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Singapore: Retail sales surprise on the upside again in April. April retail sales beat market expectations to gain 3.6% year-on-year   April retail sales rise 3.6% Singapore's retail sales bested market expectations to rise 3.6% YoY, beating the consensus estimate for a 1.9% YoY contraction. On a monthly basis, retail sales were up 4.2% while excluding motor vehicles, sales were up 4.2%. Retail sales have held up surprisingly well despite elevated inflation, possibly supported by the return of visitors to Singapore. Monthly visitor arrivals have recently hit one million for the first time since the pandemic and could be helping drive the strong sales for food & alcohol (30.5% YoY) and wearing apparel & footwear (13%YoY). Meanwhile, sales for supermarkets and hypermarkets finally posted growth after several months of contraction.     Retail sales could continue to surprise on the upside should tourist flows continue Despite the recent uptick in inflation, we believe that retail sales can continue to post growth if the boost driven by foreign visitor arrivals is sustained. Monthly visitor arrivals were as high as 1.8 million before Covid-19 and the steady march back to those levels could offset softer domestic household spending due to elevated inflation. Furthermore, retail sales can accelerate once price pressures cool perhaps towards the end of 2023.

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.  

GBP: Hard to buck the sterling bullish trend EUR/GBP pressing lower again this morning: a move below the 0.8540 support would set the pair back to pre-Mini-Budget crisis levels (August 2022). UK GDP figures for April matched expectations, showing 0.2% MoM growth, while industrial production declined by more than expected (1.9% YoY).   Still, the latest evidence from employment and wage growth has prompted yet another repricing higher in BoE rate expectations, with 132bp of tightening priced in by year-end. With short-dated gilts reaching their highest levels since 2008 yesterday, it remains hard to buck the EUR/GBP bearish trend, especially ahead of the ECB risk event, but our medium-term view remains bullish on the pair.

CEE: CNB will try to fight dovish market pricing Industrial production, PPI and labour market data in Poland will be published today. We expect industrial production to have fallen by 2.0% yoy in May, less than the market expected. Industrial producer prices have slowed again from 6.8% to 4.7% YoY in our view, and we also pay attention to wage growth, which we see rising 13.0% YoY.  Later today we will see the decision of the Czech National Bank on rates and we expect these to remain unchanged. Reasons for hiking rates mentioned by the board have diminished in recent weeks and the main focus will be on the vote split. In May, three of the seven members voted for a hike. We expect some votes for a hike to remain for hawkish central bank communication. We expect a 5:2 vote split in the baseline scenario, however central bankers voting for a hike in May have not been very vocal of late and so it is hard to assess how they see weaker inflation or wage growth. Overall, the vote split will thus be the main question for Wednesday's meeting, which will determine the outcome. The governor will still be pushing a hawkish message of higher rates for longer, and premature pricing of rate cuts by the market. We see the first rate cut at the end of the year.  The Czech koruna has been weaker than expected in recent weeks. We still expect the koruna to return to stronger levels. On a global level, the koruna should benefit most in a rebound in EUR/USD, while the CNB will try to postpone dovish market pricing, which should support interest rate differentials. Market positioning is rather light comparted to PLN and HUF. We expect the koruna to return below EUR/CZK 23.70. 

Spanish inflation falls below 2% for the first time in two years Spain's inflation outlook improved further in June. Headline inflation fell below 2% for the first time since March 2021. However, inflation is expected to pick up in the second half of the year due to several factors, including higher oil prices and the fading of favourable base effects.   Spanish inflation reaches 2% target The downward trend in Spanish headline inflation continues, falling to 1.9% year-on-year in June from 3.2% YoY in May. This month's sharp fall in inflation was expected given the jump in June last year. This marks the first time in about two years, since the start of the spike in inflation, that inflation is back in line with the ECB's 2% target. Headline inflation has now fallen to 1.9% YoY, after peaking at 10.8% in July 2022, while the HICP gauge stands at 1.6% YoY, down from its peak of 10.7% in July last year. Core inflation fell further to 5.9% in June from 6.1% in May, showing that disinflationary pressures are broadening.  

