trade balance

Indonesia’s trade surplus is still healthy despite a slight disappointment in export and import growth Source: Stenly Lam $5bn September trade balance   Higher than expected Trade balance at $5bn Indonesia’s exports and imports slipped below market expectations but still managed to post strong growth, up by 20.3% year-on-year and 22%, respectively.  Exports slipped below median expectations for a 28.6% increase which may have prompted the suspension of export tax for palm oil exports until the end of the month. Import growth was also below the market consensus which could reflect softer domestic demand given elevated prices. The overall trade balance however was still healthy, settling at $5bn compared to expectations for $4.8bn.  Trade surplus remains but may be less able to support the IDR Source: Badan Pusat Statistik Surplus helps but pressure on the IDR persists Indonesia’s string of trade surpluses has provided some support to the rupiah for the most part of 2022. Surging commodity prices have helped deliver outsized gains for exports, translating to a record-high trade surplus of $7.6bn in April. Indonesia will likely continue to post trade surpluses for the rest of the year but the support provided to the currency appears to be slipping.  The $5bn trade surplus should help limit some pressure on the IDR but sustained foreign selling in the bond market may still translate to depreciation pressure on the currency in the coming months.  Read this article on THINK TagsIndonesia IDR 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

This morning, reports from Asia and the Pacific appeared. Traders also are now looking at macro data from the US - Philly Fed Manufacturing Index, the usual weekly data on initial unemployment claims, and data on existing home sales. Japanese Trade Balance (Sep) Japan provided data on exports and imports, and thus on its balance sheet, at the start of the day. The current reading is positive and shows an improvement in the trading result. The current reading is higher than the pronosed -2.167.4B and is at the level of -2.094.0B. For more than a year, Japan has been importing more than exporting, and since May the situation has worsened significantly. The balance then decreased from the level of -842.8B to the level of -2,384.7B. In the following months, the result was above the level of 1,000.0B. This situation is unfavorable for the country, so the current positive reading has a significant impact on the Japanese currency (JPY). Source: investing.com This positive trade result was largely influenced by the positive export performance. The published report shows that exports increased from 22% to 28.9%. He was taller than expected. This is the lowest result during the year. Source: investing.com Australia labor maket reports Australia today presented the result on the appearance of the labor market. The number of employees and the unemployment rate are instances of the country's conditions in this sector. Despite a rebound from the negative area in the previous reading, the number of people employed in September fell to 0.9K. The index scores for the year are generally in a downward trend. The decline will begin in the first half of the year, and the lowest level was in April at 4.0K. It then doubled and the annual peak was at 88.4K. The unexpected drop below zero occurred in the month following the highest score. Therefore, the positive reading from the previous period was significant for the economy. The current reading may weaken not only the economy but also the Australian dolar (AUD). Source: investing.com People's Bank of China Loan Prime Rate The positive news for the Australian labor market is that the unemployment rate remains at 3.5%. Another reading showed that this indicator holds up once again. People's Bank of China Loan Prime Rate will remain at 3.65% for the third time. EU Leaders Summit The most important event of the day for europe is Leaders Summit . The Euro Summit brings together the heads of state or government of the euro area countries, the Euro Summit President and the President of the European Commission. This meetings provide strategic guidelines on euro area economic policy. The comments made at this meeting may give a signal about future decisions, which at the moment are very important not only for the economy but also for the market. US Initial Jobless Claims Every weekly report on the number of individuals who filed for unemployment insurance for the first time during the past week will appear at 14:30 CET. Another increase is expected. The projected number of applications is at the level of 230K. This means that the indicator will be in an uptrend for the second week in a row. Philadelphia Fed Manufacturing Index The Philadelphia Federal Reserve Manufacturing Index rates the relative level of general business conditions in Philadelphia. The last picture of conditions is negative. It has been at a very low level since May, falling below zero levels. The latest reading was at -9.9, expected to rise to -5.0. This is a small but important improvement in conditions. The general appearance is negative. US Existing Home Sales Another important report for the US market is the change in the annualized number of existing residential buildings that were sold during the previous month. The outlook for this indicator is pessimistic. The number is expected to drop from 4.80M to 4.70M. Despite the economic situation, the index remained above 5.0M for a significant part of this year. The first drop below this level took place in July (4.81M). In August, it fell slightly to the level of 4.80M. Another decline may signal a deepening of the downward trend. This means that home sales deteriorate significantly. Source: investing.com Summery 1:50 CET Japan Exports (YoY) (Sep) 1:50 CET Japan Trade Balance (Sep) 2:30 CET Australia Employment Change (Sep) 2:30 CET Australia Unemployment Rate (Sep) 3:15 CET PBoC Loan Prime Rate 12:00 CET EU Leaders Summit 14:30 CET US Initial Jobless Claims 14:30 CET Philadelphia Fed Manufacturing Index (Oct) 16:00 CET US Existing Home Sales (Sep) Source: https://www.investing.com/economic-calendar/

China is making up for its situation with overdue reports. Today, the market is mainly focused on PMI results from various sectors and various countries. Positive results from China From 3:30 a.m. CET to 4:00 a.m. CET, China released a ton of reports. Most of them show positive results. The results for exports are positive, with Chinese esports falling from 18.0% in August to 7.1%. This was a drastic decline and it also fell to 5.7%, but was higher than expected (4.1%). The trading result was also high despite a 0.3% rise in Imports. The balance rose from 79.39B to 84.74B. Because imports continued and exports were higher than expected. Such significant growth is good for the Chinese economy. The growth of the economy confirms the positive result of GDP for the third quarter (Q3). The core GDP increased from 0.4% to 3.9%, and the quarterly (QoQ) from a negative level of -2.7% to 3.9%. The production sector has also grown significantly. The current reading of the unit is at the level of 6.3%. Which means that this sector has grown once again. One of the negative signals from the Chinese economy is the unemployment rate. It was expected to fall by 0.1% but increased from 5.3% to 5.5%. French PMI The readings from France were not that positive. The Purchasing Managers Index for the manufacturing sector turned out to be positive. The indicator recorded a slight increase by 0.3%. The current reading is at 47.4 against the forecast 47.1. There has been a decline in the serivices sector. True, the decline was expected, but the current result has not met expectations. Currently, the Services PMI for France is 51.3. It fell from 52.9 and the projected decline was at 51.5. European PMI’s For the European Union region, PMI indicators fell. Services PMI fell as expected to 48.2 against previous reading at 48.8. This is a slight decrease, but has an impact on the currency position. Meanwhile, the Manufacturing PMI index dropped significantly from the level of 48.4 to the level of 46.6. Given the current situation in the euro zone, declines were expected. German PMI For the same sectors as Europe and France, Germany published its PMI. Contrary to France, Services PMI was positive, ie higher than expected (44.7) and reached the level of 44.9. The Manufacturing Purchasing Managers Index for Germany dropped significantly from 47.8 to 45.7. In both cases, these were declines as expected. The difference is that at some point it was higher than expected. UK PMI The United Kingdom, like the rest of the old continent, has published reports on the Services and Manufacturing Purchasing Managers Index. Both readings were lower than expected. Similarly to the above-mentioned regions (Germany, France, EU), declines were forecast. In the UK, Services PMI dropped from 50.0 to 47.5 and manufacturing from 48.4 to 46.6. Today's readings show a significant deterioration in these sectors, which negatively affects the exchange rate of the British currency (GBP). USA PMI America, like countries on the old continent, will publish PMI reports in the afternoon (15:45 CET). The US also expects a decline, but less significant. For Services PMI it is expected to drop from 49.3 to 49.2. A drop of 0.1 will not significantly affect the appearance of the currency and the sector. In contrast, the manufacturing sector is expected to drop by 1.0. The last reading of the indicator was at 52.0. Speeches Two important speeches are scheduled for today. The first one will take place at 16:15 CET. David Ramsden, member of the Bank of England, will speak. In the present situation of the UK, his speech can give concrete indications on the way forward in the field of motor policy. The next and last speech of the dishes will be from the American overseas. Treasury Secretary Janet L. Yellen is set to speak at 17:00 CET. She speaks frequently on a broad range of subjects and her speeches are often used to signal administration policy shifts to the public and to foreign governments. Summary: From the above information, we can conclude that the situation is generally very unfavorable. And the European Union and the United Kingdom may face a severe recession. Other regions of the world, despite the deteriorating situation, are doing much better than the countries of the old continent. 3:51 CET Chinese Exports 3:52 CET Chinese Imports 3:53 CET Chinese Trade Balance 4:00 CET Chinese GDP 4:00 CET Chinese Unemployment Rate 9:15 CET France Services And Manufacturing Purchasing Managers Index 9:30 CET German Services and Manufacturing PMI 10:00 CET European Services and Manufacturing PMI 10:30 CET UK Services and Manufacturing PMI 15:45 CET U.S. Services And Manufacturing PMI 16:15 CET MPC Member Ramsden Speaks 17:00 CET U.S. Treasury Secretary Yellen Speaks Source: https://www.investing.com/economic-calendar/

Today, the most important reports for the markets will be from Germany and the USA. In the first half of the day, attention is focused on reports from Germany, but the markets are still awaiting the most important decision of the day - the Fed's decision. German Trade Balance (Sep) The trade result report for the biggest waterfall in the euro zone is positive. The current reading shows an increase from 1.2B to 3.7B. This is quite an optimistic result and could be the start of a trend reversal. Moreover, a trade surplus can create employment and economic growth, but may also lead to higher prices and interest rates within an economy. The reading was very high in April and then dropped drastically. The very low level was maintained for the next two months. After the increase in August, there was another downward trend. This trend was expected to continue this time, the expected level was 0.2B. Source: investing.com German Manufacturing PMI Expectations for Germany Manufacturing were lower than the previous reading, ie the expected level was at 45.7 against the latest reading of 47.8. The current reading of the gauge is 45.5. Another decline was clearly expected, but was 0.2% lower than the forecast level. As you can see, the approaches to this indicator and this sector are projected on a downward trend. German Unemployment Change The change in the number of unemployed fell in Germany from 15K to 8K. This is a positive reading in view of the sustained unemployment rate of 5.5%. As we can read from the data, this number has been decreasing month by month since the sudden increase in the unemployed in June. This is a positive signal for the labor market. Source: investing.com ADP Nonfarm Employment Change The first report that will be published in America will concern the labor market, namely the monthly change in non-farm, private employment. This number is expected to drop from 208K to 195K. These forecasts suggest that the recent rise was just a step back from the prevailing downtrend. Source: investing.com Crude Oil Inventories The next report will be the weekly report on the U.S. Crude Oil Inventories. The last reading was at 2.588M and this was a sharp increase. It is currently predicted to reach the level of 0.367M. What if? If the decline in crude is less than expected, it implies greater demand and is bullish for crude prices. The same can be said if a increase in inventories is more than expected. Fed Interest Rate Decision The most important event of the day, or even of the week, is the Fed's decision on interest rates. The Fed is not expected to follow other central bank decisions and will not soften its decisions. The Fed rarely deviates from expectations in its decisions, therefore the market is ready for another interest rate hike by 75bp. We have to wait for this decision until 19:00 CET Read more: What Can Bring The Fed's Next Decision And What It Means For Economy?| FXMAG.COM FOMC Press Conference U.S. Federal Open Market Committee (FOMC) Press Conference will take place a half an hour after decision. Valuable comments may appear at the press conference regarding the current decision, the situation of the farm and future activities. Summary 8:00 CET German Trade Balance (Sep) 9:55 CET German Manufacturing PMI (Oct) 9:55 CET German Unemployment Change (Oct) 13:15 CET ADP Nonfarm Employment Change (Oct) 15:30 CET Crude Oil Inventories 19:00 CET Fed Interest Rate Decision 19:30 CET FOMC Press Conference Source: Economic Calendar - Investing.com

We can often come across terms about a country's trade surplus in, for example, foreign trade. We understand that a given product is exported and another is imported, but what exactly is export and import and what importance they have for the economy. Balance of trade (BOT) Balance of trade (BOT) is the difference between the value of a country's imports and exports for a given period and is the largest component of a country's balance of payments. A country that imports more goods and services than it exports in terms of value has a trade deficit while a country that exports more goods and services than it imports has a trade surplus. The formula for calculating the BOT can be simplified as the total value of exports minus the total value of its imports. Balance of trade (BOT)=Exports−Imports Economists use the BOT to measure the relative strength of a country's economy. A positive balance of trade indicates that a country's producers have an active foreign market. A negative balance of trade means that currency flows outwards to pay for exports, indicating that the country may be overly reliant on foreign goods. A country with a large trade deficit borrows money to pay for its goods and services, while a country with a large trade surplus lends money to deficit countries. In some cases, the trade balance may correlate with a country's political and economic stability. A trade surplus or deficit is not always a real indicator of the health of an economy and must be viewed in the context of the business cycle and other economic indicators. Export Exports are incredibly important to modern economies because they offer people and firms many more markets for their goods. Exports are one of the oldest forms of economic transfer and occur on a large scale between nations. Exporting can increase sales and profits if they reach new markets, and they may even present an opportunity to capture significant global market share. Exports lead to increased investment, technological advances, and the expansion of imports, all of which contribute to economic growth. For companies, it is of particular importance because it allows you to gain access to new markets through export, you can increase sales and profits, and even gain a large share of the global market. But there is also another side to this. Companies that export a lot tend to be more likely to fail financially. Import Import is a product or service that is manufactured abroad and purchased in your home country. Free trade agreements and tariffs often determine which goods and materials are cheaper to import. Countries most likely import goods or services that their domestic industries cannot produce as efficiently and cheaply as the exporting country. Countries can also import raw materials or goods that are not available within their borders. For example, many countries import oil because they cannot produce it domestically. Some critics argue that continued dependence on imports means a reduction in demand for domestically manufactured products and thus may inhibit entrepreneurship and the development of business ventures. Proponents argue that imports improve quality of life by giving consumers more choice and cheaper goods. The Commitment of Traders (COT) The Commitment of Traders (COT) report is a weekly publication that shows the aggregate holdings of different participants in the U.S. futures market. These are compiled and published by the CFTC in the U.S. COT reports detail how many long, short, and spread positions make up the open interest. Traders can use the report to help them determine whether they should take short or long positions in their trades.

