recession

The August PMI indicates this economy is heading towards recession quickly if it’s not already in one. Meanwhile, weaker demand is leading to some fading of inflationary pressure, but the question is how soaring energy costs will impact this in the coming months The post-pandemic rebound in consumer spending on services is fading rapidly   The composite PMI fell from 49.9 to 49.2. Anything under 50 indicates falling business activity, so the survey is hinting at a contraction that started in the third quarter. This is consistent with our forecasts, and the colour that the survey gives on the weakness is not pretty. The manufacturing output PMI ticked up a bit in August but remained deep in contraction territory at 46.5. New orders continue to fall and inventory build-up is very strong, which reflects the squeeze in demand that the eurozone economy is currently experiencing. The services PMI fell rapidly in August to a level indicating stagnation in activity at 50.2. Demand also weakened for the service sector as the post-pandemic rebound in consumer spending on services is fading rapidly. The good news is coming from the inflation side. While high costs continue to play a major role in weakening demand, the pace of inflation seems to be fading among manufacturers and in the service sector. Weaker demand and easing input prices are helping selling price inflation moderate a bit, but the question is whether this can last now that natural gas prices are reaching new records again. For the months ahead, economic weakness is set to persist. We expect that a eurozone recession has started as the purchasing power squeeze in the eurozone economy continues. For the ECB, this complicates matters significantly, but we do think that September will still see a 50 basis point rate hike. After that, we think the rapid cooling of the economy will cause the ECB to pause its hike cycle, if we can call it that… Read this article on THINK TagsInflation GDP 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

Summary:  Financial conditions loosening over the past six weeks were a natural evolution of the US economy improving in July, but the Fed is poised to hike potentially 75 basis points at the September meeting to tighten financial conditions even more as the nominal economy is still running too hot to get inflation meaningfully lower. The most likely scenario is weaker equities as winter approaching as the energy crisis will hurt. Financial conditions will soon begin tightening again S&P 500 futures are trading 3.4% lower from their high last week touching the 200-day moving average before rolling over again. Sentiment has shifted as the market is slowly pricing less rate cuts for next year with Fed Funds futures curve on Friday (the blue line) has shifted lower compared to a week ago (the purple line) as inflationary pressures are expected to ease as much as betted on by the market over the past month. Fed member Bullard recently said that he was leaning towards 75 basis points rate cut at the September FOMC meeting to cool the economy further. If the Fed goes with 75 basis points while the real economy is seeing lower activity it will mean that financial conditions will begin tightening more relative to the economic backdrop. Financial conditions have been loosening since June but expectation is that we will see another leg of tightening to levels eclipsing the prior high and with that US equities will likely roll over. S&P 500 futures are now well below the 4,200 level and currently in the congestion zone from before the last leg higher. The next gravitational point to the downside is the 4,100 and below that just above 4,000. December put options on the S&P 500 are currently bid around $208 which roughly a 5% premium for getting three-month downside protection at-the-money. S&P 500 futures | Source: Saxo Group   Fed Funds futures forward curve | Source: Bloomberg   US financial conditions | Source: Bloomberg The US is headed for a recession, but when? US financial conditions eased in July lifting equities and with good reasons we can see. The Chicago Fed National Activity Index (the broadest measure of economic activity) rose to 0.27 in July from -0.25 in June suggesting a significant rebound in economic activity. The rebound was broad-based across all the four major sub categories in the index with the production index rising the most. The three-month average is still -0.09 with -0.7 being the statistical threshold for when this indicator suggests that the US economy is in a recession. The probability is therefore still elevated for a recession but the slowdown in the US economy has eased which is positive factor for US equity markets. Predicting the economy is difficult but our thesis going into the winter months on the Northern hemisphere is that it is very difficult to avoid a recession, at least in real terms, when the economy is facing an energy crisis. The most likely scenario is that the US economy will slide into a nominal recession but continue at a fast clip in nominal terms.          China is facing a 2008-style rescue of its real estate sector We have written earlier this year about the downfall of Evergrande and the other Chinese real estate developers. The stress in China’s real estate sector was a big theme earlier this year but has since faded, but recently the Chinese central bank has eased rates and today the government is planning a $29bn rescue package of special loans for troubled developers. Tensions in Chinese real estate are weighing down on the economy through lower consumer confidence and investors are increasingly reducing exposure to China has we have highlighted in our daily podcast. The PBoC (central bank) is urging banks to maintain steady growth of lending, but with the market value of banks relative to assets having declined for many years the market is no longer viewing the credit extension as driven by sound credit analysis, but more as an extended policy tool of the government with unknown but likely less good credit quality.   Source: Equities are rolling over as conditions are set to tighten

While wage growth remains strong, there are signs that the unemployment rate is rising. This weakening could be because companies are slowly starting to adapt to their ever-increasing costs by downsizing their workforce  Based on our latest outlook, the Hungarian economy is facing a technical recession in the second half of the year Wage growth remains strong The Hungarian Central Statistical Office (HCSO) has released the latest set of labour market data (wages and unemployment rate). While wage growth from June suggests that the labour shortage is motivatingn the wage-related decisions of employers, the July employment data may show the first signs of a turnaround. Starting with wages, gross average wages increased by 15.4% year-on-year in June 2022, causing a minor upside surprise. If we check the development in regular wages (which means getting rid of the impact of one-off payments and bonuses) we can see clearly that underlying wage growth strengthened significantly, with a 16% year-on-year increase. However, despite the strong underlying wage increase, galloping inflation is erasing more and more from the nominal rise. The real wage growth has remained in the positive territory but dropped to only 3.3% year-on-year by June. With the further strong rise in inflation in July and in the coming months, real wage growth could turn into negative territory, dragging on consumption during the second half of 2022. Nominal and real wage growth (% YoY) Source: HCSO, ING   Back to the details. Wage growth in the private sector came in at 14.8% YoY, a full percentage point higher than the average seen in the first five months of this year. Salaries rose by 12.8% in the public sector over a year. Meanwhile, due to educational institutions being reclassified as part of the non-profit sector, wage growth here remained on the extreme side: above 32% over a year. In this regard, the main driver of the acceleration in June was coming from private corporates that are still facing labour shortages and trying to solve this issue with higher wages. Wage dynamics (3-month moving average, % YoY) Source: HCSO, ING Unemployment rate rises for the first time this year But this phenomenon could end soon if July data is anything to go by. Employment data points to a weakening in labour metrics. The number of unemployed people moved up to 173k, corresponding to an unemployment rate of 3.5% in July. This is 0.2ppt higher than in the previous month. Although this isn't a ground-breaking change, as it could be a statistical error, this is the first increase in six months. In addition to the increase in unemployment, the number of participants in the labour market also decreased somewhat. This means that the reduction in the number of employed compared to the previous month was split between going into inactivity (e.g. retirement) and becoming unemployed. Based on one month's data, we can't draw any serious conclusions about major changes in the labour market processes. However, this weakening could be the first sign that companies have slowly started to adapt to their ever-increasing costs. Labour market trends (%) Source: HCSO, ING   After all, if employers expect more difficult times ahead, and that demand for their products and services will fall, more companies will be forced to start an extensive labour market adjustment. To put it more simply, they could try to save on costs by downsizing and thus maintain their profitability despite the expected decrease in revenues. Based on our latest outlook, the Hungarian economy is facing a technical recession in the second half of the year, that is, we expect a decrease in aggregate demand. All of this, in addition to the increased costs companies are facing (energy, transport, raw materials, labour, etc.), means ever higher inflation since companies are primarily now trying to maintain their profitability by passing on costs. However, as real wage growth turns into negative and aggregate demand shrinks, this option will become less functional, so layoffs may begin. Accordingly, towards the end of this year, we expect the unemployment rate to rise, but we don’t see the indicator significantly exceeding 4%. Read this article on THINK TagsWages Unemployment rate Labour market Jobs Hungary 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

With inflation set to hit 16-17% in January, a UK recession looks inevitable. The depth depends heavily on how much support the new prime minister offers to households and small businesses when he or she takes office next week. In this article Energy bills set to increase six-fold based on latest price data Savings stockpile and tight jobs market could insulate economy if government support is ramped up     Energy bills set to increase six-fold based on latest price data The UK, like the eurozone, looks like it’s headed for a recession. The UK may benefit from greater security of gas supply and larger LNG regasification facilities. But a lack of gas storage means that Britain is vulnerable to price volatility across Europe this winter. Indeed if wholesale gas prices were to settle at their most recent peak, we could see the average household energy bill hit almost £7,000 on an annualised basis next April. That compares to roughly £1,100 in previous years, and our latest forecasts suggest that inflation could hit 16-17% in January next year – or perhaps even higher. Unmitigated, that would see most households paying more than 10% of their disposable income on energy, something that could amount to material cuts in non-essential spending. The government has announced £37bn worth of support so far, but that was when energy bills were expected to peak at around £3,000. Households will need to find an extra £65bn to pay for energy bills from October to the same period next year, to offset the further rise in gas prices we’ve seen since the last round of support was announced. Households in most income deciles set to pay more than 10% of disposable incomes on energy  Source: ING analysis of ONS Living Costs and Food Survey, Effects of Tax and Benefits, Ofgem, UK TreasuryGovernment support based on estimates produced by the UK Treasury as part of the 26 May Cost of Living package. For simplicity, we've used 2020/21 equivalised disposable income data, which in practice will have increased. Assumes energy prices increase by same percentage for all income deciles. Disposable income = after income tax/national insurance etc (but before accounting for housing and other costs This gives a sense of what the new prime minister, who will be announced on 5 September, will face. Foreign Secretary, Liz Truss, who is odds-on to succeed Boris Johnson, has stated a preference for using tax cuts to help households. However, the sheer scale of the energy bills that are likely to hit next year suggests that this will need to be coupled (or replaced) with additional direct payments to households across the income spectrum. The most obvious mechanism for that would be to dramatically increase the existing £400 discount on energy bills that households receive from October. Importantly that will probably need to be extended, in one form or another, to small businesses, which are unprotected by the regulator’s price cap and are already experiencing potentially-existential price hikes. Savings stockpile and tight jobs market could insulate economy if government support is ramped up The key message is that the UK is heading for a recession, though its magnitude depends heavily on the scale of government support. In our base case, we’re assuming that support is materially increased and the scale of the economic downturn can be kept relatively shallow, at least by recent historical standards. Remember that households still have ‘excess savings’ accrued during subsequent lockdowns, which amount to roughly 8% of GDP – albeit these are heavily skewed towards higher earners. For the time being, the jobs market is also very solid and remains characterised by ultra-low redundancy levels and staff shortages,  though higher energy bills for corporates could begin to change that picture. Vacancy levels have begun to decline. We’re pencilling in a hit to GDP of roughly 1%, though this is highly conditional on how much government support is offered. Markets are assuming that a large government support package would raise the chances of a forceful reaction from the Bank of England. We agree with this assessment even if current swap rates wildly overestimate the scale of tightening that’s likely. We expect at least one, if not two, further 50bp rate hikes. Source: https://think.ing.com/articles/monthly-uks-new-prime-minister-faces-immediate-test-as-recession-looms/?utm_campaign=September-01_monthly-uks-new-prime-minister-faces-immediate-test-as-recession-looms&utm_medium=email&utm_source=emailing_article&M_BT=1124162492 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 hefty falls in equity markets through the first half 2022 have put quite a dent in household wealth, but we have to remember strong gains over the past two years means it is still up $27tn on pre-pandemic levels to currently stand at $144tn. This will provide a strong platform for the consumers to withstand intensifying economic headwinds In this article Falling stock prices hit household wealth Household wealth is still up massively on pre-pandemic levels Strong balance sheets will help the US weather the economic storm $144tn Household net worth Falling stock prices hit household wealth The US economy and jobs market have rebounded strongly over the past couple of years, recovering all output and jobs lost during the pandemic. Asset markets performed even better. House prices nationally are up more than 40% on pre-pandemic levels while the S&P500, even after recent declines, is up around 20% from that same point and is up more than 80% on its 23rd March 2020 low. Nonetheless, the technical recession through the first half of the year and worries about the outlook for growth and corporate profits has seen stock prices come under pressure of late. It was this, in combination with an increase in mortgage debt that led to a $6.1 trillion decline in household wealth in the second quarter. The value of financial assets held by the household sector fell $7.3tn. $6.7tn of the drop was in directly held corporate equities and mutual fund shares with a further $1.3tn stripped from the valuation of pension and insurance funds. Wealth held in debt securities and non-corporate equities rose modestly while there was a slight $129bn drop in the holdings of cash, checking and time savings deposits. Non-financial assets held by the household sector continue to grow, increasing $1.6tn in value in the quarter. This is primarily real estate, but also includes things such as cars, jewellery and equipment. Rounding out the balance sheet, liabilities increased by $363bn due to higher mortgage borrowing and consumer credit. Cumulative change in household assets since 4Q 2019 $tn Source:Macrobond, ING Household wealth is still up massively on pre-pandemic levels While this decline in wealth isn’t exactly good news, it has to be set against the huge net $27tn gain in household wealth through the pandemic overall. Even after the second quarter decline, net worth stands at $144tn. Massive fiscal and monetary stimulus – $5tn of direct payments to households via stimulus checks and extended and uprated unemployment benefits plus a further $5tn of quantitative easing played a huge part. So too did the involuntary saving caused by movement restrictions imposed during the pandemic. The result was that money that would have been spent on goods and services ended up being funneled into both financial and non-financial assets. Assets & liabilities as a percentage of disposable income (1950-2022) Source: Macrobond, ING Strong balance sheets will help the US weather the economic storm With recessionary forces intensifying both externally through the European energy crunch and weaker Chinese activity, and domestically via higher interest rates, a strong dollar and a softening housing market, the consumer will play a huge role in how prolonged and deep any downturn will be. Thankfully the jobs market remains strong with more than two job vacancies for every unemployed American while today’s wealth numbers suggested the household sector is in a fundamentally strong position – cash balances look particularly good. As a proportion of disposable incomes, household assets are 880% while liabilities are ‘just” 102%. This is a much better position than any previous recessionary environment and means that the consumer sector should be better able to withstand intensifying economic headwinds. Consequently we remain hopeful that a likely 2023 recession will be modest and short lived assuming a swift easing of monetary policy from the Federal Reserve. TagsWealth US Recession Liabilities Assets   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 drop from 97.3 to 93.7 in the eurozone economic sentiment indicator indicates a likely contraction in the economy in the third quarter. Selling price expectations have been on the rise again, increasing the risk of a longer period of stagflation in the eurozone economy Selling price expectations are increasing again as businesses face higher energy costs Is Recession Already Here, In The Eurozone? The eurozone economy is slowing rapidly as high prices reduce business activity and dampen consumer demand. We expect that a recession could, therefore, have already started. For industry, production expectations dropped sharply in September. Backlogs of work have fallen as new incoming orders disappointed in recent months and in some industries production is reduced as high energy costs impact the profitability of production. With energy costs still at unsustainably high levels for some industrial sectors, this is adding to the bleaker outlook for industrial production. For the services sector, confidence fell even more as the post-pandemic catch-up demand is fading and the purchasing power squeeze is starting to bite. The services indicator dropped from 8.1 to 4.9 as businesses indicate that demand has recently weakened and they are becoming gloomier about demand in the months ahead. Read next: Tim Moe (Goldman Sachs) Comments On USD And Turbulent Times For Markets In General, Ole Hansen (Saxo)Talks Nord Stream | FXMAG.COM  Despite the clear slowing of the economy, selling price expectations are increasing again as businesses face higher energy costs again due to the spike in prices in August. This is particularly worrisome as it could prolong a period of stagflation in the eurozone economy. For the ECB, the path is already quite clear: the central bank is set to hike in the coming meetings regardless of a slowing economy. The increase in selling price expectations will only strengthen that view for the October meeting. Read this article on THINK

GDP grew 0.3%QoQ (sa) gain in 3Q22. Consumer spending, which had been boosted following reopening, slowed. In contrast, investment was more resilient. Based on the grim outlook for consumption and exports from recently released data, we maintain our view that the economy will experience a moderate recession early next year Source: shutterstock.com 0.3% Real GDP growth in 3Q22 %QoQ sa As expected Growth supported by domestic demand while net export contribution contracted even further In 3Q22, GDP growth was led by domestic demand, as expected. Household consumption rose 1.9% - a slower pace than the previous quarter (2.9% in 2Q22) mainly due to the increased debt service burden and higher inflation. Investment components were particularly strong. Construction and facility investment rose by 0.4% and 5.0% respectively. Investment in the IT sector expanded despite the recent semiconductor downturn cycle, and transportation equipment investment also increased as mobility restrictions were relaxed around the world and supply bottlenecks in the auto industry eased. Exports rebounded 1.0% in 3Q22 (vs -3.1% in 2Q) on the back of gains in auto and service exports. But, imports rose even faster than exports, rising 5.8% (vs -1.0%) with high commodity prices and increases in capital goods imports. As a result, the net exports contribution to GDP was a drag of 1.8pp more even than the 1.0pp drag in 2Q22.  By industry, manufacturing fell for the second consecutive quarter, while construction and services gained strongly.  3QGDP was led by domestic demand Source: CEIC GDP outlook : 2.6% in 2022, 0.7% in 2023 The latest data show the reopening boost starting to fade, and we expect this trend to accelerate in the current quarter. We think consumer spending will decline in the near term due to debt deleveraging and the debt service burden. Regarding investment, we expect IT equipment investment to continue to rise but other components of investment to weaken. The recent credit market squeeze will likely negatively impact investment due to high funding costs and increased uncertainty, with the construction sector being the hardest hit. Exports are also likely to turn weak again, due to the economic slowdown in major trade partners such as the US, EU, and China and sluggish semiconductor exports. Thus, we maintain our view that the economy will experience a moderate recession early next year.  The Bank of Korea's policy outlook With consumer price inflation back above 5%, the BoK is expected to raise its policy rate by 25bp in November instead of a 50bp hike. By doing so, the BoK's commitment to price stability can continue to be communicated to the market, while the BoK also needs to calm down the market's anxiety about the recent credit market squeeze to some extent. Although there is still a risk of inflation, an aggressive 50bp hike will probably be avoided as prices are expected to stabilize after a temporary rise in October.  The BoK's MPC will meet today. This is a regular meeting and the BoK will discuss policy response to the recent credit market issue. We believe that the BoK will not inject liquidity directly into the market as this would work against their current tightening policy stance. But, the BoK will likely adjust its micro-policy tools. Thus, we expect that options like reactivating Special Purpose Vehicles (SVPS) to purchase corporate bonds and CP and unlimited RP are not going to be delivered at this time. Instead, it is possible that the BoK will expand its purchases of bonds from commercial banks.  Read this article on THINK TagsSouth Korea GDP growth Exports Consumption Bank of Korea 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 media are scaring about economic recession, which should inevitably appear as a consequence of persistently high inflation and a radical increase in the main interest rates. Even in private conversations, you can often hear that many other countries in the world are threatened with recession. What is this? Definition In the economic literature, there is also a definition of recession as a decrease in GDP in two consecutive quarters, where annual dynamics in individual quarters are used to qualify the state of recession without removing the impact of price changes and the impact of seasonal factors. According to John R. Meyer and D. H. Weinberg, a recession is "a period of decline in the general activity of the economy, having a wide impact on various areas of economic life, which lasts at least a year". The terms recession, crisis and depression are synonymous and often used interchangeably. Economists who study business cycles consider the first two terms to be synonymous. After World War II, the term "recession" was often used instead of the term "crisis" (which was initiated by the NBER). However, it is believed that this is mainly due to psychological reasons (less negative reception of "recession"). On the other hand, "depression" is in practice a deeper phenomenon, defined as long-term and very severe recessions. Types Recession is often compared by researchers to the letters of the alphabet, which corresponds to the appearance of this stage on the business cycle chart, and at the same time helps to visually determine its duration and course. Recession types: "V" - the most common type: quick exit from the collapse, return to the growth rate before the recession in no longer than the period of falling into it, "W" - after reaching the bottom of the cycle, the economy quickly recovers, only to collapse again (often deeper) and only after the "second bottom" go into recovery mode, "U" - rapid entry of the economy into a recession, followed by a slowdown in further decline and remaining at a low level of development, it usually takes several years to return to the rate of economic growth before the recession "L" - after reaching the lowest level, the economy is unable to return to a higher growth rate, inverted letter "L" - a relatively quick, but short-lived recovery of the economy is interrupted by a long-term phase of stagnation. In practice From the point of view of economics, recession is a macroeconomic phenomenon that involves a significant slowdown in economic growth. In general, a recession leads to a decline in domestic production, employment, investment and real wages. Instead of growing, the country's GDP is decreasing. Mainly, the recession is visible from the side of entrepreneurs, where it manifests itself as disturbances in financial liquidity, downtime in production due to the lack of orders or materials needed for its implementation. At the level of individuals, i.e. natural persons who do not run a business, recession means higher unemployment and lower wages as well as impoverishment of the society. During a recession, the average citizen begins to spend less, which results in a decline in consumption across the country. Causes The causes of a recession can be very different. The most common causes of recessions include bad monetary policy and excessive state interference in the economy, and in particular in the financial system. War and natural disasters also have an impact on the occurrence of recessions. Consequences The most serious effect of the recession is the decline in gross domestic product (GDP). There is also a decrease in the value of goods and services. GDP decreases, which leads to negative economic growth. Among other, equally serious consequences related to the occurrence of recession, the following can also be distinguished: lowering real wages and incomes in society; decrease in capital expenditures; increase of unemployment; reduction in the level of labor productivity and growth rate; lowering consumer demand. At the same time, along with the decreasing demand for consumer goods, a recession most often leads to a slowdown in price growth, and thus to a reduction in inflation. What comes after a recession? Many experts consider the recession to be the first phase of the economic cycle. According to this theory, a recession is followed by a depression, i.e. low levels of output, prices, interest rates, and employment. How to prevent? When anticipating a recession, stabilization (anti-recession) policy tools can be used, e.g. lowering taxes on enterprises (thus increasing the amount of investment in durable goods), reducing social spending (to stop the budget deficit from growing) or lowering interest rates (assuming that appropriate mix). During the beginning of the recession phase, it is possible to temporarily increase budgetary accidents, influence the weakening of the national currency exchange rate (which allows for a temporary increase in the competitiveness of export goods) or increase the protection of the internal market against the influx of imported goods, in a situation where it does not violate international agreements. Thanks to stabilization policy tools and properly conducted fiscal and monetary policy, recession can be prevented or mitigated. Source: Begg D., Fischer S., Dornbusch R. (1997) Ekonomia. Makroekonomia

After two years of lockdowns, COVID deaths, and rising sentiment and unrest, it was hoped that 2022 would bring some relief. Instead, 2022 turned out to be a difficult year in a year where no gnews would fall very well. We have wars, rising interest rates, rising inflation. Central banks around the world have taken action to combat the high level of inflation, including the ECB. The data is far from the expected 2% and as you can see the fight is not over. Inflation reports from the old continent will be presented next week. CPI data The week between Christmas and New Year's is usually very data-poor, and there were no Tier 1 events in Germany or the Eurozone this week. Spain released flash CPI estimates for December, which showed that inflation continued to weaken. CPI fell to 5.8% from 6.8% and below estimate of 6.0%. Inflation in Spain fell for the fifth consecutive month as energy costs continue to fall. The next week may prove to be more important for the European Union, as the inflation report will appear. Moreover, reports from Member of UE will be just as important. The ECB will be keeping a close eye on these inflation reports and the data will be an important factor in the ECB's decision on the pace of future rate hikes. Next Friday, Eurostat will give its first look at consumer prices in the euro area at the end of 2022. It predicts a decrease in the annual growth rate of basic consumer prices from 10.1% in November to 9.6% in December. Source: investing.com Energy situation Russian President Vladimir Putin's invasion of Ukraine on February 24 triggered a price shock, sparked an energy crisis and brought supply chains to a halt. Not to mention thousands dead, millions homeless and a kind of Cold War that pits Russia, with the exception of Iran and North Korea, against the rest of the world. The high volatility in the markets has persisted since the invasion and there is no end in sight. In 2021, Europe imported $117 billion worth of energy from Russia, which was about 40% of Europe's consumption of natural gas and 30% of its oil. It has yet to move away from relying on Russia, leaving European countries struggling to replenish their underground gas reserves for the colder winter months. Until recently, Europe received large amounts of natural gas from Russia via the Nord Stream pipeline. However, flows were halted in late August when Russia cut off flows to Europe via Nord Stream in response to Western sanctions. Russia is set to increase diesel exports next month before EU oil sanctions go into effect in February. Fuel deliveries from Russian ports in the Baltic and Black Seas will increase to 2.68 million tons in January. By February 5, the European Union will ban imports of Russian petroleum products, which it heavily relies on for diesel production. This follows a ban on Russian oil that came into effect in December. Should a recession be expected? Recessions in Europe seem inevitable as gas prices rise. Meanwhile, the central banks of Europe and the UK are determined to bring down inflation by continuing to raise interest rates. While recessions around the world have been suggested, analysts say they will only be mild. The outlook for 2023 remains uncertain. The war continues. Interest rates will go up until inflation goes down. Source: investing.com

Give us a minute, and our economists will give you some answers to the global economy's biggest questions, notably around energy and China's reopening. And take a look at our three scenarios for the world as February begins In this article How far could gas prices rise from here, and what would be the major cause? Is Europe still heading for recession? If gas prices rise, have governments done enough to shield consumers/businesses in Europe? Is the end of zero-Covid in China a gamechanger? Is inflation really falling, and have markets been too quick to price in cuts? Can the US economy avoid recession? Can the recovery in risk assets continue?   Three scenarios for the global economy ING   ING   ING How far could gas prices rise from here, and what would be the major cause? We currently expect that European gas prices will average EUR 70/MWh over 2023, peaking in the fourth quarter with an average of EUR 80/MWh. However, clearly there are significant upside risks to this view. If remaining Russian gas flows to the EU were to come to a halt and if we were to see stronger than expected LNG demand from China this year, this would tighten up the European market significantly. Under this scenario, we would need to see stronger-than-expected demand destruction to keep the market in balance. As a result, prices would need to trade higher, potentially up towards EUR 150/MWh going into the '23/24 winter. The European Commission’s price cap of EUR180/MWh for TTF should provide a ceiling to the market, at least for exchange prices within the EU. Is Europe still heading for recession? Lower energy prices and high levels of national gas reserves as a result of the warm weather and lower energy consumption have helped the eurozone economy to avoid an energy crisis this winter. Fiscal stimulus has also supported the economy and prevented the eurozone from falling into a severe recession. However, the eurozone economy is not out of the woods yet. Industrial orders have weakened and once the post-pandemic boost is behind us, growth in the services sector could soften. With (core) inflation remaining stubbornly high and the full impact of ECB rate hikes still materialising (with activity in the construction sector particularly vulnerable), the eurozone is facing a longer quasi-stagnation. The worst-case scenario has been avoided for now but this doesn’t automatically lead to a strong recovery. If gas prices rise, have governments done enough to shield consumers/businesses in Europe? It took a while but at the end of last year, fiscal support measures in most eurozone countries had reached levels seen during the pandemic. For the eurozone as a whole, the announced fiscal stimulus amounts to around 5% of GDP. The stimulus packages are largely aimed at supporting household purchasing power but also at keeping companies’ energy costs at bay. However, if energy prices remain at current levels, the full amount reserved for energy price caps will not have to be used up. While these packages offer significant relief in the short run, they will not be able to shield consumers and businesses against structurally higher energy costs. Government expenditures in the eurozone already amount to around 50% of GDP and with the weighted eurozone government budget at 4.5% of GDP, any room to scale up deficit-financed stimulus, which is exclusively aimed at supporting consumption, looks limited. Is the end of zero-Covid in China a gamechanger? The surprise reopening of the Chinese economy will certainly boost demand, and we have revised up our GDP forecasts accordingly. What is still unclear is how much and when the reopening will boost domestic spending within China, especially on services. Household balances are swollen after prolonged inactivity, so some "revenge" spending seems plausible. How important these balance sheet effects are for spending within China is still being debated, with unemployment still high and wage growth still subdued. Of greater global relevance will be how strongly industry recovers, as this will dictate the strength of the recovery in demand for commodities, including energy. Our current thinking is that manufacturing recovers more slowly than domestic spending on services, and this should not result in a substantial boost to global commodities prices, though some upward price pressure is probable. With the economy just emerging from the Lunar New Year, and data clarity very low right now, this "goldilocks" view is offered with fairly low conviction. Is inflation really falling, and have markets been too quick to price in cuts? Headline inflation rates across the developed world should fall this year as the sharp rises in food, fuel and goods prices of late 2021-mid 2022 are unlikely to be repeated. Admittedly, of these three categories, food prices have probably the biggest potential to rise again significantly this year. With commodity prices – including food indices – having fallen in many cases, there is a case for a sharp reduction in goods-related inflation this year, and in some categories, outright price falls. This story is likely to be more aggressive in the US, where month-on-month increases in core CPI and PCE deflator readings have slowed from 0.5-0.6% in the middle of last year, to 0.2-0.3% more recently. That's still above the 0.17% MoM average required to take the year-on-year rate to 2%, but we're getting close. Rents are topping out, vehicle prices are falling and there is growing evidence that corporate pricing power is waning with businesses thinking more defensively as recession fears mount. We continue to forecast core inflation measures getting down to 2% by the end of 2023. In Europe, the story is likely to be more gradual. Core inflation is yet to peak, and the lagged impact of higher energy prices is continuing to put pressure on services pricing. The strong prevalence of collective bargaining in many European countries also suggests wage pressures will continue to feed through, too, and ongoing fiscal stimulus and government intervention could lengthen the inflationary pressure. The fear is that supply-side inflation could morph into demand-side inflation. The divergence between the EU and the US in terms of inflation suggests that markets are right to be pricing rate cuts from the Federal Reserve later this year, while the easing priced in from the ECB in 2024 looks premature. Can the US economy avoid recession? Possibly, but we need something to turn around quickly. We have a housing market correction coupled with six consecutive monthly falls in residential construction, three month-on-month drops in industrial production and two consecutive 1%+MoM falls in retail sales, which hint at a broadening slowdown. Meanwhile, the labour market is showing tentative signs of cooling after five consecutive months of decline in temporary help, which typically leads to broader labour market trends. With CEO confidence at the lowest level since the global financial crisis, implying a growing proportion of businesses adopting a more defensive stance, the risks are mounting that there will be a recession. However, strong household balance sheets and a robust-looking jobs market suggest it will be relatively short and shallow, assuming inflation falls as we expect and the Fed is able to offer stimulus later this year. Can the recovery in risk assets continue? It has been a strong start to the year for risk assets, underpinned by robust inflows. Equity markets are up as much as 9% in Europe and dedicated bond funds are up anywhere between 2-4%. But risk assets will struggle to post further near-term gains should our view for some tactical upward pressure on market rates bear fruit. It’s a non-consensus call though, and even if market rates were to fall it’s more likely that the market reads this as a measure of underlying angst, which can cause issues for risk assets, via an elevation in perceived default risk ahead. The strong rally in credit markets has lasted for over three months before which credit was pricing in a significant recession. The value that was evident then has evaporated. Nonetheless, with persistent inflows to the sector remaining a dominant theme, we remain constructive in the longer term and further returns in the sector will be a function of yield and carry, rather than spread tightening. In FX, growing headwinds to risk assets would provide some temporary support to the dollar and help cement a 1.05-1.10 EUR/USD trading range for the rest of the quarter. Later in the year, however, 1.15 levels are possible as the conviction builds over a Fed easing cycle. TagsEconomy 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

Stephen Dover, Head of Franklin Templeton Institute, crunches the data to decipher the odds of a US recession this year and the implications for investor portfolios. Originally published in Stephen Dover’s LinkedIn Newsletter Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter. In 1663 a strange skeleton was found in a gypsum quarry near the mountain town of Quedlinburg, in present day Germany. The discovery caught the attention of Otto von Geuricke, a Prussian scientist, who concluded that the incomplete skeleton was a unicorn. The skeleton, dubbed the Magdeburg Unicorn, was obviously not actually a mythical beast. It was a composition of bones from several different prehistoric animals.1 The Magdeburg Unicorn is a reminder of the problems that can occur with an incomplete picture. At Franklin Templeton, we invest heavily in gathering data, crunching numbers, building models, and trying to make sense of the deluge of information that bombards us daily. In the modern world, data capture and systematic data analysis are an important part of making informed judgements that help us meet our fiduciary responsibilities.  The topic at the top of everyone’s minds as we start 2023: Is the United States headed into recession, and how will my investment portfolio be impacted? One tool the Franklin Templeton Institute employs to better assess how to answer these questions is a Nowcast model.2 What indicators are we watching While there are several Nowcast-style models, developing our own brings us closer to the data. Our Nowcast index is constructed based on 153 economic and financial indicators from the following categories: manufacturing, labor, consumer, housing and construction, liquidity, and financial conditions. Looking at the most recent readings of many economic indicators, nowcasting gives a more up-to-date reading of the economy than gross domestic product (GDP). Currently, all categories are contributing to the ongoing US economic slowdown, which is also becoming more pronounced. Several indicators are particularly worrisome. Consumer sentiment is near five-decade lows. The gap between current and future sentiment readings, which is typically a good recession indicator, is elevated. More recently, manufacturing sentiment has deteriorated. The global manufacturing purchasing managers’ index (PMI) dropped below the expansion/contraction line of 50 (to 48.6) in December, while ISM manufacturing index also dipped to a “stall-speed” of 48.4 in December. The weakest US sector is housing. Building permits have been on a downward trend for much of 2022 and dropped again in December, as did existing home sales. Sentiment among builders of US single-family homes has been deteriorating for 12 consecutive months. Home prices have recently begun to decline in many US regions. The US labor market has been an outlier of resilience. The prime-age unemployment rate is 3% and job growth remains solid, as shown by a net 199,000 nonfarm payroll jobs added in December. To be sure, labor market indicators typically lag overall activity. But the jobs market is also holding up given supply shortages—as of November, job vacancies outstripped jobseekers by a ratio of 1.8.  However, we are starting to see cracks here as well as the labor component turned negative for the first time in December. US recession looks more probable today than at any time since 1970 Armed with information that shows the US economy slowed significantly in 2022, what lies ahead? What are the odds that a slowdown turns into a full-blown recession? Perhaps the most used and statistically significant recession probability variable is the shape of the US yield curve. The US Treasury curve is now inverted, in the sense that two-year note yields of 4.22% are higher than 10-year yields of 3.49%.3 That’s unusual—typically investors require higher yields at longer maturities. An inverted yield curve typically precedes recessions. But as our work shows, the probability of a recession increases the more different maturities along the yield curve are inverted. Based on a deeper historical statistical analysis, the probability of a recession nears 100% if more than 50% of the maturity spreads along the yield curve are inverted, as is the case today. History also provides plenty of data about how other variables typically behave before recessions. Our work also points to a leading relationship of broad stock market returns and recessions, with large and sustained negative equity market returns often (if not always) preceding recessions. By gathering and analyzing a lot of data we can employ elementary statistics to estimate probabilities of future outcomes. We can also neatly compile a plethora of different data sources with recession-forecasting significance into a single index, which we present in the chart below. Currently, our recession probability index is beyond ”amber”—it is flashing ”red.” In our analysis, a US recession looks more probable today than at any time since 1970. US Recession Model: Probability of Recession Within 12 Months January 1971–January 2023   Sources: Franklin Templeton Institute, S&P Global, NBER (National Bureau of Economic Research), Federal Reserve Bank of Philadelphia, Conference Board, University of Michigan, Institute for Supply Management (ISM), US Department of Treasury, US Bureau of Labor Statistics (BLS), Macrobond.Grey areas represent NBER recessionary periods. Equal-Weighted Composite Of: CEO Confidence, Consumer Confidence Spread, ISM Manufacturing, Treasury Spread, Unemployment Rate, National Financial Conditions Leverage.There is no assurance that any estimate, forecast or projection will be realized.   How should investors position? These quantitative methods provide a basis for how portfolios might be optimally positioned depending on the current environment. Utilizing this framework plus the collective wisdom and experience of 1,300 investment professionals at Franklin Templeton across asset classes, gives us additional intelligence on what this might mean for investors. It is important to distinguish between investor types. Very long-term (endowment style) and risk-tolerant investors will face different decisions than those who are either risk averse or anticipate the need for liquidity in the near term. The former may use any market dislocations that occur when recession looms to opportunistically look for value. The latter may want to consider a near-term reallocation to safer instruments. A third type of investor, one looking to add extra return from tactical asset allocation, will focus on opportunities to switch between asset classes. In short, there is no ”one size fits all” answer for investors. Nevertheless, a few observations can be made that may serve most investors, irrespective of their risk tolerance, return objectives, liquidity needs or other considerations: Government bonds provide a safer haven. If the US economy is moving toward recession, government bonds (i.e., US Treasuries) are likely to produce positive returns. Weak growth (or recession) reduces private sector borrowing demand and hence tends to push down real interest rates. Inflation is more likely to fall than rise, further lowering bond yields. Risk aversion also tends to drive many investors out of corporate assets and into Treasuries as recessions unfold. Corporate profits will almost certainly fall in absolute terms if the economy dips into recession. There has never been a US recession in US postwar history when the S&P 500 Index or National Income and Products Accounts (NIPA) measures of corporate profits did not shrink. That should concern investors, insofar as the consensus of company analysts (as collected by FactSet) expects US corporate profits to rise in 2023. If analysts are forced to significantly downgrade earnings forecast, stocks are likely to struggle. Corporate bond default rates are likely to rise in 2023. After more than a decade of cheap finance, the combination of higher interest rates in 2022 (due to aggressive Federal Reserve rate hikes) and weak economic activity will lead to a deterioration of credit quality. If the past is a good indicator, the spread between corporate bonds and Treasuries is likely to widen. Careful selection of credit risks will be increasingly important. In summary, for long-term, risk-tolerant investors, the abovementioned outcomes should present opportunities in equities and corporate credit. But for more risk-averse investors, those anticipating liquidity needs and those looking to opportunistically exploit cyclical market moves, it is probably best to consider safer government bonds. Stay tuned as we bring you more insights from our quantitative studies and independent investment teams in the coming year. We want to acknowledge the efforts of Lukasz Kalwak, CFA, and Karolina Kosinska, the architects of Franklin Templeton Institute’s Nowcast model.

