jobs market

Four scenarios for the Bank of England's February meeting

Expect the BoE to drop the pretence that it could hike rates again but to continue signalling rates will stay restrictive for an "extended period". With services inflation and wage growth to remain sticky in the near term, we think August is the most likely starting point for rate cuts.


Four scenarios for the Bank of England meeting

Source: ING


The BoE seems more reticent than other central banks to endorse rate cuts

Both the Federal Reserve and European Central Bank have hinted, with varying degrees of caveats, that rate cuts are on the cards this year. So far, the Bank of England hasn’t followed suit. It was careful not to say anything at the December meeting that could be misconstrued as an endorsement of market pricing on cuts. And there has essentially been radio silence from committee members since then.

We suspect the Bank will still want to tread carefully as it gears up for the first meeting of 2024. But the realit

The UK Economy Looks Worse Than The Rest Of The G7 Countries

The UK Jobs Market Is Still Holding Up Fairly Well

ING Economics ING Economics 17.01.2023 10:10
While the jobs market is a lagging indicator of economic strength, the resilience of both vacancy and redundancy numbers suggest the impact of the forthcoming recession on the jobs market will be more modest than in some past recessions The UK jobs market is holding up despite the looming recession   Despite all the challenges facing the UK economy, the jobs market is still holding up fairly well. The unemployment rate is still flirting with all-time lows, while so far there are only moderate signs of deterioration in the more timely indicators. Unfilled vacancies are trending lower – and you’d expect that to continue based on another measure of online adverts – though neither measure is below pre-Covid norms. The official redundancy rate is edging higher but again is now essentially in line with past averages. The redundancy rate is edging higher, but so far is only back to pre-Covid norms Source: Macrobond   As with all jobs data, we need to remember they are lagging indicators, and indeed the redundancy rate took more than a year to go from trough to peak during the financial crisis. Nevertheless, the UK jobs market is entering the forthcoming recession from an unusually tight starting point. While Bank of England survey data shows the proportion of firms finding it ‘much harder’ to hire has begun to tumble, the root causes of worker shortages look like they will prove long-lasting. The number of people economically inactive – that are neither employed nor actively seeking a role – is no longer increasing, and the worrying upward trend in long-term sickness levels appears to have tentatively reversed. But to the extent that this vast increase in illness has been amplified by long waiting lists for treatments and delays in urgent care, the situation is, if anything, getting worse. Lower levels of inward migration from the EU also appear to have added to hiring struggles. Inactivity levels have stabilised over the past few readings Source: Macrobond, ING calculations   We therefore suspect firms will be more inclined than usual to ‘hoard’ labour, and avoid layoffs where possible to insure against potential rehiring problems when conditions improve. While we suspect the unemployment rate will rise, we think it will be more modest than during some past recessions. The clear risk here is that, with 70% of SME debt on floating interest rates and the effective rate on this lending already dramatically higher, firms are forced to make material cutbacks to their workforce regardless. A lot could hinge on whether energy prices begin to rise again later this year. For the time being though, the jobs market is the biggest argument in favour of another 50 basis-point rate hike by the Bank of England. Indeed, wage growth came in a touch higher than expected in the latest figures, and the bank's own survey data continues to point to more acute pay pressures come through. In reality, though, the February meeting rests on a knife edge, and there's a clear chance the Bank decides to mirror the Fed and slow the pace of rate hikes further now Bank Rate is well into restrictive territory. Tomorrow’s inflation data could be key. Read this article on THINK TagsUK jobs Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
EUR/USD Stabilizes as Eurozone Recession Takes Backseat, GBP Undervalued Against EUR/GBP

Decisive Week Ahead: Central Banks, Inflation, and Rate Risks Take Center Stage

ING Economics ING Economics 09.06.2023 09:56
Rates Spark: Getting into position for a decisive week Featuring US CPI data, three major central bank meetings - if one adds the Bank of Japan - and substantial bond supply, next week should shape up to be a decisive one for rates markets. We see largest the upside risks to rate levels from a surprise hike by the Fed. On the other end the "skip" narrative should prevent markets from extrapolating a pause towards cuts.   Central banks to decide against backdrop of still high inflation but heightened macro uncertainty Markets are bracing for a decisive week which sees central bank decisions from both the Federal Reserve and the European Central Bank. The backdrop of late has been one of heightened macro uncertainty, but with inflation still running uncomfortably high.   Especially in the US, ambiguous signals from the jobs market have jolted rates markets around. Following a very strong payrolls number, we have now seen yesterday what could be the first signs of lay-offs feeding through to the weekly jobless claims data.   In the eurozone, final 1Q GDP data has now confirmed that the economy was in a (shallow) technical recession, while prospects for a notable uptick in the second quarter are dim. At the same time, the jobs market here remains resilient and inflation is still painfully slow in turning lower.   As central banks’ usual modelling has proven of limited use in the post-pandemic and geopolitical crisis-ridden world, they have become increasingly reliant on current data to guide their policies. Next week, that will mean an increased focus on Tuesday’s US CPI data just a day before the FOMC meeting. A core rate printing above the 0.4% month-on-month rate that the consensus is currently expecting could well swing the market back towards pricing in a hike. Note that in the week we will get more indications about pipeline price pressures from producer prices as well as import prices.   And at the end of the week looms the University of Michigan's consumer survey including inflation expectations.    
Understanding Gold's Movement: Recession and Market Dynamics

The Dilemma for the Federal Reserve: To Hike or Hold This Week?

Michael Hewson Michael Hewson 13.06.2023 15:46
To hike or to hold for the Fed this week     When the Federal Reserve last met at the beginning of May raising rates by 25bps as expected, the market reaction was relatively benign. There was little in the way of surprises with a change in the statement seeing the removal of the line that signalled more rate hikes were coming, in a welcome sign that the US central bank was close to calling a halt on rate hikes.     Despite this signalling of a possible pause, US 2-year yields are higher now than they were at the time of the last meeting.     This is primarily due to markets repricing the likelihood of rate cuts well into next year due to resilience in the labour market as well as core inflation. Some of the recent briefings from various Fed officials do suggest that a divergence of views is forming on how to move next, with a slight bias towards signalling a pause tomorrow and looking to July for the next rate hike.      At the time this didn't appear to be too problematic for the central bank given how far ahead the Federal Reserve is when it comes to its rate hiking cycle. The jobs market still looks strong, and wages are now trending above headline CPI meaning that there may be some on the FOMC who are more concerned at the message a holding of rates might send, especially given that the RBA and Bank of Canada both unexpectedly hiked rates this past few days.     With both Fed chair Jay Powell leaning towards a pause, and potential deputy Chair Philip Jefferson entertaining similar thoughts in comments made just before the blackout period, the Fed has made itself a hostage to expectations, with the ECB set to raise rates later this week, and the Bank of England set to hike next week, after today's big jump in wage growth.       This presents the Fed with a problem given that it will be very much the outlier if it holds tomorrow. Nonetheless there does appear to be increasing evidence that a pause is exactly what we will get, with the problem being in what sort of message that sends to markets, especially if markets take away the message that the Fed is done.     If the message you want to send is that another hike will come in July, why wait when the only extra data of note between now and then is another CPI and payrolls report. You then must consider the possibility that these reports might well come in weaker, undermining the commitment to July and undermining the narrative for a further hike that you say is coming, thus loosening financial conditions in the process.     While headline inflation may well be close to falling below 4% the outlook for core prices remains sticky, and at 5% on a quarterly basis, and this will be an additional challenge for the US central bank, when it updates its economic projections, and dot plots.   The Fed currently expects unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     As markets look to parse this week's new projections the key question will be this, is the US economy likely to be in a significantly different place between now and then, and if it isn't then surely, it's better to hike now rather than procrastinate for another 5 weeks, especially if you are, as often claimed "data dependant".       By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
Understanding the Bank of England's Approach to Interest Rates Amidst Heightened Expectations: A Balancing Act with Inflation and Market Pressures

Fed's Rate Hike Guessing Game: Managing Market Expectations. Inflation Concerns and Tightening Credit Conditions: Fed's Decision and Market Reaction

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.06.2023 08:52
The Federal Reserve (Fed) refrained from raising interest rates at this week's monetary policy meeting. Yet the median forecast on the Fed's dot plot suggested that there could be two more rate hikes before the end of this year. That came as a slap on the face of those expecting a rate cut by the end of the year, even though, I think that the doves haven't said their last word just yet. The credit conditions in the US are tightening, inflation is falling. Yesterday's PPI data revealed a faster than expected contraction in producer prices in May, while both headline and core CPI figures continued to ease over the same month.    Why, on earth, has the Fed started playing a guessing game, instead of hiking the rates right away?   It is because the US policymakers know that the idea of a 25bp hike - or two 25bp hikes - is more powerful than a 25bp hike itself, as future rate hikes are more effective in managing market expectations. The market is keen to go back to pricing the end of rate hikes - and rate cuts - when they know that the Fed is coming toward the end of the tightening cycle. To avoid that end-of-tunnel enthusiasm from jeopardizing tightening efforts, the Fed keeps the tightening suspense alive, without however acting on the rates. If all goes well - if inflation continues easing, and tighter financial conditions begin weighing on US jobs market - the Fed will have the option to step back and simply... not hike.  But for now, 'nearly all policymakers' remain concerned with the moderate cooling in core inflation, and they don't see inflation going below 3% this year.       Mild reaction  The US 2-year yield continues pushing higher, while enthusiasm at the long end of the yield curve is lesser, as higher rates increase recession odds. The S&P500 hit a fresh high since last year but closed almost flat. The US dollar rebounded off its 100-DMA, and the EURUSD rallied above its own 100-DMA and holds ground above the 1.08 mark this morning, into the widely watched European Central Bank (ECB) decision.    A hawkish ECB hike?  The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.  Note that 500-billion-euro TLTROS will mature on June 28th and will pull a good amount of liquidity out of the market. While there is still around 4 trillion euros of excess liquidity in the financial system, the draining liquidity could cause anxiety among investors, especially if some European banks fail to find enough financing in the market to replace their TLTRO funding – a scenario which could sap investors' confidence and appetite in the coming weeks.     In this respect, Italian banks are under a close watch as they are behind their European pears in repaying their TLTRO and the funding through TLTROs are more than the excess cash its lenders parked with the ECB. That means that Italian banks must find money somewhere else – but where? – to repay their TLTROs.   I am not particularly worried about the stability of the European financial system, but I can hardly imagine European stocks extend rally in the environment of draining liquidity and rising rates. The Stoxx 600 index spiked above its 50-DMA yesterday, as a stronger euro may have reinforced appetite, yet European stocks will likely return to the 435-450 area.       China cuts.  In China, we have a completely different ambiance when it comes to inflation and monetary policy. The Chinese inflation remains flat and under pressure near 26-month lows, growth is not picking up the anticipated post-Covid momentum, and the People's Bank of China (PBoC) cut its one-year MLF rate by 10bp today, as broadly expected, to give a shake to the depressed Chinese economy. The problem is, there is now a talk that China could be entering a liquidity trap, meaning a period where lower rates fail to boost appetite and don't translate into faster growth.  
Rising Chances of a Sharp Repricing in Hungarian Markets

