thursday and the finalized Q2 GDP to be released on Friday. The preliminary figure indicated growth of 6% on an annualized basis that surpassed Q1’s GDP of 3.7% and consensus expectations of 3.1%; its steepest pace of increase since Q4 2020 and a third consecutive quarter of annualized economic expansion. Singapore Retail sales for July will be out on Tuesday with another month of lackluster growth expected at 0.9% y/y from 1.1% y/y in June; its softest growth since July 2021 as the Singapore economy grappled with a weak external environment. On a monthly basis, a slower pace of contraction is expected for July at -0.1% m/m versus -0.8% m/m in June.  

Rates Spark: Service sector oomph We continue to view the dominant market tilt as one point towards upward pressure on market rates. Resilience is the simplest explainer. It will give eventually, but has not done so as of yet. The latest US ISM services report pushes in the same direction.   Another ratchet up in US Treasury yields, and for good reason Another leg higher in US Treasury yields, this time driven by ISM services. New orders and prices paid in the high 50s were the standout contributors. An interesting outcome was the re-inversion of the curve as the front end began to raise the discount for one more 25bp rate hike. It’s still priced for no further hikes but has moved closer to a balanced probability. A more neutral to downbeat Beige Book later in the day tempered enthusiasm, but not by enough to materially take yields off their highs. It still appears to us that the marketplace is not getting a green light to re-test lower, and we continue to read the path of least resistance as pointing higher for market yields. The market discount for the funds rate is now up to 4.3% for January 2025. Remember that was at 2.5% when Silicon Valley Bank went down in March this year. The market continues to discount rate cuts, but nowhere near to the extent they once were. The US 10yr Treasury yield is also at 4.3% and does not look wrong there. There is still a greater likelihood that it heads to the 4.5% area than the 4% one in the weeks ahead. Ultimately there is much more room to the downside for yields when something actually breaks, but for now, things are very much holding together – or at least there is enough constructiveness in the service sector to support ongoing elevation in official rates and market yields.   Resilience keeps the Fed discount elevated   Today's events and market views The goldilocks scenario is a narrow path; things can easily break precipitating a sharper downturn, or stay too hot and keep inflation elevated. The services ISM moved the needle a little to the latter scenario, bear flattening the curve as markets also pushed the implied probability for a Federal Reserve hike before year-end to 50%. The Fed Beige Book however was more downbeat, arguing for a Fed pause this month. Today’s calendar features the weekly initial jobless claims data, a more contemporaneous read of job market conditions than the payrolls data. Markets will also be confronted with another busy slate of Fed speakers.     In Europe, we will get the final reading for second quarter GDP growth. The list of scheduled European Central Bank speakers is long, but the black-out period has started. Yesterday Klaas Knot suggested markets were underestimating the chances for a hike this month, nudging rates higher to now discount a one-in-three chance.   A greater focus will be on the Bank of England publishing the results of the decision-maker panel survey on price expectations. Yesterday Governor Andrew Bailey remarked the Bank was probably “near the top of the cycle”, causing markets to pare their hike expectations. Two more hikes are fully priced, but we think chances still are we get one less.   In government bond primary markets, France and Spain will be active with auctions. Source: Refinitiv, ING

Economy concerns weigh on Europe, as higher rates keep US markets on the back foot By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Yesterday was another mixed bag for European markets, with the DAX closing lower for the 5th day in a row, while still closing well off the lows of the day in another choppy session.  The FTSE100, on the other hand, managed to break a 3-day losing streak, helped by a slightly weaker pound. US markets had a slightly more negative tone to them with the Nasdaq 100 closing lower for the 4th day in a row, with weakness in the Apple share price acting as the main lag on the index, while weekly jobless claims fell to their lowest levels since February.       The overall mood amongst investors does appear to be becoming gloomier, however despite recent price moves we're still within the price ranges we've been in over the past 6 months. With some key central bank meetings looming in the next 2 weeks we might find the catalyst that breaks us out of these choppy ranges. It's been another strong week for the US dollar, set for an eight successive weekly gain, and its highest level in over 6 months as it recovers back to the levels it was just prior to the March regional banking crisis.     One of the main reasons why the US dollar is doing so well is largely down to the performance of the US economy relative to its peers. Recent economic data has shown that the economy remains resilient, so much so that there is a feeling that the Federal Reserve might be able to get away with one more rate hike before year end, probably in November.       The same cannot be said anywhere else with weakness in China, Europe and the UK holding back any prospect of further rate hikes against a backdrop of a deteriorating economic outlook, This change in sentiment has seen the pound and the euro slide back, with the euro slipping below 1.0700 for the first time since June, along with the pound which has slipped below 1.2500. The economic data seen this week, especially from Germany and the rest of the euro area has been extremely disappointing, from some dreadful factory orders data for July, to a sharp downgrade to EU Q2 GDP from 0.3% to 0.1%, which meant that since Q3 of last year the euro area has barely grown at all.     It would take a brave central bank to hike rates further when economic activity is collapsing in one the biggest economies in Europe.   The weakness in the pound has been much more notable as traders pare bets on the likelihood of the Bank of England hiking rates by as much as expected over the coming weeks and months. Judging by recent comments from the likes Governor Bailey earlier this week, as well as deputy governor Broadbent and chief economist Huw Pill at the end of August, there is a sense the market is being softened up for a rate pause later this month, with the narrative likely to be that rates are likely to stay at current levels until 2025 at the very least.     This in turn has seen gilt yields slide across the board, as future rate hike bets get priced out, and investors turn their attention to which central bank might have to cut rates first, with opinion split between the ECB, or the Bank of England.   On the data front it's set to be fairly quiet day, with little way of data on the docket, as we look towards a modestly cautious, but positive European open.   EUR/USD – slipped below the 1.0700 area yesterday, with the May lows at 1.0635 the next key support. Resistance comes in at the 1.0760/70 and the August lows.     GBP/USD – closing in on the 200-day SMA at the 1.2410 area. Below 1.2390 argues for a move towards the 1.2300 area. Only a move back above the 1.2630/40 area, stabilises and argues for a return to the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 0.8600 area breaking above the 50-day SMA in the process. The 100-day SMA and 0.8620/30 area is also a key resistance. Support lies back at the lows this week at 0.8520.     USD/JPY – had 3 attempts at the 147.80/90 area this week and failed. A break above 148.00 targets the 150.00 area. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 7 points lower at 7,434     DAX is expected to open 12 points higher at 15,730     CAC40 is expected to open 5 points higher at 7,201  

Beyond Apple...  When a tech giant like Apple, with a market cap of nearly $2.8 trillion sneezes, the whole market catches a cold. The S&P500 fell for the third day to 4451 yesterday, while Nasdaq 100 slipped below its 50-DMA. Apple selloff also affected suppliers and other mega cap stocks. Qualcomm for example fell more than 7%, while Foxconn remained little impacted by the news.   Zooming out, the US small caps were also under pressure yesterday, the Russell 2000 fell below its 100-DMA and came close to the 200-DMA, as the latest data showed that the US jobless claims fell to the lowest levels since February, defying the latest softness in jobs data. Other data also showed that the labor unit cost didn't fall as much as expected in Q2. But happily, the US treasuries were not much affected by the latest jobless claims data. The US 2-year yield fell below 5%, although the US dollar index extended its advance toward fresh highs since last March.   The selloff in the Japanese yen slowed against the US dollar. The USDJPY pushed below the 147 mark this morning despite a slower than expected GDP print in Japan in the Q2. Capital expenditure fell 1%, private consumption declined 0.6%, making the case for a softer Bank of Japan (BoJ) more plausible. But the Japanese officials dared traders to continue buying the USDJPY to 150, saying that they would intervene.   The EURUSD sees more hesitation into the 1.07 mark, and into next week's European Central Bank (ECB) meeting. The base case is a no rate hike, and yesterday's morose growth figures came to cement the no change expectation. But the economic weakness may have little impact on inflation. Any bad surprise in German inflation due this morning could convince some ECB doves that the European policymakers may announce another 25bp hike when they meet next week.  

US weekly jobless claims drop to lowest levels since February Apple shares slide as China’s crackdown on iPhone use grows; Losing over $200 billion in market value BOJ’s Nakagawa reiterates stance that BOJ and gov’t are monitoring FX rates and impact on economy The US dollar index hit its highest level since March as risk aversion runs wild on higher interest rate fears and as global growth concerns spread to the US.  The dollar is poised to have an eight straight week of gains, but that is somewhat capped against the Japanese yen.  US stocks are falling on concerns that the Fed might not be done tightening and over uncertainty over how far China’s iPhone ban will extend into other parts of American technology.  Also weighing on sentiment is the global growth story that remains uninspiring following slightly better-than-expected China trade data and as fears grow for German industrial output.  For the US economy, the labor market is not softening quickly enough and that makes the Fed stick to the hawkish script that they might not be done raising rates.  The yen got a minor boost after BOJ Nakagawa stated that the central bank will closely coordinate with the government in monitoring foreign exchange rates and paying due attention to any impacts on the economy. Japanese officials will remain consistent with this messaging, but markets won’t react that much unless we significantly more yen weakness. Apple The Nasdaq is sinking as one bad Apple spoils a bunch of mega-cap tech stocks.  Apple’s growth story is heavily reliant on China and if the Beijing crackdown intensifies that could pose a big problem to the bunch of other mega-cap tech companies that rely on China.  The WSJ reported that China is banning iPhone use for government officials at work.  China is delivering some harsh restrictions on overseas technologies, and this could really hamper Apple’s revenue outlook as China is their largest foreign market.  The mega-cap tech trade appears ripe for pullback, but most investors will likely be eyeing the early AI winners and not so many companies that are still in the early stages of their investment.  Microsoft and Nvidia will likely outperform their peers.    USD/JPY Daily Chart     Earlier verbal intervention might have helped stall the dollar’s rally against the yen, but this latest pressure on tech stocks is significantly weighing on sentiment, which could help keep the yen supported. Japan officials are getting unexpected support from a bad Apple outlook, which help support a dollar-yen dip back to the lows seen earlier in the month.  The dollar temporarily surged after jobless claims fell to the lowest levels since February, but some are expecting that to influenced by the impact of Hurricane Idalia. The key levels for dollar-yen remain 145.80 and 148.00, with volatility expected to remain elevated given a breach of either the 145 or 150 levels.  If the broader dollar strengthening cycle remains that will eventually tip the scales of the massive divergence in central bank policy. One more Fed rate hike getting fully priced in might not be enough to get USD/JPY back to last October’s high, so you might start to see some bearish positioning.    