Summary:  Economists and consensus were looking for an incoming recession back in the fourth quarter of last year with even big investors such as Warren Buffett holding tight despite global equities down 20%. Instead the economy has rebounded releasing animal spirits and a rally in growth stocks. Recently equities have absorbed higher bond yields suggesting that the interest rate sensitivity has mostly disappeared. The path from here will be dictated by whether the economy can continue to rebound or recession fears come back. A flying start to the year During October last year the interest rate shock reached its maximum impact on global equities and consensus shifting towards an incoming recession and that inflationary uncertainty combined with lower economic activity would increase the equity risk premium causing equities to fall. The fact that Berkshire Hathaway did not materially buy anything in the equity market during the fourth quarter suggests that the experienced investors of Warren Buffett and Charlie Munger were betting on the same thing. A recession in 2023 providing a backdrop of fear on which to capitalise with a new big bet. Things did not turn out that way. Instead equity markets slowly recovered as long-term bond yields and inflation expectations came down. The new narrative was not a one-way street with a setback in December unfolding with increased nervousness around Tesla and cryptocurrencies. Those worries were put aside this year with the MSCI World Index up 8.3% and bubble stocks rallying 27%. Other growth segments such as energy storage, which we will do a longer equity note on next week, semiconductors, and e-commerce have also rallied 20% or more. With such a strong start to the year it begs the question whether technology is now back in town for longer or it is short-term trade as bearish positions in technology stocks have been squeezed? Our playbook as described in our Q1 Equity Outlook: A painful phase transition is still that the physical world will continue to outperform the intangible world as our global economy is transitioning away from unconstrained globalisation to a regionalisation, a conflict between two value systems (authoritarian vs liberal democracy states), and rebuilding our physical infrastructure which was neglected for 10 years during the raging bull market in technology. The 1-year momentum across our theme baskets reflects this as the best performing baskets over the past year are defence, renewable energy, commodities, nuclear power, logistics, construction, and transportation infrastructure. Interest rate sensitivity is no longer a focus A question that we have been debating at Saxo is the interest rate sensitivity which was a big theme last year. One question that has been raised is why are equities trading at the current levels with the US 10-year yield back at 3.8% when the MSCI World Index was trading around 9% lower at the same interest rate level back in late September? Read next: Kim Cramer Larsson takes a technical look at Bitcoin and Ethereum| FXMAG.COM There are several factors that can explain this. One of them is that the interest rate sensitivity on equities has fallen because equity valuations have come down from very elevated levels to just above the historical average. Equities have also priced out the probability of a recession and thus increased growth expectations, and finally animal spirits have been released reflected in private investor surveys on their bullishness and bearishness which we highlighted in our equity note The equity market in four charts which have decreased the equity risk premium. Finally, the Q4 earnings season was better than feared when it comes to the margin pressure. So where is the real risk in equities? US 10-year yield | Source: Bloomberg MSCI World Index | Source: Bloomberg It is all about a recession or not The main risk to equities is whether we get a recession or not. As we have been writing many times the past couple of months the leading indicators in the US suggest that a recession is incoming and the Bloomberg US recession model has flashed 100% probability of a recession within the next 12 months since October last year. But economic data remains positive and are actually pointing towards a reacceleration in growth rather than a recession with the US economy experiencing a credit boom and improved construction activity as Caterpillar said on their recent earnings call. Now, a reacceleration in the economy combined with China reopening are likely to underpin inflationary pressures which might push long-term bond yields higher from current levels, but that is not something that will take equities down 15%-20% unless we see a significant profit margin deterioration in 2023. Equities are right now priced for perfection with the assumption that the world economy is reaccelerating, inflation will ease down to 2.5% annualised, China will get back on the growth track, geopolitical risks will not worsen, and the energy crisis will slowly be solved. All those things can be true at the same time, so something has to give at one point, but for now equities are in an uptrend. One key market to monitor here, as it is right now not agreeing with the reacceleration narrative, is the commodity market. The Bloomberg Commodity Index is down 4% this year and has not responded positively to the Chinese reopening. Bloomberg US Recession Probability Model | Source: Bloomberg Bloomberg Commodity Index | Source: Bloomberg Source: The equity conundrum It is all about a recession or not | Saxo Group (home.saxo)

The latest weekly gold survey shows that retail investors remain optimistic. At the same time, the opinions of Wall Street analysts are evenly divided: many suggest that traders should differentiate between short-term volatility and the broader trend. According to Ole Hansen, head of commodity strategy at Saxo Bank, gold has strong fundamental support, so he is personally inclined to be patient. However, as investors react to the covering of short positions in the U.S. dollar, speculative volatility caused by positioning is likely to lead to a price drop this week. As long as gold is trading above $1,950, the precious metal remains in an upward trend. Sean Lusk, co-director of commercial hedging at Walsh Trading, is also monitoring the $1,950 level. Despite this, he is bearish for the coming week. Nevertheless, in the long term, he believes in rising prices since the overall economic uncertainty provides solid support to the precious metal. Gold - eight votes for both bearish and bullish positions 19 Wall Street analysts participated in the gold survey. With equal voting, both bearish and bullish positions garnered eight votes each, representing 42% each. Additionally, 16%, or three analysts, remained neutral. In online polls, a total of 665 votes were cast. Of these, 382 respondents, or 57%, expect gold prices to rise. Another 162, or 24%, believe it will fall, and 121 voters, or 18%, remained neutral. Interest in safe-haven assets is increasing as recession fears continue to grow. The Federal Reserve's monetary policy, which influences the U.S. dollar, remains a driving force. Read next: Australian dollar against US dollar: USD may rise on the back of the Republicans and Democrats negotiations| FXMAG.COM Some analysts believe that gold will face challenges as the Fed has indicated that it is not prepared to lower rates due to persistent inflation. Relevance up to 10:00 2023-05-20 UTC+2 This information is provided to retail and professional clients as part of marketing communication. It does not contain and should not be construed as containing investment advice or investment recommendation or an offer or solicitation to engage in any transaction or strategy in financial instruments. Past performance is not a guarantee or prediction of future performance. Instant Trading EU Ltd. makes no representation and assumes no liability as to the accuracy or completeness of the information provided, or any loss arising from any investment based on analysis, forecast or other information provided by an employee of the Company or otherwise. Full disclaimer is available here. Read more: https://www.instaforex.eu/forex_analysis/343135

On Tuesday, the demand for the pound was significantly higher than that for the euro. As soon as this happened, many analysts began to pay attention to the report on prices in UK stores, as shop price inflation accelerated to 9% this month. This indicates that UK inflation is decreasing slowly or not decreasing at all, despite the benchmark interest rate being raised to 4.5%.   The consensus forecast for the Bank of England's rate currently suggests two more quarter point rate hikes in June and August.   This would bring the rate to 5%. Any further tightening without alternatives would push the British economy into a recession, and even the current rate could potentially cause it, despite the BoE's optimistic forecasts. But how can inflation be combated if it hardly responds to the actions of the central bank?     I believe there can only be one disheartening answer: it cannot. If further rate hikes lead to a recession, the Brits, clearly dissatisfied with recent events within the country, may start a new wave of mass strikes. Take note that in the past year, many Brits have openly criticized the British government for the sharp decline in real incomes and high inflation.   If the rate increases further, the economy will contract, leading to an increase in unemployment. If the rate is kept as it is, it might take years for inflation to return to the target level. The BoE is in a deadlock. BoE Governor Andrew Bailey expects inflation to start decreasing rapidly from April. He noted the decline in energy prices, which will somewhat dampen inflationary pressure on all categories of goods and services. However, the April inflation report was unusually contradictory. While headline inflation showed a significant slowdown, core inflation continues to rise.   Therefore, it is not possible to conclude that inflation is slowing down in the general sense. We can only wait and observe. If Bailey turns out to be right, then the BoE will not need to raise the rate to 5.5% or 6%, which currently seems like a fantasy.   However, if inflation continues to hover around 10%, the BoE will need to devise new measures to address it without exerting serious pressure on the economy. It might require patience for several years. It is entirely unclear which option the central bank will choose.   The demand for the British pound may increase as market expectations of a hawkish stance grow. But will these expectations be justified? The pound may rise based on this, but fall even harder when it becomes clear that the BoE is not ready to raise the rate above 5%. I believe that wave analysis should be the primary tool for forecasting at the moment.     Based on the analysis conducted, I conclude that the uptrend phase has ended. Therefore, I would recommend selling at this point, as the instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic.   A corrective wave may start from the 1.0678 level, so you can consider short positions if the pair surpasses this level. The wave pattern of the GBP/USD pair has long indicated the formation of a new downtrend wave. Wave b could be very deep, as all waves have recently been equal.   A successful attempt to break through 1.2445, which equates to 100.0% Fibonacci, indicates that the market is ready to sell. I recommend selling the pound with targets around 23 and 22 figures. But most likely, the decline will be stronger.    

Weak Chinese manufacturing data put pressure on the single currency as Europe, particularly Germany, is highly correlated with China.   However, the Eurozone's data is not so bad today. The number of unemployed in Germany rose by 9K, down from 23K and 19K in the previous two months. Unemployment is rising much more slowly than in the recessions of 2009 and 2020, and the unemployment rate (5.6%) is low by historical standards.   Second estimates confirmed a 0.2% q/q and 0.9% y/y rise in French GDP in the first quarter, although private consumption fell by a further 1% in April after a 0.8% decline in the previous two months.   For Italy, the final data pointed to economic growth of 0.6% q/q and 1.9% y/y, 0.1 percentage points higher than previously estimated.   Despite the upbeat economic data, the EURUSD fell to 1.0660 in early European trading, its lowest level since 17 March.

UK Mortgage Approvals (Apr) – 31/05 We've started to see a modest improvement in mortgage approvals since the start of the year, after they hit a low of 39.6k back in January, as the sharp rise in interest rates at the end of last year weighed on demand for property as well as house prices.   As energy prices have come down, along with lower rates, demand for mortgages has started to pick up again with March approvals rising to 52k, while net consumer credit has also started to improve after similar weakness at the end of last year.   With inflationary pressures starting to subside we could see this trend continue in the coming months, as long as energy prices remain at their current levels, and the Bank of England starts to signal it is close to being done on raising rates.     Manufacturing PMIs (May) – 01/06 Last week saw the latest flash PMIs show that manufacturing activity in France and Germany remained weak, while in Germany activity deteriorated further to its lowest levels since June 2020, when economies were still reeling from the effects of pandemic lockdowns.   We also found out that the German economy was in recession after Q1 GDP was revised lower to -0.3%. The UK and US on the other hand were able to see a modest pickup in economic activity. It is clear that manufacturing globally is in a difficult place, we're also seeing it in China, as well as copper and iron ore prices, which suggests that global demand is weakening sharply.   Italy and Spain economic activity is also expected to see further weakness in manufacturing when their latest PMIs are released later this week.

France: consumption plunges while inflation moderates The second quarter got off to a poor start in France, with household consumption falling for the third consecutive month in April, and the outlook has been revised downwards. Against a backdrop of falling demand, inflationary pressures are moderating more quickly than expected.   Consumption continues to plummet In April, for the third consecutive month, consumer spending on goods fell. This time, the fall was 1% over the month, following a 0.8% fall in March. Household consumption of goods is now 4.3% lower than a year ago and 6.3% below its pre-pandemic level. The fall is due to lower energy consumption (-1.9% over one month) and a further fall in food consumption. Food consumption is now 11% below its pandemic level.   The magnitude of the fall shows the significant impact of the inflationary context and the fall in purchasing power, which has led households to significantly alter their consumption habits.   These figures were eagerly awaited, as they are the first real activity data available for the second quarter. And we can now say that the second quarter got off to a poor start. It is clear that the French economy is slowing sharply. It is unlikely that consumption will make a positive contribution to GDP growth in the second quarter, especially as the slowdown is beginning to have an impact on the labour market, as suggested by the employment climate data published by INSEE last week.   The prospect of a recovery later in the year seems to be fading. This has led us to revise our growth outlook slightly downwards. We are now expecting GDP growth of 0.6% in 2023 and 0.7% in 2024, with the risks still tilted to the downside. Although France escaped recession last winter, today's indicators are a reminder that a recession in the coming months cannot be ruled out.   Strong moderation in inflationary pressures Against this backdrop of falling demand, inflationary pressures are moderating. As expected, the pace of consumer price inflation eased in France in May. Inflation stood at 5.1%, down from 5.9% in April, while the harmonised index, which is important for the ECB, reached 6% in May, compared to 6.9% in April. The good news is that the fall in inflation is now visible in all consumer categories. Energy inflation fell sharply to 2% year-on-year in May.   Unlike in other European countries, it remains positive, however, as the rise in household energy bills did only take place at the start of 2023, rather than in 2022, as a result of the "tariff shield" introduced by the government last year. Food inflation remains very high but is starting to fall, to 14.1% in May from 15% in April.   At 4.1% year-on-year, compared with 4.6% in April, growth in the prices of manufactured goods is also moderating, as is that of services, which stood at 3% compared with 3.2% in April. These last two developments are very good news, as they signal that the inflation peak is behind us, but also that inflation is likely to fall rapidly over the coming months. Indeed, the signs of moderation in inflationary pressures are mounting.   For example, tensions in supply chains have disappeared and the growth in industrial producer prices, which gives an indication of changes in production costs for the manufacturing sector, slowed sharply to 5% year-on-year in April (compared with 9.5% in March). Over one month, producer prices fell sharply, by 4.1%, after +1.2% in the previous month. This indicates that growth in the prices of manufactured goods is set to slow markedly over the coming months.   Furthermore, business forecasts for selling prices fell sharply in May, particularly in the industrial and construction sectors, but also in services. Inflation in services should therefore continue to weaken over the coming months.   Finally, given the fall in agricultural commodity prices on international markets and the weakness of demand, food inflation should continue to fall gradually, and more rapidly once the impact of the price agreement between food producers and big retailers has been absorbed, i.e. during the summer. Ultimately, inflation is likely to fall over the coming months, helped by weak demand. We are expecting inflation to average 4.7% over the year (5.7% for harmonised inflation).

The US may be adding jobs in huge numbers but the key ISM business surveys cast serious doubt on how long this can last. The manufacturing ISM index is already indicating recession and the service sector will soon join it unless order books turn around dramatically. ISM reports indicate a rapid softening in business activity Last week’s ISM manufacturing index dropped to 46.9, the seventh consecutive sub-50 reading with order books, aside from two months of pandemic stress, looking in their worst shape since the 2009. Today’s ISM services report for May, while not quite as grim, only adds to worries about the outlook for the economy. The headline balance fell to 50.3 from 51.9 (consensus 52.4). As with many of the manufacturing ISM components, the only time the service sector report has been weaker in the past 14 years was in April and May 2020 at the peak of Covid containment and the December 2022 blip caused by the huge winter storm that was so disruptive for the travel, entertainment and service sectors. The details are poor throughout with business activity having similar metrics to the headline. New orders fell 3.2 points to 52.9, but the backlog of orders plummeted to 40.9 from 49.7. The backlog of orders are not seasonally-adjusted so comparisons are tricky, but for what it is worth, this is the worst reading since 2009. This is something that we also saw in the manufacturing report, dropping from 43.1 to 37.5.   ISM reports are heading in the wrong directions    

Order books need to turn around quickly to avert recession Now at least in the manufacturing report we saw the employment component rise to 51.4 from 50.5, yet the payrolls report said manufacturing employment fell 2000. We saw private sector employment rise 257,000 in that same report, yet the ISM has service sector employment in contraction territory at 49.2!   The data contradictions underscore the challenge for the Federal Reserve and only support the argument that they leave policy on hold in June to try and get a better gauge of what is happening in the economy. The decline in price pressure is a welcome development though with the manufacturing prices paid below the break-even 50 level at 44.2 and service sector prices falling to 56.2 from 59.6. This leaves the service sector price index at its lowest level since March 2020 and slap bang in the middle of its long run range.   It looks likely that the manufacturing sector is already in recession (seven consecutive sub-50 readings for ISM manufacturing). The service sectors order books are weak and will need to turn around rapidly to prevent the service sector joining it. Given this situation it is difficult to imagine that employment will continue to make such large gains. Then with price measures rapidly weakening it is understandable that markets doubt that if we do get a pause at the June Federal Open Market Committee meeting that the Fed will be able justifying a restart on rate hikes later in the year.  

The GBP/USD currency pair continued its decline on Monday, which had started on Friday. Recall that on Friday, a single report triggered a strong US dollar. This report is the Nonfarm Payrolls. In recent months, many analysts have regularly claimed that the US labor market is in recession, with the number of jobs created decreasing monthly.   Therefore, the situation is expected to worsen further, which may force the Federal Reserve (Fed) to ease its monetary policy earlier than scheduled. However, every new Nonfarm report proves only one thing: the labor market is in good shape. As previously noted, a normal report value can be considered in the 200-250 thousand range. For several consecutive months, we have been observing precisely such figures. There has not been a report below 200 thousand in the last 12 months.     Therefore, the Fed has the opportunity to maintain the rate at its maximum level and to continue tightening its monetary policy. And this combination of factors should support the dollar, not the pound. Now let's look at the technical picture. The British pound has been confidently rising for the past nine months. Moreover, it has been challenging to pinpoint the reasons for its growth in the last three months.   As a result, it has become overbought and unreasonably expensive. What kind of movement can we expect from a pair that is not only overbought and lacks factors for new growth but also faces fundamental and macroeconomic pressures for its decline? That's why we have advocated and continue to advocate for the decline of the British currency. The first target we still see is the level of 1.2170, which corresponds to the Senkou Span B line. The Fed can raise the rate in both June and July. According to the FedWatch tool, the current rate hike probability at the June meeting is only 22%.   Just a week ago, the probability exceeded 50%. We believe that the market has not paid due attention to a whole series of "hawkish" comments from members of the Fed's monetary committee. Or perhaps it paid too much attention to the words of other Fed officials about "raising the rate once every two meetings." However, the market believes the next tightening can be expected in July. The probability of a July hike is currently at 54%.     Either way, we are talking about an unplanned rate hike. The market did not factor in a dollar exchange rate increase above 5.25%. However, the current labor market state allows the US regulator to raise the rate one or two more times.     And this, in turn, supports the dollar, which should grow even without this factor. Separately, it should be noted that the situation with the US debt ceiling has been resolved. Joe Biden signed the relevant document, so we can put a bold period in this saga.     The US dollar did not react much to this saga and had been rising more than falling in the past month, which is at least illogical for a country's currency on the brink of default. This influence on market sentiment is neutralized, so nothing should prevent the dollar from rising now.   We can still expect 1-2 rate hikes from the Bank of England, but the market has already priced them in. No matter how you look at it, the pound has no grounds for further growth. The market quickly worked off the oversold condition of the CCI indicator, which occurred accidentally on May 11th, and now the decline can continue. It failed to consolidate above the critical line in the 24-hour time frame, so the decline can continue. There will be few macroeconomic statistics this week, so nothing should hinder the decline.     The average volatility of the GBP/USD pair for the past five trading days is 109 points. For the pound/dollar pair, this value is considered "average." Therefore, on Tuesday, June 6th, we expect movements within a channel bounded by the levels of 1.2327 and 1.2545. A reversal of the Heiken Ashi indicator upwards will signal a possible resumption of an upward movement.   Nearest support levels: S1 - 1.2421 S2 - 1.2390 S3 - 1.2360   Nearest resistance levels: R1 - 1.2451 R2 - 1.2482 R3 - 1.2512   Trading recommendations: The GBP/USD pair on the 4-hour timeframe has settled back below the moving average line, so short positions with targets at 1.2360 and 1.2329 are currently relevant. This should be opened if the price bounces off the moving average from below. Long positions can be considered if the price stabilizes above the moving average with targets at 1.2512 and 1.2543.   Explanations for the illustrations: Linear regression channels - help determine the current trend. It indicates a strong current trend if both are directed in the same direction. Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction in which trading should be conducted. Murray levels - target levels for movements and corrections. Volatility levels (red lines) - the probable price channel in which the pair will move the next day based on current volatility indicators. 0000 CCI indicator - its entry into the oversold zone (below -250) or overbought zone (above +250) indicates an approaching trend reversal in the opposite direction.    

German industrial production remains weak in April With another rebound that was too weak to bring any substantial relief, industrial production increased by a meagre 0.3% month-on-month in April. WIthout any significant pick up in activity, the German economy's recession could continue in the second quarter.     A disappointing rebound The German economy is still licking its wounds after the disastrous March performance. Industrial production just joined the trend of exports and retail sales, which all rebounded marginally in April but failed to bring substantial relief. If the economy doesn’t gain more momentum over the coming two months, the second quarter could end up with another contraction. In April, industrial production increased by 0.3% month-on-month, from an upwardly revised -2.1% MoM in March. For the year, industrial production was up by 1.6%. Industrial production is still some 5% below its pre-pandemic level. Activity in the construction sector surprised positively, increasing by 2% MoM, while the production of automotives dropped by 0.8% MoM. Production in the energy-intensive sectors dropped by 1.1% MoM in April and was down by almost 13% over the year.     So what next? Looking ahead, the optimism at the start of the year seems to have given way to more of a sense of reality. Production expectations have weakened again to the lowest level since October last year, order books are thinning out rapidly and the inventory build-up doesn’t bode well for industrial production in the coming months. Sure, there could still be some technical rebounds, but the expected slowdown of the US economy – as well as the well-known structural factors like the ongoing war in Ukraine, demographic change and the current energy transition – will structurally weigh on the German economy in the coming years.

US household wealth rose $3tn in the first quarter A strong performance by equity markets lifted household wealth, helping to offset declines in real estate and cash, checking and time savings deposits. With wealth $35tn higher than before the pandemic households continue to have a strong platform to withstand intensifying economic headwinds, offering hope that any recession will be short and shallow.   Wealth increase led by equity market gains The value of assets held by US households increased by $3.05tn in the first three months of the year, taking the total assets held by the household sector to $168.5tn. Liabilities rose just $23bn to $19.6tn, leaving net household worth at $148.8tn.   Rising equity markets was the main factor leading to the increase, but holdings of debt securities increased $893bn. These factors more than offset the $617bn drop in household wealth in real estate and the $415bn decline in cash, checking and time savings deposits held by US households.     Excess savings are dropping We have to remember that March saw the collapse of Silicon Valley Bank and Signature Bank with deposit flight hitting many of the small and regional banking groups. We have subsequently seen this situation stabilize although some money that would typically be left in banks has been switched to money market funds.   Nonetheless, we do appear to be seeing much of the excess saving built up during the pandemic via stimulus payments and extended and uprated unemployment benefits being eroded – it is now "only" around 1.8tn above where we would expect it to be based on long run trends. This is especially the case now that households have an apparent appetite to spend, particularly on services.     Household balance sheets in a good position to help limit the downside from a recession After the most rapid and aggressive period of interest rate hikes seen in over 40 years plus the tightening of lending conditions currently being experienced in the US, recession fears are mounting. Households will play a huge role in how prolonged and deep any downturn will be given consumer spending accounts for more than two-thirds of economic activity in the United States.     Household assets are 860% of disposable income while liabilities are ‘just” 100% of disposable incomes. While this is down on the peak seen in 1Q 2022 and there are questions over wealth concentration, this is a much better position than any previous recessionary environment and means that the consumer sector should be better able to withstand intensifying economic headwinds. Consequently, we remain hopeful that a likely 2023 recession will be modest and short-lived assuming a swift easing of monetary policy from the Federal Reserve.

EUR: Shrugging off the recession EUR/USD is back around the 1.0800 handle, with the moves once again coming entirely from the USD leg. Domestically, the news of the eurozone entering a technical recession after the 1Q GDP revision was understandably overlooked by the market, and may well be overlooked too by an inflation-focused ECB next week (here is our economist’s meeting preview).   There are no domestic drivers for the euro today, and in line with what we highlighted in the USD section above, we expect some consolidation around current levels in core dollar pairs. EUR/USD could stabilise marginally below 1.0800.   Elsewhere in Europe, we saw EUR/CHF come under pressure yesterday following hawkish comments from the Swiss National Bank Governor Thomas Jordan, where he highlighted how current rates are low and “it’s not really a good idea to wait then have higher inflation later”. The SNB will announce policy on 22 June, and we expect a 25bp hike following a similar move by the ECB. It appears however, that the market is pricing in more beyond that hike, which is not part of our baseline scenario at the moment.   GBP: EUR/GBP is undervalued EUR/GBP has moved back below 0.8600 after a very small rebound and we estimate the pair to be trading at around a 2.0% short-term undervaluation at the current levels, which falls beyond the 1.4% 1.5 standard-deviation lower-bound.   We remain of the view that EUR/GBP will increasingly struggle to find more bearish momentum now that markets are already pricing in 100bp of Bank of England tightening and the pair is already in undervaluation territory. On the cable side, we expect some stabilisation around 1.2550-1.2600. The UK calendar is empty today.

Fed likely to skip, but it's going to be close Market pricing has shifted massively over recent weeks, but we think the most likely outcome remains the Fed leaving policy rates unchanged on 14 June. There will be some dissent and a shock inflation reading could make it a very close decision. Either way, the Fed will leave the door open to further rate moves.   No change the most likely outcome Just over a month ago, Federal Reserve Chair Jerome Powell hinted that after 500bp of rate hikes over a 14 month period, interest rates may finally have entered restrictive territory and the Fed could pause at the June meeting to take some time to evaluate the effects. Markets took this as a signal that we may already be at the peak with the fear that the combination of high borrowing costs and tighter lending conditions could prompt a recession with inflation falling swiftly back towards target. On 4 May, Fed funds futures contracts were pricing in 86bp of interest rate cuts by year end and the target range heading below 4% at the January 2024 FOMC meeting.   Over the subsequent six weeks, activity has remained resilient, inflation continues to run hot, payrolls jumped 339,000 and the Australian and Canadian central banks surprisingly hiked rates. Hawkish comments from a few Fed officials have added to the sense that they may not be done. The result is that pricing for the June FOMC meeting is not far off a coin toss (just under 10bp priced) and July is looking a decent bet for a hike (21bp priced). Next Tuesday’s CPI report could see pricing move even further in favour of a hike – currently the consensus is for core CPI to come in at 0.4% month-on-month, but if we get a shock 0.5% that could be sufficient to convince enough FOMC members to vote for a hike.   That’s not our base case and we believe there will be a majority on the committee who think they have tightened policy a lot and it makes sense to wait. This was certainly the commentary from senior Fed officials such as Governor Philip Jefferson and Philadelphia Fed Governor Patrick Harker, that while “there is still significant room for improvement” the Fed is “close to the point where we can hold rates in place and let monetary policy do its work”. Moreover, recent data releases have been sending very mixed messages, which suggests it may make sense pause to evaluate.   Conflicting data makes life hard for the Fed Friday’s Labour report is a notable example. The establishment survey, which questions employers and generates the non-farm payrolls number, reported a jump of 339,000 in employment in May. However, the household survey, used to calculate the unemployment rate, showed employment declined 310,000 with unemployment rising 440,000. Then we have the manufacturing ISM reporting a rise in its employment survey yet the payrolls report stated there was a 2000 decline. Meanwhile, service sector payrolls rose 257,000 yet the ISM services employment index fell into contraction territory.   We see similar mixed messages within the GDP report. On an expenditure basis, GDP grew 1.3% annualised in 1Q 2023 and 2.6% in 4Q 2022. However, an alternative measure of US economic activity, Gross Domestic Income, which combines all the costs incurred and incomes earned in the production of GDP, contracted 2.3% annualised in 1Q 2023 after a 3.3% drop in 4Q 2022 and has declined in three out of the past four quarters. An average of the two series suggests the economy has flatlined since 3Q 2022.   Fed to leave the door open for further hikes Nonetheless, the Fed wants to see 0.2% month-on-month or below CPI readings to be confident inflation will return to 2%. We aren’t there yet so if they do hold rates steady, as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow – July is clearly a risk. We certainly acknowledge the risk that they hike rates 25bp, especially if Tuesday’s inflation data surprises to the upside, but doubt they will intensify the language on rate hikes so the “hawkish hike” scenario in the table above looks unlikely.

Asia Morning Bites 12 June 2023 Indian inflation later will show further declines. Markets are reasonably upbeat ahead of the likely Fed pause decision later this week.   Global macro and markets Global markets: US Stocks continued to push higher on Friday, seemingly finding comfort in the prospect of a pause from the Fed later this week, though markets are split over whether this will be the last hike this cycle, or whether there will be one more. The S&P 500 is now at levels it has not seen since last September. The NASDAQ is up 26.68% YTD – not bad for an economy that seems poised to slip into recession later this year….   Chinese stocks also made gains on Friday. Both the Hang Seng index and CSI 300 rose between 0.4-0.5%. US Treasury yields also pushed higher. Yields on the 2Y Treasury rose 8.1bp to 4.596%, while those on 10Y Treasury bonds rose just 2.1bp to 3.739%. EURUSD is pretty steady at 1.0749, though the AUD has pushed back up to 0.6745. Sterling is also stronger, rising to 1.2579 though the JPY is a little softer at 139.35. Asian FX is a bit mixed, with gains from the THB, and IDR, but further weakness from the CNY, which is now 7.13 following a month and a half of losses. G-7 macro: It is a quiet start to the week, though this won’t last. US CPI for May is out tomorrow, and we should see decent falls in the headline rate and some smaller declines in core inflation ahead of the FOMC decision, which comes out at 02:00 SGT on 15 June. China: Aggregate Finance data are released at some point this week, along with the usual monthly data dump on economic activity and MLF rates, which are out on 15 June – and there is some growing market speculation of a small rate cut. Regarding the activity data, we will be watching the retail sales figure, in particular, to see how the main engine of the recovery is doing. We expect it to slow from April as the post-re-opening spending bounce is not sustainable at current levels.   India: CPI data for May will show inflation falling further into the Reserve Bank of India’s (RBI’s) target range. We expect inflation to drop from 4.7% to 4.3%YoY (consensus 4.37%). Keep an eye out for the core inflation figures, which will be key for determining when the RBI may feel it can start thinking about winding back some of its tightening. For the moment, on-hold seems the more likely response. But the RBI won’t ignore a chance to give growth a chance if offered and may signal a more neutral stance at the next meeting on 10 August.     What to look out for: Japan PPI inflation and machine tool orders (12 June) India CPI inflation (12 June) Australia Westpac consumer confidence and NAB business confidence (13 June) US CPI inflation and NFIB small business optimism (13 June) South Korea unemployment (14 June) India Wholesale prices (14 June) Philippines OF remittances (14 June) US PPI inflation and MBA mortgage applications (14 June) FOMC policy meeting (15 June) New Zealand GDP (15 June) Japan core machine orders (15 June) Australia unemployment (15 June) China industrial production and retail sales (15 June) Indonesia trade (15 June) India trade (15 June) Taiwan policy meeting (15 June) ECB policy meeting (15 June) US retail sales and initial jobless claims (15June) Singapore NODX (16 June) BoJ policy meeting (16 June) US University of Michigan sentiment (16 June)

Fed set for a rate pause; UK GDP set to rebound in April    European markets closed higher for the second day in a row, after the latest US inflation numbers for May came in at a 2-year low, and speculation about further Chinese stimulus measures boosted sentiment.   US markets followed suit although the enthusiasm and gains were tempered ahead of today's Fed meeting as caution set in ahead of the rate announcement.   Having seen US CPI for May come in at a two year low of 4%, in numbers released yesterday, market expectations are for the US central bank to take a pause today with a view to looking at a hike in July. Of course, this will be predicated on how the economic data plays out over the next 6-7 weeks but nonetheless the idea that you would commit to a hike in July begs the question why not hike now and keep your options open regarding July, ensuring that financial conditions don't loosen too much.   Today's May PPI numbers are only likely to reinforce this more dovish tilt, if as expected we see further evidence of slowing prices, with core prices set to fall below 3% for the first time in over 3 years. Headline PPI is expected to slow to 1.5%, down from 2.3%.       When Fed officials set out the "skip" mindset in their numerous briefings since the May decision when the decision was taken to remove the line that signalled more rate hikes were coming, there was always a risk that this sort of pre-commitment might turn out to be problematic.   So, while markets are fully expecting the Fed to announce no change today, Powell's biggest challenge will be in keeping the prospect of a July rate hike a credible outcome, while at the same time as outlining the Fed's economic projections for the rest of the year, as well as for 2024.   In their previous projections they expect 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%.     Before we get to the Fed meeting the focus shifts back to the UK economy after yesterday's unexpectedly solid April jobs data, as well as the sharp surge in wages growth, which prompted UK 2-year gilt yields to surge to their highest levels since 2008, up almost 25bps on the day.   While unemployment slipped back to 3.8% as more people returned to the work force, wage growth also rose sharply to 7.2%, showing once again the resilience of the UK labour market, and once again underlining the policy failures of the Bank of England in looking to contain an inflation genie that has got away from them.   This failure now has markets pricing in the prospect that we could see bank rate as high as 6% in the coming months, from its current 4.5%. The risk is now the Bank of England, stung by the fierce and deserved criticism coming its way, will now overreact at a time when inflation could well start to come down sharply in the second half of this year.   So far this year the UK economy has held up reasonably well, defying the doomsters that were predicting a 2-year recession at the end of last year. As things stand, we aren't there yet, unlike Germany and the EU who are both in technical recessions.   Sharp falls in energy prices have helped in this regard, and economic activity has held up well, with PMI activity showing a lot of resilience, however the biggest test is set to come given that most mortgage holders have been on fixed rates these past two years which are about to roll off.     As we look to today's UK April GDP numbers, we've just come off a March contraction of -0.3% which acted as a drag on Q1's 0.1% expansion. 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%.     This isn't expected to be repeated in today's April numbers, however there was still widespread strike action which is likely to have impacted on public services output.   The strong performance from manufacturing is also unlikely to be repeated with some modest declines, however services should rebound to the tune of 0.3%, although the poor March number is likely to drag the rolling 3M/3M reading down from 0.1% to -0.1%.       EUR/USD – failed at the main resistance at the 1.0820/30 area, which needs to break to kick on higher towards 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – finding resistance at trend line resistance from the 2021 highs currently at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – has slipped back from the 0.8615 area yesterday, however while above the 0.8540 10-month lows, the key day reversal scenario just about remains intact. A break below 0.8530 targets a move towards 0. 8350.     USD/JPY – looks set to retest the recent highs at 140.95, with the potential to move up towards 142.50.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,585     DAX is expected to open 15 points lower at 16,215     CAC40 is expected to open 3 points lower at 7,288

The worst might be behind Hungary. Yes, the economy is still in a technical recession, but we see a way out from it by the second half of 2023. A key source of the recovery lies in the growing disinflation process. The collapse of the domestic demand erases the repricing power of companies. Thus, we see a single-digit headline inflation by the year-end and further normalisation in 2024.   This means a positive real wage growth yet again from late-2023. However, with depleted household savings and tighter fiscal headroom, we hardly see a boom in domestic demand. The recovery will be export driven, thus we see a quick return to surplus in the current account balance. Improving external financing needs and the new era of monetary policy (eg, persistent positive real interest rates from late-2023) lead us to be constructive towards Hungarian assets.   Forecast summary   Macro digest The Hungarian economy has been stuck in a technical recession for three quarters (3Q22–1Q23) due to sky-high inflation suffocating economic activity. Consumption has been markedly slowing down since last autumn, as households cope with double-digit price increases, resulting in deteriorating purchasing power. On top of this, the high interest rate environment prompted a collapse in private investment activity, coupled with the government’s mandated freeze on public investments.   The only silver lining has been net exports, recently. Export activity is helped by pent-up production in car and battery manufacturing, while imports slow on lower energy demand.   Contribution to YoY GDP growth (ppt)   We expect the economy to emerge from the technical recession in the second quarter of this year, although the year-on-year growth will remain negative. As most economic sectors are still struggling amid weak domestic demand, the one sector that stands out on the positive side is agriculture.   The reason for this lies in base effects, which this time will help a lot, as last year’s energy crisis and drought wreaked havoc on the performance of agriculture.   Though this year’s weather has been favourable as well. In this regard, the fate of the overall 2023 GDP growth rather depends on the performance of agriculture as domestic demand will remain weak for the remainder of the year, curbing industry, construction and services.   Key activity indicators (swda; 2015 = 100%) In parallel with an acceleration of the disinflationary process, we expect the economy to display a rebound from the third quarter, delivering growth in every aspect for the remainder of the year. However, we expect a modest growth rate of 0.2% for 2023 followed by a 3.1% GDP expansion next year, boosted by both returning consumption growth and rising investment activity next to positive net exports.   Headline and underlying measures of inflation (%YoY)     Headline inflation retreated to 21.5% YoY in May, after peaking in January, while core inflation has also improved, with services being the only component where we see upside risks in the short run. As for the other components, food inflation has moderated for five months, while both motor fuel and household energy prices have recently declined, supported by a fall in global energy prices and a stronger HUF. We expect inflation to continue to retreat gradually in the coming months, as demand is vastly constrained by the loss of household purchasing power. In addition, base effects are contributing significantly to this year’s disinflationary process, which will accelerate from the third quarter onwards, thus we see the year-end reading dipping comfortably below 10%. At the same time, we expect inflation to average around 18% for this year, with balanced risks to our forecast. However, after two years of double-digit average inflation figures, we expect the full-year average to come in at around 5% in 2024

Rates Spark: Raising the hawkishness bar A hawkish pause from the Fed, but the higher dots add to its degree. Market rates have reason to rise more. The bar for the ECB to surprise to the hawkish side today and move longer rates sits high, with the market apparently well-priced already.   Market rates have enough here to push higher, and the front end will feel tighter even without a hike The Fed has latched on to the theme that has dominated the market mindset in the past number of weeks, namely that the US economy continues to refuse to lie down. This has helped risk assets, as by implication default risks that would typically evolve from a recession have been kept at bay, helping credit spreads to tighten and equity markets to perform. There has also been an easing in measures of system risk, especially as immediate banking sector angst has been downsized. This overall combination has allowed market rates to ease higher, driven by higher real rates, which in turn are a sign of strength.   Initial comments from the Fed do not negate these themes, and in fact push for more of the same. While this is more reflective of the new “dots” than anything else, it in any case pushes in the direction for higher market rates ahead. We continue to position for the 10yr to head to the 4% area, and it would not look wrong if it were to drift above for a period, at least until the illusive macro slowdown is a tad more clear-cut than now. We still expect the 10yr to be much closer to 3% by the end of the year but for now we see yields rising higher first.   There was no particular mention of the changing liquidity circumstances. Currently there is amble liquidity, with bank reserves on the rise (up from US$3trn to US$3.4trn), and still over US$2trn going back to the Fed on the reverse repo facility. The US Treasury has only slowly rebuilt its cash balance at the Fed since the debt ceiling was suspended, so the impact of less prior bills issuance and more bank support has dominated the ongoing quantitative tightening programme. Ahead, some US$500bn off liquidity will get drained out of the system as the Treasury rebuilds its balance through net bills issuance. We expect from that a combination of lower bank reserves and lower cash on the reverse repo facility.   This will make it feel like there has been some tightening in conditions, even if not in levels (as the Fed has not hiked).   Still hawkish, but harder to regain traction further out

Outlook for bond yields and the AUD It has been a volatile 12 months for the Australian dollar, which dropped as low as 0.617 intraday against the US dollar in September 2022 and reached as high as 0.716 in February this year. Currently, the AUD is sitting in the upper half of this range. Further volatility is probable. The combination of a turn in global central bank rates, a pick-up in risk sentiment, and China’s reopening, all point to a stronger AUD in the medium term. Still, the long-awaited weakening of the USD is proving very elusive. Global risk sentiment, as proxied by the Nasdaq, which is up more than 25% year-to-date hardly needs any further encouragement and may be due a re-think if analysts’ earnings forecasts finally start to price in recession. And China’s reopening story may prove to be a case of the dog that didn’t bark. That makes the argument for further volatility seem a stronger one than our directional preference.     We feel on stronger ground on bond yields. Australian government Treasury yields track US Treasuries closely, so the broad direction is likely to be driven by those, with local factors (RBA policy, Australian inflation etc) of second-order importance though still useful for considering the direction of spreads. And right now, with US Treasury yields up at around 3.80%, the balance of risks for lower bond yields certainly feels better than it does for higher yields. The current spread of Australian government bond yields over US Treasuries is about 20bp, and this could widen as we think the US inflation story will improve quicker than that in Australia, resulting in a more rapid return to easing in the US.       Summary forecast table

JPY: It's a "skip" from the BoJ too We don’t expect real surprises from the Bank of Japan policy announcement overnight. We recently withdrew our views on the adjustment of the yield curve control policy in June, following some firmly dovish comments by BoJ officials. Still, with little-to-nothing being priced in terms of a hawkish surprise, the downside risks for JPY also appear limited. Our economics team continues to see good chances that the BoJ will make some changes to its YCC policy at the end of July – although the Fed decisions will admittedly play an important role. Incidentally, further USD/JPY strength (possibly driven by carry trade strategies) may well lead Japanese authorities to restart FX intervention, which was deployed around the 145 area last September. We may not be far from the peak in USD/JPY, even though a reversal of the bullish trend may take some time.   Elsewhere in G10, we saw New Zealand enter a recession after a 0.1% contraction in 1Q, with the impact of Cyclone Gabrielle having impacted activity without causing a material jump in inflation (which surprised on the downside in 1Q). It remains to be seen whether the government’s spending boost will prevent the recession from proving to be the norm for the rest of the year. For now, the figures all but endorse the recent dovish turn by the Reserve Bank of New Zealand, and a repricing higher in NZD rates looks unlikely before the 12 July policy meeting.   Australia’s May jobs numbers moved diametrically in the opposite direction than the April release, showing a huge increase in hiring (75.9k) almost entirely driven by full-time employment (61.7k). The unemployment rate inched lower to 3.6%, and markets now fully price in two more rate hikes by the Reserve Bank of Australia.   The Australian yield curve inverted for the first time since 2008 after the release, as 2-year yields jumped 10bp. Although this is a sign of a coming recession, a domestic inverted yield curve is not a bad sign for a currency in the near term: the question is whether the RBA will match the hawkish market expectations on tightening. We are not fully convinced as inflation may prove less resilient than markets are thinking, but AUD understandably remains one of the pro-cyclicals of choice at the moment.

Watch: The next steps in the Fed’s inflation fight Encouraging signs of cooling inflation are beginning to emerge as the Federal Reserve inches closer to its 2% target, but the rising threat of recession is looming. ING's James Knightley says there are a couple of key data points to watch over the month ahead for more clarity on what could be next for the US economy.   A hawkish hold and the next steps in the Fed’s inflation fight A hawkish hold, signals of further rate hikes still to come and a clear determination to stamp out inflation once and for all accompanied the Fed's decision to leave interest rates unchanged at this week's meeting. Market expectations for where the US economy could be heading are moving in a very different direction from those of the central bank – so where next?    

Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

The week kicks off on positive geopolitical vibes as the weekend talks between the US and China went well, and more senior level talks, including Xi Jinping are expected in the next few hours.  Despite this, Asian indices remained mostly sold on Monday, while US futures traded in the negative. It's certainly because last week was a bit confusing in terms of where the Federal Reserve (Fed) is headed to, after the dot plot showed two more possible rate hikes before the year ends, versus a final rate hike expected in July.   Activity on Fed funds futures gives more than 70% for a July hike, and more than 75% for a September hike on fear that inflation wouldn't slow as much as expected, and that the US jobs market will remain too robust to call the end of the US rate hikes. Fed Chair Powell will testify before the Senate this week and will certainly stick to the Fed's hawkish stance.      The S&P500 and Nasdaq both fell on Friday, but the S&P500 ended last week having gained 2.6%. It was the 5th straight week of gains for the S&P500, while Nasdaq closed the week 3.3% higher than where it had started. Both indices are now at the highest levels since last spring, and both are in overbought territory. Volatility continues fading, while any investors questions whether this is the calm before storm.   On good thing is that the Fed's reverse repo operations are trending lower, as a result of a flood of US bond issuance following the debt ceiling agreement and keep market liquidity sustained for equities.   But the US 2-year yield is headed toward the 5% mark – which is negative for equity valuations, whereas upside potential remains contained at the long end of the curve. And the widening spread means that bond investors continue pricing in recession in the foreseeable future, which is, in theory, negative for equity valuations as well.   Big Tech is responsible for around 80% of the gains in the S&P500 this year due to the AI-rally, but Russell 2000 gives signs of willingness of joining the rally as well. And because there is nothing much encouraging happening on the Fed end, the overall direction of the market, and market mood, will depend on the performance of the Big Tech. And they are now in the overbought market.       Soft dollar  The US dollar trades below its 50-DMA, as other central banks are as aggressive as the Fed – if not more! The Bundesbank President Nagel for example hinted that the ECB hikes could extend into autumn and may persist beyond September if core inflation doesn't slow persistently. The EURUSD is back on track for further gains and will likely continue pushing into the 1.10 psychological mark. Price pullbacks are interesting opportunities to strengthen long positions for a further rise toward the 1.12 mark.      Across the Channel, Cable consolidates above the 1.28 mark ahead of the next inflation update, due Wednesday and the next Bank of England (BoE) decision due Thursday. Inflation in Britain is expected to have eased from 8.7% to 8.4%, but the BoE – which has been telling us since a while that these numbers would get smashed by the H2, is now questioning their inflation forecast model – as a clear sign that even they don't believe that inflation will take the direction their model says it will. The BoE expectations remain comfortably hawkish, with another 125bp hike priced in before the end of this year. The latter could help push Cable toward the 1.30 mark.    In Switzerland, the Swiss National Bank (SNB) is also preparing to hike the rates by 25bp this week to follow the European peers, while in Turkey, the central bank, with its new leadership, is expected to hike the one-week repo rate from 8.5% to 20% in an effort to normalize the monetary policy that has been put to coma since around two years. Normalization will be painful, both for the economy and the lira, and the dollar-TRY will be left to float free from time to time to test the strength of the negative pressure from the market. The USDTRY remains – is kept - steady around the 23 mark, while the upside is the only direction that the pair could take even despite a monstrous rate hike that will hit the fan this week.  

In the ever-evolving landscape of financial markets, decisions made by major central banks have a significant impact on shaping trends. We recently had the opportunity to speak with Matthew Weller, an analyst at StoneX, to gain insights into the current state of affairs.   Read more   The European Central Bank (ECB) recently made headlines with its "Hawkish Hike," raising its key interest rate by 25 basis points to 3.5%. This move aims to combat the escalating inflation in the eurozone, marking the eighth consecutive rate hike since July 2022. The ECB's determination to bring inflation down from its current 6.1% to its target of 2% is evident. ECB President Christine Lagarde has hinted at the possibility of further rate hikes at the next meeting in July, emphasizing the need to tackle inflation head-on. Lagarde made it clear that the ECB has no plans to pause its rate hikes. While the ECB focuses on inflation control, other central banks, such as the US Federal Reserve, have taken a pause in their rate hikes to assess their impact on economic growth and employment. However, the Fed's projections indicate the potential for two more rate hikes this year. Similarly, central banks in Australia and Canada have resumed rate increases after a temporary pause, underscoring the global challenge of high inflation. The ECB's decision to raise rates comes at a time of economic uncertainty, influenced by factors such as the ongoing conflict between Russia and Ukraine and potential wage agreements that may further fuel inflationary pressures. The ECB acknowledges that short-term economic growth may remain subdued, but it expects improvements as inflation subsides and supply disruptions ease. While concerns persist regarding the potential negative impact of higher rates on the economy and the risk of a recession, the ECB remains committed to addressing inflation as a top priority   FXMAG.COM: Could you give as your point of view about how the gold prices would behave in next weeks? Is there a chance that there will be new ATH? Gold Consolidates Amid Hawkish Central Bank Actions   With major central banks continuing to tighten monetary policy and inflation still receding (if more gradually than before) gold prices are likely to remain on the back foot in the near term. As of writing, the yellow metal is trading in the mid-$1900s, where it has spent the last three weeks consolidating. Bulls will be looking for a break above the June high near $1990 to signal a potential retest of the record highs near $2075 as we move into July, whereas a confirmed break below $1930 could open the door for a retest of the 200-day EMA near $1900 next.

FX Daily: Dollar trapped between inverted curves and rallying equities There has been little follow-through from the dollar selling we saw late last week. Currently, global markets present a curious picture of steeply inverting yield curves – which occasionally forewarn recession – but bid equity markets. Which market has it right? We tend to think the dollar will come lower in the second half, but again timing is everything.   USD: Dollar trapped in the middle of inverted curves and risk rally FX markets are relatively quiet following yesterday's public holiday in the US. Risk assets are marginally softer after Chinese authorities only cut the 5-year Loan Prime Rate by 10bps – disappointing those looking for more aggressive support from lower mortgage rates to China's property sector. USD/CNH pushing back up to 7.18 has kept USD/Asia bid and provides a mildly bullish undercurrent to the dollar as the European session gets underway. Softening the lens a little we see the dollar trapped between two stories and reflected in its 2% gains against the yen and 2% losses against sterling and commodity currencies over the last month. Those two stories are: i) steeply inverting yield curves as central banks try to squeeze inflation out of economies and ii) rallying equities on the view that recessions will be mild (perhaps because of low unemployment). Our big picture call here is that US disinflation comes through in the third quarter, bearish US yield curve inversion switches to bullish steepening, and the dollar falls more broadly. But we are not there yet. Back to the short term, there is only second-tier US data today in the form of housing starts and we have the Fed's James Bullard speaking at 1230CET today. He is one of the most hawkish Fed governors, but not an FOMC voter this year. Presumably, he may shed some light on why the Fed could hike by another 50bp this year (consistent with the latest Dot Plots), but that may not move the dollar needle much. DXY is to trade well within a 102.00-103.00 range and expect USD/JPY to continue nudging higher. It increasingly looks as though Japanese authorities will be called into FX intervention again near the 145 level.

The GBP/USD currency pair experienced a slight correction on Monday but remained in a strong, short-term, upward trend. The current trend period raises many questions, as we have discussed before. Such explosive growth, reminiscent of Bitcoin, often serves as a precursor to a prolonged decline. Traders are using the last chance to buy in fully, but they will soon start to take profits on long positions, which will be a harbinger of a new downward trend. Of course, this is just a hypothesis, and any hypothesis requires confirmation. So far, there are none.   However, let's draw traders' attention again: even in the short term, the pound shows such strong growth that it needs to be more consistent with the macroeconomic and fundamental background. Over the past few months, we have repeatedly mentioned that we expect a decline in the British pound. The decline has yet to begin, and the British currency cannot even correct itself properly, especially in the 24-hour time frame. Let's ask ourselves: Is the British economy really that strong, and is the Bank of England's stance aggressive enough for the pound to show a rise of 2500 in three quarters? The answer is obvious. Of course, part of this trend should be attributed to a simple technical correction after a significant decline.   Another part of the trend is the pound's recovery after Liz Truss's departure. But even with these two "buts," it seems too much. Interestingly, such a momentum trend can continue for some time. The market sees that the pound is growing and logically continues to buy, even though there are no grounds for it. Therefore, the conclusion remains the same: the pound is rising illogically, and at any moment, this growth may end with a crash, but the upward trend can continue for as long as the market deems necessary, largely ignoring the fundamental background.   Events this week may cause a decline in the pound This week, the Bank of England will hold its regular meeting in the UK. The key rate is likely to increase for the thirteenth consecutive time, which is unsurprising. We receive very few comments and forecasts from Bank of England representatives, making it extremely difficult to predict the regulator's future actions. However, the market does not doubt that monetary policy will be tightened again.   If so, this decision has already been priced in. However, if even one "dovish" hint comes from the Bank of England's corridors, it could end badly for the pound. It is evident to everyone that the Bank of England can only maintain elevated interest rates for a limited period. The rate has already reached 4.5%, and after a deceleration in the tightening pace, two 0.25% rate hikes have already been implemented. This week might witness the occurrence of the third and final hike. The British economy has teetered on the brink of recession for four consecutive quarters, and each subsequent rate increase further raises the likelihood of a recession commencing within this year. However, we have been aware of all these factors for quite some time.       On Monday, there were no noteworthy developments concerning the dollar or the pound. Tuesday will also have scarce news. The real excitement will commence on Wednesday when Jerome Powell, the Chairman of the Federal Reserve, makes his debut appearance in Congress. This event might go unnoticed, as Mr. Powell will provide an account of the Federal Reserve's operations and respond to inquiries from senators and congress members. Since the Federal Reserve is an independent entity not subject to the control of the US government, Powell has no reason to fear. He will not face job loss and can address questions according to his own judgment. It is no secret that US authorities would prefer a less aggressive monetary policy since the regulator's actions have led to a banking crisis. But again, Powell and his colleagues have a different view on this matter: inflation is their top priority. We do not expect any "dovish" statements from Jerome. Accordingly, we do not expect the dollar to weaken after his speeches in Congress. The pound has excellent chances of starting a decline this week if the fundamental background means anything to the market.    

The EUR/USD currency pair did not show high volatility on Monday and started a weak downward correction, as we anticipated. In principle, the market sentiment was not influenced by the planned fundamental events (we will discuss them below). And perhaps they were not supposed to. Recall that the EUR/USD pair is in a strong upward correction after its monthly decline. Corrections can vary. Those that are truly worth highlighting range from 30% to 100%. This time, the euro could have corrected by 60–70%, and there is nothing strange or surprising about that. We have mentioned many times in recent months that the euro currency is significantly overbought and is positioned too high, given the fundamental backdrop at its disposal.     Therefore, we expect only one thing - a decline. Lately, the interest rate factor has come to the forefront again. The markets received new information from the Fed and the ECB, and it unexpectedly turned out that both central banks are willing to tighten monetary policy more aggressively than was previously thought a couple of months ago.   The ECB believes that the rate may continue to rise in the autumn, while the Fed has stated that the rate may increase one or two more times. However, in any case, both central banks are ready to continue tightening beyond the "planned" levels. Thus, there are no advantages for the euro currency over the dollar after it has already risen by 1550 points in the past three quarters. Furthermore, the Fed's rate is higher than the ECB's rate and will remain so because the ECB does not have the same capabilities as the US regulator. Additionally, the Eurozone economy has shown a 0.1% contraction in the last two quarters, unlike the US economy, which still exists although its growth rates are decreasing. Not to mention the state of the labor market and unemployment.   In the United States, these indicators are in good order, while unemployment in the EU stands at 6.5%. Thus, the path for the euro currency is only downward if the fundamental backdrop has any significance. ECB Chief Economist Philipp Lane stated on Monday that a rate hike in July would be appropriate. With this statement, he certainly did not reveal anything groundbreaking. We have mentioned many times that we should expect three more rate hikes after slowing down the pace of monetary policy tightening to a minimum.   Therefore, the rate will rise to 4.25%. This is not news or an intensification of the regulator's "hawkish" stance, so the market did not react to this statement. Similarly, the statements made by Luis de Guindos and Isabel Schnabel should have been addressed. Mr. Lane stated that inflation in the Eurozone would fall to 2% in the coming years, which speaks to the regulator's need for more urgency. In other words, he is not striving, like the Fed, to return inflation to 2% in the shortest possible time (they even started raising rates six months later).   Indirectly, this indicates that the rate will only rise for a short time. And if so, it will rise to 4.25% or a maximum of 4.5%. In other words, one or two more times. That's how many times the Fed's rate can rise this year. And if inflation in the EU continues to decrease at normal rates, it will not make sense to continue tightening monetary policy, driving its economy into a recession.   After all, what is the ECB's calculation? Even a few quarters of negative growth are fine. The rate will decrease when inflation approaches 2%, and the economy will accelerate. However, the higher the rate rises in 2023, the stronger the economy will fall. It may take a long time to solve the recession problem.   The conclusion is that the euro currency has no grounds for further growth against the US dollar. The average volatility of the euro/dollar currency pair for the past five trading days, as of June 20th, is 77 points and is characterized as "average." Therefore, we expect the pair to move between the levels of 1.0843 and 1.0977 on Tuesday. A reversal of the Heiken Ashi indicator back upwards will indicate a resumption of the upward movement.    

Risk takers are not out dancing on the Wall Street this week before the Federal Reserve (Fed) President Powell's semiannual congressional testimony scheduled for today and tomorrow. Equities are down, oil is down, sovereign bonds are up. And the rally in equities versus a selloff in sovereign bonds is a pattern that we have been seeing since the rebound following the mini banking crisis, and the correlation between stocks and sovereign bonds are reestablished, again, after last year's visit to the positive territory.   This – the return of negative equity-bond correlation - is what we expected to happen this year, but for the exact opposite reason. We were expecting the sovereign bonds to recover, as the US was supposed to be in recession by now, whereas the sovereign bonds were supposed to find buyers as a result of softening, and even reversing Fed policy. But none of it happened. Equities rallied, the Fed became more aggressive on tightening its monetary policy, and now the American housing market starts printing surprisingly positive data, with housing starts and building permits flashing strong figures for May, defying the rising mortgage rates in the US due to the rising Fed rates. I mean housing starts jumped more than 20% in May, but loans for residential real estate slumped. We no longer know what to do with this data, and that's a cause for concern per se... not understanding the data.     What we know and understand very well, however, is, a strong housing market and tight jobs market will encourage Fed to hike more, and encourage other central banks to do more, as well. But not everyone is as lucky as Powell, because in Britain, the skyrocketing mortgage rates are turning into a serious headache that no one can solve for now. The UK home-loan approvals have been dropping after a post-pandemic peak, the refinancing costs took a lift, and political dispute is gaining momentum with Liberal Democrats asking for a £3 billion mortgage protection package to help people keep their homes, and their mortgages, while Jeremy Hunt says there is no money in the coffers for such fiscal support. The 2-year gilt yield slid below 5% yesterday, as a result of a broad-based flight to safer sovereign bonds, but the relief will likely remain short-lived and the outlook for Gilt market will likely remain negative with further, and significant rate hikes seen on the BoE's horizon.   Released this morning, the British inflation was expected to ease from 8.7% to 8.4% but did not ease... while core inflation unexpectedly jumped past the 7% mark again. These numbers warn that inflationary pressures in the UK are not under control and call for further rate hikes which will further squeeze the British households, without a guarantee of easing inflation. We will see what the BoE will do and say tomorrow, but we know that they now have a few doubts regarding the reliability of their inflation model which was pointing at a steep fall in H2 this year – a scenario that is unlikely to happen.   Cable jumped past the 1.28 mark following the inflation data, then rapidly fell back to the pre-data levels. The short-term direction will depend on a broad US dollar appetite, yet the medium-term outlook for the pound-dollar remains positive on the back of more hawkish BoE expectations, compared to the Fed's, and an advance toward the 1.30 is well possible, especially if the dollar appetite remains soft.     In the US, profit taking and flight to safety before Powell's testimony sent the S&P500 and Nasdaq stocks lower yesterday. The S&P500 slipped below the 4400 mark, while Nasdaq 100 tipped a toe below the 15000 mark but closed above this level.    The US dollar index traded higher for the 3rd session and is now testing the 50-DMA to the upside, while gold pushed below the 100-DMA as rising US yields and stronger dollar weigh on appetite for non-interest-bearing gold.    Yet, any hawkishness from Powell's testimony will likely be tempered by counter-expectation that the Fed may be going too fast too far, and could stop hiking before materializing the two rate hikes they revealed last week in their dot plot. It's true that the surprising data on housing and jobs front don't give a respite to the Fed, but a part of it is still believed to be the post-pandemic effect. For housing for example, insufficient number of homes due to the rising WFH demand, the retreat in material costs that exploded during the pandemic and the fading supply chain pressures help to explain why the market is not responding to the skyrocketing mortgage rates.   But the risk is there – it's not even hidden, and the meltdowns tend to happen without telling.   I mean, no one could tell that the US regional banks would go bankrupt a week before they did! Anyway, the risks are there, but the resilient eco data hints that Jerome Powell will confidently remain hawkish, and that could lead to some further downside correction in US big stocks which are now in overbought market. 

Wall Street awaits a week full of hawkish Fed speak Global risk aversion settles in as PBOC stimulus disappoints US-China relations improve but no significant breakthroughs are expected   US stocks are starting on softer footing on disappointment from the PBOC’s stimulus efforts for the struggling property market and on expectations Fed Chair Powell will defend the FOMC’s dot plots. ​ Improving sentiment with US-China relations was somewhat faded as the yuan was fixed at the lowest levels since November. ​ China has a habit of playing nice when they let the yuan weaken. ​ Secretary of State Blinken’s trip was constructive enough that he was able to meet with Chinese President Xi Jinping. ​ This was the first visit by a US Secretary of State to China since 2018, which was initially going to happen earlier in February, but was called off due to a suspected spy balloon. Any momentum from Blinken’s trip was expected to be short-lived as China’s not budging on Taiwan, and they will continue to trade with Russia, despite pressures from Washington DC. ​   US data Housing data for the month of May showed the best rebound since 2016 as inventories for homes remain at low levels. ​ Housing starts surged 21.7%, much higher than the expected 0.1% dip, and huge improvement from the revised -2.9% prior reading. ​ Building permits rose from -1.4% to 5.2%. ​ Demand for houses appears to be strong and that should help that part of the economy get out of a recession. ​ The problem for the Fed is that the inflation fight was so used to a weakening housing market but that appears to be bottoming out. ​   S&P 500 Index  

NZD/USD is down 1.3% this week New Zealand consumer confidence rises Powell to testify before a House Committee on Wednesday The New Zealand dollar is sharply lower for a second straight day. In the North American session, NZD/USD is trading at 0.6148, down 0.83%.   New Zealand consumer confidence rises New Zealand Westpac consumer confidence accelerated to 83.1 in May, up from 77.7 in April and above the consensus of 76.2 points. Still, this is a low level as consumers remain pessimistic about economic conditions. The Westpac survey found that even though household incomes were higher due to strong wage growth, household finances were squeezed for two reasons. First, the cost-of-living crisis has hurt households, with inflation climbing 6.7% over the past year. Second, high interest rates have impacted on many households as mortgage rates have shot up. Weak consumer confidence, which could well translate into a drop in consumer spending, would not be bad news at all for the Reserve Bank of New Zealand, which needs the economy to slow in order to pause interest rate hikes. The benchmark rate currently stands at 5.50% and the RBNZ meets next on July 12th. Last week’s GDP report for the first quarter showed growth contracted by 0.1%, which means that technically New Zealand is in a recession, with two consecutive quarters of negative growth. In the US, this week’s data calendar is very light. There are no tier-1 releases on Tuesday and the markets are looking ahead to Wednesday, with Jerome Powell testifying before the House Financial Services Committee. Powell will likely be grilled by lawmakers on the Fed’s unconventional interest rate path, as the Fed paused last week after ten straight hikes but has signalled that it plans to renew hiking at next month’s meeting. . NZD/USD Technical NZD/USD is putting strong pressure on support at 0.6147. Below, there is support at 0.6056 0.6198 and 0.6276 are the next resistance lines  

Bank of England set to raise rates again, but by how much?      European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.   This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today.   That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.   As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued.   This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected. Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.    In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down. The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers.   If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.    Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.    These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral.   It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market.   It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.     This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.   This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.      EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.   GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.    EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.   USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.    FTSE100 is expected to open 45 points lower at 7,514   DAX is expected to open 82 points lower at 15,941   CAC40 is expected to open 34 points lower at 7,227   By Michael Hewson (Chief Market Analyst at CMC Markets UK)

BoE decides after another bad inflation report  The Bank of England (BoE) meets after another shocker inflation report, and is broadly expected to hike the rates by another 25bp points.   The BoE is the first major central bank that started hiking the rates to fight inflation. It proved to be the least efficient bank doing this job; British inflation is the worst among developed economies at nearly 9%. Consequently, the BoE will certainly be the last to finish hiking. The bank is expected to hike six more times, by 25bp, to reach a peak rate above the 6% by the end of this year, or the beginning of the next.   And I don't see how the UK will avoid recession in this morose macroeconomic setting.   The British pound didn't find an army of buyers after the UK inflation report yesterday. After an initial attack on the 1.28 resistance, Cable came back to pre-data levels and even traded at five-session lows. The EURGBP made a sharp U-turn from a nearly oversold market and jumped above 0.86. There is room for a hawkish surprise from the BoE (a 50bp hike?), and if not today, in one of the next meetings. The latter should keep Cable on path for more gains, in the actual environment of softening US dollar.    Let's see what's the new Team is worth!  The new leadership team of the Central Bank of Turkey (CBT) will give the first policy verdict of its new mandate today. The bank is expected to hike the rates from 8.5% to 20%. It looks like a big hike – and it is a big hike – but the Turkish Central Bank will have to   1. regain its credibility that has been shattered   2. repeat a similar operation in the next few meetings to bring the Turkish rates to where they should be in accordance with the economic fundamentals, and not where the government wants them to be.   3. if all goes well, get rid of the expensive and ineffective side measures – like FX interventions and FX protected savings – that served to keep the lira afloat while the monetary policy was no longer.   The USDTRY is again put to sleep near the 1.23 level after a tentative relaxation of FX interventions at the start of this month. Hiking interest rates, regaining credibility, then relaxing FX interventions sounds like a plan, but it will take ZERO verbal intervention from the government to conduct a healthy policy normalization.   Note that, in no case, do I expect the selloff in lira to stabilize or the reverse – without external intervention – below the 30/35 range – if left free.    Swiss will hike as well The Swiss National Bank (SNB) is about to announce a 25bp hike at today's meeting taking the Swiss policy rate to 1.75%. The dollar-franc sees resistance into the 0.90 psychological level, but most of the price action is driven by USD appetite. Given the sharp fall in Swiss inflation toward the 2% target, the SNB will unlikely let the franc run too strong from here. 0.88 seems to be a floor to franc appreciation.    

Powell testifies before Congress Fed Chair Powell testifies before Congress on Wednesday and Thursday and lawmakers will likely press him on the Fed’s rate policy. The Fed paused at this month’s meeting but is expected to raise rates at the July meeting. Powell has expressed confidence that he can guide the economy to a soft landing and avoid a recession and large layoffs, even with further rate hikes. Many lawmakers, however, don’t share Powell’s optimism and are deeply concerned that the Fed’s aggressive tightening could cause significant damage to the US economy. . USD/CHF Technical USD/CHF is testing resistance at 0.8984. Above there is resistance at 0.9065 0.8902 and 0.8777 are providing support  

Powell testifies on the Hill Fed Chair Powell will testify before Congress on Wednesday and Thursday and will face questions about the Fed’s rate path.   The Fed paused at this month’s meeting but is expected to raise rates at the July meeting. Powell has said that he can pull off a soft landing that will avoid a recession and large layoffs, but many lawmakers remain concerned that more rate hikes this year will cause significant damage to the US economy.   USD/CAD Technical USD/CAD is testing resistance at 1.3253. Above, there is resistance at 1.3329 1.3175 and 1.3047 are providing support lines    

UK core inflation rises in May BoE likely to raise rates on Thursday Fed Chair Powell testifies before House Committee The British pound has edged lower on Wednesday. GBP is trading at 1.2724 in Europe, down 0.3%. GBP/USD spiked after today’s inflation release but in currently in negative territory.   UK inflation disappoints The UK released the May inflation report today, and the results were a major disappointment, to put it mildly. With inflation falling for two straight months, there were hopes that the Bank of England’s rate policy was slowly working and the downtrend would continue. The monthly readings showed that headline and core CPI eased, but the annualized readings were worse than expected. Headline CPI remained at 8.7%, above the consensus of 8.4%. Core CPI rose from 6.8% to 7.1%, above the consensus of 6.8%, the highest level since March 1992. The core rate, which excludes food and energy prices, is considered more important, and the 0.3% gain is a huge disappointment for the BoE. The Bank of England won’t have much time to mull over the inflation figures, as it announces its rate decision on Thursday. There’s little doubt that the BoE will have to raise rates for a 13th consecutive time, and today’s inflation numbers mean there is a strong possibility of an oversize 0.50% increase. The BoE finds itself between a rock and a hard place, as it struggles to contain inflation without causing a recession. The resilient labor market has complicated the BoE’s attempts to cool the economy, and the markets are projecting that the Bank Rate, currently at 4.5%, won’t peak until 6%. High inflation has already caused a cost-of-living crisis, and more rate hikes will only exacerbate the pain.   Powell on the hot seat? Fed Chair Powell begins two days of testimony before Congress on Wednesday. Lawmakers are expected to grill Powell about the Fed’s rate policy. The Fed paused at this month’s meeting but is expected to raise rates at the July meeting. Powell has said that he can pull off a soft landing that will avoid a recession and a jump in unemployment, but he’ll likely have to answer pointed questions from lawmakers who are concerned that higher rates will damage the economy. . GBP/USD Technical 1.2719 remains under pressure in support. Next, there is support at 1.2645 There is resistance at 1.2848 and 1.2950    

Bank of England set to raise rates again, but by how much?    By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.     This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today. That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.     As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued. This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected.     Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.      In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down.   The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers. If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.  Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.      These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral. It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market. It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.   This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.     This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.    EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.     USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 45 points lower at 7,514     DAX is expected to open 82 points lower at 15,941     CAC40 is expected to open 34 points lower at 7,227

UK retail sales could surprise to the upside, flash PMIs in focus - By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets fell for the fourth day in succession yesterday, driven lower on worries that central banks will look through concerns over a slowdown in economic activity and prioritise the battle against inflation, and look set to open lower this morning.     These concerns have been magnified in recent days with last week's hawkish Fed meeting, followed by the bigger than expected 50bps rate hikes from the Bank of England and Norges Bank yesterday, as investors started to worry that creating a possible recession was likely to become a necessary side-effect in their willingness to push inflation back down to their 2% targets. Certainly, the sticky nature of core inflation is causing a great deal of anxiety not only on the part of central bankers, but also on the part of those who are due to come off fixed rate mortgages in the next 12 months. The hope is that this period of high rates could soon give way to a softening later in the year, however the big rise in core inflation suggests that we may have to endure them for quite a bit longer.     On the plus side the lowering of the energy price cap next month is already seeing energy companies writing to customers and lowering their monthly direct debits with gas prices now back at 2021 levels. This should start to see headline inflation continue to decline into the end of the year.       While concerns over a possible recession are increasing, a lot of the economic data so far thisyear has proved to be reasonably resilient, which makes the timing of yesterday's decision to be more aggressive by the Bank of England a little bit after the fact.   For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been surprising so far this year, with clothing retailer Next surprising the market earlier this week when it upgraded its full year profits forecasts on better-than-expected trading activity.   Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent increase in interest rate costs that are likely to act as a drag in H2 of this year. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February.   The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year.   For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns. We also have the latest flash PMI numbers for June which are likely to continue to exhibit one of the more notable trends we've seen in recent months, which has been an ongoing divergence between services sector activity and manufacturing activity.   This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Both of these are expected to remain close to current levels.   Services continue to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56. Again, these are expected to come in slightly weaker at 52.1 and 56.3.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling, coming at 47.1 in May, while services also slowed to 55.2 from 55.9. UK manufacturing is expected to soften to 46.8 and services to 54.8.     Lower fuel costs may offer some support here; however, most service providers are struggling with higher costs, which by and large they are having to pass on.    EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – spiked up to 1.2850 yesterday before slipping back, however it remained above the lows this week at the 1.2680/90 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510, but needs to clear 1.2850.      EUR/GBP – failed between the 0.8630/40 area before slipping back. The main support is at least weeks low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally cracked the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 27 points lower at 7,475     DAX is expected to open 120 points lower at 15,868     CAC40 is expected to open 53 points lower at 7,150

Keeping up with the central banks.  There were three major surprises from three central banks yesterday.     BoE hikes 50bp, peak rate seen unchanged past 6%.  The Bank of England's (BoE) decision to step up the pace of rate hikes at the 13th meeting since the start of the tightening policy has been broadly unwelcomed from households, to bond and stock investors, and to FX traders.   The 2-year gilt yield stabilized above the 5% mark, yet didn't take a lift on doubt that the BoE could hike by another full percentage point without wreaking havoc across the British economy, especially in the property market. The 10-year yield fell on the morose economic outlook. At this point, it would be a miracle for Britain to avoid recession, and even a property crisis.   The FTSE 100 slumped below its 200-DMA, and tipped a toe below the 7500 mark. Trend and momentum indicators are negative, and the index is now approaching oversold conditions. It is worth noting that falling energy and commodity prices due to a softish Chinese reopening didn't play in favour of the British big caps this year. The rising rates step up the bearish pressure. The outlook remains neutral to negative until we see a rebound in global energy prices - which is not happening for now.   The pound fell as a reaction to the 50bp hike. You would've normally expected the opposite reaction, but the bears remained in charge of the market, pricing the fact that the dark clouds that are gathering over Britain will destroy more value than the higher rates could create.   In summary, it was a disastrous week for Britain. But at least one person didn't get discouraged by the data and the BoE hike, and it was Rishi Sunak who said that the British economy is 'going to be ok' and that he is '100% on it'.     He is not scared of being ridiculous.  Moving forward, the Gilt market will likely remain under pressure, the longer end of the yield curve will do better than the shorter end. The British property market will be put at a tougher test, and could crack under the pressure at any time, in which case the economic implications would go far beyond the most pessimistic forecast. And any government help package to help people go through higher mortgage costs would further fuel inflation and require more rate hikes. The outlook for pound weakens and the FTSE100's performance is much dependent on China, which is struggling with low inflation and sluggish growth on the flip side of the world. Long story short, there is not much optimism on the UK front.  Elsewhere, the Swiss National Bank (SNB) raised by 25bp as expected, Norges Bank surprised with a 50bp hike, said that there will be another rate hike in August, while Turkey hiked from 8.5% to 15% vs 20% expected, raising worries that Turkey's new central bank team could not shrug off the low-rate-obsessed goventment influence. The dollar-try spiked above the 25 level, the highest on record, but not the highest on horizon.       Consume less!  The US existing home sales came in better than expected, adding to the optimism that the US real estate market could be doing better after months of negative pressure. The surprising and unexpected progress in US home data is welcomed for the sake of the economic health, but a strong housing market, along with an unbeatable jobs market hint that the Federal Reserve (Fed) will keep hiking rates. Powell confirmed that there could be two more rate hikes in the US before a pause at his semiannual testimony before the Congress, while Janet Yellen said she sees lower recession risks, but that consumer spending should slow.   The US dollar rebounded on hawkish Fed expectations. 

Slow start following an eventful weekend.    The weekend was eventful with the unexpected rebellion of the Wagner Group against the Kremlin. Yevgeny Prigozhin's men, who fight for Putin in the deadliest battles in Ukraine walked towards Moscow this weekend as Prigozhin accused the Kremlin of not providing enough arms to his troops. But suddenly, Prigozhin called off the attack following an agreement brokered by Belarus and agreed to go into exile. The Kremlin took back control of the situation, but we haven't seen Vladimit Putin, or Prigozhin talk since then. The Wagner incident may have exposed Putin's weakness, and was the most serious threat to his rule in two decades. It could be a turning point in the war in Ukraine. But nothing is more unsure. According to Volodymyr Zelensky, there are no indications that Wagner fighters are retreating from the battlefield.  The first reaction of the financial markets to Wagner's mini coup was relatively calm. Gold for example, which is a good indication of market stress at this kind of moment, remained flat, and even sold into the $1930 level. The dollar-swissy moved little near the 90 cents level. Crude oil was offered into the $70pb level, as nat gas futures jumped more than 2% at the weekly open, and specific stocks like United Co. Rusal International, a Russian aluminum producer that trades in Hong Kong, gapped lower at the open but recovered losses.  Equities in Asia were mostly under pressure from last week's selloff in the US, while US futures ticked higher and are slightly positive at the time of writing.    The Wagner incident will likely remain broadly ignored by investors, unless there are fresh developments that could change the course of the war in Ukraine. Until then, markets will be back to business as usual. There is nothing much on today's economic calendar, but the rest of the week will be busy with a series of inflation reports from Canada, Australia, Europe, the US, and Japan.     Except for Japan, where the Bank of Japan (BoJ) doesn't seem urged to hike the rates, higher-than-expected inflation figures could further fuel the hawkish central bank expectations and add to the weakening appetite in risk assets.     The Federal Reserve (Fed) will carry its annual bank stress test this week, to see how many more rate hikes the baking sector could take in and the potential for changes in capital requirements down the road. The big banks are likely not very vulnerable to higher capital requirements, yet the profitability of the US regional banks could be at jeopardy and that could cause investors to remain skeptical regarding the US banking stocks altogether. Invesco's KBW bank ETF slipped below its 50-DMA, following recovery in May on the back of decidedly aggressive Fed to continue hiking rates, and stricter requirements could further weigh on appetite.    Zooming out, the S&P500 is down by more than 2% since this month's peak, Nasdaq 100 lost more than 3% while Europe's Stoxx 600 dipped 3.70% between mid-June and now on the back of growing signs that the aggressive central bank rate hikes are finally slowing economic activity around the world. A series of PMI data released last Friday showed that activity in euro area's biggest economies fell to a 5-month low as manufacturing contracted faster and services grew slower than expected. The EURUSD tipped a toe below its 50-DMA last Friday but found buyers below this level. Weak data weakens the European Central Bank (ECB) expectations, but that could easily reverse with a strong inflation read given that the ECB is ready to induce more pain on the Eurozone economy to fight inflation.     Across the Channel, the picture isn't necessarily better. Both services and manufacturing came in softer than expected. And despite the positive surprise on the retail sales front, retail sales in Britain slumped more than 2% in May, due to the rising cost of living that led the Brits back from loosening their purse string. One thing though. UK's largest lenders agreed to give borrowers a 12-month grace period if they missed their mortgage payments as a result of whopping costs of keeping their mortgages due to the aggressively rising interest rates. Unless an accident – in real estate for example, the Bank of England (BoE) will continue hiking the rates and reach a peak rate of 6.25% by December.   The only way to slow down the pace of hikes is to find a solution to the sticky inflation problem. And because the BoE has limited influence on prices, Jeremy Hunt will meet industry regulatory this week to discuss how they could prevent companies from taking advantage of inflation and raising prices more than needed, which adds to inflationary pressures through what we call 'greeflation'. But until he finds a solution, the BoE has no choice but to keep hiking and the UK's 2-year gilt yield has further to run higher, whereas the widening gap between the 2 and 10-year yield hints at growing odds of recession in the UK, which should also prevent the pound from gaining strength on the back of hawkish BoE. Cable will more likely end up going back to 1.25, than extending gains to 1.30.       By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

US While Europe appears at great risk for a recession as traders bet on aggressive rate rises by all the European central banks, the Fed is still expected to be nearing the end of their respective rate hiking campaign.  The focus in the US will fall on the PCE readings. If inflation comes down as expected, the swap futures might grow even more confident that the Fed will only deliver one more rate hike.  Wall Street will also pay close attention to the Conference Board’s consumer confidence reading, which is expected to show a modest rebound.  Friday’s Personal income and spending data will also be closely watched as incomes continue to grow, while spending softens. Fed’s Williams speaks at the Bank for International Settlements on Sunday.  Fed Chair Powell heads to Europe and speaks at the ECB’s global banking forum in Portugal.  The Fed will also release the results of their annual banking stress tests.   Eurozone There’ll be a lot of attention on ECB President Christine Lagarde’s appearances early in the week, particularly in light of what we’ve seen recently with central banks continuing to raise interest rates amid stubborn inflation. But it’s the flash HICP data on Friday that investors will be most interested in. The ECB recently warned that it will take a significant improvement in the data to avoid another rate hike next month and another repeat performance of the May report could be just that. Instead, we’re expected to see a small move in the other direction as base effects become less favourable for a couple of months, enabling the ECB to hike again in July before reassessing the situation in September. Inflation data from individual countries earlier in the week may offer some insight into what we can expect on Friday.   UK In light of the Bank of England decision to hike interest rates by 50 basis points last week, focus will be on what MPC members have to say. There’s been a lack of unity for months but that was increasingly evident at the June meeting. Going forward, the decisions aren’t going to get easier which means there’s likely to be less unity, rather than more. It won’t take many votes to pause the tightening cycle and so, despite the clear inflation problem, comments from MPC members will become increasingly scrutinized.   Russia A few data releases on the agenda next week including unemployment, retail sales, industrial output and monthly GDP.  

Stocks tumble on fears monetary tightening will trigger a recession Fed rate hike bets still only pricing in one last rate increase European bond yields plunge on downbeat global sentiment   US stocks are sliding as the global growth outlook continues to deteriorate following soft global PMI readings.  The risk of a sharper economic downturn is greater for Europe than it is for the US, so that could keep the dollar supported over the short-term.  This has been an ugly week for stocks and that is starting to unravel a lot of the mega-cap tech trades. The Nasdaq is getting pummeled as the AI trade is seeing significant profit taking.      Europe Brief: European stocks got rattled after France posted a surprise contraction with their Services PMI.  Almost all the European PMI readings disappointed and that is bursting the euro trade. Stubborn UK inflation is forcing the BOE to become a lot more aggressive with their rate hiking campaign, which will pile on significantly more pain on people with mortgages. UK Chancellor Hunt needed to do something for homeowners and this year-long break before repossessions is a step in the right direction. Over 2 million UK mortgage holders are going to see skyrocketing monthly mortgage bills and right now it seems it will steadily get worse.     Bostic The Fed’s Bostic delivered a dovish message today after favoring no more rate hikes for the rest of the year. Bostic is optimistic that the Fed will bring down inflation without tanking the job market.  Bostic is in the minority as other members will need to see a significant deterioration in the data.  Today, the service sector PMI declined not as much as expected and is still trading near pre-pandemic levels. The June preliminary Services PMI fell from 54.9 to 54.1, a tick higher that 54.0 consensus estimate. The economic resilience for the US will likely keep the majority of Fed officials with a hawkish stance.       

FX Daily: Inflation remains the market’s priority Events in Russia have had little discernible impact on the FX market so far. Instead, the hot topic of high inflation and what policymakers are prepared to do about it remains the market's priority. This will be at the top of the agenda at this week's ECB's annual symposium in Sintra. Expect another mixed week in FX markets and possible BoJ intervention.   USD: Geopolitics has yet to make its mark Events in Russia this weekend have so far had very little impact on global financial markets. There has been no flight to quality rush into the short end of the US Treasury market (two-year yields are down only 2bp since Friday), crude oil failed to hold onto some very modest gains in Asia, and Asian equity price action was muted. In FX, it is hard to discern any flight to quality into the dollar, nor discernible outperformance of defensive currencies like the Japanese yen and the Swiss franc. The muted response probably reflects i) a lack of clarity over what comes next after this challenge to President Putin's authority and ii) financial markets having already experienced a year of a stronger dollar and higher energy prices after the Russian invasion of Ukraine.   Instead, the market is very much focused on inflation. Both central bankers and governments are under fire for having kept monetary and fiscal policy respectively too loose for too long. These (or at least monetary policy anyway) will be the hot topic for this week at the ECB annual symposium in Sintra. Many of the G7 central bank governors are in attendance and presumably will deliver a hawkish message, similar to the one that Federal Reserve Chair Jerome Powell delivered to Congress last week.   This means that yield curves look to remain very inverted as investors assess the degree of looming recession and that the dollar will stay strong against those currencies without a monetary defence – i.e., USD/JPY stays bid. In addition to Powell's comment at Sintra on Wednesday, the US highlight this week will be the release of the core PCE inflation data for May. This is released on Friday. Expected at 0.4% month-on-month, another high reading for core inflation suggests there can be no let-up in the Fed's hawkishness.   DXY can probably bounce around in a 102.00-103.00 range this week, while USD/JPY should edge closer to the 145 intervention zone.  

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

German Business Confidence falls for second straight month ECB’s Lagarde hosts central banking conference in Portugal EUR/USD is drifting higher on Monday. In the European session, EUR/USD is trading at 1.0917, up 0.20%.   German business confidence slips Germany once prided itself as being the locomotive of the eurozone, which blazed the way with a strong economy. The country is still by far the largest economy in the bloc, but hard times in the global economy haven’t spared Germany. The week started with disappointing news as the German Ifo Business Climate index dropped for a second straight month, falling from 91.7 to 88.5 in June. This missed the consensus of 90.7 and was the index’s weakest level this year. The Ifo release did not indicate reasons for the decline, but a weak global economy, exacerbated by China’s wobbly recovery, and the ECB’s aggressive tightening appear to be weighing on business sentiment. Last week’s German PMI data indicated slower activity in manufacturing and services. Manufacturing has been mired in a recession and fell from 43.5 to 41.0 points. Services is showing growth, but slipped from 54.7 to 54.1 points. The 50 line separates contraction from expansion. The ECB has been playing catch-up with inflation but has made progress as higher rates have dampened economic activity in the eurozone. The ECB has hinted strongly that it will raise rates in July and there is a strong possibility of another hike in September or October. ECB President Christine Lagarde will be in the spotlight as host of the ECB forum on Central Banking in Sintra, Portugal this week. The markets will be monitoring her remarks and looking for insights into future rate policy, which could result in stronger movement from the euro. . EUR/USD Technical EUR/USD is testing resistance at 1.0916. Next, there is resistance at 1.0988 1.0822 and 1.0780 are providing support

US While Europe appears at great risk for a recession as traders bet on aggressive rate rises by all the European central banks, the Fed is still expected to be nearing the end of their respective rate hiking campaign.  The focus in the US will fall on the PCE readings. If inflation comes down as expected, the swap futures might grow even more confident that the Fed will only deliver one more rate hike.  Wall Street will also pay close attention to the Conference Board’s consumer confidence reading, which is expected to show a modest rebound.  Friday’s Personal income and spending data will also be closely watched as incomes continue to grow, while spending softens. Fed’s Williams speaks at the Bank for International Settlements on Sunday.  Fed Chair Powell heads to Europe and speaks at the ECB’s global banking forum in Portugal.  The Fed will also release the results of their annual banking stress tests.   Eurozone There’ll be a lot of attention on ECB President Christine Lagarde’s appearances early in the week, particularly in light of what we’ve seen recently with central banks continuing to raise interest rates amid stubborn inflation. But it’s the flash HICP data on Friday that investors will be most interested in. The ECB recently warned that it will take a significant improvement in the data to avoid another rate hike next month and another repeat performance of the May report could be just that. Instead, we’re expected to see a small move in the other direction as base effects become less favourable for a couple of months, enabling the ECB to hike again in July before reassessing the situation in September. Inflation data from individual countries earlier in the week may offer some insight into what we can expect on Friday.   UK In light of the Bank of England decision to hike interest rates by 50 basis points last week, focus will be on what MPC members have to say. There’s been a lack of unity for months but that was increasingly evident at the June meeting. Going forward, the decisions aren’t going to get easier which means there’s likely to be less unity, rather than more. It won’t take many votes to pause the tightening cycle and so, despite the clear inflation problem, comments from MPC members will become increasingly scrutinized.