Hawkish ECB Raises Rates Amidst Slowing Eurozone Growth and Surging Inflation Forecasts

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.06.2023 09:34
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    
US Inflation Slows as Spending Stalls: Glimmers of Hope for Economic Outlook

US Inflation Slows as Spending Stalls: Glimmers of Hope for Economic Outlook

ING Economics ING Economics 03.07.2023 08:16
Glimmers of hope for US inflation slowdown The Federal Reserve's favoured measure of inflation slowed fractionally more than expected, but there was clearer evidence of softening in the so-called "super core" measure that Fed Chair Jay Powell has been focusing on. There is also evidence of a loss of momentum in spending which will dampen prices pressures further down the line   Incomes rose, but spending stalled in May The May US personal income and spending report in aggregate is a touch softer than predicted. Incomes rose 0.4% month-on-month, above the 0.3% MoM expectation, but then we had a corresponding 0.1pp downward revision to April's growth rate from 0.4% to 0.3%. The more interesting story is on the expenditure side with nominal personal spending rising only 0.1% MoM versus 0.2% expected and there were downward revisions to April (from 0.8% to 0.6%). This leaves "real" consumer spending softer at 0% and April was revised down to 0.2% MoM from 0.5%. This means the savings rate has risen from 4.3% to 4.6%.   2Q growth looks to be a fair bit weaker than 1Q as momentum fades For those that like digging into data, the MoM real consumer spending change was -0.03% MoM to two decimal places. This means if we get a +0.2% MoM real consumer spending print for June, we will have quarter-on-quarter annualised consumer spending of 1% for the second quarter, down from 4.2% in the first. 0.1% MoM for June works out at 0.9% QoQ annualised for 2Q. while 0% MoM reading for June real spending generates 0.8% QoQ annualised. This report suggests a fair bit of spending momentum has been lost as we progress through 2Q. We are currently pencilling in 0.2% MoM for real spending growth in June. So far, weekly chain store data (Redbook) has been soft and restaurant dining is currently (according to Opentable) running at -3% year-on-year and hotel occupancy is running at roughly -1.5% YoY for June (to June 24) according to our interpretation of STR data. TSA airport security check numbers are up though. A 1% QoQ annualised consumer spending number would leave us struggling to get GDP growth above 1.5% in 2Q.   Service sector inflation appears to be topping out (YoY%)   Early signs of softening in Fed's "super core" inflation measure Rounding the report out, we see the Fed's favoured measure of inflation, the core PCE deflator coming in at 0.3% MoM/4.6% YoY. A touch softer than the 0.3%/4.7% expected. At 4.6%, this is the slowest rate of core PCE inflation since October 2021. Based on my calculations, the core PCE deflator ex-energy and ex-housing (Fed Chair Powell is focusing on this as it is this component that is most heavily influenced by the tightness in the jobs market since wages make up the biggest cost input and in which demand has been robust) also slowed to 4.6% from 4.7% YoY while Bloomberg’s calculations back this up, saying on a MoM basis it came in at 0.23% MoM versus 0.42% in April. This is a really encouraging story since we need to see 0.1s or 0.2s MoM to get inflation to 2% YoY over time. It is early days, but NFIB corporate pricing intentions data and ISM prices series offer clear hope that we will soon consistently see these sorts of figures.
US August CPI: Impact on USD/JPY and Trading Strategies

US Jobs Market Confounds Expectations, RBA Rate Decision Looms, and Manufacturing PMIs Signal Concerns

Michael Hewson Michael Hewson 03.07.2023 08:35
US non-farm payrolls (Jun) – 07/07 – the US jobs market has continued to confound expectations for all this year, and it is this factor that is making the Federal Reserve's job in trying to return inflation to its target rate much harder to achieve. When the May payrolls report was released a month ago, we once again saw a bumper number, this time of 339k, with April revised up to 294k. The resilience of the jobs market has also been a little embarrassing for the economics profession, comfortably beating forecasts for the 14th month in succession. It also presents a problem for the Federal Reserve in the context of whether to to stick or twist when it comes to more rate hikes in the coming months. We've already seen a pause in June, however the commitment to raise rates by another 50bps by year end has got markets a little nervous, driving yields higher at the short end of the yield curve. For June, forecasts are again for a number below 300k, at 213k. We did see a rise in the unemployment rate from 3.4% to 3.7% while the participation rate remained steady at 62.6%. Wages also remained steady at 4.3%, however we also know that job vacancies after briefly dipping below 10m in March, rose strongly again in April to 10.1m. Against this sort of backdrop the Federal Reserve had to downgrade its forecast for end of year unemployment from 4.5% to 4.1%. Even with this adjustment it's hard to see how this will play out unless we see a significant rise in the participation rate, and vacancies start to disappear.         RBA rate decision – 04/07 – having paused earlier this year when it came to their own rate hiking cycle the RBA now appears to be playing catchup. Having caught the markets by surprise in April by hiking rates by 25bps, they followed that up in May by another 25bps rate increase pushing the cash rate up to 4.1%. The sudden hawkish shift in stance appears to have been prompted by stinging criticism over its failure to spot early enough the inflation surge seen at the end of 2021, and through 2022. They were hardly unique in this, with other central banks being similarly caught out, however their response has been fairly tepid, in comparison to the likes of the RBNZ where rates are much higher at 5.5%. This suggests that the RBA might feel it has to overcompensate in the opposite direction, running the risk of them tightening too hard and unsettling the housing market. Will the RBA raise rates again or decide to wait and see.               Manufacturing PMIs (Jun) – 03/07 –. recent flash PMI numbers suggest that the underperformance in manufacturing has continued in June with activity in Germany falling to its lowest level since March 2020, at 41, and the initial Covid lockdowns. In France we saw similar weakness albeit slightly higher at 45.5. Of slightly great concern has been weakness in Chinese economic activity with weak demand there feeding into a global narrative that the economy is slowing, weighed down by higher costs and varying degrees of supply chain disruption. Economic activity in Italy and Spain has also been weak, however on the plus side they have managed to outperform France and Germany. If the eurozone is to avoid a 3rd quarter of negative growth then it is Italy and Spain that might allow them to do it. 
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FX Daily: Hawkish Fed Minutes and the Impact on Data Expectations

ING Economics ING Economics 06.07.2023 09:26
FX Daily: Hawkish Fed minutes raise the bar for data disappointment Yesterday’s release of the June FOMC minutes gave very few reasons to doubt the Fed’s determination to keep raising rates. In a way, the bar for data disappointment and consequent dovish repricing may now be higher. Still, expect a hit to the dollar if the ISM services fall into contractionary territory. Job openings and ADP payrolls will also be watched.   USD: Growth and jobs under the microscope The narrative that emerged from the minutes of the June FOMC meeting fell unequivocally on the hawkish side of the spectrum. The summary of opinions confirmed some divergence within the committee, as some members would have favoured a hike already in June, but accepted a pause and signalled instead more tightening via the new dot plot projections. “Almost all” participants thought more tightening was likely this year. There was also an acknowledgement of ongoing firm GDP growth and high inflation, with core inflation, in particular, showing no tendency to ease as of yet this year. The Fed also noted that credit remains available to high-rated borrowers, but that lending conditions had tightened further for bank-dependent borrowers. Still, the risk of a credit crunch was deemed modest. All in all, the minutes offered no reason to doubt the Fed will go ahead with a July hike (85% priced in) unless data points firmly in the opposite direction on the economic and inflation side. The hawkish minutes, however, may have further raised the bar for disappointing data to cast doubt on further tightening. Today, the ISM services figures for June will be closely watched, as last month’s print (50.3) surprised sharply on the downside. Consensus is expecting a rebound to 51.2, while another surprise drop could take the index into contractionary territory – where the ISM manufacturing has been for the past eight months. Expect any surprises on the ISM release to drive most of the dollar reaction today, but markets will also look at some labour data, in particular, the JOLTS job opening figures for May and the ADP payrolls for June. The dollar has drawn some strength from the hawkish FOMC minutes, which have so clearly pointed to more tightening, that it will probably take some substantial downside surprise for markets re-consider their expectations. With this in mind, the dollar's reaction to today’s data may not prove particularly long-lived, especially if tomorrow’s payrolls continue to point to a tight jobs market and keep a post-July hike on the table.    
Resilient US Economy and the Path to Looser Fed Policy

