Daily Market Outlook by Kate Curtis from Trader's Way

[katetrades]

Forex Major Currencies Outlook (June 19 – June 23)

BOE and SNB rate hikes, potential rate cut from PBOC, preliminary PMI data from the Eurozone and the UK as well as Fed Chairman Powell testify in front of the Senate on Thursday will highlight the week ahead of us.

USD

US CPI data for the month of May dropped to 4% y/y from 4.9% y/y in April with a 0.1% m/m increase. Yearly headline number has been declining for eleven straight months. Shelter was again the biggest contributor to inflation (0.6% m/m) followed by index for used cars. The food index also contributed positively to the reading with food price index increasing 0.2% m/m. The biggest drop down was seen in the energy components. Core inflation came in at 5.3% y/y from 5.5% in April. Core services ex-shelter, the metric closely watched by Fed, has increased 0.1% m/m which is well in line with 2% target.

Fed paused as was widely expected and left the rate in the range of 5-5.25%. This is the first meeting that there was no change in the rate after ten consecutive ones that saw rate hikes. Accompanying dot plot showed members expecting rate to be at 5.6% vs 5.1% in March which will imply at least two more rate hikes. Additionally, no members see rate cuts in 2023 and high for rates in 2024 is seen at 4.6% vs 4.3% in March indicating that rates will stay higher for longer. The reason for more rate hikes can be found in the Summery of Economic Projections (SEP) which show GDP will be much stronger in Q4 (1% vs 0.4% as previously forecast). SEP also shows that the unemployment rate will be lower than thought (4.1% vs 4.5% in March). The hawkish stance was confirmed by Chairman Powell in the press conference and that opens the door for a July hike.

Retail sales in May 0.3% m/m vs -0.1% m/m as expected. Control group, the one used to calculate the GDP, came in at 0.2% m/m as expected. When we exclude autos retail sales rose by 0.1% m/m as expected. Overall, the reading is a positive one, but still the numbers show that consumer is feeling the burden of high inflation and is adjusting its own purchases accordingly. In nominal terms sales are up 1.6% y/y and when we take inflation into the account, real retail sales are deeply negative.

The yield on a 10y Treasury started the week and year at around 3.75%, rose to 3.85% post FOMC and finished the week at around the 3.77% level. The yield on 2y Treasury reached around 4.8% after the FOMC meeting. Spread between 2y and 10y Treasuries started the week at -86bp then widened to -97bp. FedWatchTool sees the probability of a 25bp hike at 77% while probability of no change in July is at 23%.

EUR

German ZEW June survey was mixed. Current situation fell to -56.5 from -34.8 while expectations component improved to -8.5 from -10.7. It is the first improvement in four months. Industrial production for the Eurozone in the month of April improved by 1% m/m vs 0.8% m/m as expected. Q2 has started with a small bounceback but we have to remember that March reading was a very bad on. The data still shows underlying issues as new orders continue to be weak.

ECB has raised rates by 25bp as was widely expected and brought the deposit rate to 3.5%. Inflation has been coming down but it is projected that it will remain too high for too long. Inflation is seen averaging 5.4% in 2023, 3% in 2024 and 2.2% in 2025. Projections for core inflation has been revised up and are now at 5.1% in 2023, 3% in 2024 and 2.3% in 2025. GDP has been revised down to 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025. The Governing Council is committed to bring inflation down to 2% and will continue to follow a data-dependent approach. Bundesbank has come with its own projections and they see German economy shrinking by 0.3% in 2023 and then to expand by 1.2% in 2024 and 1.3% in 2025. Inflation risks are seen tilted to the upside and current projections are for inflation to be at 6% in 2023, 3.1% in 2024 and 2.7% in 2025.

ECB President Lagarde started the press conference by acknowledging that the economy of Eurozone stagnated in recent months, as was seen by GDP data. She emphasized that data-dependent approach is the way to go further. Wages are increasing and are now seen as the important component of inflation. She explicitly said that ECB is not done with rate hikes, there is no thinking about pausing and if there is no material change in data rate hike in July will occur. Analysts are now putting terminal rate at 4% and see hikes in July and September.

This week we will have preliminary June PMI data.

Important news for EUR:

Friday:​

• S&P Global Manufacturing PMI (Eurozone, Germany, France)​
• S&P Global Services PMI (Eurozone, Germany, France)​
• S&P Global Composite PMI (Eurozone, Germany, France)​

GBP

May Employment report was a scorching hot one. Payroll change showed adding of 23k jobs. Previous month’s number was revised from loss of 135k jobs to gain of 7k jobs. April unemployment rate has ticked down to 3.8% from 3.9% while expectations were for it to tick up to 4%. Employment change in previous three months amounted to 250k jobs added. Claimant count change was -13.6k and previous month;s reading was revised down. On the wages side number were even more hot with average weekly earnings coming at 6.5% 3m/y, up from upwardly revised 6.1% 3m/y in April. Ex bonus category jumped to 7.2% 3m/y from upwardly revised 6.8% 3m/y the previous month. Due to high inflation real wage growth is still negative but it is trending up. The report overall, particularly wages, screams rate hike next week. BOE policy member Haskel, a hawk, stressed the importance of keeping inflation expectations anchored and added that further rate hikes cannot be ruled out.

This week we will have inflation and preliminary June PMI data as well as BOE meeting. A 25bp rate hike is consensus with around 25% of a 50bp rate hike.

Important news for GBP:

Wednesday:​

• CPI​

Thursday:​

• BOE Interest Rate Decision​

Friday:​

• S&P Global Manufacturing PMI​
• S&P Global Services PMI​
• S&P Global Composite PMI​

AUD

After a lackluster April employment report, May report came in with a bang. Employment change saw 75.9k jobs added vs 15k as expected. The unemployment rate ticked down to 3.6% while participation rate reached record high level of 66.9%. Rounding up stellar jobs report was the fact that 61.7k jobs added were full-time with other 14.2k being part-time. Labour market is getting tighter and with high inflation running RBA may be forced to continue hiking rates. In any case, chances of another rate hike have increased.

PBOC has cut 7 day reverse repo rate to 1.9% from 2%. This is intended to release liquidity into the system and thus stimulate economic growth. Later in the week they have decided to cut 1-year MLF also by 10bp bringing it to 2.65% from 2.75%. MLF rate is used when banks borrow funds from the central bank. A 1-year rate refers to transactions with duration of 6 months to 1 year. Activity data from China in May disappointed. Industrial production came in at 3.5% y/y, down from 5.6% y/y in April while retail sales came in at 12.7% y/y vs 13.6% y/y as expected and down from 18.4% y/y the previous month. High retail sales numbers are distorted due to base effects from last year’s lockwodns. Incoming weak data was the main reason for rate cuts and looser monetary policy.

This week we may see continuation of rate hikes from China with a cut to Loan Prime Rates (1y and 5y).

Important news for AUD:

Tuesday:​

• Loan Prime Rate (China)​

NZD

Electronic retail card sales, constitutes about 70 of total retail sales, fell in May by 1.7% m/m while expectations were for an increase of 0.3% m/m. April reading was revised down to 0.4% m/m from 0.7% m/m. Consumption appears to be a drag on Q2 GDP. Q1 GDP came in at -0.1% q/q and 2.2% y/y. Considering that Q4 was at -0.7% q/q it signals that New Zealand economy entered a technical recession, two consecutive quarters of negative growth. Services industry contracted by 0.6% with net exports contracting 2.5% while household consumption expenditure contributed positively with 2.4%.

CAD

Housing starts in May came in at 202.5k vs 235k as expected and down from 261.4k in April. Existing homes sales also rose in May, A healthy migration is keeping demand for housing up despite higher mortgage costs. CAD took advantage of weak USD and JPY and gained against them, but it was weaker against other major currencies.