Post-BOJ Initial reaction – yen jumped, dollar fell, gold rallied, and equities rose. Some of these moves have started to reverse Japan’s Overnight Swap Indexes have an implied rate of 0.042% by the January 23rd BOJ policy meeting US 3-year Treasury attracts highest yield since 2007 (4.660% vs 4.650% pre-sale) The Japanese yen surged in Asia following BOJ Governor Ueda’s verbal intervention. Ueda noted that the BOJ might know enough about wage pressures by year-end, in other words if they could be ready to abandon negative rates.  The BOJ blackout period typically starts two days before the first policy meeting, which means we could have a full week of verbal intervention before the September 21st policy meeting starts. Japan officials will likely hesitate to actually intervene until some of the major US risk events are behind us. ​ No sense in selling dollars before seeing the latest US inflation report, which could easily upend any action. ​ A new week is here, and it looks like financial markets were ready for a major reset. Dollar-yen bearishness could also gain momentum if risk appetite deteriorates here. The yen got a boost after some weekend reading reaffirmed Wall Street’s belief that the Fed will pause rate increases in September, then review the latest economic data and assess if more rate hikes are needed in November/December.  The WSJ’s Nick Timiraos, who’s also known as the Fed whisperer has markets convinced that officials view the risks as more balanced, so a September surprise is very unlikely. It seems many risk events are on this week’s calendar, so we could see other drivers besides more chatter from Japanese officials and US CPI/retail sales data/inflation expectations.  The $AAPL This will be a big week for tech given the recent slide with some of the mega-cap tech stocks.  Apple was in the headlines after they decided to stick with Qualcomm’s 5G modems for their smartphones. Apple was trying to produce similar chips as soon as 2024, but it seems they aren’t there just yet.  The Qualcomm deal for Snapdragon 5G Modem-RF Systems will cover smartphone launches in 2024, 2025 and 2026.  This is great news for Qualcomm shares, while Apple shares will mostly await what happens with Tuesday’s important launch event.  Expectations are for Apple to unveil the new iPhone 15 and show how AI will be used.   $TSLA Tesla is also getting a boost after Morgan Stanley upgraded the EV giant and raised their price target from $250 to a street-high $400 a share.  The upgrade was driven by hopes that their Dojo supercomputer could help accelerate the adoption of robotaxis and network services.   Equities and risk appetite will have a handful of events to determine if a rebound is justified: Tuesday is all about the Apple event. Wednesday focuses on the US inflation report, which should show rising gasoline prices sent headline inflation higher, but the core readings are likely to remain subdued.  Thursday will be busy with the UAW strike deadline, a potential pause by the ECB, slight labor weakness from jobless claims data, and a soft retail sales report.  For Wall Street, Thursday’s focus should fall on the UAW strike deadline, which falls a minute before midnight.  A potential UAW strike of 10 days could trigger a recession for the Michigan economy and cost $5.6 billion in US GDP.  Friday contains the release of the University of Michigan inflation expectations, which are important for the higher for longer trade. Any yen strength could be short-lived until we get beyond some of the big market events of the week.   USD/JPY Daily Chart      Bearish price on USD/JPY , a daily chart of which is shown, is tentatively respecting key trendline support that started from the July 28th low.  The knee-jerk selloff spurred from BOJ Governor Ueda’s verbal intervention might not be the beginning of a new trend just yet.  Given the state of the US economy and its resilience, it appears that Japan’s central bank remains very concerned with the yen’s levels.  If USD dollar strength reemerges, the 147.80 level remains critical resistance.  On the other hand, if risk aversion runs wild, the 145.00 level provides initial support, followed by the 143.75 level.  

Asia Morning Bites Australia's labour market report is due out soon. Later today, the ECB meeting and US retail sales numbers should give investors more to ponder after yesterday's upside inflation misses.   Global Macro and Markets Global markets: We will start with Treasury yields today since they were most at risk from an upside miss to the inflation numbers, which we got on both the core and headline measures yesterday. But, contrary to everything you thought you knew about how markets worked, yields fell. The 2Y yield dropped by 5.1bp to 4.969%, and the 10Y yield fell by 3.2bp to 4.248%. Those declines in yield have had no impact on major FX rates. EURUSD remains roughly unchanged at about 1.0733 ahead of the ECB decision today, which still hangs in the balance. The AUD is also more or less unchanged at 0.6423, though it did have a look at sub-64 cent levels at one stage yesterday before recovering. Sterling is also about the same at 1.2491, though the JPY continued to nose higher and is now 147.28. In Asian FX, the main standout is the CNY, which is now down to 7.2717, in contrast to expectations for it to push above 7.35 which looked more likely only a few days ago. The PBoC is now using higher CNY funding costs in its battle to prop up the yuan, and right now, it seems to be working. Our end-of-month and quarter 7.25 forecast no longer looks quite so silly. This could change very rapidly though, and we have the China data dump tomorrow, though we are half-expecting this to be a little less negative than some of the recent data releases. The TWD was dragged stronger by the CNY, as was the SGD. SE Asian FX tended to lose ground yesterday, and the THB propped up the bottom of the table declining 0.34%. G-7 macro: The US CPI inflation release for August saw upside misses on both the headline inflation rate (3.7%YoY, up from 3.2%, and 3.6% expected) and the month-on-month figure for the core rate ex-food and energy, which rose 0.3% against expectations for a 0.2% rise. That still left core inflation falling to 4.3% which was in line with expectations, but progress in reducing core inflation will only be assisted by base effects for so long before it too will need to see the monthly rate need to drop to 0.1-0.2 to deliver a 2% target rate. James Knightley adds more detail in this note. It is also the ECB meeting today, and while we are looking for one, final rate hike, the market is totally split, and this decision could almost as easily result in no change. Our FX and rates strategists have put this cheat sheet together to highlight the potential market scenarios depending on what the ECB does, and more importantly, how it delivers its decision. We also get the August retail sales numbers for the US out today. The consensus expectation for the headline figure is 0.1%MoM, down from 0.7%MoM in July. We are beginning to see delinquencies on credit cards rising (as well as student loans and mortgages), and the latest consumer credit figures were also softer, so a bit more evidence of a consumer slowdown would vindicate the markets’ move to ignore the inflation figures overnight. The control group of spending is expected to decline 0.1% MoM after its 1.0% rise in July. US PPI data for August and weekly jobless claims round out the day. Australia:  August’s labour report remains an important piece of data while there remains some lingering doubt about whether or not the Reserve Bank of Australia has already delivered peak cash rates, or, as we suspect, maybe has one last hike left in the chamber to deliver before we can declare “job done”. And as ever, the outcome of this report is virtually impossible to call. We tentatively expect some unwinding of recent moves, with some modest job creation in the full-time segment, though this may be offset by some part-time employment declines, to deliver a +15K overall employment gain. This is a bit lower than the consensus +25K call. We are, however, in agreement that this will result in a drop back of the unemployment rate to 3.6% after the jump to 3.7% last month. What to look out for: ECB meeting and US retail sales Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)

US inflation remained firm both on headline and core, suggesting Fed will continue to push for higher-for-longer at next week’s meeting. Markets however shrugged off the report and USD also was largely unchanged. The yuan extended gains, and focus today will be on whether ECB can surprise hawkish, as well as the US retail sales. Oil prices saw another run higher before settling lower on inventory builds.     US Equities: The S&P500 ticked up 0.1% while the Nasdaq 100 added 0.4%. The CPI prints released were generally considered as not having an impact on a probable pause at the FOMC next week. Nvidia and Microsoft gained around 1.3% as the chipmaker’s chief scientist and the software giant’s President testified in Senate hearings about AI.     Fixed income: Treasuries sold off briefly following a higher-than-expected core CPI print but quickly reversed as buy-the-dip trades emerged. The 2-year yield ended the choppy session 5bps lower at 4.97% while the 10-year yield finished 3bps richer at 4.25%, near the day-low in yields in spite of a relatively weak 30-year auction.     China/HK Equities: Weaknesses in healthcare and technology stocks weighed on the benchmark indices, offsetting gains in China properties and financials. China properties were supported by news that Zhengzhou, a major city in eastern-central China, lifted restrictions on home purchases and lowered minimum down payment requirements. EV stocks sold off on EU anti-subsidy investigation news. The Hang Seng Index slid by 0.1% while the CSI300 dropped by 0.7%. Northbound net selling reached RMB6.6 billion.     FX: The US dollar wobbled on the CPI release but could not close the day higher with Treasury yields slipping. EUR in the spotlight today as ECB decision is due, and EURUSD has found support at 1.07 for now with a rate hike priced in with over 65% probability. USDJPY spiked to 147.73 but that remained short-lived and pair was back below 147.40 into Asian open. Yuan strengthened further with authorities increasing bill sales in Hong Kong to soak up yuan liquidity making it more expensive to short the currency. This could likely continue into the month-end National Day holiday, and USDCNH is seen testing 7.27 handle.     Commodities: Crude oil prices rose further with IEA estimates also looking at a supply deficit in Q4, although less so than the OPEC estimates. But gains were short-lived and prices fell after inventory data showing a crude build following weeks of drawdowns. US commercial inventories of crude oil rose 4 million barrels last week, according to EIA data. Gasoline inventories also rose by 5.6mn barrels. Meanwhile, Gold is back to threatening the $1900 handle with firmer US CPI.   Macro: US CPI surprised to the upside, but markets were not spooked as it did little to change the thinking around the Fed. Core CPI rose 0.3% MoM, or +0.278% unrounded, above the prior/expected +0.2%, with core YoY printing 4.3%, down from July's 4.7%, and in line with expectations. Headline print was in line with expectations at 0.6% MoM, up from +0.2% on account of energy price increases, with YoY lifting to 3.7% from 3.2%, above the expected 3.6%. The PBoC announced plans to issue RMB15 billion Central Bank Bills in Hong Kong on September 19, which is going to tighten CNH (offshore renminbi) liquidity. This issuance includes RMB5 rollover and RMB10 billion net issuance. According to PBOC's Financial Times, the PBoC will continue to issue bills in the offshore market to maintain ongoing control over offshore renminbi liquidity. The CNH HIBOR in Hong Kong reached 5.6% on Wednesday, marking its highest level since April 2022.   Macro events: US retail sales (Aug) exp 0.1% MoM (prev 0.7%), US PPI (Aug) exp 0.4% MoM and 1.3% YoY (prev 0.3% MoM, 0.8% YoY), US jobless claims exp 225k (prev 21k), ECB policy meeting exp 4.25% (prev 4.25%), Australia employment change exp 25k (prev -14.6k)   Adobe is scheduled to report Q3 results on Thursday after market close. Analysts' median forecast anticipates a 9.8% revenue increase and a 17% growth in adjusted EPS, reaching USD3.979. While Adobe has experienced steady revenue growth due to its shift to a cloud-based subscription model, recent trends indicate a plateau. Analysts remain skeptical about whether generative AI features in Adobe's content creation software will significantly contribute to growth.     In the news: EU launched an anti-subsidy investigation Wednesday against import of Chinese electric cars into the EU (Politico). Arm prices IPO at $51 per share, valuing company at over $54 billion (CNBC) Citigroup CEO shook up the management team (WSJ). For    

