PCE deflator

Asia Morning Bites

The Bank of Japan (BoJ) meets to decide on policy today and is widely expected to retain its yield curve control (YCC) policy. Singapore will report CPI inflation while South Korea will release data on PPI inflation.

 

Global Macro and Markets

    Fed Rate Hike Expectations Wane, German Business Climate Declines

    US Debt Limit Agreement Sets the Tone for Risk Demand, Dollar Sentiment Shifts

    InstaForex Analysis InstaForex Analysis 30.05.2023 09:32
    The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.   It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.   The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.     It is also worth noting a decrease in the long position on gold by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar. The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%.   Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator indicates that the fight against inflation is still far from over. In a 3-month annualized expression, the core PCE deflator stands at 4.3%, the same as in April 2022. The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."   The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely. Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements. EUR/USD The ECB maintains a firm stance on continuing rate hikes as part of its fight against inflation.   On June 1, preliminary inflation data for the Eurozone will be published, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data release aligns with expectations, it will lower the ECB rate forecasts and put additional pressure on the euro.   The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant reduction in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.     EUR/USD has predictably declined to 1.0730, where support held, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.   GBP/USD The decline in inflation in the UK is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of an aim than a reality. Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%.   If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected. Monday is a banking holiday in the UK, and there are no macroeconomic data expected this week that could influence Bank of England rate forecasts.   Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements. The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.     The pound has predictably moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the decline to continue, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for a resumption of growth.  
    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      
    Turbulent Times Ahead: Poland's Central Bank Signals Easing Measures

    Rates Spark: US 10yr Hits 4%, ECB Returns to 0% on Excess Reserves

    ING Economics ING Economics 28.07.2023 08:36
    Rates Spark: Don’t look down, yet Policy rates have practically peaked in the US and eurozone. Even if there is another hike it would be the final one. But market rates are not yielding to this. The US 10yr has re-hit 4%. The issue here is not the peak in policy rates, but the potential for cuts. Basically the market has reined back rate cut expectations, and that's keeping long rates elevated.   US 10yr makes the break to 4%. It should stay there for a while US market rates latched on to the strength in the activity data released on Thursday, rather than the calming in inflation data. Even if lower, the 3.8% on core PCE is still too high for comfort, and remains vulnerable to future upside should the economy continue to bubble as it has been doing. The release of decent consumer spending, a fall in jobless claims and firm durable orders all point to an economy that continues to defy the forces acting against it. For the 10yr Treasury yield, the issue remains that there is little room for lower yields if the terminal discount for the funds rate is not much below 4% in the medium term. The implied fed funds discount for Jan 2025 has in fact drifted higher, now up at 4.1%. Based off that the 10yr is in fact still arguably too low. We view the push up to the 4% area as perfectly valid, and indeed we anticipate that the 10yr yield remains above 4%, at least for as long as the medium-term discount for the fed funds rate also remains above 4%.   The ECB moves to 0% on excess reserves; don't worry, it's a move back to normalcy The European Central Bank (ECB) decision to pay 0% on excess reserves brings things back to where they were before the Great Financial Crisis (GFC). Regulatory reserves always paid zero percent. But since the GFC the ECB has remunerated reserves at the overnight deposit rate. This had to be done as else the banks would simply not hold them. The move back to 0% applies only to regulatory reserves, and not to excess reserves. It is a mild hit to banks, as they receive less interest income on reserves. But it is not dramatic, as the reserves held over and above the minimum will continue to get remunerated as normal. Latest data show that excess reserves across the banking system were running at EUR 3.6trn. These continue to get compensated at the deposit rate. Reserve requirements were running at an average of EUR 165bn. These will be compensated at zero percent. That represents about 5% of total reserves. It's not nothing, but it's also not terribly significant. This saves the ECB a few bob, but nothing more to it.   Today's events and market views Key US data on Friday includes the June PCE deflator. Look for a continuation of the deceleration in inflation, with the headline deflator set to ease down to 3% and the PCE core deflator to ease down in the direction of 4% (but likely to remain above). The University of Michigan Sentiment indicator for July is set to hold in the low 70's, which is below the average in the 85 area. It's been on a upward recovery, from around 60 in May. We'll also get the 5-10yr inflation expectation, which is expected to ease slightly to 3%. The eurozone will have a consumer price inflation focus, with the German lander CPI data to be followed by a country-wide one. A mild easing is expected, but still leaving inflation running uncomfortably high. We'll also see EU consumer confidence, which is likely to remain in the mid 90's, and below the benchmark reference of 100, signalling ongoing macro weakness.
    Turbulent Times Ahead: Poland's Central Bank Signals Easing Measures