German disinflationary trend pauses for the summer German inflation increased in June to 6.4% year-on-year, from 6.1% YoY in May. But what looks like an end to the disinflationary trend of the last few months is only a temporary break. Disinflation should gain more momentum after the summer. According to the just-released first estimate, German headline inflation increased in June, coming in at 6.4% year-on-year (from 6.1% YoY in May). The harmonised European measure showed German headline inflation at 6.8% YoY, from 6.3% in May. This marks an end to the disinflationary trend seen over the last six months. However, a closer look at the data suggests that the disinflationary trend will gain new and even stronger momentum after the summer.   Disinflationary trend has paused, not stopped Inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value. Government intervention and interference, whether temporary or permanent or occurring this year or last, will continue to blur the picture. Today’s inflation data show that headline inflation is and will be affected by several base effects: while lower energy prices insert downward pressure on inflation, the end of last summer’s temporary government energy relief measures has inserted upward pressure. Looking at monthly price changes actually paints a promising picture of German inflation dynamics. For the third month in a row, food prices have dropped month-on-month. Prices for clothing have dropped for the first time since January; a tentative sign of weaker demand and price discounts. With still lower-than-expected energy prices, dropping food prices and fading pipeline price pressures in both services and manufacturing, German (and eurozone) inflation could come down faster than the ECB expects, at least after the summer. In fact, there is the risk that another chapter will be added to the misconceptions of inflation dynamics: after ‘inflation is dead’ and ‘inflation is transitory’, we could now have ‘inflation will never come down’. Don’t get us wrong, we still believe that, structurally, inflation will be higher over the coming years than pre-pandemic. Demographics, derisking and decarbonisation all argue in favour of upward pressure on price levels. However, be cautious when hearing comments that inflation will never come down. These comments might come from the same sources that only a few years ago argued that inflation would never surge again. This does not mean that the loss in purchasing power as a result of the last inflationary years will be reversed any time soon. It only means that headline inflation can come down faster than currently anticipated. We see German headline inflation falling to around 3% towards the end of the year. Admittedly, the risks to this outlook are obvious: sticky core inflation, wage pressure and government measures to support the demand side of the economy.   ECB will continue to hike ECB President Christine Lagarde made it clear at this week’s ECB forum in Sintra that the job is not done, yet. We, however, still think that the ECB is too optimistic about the eurozone’s growth outlook. Historic evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. These are two strong arguments for a further slowing of core inflation in the second half of the year and reasons to start doubting the need for further rate hikes. But, the ECB simply cannot afford to be wrong about inflation (again). The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why it is putting more emphasis on actual inflation developments, and why it will rely less on forecasts than in the past. As a consequence, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point and will continue hiking until then. If we are right and the economy remains weak, the disinflationary process gains momentum and core inflation starts to drop after the summer, the ECB’s hiking cycle should end with the September meeting.

Glimmers of hope for US inflation slowdown The Federal Reserve's favoured measure of inflation slowed fractionally more than expected, but there was clearer evidence of softening in the so-called "super core" measure that Fed Chair Jay Powell has been focusing on. There is also evidence of a loss of momentum in spending which will dampen prices pressures further down the line   Incomes rose, but spending stalled in May The May US personal income and spending report in aggregate is a touch softer than predicted. Incomes rose 0.4% month-on-month, above the 0.3% MoM expectation, but then we had a corresponding 0.1pp downward revision to April's growth rate from 0.4% to 0.3%. The more interesting story is on the expenditure side with nominal personal spending rising only 0.1% MoM versus 0.2% expected and there were downward revisions to April (from 0.8% to 0.6%). This leaves "real" consumer spending softer at 0% and April was revised down to 0.2% MoM from 0.5%. This means the savings rate has risen from 4.3% to 4.6%.   2Q growth looks to be a fair bit weaker than 1Q as momentum fades For those that like digging into data, the MoM real consumer spending change was -0.03% MoM to two decimal places. This means if we get a +0.2% MoM real consumer spending print for June, we will have quarter-on-quarter annualised consumer spending of 1% for the second quarter, down from 4.2% in the first. 0.1% MoM for June works out at 0.9% QoQ annualised for 2Q. while 0% MoM reading for June real spending generates 0.8% QoQ annualised. This report suggests a fair bit of spending momentum has been lost as we progress through 2Q. We are currently pencilling in 0.2% MoM for real spending growth in June. So far, weekly chain store data (Redbook) has been soft and restaurant dining is currently (according to Opentable) running at -3% year-on-year and hotel occupancy is running at roughly -1.5% YoY for June (to June 24) according to our interpretation of STR data. TSA airport security check numbers are up though. A 1% QoQ annualised consumer spending number would leave us struggling to get GDP growth above 1.5% in 2Q.   Service sector inflation appears to be topping out (YoY%)   Early signs of softening in Fed's "super core" inflation measure Rounding the report out, we see the Fed's favoured measure of inflation, the core PCE deflator coming in at 0.3% MoM/4.6% YoY. A touch softer than the 0.3%/4.7% expected. At 4.6%, this is the slowest rate of core PCE inflation since October 2021. Based on my calculations, the core PCE deflator ex-energy and ex-housing (Fed Chair Powell is focusing on this as it is this component that is most heavily influenced by the tightness in the jobs market since wages make up the biggest cost input and in which demand has been robust) also slowed to 4.6% from 4.7% YoY while Bloomberg’s calculations back this up, saying on a MoM basis it came in at 0.23% MoM versus 0.42% in April. This is a really encouraging story since we need to see 0.1s or 0.2s MoM to get inflation to 2% YoY over time. It is early days, but NFIB corporate pricing intentions data and ISM prices series offer clear hope that we will soon consistently see these sorts of figures.