FX Daily: ECB to hike, but don’t get too excited for the euro It’s a close call, but we expect a 25bp hike by the ECB today. Markets are pricing in a 65% implied probability of a hike, so EUR/USD should rise after the announcement if we are right. However, a full 25bp are factored in by year-end, and it will be hard for Lagarde to convince markets the ECB can push rates even higher. Any EUR rally may be short-lived.   USD: Muted reaction to CPI, but still good news for the dollar US inflation came in slightly hotter than expected in the August report released yesterday. As noted by our US economist here, the core print was 0.278%: not a terrible miss to the 0.2% consensus, but probably enough to convince the majority of FOMC members to keep one rate hike in their end-2023 dot plot projections. The headline surprise was, instead, primarily driven by the 10% jump in gasoline prices. The market reaction was, however, quite muted. We could speculate on some extremely forward-looking interpretation of the data, but we think it was just a case of rates and FX having priced in an above-consensus CPI ahead of the release. Still, the broader dollar story is firmer now heading into next week’s Federal Reserve meeting. A hike is unlikely, and dot plots will move the market. If the blip in the disinflation process that emerged in these August figures prevents a big dovish revision of the 2023 dots, then the evidence of US economic resilience since the last projections (June) means the 2024 dots could be revised higher. It all argues against any near-term turn lower in the greenback; that is, unless US activity data starts to disappoint. Today, markets will closely watch the European Central Bank, but the US calendar is also quite busy. Along with the jobless claims – which dropped much more than expected last week – retail sales, PPI and Empire Manufacturing figures for August will be released. We see DXY contracting on the back of the ECB hike, but as we discuss below, we don’t expect the EUR/USD rally to be long-lived: the dollar index could be trading back around 104.50/105.00 before the Fed meeting.

Euro falls to the lowest levels since May after ECB hikes rates and delivers an abysmal growth forecasts, while upgrading 2023 and 2024 inflation outlooks Post ECB decision – October 26th ECB rate hike odds hover around 35.4% US retail sales remained strong on back-to-school spending and despite the extra energy costs at the pump The euro initially spiked after the ECB raised rates, but quickly tumbled after traders digested the ECB forecasts that suggest stagflation might be here.  Shortly after, the US posted robust retail sales and jobless claims data, which basically drove home the message that the US economy will easily outperform the eurozone economy throughout the rest of the year.  Investors were thinking that the US might be poised to deliver more rate cuts than the eurozone, but that seems like that won’t be happening anytime soon.   EUR/USD – 30 minute chart   ECB The summer break is over for the ECB and they have a tough job ahead.  Inflation remains too high and that is forcing the ECB to signal that they ” will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.” The market was split on whether they would raise rates, but when they processed the forecasts, they realized stagflation risks are here.   ECB Forecasts:  2023 GDP forecast cut from 0.9% to 0.7% 2024 GDP forecast cut from 1.5% to 1.0% 2023 GDP forecast cut from 1.6% to  1.5% 2023 Inflation forecast raised from 5.4% to 5.6% (core steady at 5.1%) 2024 Inflation forecast raised from 3.0% to 3.2%(a tick lower to 2.9% 2025 Inflation forecast lowered from 2.2% to 2.1%(core a tick lower to 2.2%) ECB’S Lagarde Press Conference When asked if she was done with rate hikes, Lagarde noted that some members preferred to pause, but that still a solid majority of members agreed with the decision.  One of the key takeaways from Lagarde is that they won’t be cutting rates anytime soon as inflation is still far from target.  Lagarde repeated this quote a few times, “based on current assessment…. the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” EUR/USD – Daily Chart   The euro might not be ready to punch a one-way ticket to the 1.05 level, but it sure seems like it is heading there.  Price action on the EUR/USD daily highlights the bearish trend has firmly been in place since mid-July.  As the risks for growth continue to deteriorate even further, the euro could see short-term weakness before a bottom is put in place.  Major long-term support could be provided by the 1.04 level, which is the 50% Fibonacci retracement of the September low to July high move. On the other side of the Atlantic, another round of US data supported USD strength after it reminded investors how strong the US economy remains; retail sales ex-auto had a fifth straight increase, producer prices came in hotter-than-expected, and jobless claims remained low.    

Equities closed higher with VIX at the 12 handle after ECB’s dovish rate hike and US economic data still being resilient. ARM IPO had a positive start although Adobe slid in post-market after reporting earnings. EURUSD broke below key support at 1.0635 but closed just above, while CAD and AUD outperformed. China’s RRR cut boosted oil further and could set a positive tone for today, but activity data and MLF announcement on watch ahead of Quad Witching option expiries in the US session.     US Equities In a broad-based rally, both the S&P500 and the Nasdaq 100 added 0.8% while small-cap stocks outperformed with a 1.4% gain in the Russell 2000 Index. Chip designer ARM soared 13.4% to USD63.59 on the first day of trading after the IPO. Moderna gained 3.9% after releasing a statement guiding higher revenue through 2028 on new drugs. Cruise liners and energy stocks were some of the top performers for the session. Adobe slid nearly 2% in extended-hour trading on a softer-than-anticipated AI boost to revenue outlook.   Fixed income Treasuries had a volatile session. The market was initially supported by the decline in yields across the pond in Europe following a 25bp ECB hike but signaling a pause in the statement. The hotter-than-expected US retail sales and PPI brought sellers back to the market. The Treasury announced USD13 billion 20-year bond and USD15 billion 10-year TIP auctions for next week. The 2-year yield climbed back above 5% to settle at 5.01%, up 4bps. The 10-year yield rose 4bps to 4.29%.   China/HK Equities The Hang Seng Index managed to close 0.2% higher, thanks to gains in coal miners and oil producers, while the CSI300 was flat in a choppy but subdued session. A surprise reduction in the Reserve Requirement Ratio (RRR) by the People's Bank of China (PBoC) after the market closed in the evening led to higher futures trading overnight and may set a more positive tone for today's trading.   FX The US dollar rose to fresh 6-month highs with EURUSD breaking below 1.07 and the May lows of 1.0635 after ECB’s dovish rate hike. A close below 1.0635 will  expose the 1.05 handle. GBPUSD also slumped to test the 1.24 handle. USDCNH rose slightly to 7.29 as PBoC cut RRR but AUDUSD attempted to break above 0.6450 after a hot labor report. CAD was the G10 outperformer as oil prices continued to surge, and EURCAD – as hinted in the FX Watch – slumped below 1.44.   Commodities Fresh highs in crude oil with WTI jumping over $90/barrel and Brent approaching $94. ECB signaling a pause, hot US economic data as well as China RRR cut supported the demand outlook while supply constraints linger. China’s activity data will be a key focus in the day ahead, and whether the RRR cut is followed by another MLF cut. Iron ore continued to climb higher breaking above $120, the highest in five months on the back of strong production from China steel mills with a seasonal pickup in construction. Meanwhile, uranium futures are surging higher driven by supply tensions as nuclear reactor capacity growth increases.   Macro: The ECB raised interest rates 25bp, taking the deposit rate to 4.0%, however the hike was dovish as it came with hints of the end of tightening cycle even though President Lagarde stayed short of saying that ECB is at peak rates. 2023 inflation was upgraded to 5.6% from 5.4%, 2024 (in-fitting with source reporting by Reuters) raised to 3.2% from 3.0% and 2025 lowered to 2.1% from 2.2%, but still ultimately seen just above target. Growth projections for 2023-25 were lowered across the board. The PBoC cut the reserve requirement ratio (RRR) by 25bps effective Friday, September 15, 2023, bringing the weighted average RRR across banks to 7.4% and increasing loanable funds by over RMB500 billion. There is RMB400 billion in medium-term lending facility loans maturing today. US retail sales for August came in firmer than expected although July’s print was revised lower. Headline up 0.6% MoM (exp 0.2%, prev 0.5%) as gasoline station sales surged to 5.2% from 0.1% in July. The control metric also posted a surprise gain of 0.1% despite expectations for a 0.1% decline, although the prior was revised down to 0.7% from 1.0%. US PPI meanwhile rose 0.7% MoM in August, above the expected and prior 0.4%, marking the largest increase since June 2022 and heavily driven by a 10.5% increase in the energy component. Weekly jobless claims rose to 220k from 217k, suggesting a still tight labor market.   Macro events Among the Chinese activity data scheduled for release today, the consensus forecasts a 3.9% increase in industrial production in August, up from 3.7% in July, reflecting stronger manufacturing PMI data. Retail sales are expected to grow by 3.0% Y/Y, boosted by auto sales and catering, surpassing July's 2.5%. While the front-loading of local government bond issuance in August would have supported infrastructure construction, a combination of a high base from the previous year and continued weakness in property construction may limit fixed asset investment growth for August. This likely contributed to the Bloomberg consensus projection of a year-to-date fixed asset investment slowdown to 3.3% Y/Y from 3.4%. Other key events scheduled include US industrial production (Aug) exp 0.1% MoM vs. 1.0% prev, UoM sentiment (Sep P) exp 69.0 vs. 69.5 prev.   Company events Adobe reported Q3 of USD4.89 billion, in line with street consensus and adjusted EPS of USD4.09 beating estimates slightly. Q4 profit guidance of USD4.10 to 4.15 per share surpassed consensus USD4.06 while sale guidance of USD4.98 billion to 5.03 billion was in line. The initial reaction was mild disappointment on the tepid sales outlook.  

