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10Y US Treasury yields are more than 60bp away from the peak they reached in early March, prior to the regional banking crisis. The Fed has been pushing a more hawkish line disappointed by the lack of progress on the inflation front, but end-2023 Sofr futures still price a rate that is 50bp below the early March peak.   At least so far, this doesn’t feel like a wholesale reappraisal of the market’s macro view although a more forceful Fed communication at the 14 June meeting, with potentially a hike and a higher end-2023 median dot, could push us closer to this year’s peak in rates.     ECB pricing is hard to move but markets look to the BoE for guidance In Europe, today’s inflation prints from France, Germany, and Italy will, in addition to yesterday’s Spanish release, give us a pretty good idea of where the eurozone-wide number will fall tomorrow. If the drop in Spain’s core inflation is any guide, EUR markets will struggle to follow their US peers higher.   Add to this that it is difficult for euro rates to price a path for policy rates that materially diverges from their US peers. Even if the Fed hikes in June or July, the EUR swap curve already prices ECB hikes at both meetings. Swaps assign a low probability to another hike in September for now.   That probability may well rise but we think any labour-market induced sell-off in US Treasuries will reflect, in part, in wider rates differentials between the two currencies.   It is difficult for euro rates to price a path for policy rates that materially diverges from their US peers  

AUD: RBA hike is a 50-50 affair The Reserve Bank of Australia has had a tendency to surprise markets in recent months. As it prepares to announce monetary policy tomorrow, markets (40% implied probability of a hike) and consensus are split between a 25bp rate increase and a hold after a set of contrasting data in Australia. We agree that the chances of a hike are very close to 50-50: 1Q wage data pointed to more tightening in our view, but April jobs figures were dismal. When April CPI data was released last week and surprised with a jump to 6.8% year-on-year, and Governor Philip Lowe sounded open to all options by reiterating data-dependency, the probability of a June hike jumped again.     In theory, data dependency means that the prospect of a “hawkish hold” or “dovish hike” should not be on the spectrum of possibilities, and even though the shades of central bank communication can admittedly be quite varied and creative (Lowe will speak Wednesday morning), we see tomorrow’s risk event as quite binary for the Australian dollar. A hike could see AUD/USD initiate a move that can take it to stabilise around 0.6700 towards the end of this week; a hold raises the risk of sub-0.6500 lows being tested again soon, even though we think less USD strength can favour stabilisation in the pair regardless of a hawkish surprise by the RBA.

With the appearance of the Bearish 123 pattern followed by the appearance of deviations between the #USDX price movement and the osMA indicator on the daily chart, then the probability of the USD Index in the next few days to fall down is quite large where the 103.35 level will be the main target to aim for and if this level is successfully broken downward then #USDX has the potential to fall down to test the 102.53-102.03 area as long as there is no upward movement that exceeds the 104.67 level because if this level is broken then all the downward scenarios that have been described will become invalid and cancel automatically.    

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%.

Painting a 3% to 4% range for the US 10yr We are nearing the peak for US rates, but we are not there yet. The 10yr needs to get to a 4% handle, the 2yr to a 5% one and the funds rate should peak out at 5.5%. Sticky inflation and an economy that won’t lie down rationalise a continuation of rising rates. But a dash lower in market rates is a theme for 2024, with an overshoot to the 3% handle the target for the 10yr   The US curve has shifted higher. More to come as a 4% handle on the 10yr is coming In recent weeks the US yield curve has shifted higher and the curve inversion has deepened further. The 10yr is now at 3.8%, and the 2yr is back above 4.8%, stretching the 2/10yr inversion back above 100bp. There is room for the 2yr to rise to 5% on the likelihood that the market prices out the rate cut bias just about discounted for the December 2023 meeting. Remember the 2yr was above 5% just before Silicon Valley Bank (SVB) went down.   The latest core PCE number at 4.9% reminds us that the US is still a '5% inflation economy'. We think this will change (inflation will ease lower), but for now it is what it is until dis-proven. The issue is that activity data is not lying down. The latest consumer confidence number for June, for example, has popped back out to 109.7 (versus 100 at neutral). Market rates can only rise given this, albeit muted by recent good demand for bonds. Had it not been for this recent buying we’d already be at 5% for the 2yr and 4% for the 10yr yield. But based on what we see in front of us, we are likely to get there. The rising pressure on market rates is also underpinned by a Federal Reserve that continues to sound quite a hawkish tone on worries that the inflation monster remains alive and well. The Fed skipped the rate hike opportunity for June, but seem very ready to resume hiking at the July meeting. There is over an 80% probability attached to a 25bp hike from that meeting. Beyond that, there is a 50:50 chance attached to the delivery of one final 25bp hike.   The rationale for maintenance of rate hikes for now is centred on the stickiness of inflation and the refusal of the economy to slow by enough to really quell inflation pressures. We actually think the Fed has done enough and could simply hold here rather than hike. But the Fed has made it pretty clear that it thinks it needs to keep hiking some more. The Fed will want to do the rate hiking exercise once, and not to have to come back again later and re-accelerate hikes. We target the 10yr Treasury yield to get back up to the 4% area; back to where it was before the SVB induced rally in bonds and sell-off in risk.   But the peak in market rates is nearing, and the next big journey is towards a 3% handle in 2024 At the same time, we note that lending standards have tightened significantly in recent months. On top of that there is a growing degree of concern with respect to the commercial real estate loans portfolios being held by US banks (a post-pandemic outcome). All of this adds to stresses coming from the banking sector, stresses that can hamper macro circumstances. Already key US forward-looking indicators, such as PMIs and ISMs, are in recessionary territory. The external backdrop is not great either, with the eurozone having moved into a state of technical recession, and China showing only a subdued re-opening oomph. The move to the recessionary environment paves the route for interest rate cuts from the Federal Reserve by early 2024.   The idea then is for 2024 to be a year with a rate-cutting theme. We see the Federal Reserve getting the funds rate down to 3% by the end of the year. Market rates will get there first. So, we see the 10yr Treasury yield heading to the 4% area in the next month, but by the end of 2023 it will be comfortably back below 4% with a view to heading towards 3%, likely overshooting to the downside.   The theme for the remainder of 2023 is for the 10yr to head for the 4% area, the 2yr to head for the 5% area, and for the fed funds rate to peak at 5.5%. The 10yr can then journey back down towards 3% through the first half of 2024, with the funds rate getting there by the end of 2024. And provided the funds rate bottoms at 3%, then the 10yr Treasury yield should be heading back up again in order to generate a normal upward sloping curve. A move back up to 3.75% would have a suitable 75bp gap above the funds rate.

