June

Financial supply to remain at elevated levels in June  Financials supply was also substantial in May, totalling €33bn, although not to the same levels as corporates. The last week of May, however, saw a skew towards more financials supply. We expect financials supply will continue to come at significant levels over the coming few of weeks. YTD supply is still running ahead of previous years, now sitting at €163bn.                  

FX Daily: June tells us the dollar is not the only game in town Despite relatively low levels of volatility, June has so far seen some pretty large spot FX moves in both the G10 and emerging market space. These moves seem to reflect a growing conviction of a soft landing in the global economy and a more hawkish view across the G10 central banks outside of the US. Look out for inflation surveys and central bank speakers today.   USD: Two factors weighing on the dollar We have recently been talking about inverted yield curves and late-cycle dollar strength. Looking at USD/JPY, that seems a fair comment given that it is trading not far from its recent highs and the US 2-10 yield curve is inverting even further (now -94bp) on the back of a hawkish Federal Reserve. However, this month in the G10 space, the dollar is only stronger against the yen and is anywhere from 2% (Swiss franc) to 6% (Australian dollar) weaker against the rest of the G10 currencies. This looks like a function of two factors: The first is the increasing hawkishness shown by the rest of the central banks in the G10 space. Inflation forecasts and expected tightening cycles are being revised higher across the board and in some cases more aggressively than in the US. This includes recent surprise hikes from Australia and Canada, a very hawkish ECB meeting yesterday, and very aggressive expectations for Bank of England rate hikes. The second is the bullish global risk environment. Investors are cutting allocations to cash and look to be putting money to work in bonds, equities and emerging markets. Against all the odds the MSCI world equity index is up 14% year-to-date and fund managers are surprisingly suffering from a Fear Of Missing Out (FOMO) on a good rally in benchmark risk assets. Notably, USD/CNH reversed lower yesterday despite the People's Bank of China rate cut – suggesting that investors are instead more interested in the prospect of upcoming Chinese fiscal stimulus.   Of course, data remain crucially important and will determine whether central banks need to keep rates tighter for longer or can perhaps start to consider rate cuts – as is the case in some parts of Eastern Europe and potentially Latin America too. But that is ING's central call for the second half of the year – that US disinflation will become more evident through the remainder of this year and that a less hawkish Fed will allow the dollar to sell off. Back to the short term, the dollar may well stay soft against most currencies except the Japanese yen, with the Bank of Japan remaining resolutely dovish. Here, yen-funded carry trades will remain popular. For today's data, we have the University of Michigan inflation expectations. This occasionally moves markets and any meaningful drop could nudge the dollar lower. Equally, we have three Fed speakers, generally from the hawkish end of the spectrum.  We think the mood to put money to work probably dominates and barring any big upside surprise in US inflation expectations, DXY can probably edge down to the 102.00 area, if not below.

France/Germany flash PMIs (Jun) – 23/06 – One of the more notable trends we've seen in recent months has been an ongoing divergence between services sector activity and manufacturing activity. This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Services continues to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling coming at 47.1 in May, while services also slowed to 55.2 from 55.9. Lower fuel costs may offer some support here; however, most services providers are struggling with higher costs, which by and large they are able to pass on.

Eurozone and German PMIs weakened in June EUR/USD fell as much as 110 pips on Friday EUR/USD has taken a tumble on Friday. In the European session, the euro is trading at 1.0885, down 0.64%. The euro fell as low as 1.0844 earlier in the day. Later today, the US releases ISM Services PMI. The consensus stands at 54.0 for June, following 54.9 in May. The services sector is in solid shape and the ISM Services PMI has posted four straight readings over the 50 level, which separates expansion from contraction.     Eurozone, German PMIs fall in June Eurozone PMIs for June pointed to weaker activity in the services and manufacturing sectors. The Services PMI eased to 52.4, down from 55.1 in May and below the consensus of 54.5 points. The Manufacturing PMI fell to 43.6, down from the May reading of 44.8 which was also the consensus. Germany, the largest economy in the eurozone, showed a similar trend, with Services PMI falling from 54.7 to 54.1 and Manufacturing PMI dropping from 43.5 to 41.0 points. The 50 line separates contraction from expansion. The takeaway from these numbers is that the eurozone economy is cooling down. Business activity is still growing but at a weaker pace, while the manufacturing recession has deepened. The eurozone economy is yet to recover after negative growth in the past two quarters, as the ECB’s aggressive tightening makes its way through the economy. At first glance, the weak PMI readings should be good news for the ECB, which is trying to dampen economic growth in order to wrestle inflation back down to the 2% target. However, inflation remains very high at 6% and further tightening could tip the weak eurozone economy into a recession. The ECB’s efforts to push inflation lower have been made more difficult, as unemployment is at historic lows and wage growth is high. Germany, the bloc’s largest economy, isn’t the power locomotive that it once was and is still in recovery mode. The ECB has signalled that it will hike rates in July and another increase could be coming in September unless inflation decelerates more quickly.  