    Asia Morning Bites: Bank of Japan's YCC Policy Change Amid Tokyo Inflation Surge

    ING Economics ING Economics 28.07.2023 08:44
    Asia Morning Bites Expectations for a tweak to the Bank of Japan's (BoJ) yield curve control (YCC) policy rise as Tokyo inflation remains high in July.   Global Macro and Markets Global markets:  The main market development yesterday stemmed from the more dovish commentary from the ECB, which in contrast to the attempt by Jay Powell the previous day to keep thoughts of tightening alive, seemed to suggest that this may be the peak in Europe. EURUSD dropped to 1.0978, and this pulled most other G-10 with it, helped also by stronger-than-expected GDP figures out of the US that dampened thoughts of rate cuts next year. The AUD dropped to 0.6709, Cable fell to 1.2794. But the JPY, bucked this trend, with possible tweaks to the yield curve control program at today’s Bank of Japan (BoJ) meeting (see also below), the JPY has strengthened to 139.271. The MYR and THB also made some decent gains yesterday, but the CNY weakened 0.34% to 7.1675 as optimism about stimulus measures continued to fade. Bond markets saw the spread of US yields widen over European yields. Germany’s 2Y govt yields fell 5.2bp yesterday to 3.033%, while US 2Y Treasury yields rose 7.7bp to 4.928%. And there was a large rise in US 10Y yields too, which pushed up 13.1bp to just under 4% and briefly traded above the 4% level. The equivalent German bond yield fell 1bp to 2.467%. Equities did not like the prospect that rates in the US may stay elevated thanks to rising prospects of a soft landing. Here, a bit of bad news might actually go down better than continued macro resilience. Both the S&P 500 and NASDAQ dropped by 0.64% and 0.55% respectively. Chinese stocks were mixed. The Hang Seng made a decent gain of 1.41%, but the CSI 300 lost 0.13% on the day. G-7 macro:  There was no shortage of macro excitement yesterday - first the ECB meeting which is covered by our European team here. Europe’s main policy rate is now 3.75%, which remains well below inflation, so on some measures, is barely even restrictive, and one of the reasons why our Eurozone economists don’t believe the ECB is done with hikes just yet. Christine Lagarde may not have shut the door to further hikes, but she has undoubtedly opened one to possible pauses should that be deemed appropriate by the run of data. One other tweak to their policy was to reduce the remuneration of minimum reserves to zero. The 2.4% annualized GDP growth rate from the US was also a surprise yesterday. The consumer spending figures did slow from 1Q23, but at 1.6%, were better than had been forecast. And the continued signs of slowing inflation were evident in the decline in the PCE deflator’s annualized growth rate to 3.8% from 4.9%. James Knightley describes this “Goldilocks: release here.    Japan: Tokyo inflation stayed at 3.2% YoY in July for a third month, which was higher than the market consensus of 2.9%. Even more surprising is that core inflation, excluding fresh food and energy, actually rose to 4.0% YoY (vs 3.8% in June, 3.7% market consensus). This shows that, unlike other major economies, Japan’s inflation hasn’t yet reached its peak. The only item to fall was utilities (-10.8%) thanks to the continued energy subsidy program. On a monthly comparison, inflation accelerated 0.3% MoM sa in July (vs 0.2% in June) and we saw a pickup in service prices of 0.4% while goods prices continued to rise 0.2%.  Headline inflation will continue to go down slowly due to base effects and falling global commodity prices, but core inflation will remain high for a considerable time. The BoJ is set to announce its policy decision in a few hours later today following this inflation surprise. We expect the BoJ to leave its policy rates unchanged, but we think there is a good chance of a YCC policy change at today’s meeting, which is a non-consensus view - the market believes that October is more likely. If the BoJ seeks to normalize its policy in the future, we think that delaying a YCC policy adjustment will create a larger burden for them. For a more detailed view of BoJ policy, please see here. The BoJ will also release its quarterly macro outlook today, and the focus will be the inflation outlook for 2024. We think that this is how the BoJ will assess the sustainability of inflation in this cycle and will be a good indicator against which to estimate the timing of the BoJ’s first rate hike move. South Korea:  Industrial production fell -1.0% MoM sa in June (vs revised 3.0% in May and -0.9% market consensus). Semiconductor output has now increased for four months in a row which is quite different from the industry’s reduction plan, and inventory data suggest that high-value chip output may have increased while general chip production slid. Also, shipments of semiconductors rose 41.1%. We believe that the chip cycle is bottoming out slowly. Meanwhile, vehicle output dropped quite sharply -12.9% but after having risen solidly for the previous three months, it seems likely that the auto sector is taking a breather for the time being. Forward-looking investment data were soft, which suggests that investment in the current quarter will continue to contract.   What to look out for: The BoJ and US core PCE Japan BoJ policy (28 July) Australia PPI (28 July) US personal spending, core PCE, University of Michigan sentiment (28 July)
    Rates and Cycles: Central Banks' Strategies in Focus Amid Steepening Impulses