Resilient US Economy and the Path to Looser Fed Policy

ING Economics ING Economics 06.07.2023 13:22
The US economy has proven to be more resilient than we expected, but the threat of recession lingers on due to lagged effects of rate hikes and tighter lending conditions while the restart of student loan repayments could come as a financial shock for millions of Americans. Inflation is subsiding and this will open the door to looser Fed policy next year.   Upward revisions to near-term growth and Fed view We have made major changes to our US forecasts this month, which see us revising up the near-term growth profile while also inserting a July Federal Reserve rate hike. Inflation is still set to slow sharply, but interest rate cuts, which we have long been expecting, are unlikely to happen before the end of this year. We expected the economy to have been more impacted by the cumulative 500 basis points of interest rate hikes and a reduction in credit availability than it has been. Certainly, the banking stresses seen in March/April appear to have stabilised thanks to massive support for small and regional banks from the Federal Reserve. Employment creation has been robust, while residential construction has been stronger than expected despite the surge in mortgage rates. The lack of existing homes for sale is keeping prices elevated and is generating demand for new homes. Inflation is slowing, but not quickly enough for the Federal Reserve and with the jobs market remaining firm officials are taking no chances. The Fed signalled that June’s decision to leave interest rates on hold should be seen merely as a slowing in the pace of rate hikes rather than an actual “pause”. Consequently, a 25bp July rate looks likely, but we doubt the Fed will carry through with the additional 25bp hike outlined in its latest forecasts.   Bank nervousness points to a contraction in lending        
Driving Growth: The Resilience of Green Bonds and Shifting Trends in Sustainable Finance

Central Bank Policy Meeting in Canada and Inflation Outlook in Czech Republic and Hungary

ING Economics ING Economics 07.07.2023 11:48
Canada: central bank policy meeting In Canada, the highlight will be the Bank of Canada policy meeting. It hiked interest rates by 25bp last month having left them untouched since the last hike in January. We don’t see last month’s move as a one-off. To restart the hiking process means that the BoC feels it has unfinished business, and with the jobs market looking tight and inflation running above target we expect the BoC to hike by a further 25bp. Czech Republic: Inflation to fall below 10% for the first time since January last year We expect prices to have risen at a similar pace in June as in May by 0.2% MoM. This should translate into a drop from 11.1% to 9.6% YoY, returning to single-digit territory for the first time since last January. We expect stable food prices and modest growth in fuel prices after the massive drop in the previous month. We should also see small increases in housing (0.2%) and the rest of the consumer basket with no significant driver this time around. Hungary: June monthly budget to accumulate a wider deficit Next week will be rather quiet in Hungary except for Monday. We are going to see the preliminary trade balance data in May. Though export activity has shown some volatility recently, the continued contraction of domestic demand and the demand destruction in energy will help in scaling back import activity. As a result, we see yet another widening of the trade surplus. After a strong May, we see the June monthly budget balance accumulating a wider deficit mainly on the weaker stream of indirect revenues.            
FX Daily: Evaluating Short-Term Dollar Bearishness and Potential for Rebound

FX Daily: Evaluating Short-Term Dollar Bearishness and Potential for Rebound

ING Economics ING Economics 10.07.2023 10:57
FX Daily: Short-term dollar bearishness remains unconvincing We remain a bit reluctant to chase the dollar lower. The greenback still has to catch up with recent market dynamics – higher US rates in particular – and the scope for further dovish repricing in the USD curve is not broad. This week’s US CPI is undoubtedly a risk event, but we don’t see a EUR/USD move above 1.1000 as being very sustainable just yet.   USD: Room for a rebound Last week saw the dollar trade on the soft side amid mixed data from the US. The latest and most important release, the US payrolls figures for June, came in a bit weaker than expected, but the jobs market likely remains too tight for the Fed to backtrack on a July hike. After all, the headline print was solid (+209k) and with wages remaining high and unemployment moving lower, there aren’t many strong dovish arguments to be extrapolated from the June jobs report. We are still reluctant to chase the dollar lower from this point – not particularly because we expect incoming data (US CPI above all) to surprise on the upside, but because the dollar still has to catch up with some recent market dynamics. Front-end US treasuries arrested their selloff, but remain very close to 5.0%, and 10Y UST are at the 4.0% benchmark level. Equities have also shown some signs of instability since the start of July. All of this should, in theory, put the dollar in a solid position to rebound from the current levels – especially given there isn’t much room for a further dovish re-pricing in the USD swap curve. That currently factors in 35bp of tightening to the peak, still short of the 50bp signalled by the Fed in the latest dot plot. The big risk event for the dollar this week is the June inflation report on Wednesday. Our economist expects a consensus 0.3% month-on-month core read, which should keep providing encouraging news on the disinflationary story – but should still fall short of tweaking the Fed narrative or convincing markets to price out a July hike. A downside inflation surprise could see DXY test the 101.00 April lows, but we think that the dollar could instead find some support into the CPI release and stabilise in the second half of the week. Today’s calendar includes some Fed speakers: Michael Barr, Mary Daly, Loretta Mester and Raphael Bostic. Elsewhere, we expect the Bank of Canada to hike by 25bp this week. This is far from a consensus view, with the pool of economists split between a hold and a hike and markets pricing in around 67% of implied probability of an increase. We explain our reasons in our latest Bank of Canada meeting preview.
German Ifo Index Continues to Decline in September, Confirming Economic Stagnation

Signs of UK Worker Shortage Easing, But Wage Growth Outlook Remains Gradual

ING Economics ING Economics 11.07.2023 11:40
If there’s a sliver of good news for policymakers, it’s that there are further signs that the UK’s worker shortage crisis is becoming less acute. The number of people inactive (neither employed nor actively seeking a job) has continued to fall. Where at one point there were more than half a million extra people inactive compared to pre-pandemic, that figure now sits at 173,000. That’s overwhelmingly because of a net influx of students to the jobs market, helping to offset elevated long-term sickness levels which haven’t improved at all. That, and a marked increase in economic migration this year, has helped lower the proportion of companies reporting that it is “much harder” to recruit in recent Bank of England surveys of Chief Financial Officers (CFOs). The latest jobs figures also contain further signs that the labour market is cooling, though it’s a gradual story. The unemployment rate ticked up to 4% in May, albeit the redundancy rate has barely budged over recent months. The reality though, as the Bank of England’s rate June decision made clear, is that these trends have been on display for several months now, and policymakers are losing confidence that they will translate into lower inflation. The BoE is focused squarely on the official pay and CPI data as it emerges.   Worker shortages have eased, but it varies by sector   The downside to that strategy of course is that wage growth is one of the most backward-looking indicators out there. And we think we should see pay pressure start to ease later this year – how quickly is up for debate. Bank of England modelling indicates that higher inflation expectations among consumers/businesses explain most of the previous rise in wage growth, and by that logic you’d expect pay pressures to abate a fair bit from here on. Consumers, and to a lesser extent businesses, are no longer expecting such aggressive price rises over the coming months. But as we discussed in more detail last month, we think that modelling underplays the role of worker shortages. In the UK jobs market – where only a minority of roles are linked to collective bargaining agreements/formal pay negotiations – it’s ultimately the ability (or threat) of workers quitting that keeps pay growth elevated. Higher inflation may incentivise workers to switch jobs more readily than they might otherwise, but the process relies on a strong underlying jobs market. Our tweaked version of that BoE modelling finds that post-pandemic shortages were a big driver of the wage pressure we’re seeing now. While those worker shortages are easing, the story varies considerably across sectors and at least some of these hiring challenges can be explained by structural rather than cyclical forces. Persistent staff shortages suggest the downtrend in wage growth, when it comes, is likely to be pretty gradual.
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US Retail Sales Expected to Continue Steady Growth in June, While Speculation Surrounds Ocado's H1 2023 Performance

Michael Hewson Michael Hewson 17.07.2023 08:35
  US Retail Sales (Jun) – 18/07 – US retail sales growth has been broadly steady for the most part during Q2, rising 0.4% in April and 0.3% in May. All the while consumer confidence has been increasing while inflation expectations have been falling. All of this should make for a more positive headwind for US consumer spending. Expectations for June retail sales are for a gain of 0.4%, against a backdrop of a still resilient jobs market, despite concerns that the manufacturing sector slowdown will start to act as a significant drag on the more resilient services sector. Ocado H1 23 – 18/07 – having narrowly avoided being relegated to the FTSE250 in the last reshuffle Ocado shares recently jumped to their highest levels in March, as chatter about a possible Amazon bid drove speculation in the share price. One of their largest shareholders Lingotto Investment Management increased its stake in the business to 5% fuelling speculation that something might be afoot, especially given the lack of any pushback on the speculation by either Amazon or Ocado. In Q1 Ocado reported revenues of £584m a rise of 3.4% on last year, while average orders per week have risen 3.6% to 381k. Average basket value remained flat, despite a fall in basket size and a rise in active customers to 951k, a rise of 13.8% year on year. This trend continues to show that with ever rising prices Ocado customers, like a lot of other retailers, are spending more money and getting less. Ocado kept its full year guidance unchanged.           
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Assessing the Disinflationary Impact on FX Markets: Outlook for the Dollar and Potential Reversal Signals