Metals – Chile copper output declines The latest data from the National Statistics Institute of Chile shows that domestic copper output contracted for a second consecutive month by 1.1% MoM and 14% YoY to 413kt in May following a series of operational issues. Cumulative output declined 4.7% YoY and totalled 2.1mt in the first five months of the year. Meanwhile, recent reports suggest that Codelco halted mining activities at its El Teniente copper mine in Chile on Friday, following an accident at the mine while installing a generator. In aluminium, the latest LME data shows that on-warrant stockpiles rose by 13,725 tonnes (the biggest daily addition since 23 May) to 271,475 tonnes on Friday. Most of the rise came from warehouses in Gwangyang, South Korea. Net outflows for June were still higher at 126,025 tonnes, compared to outflows of 94,175 tonnes a month earlier. Total LME exchange inventories for aluminium rose by 11,925 tonnes to 543,150 tonnes on Friday, after having declined for seventeen consecutive sessions. Weekly data from Shanghai Futures Exchange (ShFE) show that inventories for base metals remained mixed over the last week. Aluminium weekly stocks fell by 32,994 tonnes (-25% WoW) to 98,079 tonnes (the lowest since the start of the year). Copper inventories rose by 7,889 tonnes (+13% WoW) to 68,313 tonnes, while nickel inventories declined by 319 tonnes (-9.2% WoW) to 3,133 tonnes at the end of last week.

Hungary's industry continued to underperform in May, as the volume of industrial production fell by 4.6% YoY, after adjusting for calendar effects. The yearly based drop is the result of a 1.6% month-on-month increase in the volume of industrial production, after adjusting for seasonal and calendar effects. However, the rebound in May was not significant enough to break the sector's negative trend, as output is still below the level recorded at the beginning of the year.   Performance of Hungarian industry   Even though the Statistical Office will release the detailed data next week (13 July), the preliminary statement highlights that the majority of the manufacturing subsectors contributed to the production decline. As always, the exceptions are electrical equipment and transport equipment manufacturing (e.g. electric vehicle batteries and cars). Both sectors expanded on a yearly basis in May. In contrast, the other two most important sectors: computer electronics and food manufacturing recorded declines in production, according to the Statistical Office’s commentary.

In the dynamic world of foreign exchange, understanding the factors driving currency movements is crucial for investors and traders alike. Today, we turn our attention to the Norwegian economy and the implications of recent data releases and policy actions by the central bank, as we engage in a conversation with renowned analyst Valeria Bednarik. With her vast expertise and deep insights into the foreign exchange market, Bednarik sheds light on the latest developments surrounding the Norwegian krone (NOK) and its performance against major currencies. The Norwegian economy has been making headlines due to the actions taken by the Norges Bank, which has adopted a more aggressive stance compared to its European counterpart, the European Central Bank (ECB). In June, the Norges Bank raised the key policy rate by an impressive 50 basis points to reach 3.75%, marking a 15-year high. This bold move by Governor Ida Wolden Bache reflects concerns over the potential entrenchment of inflation and suggests that rates could further increase to 4.25% by autumn.   Read more on FXStreet   FXMAG.COM:  How would you comment on the latest data from the Norwegian economy and the actions of the central bank there, and what about the Norwegian krone as a result?   Valeria Bednarik: The NOK benefited from the Norges Bank's decision to become more aggressive than the European Central Bank. The NB hiked the key policy rate by 50 basis points (bps) to 3.75% in June, a 15-year high. Governor Ida Wolden Bache warned about the risk of inflation becoming entrenched,  indicating rates could reach 4.25% by autumn.   Following the announcement, the Norwegian krone strengthened against most major rivals, the Euro included. Wolden Bache was spot on, as inflation in the country was up by 6.7% YoY in May 2023 from 6.4% in the previous month and surpassing expectations of a 6.2% increase. It was also higher than the EU inflation, which hit 6.1% YoY in May.  

Asia Morning Bites Australian inflation this morning is an appetizer ahead of tonight's FOMC main course.   Global Macro and Markets Global markets:  US stocks crept higher on Monday, though without much conviction. The S&P rose 0.28%, while the NASDAQ rose a further 0.61%. That leaves the NASDAQ up 35.14% ytd… Chinese stocks responded well to the supportive comments coming out of the Politburo yesterday. The Hang Seng index rose 4.1% and the CSI 300 rose 2.89%. However, we remain cautious about the economic outlook as the recent comments continue to lack detail despite the various “pledges” and “vows” to boost spending.  Ahead of today’s FOMC, which we in Asia will wake up to tomorrow morning, Treasuries were relatively quiet. 2Y yields rose 1.5bp to 4.874%, while 10Y UST yields rose just 1.2bp to 3.884%. EURUSD has drifted back down to 1.1051 on expectations of a hawkish Fed tonight. But the AUD gained ground yesterday, rising to 0.6788.  The GBP and JPY also strengthened against the USD ahead of Friday’s Bank of Japan meeting (see our latest note on this). The positive sentiment in China has enabled the CNY to strengthen to 7.1363 and the yuan was Asia’s best performing currency yesterday. Most other Asian currencies also gained against the USD. G-7 macro:  House prices in the US gained further ground in May, with both the FHFA and S&P CoreLogic measures of house prices rising more than expected.  There were also gains in the Conference Board’s consumer confidence indices. None of which plays into the “one and done” view that the market currently holds for the FOMC. Elsewhere, Germany’s Ifo survey presented more bad news, falling more than expected, though the UK’s CBI business survey was a little brighter. Today is quiet ahead of the Fed (02:00 SGT/HKT) with just US home sales and mortgage applications.   Australia:  CPI inflation for June should show further declines in inflation, with the headline rate declining to around 5.4% YoY from 5.6% currently. That would be a 3 percentage point decline from the December 2022 peak. Inflation should decline again next month. Thereafter, we will need to see month-on-month changes in inflation slow considerably to stop inflation from stabilizing at high levels or even backing higher again, as all the helpful base effects will have been used up until we get nearer to the end of the year. Singapore: Singapore reports industrial production figures for June.  We expect another month of contraction, extending the slump to 9 months of decline, tracking the downturn in non-oil domestic exports.  Industrial production should slip by 6%YoY and we can expect the slide to continue for as long as global demand stays subdued. 