German Ifo index plunges in June The Ifo index has dropped or more accurately, collapsed, for the second month in a row, suggesting that the rebound of the German economy has ended before it ever really began.   In June, Germany’s most prominent leading indicator, the Ifo index, dropped for the second consecutive month, after a six-months expansion, coming in at 88.5 from 91.7 in May. The weaker-than-hoped-for Chinese reopening, a looming US recession and ongoing monetary policy tightening seem to be weighing on German company sentiment. Also, the growing feeling that Germany is in for a longer period of subdued growth seems to have reached German business. Both the current assessment and the expectations component fell. Expectations are now as low as at the end of last year.   Uncomfortable reality check We still don’t know what the best title for the current German economic situation should be: ‘The Great Decoupling’ or ‘The rebound that never came’ are clear favourites after today’s Ifo index release. Since last year, soft or leading indicators have become rather more 'soft' than 'leading'. Remember that the Ifo index had been on an upward trend since last autumn, while the economy actually shrank by 0.5% quarter-on-quarter in the fourth quarter of 2022 and 0.3% in the first quarter of 2023. An unprecedented war, energy crisis and fiscal stimulus have clearly weakened the relationship between soft and hard data - be it the 50 threshold of PMIs or the trend in other previously reliable indicators like the Ifo index or the European Commission’s economic sentiment index. At the current juncture, all traditional leading indicators have to be taken with a large pinch of salt.   Back to the German economy. What is clear is that the optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books, as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic changes, and the current energy transition will structurally weigh on the German economy in the coming years. However, all is not bleak. The stuttering Chinese rebound could easily bring some temporary positive surprises as well. Also, the drop in headline inflation and the actual fall in energy and food prices combined with higher wages should support private consumption in the second half of the year.   Today's disappointing Ifo index reading suggests that the hoped-for rebound of the German economy is nothing more than hope. Optimism is fading and the economy faces new growth concerns. We are not saying that the economy will be stuck in recession for the next couple of years, but with several short and long-term challenges, growth will remain subdued at best.

Spanish inflation falls below 2% for the first time in two years Spain's inflation outlook improved further in June. Headline inflation fell below 2% for the first time since March 2021. However, inflation is expected to pick up in the second half of the year due to several factors, including higher oil prices and the fading of favourable base effects.   Spanish inflation reaches 2% target The downward trend in Spanish headline inflation continues, falling to 1.9% year-on-year in June from 3.2% YoY in May. This month's sharp fall in inflation was expected given the jump in June last year. This marks the first time in about two years, since the start of the spike in inflation, that inflation is back in line with the ECB's 2% target. Headline inflation has now fallen to 1.9% YoY, after peaking at 10.8% in July 2022, while the HICP gauge stands at 1.6% YoY, down from its peak of 10.7% in July last year. Core inflation fell further to 5.9% in June from 6.1% in May, showing that disinflationary pressures are broadening.  

Agriculture – Canada increases grain planting estimates on supportive weather The latest report from Statistics Canada shows that farmers in the nation are expected to increase the planting of grain in 2023 compared to a year ago following supportive weather conditions, high prices, and stronger demand. Statistics Canada forecast all-wheat plantings to increase to 26.9m acres (+6.7% year-on-year), marginally down from previous estimates of 27m acres but exceeding the market expectation of 26.5m acres. For soybean, the agency revised the planting area projections from 5.5m acres to 5.6m, in line with market expectations. Similarly, corn planting acreage projections were increased from 3.7m acres to 3.8m, up 5.5% YoY. The agency stated that favourable weather conditions in most parts of Canada helped complete the planting on time. The General Statistics Office of Vietnam released trade volume estimates for June which show that coffee exports are seen at 150kt, up 9.1% compared to 137.5kt reported a year ago. However, the coffee export estimates for June are down 9.1% compared to the 165kt shipped in May. In the first half of 2023, coffee exports are projected to fall by 2.2% YoY to 1.02mt. The overall decline in exports could be attributed to severe rains that have battered the country.

Inflation slips in Indonesia, but central bank expected to keep rates on hold Inflation in Indonesia fell to 3.5% year-on-year in June, from 4% in May, which was slightly below market expectations.   Headline inflation slipped to 3.5% year-on-year in June, down from 4.0%YoY in the previous month. The June reading was slightly below market consensus for a 3.6%YoY rise with prices up only 0.14% from May. Meanwhile, core inflation dipped to 2.6%, down from 2.7% in May.  A favourable base, in addition to moderating commodity prices, has helped steer prices back within target. We expect inflation to remain subdued in the near term, barring substantial supply-side shocks.   Inflation comfortably back within target     Bank Indonesia likely to extend pause Bank Indonesia (BI) hiked aggressively in late 2022 to help bring inflation back within target. However, despite price pressures abating, we do not expect the central bank to resort to rate cuts as it hopes to ensure continued support for the Indonesian rupiah.  Foreign exchange stability will likely determine any BI rate adjustment, and we expect Governor Perry Warjiyo to extend his pause until IDR stabilises.