JPY

BOJ meeting was another snooze fest as there were no changes to monetary policy or the targeted band of Yield Curve Control (YCC). The rate is still at -0.1%, the only country with negative interest rates and YCC band is +/-50bp around 0%. BOJ stated that economy is picking up as a whore and that it is likely to continue improving moderately. They see core inflation growth slowing towards the middle of the current fiscal year, meaning towards the end of Q3 and start of Q4. JPY has been battered whole week with GBPJPY as the biggest mover gaining around 3.5% (around 700 pips).​

CHF

SNB total sight deposits for the week ending June 9 came in at CHF509.8bn vs CHF519bn the previous week. After couple of weeks of increases in sight deposits they are now continuing their longer term downward trajectory as SNB continues to strengthen Swissy in order to stabilize inflation.

This week we will have SNB meeting where a rate hike is guaranteed but markets are still unsure whether it will be a 25bp or a 50bp rate hike.

Important news for CHF:

Thursday:​

• SNB Interest Rate Decision​

 

[katetrades]

Forex Major Currencies Outlook (June 26 – June 30)

Inflation week is ahead of us with US, Eurozone and Canada reporting, all expected to continue lower, additionally we will get official PMI data from China.

USD

Housing sector has posted great results despite high mortgage rates. Housing starts in May printed 1631k vs 1400k as expected and up from 1401k in April. Building permits also showed a strong print coming in at 1491k vs 1420k as expected and up from 1417k the previous month. So far there are no signs that recession will come from the housing sector.

In his testimony before Senate Fed Chairman Powell stated that there is a long way to go to bring inflation back to the 2% target and that nearly all FOMC members agreed about future rate hikes by the end of the year. He reiterated that Fed will continue with meeting by meeting approach and that reducing inflation will likely result in a period of below trend growth.

The yield on a 10y Treasury started the week and year at around 3.77%, rose to 3.82% and finished the week at around the 3.75% level. The yield on 2y Treasury reached around 4.81%. Spread between 2y and 10y Treasuries started the week at -95bp then widened over a full percentage point -103bp. FedWatchTool sees the probability of a 25bp hike at 77% while probability of no change in July is at 23%.

This week we will have Fed’s preferred inflation measure PCE as well as data on income and spending.

Important news for USD:

Friday:​

• PCE

EUR

ECB Chief Economist Phillip Lane stated that rate hike in July seems appropriate given current economic situations but that decision on September rate hike will depend on the incoming data. ECB member of the Executive Board Isabelle Schnabel stated that risks to inflation are skewed to the upside and added that although ECB will remain data-dependent they should err on the side of doing too much. According to her ECB needs to continue raising interest rates until they see convincing evidence that inflation is moving toward 2% targeted level. ECB member Villeroy stated that level of terminal rate is not as important as the time that bank will keep it. Ifo has downgraded their GDP forecast for Germany and they see the economy now shrinking by 0.4% in 2023 vs 0.1% as previously expected.

Preliminary June PMI data was disappointing, particularly French services which plunged into contraction with a reading of 48, down from 54.6 in May. Manufacturing for the Eurozone continued to decline and printed 43.6 vs 44.8 as was expected and as was in May. German manufacturing printed abysmal 41 which was the lowest since May 2020. Services for the Eurozone declined to 52.4 from 55.1 in May with expectations of a drop to 54.5. The report shows divergence between falling prices of goods and rising prices of services. Overall composite for the Eurozone barely hanged in expansion with 50.3 reading dragged down by misses in activity and especially heavy plunge in French reading to 47.3. Eurozone has finished Q2 on a very weak note and another negative GDP reading cannot be ruled out, particularly in France.

This week we will have preliminary June inflation reading.

Important news for EUR:

Friday:​

• CPI​

GBP

UK inflation in May refused to budge. Headline number was unchanged at 8.7% y/y while expectations were for a slower increase of 8.4% y/y. Monthly increase in prices was 0.7%, higher than 0.5% the previous month. Air travel, recreational and cultural goods and services and second-hand cars contributed most to price increases. Food inflation has been on decline but is still the main culprit with astonishing increase of 18.3% y/y. Core inflation posted additional problem for the BOE as it increased to 7.1% y/y from 6.8% y/y in April. This is the highest level of core inflation in over 30 years. Expectations were for it to remain at 6.8% y/y.

BOE has surprised markets and raised bank rate by 50bp thus bringing it to a round number of 5%. The vote for decision was 7-2 with two members voting for no change. The statement shows that core good inflation has been running hotter than expected. Still, members expect inflation to slow down significantly in the second half of the year due to drop in energy prices. Services inflation is expected to remain unchanged while food inflation is projected to fall further. Further tightening is on the table and markets are pricing in terminal rate between 5.75% and 6%. Business surveys show that Q2 GDP should be around 0.25%. Indicators of household spending have somewhat strengthened while labor market remains strong.

Preliminary PMI data for the month of June showed declines across the economy. Manufacturing slid further into contraction, continuing for the fourth consecutive month and printing 46.2. Services declined to still healthy 53.7 which kept composite at 52.8. The report shows that consumer spending on services started to decline due to increase in cost of living and bleak growth outlook. Strong pace of BOE rate hikes is taking negative toll on business activity although labor market still remains strong with firms in the service sector continuing to hire.

AUD

Minutes from the last RBA meeting showed that decision between raise and pause was highly debated. Members opted to act and hike expecting that will bring inflation faster to the targeted level. Balance of risks for inflation is skewed to the upside. Additionally, wage increases are been higher than expected with wages rising in the public sector as well. AUD was repriced down after the minutes were published as they show a less hawkish bank with no clear intentions on hiking in July.

PBOC has cut LPR rates by 10bp as was widely expected. The new 1-year LPR is now at 3.55% while 5-year LPR is at 4.20%. These rates are used as benchmarks, 1-year LPR for most new loans and 5-year LPR for most mortgages. If the economy continues to stumble we can see more cuts in the coming months, but the ball for stimulus is now passed to the fiscal side. Major banks are slashing their GDP forecast for 2023 as a result of weak economic data.

This week we will have official PMI data from China.

Important news for AUD:

Friday:​

• Manufacturing PMI (China)​
• Non-Manufacturing PMI (China)​
• Composite PMI (China)​

NZD

Trade balance data for May saw a small surplus of NZD46m as exports printed NZD6.99bn while imports printed NZD6.95bn, a significant jump from NZD6.37bn in April. The jump in imports was due to aircraft and aircraft parts purchases which were followed by increases in medical equipment, machinery and vehicles and vehicle parts. Global dairy auction was flat, there were no changes to prices. Butter prices showed biggest increase while cheddar prices saw biggest decline.

CAD

Retail sales report for April was very strong. Headline number saw increase of 1.1% m/m vs 0.2% m/m as expected. General merchandise and food and beverage categories showed the biggest gains. Ex autos category rose by 1.3% m/m vs 0.4% m/m as expected. Advance reading for May see retail sales growing additional 0.5%.

This week we will have May inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

National inflation numbers for the month of May saw headline inflation fall to 3.2% y/y from 3.5% y/y in April. Ex fresh food category also printed 3.2% y/y, down from 3.4% y/y. However, ex fresh food, energy, so called core-core, printed 4.3% y/y vs 4.1% y/y the previous month. This is a new 42-year high for the reading. BOJ has been adamant in categorizing inflation as “transitory” as they expect it to fall significantly from September/October. Preliminary June PMI data showed that manufacturing stumbled and slipped back into contraction with 49.8 reading. Services PMI also came in weaker than in April (54.2 vs 55.9) but is still at a very healthy level. Composite was driven down to 52.3 from 54.3 the previous month. The report shows weaker growth for output, new orders, new export orders and employment for services with decline from growth for output and new orders for manufacturing. Both sectors show weaker output and input prices inflation.

CHF

SNB total sight deposits for the week ending June 16 came in at CHF510.6bn vs CHF509.8bn the previous week. Total sight deposits have been ranging for the last month and a half.