Higher start expected for Europe as we drift towards quarter end    Despite weekend events in Russia, European markets proved to themselves to be reasonably resilient yesterday, finishing the day mixed even as the DAX and FTSE100 sank to multi week lows before recovering.     US markets didn't fare much better with the Nasdaq 100 sliding sharply, while the Russell 2000 finished the day higher. While equity markets struggled to make gains there wasn't any sign of an obvious move into traditional haven assets which would indicate that investors had significant concerns about what might come next.     If anything, given how events have played out over the last few years, and the challenges that have faced global investors, the view appears to be let's worry about what comes next when and if it happens, rather than worrying about what might happen in what is becoming an increasingly fluid geopolitical situation.   Bond markets appeared sanguine, as did bullion markets with gold finishing modestly higher, while the US dollar finished the day slightly lower, ahead of the start of this week's ECB central bank forum in Sintra, Portugal which starts today.     Oil prices found themselves edging higher yesterday, largely due to uncertainty over the weekend events in Russia given its position as a key oil and gas producer.   The prospect that we might see supply disruptions if the geopolitical situation deteriorates further may have prompted some precautionary buying. While the crisis appears to have passed quickly the fact that it happened at all has been a bit of a wakeup call and raised some concerns about future long term political stability inside Russia.     One other reason for the so far muted reaction to recent events is that we are coming to the end of the month as well as the first half of the year, with investors indulging in portfolio tweaking rather than any significant shift in asset allocation.   With H2 fast approaching the key decisions are likely to involve determining how many more rate rise decisions are likely to come our way, and whether we can avoid the prospect of a recession in the US.   As far as the UK is concerned it's going to be difficult to see how we can avoid one, having just about avoided the prospect at the end of last year, while the EU is already in one. The US continues to stand out, although even here there is evidence that the economy is starting to slow.     On the data front there isn't much in the way of numbers before the back end of the week and various inflation numbers from Germany, France and the EU, as well as the US. Today we have the latest US durable goods numbers for May, as well as housing data for April and May, which are expected to show signs of softening, and consumer confidence numbers for June. Consumer confidence has been one area which has proved to be the most resilient edging up in May to 102.3. This is expected to continue in June to 103.90, in a trend that appears to be matching the resilience of the labour market.     EUR/USD – not much in the way of price movement yesterday, with resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which is acting as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – quiet session yesterday but still holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – struggling for momentum currently having failed at the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – while above the 142.50 area, the risk is for a move towards 145.00. This support area which was the 61.8% retracement of the 151.95/127.20 down move, needs to hold or risk a return to the 140.20/30 area. as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 22 points higher at 7,475     DAX is expected to open 30 points higher at 15,843     CAC40 is expected to open 20 points higher at 7,204

Rates Spark: The battle to keep policy tight At Sintra, hawkish central bankers meet a deteriorating economic outlook, and face their diminished ability to tighten financing conditions. Inverted curves and lower real rates may be the counterproductive product of their single-minded focus.   Hawkish messaging is only credible if the economy holds up As the European Central Bank’s (ECB) Sintra conference get underway, central bankers will have their eyes firmly on two important checks on their recent hawkish charge. Firstly, a deterioration in economic outlooks, illustrated by the plunge in Germany’s Ifo index published yesterday, limits the credibility of any aggressive hawkish tone with markets fearing a recession. Secondly, it is not altogether certain that, in isolation, a more hawkish central bank results in materially tighter financial conditions.   The first concern can in theory be addressed by a single-minded focus on backward-looking inflation. This is the strategy adopted by most central banks, also justified by their poor track record in forecasting inflation. By and large, this strategy has been successful in delaying rate cut expectations, but the central banks’ sphere of influence typically doesn’t reach very far up the curve, so the economic outlook still matters. Dhingra and Tenreyro have an easier job communicating the Bank of England’s stance when they speak today, given the UK’s entrenched inflation problem. Things are more challenging for Lagarde given the deterioration of European economic data.   Long-end EUR real rates have declined since May, hardly a tightening of financial conditions    

Oil It’s going to take a lot to change the minds of energy traders. Fears of a weaker global growth outlook are not going away anytime soon. In the US, good news is bad news as that will suggest the Fed might have to do more tightening. ​ Inflation is stubbornly high in Europe that could trigger a lot more rate hikes and a harsher recession. ​ Even comments from Delta CEO about demand outpacing expectations was unable to provide a boost for oil prices. ​ Oil is looking very vulnerable here as it is getting close again to the spring lows near the upper mid- $60s. One more plunge and that should make OPEC+ very nervous. A drop below the $67.50 level could ​ trigger momentum selling that won’t stop until the $62.50 region.   Gold Gold remains under pressure as the US consumer still looks strong. Today’s economic data in the US painted a picture of a resilient economy that could be subject to further Fed tightening. The ECB also signaled there is no end in sight for their rate hiking cycle and that has also helped send Global Bond yields higher. It has been pretty ugly for gold since early May and if expectations grow for further Fed tightening, that could send gold tentatively below the $1900 level.      

Global bond yields rise; 10-year Treasury rises 4.1bps to 3.762% Consumer Confidence hits highest levels since January 2022 Dow eyes first gain in 7 trading days   US stocks are bouncing back after some strong US economic data gave a boost to consumer discretionary stocks and as investors piled back into AI trades. The losing streak had to end, but that doesn’t mean the market will resume.     US data There was a lot of US economic data released today and the key takeaway was that the economy is not breaking just yet. The first key reading was durable goods and that surged, but the reason behind that was due to strong aircraft orders. The overall trend is expected to be softer, going forward as higher, borrowing costs and tighter lending from banks, will dampen demand. We also got a couple housing reports, the case Shiller report showed home prices are stabilizing as prices recover, mainly because there’s just not enough supply. New home sales impressed with a buying spree that hit the highest levels in more than a year. The main event was the Conference Board’s consumer confidence report which surged 7.2 points to 109.7, the best reading since January 2022. The strong consumer confidence report will likely suggest expectations are not for the labor market to deteriorate quickly, which should confirm expectations that a recession will not happen this year, but most likely next.     We also saw a couple fed regional surveys, the Richmond Fed manufacturing index remained in negative territory, and so did the Dallas Fed’s services activity report, which is in line with the other federal regional surveys. Overall the US economy is still chugging along, and that will complicate the disinflation process for the Fed. ​ Swap futures are still expecting one more rate hike by the Fed.  

Wall Street awaits Fed Chair Powell and counterparts at ECB forum Mortgage demand rises for a 3rd straight week 10-year Treasury yield down 1.9 bps to 3.745%   The artificial intelligence trade had a major setback after the Wall Street Journal reported that the Biden administration could unveil new restrictions on the exports of AI chips to China. Nvidia, a pivotal mega cap tech trade, gets about 20% of its revenue from China. In Asia, AI related stocks were under significant selling pressure.   Despite a potential headwind for the AI trade, the NASDAQ 100 will likely have a record first half. BlackRock, the world’s largest asset manager is also betting big on AI, coming out with a new overweight call. BlackRock sees a mild recession happening later this year but anticipates a mega force like AI could still help equities outperform, given a weakening macroenvironment.   We should get some volatility going into quarter close as so many traders are starting to become bullish stocks and as so many stocks are near critical option levels. The FOMO trade might be here, but the economy is clearly feeling the effects of the Fed’s tightening cycle and the consumer is weakening but has no trouble getting a job, so it will be interesting how the stock market’s back gets broken.    

German consumer sentiment falls ECB’s Lagarde will participate in a panel discussion on policy   EUR/USD has edged lower on Wednesday. In the European session, EUR/USD is trading at 1.0939, up 0.20%.   German consumer confidence dips The German GfK Consumer Sentiment report found that consumer confidence is expected to fall in July to -25.4, down from a downwardly revised -24.4 in June. The report noted that the German consumer is reluctant to spend due to economic uncertainty, and high inflation has eroded the purchasing power of households. The consumer confidence release comes on the heels of the German Ifo Business Climate index, which fell from 91.7 to 88.5 in June. This missed expectations and marked the index’s lowest level this year. The weak confidence numbers highlight a persistent lack of confidence in the German economy.   The ECB, which continues to signal that more rate hikes are coming, finds itself between a rock and a hard place. The Bank’s number one priority is curbing inflation, which will require more rate hikes. However, tightening too quickly runs the risk of choking economic activity and tipping the German economy into a recession. How far will the ECB go in raising interest rates? Investors hope to get some clues from ECB President Lagarde later today when she participates in a panel on policy at the ECB bank forum in Sintra. Lagarde said on Tuesday that eurozone inflation remains too high and reiterated that ECB policy “needs to be decided meeting by meeting and has to remain data-dependent.”   In the US, Tuesday’s strong releases were further proof of a solid economy. Durable Goods Orders and New Home Sales were higher and beat expectations, and Conference Board Consumer Confidence jumped in June from 102.5 to 109.7, its highest level since January 2022. These strong releases will provide support for the hawkish Fed, which is expected to raise rates in July and again in September or October.   EUR/USD Technical EUR/USD is putting pressure on support at 1.0916. Next, there is support at 1.0822 1.0988 and 1.1082 are the next resistance lines    

Prioritise quality companies. If an investor needs to take a defensive stance, it is worth turning to quality stocks, as their robust balance sheets and stable cash flows should insulate them from unforeseen downside risk. With this in mind, many of the largest technology and Internet stocks meet these criteria, while exposure to highly cyclical sectors and companies with excessive leverage should be kept to a minimum. Thus, in order to increase the resilience of your portfolios, you should focus on high quality companies, strong dividend payers and also not forget about regional diversification, as lower valuations and a weaker US dollar can also make global stock markets outside the US attractive.   The general understanding is that the market is likely to come out of the correction this year with expectations of a continued recovery in the second half of the year and a return to a bullish trend. This recovery is expected to help recoup portfolio losses from 2022.   However, there are several factors that pose risks to the market in the near future. These risks include the potential for a bear market, which could be triggered by inflation statistics such as the PCE index and strong labour market conditions. Another risk is the narrow scope of the current rally, where only some sectors have shown growth while others, including cyclical, defensive and growth sectors and assets such as bonds, have remained weak. There is also uncertainty about the timing and severity of a possible recession this year. The market is now looking at the likelihood of a moderate recession, which is already factored into current expectations and prices.   Once there is more clarity on these risk factors, portfolio allocation can be adjusted accordingly, considering both bonds and stocks, with a focus on the second half of the year and recovery of losses incurred in 2022. Two scenarios were considered for such an adjustment:   Scenario No. 1, the positive outlook, sees the market rising and breaking through significant resistance levels of 4200-4300 in the SPX index, which would lead to a rally. In this case, it would be prudent to increase long positions. Risky stocks should be held until they reach the most likely level of local recovery, and then locked in. For positions that still have potential, they should be held. The portfolio as a whole should then be rebalanced, creating a new balanced structure with a 25% allocation to cyclical assets, 35% to growth assets, 10% to protection and 30% to bonds.   Scenario #2, the negative outlook, assumes that the market continues to decline either from the current level or below 4100. In this scenario, protection should be strengthened by using inverse ETFs and reducing long positions (using stop losses) until the target stock is reached. This approach aims to minimise further drawdown until the correction is finally resolved in 2023.   The US stock market has thus experienced a strong recovery since the start of the new year, supported by a resilient technology sector, growth in the semiconductor industry due to AI development, a strong Q1 2023 reporting season, a pause in the Federal Reserve's rate hike, expectations of future rate cuts, lower inflation, a resilient economy, a smooth economic landing and a debt limit increase. While risks are still present, a focus on longer-term investment strategies can help investors benefit from the market's upward trajectory and continued recovery in 2H.  

As markets factor in interest rate hikes by the Federal Reserve until the end of 2023, gold prices remain under pressure. In its latest gold price forecast, ABN AMRO's Senior Economist Sustainability Research, Georgette Boele, has lowered her long-term gold forecast. She projects prices to reach $2,000 by the end of this year and 2024 instead of the $2,200 previous forecast for 2024.   According to her, investors are not eager to buy gold at current levels, likely because prices are close to historical highs. She added that market expectations shifted after the Federal Reserve's statement about continuing its aggressive policy, even though the tightening cycle is nearing completion, marking the most aggressive tightening cycle in the last 40 years.   According to the CME FedWatch Tool, there is an 80% probability of a rate hike in July.   Boele stated that the Dutch bank expects the Federal Reserve to cut interest rates by 175 basis points only next year, as the economy slipped into a recession in the first quarter. Consequently, the bank anticipates a global bullish impulse for gold only in the following year, which could push prices towards.  

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      

The first half of the year ends on a positive note for equities and not so much for the bonds. This is the exact opposite of what was predicted. The bond markets were supposed to recover due to economic pains which should have led to a more dovish central bank landscape, while equities should have suffered due to the economic woes, slowing spending and recession. But no. Equities did well. Even though profits fell, they fell less than expected and more importantly, AI saved the day sending the Big Tech stocks to a nice bull market. Bonds on the other hand tumbled as US spending and growth remained resilient. The latter convinced the Federal Reserve (FeD) that it should keep hiking the interest rates. The spread between the US 2 and 10-year yield hit nearly 110bp, as an indication of recession in the coming months.  But last week's strong economic data released in the US, combined with Friday's softer-than-expected PCE figures supported, yet again, the idea of a soft landing and further fueled the rally in stocks. As such, the S&P500 hit a fresh year high at the last trading day of the first half and gained more than 17% so far this year, while Nasdaq 100 soared more than 40%! Apple hit $194 per share, and closed last week with a valuation above $3 trillion.   Of course, this incredible performance makes many investors wonder whether the equit rally could continue in the second half.     On the data dock  The Reserve Bank of Australia (RBA) is expected to keep its rate unchanged at this week's policy meeting, after being partly responsible of the latest hawkish spree in global central bank expectations when it raised rates unexpectedly the last time. A no action from the RBA could calm down the nerves this week. But for that, we must also see loosening in US jobs data. Due Friday, the US NFP is expected to print more than 220K nonfarm job additions in June, with steady wage growth of around 0.3% over the month. The best scenario for stock investors is a strong NFP read combined with softening wages growth.   In China, Caixin manufacturing index for China came in slightly better than expected, and slightly above the 50 threshold, though sentiment weakened to an 8 month low and new orders rose at a softer pace. China could recover in the H2 amid People's Bank of China's (PBoC) efforts to boost growth, but we won't get the growth bang that we were looking for. That means that we will probably bypass a dangerous long-lasting rally in energy and commodity prices, which could help central banks contain inflationary pressures with more success.   For now, oil prices remain mostly ranged despite OPEC's malicious efforts to boost them artificially. The barrel of crude jumped past the $70 level on the back of a broad-based risk rally following the US softer than expected PCE read, which fueled some dovish central bank expectations. The Chinese data also give some support this morning, but the 50-DMA, near $71.30pb will likely act as a solid resistance. This week, risks remain tilted to the upside, as OPEC meets with the industry heads. This week's meeting is not a policy meeting so there won't be any production cuts, or any important decision from OPEC, but what we could well hear slowing demand forecasts, which would then bring traders to assess another production cut from OPEC down the road. In all cases, we have seen clearly that cutting production hasn't been enough for a sustained price rally so far. Therefore, any rally triggered by comments could be interesting top selling opportunities for short-term traders.   Tesla delivered a record number of cars worldwide in Q2, something like 466K cars, as Elon Musk is up to aggressively cutting prices to boost volume. It looks like it is paying off. The latest figures will likely keep Tesla shares on a positive path to challenge the $280 level again. But competition is not far. The Chinese BYD did better than Tesla, selling more than 700K cars last quarter, its best-ever quarter as well. BYD shares jumped 2.70% in Hong Kong.   

Dollar weakens as inflation cools Apple reaches historic $3 trillion market cap Fed rate hike bets eye a peak at 5.410%   US stocks are rallying after the Fed’s favorite inflation gauge showed the disinflation process remains intact and the consumer is showing signs of weakness. A hot inflation report and Fed swaps might have been convinced that a second-rate hike by year end was likely.  Treasury yields edged lower after the PCE report was a little dovish. US Data The core personal consumption expenditure index, a key reading followed by the Fed rose 0.3% in May, matching the consensus estimate.  On annual basis, the PCE reading dropped from 4.7% to 4.6%.  Personal spending came in softer at 0.1%, while the prior reading was revised lower from 0.8% to 0.6%.  The consumer is starting to look a lot weaker and that should support inflation to drop even further over the coming months.   Apple Apple is attempting to become the first $3 trillion company as Wall Street remains all-in on mega-cap tech stocks.  Last month, Apple’s capitalization became more valuable than the entire Russell 2000 and it seems like that could widen further.  Apple got a boost after Citi raised their price target to a Street-high price of $240.  Apple’s outlook remains solid given their balance sheet and future revenue projects, but these latest gains might be more of a defensive switch for traders who see a US economy that is recession bound.    

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

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  

Services PMIs and Fed minutes in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) In the absence of US markets yesterday, European markets underwent a modestly negative session on a fairly quiet day, and look set to open modestly lower this morning, with Asia markets drifting lower. For the past few days, markets have been trading in a broadly sideways range with little in the way of momentum, as investors weigh up the direction of the next move over the next quarter.   The last few weeks have been spent obsessing about the timing of a possible recession, particularly in the US, with the timing getting slowly pushed back into 2024, even as bond markets flash warnings signs that one is on the horizon.     As we look ahead to Friday's US payrolls report, speculation abounds as to how many more central bank rate hikes are inbound in the coming weeks, against a backdrop of economic data that by and large continues to remain reasonably resilient, manufacturing notwithstanding.     Despite the dire start of manufacturing activity as seen earlier this week, services have held up well, although we are now starting to see some pockets of weakness. A few days ago, in the flash numbers France saw a sharp fall in economic activity, sliding from 52.5 to 48 for June, although activity in the rest of the euro area remains broadly positive.     This is an area of the economy that could help boost economic activity, particularly in Italy and Spain now we're in the holiday season and has seen these two countries perform much better in recent months. The outperformance here could even help avert a 3rd quarter of economic contraction for the euro area.       Expectations for Spain and Italy are 55.7, and 53.1, modest slowdowns from the numbers in May, while France and Germany are expected to slow to 48 and 54.1.     We're also expected to see a positive reading from the UK, albeit weaker from the May numbers at 53.7. US PMI numbers are due tomorrow given the July 4th holiday yesterday.     Later today with the return of US markets, we get a look at the most recent Fed minutes, when the FOMC took the collective decision to keep rates on hold, with the likelihood we will see a resumption of rate hikes later this month.     In the lead-up to the decision there had been plenty of discussion as to the wisdom of pausing given how little extra data would be available between the June and July decisions. The crux of the argument was if you think you need to hike again, why wait until July when the only data of note between the June and July decisions is one payrolls report, and one set of inflation numbers.     All of that is now moot however and while inflation has continued to soften, the labour market data hasn't. Here it remains strong with tomorrow's June ADP report, the May JOLTs report, weekly jobless claims, as well as Friday's June payrolls numbers.     Tonight's minutes may offer up further clues as to the Fed's thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.     A few members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July now almost certain. This stance caught markets off guard given that pricing had been very much set at the prospect of one more rate hike, before a halt.     A key part of the thinking may have been the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets.     This has now been largely priced out, so in this regard the Fed has succeeded,   The key now is to make sure that the Federal Reserve, along with other central banks, while prioritising pushing inflation down, don't break something else, and start pushing the rate of unemployment sharply higher.   This is the balancing act central banks will now have to perform, and here it might be worth them exercising some patience. Given the lags being seen in the pass through of monetary policy it may be that a lengthy pause after July, keeping rates at current levels for months, is a wiser course of action than continuing to raise rates until the tightrope snaps, and the whole edifice comes tumbling down.       Today's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of this balance of risks.             EUR/USD – remains range bound with support 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 – still looking well supported 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 it has resistance at 1.2770.       EUR/GBP – rolling over again yesterday, sliding below the 0.8570/80 area, and looks set to retarget the 0.8520 area. Resistance remains at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.     USD/JPY – currently capped at the 145.00 area, with support at the 144.00 area this week.  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 5 points lower at 7,514     DAX is expected to open 28 points lower at 16,011     CAC40 is expected to open 23 points lower at 7,347

European markets were mostly flat; the Stoxx600 remained close to its 50-DMA, while the FTSE 100 remained offered near its 200-DMA, near the 7544 level. The FTSE has been one of the biggest laggards of the year, as capital flew into the tech stocks. The slow Chinese reopening and the crumbling commodity prices didn't help FTSE extend the last year's outperformance to this year.   Happily, more rate hikes from the Bank of England (BoE) and the darkening economic and political picture for the UK is not a cause for concern for the British blue-chip index. A major part of their revenue comes from outside the UK. Therefore, a rotation from tech to value could throw a floor under the FTSE100's selloff near the 7300 level  if of course we don't see a global selloff due to recession and hawkish central banks-    OPEC meets industry heads  The barrel of oil remains sold near the 50-DMA as OPEC meeting with industry heads is due today. Everything that involves OPEC is an upside risk to oil prices. Yet any OPEC-related rally will attract top sellers and won't let OPEC reach stability around $80pb level. The major medium-term risk is that the unresponsive price action could hide a worsening global glut that could hit suddenly in the H2, and send oil prices higher. Until then, bears will keep selling.    Fed releases minutes  The Federal Reserve (Fed) will release the minutes of its latest policy meeting today, and there will clearly be a couple of hawkish sentences that will hit the headlines, given that the Fed officials paused their rate hikes in their June meeting, but their dot plot showed two more interest rate hikes before a real and a longer pause.   At this point, the Fed expectations went so hawkish that there is a growing chance of correction. Fed funds futures gives near 90% chance for a another 25bp hike in July, and another 25bp after that is more likely than not. No one expects or is positioned for a rate cut from the Fed this year. Unless there is another baking stress or chaos in the housing market, nothing could stop the Fed from pursuing its battle against inflation. And interestingly, Bloomberg research found out that interest rate increases in the US are benefitting savers more than they are costing mortgage payers, because many mortgages are on fixed rates for 30-years and they have yet to expire.  

On Tuesday, the EUR/USD currency pair struggled to establish itself above the moving average line, failing to surpass the Murray level of "3/8"-1.0925, resuming its downward trend in the latter half of the day. However, to label this movement as a "decline" would be an overstatement, as the day's total volatility was merely 40 points. As such, the past week better embodies the idea of a "flat" market rather than a trending one. Currently, the currency market is experiencing a tranquil period.   The fundamental and macroeconomic landscapes are intact, but the market appears saturated by them. Time and again, macroeconomic reports are in line with market expectations. Statements by representatives of the Fed and ECB do not offer traders any new or crucial information. The euro continues to maintain a relatively high position but has been static in recent weeks. The subject of interest rates is becoming less pertinent to traders. It's worth noting that when a monetary tightening or easing cycle initiates, the market endeavors to anticipate it. If this happens concurrently in two or more countries, as is usually the case, the market also strives to consider all changes preemptively.     For instance, last year, the Fed began raising rates ahead of the ECB, resulting in an initial surge in the dollar's value (taking geopolitics into account). Subsequently, as inflation in the US began to ease, the euro began to appreciate. It has been on an upward trend for the past ten months, although it has been largely consolidating in the 1.05–1.11 range for the last 5–6 months. Consequently, we do not foresee any significant triggers for a sudden upswing in the value of the euro or the dollar.   The pair will likely continue to consolidate within the outlined range, and it might take considerable time before this process reaches completion. The market has already accounted for 90% of all forthcoming interest rate hikes by the Fed and ECB.   Currently, neither the euro nor the dollar holds a distinct advantage. Many experts have been forecasting a downturn, recession, and deceleration for the US economy, particularly for the labor market. These predictions have been circulating since last year, yet official statistics suggest no signs of a looming recession.   Over the past three quarters, the US economy has grown by at least 2%, significantly more than the growth observed in the European Union or Britain. The labor market continues to demonstrate robust performance month after month, even with the Fed's rate escalating to 5.25%. Unemployment has seen minimal growth, while Nonfarm Payrolls consistently reveal at least 200 thousand new job additions each month.     As such, the Fed can continue its monetary tightening policy as required, especially now that inflation has fallen to 4%. This factor might play against the dollar in the medium term. Since inflation is already approaching the target level, the Federal Reserve will begin to soften monetary policy in 2024. It is unknown when the ECB, dealing with higher inflation, will begin to soften. Nevertheless, inflation in the Eurozone continues to decrease steadily. It initially rose more than in the US. Hence, it needs more time to return to 2%. However, the ECB began raising the rate after the Fed. Thus, everything is in its place. The European regulator may start reducing the rate a few months later than the Fed.   The monetary policy of the Fed and the ECB currently does not imply a strong strengthening of the dollar or the euro. The average volatility of the euro/dollar currency pair for the last five trading days as of July 5 is 70 points and is characterized as "average." Thus, we expect the pair to move between levels 1.0779 and 1.0915 on Wednesday. A reversal of the Heikin Ashi indicator upwards will indicate a new round of upward movement.

The GBP/USD currency pair was traded with low volatility on Tuesday but still managed to move upwards, while the euro currency stood still and decreased more than it grew. Thus, even on a completely empty Tuesday, the pound sterling found reasons to start moving north again.   The price has re-fixed above the moving average and is still very close to its local maximums, which also coincide with the annual maximums. The British currency still cannot correct down properly, which is especially visible in the 24-hour timeframe. Occasionally, there are downward corrections on the 4-hour timeframe, but in most cases, they are purely formal.   The logic of the movements needs to be improved. Two weeks ago, when the Bank of England unexpectedly raised the rate by 0.5% for many, the pound did not grow. But yesterday, when it was a holiday in the States, it added about 40-50 points. The British economy is still weak and is holding out with the last of its strength not to slide into a recession.   US GDP exceeds forecasts by 0.7% and shows a value of +2% q/q. The Bank of England's rate continues to rise but is still lower than the Fed's. The British regulator can raise the rate several times but will likely stay within the Fed's rate. All this suggests that even if the dollar doesn't have strong reasons to grow now, it certainly has no reasons to fall. However, in most cases, we continue to observe the pair's growth. Only business activity indices in the manufacturing sectors can be highlighted for the first two days of the week. In the US and UK, the indices fell synchronously for June and have long been below the "waterline" of 50.0. Again, the pound did not have an advantage over the dollar due to macroeconomic statistics.     Thursday and Friday promise to be "stormy"! The week's most important events are concentrated in its last two days. Today, of course, the Fed's minutes will be published. In the European Union and Britain, the second estimates of business activity indices for June will become known, but all these are secondary data. It is unlikely that the Fed's minutes will surprise traders who are already confident in a rate hike in July, as well as after Jerome Powell's five speeches over the past weeks, in which he laid everything out. Therefore, the main movements are planned for Thursday and Friday, when the ISM, ADP, unemployment benefit claims, the number of job openings, NonFarm Payrolls, and the unemployment rate will be released in the US.   As we can see, almost all reports are related to the labor market, which the Fed continues to monitor closely, and which has a priority for the regulator and the market. However, even if the reports are disastrous (which is currently hard to believe), the Fed will not change its plans to raise the rate.   And for the GBP/USD pair, it doesn't matter at all. The pound grows for a reason and without. If statistics from overseas turn out to be weak, it will merely get a new reason to grow against the dollar. If the statistics from the US turn out to be strong, we will see a new pullback down, a maximum of 100 points, and the Fed's position on the rate will not change. Thus, the market's local reaction could be significant.   In the medium term, these reports will not affect the situation in the market. The average volatility of the GBP/USD pair over the last 5 trading days is 94 points. For the pound/dollar pair, this value is "medium." Therefore, on Wednesday, July 5, we expect movement within the range limited by levels 1.2612 and 1.2800. The Heiken Ashi indicator's reversal down signals a possible new downward movement wave.    

US crude jumps above 50-DMA  Minutes from the Federal Reserve's (Fed) latest policy meeting were more hawkish than expected. The minutes revealed that some officials preferred another 25bp hike right away instead of a pause. Almost all of them said that additional hiking would likely be appropriate, and the forecasts showed that they also expect mild recession.     The minutes came to confirm how serious the Fed is in further tightening monetary conditions, and boosted the Fed hike expectations. The US 2-year yield came very close to 5%, the stocks fell, but very slightly. The S&P500 closed the session just 0.20% lower, while Nasdaq 100 gave back only 0.03%. The US dollar gained however, the EURUSD slipped below its 50-DMA, as the Eurozone services PMI fell short of expectations. The June number still hinted at expansion, but the composite PMI slipped into the contraction zone for the first time since January, hinting that activity in Eurozone is slowing because of tightening monetary conditions in the Eurozone as well. On the inflation front, the producer prices fell 1.5% y-o-y in May, the first ever deflation since February 2021. The expectation for the 12-month inflation in EZ fell to 3.9% in May. It's still twice the ECB's 2% policy target, but it's coming down slowly. And the trajectory is certainly more important than the number itself.     Moving forward, further opinion divergence will likely appear along with softening data, but the ECB will continue hiking the rates because officials will be too afraid to stop hiking too early. And as the economic picture worsens, the credit conditions become tighter, the cheap loans dry up and the post-pandemic positivity on peripheral countries fade, we will likely see the yield spread between the core and periphery widen. And the latter could have a negative impact on the single currency's positive trajectory against the US dollar.     Due today, the ADP report is expected to reveal that the US economy added around 228K new private jobs in June, while the JOLTS is expected to have slipped below 10 mio job openings in May.      By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

What happens if central banks hike interest rates too much, and how a renewed crisis in the banking system could weigh on the global economy.   Aggressive interest rate hikes trigger a ‘hard landing’ Our base case: The most aggressive rate hike cycle in decades will no doubt take its toll. We’re more concerned about the US, where a tightening in lending standards post-banking crisis is likely to trigger more noticeable weakness in hiring and investment. Europe is currently enjoying the benefit of lower energy prices, which partly offsets the impact of higher rates in the short term. But the longer-term outlook for Europe remains one of subdued growth at best. In the US, we’re not expecting a deep downturn, and developed economies are insulated by the greater prevalence of fixed-rate mortgages relative to past crises. That makes for a longer/more drawn-out transmission to the economy. Stagnation is likely, and the impact of higher rates is less concentrated in any single quarter. Risk scenario and how it plays out: There are three ways things could be worse than we expect. Firstly, central banks hike more aggressively than currently expected – and with rates already well into restrictive territory, that would make deeper recessions in 2024 more inevitable. Rates at 6% or above in the UK and US, or 5% in the eurozone, would be challenging. Secondly, businesses begin to feel the pinch more acutely. Corporates have enjoyed pricing power over the past couple of years as economies emerge from Covid. But that’s fading as consumer demand – especially for goods – abates, and the impact of interest rates on unemployment could accelerate as debt servicing becomes a greater challenge. Finally, a high interest rate environment raises the risk of something breaking in the financial system. March’s banking crisis was a taster of that, and despite central banker assurances to the contrary, persistently higher interest rates clearly risk having knock-on effects for financial stability. The feedback loop could tighten lending standards yet further, adding to the pressure on smaller businesses as well as real estate and the construction sector. Wider economic impact: We’d expect to see many major economies enter recession through the early part of 2024, or perhaps earlier. Where economic weakness has so far been concentrated in manufacturing, we’d expect the service sector to enter a downturn too. That would see a corresponding easing in service-sector price pressure, via lower wage growth. Central banks would turn to rate cuts much earlier than we’re currently forecasting.  

US banking troubles flare up again Our base case: The European banking system has coped well with the bank worries at the beginning of the year. The positive impact from higher interest rates continues to support European banks, with the negative side effects still contained. The solid liquidity positions of banks have been confirmed by the very limited additional drawings from the ECB’s regular funding operations, despite the substantial TLTRO-III maturities that took place at the end of June. The European bank debt markets have also shown some promising signs with some action on the AT1 debt markets in mid-June, despite the full write-down of Credit Suisse's AT1 capital earlier this year. Concerns over the US banking system have eased in the course of the second quarter. The issues have not spread to larger US banks, we have not seen further severe liquidity stresses and deposit flows have broadly stabilised. The Fed published its bank stress test results in late June, which confirmed that the larger US banks could weather substantial weakness with their existing capital buffers. The Fed modelled a severe recession including US$541bn in forecast losses to result in a 230bp decline in the average CET1 ratio of the 23 banks. Large banks retained relatively solid modelled CET1 ratios. Banks with the lowest (and highest) stressed CET1 capital ratios were smaller or mid-sized banks. This group could be somewhat less well-positioned to weather weakness with their existing CET1 buffers.   Risk scenario and how it plays out:  The US bank problems were driven by a quick loss of confidence on the part of uninsured depositors towards regional banks. If the loss of confidence were to spread quickly to impact more institutions, it could result in several banks struggling to absorb deposit outflows simultaneously. This could create worries over contagion in the system and exaggerate further deposit instability. Finding buyers for assets to safeguard depositors and operational continuity for several, although smaller, banks at the same time could pose challenges. In the very worst-case scenario, several smaller lenders end up being absorbed by larger ones. The failing banks may, however, come with unforeseen additional risks, which may eventually result in the credit profiles of the larger acquirers weakening more than expected. If the issues are severe enough, they may pose risks to the stability of the larger acquiring banks. If investors start second-guessing the stability of the financial system, this may have severe consequences on financial markets.   Wider economic impact:  Fresh banking stresses would fuel a further tightening in lending standards than we’ve already seen in the US. History shows this is almost always followed by a sharp rise in the unemployment rate and would deepen the recession we already expect. While it’s uncertain whether contagion would spread directly to Europe, the prospect of a US downturn would inevitably have wider economic repercussions overseas. Central banks have so far been able to separate out financial stability and monetary policy tools, but such stresses, should they happen, are ultimately borne out of higher interest rates. This scenario would likely herald earlier and more aggressive rate cuts in both the US and Europe.  

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

The latest data show that eurozone growth is not picking up, with services now also losing steam. While it’s not all downhill from here, subdued growth is the best we can hope for. Inflation is now clearly coming down, but the European Central Bank is still set for two more rate hikes.   (Overly?) optimistic ECB growth outlook After negative growth over the winter quarters, the ECB’s staff forecasts pencil in a gradual acceleration of eurozone GDP growth to 0.3%, both in the second and third quarters of this year, and 0.4% from the fourth quarter onward. However, eyeballing the most recent data, it doesn’t look as if the eurozone economy is accelerating – on the contrary. The first real indicators for the second quarter, such as retail sales and industrial production, actually came out below the average of the first quarter. And sentiment indicators for May and June rather point to further deterioration. The €-coin indicator, a monthly tracker of GDP growth, averaged -0.3% for April and May. In that regard, we fear that second-quarter growth will be close to 0%, with a non-negligible probability of negative growth.   Manufacturing in recession and services is slowing    

Services are now also slowing We certainly don’t deny that the pick-up in wage growth, in combination with lower energy prices, is boosting consumers’ purchasing power, supporting consumption growth over the coming quarters. But at the same time, some increase in the savings ratio looks likely as the economic outlook has become more uncertain (in some member states unemployment has started to increase). All sectors are now signalling a deceleration in incoming orders, while inventories in industry and retail are at a very high level. Even services, which held up well despite the recessionary environment in manufacturing, are losing steam. The services confidence indicator fell in June below its long-term average. That doesn’t necessarily mean that the only way is down – we still expect a strong summer holiday season, supporting third-quarter growth. But after that things might become shakier again, as the US economy is expected to have fallen into recession by then. The bottom line is that we now only expect 0.4% growth in 2023. Subsequently, on the back of the low carry-over effect, we pencil in a 0.5% GDP expansion for 2024.   Downward trend in inflation continues The flash headline inflation estimate for June came out at 5.5%, while core inflation increased slightly to 5.4%. However, the increase in core inflation is entirely due to a base effect in Germany that will disappear in September. The growth pace of core prices, measured as the three-month-on-three-month annualised change in prices, now stands at 4.4%. That is still too high, but the trend is clearly downwards. The inventory overhang is leading to falling prices for goods. In the European Commission’s survey, selling price expectations softened again in all sectors, while the expected price trends in the consumers’ survey fell to the lowest level since 2016. It, therefore, doesn’t come as a surprise that we expect the downward trend in inflation to continue, with both headline and core inflation likely to be below 3% by the first quarter of 2024.   Selling) price expectations are coming down across the board

For the global economy, the first half of the year was packed with action. The remainder of the year will see a further weakening of the global economy, a rapid fall in headline inflation, and a dearth of central bank rate cuts   Our three calls for the remainder of 2023 It’s halftime for 2023 but not halftime like at the Super Bowl with Snoop Dogg, Shakira or Rihanna. It’s halftime of the economic year, and economists are taking a deep breath with no singing or dancing (even if some of us might have hidden talents). It is simply the moment to assess the first half of the year and to sharpen our minds (and calls) for the second half.   For the global economy, the first half of the year was packed with enough action for an entire year. An energy crisis in Europe that was avoided thanks to a mild winter and fiscal stimulus. A reopening of China that is more sluggish and wobblier than hoped for. A banking crisis in the US and Switzerland which hasn’t ended in a global financial crisis as feared. Unprecedented central bank tightening and gradually retreating inflation, with the latter not necessarily the result of the former   Against this backdrop, the age-old question of whether the glass is half-empty or halffull comes to mind. Should we cherish the current resilience of many economies and the financial system as things could have become much worse? Or should we moan about the missed opportunities, lacklustre growth and a still very long list of potential risks? As is so often the case, the truth is probably somewhere in the middle.   Looking ahead, the risk for every forecaster is the temptation to spread optimism and predict an upturn of almost everything towards the end of the year (or the end of the forecast horizon as many traditional macro models do). We are more cautious. The fact that things didn’t get as bad as feared does not automatically lead to a return of optimism or a surge of economic activity.   In fact, the structural themes of the last few years are still pressing and impacting the economic outlook. Think for example of geopolitical tensions, the war in Ukraine, demographics, climate change more generally and more specifically the energy transition, and high government debt. It is impossible to tell how and when exactly these factors will affect growth or an inflation forecast profile but we definitely know that these effects are here and they are here to stay   Let’s be a bit more precise and come back to economic developments in the second half of this year. Bold or not, we have three major calls for the remainder of the year: • Further weakening and not strengthening of the global economy. • Headline inflation will retreat faster than central banks currently think. • Rate cuts are a 2024 but not a 2023 story.     Let's look at these three calls in more detail. The global economy will further slow down and "slowcessions" are likely in several parts of the developed world. The Chinese reopening will continue to stutter, the US economy is likely to experience a winter recession and the eurozone will remain in this twilight zone between stagnation and recession.   Besides negative base effects from energy and food prices, the cooling of many economies will lower wage pressure, reduce inflation pipeline pressures and will increasingly lead to price discounts. Headline but also core inflation are likely to come down faster than central banks anticipate towards the end of the year.   The phenomenon of "slowcessions" is a new challenge for central banks. Reacting to a more pronounced cycle is much easier as it takes much longer to identify a "slowcession". Until central bankers have realised that we are in a "slowcession" for good, they will continue hiking rates, not cutting them. If we are right, central bankers will adjust to the new reality in the last months of the year, acknowledging weaker growth, broader disinflation and no further need for rate hikes.   It might not be as eye-catching as Janet Jackson and Justin Timberlake, but it is definitely an exciting view of the global economy. Have a good summer.