Both exports and imports continued to contract on a yearly basis, which is the result of supply disruption in China as well as weak demand from the US and Europe. Looking forward, weak external demand could drive China's exports even lower Chinese container ship Trade slump China's exports and imports contracted by 8.7% and 10.6% year-on-year in November, respectively, after contracting by 0.3% and 0.7% in October.  Not everything is so bad. China's exports to ASEAN, which is now the number one export destination for China, still grew 2.9% YoY in November. China's exports to Europe, another big destination after ASEAN and the US, grew 1.5% YoY. China's exports to the US fell 13.2% YoY in the month. Bear in mind that the role of ASEAN for China is more of a joint supply chain than a final goods export destination. This implies that production activity for exports grew slightly in November. But final exports to the US and Europe were weak, especially exports to the US. This could mean that inventory will start to pile up as final goods sales were weak. Early indicator hints that slump in exports may continue Smartphone exports contracted 9.6% YoY in November. This could be a combined effect of supply disruption in China as well as weak demand in the US and Europe. But if we look further, it could be more an issue of weak demand.  Imports from Taiwan contracted by 10.4% YoY in November. Parts and raw material imports into China for the production of electronic parts and electronic goods contracted. As we use semiconductors as an early indicator of growth, we believe that exports in the coming months should continue to contract. Read this article on THINK TagsSemiconductors Imports Exports China 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

Indonesia’s January trade balance settled at $3.9bn after exports beat expectations         Jakarta, the capital of Indonesia $3.9bn January trade balance smallest since May 2022 Higher than expected Exports rise 16.4% while imports up only modestly Indonesia’s export sector managed to outpace expectations with overall outbound shipments rising 16.4% year-on-year compared to the 12.5% YoY expectation.  Export gains were driven largely by robust oil & gas shipments although non-oil exports managed to expand by roughly 14% on robust exports to China (+49.4% YoY) and Japan (+24.9% YoY).  Meanwhile, imports managed to eke out gains, up by only 1.3% YoY.  Import growth was driven mainly by imported energy as oil & gas imports were up sharply by 30.4% YoY. This managed to offset the contraction reported in non-oil and gas imports.  The overall trade balance settled at $3.9bn, the lowest since May but slightly better than expectations. We expect that trade surpluses this year will be robust but nowhere close to the record high of $7.5bn in April of last year. Thus, we can assume that the Indonesian rupiah will see less and less support from the current account in 2023. Trade surpluses just not what they used to be... Source: Badan Pusat Statistik Exporters forced to keep earnings onshore? Today’s trade report comes on the heels of reports that Indonesia will soon be requiring certain exporters to keep a portion of export earnings onshore in a bid to help boost the domestic supply of foreign currency. And although details and timelines on the potential implementation of the measure have yet to be released, we are unsure if this would provide meaningful support to the IDR.  Uncertainty regarding the measure and the possibility of this regulation being pulled abruptly may result in episodes of volatility for the currency, especially if some market participants view this as a form of capital control.  The IDR may be facing diminished support from the trade and current account surpluses this year but the currency could be steadied by renewed foreign investor flows should sentiment towards emerging markets improve substantially in the coming months.     Read this article on THINK TagsIndonesia Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

German export rebound in April is too small to make us happy After the collapse of German exports in March, the rebound in April may seem like good news, but in fact, the recovery was too weak to bring real relief. And there are very few signs of a more robust rebound in the coming months.   The zigzagging continues. After the severe March plunge, German exports rebounded in April, increasing by 1.2 % month-on-month, from -6.0% MoM in March. On the year, exports were up by 1.5%. Don’t forget that this is in nominal terms and not corrected for high inflation. As imports dropped by 1.7% MoM, from -5.3% MoM in March, the trade balance widened to €18.4bn.   Trade unlikely to be a growth driver this yearSince last summer, German exports have been extremely volatile. However, the general trend is pointing downwards, not upwards. Trade is no longer the strong resilient growth driver of the German economy it used to be but rather a drag.   Supply chain frictions, a more fragmented global economy and China increasingly being able to produce goods it previously bought from Germany, are all factors weighing on German exports. In the first quarter of 2023, the share of German exports to China dropped to 6% of total exports, from almost 8% before the pandemic. At the same time, however, Germany’s import dependence on China remains high as the energy transition is currently impossible without Chinese raw materials or solar panels.   In the very near term, the ongoing weakening of export order books, the expected slowdown of the US economy (which accounts for roughly 10% of total German exports), high inflation and high uncertainty will leave clear marks on German exports. After the collapse in March, today’s export numbers bring only very limited relief. In fact, it is a very floppy rebound and another piece of evidence that the traditional growth engine of the German economy – trade - is stuttering.

Market sentiment could change depending on the Fed's final decision at its June monetary policy meeting. This decision, however, could be affected by upcoming economic data from the US. Ahead lies key manufacturing indicators from both the US and Europe, followed by reports on China's export volume, import volume, and trade balance. Equally important will be the meetings of other central banks, where key parameters of monetary policy will remain unchanged. Markets will likely establish equilibrium, as investors expect a 0.25% increase in the Fed's interest rates. However, the recently-released strong US labor market data for May changed the sentiment, pushing market players to opt for a pause. Now, only 19.6% expect a 0.25% increase in rates. Resolving the debt problem, as well as very positive employment data, allow investors to believe that the US will no longer face recession.   As such, the Fed may opt not to raise rates, primarily because they do not want to shake the markets and stimulate another sell-off in the government bond market, given the government's high need for new loans at relatively low interest rates. Most likely, until June 14, consolidation in broad ranges will be observed in the forex market. Similar expectations can be set for stock and commodity markets.   Forecasts for today:     EUR/USD The pair trades above 1.0685. A neutral or weakly positive market sentiment will push the quote between 1.0685 and 1.0825. However, a decline below 1.0685 mark could lead to a `further fall to 1.0540.   XAU/USD Gold trades within the range of 1933.75-1983.75. A pause in the fed's rate hike cycle will push the quote towards 1983.75. Pati Gani Analytical expert of InstaForex © 2007-2023 Back to the list  

GDP first quarter 2023: contraction due to inventory reduction and growth in service imports       GDP outlook: sluggish growth in quarters ahead     Sectors: contraction in ICT, recreation & culture and industry in first quarter     Trade balance: especially higher service import worsened the trade balance     Exports: while total exports fell businesses also became negative about export order book   Investment: still solid investment growth     Profitability: indication of higher profitability, but especially smaller businesses are still negative about it

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

Energy price trends: impact on CEE CPI Representing 11-18% of the consumer basket, energy prices matter for the CPI dynamic in the CEE, and last year’s spike in global commodities translated into an acceleration of the CPI, the headline more so than the core CPI. However, it should be noted that the post-Covid spike in price growth results not only from energy inputs, but also other supply- and demand-side factors that are not the focus of this exercise.   One observation we have is that, unlike the trade balance, global commodity prices pass through into the local consumer prices with a lag and to a lesser extent due to price offsetting countermeasures taken by local governments. Looking at the non-core portions of country CPIs, it appears that Turkey saw the biggest non-core CPI growth of 12ppt in 2022, but that could have been largely the effect of the country’s unorthodox monetary policy and TRY depreciation.   Among our selected CEE countries, the Czech Republic and Poland saw the biggest (5-7ppt) non-core consumer price increases in 2022, while Hungary’s pick up in headline CPI seems to have been a result of a polycrisis (indirect effect of energy shocks, supply chain disruptions, rapid HUF weakening and productivity issues, mainly in agriculture). The Czech Republic’s sharper pass-through appears surprising given its relatively low share of energy in the CPI.   Looking forward, the positive effect of 2023 energy price moderation will only have a limited effect on CPI trends due to inertia and the fact that the drop or moderation in local energy price growth will be offset by continued acceleration in the core CPI. Within the CEE space, the Czech Republic, Poland and Romania are expected to see a deceleration of overall CPI by 1.6-4.1ppt thanks to a 4.6-5.9% slowdown in non-core CPI, while Hungary may see a pick-up. Turkey is a separate case, where CPI is expected to decelerate from 64% in 2022 to 47% in 2023, and purely on the core CPI components.   CE4 non-core CPI versus global energy prices   Looking at the impact on individual countries, energy has had only an indirect effect on Hungary’s inflation due to government support measures. Thus, the drop in global energy prices will have only a lagged positive impact on inflation. Like others in the region, lower energy prices are creating opportunities for the Czech and Polish governments to pressure the margins of the fuel retailers.   This creates downside risks to inflation and could provide room for rate cuts later this year. While being self-sufficient in energy to the greatest extent, Romania is still a price taker and had to abruptly cap prices for consumers. Even so, consumption dropped by 9.3% in 2022 and the acceleration of photovoltaic panel installation is determining large structural changes within the energy system. The business economy has nevertheless been exposed to higher prices and, to the extent possible, it might want to recover some of the losses when prices revert to more normal levels.   Turkey meets only a quarter of its energy demand from national resources (importing 99% of its natural gas and 93% of the petroleum it uses). While the country has been trying to diversify energy sources, lower energy prices should help to significantly improve external imbalances and reduce dependency on its suppliers.

Fiscal discipline should not be up for debate We continue to believe that despite the year-to-date cash-flow based deficit reaching 81% of the full-year deficit target by May, the budget situation still looks manageable. However, we can pinpoint some key slippages, namely less inflow via indirect taxes on the revenue side and higher debt servicing costs on the expenditure side. Despite the year-to-date bleak performance, the government is committed to the 3.9% Maastricht-deficit criteria, but a slight adjustment might be needed to ensure that the target is met. The need for an adjustment significantly increases next year as both sides of the budget are more uncertain based on our gloomier outlook versus the government’s. In addition, the revival of the excessive deficit procedure in 2024 should alert policymakers that fiscal discipline should not be up for debate.   Budget and primary balance of general government (%)   Effective normalisation of monetary policy has started After extreme scenarios have been priced out, the central bank started effective normalisation in May, by cutting the rate of the O/N quick deposit tender by 100bp to 17%. The normalisation process started by emphasising the separation of market stability (ensured by the overnight tools) and price stability (cured by the base rate).   In this regard, a cut in the base rate is not on the table yet, as the merger of the effective rate with the base rate must happen first. We expect this convergence to be finalised by September, following which we see the first cut in the base rate in December.   However, as highlighted by the NBH, positive real interest rates are needed to support the disinflationary process, at which point we believe Hungary can turn its back on the era of negative real rates for good.   Benchmark policy rate and interest rate corridor   Labour shortage poses a structural problem We believe that labour shortage has evolved from a cyclical to a structural problem, which entails a long-term inflation risk, hence the need for a tighter monetary policy stance in the future. In this context, we have not seen widespread layoffs, which could explain the resilience of the labour market that, in our view, will continue.   The story is different for real wages. Amid sky-high inflation, March is the seventh consecutive month in which real wage growth has been negative, but we expect a turnaround in the fourth quarter. In our view, this is more likely to boost savings as households have already tapped into their savings to offset the impact of inflation. Therefore, this positive income shock implies less upside impact on inflation and more downside on GDP growth, in our base case.   Unemployment, job vacancy rate and wage growth   Current account deficit to show marked improvement Last year's energy crisis eroded the country's trade balance in goods, leading to a year-end current account balance of -8.2% of GDP.   As the energy issue appears to be easing this year, pressure on the current account from the import side is softening significantly, with the trade balance posting positive readings for the past three months. In addition, inflation has weighed on consumption and high interest rates held back investments, further reducing import demand.   Conversely, the export side carries huge growth potential, as new export capacities have improved significantly recently due to EV battery plants, while car manufacturers are dealing with large backlogs. With all these factors combined, we expect the current account to close this year with a balance of only -2.2% of GDP.   Structure of the current account (% of GDP)

National Bank of Hungary Preview: Systematic easing continues The National Bank of Hungary’s easing cycle is subject to conditions, and we still see a good enough constellation for the rate cuts to continue. We see a “copy-paste” decision, meaning the effective rate moves lower to 16%.   Our call We expect the National Bank of Hungary to continue its systematic easing which started with a symbolic step in April and the first effective rate cut in May. We believe that the circumstances are right for the Monetary Council to vote for another cut in the effective interest rate (quick deposit tender rate) by another 100bp, replicating the decision seen in May. This will put the effective rate at 16%. Alongside that – just to fully emulate the previous move – the top-end of the interest rate corridor will be lowered by 100bp as well to 18.5%.   The main interest rates (%)   The rationale behind our call The central bank has given markets a fairly concrete guide regarding the conditions to continue rate cuts. Having reviewed these, we think the upcoming decision seems clear. The current account and trade balance indicators continue to be a focus of attention, and we have seen a further improvement in the last month. This has been accompanied by an improvement in the terms of trade as well.   CEE currencies vs EUR (end 2022 = 100%)