ING Economics ING Economics 17.07.2023 10:41
FX Daily: How much more fuel in the disinflation tank? Last week’s US disinflation shock altered the FX landscape, but a few days without key data releases will tell us whether that impulse can keep the dollar on the back foot as the FOMC risk event draws nearer. EUR/USD appears a bit overstretched in the short term and could face a correction this week.   USD: Some caveats to the bearish narrative On Friday, we published FX Talking: The dollar’s break point, where we discuss our updated views on G10 and EM currencies and present our latest forecasts. The radical shift in the FX positioning picture since the US CPI and PPI releases last week now forces a reassessment of the dollar outlook. The Commodity Futures Trading Commission (CFTC) data on speculative positioning offers little help in understanding how much dollar positioning has changed since the latest reported positions were as of Tuesday, before the inflation report. Back then, the weighted aggregate positioning against reported G9 currencies (i.e., G10 excluding SEK and NOK) had already inched into net-short territory (-2% of open interest, in our calculations). When making the parallel with the November-December 2022 dollar decline, positioning shows a key difference. At the end of October 2022, markets were still speculatively long on the dollar (around 10% of open interest against CFTC-reported G9). Another important factor – especially for EUR/USD – is the degree to which other central banks outside of the US can still surprise on the hawkish side, which is significantly lower than it was last autumn. These caveats to the rather compelling bearish dollar story mean that it may not be one-way traffic from here in FX, even if we see the dollar weaken further into year-end. On the fundamental side, the disinflation story puts risk assets on a sweet spot, favours a re-steepening of the US yield curve and should make pro-cyclical currencies more attractive. However, the Federal Reserve may not turn into a USD-negative that swiftly. Our US economist still sees a 25bp hike next week as likely. It is fully priced in, but will the Fed be ready to throw the towel on more hikes just yet? Core inflation is declining, but the jobs market remains very tight and other economic indicators remain resilient. The dot plot is still showing another hike before a peak and Fed Chair Jerome Powell may prefer to err on the hawkish side, especially through a rate cut pushback (first cut priced in for the first quarter of 2024). This week will be interesting to watch since the lack of tier-one data in the US will offer a clue on how FX markets will trade from now on; the question is whether investors now see enough reasons to add short positions on the dollar ahead of the FOMC or take a more cautious approach. The latter – which appears marginally more likely in our eyes – may see the dollar reclaim some portions of recent losses. DXY could find some support after climbing back above 100.00.
UK Inflation Data Boosts Chances of August Rate Hike

UK Inflation Data Boosts Chances of August Rate Hike

ING Economics ING Economics 19.07.2023 10:05
Good news on UK inflation bolsters chances of a 25bp August hike UK inflation fell more than expected in June, owing in part to an encouraging decline in service-sector CPI. The August Bank of England meeting is going to be a close call, but we think this latest data makes a 25bp hike more likely than a repeat 50bp increase. Finally, we have some good news on UK inflation. Headline CPI has dropped back to 7.9%, below consensus and almost a full percentage point lower than in May. Much of that can be put down to petrol and diesel prices, which fell by 2.6% across the month – a stark difference to the same period last year, where we saw a near-10% spike amid the ongoing fallout of the Ukraine war. But encouragingly, we also saw a marked slowdown in food inflation. These prices increased by 0.4% on the month, which looks like the slowest month-on-month increase since early 2022. This is a trend that should continue, given that producer prices for food products are now falling on a three-month annualised (and seasonally-adjusted) basis, as the chart below shows.   Producer prices point to further improvements in food inflation   The good news continues for services What matters most to the Bank of England is services inflation, and the good news continues here too. Service-sector CPI slipped back from 7.4% to 7.2%, contrary to both the Bank of England’s and our own forecasts for this to remain unchanged in the near term. As always, we caution that one month doesn’t make a trend, but our expectation is that services inflation should gradually nudge lower through the remainder of this year. While stubbornly high wage growth will ensure that the journey back towards target is a long one, surveys have shown that price rises among service-sector firms (most notably hospitality) can be traced in large part back to higher energy prices. Now that gas prices are dramatically lower, the impetus for firms to continue to raise prices quite as aggressively should fade. Indeed, the proportion of hospitality firms expecting to raise prices over the next few months has tumbled from 46% in April to 26% now, according to ONS survey data.   Has UK services inflation finally peaked?   All in all, we now expect headline inflation to dip back to 6.6% in July, owing to the near-20% fall in household energy prices. Core inflation should slip back to roughly the same level too. Is this enough to convince the Bank of England to opt for a 25bp rate hike in August? We think it probably will – but it's going to be a close call. The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply. The risk is that the BoE applies a similar logic to that seen in June. This could mean that if it expects to hike again in September, then it might as well opt for a larger 50bp hike in August. We certainly wouldn’t rule this out.    
Continued Disinflation Trend in Hungary: July Inflation Figures and Prospects

Fed to Keep up the Squeeze with Another 25bp Hike

ING Economics ING Economics 24.07.2023 09:48
Fed to keep up the squeeze with another 25bp hike The Federal Reserve is set to resume its policy tightening on 26 July. Inflation is moderating but remains well above target and with a tight jobs market and resilient activity, officials may feel they can't take any chances. The Fed will continue to signal the prospect of further hikes, but with the credit cycle turning, we doubt it will carry through.       25bp hike an obvious call After 10 consecutive interest rate hikes over the previous 15 months, the Federal Reserve left the Fed funds target rate unchanged at 5-5.25% in June. While it was a unanimous decision, there was hawkish messaging in the accompanying press conference and updated Fed forecasts, signalling a broad consensus behind the idea of two more rate rises later in the year. Fed Chair Jerome Powell stated that the long and varied lags in monetary policy meant that the decision should be interpreted as a slowing in the pace of rate hikes rather than an actual pause. While inflation is moderating, it is still far too high and with the jobs market remaining very tight, the Fed can’t take any chances. The commentary since then remains consistent with this messaging, with broad support among officials that the 26 July Federal Open Market Committee (FOMC) announcement will be for another 25bp rate rise, taking the Fed funds range to 5.25-5.5%. Fed funds futures contracts are pricing 24bp with economists nearly universally expecting a 25bp hike   Keeping the door open for additional tightening The scenario graphic outlines the options open to the Fed and our sense of the likely market consequences of those actions. The no change and 50bp hike options seem very remote possibilities given comments from officials. The dilemma is whether the Fed hikes 25bp and sticks with the view that it needs to signal the likely need for one or more rate hikes or whether it moves more to a data dependency stance. A data dependency narrative would be a shift in position and lead the market to latch onto the possibility of the Fed not hiking further. This would likely see Treasury yields and the dollar fall quite significantly, which would loosen financial conditions in the economy. Given low unemployment, robust wage growth and the fact that core inflation is still running at more than double the 2% target, this is not something Fed officials would willfully countenance. Consequently, we put a 70% probability on the 25bp hike scenario that includes commentary emphasising the need to be attentive to inflation risks, that growth needs to slow below trend and that further rate hikes “may be appropriate”. We would then say there is a 25% chance of a more dovish 25bp hike, signalling a likely peak for rates, while the 0bp and 50bp outcomes each have a 2.5% chance of materialising.   Tighter lending standards suggest credit growth will turn negative
Likely the Last Hike for a While: FOMC Meeting Insights

Likely the Last Hike for a While: FOMC Meeting Insights

ING Economics ING Economics 24.07.2023 09:50
But it is likely the last hike for a while... By the time of the next FOMC meeting on 20 September, we will have had two further job and inflation reports, a detailed update on the state of bank lending plus more time for the lagged effects of the already enacted Fed tightening to be felt. In terms of inflation, the next couple of months have some tough comparisons with last year. Energy prices fell sharply last summer so headline year-on-year CPI could be a tenth or two of a percentage point higher than the current 3% rate at the September FOMC meeting, but core inflation looks set to slow further and could be down at around 4.2% versus the current 4.8% rate. If anything, the risks are that core inflation could be a little lower given decelerating housing rent inflation may materialise more quickly than we are currently conservatively forecasting. It is also the composition of inflation the Fed will be paying close attention to. Is the super core (non-energy services ex housing) slowing meaningfully? We think the answer will be 'yes' based on lead surveys such as the ISM prices paid, PPI trade services and the National Federation of Independent Business price intentions surveys.   Inflation pressures are fading   As for activity, industrial activity is already struggling with the ISM manufacturing index in contraction territory for the past nine months, while consumer spending growth is slowing. Over the next two months, we think the headwinds for activity will intensify with outstanding stock of commercial bank lending set to fall further thanks to the combination of higher borrowing costs and tightening of lending standards. This is a hugely important story given the insatiable appetite for credit within the US economy. We may also see the spreading awareness of the financial implications of the restart of student loan repayments starting to impact the spending behaviour of tens of millions of Americans. So, by the time of the 20 September FOMC meeting, we think the Fed will have evidence to be pretty confident that inflation is on the path to 2% and that activity is slowing to below trend rates and the jobs market is cooling. This is likely to be characterised as another pause and the Fed is likely to keep one additional rate hike in its forecast profile before year-end. However, our base case is that it will not carry through with it, and 5.25-5.5% marks the peak for US rates.   Market rates to edge towards 4% and money markets to slowly re-tighten post the FOMC The US rates curve has been re-pricing in recent weeks to reflect the relative robustness of the economy, primarily by pricing out many of the rate cuts that had been discounted. The liquid portion of the strip out to early 2025 is now not tending to dip below 3.75%. Adding a 30bp term premium to this suggests that the US 10yr yield could easily be closer to 4%. It’s far from a perfect model, but it does help to explain why the 10yr yield has not collapsed lower, and in fact, we rationalise this as a factor that can force US yields higher as a tactical view. It goes against the consensus out there that the inflation story is behind us but is rationalised by the reality of relative contemporaneous macro robustness. For this reason, we maintain a moderate bearish stance on the directional view, expecting market rates to remain under moderate rising pressure. A hawkish Fed pushes in the same direction, preventing the strip from becoming too inverted. The Fed may or may not choose to focus on liquidity circumstances at the press conference. If quizzed, it will likely note that the impact of ongoing quantitative tightening and resumed bills issuance by the US Treasury is largely showing up in reduced amounts going back to the Fed on the reverse repo facility. The Fed will generally be happy with this, as this facility is more of a balancing mechanism, one that can take in liquidity that is not flowing into bank reserves. Bank reserves themselves have not seen a material fall, which acts to keep the overall liquidity banks circumstance reasonably ample. It also coincides with money market funds balances still around record highs and bank deposits holding up very well, too. Many of these factors will, in fact, justify the Fed’s decision to maintain a tightening trajectory for policy, as at least the price of money continues to rise even if underlying liquidity volumes are slow to fall.
USD Outlook: Fed's Push for Higher Rates and Powell's Speech at Jackson Hole Symposium

US Inflation Moderates, Fed Eyes Another 25bp Hike; All Eyes on Bank of Hungary's Rate Decision