German industrial production drops in May German industry is still stagnating and needs an activity surge in June to avoid an extension of the recession. German industry remains stagnant. In May, industrial production dropped by 0.2% month-on-month, from +0.3% MoM in April. For the year, industrial production was up by 0.7%. Industrial production is still 5% below its pre-pandemic level, more than three years since the start of Covid-19. Production in energy-intensive sectors dropped by 1.4% MoM in April and was down by more than 12% over the year.\   Recession risk remains The optimism at the start of the year seems to have given way to more of a sense of reality. Production expectations have continued to weaken, order books have thinned out significantly despite the May rebound and the inventory build-up is not over, yet. This is a toxic combination, which suggests more industrial disappointments in the months ahead. And if that wasn’t enough, well-known structural factors including the ongoing war in Ukraine, demographic changes and the current energy transition will continue to weigh on the German economy in the coming years. The country’s international competitiveness has deteriorated in recent years and is likely to continue to do so. In a recent study, the German Economic Institute concluded that, even prior to the start of the pandemic, Germany saw net outflows of Foreign Direct Investments. This trend accelerated in 2021 and 2022. All in all, the monthly data for the first two months of the second quarter have not taken away the risk of a further contraction of the German economy. This would make it the first time since 2008 that the economy shrinks for more than two consecutive quarters.

As Germany holds the position of the largest economy in the European Union and is renowned as one of the world's leading manufacturing powerhouses, recent data concerning its manufacturing sector has raised concerns among investors. With Germany already experiencing a technical recession since the first quarter of 2023, there are growing uncertainties about the depth and duration of the downturn. To shed light on these matters, we engage in a conversation with Santa Zvaigzne-Sproge, CFA, to assess the latest data from German industry and its potential implications. The manufacturing Purchasing Managers' Index (PMI) indicators for both Germany and the entire Euro area are currently situated in the contraction territory, indicating the challenges faced by the manufacturing sector. High inflation and elevated credit costs have led to a decline in private consumption, further impacting manufacturing numbers. Until these factors normalize, a return to expanding private consumption may be hindered.   FXMAG.COM:  How do you assess the latest data from German industry? Do they hint that the recession in Germany will be deep and prolonged?    Santa Zvaigzne-Sproge, CFA:  As Germany is the largest economy in the European Union and is considered among the strongest manufacturing powerhouses in the world, the latest manufacturing data may cause some worry among investors.  Germany has been in a technical recession since the first quarter of 2023 and is expected to continue the contraction at least till the end of 2023. However, for the technical recession to be over in Germany by the end of 2023, we should start seeing some improvement in economic indicators such as the PMI soon. Meanwhile, both – Germany’s and the whole Euro area’s – manufacturing PMI indicators are deep in the contraction territory.    Private consumption in Germany has fallen mainly due to high inflation and more expensive credit, which has led to lower manufacturing numbers. Therefore, until neither of the factors has normalized, private consumption may not return to a more expanding territory.    Until now, the German economy’s contraction has been relatively mild with -0.3% GDP growth in the first quarter. However, comparing it to the initially expected +0.3% and the preliminary estimate of -0.1%, we may see that the actual data tend to turn out worse than expected. The GDP growth estimate for a full 2023 year in Germany now stands at -0.4%, however, it might be revisited as the second quarter GDP growth estimates start coming in.    On the bright side, German companies hired people at a faster pace in June than one month ago (which cannot be said about France, Italy, or Spain). Healthy employment is an important factor to support private consumption and at the same time an indicator that recession in Germany is kept at a relatively mild level.    To sum up, current German PMI data do not signal that a turnaround in the second quarter GDP growth data is likely. This may lead to slightly lowered expectations for full-year GDP growth in Germany. However, the length of a recession in Germany may be hard to assess based on the PMI data. It may be more dependent on future monetary and fiscal decisions by policymakers in the rest of the year’s time.   

As the Eurozone grapples with the latest economic data, investors and market participants are keen to understand the forecast for the Euro (EUR). We engage in a conversation with Santa Zvaigzne-Sproge, CFA, to gain insights into the potential implications of recent developments on the Euro's performance. The manufacturing and services Purchasing Managers' Index (PMI) in the Euro area has shown signs of decline, introducing downward pressure on the common currency. This suggests a potential deterioration in economic health and raises concerns about the onset of a recession. These factors may impact the valuation of the Euro against other major currencies.     FXMAG.COM: In light of the latest data from the Eurozone, what forecast can you make for the EUR?   Santa Zvaigzne-Sproge, CFA: Lowering manufacturing and services PMI in the Euro area might contribute to downward pressure on the common currency as they indicate a potential deterioration of economic health and a potential recession.   However, the Euro value may be more dependent on the ECB's decisions on further interest rate hikes and the value of the US Dollar. During recent uncertainties in the financial markets, the US Dollar has been slightly regaining strength due to its “safe haven” asset features.   Furthermore, the FED is expected to raise key interest rates in their July meeting potentially giving additional strength to the US Dollar. Meanwhile, continued deterioration of macroeconomic data in the Euro area may push the ECB to halt raising interest rates resulting in a weakening Euro.   

The recent decision of the National Bank of Poland (NBP) and the Monetary Policy Council (MPC) regarding interest rates has drawn attention to the economic landscape in Poland and its implications for the Polish zloty (PLN). In light of this development, market participants eagerly seek insights into the rationale behind the decision and the future forecast for the PLN. Paweł Majtkowski, eToro Market Analyst, highlights that the NBP and MPC have maintained the level of interest rates, aligning with analysts' expectations. The last interest rate hike in Poland occurred in October 2022, suggesting that there may be no further rate hikes in the near future.   FXMAG.COM Please comment on the NBP / MPC decision on interest rates in Poland and the forecast for the PLN.   Paweł Majtkowski, eToro Market Analyst said: The RPP once again did not change the level of interest rates. This was in line with analysts' predictions. The last interest rate hike in Poland took place in October 2022. It can therefore be concluded, although the Council did not officially state this, that there will be no further rate hikes in Poland. Although inflation has been falling sharply recently, it remains high all the time, reaching 11.5 percent in June. Despite the declines, Poland currently has the highest inflation in the European Union. In countries where inflation was previously higher, such as Latvia, it has fallen even more dramatically. And it seems that this state of affairs may continue in the coming months. Poland currently has the highest inflation in the EU, and at the same time the lowest unemployment, which seems an ideal mix for an interest rate hike. However, in the current situation, the first interest rate cut, which may occur in the fourth quarter of this year, seems more likely. However, this will be more of a political decision, due to the upcoming elections, than an economic one. The continued fight against inflation could be jeopardized by the increased level of budget spending associated with the upcoming elections. The race to the Sejm is very close, and this will create a temptation to settle the race by making ever more far-reaching social promises. With inflation falling, investor concerns about it are diminishing. In eToro's Retail Investors Beat survey covering the last quarter, the percentage of investors considering inflation as the biggest external risk fell from 27 percent to just 7 percent. At the same time, the number of investors worried about the state of the Polish economy rose strongly, from 8 percent to 36 percent. This is a result of concerns about a possible recession and the possible financial impact of the election campaign, also evident in the survey. Inflation is falling not only in Poland, but also in the US and the Eurozone. In the US, inflation fell from 6.6 percent in January to 4 percent in May. In the Eurozone, it went from 8.6 percent in January to 5.5 percent in June.  In both the U.S. and the Eurozone, we expect one more rate hike of 0.25 percentage points in late July. If the first rate cuts in the U.S. occur in the fall, the RPP will probably be more bold in making its own reductions.  

The ADP report on employment in the private sector, published a day before the non-farm payroll data release, was so shocking that it instantly raised expectations for the labor market as a whole, leading to rapid repositioning on Friday before the data release. However, the non-farm payroll figures were significantly weaker than expected, with 209,000 new jobs created (225,000 expected), and data for the previous two months were revised downwards by 110,000. Employment growth is slowing, but the pace remains high. As for wage growth, the figures were an unpleasant surprise for the Federal Reserve. In June, wages increased again by 0.4% instead of the expected 0.3%, and annual growth rates remained at 4.4%, which is higher than the 4.2% forecast. Steady wage growth does not allow inflation expectations to fall, the growth of real rates does not allow the Federal Reserve to start lowering the rate this year.       The U.S. inflation index, which will be published on Wednesday, is the main event of the week and the last important data before the Fed meeting at the end of July. The markets expect an 89% probability of a quarter-point rate hike. Furthermore, the probability of another increase in November has already exceeded 30%, and the first cut is now expected only in May of next year. The U.S. dollar fell after the data release and ended the week weaker than all G10 currencies. The growth of real rates in the current conditions makes a recession in the U.S. almost inevitable.   EUR/USD The Sentix Economic Index for the eurozone has fallen for the third time in a row to -22.5 points, a low since November 2022, and expectations also remain depressed. The eurozone economy has fallen into a recession as of early July. The situation in Germany is even more depressing – the index has fallen to -28.5 points, and the possibility of improvement is ephemeral.     The ZEW index will be published on Tuesday, and the forecast for it is also negative, with a decrease from -10 points to -10.2 points expected in July. On Thursday, the European Commission will present its forecasts. Bloomberg expects that industrial production in the eurozone fell in May from 0.2% y/y to -1.1% y/y, a sharp decline that characterizes the entire eurozone economy as negative and tending to further contraction.   Under the current conditions, the European Central Bank intends to continue raising rates, and even plans to shorten the reinvestment period of the PEPP program. If this step is implemented, a debt crisis, which will put strong bearish pressure on the euro, is inevitable in the face of capital outflows to the U.S. and an expanding recession.   The net long position on the euro has hardly changed over the reporting week and amounts to just over 20 billion dollars, positioning is bullish, there is no trend. However, the calculated price is still below the long-term average and is trending downward.     The euro attempted to strengthen on Friday in light of the news, but it was unable to rise beyond the borders of the technical figure "flag", let alone higher than the local high of 1.1012. We assume that the corrective growth has ended, and from the current levels, the euro will go down, the target is the lower boundary of the "flag" at 1.0730/50. GBP/USD Updated data on the UK labor market will be published on Tuesday. It is expected that the growth of average earnings including bonuses increased in May from 6.5% to 6.8%, and if the data comes out as expected, inflation expectations will inevitably rise. As will the Bank of England's peak rate forecasts. The NIESR Institute expects that further rate increases could trigger a recession.   The cost of credit is rising, and an increase in the volume of bad debts is inevitable in an economic downturn. Inflation did not decrease in May, contrary to expectations, and remained at 8.7%, even though energy prices significantly decreased. Food inflation on an annual basis reached 18.3%, and core inflation at 7.1% is at its highest since 1992. The labor force is decreasing, and if this trend is confirmed on Tuesday, it will almost inevitably result in increased competition for staff, which will mean, among other things, the continuation of wage growth. The Bank of England has already raised the rate to 5%, with forecasts implying two more increases. What does the current situation mean for the pound?   If the economy can keep from sliding into a recession, then in conditions of rising nominal rates, the yield spread will encourage players to buy assets, leading to increased demand for the pound and its strengthening. However, if signs of recession intensify, which could be clear as soon as Thursday when GDP, industrial production, and trade balance data for May will be published, the pound will react with a decrease, despite high rate expectations. After impressive growth two weeks ago, pound futures have stalled at achieved levels, a weekly decrease of just over 100 million has no significant impact on positioning, which remains bullish.  

FX volatility might be returning given Wall Street is seeing some exhaustion with several key currency trades.  The end of tightening for the advance economies keeps getting delayed and sooner than later it will deliver a major blow to growth.  FX volatility should pick up as diverging policies from the Fed, BOE, and PBOC could trigger some significant moves in H2.   USD/JPY A lot of macro traders were expecting dollar strength to intensify against the Japanese yen as interest rate differentials appear likely to widen further over the next few months.  The carry trade isn’t making a comeback given the rising prospects of a recession coming to the US.  Everyone also remains on intervention watch from Japan’s Ministry of Finance, but expectations are for action if dollar-yen tests the 150 region.  The consensus on Wall Street is that Japan will probably act, but it might not happen until after the summer.  A tweak to yield curve control could trigger yen strength but that won’t happen until the BOJ’s price goal is achieved.  BOJ Governor Ueda has been clear that no tweaks will occur until the prospects heighten for inflation to sustainably reach its 2% target. USD/JPY weakness towards 140 has triggered some buyers and that might gain momentum if risk appetite can remain throughout tomorrow’s US inflation report (Wednesday 830am est).  Further upside could eye a return to the 145 zone if risk aversion does not run wild post both Wednesday’s CPI reading and Friday’s bank earnings.        

The metaverse, a virtual realm that blends the digital and physical worlds, has been a topic of growing interest in recent years. However, data from DappRadar reveals a notable shift in investment patterns. In the first half of 2023, investments in the metaverse accounted for just 10% of the figures recorded during the corresponding period of the previous year. This begs the question: What lies ahead for metaverse technology? Andrey Goilov, an analyst at RoboForex, sheds light on the current market dynamics surrounding metaverse investments. He highlights that the surge in interest in metaverses occurred during a relatively calm period in the economy. However, with the global economy facing the threat of a recession, investors are understandably focused on mitigating risks and ensuring the stability of their portfolios. The uncertainty surrounding the recession has made it challenging for investors to divert their attention and capital towards intangible assets such as metaverses.   FXMAG.COM: Data from DappRadar shows that in the first half of 2023, investments in the metaverse barely accounted for 10% of those in the corresponding half of the previous year. What's next for metaverse technology?   Andrey Goilov, analyst at RoboForex: A surge in interest in the development of metaverses happened during a relatively calm period in the economy. This year, investors are fully focused on the recession and its probabilities. It is difficult to invest in something that you cannot touch when your normal world is on the verge of serious trouble.At the same time, an inflow of money to metaverses remains, though not as lavish as previously. Market participants think that as soon as the situation stabilises, the demand will return.The future of metaverses fully depends on how the US and European economies will beat the threat of a recession. If the economic slump lasts for six to twelve more months, the interest of market players might increase.   Visit RoboForex

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)  

  In analyzing the state of the British economy, this week's macroeconomic readings have provided a mixed outlook. With indicators such as wages, GDP, and industrial production under scrutiny, market observers are eager to gain insights into the potential depth of the recession and the Bank of England's (BoE) approach to interest rates.   Examining the released figures, renowned economist Walid Koudmani highlights the various nuances in the current economic landscape. Wages in the UK continue to rise, with average earnings for a 3-month period surpassing expectations at a 6.9% year-on-year (YoY) growth rate, slightly higher than the previous level of 6.7% YoY. However, the number of unemployment benefit claims has seen a significant increase of 25.7k, reversing the prior decline of 22.5k. Additionally, the quarterly change in employment of 102 thousand falls short of the previous level of 250k, although it exceeds expectations set at 85k.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?   Walid Koudmani The macroeconomic readings released this week paint a mixed picture of the British economy. Wages in the UK continue to rise with average earnings for a 3-month period increasing by 6.9% year-on-year (YoY), slightly higher than the expected 6.8% YoY and the previous level of 6.7% YoY.  However, the number of unemployment benefit claims increased by 25.7k, reversing the previous decline of 22.5k. The quarterly change in employment amounted to 102 thousand, surpassing the expected 85k but lower than the previous level of 250k. The rise in wage growth is a concern as it could indicate persistent inflationary pressures to come which could lead to a decline in consumer spending, leading to a negative impact on economic growth.  Overall, the macroeconomic readings released this week do not provide a clear picture of the state of the British economy. However, they do suggest that the economy could be facing some headwinds, such as rising inflation and slowing growth. It is too early to say whether the UK will experience a deep recession, but the BoE is likely to continue raising rates in an effort to combat inflation and expectations for those rates continue to increase. While the Pound has benefited from this news, there could be a noticeable pressure on stocks as the cost of money continues to rise and investors are left with less resources to allocate. In addition to this, there are several other factors which may influence the British economy including the outcome of the war in Ukraine, the pace of global economic growth, and the direction of commodity prices. 

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.

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

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)

Eurozone industrial production confirms no strong GDP bounce back for 2Q With more data coming in, it really seems to be a coin flip as to whether the eurozone technical recession continued into the second quarter. The May production data is consistent with industry stagnating at a relatively low level of activity.   Industrial production increased by 0.2% in May, which is the second small increase in a row after plummeting in March. Overall, this leaves the level of activity well below the average for where it was in 2022, in line with a weakening global growth environment in which demand for goods has moderated. In recent months, industrial production has stagnated. There are large differences by sector, which is due to the shocks that individual sectors have been influenced by in recent years. At the moment, the sectors most hurt by supply-chain problems are still contributing positively to annual industrial production growth. The sectors that profited a lot from the pandemic – think of pharma for example – are showing more volatile production performance at the moment and energy production and energy-intensive sectors are contributing negatively. For the months ahead, weakness continues to be in the cards as surveys point to a drying up of backlogged orders and new orders are weakening. Global demand is going through a weak patch and that is reflected by a subdued outlook for the manufacturing sector. For GDP growth in the second quarter, the impact is clear. Production will have needed a strong rebound in June to have an average production level similar to the first quarter. That seems unrealistic given the negative PMI and industrial sentiment data for the month. Another quarterly decline for industrial output is therefore in the making, which is also likely for retail sales. The goods part of the economy is therefore likely to have remained in recession and services – on which we have much less intermediate data – will have needed to perform well to eke out a positive growth figure. It’s likely that the eurozone economy has therefore continued to straddle the zero growth line in the second quarter, extending the current phase of stagnation in economic activity.

Recent macroeconomic readings, including data on wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators offer crucial information about the depth of the potential recession and the future course of action for the Bank of England (BoE). To shed light on these important developments, we reached out to Nick Cawley, Senior Strategist at DailyFX, for his expert analysis.   The persistent challenge faced by the BoE is the backdrop of persistently high inflation, which currently stands at 8.7%, well above the central bank's target of 2%. Simultaneously, the UK's economic growth remains lackluster, prompting the BoE to carefully assess the delicate balance between raising the borrowing rate to control inflation and avoiding a recession.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?    Nick Cawley, Senior Strategist at DailyFX said: This week's economic data continue to highlight the problems that the Bank of England (BoE) face. Against a backdrop of relentlessly high inflation -  8.7% against the central bank's 2% target – and tepid UK growth, the BoE will need to gauge how much further they can lift the borrowing rate without sparking a recession.   The UK labor market remains robust, although cooling, with wage growth near record levels last seen during the pandemic period. This week's data show the UK unemployment rate rising to 4% in April, from a prior month's 3.8%, a small positive for the BoE in its fight against inflation, but soaring wage growth will likely keep pressure on consumer prices.    The latest Office for National Statistics (ONS) data show UK GDP flatlining in the three months to May, and indeed UK growth has been fairly stagnant since the start of 2022, not helped in part by rising borrowing. While the UK has avoided a technical recession so far, the likelihood that UK GDP may turn negative in the coming months is growing.   Recent inflation and jobs data all but guarantee that the UK central bank will hike the Bank Rate by a further 50 basis points to 5.50% at the next monetary policy meeting on August 3rd. The question then is what happens at the next meeting in the economic calendar on September 21. Will inflation fall sharply, as suggested on many occasions by BoE governor Andrew Bailey, or will data show the accumulative effects of prior rate hikes is taking effect? Add into the mixture UK mortgage costs are hitting multi-year highs and the BoE have a testing few months ahead. 

Recent macroeconomic readings, including wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators have prompted discussions about the depth of the potential recession and the future actions of the Bank of England (BoE). To gain a better understanding of these developments, we turn to Antreas Themistokleous, an expert in the field. The release of major economic data from the UK this week shed light on the condition of the British economy. The unemployment rate for May saw a 0.2% increase, reaching 4%, and the number of unemployment claims surpassed expectations, indicating a higher demand for unemployment benefits. On the other hand, average earnings experienced a 0.2% growth, while year-over-year GDP showed a decline of -0.4%. Although the GDP figure was not as dire as anticipated, it still reflects a subpar performance compared to the same period last year. Industrial production also fell by 2.3%, aligning with market forecasts.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?   Antreas Themistokleous:  This week we saw major economic data from the UK being released that could help in determining the state of the British economy. Unemployment rate for the month of May increased by 0.2% pushing the figure to 4% while the Claimants came out to be worse than expected, missing expectations of negative 22,000 claims to a positive 25,700. This means more people claimed for unemployment benefits in May and that was reflected in the official unemployment rate.  On the other hand average earnings have increased by 0.2% while the year over year GDP growth came out at -0.4%. Even though the GDP was expected to be worse , at -0.7% , it still shows that the British economy did not perform very well compared to the same month last year. Industrial production recorded a negative 2.3% perfectly aligned with market expectations.    Inflation rate for the month of June is expected to be published on the 19th where the market expects a further decline of around 0.4%. If this is confirmed it would be the yearly low and could potentially boost the quid against its pairs, especially USD and the Euro at least in the short term.    Even though inflation might be coming down, it does so at a very slow pace so the Bank of England could still have a hawkish stance at their next meeting on the 3rd of August. In June, the Bank of England increased interest rates for the 13th time in a row, by 50 basis points to 5% while some analysts argue that they could peak around 5.75% by the end of this year.    By paying attention to the labor market and the economic growth we will be able to gauge the consequences of the rate hikes by the central bank and how it could affect the overall economy. Recession fears are still hovering above the heads of the British since they are not “out of the woods” just yet but the stance of the central bank in regards to their monetary policy will be closely monitored by market participants.       

Not only is the demand for the US currency decreasing, it's practically falling every day. The EUR/USD pair increased by 220 points this week, the GBP/USD pair by 270, if calculated from the week's opening point. At first glance, it may seem that the dollar losses are not frightening, but it continues to fall even when there are no reasons for it to do so. We are all used to the idea that market movements rely on economic data, daily events that help determine direction within each day. Sometimes there are strong background events, thanks to which one or another currency can grow every day, but this growth is not expressed in three-digit numbers.     Having analyzed the situation again, I came to the conclusion that the dollar's problem may lie in rapidly falling inflation. If inflation has already dropped to 3%, then the Federal Reserve has no need to continue policy-tightening in 2023. Perhaps there will be another "control shot" at consumer prices, and the rate will rise to 5.5%. But that's it.   The second point - if inflation is approaching the Fed's target, then monetary easing may begin as early as 2023. In the case of the European Central Bank and the Bank of England, if the rate does finish rising in the coming months, it is not possible to talk about policy easing in the context of the near-term perspective. In my opinion, this is a rather dubious explanation for the falling demand for the US currency, but there is no other! The ECB and the BoE will sooner or later also cease tightening and move to easing, and this time may come even sooner than it seems now.   After all, in the UK and the EU the question of recession remains open. US GDP grows by 2-3% each quarter, whereas in Europe and the UK, growth has been absent for several quarters. And the higher the rate goes, the more "negative" economic growth will be. And I believe this factor should also be taken into account. Based on all of the above, the euro and pound can extend its upward movement for some time. This can be explained as the "final impulse" of the market, which understands that it has placed both instruments in overbought territory. However, it's impossible to predict when most market participants will decide to take profits and close long positions. I believe that now it is necessary to carefully monitor the situation and try to respond to it as quickly as possible.   There aren't really any other options. Both wave markings allow for a build-up of a descending set of waves, but we know that any wave structure can be complicated. And the current news background provides no help or benefit. There were plenty of weak economic reports from the EU and Britain this week.   Based on the analysis conducted, I conclude that the uptrend build-up is still in progress, but it can end at any moment. I believe that targets around 1.0500-1.0600 are quite realistic, and I advise selling the instrument with these targets. However, now we need to wait for the completion of the a-b-c structure, and afterwards we can expect the pair to fall into this area. Buying is quite risky. The euro uses any opportunity to rise, but the news background for the dollar is not as weak as it may seem. The wave pattern of the GBP/USD pair suggests the formation of an upward set of waves. Earlier, I advised buying the instrument in case of a failed attempt to break through the 1.2615 mark, which is equivalent to 127.2% Fibonacci, and then open long positions while aiming for targets around the 1.3084 mark, which corresponds to 200.0% Fibonacci. Now all targets have been achieved, but a successful attempt to break through 1.3084 can lead to a new momentum with targets located around 1.3478 (261.8% Fibonacci).  

The Federal Reserve has clearly won the fight against inflation. Victory is not inevitable, and its timing is not determined, but no one is talking about stagflation or hyperinflation at the moment. The markets responded favorably to the June consumer price index, fueling the dollar sell-off.   EUR/USD surged to 15-month highs, and this is far from the limit. Economists at Deutsche Bank expect EUR/USD to rise to 1.15 by Q4 2023, while Eurizon SLJ Capital suggests the 1.2 level. When the divergence in monetary policy between the European Central Bank and the Federal Reserve is accompanied by heightened global risk appetite and the decline of American exceptionalism, the US dollar is forced to raise the white flag. Currently, the gap between consumer and producer prices is at a record high. When such situations have occurred in the past, stock markets have risen. This has happened either in the very late stages of a recession or in the early stages of an upturn.        The Federal Reserve has clearly won the fight against inflation. Victory is not inevitable, and its timing is not determined, but no one is talking about stagflation or hyperinflation at the moment. The markets responded favorably to the June consumer price index, fueling the dollar sell-off. EUR/USD surged to 15-month highs, and this is far from the limit.   Economists at Deutsche Bank expect EUR/USD to rise to 1.15 by Q4 2023, while Eurizon SLJ Capital suggests the 1.2 level. When the divergence in monetary policy between the European Central Bank and the Federal Reserve is accompanied by heightened global risk appetite and the decline of American exceptionalism, the US dollar is forced to raise the white flag. Currently, the gap between consumer and producer prices is at a record high. When such situations have occurred in the past, stock markets have risen.   This has happened either in the very late stages of a recession or in the early stages of an upturn.      

Goldman Sachs eyes a significant crude deficit in the second half of the year Markets price in 25% chance Fed cuts at December 13th FOMC meeting Bitcoin supporter Novogratz expects Bitcoin ETF gets done by end of year   Oil Crude prices are lower as China’s economic recovery stalled and as Libya resumed production at key oil fields.  Oil won’t catch a bid unless China finally unleashes meaningful stimulus that propels large parts of the economy.  Little rate cuts here and there and support for property markets won’t do the trick for revitalizing the China recovery trade.   If China doesn’t appear strong the global growth outlook will get slashed and that could keep oil prices heavy a while longer. WTI crude has major support at the $70 level and should consolidate above here until we hear from Chinese officials at the end of the month.       Gold Gold’s rebound will have to take a break until we know for sure if the Fed is done raising rates at the July 26th FOMC meeting.  The labor market is still hanging in there, but expectations remain for it to gradually weaken.  Earnings season will be key for the precious metal because more Fed tightening might need to get priced in if corporate America is too optimistic about both a recession being avoided and that consumer resilience will remain. Gold may start to form a broadening formation here between the $1945 and $1965 range.   Bitcoin Bitcoin remains anchored until the cryptoverse gets an update with any of the latest bitcoin exchange-traded-fund (ETF) applications. We are approaching crunch time for getting the final comments from all the top Bitcoin ETF applications.  There has been some progress in small crypto companies finding banks that can help facilitate transactions, as Customers Bancorp has emerged as the winner from the downfall of Signature Bank and Silvergate Capital Corp. Bitcoin’s range of $29,500 and $31,500 may hold until we get a major crypto headline.  

The euro is showing little movement on Monday. In the North American session, EUR/USD is unchanged at 1.1226. The US dollar was broadly lower against the majors last week and on Friday the euro hit its highest level since February 28th.   Will ECB continue hiking after July? The ECB holds its next meeting on July 27th, a day after the Federal Reserve meeting. Similar to the Fed, a rate hike is widely expected in July but there is uncertainty about what happens after that. Eurozone inflation is not expected to fall as quickly as expected, which would support the ECB continuing to deliver more rate hikes. The ECB has signalled that it will hike in July but hasn’t said much about September, other than the decision will be data-dependent. ECB Governing Council member Boris Vujcic, head of the Croatian central bank, said that the September decision remains “very open”, a nod towards a divergence of opinion at the Bank. The hawkish members want to see a rate hike in September while the doves are worried about the damage to the fragile eurozone economy, which tipped into recession in the winter. The US dollar’s downturn last week against the major currencies was intensified by the US inflation report, which was softer than expected. The headline and core rates both eased in June, raising market speculation that the Fed may finally wrap up its rate-tightening cycle after the July 26th meeting. The markets have priced in a July hike at 98% and a pause in September at 85%, according to the CME tool. Once again, the money markets are marching to their own tune. Fed members have sounded hawkish, saying that inflation remains too high and Fed Chair Powell has hinted at further tightening after the July meeting.   EUR/USD Technical EUR/USD tested support at 1.1210 earlier. The next support level is 1.1139 1.1289 and 1.1335 are the next resistance line  

Rates Spark: The stretch before two key central bank meetings There was some selling of bonds yesterday, and it feels a bit vulnerable here considering the decent total returns recorded year-to-date against all odds given monetary tightening and the future recession risk. There is also a pre-FOMC and pre-ECB theme in the air. Many will wait to get the central bank(s) assessment of things before pulling the trigger.   Long duration buying in the past month morphs to a selling tendency Most of the past month has been dominated by bond buying, typically long duration in nature. The same has been seen in corporates, and there has also been a decent bid into high-yield bonds. A glance at total return year-to-date show some impressive bond market performances, led by higher beta products. There are always profit-taking risks attached to this. A lot of the buying in the past month or so had helped to keep core yields from getting too carried away to the upside. But yesterday more selling than usual was seen for a change, in particular out of Asia. This was a factor in unleashing Treasury yields higher. The low jobless claims number pushed in the same direction, but would not have been enough as a stand-alone to push the 10yr yield from 3.75% to 3.85%. And other data today has in fact been quite muted or negative for the economy. The terminal discount for the funds rate also remains elevated, with the Jan 2025 future still above 3.75%. That keeps the pressure focused on the upside for market rates. The 4% level for the 10yr Treasury yield is firmly in focus here, likely post next week's FOMC outcome; at least we'll likely need to get through that first.   Closing in on cycle peaks With inflation dynamics looking more encouraging, the general notion is that central banks are close to their cycle peaks in terms of tightening. If we look at current pricing, the market is seeing a good chance that the Fed will deliver its final hike of the cycle next week. Historical patterns suggest that a re-steepening of the yield curve led by the front end then followed as recession eventually ensued. And indeed, if it were to go by the Conference Board's Leading indicator, which posted another drop yesterday, we would have been in recession for a long time already.  However, the context looks somewhat different this time, as some parts of the economy still look unusually resilient. And markets are seeing a growing likelihood of a soft landing, which itself limits the drop in front-end rates as less aggressive rate cuts are then needed. On the flip side, that resilience continues to harbour potential upside risks to inflation. And central banks will therefore tread more cautiously and not take any chances. They are sensitive to their poor track records of forecasting inflation in the past and are basing their policies on current inflation dynamics rather than their models.   Curves have reflattened over past weeks, a clear steepening signal remains elusive      

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

US The Fed is expected to resume raising rates at the July 26th FOMC meeting.  Fed funds futures see a 96% chance that the central bank will deliver a quarter-point rate rise, bringin the  target range to between 5.25% and 5.50%, almost a 22-year high. The Fed delivered 10 straight rate increases and then paused at the June FOMC meeting.  The Fed is going to raise rates on Wednesday and seems poised to be noncommittal with what they will do in September.  The economic data has been mixed (strong labor data/cooling pricing pressures) and that should support Powell’s case that they still could deliver a soft landing, a slowdown that avoids a recession.  This seems like it will be the last rate hike in the Fed’s tightening cycle, but we will have two more inflation reports before the Fed will need to commit that more rate hikes are no longer necessary. The Fed will steal the spotlight but there are several other important economic indicators and earnings that could move markets.  Monday’s flash PMI report should show both the manufacturing and service sectors continue to soften, with services still remaining in expansion territory. Tuesday’s Conference Board’s consumer confidence report could fuel expectations of a soft landing. Thursday’s first look at Q2 GDP is expected to show growth cooled from 2.0% to 1.8% (0.9%-2.1% consensus range) as consumer spending moderated.  Friday contains the release of personal income and spending data alongside the Fed’s preferred inflation and wage gauges. The Q2 Employment Cost Index (ECI) is expected to dip from 1.2% to 1.1%. The personal consumption expenditures price index is expected to cool both on a monthly and annual basis (M/M: 0.2%e v 0.3% prior;Y/Y: 4.2%e v 4.6% prior). Earnings will be massive this week as we get updates from 3M, AbbVie, Alphabet, Airbus, AstraZeneca, AT&T, Barclays, BASF, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Chevron, Chipotle Mexican Grill, Comcast, Exxon, Ford Motor, General Electric, General Motors, GSK, Hermes International, Honeywell International, Intel, Mastercard, McDonald’s, Meta Platforms, Microsoft, Nestle, PG&E, Procter & Gamble, Raytheon Technologies, Samsung Electronics, STMicroelectronics, Texas Instruments, Thermo Fisher Scientific, UniCredit, Unilever, Union Pacific, Verizon Communications, Visa, and Volkswagen

Fed swaps show only an 18% chance of a hike in September (under 50% for November) FOMC to take data-dependent approach on future hikes Fed no longer forecasting a recession   The dollar declined as US stocks embraced a patient Fed Chair Powell that will remain dependent with the next two inflation reports before committing to what they will do in September.  The Fed is probably done raising rates and that is keeping soft landing hopes alive. Fed Decision The Fed raised rates by a quarter-percentage point, bringing the target range to 5.25% to 5.50%, a 22-year high.  This was an easy FOMC decision as economic growth remains impressive, which is why the Fed will try to keep the door open for one last hike. The US economy is starting to feel the impact of the Fed’s rate hiking campaign and unless the housing market continues to heat up, the disinflation process should help bring rates back to target.   FOMC Statement The statement did not deliver any surprises as the Fed emphasized that inflation remains elevated and they will continue to assess additional information and its implications for monetary policy.  Economic growth is softening as the June statement said economic activity is expanding at a modest pace, while now it is at a moderate one.  The Fed is keeping optionality for future rate increases but it probably won’t need them.  The disinflation process will remain as the economy is weakening and the corporate world should start feeling the impact of tighter credit conditions.    FOMC press conference Powell noted that the FOMC will take a data-dependent approach on future hikes.  He acknowledged the rebound with housing and highlighted that they are waiting for the full effects of their tightening.  Powell clearly stated that it is possible that they’d raise or hold in September if data warranted it.  The Fed is going to be locked in with all the key inflation data points.  The June CPI report was cooler-than-expected, so if that trend continues, the Fed will probably skip in September.  The Fed will have two inflation reports before it meets again, with the core remaining quite elevated.  The Fed clearly believes a soft landing is achievable as the staff no longer is forecasting a recession.   FX The dollar softened as the Fed signaled they will be patient with future rate hikes, which suggests if they deliver one more hike that will most likely be in November. The economy should weaken going forward and that should support a shifting of the focus from just inflation to also including recessionary fears.  Both the euro and pound rallied against the dollar as their respective central banks have clearly signaled more tightening will occur beyond the summer.  EUR/USD has clearly found support ahead of the 1.10 handle, which suggests prices could stabilize until we get to the ECB meeting.  The 1.1150 remains key short-term resistance.      

German economy stagnated in the second quarter The flash estimate of German GDP growth shows that the eurozone's largest economy stagnated in the second quarter and seems to be stuck in the twilight zone between stagnation and recession. According to the flash estimate of the German statistical agency, the German economy stagnated in the second quarter. On the year, GDP growth was down by 0.6% or 0.2% if corrected for working days. We advise you to take these numbers with caution as over the last quarters, these flash estimates had been subject to significant revisions. Today, again, the last quarters were slightly revised upwards, without revising away the winter recession. Judging from available monthly data and the comments by the statistical office, it was mainly private consumption which helped the German economy to avoid an extension of the winter recession.   Stuck between stagnation and recession Looking ahead, recently released sentiment indicators do not bode well for economic activity in the coming months. In fact, weak purchasing power, thinned-out industrial order books, as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy, all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic changes, and the current energy transition will structurally weigh on the German economy in the coming years. However, all is not bleak. The stuttering Chinese rebound could easily bring some temporary positive surprises as well. Also, the drop in headline inflation and the actual fall in energy and food prices combined with higher wages should support private consumption in the second half of the year. We continue to see the German economy being stuck in the twilight zone between stagnation and recession. Today’s German GDP data resembles this economist's favourite football club winning the last match of the season but still being delegated to the second division. It's a victory that does not give rise to celebration.

EUR/USD The euro is once again (after 20 days) disrupting the market. The European Central Bank raised its rate by 0.25% yesterday, and ECB President Christine Lagarde indicated that this increase may be the last one (similar to the Federal Reserve) in the current tightening cycle. The euro lost 0.95% or 108 pips.   Media reports that such a sharp decline was caused by the US Q2 GDP report, which showed that the economy expanded by 2.4% against the expected 1.8%. In addition, durable goods orders in June added 4.7% (forecast was 1.0%). Only the S&P 500 fell by 0.64%, reflecting expectations of a recession in the US and an expansion in the yield curve inversion in the government bond market.     The volume of yesterday's trades was the largest in the last 4 months, which means there is still potential for further decline. The 1.0924 level is an important support on the daily chart, which the MACD line is approaching. Consolidating below it will initiate a new downtrend in the medium-term. The Marlin oscillator has settled in the negative area. If the euro does not fall below 1.0924, it may rise again, even against unfavorable grounds. We are expecting a significant reversal of the euro that is in sync with the stock market decline (in September).     On the four-hour chart, the situation is bearish: the price is developing below both indicator lines, and the Marlin oscillator has settled in the downtrend territory. Consolidating below yesterday's low at 1.0966 opens up the target at 1.0924. Some kind of price convergence with the oscillator supports the euro's consolidation in the 1.0966-1.1012 range  

Eurozone core inflation surprises on the upside Eurozone GDP accelerates to 0.3% The euro is showing little movement on Monday. In the North American session, EUR/USD is trading at 1.1023, up 0.06%. It has been a wild ride for the euro over the past two weeks. On July 18th, EUR/USD hit its highest level since February 2022, but the same day, the euro began a slide which saw it drop almost 300 points. Interestingly, the euro had a muted reaction to Monday’s eurozone inflation and GDP reports. Eurozone inflation for June was within expectations. Headline CPI dropped from 5.5% to 5.3% y/y, matching the consensus estimate. Core CPI remained steady at 5.5%, a notch higher than the consensus of 5.4%. Core CPI, which is closely watched by the ECB, hasn’t improved much from the 5.7% gain in March, which marked a record high. The inflation report shows that inflation remains stubbornly high, and will provide support to ECB members who favor a rate hike at the September meeting. The ECB raised interest rates last week, which came as no surprise as the ECB had signalled that it would do so. What happens next is anyone’s guess. ECB Lagarde said at last week’s meeting that “the September meeting will be deliberately data-dependent”. This didn’t clear up any uncertainty or really say anything, as the ECB has abandoned forward guidance and made rate decisions based on key data, especially inflation and employment reports. The ECB could go either way in September – inflation remains well above the 2% target, which would support a hike, but the eurozone economy remains weak and some members may wish to pause in order to avoid a recession. There was a bright spot in Monday’s releases as eurozone GDP rose to 0.3% in the second quarter, up from 0.0% in Q1. We’ll get a look at German and eurozone Manufacturing PMIs on Tuesday. EUR/USD Technical EUR/USD is testing resistance at 1.1037. The next resistance line is 1.1130 There is support at 1.0924 and 1.0831    

As this week's macroeconomic readings unfold, providing insights into the state of the British economy, certain trends and challenges have emerged. The UK is facing a potential inflation rally, with average wages increasing by 6.9% over the three months ending in May, indicating a competitive labor market that can drive inflation higher. This pro-inflationary factor is closely monitored by the Bank of England, which stands ready to react if necessary. The central bank's ongoing efforts to raise interest rates are aimed at gaining control over inflationary pressures. However, the GDP data for May reflects a recessionary phase, with the economy contracting by 0.1% month-on-month. While this decline was not as severe as initially anticipated, the UK continues to grapple with inflation, logistic chain disruptions, and domestic challenges. Despite the current recessionary signals, there is optimism that the Bank of England's measures will yield positive results, leading to a decline in inflation and a normalization of economic processes. It is hoped that with time, negative statistics will gradually subside.   FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates   The UK faces a risk that the inflation rally will develop further. This week, statistical data has demonstrated that average wage over the three months ended in May increased by 6.9% against a rise of 6.7% earlier. There had been forecast an increase but a less expressed one. The growth of wages shows that the employment market is vigorous enough to compete over labour resources through raising payments. It is an apparent pro-inflationary factor. The Bank of England monitors this and will react if needed. The BoE's interest rate will be growing until inflation gets under control. The GDP data for May in the UK reflected a recession. The economy lost 0.1% m/m after a rise of 0.2% in April. The expectations had been gloomier, suggesting a decrease of 0.3%. The indications of a recession were not unexpected. The UK suffers greatly from inflation, logistic chain breaches, and domestic problems. It is doubtful whether the recession will be profound. Most probably, the Bank of England's effort will soon bring fruit, inflation will go down, and economic processes will start normalising. There might be a month or two more of negative statistics.     What does the industrial production reading from the Eurozone tell us about the state of the European economy and European industry? In May, industrial production in the Eurozone increased by 0.2% m/m, turning out inferior to the forecast. Calculated year by year, it dropped by 2.2% after a rise of 0.2% in April. It is very weak data. It was not unexpected, but the decrease in industrial production had been predicted to be less expressed. The statistics are comprised of extremely high purchase prices and increased salaries, and capacity maintenance expenses. At the same time, enterprises cannot count on future improvements and prefer to decrease production volumes, which allows for cutting down on estimated loss. Most probably, the picture of industrial production will be similar in June.     Visit RoboForex

US inflation expected to rise to 3.3% UK GDP projected to fall to 0% Fed member Harker says rates may have peaked The British pound has had a relatively quiet week. In the North American session, GBP/USD is trading at 1.2731, down 0.13%. Markets eye US inflation, British GDP It has been a quiet week on the data calendar, with no tier-1 events out of the UK or the US. The rest of the week will be busier, with the US inflation report on Thursday and UK GDP on Friday. That could mean some volatility for the sleepy British pound. US inflation expected to rise The Federal Reserve’s aggressive tightening campaign has made its impact felt, as inflation has been falling and dropped to 3.0% in June. Headline CPI is expected to rise to 3.3% in July, while the core rate is expected to remain steady at 4.8%. Will an uptick in inflation change the Fed’s rate path? Probably not, especially if Jerome Powell follows the view that he has often stated, which is that a rate policy is not based on one or two inflation reports. The money markets are confident that the Fed will take a pause at the September 20th meeting, with an 86% probability according to the FedWatch tool. Another pause in November is likely (71% probability), but a higher-than-expected inflation report on Thursday would likely raise the odds of a rate hike in November.   Fed member Harker said on Tuesday that the Fed might be done raising rates, “absent any alarming new data”. Harker said that rates would need to stay at the current high levels “for a while” and went as far as to say that the Fed would likely cut rates at some point in 2024. The UK economy is not in good shape and the possibility of a recession is very real. GDP is expected to flatline in Q2 (0.0%) after a weak gain of 0.1% in the first quarter. A weaker-than-expected GDP reading could spook investors and send the British pound lower.     GBP/USD Technical GBP/USD is testing support at 1.2747. The next support level is 1.2622  1.2874 and 1.2999 are the next resistance lines

US inflation boosts case for no further rate hikes A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centred on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materialises.   US inflation pressures continue to ease The US consumer price inflation report showed that prices rose 0.2% month-on-month at both the headline and core (ex food and energy) level as was expected. To two decimal places it was even better at 0.17% and 0.16% respectively, which meant that the annual rate of headline inflation came in at 3.2% rather than 3.3% (versus 3% in June). Core inflation slowed to 4.7% from 4.8% as expected. A decent drop in used car prices helped (-1.3% MoM), but a second consecutive large decline in air fares (-8.1%) is a bit of a surprise. With medical care (-0.2%), recreation (0.1%), education (0%) and other goods and services (0.1%) all very subdued the Federal Reserve has got to be pretty happy with this. That so-called 'supercore' services (services ex energy ex housing) looks like it comes in at around 0.2% MoM, although the year-on-year rate ticks higher a little due to base effects.   Supercore services on the right path (YoY%)   Housing costs rose more than we thought though, with owners’ equivalent rent (the largest CPI component with a 25% weighting) rising 0.5% MoM/7.7% YoY but all in this report supports the nice golidlocks scenario of a slowdown in inflation allowing the Fed to stop hiking and eventually cut rates next year, which catches the slowing economy in time to prevent a recession. Obviously a lot can go wrong and we think it probably will given the worries about the abrupt slowdown in credit growth, but for now this data is encouraging   Housing components of CPI set to slow in line with rents   Headline may tick higher on energy but core will slow much further Unfortunately we are likely to see headline annual inflation rise further in YoY terms in August, albeit modestly. This will largely reflect higher energy costs, but we suspect it will resume its downward path again by October. Core inflation won't have this problem as the 0.6% MoM prints for August and September last year will drop out of the annual comparison to be replaced by 0.2% readings we predict, allowing annual core inflation to slow to below 4% by September. This is going to be increasingly driven by the all-important housing components, which are set to slow sharply based on observed rents while used car prices are set to fall further based on auction prices. Consequently we are increasingly confident of a sub 3.5% YoY core CPI print by year-end. We had been hoping that headline inflation could be around 2.5%, but the rise in oil and gasoline prices over the last couple of months makes this look less achievable.   Higher energy costs can be viewed like a tax – no need for the Fed to hike further In fact there has been some talk that the rise in energy costs will make the Fed more inclined to hike rates since it will push up inflation with rising costs potentially passed onto other components such as logistics and airline fares. We are not that concerned though since it can have a disinflationary effect elsewhere because higher energy prices can be viewed similarly to a tax. You can't avoid filling up your car with gasoline and you can't not heat your home etc so it effectively means you have less money at the end of the day to spend on other goods and services. It hurts economic activity and effectively intensifies disinflation in other components over time. As such the Fed will be watching and waiting to see what happens rather than any knee-jerk hike action.   NFIB survey points to weakening corporate pricing power and lower core CPI     Moreover, business surveys continue to point to weakening pricing power, such as the ISM services index being consistent with 1% headline CPI and the National Federation of Independent Business survey pointing to core inflation heading to 3% by year-end. Such an inflation backdrop should allow the Fed to respond to any recession threat with interest rate cuts next year.