SNB has raised policy rate by 25bp as expected and brought it to 1.75%. Additional rate hikes and tightening of monetary policy cannot be excluded. Focus at the moment, in the current environment, is on selling foreign currency. This is done in order to strengthen Swissy and bring down inflation from import. We saw this through total sight deposits data. Inflation for 2023 was revised down to 2.2% from 2.6% while it was revised up to 2.2% for 2024 from 2% as previously forecast. Inflation is expected to remain persistent. SNB Chairman Jordan stated that most likely further tightening of monetary policy will occur but approach will be gradual.​

 

[katetrades]

Forex Major Currencies Outlook (July 3 – July 7)

RBA meeting with almost 50/50 chance of a rate hike, followed by ISM PMI data from the US, latest FOMC meeting minutes, NFP and employment data from Canada will highlight the first week ahead of second half of 2023. Note that markets in the US will be closed on July 4 on Independence day which will lead to lower liquidity and potentially high volatility so we would advise caution in trading.

USD

New home sales in May printed a very strong 763k, up from 680k in April. This is the highest number since February of 2022 and it confirms that recession will not come from the housing sector. Consumer confidence in June printed 109.7, making it the highest reading since January of 2022 as consumers have upbeat view of labor market and falling inflation expectations. Final reading of Q1 GDP came in at 2% annualized vs 1.4% as expected on the back of huge jump in net exports. The report indicates that economy is still running hot, that recession is nowhere to be seen and that Fed will be pushed to hike at least two more times.

Fed Chairman Powell reiterated its hawkish stance at the ECB symposium in Sintra. He stated that there is a long way to go to reach inflation target of 2% and that he expects moderate pace of rate hikes to continue. Additionally he added that “Although the policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” This makes a July rate hike (25bp) a very viable option.

Headline PCE in May declined to 3.8% y/y from 4.3% y/y in April. Monthly increase was 0.1%. Core PCE slipped to 4.6% y/y from 4.7% y/y the previous month. Energy prices printed biggest declines while both foods prices and services prices increased. The rise of latter two can be seen in the core reading which is stubbornly high and proving to be very sticky. Personal spending rose 0.1% m/m and it spook markets and brought USD weakness.

The yield on a 10y Treasury started the week and year at around 3.74%, fell to to 3.7%, rose to 3.88% and finished the week at around the 3.8% level. The yield on 2y Treasury spiked to around 4.93%. Spread between 2y and 10y Treasuries started the week at -101bp then widened to -105bp. FedWatchTool sees the probability of a 25bp hike at 86% while probability of no change in July is at 14%.

This week we will have ISM PMI data, minutes from the June FOMC meeting and NFP data on Friday. Headline number is expected to print around 250k with the unemployment rate remaining at 3.7%.

Important news for USD:

Monday:​

• ISM Manufacturing PMI​

Wednesday:​

• FOMC Minutes​

Thursday:​

• ISM Non-Manufacturing PMI​

Friday:​

• NFP
• Unemployment Rate

EUR

German Ifo survey for the month of June saw very pessimistic results. Business climate fell by more than expected and printed 88.4, the lowest level in 2023. Current situation and business outlook also came down more than expected reflecting worsening conditions in the economy. Ifo economist, Klaus Wohlrabe noticed weak demand for industrial products as higher interest rates around the world suppress demand.

ECB president Lagarde offered hawkish signals at the ECB conference in Sintra as she wanted to reaffirm that the bank has price stability as their main goal as inflation is still too high. She emphasized the need to communicate clearly that rates will stay at elevated levels for as long as necessary and that they have not peaked yet. ECB Vice President Luis de Guindos stated that rate hike in July is certain.

Preliminary inflation figures for June saw headline number fall to 5.5% y/y from 6.1% y/y in May while core reading ticked up to 5.4% y/y from 5.3% y/y the previous month. We saw drops in headline number in French and Spanish reading while German ticked higher due to base effects. Core inflation is refusing to budge, it remains sticky and ECB will remain on the hiking path in July and most likely in September as previously signaled by members.

GBP

BOE MPC member Dhingra, a well known dove who voted for no change at the last BOE meeting, stated that sharp drop in PPI is promising but that it takes between one and two quarters for it to translate to drop in CPI. He also added that wages are having lagged response to the inflation. BOE Tenreyro, note that she will end her tenure as MPC on July 4, stated that forward-looking indicators point to declines in wage growth as well as core-goods inflation over the rest of the year. She added that so far they have seen very little pass through to economy from policy tightening. Final GDP reading was unchanged at 0.1% q/q. Services and production grew 0.1% while construction output increased by 0.4%.

AUD

CPI for the month of May plunged more than expected to 5.6% y/y from 6.8% y/y in April. Expectations were for a drop to 6.1% y/y. This is the lowest reading since April of 2022. The biggest declines were seen in motor fuel, recreation and clothing prices. Price increases have been evident in food prices and rents. Core reading has held higher at 6.4% y/y. The odds of a rate hike next week have been dialed down after the report. Retail sales in May heavily beat expectations by rising 0.7% m/m vs 0.1% m/m as expected.

Official Chinese PMI data for the month of June saw manufacturing improve slightly to 49 from 48.8 in May while non-manufacturing continued to decline and printed 53.2, down from 54.5 the previous month. This has dragged composite to 52.3 from 52.9 in May. New orders, new export orders and employment sub-components declined in both sectors.

This week we will have RBA meeting. Markets are leaning toward no change for RBA with a 25bp given around 40% probability, but big Australian banks and Reuters poll of economists are leaning toward a rate hike.

Important news for AUD:

Tuesday:​

• RBA Interest Rate Decision​

NZD

Both business confidence and activity outlook. as measured by ANZ, improved in the month of June. Business confidence printed -18, up from -31.1 in May. This is the best result since November of 2021. Activity outlook returned into positive territory for the first time after fourteen months and printed 2.7 vs -4.5 the previous month. The report shows fall in cost and wages expectations and improvement in construction, profit expectations and ease of credit. ANZ consumer confidence improved to 85.5 from 79.2. It is still at very low levels, but it is the highest since January of 2022.

CAD

CPI in May fell to 3.4% y/y as expected. It was 4.4% y/y the previous month. This is the lowest level of inflation since June of 2021. Gasoline prices were the biggest reason for decline as base effects kicked in and they dropped by -18.3% y/y. Core measures all declined with median printing 3.9% y/y vs 4.3% y/y in April, trim at 3.8% y/y vs 4.2% the previous month and common at 5.2% y/y vs 5.7% y/y in April. Economists from CIBC see inflation falling below 3% in June. April GDP came in flat vs 0.2% m/m as expected indicating that economy started Q2 on a slow foot. BOC has raised last meeting and these reports would nudge them to go back to pause. If next week’s employment data comes out weak we can be almost certain that BOC will not hike rates and that CAD will suffer.

This week we will have employment data.

Important news for CAD:

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

Summary of opinions from the BOJ June meeting offered us something new. They have stated that current monetary easing stance is appropriate and that wage growth is needed in order to keep inflation sustainably at 2% but then added that there is a strong chance that inflation will not slow down below 2% by the middle of current fiscal year (which is September/October in Japan). BOJ has previously been adamant that inflation is transitory and that it will fall below 2% by September/October and now they are having doubts about it. This opens the room for some Yield Curve Control adjustments at their July meeting as a move toward normalization of monetary policy. However, BOJ Governor Ueda reiterated at Sintra forum the need for ultra-loose monetary policy and made it clear that it will stay that way for the foreseeable future. He also added that underlying inflation, according to BOJ’s estimates, is lower than 2%.

Inflation data for the Tokyo area in the month of June saw headline number slip down to 3.1% y/y from 3.2% y/y in May while increase of 3.8% y/y was expected. Ex fresh food also missed expectations and remained unchanged at 3.2% y/y. Ex fresh food, energy category, “core-core”, slipped to 3.8% y/y from 3.9% y/y the previous month while expectations were for a jump to 4.4% y/y. This is the first time “core-core” has declined after sixteen consecutive months of increases. This reading will give more credence to BOJ’s stance that inflation is transitory and that it will come down from September/October. Retail sales in May were very encouraging as they rose 1.3% m/m vs 0.5% m/m as expected and 5.7% y/y vs 5.4% y/y as expected.