In our conversation with an analyst from broker Orbex, we delve into Turkey's current inflation situation and the effectiveness of the central bank's monetary policy. Turkey has been grappling with a persistent inflation problem, evident from the latest CPI and PPI readings. The Consumer Price Index rose by 9.49% MoM in July and by 47.83% YoY, indicating a concerning upward trend. While these figures are still lower than the peak inflation of 85% in 2022, they break an eight-month trend of inflation slowing down. The lira's sharp depreciation since President Erdogan's election win in May and the government's decision to raise taxes on essential goods and fuel have exacerbated price pressures, heightening the inflation risks.   FXMAG: What is your assessment of the CPI reading from Turkey, and do they allow the central bank to continue too loose a monetary policy? Turkey is facing a high and persistent inflation problem, as the latest CPI and PPI readings show. Turkey's Consumer Price Index rose by 9.49% MoM in July and by 47.83% YoY. Although these figures are much higher than the inflation rates in the US and EU, they are lower than Turkey's 85% peak in 2022. However, the latest figures are disappointing as they break Turkey's eight-month trend of slowing inflation. The lira's sharp depreciation since President Erdogan's win in the May elections has increased price pressures. The government also raised taxes on many essential goods and fuel, partly to cover the costly pledges it made before the ballot. This worsens the inflation risks. Meanwhile Turkey's Central Bank may soon be out of fire power as it has already responded with two sharp interest-rate hikes that raised its benchmark by 900 basis points to 17.5%.  

There will be essential data releases in Poland next week with CPI expected to fall and GDP to decline for the second consecutive quarter. In Hungary, all eyes will be on the preliminary release of second-quarter GDP growth as it is expected to break a streak of three consecutive quarters of negative growth. Poland: CPI and Flash GDP to be released CPI (July): 10.8% YoY The StatOffice is expected to confirm its flash estimate of July CPI inflation at 10.8% year-on-year. According to preliminary estimates, the price of food and non-alcoholic beverages fell by 1.2% month-on-month, the price of energy sources for housing was unchanged vs. in June, while gasoline prices increased by 0.4%MoM. We estimate that core inflation moderated to 10.5%YoY from 11.1%YoY in the previous month. In August, annual inflation will be close to single-digit levels and will certainly fall below 10%YoY in September. Flash GDP (2Q23): -0.3% YoY According to our forecasts, the second quarter of 2023 was the second consecutive quarter of GDP declines in annual terms. We think the economy shrank at a similar scale as in the first quarter, with an even deeper annual decline in household consumption (close to -3%YoY), while fixed investment continued to expand. We judge the positive contribution of net exports was higher than the drag from a change in inventories. A more decisive improvement in economic activity is projected for the fourth quarter.  

Australia: Rate hike forecast is hanging by a thread The headline inflation rate has now fallen below 5% which will encourage thoughts that the RBA tightening cycle has peaked - though progress over the next few months will be harder. Our final 25bp rate hike call for 4Q23 is hanging by a thread.   This was much lower than expected We were not expecting Australian inflation to fall markedly this month. Large electricity tariff hikes were going to be part of today's figures, and incorporating these into our forecasts, it looked more likely that inflation would at best fall only a little, or more likely, would remain roughly unchanged with an outside chance that it actually rose a bit.  So the fall in inflation to 4.9% YoY in July from 5.4% was a shock, albeit a welcome one.  We did see the housing component rise by 1.3% over the previous month, up from 0.3% MoM in June, and this will have been where the electricity tariff increases will be evident. But declines in food and beverage prices as well as holidays (part of the recreation subindex) look to have offset all of that and more, and there was a large rump of the CPI basket, especially on the service side (education, health, finance) where prices apparently did not move at all in July, which will have helped pull the average for the whole basket down.     Australian CPI MoM% change by component   Progress over the coming months may be slow From a month ago, the CPI index rose only 0.25%, which if maintained over the medium term, would bring the inflation rate back within the RBA's 2-3% target range over the coming 12 months. But month-on-month increases really do need to stay down at these sorts of rates or lower, since base effects, including this month (last year's July CPI index rose 0.7%MoM) have been doing a lot of the hard work in bringing inflation down recently.  Over the next three months, the corresponding 2022 monthly increases were all 0.3%, so if July's CPI increase is maintained for the next three months, we will see inflation falling only by a further 0.1-0.2pp. Any upside deviation from this, and inflation may start to edge higher again, and for that reason alone, we are holding on to the final 25bp rate hike in 4Q23, but we admit, we are a lot less comfortable with this view than we were yesterday.   A final rate hike for the RBA looks more doubtful If, in addition to a decent run of inflation date over the next month, we also see some corroboration from the real economy, for example, a repeat of last month's softer labour market data, then we will almost certainly trim out the final cut. At that point, the question will change to consideration of when and how the RBA might begin to row back from its current restrictive setting. Will this be a modest reduction to take policy rates back to a more neutral setting in the face of a fairly soft landing, or will it be cutting more aggressively to shore up a more rapidly slowing economy? In truth, we don't know the answer to this. Our expectation is for the former scenario, but there are a great many moving parts to this, including how the external environment (China and the United States in particular) shape up. And we won't be ruling out more downbeat scenarios until we have much more evidence to support the soft-lending hypothesis. The AUD quickly shrugged off the weaker inflation print. Broader USD trends will probably be more important in the coming months for the AUD than any marginal changes to RBA policy expectations.      