Asia Morning Bites Market attention today will be on regional PMI figures and China's Caixin manufacturing report. Later in the week, the focus will shift to the FOMC minutes and US non-farm payrolls.   Global Macro and Markets Global markets:  US stocks finished last week on a positive footing, with both the S&P 500 and NASDAQ rising more than a per cent. That was a better performance than Chinese stocks. The CSI 300 did rise about half a per cent on Friday, but the Hang Seng was roughly unchanged. Tomorrow is the 4th of July, so the US will be out, and markets may be a bit thin ahead of the holiday. US Treasury yields nosed higher again on Friday. The 2Y UST yield rose 3.6bp to 4.895%, while the yield on the 10Y actually edged down 0.2bp to 3.837%. EURUSD staged an abrupt turn on Friday, rising back above 1.09 and it sits just above that level currently. The AUD has also made gains, rising to 0.666 ahead of tomorrow's RBA decision (we think no change, but the consensus is split), as has Cable, which is up to 1.2698. The Yen briefly went above 145 on Friday but with concern about intervention, it came down to 144.3 and traded in the narrow range. From previous years’ experience, intervention could be imminent, but we should watch the pace of depreciation more closely than the actual level of the JPY.  If the yen depreciates by more than 2% within 1-2 business days, we think that could be a trigger for government intervention. Other Asian FX has also made some gains against the USD. The THB and PHP were the main gainers on Friday, while the TWD lagged the pack.   G-7 macro:  US data on Friday was a little softer than predicted. Personal spending was up just 0.1% MoM, and flat on the previous month in real terms. The core PCE deflator rose 0.3%MoM, in line with expectations, but the core PCE inflation rate came in a little softer on rounding, to 4.6%YoY, down from 4.7%. Core inflation in the Eurozone edged 0.1pp higher to 5.4%, though this wasn’t quite as bad as had been expected. To kick this week off, we have the US Manufacturing ISM survey. Forecasters expect the headline index to move to a slightly less negative reading of 47.2 after 46.9 last month.   China: Caixin releases PMI data today. The official PMI numbers last week showed manufacturing still struggling with a below-50 reading. But although the non-manufacturing survey index was still in the expansion zone above 50, it was lower than the previous month. The Caixin manufacturing PMI has been a little stronger than the official numbers and was still just above 50 last month. We think it will probably drift down to about the 50 level this month, in line with the consensus view.   Japan:  The latest Tankan survey showed that Japan’s economy stays on its recovery path and will likely accelerate in the third quarter. The Tankan survey for large firms (both manufacturing and non-manufacturing) rose in both the current conditions and outlook indices. The current condition for manufacturing advanced from 1 to 5 for the first rise since June 2021 with confidence rising in the auto and electronics sectors. The outlook index also advanced to 9, beating the market expectation of 4. Despite the weakening of global demand, solid domestic demand, strong auto-sector performance and improving profits due to the weak JPY all may have supported the improvement seen in the manufacturing indices. The service-sector index also improved as expected. More importantly, capital investment across large enterprises rose 13.4% YoY (vs 3.2% 1Q, 10.0% market consensus).  The Tankan survey is one of the most closely watched indicators by the Bank of Japan, and we think the BoJ will likely upgrade its growth outlook in its quarterly macro-outlook report.   South Korea:  The trade balance in June recorded a surplus for the first time in sixteen months mainly due to falling global commodity prices. Within the export side, transportation - autos and vessels - gained the most, but this was more than offset by a decline in chips and petroleum. By destination, exports to the US fell for a third month while exports to the Middle East rose solidly due to regional infrastructure investment projects.  Please see the link for more details. However, business surveys showed that the manufacturing sector recovery is not so promising. Today’s manufacturing PMI fell to 47.8 in June from 48.4 in May. Last week’s local business survey also retreated. Thus, we are cautious about the improvement in manufacturing and exports in the current quarter.   Indonesia:  Indonesia reports inflation numbers today.  We expect inflation to moderate further with the market consensus pointing to a 3.6% YoY increase in prices last June.  Despite the slowdown in inflation, BI may opt to extend their pause and keep rates at 5.75% in the near term to help support the IDR.     What to look out for: Regional PMI reports and US NFP Japan Tankan survey and Jibun PMI (3 July) Regional PMI reports (3 July) Australia building approvals (3 July) China Caixin PMI manufacturing (3 July) Indonesia CPI inflation (3 July) US ISM manufacturing (3 July) South Korea CPI inflation (4 July) Australia RBA meeting (4 July) Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

Asia Morning Bites The RBA decision will be the main data release for the day as the US takes a holiday.   Global Macro and Markets Global markets:  Not surprisingly, it was a fairly moribund start to the week for US stocks ahead of today’s US holiday.  Both the NASDAQ and S&P 500 made small gains. There was more action on Chinese bourses, where the Hang Seng rose 2.06% and the CSI 300 rose 1.31%. US Treasury yields continued to rise with 2Y yields up a further 4bp but 10Y yields up just 1.8bp. EURUSD is largely unchanged at 1.0914. The AUD is looking a little stronger at 0.6675 ahead of the RBA later today (we expect no change from them, though the market is split).  Cable was little changed, but the JPY lost further ground rising to 144.64. In Asian Markets, the KRW and THB made some gains, but it was a lacklustre day for most currency pairs.   G-7 macro:  The US Manufacturing ISM index weakened further to 46.0 from 46.9, and the employment index dipped into contraction territory, falling from 51.4 to 48.1. New orders were slightly less bad at 45.6, up from 42.6, but still in contraction territory. The equivalent manufacturing PMI index produced by S&P also registered 46.0, though was flat from the previous month. US construction data was stronger than expected, rising 0.9% MoM, though there were a lot of downward revisions. Apart from German trade data, it is quiet for Macro today in the G-7.   Australia:  The RBA decision today has the market split. Of 32 economists surveyed by Bloomberg, 13 expect a rise of 25bp to 4.35%, while 19 (including ourselves) expect no change to the current 4.1% cash rate target. The main reasons for our decision are as follows: The RBA hiked in June, and although the data has been mixed, back-to-back hikes seem excessive with rates already at an elevated level. Moreover, the run of recent inflation data has been far more benign than was expected, and if last month’s finely balanced decision was pushed over the edge by higher-than-expected inflation, this month’s decision should result in no change by the same logic. See this note on the latest CPI data for more on this. Finally, there will be much better occasions for the RBA to hike in the months ahead if that remains necessary. September will be one of those, as the RBA can assess the impact of large electricity tariff increases which are due in July, and should be visible in CPI data by September. Also, favourable base effects drop out after July's CPI release for several months, so it is not inconceivable that we see some backing up of inflation over the third quarter before it dips again into the year-end.   South Korea: Consumer prices rose 2.7% YoY in June, slowing for a fifth month (vs 3.3% in May, 2.8% market consensus) as gasoline (-23.8%) and diesel (-35.2%) prices limited overall price increases. Excluding agricultural products and oils, core inflation also slowed to 4.1% from 4.3% in May. We believe that inflation will stay in the 2% range throughout the year, there will be some ups and downs, but inflation probably won’t return above 3%. KEPCO raised power bills from the middle of May leading utility fees to rise sharply (25.9%), but we don’t expect additional fee hikes throughout this year due to falling global commodity prices. Also, rent prices marked five monthly drops in month-on-month comparisons, and the declines are gradually increasing each month. As a result, we think that service prices will come down further in the coming months. Today’s data support our view that the Bank of Korea (BoK) will continue to stay on hold.  Now, the question is the timing of the first rate cut. We have pencilled in a 25bp cut in October as inflation is expected to head towards 2% while the economic recovery remains sluggish. The BoK may be concerned that rate cuts could cause a rebound of household borrowing, along with the recent easing of mortgage measures. At the same time, rising delinquency rates and default rates will also be a concern for the BoK as strict credit conditions have increased the burden on households.     What to look out for: RBA meeting South Korea CPI inflation (4 July) Australia RBA meeting (4 July) Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

Asia Morning Bites Philippine inflation and Singapore retail sales are all slated for release today.   Global Macro and Markets Global markets:  With the US on vacation yesterday, there wasn’t much going on in global markets. Chinese stocks made small gains, while European bourses were mostly in the red. Bond markets generally saw yields make small declines at the front end of the yield curve, but 10Y yields rose slightly except in the UK and Australia, where they dropped very slightly following the RBA’s (Reserve Bank of Australia) no-change rate decision. In currency space, EURUSD moved lower to 1.0881. The AUD dropped sharply after the RBA but recovered and ended slightly higher on the day at 0.6692. Cable also made gains, rising to just under 1.2740 before easing back down to 1.2714. The JPY made slight gains and is currently 144.47. Most of the Asia FX pack made gains against the USD, led by the KRW and THB. The CNY moved down to 7.2163 G-7 macro: A slight shrinkage in Germany’s trade balance yesterday was the main data from Tuesday. Here’s Carsten Brzeski’s take on the data. European Service sector and composite PMI numbers dominate the calendar today. The US releases final durable goods numbers and vehicle sales. Australia: The RBA left rates on hold at 4.1% yesterday, though signalled a willingness to hike again dependent on the flow of data. Our expectation is that the RBA will hold fire again in August, as we expect further downward progress in inflation, but that they will hike once more in September, as inflation progress at that point may be hampered by electricity price rises in July (data released later). We think (hope) that this will be the last hike in the current cycle.    Singapore:  Retail sales for May will be reported today.  Market consensus points to a modest 1.9%YoY gain.  Sales may have been supported by a resurgence of visitor arrivals, countering the likely negative fallout from still elevated inflation.  We can expect this trend of modest expansion to continue in the near term until inflation cools off further by the end of the year.     Philippines:  Inflation numbers will be released this morning. June inflation will likely slow down further from the 6.1%YoY expansion recorded in the previous month with consensus suggesting a slide to 5.5%YoY.  Moderating inflation will give newly minted Governor Remolona space to extend the BSP's recent pause and we could see the central bank on hold for at least the next couple of meetings.      What to look out for: Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

Asia Morning Bites Australia reports trade this morning, and Taiwan releases June inflation data. US Fed minutes showed officials in favour of additional rate hikes. Busy day for US data ahead of Friday's payrolls.   Global Macro and Markets Global markets:  It was the turn of the back end of the yield curve to rise yesterday. 10Y US Treasury yields rose 7.7bp to 3.932%. But despite some fairly hawkish Fed minutes, the front end didn’t move much. 2Y yields rose only 0.9bp to 4.945%. US equities opened lower yesterday, but after a choppy day which lacked direction, finished only slightly down. The S&P 500 ended 0.2% lower while the NASDAQ fell 0.18%. The USD continued to find support from the Fed outlook, and EURUSD moved down to 1.0855. Other G-10 currencies also lost ground.  The JPY remains at 144.43, similar to this time yesterday, though it has been quite volatile. Most of the Asian FX pack lost ground to the USD yesterday. The CNH has traded back up above 7.26. G-7 macro:  Despite what was clearly a meeting with considerable differences of opinion, and very low conviction on the way forward, the key element to the June FOMC minutes seems to be that “almost all” officials thought more tightening would be needed this year. Here’s a link to the transcript. Today, we have the ADP survey of employment, jobless claims, and the service sector ISM survey, all coming ahead of tomorrow’s payrolls. Taiwan: June inflation data will remain subdued, with consensus estimates targeting a 1.8%YoY inflation rate, slightly down from the 2.02% reading in May. Core CPI is running slightly higher, but not much, and could also decline slightly from the 2.57% May reading. This all suggests that Taiwan’s central bank need not follow the Fed if they decide to hike rates again this month, as now looks likely.   What to look out for: US ADP and Australia trade Australia trade (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

Canada: central bank policy meeting In Canada, the highlight will be the Bank of Canada policy meeting. It hiked interest rates by 25bp last month having left them untouched since the last hike in January. We don’t see last month’s move as a one-off. To restart the hiking process means that the BoC feels it has unfinished business, and with the jobs market looking tight and inflation running above target we expect the BoC to hike by a further 25bp. Czech Republic: Inflation to fall below 10% for the first time since January last year We expect prices to have risen at a similar pace in June as in May by 0.2% MoM. This should translate into a drop from 11.1% to 9.6% YoY, returning to single-digit territory for the first time since last January. We expect stable food prices and modest growth in fuel prices after the massive drop in the previous month. We should also see small increases in housing (0.2%) and the rest of the consumer basket with no significant driver this time around. Hungary: June monthly budget to accumulate a wider deficit Next week will be rather quiet in Hungary except for Monday. We are going to see the preliminary trade balance data in May. Though export activity has shown some volatility recently, the continued contraction of domestic demand and the demand destruction in energy will help in scaling back import activity. As a result, we see yet another widening of the trade surplus. After a strong May, we see the June monthly budget balance accumulating a wider deficit mainly on the weaker stream of indirect revenues.            

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.  