US housing feels the squeeze from high mortgage rates A tripling of US mortgage rates constrained both the demand and supply of housing, leaving existing home sales at post-GFC lows. Mortgage rates will rise further in the wake of the market's reaction to yesterday's Fed forecasts, further constraining activity.   Market acknowledges the risk of a final hike, but it will depend on the data The Fed's messaging of higher for longer interest rates has been taken on board by financial markets, with the dollar strengthening and the yield curve shifting higher in the wake of yesterday's decision. Nonetheless, the market remains somewhat sceptical on the prospect of the final 25bp interest rate rise that the Fed's forecasts signalled for this year, with the pricing for November's FOMC meeting only being 8bp with 13bp priced by the time of the December meeting. The jobs market remains tight, as highlighted by low jobless claims numbers today, but we continue to believe that core inflation pressures will slow meaningfully, the economic outlook will soften, and the Fed won't end up carrying through. The jobs market is always the last thing to turn lower in a downturn and there are areas of more obvious weakness.  For example, US existing home sales fell 0.7% MoM in August to a level of 4.04mn rather than rising the 0.7% MoM as the market expected. This is due not only to weakness in demand but also a complete collapse in properties available for purchase. The affordability issue is front and centre here, with prices having risen nearly 50% nationally during the pandemic, but demand has obviously been crushed by the fact that mortgage rates have tripled since the Federal Reserve started hiking interest rates. But this surge in borrowing costs is constraining the supply of homes for sale as well - people who are locked in at 2.5-3.5% mortgage rates cannot afford to give them up. They can't take the mortgage with them when they move home, so even if you downsize to a smaller, cheaper property, you are, in all likelihood, going to end up paying a higher monthly dollar mortgage payment.   We're in a crazy-sounding position Consequently, we are in a crazy-sounding position whereby the number of housing transactions is on a par with the lows seen during the global financial crisis, yet home prices are rising. This should be a boon for home builders, but note the big drop in sentiment and housing starts seen earlier in the week. The drop-off in prospective buyer traffic is making builders cautious. Mortgage rates at 7%+ will obviously do that over time, but it may be another sign of the household sector starting to pull back at the margin now that the Fed believes pandemic-era savings are close to being exhausted.   Existing homes sales transactions and home prices   Leading index still indicates recession can't be ruled out Meanwhile, the US leading economic indicator, which combines a range of other numbers, including jobless claims, orders, average work week, the yield curve and credit conditions, posted its 17th straight monthly decline. As the chart below shows, the index at these sorts of levels has been a clear recession indicator in the past, but for now, GDP growth is strong.   Leading index versus GDP (YoY%)   Our view remains that this strength in activity has been caused primarily by households running down pandemic-era accrued savings aggressively and borrowing more on credit cards. But with savings obviously being finite - note the Fed's Beige Book citing evidence of the "exhaustion" of these savings - and consumer credit harder to come by and certainly less affordable than it was, the cashflow required to finance ongoing increases in spending will have to increasingly come from rising real income growth. Rising gasoline prices will erode spending power while student loan repayments, strikes and the prospect of a government shutdown will add to the financial stresses on millions of households, so we will need to see substantial wage increases for everyone - not just auto workers - to keep this growth engine firing.  Given this situation, we not only think the Fed will leave rates at their current levels, we also see the potential for more rate cuts next year than the 50bp currently being signalled by the Federal Reserve.

FX Daily: Re-pricing for a world of higher US rates FX markets are settling down after a big week of central bank policy announcements. Perhaps the biggest story is that the world's 10-year benchmark borrowing rate is pressing at 4.50% – seemingly on the view that a new neutral rate for Fed Funds may be 4%, not 2.5%. Expect the dollar to hold gains as Europe braces for another soft run of PMI data.   USD: 4.50% on the US 10-year yield could pressure risk assets US interest rates continue to grind higher. Overnight, the US 10-year Treasury yield has edged up to 4.50% – the highest since 2007. Driving the move continues to be a re-assessment of the Fed's higher-for-longer policy. Looking out along the USD OIS curve, investors struggle to see short-term US rates (one month OIS) below the 4.00% area over the next 15 years. Our rates strategy team argues that it is fair to see a modest positively sloping yield curve over that period and the 10-year priced 50bp above this 4% low point. This grind higher in US yields – marking higher risk-free rates – creates headwinds for risk assets such as equities, credit and emerging markets. Indeed, even the AI-powered S&P 500 is having a bad month, though it is still up 12.8% year-to-date. This equity correction is supportive news for the dollar, where any move to cash will mostly end up in the liquid dollar that pays 5.30% overnight rates. For today, another bleak run of PMIs in Europe may well keep European currencies soft and the dollar bid. The US data calendar today sees the flash PMIs for September, where the composite PMI remains just above 50. This data has not been market-moving recently. More important was yesterday's release of the lowest weekly jobless claims since January which suggested there are very few signs of a robust US labour market turning.  Expect DXY to remain bid and there is a scenario where the dollar stays strong into mid-October, when large US corporates based in California need to pay their taxes.

FX Daily: Fed pause renews interest in the carry trade Even though it was a hawkish hold, the Fed's decision to leave rates unchanged for a second meeting in a row has seen interest rate volatility drop and high-yielding currencies start to perform well again. This may be an emerging trend, especially if tomorrow's jobs data isn't too hot. The focus today is on rate meetings in the UK, Norway and the Czech Republic.   USD: Investors look set to explore the Fed pause The dollar has been a little weaker over the last 24 hours. Helping the move has likely been the rally in the US bond market, supported by a lower-than-expected quarterly refunding announcement, the soft manufacturing ISM and then the FOMC meeting. Despite the Fed retaining a tightening bias, it seems investors are more interested in reading and trading a Federal Reserve pause. This has seen interest rate volatility drop and triggered renewed demand for high-yielding FX through the carry trade. Calmer market conditions have gone hand in hand with the re-pricing of the medium-term Fed cycle. Recall that last month, the story was very much 'higher for longer' and rather incredibly, the low point for the Fed cycle over the coming years was priced at just 4.50%. That pricing has now adjusted 60bp lower over the last few weeks and has even seen yields at the short end of the US Treasury curve start to move lower, e.g., sub 5% again. It may be too early to expect these short-end rates to go a lot lower just yet, but it does seem as though investors are a little more open to the prospect of weaker data knocking the dollar off its perch. Without that confidence that US growth will decelerate this quarter, the Fed's pause can, however, see further demand for carry. In the EM space, it has been a good week for currencies in Chile, South Africa and Mexico, while in the G10 space, the under-valued Australian dollar is doing well. We continue to see upside potential for AUD/CNH. This would normally be a weak environment for the yen as well, meaning that we cannot rule out USD/JPY retesting 152. US data will determine whether the dollar can generally hold steady in this carry trade environment or whether weaker US data finally triggers a more meaningful and broad-based dollar correction. For today, the focus will be on the weekly jobless claims data – where any decent jump higher can knock the dollar – and the volatile Durable Goods Orders series. Do not expect big moves before tomorrow's US jobs report, but we would say the dollar's downside is vulnerable today. DXY to drift towards 106.00.