Philippines: Crucial 3 could drive renewed acceleration of inflation August inflation surges to 5.3%YoY from 4.7% in previous month.   Usual suspects August inflation rose to 5.3% YoY, settling much higher than market expectations for a 4.7% YoY rise.  The usual suspects of rice and transport costs tag-teamed to help reverse a 6-month downward trend.  Rice inflation jumped to 8.7% YoY, up sharply from 4.2% YoY due to supply shortages.  Other food items also contributed to the resurgence in inflation with fish prices rising 6.9% YoY, fruits up 9.6% YoY and vegetables surging 31.9% YoY due to storm damage.  Meanwhile, transport costs, which had been a major source of downward pressure on inflation over the past 6 months, shifted back into inflation (0.2%) after posting 3 straight months of declines.  Meanwhile, inflation for services such as restaurants & accommodation, personal care and other services all posted slower inflation likely due to the lagged impact of BSP policy tightening carried out over the past few months.   Watch the Crucial 3: Rice Transport and Electricity   BSP on notice The recent uptick in inflation reverses what was a steady streak of slowing inflation.  However, with supply shocks to important food items and imported energy, we could see a resumption of price pressures building up.  President Marcos has implemented a price cap on retail rice prices in a bid to curb the surge in prices while also lowering tariffs for rice imports.  We previously noted the importance of inflation for three key commodities, namely rice, electricity and transportation and we believe the inflation path will be driven largely by how inflation for these items behaves.  The August upside surprise now has Bangko Sentral ng Pilipinas (BSP) on notice although we doubt one data point will be enough for Governor Remolona to flip back into tightening mode.  However, should inflation for these key commodities accelerate further, we believe Governor Remolona will not hesitate to hike further to get a hold of inflation expectations.    

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    

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

Metals – LME copper spreads widens LME copper cash/3m spread widened to a record contango of a little more than US$70/t this week (although this narrowed to a little less than US$57/t yesterday) as copper demand in the physical market remains under pressure due to slower industrial activity in China and elsewhere. Tepid demand has led to a significant increase in exchange inventories. LME copper inventories increased to a fresh one-year high of 164kt with inflows of around 110kt since mid-July. Meanwhile, LME data shows that speculative net longs in LME copper dropped by 12,501 lots over the last week with their net long position falling to a 3-month low of 43,441 lots as of 22 September. The latest data show that China’s gold imports from Hong Kong increased to 45.2 tonnes over August compared to around 30.2 tonnes in July as demand for precious metals remains strong in the domestic market. Cumulatively, China’s gold imports from Hong Kong increased by 36% YoY to 359 tonnes over the first eight months of 2023. Looking ahead, gold demand in China is likely to have improved further this month as reflected by the high premium for gold in the local market. Shanghai gold currently trades at a premium of around US$100/oz over international prices.

Australia: Inflation back on the rise While this is mostly down to less helpful base effects, international energy prices and excise duty hikes, it is not safe to conclude that the RBA rate cycle has peaked.   In line with expectations, but more progress needed At 5.2% YoY, the August inflation figures were bang in line with expectations. However, inflation is rising again, not falling, and the month-on-month and core inflation figures (0.69% MoM and 0.3% MoM respectively) leave no room for complacency. It is still possible that the Reserve Bank of Australia (RBA) will conclude that the trend pace of improvement in inflation is insufficiently fast and that a further hike is required.  Base effects can take some of the blame for the rise in inflation this month. In 2022, the August CPI index rose only 0.3% MoM, so this year's August CPI was always going to have to come in low just to keep inflation steady. It didn't come in low enough. This could be a problem over the coming two months, with September and October 2022 CPI increases also just 0.3% MoM.   Excluding volatile items, the rise in CPI was indeed only 0.3%, but with oil prices rising, and September retail gasoline prices likely to boost the transport component almost as much as it did in August, this is not going to be enough to keep inflation on a downward trend. And that sort of consecutive backsliding in inflation could be exactly the sort of condition that could pressure the Reserve Bank of Australia to respond with some further tightening. This could perhaps occur at the November meeting, after the September (and 3Q23) CPI release, or even in December, when the October inflation figures will be available.    Australian CPI by major component (MoM%)