Canada’s GDP surprises to the upside US PCE Price Index eases in June ISM Manufacturing PMI expected to contract The Canadian dollar is trading at 1.3259, up 0.07%. Canadian markets are closed for a holiday and I expect USD/CAD movement to be limited. On the economic front, the US releases ISM Manufacturing PMI. The index is projected to tick lower to 46.9 in June, down from 47.0 in May.   Canada’s GDP climbs in May Canada wrapped up the week with a strong GDP report. The economy is estimated to have gained 0.4% in May, after flatlining in April. The Canadian economy continues to surprise with its resilience despite rising interest rates. The Bank of Canada raised rates to 4.75% earlier this month after a five-month pause, arguing that monetary policy was not restrictive enough. The BoC statement pointed at strong consumer spending and higher-than-expected growth as factors in the decision to raise rates. The BoC also expressed concerns that inflation could remain entrenched above the 2% target. The strong GDP report has added fuel to speculation that the BoC will raise rates again on July 12th but there is also concern that higher rates will lead to a recession. Canadian 10-year bonds have fallen further below the 2-year bonds, as the yield curve inversion, a predictor of recession, has become even more pronounced. Inflation has been falling and headline inflation eased to 3.4% in May, down from 4.4% in April. Core inflation also declined to 3.8%, down from 4.2%. The question remains whether inflation, still well above the 2% target, is falling fast enough to prevent another rate hike in July. In the US, there were more signs that inflation is weakening. On Friday, the PCE Price Index, which is the Fed’s favourite inflation gauge, declined from 0.4% to 0.1% in June. As well, UoM Inflation Expectations dropped to 3.3% in June, down from 4.2% in May and the lowest since March 2021. Despite these signals that inflation is decelerating, the Fed is widely expected to raise rates at the July meeting.   Canada’s GDP surprises to the upside US PCE Price Index eases in June ISM Manufacturing PMI expected to contract The Canadian dollar is trading at 1.3259, up 0.07%. Canadian markets are closed for a holiday and I expect USD/CAD movement to be limited. On the economic front, the US releases ISM Manufacturing PMI. The index is projected to tick lower to 46.9 in June, down from 47.0 in May. Canada’s GDP climbs in May Canada wrapped up the week with a strong GDP report. The economy is estimated to have gained 0.4% in May, after flatlining in April. The Canadian economy continues to surprise with its resilience despite rising interest rates. The Bank of Canada raised rates to 4.75% earlier this month after a five-month pause, arguing that monetary policy was not restrictive enough. The BoC statement pointed at strong consumer spending and higher-than-expected growth as factors in the decision to raise rates. The BoC also expressed concerns that inflation could remain entrenched above the 2% target. The strong GDP report has added fuel to speculation that the BoC will raise rates again on July 12th but there is also concern that higher rates will lead to a recession. Canadian 10-year bonds have fallen further below the 2-year bonds, as the yield curve inversion, a predictor of recession, has become even more pronounced. Inflation has been falling and headline inflation eased to 3.4% in May, down from 4.4% in April. Core inflation also declined to 3.8%, down from 4.2%. The question remains whether inflation, still well above the 2% target, is falling fast enough to prevent another rate hike in July. In the US, there were more signs that inflation is weakening. On Friday, the PCE Price Index, which is the Fed’s favourite inflation gauge, declined from 0.4% to 0.1% in June. As well, UoM Inflation Expectations dropped to 3.3% in June, down from 4.2% in May and the lowest since March 2021. Despite these signals that inflation is decelerating, the Fed is widely expected to raise rates at the July meeting.   USD/CAD Technical USD/CAD is putting pressure on resistance at 1.3254. Next, there is resistance at 1.3328 1.3175 and 1.3066 are providing support  

Manufacturing PMIs point to contraction across the eurozone but euro remains steady US ISM Manufacturing PMI weakens US PCE Index slows but Fed still expected to hike in July EUR/USD is almost unchanged on Monday, trading at 1.0909.   Eurozone manufacturing continues to sputter The eurozone manufacturing sector has been in poor shape for months and the downturn worsened worse in June. The eurozone PMI slowed to 43.4 in June, down from 44.8 and shy of the consensus of 43.6 points. Germany, the largest economy in the bloc, looked even worse, as the PMI fell to 40.6, down from 43.2 and below the consensus of 41.0 points. Spain, Italy and France also reported readings below 50, which separates contraction from expansion. Manufacturing in the eurozone has now contracted for 12 straight months and the PMI reading was the lowest since May 2020. Customer demand has fallen sharply and manufacturing employment declined in June for the first time since January 2021. These latest numbers indicate that manufacturing is in trouble, but this is nothing really new and the euro shrugged off the weak numbers. The news wasn’t much better in the US, as ISM Manufacturing PMI eased to 46.0 in June, down from 46.8 in May. ISM Manufacturing Employment contracted as well, falling from 51.4 to 48.4 and missing the consensus of 50.5 points. The week wrapped up with inflation releases showing that deceleration is alive and well. On Friday, the PCE Price Index, which is the Fed’s preferred inflation indicator, declined from 0.4% to 0.1% in June. As well, UoM Inflation Expectations dropped to 3.3% in June, down from 4.2% in May and the lowest since March 2021. Inflation may be headed in the right direction, but the Fed is still widely expected to raise rates at the July 12th meeting. Traders have priced in a 25-basis point hike at 86%, according to the CME FedWatch tool.   EUR/USD Technical EUR/USD is putting pressure on support at 1.0908. This is followed by support at 1.0838 1.0980 and 1.1050 are the next resistance lines    

AUD/USD slips after a four-day rally China’s Services PMI eases in June Australia’s retail sales jump 0.7% in May FOMC minutes will be released later on Wednesday The Australian dollar is in negative territory on Wednesday, after a four-day rally that saw the Aussie climb 100 pips. In the North American session, the Australian dollar is trading at 0.6663, down 0.42%.   China’s Services PMI eases but indicates expansion China is Australia’s largest trading partner, making the Aussie sensitive to Chinese data. China released the Caixin Services PMI on Wednesday, and the June report showed a deceleration to 53.9, down from 57.1 in May. This still points to expansion in business activity, but the reading was the lowest in five months, which is cause for concern as China experiences a bump recovery. The soft reading sent the Australian dollar considerably lower on Wednesday.   Australian retail sales jumps 0.7% If Australia is close to a recession, it looks like someone forgot to tell the consumer, who opened up the purse strings in May. Australia’s retail sales impressed with a 0.7% gain in May, unrevised from the flash estimate. This follows a flat reading in April and matched the consensus. This was the strongest showing since January. The Reserve Bank of Australia may have preferred a weaker retail sales release, as it needs the economy to continue to slow in order to push inflation lower. The RBA would love to continue pausing rate hikes and bring some relief to households, but inflation remains far too high – the 5.6% reading in May was still almost three times above the 2% target. The RBA announced a pause at the rate meeting this week but warned that inflation risks were tilted upwards and further rate hikes might be required. The central bank delivered a “hawkish pause”, signalling that the pause did not indicate an end to the current rate-hike campaign. Money markets have priced in a 45% chance of a rate hike in August, as investors are having a tough time figuring out the RBA’s rate path, which has wavered between hikes and pauses this year. All eyes are on the FOMC minutes of the June meeting, when the Fed paused rates after 10 straight hikes, leaving the benchmark cash rate in a range of 5.00%-5.25%. The markets are widely expecting the Fed to hike at the July meeting but haven’t bought into Fed Chair Powell’s stance that another hike is coming in the fall. If the minutes are hawkish, the market could fall in line with Powell which would likely give the US dollar a boost.   AUD/USD Technical AUD/USD tested 0.6659 earlier on Wednesday. Below, there is support at 0.6597 0.6722 and 0.6784 are providing support

