labour market

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 Fed

USDA's WASDE Update: Wheat Tightens, Corn Loosens

Work In France And French Labour Market | France’s labour market continues to outperform – for now | ING Economics

ING Economics ING Economics 17.05.2022 20:51
The unemployment rate has fallen further in France and the employment rate continues to rise. The labour market is therefore still doing very well in the face of the overall deteriorating economic outlook. However, the fall in unemployment may not last  Learn more on ING Economics The employment rate among young people in France is now at its highest level since 1991 All the lights are green in the labour market As the quarters pass, the performance of the French labour market continues to surprise positively. In the first quarter of 2022, the unemployment rate in France stood at 7.3% of the active population (as defined by the ILO), a slight decrease compared to the end of 2021. The unemployment rate is now 0.9 points below its pre-pandemic level and at its lowest level since 2008. But the most interesting aspect of the INSEE report is the employment rate, which is increasing in all age categories. The employment rate of 15- to 64-year-olds reached 68%, up 0.2 points over the quarter and at its highest level since the beginning of the statistical series (1975!). It is the young person category which has seen the highest increase, up 0.7 points over the quarter and up 4.8 points compared to the pre-pandemic level. This is quite an evolution, which goes hand-in-hand with the boom in "apprenticeships" (training in companies) among young people, the consequence of the "one youth, one solution" and "youth commitment contract" plans put in place by the government since the beginning of the health crisis under the leadership of the Minister of Labour, Elisabeth Borne. The employment rate among young people is now at its highest level since 1991 (34.6%), while among those aged 50 to 64, the employment rate has reached 65.5%, its highest level ever. This rise in the employment rate is accompanied by a fall in the number of people who are constrained in their labour supply, whether it is unused (wanting a job) or underused (underemployed). Therefore, contrary to what was observed at certain times during the health crisis, the improvement in labour market statistics is not a "trompe l'oeil", a consequence of a fall in hours worked (partial activity) or an exit from the labour market due to the impossibility of looking for a job. There is indeed a real improvement in the overall labour market situation in France at present. No sharp deterioration expected, but a stabilisation These data can be seen as good news for the economy, as a strong labour market means that nominal household disposable income does not deteriorate and thus supports consumption and consequently economic growth. That said, a strong labour market alone will not prevent a contraction in real household disposable income, given the high inflation environment. Indeed, we expect household consumption and GDP to contract in the second quarter of 2022. But the contraction would have been more pronounced if the labour market was in a bad position. What can we expect from the labour market in the coming quarters? The sharp economic deceleration is likely to have a negative impact on the labour market in the coming months and we expect much less dynamism in job creation. Nevertheless, at this stage we do not foresee a sharp deterioration in the unemployment rate. After all, recruitment difficulties are still very important: according to the Banque de France survey at the end of April, 52% of companies indicate that they are having difficulty recruiting. Furthermore, we continue to forecast economic growth in France in 2022 of 2.7%. This figure is much less optimistic than the European Commission's forecast (3.1%) but is still compatible with job creation over the year. We therefore expect the unemployment rate to stabilise at around 7.3% (in the ILO sense) for the rest of the year. If the French economy continues to grow in 2023, a further decrease in the unemployment rate could be observed and unemployment could reach 7% by the end of 2023, a symbolic level that has not been reached since 1982. A new prime minister Elisabeth Borne, the former minister of labour and architect of the plans that led to the sharp rise in the employment rate among young people, has just been appointed by Emmanuel Macron as prime minister of the new government. This left-wing technocrat, who has also served as minister of transport and ecological transition in the past, will first have to lead the president's party in the legislative elections of 12 and 19 June with the aim of winning a majority of seats in the National Assembly. Although Jean-Luc Mélenchon still hopes that his left-wing party alliance will win a majority to force Macron to choose him as prime minister, poll projections indicate that a presidential majority is more likely. The nomination of Borne as prime minister strengthens this probability a little as it could lead some left-wing candidates at odds with Mélenchon to rally support for the president. TagsUnemployment rate Prime Minister Labour market France Eurozone 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
Hungarian Labour Markey Data And Turkish Monetary Policy Are Going To Arouse Our Interest | Key events in EMEA next week - 19/05/22 | ING Economics

Hungarian Labour Markey Data And Turkish Monetary Policy Are Going To Arouse Our Interest | Key events in EMEA next week - 19/05/22 | ING Economics

ING Economics ING Economics 19.05.2022 23:47
Labour market figures in Hungary and Turkish policy rates are the key releases to look out for next week The Central Bank of Turkey Content Hungary: Double-digit wage growth expected in March Turkey: Policy rate to remain on hold Hungary: Double-digit wage growth expected in March Next week we will see the latest set of labour market data in Hungary. After a significant jump in wages in February due to a six-month bonus payment to the armed forces, we expect a more moderate growth rate in March. However, due to the labour shortage and the minimum wage increase, this moderate rise will still be well into double-digit territory, around 14% year-onyear. We don’t see any significant change in the unemployment rate as the latest surveys show that companies are still complaining about a lack of labour and are ready to hire new workers. Read next: Altcoins: What Is Litecoin (LTC)? A Deeper Look Into The Litecoin Platform| FXMAG.COM Turkey: Policy rate to remain on hold Recent Central Bank of Turkey moves that 1) tightened reserve requirements to curb TRY commercial loan growth and 2) aimed to encourage a higher take-up of FX-protected deposits on the retail side and strengthen its FX reserves moves, signal that there is no reason to expect the bank to change its stance and policy rate in the near term. This is despite ongoing challenges to external balances and the inflation outlook. Given this backdrop, we expect that the policy rate will be kept unchanged at 14%. Read next: Altcoins: What Is PancakeSwap (CAKE)? A Deeper Look Into The PancakeSwap Platform| FXMAG.COM EMEA Economic Calendar Source: Refinitiv, ING, *GMT TagsTurkey Hungary EMEA 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
The Swing Overview - Week 22 2022

The Swing Overview - Week 22 2022

Purple Trading Purple Trading 07.06.2022 13:59
The Swing Overview - Week 22 Equity indices continued to rise for a second week despite rising inflation and sanctions against Russia. Economic data indicate optimistic consumer expectations and the easing of the Covid-19 measures in China also brought some relief to the markets. The Bank of Canada raised its policy rate to 1.5%. The Eurozone inflation hit a new record of 8.1%, giving further fuel to the ECB to raise interest rates, which is supporting the euro to strengthen.   Macroeconomic data The US consumer confidence in economic growth for May came in at 106.4. The market was expecting 103.9. This optimism points to an expected increase in consumer spendings, which is a positive development. The optimism was also confirmed by data from the manufacturing sector. The ISM PMI index in manufacturing rose by 56.1 in May, an improvement on the April reading of 55.4. The manufacturing sector is therefore expecting further expansion.   On the other hand, data from the labour market were disappointing. The ADP Non Farm Employment indicator (private sector job growth) was well below expectations as the economy created only 128k new jobs in May (the market was expecting 300k new jobs). The unemployment claims data held at the standard 200k level. However, the crucial indicator from the labour market will be Friday's NFP data.   Quarterly wage growth for 1Q 2022 was 12.6% (previous quarter was 3.9%). This figure is a leading indicator on inflation. Faster inflation growth could lead to a higher-than-expected 0.50% rate hike at the Fed's June meeting.   The US 10-year Treasury yields have rebounded from 2.6% and have started to rise again. They are currently around 2.9%. However, the US Dollar Index has not yet reacted to the rise in yields. The reason is that the euro, which has appreciated significantly in recent days, has the largest weight in the USD index. Figure 1: US 10-year bond yields and USD index on the daily chart   The SP 500 Index The SP 500 index has continued to strengthen in recent days. The market seems to be accepting the expected 0.50% rate hike and while economic data points to some slowdown, forward looking consumers‘ and managers’ expectations are optimistic.  Figure 2: The SP 500 on H4 and D1 chart   The US SP 500 index is approaching a significant resistance level, which is in the 4,197-4,204 range. The next one is at 4,293 - 4,306. The nearest support is at 4 075 - 4 086.    German DAX index Figure 3: German DAX index on H4 and daily chart Germany's manufacturing PMI for May came in at 54.8. The previous month it was 54, 6. Thus, managers expect expansion in the manufacturing sector. Surprisingly, German exports rose in April despite the disruption of trade relations with Russia. Exports in Germany grew by 4.4% even though exports to Russia fell by 10%.  The positive data has an impact on the DAX index. However, the bulls in DAX may be discouraged by the expected ECB interest rate hike.   The DAX has reached resistance in the 14,600 - 14,640 area. The nearest significant support is at 14,300 - 14,330, where the horizontal resistance is coincident with the moving average EMA 50 on the H4 chart.   The euro continues to rise Bulls on the euro were supported by inflation data, which reached a record high of 8.1% in the eurozone for the month of May. Inflation increased by 0.8% on a monthly basis compared to April. Information from the manufacturing sector exceeded expectations, with the manufacturing PMI for May coming in at 54.6, indicating optimism in the economy. The ECB will meet on Thursday 9/6/2022 and it might be surprising. While analysts do not expect a rate hike at this meeting, rising inflation may prompt the ECB to act faster.  Figure 4: The EUR/USD on H4 and daily chart The EUR/USD currency pair is reacting to the rate hike expectations by gradual strengthening. A resistance is at 1.0780 The nearest support is now at 1.0629 - 1.0640 and then at 1.0540 - 1.0550.   The Bank of Canada raised the interest rate The GDP in Canada for Q1 2022 grew by 2.89% year-on-year (3.23% in the previous period). On a month-on-month basis, the GDP grew by 0.7% (0.9% in February). This points to slowing economic growth.  Canada's manufacturing PMI for May came in at 56.8 (56.2 in April ), an upbeat development. The Bank of Canada raised its policy rate by 0.50% to 1.5% as expected by analysts. In addition to the rate hike, the Canadian dollar is positively affected by the rise in oil prices as Canada is a major exporter. Figure 5: The USD/CAD on H4 and daily chart The USD/CAD currency pair is currently in a downward movement. The nearest resistance according to the daily chart is 1.2710-1.2730. Support according to the daily chart is in the range of 1.2400-1.2470.  
The Swing Overview – Week 23 2022

The Swing Overview – Week 23 2022

Purple Trading Purple Trading 17.06.2022 08:53
The Swing Overview - Week 23 Major global stock indices broke through their support levels after several days of range movement in response to the tightening economy, the ongoing war in Ukraine, slowing economic growth and high inflation. The Reserve Bank of Australia raised its interest rate by 0.50%. The ECB decided to start raising interest rates by 0.25% from July 2022. The winner of last week is the US dollar, which continues to strengthen. Macroeconomic data Data from the US labour market was highly anticipated. The job creation indicator, the so-called NFP, surprised the markets positively. Analysts expected that 325,000 new jobs had been created in May. In fact, 390 thousand jobs were created in the US. Unemployment is at 3.6%. The information on the growth of hourly wages, which is a leading indicator of inflation, was important. Average hourly earnings rose 0.3% in May, less than analysts who expected 0.4%.   Unemployment claims reached 229,000 this week. This is the highest levels since 3/3/2022. However, this is not an extreme increase. The number of claims is still in the pre-pandemic average area. Nevertheless, it can be seen that since 7/4/2022, when the number of applications reached 166 thousand, the number of applications is slowly increasing and this indicator will be closely monitored.  The ISM index of purchasing managers in the US service sector reached 55.9 in May. This is lower than the previous month's reading of 57.1. A value above 50 still points to expansion in the sector although the decline in the reading indicates  economy.   The yield on the US 10-year bond is close to its peak and is currently around 3%. The rise in yields has been followed by a rise in the US dollar. The dollar index has surpassed 103. The reason for the strengthening of the dollar is the aggressive tightening of the economy by the US Fed, which began reducing the central bank's balance sheet on June 1, 2022. In practice, this means that the Fed will let expire the government bonds it previously bought as part of QE and will not reinvest them further. The first tranche of bonds will expire on June 15, so the effect of this operation remains to be seen. Figure 1: The US 10-year bond yields and USD index on the daily chart   The SP 500 Index The SP 500 index has been moving in a narrow range for the past few days between 4,200, where resistance is and 4,080, where support has been tested several times. This support was broken and has become the new resistance as we can see on the H4 chart.   Figure 2: The SP 500 on H4 and D1 chart   The catalyst for this strong initiation move is the strong US dollar and rising bond yields. Therefore, the current resistance is in the 4,075 - 4,085 range.  The nearest support is 3,965 - 3,970 according to the H4 chart. The next support is 3,879 - 3,907.   German DAX index Macroeconomic data that affected the DAX was manufacturing orders for April, which fell 2.7% month-on-month, while analysts were expecting a 0.3% rise. Industrial production in Germany rose by 0.7% in April (expectations were for 1.0%). The war in Ukraine has a strong impact on the weaker figures. The catalyst for breaking support was the ECB's decision to raise interest rates, which the bank will start implementing from July 2022. Figure 3: German DAX index on H4 and daily chart The DAX is below the SMA 100 moving average according to the daily and H4 chart. This shows a bearish sentiment. The nearest resistance is 14,300 - 14,335. Support is at 13,870 - 13,900 according to the H4 chart.   The ECB left the interest rate unchanged  The ECB left interest rates unchanged on June 9, 2022, so the key rate is still at 0.0%. However, the bank said that it will proceed with a rate hike from July, when the rate is expected to rise by 0.25%. The next hike will then be in September, probably again by 0.25%. The bank pointed to the high inflation rate, which is expected to reach 6.8% for 2022. Inflation is expected to fall to 3.4% in 2023 and 2.1% in 2024.  Figure 4: The EUR/USD on H4 and daily chart According to the bank, a significant risk is Russia's unjustified aggression against Ukraine, which is causing problems in supply chains and pushing energy and some commodity prices up. The result is a slowdown in the growth of the European economy. The bank also announced that it will end its asset purchase program as of July 1, 2022. This is the soft end of this program, as the money that will flow from matured assets will continue to be reinvested by the bank. In practice, this means that the ECB's balance sheet will not be further inflated, but for now, unlike the Fed’s balance sheet, the bank has no plans to reduce its balance sheet. This, coupled with the more moderate rate hike plans and the existence of the above risks, has supported the dollar and the euro has begun to weaken sharply in response to the ECB announcement. The resistance is 1.0760-1.0770. Current support at 1.063-1.064 is broken and it will become new resistance if the break is confirmed. The next support according to the H4 chart is 1.0530 - 1.0550.   Australian central bank surprises with aggressive approach In Australia, the central bank raised its policy rate by 0.50%. Analysts had expected the bank to raise the rate by 0.25%. Thus, the current rate on the Australian dollar is 0.80%. However, this aggressive increase did not strengthen the Australian dollar, which surprisingly weakened. The reason for this is the strong US dollar and also the risk off sentiment that is taking place in the equity indices.  Also impacting the Aussie is the situation in China, where there is zero tolerance of COVID-19. This will impact the country's economic growth, which is very likely to fall short of the 5.5% that was originally projected.  Figure 5: The AUD/USD on H4 and daily chart According to the H4 chart, the AUD/USD currency pair has broken below the SMA 100 moving average, which is a bearish signal. The nearest resistance is 0.7140 - 0.7150. The support is in the zone 0.7030 - 0.7040. 
The Swing Overview – Week 24 2022

The Swing Overview – Week 24 2022

Purple Trading Purple Trading 17.06.2022 16:54
The Swing Overview - Week 24 We've had a week in which the world's major stock indices took a bloodbath in response to rising inflation, which is advancing faster than expected. Central banks have played a major part in this drama. As expected, the US, the UK and, surprisingly, Switzerland raised interest rates. Japan, on the other hand, is still one of the few countries that decided to keep interest rates at their original level of - 0.10%. Macroeconomic data The 0.75% interest rate hike to 1.75%, which was 0.25% higher than the Fed announced at the last meeting, might not have come as a surprise to the markets given that inflation for May was 8.6% on year-on-year basis (8.3% for April). The market reacted strongly in response to the inflation data, and a sell-off in equity indices and a strengthening US dollar followed.   The 0.75% rate hike is the highest since 1994 and the next Fed meeting is expected to see another rate hike again in the range of 0.50% to 0.75%. The Fed is trying to stop rising inflation with this aggressive approach. The problem is that economic projections point to slowing economic growth. Retail data for May fell by 0.3%, which was a surprise to the markets. This is the first drop in consumer spending in 2022. The Fed also lowered GDP growth projections and unemployment is expected to rise as well. All of this points to the risk of stagflation.     But the labour market data is still good. The number of initial claims in unemployment reached 229k last week, down from 232k the previous week. The US dollar hit a new high for the year at 105.86 in response to high inflation and a faster tightening economy. The US 10-year bond yields also rose, reaching 3.479%. Figure 1: The US 10-year bond yields and the USD index on the daily chart   The SP 500 Index The SP 500 index, like other global indices, was in a bloodbath last week as data on rising US inflation in particular surprised. Major supports according to the H4 chart were very quickly broken and the market is showing that it is still in a bearish mood. According to the daily chart, another lower low has formed which together with the lower highs confirms this bearish trend.   Figure 2: The SP 500 on H4 and D1 chart   A support according to the H4 chart is in the 3,645 - 3,675 range. The nearest resistance is at 3,820 - 3,835. A broken support in the 3,710 - 3,732 area can also be considered as resistance. The most important news is behind us and the market could take a breath for a while. The low levels could also be noticed by long-term investors who will be buying dip. But for speculators, it is very risky to speculate on a market reversal in a downtrend.   German DAX index The German DAX index offers a very similar picture to the SP 500. The ZEW economic sentiment indicator in Germany for the month of June showed a deterioration in sentiment among institutional investors and analysts, with the index reading coming in at -28.0. The ongoing war in Ukraine is undoubtedly influencing this pessimism. The end of this tragic event is still not in sight. What is clear, however, is that the longer the conflict continues, the stronger the impact on the European economy will be.    Figure 3: German DAX index on H4 and daily chart The DAX is in a clear downtrend and broke through significant support at 13,300 last week. The nearest resistance according to the H4 chart is 13,250 - 13,300. Significant resistance is at 13,650 - 13,700. A new support according to the H4 chart is at 12,950 - 12,980.   The euro has rejected lower readings  Information about higher inflation in the US and a rate hike sent the EUR/USD pair to support levels at 1.0370. However, the level was not broken and the euro then took a strong move from this area. Investors seem to assume that the ECB will have to respond with a higher than 0.25% rate hike announced at the last meeting. Figure 4: The EUR/USD on H4 and daily chart According to the H4 chart, the nearest resistance is at 1.0560 - 1.0600. The next resistance is then at 1.0760-1.0770. Current support is at 1.0340 - 1.0370 according to the daily chart.   The Bank of England raised rates as expected Rising inflation did not leave the Bank of England in dovish mood as it raised its key rate by 0.25% as expected. The current rate is 1.25%. Inflation may be approaching double digits, but the bank could not afford to be more aggressive. In Britain, economic activity has already fallen and the GDP is falling at its fastest pace in a year. On a month-on-month basis, the GDP in Britain fell by 0.3%.  Manufacturing production fell by 1% in April. Figure 5: The GBP/USD on H4 and daily chart The GBP/USD currency pair had a very dramatic week, first breaking below 1.20, only to stage an unprecedented rally later. Anyway, according to the H4 chart and also the daily chart, the pound is below the SMA 100 moving average, which indicates a bearish sentiment. There are also clear lower lows and lower highs on the daily chart, confirming the downtrend.   The UK interest rate hike did send the GBP/USD currency pair to 1.24, but the price did not stay there for long time as the pound descended from higher values, underlining the overall downtrend. The nearest resistance is at 1.24. A support is then at 1.1930 - 1.2000.   Central Bank of Japan still dovish   In the early hours of Friday morning, the Bank of Japan was also deciding on rates. There, as expected, everything remains as it was, i.e. the rate remains negative at - 0.10%. This situation means a favourable interest rate differential between the US dollar and the Japanese yen in favour of the dollar. It is therefore no surprise that the USD/JPY pair has reached its highest level since 2002. However, the weak yen is a big problem for the Japanese economy, as it makes imports of basic manufacturing raw materials more expensive and thus contributes to inflation. Figure 6: The USD/JPY on H4 and monthly charts The USD/JPY pair has reached the resistance level at 134.5 - 135.0, the highest level since 2002. A support according to the H4 chart is at 131.50 - 131.80.  
The Swing Overview - Week 26 2022

The Swing Overview - Week 26 2022

Purple Trading Purple Trading 04.07.2022 10:50
The Swing Overview - Week 26 2022 After ashort-term upward correction, the indices resumed their bearish trend and closed the week in the red. Along with this risk-off sentiment, commodity currencies weakened, as did the British pound and the euro. Gold is losing ground as a means of inflation protection and has fallen back below the USD 1,800 per ounce. The US dollar, on the other hand, is still the strongest currency amid the looming recession. Macroeconomic data The number of new home sales in the US for May reached 696,000, beating expectations of 588,000. This is positive news.   On the other hand, the negative news is the drop in consumer confidence, which reached 98.7 for May (103.2 the previous month). The drop in consumer confidence is expected to affect consumer spendings. It is evident that American consumers are reluctant to spend in times of rising prices and are accumulating savings for the future. This is of course contributing to the economic slowdown and the risk of a recession in the US is thus becoming stronger. This was confirmed by the GDP data, which fell for the third month in a row.   The fall in GDP last month was 1.6%. GDP was therefore negative in 1Q 2022. If it is also negative in 2Q2022, it will be an official confirmation of the recession defined by two negative quarters in a row. Jerome Powell suggested this week that the risk of the economy being damaged by higher rates is less important than restoring price stability. This heightens fears that a slowdown in the US economy will take the whole world down with it. So in times when central banks are tackling inflation, this risk will set the tone for some time.    This situation is positive for the US dollar, which is seen by investors as a safe haven asset in times of uncertainty. The dollar therefore remains close to this year's highs.  Although the yield on 10-year US Treasuries has fallen below 3%, the overall trend in bond yields is still upwards. Figure 1: US 10-year bond yields and USD index on the daily chart   The SP 500 Index The strengthening on the SP 500 Index that we have seen in the week of June 20 was really just a short-term correction to the overall downtrend, as we have previously suggested. Last week saw another sell-off and so the overall downtrend on the index continues.   Figure 2: The SP 500 on H4 and D1 chart   The nearest resistance according to the H4 chart is in the range of 3,810 - 3,820. The next resistance is 3,930 - 3,950. A support is 3 640 - 3 670.    German DAX index  The German Ifo Business Climate Index which measures the expectations of manufacturers, builders and sellers for the next 6 months continued to show a value of 92.3, which is worse than the previous month when the index value was 93.0. The fall in the reading suggests some pessimism, accentuated by current market uncertainties, which include the impact of the war in Ukraine and high inflation, which in Germany for the month of June was 7.6% year-on-year. However, inflation fell by 0.1% month-on-month.   The labour market has also indicated problems. The number of unemployed in Germany rose by 133 000, while the market had expected a fall of 6 000. This was very negative news, which triggered a strong sell-off on the Dax on Thursday. On the other hand, retail sales were positive, rising by 0.6% in May, while a 5.4% decline was recorded in April. Figure 3: German DAX index on H4 and daily chart The DAX has broken support according to the H4 chart at 12,850, which has now become the new resistance, which is in the 12,820 - 12,850 range. The next resistance according to the H4 chart is then at 13,280 - 13,375. The strong support according to the daily chart is 12,443 - 12,620, which price is currently approaching.    Eurozone inflation at a new record Eurozone consumer inflation reached another record high in June, rising by 8.6% year-on-year. This is higher than analysts' expectations, who predicted a rise of 8.4%. Inflation is therefore continuing to rise, so the expectation that the ECB could raise rates by more than 0.25% in July is on target and this could support the euro's growth. On the other hand, there is a strong dollar which could continue to slow down bulls on the euro.   Figure 4: EUR/USD on H4 and daily chart The nearest resistance according to the H4 chart is at 1.048 - 1.0500. The next resistance is at 1.0600 - 1.0610. Support is at 1.0360 - 1.0380.   Gold broke the $1,800 price tag The development in gold has once again confirmed that investors prefer US bonds instead of gold, which, in addition to being considered a "safe haven" along with the US dollar, also brings a small but still certain return. The strong dollar is not good news for gold, which has fallen below the key support of USD 1,800 per ounce.  Figure 5: Gold on H4 and daily chart The nearest resistance according to the H4 chart is therefore in the zone of USD 1,800 - 1,807 per ounce. Below this resistance we have several supports. The closest one is 1 780 - 1 787 USD per ounce.  
The Swing Overview - Week 26 2022 - 08.07.2022

The Swing Overview - Week 26 2022 - 08.07.2022

Purple Trading Purple Trading 08.07.2022 09:47
The Swing Overview - Week 26 2022 After ashort-term upward correction, the indices resumed their bearish trend and closed the week in the red. Along with this risk-off sentiment, commodity currencies weakened, as did the British pound and the euro. Gold is losing ground as a means of inflation protection and has fallen back below the USD 1,800 per ounce. The US dollar, on the other hand, is still the strongest currency amid the looming recession. Macroeconomic data The number of new home sales in the US for May reached 696,000, beating expectations of 588,000. This is positive news.   On the other hand, the negative news is the drop in consumer confidence, which reached 98.7 for May (103.2 the previous month). The drop in consumer confidence is expected to affect consumer spendings. It is evident that American consumers are reluctant to spend in times of rising prices and are accumulating savings for the future. This is of course contributing to the economic slowdown and the risk of a recession in the US is thus becoming stronger. This was confirmed by the GDP data, which fell for the third month in a row.   The fall in GDP last month was 1.6%. GDP was therefore negative in 1Q 2022. If it is also negative in 2Q2022, it will be an official confirmation of the recession defined by two negative quarters in a row. Jerome Powell suggested this week that the risk of the economy being damaged by higher rates is less important than restoring price stability. This heightens fears that a slowdown in the US economy will take the whole world down with it. So in times when central banks are tackling inflation, this risk will set the tone for some time.    This situation is positive for the US dollar, which is seen by investors as a safe haven asset in times of uncertainty. The dollar therefore remains close to this year's highs.  Although the yield on 10-year US Treasuries has fallen below 3%, the overall trend in bond yields is still upwards. Figure 1: US 10-year bond yields and USD index on the daily chart   The SP 500 Index The strengthening on the SP 500 Index that we have seen in the week of June 20 was really just a short-term correction to the overall downtrend, as we have previously suggested. Last week saw another sell-off and so the overall downtrend on the index continues.   Figure 2: The SP 500 on H4 and D1 chart   The nearest resistance according to the H4 chart is in the range of 3,810 - 3,820. The next resistance is 3,930 - 3,950. A support is 3 640 - 3 670.    German DAX index  The German Ifo Business Climate Index which measures the expectations of manufacturers, builders and sellers for the next 6 months continued to show a value of 92.3, which is worse than the previous month when the index value was 93.0. The fall in the reading suggests some pessimism, accentuated by current market uncertainties, which include the impact of the war in Ukraine and high inflation, which in Germany for the month of June was 7.6% year-on-year. However, inflation fell by 0.1% month-on-month.   The labour market has also indicated problems. The number of unemployed in Germany rose by 133 000, while the market had expected a fall of 6 000. This was very negative news, which triggered a strong sell-off on the Dax on Thursday. On the other hand, retail sales were positive, rising by 0.6% in May, while a 5.4% decline was recorded in April. Figure 3: German DAX index on H4 and daily chart The DAX has broken support according to the H4 chart at 12,850, which has now become the new resistance, which is in the 12,820 - 12,850 range. The next resistance according to the H4 chart is then at 13,280 - 13,375. The strong support according to the daily chart is 12,443 - 12,620, which price is currently approaching.    Eurozone inflation at a new record Eurozone consumer inflation reached another record high in June, rising by 8.6% year-on-year. This is higher than analysts' expectations, who predicted a rise of 8.4%. Inflation is therefore continuing to rise, so the expectation that the ECB could raise rates by more than 0.25% in July is on target and this could support the euro's growth. On the other hand, there is a strong dollar which could continue to slow down bulls on the euro.   Figure 4: EUR/USD on H4 and daily chart The nearest resistance according to the H4 chart is at 1.048 - 1.0500. The next resistance is at 1.0600 - 1.0610. Support is at 1.0360 - 1.0380.   Gold broke the $1,800 price tag The development in gold has once again confirmed that investors prefer US bonds instead of gold, which, in addition to being considered a "safe haven" along with the US dollar, also brings a small but still certain return. The strong dollar is not good news for gold, which has fallen below the key support of USD 1,800 per ounce.  Figure 5: Gold on H4 and daily chart The nearest resistance according to the H4 chart is therefore in the zone of USD 1,800 - 1,807 per ounce. Below this resistance we have several supports. The closest one is 1 780 - 1 787 USD per ounce.  
The Swing Overview - Week 27 2022

The Swing Overview - Week 27 2022

Purple Trading Purple Trading 08.07.2022 10:27
The Swing Overview - Week 27 2022 The fall in US bond yields, the rise in the US dollar and the sharp weakening in the euro, which is heading towards parity with the dollar. This is how the last week, in which stock indices cautiously strengthened and made a correction in the downward trend, could be characterised. It is worth noting that Germany has a negative trade balance for the first time since May 1991. Is the country losing its reputation as an economic powerhouse of Europe? Macroeconomic data The ISM in manufacturing, which shows purchasing managers' expectations of economic developments in the short term, came in at 53.0 for June.  While a value above 50 still indicates an expected expansion in the sector, the trend since the beginning of the year has been declining, indicating worsening of optimism.   Unemployment claims reached 231,000 last week. This is still a level that is fairly normal. However, we note that this is the 6th week in a row that the number of claims has been rising. The crucial news on the labour market will then be shown in Friday's NFP data.   On Wednesday, the minutes of the last FOMC meeting were presented, which confirmed that another 50-75 point rate hike is likely in July. The minutes also stated that the Fed could tighten further its hawkish policy if inflationary pressures persist. The Fed's target is to push inflation down to around 2%.   The Fed's hawkish tone has led to a strengthening of the dollar, which has reached a level over 107, its highest level since October 2002. Following the presentation of the FOMC minutes, the US Treasury yields started to rise again. Figure 1: The US 10-year bond yields and the USD index on the daily chart   The SP 500 Index The temporary decline in US Treasury yields was the reason for the correction in the bearish trend in equity indices. However, the bear market still continues to be supported fundamentally by fears of an impending recession.  Figure 2: The SP 500 on H4 and D1 chart   The nearest resistance according to the H4 chart is in the 3,930 - 3,950 range. A support is at 3,740 - 3,750 and then 3,640 - 3,670.    German DAX index The German manufacturing PMI for June came in at 52.0 (previous month 54.8). The downward trend shows a deterioration in optimism.    It is worth noting that Germany's trade balance is negative for the first time since May 1991, i.e. imports are higher than exports. The current trade balance is - EUR 1 billion. The market was expecting a surplus of 2.7 billion. Rising prices of imported energy and a reduction in exports to Russia have contributed to the negative balance. Figure 3: German DAX index on H4 and daily chart The DAX is in a downtrend. On the H4 chart, it has reached the moving average EMA 50. The resistance is in the range of 12,900 - 12,960. Strong support on the daily chart is 12,443 - 12,500, which was tested again last week.    Euro is near parity with the USD Even high inflation, which is already at 8.6%, has not stopped the euro from falling. It seems that parity with the dollar could be reached very soon. The negative trade balance in Germany has contributed very significantly to the euro's decline.  Figure 4: EUR/USD on H4 and daily chart The nearest resistance according to the H4 chart is at 1.020 - 1.021. Support according to the daily chart would be only at parity with the dollar at 1.00. Reaching this value would represent a unique situation that has not occurred on the EUR/USD pair since 2002.   Australia raised interest rates The Reserve Bank of Australia raised the interest rate by 0.50% as expected. The current interest rate now stands at 1.35%. According to the central bank, the Australian economy has been solid so far thanks to commodity exports, the prices of which have been rising. Unemployment is 3.9%, the lowest level in 50 years.   One uncertainty is the behaviour of consumers, who are cutting back on spending in times of high inflation. A significant risk is global development, which is influenced by the war in Ukraine and its impact on energy and agricultural commodity prices.   Figure 5: The AUD/USD on H4 and daily chart The AUD/USD is in a downtrend and even the rate hike did not help the Australian dollar to strengthen. However, there has been some correction in the downtrend. The resistance according to the H4 chart is 0.6880 - 0.6900. The support is at 0.6760 - 0.6770.  
What Does Inflation Rates We Got To Know Mean To Central Banks?