Strong Tokyo CPI will likely put pressure on the Bank of Japan The Bank of Japan should be concerned about whether 'higher for longer' inflation could hurt the economic recovery.   Headline inflation in Tokyo topped 3% again in three month Tokyo inflation climbed up to 3.3% YoY in October (vs 2.8% in September, market consensus). Upside surprises came from: Higher than expected pick up in utilities with a reduction of government subsidies and A solid rise in entertainment prices. More importantly, the BoJ's preferred measures of inflation, core CPI excluding fresh food (2.7% vs 2.5% in September & market consensus) and core-core CPI excluding fresh food and energy (3.8% vs revised 3.9% in September, 3.7% market consensus) came out higher than market consensus. Since Tokyo inflation is a leading indicator for nationwide inflation, today's readings showed that inflation has been clearly overshooting the BoJ's projections.  On a monthly comparison, CPI soared 0.9% MoM, seasonally adjusted, in October, with both goods and services prices rising by 1.6% and 0.4% each   Tokyo's inflation reaccelerated in October   Utilities and fresh food prices rose the most, but prices of all other major items gained. In particular, the weak JPY has accumulated pressure on the imported goods prices, and this prolonged pressure pushed up prices of household goods, apparel, and transportation. The rise in entertainment is mostly driven by strong demand from foreign and domestic tourists. Going forward, we expect that base effects will kick in and suppress the headline inflation again by the end of the year, but we will likely witness a stickier than expected inflation trend throughout next year.   Overheated inflation is a risk for the recovery Today’s hotter-than-expected Tokyo CPI reading will likely be a warning to the Bank of Japan. It may still rule out a policy change at its October meeting, but at least we expect the BoJ to change its view on inflation. It is clearer that companies are shifting the pressure of rising input costs to consumers, and the weak JPY is partially contributing to the added pressure on input costs. Also, demand-led price hikes continued on the back of a solid recovery in service activity despite a fall in real wage growth. But, if the yen weakens further and brings about overly heated inflation for longer, it will eventually hamper private consumption even before the BoJ's long-awaited goal of sustainable inflation is accomplished, which is the biggest risk for the BoJ. We are sticking to our call that the BoJ will deliver a policy tweak and revise the inflation outlook meaningfully for FY 23 and 24. And today's outcome has slightly increased our confidence in our non-consensus view. There are more details about the BoJ's next moves in our article earlier this week;  Source: CEIC

Poland’s uncertain inflation prospects as commodity prices drop sharply October CPI inflation was revised to 6.6% YoY, against a preliminary estimate of 6.5%. The inflation outlook is exceptionally uncertain due to administrative decisions. Our baseline scenario assumes 2024 CPI as high as 6%, leaving no room for additional NBP rate cuts. Food and non-alcoholic beverage price growth in Poland was revised from 0.4% MoM to 0.5%. Commodity prices rose 5.7% YoY, while service prices increased 9.3% YoY, compared to 7.6% and 9.7%, respectively, in September. The deceleration of services price inflation is noticeably slower than that of goods prices. The biggest contributors to last month's decline in the annual inflation rate, relative to September, were a further slowdown in food price growth (7.6% in October vs. 10.1% YoY in September), a deeper decline in fuel prices than a month ago (-14.4% vs. -7.0% YoY) and slower growth in energy prices (8.3% vs. 9.9% YoY). We estimate that core inflation, excluding food and energy prices, declined to around 8.0% from 8.4% in September. On a monthly basis, however, we saw a high increase in core prices (about 0.6% MoM). The inflation outlook is exceptionally uncertain due to the lack of any final decision on the zero VAT rate on food and support measures in the energy market, as well as a decision on electricity and gas prices for households in 2024. Based on past declarations by representatives of the future government coalition, we assume that the VAT rate on food will be raised from January 1, 2024, and electricity prices will be frozen until the middle of next year. In such a scenario, average annual CPI inflation in 2024 could be as high as 6%, leaving no room for interest rate cuts. We forecast that they will remain unchanged until the end of next year (the main NBP rate at 5.75%).

Singapore inflation rises more than expected Headline inflation heated up to 4.7% year-on-year compared to expectations of a 4.5% rise.   October inflation heats up more than expected Singapore's headline inflation rose to 4.7% YoY, higher than the median forecast of a 4.5% increase from October last year. Prices were up 0.2% from the previous month. Core inflation, which is the preferred measure of the Monetary Authority of Singapore (MAS), rebounded to 3.3% YoY, up from the previous month's 3.0% gain. The central bank was expecting some upside pressure on prices in the near term owing to higher energy prices and utilities but the acceleration in October was more than market participants were anticipating.  As expected, transport costs picked up (8.4% YoY vs 6.3% previous) as did healthcare (5.2% YoY) and housing & utilities (3.9% YoY). Meanwhile, items related to recreation & culture saw prices increase 5.8% YoY (vs 4.3% previous), reflecting still robust domestic spending, which figured in the latest 3Q GDP report.  For the year, the MAS expects headline inflation to average roughly 5% YoY while core inflation is forecast to settle at between 2.5-3.5% YoY.            Inflation picks up more than expected in October

Agriculture - Coffee production in Africa declines The latest data from the International Coffee Organization shows that African coffee production in 2022/23 fell by 7.3% YoY to 17.9m bags (60 kg bags), down from 19.3m bags (60 kg bags) for the previous season. The decline was mainly due to low production in Ivory Coast, where output dropped 65% YoY to 600k bags. Along with that, Uganda and Kenya coffee production also declined by 6.7% YoY and 3.9% YoY to 5.6m bags and 730k bags, respectively. The latest trade numbers from Chinese Customs show that China’s soybean imports rose 7.8% YoY to 7.9mt in November, as cheaper supplies from Brazil continued to dominate the import market share. Cumulative imports rose 13.3% YoY to 89.6mt over the first eleven months of the year.