CHF

SNB total sight deposits for the week ending June 23 came in at CHF508bn vs CHF510.6bn the previous week. Total sight deposits drop again signalling that SNB is still on the path of selling USD and EUR in order to strengthen Swissy and thus fight off inflation.

This week we will have inflation data.

Important news for CHF:

Monday:​

• CPI​

 

[katetrades]

Forex Major Currencies Outlook (July 10 – July 14)

RBNZ and BOC meetings, inflation from the US and China as well as employment from the UK and trade data from China will highlight the week ahead of us.

USD

June ISM manufacturing slipped to 46 from 46.9 in May while expectations were for it to tick up to 47. Digging into subcomponents of the report we see a fascinating thing, all of indexes were in contraction territory, below the 50 level. This is the first time that happened since Covid outbreak. Production and employment were above the 50 level in May and now they are contracting. Demand remains weak with new orders and new export orders continuing to decline with backlog of orders at a very low level.

Minutes from the latest FOMC meeting saw almost all participants opting to keep rates unchanged. There were some members who wanted to continue with 25bp rate hikes stating: 1. Strong labour market; 2. Strong economy; 3. Not enough evidence of inflation going back to 2% target. Desk survey showed that majority of members expect recession to occur in the short-term but good economic data keeps pushing the date further into the future. Members agree overall that recession will not be deep or prolonged.

ISM Services PMI came in at 53.7 vs 51 as expected and up from 50.3 the previous month. Highlights of report include improvement in new orders and new export orders, employment index returning into expansion after being in contraction the previous month. Backlog of orders is improving while inventories are declining. Additionally, prices paid component continued to decline indicating that inflation pressures are easing.

NFP in June has broken a streak of 14 reports in a row in which it beat expectations. Headline number came in at 209k vs 225k as expected. The unemployment rate ticked down to 3.6% as expected while participation rate remained unchanged at 62.6%. Wages continued to run hot as they rose 0.4% m/m vs 0.3% m/m in May and 4.4% y/y vs 4.3% y/y the previous month. Government added 60k jobs, health care added 41k jobs while leisure and hospitality added 21k jobs. Construction added 21k jobs solidifying the case for a strong construction sector.

The yield on a 10y Treasury started the week and year at around 3.84%, rose to 4.10% and finished the week at around the 4.02% level. The yield on 2y Treasury spiked to highest level since 2007 of around 5.12%. Spread between 2y and 10y Treasuries started the week at -109bp then tightened to -90bp as the curve flattened. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at 95% while probability of no change in July is at 5%.

This week we will get inflation numbers for the month of June. Headline number is expected to be around 3.6% due to base effects while core number should print around 5%.

Important news for USD:

Wednesday:​

• CPI​

EUR

Final manufacturing PMI for the month of June for Eurozone was revised down to 43.4 from 43.6 on the back of revision lower for German reading which printed measly 40.6. New orders and output declined at a faster rate owning to the slowing demand for industrial goods. There was a first decline in employment since January of 2021. The report also shows that supply delivery times are improving but companies are reporting shortage of materials. French reading was revised up and now makes it second consecutive month of improvements. The number is still well in contraction territory though and with ongoing protests across the France we may see it declining in the coming months. Final services was revised down to 52 from 52.4 on the back of lower than expected readings from Italy and Spain while German and French reading remained unchanged. This has caused composite to slip into contraction with 49.9. The report shows that “all major euro countries have again lost considerable momentum. The slowdown in business activity growth was accompanied by a weaker rise in new business, lower price increases and a decline in business expectations.” Employment continuing to improve and price pressures easing are the positives.

ECB policymaker and head of German Bundesbank Nagel, a well-known hawk, stated that rates must continue to rise but it is too early to say how far. On the other hand, ECB policymaker and head of Bank of Italy Visco, a well-known dove, stated that more rate hikes is not the only way to bring inflation down. Rates can also be held steady at high levels for sufficient period of time. He added that he is not going along with idea that tightening too much is better than tightening too little.

GBP

UK final June manufacturing reading was revised slightly up to 46.5 from 46.2 as preliminary reported, but still down from 47.1 in May. New orders, output and employment indexes showed further declines as weaker demand conditions are dominating. On the positive side, there was a further reduction in supply chains and price pressures. Services and composite were unchanged at 53.7 and 52.8 respectively as services sector starts loosing momentum with business activity increasing at a weak pace. On the other hand, price pressures are seen easing which is a very welcomed sign considering how high inflation in the UK is. BOE MPC member Silvana Tenreyro, a most dovish member of MPC, finished her mandate on July 4 and according to reports her replacement will lean much more hawkish.

This week we will have employment data.

Important news for GBP:

Tuesday:​

• Claimant Count Change​
• Unemployment Rate​

AUD

RBA has opted to keep the cash rate unchanged at 4.1%. They see rate hikes slowly working its way into the economy and combined with uncertainty surrounding the economic outlook they decided that pause is the best decision. They claim that inflation has peaked, that economy has slowed and that labour market has eased somewhat although it remains very tight. Wages have picked up and are in line with inflation target. Household consumption is a cause of concern as costs of living increase. The statement shows that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.” This decision may be viewed as a skip now and hike in August. Data still plays the central role in board’s decisions.

Caixin manufacturing PMI for the month of June came in at 50.5 vs 50.9 the previous month. It weakened but still managed to stay in expansion territory and beat the expectations of 50.2. The report pointed to slow in demand for goods but improvement in supply chains. Employment in manufacturing sector continued to decline and it was well below 50. Both output and input prices also continued to decline and are deep under the 50 level. Caixin services printed 53.9, down from 57.1 in May but still well in expansion territory. Composite was at 52.5 and report shows that production, exports, employment and demand all continued to improve albeit at a slower pace.

This week we will have inflation and trade data from China.

Important news for AUD:

Monday:​

• CPI (China)​

Thursday:​

• Trade Balance (China)​

NZD

Q2 business confidence has improved to -63 from -66 the previous quarter. First dairy auction of July saw GDT price index decline -3.3% with butter and butter milk prices plunging more than 10%.

This week we will have RBNZ meeting. At their last meeting it was stated that peak rate level is at current level of 5.5% and that there will be no rate changes until September of 2024.

Important news for NZD:

Wednesday:​

• RBNZ Interest Rate Decision​

CAD

June employment report was a scorching hot. Employment change came in at 59.9k vs 20k as expected and up from -17.3k in May, The unemployment rate ticked up to 5.4% but it was due to participation rate jumping to 65.7%. The real star of the report was the fact that full-time jobs added printed astonishing 109.6k! Part-time jobs declined by 49.8k. Wage data showed and increase of 4.2% y/y, slowly coming down which will make BOC happy.

This week we will have BOC meeting. With inflation coming down but labour market running hot markets are leaning toward no change in the policy rate with some pricing in a 25bp rate hike.

Important news for CAD:

Wednesday:​

• BOC Interest Rate Decision​

JPY

BOJ Tankan survey for Q2 saw improvements for both companies in manufacturing and services sector. Additionally, survey showed improved outlook for companies from both sectors indicating that they see strong Q3. Final manufacturing PMI was unchanged at 49.8. The report notes that both new orders and output regresses into contraction. Weak demand for goods dominated while on the positive side supply chain issues and inflation pressures eased. Final services reading was revised down to 54 from 54.2 as preliminary reported which dragged composite down to 52.1 from 52.3 as preliminary reported. The report accentuates divergence between sectors as demand for services remained positive.

Wages data saw nominal wages in May rising 2.5% y/y vs 0.8% y/y in April. Due to the high inflation this still puts real inflation into negative territory with a -1.2% y/y reading. Household consumption was affected by weak wage growth as it fell 4% y/y in May after a decline of 4.4% y/y the previous month. BOJ Deputy Governor Uchida stated “We will continue YCC”. This indicates that July meeting will again lead to no changes in monetary policy. Additionally, this prompted some thinking that BOJ will not intervene before USDJPY reaches the 150 level.