    Asia Morning Bites: Australian Inflation in Focus Amid Market Movements

    ING Economics ING Economics 30.08.2023 09:38
    Asia Morning Bites Eyes down for Australian inflation. Markets brace for weaker payrolls after JOLTS decline in job openings. ADP due later.   Global Macro and Markets Global markets:  There was a lot of green on the boards across the equity world yesterday. Both US, European and Chinese stock indices all rose on the day. The S&P and NASDAQ rose 1.45% and 1.74% respectively, while the Hang Seng and CSI 300 rose 1.95% and 1.0%. The earlier announcement in China of stamp duty cuts and curbs on share sales by major shareholders may have provided some lingering support. Falling US Treasury yields possibly added some additional “oomph” to the US equity market. 2Y US Treasury yields fell 11bp to 4.894%, and the yield on the 10Y Treasury bond fell 8.2bp taking it to 4.12%. EURUSD picked up to 1.0876, having briefly traded below 1.08 intraday.  Other G-10 currencies also rallied against the USD. The AUD rose to 0.6480, Cable pushed up to 1.2644, and the JPY reversed a move up towards 147.50 and came all the way back to 145.89. These moves lifted the SGD too, which has pulled back below 1.35. The PHP and VND both lost ground yesterday.   G-7 macro:  It was a thin day for Macro, but it nonetheless contained some interesting data releases. The US JOLTS survey showed a sharp drop in job openings, falling from 9165K to 8827K. This was way down on the 9500K openings that had been forecast. There was also an unexpected and sharp decline in the Conference Board’s consumer confidence indicators, including those relating to the labour market. And the US house price purchase index also came in a little softer than had been expected. Germany’s GfK consumer confidence survey also came in on the low side. Today, German preliminary  CPI data for August are due. The US publishes the second release of 2Q23 GDP as well as the ADP employment survey (195K expected), to whet our appetites (or perhaps just to confuse us) before Friday’s payroll numbers.   Australia: July CPI inflation data is forecast to decline to 5.2%YoY from 5.4% in June. But the July data will also include some chunky electricity tariff increases, so we think there is a chance the number is higher than this, with an outside chance that inflation actually rises from last month.     What to look out for: US ADP report Australia building approvals and CPI (30 August) South Korea retail sales (30 August) US MBA mortgage applications, ADP employment, GDP and pending home sales (30 August) South Korea industrial production (31 August) Japan retail sales (31 August) China PMI manufacturing and non-manufacturing (31 August) Thailand trade balance (31 August) Hong Kong retail sales (31 August) India GDP (31 August) US initial jobless claims, PCE deflator and personal spending (31 August) Japan capital spending and Jibun PMI (1 September) South Korea trade (1 September) Regional PMI (1 September) China Caixin PMI (1 September) Indonesia CPI inflation (1 September) US NFP, ISM manufacturing and industrial production (1 September)
    FX Markets React to Rising US Rates: Implications and Outlook