Japanese data improves but we still don’t expect a BoJ policy shift this month Although third-quarter GDP was revised down unexpectedly, the improved current account and cash earnings suggest a rebound in growth in the current quarter. Market speculation about the Bank of Japan's possible policy turnaround at the December meeting has been amplified after recent remarks from Governor Kazuo Ueda and Deputy Governor Ryozo Himino.   GDP contraction deepened in 3Q23 Third-quarter GDP was unexpectedly revised down to -0.7% quarter-on-quarter (seasonally adjusted) compared to the flash estimate and market consensus of -0.5%. The largest revision came from private consumption, which fell 0.2% (vs 0.0% in the flash estimate) and the inventory contribution to GDP, which was down by 0.2% ppt. The negative contribution of inventory should be a good sign for the inventory restocking cycle. But household spending still lagged amid high inflation despite relatively healthy labour market conditions, which should be a real concern for the Bank of Japan. We think that weaker-than-expected GDP could justify the Bank of Japan's current easing policy at least for now.   Meanwhile, GDP for the first quarter was revised up meaningfully from 0.9% to 1.2% resulting in an upward revision to annual GDP. Thus, now we expect 2023 GDP to rise 2.0% year-on-year.    However, other data releases today - labour cash earnings, household spending, and current account - point to a rebound in growth in the fourth quarter, thus we believe that the BoJ will shift its policy early next year.   Contraction deepened in 3Q23   Labour cash earnings rose in October Labour cash earnings rose 1.5% YoY in October (vs 1.2% in September, 1.0% market consensus) beating the market consensus. Contractual earnings gained steadily by 1.3% (vs 0.9% in September) while volatile bonus earnings (7.5%) rebounded after two months of declines. Also, hours worked bounced back 0.7% for the first time in four months, thus overall labour market conditions and earnings appear to have recovered in October. However, wage growth was still short of inflation growth, thus real earnings dropped 2.3% in October, although at a slower pace than the previous month's -2.9%.  Nominal wage growth continues and is clearly faster than the previous year. Also, there are several news reports that big companies plan to raise wages above this year's level of growth. Thus, we believe that next year's wage growth should accelerate a bit more than the current year.    Cash earnings and household spending improved in October   Current account surplus widened in October In a separate report, the current account surplus widened more than expected in October to JPY 2.6tn (vs 2.0 in September, 1.8 market consensus). Despite the global headwinds, the current account surplus will likely widen in the coming months. Due to falling commodity prices, the merchandise account will turn to surplus while an influx of foreign tourists will help the travel account to remain in surplus. We expect the trade of goods and services to improve in the current quarter.    Current account surplus in October led by service (travel)   BoJ preview Several remarks by the Bank of Japan, including Governor Ueda, have shaken the FX market quite strongly. Deputy Governor Himino said that ending the negative interest rate policy would have only a limited impact on the economy and Governor Ueda yesterday met with the prime minister, highlighting the importance of sustainable wage growth and inflation, which led to a fairly rapid shift in market sentiment betting on the Bank of Japan's policy tightening. Dollar weakness is also supporting the sudden move of the yen partially, especially ahead of today's release of the US nonfarm payrolls data.   It seems like the BoJ is paving the way to a gradual normalisation and giving the market a signal that the time is approaching. However, since these comments were made outside of the BoJ meeting, any sudden major change of policy is not expected this month. Yes, we remember that Governor Kuroda surprised the market with a yield curve control tweak last December, but we believe Governor Ueda is unlikely to adjust policy without prior communication. Thus, we expect some changes in the statement and dialogue from Governor Ueda at the BoJ meeting on 18-19 December.    As we have previously argued, we think the Bank of Japan's rate hike will come in 2Q24, most likely at its June meeting. By then, the BoJ will be able to confirm a solid wage increase with Shunto's results. In terms of inflation, it will trend down early next year, but still core inflation, excluding fresh food, is expected to remain above 2%. Even if the BoJ carries out a rate hike, we believe that the Bank's JGB buying operation will continue in order to avoid a rapid rise in long-term yields.

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.