Swiss inflation lower than expected US markets closed on Tuesday Fed minutes will be released on Wednesday The Swiss franc is showing little movement on Tuesday, trading at 0.8959 in the European session. US markets are closed for the July Fourth holiday and we can expect a quiet day for USD/CHF.   Swiss inflation falls to 1.7% Switzerland’s inflation rate dipped in June to 1.7% y/y, down from 2.2% in May and just below the consensus of 1.8%. On a monthly basis, inflation rose 0.1%, down from 0.3% and below the consensus of 0.2%. Core inflation eased to 1.8% y/y, down from 1.9%. Swiss National Bank President Jordan has often complained that inflation remains too high, although other central bankers, who are grappling with much higher inflation, would be happy to change places. Both the headline and core rates have now dropped into the Bank’s target range of 0%-2%, which should lend support to the SNB taking a pause at the September meeting. However, Jordan has been quite hawkish and one positive inflation report may not be enough to convince the SNB that the decline in inflation is temporary. The markets have priced in a 66% probability of a 0.25% in September, which would bring the cash rate to an even 2.0%. US markets are closed today, but Wednesday should be a busy session as the Fed releases the minutes from the June meeting. The markets are widely expecting a rate hike in July, and there are growing concerns that if the Fed continues to hike, the economy will tip into a recession.  The spread between 2-year and 10-year Treasury note yields deepened to a 42-year high on Wednesday, raising fears of a recession. A yield curve inversion is considered a reliable indication of a recession and the current inversion has been in place since July, raising fears about the direction of the US economy.   USD/CHF Technical USD/CHF is testing support at 0.8961. Below, there is support at 0.8904 0.9009 and 0.9081 are the next resistance lines  

GBP/USD On Friday, the British pound fell by 42 pips. The signal line of the Marlin oscillator has turned downwards, and the upper band of the descending price channel in green remains untested. Now the question arises - if the pound decides to reverse (or deep correction), will it proceed to test the price channel? The pound tends to test key levels, so it can rise to 1.3180. Price consolidation below 1.3034 will lower such probability.     Bringing the price back to the initial level of speculative growth at 1.2666 on July 6th, when US private sector employment data from ADP was released, will be a challenging task - a four-figure move lies ahead with strong intermediate levels (1.2847, 1.2720). It is possible that the price will reach the designated area in the first week of August (the Federal Reserve's rate decision will be on July 26th, and the Bank of England's meeting will be on August 3rd).     On the 4-hour chart, the Marlin oscillator has come close to bearish territory. Marlin encourages the price to overcome 1.3034 in the near term, but further difficulties may arise, the nearest one is the MACD line (1.2907). The rapid decline of Marlin carries the risk of divergence, in which case the price may rise towards the upper band of the daily chart's price channel.    