    Rates Spark: Different Focus, Different Outcomes

    ING Economics ING Economics 31.08.2023 10:29
    Rates Spark: Different focus, different outcomes US data disappointments are still putting downward pressure on yields, and a busy calendar suggests more volatility ahead. EUR rates may detach from US dynamics as inflation data and European Central Bank minutes sharpen the focus on the upcoming ECB meeting.   The resilience narrative has driven US rates on the way up, and now down US Treasury yields remain under downward pressure as 10Y yields are trying to get a foothold at around 4.1% – early last week they had hit a high at 4.35%. Bund yields, on the other hand, have managed to bounce off the 2.5% level and as a result, the 10Y UST/Bund spread has tightened to 157bp. The narrative that has driven the wedge between the US and EUR rates is now narrowing it. That is also illustrated when looking at the market moves in real rates. They had been the driver of US rates going up and are now mostly the driver on the way down. 10Y real OIS rates have dropped some 17bp from the recent peak, although inflation swaps also slipped 8bp.       Real rates were the driver the UST/Bund gap, and also the latest retightening   Inflation remains the main preoccupation of EUR rates In Europe, the concerns have been more centred around inflation. Longer real rates never picked up and stuck to a tight range, reflecting the outlook for a longer period of stagnation that was also confirmed by the latest PMIs. Instead we had a slow grind higher in longer-term inflation expectations, picking up pace again with the second quarter. While the often cited 5y5y forward inflation has come off its recent highs, the market remains sensitive to the inflation topic, with the ECB now calibrating the final stage of its tightening cycle. The somewhat slower-than-anticipated decline in German inflation yesterday was important in keeping Bund yields off the 2.5% mark. It provided the ECB’s hawks with arguments for further tightening. Never mind that it could be the last burst of German inflation for a while, as our economist thinks – with the ECB’s current mindset being more focused on actual data than forecasts, that may well be all the more reason for the hawks to push for a hike in September and not wait any longer. It may be the last opportunity. Market pricing now sees the chances for a hike next month a tad above 50%, and 90% that we will see a hike by the end of the year.    Dynamics of inflation expectations played a larger role for EUR rates   Today's events and market view US data disappointments are still putting downward pressure on yields, having stalled any attempt to move these higher over the past sessions. A busy slate of US data featuring Challenger job cuts data, initial jobless claims, personal income and spending data, as well as the Federal Reserve's preferred inflation measure – the PCE deflator, which is seen slightly up this time – means there is plenty in store to push yields around again. EUR rates, however, may manage to detach from the US rates again as the focus turns to the flash eurozone CPI release and the ECB minutes of the July meeting. The latter may provide some more insight into any changes to the balancing of inflation versus macro risks and of course the growing debate between the Council’s hawks and doves. With Isabel Schnabel, there is also a prominent hawk slated to speak in the morning – she gives the opening remarks at a conference titled “Inflation: drivers and dynamics” and may well set the tone for the day. 
    FX Markets React to Rising US Rates: Implications and Outlook