What Does Inflation Rates We Got To Know Mean To Central Banks?

Purple Trading Purple Trading 15.07.2022 13:36
The Swing Overview – Week 28 2022 This week's new record inflation readings sent a clear message to central bankers. Further interest rate hikes must be faster than before. The first of the big banks to take this challenge seriously was the Bank of Canada, which literally shocked the markets with an unprecedented rate hike of a full 1%. This is obviously not good for stocks, which weakened again in the past week. The euro also stumbled and has already fallen below parity with the usd. Uncertainty, on the other hand, favours the US dollar, which has reached new record highs.   Macroeconomic data The data from the US labour market, the so-called NFP, beat expectations, as the US economy created 372 thousand new jobs in June (the expectation was 268 thousand) and the unemployment rate remained at 3.6%. But on the other hand, unemployment claims continued to rise, reaching 244k last week, the 7th week in a row of increase.   But the crucial news was the inflation data for June. It exceeded expectations and reached a new record of 9.1% on year-on-year basis, the highest value since 1981. Inflation rose by 1.3% on month-on-month basis. Energy prices, which rose by 41.6%, had a major impact on inflation. Declines in commodity prices, such as oil, have not yet influenced June inflation, which may be some positive news. Core inflation excluding food and energy prices rose by 5.9%, down from 6% in May.   The value of inflation was a shock to the markets and the dollar strengthened sharply. We can see this in the dollar index, which has already surpassed 109. We will see how the Fed, which will be deciding on interest rates in less than two weeks, will react to this development. A rate hike of 0.75% is very likely and the question is whether even such an increase will be enough for the markets. Meanwhile, there has been an inversion on the yield curve on US bonds. This means that yields on 2-year bonds are higher than those on 10-year bonds. This is one of the signals of a recession. Figure 1: The US Treasury yield curve on the monthly chart and the USD index on the daily chart   The SP 500 Index Apart from macroeconomic indicators, the ongoing earnings season will also influence the performance of the indices this month. Among the major banks, JP Morgan and Morgan Stanley reported results this week. Both banks reported earnings, but they were below investor expectations. The impact of more expensive funding sources that banks need to finance their activities is probably starting to show.   We must also be interested in the data in China, which, due to the size of the Chinese economy, has an impact on the movement of global indices. 2Q GDP in China was 0.4% on year-on-year basis, a significant drop from the previous quarter (4.8%). Strict lockdowns against new COVID-19 outbreaks had an impact on economic situation in the country. Figure 2: SP 500 on H4 and D1 chart The threat of a recession is seeping into the SP 500 index with another decline, which stalled last week at the support level, which according to the H4 is in the 3,740-3,750 range. The next support is 3,640 - 3,670.  The nearest resistance is 3,930 - 3,950. German DAX index The German ZEW sentiment, which shows expectations for the next 6 months, reached - 53.8. This is the lowest reading since 2011. Inflation in Germany reached 7.6% in June. This is lower than the previous month when inflation was 7.9%. Concerns about the global recession continue to affect the DAX index, which has tested significant supports. Figure 3: German DAX index on H4 and daily chart Strong support according to the daily chart is 12,443 - 12,500, which was tested again last week. We can take the moving averages EMA 50 and SMA 100 as a resistance. The nearest horizontal resistance is 12,950 - 13,000.   The euro broke parity with the dollar The euro fell below 1.00 on the pair with the dollar for the first time in 20 years, reaching a low of 0.9950 last week. Although the euro eventually closed above parity, so from a technical perspective it is not a valid break yet, the euro's weakening points to the headwinds the eurozone is facing: high inflation, weak growth, the threat in energy commodity supplies, the war in Ukraine. Figure 4: EUR/USD on H4 and daily chart Next week the ECB will be deciding on interest rates and it is obvious that there will be some rate hike. A modest increase of 0.25% has been announced. Taking into account the issues mentioned above, the motivation for the ECB to raise rates by a more significant step will not be very strong. The euro therefore remains under pressure and it is not impossible that a fall below parity will occur again in the near future.   The nearest resistance according to the H4 chart is at 1.008 - 1.012. A support is the last low, which is at 0.9950 - 0.9960.   Bank of Canada has pulled out the anti-inflation bazooka Analysts had expected the Bank of Canada to raise rates by 0.75%. Instead, the central bank shocked markets with an unprecedented increase by a full 1%, the highest rate hike in 24 years. The central bank did so in response to inflation, which is the highest in Canada in 40 years. With this jump in rates, the bank is trying to prevent uncontrolled price increases.   The reaction of the Canadian dollar has been interesting. It strengthened significantly immediately after the announcement. However, then it began to weaken sharply. This may be because investors now expect the US Fed to resort to a similarly sharp rate hike. Figure 5: USD/CAD on H4 and daily chart Another reason may be the decline in oil prices, which the Canadian dollar is correlated with, as Canada is a major oil producer. The oil is weakening due to fears of a drop in demand that would accompany an economic recession. Figure 6: Oil on the H4 and daily charts Oil is currently in a downtrend. However, it has reached a support value, which is in the area near $94 per barrel. The support has already been broken, but on the daily chart oil closed above this value. Therefore, it is not a valid break yet.  
Hungarian Industrial Production Shows Surprise Uptick in Summer

Harvard Business Review Research Shows That Education Is No Longer So Important On The Labor Market, The Ban On The Import Of Hamsters Has Been Lifted, 60/40 Portfolio Is Ended?

Kamila Szypuła Kamila Szypuła 05.01.2023 13:03
The pandemic started cyclical events. Even defenseless hamsters were affected by the pandemic, but now their integration has changed. The uptick in growth started just before the pandemic, according to health, but only 2022 towards the region, even the 60/40 portfolio was affected. In this article: Education Is No Longer So Important On The Labor Market Hamsters Will Return To Hong Kong 60/40 portfolio Education Is No Longer So Important On The Labor Market In the past, having a higher education meant getting a well-paid job. Employers were looking for educated employees. According to a study conducted in 2022. According to Harvard Business Review and labor data firm Emsi Burning Glass, between 2017 and 2019, 46% of medium-skilled occupations and 31% of high-skilled occupations reduced the degree requirement on job postings. Which may mean education may not matter as much to job searches in 2023 as it once did. When employers drop degree requirements, they become more specific about skills in job postings, detailing soft skills. Take, for example, hiring an office manager. They must be extremely organized, have good interpersonal skills and understand the basics of accounting. The world is changing and so are the conditions on the labor market. Young job seekers must take these changes into account. Employers may finally stop caring about where you went to school, says HR expert: 'We have been using education as a proxy' (via @CNBCMakeIt) https://t.co/3OQGuVlFcO — CNBC (@CNBC) January 5, 2023 Hamsters Will Return To Hong Kong The pandemic caused by the Sars-Cov 2 virus has caused a lot of confusion around the world. From restrictions to lockdown. Life changed quickly, part of our lives had to move to the virtual zone, including teaching and work. Asia was and, as data from China show, is still the center of the coronavirus. In this region, it was especially believed that bats, hamsters, dogs and others were responsible for spreading the virus. Hong Kong even took action and killed 2,000 hamsters to fight Covid-19 and banned the import of these animals. Now there is information that the ban on the import of hamsters has been lifted. Imported hamsters still need to test negative for the virus before they can be sold. They're not just jet critters; arriving people are required to undergo tests before boarding a plane, even though China opposes similar measures against its citizens in other countries. Masks remain mandatory, with no plans to lift the requirement to wear them in many public places. Other stringent measures, such as shortening school days and daily tests for students, will remain in place for a few more weeks. From Breakingviews - Hong Kong’s hamsters sound shrill warning https://t.co/BLnELRnob3 — Reuters Business (@ReutersBiz) January 5, 2023 Read next:Samsung Suffers From Weakening Demand, Amazon Will Increase The Total Number Of Layoffs To Over 18,000| FXMAG.COM 60/40 portfolio Many people hedge their portfolio in the stock market. From the 1980s until recently, a portfolio of 60% stocks and 40% bonds had a "golden age." But that strategy may no longer have the same relevance. Persistent inflation and growing recession fears have hit markets in 2022. , bringing strong headwinds to the 60/40 portfolio and prompting some critics to declare the "end" of 60/40 as a useful investment strategy. There are also opinions that the 60/40 portfolio will yield lower risk-adjusted returns compared to those of the last four decades, but that doesn't mean it's broken. You need to know the details of this wallet from the beginning as well as its background to see for yourself which opinion is more real. Is the 60/40 portfolio dead? Our strategists don’t think so, but they do expect a bumpier road ahead for the popular strategy. Learn why here: https://t.co/44GHjqYscE — Morgan Stanley (@MorganStanley) January 4, 2023
Monitoring Hungary: Glimmering light at the end of the tunnel

The Hungarian Labour Market Will Remain Tight And Labour Shortages Will Be There In Some Parts Of The Economy

ING Economics ING Economics 07.01.2023 10:27
The labour market has shown signs of weakening since the summer. But this deterioration is too slow to result in a strong and sudden anti-inflationary shock   The biggest market in Budapest   The Hungarian Central Statistical Office (HCSO) released the latest set of labour market data (wages and unemployment rate) in early January. Wage growth from October suggests that employers are adapting to the strong inflation environment, giving unscheduled, additional wage increases to keep labour in place. In parallel, unemployment statistics reflect that there are still more sectors facing labour shortages than sectors suffering from cost pressures. Nominal and real wage growth (% YoY) Source: HCSO, ING   Gross average wages increased by 18.4% year-on-year in October 2022. If we remove the impact of one-off payments and bonuses, we see roughly similar underlying wage growth (18.5% YoY). This suggests that recent inflation-related wage adjustments are built into base salaries. However, despite the strong underlying wage increase, surging inflation is erasing more and more from the nominal rise. Real wages fell by 2.2% on a yearly basis in October due to the more than 20% headline inflation. With the expected move higher in inflation (possibly peaking only in March 2023), real wage growth could turn into deep negative territory, dragging down consumption during late 2022 and the first half of 2023. Wage dynamics (three-month moving average, % YoY) Source: HCSO, ING   Wage growth in the private sector came in at 18.2% year-on-year, significantly higher than the year-to-date average. Salaries rose by 18.6% in the public sector over a year. In this regard, there is a general sense of wage increase, though the private sector wage growth can be seen as remarkable, considering all the cost-related pressures here. This explains a lot about the health of the Hungarian labour market during a cost-of-living crisis. Employment data points to a steady labour market. The employment rate has been pretty much unchanged for five months now. The November unemployment rate came in at 3.8%, alternating between this and 3.6% for four months now. Though this is significantly higher than the 3.3% nadir in June, it is hard to say that this is an earth-shattering or ground-breaking change. The labour market is weakening only in incremental steps. Labour market trends (%) Source: HCSO, ING   Reading through the details, we can see that fluctuations in the labour market have increased in recent months. This may partly be the result of a bifurcated economy. While certain sectors (e.g. services) are reacting to the constantly changing economic environment with layoffs, other sectors (e.g. manufacturing) are able to partially absorb these workers. While the energy shock is impacting service providers more, the high level of new orders and the capacity expansions are keeping labour needs alive in manufacturing. It is also interesting that the number of participants in the labour market increased in November on a monthly basis. This did not lead to an increase in employment but rather increased the number of unemployed. We conclude from this that due to the intensified pressure on household budgets, more and more people are becoming active job seekers, increasing the statistical number of unemployed. Number of job vacancies and job vacancy rate Source: HCSO, ING   Despite the recent resiliency, if employers realise that difficulties are mounting (still high costs accompanied by lower demand for their products and services), more companies will be forced to start an extensive labour market adjustment. To put it more simply, they will try to save on costs by downsizing and thus will try to maintain their profitability despite the expected decrease in revenues. Accordingly, we expect the unemployment rate to rise further, and to peak around 4.5% during mid-2023. However, this hardly qualifies as a significant labour market adjustment or deterioration. The Hungarian labour market will remain tight and labour shortages will be there in some parts of the economy, thus we can’t see the job sector providing a sizable anti-inflationary shock in a 20%+ inflation environment. Read this article on THINK TagsWages Unemployment rate Labour market Hungary Employment 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
German labour market starts the year off strongly

German labour market starts the year off strongly

ING Economics ING Economics 31.01.2023 11:34
Only a small increase in unemployment in January shows that the labour market remains an important source of resilience in the economy Almost four million people in Germany work in the metal and electronics industry   German unemployment increased by 162,100 in January, increasing the number of unemployed to 2.616 million. The seasonally-adjusted unemployment rate, however, dropped to 5.3%, from 5.5% in December. Don’t be fooled by the increase in unemployment. This was still the second-best January performance of the German labour market since reunification, with a small caveat that the number of people working in furlough schemes has increased significantly over the last few months. Source of resilience The strong labour market was an important driver of the economy’s resilience last year. A combination of fiscal stimulus, furlough schemes and demographic change seems to have made the German labour market almost invincible. It, therefore, doesn’t come as a surprise that wage pressure has picked up. We expect wage growth of around 5% this year and 3% in 2024. Not included in these numbers are one-off payments that have become more popular in wage bargaining since the government announced it would exempt one-off payments of up to 3000 euros from taxes and social contributions to help alleviate the impact of rising inflation. Earlier this morning, however, the sharp drop in retail sales (-5.3% month-on-month in December) showed that even the solid labour market cannot prevent high inflation and uncertainty from denting private consumption. Read next: Samsung Demand For Semiconductors And Smartphones Remains Weak| FXMAG.COM Looking ahead, the lack of skilled workers remains a huge burden for the German economy. This has been driven not only by the end of lockdowns but also by structural trends like demographic change and it is a problem that is more likely to worsen than improve over the coming years. As a result, Germany will either witness additional wage pressure or a shrinking of the supply side as companies have to scale down production. The labour market has been an important driver of the economy's resilience over the last few years. In the coming years, the labour market will be another symbol of the structural transition that the entire economy will have to undergo. Read this article on THINK TagsLabour market Germany Eurozone 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
Inflation in Singapore heats up again in April

Singapore Is Expected To Get A Lift From The Increase In GST

Saxo Bank Saxo Bank 15.02.2023 09:18
Summary:  Singapore’s 2023 budget announcement encompassed more support measures to fight price pressures but also brought back a focus on long-term goals of innovation and productivity. This means retail stocks and REITs could benefit, as could companies with high R&D. Higher taxes for the wealthy may do little to dampen demand and rents could continue to run higher. SGD could come under more pressure as the greenback remains in favor. Singapore announced the 2023 budget on 14 February, aiming to narrow the deficit to 0.1% of GDP in the year starting April from a revised 0.3% deficit this year. Revenues are expected to get a lift from the increase in GST and higher taxes on high-value property as well as increased taxes for multinational companies, while the expenditure will be lowered as Covid-era stimulus measures are relaxed. Still, focus remained on supporting Singaporeans amid a high inflation environment and the increase in GST. Subsidies for low-income families increased by S$3 billion but the budget also brought back a long term focus with measures to enhance competitiveness of companies and supporting family planning. Let’s assess what this can mean for Singapore stocks: Consumption focus Increasing the handouts to citizens by S$3 billion in the year starting April will support private demand despite high inflation pressures. This could be positive for value grocers like Sheng Siong (OV8) and restaurants like Kimly (1D0) or Jumbo Group (42R) . This could in turn benefit retail REITs like Frasers Centrepoint Trust (J69U) or Suntec REIT (T82U) which have a large part of their malls dedicated to food courts and restaurants. Read next: GBP/USD Pair Rose Sharply Above $1.22, EUR/USD Pair Also Rose| FXMAG.COM Innovation push Keeping a long-term focus, Singapore announced measures to promote innovation by topping up the national productivity fund by S$4 billion. Businesses will enjoy tax deductions of up to 400% (previous 250%) of qualifying innovation expenditure under the new Enterprise Innovation Scheme. This brings positives for companies that invest in R&D, for instance AEM Holdings (AWX), Venture (V03), UMS (558), ISDN (I07) and Nanofilm (MZH). Labor market support Singapore also announced a focus on developing labor-market intermediaries who can go through industry training and employment facilitation to fast pace job opportunities for Singaporeans. This brings staffing-solutions providers such as HRnetgroup Ltd (CHZ) in focus. On the flip side, higher CPF contributions would potentially add to manpower costs for companies, and weigh on long-term earnings. But the measure is to be implemented in a progressive manner over 4 years, so the effect will be gradual. On watch will be companies with a high labor cost including ST Engineering (S63) and Singapore Airlines  (C6L). Moreover, higher foreign company taxes could divert some foreign flows away. Singapore intends to set its effective tax rate for multinational enterprises at 15% starting 2025, in line with a global agreement to increase the floor rate. Property taxes To boost revenues, Singapore will raise taxes for higher-value properties. Residential properties in excess of S$1.5 million and up to S$3 million will be taxed one percentage point higher at 5%. Properties in excess of S$3 million will be taxed at 6% from 4% earlier. This is a negative for City Developers (C09), UOL (U14), Capitaland Investment Ltd (9CI) and Keppel Corp (BN4). However, the measure appears modest for the wealthy individuals and is unlikely to deter demand. SGD weakened to test the 50DMA USDSGD rose higher following the budget announcement to test the 50DMA at 1.3338. Singapore dollar is down over 2% since the highs of early February. A break above opens the door to 1.3400 and 1.3600. Disappointing growth prompted the Monetary Authority to say that cumulative tightening measures could help to slow growth, suggesting further tightening measures will remain cautious. Meanwhile, US inflation remains sticky and the potential for US yields and the US dollar to go higher means more pain could come for the Singapore dollar.   Source: Macro Insights: Singapore’s balanced 2023 budget – which sectors and stocks could see an impact? | Saxo Group (home.saxo)
Hawkish Fed Minutes Spark US Market Decline to One-Month Lows on August 17, 2023

The Key Focus Will Be On How Powell Sees The US Labour Market

Michael Hewson Michael Hewson 07.03.2023 08:36
We saw a broadly positive start to the week yesterday, with the France CAC40 posting a new record high of 7,401, while the FTSE100 lagged over disappointment around China's GDP target for 2023. This disappointment weighed on the mining sector yesterday after China set its 2023 GDP target at a fairly modest 5%, pointing to weaker demand for commodities. This target, which is below last year's 5.5% target, suggests that the Chinese government is less likely to be as generous when it comes to helping to stimulate demand and economic activity. This focus on stability appears to be an acknowledgment that recent years have been far too generous and created areas of financial instability and that the focus now is a more conservative approach. Today's China trade numbers for February have seen a marked improvement in the wake of the sharp slowdown seen in the last 2 months of 2022, which saw the various rolling restrictions and lockdowns impact the Chinese economy markedly. In Q4 the Chinese economy stagnated to the tune of growth of 0%, equating to annual GDP growth of 3%. With today's trade numbers for the months of January and February covering the period over the Chinese New Year, we now have a better idea of how much the relaxation of lockdown restrictions may have unleashed pent-up demand, although they also come against a backdrop of the stronger comparatives of a year ago before the Omicron wave had taken hold. Today's numbers have seen exports slide by -6.8%, which was slightly better than expected, while imports slid by -10.2% which was more than expected. The Reserve Bank of Australia also raised rates as expected by 0.25% to 3.6%, as the central bank continues to navigate concerns about upending the mortgage market, against a backdrop of inflation that still looks very sticky. While the guidance was hawkish there was a slight softening bias suggesting the bank might be close to a pause, with the Australian dollar slipping back a touch. Today's main focus will be on the first day of testimony from Fed chairman Jay Powell to US lawmakers with questions likely to focus on the resilience of the US economy. There'll be the usual showboating by some US politicians who will want the Fed to go easy when it comes to future rate hikes, along with those who think the Fed has dropped the ball when it comes to inflation. The key focus will be on how Powell sees the US labour market, and whether the FOMC think that economic conditions have improved or deteriorated since the last Fed meeting. Markets will also be paying attention to whether Powell continues to peddle the same narrative of disinflation, which was a hallmark of his last press conference. If he acknowledges that inflation could be much stickier than the Fed thought over a month ago, that could prompt a pullback in US equity markets. What is notable is that while US equity markets have recovered to the same levels, they were at the time of the February Fed meeting, after another strong finish yesterday, bond yields are much higher, with the US 2-year yield over 80bps higher, which suggests that once again there is a disconnect between what bond markets are pricing on inflation, and what equity markets are pricing. Today's European open looks set to be a positive one on the back of yesterday's strong US close. On the currencies front the euro outperformed yesterday as more ECB policymakers touted the prospect of further multiple 50bps rate hikes in the aftermath of the expected 50bps hike that is due to be delivered next week. Austrian central bank governor Robert Holzmann said the ECB should do 50bps hikes in March, May, June, and July, potentially taking the main financing rate to 5%. These comments followed comments from ECB chief economist Philip Lane who also acknowledged the need for further hikes, beyond next week's meeting, stating that current high levels of inflation continue to be a concern for the ECB, and that core inflation momentum remains strong. EUR/USD – continues to range trade between the recent peaks around the 1.0700 area and above trend line support from the recent 1.0530 lows. We need to push through the 50-day SMA at 1.0730 to open up 1.0820. While below 1.0730, the bias remains for a test of the January lows at 1.0480/85.GBP/USD – continues to range trade between the 1.1920 area and the 200-day SMA, and the 50-day SMA at 1.2150 which remains a key resistance area. A break of 1.1900 retargets the 1.1830 area, while a break of the 1.2150 area is needed to retarget the 1.2300 area.EUR/GBP – retesting trend line resistance at 0.8900 from the January peaks last week. Above 0.8900 targets the 0.8980 area. We need to push below support at the 0.8820/30 area to retarget the 0.8780 area.USD/JPY – still below the 200-day SMA at 136.90/00 which is currently capping further gains. Support comes in at the 135.20 area. We also have interim support at 133.60. A break above 137.00 could see a move to 138.20. FTSE100 is expected to open 13 points higher at 7,943DAX is expected to open 17 points higher at 15,670CAC40 is expected to open 9 points higher at 7,382Email: marketcomment@cmcmarkets.comFollow CMC Markets on Twitter: @cmcmarketsFollow Michael Hewson (Chief Market Analyst) on Twitter: @mhewson_CMC
Bulls Stumble as GBP/JPY Nears Key Resistance at 187.30

European Markets React to US Debt Ceiling Deal! A Mixed Open Expected. US Dollar Dominates CEE Markets: Concerns Over Economic Recovery Linger

Michael Hewson Michael Hewson 30.05.2023 09:11
Europe set for a mixed open, as debt ceiling deal heads towards a vote. By Michael Hewson (Chief Market Analyst at CMC Markets UK) With both the US and UK markets closed yesterday, there was a rather tepid response to the weekend news that the White House and Republican leaders had agreed a deal to raise the debt ceiling, as European markets finished a quiet session slightly lower. The deal, which lays out a plan to suspend the debt ceiling beyond the date of the next US election until January 1st 2025, will now need to get agreement from lawmakers on both sides of the political divide to pass into law. That could well be the hardest part given that on the margins every vote is needed which means partisan interests on either side could well derail or delay a positive outcome. A vote on the deal could come as soon as tomorrow with a new deadline of 5th June cited by US Treasury Secretary Janet Yellen. US markets, which had been rising into the weekend on the premise that a deal was in the making look set to open higher when they open later today, however markets in Europe appear to be less than enthused. That's probably due to concerns over how the economic recovery in China is doing, with recent economic data suggesting that confidence there is slowing, and economic activity is declining. Nonetheless while European stocks have struggled in recent weeks, they are still within touching distance of their recent record highs, although recent increases in yields and persistent inflation are starting to act as a drag. This is likely to be the next major concern for investors in the event we get a speedy resolution to the US debt ceiling headwind. We've already seen the US dollar gain ground over the last 3 weeks as markets start to price in another rate hike by the Federal Reserve next month, and more importantly start to price out the prospect of rate cuts this year. Last week's US and UK economic data both pointed to an inflationary outlook that is much stickier than was being priced a few weeks ago, with core prices showing little sign of slowing. In the UK core prices surged to a 33 year high of 6.8% while US core PCE edged up to 4.7% in April, meaning pushing back any possible thoughts that we might see rate cuts as soon as Q3. At this rate we'll be lucky to see rate cuts much before the middle of 2024, with the focus now set to shift to this week's US May jobs report on Friday, although we also have a host of other labour market and services data between now and then to chew over. The last few weeks have seen quite a shift, from the certainty that the Federal Reserve was almost done when it comes to rate hikes to the prospect that we may well see a few more unless inflation starts to exhibit signs of slowing markedly in the coming months. In the EU we are also seeing similar trends when it comes to sticky inflation with tomorrow's flash CPI numbers for May expected to show some signs of slowing on the headline number, but not so much on the core measure. On the data front today we have the latest US consumer confidence numbers for May which are expected to see a modest slowdown from 101.30 in April to 99, and the lowest levels since July last year. EUR/USD – has so far managed to hold above the 1.0700 level, with a break below arguing to a move back towards 1.0610. We need to see a rebound above 1.0820 to stabilise. GBP/USD – holding above the 1.2300 area for now with further support at the April lows at 1.2270. We need to recover back above 1.2380 to stabilise. EUR/GBP – currently struggling to move above the 0.8720 area, with main resistance at the 0.870 area. A move below current support at 0.8650 could see a move towards 0.8620. USD/JPY – having broken above the 139.60 area this now becomes support for a move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20. Further support remains back at the 137.00 area and 200-day SMA. FTSE100 is expected to open unchanged at 7,627 DAX is expected to open 17 points higher at 15,967 CAC40 is expected to open 30 points lower at 7,273
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Poland's First-Quarter GDP Highlights Disinflationary Trend, Raising Chances of Rate Reduction