CHF

SNB total sight deposits for the week ending June 30 came in at CHF491.9bn vs CHF508bn the previous week. SNB is not letting go of selling USD and EUR to conduct its monetary policy. June inflation figures showed headline inflation dropping below 2% and printing 1.7% y/y vs 1.8% y/y as expected and down from 2.2% y/y in May. Core also declined and printed 1.8% y/y, down from 1.9% y/y the previous month. Inflation has dropped below the target and the rhetoric coming from SNB is still that they are prepared to further tighten monetary policy if need arises.​

 

[katetrades]

Forex Major Currencies Outlook (July 17 – July 21)

Inflation data from the UK, Canada, New Zealand and Japan followed by retail sales data from the US, Q2 GDP from China and employment data from Australia will highlight the week ahead of us.

USD

Headline CPI in June plunged to 3% y/y vs 3.1% y/y as expected, down from 4% y/y in May. Monthly rise was 0.2% vs 0.3% as expected. Core reading slid to 4.8% y/y vs 5% y/y as expected and down from 5.3% y/y the previous month. Monthly core also increased by 0.2% vs 0.3% as expected. Shelter component, making more than 34% of the entire CPI index, rose by 0.4% m/m and 7.8% y/y which is slower increase from 0.6% m/m and 8% y/y increase we saw in May. Used cars and trucks saw biggest declines. The report shows “The energy index rose 0.6 percent in June after falling 3.6 percent in May. The gasoline index increased 1.0 percent in June, following a 5.6-percent decrease in the previous month.” The energy index declined by almost 17% y/y. Core services ex shelter has continued to decline and printed 3.2% y/y. July rate hike probability remained unchanged but probability of future rate hikes has diminished significantly. Still, food and rent prices stay very high.

Fed Board Governor Weller stated that he will vote for a rate hike at the July meeting and stated that September meeting will be a “live” meeting. He added that Fed will likely need two more 25bp rate hikes this year. He acknowledged that CPI coming down is a very welcoming situation but it is yet to be seen if it can be sustained. According to him, rate hikes so far have already impacted the economy, therefore more hikes are needed to further cool inflation down.

The yield on a 10y Treasury started the week and year at around 4.09%, fell to 3.76% and finished the week at around the 4.02% level. The yield on 2y Treasury reached the high of around 4.96% and then tumbled post CPI. Spread between 2y and 10y Treasuries started the week at -86bp then tightened to -85bp as the curve flattened. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at 95% while probability of no change in July is at 5%.

This week we will have consumption data.

Important news for USD:

Tuesday:​

• Retail Sales​

EUR

July German ZEW survey, a survey of financiers, showed that current conditions continue to deteriorate but at slightly slower pace than expected (-59.5 vs -60). On the other hand, outlook for German economy is very bleak as it printed -14.7 vs -10.5 as expected and down from -8.5 in June. Sentiment for the EU has declined for the fifth straight month and printed -12.2, down from -10 the previous month.

ECB policymaker Villeroy, neutral member with hawkish leanings, stated that the bank is getting closer to the peak interest rates. He emphasized that once the peak is reached they will need to stay there for a prolonged period of time. His statement is adding to uncertainty around September meeting hike.

GBP

June employment report saw payroll change decline 9k vs positive 20k in May. ILO unemployment rate for May moved higher to 4% from 3.8% the previous month. Average weekly earnings rose again to 6.9% 3m/y from upwardly revised 6.7% 3m/ in April. Weekly earnings ex bonus were unchanged at 7.3% 3m/y but expectations were for them to decline to 7.1% 3m/y. Due to high inflation real wages are still negative, however strong wage pressures will keep inflation pressures to the upside and will move BOE towards a 50bp rate hike in August. GDP for the month of May came in at -0.1% m/m vs -0.3% m/m as expected showing that economy contracted less than expected and that economy can sustain high rates.

This week we will have inflation data for the month of June and headline number is expected to ease to 8.3% y/y.​

Important news for GBP:

Wednesday:​

• CPI​

AUD

RBA Governor Lowe stated that we could see more rate hikes in order to return inflation back to its target. It is still uncertain whether monetary policy has more work to do. There will be new updated economic projections at the August meeting. He is confident that monetary policy is working adding that there are variable lags to it. Governor Lowe will be stepping down in September and Michelle Bullock has been named as his successor. She is a current deputy governor. Additionally, from 2024, there will be reduction in board meetings as the board will meet eight times a year, rather than 11 times as it is the case now.

Inflation data from China run in stark contrast to the rest of the world. June CPI was flat vs 0.2% y/y in May. PPI has continued to decline and printed -5.4% y/y vs -4.6% y/y the previous month. Absence of inflation opens the door for new stimulus measures. Trade balance data for June showed improvement in surplus $70.2bn vs $65.81bn the previous month. However, exports data have plunged 12.4% y/y as weak international demand hurts Chinese exporters. Imports were down 6.8% y/y indicating that domestic demand is declining fast.

This week we will get employment data from Australia and Q2 GDP data from China combined with production and consumption data.

Important news for AUD:

Monday:​

• GDP (China)​
• Industrial Production (China)​
• Retail Sales (China)​

Thursday:​

• Employment Change​
• Unemployment Rate​

NZD

RBNZ has kept its official cash rate at 5.5% as was widely expected. They have noted that tighter monetary conditions are putting constraints on inflation and spending as was intended. Inflation is still too high and that is why the Committee sees it necessary to keep the rates at restrictive levels for the foreseeable future, until inflation returns to the 1-3% targeted range. The Committee sees inflation coming down and expects it to return to the targeted range in the second half of 2024.

This week we will have inflation data.

Important news for NZD:

Wednesday:​

• CPI​

CAD

BOC has decided to raise rate by 25bp and bring it to 5%. Inflation is seen coming down globally but price pressures remain particularly in services sector. Inflation has come down fast since its peak due to drop in energy prices. Getting it further down will prove more challenging. CPI inflation is projected to be at 3.7% for 2023 (it was at 3.5% previously), then falling to around 3% in 2024 and then gradually declining toward 2% by mid-2025. Economic growth has been resilient and stronger than expected. New bank’s projections see it at around 1.8% for 2023, 1.2% for 2024 (both are higher than previous projections) and then economy picks up with 2.4% growth in 2025. There was no clear forward guidance as statement said “Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target.”

BOC Governor Macklem stated that the bank remains data dependent with paying special attention to the outlook for inflation. He added that monetary policy is working but that underlying inflation pressures remain stubborn and that bank is prepared to raise interest rates further. Governing Council has debated whether to leave rates unchanged but decision for rate hike was made due to persistence in excess demand and inflationary pressures as well as cost of pausing being judged to be too high.

This week we will have inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

Core machinery orders, a good proxy for capex spending 6-9 months into the future, came down hard in May. They fell 7.6% m/m and 8.7% y/y while expectations were for an increase of 1% m/m and 0.1% y/y. The series can be volatile but the reading here is a rather concerning.

CHF

SNB total sight deposits for the week ending July 7 came in at CHF486.6bn vs CHF491.9bn the previous week. SNB continues to sell USD and EUR in order to successfully conduct its monetary policy.​

 

[katetrades]

Forex Major Currencies Outlook (July 24 – July 28)

Fed, ECB and BOJ meetings, with first two delivering a 25bp rate hike, preliminary July PMI data from the Eurozone, the UK and Japan coupled with inflation data from Australia will drive the markets in this massive week ahead of us.

USD

Headline June retail sales came in at 0.2% m/m vs 0.5% m/m as expected. Markets have pushed USD down but then other data came out which strengthen USD. There was a positive revision to previous month’s reading which rose 0.5% m/m. Ex autos component beat expectations and came in at 0.2% m/m while previous month’s reading was revised up to 0.3% m/m. The highlight of the report was control group, used in GDP calculation and it rose 0.6% m/m with May reading being revised up to 0.3% m/m. The biggest drop was seen in gasoline stations -22.7% y/y while nonstore retailers and food services & drinking places rose by 9.4% y/y and 8.4% y/y respectively. The report shows that consumer is still holding strong and that economy is rising at a good pace.