AUD/USD slips after a four-day rally China’s Services PMI eases in June Australia’s retail sales jump 0.7% in May FOMC minutes will be released later on Wednesday The Australian dollar is in negative territory on Wednesday, after a four-day rally that saw the Aussie climb 100 pips. In the North American session, the Australian dollar is trading at 0.6663, down 0.42%.   China’s Services PMI eases but indicates expansion China is Australia’s largest trading partner, making the Aussie sensitive to Chinese data. China released the Caixin Services PMI on Wednesday, and the June report showed a deceleration to 53.9, down from 57.1 in May. This still points to expansion in business activity, but the reading was the lowest in five months, which is cause for concern as China experiences a bump recovery. The soft reading sent the Australian dollar considerably lower on Wednesday.   Australian retail sales jumps 0.7% If Australia is close to a recession, it looks like someone forgot to tell the consumer, who opened up the purse strings in May. Australia’s retail sales impressed with a 0.7% gain in May, unrevised from the flash estimate. This follows a flat reading in April and matched the consensus. This was the strongest showing since January. The Reserve Bank of Australia may have preferred a weaker retail sales release, as it needs the economy to continue to slow in order to push inflation lower. The RBA would love to continue pausing rate hikes and bring some relief to households, but inflation remains far too high – the 5.6% reading in May was still almost three times above the 2% target. The RBA announced a pause at the rate meeting this week but warned that inflation risks were tilted upwards and further rate hikes might be required. The central bank delivered a “hawkish pause”, signalling that the pause did not indicate an end to the current rate-hike campaign. Money markets have priced in a 45% chance of a rate hike in August, as investors are having a tough time figuring out the RBA’s rate path, which has wavered between hikes and pauses this year. All eyes are on the FOMC minutes of the June meeting, when the Fed paused rates after 10 straight hikes, leaving the benchmark cash rate in a range of 5.00%-5.25%. The markets are widely expecting the Fed to hike at the July meeting but haven’t bought into Fed Chair Powell’s stance that another hike is coming in the fall. If the minutes are hawkish, the market could fall in line with Powell which would likely give the US dollar a boost.   AUD/USD Technical AUD/USD tested 0.6659 earlier on Wednesday. Below, there is support at 0.6597 0.6722 and 0.6784 are providing support

CAD: We expect a BoC hike today The Bank of Canada surprised markets with a hike in June, and our base case is that policymakers will follow up with another 25bp increase today. As discussed in our preview, the data flow since the June meeting has not pointed unequivocally in the direction of more tightening, but the latest jobs report continued to point to a tight jobs market and we see a higher chance that the BoC will favour two back-to-back hikes after a five-month pause. The consensus has been split lately but has leaned more in favour of a hike in the past few days. Markets price in around 17bp ahead of today’s announcement. There is undoubtedly some upside potential for CAD today in our baseline scenario, especially because the BoC may see the advantage in attaching a dovish statement to a hike, so closing the door to further tightening if needed. USD/CAD could be eyeing the 1.3120 late-June lows, and we like the loonie even more against other procyclical currencies like the Australian dollar or the Swedish krona. 

CAD: We expect a BoC hike today The Bank of Canada surprised markets with a hike in June, and our base case is that policymakers will follow up with another 25bp increase today. As discussed in our preview, the data flow since the June meeting has not pointed unequivocally in the direction of more tightening, but the latest jobs report continued to point to a tight jobs market and we see a higher chance that the BoC will favour two back-to-back hikes after a five-month pause. The consensus has been split lately but has leaned more in favour of a hike in the past few days. Markets price in around 17bp ahead of today’s announcement. There is undoubtedly some upside potential for CAD today in our baseline scenario, especially because the BoC may see the advantage in attaching a dovish statement to a hike, so closing the door to further tightening if needed. USD/CAD could be eyeing the 1.3120 late-June lows, and we like the loonie even more against other procyclical currencies like the Australian dollar or the Swedish krona. 