ING Economics ING Economics 31.05.2023 15:27
Polish first-quarter GDP shows disinflationary structure, with odds of a rate cut growing. Poland's statistics office has revised the first-quarter GDP estimate to -0.3% year-on-year. In 2023 as a whole, we expect economic growth to be around 1% on the back of the improving foreign trade balance.   Seasonally adjusted GDP rose by a hefty 3.8% quarter-on-quarter in the first quarter of 2023, following a decline of 2.3% QoQ in the fourth quarter of last year. But seasonally adjusted data have shown surprisingly high volatility in recent quarters and should be taken with a pinch of salt.   The composition of the first quarter GDP was also revealed and shows a quite disinflationary picture, with some caveats. Domestic demand contracted by 5.2% year-on-year amid a deepening decline in consumption, which fell by 2.0% YoY, following a drop of 1.1% YoY in the fourth quarter of 2022. Investment activity continues to hold up well, expanding by 5.5% YoY in the first quarter of this year (vs +5.4% YoY increase in the fourth quarter of last year).   As expected, the change in inventories had a negative impact on activity, subtracting 4.1 percentage points from the annual GDP growth rate. This was offset by an improvement in the foreign trade balance. The positive impact of net exports on the change in annual GDP amounted to 4.3 percentage points. The exports of goods and services increased by 3.2% YoY, while imports were 4.6% lower than a year earlier. The GDP deflator reached 15.6%.     With respect to value added, we saw declines in trade and repair (-4.4% YoY), industry (-1.4% YoY) and transport and storage (-1.2% YoY). Most other sectors of the economy recorded increases.   2023 GDP and inflation outlook As expected, the start of 2023 brought a decline in GDP on a year-on-year basis, but on a markedly smaller scale than we had feared. However, this does not mean that the outlook for the year as a whole is markedly better. High-frequency data point to weakness in retail sales, industry and housing construction in the second quarter. At the same time, growth in infrastructure-related construction continues.   This is accompanied by continued elevated levels of inflation, which negatively affects consumers, dragging on the performance of the economy. On the other hand, investment activity will have a positive impact on the economy. Investments will most likely concentrate in large companies and the public sector (including defence spending). We expect that the main driving force of the economy will continue to be the improving foreign trade balance, mainly due to low imports.   The structure of GDP growth should be disinflationary this year due to the weakness of consumption, rising investment and the large role of foreign trade in shaping economic activity. Combined with the eradication of the direct impact of the energy shock, this should favour a further decline in inflation, with its pace being constrained by core inflation. The latter is more sticky than the headline CPI.   One factor in the slower deceleration of core inflation will be a tight labour market and high wage growth. We forecast that by the end of 2023, both the headline CPI and core inflation may moderate to single-digit levels, but the outlook for 2024 is more uncertain.     National Bank of Poland rates outlook Expectations for a cut by the National Bank of Poland (NBP) may rise (we see 30-40% odds in the second half of the year). Theoretically, today's data show an improvement in the inflation outlook: a better GDP structure, month-on-month core CPI slowing, and NBP more vocal on rate cuts.   But the cross-country comparison (especially with the Czech Republic) suggests this could be a premature move.   Moreover, we still see important inflationary risks in the long term: a strong public acceptance of price increases, an election spending race, and strong investment mainly in energy (other sectors are still performing poorly to offset high costs).   In our view, an NBP cut would not help Polish government bonds (POLGBs) with longer maturities.   The premature cut would extend the return of CPI to the target, which is already a distant prospect (in 2025-26).
Inflation Dynamics and Market Pricing: Assessing the UK's Monetary Outlook.  Job Openings Decline Continues in the US

Inflation Dynamics and Market Pricing: Assessing the UK's Monetary Outlook. Job Openings Decline Continues in the US

ING Economics ING Economics 31.05.2023 08:39
It is in the UK that the local swap curve is diverging most from the central bank’s message. Swap currently imply another 100bp of tightening will be implemented before year-end. We do not disagree that core inflation has been disappointingly slow to decline in the UK but betting on another four 25bp hikes this year requires a strong opinion on inflation dynamics which we think few in the market actually have.   This means current pricing is unlikely to be maintained. Markets should also be on alert for a pushback by Bank of England (BoE) officials against market pricing. Only Catherine Mann is due to speak today. As the more hawkish member, she is the least likely to disagree with elevated rates but her pushback would be all the more potent.   Forward EUR rates have been relatively immune to the recent re-pricing higher in USD and GBP rates   Today's events and market view Chinese PMIs released today missed expectations on both manufacturing and services, although the latter remains at a healthy level above the 50 expansion/contraction line.   French, Germany, and Italian CPIs for the month of May will be released today. In addition to yesterday’s Spanish prints, this means over 70% of the eurozone-wide print, which is only published tomorrow, will be available to markets today. As is increasingly the case, focus will be squarely on service inflation.   After the sharp re-pricing in BoE hike expectations Catherine Mann’s speech will be closely watched, although, as the most hawkish member on the MPC, we don’t see her as the most likely member to push back against the nearly 100bp of further hikes priced by the curve.   In the US, the decline in job openings is expected to continue, albeit at a more modest pace than last month. Details of the report, such as a worsening of the quits rate, will be closely watched for hints of a further softening of the labour market into Friday’s non-farm payroll release.
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Australia's Reserve Bank Raises Cash Rate Again: Analysis and Outlook

ING Economics ING Economics 06.06.2023 12:30
Australia’s Reserve Bank lifts cash rate again This latest hike was not totally surprising given the backward steps from inflation according to the monthly data. Further tightening is not ruled out, but we think this may well be the peak for rates as we expect inflation to ease more substantially in the coming months.     Recent guidance has not been helpful We went into this meeting with very low conviction on our call for a further 25bp rate hike, taking the cash rate to 4.1%. This was in contrast to the consensus view, which was about 3:2 in favour of no hike at this meeting.   The Reserve Bank of Australia (RBA) had already delivered a 25bp rate hike at its May meeting, and that was against a backdrop of much better inflation data and came after the bank had hinted that rates may already have peaked. So with their reaction function muddied by recent actions, it was not at all clear whether the RBA would indeed respond to the increase in April inflation from 6.3% to 6.8% year-on-year, or wait for the full quarterly inflation figures to come out - and give more time for the effects of previous tightening to become apparent.   As it turns out, that April inflation increase was too much for the RBA to ignore, and policymakers did raise rates again. The recent increase in the unemployment rate also doesn't yet look like a convincing turn in the labour market, and indeed, disappears completely with just a little smoothing (three-month moving average) of the recent data, though a few more months may provide some more confidence that labour developments are moving in an encouraging direction. Labour data remains a key input into the RBA's rate-setting decision, at least that is what its statement suggests. Though we suspect it will cease to be as instrumental for policy decisions as inflation eases.     Any more? Never say never, but we think not As for whether this marks the peak in rates, we suspect the answer may be "yes". The statement accompanying the decision notes "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve." It feels like the RBA is hedging its bets on whether it will need to hike again, but we believe that inflation will fall more rapidly in the coming months (see chart), and that this will narrow the gap between inflation and policy rates, making real policy rates less negative. Real policy rates at zero tend to be a fairly basic benchmark for the point at which policy shifts from being accommodative to restrictive.   Risks to this view remain firmly on the upside, however. It would only take some acceleration in wage costs, some climate or other supply shock or more notable increases in house prices to shift the balance to one further (and probably final) hike. But as things stand, we believe this latest hike from the RBA should be enough, and still leaves a chance for the RBA to pull off the soft landing that it is clearly aiming for.  
NBP Holds Rates Steady with Focus on Future: Insights from Press Conference

NBP Holds Rates Steady with Focus on Future: Insights from Press Conference

ING Economics ING Economics 07.06.2023 08:18
National Bank of Poland leaves rates unchanged, focus on tomorrow’s press conference The National Bank of Poland rates and statement after the June Monetary Policy Council meeting were unchanged. More information should come from tomorrow's conference by the central bank president. We expect a slightly more dovish stance.   As expected, NBP rates remain unchanged (reference rate still at 6.75%). The post-meeting statement noted a decline in first quarter GDP and a further contraction in consumer demand, with investment still growing. The document again underlined the favourable labour market situation, including low unemployment. As expected, the MPC noted a further decline in CPI inflation and a marked decline in core inflation in May. The Council continued to see a pass-through of rising costs onto finished goods prices. Aside from updating paragraphs on the first quarter GDP figure and the latest inflation data, the rest of the statement was largely unchanged. The Council reiterated its view that the return of inflation to the NBP's target will be gradual due to the scale and persistence of past external shocks.     The key event in the context of the monetary policy outlook is tomorrow's press conference by NBP President Glapiński. We expect its tone to be more dovish than a month ago. The decline in inflation has been faster than expected (albeit close to the NBP's March projection). The peak in core inflation is most likely behind us, and the strengthening of the zloty and lower commodity prices should favour further disinflation. The short-term inflation outlook has improved, and some MPC members have again begun to raise the topic of a readiness to cut interest rates before the end of this year.     In our view, the medium-term inflation outlook remains uncertain, and with a tight labour market, high wage pressures and strong consumer acceptance to price increases, inflation may therefore stabilise in the medium term at levels well above the NBP target. The NBP's projection, assuming it leaves interest rates unchanged, suggests a return of inflation to the target by the end of 2025, and a possible rate cut before the end of 2023 could delay this.   Therefore, in the baseline scenario, we see no rate cuts this year. However, an improvement in the short-term inflation outlook, the strengthening of the zloty and a possible softening of other central banks' rhetoric in the coming months could serve as arguments for a single MPC rate cut in the second half of the year. We estimate the probability of such a scenario at 30-40%.
Bank of Canada Likely to Maintain Hawkish Stance: Our Analysis

Bank of Canada Likely to Maintain Hawkish Stance: Our Analysis

ING Economics ING Economics 07.06.2023 08:49
CAD: Our call is a BoC hawkish hold today The Bank of Canada moved considerably earlier than other central banks to the dovish side of the spectrum and has kept rates on hold since January. Now, stubborn inflation, an ultra-tight labour market and a more benign growth backdrop are building the case for a return to monetary tightening. Markets are attaching a 45% implied probability that a 25bp hike will be delivered today.   While admitting it’s a rather close call, we think a hawkish hold is more likely (here's our full meeting preview), as policymakers may want to err on the side of caution while assessing the lagged effect of monetary tightening. We still expect a return to 2% inflation in Canada in the early part of 2024 with the help of softer commodity prices. Developments in the US also play a rather important role for the BoC: recent jitters in the US economic outlook (ISM reports recently added to recession fears) and the proximity to a “toss-up” FOMC meeting would also warrant an extension of the pause.   Still, we expect another hold by the BoC to be accompanied by hawkish language. Markets are pricing in 40bp of tightening by the end of the summer, and we doubt policymakers have an interest in pushing back or significantly disappointing the market’s hawkish expectations given recent data. So, as long as a hold contains enough hints at potential future tightening, we think the negative impact on CAD should be short-lived and we keep favouring the loonie against other pro-cyclical currencies in the current risk environment.
Asia Morning Bites: Singapore Industrial Production and Global Market Updates

Economic Snapshot: Unemployment, Inflation, and Trade in Focus

ING Economics ING Economics 09.06.2023 09:11
Unemployment could edge higher in Australia The Australian labour market data for May may show a further increase in the unemployment rate from 3.7% to 3.8%, though this remains very low by historical standards and won’t provide the Reserve Bank of Australia with too much comfort. Employment growth may register a small increase, with last month’s fall in full-time employment and rise in part-time employment likely to swap signs this month.   The Australian labour market may not be powering ahead as it recently did, but it hasn’t yet delivered a clear sign of weakening either, and we aren’t expecting the picture to change this month.   Inflation comfortably within target in India CPI data for May will show inflation remaining comfortably within the Reserve Bank of India's 2-6% target range. We are expecting inflation to come in at 4.3% YoY after a 0.5% MoM increase. Helpful base effects are keeping inflation within the target range for now, but we need to see the MoM trend to move below 0.5% in the coming months to keep it there.     Indonesia's trade balance to remain in healthy surplus Indonesia reports trade numbers next week. We expect both exports and imports to remain in contraction although the drop off may be less pronounced than the previous month. Imports are likely to dip roughly 12.2% YoY while exports may fall by 2.1% YoY, resulting in a sizable trade surplus of $4.7bn. A trade surplus of this magnitude should help keep the current account balance in surplus and could act as one counterbalance to investment related outflows, which would help provide some support to the rupiah.  
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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)  
Stagnation and Struggles: Assessing the Czech Economy's Road to Recovery

Stagnation and Struggles: Assessing the Czech Economy's Road to Recovery

ING Economics ING Economics 14.06.2023 14:39
In 1Q23, we believe the Czech economy may have ended a soft recession, given the previous QoQ decline of 2H22 turned into stagnation but remained still negative in YoY terms (-0.4%). We expect the annual growth of GDP to remain negative in the first half of 2023.   This reflects a continued decline in household consumption, which fell deeply by 6.4% YoY, following a sharp decline in the inflation-driven fall of purchasing power of households, while corporates cut their investment on the back of weak foreign demand and high costs of lending. On a positive note, inflation is on a declining trend owing to an ongoing decline in core inflation, given a slowdown of food and fuel prices. This is likely to prevent the CNB from increasing interest rates despite the still tight labour market and the risk of a potential wage-inflation spiral.   Forecast summary   Macro digest After two consecutive declines in GDP growth during the second half of 2022, the Czech economy in 1Q23 stagnated but remained negative in YoY terms (-0.4%). The main obstacle in economic recovery remained private consumption, which declined in the first quarter of 2023 by 6.4% YoY, as double-digit inflation squeezed markedly the purchasing power of households, while high interest rates and soft foreign demand led companies to reduce the growth of investment.   We expect the annual growth of GDP to remain negative in the first half of 2023 due to still declining household consumption. During the remainder of 2023, however, the economy is likely to show signs of a recovery, as gradually receding inflation will weigh less on the real purchasing power of households and the ongoing improvement of the external environment should support a recovery of exports. Yet, investment demand is likely to remain weak due to persistently high interest rates.    Real GDP growth structure (ppt of YoY growth, SA adj)   The unemployment rate (ILO) fell 3.6% to 3.5% in May. However, it stagnated at 3.6% on a seasonally adjusted basis. Nevertheless, the overall labour market in the Czech Republic remains extremely tight, even though firms in the PMI survey reported further layoffs in May due to fewer new orders. However, recent developments in the Czech industry and retail sector are not very favourable, which could be reflected in the pressure to lay off employees. For the time being, however, companies are still trying to hold on to employees in the hope of a recovery in demand. The overheated labour market is thus also reflected in rapid wage growth, particularly in industry and construction. The first quarter showed nominal growth of 8.6% YoY, but in real terms growth is deep in negative territory and a turnaround can only be expected in the third quarter.    Czech PMI underperforming region   Inflation, in our view, posted its last double-digit reading in May and will continue its swift disinflation for the rest of the year. The slowdown or even decline in inflation can be seen across the consumer basket. However, the main drivers are and will be food, fuel and housing prices.   Food and housing prices in particular, in our view, still have the potential to collapse faster than expected and headline inflation will surprise more to the downside. At the moment, year-end inflation should be around 8% YoY and, thanks to a large base effect and the re-pricing of energy prices, we should be in the 3-4% range as early as January next year.   Structure of inflation (ppt)   Government promises fiscal package to tame deficit   May's state budget deficit of CZK270bn, the worst result in history, confirmed the trend of weak tax revenues. For this year, the government is projecting a deficit of CZK295bn, however, given current developments, it plans to introduce measures to tame the growing deficit. Thus, for this year, we expect a general government deficit of 3.8% of GDP.   Looking ahead, for the next two years, the government has unveiled a large consolidation package that will soon enter the legislative process. The government is targeting a deficit of 1.8% for next year and 1.2% of GDP for 2025, which would be by far the lowest number in the region. We expect slightly higher numbers (2.3% and 1.8%), but in any case, consolidation will be ongoing, which makes a difference.   General government balance (% of GDP)
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Poland's Fiscal Landscape: Outperforming, but Social Spending Looms

ING Economics ING Economics 15.06.2023 07:50
Disinflation in 2023, but NBP target still distant CPI peaked in 1Q23, but below 20% YoY, and started trending downwards as the direct impact of the energy shock started to abate, leading to annual declines in gasoline and diesel prices as well as slower growth of energy for households. Upward pressure on food prices has also started moderating.   Even core inflation peaked but declines are slower and core prices remain sticky. The legacy of the energy shock is still visible as businesses adjust their prices to cost levels. On top of that, the labour market remains tight and wages are expanding at double-digit pace. Core inflation is projected to moderate more slowly than headline inflation. The NBP target of 2.5% is unlikely to be reached before late-2025. In our view, the CPI picture doesn’t justify a rate cut this year, but the NBP may refer to the strong PLN and the NBH and provide a single cut in 2H23.   CPI inflation and its composition (%, percentage points)   Poland outperformed on fiscal front in 2022, but high social, military and infrastructure spending ahead In 2022, the general government deficit reached 3.7% of GDP but was below expectations. In 2023, we expect it to reach 5.2% of GDP. Authorities continue to bear the substantial cost of energy measures and are pursuing ambitious military and healthcare spending programmes. So far, pre-election pledges of the ruling party have reached 0.6% of GDP one-offs in 2023 and permanent from 2024 onwards at 0.7% of GDP, but more programmes are coming and the opposition also seems to be competing with the incumbents on that front. With public debt below 50% of GDP there are no immediate threats to fiscal sustainability, but the high structural deficit and high borrowing needs in the mid term are a challenge. Spending on energy transition, defence, healthcare and the risk to the RRF and EU funds call for careful choice of priorities   General government balance (% of GDP)   Tight labour market and robust wages growth Poland’s labour force is driven by a combination of structural and cyclical factors, with the former dominating the overall picture so far. The continuous decline in working age population (some c.2m fewer over the past 12 years) has curbed labour supply although both an increase in participation rate and working immigrants (including the influx of refugees from Ukraine) has eased the pressure. With labour shortages in many sectors of the economy the cyclical employment adjustment is shallow and firms are hoarding labour. The unemployment rate in Poland will remain one of the lowest in the European Union. High inflation, scarcity of skilled workers and the high administrative increase in the minimum wage has put upward pressure on salaries. Nominal wages are projected to continue increasing at a double-digit pace in the coming quarters.   LFS unemployment rate (Apr) (% of labour force, SA)   Swift switch from external CA deficit to a surplus in 2023 Poland’s current account deficit widened to 3.0% of GDP in 2022 from 1.3% in 2021 on the back of record-high energy prices in Europe, in particular natural gas and coal prices. Their deliveries from Russia were terminated in early spring 2022. By contrast, radical decreases in energy commodity prices in 2023 together with a deceleration of domestic demand led to a swift improvement in Poland’s external balance. We project a surplus of 1.5% of GDP this year as net exports is to be a major GDP growth driver. Poland’s external CA balance is to moderate over 2024-2025 in line with strengthening of consumer and domestic demand. Also, elevated spending on military equipment is to push imports up.   Current account and trade balance (% of GDP)  
Bank of Japan Governor Hints at Rate Hike: A Closer Look

Stagnant Unemployment Rate, Labour Market Recovery, External Imbalances, Budget Deficit, Lending Moderation, Banking Sector Expansion

ING Economics ING Economics 15.06.2023 08:17
In the labour market, the seasonally adjusted unemployment rate has turned stagnant from 2H22 onwards with the latest March data standing at 10%. However, the actual rate is likely to be higher as TurkStat pointed out that the Household Labour Force Survey could not be conducted in certain cities due to the earthquake disaster. Accordingly, both male and female employment has returned to pre-2018 volatility levels, while the informality rate is now close to the lowest in the current series, started in 2014. Despite the same recovery trend in supplementary indicators for labour force, wider definitions of unemployment, ie, the composite measure of labour underutilisation, have remained well above of pre-2018 levels. This implies the labour market has not fully recovered since the pandemic and an expected slowdown in activity could further add to challenges on this front.   Unemployment vs NPLs (%)   Breakdown of C/A financing (12m-rolling, US$bn)   Primary balance (12m-rolling, % of GDP)   Widening external imbalances The current account deficit has expanded rapidly since early 2022 driven by commodity and gold imports in addition to the widening impact of strong domestic demand. A strong increase in tourism revenues has limited the extent of expansion. For the remainder of the year, an improvement is likely given the recent normalisation in energy prices and gold imports, while recovery in global demand and a possible change in policy mix to a tighter stance should also be supportive for the foreign trade balance.   On the capital account, with official transfers from Russia and strong unidentified inflows, official reserves recorded an increase last year, though the quality of external financing continues to overshadow the outlook given tighter global financial conditions. In the first quarter of this year, total flows have again weakened in the absence of strong unidentified inflows, leading to pressure on international reserves.     Budget deficit on the rise In the first four months of this year, there has been a major fiscal expansion pulling the central administration budget deficit to c.3.0% of GDP. According to the real budget trend based on the programme (IMF) defined primary balance realisation, which excludes one-off revenues, there was a deficit of around TRY42.5bn in April, bringing the primary balance for the last 12 months to a deficit of 1.9% of GDP.   In addition, the 12-month budget balance excluding one-off revenues rose to a deficit of 2.8% of GDP. Going forward, elevated spending pressures during the election period and an expected slowdown in activity and reconstruction efforts after the earthquakes point to a higher deficit, to above 5% of GDP. However, tax hikes and administrative price hikes to address the widening in the budget deficit in 2H23 should not be ruled out.   Signals of moderation in lending The latest volume data after the elections hint at momentum loss. Accordingly: (1) non-SME corporate lending decelerated sharply in both state and private banks though appetite in the latter dropped to single digits in annualised 13-week moving average terms. This shows increasing challenges for corporates in accessing financing lately; (2) SME lending momentum hand is strong but there has been a moderation in private banks. On the retail side, (3) credit cards have remained on a strong growth path given the supportive impact of low real interest rates; (4) there are signals that momentum in mortgages is about to peak; (5) while the appetite for GPLs is on the decline, in recent months this has been more evident in state banks.   Regarding deposits, FX deposit formation on both the retail and corporate sides remain in negative territory showing the impact of “liraization” moves to control residents’ FX demand.   Banking sector volume expansion
EUR/USD Flat as Eurozone and German Manufacturing Struggle Amid Weak PMI Reports

Australia's Uncertain Path: Deciphering Inflation, Rate Hikes, and Market Confusion

ING Economics ING Economics 15.06.2023 11:39
Australia: Why markets may be pricing in too much tightening Australia’s economy is slowing, though not enough to quell inflation fears. Inflation itself is falling, though the pace of decline has been erratic and the labour market remains robust. Amidst all of this, the Reserve Bank of Australia has been hiking rates though is struggling to get its message across about the likely path from here.   Guidance has sometimes been inconsistent Markets have been taken on quite a ride in recent months. Firstly, the RBA noted at its February 2023 meeting that inflation was unlikely to fall into its target range until 2025. We don’t agree. But notwithstanding that, there seemed to be information contained in that statement that rates would stay higher for longer. Then there was the change to the policy statement in March moving from “further rate hikes” to “further tightening”, which seemed to suggest multiple planned hikes had dwindled to just one and was followed by a pause in policy in April. Markets smelled a peak in rates at 3.6%.     Then, despite further falls in inflation, the RBA hiked again in May and held the door open to further hikes (the previous singular rate hike hint seems to have been erroneous, misinterpreted, or both), and subsequent commentary emphasised the risks to rising unit labour costs and low productivity. That was then followed by a higher-than-anticipated wage price index for 1Q23, a softer-than-expected labour release for April, but a pickup in monthly inflation data. Markets were divided, but most thought the RBA would leave rates unchanged in June. They didn’t, and hiked to 4.1%, with a hint that further hikes were going to be data-dependent.     Most recently, the May labour data has strengthened unexpectedly again, raising doubts about the whole slowdown story and putting the RBA back under tightening pressure. Markets are still pricing in further hikes, but it doesn’t feel like they have a strong grasp on what is really going on, or where we are going from here. Admittedly, the macro data has been very erratic. But this hasn’t been helped by official guidance, which has not been very consistent. This note will try to make some sense of what is a very cloudy backdrop. But the reality is that the outlook remains extremely uncertain.   Productivity is cyclical  
ECB Decision Dilemma: Examining the Hawkish Hike and Its Potential Impact on Rates and FX

Navigating Uncertainty: Assessing the Labour Market and Rate Outlook Amidst Economic Dynamics

ING Economics ING Economics 15.06.2023 11:48
Is the labour market turning? It is not at all clear The labour market is also remaining remarkably (and unhelpfully) firm, with May data showing an unexpected rise in full-time employment and a drop in the unemployment rate. Viewed against long-run trends, the unemployment rate remains extremely low and doesn't seem consistent with slower inflation. And then there is wage growth, which is also still heading higher, though is very lagging, so we don’t really know what is going on here in real time.    So, despite the slowdown in overall economic growth, there are a number of indicators that still look like reasons for more tightening, rather than either easing or pauses, though we suspect these are not yet showing the full extent of the effects of earlier monetary easing.     Also, the RBA has at times seemed keen not to overtighten given the lags involved in the monetary transmission mechanism. Time is likely to be a helpful ally for rate doves allowing the slowdown to work through the economy more fully. This is certainly true of the lagging labour market.  What happens in other central banks, most notably the US Federal Reserve may also play a role. It will be far easier for the RBA to hold fire if that is also what the Fed is doing. Though this also remains a tight call and the current guidance from the Fed is for another 50bp of tightening, even though we don't think that they will ultimately deliver.    All things considered, the case for believing that the cash rate may have already peaked is weakening, if not entirely dead. So while this remains the base forecast, it will not take much for us to jettison it in favour of further hikes. That said, the market expectation for a further 50bp of tightening does feel too high, and we would limit any further increase to 25bp. It would certainly help our current call a lot if activity and labour data both swung our way in the coming months, to bolster the message from lower inflation, on which we feel a much stronger conviction. We have, however, ditched our view that rates will be cut as soon as 4Q23, and have pushed this out into 2024.   AUD/USD outlook
Navigating Headwinds: Outlook for the Finnish Economy

ECB Raises Interest Rates: Market Reaction, Future Outlook, and Implications for EURUSD