In this interview, we sit down with Paweł Majtkowski to delve into the intricate web of macroeconomic data shaping the British economy. As a seasoned economic analyst, Mr. Majtkowski provides his expert insights on the latest series of economic indicators from the UK. From GDP growth and inflation figures to employment rates and trade balances, we explore the trends, challenges, and potential opportunities that lie ahead for the UK's economic landscape. Join us as we navigate through the numbers and uncover the narratives behind the data-driven journey of the British economy.   FXMAG.COM: Let me ask you to comment on the whole series of macroeconomic data from the British economy. However, will it enter a recession? What does this data say about further potential rate hikes in the UK? The UK continues to struggle with high inflation. In June, it stood at 7.3 per cent year-on-year. The British economy is therefore experiencing difficult times, not least because of 14 consecutive interest rate rises in a row. Domestically, there is economic stagnation. However, the GDP results - 0.5 % growth last month and 0.2 % in the second quarter - are better than analysts' expectations. With such modest growth, it is the details that count. Economic activity increased in June due to very good weather (the best since 1884), there were more working days in May than in previous years and this helped to offset the effects of ongoing strike action. The services sector, which dominates UK GDP, is benefiting from low (structural) unemployment and rising wages. This, in turn, is a cause for concern for the Bank of England and especially its hawkish representatives. Further rate rises cannot therefore be ruled out. The manufacturing sector and the real estate market, on the other hand, are performing worse. Not insignificant for the UK is the fact that its second largest trading partner, Germany, has already slipped into recession. This is a result of falling manufacturing and a very slow recovery in China.   Paweł Majtkowski, eToro Market Analyst

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    

Strong consumer keeps US on track for 3% GDP growth Retail sales provided another upside data surprise and indicates a 3% annualised GDP growth rate is possible for the third quarter. However, higher consumer borrowing costs, reduced credit availability, the exhausting of pandemic-era savings and the restart of student loan repayments pose major challenges for fourth quarter activity.   Retail sales lifted by Prime Day and eating out We have another US data upside surprise from the household sector with retail sales rising 0.7% month-on-month in July versus the 0.4% consensus. June's growth was also revised up 0.1 percentage point to 0.3% MoM. Importantly, the control groups which excludes volatile autos, gasoline, food service and building materials, rose 1% MoM versus 0.5% consensus, but here there was a 0.1pp downward revision to June's growth to 0.5% MoM. This category, historically, has a better correlation with broader consumer spending. Remember retail sales is only around 45% of consumer spending in total, with consumer services taking a greater share. Amazon Prime Day appears to have been the main driver with non-store sales up 1.9% MoM, but there was also strength in restaurants and bars (+1.4%) while sporting goods rose 1.5%, clothing was up 1% and grocery up 0.8%. Electronics (-1.3% MoM) and vehicles (-0.3%) and furniture (-1.8%) were the weak spots. All in it points to the US being on track to report 3% annualised GDP growth in the third quarter, which will keep the Fed's language hawkish even if they don't carry through with further rate hikes, as we expect.   Official retail sales growth versus weekly chain store sales growth (YoY%)   The challenges for spending are mounting Interestingly, there has been a bit of a breakdown in the relationship between official retail sales growth of the control group and the weekly Redbook chain store sales numbers, as can be seen in the chart above. Maybe this is the Prime day effect playing out and we see a reconvergence again in August. The Retail sales report is a good story for now, but we are expecting weakness to materialise in the fourth quarter. Higher market interest rates will add to upward pressure on what are already record high credit card borrowing rates and rising auto, mortgage and personal loan rates. With households also continuing to run down pandemic-related excess savings, as measured by Fed numbers on cash, checking and time savings deposits, this will act as a brake on growth.   US consumer borrowing costs (%)   Higher borrowing costs and reduced credit availability will hurt However, it is important to remember that reduced access to credit is just as important as the cost of credit in taking heat out of the economy. The latest Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) underscores how the tightening of lending conditions will increasingly act as a headwind for activity and contribute to inflation sustainably returning to target. Banks are increasingly unwilling to make consumer loans and as the chart below shows, this has historically pointed to an outright contraction in consumer credit outstanding.   Fed's Senior Loan Officer Opinion Survey points to negative consumer credit growth (YoY%)   Fed to keep rates on hold Add in the squeeze on household finances from the restart of student loan repayments for millions of households and it means further weakness in retail sales and broader consumer spending remains has to remain our base case. The concern is that it will also heighten the chances of recession, which we believe will discourage the Fed from any further interest rate increases. Instead, we expect interest rate cuts from March 2024 onwards as monetary policy is relaxed to a more neutral footing.  

Eurozone PMI paints worrisome growth picture Another weak PMI for the eurozone confirms a sluggish economy with recession as a downside risk. Inflation pressures for services remain stubborn as wage pressures continue to be a concern. The latter adds to our expectations that the ECB's hiking cycle is not over yet.   There is very little to like about today’s PMI. In recent months, the PMI has painted a worsening picture of eurozone activity, and August data are no different. The composite PMI dropped from 48.6 to 47 with the services PMI also dropping below 50. Inflationary concerns are not over though. The manufacturing sector has been in contraction for some time, with new orders falling and backlogs of work easing. This is helping inflationary pressures subside quickly. Services activity held up for a while but is now also showing contraction, according to the survey. While goods inflation is easing on the back of lower costs and weak demand, services inflation remains elevated for now due to increased wage cost pressures – despite weakening demand. The economic picture that we're seeing is quite worrisome. Growth in the bloc was decent at 0.3% quarter-on-quarter between April and June, but strong Irish growth masked a lot of underlying weakness. While we expect tourism to have contributed positively to third-quarter growth, business surveys like the August PMI show a picture of deteriorating activity. This makes a recession a realistic downside risk to the outlook. The main concern that the European Central Bank will have with this reading is the inflationary effect of wage pressures. The economy is cooling off significantly, but hawks on the ECB board will be tempted to push for one more hike as wage pressures are translating into elevated inflation pressures for services. The fact that the selling price inflation indicator from the PMI inched up this month clearly leaves the door open to another ECB rate hike.

UK service sector enters contraction as rate hikes begin to bite The latest UK PMIs are unquestionably bad, and will give the Bank of England pause for thought as it nears the end of its tightening cycle.   The PMIs are unquestionably bad Like the eurozone, there has been a pronounced deterioration in service sector activity in August, according to the latest PMIs. The index for this sector has slipped below the all-important 50 level, reaching 48.7. According to the makers of the PMI, S&P Global, higher Bank of England rates are beginning to do their job. For various reasons, none of this will likely lead to a contraction in third-quarter GDP. Mainly because a hefty increase in June’s monthly activity numbers gave the third quarter a decent starting point, so when you compare the average GDP across July-September, it’s likely to be higher than the three months prior even if the economy fails to grow over the summer. On top of that, the ever-deteriorating manufacturing PMI – now at 42.5 – doesn’t really tally with what the official data is telling us, and that’s partly due to a sharp improvement in car production in recent months. Overall GDP growth in the 0.3-0.4% area for the third quarter seems a reasonable base case at this stage. Still, what these PMIs do tell us is that the UK is unlikely to be able to sustain those sorts of growth figures over the coming months. That manufacturing weakness is likely to show up more evidently. And remember that much of the impact of past rate hikes is still to feed through, given the heavily-fixed nature of the UK’s mortgage market.     Poor PMIs highlight the risks of focusing on backward-looking wage/inflation data For now, the Bank of England doesn't seem to be been putting too much emphasis on the growth numbers, with its focus still almost entirely on inflation. And on that score, policymakers won’t like the references in the latest PMI press release to persistently strong wage pressures. Still, the PMIs also reveal that prices charged by corporates are increasing at the slowest rate since February 2021, and that echoes what we’ve seen in various other surveys too. Ultimately, the Bank of England appears wary about putting too much weight on survey data, while official numbers on wage growth and services inflation continue to come in higher. But much like the recent increase in unemployment and ongoing fall in vacancy numbers, today’s PMIs show that the economy does appear to be turning from a state of very modest growth to stagnation and perhaps even modest recession. As time goes on, the BoE’s laser-focus on inflation/wages, both of which are heavily lagging indicators of economic activity, means the risks of overtightening have risen. These latest PMIs have seen a big repricing of UK rate expectations this morning according to the swaps curve, and investors now see Bank Rate peaking at 5.83% – or two-and-a-bit extra rate hikes. That doesn’t seem totally unrealistic, though our own base case is that we get just one final rate hike in September. That’s premised on the services inflation numbers staging a modest improvement before November’s meeting, enabling the Bank to pause.

05:40BST Thursday 24th August 2023 Positive start expected after Nvidia knocks it out of the park   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Despite a raft of disappointing economic data from France, Germany and the UK which saw services activity slide into recession territory, European equity markets managed to finish the day higher yesterday. Rather perversely markets took these data misses as evidence that rate hikes were starting to work and that further rate hikes were likely to be unnecessary, sending bond yields sharply into reverse, as markets started to price an increased probability of recession. Yesterday's economic data will certainly offer food for thought for central bankers as they get set to assemble today at Jackson Hole for the start of the annual symposium, ahead of interest rate meetings next month where they are likely to decide whether to raise rates further to combat sticky inflation. If yesterday's data is in any way reflective of a direction of travel, then we could see a Q3 contraction of 0.2%. Of course, one needs to be careful in reading too much into one month of weak PMIs, especially in August when a lot of industry tends to shutdown or pare back economic activity, however the weakness in services was a surprise given that the summer holidays tend to see that area of the economy perform well.     US markets also underwent a strong session led by the Nasdaq 100 in anticipation of a strong set of numbers from Nvidia with the bar set high for a strong set of Q2 numbers. Back in Q1 when Nvidia set out its revenue guidance for Q2 there was astonishment at the extent of the upgrade to $11bn. This was a huge increase on its Q2 numbers of previous years, or any other quarter, with the upgrade being driven by expectations of a big increase in sales of data centre chips, along with investments in Artificial Intelligence.       Last night Nvidia crushed these estimates with revenues of $13.5bn, datacentre revenue alone accounting for $10.3bn of that total, a 171% increase from a year ago. For comparison, in Q1 datacentre revenue accounted for $4.3bn. Gross margins also beat expectations, coming in at 71.2% as profits crushed forecasts at $2.70 a share. Nvidia went on to project Q3 revenues of $16bn, plus or minus 2%. The company also approved an extra $25bn in share buybacks, with the shares soaring above this week's record highs in after-hours trading, with the big test being whether we'll see those gains sustained when US markets reopen later today.     On the back of last night's positive finish, as well as the exuberance generated by the belief that interest rate hike pauses are coming next month, European markets look set to open higher later this morning. The focus today is on the latest set of weekly jobless claims numbers which are set to remain unchanged at 239k, as well as July durable goods orders, excluding transportation, which are forecast to see a rise of 0.2%, a modest slowdown from June's 0.5% gain.      EUR/USD – bounced off the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – the 1.2600 area continues to hold with resistance still at the 1.2800 area and 50-day SMA. A break below 1.2600 targets 1.2400.        EUR/GBP – briefly hit an 11-month low at 0.8490 before rebounding sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – the failure to push above the 146.50 area has seen a pullback below the 145.00 level. This raises the prospect of a move towards the 50-day SMA at 142.70 area.     FTSE100 is expected to open 24 points higher at 7,344     DAX is expected to open 70 points higher at 15,798     CAC40 is expected to open 36 points higher at 7,282  

UK Services PMI falls to 48.7 (50.8 expected, 51.5 in July) UK Manufacturing PMI falls to 42.5 (45 expected, 45.3 in July) Cable tests support but rebounds for the third time The UK services and manufacturing PMI surveys fell well short of forecasts this morning, the former deep into contraction territory. What’s more, the weakness was widespread from new orders to hiring and prices paid, which suggests we’re not just talking about a blip in the data, but rather the prospect of a recession in the second half of the year. From the Bank of England’s perspective, there’s a lot within the data that will be viewed as encouraging, with slower employment resulting in less tightness in the labor market and lower prices paid across manufacturing and services sectors indicating easing inflationary pressures, in theory at least. The surveys alone won’t be enough to convince the MPC and another rate hike in September looks a near-certainty but beyond that, traders have been paring back expectations on the back of these releases, with only one more then priced in this year.   A bearish or bullish signal for cable? The pound headed lower after the report having drifted higher over the last week or so but once again it ran into trouble around a previous support level.       That level is just above 1.26 where it also rebounded off a little over a week ago and a little over a week before that. This is clearly now a very notable support level, one which if broken could send a strong bearish signal. What’s interesting is that it’s now rebounded back into the 55/89-day simple moving average band and a close within this would further suggest there’s still plenty of support around this important support zone too. This was a crucial support zone a few months ago and it’s proving so again. To the upside, 1.28 continues to look significant, having provided plenty of resistance over the last few weeks and it also roughly coincides with the 38.2% Fibonacci retracement level.  

The EUR/USD currency pair moved upwards and downwards over the past day. Such a movement does not surprise us, as we have repeatedly mentioned that the current move to the south is fairly weak, and corrections and pullbacks occur quite frequently. So it's not surprising that the euro initially dropped and then increased.     Overall, it continues to decline, just not very rapidly or hastily. Yesterday showed us what many had realized long ago. The European economy is just shy of sliding into a recession. For several quarters, GDP indicators have been teetering on the brink of negative values. But what can one expect when the European Central Bank regularly raises its rate? It's worth noting that the GDP is going through tough times with a not-so-high key rate, especially when compared to rates in the UK and the US, where they are much higher.   While the British economy is also struggling, the American economy is growing briskly, giving the dollar a strong advantage. We will discuss business activity indices. For now, it's worth noting that the downward trend for the pair continues, but the CCI indicator went into the oversold zone yesterday. This is a strong buying signal, so we can expect a stronger upward correction soon. Especially since, on the 24-hour timeframe, we are still looking for a confident breakthrough of the Ichimoku cloud. Thus, the pair continues its correction within the global upward trend, but the main movement can resume anytime. What are the fundamental reasons for this? There aren't any. However, it's important to remember that the forex market doesn't always move strictly with fundamentals and macroeconomics.     The European economy is sliding into the abyss. The service sector in the European Union and Germany has fallen below the "waterline." If the manufacturing sector has been in the negative business activity zone for over a year, the service sector entered it in August. Now, both sectors in Germany and the EU are below the key level of 50.0, which does not bode well for the European economy. For instance, business activity indices in the US could be in better shape but still higher than in the EU or Germany.   Hence, we can only state the obvious: US statistics continue to outperform European ones. It's worth noting that the American currency has been falling for almost a year now. This happens when the Federal Reserve's rate rises faster and stronger, and the US economy appears much more stable and confident than the European one. Recognizing this fact leads us to believe that the European currency is extremely overbought and unjustifiably expensive. Based on this, we anticipate a further decline in the European Union's currency.   This week, we are awaiting the speeches by Jerome Powell and Christine Lagarde. Although we think both officials will only provide a little significant information, the market might still grasp certain hints. Both leaders hint at a pause in September; if one doesn't, it might support their country's currency. Given the sharp decline in business activity in the European Union, we believe the likelihood of "dovish" rhetoric from Christine Lagarde is much higher. But the Federal Reserve has also adopted a "two meetings – one hike" policy, so Powell is unlikely to discuss the need for immediate tightening without seeing the August inflation report.       The average volatility of the EUR/USD currency pair over the last five trading days as of August 24 is 65 points and is characterized as "average." Therefore, we anticipate the pair to move between levels 1.0809 and 1.0939 on Thursday. A downturn in the Heiken Ashi indicator will signal a resumption of the downward movement.   Nearest support levels: S1 – 1.0803 S2 – 1.0742 S3 – 1.0681   Nearest resistance levels: R1 – 1.0864 R2 – 1.0925 R3 – 1.0986     Trading recommendations: The EUR/USD pair currently maintains a downward trend. New short positions should be considered with targets at 1.0803 and 1.0742 in case of a downward reversal in the Heiken Ashi indicator or a price rebound from the moving average. Long positions can be considered if the price consolidates above the moving average, with targets at 1.0939 and 1.0986.   Explanations for illustrations: Linear regression channels – help determine the current trend. The current trend is strong if both are directed in the same direction. Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should proceed. Murray levels – target levels for movements and corrections. Volatility levels (red lines) – the probable price channel in which the pair will operate in the next 24 hours, based on current volatility indicators. The CCI indicator – its entry into the oversold area (below -250) or overbought area (above +250) indicates that a trend reversal in the opposite direction is approaching.  

All ears on Powell and Lagarde at Jackson Hole today   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After an initially positive start to the day yesterday, only the FTSE100 managed to eke out any sort of gains, after a rebound in yields and the fading of the Nvidia sugar rush saw European markets slip into negative territory.   US markets, having started very much in a positive vein with the Nasdaq 100 leading the way higher, also turned tail as bond yields pushed higher, along with the US dollar, finishing the day sharply lower. As we look towards today's European open, the rise in yields and weak finish in the US, as well as weakness in Asia this morning, is set to see European markets open lower this morning. Much of the narrative for this month was supposed to be centred around what Fed chair Jay Powell would likely say at Jackson Hole today with respect to the prospect of another pause in the rate hiking cycle when the FOMC meets next month.   This week's poor economic data out of Germany and France has shifted the spotlight a touch when it comes to central bank policy towards the European Central Bank and Christine Lagarde's speech, at 8pm tonight, after Powell who is due to speak at 3:05pm.   While this year's Symposium is titled "Structural Shifts in the Global Economy" it won't be just Jay Powell whose words will be closely scrutinised for clues about rate pauses next month it will also be the Bank of England and the Bank of Japan where markets will be looking for important insights into the risks facing central banks in terms of the risks in over tightening monetary policy at a time when the challenges facing the global economy are numerous.   This week's PMIs have highlighted the challenges quite clearly to the point that it appears the ECB may well also look at a rate pause next month, alongside the Federal Reserve, although the reasons for an ECB pause are less about inflation falling back to target, than they are about a tanking economy.   The latest German PMIs suggest the prospect of another quarter of contraction in Q3, while the Bank of England has a similar problem, although the bar for a pause next month is slightly higher given how much higher UK CPI is relative to its peers.   Before we hear from ECB President Christine Lagarde, Powell will set the scene just after US markets open, and his tone is likely to be slightly less hawkish than he was a year ago.  When Powell spoke last year, he made it plain that there was more pain ahead for US households and that this wouldn't deter the central bank in acting to bring down inflation, even if it meant pushing unemployment up. While Powell is unlikely to be anywhere near as hawkish, as he was last year, he won't want to declare victory either. As we already know from recent comments from various Fed officials it is clear the Fed believes the fight against inflation is far from over, and in that context it's unlikely he will deliver any dovish surprises.   This belief of a slightly hawkish Powell is likely to have been behind yesterday's sharp declines in US markets, which were driven by rising yields as investors continued to price in higher rates for longer. Not even a set of blow-out earnings from Nvidia was enough to keep markets in the black, with the shares opening at a new record high above $500, before sliding back to finish on the lows of the day, closing unchanged. The inability to hold onto any of the early gains suggests that the recent enthusiasm for this $1trn chipmaker may be due a pause. While investors will be focussing on Powell, the focus today returns to the German economy and in the wake of this week's poor PMIs we'll be getting the latest snapshot of the business sentiment in Europe's largest, but also sickest economy, as well as the final reading of Q2 GDP.   The most recent German IFO business climate survey showed sentiment falling to its lowest level since October last year in July at 87.3 and is expected to slow further to 86.8. Expectations also slipped back to 83.5 suggesting the economy could remain in recession in Q3.   Any thoughts that we might see an improvement in August are likely to have been dealt a blow by the sharp rise in oil prices seen in the last few weeks, as well as this week's PMIs. With recent economic data out of China also suggesting a struggling economy, German exporters are likely to continue to find life difficult.        EUR/USD – sinking below the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feelsrange bound with resistance at the 1.1030 area.   GBP/USD – slipped below the 1.2600 area which could well open up a move towards 1.2400 and the 200-day SMA.  We still have resistance at the 1.2800 area and 50-day SMA.       EUR/GBP – the rebound off this week's 11-month low at 0.8490 looks set to retest the 0.8600 area. We also have resistance at the 0.8620/30 area.   USD/JPY – rebounded off the 144.50 area with resistance at the highs this week at the 146.50 area, with resistance also at 147.50.   FTSE100 is expected to open 5 points lower at 7,328   DAX is expected to open 39 points lower at 15,582   CAC40 is expected to open 16 points lower at 7,198    

Governor Thedeen say krona is fundamentally undervalued Markets fulling pricing in September Riksbank quarter-point rate hike Sweden’s government expects economy shrink by -0.8% in 2023 (previously eyed -0.4%) Sweden’s krona has been punished as the economy appears to be headed for a tough recession. Core inflation is coming down too slowly and that will keep the Riksbank hiking even as expectations grow for a lengthy recession.  The krona has not been getting any relief as many Swedes have started to embrace holding euros given the krona’s record plunge this year. Riksbank Governor Thedeen Riksbank governor Thedeen said that “the krona is too weak and it is fundamentally undervalued.” He added that “it should strengthen and we think that it will, but we know that it is almost impossible to predict currency moves over the short and medium term.” It is tough to call for a reversal after watching the krona fall to a fresh all-time low against the euro.  The current market expectations for the September meeting is to see the Riksbank raise rates by 25bps to 4.00%.  A freefalling krona is complicating the inflation fight, but that could see some relief as the outlook for the eurozone deteriorates. Expectations for the Sweden’s GDP are not seeing a strong consensus emerge.  Given the currency and inflation situation, it seems that the economy could be entering a recession that last more than a handful of quarters. The Swedish government is expecting a 0.8% decline in 2023 and a 1.0% growth for 2024.  It seems hard to believe that households will be a better position anytime soon, so a recession extending beyond 2024 seems likely.   The EUR/SEK weekly chart     EUR/SEK (weekly chart) as of Thursday (8/24/2023) shows the uptrend to record high territory is showing overbought conditions have arrived.  If the krona is able to firm up here, a mass exodus of EUR/SEK bullish bets could see price action tumble towards the 11.7118 region. If the plunge deeper into record low territory continues, EUR/SEK could make an attempt at the 12.000 which is just below the 141.% Fibonnaci expansion level of the 2020 high to 2021 low move. Last week, the krona was the most volatile G10 currency, so we should not be surprised if that volatility extends further given the chaos in the bond markets.    

Euro falls below 1.08 for first time since June Fed’s Harker says interest rates may have peaked The euro has extended its losses for a second straight day. In the European session, EUR/USD is trading at 1.0785, down 0.23% and falling below the 1.08 line for the first time since June. Later today, Germany’s Business Climate is expected to ease for a fourth straight month. It has been a nasty slide for the euro, which has been unable to find its footing and has plunged a staggering 500 points over the past six weeks. EUR/USD is down 0.80% this week, in large part due to soft eurozone manufacturing and services PMI readings on Wednesday. The eurozone economy has been damaged by the war in Ukraine and Germany, known as the locomotive of Europe, is in trouble as well. The deterioration of China’s economy is more bad news for the eurozone’s export sector. The ECB’s rate-tightening cycle, aimed at curbing high inflation, has also dampened economic activity. Lagarde & Co. have a tricky task in charting out a rate path. If rates remain too low, inflation will remain well above the 2% target. However, too much tightening raises the risk of tipping the weak eurozone economy into a recession. Lagarde has a difficult decision to make and the markets are uncertain as well – ECB rate odds for the September meeting are around 50-50 between a hike or a pause. Harker says Fed could be done Investors are anxiously awaiting Jerome Powell’s speech at Jackson Hole later today. Meanwhile, Philadelphia Federal Reserve Harker made headlines on Thursday when he said that the Fed may have reached the end of its current rate-tightening cycle. Harker said that he didn’t see a need to raise rates further “absent any alarming new data between now and mid-September”.   At the same time, Harker stressed that he expected rates to remain at high levels for “a while” and ruled out rate cuts anytime soon. This was a pointed message to the markets not to assume that rate cuts are just around the corner.  I expect Fed Chair Powell to be even more cautious in today’s speech, perhaps with a reminder that inflation remains above target and that the door is still open to further tightening.   EUR/USD Technical There is resistance at 1.0893 and 1.0940 EUR/USD has support at 1.0825 and 1.0778    

Australia retail sales rebounds with 0.5% gain Fed’s Powell keeps door open to further hikes The Australian dollar started the week with gains but then retreated. In the European session, AUD/USD is trading at 0.6408, up 0.09%. Last week, the Australian dollar showed significant swings of around 1%. Australia’s retail sales surprise on the upside Australian retail sales rebounded in July with a respectable gain of 0.5% m/m.  This followed a dismal -0.8% reading in June and beat the consensus estimate of 0.3%. The welcome uptick was driven by the Women’s World Cup which was held in Australia and was a massive boost for Australia’s travel and retail sectors. Much of the tournament took place in August, which means that the August retail sales report should also receive a shot to the arm. The August report showed that consumers still have an appetite for spending, but there are unmistakable signs that the economy is cooling. Inflation has been falling, wage growth in the second quarter was weaker than expected and unemployment rose to 3.7%. This all points to the Reserve Bank of Australia holding rates at the September 5th meeting, and the future markets have priced a hold at around 90%. The slowdown in China, which is Australia’s largest trading partner, could throw a monkey wrench into the central bank’s efforts to guide the economy to a soft landing. There is a always the concern that aggressive tightening, with the aim of curbing inflation, will choke economic growth and tip the economy into a recession. The Australian dollar is sensitive to Chinese releases and the recent batch of soft Chinese data has weighed on the struggling Australian dollar.   Federal Chair Jerome Powell delivered the keynote speech on Friday, but anyone looking for dramatic headlines walked away disappointed. Powell reiterated that the battle to lower inflation to the 2% target “still has a long way to go”. Powell was somewhat hawkish with regard to interest rates, saying that the Fed would “proceed carefully” with regard to raising rates or putting rates on hold and waiting for additional data. This was a deliberate omission of any mention of rate cuts, a signal that the Fed isn’t even thinking about lowering rates. The future markets responded by raising the odds of a rate hike in September to 21%, up from 14% a week ago.     AUD/USD Technical AUD/USD is testing resistance at 0.6424. Above, there is resistance at 0.6470 There is support at 0.6360 and 0.6317    

Australia retail sales rebounds with 0.5% gain Fed’s Powell keeps door open to further hikes The Australian dollar started the week with gains but then retreated. In the European session, AUD/USD is trading at 0.6408, up 0.09%. Last week, the Australian dollar showed significant swings of around 1%. Australia’s retail sales surprise on the upside Australian retail sales rebounded in July with a respectable gain of 0.5% m/m.  This followed a dismal -0.8% reading in June and beat the consensus estimate of 0.3%. The welcome uptick was driven by the Women’s World Cup which was held in Australia and was a massive boost for Australia’s travel and retail sectors. Much of the tournament took place in August, which means that the August retail sales report should also receive a shot to the arm. The August report showed that consumers still have an appetite for spending, but there are unmistakable signs that the economy is cooling. Inflation has been falling, wage growth in the second quarter was weaker than expected and unemployment rose to 3.7%. This all points to the Reserve Bank of Australia holding rates at the September 5th meeting, and the future markets have priced a hold at around 90%. The slowdown in China, which is Australia’s largest trading partner, could throw a monkey wrench into the central bank’s efforts to guide the economy to a soft landing. There is a always the concern that aggressive tightening, with the aim of curbing inflation, will choke economic growth and tip the economy into a recession. The Australian dollar is sensitive to Chinese releases and the recent batch of soft Chinese data has weighed on the struggling Australian dollar.   Federal Chair Jerome Powell delivered the keynote speech on Friday, but anyone looking for dramatic headlines walked away disappointed. Powell reiterated that the battle to lower inflation to the 2% target “still has a long way to go”. Powell was somewhat hawkish with regard to interest rates, saying that the Fed would “proceed carefully” with regard to raising rates or putting rates on hold and waiting for additional data. This was a deliberate omission of any mention of rate cuts, a signal that the Fed isn’t even thinking about lowering rates. The future markets responded by raising the odds of a rate hike in September to 21%, up from 14% a week ago.     AUD/USD Technical AUD/USD is testing resistance at 0.6424. Above, there is resistance at 0.6470 There is support at 0.6360 and 0.6317    

Gold is traditionally seen by investors as a hedge against inflation. However, it is not inflation that drives the XAU/USD quotes, but recession. In the spring, the precious metal confidently rose towards historical highs amid expectations of an impending downturn in the U.S. economy. However, a stable labor market and positive macroeconomic indicators suggested a soft landing. This led to a collapse in the price of gold during the summer. As autumn approaches, the cooling economy is once again translating into its rise. Disappointing statistics from the U.S. are a reason to buy gold. The weaker the data, the less likely the Federal Reserve will implement its June forecast and raise the federal funds rate to 5.75%. Regardless of how much Fed Chairman Jerome Powell argues otherwise in Jackson Hole.   Furthermore, once a tightening monetary policy cycle ends, a dovish pivot usually follows. Monetary expansion creates a favorable environment for XAU/USD. Dynamics of the federal funds rate and gold     In this respect, the sharp decline in consumer confidence from the Conference Board in August and the continued peak in job vacancies and layoffs in the U.S. labor market in June are alarming signs for the U.S. economy and great news for gold enthusiasts. The chances of the Fed raising borrowing costs in 2023 have once again dropped below 50%, which adversely affected the dollar and allowed XAU/USD to counterattack. In essence, asset managers who reduced their net short positions on precious metals to their lowest levels since mid-March were mistaken. Aswere investors who withdrew money from ETFs for 13 weeks in a row. They were betting on the highest yield of U.S. Treasury bonds in over a decade. However, as soon as the U.S. macro data began to deteriorate, U.S. debt market rates declined, and XAU/USD quotes went up.   Dynamics of market expectations on the Federal Reserve rate   What's next? Gradual cooling of the labor market, a sharp reduction in excess savings, and mortgage rates rising above 7% paint a picture of new cracks in the U.S. economy. The tightening of the Fed's monetary policy occurs with a temporary lag. The more time that passes since the beginning of the cycle, the more painful the monetary restriction will be. Under such circumstances, recession risks will increase again.   In the end, the markets will return to the original conditions that existed in the spring and pushed gold to $2,075 per ounce. However, there is another scenario. The U.S. economy will continue to pleasantly surprise; the likelihood of forming a new inflation peak increases, as do the chances of raising the federal funds rate to 5.75%. Technically, on the daily chart of the precious metal, there is a "Double Bottom" pattern. Thanks to this, gold broke above the EMA and has the opportunity to continue its rally towards the fair value of $1,962 per ounce. As long as prices hold above $1,929, traders should focus on buying.    

The resilience of US growth, earnings, and markets in 2023 has surprised many. After more than a year of aggressive Federal Reserve (Fed) rate hikes, the fact that the United States managed to avoid a recession, experience an upswing in US corporate earnings expectations, and witness a strong rebound in major equity indexes was unexpected at the beginning of the year. While numerous explanations have been offered to account for these phenomena, one crucial factor seems to have been overlooked—US private sector debt. Over the past 15 years, significant changes have occurred in US household and corporate sector indebtedness, reshaping the economy, profits, and equity valuations. These changes have made these factors less sensitive to monetary policy than they have been in over a generation.     The resilience of US growth, earnings and markets has been the big surprise of 2023. Following more than a year of aggressive Federal Reserve (Fed) rate hikes, few would have believed at the beginning of this year that the United States would avoid a recession, see an upswing in US corporate earnings expectations, and enjoy a strong rebound of major equity indexes. While many explanations have been offered to explain these phenomena, one important factor has been generally overlooked—US private sector debt. Over the past 15 years, US household and corporate sector indebtedness has changed significantly and in ways that make the economy, profits and equity valuations less sensitive to monetary policy than at any time in over a generation. We will focus on the corporate debt story here. But we must note that household borrowing habits have also changed in important ways since the global financial crisis (GFC). Total household debt, as a share of gross domestic product (GDP), has fallen by nearly a third since 2008. Credit standards have tightened, with fewer at-risk households able to borrow or borrow as much. And, importantly, mortgage borrowing has reverted to conventional 30-year fixed rate mortgages and away from floating rate or adjustable-rate mortgages. As a result, the lags between the Fed’s short-rate hikes and debt servicing costs in the household sector have lengthened. Those factors alone help explain why the US economy and consumer spending have held up better than many thought they would at the onset of 2023. A strong labor market, underpinned by post-COVID re-hiring, shortages of able-bodied workers, and fiscal stimulus have also contributed significantly to the resilience of demand. But for economists, policymakers and investors, there has been another interesting debt development underway: the absence of any discernable impact of rising interest rates on corporate profitability. That outcome deserves closer attention, because it has important implications for growth, profits and equity as well as credit market outcomes.   What has changed? Just as for the household sector, the GFC unleashed significant changes in the way companies borrow. Although overall corporate de-leveraging was more modest for companies than households since the GFC, a similar development has taken place in the tenor of borrowing. Specifically, one of the consequences of the GFC was to reduce company reliance on short-term borrowings such as commercial paper or bank loans and replace it with public and private credit instruments with longer maturities and fixed terms. For example, the commercial paper market was roughly $2.2 trillion in mid-2007 and as of August 2023, it is close to $1.2 trillion.1 In that same span, US investment-grade and US high-yield debt markets have mushroomed from $2.1 trillion to $7.8 trillion, and from $0.7 trillion to $1.2 trillion respectively.2 Meanwhile, global private credit has grown by $1 trillion.3 Mostly, those borrowings are fixed rate and the average maturities across these three asset classes range from 4 to 10 years.   Accordingly, lags between rising interest rates (courtesy of Fed tightening) and corporate debt servicing costs have lengthened. As a result, the corporate sector, by virtue of structural changes in corporate finance, has thus far been sheltered from the harshest impacts of what has otherwise been an aggressive series of Fed rate hikes since early 2022. But that is not all. As the most recent data for the second-quarter 2023 earnings season shows, companies across many sectors are reporting falling net interest costs, despite higher interest rates at all maturities. How is that possible? Part of the answer resides in an inverted yield curve, with short-term rates above long-term rates. Companies with high cash balances (based on resilient earnings as well as prudent capital spending) are enjoying higher interest revenues by parking their money in short-dated notes, but low interest costs having locked in lower rates via longer-term borrowing. The corporate sector is, in sum, playing an inverted yield curve to its benefit. That is a contributing factor to explain why, for virtually every sector in the S&P 500 Index (except for consumer staples and health care), net interest expense as a percentage of net profit is lower today than it was 20 years ago. Indeed, for the S&P 500 as whole, net interest expense as a percentage of net profit is today only about 40% of its 2003 level.4 The result is higher earnings—boosting share prices—as well as a more resilient corporate sector to Fed tightening. But is this happy situation sustainable? In the long run, no. At some point, new borrowings are required and maturing debt must be rolled over. If borrowing costs remain elevated, the good times will go away. But the corporate debt shield may yet endure for longer. That is because maturity extension has been significant for many companies and across many sectors. Since the end of 2020, for example, the proportion of investment-grade debt maturing after 2028 has gone from roughly 48% to 56%.5 This trend is even more pronounced among high yield (sub-investment grade) borrowers, with the proportion of borrowings extending beyond 2028 rising from 20% to roughly 42% of the market.6 And, of course, if rates fall between now and then (as would seem likely as inflation recedes), then companies may refinance on more agreeable terms before their debt matures.   It is also interesting to see where these developments are particularly significant. Within investment- grade markets, financials lead the way with a 50% increase in longer dated debt.7 The energy and technology sectors have witnessed increases of over 25%.8 At the other end of the borrowing spectrum, health care has not recorded a similar shift in debt maturity and, perhaps as a result, it has seen net interest expense take a bigger chunk out of net earnings in recent quarters.     The fact that profits have been shielded from the impacts of Fed tightening helps explain continued company interest in hiring. It also points to a positive feedback loop between profits, employment and demand that, while not sustainable forever, has helped to support US economic growth well into 2023. If so, the resilience of earnings and growth has another key implication for investors—namely reduced default risk. Credit risk is more nuanced. Individual defaults remain possible, and some will be unavoidable. But barring a freezing up of lending markets, overall corporate default rates are likely to be lower in this cycle than in prior ones.