    Rates Spark: Different Focus, Different Outcomes - 31.08.2023

    ING Economics ING Economics 31.08.2023 10:29
    Rates Spark: Different focus, different outcomes US data disappointments are still putting downward pressure on yields, and a busy calendar suggests more volatility ahead. EUR rates may detach from US dynamics as inflation data and European Central Bank minutes sharpen the focus on the upcoming ECB meeting.   The resilience narrative has driven US rates on the way up, and now down US Treasury yields remain under downward pressure as 10Y yields are trying to get a foothold at around 4.1% – early last week they had hit a high at 4.35%. Bund yields, on the other hand, have managed to bounce off the 2.5% level and as a result, the 10Y UST/Bund spread has tightened to 157bp. The narrative that has driven the wedge between the US and EUR rates is now narrowing it. That is also illustrated when looking at the market moves in real rates. They had been the driver of US rates going up and are now mostly the driver on the way down. 10Y real OIS rates have dropped some 17bp from the recent peak, although inflation swaps also slipped 8bp.       Real rates were the driver the UST/Bund gap, and also the latest retightening   Inflation remains the main preoccupation of EUR rates In Europe, the concerns have been more centred around inflation. Longer real rates never picked up and stuck to a tight range, reflecting the outlook for a longer period of stagnation that was also confirmed by the latest PMIs. Instead we had a slow grind higher in longer-term inflation expectations, picking up pace again with the second quarter. While the often cited 5y5y forward inflation has come off its recent highs, the market remains sensitive to the inflation topic, with the ECB now calibrating the final stage of its tightening cycle. The somewhat slower-than-anticipated decline in German inflation yesterday was important in keeping Bund yields off the 2.5% mark. It provided the ECB’s hawks with arguments for further tightening. Never mind that it could be the last burst of German inflation for a while, as our economist thinks – with the ECB’s current mindset being more focused on actual data than forecasts, that may well be all the more reason for the hawks to push for a hike in September and not wait any longer. It may be the last opportunity. Market pricing now sees the chances for a hike next month a tad above 50%, and 90% that we will see a hike by the end of the year.    Dynamics of inflation expectations played a larger role for EUR rates   Today's events and market view US data disappointments are still putting downward pressure on yields, having stalled any attempt to move these higher over the past sessions. A busy slate of US data featuring Challenger job cuts data, initial jobless claims, personal income and spending data, as well as the Federal Reserve's preferred inflation measure – the PCE deflator, which is seen slightly up this time – means there is plenty in store to push yields around again. EUR rates, however, may manage to detach from the US rates again as the focus turns to the flash eurozone CPI release and the ECB minutes of the July meeting. The latter may provide some more insight into any changes to the balancing of inflation versus macro risks and of course the growing debate between the Council’s hawks and doves. With Isabel Schnabel, there is also a prominent hawk slated to speak in the morning – she gives the opening remarks at a conference titled “Inflation: drivers and dynamics” and may well set the tone for the day. 
    Rates Steepen as Fed's Upgraded Dot Plot Takes Hold: 10-Year Yields Hit 16-Year High

    Rates Steepen as Fed's Upgraded Dot Plot Takes Hold: 10-Year Yields Hit 16-Year High

    ING Economics ING Economics 26.09.2023 14:44
    Rates Spark: Steepening from the back end The steepening via the back end has resumed as the Fed's upgraded dot plot sinks in. Even if the market does not fully embrace the Fed's view, the current discount for the Fed funds trough is high enough to justify 10Y yields of 4.5% and higher. EUR curve steepened from both ends, but today's German funding update may put the focus on the Bund asset swap spread.   The back end remains in the lead, in the US... Bear steepening of curves resumed at the start of this week with the 10Y UST climbing  above 4.5%. As this marks the highest yield level in 16 years, the closer guideposts are relative valuations. The 2s10s curve for instance has just straddled -60bp, but we have seen range-bound levels for some time around -50bp post March this year. We would argue a key relative metric is where the 10Y stands in relation to the trough of the discounted Fed funds trajectory, essentially the Fed’s landing zone. If that stays around 4% then longer rates at 4.5% or even higher do not look out of whack. The Fed’s key message last week was the shift higher in the fed funds rate projection. Even at the front end this change still has to sink in to a degree with the market discount of around 75bp still higher than the Fed’s 50bp. Of course this is all premised on nothing breaking in the meantime and data largely holding its poise. Therefore some scepticism seems only natural, but we have argued that it’s the long end that has more room to adjust relative to the given front end discount. Which is why data in the wake of the central bank meetings will remain key, and this week has quite a bit to offer. Foremost the personal income and spending data later this week, but also alongside the Fed’s preferred inflation measure, the PCE deflator. Here our economist does see the risk of the monthly reading ticking higher again, similar to the upside surprise in the prior CPI release.    
    National Bank of Romania Maintains Rates, Eyes Inflation Outlook