New Zealand’s central bank takes a pause after 12 consecutive hikes New Zealand Manufacturing PMI expected to show manufacturing is stalled US inflation expected to decline to 3.1% The New Zealand dollar showed some gains after the Reserve Bank of New Zealand paused rates, but has given up most of those gains. In the European session, NZD/USD is trading at 0.6206, up 0.14%.   RBNZ takes a breather There was no dramatic surprise from the RBNZ, which kept interest rates on hold at Wednesday’s meeting, as expected. The central bank has been aggressive, raising rates 12 straight times since August 2021 until Wednesday’s meeting. This leaves the cash rate at 5.50%. The RBNZ had signalled that it would take a break, with Deputy Governor Hawkesby stating last month that there would be a “high bar” for the RBNZ to continue raising rates. Today’s rate statement said that interest rates were constraining inflation “as anticipated and required”, adding that “the Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range.” The RBNZ did not issue any updated forecasts or a press conference with Governor Orr, which might have resulted in some volatility from the New Zealand dollar. The central bank has tightened rates by some 525 basis points, which has dampened the economy and chilled consumer spending. Is this current rate-tightening cycle done? The central bank would like to think so, but that will depend to a large extent on whether inflation continues to move lower toward the Bank’s inflation target of 1-3%. The pause will provide policymakers with some time to monitor the direction of the economy and particularly inflation. If inflation proves to be more persistent than expected, there’s every reason to expect the aggressive RBNZ to deliver another rate hike later in the year. New Zealand releases Manufacturing PMI for June on Wednesday after the rate decision. The manufacturing sector has contracted for three straight months, with readings below the 50.0 line, which separates contraction from expansion. The PMI is expected to rise from 48.9 to 49.8, which would point to almost no change in manufacturing activity. The US will release the June inflation report later in the day. Headline inflation is expected to fall from 4.0% to 3.1%, but core CPI is expected to rise to 5.3%, up from 5.0%. If core CPI does accelerate, that could raise market expectations for a September rate hike. A rate increase is all but a given at the July 27th meeting, with the probability of a rate hike at 92%, according to the CME FedWatch tool.   NZD/USD Technical 0.6184 is a weak support level. Below, there is support at 0.6148 0.6260 and 0.6383 are the next resistance lines  

Poland’s inflation may fall to single digits in August but pace of disinflation to slow The final CPI print for June confirmed that inflation slowed to 11.5% year-on-year from 13.0% in May. We estimate that core CPI fell to 11.1% YoY from 11.5% a month prior. We see further deceleration ahead, likely allowing the MPC to cut rates in September and October.   Prices of goods rose by 11.4% YoY, and service prices by 11.7% YoY, compared with 13.3% and 12.3%, respectively, in the previous month. The biggest contributors to further disinflation in June were the deepening of the decline in fuel prices, the slowdown in the growth of prices of energy carriers, and the slightly slower growth of food prices compared to a month ago. These factors lowered the annual inflation rate in June by about 1.1 percentage points relative to May. For the second month in a row, consumer prices did not change significantly vs. the previous month. Core inflation declined markedly again and according to our estimates eased to about 11.1% YoY in June vs.11.5% in May. However, the months of rapid disinflation are behind us. Since the peak in February, CPI inflation has declined by nearly seven percentage points. We expect the disinflation process to continue, but its pace in the second half of the year will be slower, due to, among other things, a somewhat smaller drag from the reference base. In July, we may see a decline in prices relative to June and we may see the annual inflation rate at single-digit levels as early as August. The Monetary Policy Council has officially ended the cycle of interest rate hikes and is preparing for rate cuts, which, according to recent announcements by the National Bank of Poland President Adam Glapinski, may take place as early as after the summer holidays. This is also our baseline scenario, assuming rate cuts in September and October (both by 25bp). At the same time, the NBP's July projection indicates that even in the absence of interest rate changes, inflation will take a long time to return to target so the space for rate cuts seems limited. The market-priced scale of monetary easing may prove too aggressive.

USD/CAD: Loonie affected by the US as much as by Canada   The Bank of Canada resumed tightening with two hikes in June and July, and we cannot exclude another increase in September. However, the softer June US CPI means that there is less external pressure to hike as chances of a Fed move have declined. CAD remains quite tied to the domestic US story, and therefore to the USD itself. Should we see a fully-fledged risk-on rally on the back of a clear softening in US data, expect CAD underperformance compared to other pro-cyclicals. A more conservative scenario, where markets have to “hold their horses” on the USD decline/Fed peak story for a bit longer can make CAD stand out. In all cases, the attractive volatility-adjusted carry means USD/CAD can hit 1.25-1.27 by mid-2024.      

Poland: Industrial output decreases YoY in June Industrial output (June): -2.2% YoY We forecast that industrial production remained in the red in June, falling for the fifth consecutive month in annual terms. Last month’s PMI report points to a further sharp deterioration in new orders, particularly from Germany, which suggests that weakness in Poland’s manufacturing activity is likely to continue in the near term. On a positive note, capital goods manufacturing has remained solid recently, giving reason to expect further growth in fixed investment. PPI (June): 1.3% YoY Rapid disinflation in producer prices likely continued in June and annual growth is trending towards negative figures. In monthly terms, PPI has been falling since February this year and prices in manufacturing have been declining in MoM terms since November last year. Given the high reference base, this has led to a rapid drop in annual wholesale inflation. June's PMI report showed that the downward pressure on manufacturing prices remains strong. In the second half of 2023, we expect producer prices to be lower than in the second half of 2022. Retail sales (June): -5.5% YoY We forecast that retail sales of goods fell again in June as the broad-based decline in consumption demand continued. Higher prices and a deterioration in the real purchasing power of households trimmed spending. According to our estimates, 2Q23 was the third consecutive quarter of annual decline in private consumption in Poland. Some improvement should be visible towards the end of this year as CPI inflation moderates and real wage growth returns. Wages (June): 12.1% YoY Nominal wage growth stabilised at low double-digit levels and swings along additional payments in mining and energy sectors. We project wage pressure to continue over the medium term despite some deterioration in economic activity. Demographic trends are curbing the supply of labour and the gap has mostly been filled with immigrants. On top of that, the government has pursued sharp increases in minimum wages recently. In 2024, the minimum wage is proposed to go up by more than 20%. Employment (June): 0.4% YoY The level of employment in the enterprise sector has been moderating slightly in recent months and annual growth remains low. A cooling in manufacturing has reduced the demand for workers in some sectors. At the same time, unemployment remains at very low levels and the supply of labour is limited.