USD/UAH: Foreign reserves at all time high and continue to rise   Short-term risks to hryvnia are limited. Foreign reserves neared $39bn in June, an all-time high. External financial aid more than balances the costs of stabilising the currency. The National Bank of Ukraine is planning to liberalise the exchange rate, but in a gradual manner.  Long-term prospects of the hryvnia are mixed. The government will balance the negative trade balance with a massive inflow of foreign aid. It will be a political choice whether the foreign funds are converted via the market (supporting the hryvnia), or in the central bank. Given the scale of war damages, we expect the government to largely opt for the latter, to boost Ukraine’s trade competitiveness and support an economic recovery.  

USD/KZT: Upside risks in the near term   KZT has been moving with oil prices in the last couple of months, showing depreciation to 454 by the end of June (we expected 455) and recovering to 440-45 in early July. The trade balance is the key driver of FX as capital flows seem to be muted: transfers from NFRK, the sovereign fund, to the budget halved month-on-month to $0.6bn in June, while portfolio flows were likely balanced, as the National Bank of Kazakhstan guided to gradual cuts in the key rate starting in September amid the slowdown in CPI. We continue to see gradual KZT depreciation on limited oil output and capital outflow risks as our base case, while acknowledging near-term upside risks coming from expectations of better global risk appetite and oil prices.      

USD/KRW: Equity-led appreciation on chip hype       The KRW once again sensitively reacted to the Fed’s additional hike possibility and fears of a regional bank run and returned all the earlier gains brought about by the AI chip hype. The trade balance turned positive after fifteen months in the red as imports declined sharply due to falling commodity prices. We expect terms of trade to improve further thanks to strong demand in transportation equipment and the Middle East’s investment boom, while commodity prices remain soft. Thus, we expect the KRW to appreciate for a while until markets begin to re-think Fed direction after the expected rate hike in July.  

Stalling imports widen Indonesia’s trade surplus Indonesia’s trade surplus has widened, but at the expense of important consumer and raw materials imports.   Exports and imports fall sharply in June Indonesia’s exports and imports contracted sharply in June, with imports suffering a much more pronounced drop of 18.4% year-on-year.  Exports were expected to slip 17.8% but fell 21.2% YoY due to the slide in global commodity prices. Meanwhile, inbound shipments were forecast to edge lower by 4.2% YoY, only to plunge by 18.4% with both consumer and raw materials imports falling by 6.6% YoY and 23.8% YoY respectively. One key factor for Indonesia’s export sector has been China’s recent performance, which appears to be impacting trade between the two economies. Non-oil exports to China fell 9.9% YoY, while imports from mainland China dropped 20.6% YoY for the same period.    With the performance of exports and imports in June, the overall trade balance widened to $3.5bn, recovering from $0.44bn in the previous month. The trade surplus had been a key support for the IDR in 2022 after the balance hit a high of $7.6bn in April of last year. Since then, the trade surplus has narrowed to more normal levels and will likely be a key contributor to the stability of the IDR in the coming months   Trade surplus widens but remains much lower than 2022 peak   Import trends could point to slowing growth momentum The widening of the trade surplus back to more comfortable levels may have been a welcome development, but the improvement could have come at the expense of growth momentum. The stark drop in imports was driven largely by slower inbound shipments of consumer goods and raw materials. The 6.6% YoY fall in consumer imports could signal waning household spending even after inflation slipped back within target. The substantial slowdown in raw materials imports may point to slower growth momentum in the coming months as well. We are retaining our 4.7% YoY full-year growth for Indonesia for now, but we may need to revisit this outlook should consumer spending show more signs of moderating.  

National Bank of Hungary preview: Normalisation to continue unabated Despite recent market volatility, we still see a strong enough environment for the normalisation process to continue, with the need for caution likely to be echoed once again by policymakers. In practice, this means that the National Bank of Hungary will deliver a 100bp of cut in the effective rate at its July meeting this week.   Our call We expect the National Bank of Hungary (NBH) to continue the normalisation of monetary policy despite recent market volatility, especially in the forint. We believe that global factors and repricing are the drivers of recent selloffs, while the local macro story remains supportive in our view. These episodes proved the need for cautiousness in policymaking and provided a good example as to why the central bank may prefer to err on the side of caution, signalling the importance of patience when it comes to the easing cycle. At its June meeting, the central bank made a slight rebalancing in the order of factors that are affecting monetary policy. The updated forward guidance now puts the effects of international financial market developments on the domestic risk environment in first place, followed by incoming macroeconomic data and developments in the inflation outlook. All things considered, we expect the central bank to replicate the decision it made last month and cut the quick deposit tender rate by another 100bp, bringing the effective rate to 15%. Similarly, we anticipate 100bp cuts to the one-day FX swap tender and the overnight repo rate (upper bound of the interest rate corridor).   Caution to continue Taking all the important drivers now shaping the monetary policy into consideration, we don't believe there's any need for a plan B. This is reflected in our call above, but let's take a look at a few details. As far as international financial market developments are concerned, we believe that recent HUF weakening was widely driven by global factors. In early July, EUR/HUF briefly touched 388, crossing the 376-378 zone – the resistance level that stopped the forint from depreciating before the last three NBH meetings. While July's move was stronger than the previous three spikes, it still falls short of the rapid rise in March triggered by the collapse of Silicon Valley Bank. We therefore acknowledge the slight deterioration in FX stability, but still believe that it might not be enough to derail the ongoing normalisation of monetary policy. In this regard, market pricing is aligned with our view. In terms of global monetary policy developments, we believe that we're rapidly approaching the end of hiking cycles for both the Federal Reserve and the European Central Bank (ECB) as the global disinflationary narrative shifts into a higher gear. As a result, the Hungarian interest rate advantage will not be eroded in two directions. In addition, while energy (especially gas) price risks have clearly not diminished, Dutch TTF gas prices are approaching the local lows seen in early June. From a macroeconomic data perspective, the staggering EUR 1.1bn trade balance surplus in May is welcome news and shows a marked improvement in the country’s external balances, which also helps the current account. This is also accompanied by an improvement in the terms of trade. Lastly, the June inflation figure, which fell from 21.5% in May to 20.1% year-on-year, is yet another positive development. However, given that the central bank separates the issues of price and market stability, we do not believe that this will have a material impact on the pace of the normalisation process. In this respect, recent comments by Deputy Governor Barnabás Virág reinforce our view that better-than-expected incoming data will not change the pace or magnitude of rate cuts. In the case that the disinflationary process occurs more quickly than expected, a positive interest rate environment may come sooner, which is necessary for disinflation to continue. As the base rate is responsible for tackling fundamental price pressures, we expect it to remain unchanged at 13%. Obviously, the central bank will underscore the acceleration of disinflation as a significant factor, but we don't believe that the Monetary Council will want to make any substantive comments on a possible cut in the base rate any time soon. In contrast, recent volatility showed the need to emphasise the cautious and gradual approach to normalisation. We wouldn’t be surprised to hear these hawkish sounds again alongside the cut announcement.

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

Asia Morning Bites A finely balanced RBA decision as well as China's Caixin manufacturing PMI data are today's main events.   Global Macro and Markets Global markets: US stocks made feeble gains on Monday to close out July, but that still leaves stocks strongly up over the month, and indeed the prior month too. The S&P 500 is up 19.52% ytd, and the NASDAQ is up 37.07%.  Chinese stocks made firmer gains, helped by a further set of policies to help boost consumption. Once again though, the measures stopped short of direct stimulus, and instead, we have further "signals of support" and supply-side measures. The Hang Seng index rose 0.82%, while the CSI 300 rose 0.55%. US Treasury yields were almost unchanged on the day. 10Y JGBs were a little higher at 0.599%. EURUSD moved lower to 1.0998, though the AUD gained ahead of today’s RBA meeting, rising to 0.6718. The JPY was a little weaker at 142.379 while Cable was steady at 1.2835. There wasn’t much direction for most of the Asian FX pack yesterday, though the MYR gained more than a per cent against the USD moving to 4.507. The THB was softer ahead of tomorrow's BoT meeting. G-7 macro: Eurozone inflation data for July showed a small fall to 5.3% YoY from 5.5% for the headline index. But there was no decline in the core inflation rate, which remained at 5.5%YoY. Today is fairly quiet for macro releases, though we do get the US Manufacturing ISM for July, together with backwards-looking labour data for June from the JOLTS survey. Australia: A small majority of forecasters are expecting the Reserve Bank of Australia (RBA) to hike rates by 25bp today. We aren’t among them, believing that the need to hike will be more readily apparent in later months. With the RBA keen not to overdo the tightening, it seems unnecessary to hike today when in all likelihood the macro signals for hiking will look much stronger at the September meeting. India: The June fiscal deficit came in a lot higher than the initially reported INR1.48tr deficit for June 2022, coming in at INR2.41tr. There were some upward revisions to last year’s data, so relative to the revised figures of INR2.11tr the increase is not as startling. These numbers do need watching. Next month’s comparison is with a small surplus in 2022, so if the deficit numbers for July do not dip sharply, then the government’s 5.9% deficit target may be at risk. South Korea: The export contraction deepened again in July. Exports fell by 16.5% YoY (vs -6.0% in June, -15% market consensus). By export item, Semiconductor exports fell 34%, petroleum fell 42%, and chemicals also fell 25%. Unfavourable price effects dragged down the export performance of these items. Meanwhile, vehicle exports rose a robust 15% YoY.   Imports also fell sharply (-25.4% vs -11.7% in June, -25.0 market consensus) mainly due to falling global commodity prices (crude oil -46%, gas -61%, coal -46%). With a larger decline in imports than exports, the trade balance recorded a surplus for the second month. We believe that the trade balance will stay in surplus for most of the second half of the year, but exports will likely stay in the contraction zone for the current quarter. Korea's July manufacturing PMI rose to 49.4 from 47.8 in June, the highest reading since July 2022, but remains in the contraction zone where it has languished for thirteen consecutive months. With new orders and output rising, we believe that a modest recovery in manufacturing and exports can continue. We expect exports to turn positive in 4Q. Japan: Japan’s labour market remains tight, and this is an optimistic sign that sustainable wage growth may continue for some time. The unemployment rate edged down to 2.5% in June (vs 2.6% in May and market consensus), and labour participation also rose to 63.1% from 62.9% in May.  Although labour demand conditions weakened recently as the Job-to-application ratio continued to decline to 1.30 in June from the recent peak of 1.36 in December, we still think that the current level of labour demand is quite healthy. By industry, job offers for hospitality services such as hotels and restaurants rose, but those for manufacturing declined. We believe that Japan’s recovery will continue, mostly driven by the service sector. Indonesia:  July inflation is set for release today.  The market consensus points to a further moderation in headline inflation. July inflation is pegged to slip to 3.1%YoY from 3.5% as favourable base effects kick in.  Likewise, core inflation is set to cool further to 2.5%YoY from 2.6% in the previous month.  Despite slowing inflation, Bank Indonesia will likely remain on hold in the near term to help provide stability to the IDR which has been under pressure lately.      What to look out for: RBA decision and regional PMI New Zealand building permits (1 August) Japan labour market figures (1 August) South Korea trade balance (1 August) Indonesia CPI inflation (1 August) PMI regional reports (1 August) China Caixin PMI (1 August) Australia RBA (1 August) Hong Kong retail sales (1 August) US ISM manufacturing and JOLTS report (1 August) South Korea CPI inflation (2 August) Thailand BoT policy (2 August) US ADP jobs report (2 August) Japan Jibun PMI (3 August) Australia trade balance (3 August) China Caixin PMI services (3 August) UK BoE policy meeting (3 August) US initial jobless claims, factory orders, durable goods orders, ISM services (3 August) Philippines CPI inflation (4 August) Singapore retail sales (4 August) US non-farm payrolls (4 August)

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

Asia week ahead: China inflation and trade data China's producer and consumer price updates next week may continue to fuel concern about deflation in the world's second-biggest economy. Elsewhere, look for second-quarter GDP releases from Indonesia and the Philippines.   China and Taiwan to release trade data and CPI We expect China’s July CPI to be almost unchanged as recently adopted measures by the government have yet to take full effect. While the Politburo reiterated support for the economy, we await further details on the said measures. Meanwhile, we expect PPI inflation to remain in negative territory. Despite the recent increase in oil prices, mining and manufacturing prices are likely to drop further as evidenced by data releases this week (Caixin and property prices).   For Taiwan, July CPI inflation is expected to rise only slightly as the price of household amenities remains high amid robust demand, with consumer confidence up for a third consecutive month. The consumer confidence index rose 1.73 points from June to 68.39 points in July, the highest level since April last year.   RBI to extend pause Food prices are still climbing in India despite government efforts to keep price increases under control. Tomato prices in July recently spiked due to seasonal factors compounded by the early arrival of monsoon rains. The government announced an export ban on non-basmati rice, resulting in a further tightening of global supply for grain. Given the lagged impact of the ban, headline inflation could still exceed the Reserve Bank of India's target range of 2-6%. This development, however, is unlikely to prompt a rate hike from the RBI as food inflation is expected to recede in the coming months.   Indonesia and Philippines to experience moderate growth in 2Q Next week features 2Q GDP reports from Indonesia and the Philippines. Growth is expected to slow slightly in 2Q for both economies as base effects fade and higher inflation caps purchasing power. Meanwhile, tight financial market conditions are also expected to have weighed on investment activities as bank lending slowed. Despite the slowdown, Indonesia and the Philippines are expected to post respectable year-over-year expansion with Indonesia set to grow by 4.7% YoY while the Philippine economy likely growing by 5.6% YoY.   Trade data to show exports in the region struggling amid weak global demand Several regional economies will be reporting trade data in the coming week. China and Taiwan will release trade figures that will likely show another period of contraction for both exports and imports. Soft electronic exports due to weak global demand should continue to weigh on exports, which in turn would cap the outlook for the manufacturing sectors of both China and Taiwan. For the Philippines, June data will show both exports and imports likely in contraction given slowing global trade. Exports, which posted a surprise expansion in May, might revert to a contraction as demand for the mainstay export item, electronics, remains soft. Meanwhile, imports will continue to contract as global commodity prices normalise from the peaks experienced in 2022. All in all, the overall trade balance will likely stay in deficit with the shortfall pegged at roughly $4.5bn for the month. 