    Asia Morning Bites: BoJ Policy Decision and Singapore Inflation in Focus

    ING Economics ING Economics 25.01.2024 12:29
    Asia Morning Bites The Bank of Japan (BoJ) meets to decide on policy today and is widely expected to retain its yield curve control (YCC) policy. Singapore will report CPI inflation while South Korea will release data on PPI inflation.   Global Macro and Markets Global markets:  Monday was a quiet day for US Treasuries. The 2Y UST yield rose 0.7bp while the 10Y yield fell slightly by 1.7bp to 4.105%. The USD made slight gains against the EUR, taking EURUSD down to 1.0881. The AUD was also weaker, falling to 0.6566, though both Cable and the JPY held their ground. Asian FX was mostly a shade weaker against the USD. The PHP and THB propped up the bottom of the table. At the other end, the TWD made small gains taking it to 31.344. US stocks clawed their way higher with a new record for the S&P 500 of 4850 after a modest 0.22% gain. The NASDAQ also made a slight gain of 0.32%. US equity futures don’t seem to have a strong view on today’s open. Chinese stocks had another bad day. The Hang Seng fell 2.27% while the CSI 300 fell 1.56%. G-7 macro:  There was nothing of note in the G-7 macro calendar yesterday, and there isn’t much going on today either. UK public finance data precedes the US Richmond Fed business survey. The Bank of Japan is also meeting (see more below). Japan:  Most forecasters expect that the Bank of Japan (BoJ) will maintain its ultra-loose monetary policy today. Consequently, the market’s attention will be focused on what Governor Ueda thinks about inflation and wage growth and whether he will give any hints of policy change in the near future. The market will probably be disappointed again because we don’t believe that Ueda will give a clear signal of policy normalization in the near future. He may, however, sound more dovish than in the past, given the recent slowdown in inflation. The government renewed its utility subsidy program, so we expect the BoJ to revise down its FY2024 inflation outlook in today’s quarterly macro-outlook report. Singapore: December inflation is set for release today.  The market consensus points to inflation dipping to 3.5% YoY (from 3.6% previously) while core inflation may inch lower to 3.0% YoY from 3.2% YoY in November. Despite the slight deceleration, the MAS is widely expected to retain policy settings at the 29 January meeting, remaining wary of potential flare-ups in inflation while also looking to support an economy facing a challenging global trade environment.   What to look out for: BoJ decision and Singapore inflation South Korea PPI inflation (23 January) Singapore CPI inflation (23 January) Australia business confidence (23 January) Taiwan industrial production (23 January) BoJ policy meeting (23 January) US Richmond Fed manufacturing index (23 January) Australia Westpac leading index (24 January) Japan trade balance and Jibun PMI (24 January) Malaysia BNM policy (24 January) US MBA mortgage applications (24 January) South Korea GDP (25 January) Japan department sales (25 January) ECB policy meeting (25 January) US GDP, durable goods orders, initial jobless claims, new home sales (25 January) Japan Tokyo CPI inflation (26 January) Philippines trade (26 January) Singapore industrial production (26 January) US PCE deflator, pending home sales and personal spending (26 January)

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