  UK Retail Sales (Jun) – 21/07 – retail sales in May surprised to the upside when the numbers were released just over a month ago, despite inflationary pressure rising to its highest levels since the 1990's. The two bank holidays appeared to prompt a rise in consumption spending, while the warmer weather prompted spending on holiday breaks, as well as other leisure activities as people booked tickets for music events. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February. May saw a rise of 0.3%, against an expectation of a decline of -0.2%. This appeared to be in line with recent retail updates which have been for the most part better than expected. Consumer confidence has also been improving despite the stickier nature of inflation, although the continued rise in mortgage rates is likely to start to act as a major drag as fixed rate mortgage deals roll off and consumers become more constrained. In some part higher savings rate have helped to boost consumer spending, given the delay in seeing the effects of the roll off in fixed rate loans. This is likely to change in the coming months, although June retail sales are expected to climb by 0.2%.     

  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.           

US retail sales dip, core retail sales rise UK inflation expected to fall The British pound has edged lower on Tuesday. In the North American session, GBP/USD is trading at 1.3038, down 0.27%.     UK inflation expected to fall The UK is lagging behind other major economies in the fight to curb inflation. Will Wednesday’s inflation report bring some good news? In May, CPI remained stuck at 8.7% y/y but is expected to ease to 8.2% in June. The core rate is expected to remain steady at 7.1%. On a monthly basis, headline CPI is expected to fall from 0.7% to 0.4% and the core rate is projected to slow to 0.4%, down from 0.8%. The inflation report could be a game-changer with regard to the Bank of  England’s meeting on August 3rd. The BoE delivered an oversize 50-basis point hike in June and will have to decide between a modest 25-bp hike or another 50-bp increase at the August meeting. Last week’s employment report pointed to wage growth picking up, which moved the dial in favour of a 50-bp increase.   US retail sales report a mixed bag US retail sales for June provided a mixed spending picture. Headline retail sales rose just 0.2% m/m, below the 0.5% consensus estimate and the upwardly revised May reading of 0.5%. Core retail sales were much stronger at 0.6%, above the 0.3% consensus and the upwardly revised May release of 0.3%. The data points to resilience in consumer spending although momentum has slowed. The retail sales report did not change expectations with regard to rate policy, with the Fed expected to raise rates in July and take a pause in September. The Fed has tightened by some 500 basis points in the current rate-hike cycle and this has curbed inflation, which has fallen to 3%. Nevertheless, the Fed remains concerned that the solid US economy and a tight labour market will make it difficult to hit the 2% inflation target, and the Fed hasn’t given any hints that it will wrap up its tightening in July, although the money markets appear to think this is the case.   GBP/USD Technical GBP/USD has support at 1.2995 and 1.2906  There is resistance at 1.3077 and 1.3116    

GBP: Strong June retail sales provide a brief lift Sterling is rallying this morning on the back of strong UK retail sales data for June. Unseasonably warm weather for the UK last month was seen to be behind the bounce. The data will also feed into the Bank of England's narrative that the consumer can handle higher interest rates. The release has triggered a 20 pip drop in EUR/GBP. However, we think EUR/GBP probably put in an important low near 0.8500 earlier this month and that corporates will now use any EUR/GBP dip below 0.8600 to increase hedges on sterling receivables.  As an aside, reports are suggesting that Prime Minister Rishi Sunak will be opting for a UK general election in November 2024, i.e. as late as possible to allow more chance for the UK economy to recover.

UK retail sales rise in May Former Fed Chair Bernanke says Fed hikes could be done after July The British pound is in negative territory on Friday. In the European session, GBP/USD is trading at 1.2824, down 0.34%. The pound continues to show strong volatility – after gaining 2% last week, it has surrendered all of those gains this week.   UK retail sales beat expectations UK retail sales rebounded in June after a sluggish May due to King Charles’ coronation, which dampened consumer spending. Retail sales rose 0.7% m/m in June, up sharply from the 0.1% gain in May (revised downwards from 0.3%). Core retail sales jumped 0.8% in June, up from 0.0% in May (revised downwards from 0.1%). The hot weather in June contributed to strong sales and the uptick was broadly distributed throughout the economy. At the same time, high inflation means that consumers are getting less for their buck. Food prices have been especially high and jumped in June by 17.4% y/y according to the Office for National Statistics. Consumers may still be spending but that doesn’t mean they are a happy lot. GfK Consumer Confidence slipped to -30 in July, down from -24 in June and below the consensus of -26. This marked the first time that consumer confidence declined since January. High interest rates and an inflation rate of close to 8% have soured the mood of consumers. The Bank of England has struggled to curb inflation despite aggressive tightening, and the UK boasts the unwanted record of the highest inflation among the major economies.   Is the Fed finally done? The Federal Reserve meets on July 26th and investors have priced in a 0.25% hike as a near certainty.  Will that wind up the current tightening cycle? The markets seem to think so and have priced a hike in September at just 16%, according to the CME FedWatch tool. Are the markets out of sync with the hawkish Federal Reserve? Fed members have said that inflation isn’t falling fast enough, which could mean that another hike is coming after July. Former Fed Chair Ben Bernanke appeared to side with the market view, saying on Thursday that the July hike could be the final rate increase in the current tightening cycle. Bernanke said that the economy would slow further before the 2% inflation target was reached, but he expected any recession to be mild.     GBP/USD Technical There is weak support at 1.2816. Next, there is support at 1.2766  There is resistance at 1.2891 and 1.2995  