FX Daily: Currencies starting to detach from bond dynamics Volatility in long-dated sovereign bonds has remained elevated, but that has almost only been mirrored in a weaker yen in FX since the start of the week. The currency market is starting to detach from short-term bond swings, but the dollar’s newfound resilience could still consolidate into Thursday’s US inflation numbers.   USD: Wait and see It’s been a slow start to the week in the currency market, with the dollar being mixed but generally supported yesterday and in today’s Asian session. We continue to observe rather elevated volatility in bond markets, with long-dated Treasury yields rising again: unsurprisingly, the only notable move in FX since the weekend has been another leg higher in USD/JPY. With the Bank of Japan normalisation still looking too remote to temper bearish pressure on the yen, USD/JPY is the most exposed G10 pair to the ongoing bond market instability, especially given some signs of resilience in US equities, which limited losses in high-beta currencies. The US data calendar only includes second-tier releases until Thursday’s CPI figures. Today, the key highlights are the NFIB Small Business Confidence Optimism Index – which is expected to rise very marginally from June – trade balance figures from June, and final wholesale inventory numbers. It will be interesting to hear what FOMC members Patrick Harker and Thomas Barkin say about the economy in two separate speeches today, especially following last week’s slightly weaker-than-expected headline payroll figures. With the exception of the yen, it appears that most G10 currencies are losing their direct exposure to swings in US bond yields. At this stage, it would probably take a larger swing in yields to cause a substantial spill-over into FX than it did before the US credit downgrade by Fitch. Still, we expect some consolidation of the dollar around current levels into Thursday’s inflation numbers.

Rates Spark: Let’s start talking louder about 4.5% Let's talk louder about 4.5%! There has been a consolidation of the market discount for a soft landing. High yield has been an outperformer and the big talk has been of elevated re-financing risks as rates remain higher for longer. Given that and the latest data, there is still an upside for market rates to come, especially in longer tenors.   Enough from the data to tempt the US 10yr towards 4.5% Key levels were hit on the US curve on Tuesday: 4.25% for the 10yr and 5% for the 2yr. Then there has been a brief consolidative theme, but only for more bond weakness to show overnight, with the 10yr hitting 4.3%. That is within spitting distance of last October's yield highs. Risk assets cannot quite decide whether to go risk-on or risk-off. It still feels biased to a risk-off tone in net terms. The issue here for risk assets is how to interpret the notion of a soft landing. On the one hand, it's good as it implies minimal default elevation. On the other, it also implies less room for rate cuts and, more damaging, the maintenance of elevated official rates for longer. This is a growing issue for players that need to get some re-financing done, as this is only going to be at more penal funding rates relative to what was obtained over the past 3-5 years (and further back too). The bulk of this has to do with the robustness of the US economy. This is the main driver behind the paring back of future rate cuts as discounted by the strip. It’s also showing up in a delay on the point at which the Fed is discounted to begin cutting rates. But then, on the very front end, there has been a pullback in the expectation for more rate hikes. Most of this has come from the significant fall in headline inflation and also in core inflation (albeit less dramatically so). That, in turn, has allowed the Fed to get less fussed over pushing the funds rate higher. Keeping it higher for longer is what squares the circle here in terms of the market discount. The rise in the 10yr Treasury yield reflects this, and it is a rationale for the 10yr Treasury yield to maintain an upward-looking profile, at least until this dynamic meaningfully changes. Latest data pushes in the same direction. Industrial production came in at 1% on the month, and capacity utilisation rose, which typically does not happen to an economy facing into an imminent recession. Even the latest housing market data came in on the firm side. Basically, July has followed the June data so far as being very much 'glass half full' for the economy. Not even an economy that seems to be landing at all. Hence the logic for market yields to hold on up here for a period. The 10yr can hit 4.5% unless some dramatic tilt happens.   The 10y UST's October yield highs are close   Today's events and market view The FOMC minutes did not contain anything particularly surprising. The key passage was that “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". Limited summer trading is likely amplifying market reactions, but the bias for rates remains to the upside.  There are only a few data points of note on today’s calendar. However, the initial jobless claims data has, in the past, been a source of knee-jerk reactions. With initial claims seen somewhat lower at 240k, the market seems to seek confirmation for the story of economic resilience. The other data point is the Conference Board’s Leading Index, seen posting its 16th consecutive contraction. It has been crying wolf for some time now. The eurozone will release its trade balance for June. French short- to medium-term bond and inflation-linked bond auctions make up today’s government bond supply.

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

SEK: Enjoying a breather The Swedish krona is emerging as an outperformer this week without any clear domestic driver justifying its strength against peers. EUR/SEK had risen above 11.90 and eyed 12.00, reaching new highs last week, and we suspect this week’s correction is primarily technically driven. News on the troubled landlord SBB continues to worry investors, although at these levels, SEK is pricing in quite a good deal of domestic risks. Incidentally, the housing market has shown signs of stabilisation, which might leave slightly wider manoeuvring room for the Riksbank to deal with high inflation. Keep a close eye on today’s Nvidia quarterly results. SEK is generally the most correlated G10 currency with US tech stocks. A disappointment on that side could trigger another EUR/SEK rally, even though some EUR softness is now helping put a cap on the pair. For the moment, a break above 12.00 is not our baseline scenario, and we see instead greater chances of a gradual – although bumpy – decline in the pair into year-end.  

JPY: Where is the alarm? USD/JPY has quietly drifted into the 145-150 intervention zone without triggering many alarm bells in Tokyo. One difference between now and the intervention period last September and October is that FX conditions are much more orderly. For example, one month USD/JPY implied volatility is trading near 9% today versus levels in the 14-15% region during Japanese FX intervention last year.  At the same time, there is no sense of a 'sell Japan' mentality emerging, and Japanese authorities may actually tolerate a softer yen given the deflationary forces emerging from China and the weak export markets in Asia and Europe. Unless we see some financial shock that triggers an unwind of the carry trade, it looks as though USD/JPY can hang around this 145/150 region longer than we had originally forecast. A decisive turn lower may have to wait until the late September and October period when more evidence of a US slowdown should have emerged and speculation will be growing over a Bank of Japan policy change at the meeting in late October.

Hungary: The worst may be over We had high hopes going into the release of second-quarter GDP, and we were sorely disappointed. Hungary has been in a technical recession for four quarters, a new record in modern times. The silver lining remains agriculture, which we expect to pull the country out of the doldrums with a strong performance in the second half of the year. But it won't be enough to keep the economy out of a full-year recession. We now expect real GDP to contract by 0.5% in 2023, possibly the only country in CEE to record a down year. Shrinking domestic demand (the main driver of the negative momentum) has a positive side effect: the trade balance has been in surplus for five months, while the current account posted a surplus in the second quarter based on preliminary figures. Against this background, we have significantly raised our external balance forecast and now see the current account in surplus by 0.3% of GDP in 2023. If disinflation continues as expected on the back of weak domestic demand, we see headline inflation below 7% and single-digit core inflation by the end of the year. In this context, the National Bank of Hungary will soon succeed in creating a positive real interest rate environment, especially after the latest signal from policymakers, which warned against excessive rate cut expectations based on market pricing. This hawkish stance could translate into a higher-than-expected interest rate path, at least in the coming months. As a result, we see upside risks to our year-end policy rate forecast of 11%. Hungary's fiscal situation remains challenging, as evidenced by budgetary developments in the first seven months of the year. So, it is hardly surprising that the finance minister has openly talked about the possibility of a budget revision in September. While it is not clear what a revision could mean in practice, we think it would be a combination of an upwardly revised deficit goal to 4.4% of GDP, accompanied by some additional budgetary measures to achieve the new target. We don't see any problems here from a debt financing perspective, as the additional supply will be raised through FX debt issuance.  

Korean activity data point to a cloudy third-quarter According to recent industrial production, exports, and survey data, domestic demand will slow further, while a mediocre recovery is expected for exports. Government support to boost domestic demand will buffer the sharp contraction in consumption.   Exports continued to fall in August Exports declined by -8.4% year-on-year in August (vs -16.4% in July and a market consensus of -11.8%), extending its decline trend for 11 months. However, imports fell -22.8%, even faster than exports, thus the trade balance recorded a surplus of US$869m in August. Six out of 15 major export items increased with robust transportation equipment exports (vehicles 28.7%, vessels 35.2%). However, semiconductors (-21%), oils (-35%), petrochemicals (-12%), and steels (-11%) declined as price effects worked unfavourably. By export destination, exports to the US (2.4%), EU (2.7%), and the Middle East (6.7%) rose firmly on the back of strong vehicle and machinery exports while exports to China (-19.9%) continued to fall, but at a slower pace than in the previous quarter. Looking ahead, the decline in exports will likely narrow, with a return to growth only possible by the end of the year.    The trade surplus has continued for three months in a row   Semiconductors are key Export data suggest that chip exports have gradually improved compared to January as the contraction of exports continuously narrows. We believe that this is mainly due to base effects rather than the industrial cycle turning favourable. We believe that chip exports in value terms will continue to improve by the end of this year mostly supported by the low base last year, but that in volume terms will remain at the current level at the best.  Manufacturing industrial production data showed that semiconductor production dropped by -2.4% month-on-month seasonally adjusted in July, the first decline in five months. Major chip makers announced their production cut plans early this year, and we finally saw some of those promised reduction cuts in July. We think the production cuts will continue for a couple of quarters as inventory levels stay at an elevated level. Thus, the rebound of the chip cycle will probably come even later than the end of this year. Still, we are optimistic that AI chips will likely outperform in the near term, but the overall semiconductor demand condition will not improve meaningfully at least for a couple of quarters.   Semiconductor cycle hasn't bottomed out yet   Domestic demand is expected to worsen further Consumption and investment also slid in July with retail sales and facilities investment down -3.2% MoM seasonally adjusted and -8.9%, respectively. Worrying about the sharp decline in consumption and service activity, the government decided to extend the Chuseok holiday and provide a travel voucher programme to boost domestic demand.   This will temporarily support household consumption in the near term. However, we are still concerned about the ongoing slowdown in construction and facility investment, which will drag on growth over the next few quarters.   Lacklustre survey data also add concerns to the near-term outlook Manufacturing PMI and local business survey slid in August. The Bank of Korea's Business Survey Index outlook for manufacturing declined by four points to 67, the lowest level in five months while the manufacturing PMI retreated to 48.9 (vs 49.4 in July), staying in the contraction zone for 14 months. With semiconductor cycles showing no clear signs of bottoming out and growing concerns over softening global demand, the manufacturing slump is expected to continue this quarter.   Cloudy outlook from survey data   Third quarter GDP outlook In terms of GDP, we believe that third-quarter GDP will decelerate to 0.2% quarter-on-quarter seasonally adjusted from 0.6% in the second quarter. The positive contribution of net exports will continue mainly as imports will decline faster than exports. However, despite government support measures for consumption, domestic demand conditions will likely worsen further. We foresee a continuation of the contraction in investment with tight financial conditions for businesses, weak construction performance and sluggish consumption. Meanwhile, the Bank of Korea's policy priority will shift from inflation to growth with external and internal growth conditions deteriorating further.   GDP outlook: ING vs BoK The Bank of Korea produces a bi-annual outlook for GDP. ING has converted it to quarterly-based growth.

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.