Alex Kuptsikevich Alex Kuptsikevich 16.06.2023 14:01
On Thursday, the ECB raised three key interest rates by 25 basis points, taking the benchmark lending rate to 4%, the highest since 2008. It also confirmed its intention to refuse to refinance coupons and maturing bonds, accelerating quantitative easing - another parameter of policy tightening.     Markets had anticipated this move, so the attention of traders and journalists was, as usual, focused on the comments that would determine the trajectory of future actions. In contrast to Fed Chairman Powell, ECB President Lagarde was much more reassuring about future moves. She confidently stated that a few more hikes would be needed, leaving little doubt about a hike at the next meeting. This sharply contrasted with Powell, who highlighted a July hike as the more likely scenario but did not rule out the possibility of no hike. Lagarde pointed to the strength of the labour market and rising core inflation as factors in domestic price pressures. Despite the reversal to a lower inflation trend, she maintained that the ECB still has ground to cover to contain inflation.     It took some time for the markets to appreciate the seriousness of the ECB's stance. An initial 0.5% rise in EURUSD on the release of the commentary, which did not soften the tone significantly from May, picked up after the press conference and continued for the rest of the day, giving EURUSD a 1.1% gain, with the pair stabilising around 1.0950. The pair's technical disposition should also be considered, as it adds to the amplitude. After rising above 1.0880, the EURUSD crossed the 50-day moving average, and a decisive take of this level further supports the buyers' resolve. The EURUSD has been trading in a broad bullish corridor since the beginning of the year after bouncing off its lower boundary earlier this month and confirming the seriousness of the short-term uptrend with yesterday's strong move. The bulls are now focusing on the 1.1050 area, the April high.     However, given the upward bias of the move, the pair could be as high as 1.1100 by the end of the month. The 1.1200 area will be the next major milestone, through which the ultra-long 200-week moving average trend passes, and many pivot points are concentrated. The dollar will struggle there.
GBP: BoE Stands Firm on Bank Rate and Mortgage Interest Relief, EUR/GBP Drifts Lower

Falling Retail Sales in Poland Signal Weakness in Second Quarter Consumption"

ING Economics ING Economics 22.06.2023 12:24
Falling retail sales in Poland confirm consumption weakness in the second quarter Retail sales fell by 6.8% year-on-year in May, pointing to continued weakness in household consumption in the second quarter. Price pressure is abating in the short run, but mid-term upside risks remain substantial due to the tight labour market, buoyant wage growth and expansionary fiscal policy. More decisive monetary easing is expected in late 2024. Retail sales fell by 6.8% year-on-year in May (ING and consensus: -5.7%), following a 7.3% year-on-year decline in April. Seasonally adjusted sales fell by 1.1% month-on-month, after rising at the same rate a month earlier. Weakness in consumption will facilitate disinflation in the short term, while medium-term trends are more uncertain. The decline in sales was broad-based. In real terms, sales declined in all categories. Durable goods fell at a double-digit rate: furniture, consumer electronics, and household appliances saw declines of -14.8% YoY, while newspapers and books fell by -15.2% YoY. The exception was car sales (-2.7% YoY), where deliveries of pre-ordered cars that were delayed due to supply chain disruptions and processor shortages were most likely still taking place. On the other hand, a positive sign is a decline in the implied retail sales deflator to single-digit levels. The deceleration of inflation amid sustained double-digit growth in nominal wages should promote a gradual improvement in real household incomes and, consequently, a recovery in private consumption, but the process is slow. At the moment, everything indicates that the second quarter of this year was the third consecutive quarter of declining household consumption, and we should expect increases only in the second half of the year.   Real disposable income of households will continue to recover   Weakness in consumption will promote disinflation in the short term, while medium-term trends are uncertain. Against the backdrop of a tight labour market, high wage growth, minimum wage hikes, and expansionary monetary policy, it will be increasingly difficult for inflation to continue to fall after reaching high single-digit levels. As a result, the prospect of inflation returning to the NBP's target remains distant, and this means that the elevated level of interest rates will remain for longer. At the same time, the Monetary Policy Council has expressed a willingness to cut rates later this year in the event of single-digit inflation in September and the prospect of further declines. In our view, this would be a one-off move, and the full monetary easing cycle will not begin until the fourth quarter of next year.
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Asia Morning Bites: Japanese Inflation Rises, Anticipation of BOJ Policy Adjustment

ING Economics ING Economics 23.06.2023 12:00
Asia Morning Bites Japanese core inflation excluding food and energy edges higher in May - tees up the Bank of Japan for a July tweak to policy.   Global Macro and Markets Global markets:  After several days of decline, US stocks turned around on Thursday, and equity futures indicate that they may have a little further to go today. The S&P 500 rose 0.37%, while the NASDAQ rose 0.95%. China was out for Dragon Boat Day and will be out today too.  US Treasury yields went higher again. The Yield on both the 2Y note and the 10Y bond rose 7.6bp, taking 10Y yields to 3.795%. 10Y UK Gilt yields fell 3.8bp after the larger-than-expected Bank of England hike. EURUSD pushed above 1.10 yesterday, despite the rise in US yields, but it could not hold on to its gains and has retreated back to 1.0956 – not much changed from 24 hours ago.  G-10 currencies including the AUD and JPY lost ground to the USD, but GBP was steadier, helped by higher rates. Most Asian currencies weakened against the USD yesterday. The THB rose to 35.075, and the SGD rose to 1.3447. USDCNH has risen to 7.1957 and topped 7.20 overnight.   G-7 macro: There were further hawkish comments from Jerome Powell overnight, who said that the US may need one or two more rate hikes. Barkin also indicated that he was happy to see rates go higher. The main macro release from the US for the day was existing home sales. Lack of supply seems to be helping house prices to remain supported, as James Knightley writes here. Initial jobless claims held on to the recent highs at 264K, though continuing claims drifted a little lower. Not quite a smoking gun for the labour market, but it is becoming a little more interesting. The Bank of England’s 50bp hike took markets by surprise. James Smith and Chris Turner write about it here. James notes, “We’re tempted to say that today’s 50bp move won’t become a new trend, but two further 25bp hikes seem like the most likely route after today’s meeting”. Today is another quiet day for macro releases, with nothing of note from the US and only retail sales from the UK to look at.   Japan:  May inflation data came out slightly higher than expected. The headline inflation rate was 3.2% YoY in May (vs 3.5% in April, 3.2% market consensus) but core (3.2%) and "core-core" (4.3%) inflation beat market expectations. Inflation excluding food and energy even rose from 4.1% in April. The headline CPI index was unchanged month-on-month, but goods prices fell 0.1% MoM sa, while service prices rose 0.1%. Housing, transportation, telecommunications, and entertainment prices continued to rise, while utilities fell again. We think there are signs of inflationary pressure building up on the supply side, but it is certainly not strong enough for the BoJ to bring about immediate tightening.Looking ahead, the current energy subsidy program will end in September and some power companies will begin to raise electricity fees again. Thus, we see headline inflation staying above 2% for a considerable time. We expect June Tokyo inflation, released next week, will also pick up again.  We think that the BoJ will upgrade its inflation outlook in July and a yield curve control (YCC) tweak is still possible despite the dovish comments from several board members. They will probably justify their action by saying that a YCC tweak is not a tightening, but instead, that it is done to improve market functionality. Another reason that we think a July tweak is possible is that a shift in YCC may need to come as a surprise to avoid a large bond selloff. Singapore:  May inflation is set for release today.  The market consensus points to a slight softening in inflation with core and headline inflation slipping to 4.7%YoY and 5.4%YoY, respectively.  Continued robust domestic demand is preventing price pressures from dissipating quickly.  Despite the dip in inflation, the MAS will likely be on notice monitoring price developments with core inflation still well above target.  
AUD/USD Analysis: Identifying Opportunities for Long Positions

The Dilemma of Hungary's Strong Labour Market: Improving Metrics Amidst a Technical Recession

ING Economics ING Economics 23.06.2023 11:52
The dilemma of Hungary’s strong labour market A strengthening labour market during a technical recession is something which we are not used to seeing. Yet, Hungary’s labour metrics have been improving recently, raising the pro-inflationary risk once we emerge from the real economic downtrend.   The Hungarian labour market is very resilient The Hungarian Central Statistical Office (HCSO) has released the latest set of labour market data (wages and the unemployment rate). Wage growth remained strong in April, despite lower bonus payments, with the drop in real wages roughly unchanged compared to the previous month. Labour market participation has risen and remains close to record high levels, as the cost-of-living crisis encourages a willingness to work. This, along with still present labour shortages in some sectors, is helping to lower the unemployment rate during a technical recession.     Regular wage growth picked up again Starting with wages, outflows remained quite strong, with average gross wages rising by 15.5% year-on-year (YoY) in April 2023. However, the yearly based figure was slightly lower than our own expectations, as we had anticipated higher bonus payments. In this regard, regular gross earnings rose by 16.9% on a yearly basis in April, breaking a four-month-long streak of deceleration in the growth rate of regular gross earnings.   Nominal and real wage growth (% YoY)   Looking at the divergence in wage growth between the private and public sectors, the impact of bonuses is clearly visible. While public sector wage growth accelerated to 13.4%, private sector wage growth slowed to 16.4%. This is in line with our previously mentioned view; that this year in April higher earners missed out on last year’s bonus payments. From a sectoral perspective, wages grew above average in almost all sectors, with construction and financial services being the only two exceptions. The former is hardly surprising, given that construction activity is suffocating under high interest rates and shrinking order books. As for financial services, a mere 2.4% increase in average wages was registered, which signals that this was the main area where bonuses were not paid to the same extent as last year.   Wage dynamics (three-month moving average, % YoY)     Going forward, we expect the 2023 full-year wage growth to be around 15-16%. As cumulative average wage growth was 12% in the first four months of the year, we expect some strengthening for the rest of the year. One reason for this is the wage agreement reached during the year for some parts of the public sector. In addition, as the economy slowly recovers in the second half of the year, demand for labour may remain strong (counterbalancing the seasonal effects) pushing up the pace of wage growth further.     Unemployment rate keeps lowering Speaking of demand for labour, unemployment continues to fall in Hungary, according to the latest HCSO model estimate for May. It shows that the number of unemployed has shrunk to 186,000. Meanwhile, the official unemployment rate indicator (used in international comparisons), the three-month moving average survey, also showed a decline, to 3.9% in the March-May period. Of course, these indicators are still above their levels of a year ago, but it seems particularly surprising that labour market indicators are improving during a technical recession. It also shows that this current crisis is unlike anything we have seen before.     Looking at the monthly data, we can see that in recent months the fall in unemployment has gone hand-in-hand with a rise in employment, while the number of labour market participants has remained broadly stable (fluctuating within a statistical margin of error). The employment rate has again approached its historical peak and is not far away from reaching it. Official three-month average-based statistics show a similar trend. Thus, it appears that sectors that are facing labour shortages and remain confident about the future (for example, because they have higher order books than a year earlier) can absorb the right labour from the potential labour pool.
Market Analysis: EUR/USD Signals and Trends

Mixed Signals in Inflation Release: Caution Advised Amid Volatility and Potential Reversals

ING Economics ING Economics 28.06.2023 08:08
It wasn't all one way though... But it would be wise not to get too carried away. Certainly, a number of outsize declines in some components drove today's big fall in inflation. But this was a messy release, with a number of interesting increases as well as decreases. Food and beverages rose 1.05% MoM, much faster than the recent trend increase. Rents, an important contributor to the housing component, continued to rise at a 0.8% MoM pace, and are showing no signs of slowing. And there was a large 1.1% MoM increase in financial prices.    In short, there was a lot of volatility in this release, and a slightly different spread of outcomes could have seen the numbers go the opposite way. So while today's numbers show a welcome moderation in inflation, especially in the core series, it is harder to pull out of this release anything that confirms that the trend in the months ahead will also remain more moderate. Retail gasoline prices in June will average higher than in May, so the transport element of today's fall will likely reverse. And in July, we will have to deal with much higher electricity tariffs (a 20% YoY increase or even more is anticipated), which will push up the utilities part of the housing component.    Base effects will continue to help the year-on-year comparisons, so we see June inflation slipping further to 5.2% YoY.  But inflation in July may go sideways, or even rise slightly, and this could be enough to persuade the RBA of the merits of a further 25bp rate hike at their September meeting, taking the cash rate to 4.35%. That decision will also likely be influenced by developments in housing and the labour market, and if these have softened substantially by then, it won't be such an obvious call.    The AUD dropped sharply on the release, which is a perfectly reasonable response, as markets pared back their expectations for RBA tightening to just over one more rate hike by the end of the year. That has a little further to be reduced in our view and could keep the AUD in this sort of range over the coming months until there is a clearer sign on the direction for US rates. The long-awaited dollar weakness is taking a while to arrive as the US economy doesn't seem to want to lie down despite the best efforts of the Federal Reserve Bank.  
Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Inflation Numbers Take Center Stage as Quarter Comes to a Close

Michael Hewson Michael Hewson 30.06.2023 09:50
Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      
US Inflation Rises but Core Inflation Falls to Two-Year Low, All Eyes on ECB Rate Decision on Thursday

European Markets Await RBA Decision as US Observes Independence Day

Michael Hewson Michael Hewson 04.07.2023 08:55
Europe set for flat open, as RBA stays on hold         Yesterday saw a snoozy start to July for European markets with an initially positive open giving way to a mixed session, with US markets only opening for a short time ahead of the US Independence Day holiday today.     US markets finished their shortened trading session making some modest gains, but interest was relatively low-key with the latest ISM manufacturing numbers for June pointing to continued weakness in that part of the US economy.     On a more positive note, if you can call it that, the weak prices paid component of the data showed that inflationary pressure has continued to ease and as such might offer the hope that a July rate hike from the Fed could well be the last one before a lengthy pause.     European manufacturing PMIs also exhibited similar weakness in their respective components, with varying degrees of contraction, however there was a common theme running through them, which was declining output, as well as falls in new orders.     In the UK numbers we also saw reports of falling input costs due to lower fuel costs, commodity price decreases, and improvements in supply chains. Average output prices also fell for the first time since April 2016. These trends would appear to suggest that for all the hawkish narrative coming from central bankers that a wave of disinflation is working its way through the global economy, and that if they aren't careful, they could end up over tightening at a time when inflation is already on a downward path.     That said, central banks biggest problem is that they are so wedded to their 2% inflation target that rather than accepting the fact it may take years to fall back to that level, they risk breaking something in order to get it back there quicker.     Earlier this morning the Reserve Bank of Australia took the decision to follow up its surprise 25bps rate hike of last month, by deciding to keep rates on hold, albeit with the same hawkish bias as last month. The central bank statement went on to say that inflation was still too high and that more tightening may well be required.     With meetings occurring on a monthly basis the bank appears to have decided to wait and see the effects recent rate hikes have had on the wider economy, as well as waiting to see what other central banks do later this month, even though we pretty much know that further rate hikes are coming from the likes of the Federal Reserve and ECB.     With the labour market looking strong, services inflation still looking sticky it remains unlikely that we've seen the terminal rate yet for the Australian dollar, with markets pricing at least another 38bps of hikes by year end, although this number could come down.     Today's European session looks set to be a quiet one with the US off for the 4th July holiday, and little in the way of economic data ahead of tomorrow's services PMI numbers for June which are likely to make for better reading from an economic resilience point of view.           EUR/USD – continues to find support in and around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – while above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – finding support between 0.8570/80 area, with resistance at the 50-day SMA which is now at 0.8663. Behind that we have 0.8720. Below 0.8560 targets 0.8520.     USD/JPY – slipped back to the 144.00 area yesterday before rebounding but has so far held below 145.00. The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open unchanged at 7,527     DAX is expected to open 19 points higher at 16,100     CAC40 is expected to open unchanged at 7,386     By Michael Hewson (Chief Market Analyst at CMC Markets UK)
EUR Under Pressure as July PMIs Signal Economic Contraction

Quiet Day in FX as US Markets Take a Break on Independence Day

ING Economics ING Economics 04.07.2023 09:18
FX Daily: A hawkish ‘skip’ by the Reserve Bank of Australia The RBA decided to focus on decelerating inflation rather than the strong labour market and kept rates on hold overnight. Still, it reiterated a data-dependent approach and signalled openness to more tightening ahead. In general, it should be a quiet day in FX today due to the US national holiday, but things will get hectic again from tomorrow.   USD: National holiday today, but volatility to pick up from tomorrow The week has started without very clear direction dynamics in dollar crosses, largely due to reduced flows in US markets around the Independence Day holiday: US bond and equity markets are closed and there are no data releases, so expect another quiet day in FX. Yesterday, the ISM manufacturing index was released and came in at 46.0, below consensus expectations. The print was in contractionary territory (i.e. below 50) for the eighth consecutive month and hit its lowest level since May 2020. It’s worth noting that ISM manufacturing has been a historically accurate leading indicator of GDP dynamics and it currently points to a substantial slowdown.   This week, markets will once again need to filter their rate expectations for the evidence offered by data releases in the US. The reaction to the ISM manufacturing index has been limited due to reduced volatility around the US holiday, and also because the ISM services (out on Thursday) has been a bigger market mover. USD-crosses volatility will pick up again tomorrow when the focus will shift to FOMC minutes.
Tightening Oil Market: Macro Uncertainty and Supply Dynamics Impact Prices

Tightening Oil Market: Macro Uncertainty and Supply Dynamics Impact Prices

ING Economics ING Economics 06.07.2023 13:11
Tighter oil market over the second half of 2023 Fundamentals are not dictating oil prices at the moment. Instead, macro uncertainty and concerns over the China recovery are proving an obstacle to oil prices moving higher. In addition, expectations for a more hawkish US Fed will certainly not be helping risk appetite. Speculators have reduced their positioning in the market considerably in recent months. ICE Brent has seen the managed money net long fall from a year-to-date high of around 300k lots in February to around 160k lots in the last reporting week. This has predominantly been driven by longs liquidating, although there has also been a fair number of fresh shorts entering the market. We still expect global oil demand to grow by around 1.9MMbbls/d in 2023, and while this may appear aggressive in the current environment, it is more modest than some other forecasts – for example, the International Energy Agency forecasts demand to grow by 2.4MMbbls/d this year. Whilst we believe that our demand estimates are relatively modest, there are still clear risks to this view. The bulk of demand growth this year (more than 50%) is expected to be driven by China. So far this year, indicators for Chinese oil demand have been positive, as the economy has reopened. However, the concern is whether China will be able to keep this momentum going through the year. The risk is that the growth we have seen in domestic travel starts to wane as the effects of 'revenge' spending ease. Supply-side dynamics continue to provide a floor to the market. OPEC+ continues to cut and we have seen Saudi Arabia announce further voluntary supply cuts through the summer. Recently-announced cuts from Saudi Arabia, Russia and Algeria amount to a reduction of a little over 1.5MMbbls/d in supply over August 2023. Although, there are doubts over whether the 500Mbbls/d of cuts recently announced by Russia will be followed. It doesn’t appear as though Russia has stuck to a previous cut of 500Mbbls/d when you consider that Russian seaborne crude oil exports have been strong for most of the year. Drilling activity in the US has also slowed this year with the number of active oil rigs in the US falling from a year-to-date peak of 623 in mid-January to 545 recently, which is the lowest level since April 2022. While supply growth is still expected from the US, and output is set to hit record levels, the growth will be much more modest than in previous years. For 2023, US oil output is expected to grow in the region of 600-700Mbbls/d, while for 2024 growth is expected to be less than 200Mbbls/d. Higher costs, a tight labour market and an uncertain outlook all contribute to this more tepid growth. While the broader theme we have seen from US producers in recent years is to also be more disciplined when it comes to capital spending. We have revised lower our oil forecasts for the latter part of the year. A more hawkish Federal Reserve, limited speculative appetite (given the uncertain outlook), robust Russian supply and rising Iranian supply all suggest that the market will not trade as high as initially expected. We still forecast that the market will be in deficit over the second half of the year and so still expect the market to trade higher from current levels. We forecast ICE Brent to average US$89/bbl over 2H23.  
Jobs shed in manufacturing and real estate sectors! Fiscal support will be limited with a shortfall in tax revenue

Czech Republic: Disinflation Challenges Czech National Bank's Rate Cut Plans

ING Economics ING Economics 06.07.2023 13:35
Czech Republic: Inflation below 10% is not enough for the Czech National Bank The economy has confirmed weak activity in recent months, but the numbers are more in line with expectations. At the same time, inflation is surprising to the downside and the overall labour market picture is more anti-inflationary than expected. Looking ahead, the inflation profile looks comfortable – probably the best in the region. We expect June inflation to fall below the 10% YoY threshold and the disinflationary momentum to continue through the summer months. However, disinflation will slow in the autumn and winter, making it challenging for the CNB to cut rates. We expect the first rate cut in November when the central bank will have a new forecast in hand, but we see a risk of delaying a rate cut until the first quarter of next year. This again makes the CNB the most hawkish central bank in the CEE region. On the fiscal side, we also see a big story. The government recently approved a state budget for next year of CZK235bn targeting 1.8% of GDP, by far the lowest figure in the region. We expect a successful legislative process during the summer months, which implies a reduction of next year's borrowing needs to 60% of this year's level. In addition, June's state budget result showed an improvement for the first time this year. We thus remain positive on Czech assets. Czech government bonds (CZGBs) should maintain strong demand and we expect the market to shift its focus to supply dynamics soon. The Czech koruna has traded at weaker levels than we expected in recent weeks. However, the koruna should benefit most from the EUR/USD recovery and we see room for a reassessment of market expectations for a CNB rate cut.  
ADP Employment Surges with 497,000 Gain, Nonfarm Payrolls Awaited - 07.07.2023

ADP Employment Surges with 497,000 Gain, Nonfarm Payrolls Awaited

Kenny Fisher Kenny Fisher 07.07.2023 08:57
ADP employment surprises with a huge gain of 497,000 On Friday, US releases nonfarm payrolls and Canada publishes the employment report Nonfarm payrolls are expected to fall to 225,000, Canada projected to add 20,000 jobs The Canadian dollar is in negative territory on Thursday. In the North American session, USD/CAD is trading at 1.3360, down 0.58%. The Canadian dollar has slipped over 1% since Wednesday.   ADP employment shows a massive gain  After the Fed minutes on Wednesday, the markets were awaiting the nonfarm payrolls on Friday. The ADP employment report, which precedes nonfarm payrolls, often gets no more than a cursory glance as it’s not considered a reliable precursor to the NFP. Thursday’s release, however, was simply too large to ignore. The ADP reported a gain of 497,000 in June, up from 267,000 in May and well above the consensus of 228,000. US nonfarm payrolls are expected to move in the opposite direction of the ADP report, with a consensus of 225,000 in June, down sharply from 339,000 in May. After today’s ADP shocker, Fed policy makers will be hoping that nonfarm payrolls decline as expected. If nonfarm payrolls follow the ADP lead and climb sharply higher, the Fed may be forced to raise rates more than expected in the second half of the year to cool the hot labour market. The money markets have repriced rate expectations for July following the ADP release. The probability of a 0.25% hike is currently at 94%, up from 86% prior to the ADP report. Fed Chair Powell has hinted at one more rate hike after July, but a September hike will be more likely if nonfarm payrolls rise on Friday. The ADP report grabbed all the headlines, but other employment numbers on Thursday could indicate that the labour market is slowly weakening. Unemployment claims rose from 236,000 to 238,000, higher than the consensus estimate of 245,000. As well, JOLTS Jobs Openings fell from 10.32 million to 9.82 million, shy of the consensus estimate of 9.93 million. The ISM Services PMI may be another headache for the Fed, as it jumped in June to 53.9, well above the May reading of 50.2 and the consensus estimate of 51.2 points. The report indicates that business activity is expanding and the economy remains strong, despite the Fed’s aggressive tightening cycle. Canada releases the June employment report on Friday. The economy is expected to rebound with 20,000 new jobs in June, after a loss of 17.3 thousand in May. The unemployment rate is projected to rise to 5.3% in June, up from 5.2% in May. . USD/CAD Technical USD/CAD is testing resistance at 1.3318. Next, there is resistance at 1.3386 1.3217 and 1.3149 are providing support  
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.
EUR/USD Faces Resistance at 1.0774 Amid Inflation and Stagflation Concerns

UK Employment Falls, but Wage Growth Remains High; BoE Governor Bailey Signals More Rate Hikes Needed

Kenny Fisher Kenny Fisher 11.07.2023 14:06
UK employment falls but wage growth remains high BoE Governor Bailey says inflation will fall but more rate hikes needed The British pound has edged upward on Tuesday. In the European session, GBP/USD is trading at 1.2898, up 0.28%. The pound has put on an impressive rally, rising close to 200 pips against the dollar since Thursday.   UK employment softens, wages rise The UK delivered a mixed employment report for June. The economy created 102,000 jobs, far less than the 250,000 in May and shy of the consensus of 125,000. The unemployment rate rose from 3.8% to 4% and unemployment claims rose by 25,700, after a decline of 22,500 in May. However, wage growth excluding bonuses remained at 7.3% in the three months to May, above the consensus estimate of 7.1%. For Bank of England policymakers, the employment report is a good news/bad news release. The central bank needs the labour market to cool as it struggles to bring inflation down. To put it mildly, that battle has not gone as planned, with the OECD giving the UK the ignominious distinction of being the only major economy where inflation is rising. The June employment and unemployment numbers showed some cracks in the tight labour market, but wage growth, a key driver of inflation, remains stubbornly high. The takeaway from the jobs report is that the labour market is a bit less tight but wage growth remains inconsistent with the 2% inflation target and the BoE will have to continue to tighten policy. The cash rate is currently at 5.0% but the money markets have priced in a peak rate of 6.5%, which means that more pain is coming for businesses and households in the form of higher interest rates. BoE Governor Bailey is doing his best to put a brave face on a difficult situation. On Monday, Bailey said that inflation would fall “markedly” due to falling energy and food prices, but more rate hikes would be needed to bring inflation down from the current 8.7% to the 2% target.   GBP/USD Technical GBP/USD tested support at 1.2782 earlier today. The next support level is 1.2716 There is resistance at 1.2906 and 1.2972  
EUR/USD Downtrend Continues Amidst Jackson Hole Symposium Anticipation

A Call for Reform: Germany's Stagnating Economy and the Need for Agenda 2030

ING Economics ING Economics 12.07.2023 14:01
A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than-hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024. Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural. Fiscal and monetary austerity will extend economic stagnation With the economy on the edge of recession, the government’s decision to return to (almost) balanced fiscal budgets next year is a bold move. No doubt, after years of zero and sometimes even negative interest rates, Germany’s interest rate bill is increasing and there are good reasons to stick to fiscal sustainability in a country that will increasingly be affected by demographic change (and its fiscal impact). Nevertheless, the last 20 years have not really been a strong argument for pro-cyclical fiscal policies. With both fiscal and monetary policy becoming much more restrictive, the risk is high that the German stagnation will become unnecessarily long. Waiting for 'Agenda 2030' In the early 2000s, the trigger for Germany to move into the final stage of change management, 'acceptance' (and solutions), was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. In fact, a protracted period of de facto stagnation without a severe recession may reduce the sense of urgency among decision-makers and suggests Germany could be stuck in the stages of denial, anger, bargaining and possibly depression for a long time. Two decades ago, it took almost four years for Germany to go through the five stages of change. We hope this time that history will not be repeated.   German economy in a nutshell (%YoY)  
French Economy Faces Challenges Amid Disinflationary Trend