ING Economics ING Economics 24.07.2023 09:57
US inflation has moved lower, but as the jobs market remains tight and activity holds up, another 25bp hike still looks to be the most likely course of action for the Fed next week. In the EMEA region, all eyes will be on the Bank of Hungary's upcoming rate decision, where we're expecting the base rate to be kept at 13% US: The Fed starts slowing the pace of rate hikes as inflation moves lower After ten consecutive interest rate hikes over the last 15 months, the Federal Reserve left the Fed Funds target rate unchanged at 5-5.25% in June. However, the central bank has characterised this as a slowing in the pace of rate hikes rather than an actual pause, with two further hikes signalled for the second half of 2023 in their individual forecast projections. Since then, inflation has moved lower, but the jobs market remains tight and activity has held up well. As such, commentary from officials has broadly indicated that they feel the need to hike again on July 26th, which would bring the Fed funds to range up to 5.25-5.5%. We suspect that the accompanying press conference will acknowledge encouraging signs on inflation, but also a desire not to take any chances that could allow it to re-accelerate. We expect the door to be kept open for further policy tightening later in the year. In terms of data, the highlight will be second quarter GDP. The first quarter posted a firm 2% annualised growth rate, led by consumer spending. We suspect that the second quarter will be slower at around 1.5%, with inventories as the main contributor to growth. Meanwhile, durable goods orders should be lifted by very strong figures from Boeing, which received 304 aircraft orders in June, up from 69 in May. Outside of transportation, the data will be softer given that the ISM manufacturing new orders series has been in contraction territory for the last ten months. We will also get the June reading of the Fed’s favoured inflation measure, the core personal consumer expenditure deflator. As with the CPI report, we expect it to slow quite markedly with broadening signs of disinflation in more categories.    
US CPI Surprises on the Upside, but Fed Expectations Unchanged Amid Rising Recession Risks

UK Inflation and Wage Data: Shaping the Path for the Bank of England After November

ING Economics ING Economics 11.08.2023 14:29
UK inflation and wage data to help shape BoE path after November The Bank of England has made it abundantly clear that it’s watching services inflation and wage data, and not a whole lot else, to judge how many further rate hikes are needed. We discussed recently why a September pause is unlikely but not totally out of the question, and why we think a November hike can hopefully be avoided. But that latter prediction hinges on the data showing a bit of improvement, and here’s what we expect over the next week: Jobs/wages (Tuesday): The jobs market has been cooling, and we expect to see further signs of improving worker supply in next week’s figures. Indeed there’s a risk that the unemployment rate ticks another 0.1pp higher. For now though wage pressures remain strong and we think private sector wage growth will remain at 7.7% (measured as the last three month’s average compared to the same period last year). That will slip back over the next few readings, but the downtrend is going to be slow. We tend to agree with the BoE’s forecasts that this will have only fallen to around 6% by year-end. Inflation (Wednesday): Household energy bills fell by almost 20% in July, so it should be no surprise that the headline inflation rate should have fallen by more than one percentage point. A further improvement in food inflation should also help. But the BoE is watching services CPI and expects this to nudge up from 7.2% to 7.3% on a year-on-year basis. While the start of summer holidays leaves plenty of scope for package holidays/air fares to throw this around, we think the risk to that Bank of England forecast is to a lower reading. We expect services inflation to remain flat or in fact go slightly lower, and if so, that would support our tentatively held view that the Bank will only hike once more. Retail sales (Friday): If June’s decent retail figures were helped by warmer weather, then the washout that was July should see a bit of weakness creep back in. July was the sixth wettest on record. Ultimately though the retail figures are of little consequence to the Bank of England right now, which is squarely focused on inflation.      
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Strong UK Wage Growth Sets Stage for September Rate Hike Amid Cooling Job Market

ING Economics ING Economics 16.08.2023 13:16
Surprise UK wage growth pick-up helps cement September hike There are growing signs that the UK jobs market is softening, but for now the Bank of England will remain focused on stubbornly high wage growth. A September hike is highly likely, but November is more of a question mark.   UK wage growth has come in quite a bit higher than expected, and that should all but cement a September rate hike from the Bank of England. Private-sector wage growth, which is the number the BoE focused on, is now at 8.1% from 7.9% previously, when comparing the most recent three months to the same period last year. This is undoubtedly uncomfortable territory for the Bank, though the doves can point to the fact that the timelier median pay growth data from payrolls did actually slow. And they’ll also note that much of the upside surprise today can be put down to revisions to past data, albeit the changes are predominantly to data earlier in the second quarter, so it’s not going to be a huge comfort. Interestingly though, these stubbornly high wage growth numbers are coupled with what are unmistakable signs now that the jobs market is cooling rapidly. The unemployment rate increased by 0.2pp to 4.2%, while the ratio of unfilled job vacancies to unemployed workers now stands at 0.73, down from a peak of almost 1.1 and very nearly back to the pre-pandemic high of 0.64.   Vacancy-to-unemployed ratio has been falling quickly   This is a ratio that BoE Governor Andrew Bailey consistently referred to in his most recent press conference, and it echos what the Bank’s own CFO survey has been saying for several months now, which is that hiring difficulties are easing. A year ago, 60% of firms were saying it was “much harder” than normal to recruit, and only 2% said it was easier. Now 23% say it’s “much harder” and 16% say it’s easier. While much of that can probably be linked to cooling hiring demand, much can also be explained by improving worker supply. The number of EU workers employed in the UK is up 6% since the low in the third quarter of last year (albeit numbers fell slightly in the most recent quarter). Meanwhile, the number of people inactive has fallen by around 300,000 over that same time period, albeit again the improvement stalled in the most recent data. Much of the improvement here has been driven by returning students, as well as a fall in those classifying themselves as retired, though given both are now back to pre-Covid levels, the downward trend in inactivity is likely to stall.   The number of people "inactive" has been falling   Overall, despite the apparent weakening in hiring and ongoing improvement in worker supply, the Bank will remain focused on wages. When it comes to tomorrow’s CPI figures, we think there’s some scope for a positive surprise on services inflation, but ultimately a September rate hike still looks nailed-on. November is more of a question mark, not least because we agree with the Bank of England’s assessment that wage growth is likely to slow only gradually. Private sector wage growth at 6% or above at year-end looks likely, but this is likely to be coupled with further signs of cooling in the jobs market. It’ll therefore come down to services inflation and if, as we expect, we’ve seen a bit of an improvement by the November meeting, then the ingredients could still be there for a pause at that point.        
Italian Inflation Continues to Decelerate in August, Reaffirming 6.4% Forecast for 2023

FX Focus: Turkey in the Spotlight Ahead of Jackson Hole Symposium

ING Economics ING Economics 24.08.2023 11:02
FX Daily: Attention turns to Turkey Ahead of tomorrow's main event of the week – speeches at the Fed's Jackson Hole symposium – attention today will turn to Turkey. In focus will be whether the Central Bank of Turkey accelerates its policy tightening in a return to a more orthodox policy. Consensus suggests probably not. Elsewhere, the dollar should remain steady, with jobs in focus.   USD: Focus on the jobs market The dollar and US yields were knocked off their highs yesterday as an annual benchmark revision (up to March 2023) deducted 306,000 from the reported US payroll growth figures. Several expectations had in fact looked for a 500,000 reduction. The market reaction (a 10bp drop in the US yield curve) looked a little exaggerated but perhaps proves a reminder that the employment story is the most important US variable right now. In other words, US disinflation is welcome, but if the unemployment rate remains at its lows and consumption stays strong, inflation may never make it back to 2% on a sustainable basis.    For that reason, look out for the weekly initial jobless claims data today, where any tick higher to the 250,000 area could slightly weigh on US yields and the dollar. We would not expect big moves, however, before Federal Reserve Chair Jerome Powell's 1605CET speech tomorrow at the Fed's Jackson Hole symposium. Given that the risk environment is a little better bid today – with Nvidia's results keeping the tech boom alive – DXY could trade slightly offered in a 103.15 to 103.50 range.
Boosting Stimulus: A Look at Recent Developments and Market Impact

Boosting Stimulus: A Look at Recent Developments and Market Impact

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.08.2023 09:15
Here, get more stimulus!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech was boring, wasn't it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed's will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell's comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia's stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.   What's up this week?  This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone's CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell's Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor's relaxed view on price growth – which remains slower than the BoJ's goal, but the possibility of a direct FX intervention to limit the USDJPY's upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ's incredible policy divergence versus the rest of the developed nations.   Here, get more stimulus!  The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That's lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country's biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.  Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That's partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.    
Assessing Global Markets: From Chinese Stimulus to US Jobs Data

Assessing Global Markets: From Chinese Stimulus to US Jobs Data

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.08.2023 10:08
Calm before the storm?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The week started in a relatively good mood. The S&P500 posted its first back-to-back gains this month, even though the US 2-year yield advanced to a fresh high since July with the 2 and 5-year treasury auctions hitting the highest yields since before the 2008 crisis. One would think that the Chinese stimulus measures have lifted up the sentiment across global equities, but the CSI 300 closed yesterday just around 1% higher. In this sense, yesterday was just another day the Chinese stimulus measures didn't get the attention Chinese officials were hoping for. And that's the new normal. Before 2020, any stimulus news from China would move oceans, but now, China can cut rates, inject liquidity, half stamp duty, prevent big names from becoming net sellers... nothing is enough to bring investors back apart from a massive fiscal stimulus. And the chances are that, China won't do that, because Xi doesn't want to explode the national debt levels – which are already alarmingly high – to kick start another unsustainable growth in China. That's not bad in the long run, but it sure costs China a lot of investment. MSCI's EM ex-China ETF has outperformed the MSCI China since the beginning of the year and the trend in Chinese equities, and the latest surveys hint at around 5% growth in 2023, in line with the government's growth target, but not enough to bring money on board.     Focus on US growth & jobs data  The softer US dollar gave some breathing room to other currencies yesterday. The EURUSD bulls won a battle near the 200-DMA, and the pair is slightly above that level this morning, while the USDJPY is steady around 146.50. Crude oil steadied above the $80pb with the news that the tropical storm Idalia could interrupt crude production in the Gulf Coast and put an additional short-term pressure on oil prices. Gold is better bid above the $1900 thanks to a retreat in the US 10-year yield.  Today, the US JOLTS data is expected to post a third month below 10mio job openings. A number lower than expectations would point to loosening jobs market and could soften the hawkish Federal Reserve (Fed) expectations, while a strong figure will keep the economists and the Fed officials in a state of confusion. It is now increasingly certain that the Covid disruption in jobs market has largely passed, which means that the fact that the jobs figures remain resilient to rate hikes is due to another reason! And that reason could be the ageing population. Looking at the CBO projections, the participation rate in the US is not at shocking levels compared to the long-term projections. On the contrary, the actual participation rate (62.6%) is even higher than the long-term projection (62.4%).   Strong jobs figures have potential to boost Fed hawks as tightness of the jobs market means people ask for more money for doing the same job than they would otherwise. 
UK Monetary Policy Outlook: A September Hike Likely, but November Uncertain