Unexpected dip in Indonesia imports results in wider trade surplus Indonesia's December trade report saw exports fall 5.8% YoY while imports fell unexpectedly.   Trade surplus widens after imports surprise on the downside December trade data showed exports falling although imports unexpectedly fell.  Exports were tipped to edge lower by 8.4%YoY but managed to fall by 5.8%YoY.  However, imports contracted by 3.8%YoY compared to forecasts for a 0.2% gain.   Exports were softer accross most sectors, with coal exports down 19.1%YoY. Palm oil shipments dropped 31.9%YoY.  Imports fell, with capital goods down 9.9% YoY although consumer imports rose 13.5% YoY, reflecting robust domestic consumption. The overall trade balance settled at $3.3bn, up sharply compared to expectations at $1.9bn. Despite the better-than-expected trade surplus, the gap remains well below the record high posted in 2022 and suggests waning support for the IDR.  With global trade likely to stay subdued in 2024, we can expect this trend to continue this year.   Trade gap widens, could suggest support for IDR   BI decision up next The wider than expected trade gap suggests that the IDR should still benefit from a current account surplus. Although the trade surplus was better than expected, it remains well-below the recent record high recorded in 2022.  With modest depreciation pressure on the IDR expected to persist in the near term, we believe BI will be inclined to keep policy rates untouched at 6% later this week.  Until we gain more certainty regarding the much-awaited Fed pivot, we could see BI retaining its current restrictive stance for most of the first half of the year to help support the currency, while also wary of a potential flare-up in food inflation due to the ongoing El Nino weather phenomenon.  

The EUR/SEK pair ended last week largely unchanged, although the krona did briefly slip to its lowest level on the euro since mid-December. Swedish activity data released last week was mixed. On the one hand, retail sales fell by 1.7% YoY in November, compared to a decline of 1% in the previous month, the nineteenth consecutive month of annual declines in retail trade. On the other hand, the more important GDP data unexpectedly rebounded in November (+0.2% vs. 0.6% consensus), easing fears that the ongoing recession could extend into Q4. The above data imply a significant divergence from the Riksbank's forecast, which warned of an economic decline of 0.4%. This will undoubtedly be a relief for the Riksbank and should make for an easier task in controlling inflation without damaging the economy. If the good data materialises into a more hawkish stance by the central bank, the krona could receive some support.

This report is prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 4.0. 32/2024/AR     Event: Monthly sales growth to key clients in November 2023 at +10% yoy. Yesterday, after the market close, the Company released a monthly sales growth dynamic to key clients in November 2023 that reached +10% yoy. Expected impact: Slightly negative. Monthly data are calculated based on US$-denominated revenues. Given the US$ weakening vs PLN in November 2023 (by c. 12% yoy) they imply a yoy dynamic at c.-3% for the figures denominated in PLN while we expected +4% yoy for 4Q23.

NZD: Non-tradeable inflation offers RBNZ a hawkish "loophole" New Zealand’s inflation matched estimates at 0.5% quarter-on-quarter and 4.7% YoY in the 4Q print published overnight. This is a touch higher than our forecast (4.6%), but well below the 5.0% projected by the Reserve Bank of New Zealand for the period. However, non-tradeable CPI did come in hotter than expected at 1.1% QoQ, which has led to a move higher in short-term NZD rates. In FX, NZD/USD broke back above 0.6100 on the release, even though it quickly defaulted to being traded by external factors. The stronger non-tradeable CPI may offer an excuse for the RBNZ to stick to some hawkish narrative on 28 February, although they will need to admit that general inflation pressures have declined and the economy underperformed, making any promise of higher-for-longer a harder sell to markets. The next key release in New Zealand is the 4Q jobs report on 6 February. Until then, expect volatile Chinese sentiment and USD dynamics to drive NZD performance. Even in the case of an RBNZ dovish shift, we like the chances of a higher NZD/USD beyond the short term as the Kiwi dollar benefits from a broader USD decline and Fed rate cuts. Our year-end target is 0.64.

Agriculture – Cocoa jumps on supply woes Cocoa futures trading in New York surged to fresh record highs yesterday on the back of a worsening supply outlook from the top producers - Ivory Coast and Ghana. Recent reports suggest that weather conditions and the insufficiency of fertilisers in these countries have resulted in lower output levels. Meanwhile, total cocoa arrivals at the Ivory Coast ports so far this season have dropped to 951.7kt as of 21 January, down 37% for the same period last year.   The latest data from the Indian Sugar Mills Association (ISMA) shows that Indian sugar production dropped 5.3% YoY to 15mt for the 2023/24 season until 15 January. Sugar production has been recovering over the past few weeks and the Association estimates that total sugar production for the 2023/24 season could still be higher than its earlier estimates on improving weather and higher prices for sugarcane to farmers. The Association also requested the government to allow an additional 1-1.2mt of sugar diversion for ethanol production citing sufficient availability for the domestic market. In its latest weekly report, the European Commission revealed that the EU’s soft wheat exports for the ongoing season stood at 17.4mt as of 19 January, down by 7.6% compared to 18.8mt reported in a similar period a year ago. The major destinations for these shipments were Morocco, Algeria, and Nigeria. The commission added that the nation's corn imports stood at 9.9mt, down 42% compared to a year ago. Agriculture and Agri-Food Canada (AAFC), in its first estimates for the 2024/25 season, expects Canada’s wheat production to increase 4.2% YoY to 33.3mt. The group estimates yield to rise to 3.23t/ha from 2.99t/ha, whilst harvest area is expected to decline from 10.94m hectares to 10.73m hectares for the 2024/25 season.