French Economy Faces Challenges Amid Disinflationary Trend

ING Economics ING Economics 12.07.2023 14:05
Moderate outlook From a sectoral point of view, the strength of demand for tourism-related activities and the high level of bookings for this summer should support French economic activity in the third quarter, but the support should diminish thereafter. At the same time, the industrial sector is suffering from weakening global demand. According to survey results, business leaders' assessment of order books has remained very weak for several months. At the same time, inventories of finished products remain high. This means that production is likely to decline over the coming months, as companies see no new orders coming in and have to clear their inventories. The PMI indices for the manufacturing sector have been in contraction territory (below 50) since January. In short, the growth outlook for the French economy is moderate. Growth in the second quarter will be weak, with a fall in GDP remaining a risk. Growth in the third quarter should be slightly better, supported by the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. But this is likely to lose momentum in the fourth quarter, and the end of 2023 and 2024 look weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are expecting growth of around 0.5% this year. For 2024, the gradual recovery in household purchasing power thanks to lower inflation is likely to be offset by even weaker global demand. As a result, we are less optimistic than the central banks and are forecasting French GDP growth of 0.6% in 2024 (compared with a forecast of 1% by the Banque de France).     The trend toward disinflation has begun and will continue Inflation in France stood at 4.3% in June, compared with 5.1% in May, thanks to a fall in energy prices and slower growth in food prices. The fall in inflation is set to continue over the coming months. Growth in producer price indices has slowed markedly. In addition, business price intentions are moderating sharply: price intentions in the manufacturing sector are at their lowest since early 2021, while in the services sector they are at their lowest since November 2021. These figures are in addition to those for the prices of agricultural products, which are falling sharply, which should lead to a sharp fall in food inflation over the coming months. The trend toward disinflation is therefore clearly underway and will continue. However, this trend will probably be slower in France than in other countries, due to less favourable base effects for energy. The tariff shield and fuel rebates prevented a sharp rise in energy prices over the summer and autumn of 2022. As a result, energy inflation is likely to return to positive territory in France in the coming months, with energy prices for the remainder of 2023 likely to remain higher than their levels in 2022, unlike in other countries. This will probably keep overall inflation higher in France than elsewhere this autumn and at the end of 2023. But this does not change the overall picture: ultimately, although less visible than elsewhere, disinflation is well underway and will continue to be seen in France over the coming months. While this trend is clearly encouraging, it does not mean that the problem of inflation is completely over. There is still a major risk pocket, namely services inflation, which is likely to increase in the months ahead and will probably become the main contributor to French inflation by the end of the year. The successive increases in the minimum wage, particularly in January and May 2023, which are being passed on to all wages, will continue to push up the price of services. The Banque de France estimates that negotiated pay rises will average 4.4% in 2023 (compared with 2.8% in 2022 and 1.4% in 2021), often supplemented by a one-off bonus. Salary increases are more pronounced in sectors where recruitment difficulties are greatest. As we expect the labour market to remain tight over the coming quarters despite the economic slowdown, wage increases are likely to strengthen further. However, given the lower price intentions and sluggish demand we expect in the coming quarters, it is likely that wage increases will not be fully passed on to selling prices, weighing on margins. Therefore, inflationary pressures, including in the services sector, should eventually subside. We expect CPI inflation to average 4.6% in 2023 (5.6% for the harmonised index) and 2.1% in 2024 (3.1% for the harmonised index).   The French economy in a nutshell (%YoY)  
Market Analysis: EUR/USD Signals and Trends

Growth Shifts to Services Amid Weakening Industry, Consumption Benefits from Employment and Decelerating Inflation

ING Economics ING Economics 12.07.2023 14:07
The weakening in industry temporarily leaves the onus of growth on services. Demand-wise, expect consumption to benefit from resilient employment and decelerating inflation. Investments will reflect better progress (or the lack thereof) in the implementation of the European Recovery and Resilience funds. First quarter consumption driven by a strong recovery in purchasing power The surprisingly strong 0.6% quarter-on-quarter GDP growth between January and March this year was driven by domestic demand. The relative strength of consumption was due to a 3.1% quarterly rebound in households’ real purchasing power, which benefited from the slowdown in inflation dynamics. The resilient labour market, with employment up and unemployment and inactivity down on the quarter, was apparently a decisive factor. Conditions were there for household saving ratios to reach 7.6% (from 5.3% in the fourth quarter of 2022), close to the pre-Covid 8% average, without penalising consumption.     Weakening industry points to softer growth in the second quarter Data for the second quarter suggests that the very good performance of the first will be hard to replicate. Industry just managed to propel value-added in the first quarter, but this seems highly unlikely in the second after a very disappointing -1.9% industrial production reading in April. Business confidence data for May and June and the relevant PMIs point to manufacturing softness through the rest of the second quarter and, possibly, into the third. For the time being, the decline in gas prices has failed to provide any relevant supply push for manufacturers, outweighed by deteriorating order books and stable stocks of finished goods. Services are also signalling some fatigue, but still look to be a decent growth driver, helped by a strong summer tourism season.     The fall in producer prices will bring goods disinflation down the line in CPI The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April, anticipating further decelerations down the line in the goods component of headline inflation. Services inflation is proving relatively stickier, though, possibly reflecting in part a re-composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.   Stickier services inflation to slow the decline in core inflation  
Fed Officials Shift Focus to Inflation Amid European and British Currency Upside Momentum

Greece: Transitioning the Economy and Sustaining Growth Outperformance

ING Economics ING Economics 12.07.2023 14:20
Transitioning the economy into the new normal and maintaining a good growth pace won’t be easy, but we expect Greece to remain a growth outperformer in the eurozone for at least a couple of years.   Mitsotakis has managed to get a second consecutive mandate It took two election rounds for Prime Minister Kyriakos Mitsotakis, the leader of New Democracy, to obtain a second mandate. In the first round, held on 25 May, he came first but could not obtain an absolute majority due to the proportional system, deprived of the majority bonus. As it was already known that the next election would be held with a different system, reintroducing a majority bonus, outgoing PM Mitsotakis abstained from seeking any form of coalition and focused on the new election which was held on 25 June. The different system did the trick. ND broadly replicated the result of May’s vote, but this time round – thanks to the bonus – this was enough to obtain 158 seats out of a required majority of 151. Mitsotakis was again given the mandate to form a government which has assured him another four years in power. Confronted by a very poor result which saw the number of votes almost halve from the 2016 election result, Alexis Tsipras, the leader of the main opposition party Syriza, resigned.   Two oppositions The June election added a new feature to the Greek political scene: three small parties on the right of New Democracy managed to pass the 3% hurdle, obtaining parliamentary representation. This means Mitsotakis will now have to confront two oppositions: one on the left, which will likely need some time to reorganise after the heavy defeat of Syriza, and one on the right, which might prove to be more insidious in its desire for visibility. It will be interesting to see whether pressure from the right will impact the policy line of the government any time soon.   Economy is still enjoying post-pandemic re-opening inertia The Greek economy has benefited from the post-pandemic period of prolonged re-opening effects and the related demand for tourism services. The tourism catch-up still seems to be in place. Year-to-date, the number of arrivals has already reached above the levels of 2019 over the same period. The economic rebound in 2022 brought about improvements in the labour market which still continue to this day. In May, the unemployment rate fell below 11% for the first time since late 2009. Employment gains – helped by cooling inflation – have continued to propel disposable income, ultimately supporting consumption.   Tourist arrivals back above pre-Covid levels (January-May)      
Portuguese Economy Faces Slowdown amid Global Challenges

Portuguese Economy Faces Slowdown amid Global Challenges

ING Economics ING Economics 12.07.2023 14:30
The Portuguese economy, driven by strong export dynamics in the first quarter, is expected to face a significant slowdown due to a weakening global economic context and rising financing costs. Although a further decline in inflation is expected, the inflation slowdown is hampered by increased wage growth.   Strong first-quarter growth will not be sustained In the first quarter, the Portuguese economy experienced 1.6% quarter-on-quarter growth, primarily driven by robust export dynamics. However, this positive momentum will be increasingly challenged by the tightening of monetary policy. As households and companies become more cautious about taking on new loans, consumption and investment will slow down. The coordinated tightening of global monetary policy will also contribute to weaker global growth prospects, which will dampen Portuguese export dynamics –an essential driver of economic growth in the first quarter. Despite numerous interest rate hikes, we maintain a positive growth scenario. For the second quarter, we still anticipate growth of 0.4% quarter-on-quarter, which is expected to decrease further to 0.2% in both the third and fourth quarters of this year. Positive factors such as favourable labour market developments, increased inflows of European funds, government measures to support income, and a thriving tourism sector partially mitigate the impact of higher interest rates. Additionally, consumer confidence has risen to its highest level since the start of the war in Ukraine, boosted by rising wages which have already risen more than 7% in certain sectors. Cautious recovery in consumer confidence
Germany's 'Agenda 2030': Addressing Stagnation and Structural Challenges

Germany's 'Agenda 2030': Addressing Stagnation and Structural Challenges

ING Economics ING Economics 13.07.2023 08:57
Germany needs an ‘Agenda 2030’. A stagnating economy, cyclical headwinds and structural challenges bring to mind the early 2000s and call for a new reform agenda   As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” Such is the case with the current economic situation in Germany, which looks eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholia and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. It's hard to say which stage Germany is in currently. International competitiveness had already deteriorated before the pandemic but this deterioration has clearly gained further momentum in recent years. Supply chain frictions, the war in Ukraine and the energy crisis have exposed the structural weaknesses of Germany’s economic business model, and come on top of already weak digitalisation, crumbling infrastructure and demographic change. These structural challenges are not new but will continue to shape the country’s economic outlook, which is already looking troubled in the near term. Order books have thinned out since the war in Ukraine started, industrial production is still some 5% below pre-pandemic levels and exports are stuttering. The weaker-than- hoped-for rebound after the reopening in China together with a looming slowdown or even recession in the US, and the delayed impact of higher interest rates on real estate, construction and also the broader economy paint a picture of a stagnating economy. A third straight quarter of contraction can no longer be excluded for the second quarter. Even worse, the second half of the year hardly looks any better. Confidence indicators have worsened and hard data are going nowhere. We continue to expect the German economy to remain at a de facto standstill and to slightly shrink this year before staging a meagre growth rebound in 2024.   Headline inflation to come down after the summer What gives us some hope is the fact that headline inflation should come down more significantly after the summer. Currently, inflation numbers are still blurred by one-off stimulus measures last year. Come September, headline inflation should start to come down quickly and core inflation should follow suit. While this gives consumers some relief, it will take until year-end at least before real wage growth turns positive again. At the same time, an increase in business insolvencies and a tentative worsening in the labour market could easily dent future wage demands and bring back job security as a first priority for employees and unions. In any case, don’t forget that dropping headline inflation is not the same as actual falling prices. The loss of purchasing power in the last few years has become structural.
Prolonged Stagnation: The Impact of Fiscal and Monetary Austerity

Prolonged Stagnation: The Impact of Fiscal and Monetary Austerity

ING Economics ING Economics 13.07.2023 09:00
Fiscal and monetary austerity will extend economic stagnation With the economy on the edge of recession, the government’s decision to return to (almost) balanced fiscal budgets next year is a bold move. No doubt, after years of zero and sometimes even negative interest rates, Germany’s interest rate bill is increasing and there are good reasons to stick to fiscal sustainability in a country that will increasingly be affected by demographic change (and its fiscal impact). Nevertheless, the last 20 years have not really been a strong argument for pro-cyclical fiscal policies. With both fiscal and monetary policy becoming much more restrictive, the risk is high that the German stagnation will become unnecessarily long.   Waiting for 'Agenda 2030' In the early 2000s, the trigger for Germany to move into the final stage of change management, 'acceptance' (and solutions), was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. In fact, a protracted period of de facto stagnation without a severe recession may reduce the sense of urgency among decision-makers and suggests Germany could be stuck in the stages of denial, anger, bargaining and possibly depression for a long time. Two decades ago, it took almost four years for Germany to go through the five stages of change. We hope this time that history will not be repeated.   The German economy in a nutshell (% YoY)
Moderate Outlook: Growth and Disinflation Trends in the French Economy

Moderate Outlook: Growth and Disinflation Trends in the French Economy

ING Economics ING Economics 13.07.2023 09:03
Moderate outlook From a sectoral point of view, the strength of demand for tourism-related activities and the high level of bookings for this summer should support French economic activity in the third quarter, but the support should diminish thereafter. At the same time, the industrial sector is suffering from weakening global demand. According to survey results, business leaders' assessment of order books has remained very weak for several months. At the same time, inventories of finished products remain high. This means that production is likely to decline over the coming months, as companies see no new orders coming in and have to clear their inventories. The PMI indices for the manufacturing sector have been in contraction territory (below 50) since January. In short, the growth outlook for the French economy is moderate. Growth in the second quarter will be weak, with a fall in GDP remaining a risk. Growth in the third quarter should be slightly better, supported by the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. But this is likely to lose momentum in the fourth quarter, and the end of 2023 and 2024 look weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are expecting growth of around 0.5% this year. For 2024, the gradual recovery in household purchasing power thanks to lower inflation is likely to be offset by even weaker global demand. As a result, we are less optimistic than the central banks and are forecasting French GDP growth of 0.6% in 2024 (compared with a forecast of 1% by the Banque de France).   The trend toward disinflation has begun and will continue Inflation in France stood at 4.3% in June, compared with 5.1% in May, thanks to a fall in energy prices and slower growth in food prices. The fall in inflation is set to continue over the coming months. Growth in producer price indices has slowed markedly. In addition, business price intentions are moderating sharply: price intentions in the manufacturing sector are at their lowest since early 2021, while in the services sector they are at their lowest since November 2021. These figures are in addition to those for the prices of agricultural products, which are falling sharply, which should lead to a sharp fall in food inflation over the coming months. The trend toward disinflation is therefore clearly underway and will continue. However, this trend will probably be slower in France than in other countries, due to less favourable base effects for energy. The tariff shield and fuel rebates prevented a sharp rise in energy prices over the summer and autumn of 2022. As a result, energy inflation is likely to return to positive territory in France in the coming months, with energy prices for the remainder of 2023 likely to remain higher than their levels in 2022, unlike in other countries. This will probably keep overall inflation higher in France than elsewhere this autumn and at the end of 2023. But this does not change the overall picture: ultimately, although less visible than elsewhere, disinflation is well underway and will continue to be seen in France over the coming months. While this trend is clearly encouraging, it does not mean that the problem of inflation is completely over. There is still a major risk pocket, namely services inflation, which is likely to increase in the months ahead and will probably become the main contributor to French inflation by the end of the year. The successive increases in the minimum wage, particularly in January and May 2023, which are being passed on to all wages, will continue to push up the price of services. The Banque de France estimates that negotiated pay rises will average 4.4% in 2023 (compared with 2.8% in 2022 and 1.4% in 2021), often supplemented by a one-off bonus. Salary increases are more pronounced in sectors where recruitment difficulties are greatest. As we expect the labour market to remain tight over the coming quarters despite the economic slowdown, wage increases are likely to strengthen further. However, given the lower price intentions and sluggish demand we expect in the coming quarters, it is likely that wage increases will not be fully passed on to selling prices, weighing on margins. Therefore, inflationary pressures, including in the services sector, should eventually subside. We expect CPI inflation to average 4.6% in 2023 (5.6% for the harmonised index) and 2.1% in 2024 (3.1% for the harmonised index).   The French economy in a nutshell (% YoY)
The Service Sector Driving Growth in Italy

The Service Sector Driving Growth in Italy

ING Economics ING Economics 13.07.2023 09:05
The service sector is driving Italy’s growth The weakening in industry temporarily leaves the onus of growth on services. Demand wise, expect consumption to benefit from resilient employment and decelerating inflation. Investments will reflect better progress (or the lack thereof) in the implementation of the European Recovery and Resilience funds.   First quarter consumption driven by a strong recovery in purchasing power The surprisingly strong 0.6% quarter-on-quarter GDP growth between January and March this year was driven by domestic demand. The relative strength of consumption was due to a 3.1% quarterly rebound in households’ real purchasing power, which benefited from the slowdown in inflation dynamics. The resilient labour market, with employment up and unemployment and inactivity down on the quarter, was apparently a decisive factor. Conditions were there for households’ saving ratio to reach 7.6% (from 5.3% in the fourth quarter of 2022), close to the pre-Covid 8% average, without penalising consumption.   Weakening industry points to softer growth in the second quarter Data for the second quarter suggests that the very good performance of the first will be hard to replicate. Industry just managed to propel value-added in the first quarter, but this seems highly unlikely in the second after a very disappointing -1.9% industrial production reading in April. Business confidence data for May and June and the relevant PMIs point to manufacturing softness through the rest of the second quarter and, possibly, into the third. For the time being, the decline in gas prices has failed to provide any relevant supply push for manufacturers, outweighed by deteriorating order books and stable stocks of finished goods. Services are also signalling some fatigue, but still look to be a decent growth driver, helped by a strong summer tourism season.
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Challenges ahead for Greece's recovery under Mitsotakis' second term

ING Economics ING Economics 13.07.2023 09:25
Economy is still enjoying post-pandemic re-opening inertia The Greek economy has benefited from the post-pandemic period of the prolonged re- opening effect and of the related demand for tourism services. The tourism catch-up still seems to be in place: year-to-date, the number of arrivals has already reached above the levels of 2019 over the same period. The economic rebound of 2022 has brought about improvements in the labour market which continue to this day. In May, the unemployment rate fell below 11% for the first time since late 2009. Employment gains, helped by cooling inflation, have continued to propel disposable income, ultimately supporting consumption.   Tourist arrivals back above pre-Covid levels (January-May)   Keeping up the recovery pace won’t be easy Mitsotakis’ second legislature will be a challenging one. The election result very likely reflected a call for continuity from the electorate, particularly in the economic domain. Securing continuity in growth against a backdrop of normalising monetary and fiscal policies will not be an easy task. A stable return to amply positive interest rates might complicate things on the private investment front, where Greece has yet to fill an investment gap since the times of the sovereign debt crisis. Here, keeping a strong focus on the implementation of the recovery and resilience plan might prove decisive. On the fiscal front, as elsewhere, the restoration of fiscal rules in 2024 will reintroduce constraints that had disappeared over the recent crisis years. The good news is that Mitsotakis is having his second term in office at the height of the summer tourism season, which is a good start.
Challenges Ahead for Belgium: Solid Consumption Masks Competitiveness and Fiscal Concerns

Challenges Ahead for Belgium: Solid Consumption Masks Competitiveness and Fiscal Concerns

ING Economics ING Economics 13.07.2023 09:29
Nothing comes for free in Belgium Solid household consumption is keeping the Belgian economy afloat, but a loss of competitiveness accompanied by worsening public finances and political hurdles will likely weigh on future growth.    Solid consumer spending The sharp rise in energy prices through to autumn 2022 and fall in prices thereafter raised fears of a V-shaped recession, particularly for household consumption. This, however, was not the case in Belgium. On the contrary, household consumption remained very solid throughout the period, even when energy bills hit consumer budgets the hardest. Household consumption has actually remained the main driver of economic growth over the last four quarters, as shown in the first chart below. There are several reasons for this: Labour market strength First, the labour market remains very solid, despite slowing economic growth in the last quarter of 2022. 75,000 jobs were created in 2022 and 11,500 in the first quarter of this year alone. Job creation has therefore become a key driver in supporting both household income and consumption. Automatic wage indexation Second, automatic wage indexation has remained in place and has resulted in a nominal increase in wages of at least 10%. It should be noted that, depending on the sector, the indexation mechanism comes into play at different times. A large number of workers, for example, saw their nominal wages increase by more than 11% at the start of 2023. It should also be noted that indexation applies to pensions and all social benefits too. Government support measures Third, significant additional measures have been taken by the authorities to soften the impact of rising energy prices on household bills – including the first few months of 2023, when gas and electricity prices were falling sharply.     Consumption remains the main support for GDP growth
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Belgian Economy Faces Challenges Amidst Uneven Performance

ING Economics ING Economics 13.07.2023 09:45
Firing on all cylinders? Not quite In addition to household consumption, investment has remained volatile and has been impacted by a few large transactions in the shipbuilding industry. This largely explains the solid growth seen in the first quarter of this year. On the contrary, the contribution of net foreign trade to growth remains negative. This can be explained by imports holding up well on the back of solid domestic demand while the export sector copes with weak foreign demand and is also reflected on the supply side by the prolonged contraction in manufacturing activity (as detailed in the graph below). In short, the Belgian economy is not currently performing at its peak level. On the demand side, domestic demand alone is fuelling growth. On the supply side, only the services sector is still showing signs of growth as industry remains in recession. We should also point out that the ECB's restrictive monetary policy is weighing on household investment in housing, which fell by no less than 4.2% year-on-year in the first quarter of 2023. Nevertheless, activity in the construction sector continues to grow (+2.2% in the first quarter of this year), thanks to other developments in conversion, non-residential buildings and infrastructure.   Manufacturing sector in recession Quarterly GDP growth decomposition, supply side   Threat to competitiveness The fact that the Belgian economy has a less volatile cycle than the eurozone average is nothing new. As we are currently seeing, growth is more resilient in periods of economic weakness. Unfortunately, this is also accompanied by a lack of vigour throughout periods of recovery. In addition to factors currently impacting the eurozone economy as  a whole (weakness in global industry, restrictive monetary policy), two key concerns are mounting in Belgium's case. These concerns are nothing more than the other side of the coin of the elements currently underpinning the solidity of the Belgian economy, but they could have a negative and lasting impact on growth. Firstly, economic developments in recent quarters have led to a loss of competitiveness for the Belgian economy. The automatic indexation of wages has meant that they have risen faster in Belgium than in neighbouring countries. Negotiated nominal wage increases this year could narrow the gap between these countries and Belgium, but they will not fully compensate for it. While the strength of the labour market is a good thing for the economy and the improved financial health of households, it is also currently translating into a decline in productivity. On the one hand, there are negative productivity gains within certain sectors. This is particularly evident within the manufacturing sector, where employment grew by 0.8% between March 2022 and March this year, while the sector's value added fell by 2.4%. On the other hand, we're seeing a composition effect on productivity. A large number of jobs are being created in low-productivity sectors (leisure, healthcare, public sector), while fewer jobs are being created in high-productivity sectors – some of which are even losing jobs (the financial sector, for example). Since productivity is an essential factor in the competitiveness of an economy, recent trends are jeopardising the Belgian export sector's ability to maintain its market share
Portugal's Strong Growth Fades as Global Conditions Weaken

Portugal's Strong Growth Fades as Global Conditions Weaken

ING Economics ING Economics 13.07.2023 09:57
After exceptionally strong growth for Portugal, a slowdown is looming The Portuguese economy, driven by strong export dynamics in the first quarter, is expected to face a significant slowdown due to a weakening global economic context and rising financing costs. Although a further decline in inflation is expected, the inflation slowdown is hampered by increased wage growth.   Strong first-quarter growth will not be sustained In the first quarter, the Portuguese economy experienced 1.6% quarter-on-quarter growth, primarily driven by robust export dynamics. However, this positive momentum will be increasingly challenged by the tightening of monetary policy. As households and companies become more cautious about taking on new loans, consumption and investment will slow down. The coordinated tightening of global monetary policy will also contribute to weaker global growth prospects, which will dampen Portuguese export dynamics –an essential driver of economic growth in the first quarter. Despite numerous interest rate hikes, we maintain a positive growth scenario. For the second quarter, we still anticipate growth of 0.4% quarter-on-quarter, which is expected to decrease further to 0.2% in both the third and fourth quarters of this year. Positive factors such as favourable labour market developments, increased inflows of European funds, government measures to support income, and a thriving tourism sector partially mitigate the impact of higher interest rates. Additionally, consumer confidence has risen to its highest level since the start of the war in Ukraine, boosted by rising wages which have already risen more than 7% in certain sectors.   Cautious recovery in consumer confidence
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Navigating Finland's path out of recession in 2023

ING Economics ING Economics 13.07.2023 10:07
Can Finland make its way out of recession for the remainder of 2023? Finland was in a technical recession in the second half of 2022 but recovered some of its losses at the start of 2023. We don’t expect a double dip as our base case, but a vibrant bounce-back seems unrealistic given weak global demand, high inflation and elevated rates are weighing on the recovery.   The Finnish economy was among the first in the eurozone to enter into a technical recession last year. Quarterly declines of -0.2% and -0.5% in GDP in the third and fourth quarters of 2022, respectively, were not negligible and relatively broad-based as consumption, investment and net exports all contributed to the declines. The purchasing power squeeze, weakening global demand, a higher reliance on Russia, and higher interest rates were important drivers of last year’s weakness. So far, 2023 has been a year of modest recovery. GDP grew by 0.4% in the first quarter, which means that recovery is underway. Statistics Finland provides a trend indicator of output, which showed a sharp uptick in activity in April, indicating that the recovery was still ongoing at the start of the second quarter. Still, the pace of growth is set to lose steam due to factors like weakening global demand, fading post-pandemic spending on services, and higher interest rates, which leads us to believe that annual growth of just 0.1% is a realistic outcome for the year. So we do not expect a strong recovery from here on, but an economy that will struggle to gain momentum as headwinds mount in the second half of the year. Upsides to the outlook should come from fading inflation and regained purchasing power. The historically strong labour market participation has boosted incomes, which will now also be supported by faster-rising wages. That should dampen the negative effects of inflation. With inflation trending down, real wage growth provides an upside to personal consumption over the second half of the year. The question is how the current spell of economic weakness is affecting the labour market. We don’t expect a large uptick in unemployment given current labour shortages, but rising unemployment and easing labour market tightness could dampen the real wage recovery.  The weaker cyclical conditions put government budgets and debt ratios under pressure. The budget deficit is weakened, among other factors, by increased defence spending and a higher debt service on the back of more elevated interest rates for the coming years. This means that the debt-to-GDP ratio is unlikely to make progress towards the 60% target. In fact, expectations are that it will trend up from the current level of 73%.   The Finnish economy in a nutshell (% YoY)
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Rates Spark: Assessing the End-of-Cycle Vibes and Market Reactions

ING Economics ING Economics 13.07.2023 10:12
Rates Spark: Are we there yet? The CPI surprise will not keep the Fed from hiking rates this month, but further hikes look less likely. Today's PPI may give markets another excuse to trade the easing inflation narrative, with front-end-led steepening sending end-of-cycle vibes. Today's ECB minutes will pit a hawkish stance against signs of easing inflation pressures.   US CPI surprise gives markets end-of-cycle vibes There was something in the air in the past few trading days. Just when 4% on the 10yr was looking comfortable, there was a pivot of attention towards yesterday's CPI report. Consensus pointed to a low 3% headline number. But we got better. Bang on 3%, so close to a break into a 2% handle. And, the core rate gets back below 5% for the first time in a year and a half. A good look for inflation overall, and correlating with market rates heading decisively lower. The 10Y US Treasury is now below 3.9% and the 2Y closer to 4.70%. The curve dis-inverted, this time in bull-steeping fashion as one would expect towards the end of a tightening cycle. Both real yields and inflation expectations ease lower. The 2Y breakeven rate has dipped back below 2%, a very comforting reading from the Fed’s perspective. The question now is whether the market continues to trade off the easing inflation narrative. There is an excuse to do so as today’s PPI report is also expected to be friendly. It’s quite a swing from the strong wage data last week into an easing inflation narrative for this week. Both are in fact backward looking, but the core inflation reading in particular is the dominant driver for market rates. If the market begins to believe that easing pipeline pressures and the pull of lower headline rates can dominate, then the strong labour market backdrop can be downsized as an issue. It is tough to make a conviction-directional view from here. We had been consistently looking for a break above 4% and to stay above that level for a while. But we are clearly back below, and with some reasonable justification.   Front-end led steepening signals end-of-cycle vibes
Rates Spark: Easing Inflation, Firm Labour Market, and Market Expectations

Rates Spark: Easing Inflation, Firm Labour Market, and Market Expectations

ING Economics ING Economics 14.07.2023 08:57
Rates Spark: Don’t get carried away Easing US inflation remains the key theme of the week, and we'll see more of that today as trade price data remains negative. This theme is currently dominating the direction for rates – but economic resilience is also having an impact, upping the market discount for how low the funds rate can get. That in turn limits how far the 10yr yield can fall.   Falling inflation helping to bring rates down, but a firm labour market limits how far they can fall June data continues to produce some remarkable outcomes. Most of the activity readings have been good, while inflation readings have been subdued. Following on the heels of a taming in consumer price inflation, yesterday's producer price inflation report had more good news. For June, PPI was running at a very subdued 0.1% on the month and at around a tame 2.5% year-on-year. Market rates are really latching on to the deceleration in the inflation theme, especially with data coming in better than expected. With respect to activity data, the latest jobless claims fell to 237k, showing the labour market still holding up quite well. It's been clear in the past few days that the market has been more willing to believe in the lower inflation risk coming from realised falls in key readings than the higher inflation risk coming from the tightness of the labour market. Yesterday's 30yr bond auction tailed, just as the 10yr did, indicative of poor reception. But tailing into falling yields is no disgrace. In fact, there has been decent underlying demand. At the same time, note that the market has also priced in a much higher terminal rate for Fed funds when you look out a few years. That’s in the sub-4% area, but not that far below the 4% mark. If you take this, and then look at the 10yr yield at 3.8%, there is no glaring value in the latter. We think that’s a reason not to get too carried away with the downside for the yields story – at least not just yet, anyway. We’ve clearly moved back below 4%, but breaking down to prior lows at sub-3.5% is not entirely probable. The firm labour market data is acting to keep rate cut cycle terminal rates relatively high. That’s the important counter to the falling yields narrative coming from realised falls in inflation.   Fed pricing has shifted significantly lower with the CPI release   Calmer waters in the week ahead, with some exceptions Tomorrow, the Fed will enter into its blackout period ahead of the July meeting. In US data the highlights are retail sales and industrial production, which can shed more light on the resilience of the economy. At least for industrial data, the ISM manufacturing survey does not bode well. We will also see a slate of housing-related data. The greater focus is likely to be on European Central Bank (ECB) communication with one more week to go before the blackout period. Yesterday’s ECB minutes of the June meeting underscored the bank’s determination to extend the hiking cycle beyond its upcoming meeting. At the same time, there are signs that the discussion about how much more is actually needed was already picking up. Yesterday saw Governor of the Bank of Greece’s Yannis Stournaras even put a small question mark behind the July hike pointing to weaker data, but the September hike should not be taken as a given in his view. Relevant for Sterling rates will be next week’s UK CPI figures, which could be pivotal for the size of the next interest rate hike. For now, the Bank of England is still seen more likely than not to hike by 50bp in August, although terminal rate pricing which had seen rate expectations go up to 6.5% in the wake of the wage data has now eased back towards 6%.   Today's events and market view The 10Y US Treasury yield has now come off more than 30bp from its recent peak, which takes it well into to the trading range that held until late June. We'll also see US import prices and the University of Michigan consumer sentiment survey, which could feed the narrative of easing inflation, although we don't see these releases adding any kind of new spin to the narrative.  The only data to note for today in the eurozone is the trade balance for May.
RBA Minutes Signal Close Decision, US Retail Sales Expected to Rise