UK Monetary Policy Outlook: A September Hike Likely, but November Uncertain

ING Economics ING Economics 01.09.2023 09:47
Uncomfortably high inflation and wage growth should seal the deal on a September rate hike from the Bank of England. But emerging economic weakness suggests the top of the tightening cycle is near, and our base case is a pause in November. Markets have been reassessing Bank of England rate hikes Rewind to the start of the summer, and the view that the UK had a unique inflation problem had become very fashionable. At its most extreme, market pricing saw Bank Rate peaking at 6.5%, some 125bp above its current level. Since then, this story has begun to lose traction. The differential between USD and GBP two-year swap rates, a gauge of interest rate expectations, has halved. That reflects the growing reality that the UK inflation story looks less of an outlier than it did a few months back. Like most of Europe, food inflation has begun to slow, and further aggressive falls are likely judging by producer prices. Consumer energy bills fell by 20% in July, and another 5% decline is baked in for October. The Bank of England itself is now describing the level of interest rates as “restrictive” – a statement of the obvious perhaps, but nevertheless tells us that policymakers think they’ve almost done enough with rate hikes.   UK and US rate expectations have narrowed   A September hike is likely but November is less certain Still, we’re not quite there yet, and recent inflation data has continued to come in on the upside. Private sector wage growth – measured on a three-month annualised basis – is running at a cycle-high of 11%. Services inflation also edged higher in July, although this was partly attributable to some unusual swings in specific categories rather than broad-based moves. A September hike is therefore highly likely. Whether markets are right to be pricing another hike for November is less certain. We’ll only get one round of CPI and wage data between the September and November meetings. Wage growth is unlikely to have slowed much, but we’re hopeful for early signs that services inflation is inching lower. Various surveys suggest few service-sector firms are raising prices, and we think that reflects the sharp fall in gas prices. A lot also hinges on whether we continue to see signs of weakness in economic activity. Like Europe, the UK’s PMIs look worrisome and will have prompted some pause for thought at the Bank of England. The jobs market is also cooling, and the vacancy-to-unemployment ratio – which BoE Governor Andrew Bailey has consistently referenced – is closing in on pre-Covid highs. There’s also been an ongoing improvement in worker supply. We’re now at a point where survey numbers and various bits of official data suggest that both economic growth and inflation are losing steam. The inflation and wage growth figures aren’t there yet, but these are lagging perhaps most out of all economic indicators. A November pause isn’t guaranteed, but it remains our base case. To some extent, we’re splitting hairs. In the bigger picture, the Bank is becoming much more focused on how high rates need to go – and instead, the central goal will increasingly become keeping market rates elevated long after it stops hiking. Any further rate hikes should be seen as a means to that end.      
Moody's Decision on Hungary's Rating: Balancing Risks or False Security?

Consumer Spending Strength, Sustainability Concerns, and Excess Savings

ING Economics ING Economics 01.09.2023 10:13
Consumer spending is strong, but is unlikely to be sustainable We then turn to personal spending, which was strong, rising 0.8% MoM nominally and 0.6% MoM in real terms. This gives a really strong platform for third quarter GDP growth, which we are currently estimating to come in at an annualised rate of somewhere between 3% and 3.5%. However, the key question is how sustainable this is – we don't think it is. The robust jobs market certainly provides a strong base, but wage growth has been tracking below the rate of inflation. Note incomes rose just 0.2% MoM in July. Maybe it is that confidence of job security that is encouraging households to seek to maintain their lifestyles amidst a cost-of-living crisis, via running down savings accrued during the pandemic and supplementing this with credit card borrowing. The problem is savings are finite and the banks are tightening lending standards significantly. Credit card borrowing costs are the highest since records began in 1972 so there is going to be a lot of pain out there. The chart below shows the monthly flows of excess savings since the start of the pandemic. Fiscal support (stimulus checks and expanded unemployment benefits) more than offset falling income resulting from job losses in 2020. Meanwhile, less spending versus the baseline due to Covid constraints further boosted the accumulation of savings.   Contributions of monthly changes in income and spending to the flow of savings ($bn)     Then through 2021 spending picked up, but then through 2022-2023 the nominal pick-up in incomes has been less than the increase in spending. Consequently we have seen savings flows reverse and now we are running them down each and every month, which is not sustainable over the long term.    Stock of excess savings peaked at $2.2tn, but we have been aggressively running this down ($tn)   Excess savings will soon be exhausted and financial pressures will intensify Based on this data, the $2.2tn of excess savings accumulated during the pandemic, $1.3tn has already been spent. At the current run-rate it will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner. With banks far more reluctant to provide unsecured consumer credit, based on the Federal Reserve’s Senior Loan Officer Opinion survey, the clear threat is that many struggling households may soon find their credit cards are being maxed out and they can’t obtain more credit. With student loan repayments restarting, we expect consumer spending to slow meaningfully from late fourth quarter onwards and turn negative in early 2024.
Europe's Economic Concerns Weigh as Higher Rates Keep US Markets Cautious

Softening US Jobs Market Signals the Fed's Mission is Complete

ING Economics ING Economics 04.09.2023 10:30
Softening US jobs market suggests the Fed’s work is done The US August jobs report shows modest jobs growth, benign wage pressures and a large jump in the unemployment rate as the labour market slackens. With inflation set to continue slowing, the Fed is surely not hiking interest rates in September and is unlikely to do so in November either.   Employment growth is softening US non-farm payrolls increased 187k in August versus the 170k consensus, but there are a net 110k of downward revisions to the past couple of months, indicating that the slowing trend in employment growth remains in place. The private sector created 179k of those jobs, led yet again by private education and health with 102k jobs. Leisure and hospitality also remains a healthy provider of employment with a 40k increase. Information (-15k), trade and transport (-20k – presumably Yellow bankruptcy related) and temporary help (-19k) were the key areas of weakness.     Those numbers are all from the establishment survey of employers. The household survey, which is used to calculate the unemployment rate, reported a slightly stronger jobs gain of 222k, but the number of people classifying themselves as unemployed rose 514k with it seeming that more and more people are returning to the labour market. This increase in the participation rate is what the Fed wants to see and at 62.8%, it has risen nicely since a year ago when it stood at 62.1% and should help to keep wage pressures in check.   Wages cooling and unemployment is rising In that regard, wage growth (average hourly earnings) is soft at 0.2% MoM, the smallest increase since February 2022, while the unemployment rate jumps to 3.8% from 3.5% (consensus 3.5%). It’s pretty safe to say the Fed isn't hiking in September with this backdrop, and we don't think they will in November either, with core CPI set to slow pretty rapidly in the next couple of months.   Tightening lending conditions point to a higher unemployment rate   The Fed's work is done The chart above shows the relationship between bank lending conditions and the unemployment rate. With higher borrowing costs, less credit availability and student loan repayments all set to increasingly weigh on economic activity we fear that the unemployment rate will climb further. Unfortunately, it is unlikely to be just through rising participation rates but will likely involve some job losses too. As such, we continue to believe that US interest rates have peaked and the next move will be a cut. We are currently forecasting that to happen in March 2024.
Riksbank's Potential Rate Hike Amid Economic Challenges: Analysis and Outlook