The yield on a 10y Treasury started the week and year at around 3.85%, fell to 3.73% and finished the week at around the 4.02% level. The yield on 2y Treasury reached the high of around 4.78% and then tumbled post CPI. Spread between 2y and 10y Treasuries started the week at -94bp then widened to -99bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike next week at almost a 100%.

This week we will have Fed meeting, preliminary Q2 GDP reading as well as Fed’s preferred inflation metric, PCE. A 25bp rate hike is fully priced in so markets will be paying close attention to Powell’s remarks for any hints regarding path of future rates.

Important news for USD:

Wednesday:​

• Fed Interest Rate Decision​

Thursday:​

• GDP​

Friday:​

• PCE​

EUR

Final headline CPI for the month of June was unchanged at 5.5% y/y. However, core reading was revised up to 5.5% y/y from 5.4% y/y as preliminary reported and up from 5.3% y/y in May. With core CPI heading in the wrong direction hawkish camp in ECB gains more credibility. July 25bp rate hike was telegraphed at the June meeting, but this core reading nudges September meeting closer toward yet another 25bp rate hike.

ECB’s biggest hawks, Dutch Klaas Knot and German Joachim Nagel, stated that next week’s rate hike is a certainty, but were far less certain about September rate hike. They have suggested that September decision will be influenced by the incoming data. Markets are seeing rates at 4% by the year-end with a 80% probability.

This week we will have preliminary July PMI data and ECB meeting. Another 25bp rate hike was telegraphed at June meeting so markets will focus on any hints regarding rates at September meeting.

Important news for EUR:

Monday:​

• S&P Global Manufacturing PMI (EU, Germany, France)​
• S&P Global Services PMI (EU, Germany, France)​
• S&P Global Composite PMI (EU, Germany, France)​

Thursday:​

• ECB Interest Rate Decision​

GBP

The UK finally had some positive news on inflation. Headline inflation in June rose by 7.9% y/y vs 8.2% y/y as expected and down from 8.7% y/y in May. Core inflation also surprised to the downside and printed 6.9% y/y vs 7.1% y/y as expected and down from 7.1% y/y the previous month. Fuel prices showed biggest declines. (22.7%). There are signs that food inflation has past its peak as it rose 17.3% y/y vs 18.3% y/y in May. Markets will need to do some repricing as lower inflation readings may invalidate August 50bp rate hike and will surely lead to lower pricing for terminal rate.

Retail sales have printed 0.7% m/m in June vs 0.2% m/m as expected. Ex-autos printed 0.8% m/m vs 0.2% m/m as expected. Both huge beats little tainted by the fact that previous month’s readings were revised down. The report shows that both food and non-food stores contributed to growth with 0.7% m/m and 0.1% m/m respectively while non-store retailers increased by 0.2% m/m and fuel sales fell 0.3% m/m. Reports have started to emerge that UK Prime Minister Rishi Sunak plans to hold General Election in November of 2024. That would make US and UK elections being held at the same time.

This week we will have preliminary July PMI data,

Important news for GBP:

Monday:​

• S&P Global Manufacturing PMI​
• S&P Global Services PMI​
• S&P Global Composite PMI​

AUD

Minutes from the July RBA meeting showed that members presented strong cases for both a 25bp rate hike and a pause. In the end, the board opted to keep the rates unchanged but agreed that some further tightening may be required and agreed to keep August meeting as a live one. Current stance of monetary policy was described as “clearly restrictive” and will become more restrictive. Wage growth is seen rising 4% y/y in Q3 while economy slowed considerably with growth of around 0.2% q/q for Q2.

June employment report from Australia was another strong one. Employment change showed that the economy added 32.6k jobs vs 15k as expected. This number of jobs added comes after 75.9k jobs were added in May. The unemployment rate again ticked down to the very low level of 3.5% vs 3.6% as was expected. Admittedly, participation rate also ticked down to 66.8% but it is still much higher than pre-pandemic. All of the jobs added were full-time jobs (39.3k) adding the flare to a strong report. The labor market is as tight as it gets and is not showing any signs of slowing down.

China Q2 GDP was mixed. It printed 0.8% q/q vs 0.5% q/q as expected but 6.3% y/y vs 7.3% y/y as expected. High y/y figure is due to base effects. Housing and exports, which comprise roughly 40% of the entire economy, were notable drags. Weaker than expected yearly reading led analysts from big banks to cut its assessment of GDP for 2023 to range from 5%-5.5% from 5.5% to 6.3% as previously seen. Some stimulus measures are needed just to achieve a 5% GDP target for 2023. Activity indicators were also mixed with industrial production rising 4.4% y/y vs 2.7% y/y as expected while retail sales rose 3.1% y/y vs 3.2% y/y as expected. PBOC has decided to leave both 1-year and 5-year LPRs unchanged at 3.55% and 4.2% respectively.

This week we will have Q2 inflation data. They are expected to come down but details of the report will influence whether RBA opts for a hike or a pause.

Important news for AUD:

Wednesday:​

• CPI​

NZD

Q2 CPI came in at 1.1% q/q, down from 1.2% q/q in Q1 but it fell less than expected (1% q/q). Yearly figure was at 6%, down from 6.7% in the previous quarter, but it also fell less than expected (5.9%). RBNZ core inflation measure, sectoral factor model, was unchanged for the third straight quarter at 5.8% y/y. NZD was pushed higher by the inflation prints and markets are still weighing whether this reading will impact RBNZ. As a reminder, they are expected to be on hold with 5.5% Official Cash Rate seen through September of 2024. One of the factors that can push RBNZ to return to rate hikes is that domestic inflation came stronger than expected, although falling from Q1 levels.

CAD

June CPI data fell by more than expected and came in at 2.8% y/y vs 3.4% y/y in May. Base effects contributed to the declines as gasoline prices plunged 21.6% y/y. Grocery prices and mortgage costs saw biggest increases in price with latter rising astonishing 30.1% y/y. Core measures saw median slip to 3.9% y/y, trim slip to 3.7% y/y and common slip to 5.1% y/y. BOC may take a pause in rate hike process and enjoy the lower inflation.

JPY

BOJ Governor Ueda stated that there is some distance to sustainably achieving 2% inflation target. He emphasized that unless BOJ assumptions on the need to sustainably achieve 2% inflation target change there will be no changes to monetary policy. JPY has weakened after his remarks as they hint to no change for YCC at the July meeting. National inflation data for the month of June saw headline and ex fresh food categories both tick up to 3.3% y/y while ex fresh food, energy component ticked down to 4.2% y/y. This makes it the first decline since January of 2022.

This week we will have BOJ meeting. Incoming reports are suggesting that there will be no change to YCC. This could lead to prolonged JPY weakness.

Important news for JPY:

Friday:​

• BOJ Interest Rate Decision​

CHF

SNB total sight deposits for the week ending July 14 came in at CHF494.7bn vs CHF486.6bn the previous week. A rare move up in sight deposits and it remains yet to be seen if this is just a pull back or beginning of a new upward trend.​

 

[katetrades]

Forex Major Currencies Outlook (July 31 – Aug 4)

BOE and RBA meetings coupled with NFP as well as inflation and growth data from the Eurozone, inflation data from Switzerland and PMI data from China will highlight another action packed week ahead of us.

USD

IMF has raised its projection for 2023 GDP to 3% from 2.8% and left 2024 projection unchanged at 3%. Projection for 2023 was revised up due to better than expected GDP readings for the US and the UK. US GDP is seen at 1.8% vs 1.6% in April while UK GDP is seen rising 0.4% vs falling 0.3% in April. German GDP was downgraded and IMF now sees it falling by 0.3% vs falling by 0.1% in previous projections. Consumer confidence measured by Confidence Board jumped in July to 117 from upwardly revised 110.1 in June. This represents the highest reading in two years and it is additional proof that economy is handling high rates pretty good.