US payrolls the key test in a strong week for stock markets  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw their best one-day session in 3 weeks, with the DAX closing at a two-week high, helped by a combination of some solid earnings reports, and tumbling yields on growing optimism that central banks have hit peak rates, after the Bank of England followed the Fed in holding rates at current levels. US markets saw a similarly strong session, rising for the 4th day in a row, with the S&P500 rising to a 2-week high, while US 10- and 30-year yields falling more than 25bps in the last 2 days, reinforcing the idea that the rate hike narrative of the last 18 months is now in the rear-view mirror.     Of course, this narrative will still need to be supported by the underlying economic data, and in the case of the US is likely to be subject to two-way risks given the continued resilience of the US labour market.   Today's non-farm payrolls report for October will be the first key test of that narrative in the aftermath of Wednesday's decision by the Federal Reserve to pause for the second meeting in succession, with the goldilocks scenario for markets likely to be one of a softish or neutral report.   Having seen such a strong US close, European markets look set to open higher as we look towards this afternoon's US jobs report.     Before that we get the latest PMI snapshot from the services sector for the UK economy ahead of Q3 GDP numbers which are due next week. Recent data has shown the UK economy is slowing significantly compared to the first half and with manufacturing already in contraction, the services sector is now starting to slow as well, slipping slightly into contraction over the last 3-months we can expect to see further stagnation around 49.2.   After the release of those numbers' attention will shift to the US employment report.   Weekly jobless claims fell back below 200k earlier this month for the first time since January in a sign that the US economy remains reasonably resilient, and although they've ticked up to 217k since then there has been little sign of a slowdown.   In September we saw yet another bumper payroll report with another 336k jobs added, while August was revised up to 227k, which pushed US long term yields higher on the day to new 16-year highs, although we've since slipped back sharply, due to a belief that the Federal Reserve is probably done on the rate hike front.   Wage growth was slightly softer than expected at 4.2%. Another notable factoid was a big jump in part-time positions which rose 151k and could also explain why wage growth showed little sign of racing higher. The unemployment rate remained steady at 3.8%.   This weeks ADP payrolls report for October was another weak one, coming in at 113k, only a modest improvement from the 89k in September, however there has been little to any correlation between the two reports for months now, while vacancies in the US economy have remained high, which suggests little sign that the US economy is starting slow significantly.   One thing that has been notable this year is how every single non-farm payroll report has come in above expectations, and by quite some distance. Will today's numbers be any different?  to note is There is scope for that given that the participation rate has been rising, it was at 62.4% at the start of the year and is now at 62.8%, still 0.5% below the level it was pre-pandemic.   Expectations are for today's October payrolls to come in at 185k, which has been the estimate of choice over the last 3 months.   Most of the new jobs being added have been in services over the last few months and today's ISM services data could well offer further insights into that after the payroll's numbers have been released.   ISM services employment was at 53.4 in September and is expected to rise to 53.5, while prices paid is expected to slow to 56.6 from 58.9. This is where the US labour market is most resilient, and will need to remain so in the lead-up to Christmas.   Amazon has already indicated it will be hiring up to 250 seasonal workers in the lead up to the holiday period. Will it be alone in hiring extra people, when retailers like Target are warning that US shoppers are slowing their spending plans?             EUR/USD – pushed up to the top end of its recent range, and the 1.0675 highs of this week. We continue to be range bound between the 1.0700 area and the 50-day SMA. Below 1.0520 targets the 1.0450 level   GBP/USD – pushed above the 1.2200 area yesterday, but has thus far failed to consolidate that move. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – finding support at the 0.8680 area for now, with a break targeting the 0.8620 area. We have resistance at the recent highs at 0.8740.   USD/JPY – slipped back to the 149.80 area yesterday, we still have resistance just below the highs of last year at 151.95. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.   FTSE100 is expected to open 33 points higher at 7,479   DAX is expected to open 79 points higher at 15,222   CAC40 is expected to open 36 points higher at 7,096  

Rates Spark: Not called resilient for nothing After a huge fall in yields last week, there has been an attempt to engineer some semblance of a reversal so far this week. We expect to see more of that in the days ahead, with data unlikely to get in the way and supply pressure pushing in the direction of a concessional build in the coming days.   Market rates edging higher from Friday's lows, led by the US Market rates have staged a bit of a fightback having hit post-payroll lows on Friday. The US 10yr Treasury yield managed to bounce off the 4.5% area, which we now regard as a key support. Stay above that level and we are good to gradually re-test higher in yield over the course of this week. It’s a week of supply right along the curve in the guise of 3yr, 10yr and 30yr auctions. It’s also a week that is unlikely to get too rocked by data releases, with Thursday’s jobless claims set to be the highlight of the week. In addition, we note that there remains an underlying supply risk for bonds generally. Even though the US Treasury has taken some pressure off long-dated issuance into year-end, it does not take away the underlying pressure coming from the elevated fiscal deficit. Fiscal pressure results not just in ongoing supply pressure, but also likely ongoing upward pressure on real yields. That in turn implies steepening pressure from the back end. Importantly, we don’t have a green light yet for a complete cycle capitulation towards a structural rate-cutting agenda. That will come, but we need more first.   Yields are slowly starting to revert higher   QT lumped into the ECB's review of the operation framework European rates markets also pared some of the past week’s rally with 10Y Bund yields ending the first session 9bp higher above Friday’s close and thus well above 2.7% again. But it looked more like a general countermove, inspired also by a busy corporate supply slate, rather than being motivated by any single event. There were hawkish comments from the European Central Bank’s Robert Holzmann, who said the central bank should be ready to hike again if needed. But coming from him, such remarks should not surprise and are not new. Rather, his other remarks on quantitative tightening and that there won't be anything forthcoming on that front this year were rather dovish, if anything. The debate about the ECB’s bond portfolios could not be separated from the review of the operational framework, Holzmann said. The forthcoming framework will also determine the level of excess reserves that the ECB will operate with to maintain control over front-end rates – and perhaps even foresee a structural bond portfolio to also provide it with some flexibility to intervene in bond markets. Recall that the ECB’s hawks had also postponed their push for higher minimum reserves until spring next year for a similar reason, according to earlier Reuters reports. The review will give an opportunity to address the wider issue of excess reserves in the system – and also the cost efficiency of implementing monetary policy which could also include, for instance, the remuneration of government deposits. Given the complexity and multitude of possible tweaks, we would expect the review to conclude not with a one-off adjustment but rather a gradual path towards a new framework.     Today's events and market view There are few data points of note over today's session. For the eurozone, PPI is expected to slow to 0.5% month-on-month resulting in a -12.5% year-on-year figure and the US will be reporting its trade balance. The main highlight will be the busy schedule for Federal Reserve speakers, including Neel Kashkari, who last night was not convinced that rate hikes were over. Other Fed speakers are Austan Goolsbee, Christopher Waller and John Williams. Supply also returns to the spotlight. In Europe, Austria will auction 5Y and 10Y lines, but the main focus will be on the UST auctions this week, beginning with the sale of US $48 billion in new 3Y notes tonight

FX Daily: Government shutdown averted The dollar continues to claw back some of Tuesday's losses after US October retail sales suggested that the consumer is still spending. Also helping has been the Senate's support of a stop-gap funding bill that kicks the risk of a government shutdown into 2024. Expect more rangy price action in FX markets today, with the focus on speakers and US claims data. USD: Bouncing around The dollar is drifting higher as investors continue to assess whether the large drop on Tuesday was the start of something meaningful or just more noise in an uncertain environment. We have heard a couple of Federal Reserve speakers still holding out the risk of a further hike, but for the time being, US money markets seem pretty confident that the Fed cycle is over and have now priced 90bp of easing in 2024. Yesterday's release of US October retail sales failed to kindle this week's dollar bear trend and the Senate's support for a stopgap funding bill has removed the risk of a dollar bearish government shutdown at midnight on Friday. Where does that leave us? Confidence that the Fed tightening cycle is over should be positive for the rest of the world currencies - especially those that are very sensitive to higher interest rates. Yet with overnight rates in the US at 5.4%, the dollar is an expensive sell and the bar is high to invest elsewhere. That is why - as we conclude in our 2024 FX Outlook: Waiting for the tide to come in - the dollar bear trend is going to take some time to build and its more intense period may not be until 2Q24. For today, the focus will be on the weekly jobless claims data and industrial production. Any spike in jobless claims could hit the dollar. We also have a few Fed speakers today - most from the hawkish end of the spectrum.  Look for DXY to trade in something like a 104.00-104.85 range for the short term.  

Industrial output in the eurozone fell more than expected, as total production dropped 1.1% on month in September, while forecasts were for output to be down 0.8% on month. However, this report did not lead to any noticeable movements in the foreign exchange market. Investors were clearly waiting for US data, the forecasts for which also carried a negative tone, as they intended to extend the dollar selloff. However, the annual trend in retail sales slowed from 4.1% y/y in September to 2.5% y/y in October, whereas a slowdown from 3.8% to 2.1% was expected. So not only were the actual reports better, but the previous results were also revised for the better. Afterwards, a full-fledged rebound started, and the dollar was able to improve its position. The only thing we can highlight for today is the initial jobless claims in the United States. The total number is expected to increase by 8,000. The changes are extremely insignificant and are unlikely to have a serious impact on the current situation. Considering that the rebound is not yet complete, we expect the dollar to gradually rise further.   The EUR/USD pair has entered a retracement phase due to the high overbought levels. The level of 1.0900 acts as resistance, and we observed a decline in the volume of long positions near this area. On the four-hour chart, the RSI downwardly crossed the 70 line. This technical signal indicates that the euro's overbought conditions have started to ease, given that a retracement phase is being formed. On the same time frame, the Alligator's MAs are headed upwards. The signal corresponds to the upward cycle, ignoring the ongoing retracement. Outlook The ongoing retracement persists, which is why traders are considering a scenario with the pair moving towards the level of 1.0800. The succeeding movement will depend on the price's behavior near this level—whether sellers can keep the quotes below it or if the level will act as support. The complex indicator analysis points to the retracement phase in the short-term and intraday periods.  

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

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

Details of the Economic Calendar on November 22 Data on durable goods orders in the United States declined 5.4% in October, while the forecast predicted a drop of only 2.8%. The negative impact was slightly mitigated by data on jobless claims in the U.S., which reflected a decrease in their overall volume despite the forecast of an increase. Statistical details indicate that the volume of continuing claims fell from 1.862 million to 1.840 million, while the volume of initial claims rose from 233,000 to 209,000 Analysis of Trading Charts from November 22 During the corrective movement, the EUR/USD currency pair almost reached the level of 1.0850. This movement was characterized in the market as local, after which the quote returned above the level of 1.0900. The GBP/USD pair temporarily dropped below the level of 1.2450 during a technical pullback, but then returned to the area around the level of 1.2500. The current pullback fits into the structure of an upward cycle, and no shifts in trading interests are observed.   Economic Calendar on November 23 The publication of preliminary estimates for business activity indices in the United Kingdom and the United States is expected. Despite the importance of this event for the market, it is likely to go unnoticed. Today is a holiday in the United States due to Thanksgiving Day, which, in turn, will lead to a decrease in trading volumes. EUR/USD Trading Plan for November 23 Price stabilization above the level of 1.0900 may indicate a possible increase in the volume of long positions, paving the way to the level of 1.1000. On the other hand, holding the price below the level of 1.0850 may lead to an extension of the corrective cycle.     GBP/USD Trading Plan for November 23 Maintaining the price above the level of 1.2500 may subsequently indicate an increase in the volume of long positions. In this case, an update of the local high within the upward cycle is possible. As for the pullback scenario, it may be relevant if the price remains below the level of 1.2450.     What's on the charts The candlestick chart type is white and black graphic rectangles with lines above and below. With a detailed analysis of each individual candle, you can see its characteristics relative to a particular time frame: opening price, closing price, intraday high and low. Horizontal levels are price coordinates, relative to which a price may stop or reverse its trajectory. In the market, these levels are called support and resistance. Circles and rectangles are highlighted examples where the price reversed in history. This color highlighting indicates horizontal lines that may put pressure on the asset's price in the future. The up/down arrows are landmarks of the possible price direction in the future.