Riksbank's Potential Rate Hike Amid Economic Challenges: Analysis and Outlook

ING Economics ING Economics 08.09.2023 10:37
Further declines in economic output are likely, but for now, the Riksbank is focused on high services inflation and renewed krona weakness.   Riksbank set for at least one more hike There are two weeks to go until the Riksbank’s September meeting and another 25bp rate hike looks pretty likely. Services inflation is uncomfortably high and the trade-weighted value of the krona is back to its lows. A follow-up rate hike in November can’t be ruled out. Yet the economy is clearly reacting to higher interest rates. A 0.8% decline in second quarter GDP, while not as bad as initially reported, shows the economy is under strain. On a year-on-year basis, Sweden is in the bottom five performers in the EU when it comes to growth. Still, the story isn’t universally bad and there are some bright spots. The jobs market is still very tight by historical standards, the housing market has stabilised, confidence is rebounding and consumer spending is showing signs of levelling out. Here, we look at how the economy is performing in several key areas. Housing market Housing is a well-known vulnerability for Sweden, and the 16% peak-to-trough fall in prices during 2022 was not hugely surprising. Compared to other European economies, Sweden has a much greater percentage of variable rate mortgages, and that proportion has only increased since interest rates started to rise. According to the Riksbank, 90% of loans have a remaining fixation period of below two years, and in the majority of cases, these are not fixed at all. The result is that the average rate on outstanding mortgages has increased by 200bp since the Covid low, compared to 64bp for the eurozone as a whole, and much less still in France/Germany. How average mortgage rates have changed since 2021 That said, housing prices have stabilised this year and household sentiment towards housing has improved noticeably. But the fundamentals of the market still look challenging, and data from Hemnet – a property search site – shows housing supply at multi-year highs, while separate figures show transactions are at a low. We tend to agree with the Riksbank’s forecast that further price falls are likely. Supply of housing has increased as transaction volumes fall   Jobs market Sweden’s unemployment rate is at a post-pandemic low, and that resilience has been helped by a pronounced reduction in joblessness among foreign-born workers. One of the key issues for a number of years has been a skills mismatch and poor integration of migrant workers into the Swedish jobs market – and the gulf between native unemployment (below 5%) and foreign-born workers (near 14%) is still large, but has narrowed. There are signs that the jobs market is cooling, however. The number of layoffs has started to rise, though from a low base. Vacancy numbers have been falling too, though so far the decline in the ratio of job openings to unemployment has been less sharp than in other economies, notably the US and UK. The proportion of service-sector businesses that see labour as a constraint on production has fallen from 45% to 30% in just over a year. Still, there are signs that firms are “hoarding” staff – i.e. they are afraid of letting people go given rehiring concerns. This is helped by the fact that nominal wage growth is relatively contained given the level of inflation, with the benchmark negotiated pay deal set at 3-4% for the next couple of years. That's noticeably below the rate we've been seeing in some other advanced economies. As a result, while we’re assuming that unemployment will increase over the coming months, the rise is likely to be gradual. Vacancy numbers are falling, albeit slowly Consumer spending Consumption has been falling consistently for a year now, though this masks big differences across spending categories. Furniture sales are down 15% on pre-pandemic levels while spending on recreation/culture is up by a similar percentage. Even in the weaker areas though, the story is stabilising. Consumer confidence has risen noticeably, and real wage growth is slowly becoming less negative. Still, with interest payments set to consume an ever-increasing share of household budgets, we don’t expect consumer spending to return to meaningful growth any time soon. Higher consumer confidence points to stabilisation in retail sales Production Like consumer spending, and like pretty much everywhere, Sweden’s manufacturing sector is also in contraction, at least according to the PMIs. Admittedly, this weakness hasn’t entirely been borne out in the official production data, and Swedish manufacturing has been operating 5-10% above pre-pandemic levels for much of the last year – in sharp contrast to the likes of France/Germany where production remains below early-2020 levels. This growth has been heavily concentrated though, primarily in chemicals/pharmaceutical products, and more recently in a sharp recovery in vehicle production. The latter is up almost a third since the start of 2022 on improved supply chains, but we suspect this is more of a catch-up story and can only last for so long. We expect the weaker manufacturing numbers to show up more clearly in the official data over the coming months. Bottom line Assuming there's a renewed fall in house prices, some gradual weakness in the jobs market and ongoing pressure on consumer spending and production, we're likely to see further declines in economic output through the remainder of this year. While the Riksbank clearly isn't quite done with rate hikes, the fragile economic backdrop suggests we're near the peak.
Unlocking the Future: Key UK Wage Data and September BoE Rate Hike Prospects

Unlocking the Future: Key UK Wage Data and September BoE Rate Hike Prospects

ING Economics ING Economics 11.09.2023 10:38
Key UK wage data to help lock-in September BoE rate hike There’s mounting evidence from surveys that price pressures in the UK are easing, the jobs market is cooling, and growth is slowing. But the Bank of England has made it abundantly clear that it’s waiting for the actual data to show those trends too, and next week we’ll get crucial wage and jobs data. Private sector wage growth currently stands at 8.2% and is likely to stay there when we get fresh data next week. But there’s an outside risk that we see this nudge slightly lower on the basis that separate data from firms' payrolls indicated that median pay actually fell in level terms during August. This data is released a month ahead of the more traditional average weekly earnings numbers. We’d expect that to be coupled with a further modest rise in the unemployment rate, as well as a renewed fall in vacancies. The ratio of unfilled job openings to unemployed workers is coming down quickly and closing in on pre-Covid levels. All of that seems sufficient for the BoE to hike again in September, especially if services inflation nudges higher in data due the day before the rate announcement. But we remain comfortable with our call for a November pause and that September’s hike is likely to be the last. Separately, we’ll get growth data for July, and we expect a modest contraction in economic output. June saw surprisingly strong growth, including a huge increase in manufacturing production. That surge, which was highly unusual (outside of the Covid period), seems like an anomaly and we expect some retracement in July.      
USD/JPY Eyes Psychological Level of 150.00 Amidst BoJ's Monetary Policy and Fed's Rate Hike Expectations

UK Economy Shows Signs of Contraction Amid Volatility and Rising Rates

ING Economics ING Economics 13.09.2023 09:12
The monthly GDP numbers have been highly volatile, but we do expect slower growth over coming months as the cooler jobs market and higher rates continue to bite.   The UK economy contracted by half a percent in July, though frankly, these numbers have been all over the place recently. Remember that output had increased by the same percentage in June, thanks in no small part to a highly unusual surge in manufacturing. That boost to production, which was linked to car production and pharmaceuticals, partially unwound in July. But the hit from there was amplified by the service sector, which saw output fall by 0.5%. Strikes offer part of the explanation, with losses most visible in health. But we also saw declines in a range of other sectors, including IT and admin/support services, and this is harder to explain. Cutting through the noise, the economy seems to be still growing, albeit fractionally. The change in activity over the past three months relative to the three months before is still slightly positive. We think the economy is likely to more or less flatline over coming quarters – and a mild recession can’t be ruled out. The jobs market is cooling, while the impact of higher rates is still yet to hit the economy. The average rate paid on outstanding mortgages is roughly 3%, up from a low of 2% but well below the 6%+ rates being quoted on two-year mortgages for new lending. As more and more borrowers refinance, we expect the average mortgage rate to rise above 4% in 2024, even without any further Bank of England rate hikes. That’s a gradual process so we don’t expect an abrupt hit to GDP in any specific quarter, but it will act as an ever-increasing drag on consumer spending.   Corporates have felt the impact of higher rates more quickly than households   The caveat of course is that considerably more households own their home outright than 10 years ago (39%), relative to those with a mortgage (28%). Then again, businesses have already felt the full effect of higher borrowing costs, given lending is more typically on floating rates. Back to this latest data, and given the volatility in the GDP figures, we expect the Bank of England to largely ignore them. Officials have been clear that they are focused on wage growth, services inflation and labour market slack – and not a lot else. We expect one more rate hike at next week’s meeting, before a pause in November.
US Housing Market Faces Challenges Due to Soaring Mortgage Rates

US Housing Market Faces Challenges Due to Soaring Mortgage Rates

ING Economics ING Economics 25.09.2023 11:04
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.
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
A bright spot If there is one bright spot in Britain with all this, it is the FTSE100. First, the rising energy prices are good for the energy-rich FTSE100. Second, softer sterling makes these companies more affordable for international investors, who should of course think of hedging their sterling exposure, and third, more than 80% of the FTSE100 companies' revenues come from oversees, which means that when they convert their shiny dollar revenues back to a morose sterling, well, they can't really complain with a stronger dollar. Consequently, if a more dovish BoE is bad for sterling, the combination of a hawkish Fed and a dovish BoE and a pitiless OPEC is certainly good for the FTSE100. The index has been left behind the S&P500 this year, as the tech rally is what propelled the American index to the skies, but that technology wind is now turning direction. The FTSE 100 broke its February to September downtrending trend to the upside and is fundamentally and technically poised to gain further positive traction, whereas, the S&P500 is heaving a rough month, with technology stocks set for their worse performance this year, under the pressure of rising US yields, which make their valuations look even more expensive.   Interestingly, the US 2-year yield peaked at 5.20% after the Fed's hawkish pause this week and is back headed toward the 5% mark, but the gap between the US 2-year yield and the top range of the Fed funds rate is around 40bp, which is a big gap, and even if the Fed decided not to hike rates, this gap should narrow, in theory. If it does not, it means that bond traders are betting against the Fed's hawkishness and think that the melting savings, the loosening jobs market, tightening bank lending conditions and strikes, and restart of student loan repayments and a potential government shutdown could prevent that last rate hike to happen before this year ends. And indeed, activity on Fed funds futures gives more than 70% chance for a third pause at the FOMC's November meeting, and Goldman Sachs now sees the US expansion slow to 1.3% from 3.1% printed in the Q3. KPMG also warned that a prolonged auto stoppage may precipitate contraction. And if no deal is inked by noon today, the strikes will get worse.   One's bad fortune is another's good fortune  The Japanese auto exports surged big this year, they were 50% higher in yen terms. The yen is certrainly not doing well, but yes, you can't have it all. That cheap yen is one of the reasons why the Japanese export so well outside their country. And in case you missed, the BoJ did nothing today to exit their hyper-ultra-loose monetary policy. They didn't even give a hint of normalization, meaning that the yen will hardly strengthen from the actual levels. In the meantime, Toyota, Mitsubishi and Honda shares are having a stellar year, and the US strikes will only help them do better. 
Bank of Canada Preview: Assessing Economic Signals Amid Inflation and Rate Expectations