We think the Federal Reserve has finished hiking rates, and the ECB and Bank of England aren't far behind.   Federal Reserve At the recent Jackson Hole Fed symposium, Fed Chair Jerome Powell acknowledged that monetary policy is “restrictive” and that policymakers will “proceed carefully” in determining whether to hike interest rates further. September appears set for a pause given recent encouraging signals on inflation and labour costs, but robust activity data means the door remains ajar for a further potential hike. Markets see a 50-50 chance of a final hike while we think rates have most probably peaked. Households are rapidly running down pandemic-era savings, and rising consumer loan delinquencies indicate growing stresses that will be intensified by the restart of student loan repayments. Amid weakening global activity, we are, unfortunately, in the camp that fears this is more of a downturn-delayed rather than recession-averted story. Fortunately, we think that inflation will continue to slow rapidly and this will afford the Federal Reserve the flexibility to respond swiftly to this challenging environment with interest rate cuts through 2024.  

The current international debate on whether or not Germany is once again the 'Sick man of Europe' could finally bring about the long-awaited sense of urgency for a new reform programme by the government. It has been the big summer theme in Europe: weak growth, worsening sentiment and pessimistic forecasts have brought back headlines and public discussion about whether Germany is once again the ‘Sick man of Europe’. The Economist reintroduced the debate this summer more than two decades after its groundbreaking front page. The infamous headline seems currently justified when looking at the state of the German economy. The 'Sick man of Europe' debate The optimism at the start of the year seems to have given way to more of a sense of reality. In fact, the last few weeks have seen an increasingly heated debate about Germany’s structural weaknesses under the placative label “sick man of Europe”. Disappointing industrial data, ongoing problems in the energy-intensive industry and a long list of structural problems have fuelled the current debate. And indeed, no other eurozone economy is currently facing such a high number of challenges as the German economy. Cyclical headwinds like the still-unfolding impact of the European Central Bank’s monetary policy tightening, high inflation, plus the stuttering Chinese economy, are being met by structural challenges like the energy transition and shifts in the global economy, alongside a lack of investment in digitalisation, infrastructure and education. To be clear, Germany’s international competitiveness had already deteriorated before the Covid-19 pandemic and the war in Ukraine. To a large extent, Germany's issues are homemade. Supply chain frictions in the wake of the pandemic, the war in Ukraine and the energy crisis have only exposed these structural weaknesses. These deficiencies are the flipside of fiscal austerity and wrong policy preferences over the last decade. Fiscal stimulus during the pandemic years and last year to tackle the energy crisis have prevented the German economy from falling deeper into recession. However, with our current forecast of a contraction of the entire economy by roughly 0.5% over the entire year and yet another contraction next year, the economy would basically be back to its 2019 level in late 2024. There are many varieties of illness and the German economy has clearly caught a few bugs due to its own lifestyle choices.    

Remember that 'back to school' feeling at the end of summer? A tedious car journey home after holiday fun, knowing you'll be picking up where you left off? I'm afraid we've got a very similar feeling about the global economy right now. 'Are we nearly there yet?'. No. Very few reasons to be cheerful Lana del Rey's Summertime Sadness classic comes to mind as we gear up for autumn. And I'm not just talking about chaotic weather or even, in my case, disappointing macro data. Most of us have had the chance to recharge and rethink over the past couple of months. and I'm afraid all that R&R has done little to brighten our mood as to where the world's economy is right now. Sure, the US economy has been holding up better than we thought. And yes, the eurozone economy grew again in the second quarter. Gradually retreating headline inflation should at least lower the burden on disposable incomes. And let's be thankful for the build-up of national gas reserves in Europe, which should allow us to avoid an energy supply crisis this winter unless things turn truly arctic. But that's about as upbeat as I can get. We still predict very subdued growth to recessions in many economies for the second half of the year and the start of 2024. The stuttering of the Chinese economy seems to be more than only a temporary blip; it seems to be transitioning towards a weaker growth path as the real estate sector, high debt and the ‘de-risking’ strategy of the EU and the US all continue to weigh on the country's growth outlook. In the US, the big question is whether the economy is resilient enough to absorb yet another potential risk factor. After spring's banking turmoil, the debt ceiling excitement, and more generally, the impact of higher Fed rates, the next big thing is the resumption of student loan repayments, starting in September. Together with the delayed impact of all the other drag factors, these repayments should finally push the US economy into recession at the start of next year. And then there's Europe. Despite the weather turmoil, the summer holiday season seems to have been the last hurrah for services and domestic demand in the eurozone. Judging from the latest disappointing confidence indicators, the bloc's economy looks set to fall back into anaemic growth once again   Little late summer warmth This downbeat growth story does have an upbeat consequence; inflationary pressure should ease further. It's probably not going to be enough to bring inflation rates back to central banks’ targets, but they should be low enough to see the peak in policy rate hikes. Central bankers would be crazy to call an end to those hikes officially; they don't want to add to speculation about when the first cuts might come, thereby pushing the yield further into inversion. And there's also the credibility issue - you never know, prices might start to accelerate again. So, expect major central bankers to remain hawkish at least until the end of the year. In our base case, we have no further rate hikes from the US Federal Reserve and one final rate rise by the European Central Bank.   However, in both cases, these are very close calls, and the next central bank meetings are truly data-dependent. Sometimes, a Golden Fall or Indian Summer can make up for any summertime sadness. But it doesn’t look as if the global economy will be basking in any sort of warmth in the coming weeks. The bells are indeed ringing loud and clear. Vacation's over; school is here. And while I'm certainly too old for such lessons, I'm taken back to that gloomy, somewhat anxious feeling I had as a kid as summer wanes and the hard work must begin once again.   Our key calls this month: • United States: The US confounded 2023 recession expectations, but with loan delinquencies on the rise, savings being exhausted, credit access curtailed and student loan repayments restarting, financial stress will increase. We continue to forecast the Federal Reserve will not carry through with the final threatened interest rate rise. • Eurozone: The third quarter may still be saved by tourism in the eurozone, but the latest data points to a more pronounced slowdown in the coming months. Inflation is falling, but a last interest rate hike in September is not yet off the table. The European Central Bank will be hesitant to loosen significantly in 2024. • China: The latest activity data has worsened across nearly every component. Markets have given up looking for fiscal stimulus, and have started making comparisons with 1990s Japan. We don’t agree with the Japanification hypothesis, but clearly a substantial adjustment is underway, and we have trimmed our growth forecasts accordingly. • United Kingdom: Uncomfortably high inflation and wage growth should seal the deal on a September rate hike from the Bank of England. But emerging economic weakness suggests the top of the tightening cycle is near, and our base case is a pause in November. • Central and Eastern Europe (CEE): Economic activity in the first half of the year has been disappointing, leading us to expect a gloomier full-year outlook. Despite this, we see a divergence in economic policy responses, driven by countryspecific challenges. • Commodities: Oil prices have strengthened over the summer as fundamentals tighten, whilst natural gas prices have been volatile, with potential strike action in Australia leading to LNG supply uncertainty. Chinese concerns are weighing on metals, but grain markets appear more relaxed despite the collapse of the Black Sea deal. • Market rates: The path of least resistance is for longer tenor rates to remain under upward pressure in the US and the eurozone and for curves to remain under disinversion (steepening) pressure. We remain bearish on bonds and anticipate further upward pressure on market rates from a tactical view. • FX: Stubborn resilience in US activity data and risk-off waves from China have translated into a strengthening of the dollar over the summer. We still think this won’t last much longer and see Fed cuts from early 2024 paving the way for EUR:USD real rate convergence. Admittedly, downside risks to our EUR/USD bullish view have grown.     Inflation has only been falling for a matter of months across major economies, but the debate surrounding a possible “second wave” is well underway. Social media is littered with charts like the ones below, overlaying the recent inflation wave against the experience of the 1970s. These charts are largely nonsense; the past is not a perfect gauge for the future, especially given the second 1970s wave can be traced back to another huge oil crisis. But central bankers have made no secret that nightmares of that period are shaping today's policy decisions. Policymakers are telling us they plan to keep rates at these elevated levels for quite some time.

ECB minutes confirm hawkishness amid growing concerns about growth The just-released minutes of the European Central Bank's July meeting illustrate the slightly changed tone; from pure hawkishness to more doubtful.   At the European Central Bank's July meeting, the central bank hiked interest rates by 25 basis points before stopping the autopilot, with President Christine Lagarde stressing that both a pause and a rate hike were possible at the September meeting. The just-released minutes of this July meeting give some background to these decisions. The minutes show an ECB that was still more concerned about inflation not returning to target than an economy falling into recession.   Here are some key phrases from the minutes: “Headline inflation on an annualised three-month over three-month basis was about 2% in June, reflecting the strong negative momentum in energy inflation.” “It was also noted that the three measures identified by staff as performing best as indicators of medium-term inflation were currently pointing in different directions, with the PCCI declining swiftly, while HICP inflation excluding energy, food, travel-related items, clothing and footwear and the measure of domestic price pressures still pointed to the upside.” “However, in view of the still elevated inflation outlook, together with the weaker growth outlook, the concern was also raised that the economy might be entering a phase of stagflation, in contrast to a more benign scenario of a soft landing.” “In view of the prevailing uncertainties and the large costs of bringing inflation down once it had become entrenched, it was argued that it was preferable to tighten monetary policy further than to not tighten it enough. Before deciding to stop the tightening cycle, the Governing Council needed clearer signs of whether inflation would converge to target once the effects of recent shocks had faded.” “Taken together, the September projections, the evolution of underlying inflation and incoming information on monetary transmission would help the Governing Council update its assessment of the appropriate monetary policy stance.”   The minutes also suggested that as long as the eurozone economy doesn’t slide into a full recession, the ECB could have a higher-than-expected tolerance for growth disappointing and coming in weaker than its own forecast. A remark was made that the ECB’s inflation forecasts had been more reliable recently than the growth forecasts. The fact that underlying inflation remained high and growth was not weak enough pointed to a subtle hawkishness, even though at least one ECB member seemed to have opposed the 25bp rate hike decision initially.    

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.

The euro is lower on Thursday, after a 3-day rally which pushed the currency 1% higher. In the European session, EUR/USD is trading at 1.0861, down 0.57%.   Eurozone CPI steady, core CPI falls Eurozone inflation was a mixed bag in August. Headline inflation was unchanged at 5.3%, missing the consensus estimate of a drop to 5.1%. There was better news from Core CPI, which dropped from 5.5% to 5.3%, matching the estimate. The ECB will be pleased with the decline in core inflation, which excludes food and energy and provides a more accurate estimate of underlying press pressures. Many central banks, including the Federal Reserve, have taken pauses in the current rate-tightening cycle, but the ECB has raised rates 13 straight times. Will we see a pause at the September 14th meeting? The answer is far from clear. Inflation remains above 5%, more than twice the ECB’s target of 2%. The central bank is determined to bring inflation back down to target, but that would require further rate hikes and the weak eurozone economy could fall into a recession as a result. ECB member Robert Holzmann said today’s inflation report indicated that inflation remained persistent and admitted that the latest inflation numbers pose a “conundrum” for the ECB. The markets aren’t clear on what to expect from the ECB, with the odds of a pause at 67% and a 25-basis point hike at 33%. ECB President Lagarde hasn’t provided much guidance, perhaps because she’s as uncertain as everybody else about the September rate decision.   Germany’s numbers continue to point downwards, as the eurozone’s locomotive has become an economic burden. The latest release, July retail sales, declined by 2.2% y/y, sharply lower than the revised -0.9% reading in June and below the consensus estimate of -1.2%. . EUR/USD Technical EUR/USD is testing support at 1.0831. Below, there is support at 1.0780 1.0896 and 1.0996 are the next resistance lines

The euro is flat on Friday, after sustaining sharp losses a day earlier. In the European session, EUR/USD is trading at 1.0844. Eurozone, German manufacturing struggling There wasn’t much to cheer about after today’s Manufacturing PMI reports for Germany and the eurozone. Although both PMIs improved slightly in August, business activity continues to decline in the manufacturing sector. The Eurozone PMI came in at 43.5 in August, up from 42.7 in July and just shy of the consensus estimate of 43.7. In Germany, manufacturing is in even worse shape – the August reading improved from 38.8 to 39.1, matching the consensus. Manufacturing is in deep trouble in the eurozone and in Germany, the largest economy in the bloc. The PMIs point to a constant string of declines since June 2022. The volume of new orders is down and exports, already struggling in a weak global environment, have been hit by the slowdown in China which has reduced demand. Germany’s weak manufacturing data is particularly disturbing. Once a global powerhouse, Germany has seen economic growth slide and is officially in a recession, with two consecutive quarters of negative growth in the fourth quarter of 2022 and the first quarter in 2023. US nonfarm payrolls expected to ease In the US, the nonfarm payroll report is expected to decline slightly to 170,000, compared to 187,000 in the previous reading. If nonfarm payrolls are within expectations, it will mark the third straight month of gains below 200,000, a clear signal that the US labour market is cooling down. A soft nonfarm payrolls report would cement an expected pause by the Federal Reserve next week and also bolster the case for the Fed to hold rates for the next few months and possibly into 2024. . EUR/USD Technical EUR/USD is tested support at 1.0831 earlier. Below, there is support at 1.0731 1.0896 and 1.0996 are the next resistance lines Content  

Monitoring Hungary: Full-year growth outlook downgraded In our latest update, we reassess our Hungarian economic and market forecasts, as we turn gloomier on the full-year growth prospects. The marked collapse in domestic demand supports both external balances and disinflation. We also add some more hawkishness to our monetary policy call.   Hungary: at a glance Following weaker-than-expected activity data in the second quarter, we now see a recession in 2023 as we lower our full-year GDP growth forecast to -0.5%. The collapse in domestic demand is reflected in industry and retail sales data, while the value added share of both sectors remained weak in the second quarter. Real wage growth has been negative for 10 months, and even after a turnaround, we expect only a limited impact on consumption in the fourth quarter. The slowdown in economic activity is drastically reducing import demand, and we now expect both the trade and current account balances to end the year in surplus. Disinflation will continue amid constrained repricing power, with the headline and core measures falling below 8% and 10%, respectively by the end of the year.  After the September rates conversion, monetary authorities will likely switch off the autopilot mode and move to a second phase of policy normalisation, so we make a slight hawkish change to our interest rate forecast. We see a 2% of GDP slippage in this year's budget, which is likely to be addressed by a combination of consolidation and an upward shift of the target after the expected September revision. We remain positive on the forint, as the relative carry opportunity has improved in light of the latest guidance from the central bank. In the rates space, a possible upside surprise to inflation might be convincing enough for investors to adhere to the hawkish tone of the central bank, shifting short-end rates higher.   Quarterly forecasts   irst-half data prompts downgrade to our 2023 growth outlook Hungary has been in a technical recession for a year now, with economic activity contracting in all sectors except agriculture in the first half of 2023. The positive contribution from agriculture was not enough to pull the economy out of technical recession, as the collapse in domestic demand weighed on all sectors. Going forward, although real wages are likely to rise from September, this should have a limited impact on consumption. With double-digit interest rates for the rest of the year and with scarce fiscal room, investment activity will be severely constrained. On the export side, a looming global manufacturing recession is likely to weaken export prospects. Taking these factors into account, we have decided to revise our full-year growth forecast from 0.2% to -0.5% year-on-year, thus we now see a recession in 2023.   Real GDP (% YoY) and contributions (ppt)

Moody's latest decision on Hungary gives false sense of security Moody’s decision to affirm Hungary’s Baa2 rating with a stable outlook came as a positive surprise. However, we are not entirely comfortable with their argument, particularly the balanced risk assessment, which could lead decision-makers to become complacent.   On 1 September, Moody's affirmed Hungary's rating at Baa2 with a stable outlook. The stable outlook indicates that the risks are balanced, but we disagree, as we believe the risks are tilted to the downside, hence our earlier expectation of a downgrade to the outlook. In our view, the recent decision provides a false sense of security and may lead policymakers to become complacent at a time when growth prospects are deteriorating, and fiscal problems are mounting. These risks have led us to be more downbeat overall. The rating agency highlighted in its statement that it expects Hungarian GDP to stagnate this year. Given the economic performance in the first half of 2023, this would require GDP to grow by at least 1.9% quarter-on-quarter in both the third and fourth quarters, which we consider highly unlikely. The last time we saw such a solid performance was in late 2021 and early 2022. But back then, growth was fuelled by positive real wage growth, supportive monetary policy, very accommodative fiscal policy and, of course, some Covid rebound dynamics. Before the Covid-rebound period, such a sequence of strong growth had never happened. Although we expect the economy to perform better in the second half of the year, we are concerned that the hole dug in the first half of the year is too deep to climb out of quickly. In this regard, we have downgraded our full-year GDP forecast from 0.2% to -0.5% year-on-year, as we now see a recession in 2023.   CDS and sovereign credit rating (Moody's)   As for the nominal growth outlook, the GDP deflator is around 8% based on the first-half data, while the government had planned for 15% for the year combined with a 1.5% real GDP growth. Although the GDP deflator will definitely rise in the second half of the year (based on seasonal patterns), we believe that the risk of not reaching 15% is non-negligible. On top of that, as we mentioned earlier, real wage growth will be negative this year, in our view.   And nominal growth matters a lot when it comes to fiscal measures where the nominal GDP is the denominator, like in the deficit-to-GDP and in the debt-to-GDP ratios. The latter reached 75% at the end of the second quarter, which is 5.3 percentage points higher than the government's 2023 target in the latest Convergence Programme. With further weakness in the nominal GDP, the goal to reduce the debt-to-GDP ratio is getting harder, especially with the recent slippage in the deficit. In addition, the Hungarian government has not given up on the acquisition of Budapest Airport, which would be financed by FX bond issuance in our view, and hence would add to the debt burden of the country. Speaking of the budget shortfall, Moody's expects a 0.3ppt increase in this year's deficit target to 4.2% and a 0.6ppt increase in the 2024 target to 3.5% but does not hold the government accountable or flag this as negative. In the wake of the reinstallation of the Excessive Deficit Procedure, admitting that the government will miss the 2024 sub-3% deficit target and being negligent looks interesting. Moreover, like us, they include the scenario of an agreement with the EU but do not highlight this as a very significant risk factor. Moreover, we respectfully disagree with the positive elements listed by Moody's. It cited Hungary's "strong embeddedness in manufacturing" as a positive factor, which seems very odd to us at a time when the global economy is in a manufacturing recession. It also noted that the improvement in the trade and current account balances was due to a much lower dependence on Russian energy sources, which we see as a false interpretation of data. First, Russian energy dependence has not fallen significantly based on import statistics. Second, the improvement in external balances has occurred because domestic demand has collapsed, reducing the need for imports (including energy and non-energy goods), while energy prices are very much lower than last year. And finally, Russian contractor Rosatom started works on the first phase of construction of the new Paks Nuclear Power Plant (Paks II) units in Hungary, which hardly can be seen as a reduction of energy dependency. Taking all these factors into account, we believe that Moody's has underestimated the negative risk impact of economic activity, fiscal policy and geopolitical issues, thereby providing a false sense of security at a time of heightened uncertainty about the country’s short-term general outlook.

Today's events and market view Today the US markets return from their Labor Day holiday. Hopes of a possible goldilocks scenario - a cooling labour market bringing the Fed closer to target without necessitating any further hikes while, at the same time, growth remaining resilient enough to avoid recession - could keep long end yields elevated in the 4 to 4.25% range for now, with a busy primary market adding to the upward pressure. Such hopes remain sensitive to data, though with a particular focus this week on the ISM services tomorrow. Today we will get US factory orders. Issuance is likely to keep some upside pressure on longer EUR rates, too,  with also long-dated government bond auctions slated for later this week. The key focus is the looming ECB meeting and the possibility of another rate hike. We think the decision is a closer call than the market's pricing of a 25% probability currently suggests. We will get more ECB comments and data to sharpen our views: The ECB consumer expectations survey is released today and we will also get Eurozone producer prices. Services PMIs from Spain and Italy will be released alongside the final European services and composite readings. No government bond auctions are scheduled for today, but it is worth highlighting that Belgium also lowered its long term bond issuance target yesterday in light of the notable €22bn issued via a 1Y retail bond.

Canada’s GDP contracts in second quarter US nonfarm payrolls, wages point to weak US labour market The Canadian dollar is unchanged early in Monday’s North American session, trading at 1.3594. Canada’s GDP unexpectedly soft in Q2 The Canadian dollar posted gains throughout last week but surrendered all of those gains on Friday after second-quarter GDP was softer than expected. Canada’s economy contracted in the second quarter by 0.2% y/y, much weaker than the consensus of a 1.2% gain. The Bank of Canada was also taken by surprise, as it had projected a gain of 1.5%. The economy has slowed sharply since the first quarter, which showed GDP at a revised gain of 2.6%. The BoC’s rate hikes continue to filter throughout the economy, which may be in a slight recession, as June GDP contracted by 0.2% and July is expected around zero. The GDP report was the last major domestic release before the BoC meeting on Wednesday. The soft data has cemented a pause from the BoC, after two consecutive meetings in which the BoC raised rates by a quarter-point but said that the decisions were a close call between a hike and a hold. The BoC odds for a hold have jumped to 97%, up from 78% prior to the GDP release. With a pause a virtual certainty, investors’ focus will be on the rate statement. Goldman Sachs is projecting a pause and one final rate hike in October.     In the US, the August employment report pointed to a cooling labour market. Nonfarm payrolls came in at 187,000, the third straight release below 200,00. Wage growth fell to 0.2% in August, down from 0.4% in July and below the consensus of 0.3%. The weak jobs report raised the odds of a Fed hold at the September meeting to 93% according to the FedWatch tool, up sharply from 78% just a week ago. . USD/CAD Technical USD/CAD is putting pressure on support at 1.3573. Below, there is support at 1.3509 1.3657 and 1.3721 are the next resistance lines  

More cuts  Brent crude rallied past the $90pb yesterday, as US crude advanced above the $88pb mark as Saudi Arabia and Russia announce that they prolong their supply cuts. Saudi Arabia will continue reducing its own unilateral supply by 1mbpd to the end of the year, while Russia will be cutting 300'000 bpd. The kneejerk reaction to the news was a sharp jump in oil prices but the news was not a shocker per se, investors knew that something was cooking. What surprised the market, however, is the timeline: cuts are announced for another 3 months.   The million barrel question now is: is $100pb back on the table? It's unsure, and the road that could lead crude oil prices toward the $100pb psychological mark will likely be bumpy, because higher energy prices have already started being reflected in inflation and inflation expectations. As a result, the central banks, including the Fed, will have little choice but to keep their monetary policies sufficiently tight to prevent an uptick in inflation. That could mean further rate hikes, or keeping the rates at restrictive levels for longer, in which case, oil prices make a U-turn and cheapen due to recession and global demand concerns.   And when global demand worries kick in, and prices cheapen, Saudi will be losing money considering that the kingdom is shouldering the supply cut strategy for OPEC alone. For now, the demand outlook remains strong despite the slowing China and suffering Europe, but if it weakened, Saudi could easily change its mind, and the kingdom has a history of making sharp U-turns on its decision when winds turn against them. 

Canada expected to have shed 6,400 jobs BoC’s Macklem says rate increases may be needed to lower inflation The Canadian dollar is steady on Friday in what should be a busy day. In the European session, USD/CAD is trading at 1.3670, down 0.12%. Canada releases the August job report later today, with the markets braced for a decrease of 6,400 in employment. The US dollar has been on a tear against the major currencies since mid-July. The Canadian dollar has slumped, losing about 450 basis points during that span. The Canadian economy hasn’t been able to keep pace with its southern neighbor, and that was made painfully clear as GDP contracted by 0.2% in the second quarter, below expectations. The deterioration in economic growth is a result of a weak global economy as well as the Bank of Canada’s steep tightening cycle. After back-t0-back increases, the BoC opted to pause at this week’s meeting and held the benchmark cash rate at 5.0%. Governor Macklem likes to use the term “conditional pause”, which means that a break from rate hikes will depend on economic growth and inflation levels.   At this week’s meeting, the BoC’s rate statement was hawkish, warning that inflation was too high and not falling fast enough. This was a signal that the door remained open to interest rate increases. Macklem was more explicit on Thursday, stating that further rate hikes might be needed to lower inflation and warning that persistently high inflation would be worse than high borrowing costs. The markets are more dovish about the BoC’s rate path, given that the economy is cooling and the central bank will be wary about too much tightening which could tip the economy into a recession. The markets have priced in a 14% probability of a rate hike at the October meeting.   USD/CAD Technical USD/CAD is testing resistance at 1.3657. The next resistance line is 1.3721 1.3573 and 1.3509 are providing support  

The time is coming when the strongest trend is coming to an end. But this does not apply to the American dollar. In 2021, it strengthened due to expectations of monetary tightening by the Federal Reserve, and in 2022, due to its implementation. In 2023, investors expected the trend in the USD index to be broken. And at first, everything was going according to plan. However, in the summer, there was a 180-degree turnaround, which came as a real surprise to hedge funds. They remain short sellers of the American currency and are losing money.   Dynamics of the U.S. dollar and hedge fund positionsej     The September survey of Reuters experts suggests that in the short term, "bears" on EUR/USD will maintain their strength due to a strong economy and high U.S. Treasury bond yields. However, over the next three months, the euro will rise to $1.09. In 6 months, it will be worth $1.10, and in 12 months, $1.12. This forecast is based on the idea of a dovish pivot and the central bank's move towards reducing federal funds rates. Derivatives indicate that it will drop by 100 basis points in 2024. The same opinion was held about the U.S. dollar at the beginning of the year, but its opponents were proven wrong. At that time, investors were worried about a recession.   It was supposed to force the Federal Reserve to loosen its monetary policy. In the early autumn, markets began to fear not an economic downturn but its overheating. If the United States maintains its strength, inflation could accelerate, prompting the Federal Reserve to return to monetary tightening and further strengthen the American dollar. If we also consider that the American economy is the cleanest shirt in the basket of dirty laundry, the decline in EUR/USD seems logical. Indeed, following new manufacturing orders in Germany, German industrial production disappointed.   In July, it contracted by 0.8%. The leading economy in the eurozone has still not emerged from the slump. Is it surprising that the GDP of the currency bloc grew by only 0.1% in the second quarter? Less than the 0.3% in the initial estimate.     Thus, if in 2021-2022, the focus in the Forex market was on monetary policy and fear of high inflation, in 2023, they gave way to economic growth divergence. Judging by the strong labor market positions and the surge in business activity in the services sector to a six-month high, the U.S. GDP in the third quarter may expand by 3% or more. What's the point of selling the dollar? It's much more interesting to acquire securities denominated in it. The capital flow to North America has supported and will continue to support the "bears" on EUR/USD.     The ECB, on the other hand, can only sympathize. On the one hand, the European Central Bank is obliged to maintain "hawkish" rhetoric in the face of inflation exceeding 5%. On the other hand, the higher the interest rates rise, the greater the chances of a recession in the eurozone economy. Technically, on the daily chart of EUR/USD, the inability of the "bulls" to hold onto the key pivot level of 1.0715 indicates their weakness. The decline of the pair to 1.066 and 1.0595 continues. The recommendation is to hold shorts.  

Recessions are periods when the economy goes on a diet," Economist Paul Samuelson. In normal economic cycles, central banks raise interest rates in response to high inflation, a tight labour market and easy financial conditions, essentially the reality we see all around us. The central banks' tightening of policy is meant to cool the economy and prevent an overheating that worsens the eventual recession. However, since the 2008 financial crisis, central banks have been reluctant to trigger a recession and have become very nervous about tightening policy and taking interest rates into truly activity-dampening territory. The market believes that the Fed has done enough with its 500 basis points of hikes, but the reality is that in most economic cycles, the Fed Funds rate needs to at least match the nominal GDP growth rate in order to slow down economic activity enough to take the pressure off both inflation and a tight labor market. As of Q1 data, US GDP was growing at a nominal rate of 720 basis points year-on-year, suggesting that Fed policy is not tight, but neutral at best. It seems that the dual mandate of price stability and full employment has been replaced with a number one priority of no recession ever, or in Samuelson's metaphor quoted at the head of this article, "No diet!"   After the COVID-19 pandemic, many people believe that the economy is returning to a normal path. They believe that low interest rates will continue to support growth and that a "soft landing" is possible. However, this view is naive. The economy is currently loaded with excess debt and asset valuations are at all-time highs. A "soft landing" is very unlikely in this environment and, as an economic concept, is extremely rare!   The global economy is currently more like a river that has been dammed up. The dam represents the various factors that have been holding back economic growth, such as the COVID-19 pandemic, supply chain disruptions and the war in Ukraine. As these factors start to dissipate, the dam will begin to break and the river will flow more freely. This will lead to an extension and resurgence of economic growth and inflation, contrary to the prevailing consensus of an imminent recession together with a credit crunch and housing crisis. The freeing of obstacles will allow the overall economy to steer clear of a deep recession and possibly a minor recession, even in real GDP terms.   This means that the Fed and the economy will have a run rate in nominal GDP terms that is higher than expected. There is ample pent-up demand at state levels, company levels, and from the IRA (the Inflation Reduction Act) and the CHIPS and Science Act to keep employment firm. An insufficiently restrictive policy backdrop has set up a potential bubble in the stock market. The valuation this year has been driven by three impulses: the Silicon Valley Bank and regional bank mini-crisis, the trouble lifting the debt ceiling, and the super-valuation of the sub-set of mega caps and large cap stocks most associated with the introduction of generative AI applications (OpenAI’s ChatGPT and Google's Bard). The first two created a liquidity injection of more than $1 billion. The third became the driver of super-exponential prices for the most directly AI-linked names. The hype surrounding AI is the chief driver of the latest stock market surge, with talks of this being a new iPhone moment or even akin to the introduction of the internet. This is not a knock on AI, as we are keenly aware of the potential for generative AI to increase productivity over time. But the market is getting ahead of itself in selecting winners, and current valuations are already discounting too much of the longer-term future gains to be had.   The surface of this economic sea may be calm, with volatility at extremely low levels. However, beneath the waterline, there are strong currents and countercurrents, which, to our minds, set up a difficult second half of 2023. We don't have the ability to time and project where the markets are going, but we do have the ability to recognise when a bubble is forming and where data doesn't support the narrative. This bubble, and all bubbles, are accelerating when the fundamentals don't support the narrative.   The good news is that a deep recession is unlikely to happen. The bad news is that interest rates will need to stay high for longer. We simply don’t think the “audio matches the video” looking at complacent market expectations versus the likely path from here.

Downside risks to the global economy remain Output restrictions from Saudi Arabia and Russia push oil market further into deficit Oil accelerates higher after brief consolidation   Oil prices are creeping higher again on Tuesday, with Brent trading around $92 despite there being a mixed view on the economic outlook. As we heard from the European Commission yesterday, growth in the euro area is going to be relatively minor, with Germany struggling to avoid another recession. The UK has shown a lot more resilience than anticipated but still faces recession risks and marginal growth at best. People are feeling a little more optimistic about the US, with last week’s services PMI backing that up, but even here there are significant downside risks. While China is a big unknown with efforts to stimulate the economy being targeted and far from guaranteed to boost growth substantially. That said, one thing we’re guaranteed is supply to continue to be restricted until the end of the year at least following the recent announcement by Saudi Arabia and Russia. That has created a deficit in the market that is supporting oil prices, with OPEC forecasting that the shortfall will run at around three million barrels per day, accelerating the drawdown in inventories.   Momentum appears to be picking up again The OPEC report gave oil prices an extra boost and that appears to have lifted the momentum indicators with it which could be a bullish signal if it continues.   BCOUSD Daily OANDA on Trading View     There’s no obvious resistance ahead of $100 which isn’t to say it will necessarily reach this level, or quickly, but last time it traded around here it was quite volatile between $90 and $100. An interesting level over the last year or so was $93.50 so it will be interesting to see how it trades around here again. The late-August and early-September rally was quite powerful and if we have now seen a break higher after consolidation, it will also be interesting to see whether that momentum continues or it faces more resistance.    

Economic data, news & events ■ UK: Monthly GDP contracted by 0.5% mom in July, reversing the rise of 0.5% in the prior month. The main downward contribution came from services, where output fell 0.5% mom in July. Within services, the largest downward contribution came from healthcare activity, where industrial action increased. But there were also falls in industrial production and construction in July. Monthly GDP has been particularly volatile recently due to: 1. an additional bank holiday in May; 2. exceptionally warm weather in June, which boosted hospitality, tourism and construction; and 3. Industrial strike action. Looking instead at the less volatile 3M/3M growth rate, GDP rose 0.2% in July, unchanged from June. We continue to expect the economy to enter a recession around the turn of the year. ■ EU: Today, European Commission President von der Leyen will deliver her speech on the State of the Union 2023 during the European Parliament plenary session in Strasbourg. She is expected to outline the main priorities and flagship initiatives for the year to come, based on the EU’s achievements of the past years (9:00 CET). ■ Eurozone: We forecast a 0.7% mom decline in industrial output for July, following a contraction of 1% qoq in 2Q23. The expected contraction will have come about in a difficult environment for the industrial sector, which faces weak global demand for goods and fading support from backlogs of orders. The latest surveys of industrial activity do not point to a turnaround any time soon. The manufacturing PMI and its gauges of output and new orders remain stuck far below the expansion threshold (11:00 CET). ■ US: Headline monthly CPI inflation likely jumped to 0.6% mom in August, from 0.2% mom in July. In yearly terms, CPI inflation likely rose to 3.6%, from 3.2%. Such an acceleration was likely entirely driven by energy prices, as we estimate that gasoline prices rose by around 10% mom in seasonally adjusted terms and utility (piped) gas prices probably followed wholesale prices higher. Core inflation, on the other hand, is likely to come in at 0.2% mom for a third consecutive month, taking the yoy rate down to 4.4% from 4.7% in the prior month. We expect the disinflation process continued in housing, while inflation for core-goods and for non-housing core services (referred to as supercore) likely continued to moderate (14:30 CET).

US inflation rises but core inflation falls to two-year low All eyes on ECB rate decision on Thursday The euro is trading quietly on Wednesday. In the North American session, EUR/USD is trading at 1.0739, down 0.16%. The August US inflation report today was an interesting mix. Headline inflation rose for a second straight month, from 3.2% y/y to 3.7% y/y and above the consensus estimate of 3.6% y/y. On a monthly basis, headline inflation rose 0.6% in August, while core CPI came in at a modest 0.3%. The jump in headline inflation will no doubt grab the headlines and cause some groans.  Nobody wants to see inflation rise, but the main driver of the upswing was higher gasoline prices, which can change quickly from one month to the next. If gasoline prices reverse direction and fall sharply, that will be weigh on headline inflation. The Federal Reserve will be paying more attention to Core CPI, which fell to 4.3%, down from 4.7% in July. This matched the consensus estimate and notably, marked the lowest level since September 2021. The inflation report should cement a pause from the Fed at next week’s meeting.   Will the ECB raise rates? The European Central Bank meets on Thursday and it remains unclear whether policy makers will raise rates by a quarter-point or pause for the first time after nine straight hikes. Interest rate futures have priced in a hike at 65% but both the hawks and doves at the ECB have persuasive arguments. The hawks will argue that inflation has fallen to 5.3% in the eurozone but it’s unrealistic to expect inflation to fall back to the ECB’s 2% target without further rate hikes. With a deposit rate of 3.75%, there is still room for the ECB to continue raising rates and push inflation lower, which is the central bank’s number one priority. The doves will respond that inflation is moving in the right direction and a pause will give the central bank time to monitor the effects of rate hikes. The eurozone economy is sputtering and Germany, the bloc’s largest economy is now expected to fall into a recession, according to the European Commission. If the ECB continues hiking, it will only worsen economic conditions. I don’t envy ECB President Lagarde, who will have to decide which position to adopt and may face criticism no matter what she does.   EUR/USD Technical EUR/USD tested support at 1.0732 earlier. Below, there is support at 1.0654 There is resistance at 1.0777 and 1.0855          

US and European equity futures markets trade higher with Asian markets also climbing on cautious optimism the Federal Reserve may decide to pause rate hikes after US core inflation advanced the least in two years. The dollar and Treasury yield both trade softer ahead of US retail sales with the euro ticking higher as traders' price in a two-third chance of a rate hike from the European Central Bank later today. Crude trades near a ten-month high on concerns about a supply shortfall, copper higher on yuan strength while gold prices have steadied following a two-day decline.   Equities: S&P 500 futures are holding up well against recent weakness trading around the 4,530 level despite yesterday’s higher-than-expected US inflation opening the door for the Fed to hike interest rates one more time in December. Arm IPO was priced at the top end of the range at $51 per share with trading set to being today. Adobe earnings after the US market close could be a key event for the AI-related cluster of stocks. FX: The US dollar wobbled on the CPI release but could not close the day higher with Treasury yields slipping. EUR in the spotlight today as ECB decision is due, and EURUSD has found support at 1.07 for now with a rate hike priced in with over 65% probability. USDJPY trades softer after government minister talked about the need for strong economic measures. Yuan strengthened further with authorities increasing bill sales in Hong Kong to soak up yuan liquidity making it more expensive to short the currency. Commodities: Brent holds above $92 and WTI near $90 after the IEA joined OPEC’s warnings of a supply shortfall in the coming months, thereby supporting a rally that started back in June when Saudi Arabia curbed supply to boost prices. Softening the rally was a weekly US stock report showing rising stocks and production near the 2020 record. Near-term the market looks overbought and in need of a pullback. Gold looking for support ahead of $1900 with a hawkish FOMC pause back on the agenda while copper trades firmer with a stronger yuan offsetting a rise in LME stocks to a two-year high Fixed income: The US yield curve bull-steepened yesterday despite higher-than-expected CPI numbers, indicating that the Federal Reserve might be approaching the end of the hiking cycle. Yet, long-term yields remained flat as the 30-year auction showed a drop in indirect demand and tailed by 1bps despite pricing at the highest yield since 2011. Overall, we remain cautious, favouring the front part of the yield curve over a long duration. Bonds will gain as the economy starts to show signs of deceleration. Still, larger coupon auction sizes and a hawkish BOJ will support long-term yields unless a tail event materializes. We still see 10-year yields rising further to test strong resistance at 4.5%. Today, the focus will be on the ECB, which markets expect to hike. Due to a recession in Germany and in Netherlands, we believe that the ECB will deliver a hawkish pause today, which might result in a short-lived bond rally. Macro: US CPI surprised to the upside, but it did not alter the markets thinking around the Fed. Core CPI rose 0.3% MoM, or +0.278% unrounded, above the prior/expected +0.2%, with core YoY printing 4.3%, down from July's 4.7%, and in line with expectations. Headline print was in line with expectations at 0.6% MoM, up from +0.2% on account of energy price increases, with YoY lifting to 3.7% from 3.2%, above the expected 3.6%. The PBoC announced plans to issue RMB15 billion Central Bank Bills in Hong Kong on September 19, which is going to tighten CNH (offshore renminbi) liquidity further In the news: Asset managers BlackRock and Amundi are warning that US recession risks are rising – full story in the FT. Germany is facing big structural problems in its manufacturing sector with gloom taking over among workers – full story in the FT. The EU is weighing tariffs against China over flooding the market with cheap electric vehicles – full story on Reuters. Technical analysis: S&P 500. Key at resistance at 4,540. Key Support at 4,340. Nasdaq 100 15,561 is key resistance. EURUSD downtrend, support at 1.0685, Expect short-term bounce to 1.08. AUDJPY testing resistance at 95.00. Crude oil uptrend stretched, expect a correction lower Macro events: ECB Main Refinancing Rate exp. unchanged at 4.25% (1215 GMT), US Retail Sales (Aug) exp. 0.1% vs 0.7% prior (1230 GMT), US Initial Jobless Claims exp. 225k vs 216k prior (1230 GMT), US PPI (Aug) exp. 0.4% vs 0.3% prior (1230 GMT), Commodities events:  EIA’s Weekly Natural Gas Storage Change (1430 GMT) Earnings events: Adobe reports FY23 Q3 earnings (ending 31 August) after the US market close with analyst expecting revenue growth of 10% y/y and EPS of $3.98 up 63% y/y. Read our earnings preview here.  