German exports still stuck in stagnation After the post-lockdown volatility, German exports have entered a new phase. A phase of stagnation.   German exports remain sluggish. After the severe March plunge and a minor rebound in April, exports continue to lack momentum and are currently stuck in stagnation. In June, exports increased by 0.1% month-on-month (from a slightly upwardly revised +0.1 MoM in May). On the year, exports were down by almost 2%. Don’t forget that this is in nominal terms and not corrected for high inflation. With imports decreasing by 3.4% MoM, from 1.4% MoM in May, the trade balance widened to €18.7bn.   Stuck in stagnation From last summer until the start of this year, German exports had been extremely volatile. For a couple of months now, the volatility has gone and exports - like the entire economy - have fallen into stagnation, basically going nowhere. As a result, trade is no longer the strong resilient growth driver of the German economy that it used to be, but rather a drag. Supply chain frictions, a more fragmented global economy and China increasingly being able to produce goods it previously bought from Germany, are all factors weighing on German exports. In the first half of the year, the share of German exports to China dropped to 6% of total exports, from almost 8% before the pandemic. At the same time, however, Germany’s import dependence on China remains high as the energy transition is currently impossible without Chinese raw materials or solar panels. The collapse of export order books since the start of the year suggests a further weakening of exports in the very near term. The expected slowdown of the US economy (which accounts for roughly 10% of total German exports), still high inflation and high uncertainty will also leave their marks on German exports. One of the few silver linings for German exports remains the Central and Eastern European countries, which currently account for more than 11% of total German exports. All in all, today’s export numbers confirm the picture painted by last week's initial GDP growth estimate: the German economy remains stuck in stagnation.

Metals – Peru copper output rises Peru’s latest official numbers show that copper output in the nation rose almost 22% year-on-year (+3% month-on-month) for a fourth straight month to 241.8kt in June. It is reported that output gains from mines like Anglo American’s new Quellaveco mine, with output standing at 28.3kt, and MMG's Las Bambas mine, with a production of 26.6kt, contributed to Peru’s overall copper production growth in June. Cumulatively, copper production grew by 17.6% YoY to 1.32mt over the first half of the year. Amongst other metals, zinc production in the nation rose by 31.5% YoY to 134.8kt in June. Meanwhile, the latest LME COTR report shows that net bullish positions for copper increased by 2,248 lots (after two consecutive weeks of decline) to 53,996 lots as of last Friday. Among other metals, speculators increased their net long positions in zinc by 4,524 lots for a sixth consecutive week to 37,548 lots in the week ending 4 August. In contrast, speculators decreased their net long positions in aluminium by 790 lots to 100,7333 lots as of last Friday.

UK wages surge to a new record high in June   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   There was always the likelihood that today's unemployment and wages numbers would give the Bank of England a headache when it comes to deciding what to do when it comes to further rate increases, and this morning's numbers have not just given the central bank a headache, but a migraine.   Not only has the unemployment rate jumped to its highest level since October 2021 at 4.2%, but wages growth surged in June, while the May numbers were also revised higher.   Average weekly earnings for the 3-months to June rose to a record 7.8%, while May was revised up to 7.5%, while including bonuses wages rose by 8.2%, in the process pushing well above core CPI inflation. This move to 8.2% was primarily due to NHS bonus one-off payments made in June, which is unlikely to be repeated.   The rise in wage growth saw public sector pay rise by 6.2%, while private sector wages rose 8.2% for the 3-months to June.   Inevitably this will increase the pressure on the Bank of England to raise rates again at its September meeting by another 25bps, even as headline CPI for July is expected to slow sharply below 7% in numbers released tomorrow.   On the broader employment picture there was a 97k increase in hiring during July as payrolled employees increased. On the overall UK employment rate, this fell back to 75.7%, and is still 0.8% below its pre-pandemic peak, with the economic activity rate also falling slightly to 20.9% on the quarter. Total hours work also declined.   While many people will decry the strength of these numbers and warn of the risk of wage/price spiral they rather miss the point that consumer incomes have been squeezed for months, with the gap finally narrowing, and now starting to work in consumer's favour.         Source: Bloomberg  This trend is likely to continue in the coming months as wage growth starts to slow and falling CPI starts to find a base, offering consumers some relief from the squeeze of the last 18 months.   It's also important to remember that wage price gap leading up the end of 2021, was very much in the consumers favour, however this comparison also comes with several caveats due to furlough payments and other support structures which skewed the numbers.   While today's wages data will undoubtedly grab all the headlines, there are growing signs of weakness in the labour market which may offer the Bank of England pause, and with another 2 CPI reports, one tomorrow, as well as another labour market survey before the next meeting, it doesn't mean that we can expect to see multiple rate hikes in the coming months. While the pressure on the Bank of England to hike in September has undoubtedly risen and is fully priced for September it doesn't necessarily mean we'll see more rate hikes after that. Trends are important and the Bank of England needs to think about that before it raises rates further, and inflation is trending lower. UK 2-year gilts have edged higher and back above 5.1%   The Bank of England needs to remember that they've already raised rates 14 times in the last few months and there is still a lot more tightening that has yet to kick in. On this data another rate hike does seem likely but when you look at the graph above perhaps there's a case for a pause in September given the direction of that graph above. What today's data does mean beyond little doubt is that rates will need to stay at current levels for longer. More rate hikes aren't necessarily the solution to every problem. Just because every problem is a nail, doesn't mean you need a hammer. Just leave rates where they are for longer.   Consumers are already struggling and although we've seen Marks & Spencer update its full year forecasts for profits this morning, the upgrade has come against a backdrop of a strong performance in its food business, which saw like-for-like sales rise 11%.   Clothing and home sales saw like for like sales rise by 6%, with M&S warning that a tightening consumer market could act as a headwind into the year end. Tellingly, management upgraded their outlook to show profit growth in fiscal 2022-23.  