German exports disappoint in July Disappointing export and retail sales data shows that the German economy started the third quarter on a weak footing. The risk of falling back into contraction remains high. Going down again. German exports disappointed again and dropped by 0.9% month-on-month in July, from +0.2% MoM in June. At the same time, imports increased by 1.4% MoM, from -3.2% MoM in June. As a consequence, the trade balance narrowed to 15.9bn euro, from 18.7bn euro in June. Don’t forget that this is in nominal terms and not corrected for high inflation.   Risk of falling back into contraction remains high From last summer until the start of this year, German exports had been extremely volatile. Since then, exports have fallen into stagnation and are basically going nowhere. As a result, trade is no longer the strong resilient growth driver of the German economy that it used to be, but rather a drag. 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 increasingly being able to produce goods it previously bought from Germany, are all factors weighing on the German export sector. With last week’s drop in retail sales and today’s disappointing export data, the third quarter for the German economy has started on a very weak footing, suggesting that the risk of sliding back into contraction remains high

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)

We expect the current account to be in surplus in 2023 As economic activity has been weakening, the collapse in domestic demand is rapidly reducing the need for imports. In addition, as the energy issue appears to be easing this year, the pressure on the trade balance from the import side is easing significantly. Conversely, the export side is still supported by new EV battery plants, while carmakers are still dealing with some backlogs. Taking all these factors into account, it is hardly surprising that the trade balance has been in surplus for five months, while the current account also posted a surplus in the second quarter, according to preliminary data. Against this backdrop, we lift our forecast and now see the current account balance reaching a surplus of 0.3% of GDP in 2023. However, a further slowdown in the global economy could weaken export prospects, limiting the upside to this forecast.     Trade balance (three-month moving average)   Inflation will fall below 8% by December, but 2024 brings challenges Headline inflation sank to 17.6 % YoY in July, mainly on base effects, while prices rose by 0.3% compared to June. At the component level, food inflation continued to moderate, while the slump in domestic demand was reflected in both durable and non-durable goods prices. In our view, the rapid deterioration in firms' pricing power is evident and will only accelerate going forward as competition among retail outlets for households' overall shrinking disposable income intensifies. We expect headline inflation to fall below 8% by December, but next year brings a number of upside inflationary pressures, such as the increase in excise duty on fuel prices and a possible 10% minimum wage increase. In addition, this year's budget revision, due in September, will include some tax increases, which we believe will pose further second-round inflationary risks.   Inflation and policy rate   Our interest rate forecast has changed due to recent hawkish message At the August meeting, policy normalisation continued as the National Bank of Hungary (NBH) cut the effective interest rate by a further 100bp to 14%. The main takeaway from the meeting was that the autopilot will be switched off after the September rates conversion, a clear hawkish pushback against "excessive rate cut expectations". With a data-dependent approach, the NBH will focus on both the inflation outlook and maintaining market stability, so nothing is set in stone. Moreover, the plan to manage the highest positive real interest rate in the region will shape the NBH's decision-making function, which will both strengthen disinflation and make HUF assets more attractive. In our view, the second phase of monetary policy normalisation will bring a first rate cut in December, with a 100bp step. As for October and November, we currently expect a pause, as the NBH will continuously assess the risk environment, paying special attention to the uncertainty surrounding the EU funds and pro-inflationary risks going into 2024.   Real rates (%)    

Asia Morning Bites Higher for longer US rates trade takes its toll on Asian FX. Australia and China trade reports out.   Global Macro and Markets Global markets:  Market sentiment turned sour again yesterday, with stocks across the board dropping. The S&P 500 opened down and went lower over yesterday’s session, falling 0.7% from the previous day. The NASDAQ fell 1.06% and equity futures today are showing no respite. Chinese stocks also fell, though only slightly. The Hang Seng fell 0.04% and the CSI 300 fell just 0.22%. US bond yields pushed higher yesterday as the market continued to take out easing previously priced in for 2024/25. 2Y US Treasury yields rose 5.6bp while 10Y yields rose  2bp to 4.28%. EURUSD stayed at the low end of 1.07 on Wednesday. The AUD was also flat at about 0.6380 despite better-than-expected GDP data, as was the JPY at 147.71 despite comments from officials saying they would take action amid speculative market moves. Sterling dropped below 1.25 on suggestions from Governor Bailey that the rate tightening cycle in the UK was done, or if not, nearly done.  Asian FX sold off against the USD yesterday. The SGD unusually propped up the bottom of the list, weakening 0.27% to 1.3639. The CNY rose above 7.30 to reach 7.3180, and we would anticipate a forceful response from the PBoC at this morning’s fixing. G-7 macro:  The US services ISM index unexpectedly rose yesterday, rising to 54.5 from 52.7 (52.5 expected). There were also gains in the prices paid index, employment, and new orders. This is what drove the market to price out further easing next year, helping to lift the USD. The Fed’s latest Beige Book was somewhat downbeat given the ISM numbers. Today, there isn’t too much to look out for. US non-farm productivity and unit labour costs are both residuals from earlier GDP data and don’t really add to the sum of knowledge on the US economy. Weekly jobless claims are the only other US data of note. The Eurozone releases final GDP figures for 2Q23. No revisions are expected. China:  August trade figures will likely show a slight moderation in the pace of contraction, though it would be generous to describe this as a bounce. A trough might be a more accurate description. Still, that’s better than what has gone before, so it could buoy sentiment. The trade balance may shrink slightly despite this, from the $80.6bn figure from July. Australia:  A slight contraction in Australia’s AUD11.3bn trade surplus for July is also expected for the August figures published later this morning. This is unlikely to have any meaningful impact on the AUD, whose current weakness is more a function of broad USD strength.    What to look out for: China and Australia trade balance Australia trade balance (7 September) China trade balance (7 September) Malaysia BNM policy (7 September) US initial jobless claims (7 September) Japan GDP (8 September) Philippines trade balance (8 September) Taiwan trade balance (8 September) US wholesale inventories (8 September)

Poland: CPI expected to decline below 9% Current account (July): €1598mn Poland’s current account has been improving markedly over the recent months amid improving trade balance. The 12-month cumulative current account balance turned positive (+0.1% of GDP) in June, whereas in late 2022 it was approaching 3.5% of GDP. While export growth has been slowing in nominal terms over recent months, imports have started declining as the surge in imported energy commodities abated. We expect another current account surplus (€1598mn) in July as exports (+1.7% YoY) outpaced imports (-5.8% YoY). The outlook for the rest of the year is less positive, as poor conditions in German manufacturing are likely to weigh on Poland’s export prospects. On the other hand, external positions may benefit if the current weakening of the PLN is continued. CPI (August): 10.1% YoY The StatOffice should confirm its flash estimate of August CPI inflation at 10.1% YoY. While headline inflation remained at double-digit levels, price growth has continued moderating. The decline in inflation seen last month can mostly be attributed to developments in food and beverages prices (down by 1% MoM), lower annual growth of house energy and further moderation of core inflation. Our current estimates point to CPI inflation decline below 9% YoY.   Key events in developed markets next week   Key events in EMEA next week    

Asia Morning Bites US inflation report out tonight could see Asian markets mark time today.   Global Macro and Markets Global markets:  US stocks are up one day, down the next at the moment. Yesterday, it was time for some losses led by tech stocks following an Apple event to launch the iPhone 15. The S&P 500 dropped 0.57% while the NASDAQ lost 1.04%. This was actually in line with the steer from equity futures yesterday. But today, they are giving little away. Chinese stocks fell also. The Hang Seng was down 0.39% and the CSI 300 was down 0.18%. 2Y US Treasury yields nosed up 2.9bp to 5.02%, while the 10Y Treasury yield was marginally lower by 0.8bp taking it to 4.28%. EURUSD is slightly higher at 1.0758, but spent a lot of time yesterday exploring the downside before recovering. This hasn’t helped the AUD, which has been steady to slightly weaker over the last 24 hours, sitting at 0.6427 currently. Cable also slid yesterday and made a less robust recovery than the euro, leaving it at 1.2492 currently. And the JPY is also softer, rising to 147.126.  The PBoC’s recent browbeating of the market still seems to be keeping a lid on the CNY, which remains at 7.2923. We’d expect it to test the 7.30 level again in the coming days, though tomorrow’s data dump will need to be taken into account – we think it might be slightly less negative than in recent months…The KRW had a positive day, rising 0.28% to 1327.64, and the THB weakened 0.38% to 35.640, but there were few other notable movements in the rest of the Asia FX pack.   G-7 macro:  Today, we get August inflation data from the US. And the news will be mixed. Headline inflation will likely rise from 3.2% to 3.6%YoY - all the helpful base effects that helped lower inflation in the first half of the year are used up now, and the month-on-month rate at 0.6% (expected), is still far too high to result in anything other than an inflation increase. But it is exactly the opposite story for core inflation, which has been much stickier, but could now benefit from more helpful base effects, and the fact that most of the price increases are in the non-core food and energy sectors. We should see core inflation falling to 4.4% (consensus 4.3%) from 4.7% YoY. Exactly how the market takes this mix of data is difficult to judge in advance, and could come down to small deviations from the consensus numbers on both figures. Other than this, the UK releases a raft of production, trade, construction and monthly GDP data for July.   India: Trade balance data for August will likely show the deficit in the -USD20bn to -USD21bn range. Export growth has been on a slow but steady decline for a long time, and was -15.86%YoY in July. Looked at in USD levels terms, exports are still trending slightly lower, but the rate of annual decline should moderate to low single digits this month. Inflation data released yesterday evening came in at 6.83%, only slightly higher than our 6.7% forecast, and slightly lower than the consensus 7.1% estimate.   South Korea: The jobless rate unexpectedly declined to 2.4% in August (vs 2.8% July, 2.9% market consensus). The construction sector added jobs for the first time in six months but manufacturing shed jobs for a second month. With summer holidays underway, hotels and restaurant jobs gained. Rising pipeline inflation raised concerns that consumer prices could rise more than expected in the coming months. Import prices surged 4.4% MoM nsa (0.2% in July), the largest increase in 17 months, but due to base effects the YoY growth still fell -9.0%YoY (vs -13.6% in July). Weak currency and strong commodity prices are the two main reasons for the price increases. The KRW is hovering above the 1,300 level and oil prices continue to rise. We are concerned that consumer price inflation may rise more than expected. The tighter job market and rising prices will support the BoK’s hawkish stance. But we still don’t think this will push them to deliver additional hikes by the end of this year given sluggish exports and weak investment.   What to look out for: US CPI inflation and China data South Korea unemployment (13 September) Japan PPI inflation (13 September) India trade balance (13 September) US CPI inflation (13 September) Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)

Meanwhile, tensions have been rising again in Japan following Vice Finance Minister for International Affairs Masato Kanda's verbal intervention. Kanda said "looking at underlying moves, speculative action or activity that cannot be explained by fundamentals can be observed" and "we won't rule out any options if speculative moves persist."   Japanese authorities take more stringent tone Furthermore, at a press conference after the Cabinet meeting on 8 September, Finance Minister Shunichi Suzuki said "the government is closely monitoring developments in the currency market with a heightened sense of urgency." The authorities in Japan are taking an increasingly stringent tone in their communication. With the dollar strengthening across the board and diplomatic events such as this weekend's G20 meeting underway, we think this suggests moves to improve the environment are making progress. In any case, we expect the remarks to discourage further yen selling to some extent. Meanwhile, BOJ board members Hajime Takata and Junko Nakagawa spoke this week. This means that five of the nine policy board members, starting with Deputy Governor Shinichi Uchida, have spoken following the monetary policy meeting in July. Overall, they all saw an upside risk to inflation, and a consensus seems to have formed that monetary policy should start to be normalized once a solid rise in wages has been confirmed. However, opinions differed on the conditions for lifting negative interest rates, and this does not seem to be specifically on the agenda, even though the prospect is on the horizon. Such statements did not prompt the foreign exchange market to expect the disparity between domestic and overseas monetary policy to narrow, and the yen has continued to sell. In addition, crude oil prices have been rising recently. We expect Japan's trade balance to worsen as the value of imports rises if prices remain at this level or rise further. We also see the risk of yen selling picking up steam in anticipation of such real demand.

Asia Morning Bites China's data deluge draws near. ECB hikes rates while US retail sales surprise on the upside.   Global Macro and Markets Global markets:  We will start today with FX, given the ECB meeting yesterday, and the response of the market to what our Head of Global Macro is describing as a dovish hike. EURUSD has dropped sharply to 1.0640, and this has taken the GBP lower too, now trading at just over 1.24. The BoE meets next week and is also expected to hike  - also perhaps its last. The AUD has not been much impacted by this move, though despite the stronger-than-expected labour data yesterday, markets seem relaxed and are expecting no further tightening. We are not so relaxed. The JPY was also a little softer, rising to 147.50 . Other Asian FX was fairly quiet yesterday. The CNY is still hovering below 7.28 ahead of today’s big data release. European bond yields dropped after the ECB decision. The yield on the 10Y bond fell 5.8bp to 2.588%. US Treasury yields were not affected by the European news and had to contend with another stronger-than-expected macro release in the form of retail sales. The US 10Y Treasury yield rose 3.8bp to 4.286%, while yields on 2Y USTs rose 4.2bp to 5.011%. Equity markets seemed to like the sense that rates aren’t going any higher (if you believe the central bankers, and it's not like they have a great track record!). The S&P 500 rose 0.84% while the NASDAQ rose 0.81%. The NASDAQ is up 33.05% year-to-date, just in case you’d lost track. Triple witching today, so it may be volatile. Chinese stocks didn’t do a lot yesterday. The Hang Seng rose 0.21%, while the CSI 300 fell 0.08%. Volumes were fairly low.   G-7 macro:  The US economy is still refusing to roll over. August retail sales rose 0.6% MoM, much higher than the 0.1% expected. The control group growth rate was slower at 0.1%, but this was still more than had been expected. Markets are still not even 50% expecting another Fed rate hike. But you have to wonder how long they can keep this up after the recent upside inflation miss. US August PPI data also came in above expectations. It’s a quieter day today, except for US existing home sales and the University of Michigan consumer confidence figures.   China:  The data deluge kicks off at 09:20 this morning (HKT/SGT) with the 1Y medium-term lending facility rate, which given the PBoC’s struggles to support the CNY, and yesterday's RRR cut, seems likely to be left unchanged at 2.5%. New home prices come out at 09:30, and will likely show further month-on-month decline. Other property-related data today is unlikely to offer much sign of life. But at 10:00, the activity data emerges, and here, we think there may be some slightly less negative news. Recent export data and new CNY loan figures could indicate that production and retail sales numbers may increase slightly in year-on-year terms from last month. To be sure, we aren’t expecting them to look strong, but a positive direction of travel could provide some support for markets. We will know soon enough.     India:  August trade figures come out later this afternoon. The slide in exports has been fairly consistent, but we are now reaching a point where year-on-year declines may start to shrink from double digits to low single digits. That is also likely on the import side, and the trade deficit is likely to remain close to last month’s -USD20.67bn.   Indonesia:  Indonesia reports trade numbers today.  The market consensus suggests that we'll have another month of contraction for both exports and imports as global trade remains subdued.  The trade balance is forecast to settle in surplus but at a less substantial level of roughly $1.5bn.  Fading support from the trade surplus could be one reason for the IDR's struggles recently, and we could see the currency stay under pressure until we see this trend reversed.     What to look out for: China data deluge China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment and existing home sales (15 September)