RBA Minutes Signal Close Decision, US Retail Sales Expected to Rise

Kenny Fisher Kenny Fisher 18.07.2023 12:16
RBA minutes point to close call at July decision US retail sales for June expected to climb The Australian dollar has edged lower on Tuesday, trading at 0.6807, down 0.14%. We could see some further movement in the North American session when the US releases retail sales.   RBA minutes point to uncertainty about the economy The RBA minutes didn’t provide much in the way of insights and the Australian dollar barely showed a muted response. Perhaps the most interesting aspect of the minutes was the spelling out of both sides of the argument about whether to raise rates or take a pause. In support of a hike, the minutes noted that wage growth is rising, inflation is falling and the labour market remains tight. The case for a pause relied on inflation remaining high and weaker growth. In the end, policy makers voted to pause since the arguments in favour of holding rates were more compelling. The minutes stated that monetary policy was “clearly restrictive” at the current rate level but that would not preclude the RBA from further tightening, which would depend on the economy and inflation. The money markets have priced a pause at the August 1st meeting at 75%, according to the ASX RBA rate tracker. At the July meeting, the decision to pause was a close call and that could repeat itself at the August meeting, so I am not as confident in a pause as the money markets.     US retail sales expected to climb The US releases the June retail sales report, with expectations that consumers remain in a spending mood. The consensus estimate for headline retail sales is 0.5% m/m, up from 0.3%, and the core rate is expected to rise 0.3%, up from 0.1%. The Federal Reserve is widely expected to raise rates at the July 27th meeting. If retail sales improve as expected, we could see the pricing for a September rate hike increase – currently, there is only a 14% chance of a rate hike, according to the CME Tool Watch.   AUD/USD Technical There is resistance at 0.6878 and 0.6947 0.6786 and 0.6676 are providing support        
Asia's Key Events: BoJ Meeting, Korea's GDP, Singapore Inflation, and Australia's CPI Data

Asia's Key Events: BoJ Meeting, Korea's GDP, Singapore Inflation, and Australia's CPI Data

ING Economics ING Economics 24.07.2023 09:56
The Bank of Japan meeting could be a close call, while Bank Indonesia is likely to extend its pause. Meanwhile, Korea reports GDP figures and Singapore reports inflation Australia's second quarter CPI data are a key variable for the central bank The highlight for the week will be the second quarter CPI release in Australia on Wednesday. The inflation outlook will help determine whether the Reserve Bank of Australia (RBA) hikes rates again in the second half of the year. The unemployment data released earlier today showed that the unemployment in June stood at 3.5%, slightly lower than the consensus of 3.6%. The improvement in the labour market could point to solid economic activity despite the recent string of tightening. As such, CPI for the second quarter is likely to remain elevated but lower compared to the first quarter. Taiwan's industrial output to continue decline Given the poor performance of China’s second-quarter data, industrial output in export-reliant Taiwan is likely to have remained in contraction last month. Semiconductor production plays an integral role in Taiwan’s industrial output. A report released by TrendForce recently showed that global foundry sales will decrease by 4% year-on-year in 2023, with many major firms suggesting no significant rebound in orders. Korea’s GDP to pickup Korea’s GDP growth in the second quarter is expected to accelerate to 0.5% quarter-on-quarter seasonally-adjusted compared to the first quarter’s 0.3%. The improvement in net export contributions is likely to have driven overall growth on the back of a sharp decline in imports, while private consumption growth will probably remain flat. Monthly activity data should stay soft with construction and service activity declining in June. BoJ meeting to be a close call? The Bank of Japan (BoJ) will meet on Friday and we believe that recent swings in the FX and Japanese government bond markets reflect market expectations for policy adjustment. It is a close call, but we still think yield curve control (YCC) tweaks are possible, given that recent data support steady inflation growth and a sustained economic recovery. BI expected to pause Bank Indonesia (BI) is set to extend its pause, keeping policy rates at 5.75%. Inflation has returned to target but pressure on the Indonesian rupiah (IDR) of late may give Governor Perry Warjiyo reason to keep rates steady. We expect BI to stay on hold for a couple more meetings and only consider a potential rate cut once the IDR stabilises. Singapore inflation to slow Favourable base effects and moderating commodity prices could help both headline and core inflation dip in Singapore. Headline inflation may edge lower to 4.6% YoY with core inflation also expected to slow. The Monetary Authority of Singapore will be weighing the upside GDP growth surprise alongside the improving price outlook for its meeting later this year.   Key events in Asia next week    
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British Pound Extends Losses as UK Manufacturing and Services PMIs Decline

Ed Moya Ed Moya 25.07.2023 08:58
British pound extends losses UK manufacturing and services PMIs decline in July The British pound continues to lose ground. In the North American session, GBP/USD is trading at 1.2822, down 0.23%. The pound has been on a nasty slide, losing over 300 points since July 14th.   UK manufacturing and services PMIs ease in July The week started on a sour note, as the UK manufacturing and services PMIs both slowed in July. Manufacturing fell to 45.0, below the June reading of 46.5 and the consensus estimate of 46.1 points. The manufacturing sector has now declined for 12 straight months and today’s release marked the PMI’s lowest level this year. Services slipped to 51.5, down from 53.7 and shy of the consensus of 52.4 points. This marked a 6-month low and pointed to weaker growth in business activity, which has been a key driver of the economy. It’s a very light data calendar in the UK, with no other tier-1 releases this week. Still, it could be a busy week for GBP/USD, with the Federal Reserve decision on Wednesday and US GDP on Thursday.   Fed expected to hike on Wednesday The Federal Reserve meets on Wednesday and the money markets have priced in a 0.25% hike as a near certainty and are heavily leaning towards a pause in September. This stance may be out of sync with the Fed, as Jerome Powell and other members have voiced concern that inflation isn’t falling fast enough and that could be a hint at further rate hikes after July. With the economy performing well and the labour market remaining tight, an argument can be made that the Fed has a golden opportunity to keep tightening in order to push inflation back to the 2% target. There have been concerns about whether the Fed can guide the economy to a soft landing, but the economic data is looking good and the chances of a major recession are low.   GBP/USD Technical GBP/USD tested resistance at 1.2858 earlier. Next, there is resistance at 1.2932  There is support at 1.2757 and 1.2637  
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Australian Inflation Expected to Slow in Q2 as US Consumer Confidence Jumps; AUD/USD Rises Sharply

Kenny Fisher Kenny Fisher 26.07.2023 08:50
Australian inflation expected to slow in Q2 US consumer confidence jumps AUD/USD rises sharply The Australian dollar has gained ground on Tuesday. In the North American session, AUD/USD is trading at 0.6783, up 0.65%.     Australian inflation expected to decelerate Australia releases the second-quarter inflation report on Wednesday. The consensus is expecting inflation to slow down to 6.2% y/y after a 7.0% print in the first quarter. The core trimmed mean measure of CPI, a key gauge of underlying inflation, is expected to fall from 6.6% to 6.0%. The RBA will be keeping a close eye on the inflation data, which is the final key release ahead of the RBA decision on August 1st. Recent RBA decisions have been close calls and that could well be the case with the August decision. The money markets have priced in a 41% probability of a 0.25% rate hike, which would bring the cash rate to 4.35%. If inflation falls significantly as expected, the money markets will likely lower the probability of a rate hike in August. Last week’s employment report reiterated that the labour market remains tight. The economy added 32,500 jobs in June, beating expectations, and unemployment remained at 3.5%. The strong labour market is driving inflation and complicating the RBA’s attempts to bring inflation back down to the 2% target.     US consumers more optimistic The US Conference Board (CB) consumer confidence index rose in July to 117, up from 110.1 in June. This beat the consensus estimate of 110.5 and was the highest level since July 2021. Consumer expectations also rose significantly. The CB report attributed the boost in consumer confidence to falling inflation and the tight labour market. The CB noted that consumer expectations of a recession have eased compared to earlier in the year, but the CB still considers a recession as “likely” before the end of the year.   AUD/USD Technical AUD/USD is testing resistance at 0.6767. Above, there is resistance at 0.6878 0.6687 and 0.6643 are providing support  
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Eurozone Economy Returns to Positive Growth Amid Underlying Weakness

ING Economics ING Economics 31.07.2023 15:55
Eurozone economy returns to positive growth but underlying weakness remains GDP growth beat expectations at 0.3% quarter-on-quarter in 2Q, but underlying weakness remains significant. For the data-dependent European Central Bank, this GDP reading will not be a dovish argument at the September meeting, leaving a further hike on the table.   After GDP declined in the fourth quarter and stagnated in the first, it increased by 0.3% quarter-on-quarter in the second quarter. This was better than expected but also boosted by very strong Irish activity, which is known to be volatile on the back of multinational accounting activity. Without Ireland, growth would have been halved. Looking through the most volatile components, we argue that the economy has remained broadly stagnant. Still, for the ECB this will not be the main argument to pause in September.   The buoyant reopening phase is behind us and the effects of high inflation, weak global demand and monetary tightening are resulting in a phase of sluggish economic activity. While the labour market continues to perform very well, a recession is never far away in this type of environment and remains a clear downside risk for the quarters ahead. The differences between countries are large in terms of performance. The German and Italian economies continue to suffer, in part because their manufacturing sectors are larger and demand for goods remains in contraction. Germany saw flat GDP growth quarter-on-quarter after two quarters of negative growth, while Italy dipped back to -0.3%. On the other hand, France and Spain continued to perform well. French GDP growth accelerated from 0.1 to 0.5%. Spain saw growth decelerate from 0.5 to 0.4%. Judging by the survey data we have so far on the third quarter, the risks are to the downside for the coming quarters. Manufacturing performance continues to slump as new orders continue to weaken and strong services performance is waning as reopening effects from the pandemic fade. With monetary tightening still expected to have its most dampening effect on growth later, continued broad stagnation of economic activity remains the most likely outcome for the coming quarters.
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Hungary's Economy: Disinflation and Technical Recession Impacting Growth Prospects

ING Economics ING Economics 31.07.2023 15:57
Monitoring Hungary: Disinflation shifts into a higher gear In our latest update, we reassess our economic and market forecasts for Hungary, as we expect disinflation to shift into a higher gear due to a marked collapse in domestic demand. In contrast, we see the technical recession ending in the second quarter, while the monetary normalisation will continue unabated if market stability prevails.   Hungary: at a glance Economic activity has slowed significantly in all sectors, except one. The positive contribution of agriculture will lift the economy out of the technical recession in the second quarter of 2023. However, unsurprisingly, the lack of domestic demand is weighing on both retail sales and industrial output, with the latter currently being supported only by export sales. Real wage growth has been negative for nine months, but we expect to see a turnaround as early as September, as the disinflationary process picks up speed. Weakening economic activity lowers import demand, which combined with lower energy prices is helping the country’s external balances to improve faster than expected. The rapid deterioration in the pricing power of businesses has contributed to the strengthening disinflationary process, which we expect to markedly accelerate, especially in food items. The normalisation cycle of monetary policy should continue unabated in 100bp steps until the September merger. Beyond that, we expect a pause and then further 100bp cuts. Currently we see a 0.5-1.0% of GDP slippage in this year’s budget, but a revision by the Ministry of Finance will only come in September. We still believe in a turnaround in forint due to FX carry and support by the improving current account and a better gas price story. We see the market underestimating further normalisation in the next year or two, opening the door for more curve steepening.     Technical recession will end in the second quarter, but no change to full-year outlook Hungary has been in a technical recession for three quarters (3Q22-1Q23) as sky-high inflation has stifled economic activity. Consumption has slowed markedly, and investments have come to a standstill due to high interest rates and fiscal savings. While most sectors continue to struggle with weak domestic demand, agriculture stands out. This is due to a combination of base effects and favourable weather conditions. In our view, these factors will lead to a significant positive contribution from agriculture to overall growth, lifting the economy out of the technical recession in the second quarter. As we expect domestic demand to remain subdued for the rest of the year, we believe that agriculture could be the only silver lining for growth prospects this year. However, we maintain our full-year GDP growth forecast of 0.2% as we await the official second-quarter data.   Real GDP (% YoY) and contributions (ppt)     Industrial performance hinges on export activity Industrial production surprised on the upside in May, as production volumes rose by 1.6% month-on-month but fell by 4.6% year-on-year. At a sectoral level, the picture remains unchanged, with volumes expanding only in the electrical equipment and transport equipment sub-sectors (e.g. electrical vehicle batteries and cars). We believe this trend underlines our view that only those sub-sectors that are linked to the automotive sector, and thus largely dependent on export sales, are performing well. Nevertheless, the heavy reliance on export sales is understandable in the context of subdued domestic demand. However, with global leading indicators suggesting that recessionary forces are building globally, this could weaken export prospects and thus delay the turnaround in overall output growth in industry until next year.   Industrial production (IP) and Purchasing Managers' Index (PMI)   Retail sales continue to plunge as real wages deteriorate The retail sector continues to suffer from the cost-of-living crisis, as the volume of sales in May fell by 12.3% YoY, adjusted for calendar effects. Short-term dynamics further cloud the picture, as retail sales volume fell by 0.8% MoM, with no recovery in sight. At the component level, food retailing was virtually flat, while non-food retailing fell slightly on a monthly basis. However, the lack of domestic demand is most evident in the case of fuel, as the volume of fuel retailing fell despite lowering fuel prices. In our view, this phenomenon underlines our view that the deterioration in household purchasing power is having a significant negative impact on retail sales. In this respect, we expect this downward trend to continue at least until real wage growth turns positive, which we expect to happen as early as September.   Retail sales (RS) and consumer confidence   We expect a turnaround in real wages as early as September Average wage growth remained strong in May, rising by 17.9% YoY on the back of higher bonus payments. However, after adjusting for inflation, real wages fell by 3% YoY, extending the streak of negative real wage growth to nine months. The good news is that we expect real wage growth to return to positive territory as early as September, in line with the strengthening of the disinflation process. As for other labour metrics, the three-month unemployment rate remained at 3.9% in the April-June period, showing that the cost-of-living crisis is encouraging people to work. In addition, strong demand for seasonal workers pushed the participation rate to a record high in June. In this regard, even if the seasonal effects fade, we expect the unemployment rate to peak in the vicinity of 4%, as the labour market faces structural shortage problems.   Growth of real wages in Hungary (% YoY)   Import pressure eased by subdued domestic demand The combination of high inflation and high interest rates is weighing heavily on domestic demand, reducing the need for imports. In addition, as the energy issue appears to be easing this year, the pressure on the trade balance from the import side is easing significantly. Conversely, the export side has huge growth potential due to new EV battery plants, while carmakers are still dealing with backlogs. Taking all these factors into account, the staggering €1.1bn trade balance surplus in May hardly comes as a surprise. In our view, high-frequency data point to a balanced current account (CA) at the end of the year. However, a looming recession in the eurozone, coupled with a weaker-than-expected economic rebound in China, could significantly weaken the export outlook, and thus may limit the upside to the CA.   Trade balance (3-month moving average)    
Hungary's Budget Deficit Grows, Raising Concerns Over Fiscal Targets

Italian GDP Contracts in Q2, Posing Disinflation Challenges

ING Economics ING Economics 31.07.2023 16:02
Weaker than expected Italian GDP may help disinflation process The surprising contraction in GDP in the second quarter was driven by domestic demand. This could well have affected services, as July inflation data shows. Based on business confidence and labour market data, we believe that another contraction in GDP should be avoided in the third quarter.   After posting a surprisingly strong 0.6% quarterly expansion in the first quarter, Italian GDP contracted by 0.3% in the second, doing worse than expected. The succinct press release by Istat indicates that the quarterly decline was driven by domestic demand (gross of inventories), while net exports were growth neutral. From the supply side, Istat notes that value added contracted in both industry and agriculture and expanded marginally in services. We anticipated that the very positive first quarter would be difficult to replicate in the second, but thought that resilience in services could manage to marginally compensate for the contraction in industry. Apparently, this was not the case. On the demand front, we suspect that soft private investment and inventories might have been at the heart of the negative surprise, while private consumption could have managed to remain in positive territory courtesy of a still resilient labour market and decelerating inflation. After the preliminary estimate for the second quarter, the statistical carryover for full-year GDP growth stands at 0.8%. Our base case forecast for average GDP growth is currently 1.2%, but today’s disappointing release adds downside risks. Still, we believe that a technical recession could still be avoided in 3Q23. July business confidence data were a mixed bag, with another decline in manufacturing and improvements in services (tourism and transport) and construction (specialised works). We believe such a pattern is still compatible with a return to modest positive growth in the third quarter. The weakening economy possibly helped to cool inflation in July. Preliminary inflation data, also released today, confirms that the disinflationary path is still in place, both for the headline and core measures. Headline inflation was down to 6% (from 6.4% in June), mostly driven by the deceleration in transport services and non-regulated energy goods. The deceleration of core inflation to 5.2% (from 5.6% in June) is a comforting factor on its own, helped by a decline in services, but a similar rate of decline over the second half of the year cannot be taken for granted. Indeed, the recent acceleration in hourly wages (at 3.1% in June from 2.4% in May) will filter through the price pipeline, possibly showing up in services inflation over the next few months. Today’s inflation release still fits with our current projected profile, which points to an average headline reading of 6.5% for 2023.
EUR/USD Outlook: Dovish Shift and Inflation Data Impact Forex Markets

Australia's Central Bank (RBA) Holds Policy Cash Rate Steady at 4.1% amid Data-Dependent Approach

Ed Moya Ed Moya 01.08.2023 13:24
Australia’s central bank, RBA has kept its policy cash rate unchanged at 4.1% for the second consecutive month. The tonality of the latest monetary policy implies that RBA is now data-dependent, and indirectly acknowledged the negative adverse lagged effects of higher interest rates towards economic growth. Overall, RBA may continue to remain on hold on its policy cash rate at 4.1% for the rest of 2023 which in turn negates any potential major bullish movement of the AUD/USD.   Expectations of interest rates traders were right in line with the Australian central bank, RBA’s latest monetary policy decision (no interest rate hike today) that was in contrast to the 25-basis points hike consensus from the majority of the economists surveyed. RBA has decided to hold on to its official policy cash rate at 4.1% for the second consecutive month; data from the ASX 30-day interbank cash rate futures as of 31 July 2023 has indicated a patty pricing of only a 14% chance of a 25-bps hike, down significantly from a 41% chance being priced a week ago. These are the key takeaways from today’s RBA monetary policy statement;   The Board has decided to hold the interest rate steady this month to access the impact of the prior rate increases and monitor the economic outlook. Risk of below-trend growth for the Australian economy due to weak household consumption growth and dwelling investment. The labour market has remained tight, with job vacancies and postings at high levels, though labour shortages have lessened. But the unemployment rate is expected to rise gradually from 3.5% to around 4.5% in late 2024. Even though wage growth has picked up due to the tight labour market and high inflation but wage growth, together with productivity growth remains consistent with the inflation target.   The current growth rate of 6% inflation in Australia is still considered too high. The central forecast expects CPI inflation will decline to around 3.5% by the end of 2024 and revert to the target range of 2% to 3% by late 2025. The Board may consider further tightening of monetary policy to ensure inflation returns to the target range of 2% to 3% depending on data and evolving risk assessments.   Switched to being “data-dependent” suggests RBA may stand pat on interest rates till end of 2023 The last point as mentioned above stood up starkly, in the previous July’s monetary policy statement, it was noted as “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”. In today’s monetary policy, it has been stated as “that will depend upon the data and the evolving assessment of risks”. Hence, this latest framing of being data-dependent, and acknowledging the implied negative adverse lagged effects of a higher interest rate environment towards economic growth (risk assessment) seems to portray that if the recent trend of key economic indicators continues their respective trajectories, it is likely the RBA may continue to remain on hold on its policy cash rate at 4.1% for the rest of 2023 while monitoring the global inflationary environment.     Lacklustre sentiment for AUD/USD AUD/USD minor short-term trend as of 1 Aug 2023 (Source: TradingView, click to enlarge chart)  A “data-dependent” RBA has knocked out the bullish tone of AUD/USD after a reprieve rebound seen yesterday, 31 July where the pair staged a minor rebound of 117 pips from its last Friday, 28 July intraday low of 0.6622 to an intraday high of 0.6739 during yesterday’s US session. Right now, it has shed -81 pips to print a current intraday low of 0.6657 at this time of the writing, and the Aussie is the worst performer intraday today, 1 Aug (-0.65%) among the major currencies against the US dollar; EUR (-0.03%), CHF (-0.03%), GBP (-0.07%), CAD (-0.22%), and JPY, (-0.34%). The Aussie has resumed its underperformance against the US dollar seen in the last two trading days of last week where the AUD/USD recorded an accumulated loss of -1.68% from 27 July to 28 July versus EUR/USD (-0.63%), GBP/USD (-0.71%), and JPY/USD (-0.65%) over the same period ex-post FOMC, ECB, and BoJ. From a technical analysis standpoint, short-term bearish momentum remains intact as yesterday’s rebound has failed to surpass the 200-day moving average after a re-test on it, now acting as a key short-term pivotal resistance at around 0.6740 with the next major support coming in at 0.6600/6580.  
Eurozone PMI Shows Limited Improvement Amid Lingering Contraction Concerns in September

NZD/USD Drops 1% on Weak Chinese Manufacturing PMI and Upcoming New Zealand Employment Report

Kenny Fisher Kenny Fisher 02.08.2023 15:12
NZD/USD is down 1% China’s Caixin Mfg. PMI contracted in July The New Zealand dollar continues to show sharp volatility early in the week. In Tuesday’s European session, NZD/USD is trading at 0.6142, down 1.06%. The decline has wiped out the gains the New Zealand dollar made on Monday when it rose 0.85%. China’s Caixin Mfg. PMI declines China’s recovery has been bumpy, and this week’s PMIs didn’t bring any good news. The Caixin Manufacturing PMI for July declined for the first time in three months, falling from 50.5 to 49.2 and missing the consensus estimate of 50.3 points. On Monday, the official PMIs pointed to weak activity, with manufacturing coming in at 49.3 and non-manufacturing at 51.5 points. The 50.0 line divides expansion from contraction. The weak Caixin Manufacturing PMI has sent the New Zealand dollar sharply lower on Tuesday. China is a key trading partner for New Zealand and the New Zealand dollar is sensitive to Chinese economic releases. New Zealand’s labour market has been tight, which has interfered with the central bank’s efforts to bring inflation back to the 2% target. We’ll get a look at the second-quarter employment report on Wednesday, and the data may not be to the Reserve Bank’s liking. Employment Change is expected to rise by 0.5%, compared to 0.8% in Q1. The unemployment rate is projected to inch higher to 3.5% in the second quarter, up from 3.4% in the first quarter. There aren’t many tier-1 releases ahead of the Reserve Bank’s meeting on August 16th, which makes Wednesday’s employment report doubly important. If, as expected, the data shows that the labour market is robust, it will support the Reserve Bank raising rates. Conversely, a weak employment report would be a reason for the central bank to take a pause from raising rates. In the US, the manufacturing data reaffirmed weakness in the sector. The ISM Manufacturing PMI for July improved from 46.0 to 46.4 but missed the estimate of 46.8. ISM Manufacturing Employment slipped to 44.4, down from 48.1 and shy of the estimate of 48.0 points.     NZD/USD Technical NZD/USD has pushed below support at 0.6184. Below, there is support at 0.6093 0.6246 and 0.6337 are the next resistance lines  
Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

RBA Holds Policy Cash Rate at 4.1% Amid Data-Dependent Approach, AUD/USD Suffers 1.3% Slide

Kenny Fisher Kenny Fisher 02.08.2023 09:19
  Australia’s central bank, RBA has kept its policy cash rate unchanged at 4.1% for the second consecutive month. The tonality of the latest monetary policy implies that RBA is now data-dependent, and indirectly acknowledged the negative adverse lagged effects of higher interest rates towards economic growth. Overall, RBA may continue to remain on hold on its policy cash rate at 4.1% for the rest of 2023 which in turn negates any potential major bullish movement of the AUD/USD. Expectations of interest rates traders were right in line with the Australian central bank, RBA’s latest monetary policy decision (no interest rate hike today) that was in contrast to the 25-basis points hike consensus from the majority of the economists surveyed. RBA has decided to hold on to its official policy cash rate at 4.1% for the second consecutive month; data from the ASX 30-day interbank cash rate futures as of 31 July 2023 has indicated a patty pricing of only a 14% chance of a 25-bps hike, down significantly from a 41% chance being priced a week ago. These are the key takeaways from today’s RBA monetary policy statement; The Board has decided to hold the interest rate steady this month to access the impact of the prior rate increases and monitor the economic outlook. Risk of below-trend growth for the Australian economy due to weak household consumption growth and dwelling investment. The labour market has remained tight, with job vacancies and postings at high levels, though labour shortages have lessened. But the unemployment rate is expected to rise gradually from 3.5% to around 4.5% in late 2024. Even though wage growth has picked up due to the tight labour market and high inflation but wage growth, together with productivity growth remains consistent with the inflation target. The current growth rate of 6% inflation in Australia is still considered too high. The central forecast expects CPI inflation will decline to around 3.5% by the end of 2024 and revert to the target range of 2% to 3% by late 2025. The Board may consider further tightening of monetary policy to ensure inflation returns to the target range of 2% to 3% depending on data and evolving risk assessments.   Switched to being “data-dependent” suggests RBA may stand pat on interest rates till end of 2023 The last point as mentioned above stood up starkly, in the previous July’s monetary policy statement, it was noted as “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”. In today’s monetary policy, it has been stated as “that will depend upon the data and the evolving assessment of risks”. Hence, this latest framing of being data-dependent, and acknowledging the implied negative adverse lagged effects of a higher interest rate environment towards economic growth (risk assessment) seems to portray that if the recent trend of key economic indicators continues their respective trajectories, it is likely the RBA may continue to remain on hold on its policy cash rate at 4.1% for the rest of 2023 while monitoring the global inflationary environment.   Lacklustre sentiment for AUD/USD     AUD/USD minor short-term trend as of 1 Aug 2023 (Source: TradingView, click to enlarge chart)  A “data-dependent” RBA has knocked out the bullish tone of AUD/USD after a reprieve rebound seen yesterday, 31 July where the pair staged a minor rebound of 117 pips from its last Friday, 28 July intraday low of 0.6622 to an intraday high of 0.6739 during yesterday’s US session. Right now, it has shed -81 pips to print a current intraday low of 0.6657 at this time of the writing, and the Aussie is the worst performer intraday today, 1 Aug (-0.65%) among the major currencies against the US dollar; EUR (-0.03%), CHF (-0.03%), GBP (-0.07%), CAD (-0.22%), and JPY, (-0.34%). The Aussie has resumed its underperformance against the US dollar seen in the last two trading days of last week where the AUD/USD recorded an accumulated loss of -1.68% from 27 July to 28 July versus EUR/USD (-0.63%), GBP/USD (-0.71%), and JPY/USD (-0.65%) over the same period ex-post FOMC, ECB, and BoJ. From a technical analysis standpoint, short-term bearish momentum remains intact as yesterday’s rebound has failed to surpass the 200-day moving average after a re-test on it, now acting as a key short-term pivotal resistance at around 0.6740 with the next major support coming in at 0.6600/6580.    
SEK: Enjoying a Breather as Technical Factors Drive Correction