  UK wages surge to a new record high in June   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   There was always the likelihood that today's unemployment and wages numbers would give the Bank of England a headache when it comes to deciding what to do when it comes to further rate increases, and this morning's numbers have not just given the central bank a headache, but a migraine.   Not only has the unemployment rate jumped to its highest level since October 2021 at 4.2%, but wages growth surged in June, while the May numbers were also revised higher.   Average weekly earnings for the 3-months to June rose to a record 7.8%, while May was revised up to 7.5%, while including bonuses wages rose by 8.2%, in the process pushing well above core CPI inflation. This move to 8.2% was primarily due to NHS bonus one-off payments made in June, which is unlikely to be repeated.   The rise in wage growth saw public sector pay rise by 6.2%, while private sector wages rose 8.2% for the 3-months to June.   Inevitably this will increase the pressure on the Bank of England to raise rates again at its September meeting by another 25bps, even as headline CPI for July is expected to slow sharply below 7% in numbers released tomorrow.   On the broader employment picture there was a 97k increase in hiring during July as payrolled employees increased. On the overall UK employment rate, this fell back to 75.7%, and is still 0.8% below its pre-pandemic peak, with the economic activity rate also falling slightly to 20.9% on the quarter. Total hours work also declined.   While many people will decry the strength of these numbers and warn of the risk of wage/price spiral they rather miss the point that consumer incomes have been squeezed for months, with the gap finally narrowing, and now starting to work in consumer's favour.         Source: Bloomberg   This trend is likely to continue in the coming months as wage growth starts to slow and falling CPI starts to find a base, offering consumers some relief from the squeeze of the last 18 months.   It's also important to remember that wage price gap leading up the end of 2021, was very much in the consumers favour, however this comparison also comes with several caveats due to furlough payments and other support structures which skewed the numbers.   While today's wages data will undoubtedly grab all the headlines, there are growing signs of weakness in the labour market which may offer the Bank of England pause, and with another 2 CPI reports, one tomorrow, as well as another labour market survey before the next meeting, it doesn't mean that we can expect to see multiple rate hikes in the coming months. While the pressure on the Bank of England to hike in September has undoubtedly risen and is fully priced for September it doesn't necessarily mean we'll see more rate hikes after that. Trends are important and the Bank of England needs to think about that before it raises rates further, and inflation is trending lower. UK 2-year gilts have edged higher and back above 5.1%   The Bank of England needs to remember that they've already raised rates 14 times in the last few months and there is still a lot more tightening that has yet to kick in. On this data another rate hike does seem likely but when you look at the graph above perhaps there's a case for a pause in September given the direction of that graph above. What today's data does mean beyond little doubt is that rates will need to stay at current levels for longer. More rate hikes aren't necessarily the solution to every problem. Just because every problem is a nail, doesn't mean you need a hammer. Just leave rates where they are for longer.   Consumers are already struggling and although we've seen Marks & Spencer update its full year forecasts for profits this morning, the upgrade has come against a backdrop of a strong performance in its food business, which saw like-for-like sales rise 11%.   Clothing and home sales saw like for like sales rise by 6%, with M&S warning that a tightening consumer market could act as a headwind into the year end. Tellingly, management upgraded their outlook to show profit growth in fiscal 2022-23.    

Australian inflation falls to 4.9% US GDP expected to rise to 2.4% The Australian dollar has edged lower on Wednesday after sharp gains a day earlier. In the European session, AUD/USD is trading at 0.6473, down 0.10% on the day.   Australia’s inflation slips to 4.9% There was good news on the inflation front as July CPI fell to 4.9% y/y, down from 5.4% in June and below the consensus estimate of 5.2%. Inflation has now fallen to its lowest level since February 2022. Core inflation, which has been stickier than headline inflation, gained 5.8% in July, down from 6.1% in June. The markets are widely expecting the Reserve Bank of Australia to hold rates at the September 5th meeting and the drop in the headline and core inflation readings could well cement a pause. Inflation remains well above the RBA’s 2% target, but it is an encouraging sign that inflation continues to move in the right direction.   Soft US numbers send Aussie sharply higher The Australian dollar sparkled on Wednesday, climbing 0.80% and hitting a one-week high. The uptick was more about US dollar weakness than Aussie strength, as the US posted softer-than-expected consumer confidence and employment data on Wednesday. US consumer confidence took a hit as the Conference Board Consumer Confidence Index fell to 106.1 in July. This was a sharp drop from the August reading of 116.0 and marked a two-year low. JOLTS Job Openings fell to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. This was the sixth decline in the past seven months, another sign that the strong US labour market is showing cracks.

GBP: Softening on the crosses EUR/GBP continues to grind higher - driven we believe by the re-pricing of the Bank of England (BoE) tightening cycle into 2024. Yesterday the market moved to price the first full 25bp BoE cut in June next year and had 78bp of easing priced in by the end of the year. Having switched to forward guidance at the last BoE meeting - keeping restrictive rates for an extended period - the market will now be on the lookout for this language changing. For example, Mexico's central bank, Banxico, recently switched language from 'extended period' to 'some time' presumably forewarning the start of easing in February/March next year. Quite a lot of BoE easing is already priced in for next year, however, meaning it is not certain EUR/GBP has to trade up to 0.8800 just yet. Cable is eating into this week's rally and could dip further unless something like today's US jobless claims disappoint.

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