 Stable INR thanks to the RBI While India’s economy has also outperformed many of its peers, we aren’t putting this FX performance entirely down to structural factors, although the positive spread of policy rates over US rates is clearly helping. Rather, we think the stability of the currency all year is mainly due to Reserve Bank of India (RBI) intervention. Normally, the INR tends to track according to inflation differentials, such that it maintains a more or less constant real exchange rate. Indeed, there have been times this year when Indian inflation was lower than that of the US, and that could certainly have been consistent with a firmer currency. But more recently, apart from a relatively brief interlude a few months ago, the Indian inflation rate has pushed sharply higher again, while US inflation has consolidated at just over 3%, and the INR’s resilience is looking more questionable and less supportable now. Saying this, there seems no shortage of ammunition for the RBI if it decides it wishes to persist with its INR support. Import cover is not only holding up well above the six months usually reckoned to be a minimum requirement for emerging market economies but has been rising recently.   FX Reserve import cover   The trade balance has deteriorated This healthy FX reserves position hasn’t owed anything to the trade sector, which is currently running a deficit, though not a particularly large one by historical standards (the current account deficit is only about 2% of GDP). Like everywhere else in the region, India’s exports have fallen from their 2021 peak, but it has been quite a slow decline, and India may have benefited from two factors. The first is that India’s direct trade with China is far more limited than most of the rest of Asia. The other is that India is not yet a big player in the semiconductor sector, which has been particularly hard hit this year, and which is only now troughing. That said, India’s aggregate export performance relative to the rest of the region is not great, and it ranks towards the bottom of the pack in terms of relative year-on-year growth rates. This appears to be down to a couple of things. The first relates to what is usually very strong jewellery exports, which have been very soft this year. This is a big part of India’s export basket and accounted for about 8.5% of total exports in 2022. This is one area where weak Chinese demand could be having an outsized impact, as it is one of the largest markets for Indian jewellery after the United States, where demand has also been hit hard by high inflation rates.   India's exports by type   The second is bans on exports of agricultural products. Non-basmati rice exports were banned on 20 July, and this followed a ban last year of broken white rice last year. Exports of sugar after the current export season ends on 30 September will also add to the export gloom after sugar exports were capped at 6.1 million tonnes this season. Sugar exports have already almost stopped.    Indian agricultural exports   Helping to square the circle between ongoing central bank support for the currency, export weakness and stable FX reserves, we can refer to the financial account of the balance of payments.   India's financial account (2Q moving average)    

At the same time, the resilience of the labour market is quite impressive, as the three-month unemployment rate was at 4.1% in the July-September period. The tight labour market poses upside risks to inflation, with the expected 10-15% increase in minimum wages next year leading to a significant rise in real wages. In our view, the biggest question remains how fast domestic demand will recover in 2024; if we were to see a slow and gradual recovery, then a price-wage spiral might be avoided. The level of average and median real wages (1990 CPI adjusted HUF)   How will geopolitical risks affect the trade balance? The collapse in domestic demand led to a slowdown in economic activity in the first half of the year, which rapidly reduced the need for imports. In addition, as energy prices were significantly lower than a year earlier, the pressure on the trade balance from the import side continued to ease. These factors have led to persistent trade surpluses, while the current account was also in surplus in August. We see two downside risks to our call for a small current account surplus by the end of 2023. The first is the start of the heating season, which will lead to an increase in gas imports. However, gas storage is in particularly good shape, with levels above 90%. The second is the risk of a renewed rally in commodity prices on geopolitics. Nevertheless, we are maintaining our call and highlighting the risks as we continue to monitor market developments.   Trade balance (3-month moving average)   How fast will disinflation unfold over the rest of the year? Headline inflation sunk to 12.2% YoY in September, mainly on significant base effects, while prices rose by 0.4% compared to August. The vast majority of the deceleration is attributed to the household energy component; last year’s base was enormous due to the administrative price change. Apart from this, food prices fell on a monthly basis, while fuel prices jumped on the back of higher oil prices and the stronger USD. Another positive development was that core inflation fell by 0.2% MoM, raising hopes that underlying price pressures are dissipating. Going forward, we expect disinflation to continue swiftly supported by both base effects and constrained spending. In our view, the easier task is to bring inflation down to 7%, which is our forecast for the end of 2023. The central bank will have a much harder task in the form of bringing inflation down further to 3%, especially in light of various upside risks.   Inflation and policy rate   What is needed for the NBH to sustain the present pace of easing? At its October meeting, the National Bank of Hungary cut the base rate by 75bp to 12.25%, while maintaining the +/- 100bp symmetric interest rate corridor around the base rate. Strong disinflation and an improvement in the country’s external balances supported the case for a larger rate cut, while the looming risk environment warranted a cautious approach by the Monetary Council. In the end, the result was a careful compromise that represents a slowdown from the previous pace of easing. Going forward, we expect the NBH to stick to the same 75bp of cuts for the rest of the year, bringing the policy rate to 10.75% at the end of the year. However, given the central bank’s data-dependent approach, any significant deterioration in the risk environment could lead to smaller cuts or even to a pause in order to maintain FX stability.   Real rates (%)   How realistic is this year's revised deficit target? At the beginning of October, the government revised up the 2023 Maastricht-based deficit target by 1.3ppt to 5.2% of GDP. It was only a matter of time before we saw this kind of revision, as in early September, the Government Debt Management Agency raised this year’s financing needs to HUF 4,133bn. Part of the change is due to a downward revision of the government’s nominal GDP forecast (0.2ppt) and the rest reflects the budgetary slippage. The latter is the result of underperforming indirect tax revenues, higher pensions, and higher debt service costs, which are the main budgetary issues. Despite the updated deficit target, we are not sure that this will be enough judging by the deficit dynamics in the fourth quarters of the last four years. Barring a miracle increase in revenues and a freeze in expenditures, we remain sceptical that even the updated target can be met.   Budget performance (year-to-date, HUFbn)   Why we're maintaining our call for a stronger forint in the longer term The forint survived the first rate cut in the base rate without major damage, but we believe it should still see some short-term weakness – especially until the EU deal remains in limbo. Market expectations have still not fully adjusted to the new interest rate path indicated by the NBH, which may keep the forint at weaker readings in the coming weeks. Moreover, the US dollar still maintains stronger values which are generally not supportive to the EM universe (including the HUF). In the medium and long term, not much has changed after the last NBH meeting, and the forint should continue to strengthen depending on the success of the NBH delivering rate cuts and the EU money story. We expect 375 EUR/HUF at year-end and 365 EUR/HUF in the middle of next year, supported by the highest positive real rate and carry in the region   CEE FX performance vs EUR (30 December 2022 = 100%)   How much do core rates affect the Hungarian interest rate space? In the rates space, if we consider the baseline to be a 75bp pace of cutting for the coming months, the FRA curve and front-end of the IRS curve still have room to move down in our view. At the moment, the market is pricing in an almost 75bp move for the next meeting but only 50bp or less for the coming months. If core rates remain elevated – which seems to be the baseline at the moment – we can expect further steepening of the IRS curve again. However, 2s10s HUF has already approached the CZK curve within CEE peers, and it is clear that the vast majority of the curve normalization is behind us. On the other hand, the biggest potential for repricing remains at the long end of the curve, which still basically ignores NBH rate normalisation and pricing base rates above 7% in long-term. However, this will only be unlocked later in this cycle when we need to see core rates falling as well.   Hungarian sovereign yield curve (end of period)   Hungarian government bonds (HGBs) provide the biggest beta to core rates at the moment, which has led to a strong sell-off in recent weeks, and so far we have seen only a cautious recovery. The supply side of HGBs, despite the unclear fiscal policy picture, is rather positive. The debt agency (AKK) has covered about 85% of all planned issuance and should remain under control this year as a result. In the case of additional needs stemming from a higher deficit this year, we expect to focus on retail bond issuance, avoiding pressure on HGBs. The picture for next year still remains cloudy, but our preliminary indications point to significantly lower gross redemption needs and roughly the same supply of HGBs as this year – which is already significantly lower than previous years given the focus on retail issuance. On the demand side, we believe that the highest yields within the CEE region should attract sufficient demand, but we need to see progress in the EU money story and a clearer fiscal policy picture for a significant rally first.   Forecast summary

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.

Rates Spark: Not called resilient for nothing After a huge fall in yields last week, there has been an attempt to engineer some semblance of a reversal so far this week. We expect to see more of that in the days ahead, with data unlikely to get in the way and supply pressure pushing in the direction of a concessional build in the coming days.   Market rates edging higher from Friday's lows, led by the US Market rates have staged a bit of a fightback having hit post-payroll lows on Friday. The US 10yr Treasury yield managed to bounce off the 4.5% area, which we now regard as a key support. Stay above that level and we are good to gradually re-test higher in yield over the course of this week. It’s a week of supply right along the curve in the guise of 3yr, 10yr and 30yr auctions. It’s also a week that is unlikely to get too rocked by data releases, with Thursday’s jobless claims set to be the highlight of the week. In addition, we note that there remains an underlying supply risk for bonds generally. Even though the US Treasury has taken some pressure off long-dated issuance into year-end, it does not take away the underlying pressure coming from the elevated fiscal deficit. Fiscal pressure results not just in ongoing supply pressure, but also likely ongoing upward pressure on real yields. That in turn implies steepening pressure from the back end. Importantly, we don’t have a green light yet for a complete cycle capitulation towards a structural rate-cutting agenda. That will come, but we need more first.   Yields are slowly starting to revert higher   QT lumped into the ECB's review of the operation framework European rates markets also pared some of the past week’s rally with 10Y Bund yields ending the first session 9bp higher above Friday’s close and thus well above 2.7% again. But it looked more like a general countermove, inspired also by a busy corporate supply slate, rather than being motivated by any single event. There were hawkish comments from the European Central Bank’s Robert Holzmann, who said the central bank should be ready to hike again if needed. But coming from him, such remarks should not surprise and are not new. Rather, his other remarks on quantitative tightening and that there won't be anything forthcoming on that front this year were rather dovish, if anything. The debate about the ECB’s bond portfolios could not be separated from the review of the operational framework, Holzmann said. The forthcoming framework will also determine the level of excess reserves that the ECB will operate with to maintain control over front-end rates – and perhaps even foresee a structural bond portfolio to also provide it with some flexibility to intervene in bond markets. Recall that the ECB’s hawks had also postponed their push for higher minimum reserves until spring next year for a similar reason, according to earlier Reuters reports. The review will give an opportunity to address the wider issue of excess reserves in the system – and also the cost efficiency of implementing monetary policy which could also include, for instance, the remuneration of government deposits. Given the complexity and multitude of possible tweaks, we would expect the review to conclude not with a one-off adjustment but rather a gradual path towards a new framework.     Today's events and market view There are few data points of note over today's session. For the eurozone, PPI is expected to slow to 0.5% month-on-month resulting in a -12.5% year-on-year figure and the US will be reporting its trade balance. The main highlight will be the busy schedule for Federal Reserve speakers, including Neel Kashkari, who last night was not convinced that rate hikes were over. Other Fed speakers are Austan Goolsbee, Christopher Waller and John Williams. Supply also returns to the spotlight. In Europe, Austria will auction 5Y and 10Y lines, but the main focus will be on the UST auctions this week, beginning with the sale of US $48 billion in new 3Y notes tonight

Indonesia’s exports fall less than expected Exports and imports fell less than expected leading to a bettter-than-expected trade surplus.   Trade surplus beats expectations Indonesia's exports and imports fell as expected in October although both slipped at a less pronounced pace. Exports fell 10.4% year-on-year compared to the drop of 16.2% YoY in September. Lower global prices for mainstay exports of coal, nickel and palm oil contributed to the lower export performance. Meanwhile, imports were down a modest 2.4% YoY compared to -12.5% YoY reported in the previous month.  This resulted in the trade balance staying largely unchanged from the previous month at roughly $3.5bn, much lower than the record high in 2022 but better than the lows of less than a billion recorded earlier in this year.      Another decent trade surplus to help support the IDR   Better than expected trade surplus supports a BI pause next week November's better-than-expected trade surplus indicates that there will be less pressure on Bank Indonesia (BI) to hike rates next week. BI increased policy rates at its most recent meeting in a bid to steady the rupiah, which was under significant pressure prior to the hike last 19 October. With the trade surplus beating market expectations of a $3.0bn level, we believe the improved external balance should be enough to stabilise the IDR with BI likely keeping rates untouched at the 23 November meeting.