Rates: How to convey a hawkish message against macro headwinds A subdued macro outlook is keeping a lid on ECB hike expectations and this has led to real interest rates, a measure of how the market perceives the ECB’s policy stance, dropping considerably since July. In fact, as the ECB’s Isabel Schnabel pointed out recently, the level of real interest rates out the curve has fallen to levels that also prevailed at the ECB meeting in February, if not even lower.   With the ECB preaching data dependency, it has curbed its ability to make credible commitments with regards to the rates outlook, despite its pledge to keep policies sufficiently restrictive to achieve its inflation goals.     This is why we see the balance of risks still tilted to a hike this week – actions speak louder than words. The market is attaching only a 40% probability to a hike, highlighting some potential to surprise the market. But the market does see an overall probability for a hike at 70% before year-end, which suggests much of the repricing could just be pulling forward future hike expectations, but not necessarily embracing further tightening on top of that. After all, the macro story has not changed and even in the ECB’s own deliberations this week, the weakening backdrop could gain a greater weight.  Markets could sense that this is the likely end of the hiking cycle. Still, the ECB may want to counter the notion that this is the end of its overall inflation-fighting endeavours. The degree to which this is successful will determine how much of a curve bear flattening we get in the event of a hike. A renewed focus on quantitative tightening could help to prop up longer rates on a relative basis. Other means of tightening, such as adjusting the minimum reserve ratios (some ECB members such as Bundesbank President Joachim Nagel see room for action here) would probably have less impact on longer rates.

RBA hikes rates - market reaction is curious Although the RBA hike was expected by the majority of the forecast community, markets were not completely sold on the idea, which is why it is curious that the AUD weakened on the decision and that bond yields fell.   RBA hikes but AUD softens It was no surprise that the RBA hiked the cash rate by 25bp today. Only three of the Bloomberg consensus expected the RBA to hold rates steady today. We were not among them. However, the market pricing was more circumspect, with only about a 59% probability of a hike priced in to today's meeting.  All of which makes the subsequent market reaction quite strange.  The AUD made a very brief run stronger on the announcement, but almost immediately fell back, dropping to about 0.643 from about 0.652 prior to the announcement.  Australian government bond yields also declined. 10Y government bond yields fell from about 4.76% to 4.70% and yields on 2Y government bonds fell from 4.37% to 4.31%. There was a slight decline in US Treasury yields at the same time, which may have influenced things, but it isn't a particularly satisfactory explanation.      RBA statement was reasonably hawkish This market reaction cannot either be put down to the accompanying statement by the RBA, which in our view leant in a hawkish direction.  The justification the RBA gave for today's hike was the slow progress being made towards their target inflation range, the arrival at which was put back to late 2025. The RBA also judged that the weight of information received since the previous meeting raised the chances that inflation would remain higher for longer.  The RBA's statement also kept the door open to the possibility of further hikes, saying that "Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks". Thanks to base effects, next month's inflation data will probably show another increase (see chart above). However, we don't think the RBA will respond again so soon if inflation does indeed rise. After that, when the November and December figures are released, absent the floods and energy shortages of last year, we should see inflation resume its downward trend, which may be enough to cement the view that this was the last hike this cycle after all.  The risk to this view comes from the current run rate for inflation. For the last 2 months, the CPI index has risen by 0.6% MoM. This isn't consistent with an inflation rate between 2-3% but rather one closer to 7%. So this also needs to slow down considerably over the coming months. If it doesn't, then instead of the rate cuts that we expect could be on the radar by mid-2024, we might still be looking at some further tightening before we can call this rate cycle truly over. As the RBA notes in their statement, "There are still significant uncertainties around the outlook".  

The Japanese yen is drifting on Friday. In the European session, USD/JPY is trading at 147.80, up 0.10%. Tokyo Core CPI falls to 1.6% Tokyo Core CPI reached a significant milestone today, falling to 1.6% y/y in January, after a December reading of 2.1%. This was the first time the indicator dropped below the Bank of Japan’s 2% target since May 2022. The main driver of the decline was lower energy prices. Tokyo Core CPI excludes fresh food but includes fuel. The Tokyo core-core index, which excludes fresh food and fuel prices, rose 3.1% y/y in January, down from 3.5% in December. The drop in inflation reinforces the BoJ’s view that cost pressures are gradually being replaced by rising service prices as the main driver of inflation. This is hugely significant, as it points to inflation being more sustainable, which is a requirement for the BoJ before it tightens its ultra-loose policy. Japan also released corporate service inflation for December which held steady at 2.4%, a nine-year high. That reading underscores that service prices remain high a companies continue to pass on their costs. BoJ Governor Ueda stated at this week’s policy meeting that progress is being made towards the target of 2% sustainable inflation, and that has the markets speculating that the BoJ could make a major policy shift in April or June. The BoJ wants to see higher wages as evidence that inflation is sustainable and the national wage negotiations in March are expected to provide higher wages for workers.   In the US, the first-estimate GDP for the fourth quarter smashed above expectations, but the US dollar didn’t show much interest. GDP growth rose 3.3% y/y, below the 4.9% gain in the third quarter but well above the consensus estimate of 2.0%. The US economy continues to produce stronger-than-expected data and that has the markets paring expectations for a rate cut in March. The probability of a March cut has fallen to 48%, down sharply from 70% one month ago, according to the CME’s FedWatch tool. . USD/JPY Technical USD/JPY tested support earlier at 147.54. Below, there is support at 146.63 There is resistance at 148.44 and 149.35