Asia Morning Bites Australian 3Q23 GDP comes in soft; Moody's negative China outlook will likely dominate risk sentiment today. Taiwan CPI out later.   Global macro and markets Global markets:  US Treasury markets continued to rally on Tuesday, helped by declines in Eurozone bond yields as one of the ECB’s more hawkish board members (Isabel Schnabel) noted that further hikes were “unlikely”. US yields were then given an additional downward push by some soft JOLTS job opening figures. 2Y Treasury yields fell 5.9bp to 4.577%, while 10Y yields fell 8.8bp to 4.165%. The slightly bigger falls in Eurozone bond yields helped EURUSD to decline to 1.0793 and that has also led AUD to decline to 0.6553, Cable to drop to 1.2593, while the JPY stayed fairly steady at 147.18. As the EURUSD move has more to do with EUR weakness than USD strength, these G-10 moves look unnecessary, and a case could probably be made for these other currencies to appreciate against both the EUR and USD, especially those where rate cuts are not on the agenda (JPY) or will be later and probably less than in the US (AUD). The KRW also weakened on Tuesday, rising back to 1311.20. The IDR was also softer at 15505, as were most of the other Asian FX pairs. There may be a bit of further weakness today, though for the same arguments as for the G-10, the rationale for this is quite weak, and we wouldn’t be totally surprised to see this go the other way. Equities didn’t know which way to turn yesterday, given the weak labour demand figures but the lower bond yields, and the S&P 500 ended the day virtually unchanged. The NASDAQ made a small gain of 0.31%. Chinese stocks were battered by the outlook shift to negative from Moody’s, which pointed to the rising debt levels and higher deficits China is adopting to try to underpin the property sector. Though the decision on Evergrande’s winding up was postponed until January, which could have provided some relief. The Hang Seng fell 1.91% and the CSI 300 fell 1.90%.   G-7 macro:  As mentioned, the JOLTS job openings data showed a large decrease in vacancies, to 8733K in October (for which we already have non-farm payroll data) from 9553K in September. The service sector ISM index was actually a little stronger than in October, rising to 52.7 from 51.8, and the employment subindex rose to 50.7 from 50.2, though this has little correlation with month-on-month directional payrolls trends. After a rare “hit” with its weak reading last month, attention may revert back to the ADP employment data later today.  A 130K  increase is the latest consensus estimate. The consensus for Friday’s non-farm payrolls is higher at 187K, with an unchanged unemployment rate of 3.9%. Outside the US, German factory orders and Eurozone retail sales are the main releases, along with a Bank of Canada rate decision (no change expected to the 5% policy rate).   Australia: 2Q23 GDP slowed from a 0.4%QoQ pace in 2Q23 to only 0.2% in 3Q23, weaker than the 0.5% consensus estimate (ING f 0.3%). A more negative contribution to GDP from net exports in data revealed yesterday was the main clue that the figure was going to undershoot. Yesterday’s RBA no change statement showed no additional sign that the RBA is done hiking rates and merely repeated the previous language. Today’s GDP data slightly increases the probability that rates have peaked – however.   Taiwan:  November CPI inflation should show a further moderation, dropping to 2.80% from 3.05% in October. We don’t see this having any impact on the central bank’s policy rates for the time being though.   What to look out for: Australia GDP and US jobs numbers Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December) China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)

China trade disappoints, as Moody's downgrade weighs on Asia markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive day yesterday, with the DAX posting another record high, while the FTSE100 broke 2 days of declines to close higher as well.   The outperformance on European markets appears to be being driven by the increasing belief that the European Central Bank may well be forced into cutting rates sharply in the early part of 2024 in response to sharply slowing inflation and a sclerotic economy.   The last few days has seen a sharp decline in bond yields reflecting an increasing belief on the part of investors that rather than higher for longer, central banks will start cutting rates as soon as Q2 next year. The shift in tone has been most notable from several ECB policymakers who have indicated that rate hikes are done.   US markets also appear to have started to run out of steam after their big November rally, as traders take stock of how resilient the US economy is.   Asia markets on the other hand have struggled with the latest set of Chinese trade numbers pointing to an economy that is still struggling, and a downgrade by Moody's on China's credit outlook, along with downgrades to banks, and other small companies which looks set to weigh in the European open this morning, in the wake of weakness in Asia markets.   In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline.   Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon. Today's November numbers have seen imports decline by -0.6%, against an expectation of a rise to 3.9% in a sign that domestic demand is still very weak, while exports improved, rising by 0.5% a solid pick up from the -6.4% decline in October.   Yesterday's US ADP payrolls report saw jobs growth in November slow to 103k, in a further sign that the labour market is slowing, with the last 3 months showing significant evidence that hiring is slowing. This trend was also reflected in this week's fall in October job openings to 8.7m the lowest level since March 2021.   For the time being weekly jobless claims have shown little signs of increasing, trending in the low 210k for the last couple of months.   Continuing claims on the other hand have been edging higher rising to a 2-year high last week 1.93m. Today's claims numbers are expected to come in at 220k, with continuing claims set to also remain steady, ahead of tomorrow's eagerly anticipated non-farm payrolls report.   EUR/USD – continues to slip lower raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0825 and 200-day SMA, while above that at the 1.0940 area.   GBP/USD – remains under pressure as it continues to slip away from the 1.2720/30 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 29 points lower at 7,486   DAX is expected to open 52 points lower at 16,604   CAC40 is expected to open 24 points lower at 7,412

Rates Spark: Science fiction? The 10Y UST yield is closing in on the 4% mark as if a weak jobs report tomorrow was a given. But underlying is also a further slide of inflation expectations. The front end is lagging, however, and being already priced aggressively for cuts, it will probably need these to become more imminent to rally further.   Rates continue to decline but the front end is lagging Market yields continued to drop with the 10y UST sinking to 4.11% and 10Y Bund to 2.2% yesterday. The driver was a weaker ADP private payrolls report, though some will point out that the correlation with the official payrolls data that is due tomorrow is actually negative. Possibly more relevant for the broader picture was the 5.2% figure for third-quarter productivity growth. It facilitated a 1.2% fall in unit labour costs, which is a positive impulse for a Fed still showing concern on inflation. Another supporting factor was a further decline in oil prices, which saw WTI fall below US$70/bbl. This picture of a reassessment of inflation as a driver does gel with a further slide in inflation swaps, in the US by more than 7bp in 2Y and close to 5bp in 10Y. In EUR the drop today was less pronounced, but the overall drop of the 2y for instance from a range around 2.65% over the summer months to now 1.8% speaks volumes. It is notable in yesterday's session that the already aggressive rate cut discount is struggling to deepen further meaning that curves are inverting more as rates decline. The US saw 2Y UST yields even rising somewhat to 4.6%. Front end EUR rates also moved marginally higher. There was some pushback from the European Central Bank’s Kazimir who called expectations of a March rate cut “science fiction”. And a little earlier, the ECB’s Kazaks, who doesn’t see the need for cuts in the first half of next year, did acknowledge that if the situation changes, so might decisions. This is what Executive Board member Schnabel had hinted at as well earlier this week. At the moment the ECB is probably just as smart as the market as it will have to rely on the data. The ECB is right to signal caution and highlight lingering risks, but trying to micro manage now may only add to market volatility.   Inflation expectations have been sliding over recent weeks   Today's events and market view The 10yr UST yield came close to 4.10% and knocking on the door of the big figure 4% yesterday, before being nudged higher overnight by a weaker 10Y Japanes government bond auction. Still, the market continues to be expecting Friday's payrolls report to be weak – the softer ADP pointed in the right direction, but markets appear to be overlooking its poor forecasting track record this time around.   There are more US job market indicators to digest today with initial and continuing jobless claims as well as the Challenger job cut numbers. The former may be subject to seasonal volatility around the Thanksgiving holiday season. In Europe we will be looking at final third-quarter GDP data as well as scheduled appearances by the ECB’s Holzmann and Elderson. In government bond primary markets the focus is on the final French and Spanish bond auction for the year. Note that in the US we are still looking at upcoming 3Y, 10Y and 30Y bond sales next week.

FX Daily: Yen back in the spotlight Ahead of tomorrow's US jobs data release, the short-term highlight in the FX market is the continued outperformance of the yen. This has nothing to do with a risk-averse environment (asset markets are bid) and everything to do with the Bank of Japan potentially ending its negative interest rate policy. It looks like the yen can hold its gains near term.   USD: Mixed environment, yen strength stands out FX markets remain relatively calm. One anomaly is that global risk assets (both bonds and equities) are doing quite well, but the dollar is staying quite bid. Normally one might expect the dollar to be easing gently lower in an environment like this. One explanation for this is that while interest rates are falling around the world (risk positive) they are actually falling faster overseas (especially in Europe) than in the US. Notably, EUR versus USD swap differentials are at the widest of the year and exposing the soft underbelly of EUR/USD. But the short-term highlight is the outperformance of the yen. The focus here, once again, is whether the Bank of Japan (BoJ) plans to end eight years of negative interest rates when it meets on 18/19 December. The FX market has been here many times before with this story - only to be rudely disabused of its speculation every time. However, at ING we have pencilled in a BoJ rate hike in the second quarter of next year. Our suspicion is that speculation of a BoJ move at the 18 December meeting is premature since there is no accompanying Outlook Report - a report that could show CPI sustainably hitting 2% and justifying an end to negative rate policy. That said, USD/JPY could still drift to the 144.50/145.00 area over the next week as speculation continues to build about a December BoJ move. The underlying dollar story, however, will be determined, by tomorrow's US jobs report and next week's FOMC meeting. It looks like the US bond market is already pricing in a soft number - which warns perhaps of a firmer dollar if the data is not too weak. Yet we suspect that investors are in the mood to put money to work - noting a major pro-risk turning in the inflation and interest rate cycle - such that the dollar gets sold into any rally tomorrow.  For today, we doubt jobless claims will be a big driver of price action today. We will be interested to look at the October US consumer credit data after the close today to see whether record-high credit card interest rates are finally taking their toll on the US consumer.  DXY has been performing better this week, but we see a scenario where it stalls in the 104.25/50 area.    