US housing feels the squeeze from high mortgage rates A tripling of US mortgage rates constrained both the demand and supply of housing, leaving existing home sales at post-GFC lows. Mortgage rates will rise further in the wake of the market's reaction to yesterday's Fed forecasts, further constraining activity.   Market acknowledges the risk of a final hike, but it will depend on the data The Fed's messaging of higher for longer interest rates has been taken on board by financial markets, with the dollar strengthening and the yield curve shifting higher in the wake of yesterday's decision. Nonetheless, the market remains somewhat sceptical on the prospect of the final 25bp interest rate rise that the Fed's forecasts signalled for this year, with the pricing for November's FOMC meeting only being 8bp with 13bp priced by the time of the December meeting. The jobs market remains tight, as highlighted by low jobless claims numbers today, but we continue to believe that core inflation pressures will slow meaningfully, the economic outlook will soften, and the Fed won't end up carrying through. The jobs market is always the last thing to turn lower in a downturn and there are areas of more obvious weakness.  For example, US existing home sales fell 0.7% MoM in August to a level of 4.04mn rather than rising the 0.7% MoM as the market expected. This is due not only to weakness in demand but also a complete collapse in properties available for purchase. The affordability issue is front and centre here, with prices having risen nearly 50% nationally during the pandemic, but demand has obviously been crushed by the fact that mortgage rates have tripled since the Federal Reserve started hiking interest rates. But this surge in borrowing costs is constraining the supply of homes for sale as well - people who are locked in at 2.5-3.5% mortgage rates cannot afford to give them up. They can't take the mortgage with them when they move home, so even if you downsize to a smaller, cheaper property, you are, in all likelihood, going to end up paying a higher monthly dollar mortgage payment.   We're in a crazy-sounding position Consequently, we are in a crazy-sounding position whereby the number of housing transactions is on a par with the lows seen during the global financial crisis, yet home prices are rising. This should be a boon for home builders, but note the big drop in sentiment and housing starts seen earlier in the week. The drop-off in prospective buyer traffic is making builders cautious. Mortgage rates at 7%+ will obviously do that over time, but it may be another sign of the household sector starting to pull back at the margin now that the Fed believes pandemic-era savings are close to being exhausted.   Existing homes sales transactions and home prices   Leading index still indicates recession can't be ruled out Meanwhile, the US leading economic indicator, which combines a range of other numbers, including jobless claims, orders, average work week, the yield curve and credit conditions, posted its 17th straight monthly decline. As the chart below shows, the index at these sorts of levels has been a clear recession indicator in the past, but for now, GDP growth is strong.   Leading index versus GDP (YoY%)   Our view remains that this strength in activity has been caused primarily by households running down pandemic-era accrued savings aggressively and borrowing more on credit cards. But with savings obviously being finite - note the Fed's Beige Book citing evidence of the "exhaustion" of these savings - and consumer credit harder to come by and certainly less affordable than it was, the cashflow required to finance ongoing increases in spending will have to increasingly come from rising real income growth. Rising gasoline prices will erode spending power while student loan repayments, strikes and the prospect of a government shutdown will add to the financial stresses on millions of households, so we will need to see substantial wage increases for everyone - not just auto workers - to keep this growth engine firing.  Given this situation, we not only think the Fed will leave rates at their current levels, we also see the potential for more rate cuts next year than the 50bp currently being signalled by the Federal Reserve.

05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  

Not much relief, after all By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Relief that came with the news of a temporary avoidance of a potential government shutdown remained short lived. Sentiment in stocks markets turned rapidly sour, both in Europe and in the US, while the US treasury yields didn't even react positively to the no shutdown news in the first place. The selloff in the US 10-year bonds accelerated instead; the 10-year yield hit the 4.70% mark, whereas the 2-year yield remained steady-ish at around the 5.10% level, as the Federal Reserve (Fed) Chair Jerome Powell didn't say much regarding the future of the monetary policy yesterday, but his colleagues continued to sound hawkish. Fed's Michelle Bowman said that multiple more interest rate hikes could be needed to tame inflation, while Micheal Barr repeated that the rates are likely restrictive enough, but they should stay higher for longer. Sufficiently hawkish words combined to a set of still-contracting-but-better-than-expected manufacturing PMI data justified the positive pressure on US sovereigns.   The gap between the US 2 and 10-year yields is now closing, but not necessarily for 'good' reasons. Normally, you would've expected the short-term yields to ease more rapidly than the long-term yields when approaching the end of a tightening cycle, with the expectations of future rate cuts kicking in. But what we see today is bear steepening where the 10-year yield accelerates faster than the 2-year yield. The  latter suggests rising inflation expectations where investors prefer to buy short-term papers and to wait for the rate hikes to end before returning to long-term papers. The US political uncertainties and a potential government shutdown before the end of the year, and an eventual US credit downgrade likely add an additional downside pressure in long dated US papers.   The rising yields do no good to stocks. But interestingly, yesterday, the S&P5500 closed flat but the more rate-sensitive Nasdaq stocks were up. The US dollar index extended gains past the 107 level; the index has now recovered half of losses it recorded since a year ago, when the dollar depreciation had started.   The AUDUSD extended losses to the lowest levels since last November as the Reserve Bank of Australia (RBA) maintained its policy rate unchanged at the first meeting under its new Governor Michelle Bullock. This is the 4th consecutive month pause for the RBA. The bank said that there may be more tightening in the horizon to bring inflation back to the 2-3% range (inflation currently stands at 5.2%). But the fact that Australians biggest trading partner, China, is not doing well, the fact that real estate market in Australia is battered by rising rates and the fact that the Chinese property crisis is now taking a toll on Australia's steel exports toward China are factors that could keep Australian growth below target and prevent the RBA from hiking further. If China doesn't get well soon, Australia will see its iron ore revenues, among others, melt in the next few years, and that's negative for the Aussie in the medium run.  Elsewhere, the EURUSD sank below the 1.05 level on the back of accelerated dollar purchases and softening European Central Bank (ECB) expectations following last week's lower-than-expected inflation figures. Cable slipped below a critical Fibonacci support yesterday, and is headed toward the 1.20 psychological mark. The weakening pound is not bad news for the British FTSE100, as around 80% of the FTSE100 companies' revenues come from abroad, and they are dollar denominated. Plus, cheaper sterling makes the energy-rich FTSE100 more affordable for foreign investors. Even though FTSE100 fell with sliding oil prices yesterday - and this year's performance is less than ideal compared to European and American - London's stock market is closing the gap with Paris, and rising oil prices and waning appetite for luxury stuff could well offer London its status of Europe's biggest stock market, yet again.  Speaking of oil prices, crude oil sank below $90pb level yesterday, partly due to the overbought market conditions that resulted from a more than a 40% rally since end of June, and partly because the 'higher for longer rates' expectations increased odds for recession.    

Not much relief, after all By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Relief that came with the news of a temporary avoidance of a potential government shutdown remained short lived. Sentiment in stocks markets turned rapidly sour, both in Europe and in the US, while the US treasury yields didn't even react positively to the no shutdown news in the first place. The selloff in the US 10-year bonds accelerated instead; the 10-year yield hit the 4.70% mark, whereas the 2-year yield remained steady-ish at around the 5.10% level, as the Federal Reserve (Fed) Chair Jerome Powell didn't say much regarding the future of the monetary policy yesterday, but his colleagues continued to sound hawkish. Fed's Michelle Bowman said that multiple more interest rate hikes could be needed to tame inflation, while Micheal Barr repeated that the rates are likely restrictive enough, but they should stay higher for longer. Sufficiently hawkish words combined to a set of still-contracting-but-better-than-expected manufacturing PMI data justified the positive pressure on US sovereigns.   The gap between the US 2 and 10-year yields is now closing, but not necessarily for 'good' reasons. Normally, you would've expected the short-term yields to ease more rapidly than the long-term yields when approaching the end of a tightening cycle, with the expectations of future rate cuts kicking in. But what we see today is bear steepening where the 10-year yield accelerates faster than the 2-year yield. The  latter suggests rising inflation expectations where investors prefer to buy short-term papers and to wait for the rate hikes to end before returning to long-term papers. The US political uncertainties and a potential government shutdown before the end of the year, and an eventual US credit downgrade likely add an additional downside pressure in long dated US papers.   The rising yields do no good to stocks. But interestingly, yesterday, the S&P5500 closed flat but the more rate-sensitive Nasdaq stocks were up. The US dollar index extended gains past the 107 level; the index has now recovered half of losses it recorded since a year ago, when the dollar depreciation had started.   The AUDUSD extended losses to the lowest levels since last November as the Reserve Bank of Australia (RBA) maintained its policy rate unchanged at the first meeting under its new Governor Michelle Bullock. This is the 4th consecutive month pause for the RBA. The bank said that there may be more tightening in the horizon to bring inflation back to the 2-3% range (inflation currently stands at 5.2%). But the fact that Australians biggest trading partner, China, is not doing well, the fact that real estate market in Australia is battered by rising rates and the fact that the Chinese property crisis is now taking a toll on Australia's steel exports toward China are factors that could keep Australian growth below target and prevent the RBA from hiking further. If China doesn't get well soon, Australia will see its iron ore revenues, among others, melt in the next few years, and that's negative for the Aussie in the medium run.  Elsewhere, the EURUSD sank below the 1.05 level on the back of accelerated dollar purchases and softening European Central Bank (ECB) expectations following last week's lower-than-expected inflation figures. Cable slipped below a critical Fibonacci support yesterday, and is headed toward the 1.20 psychological mark. The weakening pound is not bad news for the British FTSE100, as around 80% of the FTSE100 companies' revenues come from abroad, and they are dollar denominated. Plus, cheaper sterling makes the energy-rich FTSE100 more affordable for foreign investors. Even though FTSE100 fell with sliding oil prices yesterday - and this year's performance is less than ideal compared to European and American - London's stock market is closing the gap with Paris, and rising oil prices and waning appetite for luxury stuff could well offer London its status of Europe's biggest stock market, yet again.  Speaking of oil prices, crude oil sank below $90pb level yesterday, partly due to the overbought market conditions that resulted from a more than a 40% rally since end of June, and partly because the 'higher for longer rates' expectations increased odds for recession.    

Eurozone economy sees a small contraction as inflation plunges A drop in eurozone GDP keeps a small technical recession in the second half of 2023 a realistic prospect. With inflation falling faster than expected, the debate within the European Central Bank's governing council is set to turn more dovish, but don’t expect rate cuts anytime soon.   GDP decline is not meaningful, broad stagnation continues The drop of 0.1% quarter-on-quarter in eurozone GDP is not very dramatic. It was led by Irish GDP falling by 1.8% – a figure which is often subject to dramatic revisions. Germany experienced a small decline of 0.1%, while Italy stagnated over the quarter. Growth in France and Spain remained positive but still lower than last quarter. All in all, growth continued to trend around zero in the third quarter. While a technical recession is certainly possible in the second half of this year on the back of the third-quarter GDP reading and a weak start to the quarter according to first business surveys, we don’t see too much reason for real alarm so far. It does look like the economic environment is weakening at the moment, but no sharp recession is in sight either. Still, continued economic and geopolitical uncertainty alongside the impact of higher rates on the economy will weigh on economic activity in the coming quarters.   Inflation surprises should make ECB debate more dovish at coming meetings Inflation is really looking more benign at the moment. It has been falling for some time, but the pace of declines disappointed up until summer. September and October surprised positively despite high oil prices and still stubborn wage growth, which adds to confidence that inflation is slowly getting under control. The October decline from 4.3 to 2.9% was mainly driven by base effects from last year's high energy prices, but core inflation also continues to come down. Month-on-month price growth does not get reported on but a quick calculation suggests that goods prices rose well under 2% annualised in October, while services prices remained more sticky around 3.5% annualised. While high services inflation remains a concern, these figures do mean that annual core inflation – currently at 4.2% – will likely trend lower over the coming months. Especially as businesses are not indicating a new surge in prices is expected. The numbers start to point to a much better inflation environment, especially now that the economy is clearly performing much weaker than last year and most of the impact of recent hikes is still in the pipeline. While the European Central Bank (ECB) will be very keen to avoid making the mistake of the 1970s by easing too soon and allowing another spell of high inflation later, debates over whether current restrictive levels of interest rates are not too strict are set to grow louder in the months ahead. Don’t expect the ECB to lower rates anytime soon though; upside risks to inflation will weigh heavily in the central bank's decision-making at the coming meetings.

Jobs day!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The S&P500 jumped almost 2% to above its 200-DMA, and Nasdaq 100 gained 1.74% and tested its 50-DMA to the upside as the rally in the US sovereign bonds extended to another day.   Apple disappoints Apple will likely slow the rally in major US indices. Apple shares dived up to 4% in the afterhours trading after announcing that the sluggish Chinese demand for iPhones dented revenue. The Mac computers sales also fell short of a billion USD. Apple sales fell for the fourth straight quarter, the longest such decline in 22 years. As a result, Apple stock could sink to $170 a share, the critical 38.2% Fibonacci retracement level, if taken out, would let Apple sink into the medium-term bearish consolidation zone. The only thing that could save Apple from falling into dark waters is... a further rally in US bonds, and a further fall in yields.  Falling yields are no good for Fed The US bond rally popped this week because the US Treasury said that it would borrow slightly less than previously thought and slightly less 3-, 10- and 30-year papers. The Federal Reserve (Fed) hinted that the rate hikes could be coming to an end because the recent surge in US long term yields helped them tighten the financial conditions without the need for another rate hike.   But if the yields fall at this speed, the Fed expectations will become hawkish very quickly, and depending on how far the market will go, the Fed could be obliged to hike rates again in December, or in January to keep financial conditions tight enough.   Jobs day!  US growth is strong, and the jobs market remains healthy. The Fed thinks that solid labour-force participation and immigration explain the resilience of the jobs market. According to the consensus of analyst estimates on Bloomberg, the US economy is expected to have added 180K new nonfarm jobs, the unemployment rate is seen steady at around 3.8% and the wages growth may have slowed from 4.2% to 4% on an annual basis. Any strength in job additions or wages growth data could bring bond trades back to earth and remind them that if the US jobs market - and the economy - remains this strong, the Fed could turn hawkish again. But strong jobs data in a context of higher supply is not necessarily inflationary.  Gloomy UK outlook  The Bank of England (BoE) kept its interest rate unchanged for the second straight month yesterday. Some MPC members still voted for a 25bp hike to make sure that the pause is not premature, but they all said the same thing: it's too early to talk about rate cuts.   Good news is that inflation may fall below 5% in October and somewhere near 4.5% by the year end. But at 4.5-5%, inflation is still more than twice the BoE's policy target. Therefore, the BOE can't promise that it's done hiking. It could only hope that the cumulative impact of higher rates on the economy would do the rest of the heavy lifting.   In the best-case scenario, the UK's gloomy economic outlook - which seems to become gloomier as months go by - weighs on demand and brings inflation lower. In the worst-case scenario, inflation remains sticky while the economy sinks into a recession. In both cases, the BoE wouldn't hike. The expectation of another hike is down to 1 in 3 and markets now fully price in 3 quarter-point cuts by the end of 2024. The softer economic outlook and softening BoE expectations are threatening for sterling bulls both against the US dollar and the euro.  

German exports disappoint once again Exports drop in September and continue to act as a drag on the economy.   Things are still looking pretty downbeat for Germany's economy. German exports disappointed again and dropped by 2.4% month-on-month in September. The only positive of this data release is that the August drop was revised into an increase of 0.1% MoM. September imports fell by 1.7% from -0.3% MoM in August. As a consequence, the trade balance narrowed to €16.5 billion from €17.7 billion in August. Don’t forget that this is in nominal terms and not corrected for high inflation. To warp up another disappointing macro morning from Germany, exports were down by 7.5% compared with September last year.   Exports remain drag on economy Today’s trade numbers do not only indicate that the contraction of the German economy in the third quarter was probably driven by more than only the reported weak private consumption but also that a downward revision of the first GDP estimate is possible. Like the rest of the German economy, exports remain stuck in the twilight zone between recession and stagnation. Since the start of 2022, net exports have been a drag on the economy in four out of six quarters. Supply chain frictions, a more fragmented global economy and China moving from a dynamic export destination to competitor are all factors weighing on the German export sector. The cooling of global demand is currently worsening the structural problems and the weakening of the euro since the summer is still too small to have any significant impact on exports. Export order books remain weak. Last but not least, recently German technology groups warned that they were being hit by customs delays for exports to China. As a result, trade is no longer the strong resilient growth driver of the German economy that it used to be, but rather a drag. Maybe the only upside of today’s disappointing data is that things can hardly get worse. However, as positive signals remain absent, the base case for the German economy over the next months remains stagnation at best.

German industrial production disappoints once again Another disappointing data release not only suggests that third-quarter GDP growth could be revised downwards, but also that the country is likely to end the year in a technical recession. Germany’s macro horror show continues, and we are almost getting to the point where kids ask their parents where they were the last time Germany produced a series of positive macro data. Today’s industrial production data is unfortunately no exception to the longer-lasting trend. German industrial production dropped once again in September for the fifth consecutive month. On the month, it was down by 1.4% from -0.1% month-on-month in August. For the year, industrial production was down by 3.7%. The drop in industrial activity was spread across all main sectors. Industrial production is now more than 7% below its pre-pandemic level, more than three years since the start of Covid-19. Production in energy-intensive sectors was more than 8% down compared with September last year.   Risk of ending the year in technical recession remains high Looking ahead, leading indicators in October don't bode well for future production. After a first stabilisation in September, production expectations and survey-based order book assessments weakened again in October. Inventories have started to come down somewhat but remain too high. Yesterday’s industrial orders data for September confirmed the weak outlook. It all looks as if German industrial production will continue moving sideways rather than gaining momentum anytime soon. With today’s data, industrial production would have to increase by at least 2% MoM in the coming months to bring production back into positive territory in the fourth quarter. Even though there isn’t any hard data for the fourth quarter yet, recent developments have clearly increased the risk that the German economy will end the year in recession.

UK economy flatlines in the third quarter UK GDP was a little better than expected, but in reality, the economy has largely stagnated this year. We expect that trend to continue over coming quarters as the impact of higher rates continue to bite, though a recession can't be ruled out.   UK economy flatlined in the third quarter We shouldn’t make too much of the fact that the UK economy performed a little better than expected in the third quarter. The level of real GDP was flat relative to the second quarter, compared to consensus and our own expectation of a 0.1% decline. The details reveal that the economy was rescued by net imports, a category that tends to be pretty volatile between quarters. Other key areas – notably consumption and business investment – were negative on the quarter. But we also have to remember that it’s been a fairly wild few months for several key sub-sectors of the GDP figures. June saw a massive 0.7% rise in activity, owing to a highly unusual surge in manufacturing. And July saw a corresponding 0.6% drop as that production boost partly unwound, but also on a number of public sector strikes in health/education. What’s happened since – with GDP growing by 0.1% in August and 0.2% in September – is as much about those trends unwinding as it is about genuine economic activity growth.   Bank of England remains more focused on inflation The fact that the UK economy didn’t contract in the latest quarter will, temporarily, dampen some of the discussion about a recession. Our best guess at the moment is that we’ll get a return to very modest growth in the fourth quarter, though this is partly down to base effects after that weakness in July. Instead, the discussion of a potential recession should be more focused on what’s happening in the jobs market. There has been a clear cooling in hiring demand, though issues with the unemployment figures make it difficult to say how far this has translated into higher joblessness. We’d expect redundancies to rise gradually as the impact of higher rates continues to squeeze margins for businesses. Higher mortgage rates will also be a drag on activity. With around 4-5% of mortgage holders refinancing each quarter, many of which coming off a 5-year fixed deal with rates that start with either a 1 or a 2, the average repayment will continue to increase – even though it looks like the Bank of England’s tightening cycle is over. We expect the average rate on outstanding mortgage debt to climb from just over 3% now to just under 4% by the end of 2024. That said, we have to remember that only around a quarter of households have a mortgage these days, and this pain will be partly offset by positive real wage growth over coming quarters. In short, we think the most likely path for the economy is stagnation or very modest growth next year, though a recession can’t be ruled out. These latest GDP figures are of limited consequence for the Bank of England, and the committee’s focus will be more centered on next week’s services inflation and wage growth figures. Both are still too high for the Bank’s liking, but barring any huge upside surprises in both sets of figures, we think the next move for Bank Rate will be down with cuts beginning next summer.

The Fed is done and market rates have peaked – so what now? Market rates have likely peaked. The 10yr hit 5% and the 2yr got to 5.25% in the past month or so. A move back toward 5% is not improbable for the 10yr, but it's more likely that we've morphed into a structural decline in market rates, and a steeper curve. Most of the time a peak for the Fed correlates with a good time to get long, or at least to average in as rates rise.   Most of the time a peak for the Fed correlates with a subsequent tendency for market rates to fall – it tends to be a good time to get long Have market rates peaked in the United States? Most probably yes. The Federal Reserve is likely done too. If true, the Fed has in fact been done since 26 July this year, and has been at a peak rate for almost four months now. When the Fed peaks, it’s a key moment for markets. Most of the time a peak for the Fed correlates with a subsequent tendency for market rates to fall – it tends to be a good time to get long. Getting long can take on many guises. For asset managers is means buying longer dated higher quality securities, even into an inverted curve, as this means locking in existing running yield for longer. For liability managers, getting long means setting fixed rate receivers, which is effectively like a funded long in a bond. It’s also code for swapping to floating, where exposure to falling official rates is sought. It's no surprise that over the long term being exposed to floating rates is the cheapest form of funding. Despite the volatility that is implied, an average upward sloping term structure tends to result in a lower cost of funding. In fact, there is no example of a 10yr fixed rate receiver resulting in negative carry at any time over the past number of decades (as 10 years is long enough for floating rates to on average be lower than the 10yr rate that has been locked in). Moreover, when the Federal Reserve is at a peak, realised carry on fixed rate receivers tends to be maximised (graph below). It’s the opposite when we are at the bottom of the rate cycle, as this is the optimal time to set a swap to a fixed (rate payer). Similarly, for the asset manager, this is the best time to be short on interest rate exposure, as the path ahead then is for the Fed to be hiking rates, and pushing market rates higher. That’s for another day. Today we’re concerned with the peak in the cycle.   Realised carry from setting fixed rate receivers (5yr, 7yr and 10yr compared)   Getting long the bond market comes in many guises, but now is the time How convinced are we that the Fed has peaked? You can never be 100% sure on this, but the odds firmly favour the view that they’re done. Latest headline consumer price inflation has fallen to 3.2% and the latest 3mth annualised reading for the core personal consumer expenditure deflator is at 2.5%. That’s bang on the 20yr average for US inflation. It has to be said that the US has managed a remarkable easing in inflation, despite the ongoing firmness in the labour market. But that labour market firmness won’t last. Every day the effective funds rate remains at 5.3% the pressure builds on e.g. the typical credit card debt holder that finds themselves paying rates in excess of 20%. All debt holder subject to re-sets at higher rates face similar issues, ones that won’t go away as the Fed holds. Also, falling inflation does not mean falling aggregate prices, so living standard pressures from high prices remain. The transmission mechanism to the economy is through higher delinquencies, and a wider lower spending link in consequence. The Federal Reserve does not need to hike rates further in order to sustain the pressure already beginning to be felt by the economy. As these pressures build, concern morphs away from inflation and towards sub-trend growth, and possibly recession. That places rate cutting on the radar. Ahead of that, market rates tend to ease lower. And once we are about three months ahead of an actual cut, the 2yr yield will gap lower – it can move lower by 100bp in a matter of days, and keeps going. The engine that drives this is the Fed cutting from 5.5% currently, to (we think) 3% by mid-2025 (starting by mid-2024). Market rates anticipate a lot of this ahead of time. The anticipatory move lower on the front end is where value comes from exposure to paying floating rates for liability managers. And for asset managers, that means lower funding costs, and moreover, downward pressure on longer tenor rates, that are pulled lower by shorter tenor ones. If that all plays out, then being long is the way to go in the coming few months. A mini back-up in market rates is far from improbable, as the deficit pressure has not gone away and the economy has not exactly imploded. We'd use any such back-up as an opportunity to average in, adding to interest rate exposure for asset managers and to floating rate liabilities for liability managers

By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Nov) – 08/12 – last month's October jobs report was the first one this year when the headline number came in below market expectations, though not by enough to raise concerns over the resilience of the US economy. Unlike September, when US jobs surged by 297k, jobs growth slowed in October to 150k, while the unemployment rate ticked higher to 3.9%, in a sign that the US economy is now starting to slow in a manner that will please the US central bank. Combined with a similarly weak ADP report the same week, where jobs growth slowed to 113k, and a softer ISM services survey yields have slipped back significantly from their October peaks, as well as being below the levels they were a month ago in a sign that the market thinks that rate hikes are done and has now moved on to when to expect rate cuts. This is the next challenge for the US central bank who will be keen to continue to push the higher for longer rates mantra. It's also worth noting that JOLTS job openings are still at elevated levels of 9.55m, and weekly jobless claims continue to trend at around 210k which means the Fed still has plenty of leeway to push back on current market pricing on rate cuts. Expectations are for 200k jobs to be added in November; however, it should also be remembered that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.          Services PMIs (Nov) – 05/12 –while manufacturing activity in Europe appears to be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation, which is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4. The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The UK economy appears to be more resilient where was saw a recovery into expansion territory in the recent flash numbers to 50.5. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have gone after Italy fell sharply in October to 47.7, while Spain was steady at 51.1.  

Services PMIs expected to remain soft, as RBA leaves rates unchanged By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a rather lacklustre start to the week, weighed down by a rebound in the US dollar as well as weakness in basic resources and energy prices, as investors took a pause after the gains of the past couple of weeks.  US markets fared little better, sliding back in the face of a modest rebound in yields as investors hit the pause button ahead of this week's jobs data, which is due at the end of the week, with markets in Europe set to open slightly weaker this morning.   Earlier this morning the RBA left rates on hold at 4.35% after last month's decision to raise rates by another 25bps. Despite last month's surprise decision to raise rates today's decision acknowledged that inflation was now starting to moderate in goods even as concerns remained about services inflation. Nonetheless, despite this acknowledgement that inflation appears to be slowing there was little indication that the central bank was considering another rate move in the near term. Last month's decision to raise rates was driven by concern about domestic price pressures and while today's decision to hold was a relief there was little sign that a policy change in either direction was being considered with Governor Bullock acknowledging significant uncertainties around the outlook.   Nonetheless today's decision to hold came against a backdrop of a month which has seen 2-year yields decline almost 40bps from their 4.52% peaks on the 1st November, as markets surmised the central bank is now done, with the Australian dollar falling sharply.   The recovery in US yields yesterday appeared to be because of the possibility that the declines seen over the past few days may have been a little too much too quickly, given Powell's comments on Friday last week when he pushed back on the idea that rate cuts were on the cards for the first half of 2024.   There is certainly an element of the market getting ahead of itself when you look at a US economy that grew at 5.1% in Q3 and still has an unemployment rate of 3.9%. The same sadly cannot be said for Europe where the French and German economies could well already be in recession.   While recent manufacturing PMI data in Europe suggests that economic activity might be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation. This in turn is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4.   The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have declined after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today's November numbers with a rise to 48.3 and 51.6 respectively.   The UK economy also appears to be showing slightly more resilience where there was saw a recovery into expansion territory in the recent flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales numbers for November, which showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like for like sales in November rose 2.6%, the same as the previous month, with sales of high value goods remaining soft, with consumers preferring to go with lower ticket and essential items spend of food and drink, health and personal care.      In the US we also have the latest October JOLTS job opening numbers which are expected to show vacancies slow from 9.5m to 9.3m, while the latest ISM services survey forecast to show a resilient economy.   The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday period hiring. Gold prices are also in focus after yesterday's new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce in the absence of a rebound.     EUR/USD – continues to look soft dropping below the 200-day SMA at 1.0825, with a break of the 1.0800 having the potential to retest the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 area has seen the pound slip back with support at the 1.2590 area currently holding. 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 – found support at the 0.8555 area for the moment, but 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 – found some support at the 146.20 area in the short term, 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 15 points lower at 7,498   DAX is expected to open 9 points higher at 16,413   CAC40 is expected to open 3 points lower at 7,329

Interest rates remain in focus after central bank decision week Following an intense week of central bank decisions with most of them being in line with expectations of keeping rates unchanged, it's become evident over the past few months that financial markets are aligned in the belief that UK interest rates have reached their peak and it would be surprising if the Bank of England were to implement an increase in UK interest rates in the near future, with such a decision likely only occurring in response to a substantial shock in inflation data. Meanwhile, predicting the timing of the initial interest rate cut, which would mark the first fall in UK interest rates since March 2020, is more challenging.  One thing that remains clear is that the UK economy is in a much worse position than both its European and US counterparts as GDP forecasts continue to indicate the potential for a recession which may trigger a response from the central bank. The BoE has also appeared to follow the US central bank (Federal Reserve) in its footsteps and may await the signal from it before starting its own rate cut cycle as rates are also expected to start falling in early 2024. In either case, new Bloomberg projections point to the possibility of the first rate cut being implemented by the Bank of England in the first quarter of 2024, followed by a gradual fall in rates throughout the following meetings with the target being reached in the coming years.      

Eurozone, German Service PMI ease in December Euro snaps four-day rally The euro has snapped a four-day winning streak on Friday. In the European session, EUR/USD is trading at 1.0949, down 0.38%. The euro has enjoyed a strong week, with gains of 1.77%. Soft Eurozone, German services PMIs weigh on euro Eurozone Services PMI eased in December, indicating that the economy continues to struggle. The PMI fell from 48.7 to 48.1 and missed the consensus estimate of 49.0. This marked a fifth straight month of contraction in the services sector, with 50 separating contraction from expansion. Germany, the largest economy in the eurozone, also reported a decline, with the PMI falling to 48.4, down from 49.6 in November and short of the consensus estimate of 49.8. Euro soars after ECB pause The European Central Bank held the benchmark rate at 4.0% for a second straight time on Thursday. This move was expected, but the central bank pushed back against market expectations for interest rate cuts next year, sending the euro soaring 1.09% against the US dollar after the announcement. ECB President Christine Lagarde reaffirmed that the Bank would continue its “higher for longer” stance, saying that the Bank was not about to let down its guard and lower rates. Lagarde sounded hawkish even though the ECB lowered its inflation forecast at the meeting. Inflation has fallen to 2.4% in the eurozone, within striking distance of the 2% target. Lagarde acknowledged that inflation was easing but said that domestic inflation was “not budging”, largely due to wage growth.   There is a deep disconnect between the markets and the ECB with regard to rate policy. ECB President Lagarde poured cold water on expectations for rate cuts, arguing that inflation had not been beaten. The markets are marching to a very different tune and have priced in at least in around six rate cuts in 2024 and are confident that Lagarde will have to change her stance, with inflation falling and the eurozone economy likely in recession. . EUR/USD Technical EUR/USD is testing support at 1.0957. Below, there is support at 1.0905 1.1044 and 1.1096 are the next resistance lines    

Indices trying to end 2023 on a high note Global stock markets seem to be headed for an end-of-year 'Santa rally' as traders and investors return to their desks after the Christmas break, gearing up for the final push into 2024. The ongoing optimism surrounding the prospect of central banks initiating interest rate reductions in 2024, with multiple cuts expected next year, continues to propel shares higher after the US stock market experienced gains in light trading, bringing the S&P 500 index to its highest intraday level in nearly two years.   This positions the S&P 500 just below 1% of its closing all-time high of 4,796.56 recorded in January 2022 with this rally reflecting investors' growing confidence in the ability of US policymakers to engineer a 'soft landing,' effectively curbing inflation without precipitating a recession with this sentiment gaining further traction after the recent US PCE index data revealed a deceleration in inflation last month. However, it is important to note that the situation in the UK is significantly more troubling after recently released data continues to indicate inflationary and economic issues in the economy as the Bank of England may have run out of moves.    

The Finish Line By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in the Q3. We were expecting the Chinese post-Covid reopening to boost the Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.  The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.   Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.   The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024. T  The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12-months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.    For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.  In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.  In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year. 

Chicago PMI expected to decelerate China releases PMIs on Saturday The New Zealand dollar is in negative territory on Friday. In the European session, NZD/USD is trading at 0.6308, down 0.37%. The US dollar has hit a rough patch lately and retreated against most of the majors. The New Zealand dollar has been full marks, climbing some 400 basis points over the past five weeks. The Federal Reserve meeting earlier this month has boosted risk appetite, as Fed Chair Powell jumped on the rate-cut bandwagon, signalling that the Fed is finally done raising interest rates. Powell pencilled in three rate cuts next year while the markets have priced in double that. Fed members have urged caution, but the markets remain exuberant and have priced in an initial rate cut in March. Inflation is getting closer to the 2% target and with the labour market in good shape, it looks like the Fed could guide the US economy to a soft landing and avoid a recession. Chinese PMIs next New Zealand doesn’t release any tier-1 events until mid-January, but Chinese PMIs, which will be released on Saturday, could have an impact on the direction of the New Zealand dollar. China is New Zealand’s largest export market and the PMIs will provide a report card on the health of China’s service and manufacturing sectors. China’s recovery has been patchy and the slowdown has resulted in deflation in the world’s number two economy. The manufacturing sector has been stuck in contraction for most of this year and non-manufacturing expansion has been steadily falling and has stagnated over the past two months. The Manufacturing PMI is expected at 49.5 and the Services PMI at 50.3.   The US releases Chicago PMI, an important business barometer, later today. The PMI shocked in November with a reading of 55.8, which marked the first expansion after fourteen straight months of contraction. The upward spike may have been a one-time occurrence due to the end of the United Auto Workers strike as activity rose in the auto manufacturing industry. The consensus estimate for December stands at 51.0, which would point to weak expansion. . NZD/USD Technical NZD/USD tested resistance at 0.6345 in the Asian session but has reversed directions. Below, there is support at 0.6031 There is resistance at 0.6150 and 0.6195

2023 key highlights & cross-assets performances in the past 2 years Fig 1: Cross assets performances as of 29 Dec 2023 (Source: TradingView, click to enlarge chart)   The US Federal Reserve’s stance of keeping interest rates higher for a longer period in the first half of 2023 triggered a resilient US dollar environment in the absence of a recession scenario in the US that led the US stock market to outperform the rest of the world. The outperformance of the US stock market in 2023 was led by the Magnificent 7 (Apple, Amazon, Microsoft, Alphabet/Google, Nvidia, Meta, Tesla) mega-cap technology stocks that have stronger balance sheets and are skewed toward “AI productivity” theme play. Also, these 7 stocks have a significant combined market-cap weightage in the Nasdaq 100 that recorded an annual gain of 54% in 2023 (2.3 times S&P 500’s 2023 returns). US regional banking crisis that led to the collapse of Silicon Valley Bank & First Republic Bank due to poor balance sheet risk management reinforced by outsized mark-to-market losses on longer-term US Treasuries (higher US Treasury yields via Fed’s tightening monetary policy). It also indirectly led to the demise of Credit Suisse which eventually was brought over by rival UBS. The US regional banking crisis was just a blip, negated by a liquidity backstop orchestrated by the US Treasury; the Bank Term Funding Program (BTFP). The risk-off behaviour in Q3 reversed abruptly in Q4 to a raging risk-on FOMO behaviour triggered by a significant easing liquidity condition in the US; the rapid drawdown of the Fed’s overnight reverse repo facility from a peak of US$2.55 trillion in December 2022 to US$683.25 billion (-74%) for the week of 11 Dec 2023 as money market funds that choose to invest their surplus cash in short-term US Treasury bills instead (rather than parking in overnight reverse repos facility) which in turn helped to fund the US Treasury general account (also US Treasury’s issuance switch from longer-term Treasuries to T-bills for funding needs). A rise in the expectations of a Fed’s dovish pivot where the first Fed funds rate cut is priced in to come as early in March 2024 indicated by the CME FedWatch tool that led to a slide of 120 basis points (bps) in the US 10-year Treasury yield from a 16-year high of 5% printed on 23 October 2023, synchronized with a weakening US dollar that kickstarted a rally in almost all asset classes (equities, bonds, gold, cryptocurrencies) except oil & China-related risk assets. China’s post-Covid re-opening bullish theme play on China and Hong Kong stock markets fizzled out after Q1 due to a heightened deflationary risk spiral caused by a persistent weak property market in China. The Hang Seng Index ended 2023 with a fourth consecutive annual loss of -14% (prior years’ losses of -15% in 2022, -14% in 2021 & -3% in 2020); its worst performance streak since 2000. Due to China’s structural weakness (deflationary risk spiral), China, and Hong Kong stock markets failed to respond to the cyclical upswing in risk assets during Q4 2023 reinforced by renewed US dollar weakness. The CSI 300 and Hang Seng Index recorded losses of -7% and -4.3% respectively in Q4 whereas the MSCI Emerging Markets Ex China exchange-traded fund gained by +12.5% over the same period, slightly outperformed the US S&P 500’s Q4 return of +11.24% The Japanese yen (JPY) plummeted to a 33-year low against the US dollar in Q3 2023 due to the Bank of Japan (BoJ)’s newly appointed Governor Ueda’s reluctance to offer firm guidance to normalize its short-term negative interest rate policy despite Japan’s core inflation rate had exceeded BoJ’s 2% target for the 20th consecutive month. Emerging themes for 2024 A potentially weaker US dollar due to the shrinkage of the US Treasury yield spread premium against the rest of the world, and a potential major JPY strength revival triggered by internal economic factors (service prices in Tokyo rose at their fastest pace since 1994 to a record gain of 3% y/y in November 2023, indicating an increase in the odds of sustainable wage-driven inflationary growth), political and business groups’ mounting pressures against a weaker JPY. The rest of the world equities may outperform the US stock market due to a weaker US dollar environment. Keep a lookout on China for potentially more “generous” fiscal and monetary policy stimulus measures that may stoke positive animal spirits in the short to medium term for China and Hong Kong stock markets. The stepped-up dovish expectations on the upcoming Fed’s interest rate cut cycle compiled with rosy earnings forecasts by analysts polled by FactSet that are projecting an earnings growth of +11.5% y/y for the US S&P 500 in CY 2024, a significant improvement from an expected CY 2023 earnings growth of just 0.6% which in turn have indicated another year of goldilocks scenario for the US economy. In contrast, the hastened speed of 6 interest rate cuts by the Fed in 2024 projected by market participants in the interest rates futures market also implied a probable US recession-liked scenario in 2024. In addition, the latest November 2023 data of the Conference Board US Leading Economic Index (LEI) has continued to flash a recession signal reinforced by weakness in the housing and labour market. If a recession hits the US economy in the second half of 2024, earnings downgrades are likely to materialize and the initial projected S&P 500 CY 2024 earnings growth rate of +11.5% is likely to be tapered to the downside which in turn may trigger a risk-off scenario that can overshadow the initial positive feedback loop from easing liquidity conditions. Potential heightened geopolitical tension between the US and China that may also spark a risk-off scenario in the latter part of 2024; the recently concluded China’s annual economic work plan conference attended by the top leadership stated that 2024 top priority will be on building a modern industrial system with a focus on developing cutting-edge technologies and artificial intelligence. Making high-tech industrialization a key priority in 2024 is likely to invite more scrutinization from neo-conservative US politicians that may put a strain on the current US-China relationship in the run-up to the November 2024 US presidential election. There is likely to be intense debate among the presidential candidates and finger-pointing again at China’s current industrialization policy that needs to be “neutralized” due to its potential national security threat to the US. Chart Of The Year – a potential major top in USD/JPY Fig 2: USD/JPY major trend as of 2 Jan 2024 (Source: TradingView, click to enlarge chart) The price actions of USD/JPY have declined by 8% to hit an intraday low of 140.25 in December 2023 after a bearish reaction from its 151.95 long-term pivotal resistance printed in mid-November 2023. The USD/JPY has traced out a potential impending major bearish reversal “Double Top” configuration considering the developments of its price actions from October 2022 to November 2023. In addition, the weekly MACD trend indicator has flashed out a bearish divergence condition over the same period (October 2022 to November 2023) which indicates the major uptrend phase from the March 2020 low of 101.18 has started to lose upside momentum which in turn increases the odds of a multi-month corrective decline to unfold next. A breakdown with a weekly close below 137.65 support exposes the next major support zone of 130.70/127.10 (also the neckline of the “Double Top” & 50% Fibonacci retracement of the prior major uptrend phase from March 2020 low to November 2023 high). On the other hand, a clearance above 151.95 invalidates the bearish scenario to see the next major resistance coming in at 159.30 in the first step.  

German Ifo index drops to its lowest level since 2020 Pessimism is now fully back in Germany as new supply chain disruptions and a train drivers' strike increase the risk of yet another quarter with a contracting economy.   Pessimism strikes back in Germany as the country's most prominent leading indicator just dropped to the lowest level since the summer of 2020. In January, the Ifo index came in at 85.2, down from 86.3 in December. The tentative revival of optimism last autumn has turned out to be very short-lived and the index has now dropped for the second month in a row. Both the current assessment and the expectations component weakened in January.   New year and two new problems It sometimes feels as someone in Germany must have smashed a mirror, causing seven years of bad luck. As if the last four years of pandemic, war in Ukraine, supply chain frictions, energy crisis and structural shortcomings weren’t enough, 2024 has not started any better. On the contrary, the new year brought new problems for the German economy: there are the government’s austerity measures but also ongoing strikes by train drivers and supply chain disruptions as a result of the military conflict in the Red Sea. In fact, another contraction of the German economy in the first quarter of the year looks even more likely. Looking beyond the near term, we expect the current state of stagnation and shallow recession to continue. The risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% YoY this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could be a shallow one.

No hints on future direction as ECB keeps everything on hold No changes from the European Central Bank. And the policy statement gives no hints of possible next steps.   The European Central Bank just announced its rate decisions and surprise, surprise, all policy interest rates remain on hold. In the press release, the ECB didn’t give away any new hints on future policy shifts; it's almost a verbatim copy of the December statement. Today’s meeting is mainly an intermediate one, waiting for the bank's next round of economic forecasts in March. If anything, it could give somewhat more guidance about potential next steps. Financial markets have been pricing in the first rate cuts for April. In the inner logic of the ECB’s macro models, these market prices make the need for actual policy rate cuts less urgent. Financing conditions have eased since early December, doing the work actual rate cuts should do: supporting growth but also pushing up inflation risks. Consequently, the more aggressive the market prices future rate cuts, the less needed and likely those cuts will be. As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue seeing a first rate cut not before the summer. Let’s see whether ECB president Christine Lagarde will add even more flavour to the ECB’s current inflation assessment and discussions about next steps. Don’t forget that at the last meeting in December, the ECB didn’t even discuss rate cuts. The press conference will start at 2.45pm CET.  

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