Fed has delivered another 25bp rate hike, as was widely expected and brought Fed funds target rate into the 5.25-5.50% range. The statement did not reveal much saying that “economic activity has been expanding at a moderate pace” that “Job gains have been robust in recent months” and that “Inflation remains elevated.” The committee will take into account the cumulative effects of monetary policy and the lags along with economic and financial developments. We got more information from Powell’s opening statement during the press conference and Q&A session.

Chairman Powell declared that full extent of rate hikes is yet to be felt. He acknowledged a strong pace of job growth and added that process of bringing inflation back to 2% inflation "still has a long ways to go". During Q&A session he stated that inflation will not return to 2% level before 2025. He also strongly emphasized that they are in a data-dependent mode stating that there are two more jobs (NFP) and inflation reports until September meeting. He admitted that June CPI was welcomed but it is just one reading and more is needed as they want to see core inflation down. He also stated that staff projections no longer see recession in 2023. Ultimately, he dismissed rate cuts for the rest of the year. Overall it can be said that his comments were neutral as he was looking to keep September meeting open for another rate hike, although he clarified that future rate hikes were not discussed.

Q2 GDP has come in strong at 2.4% annualised vs 1.8% annualised as expected and up from 2% in the first quarter. There was a big drop in personal consumption, which added just 1.12pp to the GDP reading, down from 2.79% in Q1. On the other hand, fixed investment showed a big jump and contributed 0.83pp to the GDP, up from -0.08pp in the previous quarter. Durable goods printed 4.7% m/m vs 1% m/m as expected. This is the highest monthly rise in three years.

PCE in June printed headline at 3% y/y as expected, down from 3.8% y/y in May. Core reading has dropped more than expected and is now at 4.1% y/y, down from 4.6% y/y the previous month. Headline PCE and CPI are both at 3% but core PCE is lower as core CPI is at 4.8% y/y. Personal income rose by 0.3% m/m while 0.5% m/m was expected. Personal spending jumped 0.5% m/m compared to increase of 0.1% m/m the previous month. Fed may be very satisfied with this reading as inflation is falling at desired pace and personal income seems to be slowing down while spending remains unchanged.

The yield on a 10y Treasury started the week and year at around 3.85%, rose to a little over 4% and finished the week at around the 3.95% level. The yield on 2y Treasury reached the high of around 5%. Spread between 2y and 10y Treasuries started the week at -101bp then tightened to -92bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 20% while probability of no change is at around 80%.

This week we will have ISM PMI data for July and NFP numbers on Friday. Headline NFP is seen at around 190k with the unemployment rate staying unchanged at 3.6%.

Important news for USD:

Tuesday:​

• ISM Manufacturing PMI​

Thursday:​

• ISM Services PMI​

Friday:​

• NFP​
• Unemployment Rate​

EUR

Preliminary PMI numbers for July for Eurozone as a whole came in slightly worse than expected. Manufacturing has slipped to 42.7 from 43.4 in June while services declined to 51.1 from 51.5 the previous month making composite drop to 48.9 from 49.7, a second consecutive month below 50. Digging into the details we find abysmal data. German manufacturing has fallen to 38.8. This low level has last been seen in May of 2020, at the peak of pandemic and lockdowns. French services reading has declined to 47.4 from 48 in June thus making it second consecutive month in contraction. German composite has also fallen into contraction with 48.8 reading. Q3 and H2 of 2023 will be very challenging for Eurozone as PMIs suggest even weaker readings in the coming months. The report also shows that new orders fell for services sector for the first time in seven months and that price pressures are still holding especially in the service sector.

Euro area bank lending survey for July of 2023 presented a dire situation. Credit standards have continued to tighten for all loan categories which led to sharp drop in demand for loans from businesses and households. The net demand for loans has fallen to the lowest level since the start of the survey 20 years ago. Banks are reporting that they are more concerned about non-performing loans and that they are set to further tighten lending conditions. The report states “For the third quarter of 2023, euro area banks expect a further, albeit more moderate, net tightening of credit standards on loans to firms, and unchanged credit standards on loans to households for house purchase.”

ECB has delivered their announced 25bp rate hike and brought deposit rate to 3.75%. Inflation continues to decline but it is still at too high level and will stay there for too long. ECB will remain data-dependent when deciding future rate hikes.

ECB President Lagarde acknowledged at the press conference that near-term economic outlook has deteriorated due to weaker domestic demand. Price pressures from wages and profit margins are becoming an increasing source of inflation. She reiterated during the Q&A session as well as during the opening statement that ECB is data-dependent. She particularly brought attention to the change in the statement from "The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary." to "The Governing Council’s future decisions will ensure that the key ECB interest rates will be set to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary."

Preliminary Q2 GDP readings showed French at 0.5% q/q vs 0.1% q/q as expected due to big contribution from net exports. German Q2 GDP was flat, showing weak economic rebound. As a reminder, preliminary Q1 GDP from Germany was also flat but it was revised lower in final reading to -0.3% q/q pushing the country into technical recession of two consecutive quarters of falling growth. So we cannot be sure yet that Germany managed to break the cycle and not post third consecutive quarterly decline in growth. Preliminary inflation data for July saw French reading at 4.3% y/y, down from 4.5% in June.

This week we will have preliminary Q2 GDP and July CPI data for the Eurozone.

Important news for EUR:

Monday:​

• CPI​
• GDP​

GBP

PMI data from the UK for the month of June saw continued declines in economic activity. Manufacturing fell to 45, services to 51.5 while composite managed to stay in expansion territory with a 50.7 print. New orders are almost unchanged while price pressures seem to be easing as the economy pushes to avoid a negative GDP print in Q3.

This week we will have BOE meeting. Markets are positioning themselves for a 25bp rate hike.

Important news for GBP:

Thursday:​

• BOE Interest Rate Decision​

AUD

Q2 inflation data came in at 0.8% q/q and 6% y/y vs 1% q/q and 6.2% y/y as expected and down from 1.4% q/q and 7% y/y in Q1. Inflation has come down and if we look at H1 of 2023 it has printed 2.6% annualised which is right within RBAs 2-3% target range. This report should lead to RBA not changing the cash rate next week. The report still holds some concerning data as it shows that services inflation is at 6.3% which is a 22-year high.

Pan Gongsheng has been appointed as the new Governor of PBOC. China’s Politburo has stated they will provide “counter-cyclical” measures in order to prop the economy.

This week we will have RBA meeting as well as official and Caixin PMI data from China. The economists are split almost 50/50 whether there will be a 25bp rate hike. We are leaning more toward no change in rate hike.

Important news for AUD:

Monday:​

• Manufacturing PMI (China)​
• Non-Manufacturing PMI (China)​
• Composite PMI (China)​

Tuesday:​

• RBA Interest Rate Decision​
• Caixin Manufacturing PMI (China)​

Thursday:​

• Caixin Services PMI (China)​
• Caixin Composite PMI (China)​

NZD

June trade balance saw surplus of just NZD9m, down from May figure as both exports and imports declined. Kiwi had an up and down week, as did the majority of currencies, enjoying risk on in the first half of the week and then plunging on the risk off mood post ECB.

This week we will have Q2 employment data.

Important news for NZD:

Wednesday:​

• Employment Change​
• Unemployment Rate​

CAD

Manufacturing sales in June fell 2.1% m/m after they rose 1.2% m/m in May with biggest declines seen in petroleum and coal products followed by chemical and food producing industries. May GDP data came in at 0.3% m/m as expected with preliminary June reading seen dropping 0.2% m/m.

This week we will have employment data.

Important news for CAD:

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

Preliminary July PMI numbers saw small declines across the board. Manufacturing dropped to 49.4 from 49.8 while services slipped to 53.9 from 54 which resulted in composite remaining unchanged from June at 52.1, The report shows weaker decline in output, new export orders as well as stronger decline for new orders in the manufacturing sector. Services sector saw weaker growth in all three of those categories. Stronger inflation is seen in both input and output prices while future output showed weaker positive outlook which is concerning sign going further into Q3 and H2 of 2023. Government spokesperson stated that they expect CPI to come down and print 1.5% in Fiscal Year of 2024. As a reminder, Fiscal Year in Japan starts in April. So the government sees inflation as transitory and expects it to come down below 2% target in about a year from now.