Weak start for Europe ahead of German IFO - By Michael Hewson (Chief Market Analyst at CMC Markets UK)  After an unexpectedly dovish pivot from Fed chairman Jay Powell on Wednesday, European and US markets ended another positive week very much on a mixed note after New York Fed President John Williams pushed back on market expectations of a rate cut as early as March, saying it was premature to be even considering anything of that sort.   Williams was followed in his comments by Atlanta Fed President Raphael Bostic who delivered a similar line of thought, saying he expected rate cuts to begin in Q3 of 2024 if inflation falls as expected. With the Fed dots indicating that US policymakers saw rates back at 4.6% this appears to be more in line with the message the Fed had hoped to deliver on Wednesday, however markets decided to take Powell's press conference comments and run with them, getting out in front of their skis in doing so.   Given where the US economy is now it's surprising that the Fed are said to be to start to be thinking in terms of cutting rates simply because with the economy currently where it is, there is currently no need. With GDP at 5.2% in Q3, unemployment at 3.9%, and weekly jobless claims at just over 200k the risk of inflation reigniting is clearly still a concern for some policymakers.   That certainly doesn't appear to be the case in Europe where economic activity is stagnating at best and even now the ECB comes across as being reluctant to counter a rate cut, even though a reduction in borrowing costs is clearly needed, given that headline inflation is back within touching distance of its 2% target.   The same could be argued for the UK except wage growth is still trending well above 7%, while headline CPI is at 4.6%, though this could come down further in numbers due to be released on Wednesday.   As we look towards the final week before the Christmas break, trading activity is likely to be somewhat thin and choppy, and while we have seen record highs for the Dow, DAX and CAC 40 in the last week or so, we still remain some distance away from the 2021 record peaks of the Nasdaq 100 and S&P500.   As for the FTSE100 we're looking at yet another year of underperformance, after the record highs of mid-February, with the UK benchmark up by just over 1% year to date, with the FTSE250 not faring that much better.   Due to the relatively subdued nature of Friday's US finish, today's European market open looks set to be a slightly weaker one with the only data of note the latest German IFO Business survey for December. Given the weak nature of last week's PMI numbers it would be surprising to see a significant improvement on the November numbers when the current assessment improved slightly to 89.4.   The US dollar was one of the big losers last week driven lower by expectations that US rates have peaked and are on their way back down, with the Japanese yen one of the biggest gainers.   This shift in sentiment will no doubt be welcomed by the Bank of Japan and to some extent helps them out with respect to the weakness of the yen ahead of tomorrow's rate decision. There is now less incentive for them to think about altering their current policy settings, although they might hint at starting to execute some form of shift early next year.      EUR/USD – the rebound to 1.1010 last week didn't last long, unable to push through the November peaks at 1.1015/20. We still have support now back at the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the July peaks at 1.1275.   GBP/USD – broke briefly above the 1.2730 area, and the 61.8% retracement of the 1.3140/1.2035 down move, pushing up to 1.2795 before reversing. The bias remains for further gains while above the 200-day SMA at 1.2520. We also have support at the 1.2590 area.   EUR/GBP – slipped back from the 100-day SMA at 0.8640 last week, with support at the 0.8570/80 area. A move below 0.8580 targets 0.8520.   USD/JPY – slipped below the 200-day SMA at 142.50 last week, opening the prospect of a move towards 140.00. We now have resistance at 146.00 and while below that we could push towards 139.20.     FTSE100 is expected to open 7 points lower at 7,569   DAX is expected to open 15 points lower at 16,736   CAC40 is expected to open 3 points lower at 7,594

Soft inflation at the Top of Santa's Wishlist By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Appetite in European stocks waned yesterday, yet the US counterparts recovered Wednesday losses and closed the session more than 1% higher as the latest growth data was revised slightly lower to 4.9%, real consumer spending was revised down from 3.6% to 3.1%, corporate profits from above 4 to 3.7%. Else, jobless claims came in lower than expected and the Philly Fed index printed a sharper contraction in December. All in all, the data pointed at a certain slowdown – except for the jobless claims – but the numbers looked strong in absolute terms: that's about everything that the soft-lander camp love to hear : a slowing economy that will allow the Federal Reserve (Fed) to loosen its grip on the monetary policy, but an economy that will avoid entering recession if inflation falls and remains low near the Fed's 2% target. As such the S&P500 closed a few points below 4500 and Nasdaq 100 a few points below an ATH.   Today's inflation print is the Fed puzzle's last crucial piece. If today's PCE print comes in as soft as expected, or ideally softer-than-expected, we shall see the rally in bonds – and perhaps in stocks – extend the Santa rally. In numbers, core PCE is expected to show no change on a monthly basis. If that's the case, the core PCE – the Fed's favourite gauge of inflation – will fall to the Fed's 2% target over the past 6 months, on an annualized basis. Given the strong positive trend and the market's optimism, a sufficiently soft inflation figure should be enough to justify a fresh record for the S&P500 after the Dow Jones and Nasdaq renewed record after record over the past week. When the market is high on dovish Fed expectations, the sky is the limit.  Presently, swaps point at six 25bp cut in the US by this time next year. That's a 150bp cut in total. It means that the US rates are expected to fall to 375/400bp range in a year time. And that leaves the 2-year bond – which currently yields near 4.35% with plenty of room to extend rally. This being said – and I can't repeat it enough – if the US economy is set for a 150bp cut, it would also be due to something ugly that would've triggered that Fed reaction. A 5% growth, combined with robust consumer spending, strong profit expectations and a historically low unemployment rate don't call for a 150bp cut.   Elsewhere  Today's inflation data from Japan confirmed an expected fall in inflation to 2.5% from 2.9% printed a month earlier. As such, there is no rush for the Japanese policymakers to move; low rates are sweet for growth if they don't generate inflation. Plus, the yen appreciation should keep inflation contained in Japan and leave the Bank of Japan (BoJ) in a position to ... wait until at least April to exit the negative rates... et encore. Therefore, there is a weakening case for the USDJPY to dip below the 140 level, and there is no issue with buying the Japanese stocks at 33-year high levels when the BoJ remains so supportive.   In Europe, the EURUSD bulls are waiting for the US inflation data in ambush. A sufficiently soft inflation read is expected to boost the Fed doves, back a further USD depreciation and drive the EURUSD above the 1.10 mark to the end of the year. In this configuration, gold will also remain on track for further gains above the $2000 level.   Good Bye!  American crude is testing the top of the downtrending channel that has been building since the end of September. The $74/75 offers continue to push back the bullish attempts, while trend and momentum indicators are strong and tell that a positive breakout is still possible and could lead the price of a barrel to near 200-DMA – near $78pb.   The latest news from OPEC is not necessarily enchanting. Angola decided to leave OPEC as the country rejected the restricted production quotas that the cartel imposed on them. But note that, Angola won't be pumping significantly more outside OPEC: once Africa's biggest producer, the country's production collapsed by 40% in 8 years due to an unfavourable tax environment and the absence of fresh investments, and the country pumped just above 1.1mbpd, anyway. Therefore, in absolute terms, Angola's exit won't change the dynamics for OPEC, but Angola's walkout is just another reminder that the tensions are mounting at the heart of OPEC, and the cartel – which now has the lowest market share of its history – will hardly maintain an impactful position to influence the oil price if they can't show unity.    

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

Asia Morning Bites The Bank of Japan (BoJ) meets to decide on policy today and is widely expected to retain its yield curve control (YCC) policy. Singapore will report CPI inflation while South Korea will release data on PPI inflation.   Global Macro and Markets Global markets:  Monday was a quiet day for US Treasuries. The 2Y UST yield rose 0.7bp while the 10Y yield fell slightly by 1.7bp to 4.105%. The USD made slight gains against the EUR, taking EURUSD down to 1.0881. The AUD was also weaker, falling to 0.6566, though both Cable and the JPY held their ground. Asian FX was mostly a shade weaker against the USD. The PHP and THB propped up the bottom of the table. At the other end, the TWD made small gains taking it to 31.344. US stocks clawed their way higher with a new record for the S&P 500 of 4850 after a modest 0.22% gain. The NASDAQ also made a slight gain of 0.32%. US equity futures don’t seem to have a strong view on today’s open. Chinese stocks had another bad day. The Hang Seng fell 2.27% while the CSI 300 fell 1.56%. G-7 macro:  There was nothing of note in the G-7 macro calendar yesterday, and there isn’t much going on today either. UK public finance data precedes the US Richmond Fed business survey. The Bank of Japan is also meeting (see more below). Japan:  Most forecasters expect that the Bank of Japan (BoJ) will maintain its ultra-loose monetary policy today. Consequently, the market’s attention will be focused on what Governor Ueda thinks about inflation and wage growth and whether he will give any hints of policy change in the near future. The market will probably be disappointed again because we don’t believe that Ueda will give a clear signal of policy normalization in the near future. He may, however, sound more dovish than in the past, given the recent slowdown in inflation. The government renewed its utility subsidy program, so we expect the BoJ to revise down its FY2024 inflation outlook in today’s quarterly macro-outlook report. Singapore: December inflation is set for release today.  The market consensus points to inflation dipping to 3.5% YoY (from 3.6% previously) while core inflation may inch lower to 3.0% YoY from 3.2% YoY in November. Despite the slight deceleration, the MAS is widely expected to retain policy settings at the 29 January meeting, remaining wary of potential flare-ups in inflation while also looking to support an economy facing a challenging global trade environment.   What to look out for: BoJ decision and Singapore inflation South Korea PPI inflation (23 January) Singapore CPI inflation (23 January) Australia business confidence (23 January) Taiwan industrial production (23 January) BoJ policy meeting (23 January) US Richmond Fed manufacturing index (23 January) Australia Westpac leading index (24 January) Japan trade balance and Jibun PMI (24 January) Malaysia BNM policy (24 January) US MBA mortgage applications (24 January) South Korea GDP (25 January) Japan department sales (25 January) ECB policy meeting (25 January) US GDP, durable goods orders, initial jobless claims, new home sales (25 January) Japan Tokyo CPI inflation (26 January) Philippines trade (26 January) Singapore industrial production (26 January) US PCE deflator, pending home sales and personal spending (26 January)