Rates Rally: Examining the Factors Behind the Surge and What Lies Ahead

ING Economics ING Economics 02.11.2023 12:28
Rates Spark: Don’t dismiss the remaining yield upside just yet The US borrowing estimate and the BoJ were not the drivers of another leg higher in rates as many had feared. While it's unlikely to be the end of the supply story and we still await the quarterly refunding announcement, markets will also focus on the data and the Fed meeting again. After all, economic resilience was the other factor of higher rates.   The long end took its cues from lower US borrowing and more cautious tweaks from the BoJ Long-end rates took their cues for yesterday’s trading from the somewhat lower-than-expected US Treasury borrowing estimate as well as the Bank of Japan (BoJ) decision to only slightly adjust its yield curve control policy. In essence, two of the factors that many, including us, had seen as potential drivers of a renewed attempt at taking on the 5% threshold in 10Y UST yields proved to be duds. The UST curve kicked off with a bull flatteneing which also spilled over into other rates markets.   However, especially with a view on supply it is unlikely to be the end of the story. Markets are still awaiting the quarterly refunding announcement and the maturity split of the upcoming issuance today. Some had flagged the possibility of a more cautious approach focusing any increase on shorter-dated issues. But following the lower borrowing requirement, the US Treasury might feel less pressed on this topic. More importantly, the overarching concerns surrounding the medium- to long-term trajectory of the US deficit have not been addressed.   US economic resilience remains an important factor in keeping rates elevated as well Yesterday’s quarterly employment cost index rising to 1.1% should also remind us that the other important driver of higher long-end rates was the resilience of the economy and the job market in particular. It was in fact the faster wage growth figure managed to turn around the bullish dynamic yesterday and point yields higher again. The Federal Reserve has guided markets to firmly expect a hold at tonight’s FOMC meeting despite the more benign inflation backdrop, third-quarter GDP growth coming in hot, the jobs market remaining tight and inflation remaining well above the 2% target. But it has done so by pointing out that the higher long-end rates are now doing part of its job. That said, European rates markets were confronted with a more dovish data set as the eurozone flash CPI slipped below 3% and 3Q GDP growth came in with a negative sign. Yesterday's bull flattening was probably still more inspired by the overall direction given US and Asian events rather than the domestic data. That said, European Central Bank (ECB) officials are still attempting to anchor front-end rates by emphasising the outlook of keeping rates high for longer.     The US yield increase is stalling, but curves remain steeper   Today's events and market view The BoJ and US borrowing announcements have proved more benign for rates than anticipated with the 10Y UST yield dropping towards 4.8% before moves were reversed in month-end flows. Especially on the supply side, it is unlikely to be the end of the story with the refunding announcement coming today. But economic resilience should also not be dismissed as a potential driver of another leg higher in rates. To that end, we will get the  ADP payrolls estimate today ahead of the key jobs data on Friday. Also on today’s agenda are JOLTs jobs opening numbers as well as the ISM manufacturing. The key event for the day is the FOMC meeting tonight, although a hold has been well-flagged. The Fed is still likely to keep its bias for further tightening in place.  All Saints Day is observed in large parts of Europe. In today’s government bond primary markets, Germany will tap its 7Y bond for €3bn
Worsening Crisis: Dutch Medicine Shortage Soars by 51% in 2023

Key Developments in Developed Markets: Fed's Potential Pushback and Rate Cut Expectations"

ING Economics ING Economics 12.12.2023 14:18
Key events in developed markets and EMEA next week There's growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, neither the Federal Reserve nor Bank of England will want to endorse the recent ramping up of rate cut expectations in financial markets as both prepare to release decisions next week.   US: Pushback from the Fed The Federal Reserve is widely expected to leave the Fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here. The steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year.  We expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen. We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.
EUR: Core Inflation Disappoints, ECB's Caution and Market Reactions

Inflation Challenges: US CPI Disappoints, Diminishing Odds of Early Fed Rate Cut

ING Economics ING Economics 16.01.2024 11:28
Sticky US inflation reduces chances of an early Fed rate cut In the wake of the Federal Reserve's dovish shift in December, financial markets had moved to price an interest rate cut as soon as March. However, the tight jobs market and today's firmer-than-expected inflation numbers suggest this is unlikely, barring an economic or financial system shock. We continue to think the Fed will prefer to wait until May.   CPI comes in above expectations December US CPI has come in at 0.3% month-on-month/3.4%year-on-year and core 0.3%/3.9% versus the 0.2/3.2% expectation for headline and 0.3/3.8% for core. So, it is a little disappointing, but not a huge miss. Meanwhile, initial jobless claims and continuing claims both came in lower than expected with continuing claims dropping to 1834k from 1868k – the lowest since late October. The combination of the two – slightly firmer inflation and good jobs numbers really brings into doubt the market expectation of a March rate cut from the Federal Reserve. We continue to see May as the most likely start point.   Core CPI measured in MoM, 3M annualised and YoY terms   This means that the annual rate of headline inflation has actually risen to 3.4% from 3.1% in November while the core rate (ex food and energy) has only fallen a tenth of a percentage point, so we appear to have plateaued after a strong disinflationary trend through the first nine months of 2023. The details show housing remains firm, with the key rent components continuing to post 0.4/0.5% MoM gains while used cars also rose 0.5% and airline fares increased 1% while medical care is also still running pretty hot at 0.6%. Motor vehicle insurance is especially strong, rising another 1.5% MoM, meaning costs are up more than 20%YoY. The so called “super-core” measure (core services CPI ex housing), which the Fed has been emphasising due to it reflecting tightness in the labour market given high wage cost inputs, posted another 0.4% MoM increase. This backdrop remains too hot for the Fed to want to cut rates imminently, especially with the economy likely posting 2-2.5% GDP growth in the fourth quarter of last year and the labour market remaining as tight as it is.   But this is just one measure and the outlook remains encouraging Nonetheless, the CPI report isn’t the only inflation measure the Fed looks at. In fact the preferred measure – the core personal consumer expenditure deflator – has shown much better performance. To get to 2% YoY we need to see the MoM% change averaging 0.17%. 0.31% MoM for core CPI is near enough double what we want to see, but for the core PCE deflator we have seen it come in below 0.17% MoM in five of the past six months. The reasons for the divergence are slight methodological differences in the calculations, with weights for key components such as housing and cars, being very different.   Observed rents still point to a sharp slowdown in housing inflation   Nonetheless, the prospects for consumer price inflation returning to 2% YoY remain good. We have to remember that cars and housing have a 50% weighting within the core CPI basket and we have pretty good visibility for both components. Observed private sector rents point to a clear slowdown in the housing components, while declines in Manheim car auction prices point to used car prices falling outright over the next two months. Also note that the NFIB small business survey showed only 25% of businesses are raising prices right now versus 50% in the fourth quarter of 2022. In fact, the last time we saw fewer businesses raising prices was January 2021. So, while today's report wasn't as good as it could have been, there are still reasons for optimism on sustained lower inflation rates in 2024. We still see a good chance headline and core CPI to be in the 2-2.5% YoY range by late second quarter.
Dream Comes True: Analyzing Euro Weakness and US GDP Goldilocks Moment

Dream Comes True: Analyzing Euro Weakness and US GDP Goldilocks Moment

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.01.2024 14:15
A dream comes true. By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank The EURUSD traded south yesterday, as the European Central Bank (ECB) Chief Christine Lagarde reckoned that growth and inflation are slowing, while insisting that the rate cut decision will be data dependent. The pair cleared the 200-DMA support, fell to 1.0820, it's a little higher this morning, but we are now below the 200-DMA and the ECB rate cut bets on falling inflation and slowing European economies remain the major driver of the euro weakness, with many investors now thinking that June could be a good time to start cutting the rates. Three more rates could follow this year. Across the Atlantic, the US released its latest GDP update and the data was as good as it could possibly get. The US economy grew 3.3% in Q4 versus 2% expected by analysts. It grew 2.5% for all of last year –quite FAR from a recession. The consumer spending growth slowed to 2.8%, but remained strong on healthy jobs market and wages growth, business investment and housing were supportive and... the cherry on top: the GDP price index, a gauge of inflation fell to 1.5%. Plus, data from showed that the median rent rate declined in December, and that's good news when considering that rents have been one of the major drivers of inflation lately, and they look like they are cooling down. In summary, yesterday's US GDP data was the definition of goldilocks in numbers: good growth, slowing inflation. A dream comes true. As reaction, the US 2-year yield fell below 4.30% and the 10-year yield fell below 4.10%. The strong numbers didn't necessarily hammer the Federal Reserve (Fed) cut expectations given that inflation slowed! Investors are not sure that March would bring the first rate cut from the Fed – as the probability of a March cut is around 50%, but a May cut is almost fully priced in. Today, all eyes are on the Fed's favorite gauge of inflation: core PCE – expected to have retreated to 3% in December. A number in line with expectations, or ideally softer than expected could further boost risk appetite.
Bank of England's February Meeting: Navigating Rate Cut Speculations and Economic Variables

Bank of England's February Meeting: Navigating Rate Cut Speculations and Economic Variables

ING Economics ING Economics 26.01.2024 14:49
Four scenarios for the Bank of England's February meeting Expect the BoE to drop the pretence that it could hike rates again but to continue signalling rates will stay restrictive for an "extended period". With services inflation and wage growth to remain sticky in the near term, we think August is the most likely starting point for rate cuts.   Four scenarios for the Bank of England meeting   The BoE seems more reticent than other central banks to endorse rate cuts Both the Federal Reserve and European Central Bank have hinted, with varying degrees of caveats, that rate cuts are on the cards this year. So far, the Bank of England hasn’t followed suit. It was careful not to say anything at the December meeting that could be misconstrued as an endorsement of market pricing on cuts. And there has essentially been radio silence from committee members since then. We suspect the Bank will still want to tread carefully as it gears up for the first meeting of 2024. But the reality is that defending a “higher for longer” stance on interest rates is getting harder as the inflation backdrop shows signs of improving. Remember that the BoE has pinned the chances of rate cuts on three variables. One is the strength of the jobs market, but data here is suffering from well-known reliability problems. So, in practice, it comes down to services inflation and private-sector wage growth. Both are tracking well below the November BoE projections. Services CPI is currently 6.4%, and despite that coming as an upside surprise to consensus when it was released, it’s still half a percentage point below the BoE’s projection. Private wage growth is 6.5%, but remember this is a three-month average and the latest two ‘single month’ readings are around 6%. When we get the data in a couple of weeks, this variable is likely to have ended the year a full percentage point below the BoE’s most recent forecast (7.2%). Add in the fact that natural gas prices are noticeably lower across the futures curve, and we should see sizeable downward revisions to the Bank’s inflation forecasts for this year. But what happens to the forecasts beyond 2024 is less clear-cut.   Financial markets expect roughly four UK rate cuts this year

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