Mixed Job Data Leaves CAD and USD Awaiting Clarity

Kenny Fisher Kenny Fisher 07.08.2023 09:04
Canada added a negligible 1700 jobs in July US nonfarm payrolls almost unchanged at 187,000 The Canadian dollar is showing limited movement on Friday. In the North American session, USD/CAD is trading at 1.3360, up 0.06%. Canadian and US job numbers were soft today, but the Canadian dollar’s reaction has been muted. Canada’s economy sheds jobs After a stellar job report in June, the July numbers were dreadful. Canada’s economy shed 6,400 jobs in July, compared to a 59, 900 gain in June. Full time employment added a negligible 1,700 jobs, following a massive 109,600 in June. The unemployment rate ticked up to 5.5%, up from 5.4%. Perhaps the most interesting data was wage growth, which jumped 5% y/y in June, climbing from 3.9% in May. The rise is indicative of a tight labour market and will complicate the Bank of Canada’s fight to bring inflation down to the 2% target. US nonfarm payrolls slips below 200K It was deja vous all over again, as nonfarm payrolls failed to follow the ADP employment report with a massive gain. In June, a huge ADP reading fuelled speculation that nonfarm payrolls would also surge, and the same happened this week. Both times, nonfarm payrolls headed lower, a reminder that ADP is not a reliable precursor to the nonfarm payrolls report.   July nonfarm payrolls dipped to 187,000, very close to June reading of 185,000 (downwardly revised from 209,000). This marks the lowest level since December 2020. The unemployment rate ticked lower to 3.5%, down from 3.6%. Wage growth stayed steady at 4.4%, above the consensus estimate of 4.2%. What’s interesting and perhaps frustrating for the Fed, is that the jobs report is sending contradictory signals about the strength of the labour market. Job growth is falling, but the unemployment rate has dropped and wage growth remains strong. With different metrics in the jobs report telling a different story, it will be difficult for the Fed to rely on this employment report as it determines its path for future rate decisions. . USD/CAD Technical There is resistance at 1.3324 and 1.3394 1.3223 and 1.3182 are providing support    
USD/JPY Tops Majors in Past Month; Strong Verbal Intervention from Japan's Ministry of Finance as Resistance Nears

Job Data Divergence: Canadian and US Employment Trends

Ed Moya Ed Moya 07.08.2023 09:08
USD/JPY declines on expectations BOJ will let rates rise quickly Fed rate cut bets fully priced in by March meeting; implied rate stands at 5.123% Fed’s Bostic noted US employment gains are slowing in an orderly manner, no need for tightening   NFP Day  The US economy should continue to gradually weaken as the labor market softens.  This labor market report showed 187,000 jobs were added to the economy, while wage pressures heated up, and as the unemployment rate dipped to 3.5%.  This NFP report should support the argument that the Fed is done raising rates.  Fed speak post payrolls poured cold water over the hot bond market selloff.  Fed’s Bostic said that the job gains are slowing orderly  and that they have no reason to hike again. Fed’s Goolsbee added that they are getting positive numbers with inflation and that the job market is cooling a little bit.  The risks for more Fed tightening are going away, but that could change with next Thursday’s inflation report.   USD/JPY     Price action on the USD/JPY daily chart show that the potential bearish ABCD pattern that formed a couple days ago is tentatively respecting trendline support at the 141.50 region.  If bearish momentum remains in place downside could target the 140.00 zone.  With the BOJ’s minor tweak to YCC in place and steady US data that supports the economy is weakening, the dollar-yen could see bearishness remain intact.  To the upside, 144.00 remains key resistance     Apple disappoints and Amazon Delivers The last two major tech giant earnings delivered diverging stories.  Amazon crushed it in the second quarter, while delivering financial discipline with lower spending.  The outlook impressed for both ecommerce and their cloud services, while the lower headcount made this a perfect earnings report. Apple told a different story than Amazon as their outlook devices weakened, which is prompting concerns that this might be as good as it gets over the short-term for share prices.  A weakening consumer and a similar fourth quarter is not inspiring investors.  
Navigating Australia's Disinflationary Path: RBA Rates, Labor Market, and Inflation Outlook

Navigating Australia's Disinflationary Path: RBA Rates, Labor Market, and Inflation Outlook

ING Economics ING Economics 10.08.2023 08:38
Australia: How to ride a bumpy disinflationary path Australia's growth outlook has cooled off, but the labour market remains too tight and the decline in inflation has been primarily due to base effects. We disagree with markets' expectations that we have seen the peak in RBA rates, and expect at least one more hike. This should help a recovery in the undervalued (in the short- and medium-term) Aussie dollar.   After two months of 'no-change', the market has decided that the Reserve Bank of Australia (RBA) has finished hiking rates. We disagree. There has been only a modest slowdown in the economy, and most of the decline in inflation so far owes to base effects which are turning less helpful, while the run-rate for month-on-month inflation remains much higher than is consistent with the RBA’s inflation target. We expect at least one more hike, possibly in September or maybe waiting for the quarterly inflation numbers which will be known by the November meeting, and quite possibly two. That would take the cash rate target to 4.35% with an upper risk of 4.6%. If we are right that the US Fed has finished tightening, then this could see some outperformance of the AUD into year-end. AUD’s sensitivity to pro-cyclical trades and the shape of the yield curve, as well as its pronounced undervaluation, put it in a good position to potentially outpace other G10 peers in a multi-quarter USD decline.   The macro picture: Labour market remains tight GDP growth in Australia has slowed every quarter since the third quarter of 2022, and looks set to deliver another weak quarter of growth in the second quarter of 2023. NowCasting estimates are pointing to only about a 0.2% quarter-on-quarter increase, and 1.5% year-on-year annual growth rate in the second quarter.   Australian GDP projections   This suggests that the RBA’s rate tightening is indeed working, on top of the external factors weighing on growth (weak China re-opening, US and EU slowdown). But on many measures, the Australian economy remains robust, and this remains a concern when we dig into the inflation data and see that on some measures (admittedly not all) inflation is still running quite strong. In particular, Australia’s labour market shows only limited signs of slowdown. At 3.5%, the unemployment rate is close to its all-time low of 3.4% in October last year. And almost all of the jobs that have been created over that time have been full-time jobs, with commensurately higher weekly earnings, benefits and security than part-time jobs. That means household spending power is being supported. The consequence of this is that wages growth, though only measured quarterly, and with long lags, remains, according to the RBA’s own anecdotes, on an upward path. And this will help keep service sector inflation higher than would ideally be the case.   Wages, unemployment and inflation in Australia  
ECB Meeting Uncertainty: Rate Hike or Pause, Market Positions Reflect Tension

UK Job Growth Slows as Wages Surge, Focus Shifts to CPI Release

Kenny Fisher Kenny Fisher 16.08.2023 11:45
UK job growth falls but wages soar UK releases CPI on Wednesday The British pound has edged higher on Tuesday. In the European session, GBP/USD is trading at 1.2697, up 0.08%.   UK job market cools but wages jump Investors were treated to a mixed UK employment report today. The labour market, which has been surprisingly resilient in the face of the Bank of England’s tightening, is showing unmistakable signs of cooling. Employment fell by 66,000 in the three months to June, a huge reversal from the 102,000 gain in the previous period. The consensus estimate stood at 75,000. Notably, this was the first decline in job growth since August 2022. The unemployment rate rose from 4.0% to 4.2%, above the estimate of 4.0%, and unemployment claims rose to 29,000, up from 16,200 and above the estimate of -7,300. The one exception to the soft jobs report, but a critical one, was wage growth. Average earnings excluding bonuses rose 7.8% y/y in the three months to June, up from 7.5% and above the estimate of 7.3%. This was the highest level since records began in 2001. Average earnings including bonuses jumped 8.2%, compared to an upwardly revised 7.2% previously and above the estimate of 7.3%. The jump in wage growth will be unwelcome news for the Bank of England, as it indicates that the dreaded wage-price spiral continues to feed inflation. Higher wages are a key driver of inflation, and the BoE has warned that if wage growth doesn’t ease, it will be forced to raise rates even higher. This could mean that the weak UK economy will tip into a recession, but the BoE considers that the lesser evil compared to high inflation.   The BoE meets on September 21st and I do not envy Governor Bailey, who may have to cause more financial pain and raise rates. The UK releases the July inflation report on Wednesday, with CPI expected to fall to 6.7%, down from 7.9%. That would be a significant decline but it would still leave inflation more than triple the BoE’s target of 2%. The BoE and investors will be glued to the inflation report and I expect the British pound to have a busier day.   GBP/USD Technical GBP/USD is testing resistance at 1.2726. The next resistance line is 1.2787  1.2634 and 1.2573 are providing support    
Turbulent Times Ahead: Poland's Central Bank Signals Easing Measures

Record High UK Wages in June: Bank of England Faces Tough Decisions

Michael Hewson Michael Hewson 16.08.2023 13:13
  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.    
AUD/USD Touches 9-Month Low as Australian Job Growth Slips

AUD/USD Touches 9-Month Low as Australian Job Growth Slips

Kenny Fisher Kenny Fisher 18.08.2023 10:13
AUD/USD touches 9-month low Australian job growth slips Fed minutes note concern about inflation The Australian dollar has been on a nasty slide. Earlier, AUD/USD fell as low as 0.6364, a nine-month low, before recovering. In the European session, AUD/USD is trading at 0.6433, up 0.16%. Australia’s job growth slides Australia’s labour market has been surprisingly robust in the face of the central bank’s aggressive tightening, but cracks have finally appeared. Employment in Australia fell by 14,600 in July, compared to a downwardly revised gain of 31,600 in May and missing the consensus estimate of 15,000. The unemployment rate rose to 3.7% in July, up from the previous reading of 3.5% and above the estimate of 3.6%. This is the highest level since April. The Reserve Bank of Australia has repeatedly stated that its rate decisions will be based on the data, and inflation and employment reports are likely the most critical readings for the RBA. July’s soft jobs report has dragged the Aussie lower and should cement a third successive pause from the RBA at the September meeting. The benchmark cash rate currently stands at 4.10% and the futures markets have priced in a 50-50 chance of one more quarter-point hike before the end of the year. If inflation continues to head lower, the RBA will be able to look at trimming rates sometime in 2024. The Federal Reserve remains concerned about high inflation and said that additional rate hikes might be needed, according to the minutes of the July meeting. At the meeting, the Fed raised rates by 0.25%, a move that was widely anticipated. Most members “continued to see significant upside risks to inflation, which could require further tightening of monetary policy”.       Inflation has fallen to 3.2%, but members agreed inflation is “unacceptably high”. Most members saw a  significant upside risk to inflation, but interestingly, the minutes noted that there is uncertainty over the future rate path since there were also signs that inflationary pressures could be easing. . AUD/USD Technical AUD/USD is testing support at 0.6402. This is followed by support at 0.6319 0.6449 and 0.6532 are the next resistance lines
Market Sentiment and Fed Policy Uncertainty: Impact on August Performance

UK Retail Sales Decline Amid Weather and Economic Factors

Kenny Fisher Kenny Fisher 21.08.2023 12:58
UK retail sales post a sharp decline Rainy weather and high prices weighed on consumer spending The British pound has given up ground on Friday after several days of modest gains. In the European session, GBP/USD is trading at 1.2736, down 0.07%.   UK retail sales decline more than expected The weather in the UK continues to have a major impact on consumer spending. The June retail sales report was stronger than expected, with record-hot weather contributing to an increase in spending. July brought cold and rainy weather, which led to a decline in spending as shoppers preferred to stay home. Retail sales declined -1.2% m/m in July, down from +0.6% in June and below the consensus estimate of -0.5%. The UK consumer’s spending appetite isn’t only dependent on the weather, of course. Consumer spending has been surprisingly resilient in a tough economic environment, but high inflation and rising interest rates are taking their toll. The cost-of-living crisis has created a situation in which sales volumes are falling but the value of goods purchased has been rising – in other words, consumer purchasing power has been falling as consumers are spending more to buy less. What is bad for consumers may be welcome news for the Bank of  England, whose battle with inflation hasn’t gone all that well. The BoE has raised interest rates to 5.25% in order to curb inflation, but a tight labour market and strong consumer spending have contributed to high inflation, which is currently running at a 6.8% clip. If the cracks we saw this week in the labour market and consumer spending continue, it could mean that the BoE has finally turned the corner in its tenacious battle to bring inflation closer to the 2% target.   GBP/USD TechnicalNew button GBP/USD is testing support at 1.2787. Below, there is support at 1.2634  1.2879 and 1.2940 are the next resistance lines  
Stocks Rebound Amid Rising Volatility: Analysis and Outlook

Stocks Rebound Amid Rising Volatility: Analysis and Outlook

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.08.2023 08:42
Stocks rebound, but volatility rises.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank       Stocks rebounded on Monday, in a move that looked more like a correction than a reaction to fresh news, as there was no fresh news that went against the slowing China rhetoric, nor against the fear that we will hear something sufficiently hawkish this Friday from Jerome Powell's Jackson Hole speech. At this point, the hawkish Federal Reserve (Fed) expectations are mostly priced in, leaving room for some up and down moves. So yesterday's session was not only marked by a rebound in the S&P500 from the October to July ascending baseline, but also by a visible rise in volatility. Nasdaq 100 jumped 1.65% as well, but the US 2-year yield returned well above 5%, and the 10-year yield pushed to a fresh high since 2007.     One interesting thing is, in 2007, when the US 10-year yield was at these levels, the positioning in the market was deeply negative – meaning that investors expected the yields to rebound, while today the positioning is deeply positive, meaning that investors expect the yields to bounce lower. And that's understandable: the US 10-year yield was on a steady falling path in 2007, so there was a reason for investors to expect a rebound – which did not happen. In a similar way, today, we are just coming out of a long period of near zero rates, so for our eyes, the actual levels seem very high. That explains why many asset managers expect the yields to fall. There is also a growing interest in US 10-year TIPS – which are protected against inflation, and which hit the 2% mark for the first time since the GFC as well. But there is not much reason other than our low comparison levels that gives reason to an imminent reversal in market direction. The US data is strong, the labour market is tight, and inflation is slowing but 'significant upside risks' prevail. A recent study warned that unless the monthly CPI stays below the 0.2%, inflation is headed higher in 2024. So there is a chance that we won't see a downside correction in the US 10-year yield, and if that's not the case, the selloff could extend until the 10-year yield settles somewhere between 5-5.50%.     Anyway, the market mood got significantly better yesterday. Tech stocks fueled the rally in the US, as Nvidia jumped 8.5% yesterday, a day before the release of its Q2 results. Nvidia'd better meet its $11bn sales forecast for last quarter, otherwise, there is a chance that we will see a sizeable downside correction.     In Europe, oil stocks shouldered yesterday's rally, as the barrel of US crude made an attempt above the $82pb, on lower OPEC+ exports and on the back of a golden cross formation on a daily chart where the 50-DMA crossed above the 200-DMA. But yesterday, that wasn't the case. Oil's positive attempt remained short-lived, on the contrary, and the barrel of crude is preparing to test the $80pb support to the downside again this morning. The market is driven by two major forces: the supply tightness and the Chinese demand expectations. These days, the Chinese demand expectations are very much in focus, which could help the oil bears take advantage for selling the recent rally in oil prices. But tighter OPEC rhetoric will remain a major support into the 200-DMA, near $76pb.  
Weak July Performance: Polish Retail Sales Disappoint Amid Economic Challenges

Weak July Performance: Polish Retail Sales Disappoint Amid Economic Challenges

ING Economics ING Economics 22.08.2023 14:40
Polish retails sales disappoint in July Retail sales join a list of disappointments in recent data readings on the Polish economy after less than stellar industrial production and labour market numbers yesterday.   Polish real retail sales fell by 4.0% YoY, and that's worse than the consensus expectation of a 3.8% decline, although milder than in June (-4.7%). Additionally, in seasonally adjusted terms, retail sales were 1.3% M/M higher in July compared to June this year. We saw retail sales decline across most major groups, except in motor vehicles & motorbikes parts, which was up 3.*% YoY, and that's consistent with the relatively strong growth in industrial production in this sector. The largest YoY declines were recorded in the groups "press, books, other sales in specialised shops" (down 13.6% YoY) or in the durable goods group "furniture, RTV, household appliances" (down 11.6%) and the category "other" (down 11.4%). Sales of food, beverages and tobacco also fell (by 4.2%), which can be linked to last year's high reference base following the influx of refugees from Ukraine. People's 'household' situation is slowly stabilising after real wage growth returned in June after almost a year of prolonged purchasing power erosion thanks to high inflation. Yesterday's labour market data, however, again saw wage growth (10.4% YoY) below CPI inflation (10.8% YoY in July). We expect a gradual improvement in household consumption in the coming months, particularly in the fourth quarter, when households’ purchasing power will improve further with disinflation continuing while wage growth remains in double digits.   Nominal wages, CPI inflation, and real retail sales, YoY, in %
ECB Hawkish Pushback and Key Inflation Test Await FX Markets

ECB Hawkish Pushback and Key Inflation Test Await FX Markets

ING Economics ING Economics 29.08.2023 10:13
FX Daily: ECB hawkish pushback to face key inflation test The ECB hawks have stepped in to revive depressed rate expectations, but markets are opting for data dependency, and EUR/USD is set to face two key risk events with eurozone inflation figures before the US payrolls this week. We expect core inflation will prove resilient enough to trigger another ECB hike, so see upside room for the pair.   USD: Things will get hectic this week It has been a slow start to the week for FX markets. Yesterday’s closure of the UK’s markets for a national holiday meant much thinner trading volumes, and the key data calendar was quite light. In the US, the only release to note was the Dallas Fed Manufacturing Index, which dropped slightly more than expected into contraction territory, confirming the slack in the manufacturing territory already signalled by other surveys (ISM, PMIs). Still, the slowdown in manufacturing activity is hardly a US-only story. We have seen a deterioration in global forward-looking economic indicators in many developed economies recently, especially in Europe. The difference now is how the US service sector is appearing more resilient than the eurozone’s, despite significantly tighter monetary policy in the US. The relative strength in US activity indicators – compared to the rest of the world and to expectations – is what has kept the dollar in demand over the past few weeks, and should remain the number one driver of USD moves into year-end. That is because the disinflationary process appears to be cementing, allowing the Fed to halt hikes and focus on growth: until data turn for the worst, however, markets will not be pricing in more cuts, and a favourable real rate (the highest in the G10) will keep a floor under the dollar. This week presents some important risk events for the dollar from this point of view. Today, the JOLTS job openings for July will be watched closely in search for signs that the labour market has started to cool off more drastically. The Conference Board consumer confidence index is also published, and expected to come in only marginally changed compared to July. Later in the week, we’ll see ADP jobs numbers (they move the market, but tend to be unreliable), and the official payrolls report. Remember that payrolls through March were revised lower (although that is a preliminary revision) by 306,000, which probably adds extra heat to this week’s release. DXY is trading around the May-June 104.00 high area. Investors may want to wait for confirmation from jobs data to push the dollar significantly higher from these levels, and a wait-and-see, flat (or moderately offered) dollar environment could dominate FX markets into Friday’s payrolls.
Pound Sterling: Short-Term Repricing Complete, But Further Uncertainty Looms

US ADP Set to Slow in August: Impact on Markets and Economic Outlook

Michael Hewson Michael Hewson 30.08.2023 09:42
06:00BST Wednesday 30th August 2023 US ADP set to slow in August   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     We've seen a strong start to the week for European markets with the FTSE100 outperforming yesterday due to playing catch-up as result of the gains in the rest of Europe on the Monday Bank Holiday. US markets also saw a strong session, led by the Nasdaq 100 as yields retreated on the back of a sharp slowdown in US consumer confidence in August, and a fall in the number of vacancies from 9165k to 8827k in July, and the lowest level since March 2021.     The sharp drop in the number of available vacancies in the US helps to increase the probability that the Federal Reserve will be comfortable keeping rates unchanged next month, if as they claim, they are data dependent, and that rates are now close to restrictive territory.   This belief was reflected in a sharp fall in bond yields, as well as a slide in the US dollar, however one should also remember that the number of vacancies is still well above pre-pandemic levels, so while the US labour market is slowing, it still has some way to go before we can expect to see a significant move higher in the unemployment rate. Today's ADP jobs report is likely to reflect this resilience, ahead of Friday's non-farm payrolls report. The ADP report has been the much more resilient report of the two in recent months, adding 324k in July on top of the 455k in June. This resilience is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI.   Nonetheless the direction of travel when it comes to the labour market does suggest that jobs growth is slowing, with expectations for that jobs growth will slow to 195k in August. We also have the latest iteration of US Q2 GDP which is expected to underline the outperformance of the US economy in the second quarter with a modest improvement to 2.5% from 2.4%, despite a slowdown in personal consumption from 4.2% in Q1 to 1.6%.     More importantly the core PCE price index saw quarterly prices slow from 4.9% in Q1 to 3.8%. The resilience in the Q2 numbers was driven by a rebuilding of inventory levels which declined in Q1. Private domestic investment also rose 5.7%, while an increase in defence spending saw a rise of 2.5%.     Before the release of today's US numbers, we also have some important numbers out of the UK, with respect to consumer credit and mortgage approvals for July, and Germany flash inflation for August. Mortgage approvals in June saw a surprise pickup to 54.7k, which may well have been down to a rush to lock in fixed rates before they went higher. July may well see a modest slowdown to about 51k.   Net consumer credit was also resilient in June, jumping to £1.7bn and a 5 year high, raising concerns that consumers were going further into debt to fund lifestyles more suited to a low interest rate environment. This level of credit is unlikely to be sustained and is expected to slow to £1.4bn.     As long as unemployment remains close to historically low levels this probably won't be too much of a concern, however if it starts to edge higher, or rates stay higher for an extended period of time, we could start to see slowdown in both, as previous interest rate increases start to bite in earnest.     In comments made at the weekend deputy governor of the Bank of England Ben Broadbent said he that interest rates will need to be higher for longer despite recent declines oil and gas prices as well as producer prices. These comments prompted a sharp rise in UK 2 year and 5-year gilt yields yesterday, even as US yields went in the opposite direction. This rise came against a welcome slowdown in the pace of UK shop price inflation which slowed to 6.9% in August.     Headline inflation in Germany is expected to slow to 6.3% from 6.5% in July, however whether that will be enough for Bundesbank head Joachim Nagel to resile from his recent hawkishness is debatable. As we look towards European session, the continued follow through in the US looks set us up for another positive start for markets in Europe later this morning.     EUR/USD – rebounded off trend line support from the March lows at 1.0780 yesterday. Still feels range bound with resistance at the 1.1030 area, and a break below 1.0750 looking for a move towards the May lows at 1.0630.     GBP/USD – has rebounded from the 1.2545 area, but the rally feels a little half-hearted. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – the rebound off last week's 11-month low at 0.8490 has seen a retest and break of the 0.8600 area, however we need to push through resistance at the 0.8620/30 area to signal further gains, towards the 50-day SMA resistance.     USD/JPY – wasn't able to push through resistance at 147.50 and has slipped back. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 28 points higher at 7,493     DAX is expected to open 49 points higher at 15,980     CAC40 is expected to open 21 points higher at 7,394
Eurozone PMI Shows Limited Improvement Amid Lingering Contraction Concerns in September

Rates Retreat: Impact of Weaker Data on US Yields and Market Dynamics

ING Economics ING Economics 30.08.2023 09:45
Rates Spark: Losing buoyancy Weaker data is eroding the US narrative that has helped push yields higher over the past week. A lower landing zone for the Fed also means a lower floor to long-end rates. There is still more data and volatility in store this week, with the US jobs data looming large. EUR markets will look to the inflation data key input for the upcoming ECB meeting.   The Fed discount is eroding and so is the floor for the 10Y yield Recent data is eroding the narrative of US resilience that had supported the rise of 10Y yields to above 4.3% over the past weeks. Poor job openings data and dipping consumer confidence yesterday saw the 10y falling through 4.2% and then briefly further towards 4.1% overnight. Interestingly the move was largely in real rates, and it reversed all of the gains that they had managed after dipping on the weaker PMIs last week.   We had suspected that an elevated Fed discount would draw a floor under longer rates. But just as data had shifted this floor higher, data is now hacking away at that discount. The curve bull-steepened with 2Y SOFR swap rates dropping more than 12bp while the 10Y still dropped close to 10bp. Data this week holds more candidates to push yields around, especially with US jobs data out on Friday. The consensus is already looking for further cooling with the payroll increase decelerating to 170K, but the unemployment rate is seen steady at 3.5%. Keep in mind that the Federal Reserve itself – in comments and its June projections – has pointed to an unemployment rate of 4% and above as being necessary to cool inflation towards the target rate. The indications it got yesterday are going in the right direction.   A pause in September is widely seen as the base case, with markets firming their view as the discounted probability of a pause moves towards 90%. One final hike is still possible this year, but the discounted chances for that to happen have slipped from close to 70% to a coin toss. Our economist believes the Fed has already reached its peak.   Assessing the Fed's landing zone remains crucial to overall rates   Aiding the ECB decision process, first August CPI indicators from Spain and Germany European Central Bank President Lagarde did not provide any further guidance in Jackson Hole with regard to the upcoming meeting in September. From recent comments, it is clear that the hawks on the governing council would still like to see higher rates. Austria’s Holzmann had been quite explicit, saying he saw the case for a hike if there were negative surprises until then. Latvia’s Martins Kazaks also wants to err on the side of raising rates, while Bundesbank’s Joachim Nagel also says it is too early to consider a pause. In later comments, he seemed to soften his tone, suggesting to wait for the data. Following the dip in the wake of the PMIs, the market has slowly priced the probability of a hike back into the forwards, but still just below 50%. But further out, markets are back to seeing a 75% chance that a 25bp rate hike comes before the end of the year to take the ECB’s depo rate to 4%. We would focus more on the upcoming meeting, however. We also think a September hike at this stage could be more of a coin toss, but more importantly, we sense that the hawks will see it as a last chance to hike one final time. If there is no hike in September, rates will probably not rise any further. One key input to arrive at a final assessment is the inflation data this week, starting today with the preliminary readings from Spain and Germany.   Today's events and market view It appears that the tide has turned again for rates now that data is eroding the resilience narrative. The latest auction metrics, such as the strong 7Y UST sale last night, also suggest that levels had been pushed sufficiently high to attract demand again. But the key remains in the data, with the US jobs report looming large on Friday. Today, we will get the ADP payrolls estimate, with a consensus for a weaker 195K after 324K last month. The value of the ADP as a predictor for the official data is questionable, however, as was also evidenced early this month – a large upside surprise in the ADP was followed by a disappointing official payrolls figure. But today’s data and anecdotal evidence from the release can still offer insight into the health of the labour market where more signs of cooling have come to light. In other US data today, we will get the pending home sales and the second reading of second-quarter GDP growth. The main highlight for the EUR markets will be Spanish and German regional CPI data. The consensus is for Spanish headline inflation to tick higher from 2.1% to 2.4% year-on-year. For Germany, the headline is seen falling somewhat from 6.5% to 6.3% year-on-year, but the state of NRW numbers already came in slightly hotter this morning. Yesterday, supply had initially helped push yields higher before the US data turned the market. Today, we will see Germany tapping a 4Y green OBL for €1.5bn. Italy’s bond sales today include a new 10Y benchmark and will amount to up to €10bn in total.    
Germany's Economic Déjà Vu: A Look Back and a Leap Forward