Asia Morning Bites The PBoC announced a larger-then-expected required reserve rate (RRR) reduction late Wednesday. South Korea reported stronger-than-expected GDP numbers today.   Global Macro and Markets Global markets:  The upcoming cut in China’s reserve requirement ratio (RRR) gave Chinese markets some much-needed support. USDCNY has dropped back to 7.1580 and the Hang Seng index rose 3.56% while the CSI 300 gained 1.4%. US stocks were more muted, and the S&P 500 was virtually unchanged despite opening higher - flagging in the latter part of the session. The NASDAQ eked out a 0.36% gain. US Treasury yields rose yesterday, despite the lack of much macro news as the 5Y auction tailed badly. 2Y yields rose 5bp to 4.38% and the 10Y rose a similar amount to 4.176% as the March rate cut hypothesis got priced out further. There is still a bit more room for this to run, according to our rates strategists, though the March cut is now only 36.4% priced in. A US refunding announcement on Monday could also push yields up a bit more. EURUSD rose back up to 1.0883 despite the moves in bond yields. The AUD rose strongly yesterday, pushing above 0.6620 but couldn’t hold on to its gains and dropped back to 0.6577. Cable did better and is up to 1.2719 now, and the JPY has also held on to most of yesterday’s gains and is down to 147.55. In the rest of Asia, the SGD and KRW were both boosted by the CNY moves, though the IDR lost almost half a per cent, rising to 15710. Moves elsewhere were modest. G-7 macro:  The G-7 calendar is a lot more exciting today after a very quiet day yesterday. The ECB is meeting, and while they will not cut rates today, the press conference will as ever be scrutinised for hints as to the timing of the first cut. Later on, the US releases its advance estimate for 4Q23 GDP, which, on an annualized basis is expected to slow from 4.9% in 3Q23 to 2.0%. Weekly jobless claims round off the day’s macro releases. China: The PBOC announced that it will cut the Required Reserve rate (RRR) by 50bp from Feb 5, after which the RRR for large institutions will drop from 10.5% to 10%, and the weighted average RRR will drop from 7.4% to around 7%. The 50bp RRR cut was larger than the 25bp cuts that the PBOC elected for in 2022-2023, and was the largest RRR cut since Dec 2021. The RRR cut will in theory provide around RMB 1tn of liquidity to markets. Furthermore, the PBOC also broadened access for property developers to commercial loans by allowing for bank loans pledged against developers’ commercial properties to be used to repay other loans and bonds until the end of the year. It also cut the refinancing and rediscount rates for rural and micro-loans by 0.25 ppt to 1.75%. We expect a relatively limited positive impact on the economy from the RRR cut and supplementary measures. There remains a question of whether there is sufficient high-quality loan demand to fully benefit from this theoretical liquidity injection; we saw that new RMB loans were down -10.6%YoY in 4Q23 despite the previous RRR cut in September 2023. With that said the size and timing of the RRR cut will contribute toward market stabilisation efforts. Overall, the announced RRR cut was mostly in line with our expectations, although the size of the cut surprised on the upside, and the timing of the announcement was a little unexpected given the PBOC left interest rates unchanged in January. Moving forward, we see room for an interest rate cut to come in the next few months as well. The base case is for a conservative 10bp rate cut, but the larger-than-expected RRR cut does flag a possibility for a slightly larger rate cut as well.  South Korea: Korea’s GDP expanded 0.6% QoQ sa in 4Q23 (vs 0.6% in 3Q23, market consensus). 4Q23 GDP was somewhat higher than the monthly activity data had suggested. The difference mainly came from a gain in private consumption (0.2%). According to the BoK, residents overseas spending increased, more than offsetting the decline in domestic goods consumption. Other expenditure items mostly met expectations. Exports (2.6%) grew solidly thanks to strong global demand for semiconductors, while construction – both residential and civil engineering- plunged (-4.2%), dragging down overall growth.  We expect the trend of improving exports vs softening domestic demand to continue at least for the first half of the year. In a separate report, BoK’s business survey outcomes support our view. Manufacturing outlook improved for a third month (71 in January vs 69 in December) while non-manufacturing stayed flat at 68.   The GDP path will vary depending on how well global semiconductor demand will be maintained and how well Korea’s construction soft-landing will go. We expect exports to improve further at least for the first half of the year. Yet, GDP in the first and second quarters is expected to decelerate (0.4% and 0.3% QoQ sa respectively) from last quarter as sluggish domestic demand weighs more on overall growth.  Today’s outcomes will give the Bank of Korea some breathing room to maintain its current hawkish stance. We pencilled in one rate cut in May, under the assumption of a slowdown of GDP and inflation in 1Q24, but if the construction sector restructuring carries out more smoothly, then the BoK’s first rate cut may come in early 3Q24.   What to look out for: South Korea GDP South Korea GDP (25 January) Japan department store sales (25 January) ECB policy meeting (25 January) US GDP, durable goods orders, initial jobless claims, new home sales (25 January) Japan Tokyo CPI inflation (26 January) Philippines trade (26 January) Singapore industrial production (26 January) US PCE deflator, pending home sales and personal spending (26 January)

05:40GMT Thursday 25th January 2024 ECB and US Q4 GDP in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a much more positive session yesterday, carrying over the momentum from a buoyant US market, but also getting a lift after China announced a 0.5% cut in the bank reserve requirement rate from 5th February. US markets finished the day mixed with the Dow finishing lower for the 2nd day in succession, while the S&P500 and Nasdaq 100 once again set new record highs, as well as record closes, although closing off the highs of the day as yields edged into positive territory. This divergence between the Dow and Russell 2000, both of which closed lower for the second day in succession, and the Nasdaq 100 and S&P500 might be a cause for concern, given how US market gains appear to be being driven by a small cohort of companies share prices. Today's focus for European markets which are set to open slightly lower, is on the ECB and the press conference soon after with Christine Lagarde, where apart from questions on timelines about possible rate policy, Lagarde could face some questions a little closer to home amidst dissatisfaction over her leadership style from ECB staffers. When looking at the economic performance of the euro area, we've seen little in the way of growth since Q3 of 2022, while inflation has also been slowing sharply. Yet for all this economic weakness, a fact which was borne out by yesterday's flash PMI numbers, especially in the services sector, the ECB has been insistent it is not close to considering a cut in rates, having hiked as recently as last September. Only as recently as last week we heard from a few governing council members of their concerns about cutting too early, yet when looking at the data, and the fact that the German economy is on its knees, the ECB almost comes across as masochistic in its desire to combat the risks of a return of inflation. In a way it's not hard to understand given that after November headline inflation slowed to 2.4%, it picked up again in December to 2.9%, while core prices slowed to 3.4%. This rebound in headline inflation while no doubt driven by base effects will be used as evidence from the hawks on the governing council that rates need to stay high, however there is already evidence that the consensus on rates is splintering, and while no more rate hikes are expected the economic data increasingly supports the idea of a cut sooner rather than later. Markets currently have the ECB cutting rates 4 times this year in increments of 25bps, starting in June, although given the data we could get one in April. This contrasts with the market pricing up to 6 rate cuts from the Federal Reserve despite the US economy being magnitudes stronger than in Europe. No changes are expected today with the main ECB refinancing rate currently at 4.5%, however Q4 GDP due next week, and January CPI due on 1st February calls for a March/April rate cut could start to get louder in the weeks ahead, especially since PPI has been in deflation for the last 6 months. US bond markets appear to be starting to have second thoughts about the prospect of 6 rate cuts from the Federal Reserve this year, although there is still some insistence that a March cut remains a realistic possibility. Today's US Q4 GDP numbers might bury the prospect of that idea once and for all if we get a reading anywhere close to 2%. This seems rather counterintuitive when you think about it, the idea that the Fed would cut before the ECB when Europe is probably in recession and the US economy is growing at a reasonable rate, albeit at a slower pace than in Q3. Expectations for Q4 are for the economy to have slowed to an annualised 1.9% to 2%, which would be either be the weakest quarter of 2023 or match it. Nonetheless the resilience of the US consumer has been at the forefront of the rebound in US growth seen over the past 12 months, with a strong end to the year for consumer spending. This rather jars against the idea that US GDP growth might get revised lower in the coming weeks as some have been insisting. If you look at the December control group retail sales numbers, they finished the year strongly and these numbers get included as a part of overall GDP. Weekly jobless claims are also at multi-month lows of 187k, and while we could see a rise to 200k even here there is no evidence that the US economy is slowing in such a manner to suggest anything other than a modest slowdown as opposed to a sudden stop or hard landing.  The core PCE Q/Q price index is expected to slow from the 3.3% seen in Q3 to around 2%, which may not be enough to prompt a softening in yields unless we drop below 2%. EUR/USD – pushed up to the 1.0930 area before retreating. While above the 200-day SMA at 1.0830, the bias remains for a move higher towards the main resistance up at 1.1000.  GBP/USD – pushed up towards 1.2775 yesterday with support at the 50-day SMA as well as the 1.2590 area needed to hold or risk a move lower towards the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum. EUR/GBP – fell to 0.8535 before rebounding modestly. Also have support at the 0.8520 area, with resistance at the 0.8620/25 area and the highs last week. USD/JPY – finding a few offers at the 148.80 area over the last 3days which could see a move back towards the 146.25 area. A fall through 146.00 could delay a move towards 150 and argue for a move towards 144.00. FTSE100 is expected to open 19 points lower at 7,508 DAX is expected to open 36 points lower at 16,854 CAC40 is expected to open 10 points lower at 7,445.