Asia Morning Bites High-level communication to resume between the US and China as Biden hails meetings with Xi as making "real progress". Taiwan's main opposition parties are reported to be combining forces for the upcoming Presidential Election.   Global Macro and Markets Global markets:   A mixed run of US data yesterday resulted in Treasury yields pushing higher again. 2Y yields rose 7.6bp to 4.912%, while yields on 10Y US Treasuries rose 8.4bp taking them back above the 4.50% level to 4.531%. EURUSD has dropped slightly following this yield reversal but remains at 1.0849 for now. The AUD is reasonably stable at just over 0.65, but the GBP and JPY have both lost more ground. USDJPY is now 151.29. Most of the Asian FX pack made decent gains yesterday, but will probably revert to a weakening bias today. US stocks made only very small gains yesterday. Chinese stocks did far better. The Hang Seng rose 3.92% while the CSI 300 rose 0.7% on the slight improvement in activity data. On the political front, a resumption of high-level dialogue as President Biden hails talks with President Xi as making “real progress”, is probably the main win from the Pre-APEC session. Elsewhere, the Financial Times reports that the two main opposition parties in Taiwan will join forces against the DPP for January’s Presidential elections. It remains to be seen which party’s candidate will stand for the Presidential role. This, it is reported, will be determined by a third-party analysis of how the parties are polling. These parties are viewed as being more open to dialogue with Mainland China, so they could usher in a less tense election period than has historically been the case. G-7 macro: Yesterday’s US data stuck with the theme of price pressures waning, but activity remaining more resilient (see here for a more detailed note from JK). PPI inflation dropped to 1.3% YoY following a 0.5% MoM decline, and core PPI inflation also slowed to 2.4% YoY from 2.7%. Retail sales, however, were expected to fall 0.3% MoM in October, but only fell 0.1%. The control group of sales which strips out volatile items, rose 0.2%MoM – in line with expectations. UK inflation released yesterday showed a larger-than-expected fall. The CPI inflation rate tumbled to 4.6% from 6.7%. The news flow today won’t be quite as interesting. US export and import price data is rarely a market mover. Although we do also get industrial production, which is forecast to decline by 0.4% MoM, as well as the Philly Fed business survey and usual weekly jobs figures. Japan:  Exports for October rose 1.6%YoY – beating the forecast 1.0% gain, while imports were also a little less negative than expected at -12.5% YoY, though not enough to dent the trade balance. In adjusted terms, the deficit shrank to -JPY462bn. Alongside the trade figures, core machine orders data for September showed a decent 1.4% increase, beating expectations, though still leaving the annual rate down 2.2% YoY Australia: October employment was fairly strong. The total employment change from the previous month was +55,000, up from +7,800 in September. Most of the gain was due to a 37,900 rise in part-time jobs, so the total figure flatters the positive impact this will have on domestic demand. Full-time employment rose 17,000. There was a much bigger than usual increase in unemployment, which helped lift the unemployment rate to 3.7% from 3.6%.   Philippines:  The Bangko Sentral ng Pilipinas (BSP) is expected to keep rates unchanged today at 6.5%.  BSP hiked policy rates by 25bp two weeks ago in an off-cycle move so they are expected to hold today.  BSP Governor Remolona however could retain his hawkish rhetoric should inflation projections for 2024 point to another year of above-target inflation.    What to look out for: Australia jobs data and BSP meeting Japan trade balance (16 November) Australia labour report (16 November) Philippines BSP policy (16 November) US initial jobless claims and industrial production (16 November) Singapore NODX (17 November)

Global Macro and Markets Global markets:  Fed Chair, Jerome Powell, tried to sound a hawkish tone at his speaking event on Friday, talking down the likelihood of rate cuts. But markets latched onto a remark that policy was now “well into restrictive territory” as a clue that there was a greater chance of rate cuts next year than Powell was letting on. 2Y Treasury yields plunged 14.2bp to 4.538%, while the yield on 10Y Treasuries dropped 13.1bp to 4.196%. So far, there has been no obvious response from EURUSD, which you’d imagine would rise given the magnitude of this fall in US bond yields. However, the falls were matched very closely by falls in European bond yields on Friday too, as markets seem to be swinging around to the idea of meaningful ECB cuts as well.  The AUD rose sharply though, rising to 0.6687. Cable was also up to 1.2721. And the JPY has plunged to 146.33, its strongest since 11 September. Asian FX was mixed on Friday, though we can expect the laggards (KRW, TWD and MYR) to make up ground today. The rest of the pack will also likely follow the G-10 lead. Rising rate cut expectations gave US stocks another reason to rally on Friday, though the gains were relatively muted. The S&P 500 and NASDAQ rose slightly over half a per cent. G-7 macro:  Friday’s main data release was the manufacturing ISM index. This was unchanged at 46.7, a weaker outcome than had been expected. With non-farm payrolls due on Friday, the drop in the employment index from 46.8 to 45.8 probably carried more weight than the increase in the new orders index from 45.5 to 48.3. Both indices, as well as the headline, remain in contraction territory. Today is relatively light for macro data. We get the final US durable goods orders figures for October, along with the October factory orders figures which are derived from them. China:  China Evergrande Group is due to have its future determined today by a Hong Kong court hearing to determine whether a creditor request for the company to be wound up will be granted. The Group has outstanding liabilities of around $327bn. Liquidation will place China’s housing market, which has been showing signs of declining at a more rapid pace in recent months, under further downward pressure.   India:  Ahead of next year’s lower house elections, India’s ruling BJP party has won three state elections at the weekend, taking two of them from opposition parties.   What to look out for: South Korea GDP and China Caixin PMI services later in the week US durable goods and factory orders (4 December) South Korea GDP (5 December) Japan Tokyo CPI inflation and Jibun PMI services (5 December) Philippines CPI inflation (5 December) China Caixin PMI services (5 December) RBA meeting (5 December) Singapore retail sales (5 December) US JOLTS and ISM services (5 December) Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December)China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)

Asia Morning Bites Australian 3Q23 GDP comes in soft; Moody's negative China outlook will likely dominate risk sentiment today. Taiwan CPI out later.   Global macro and markets Global markets:  US Treasury markets continued to rally on Tuesday, helped by declines in Eurozone bond yields as one of the ECB’s more hawkish board members (Isabel Schnabel) noted that further hikes were “unlikely”. US yields were then given an additional downward push by some soft JOLTS job opening figures. 2Y Treasury yields fell 5.9bp to 4.577%, while 10Y yields fell 8.8bp to 4.165%. The slightly bigger falls in Eurozone bond yields helped EURUSD to decline to 1.0793 and that has also led AUD to decline to 0.6553, Cable to drop to 1.2593, while the JPY stayed fairly steady at 147.18. As the EURUSD move has more to do with EUR weakness than USD strength, these G-10 moves look unnecessary, and a case could probably be made for these other currencies to appreciate against both the EUR and USD, especially those where rate cuts are not on the agenda (JPY) or will be later and probably less than in the US (AUD). The KRW also weakened on Tuesday, rising back to 1311.20. The IDR was also softer at 15505, as were most of the other Asian FX pairs. There may be a bit of further weakness today, though for the same arguments as for the G-10, the rationale for this is quite weak, and we wouldn’t be totally surprised to see this go the other way. Equities didn’t know which way to turn yesterday, given the weak labour demand figures but the lower bond yields, and the S&P 500 ended the day virtually unchanged. The NASDAQ made a small gain of 0.31%. Chinese stocks were battered by the outlook shift to negative from Moody’s, which pointed to the rising debt levels and higher deficits China is adopting to try to underpin the property sector. Though the decision on Evergrande’s winding up was postponed until January, which could have provided some relief. The Hang Seng fell 1.91% and the CSI 300 fell 1.90%.   G-7 macro:  As mentioned, the JOLTS job openings data showed a large decrease in vacancies, to 8733K in October (for which we already have non-farm payroll data) from 9553K in September. The service sector ISM index was actually a little stronger than in October, rising to 52.7 from 51.8, and the employment subindex rose to 50.7 from 50.2, though this has little correlation with month-on-month directional payrolls trends. After a rare “hit” with its weak reading last month, attention may revert back to the ADP employment data later today.  A 130K  increase is the latest consensus estimate. The consensus for Friday’s non-farm payrolls is higher at 187K, with an unchanged unemployment rate of 3.9%. Outside the US, German factory orders and Eurozone retail sales are the main releases, along with a Bank of Canada rate decision (no change expected to the 5% policy rate).   Australia: 2Q23 GDP slowed from a 0.4%QoQ pace in 2Q23 to only 0.2% in 3Q23, weaker than the 0.5% consensus estimate (ING f 0.3%). A more negative contribution to GDP from net exports in data revealed yesterday was the main clue that the figure was going to undershoot. Yesterday’s RBA no change statement showed no additional sign that the RBA is done hiking rates and merely repeated the previous language. Today’s GDP data slightly increases the probability that rates have peaked – however.   Taiwan:  November CPI inflation should show a further moderation, dropping to 2.80% from 3.05% in October. We don’t see this having any impact on the central bank’s policy rates for the time being though.   What to look out for: Australia GDP and US jobs numbers Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December) China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)

FX Daily: Hard to buck the euro downtrend The dollar has shown resilience after disappointing JOLTS job openings data yesterday, leaving EUR/USD under pressure as the euro’s idiosyncratic negatives fuel bearish momentum. Today, the Bank of Canada may deliver a hawkish hold despite worsening growth, giving some help to the Canadian dollar.   USD: Showing resilience The larger-than-expected drop in October’s JOLTS job openings has offered new reasons to speculate on more rate cuts from the Federal Reserve next year, but the stronger ISM services figures in November have worked as an offsetting factor in terms of FX impact. AUD and NZD are rallying this morning, helped by stronger fixing for the yuan from the People's Bank of China (PBoC) after yesterday’s downgrade of China’s outlook by Moody’s. However, the dollar has remained rather supported across the board even after the disappointing JOLTS figures, a signal that markets are taking a less aggressive stance in FX following non-conclusive evidence of deterioration in the US outlook.   Speaking of non-conclusive evidence, it’s worth noting that the ADP payrolls being released today have no predictive power for actual payrolls. Still, markets have often moved on out-of-consensus ADP numbers. Today, expectations are 130k. MBA mortgage applications, final third-quarter labour cost data, and October trade balance figures are also on the calendar today but should not move the market. We suspect markets are holding a more cautious stance as we head into the key US payroll figures on Friday and the Fed meeting next week, where there is a good probability the FOMC will deliver a protest against rate cut bets – especially if data fails to turn lower. When adding the soft idiosyncratic momentum faced by the euro, we remain modestly bullish on the dollar into the FOMC.

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

National Bank of Hungary Preview: Embracing the present Despite a clear deterioration in external risks, we believe that favourable internal developments, accompanied by recent comments from Deputy Governor Barnabás Virág, will tip the balance towards a 100bp cut. However, if the forint continues to weaken markedly, then the previous 75bp pace will likely be maintained.   The decision in December The National Bank of Hungary cut its key interest rate by 75bp to 10.75% in December. At the same time, the central bank has given clear indications that the pace of rate cuts may be increased if internal and external developments allow, as we discussed in our last NBH Review.   The main interest rates (%)   Internal developments strengthen the case for a larger cut Headline inflation fell by 2.4ppt to 5.5% year-on-year (YoY) between November and December, which in fact was a downside surprise compared to our 5.7% forecast. However, what’s more important is that December’s figure was 0.2ppt lower than the central bank’s own estimate, published in the latest Inflation Report. Other measures of price pressures also look favourable, as core inflation decelerated to 7.6% YoY in December, while on a three-month on three-month basis, it was below 3%. At the same time, the National Bank of Hungary's measure of inflation for sticky prices also decreased, displaying a reading of less than 8.7% YoY.   Underlying inflation indicators   The country's external balances are also improving, as the trade balance has been in surplus for 10 months, and even reached an all-time high of EUR 1.7bn in November. As for the current account, we have already seen surpluses in the second and third quarters of 2023, and we expect it to remain in positive territory at the end of 2023.   External developments warrant a cautious approach Let’s start with two of the positive developments regarding external risks: We've already seen a dovish pivot from the Federal Reserve, and we expect the European Central Bank to follow suit at some point. This means that the next move for both central banks will be a cut rather than a hike, which in turn means that the HUF carry will not decline as much going forward as it would have if these central banks were still in rate-hiking mode. Even though rate cut expectations have been slightly dialled down compared to the time of the December NBH meeting, the direction of travel is favourable for emerging market currencies, including the HUF. One of the key uncertainties has been removed with the positive decision of the European Commission on the horizontal enablers (judicial reforms). With Hungary now having access to around EUR 10.2 bn of Cohesion funds, this could increase risk appetite towards Hungary and support market stability. Container freight benchmark rate per 40 foot box (USD)   In our view, there has been one external factor where there has been a clear and marked deterioration, and that is the conflict over the Red Sea. Several shipping companies have already suspended shipments on the Red Sea routes due to the ongoing Houthi attacks, and in our latest note on Hungarian inflation, we’ve also discussed the effects of trade diversion. The impact of the Red Sea conflict on supply chains is already being felt as Suzuki halted the production of the Vitara and S-Cross models at its Esztergom, Hungary plant between 15 and 22 January. The shutdown was caused by delays in the delivery of Japanese engines. With shipping costs rising and supply chain disruptions already evident, we have identified the deterioration in external developments as the dominant factor that would affect the central bank's reaction function.