Germany's Economic Déjà Vu: A Look Back and a Leap Forward

ING Economics ING Economics 01.09.2023 09:49
Has anything changed over the past two decades? The current economic situation and the public debate in Germany feel eerily familiar to that of 20 years ago. Back then, the country was going through the five stages of grief, or, in an economic context, the five stages of change: denial, anger, bargaining, depression and acceptance. From being called ‘The sick man of the euro’ by The Economist in 1999 and early 2000s (which created an outcry of denial and anger) to endless discussions and TV debates (which revelled in melancholy and self-pity) to an eventual plan for structural reform in 2003 known as the 'Agenda 2010', introduced by then-Chancellor Gerhard Schröder. It took several years before international media outlets were actually applauding the new German Wirtschaftswunder in the 2010s. In the early 2000s, the trigger for Germany to move into the final stage of change management – 'acceptance' (and solutions) – was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. Generally speaking, the current situation is worse and better than the one in the early 2000s. It is better because 20 years ago Germany breached European fiscal rules, while it currently has one of the most solid public finances of all eurozone countries, leaving sufficient fiscal space to react. What is worse is that there is currently a long list of other problems. Finally, low unemployment is a bit of a blessing in disguise. While positive for the economy and very different from 20 years ago, low unemployment also seems to have reduced the sense of urgency for policymakers. Given the multifaceted challenges, it will be harder than it was in the early Noughties to find and then politically agree on a policy answer. Another important difference between the current situation and two decades ago is the external environment. Back then, Germany had some good luck, or put differently, the economic reforms coincided with a favourable macro environment. Think of EU enlargement, which enabled many German corporates to outsource production to much cheaper-wage countries in Eastern Europe. The rise of China on the global stage also brought an almost symbiotic trade partner. China had a strong appetite for German investment goods and at the same time flooded world markets with deflationary policies. Finally, Germany actually benefitted from the euro crisis and the ECB’s "whatever it takes" approach as interest rates were artificially low and the euro artificially weak. None of these factors will sugarcoat any reform efforts at the current juncture. If anything, China has become a rival and competitor and the ECB needs to fight inflation. This lack of any sugarcoating makes the need for reform even more pressing, but will probably also make these reforms initially more painful.  
Germany's Economic Challenges: Waiting for 'Agenda 2030

Germany's Economic Challenges: Waiting for 'Agenda 2030

ING Economics ING Economics 01.09.2023 09:50
Waiting for 'Agenda 2030' Structural reforms implemented in the early 2000s were mainly aimed at the labour market. This was known as ‘Agenda 2010’. Today, the German economy needs an ‘Agenda 2030’. Short-term fiscal stimulus can ease the pain but will do very little to regain international competitiveness and restructure the entire economy. What Germany needs is a full menu card with policy measures. These measures could be categorised into those boosting confidence and giving companies security and clarity, as well as supply-side improving measures. In the first category, think of an energy price cap for industry. Not for one winter but for several years. Such a measure should be accompanied by a clear schedule for the energy transition. This would prevent more companies from exiting Germany and producing elsewhere. Combined with fast depreciation rules of investments in digitalisation and renewable energies, this could safeguard the economy’s industrial backbone. With subsidies for sectors like artificial intelligence, batteries or hydropower, the government could support innovation. Finally, less bureaucracy, more investment into e-government and consequently faster public tenders and implementation of federal investments at the regional level would strengthen the supply side of the economy. It is a long list that can easily be extended and broadened. One thing, however, is clear: any overhaul of the economy will be almost impossible as long as fiscal austerity remains the dominant tune. The German economy is in for a longer period of stagnation. The new debate about the ‘sick of man Europe’ could finally increase the sense of urgency among decision-makers; more than a protracted period of de facto stagnation could.  
EM: Renminbi Weakness Persists Despite Chinese Property Support

US Payrolls Report and Global Central Banks' Monetary Policies

ING Economics ING Economics 01.09.2023 10:17
05:55BST Friday 1st September 2023 A soft US payrolls report could seal a Fed pause later this month   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After 6 days of gains, the FTSE100 ended the month on a sour note bringing the curtain down on a negative month for European markets, as sentiment soured somewhat on concerns over the outlook for interest rates, and the China recovery story.     US markets also ended a similarly negative month on a downbeat note, although we have seen a shift in some of the negative sentiment in the past few days due to softer than expected US economic data which has brought yields lower and encouraged the idea that this month's Fed meeting will see US policymakers vote to keep rates on hold. This week we've seen the number of job openings for July slow to their weakest levels since March 2021, a sharp slowdown in August consumer confidence, a weaker than expected ADP payrolls report, and a downgrade to US Q2 GDP.     US continuing claims also rose sharply to a 6-week high, suggesting that recent rate hikes were starting to exert pressure on the US economy and a tight labour market. If today's non-farm payrolls report shows a similarly modest slowdown in the rate of jobs growth, then there is a very real sense that we could see further gains in stock markets, as bets increase that the Federal Reserve may well be done when it comes to further rate hikes. At the very least it could go some way to signalling a pause as the US central bank looks to assess the effects recent rate hikes are having on the US economy.     In July we saw another modest slowdown in jobs growth, along with downward revisions to previous months. 187k jobs were added, just slightly above March's revised 165k, although the unemployment rate fell to 3.5%, from 3.6%.     While the official BLS numbers have been showing signs of slowing, up until this week's 177k, the ADP report had proven to be much more resilient, adding 371k in July on top of the 455k in June. The resilience in the US labour market is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI, while on the BLS measure average hourly earnings remained steady at 4.4% and are expected to stay around this level.       Today's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 170k jobs added, with unemployment remaining steady at 3.5%, although it is important to remember that whatever today's jobs numbers tell us, vacancies in the US are still well above pre-Covid levels on a participation rate which is also lower at 62.6%.     After the payroll numbers we also have the latest ISM manufacturing report which is expected to continue to show that this part of the US economy is in contraction territory for the 10th month in a row. Before today's US payrolls report, we'll also get confirmation of the dire state of the manufacturing sector in Europe with the final August PMIs from Spain, Italy, France and Germany, with expectations of 48.8, 45.7, 46.4 and 39.1 respectively.     UK manufacturing PMI similarly is also expected to be confirmed at 42.5 and the lowest level since June 2020. Weak numbers here, along with similarly weak services numbers next week will also go a good way to ensuring that the ECB and perhaps even the Bank of England err on the side of a pause when they also meet later this month.     The bar to a pause for the Bank of England appears to be a much higher one, however yesterday's comments from Chief Economist Huw Pill would appear to suggest that the MPC is already leaning towards the idea that monetary policy in the UK is already restrictive. In a speech made in South Africa he said that he preferred to see a rate profile along the lines of a "Table Mountain" approach, in other words keeping them at current levels, or even a little higher for a lengthy period of time. The contents of the speech appeared to suggest that while inflation levels remained elevated, there was an acknowledgement that a lot of the recent rate hikes hadn't yet been felt, raising the risk of overtightening, and that monetary policy was already sufficiently restrictive. This would appear to suggest that a consensus is growing that the Bank of England could be close to the end of its rate hiking cycle, with perhaps one more at most set to be delivered in September.     There also appears to be an increasing debate over the sustainability of the current 2% inflation target as being too low given current levels of inflation, with arguments being made for increasing it to 3% or 4%. The 2% target has been a key anchor of central bank monetary policy over the last 30-40 years, and while it has served a useful purpose in anchoring inflation expectations some are arguing that trying to return it to 2% could do more harm than good.     That may well be true, but there is also the argument that in moving the goalposts on the current inflation target now sends the message that central banks are going soft in getting inflation under control, and that rather than return it to target over a longer period, it's easier to move the goalposts.     This comes across as unwise particularly in terms of timing. The time to have moved the inflation target was when inflation was below or at 2%, not while it is miles above it. Optics are everything particularly when inflation is well above target, with central banks needing to send the message that inflation remains their number one priority, and not water down their long-term commitment to it because it's too hard. The time to discuss a change of a target is when that target has been met and not before. Once that happens in perhaps 1-2 years' time the discussion on an inflation target, or an inflation window of between 1.5% to 3.5% can begin.       EUR/USD – the retreat off the 1.0950 area this week has seen the euro slip back with the 1.0780 trend line support from the March lows coming back into view. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year. Below 1.0750 targets 1.0630.     GBP/USD – pushed up the 1.2750 area earlier this week but has failed to follow through. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – having failed at the 0.8620/30 area earlier this week has seen the euro slip below the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.     USD/JPY – the 147.50 area remains a key resistance and remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.     FTSE100 is expected to open 16 points higher at 7,455     DAX is expected to open 50 points higher at 15,997     CAC40 is expected to open 21 points higher at 7,335
US Weekly Jobless Claims Hit Lowest Level Since February; Apple Shares Slide Amid China's iPhone Crackdown; USD/JPY Shows Volatility Amid Interest Rate Fears and Tech Stock Woes

Rates Spark: When the Hawks Seem Dovish

ING Economics ING Economics 01.09.2023 10:19
Rates Spark: When the hawks seem dovish Rates remained under downward pressure, only this time it wasn't the US. The Bund curve bull-steepened as eurozone inflation was less hot than feared and the European Central Bank's Schnabel was seen as dovish. We are less certain that the odds of another hike in September can be dismissed as easily. But for today the focus is on US jobs.     Rates remain under downward pressure US rates were still under moderate downward pressure, but for a change relatively quiet with the data yesterday largely falling in line with expectations. But markets were probably also gearing up for today’s payrolls release, one data point that has had the ability to shift market sentiment in the past.   More bullish action was seen in Sterling rates and Bund yesterday. In the case of Sterling rates a reassessment of especially front-end rates was caused by the Bank of England Chief Economist Pill being unusually explicit about his preference for a “Table Mountain” profile – he was speaking in Cape Town –  for policy rates, rather than a “Matterhorn”. EUR rates were also under downward pressure. Some of that was a relief that the aggregate eurozone inflation data did not come in as hot as feared after prior country releases had suggested upside risks. In then end the headline rate proved stable, but more importantly the core rate came down to 5.3% year-on-year. Mind you, that is still way above comfortable levels for the ECB.   When a hawk sounds dovish a closer look is warranted Therefore, it was all the more surprising that ECB’s arch hawk Isabel Schnabel struck a more balanced tone than many would have expected of her. She continued to highlight the uncertainties surrounding the inflation outlook, but at the same time acknowledged that growth prospects had also deteriorated in the meantime. With regards to upcoming policy decisions she would not commit to any outcome, and rather stressed the data dependent approach. In more geographic terms: it’s elevated terrain but one can only look about 100m – it could be South Africa or the Alps. The market went for the dovish interpretation, though we think that some of Schnabel’s assessments still point to her hawkish nature. For instance, she pointed out that under certain circumstances a hike could also “insure against the continued elevated risk of inflation remaining above [the ECB’s] target for too long”. Yes, she refrained from making any prediction on rates. But she highlighted that the ECB not being able to pre-commit to any future action also means policymakers “cannot trade off a need for a further tightening today […] against a promise to hold rates at a certain level for longer”. This would close off one possible avenue for bargaining between the doves and hawks as the next steps are debated. Finally, she also stressed the importance of real interest rates as a measure of the ECB’s effective policy stance. More specifically she cautioned that the recent decline in real interest rates “could counteract our efforts to bring inflation back to target in a timely manner”. In the end Schnabel is but one voice, although an important one. The ECB minutes of the July meeting eventually also conveyed a slightly changed tone within the Governing Council – still very much concerned about inflation, but with doubts about one's own still very optimistic growth outlook starting to creep in. The market's pricing for the September meeting has slipped from previously discounting a greater than 50% probability for a hike to now around 25%.    The effective policy stance is not as restrictive as desired   Today's events and market view The US payrolls report takes the spotlight today, but those forecasting the numbers do not have much to go on given that the ISMs are only published after the jobs data this time around and that the ADP has proven of limited value as a predictor. The consensus is looking for more signs of a cooling labour market, expecting a 170k payrolls increase – with individual forecasts ranging from 120k-230k – and wage growth decelerating somewhat to 4.3%. At the same time the unemployment rate is expected to stay at 3.5%. After the jobs data we will then see the ISM manufacturing index which is seen improving only marginally to 47, meaning that the index will continue languishing in the contraction area. 
Turbulent FX Markets: Peso Strength, Renminbi Weakness, and Dollar's Delicate Balance

Turbulent FX Markets: Peso Strength, Renminbi Weakness, and Dollar's Delicate Balance

ING Economics ING Economics 01.09.2023 10:28
FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.
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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.
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Paring Back of BoE Hike Expectations Weakens GBP Gains

FXMAG Team FXMAG Team 14.09.2023 10:01
GBP: Paring back of BoE hike expectations encouraging reversal of GBP gains The pound has continued to trade at weaker levels overnight after selling off yesterday following the release of the latest labour market report from the UK. It has resulted in EUR/GBP rising back above the 0.8600-level while cable is continuing to hold just above support from the 200-day moving average that comes in at around 1.2430. The pound has been undermined recently by the paring back of BoE rate hike expectations as we highlighted in our latest FX Weekly report (click here). The UK rate market has become less confident that the BoE will deliver multiple further rate hikes in the current tightening cycle. There are 19bps of hikes priced in for next week’s MPC meeting and 39bps of hikes by February of next year. It implies that the UK rate market is currently attaching around a 50:50 probability to the BoE delivering one final hike after next week’s 25bp hike which is viewed as almost a one deal. The main trigger for the paring back of BoE rate hike expectations have been comments from BoE officials including Governor Bailey and Chief Economist Pill who have signalled that the rate hike cycle is close to an end and that keeping rates higher for longer is preferred to the alternative of hiking rates further towards 6.00%. Next week’s updated forward guidance from the MPC meeting will be important in determining whether the BoE plans to deliver one final hike or is becoming more confident that it has raised rates enough   At the same time the recent data flow from the UK is helping to dampen BoE rate hike expectations as well. While yesterday’s labour market report did show average weekly earnings hitting a new high of 8.5% in July, the details of the report provided more encouragement that labour demand continues to weaken and wage growth is beginning to slow. Employment dropped by 207k and the unemployment rate ticked up further to 4.3% as it moved further above the cycle low of 3.5% from las August. Back in the August MPR the BoE had forecast the unemployment rate would rise to only 4.4% by the end of next year. Job vacancies also continued to fall and moved below 1 million. After stripping out more volatile bonuses, regular pay growth in the private sector has slowed in recent months coming. The HMRC’s median pay measure even declined by -0.5%M/M suggesting the peak has been reached for pay growth.   Furthermore, it has just been revealed that services sector growth was much weaker than expected at the start of Q3. After expanding by 0.5%M/M in June, service sector output contracted by -0.5% in July. It has reinforced the pound’s downward momentum  
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Tight Labour Market Persists in Hungary Despite Economic Challenges

ING Economics ING Economics 27.10.2023 15:06
Labour hoarding persists in Hungary September brought a tiny weakening in official labour market statistics. However, the changes have been so gradual that the unemployment rate has remained unchanged and is still stubbornly low despite Hungary's economic difficulties.   Unemployment rate remains stubbornly low According to the latest unemployment statistics from the Hungarian Central Statistical Office (HCSO), only a minimal change was seen in Hungary's labour market in September. The model estimate for the ninth month of the year showed a slight improvement (3.9%) in the unemployment rate. Meanwhile, the official three-month moving average of the unemployment rate (based on the survey) remained unchanged at 4.1%. Against this backdrop, the number of those unemployed is estimated to be between 190,000 and 200,000. Unemployment rates are still significantly higher than a year ago. However, given that the overall performance of the Hungarian economy remains weak – even if the underlying expectation is that the third-quarter GDP data will show that the period of technical recession is likely to have ended – the latest series of labour market data can be considered very positive overall.   Historical trends in the Hungarian labour market (%, 3-m moving average) Looking at the monthly data, perhaps the most important change is that the number of non-participants fell sharply by around 47,000, while the number of employed persons rose by 45,500. At the same time, those entering the labour market found jobs straight away, with the number of people in employment rising by almost 50,000 in one month and the number of those unemployed falling slightly by almost 4,000. This suggests that seasonal and technical effects may be the main drivers behind the changes. We find it hard to believe that such a large labour market spill-over has taken place in one month – all the more so given that the labour market data for September are in line with those for June and July. It is therefore likely that the weakening of the labour market in August can be seen as an anomaly.   The monthly changes in the main labour market statistics   Looking at the monthly data, perhaps the most important change is that the number of non-participants fell sharply by around 47,000, while the number of employed persons rose by 45,500. At the same time, those entering the labour market found jobs straight away, with the number of people in employment rising by almost 50,000 in one month and the number of those unemployed falling slightly by almost 4,000. This suggests that seasonal and technical effects may be the main drivers behind the changes. We find it hard to believe that such a large labour market spill-over has taken place in one month – all the more so given that the labour market data for September are in line with those for June and July. It is therefore likely that the weakening of the labour market in August can be seen as an anomaly.   The monthly changes in the main labour market statistics   On this basis, we do not consider the slight change in the labour market indicators to contain any meaningful extra information. Overall, our picture of the Hungarian labour market has not changed – it remains close to full employment and we still see persistent labour shortages.   We don't see major changes in the strength of the labour market ahead We expect similar volatility in the unemployment rate in the coming months, without any structural change. Companies will continue to insist on retaining staff or even hoarding, having learned from the shocks of recent years that it is quite difficult to expand the workforce in a recovery period in an economy with a general shortage of labour. The Hungarian economy is also on the verge of recovery – that is, if disinflation continues to target and EU funds are available soon to draw down to support economic performance. We continue to see inflation as the biggest risk to the labour market. The backwards-looking inflation expectations based on the recent history of inflation and the government's desire to achieve positive real wages could push companies towards higher wage increases. The question is whether employers will be able to absorb these wage increases in the face of external inflationary shocks without further price increases. Our calculations suggest that companies will need to increase labour productivity by 2-3% to avoid a price-wage spiral, based on the roughly 10% wage increase forecasted in 2024. Encouragingly, the repricing of energy contracts at the end of this year promises cost reductions, which may give companies more room to raise wages without profit margin pressure. In addition, the declining but still high interest rate environment may also encourage more efficient investment. If consumption does not explode even if inflation falls sharply (and we see only a slow recovery), a gradual increase in domestic demand is also likely to prevent a renewed rapid rise in prices. The risk of a wage-price spiral therefore remains alive given the tight labour market, but we see a good chance of avoiding it for the time being.
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The Jobs Dilemma: Deciphering Long-End Rates Amidst Fed's Balancing Act

ING Economics ING Economics 03.11.2023 14:38
Rates Spark: US jobs data can be key It has been a big move lower in long-end rates over the past days, and today's US jobs data will be key in determining whether it has further to run. Notably, however, the front end has started to turn higher again. The Fed, having tied itself to long-end rates to a degree, may start pushing back against easing financial conditions.   The rally in long-end rates extended with curve flattening accelerating Overall, we have now seen a drop of close to 30bp in 10Y and longer yields over just two sessions – the 10Y is now at 4.66% and 30Y at 4.80%. As seen in the move higher before, it was also in large part a move in the real interest rate component in this leg lower. The 2s10s curve has reflattened by a substantial 18bp with the larger part of that dynamic actually coming yesterday. The lower-than-feared long-end supply fuelled by the US Treasury has helped, as has weaker macro data. And certainly, there was evidence of value hunters out there getting in at 'high' yield levels. Markets will now be taking a close look at today’s US jobs data to determine whether yields have further room to fall. Yesterday’s US labour market indicators have already helped provide 10Y yields the final nudge below 4.7%. The initial jobless claims ticked a little higher to 217k from 212k and more importantly continuing claims rose to 1815k. That latter figure has been rising over the past month and a half. While the rate of layoffs might still be considered low, it suggests that if you do lose your job it is becoming more difficult to find a new one.   The Fed may push back agains financial conditions easing again The rally on long-end rates over the past sessions also highlights another conundrum for the Fed. By essentially referencing the higher longer rates as reason to withhold further tightening it has created an awkward interdependency with the market. The Fed said it needed to see persistence in the changes to broader financial conditions for it to have implications for the policy path. While there are good reasons to assume that further tightening is off the table, the prospect of a larger rally in rates bringing them back again potentially limits the downside at the onset. The caveat is that this may only work to the degree that long-end rates are actually driven by policy expectations. Front-end rates certainly are and pushed actually higher yesterday with the 2Y yield close to 5% again. That in mind, the Fed’s interdependency with the market is adding to the re-flattening dynamic of the curve.   As the-long end rally extended, front-end resistence accelerated the flattening   Today's events and market view We have doubts that this is the end of rises in long-dated market rates. For that to happen we would need to see material labour market weakness, putting today's job market report squarely in the spotlight. The consensus is looking for a 180k rise in non-farm payrolls, with forecasts ranging from 125k to 235k. It will be a slowdown from September’s bumper figure of 336k, but even the consensus figure would still be relatively robust – cooling, but making it hard to argue that the labour market is really troubled yet. As for supply as a driver, the market is effectively still facing higher issuance at upcoming Treasury auctions, and we are not even speaking of unresolved long-term debt trajectory concerns. As for the weaker ISM manufacturing that had helped drive the rally, it had been in contractionary territory since last October. The more relevant indicator should be today’s non-manufacturing ISM. And with regards to the Fed, the speaker schedule is looking busier again after the meeting and the drop in longer rates may get some pushback.
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The Dynamics of Hungary's Labour Market Amidst Economic Changes and Inflation

ING Economics ING Economics 27.11.2023 14:37
Hungary’s labour market cools slight The cost of living crisis has not gone completely unnoticed in employment statistics, with labour metrics cooling slightly in the autumn. However, the labour market still remains tight, which also puts upward pressure on wage growth.   There has been a slight increase in the unemployment rate According to the latest unemployment statistics published by the Hungarian Central Statistical Office (HCSO), there was little change in the labour market in October. The model estimate for the tenth month of the year showed a slight deterioration in the unemployment rate (4.1%). Meanwhile, the official three-month moving average of this labour metric (based on a survey) rose by a similar 0.2ppt to 4.3%. Against this backdrop, the number of people out of work has once again risen meaningfully above 200,000, a level not seen since March 2021. Looking at the longer-term trend, the cost of living crisis has not gone completely unnoticed in the labour market. Apart from a (seasonal) improvement this summer, there has been a slow, trend-like deterioration in the unemployment rate since spring 2022. However, it is important to note that both the activity rate and the employment rate in the labour market have increased significantly over the same period. In other words, more and more people want to work as a result of the impact of the crisis on their livelihoods, and they have been absorbed to a significant extent, but not entirely, by the labour market.   Historical trends in the Hungarian labour market (%, 3m moving average) Looking at the monthly data, perhaps the most important change is that the number of people in employment rose by around 10,000, while the number of people unemployed rose by 11,000 and the number of people without a job by just under 2,000. On the one hand, these changes are within the margin of error, i.e. they are not significant. On the other hand, they suggest that more people are entering the labour market as the year draws to a close, but that finding a job is not as easy as it was a year ago. Compared to the beginning of 2023, there has been a significant increase in the proportion of people who have been unemployed for 0-3 months (i.e. either recently lost their job or recently returned to the job search), although there has also been an increase in the number of long-term unemployed who have been out of work for more than a year. The hiring propensity of companies thus appears to be easing significantly in the overall economy. Nevertheless, considering the cost of living crisis, we can conclude that the Hungarian labour market remains in good shape and labour shortages remain significant.   Unemployment by job search duration   Going forward, we do not calculate for any structural changes in the labour market for the rest of the year. The vast majority of companies will continue to insist on retaining staff, having learned from the shocks of recent years that it is quite difficult to expand the workforce in a recovery period in an economy with a structural shortage of labour. In this regard, judging by the latest third-quarter GDP data, the Hungarian economy is on the verge of recovery. The structural labour shortage can raise workers’ bargaining power and therefore support wage increases, especially in light of the recent minimum wage agreement. Positive real wages may support the economic recovery, but they also carry reflationary risks. For the time being, we believe that the corporate costs of the expected real wage increase can be covered by expected revenue growth and efficiency gains, so that while the risk of a price-wage spiral remains, we see a good chance that it can be avoided.   Slowdown in average gross earnings on the back of base effects According to the latest wage statistics published by the HCSO, the pace of year-on-year (YoY) average wage growth in Hungary slowed slightly in September. On the one hand, the 14.1% YoY average wage growth (for the full range of employers) can still be considered very strong. On the other, the slowdown in wage dynamics compared with the pace observed in recent months is due to a strong base effect, as salaries of professional members of law enforcement agencies increased significantly in September.   Nominal and real wage growth (% YoY)   Meanwhile, regular earnings in September were 14.9% higher than a year earlier, which means that the increase in total earnings (including bonuses and one-off payments) is higher than the increase in average earnings. This also means that one-off payments and bonuses were lower in September this year than a year ago. Again, this should come as no surprise, as at the end of last year, with inflationary pressures rising, many companies decided to give their employees one-off payments. The aim was to improve the financial situation of workers without imposing a long-term increase in wage costs on firms. It is therefore likely that, for the same reasons, the increase in regular earnings in the coming months will be higher than total average earnings. The impact of bonuses can also be seen from the fact that the increase in median gross earnings (14.1% YoY) was exactly the same as the increase in average gross earnings.   Wage dynamics (three-month moving average, % YoY)   The detailed data also shows that the base effect of last September's pay settlement for law enforcement officers influenced the change in average wage growth in the whole economy. In the public sector, the pace of wage growth slowed considerably, from almost 15% to just under 12% YoY. Meanwhile, wage growth in the private sector has also slowed, although this is mainly due to a decline in the level of one-off payments.  Looking at the individual branches of the economy in general, the pace of wage growth has slowed significantly almost everywhere, but there are a few exceptions, like scientific and technical activity, and education. As inflation continued to slow in September, the 12-month negative real wage growth on an annual basis has come to an end, despite the slowdown in average wage growth. The purchasing power of average wages was 1.7% higher in September 2023 than it was a year earlier, which is a significant change, but at the same time needs to be taken with a pinch of salt. In general, this simply means that the purchasing power of the population has started to increase again compared with the previous year.   The level of average and median real wages (1990 CPI adjusted HUF)   The problem might be that this is only one month of positive data, and it looks at the growth compared to the same period of the previous year. However, if we look at the level of monthly real wages at 1990 prices (i.e. we are not looking at a percentage change), our calculation shows that the level of real wages was 28,784 forints (around US$83). This compares with an average monthly wage of around 31,000 forints (US$89) in the last three months of 2021, calculated at 1990 price levels. This shows that the current positive year-on-year change basically marks the beginning of a recovery and that there is still a long way to go before the purchasing power of wages catches up with the decline caused by the inflation shock and the living standards crisis. The purchasing power of average wages is currently around the average in 2020, so we have managed to invent the time machine and get back to the 2020 standard of living in terms of wages. None of this suggests that households are going to start consuming a lot just because a statistic has gone from negative to positive. The recovery in domestic demand will therefore be a slow and gradual process, in our view.
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China Trade Disappoints as Moody's Downgrade Weighs on Asia Markets: European and US Markets Show Resilience Amidst Global Economic Concerns

ING Economics ING Economics 12.12.2023 13:05
China trade disappoints, as Moody's downgrade weighs on Asia markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive day yesterday, with the DAX posting another record high, while the FTSE100 broke 2 days of declines to close higher as well.   The outperformance on European markets appears to be being driven by the increasing belief that the European Central Bank may well be forced into cutting rates sharply in the early part of 2024 in response to sharply slowing inflation and a sclerotic economy.   The last few days has seen a sharp decline in bond yields reflecting an increasing belief on the part of investors that rather than higher for longer, central banks will start cutting rates as soon as Q2 next year. The shift in tone has been most notable from several ECB policymakers who have indicated that rate hikes are done.   US markets also appear to have started to run out of steam after their big November rally, as traders take stock of how resilient the US economy is.   Asia markets on the other hand have struggled with the latest set of Chinese trade numbers pointing to an economy that is still struggling, and a downgrade by Moody's on China's credit outlook, along with downgrades to banks, and other small companies which looks set to weigh in the European open this morning, in the wake of weakness in Asia markets.   In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline.   Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon. Today's November numbers have seen imports decline by -0.6%, against an expectation of a rise to 3.9% in a sign that domestic demand is still very weak, while exports improved, rising by 0.5% a solid pick up from the -6.4% decline in October.   Yesterday's US ADP payrolls report saw jobs growth in November slow to 103k, in a further sign that the labour market is slowing, with the last 3 months showing significant evidence that hiring is slowing. This trend was also reflected in this week's fall in October job openings to 8.7m the lowest level since March 2021.   For the time being weekly jobless claims have shown little signs of increasing, trending in the low 210k for the last couple of months.   Continuing claims on the other hand have been edging higher rising to a 2-year high last week 1.93m. Today's claims numbers are expected to come in at 220k, with continuing claims set to also remain steady, ahead of tomorrow's eagerly anticipated non-farm payrolls report.   EUR/USD – continues to slip lower raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0825 and 200-day SMA, while above that at the 1.0940 area.   GBP/USD – remains under pressure as it continues to slip away from the 1.2720/30 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 29 points lower at 7,486   DAX is expected to open 52 points lower at 16,604   CAC40 is expected to open 24 points lower at 7,412
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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.

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