During the week speculations appeared that BOJ will tweak its Yield Curve Control (YCC) and that gave a huge boost to the JPY. Finally, after the meeting was concluded, it was announced that there will be no changes to the monetary policy or YCC, however BOJ will keep offering fixed-rate operations for 10y JGBs at yield of 1%. The vote on YCC was not unanimous, it was an 8-1. 10y This caused JGBs to trade at highest levels since 2014. Markets whipsawed on these comments with USDJPY going up and down 300 pips in a short time span. This is a tweak to YCC but not exactly as markets hoped for and they are still trying to grasp the meaning of the move.

Tokyo CPI data showed continued decline in ex fresh food category in July as it came in at 3% y/y vs 3.2% y/y in June. On the other hand, headline and the so-called “core core” measure which excludes food and energy reaccelerated to 3.2% y/y and 4% y/y from 3.1% y/y and 3.8% y/y the previous month. This is the highest reading for “core core” since April of 1982. BOJ quarterly report showed that risks for inflation are skewed to the upside for fiscal years of 2023 and 2024. There was an upward revision to core core inflation for 2023. It is now seen at 3.2% vs 2.5% in April.

CHF

SNB total sight deposits for the week ending July 21 came in at CHF489.3bn vs CHF494.7bn the previous week. It is a continuation of a trend down as SNB sells EUR and USD in order to strengthen Swissy and fight off inflation.

This week we will have inflation data.

Important news for CHF:

Thursday:​

• CPI​

 

[katetrades]

Forex Major Currencies Outlook (Aug 7 – Aug 11)

After two action packed weeks we will take a breather in the coming week with the US inflation data taking centre stage followed by inflation from China and preliminary Q2 GDP from the UK.

USD

ISM manufacturing PMI for July printed 46.4 vs 46.8 as expected, but still up from 46 in June. New orders and production showed improvements but are still deep in the contraction territory. Prices paid turned higher, but it rose less than expected. Employment index was most concerning as it showed a huge drop further into contraction, much larger than expected. It printed 44.4 vs 48 as expected and down from 48.1 in June.

Fitch downgraded US government to AA+ from AAA which is the first time they downgraded in almost 30 years. USD weakened on the news but it has recovered its strength in the next few hours. Oil inventories saw a biggest drawdown in the 40 year history of the series. EIA reported that inventories fell 17409k barrels while a drop of 1367k was expected.

ISM Services PMI for July came in at 52.7 vs 53 as expected and down from 53.9 in June. The report shows small declines in new orders and new export orders, but they are still in very healthy territory with latter printing over 60. There was a big jump in backlog of orders, indicating unfinished orders and big drop in inventories. Worrying signs are appearing in the employment index which fell and barely managed to stay in expansion with 50.7 while there was a small increase in prices paid index.

Headline number NFP for the month of July printed 187k vs 200k as expected. June reading was revised down to 185k from 209k as previously reported. The unemployment rate slid to 3.5% with participation rate staying the same at 62.6%. Wages rose 0.4% m/m and 4.4% y/y, unchanged from previous month but higher than expected at 0.3% m/m and 4.2% y/y respectively. Underemployment rate fell to 6.7% from 6.9%. Although headline number missed expectations and there was a downward revision to June, exactly what Fed wants to see, other details of this report indicate still strong labour market, particularly stronger than expected wage growth.

The yield on a 10y Treasury started the week and year at around 3.95%, rose to 4.2% and finished the week at around the 4.05% level. The yield on 2y Treasury reached the high of around 4.93%. Spread between 2y and 10y Treasuries started the week at -91bp then tightened to -70bp due to bear steepening of the curve. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 17% while probability of no change is at around 83%.

This week we will have inflation data. Headline reading is expected to drop below 3% while core reading is expected to tick down to 4.6%.

Important news for USD:

Thursday:​

• CPI​

EUR

Preliminary June inflation data saw headline continue its downward trajectory as it printed 5.3% y/y as expected vs 5.5% y/y in May. Goods inflation is continuing to trend down, while services inflation is trending up. Core is proving to be much more stubborn as it printed 5.5% y/y, same as previous month while a slip to 5.4% y/y was expected. Headline data suggests that ECB can relax a bit and pause in September while core screams stickiness, dropping just slightly from the high of 5.7% in March. Looking solely at the core ECB should deliver another rate hike in September.

Preliminary Q2 GDP came in at 0.3% q/q vs 0.2% q/q as expected and helped Eurozone escape technical recession after GDPs of Q1 and Q4 came in negative. Irish GDP gave the boost to the overall reading while italian GDP came in negative 0.3% q/q vs 0% q/q as expected indicating that parts of the Eurozone are going though a ton of struggle. French and Spanish GDP readings were encouraging. Overall, this reading does not suggest that ECB will pause in September.

GBP

BOE has decided to raise interest rate by 25bp as majority of markets expected and thus bring bank rate to 5.25%. The voting was split 6-3 with Dhingra voting for no change. MPC members Haskel and Mann voted for a 50bp rate hike! Inflation is still too high and is seen falling toward 5% by the end of the year. Energy will be the main cause of bringing inflation down, followed by food and core goods while services is expected to stay close to current high levels. CPI inflation is seen returning to 2% by Q2 of 2025. Current monetary policy is seen as being restrictive. This is the first time since the start of tightening cycle that BOE described monetary policy as restrictive. BOE stands ready to tighten further if necessary and they conclude the statement with “The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.” They continue to be data dependent and statement has some clearly hawkish tones as more rate hikes are possible. Markets are pricing in two more rate hikes before the year ends. BOE Governor Bailey stated “I don’t think it is time to declare it’s all over,” indicating their readiness to tighten further and deliver on market expectations. Major banks are slashing their forecast for peak rates to 5.50% from 6%, not believing that BOE can deliver more than one rate hike.

This week we will have preliminary Q2 GDP reading.

Important news for GBP:

Friday:​

• GDP​

AUD

RBA has decided to keep rates unchanged at 4.10%. This is the second consecutive meeting where there was no change in the cash rate. This decision was made so that further impact of previous rate hikes can be assessed better. Inflation is seen as declining, with goods inflation easing, but it is still deemed to be too high at 6%. Central forecast sees CPI at around 3.75% by the end of 2024 and then falling further into the targeted range of 2-3% by the end of 2025. Economy is growing below trend with weak household consumption growth. Central forecast for GDP is around 1.75% for 2024 and little above 2% for 2025. Labour market remains very tight, although it has eased a bit. The unemployment rate is seen gradually rising to 4.5% by the late 2024. “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow.” The bank continues to be data dependent and some further tightening will also depend on “the evolving assessment of risks.” As long as RBA stays on the sidelines AUD will suffer. Potential stimulus from China could prop AUD up.

RBA released Statement on Monetary Policy (SoMP) on Friday in which it stated that the board has considered a rate hike in August, but instead decided that there was a stronger case to keep them unchanged. They acknowledged that policy has been significantly tightened but that the full effects of monetary tightening have not been fully felt yet. They have cut GDP and CPI projections slightly from the previous SoMP as they now see GDP at 0.9% by the end of 2023, 1.6% by the end of 2024 and 2.3% by the end of 2025. CPI is seen at 4.1% by the end of 2023, 3.3% by the end of 2024 and 2.8% (within 2-3% target) by the end of 2025.

Official PMI data for the month of June showed manufacturing improve to 49.3 from 49 in May while expectations were for it to decline to 48.9. Non-Manufacturing has declined to 51.5 from 53 the previous month, which was bigger decline than expected, and brought composite with it to 51.1, down from 52.5 in May. Since China is seen as world’s factory the jump in manufacturing was celebrated in the markets with AUD getting a push up. Caixin manufacturing PMI slipped back into contraction with 49.2 reading after spending previous two months above the 50 level. Expectations were for it to decline modestly to 50.3. The report shows a big drop in new export orders as international demand falters. Combine that with declines in supply and deterioration of jobs market and with June reading barely holding above 50, below 50 reading was inevitable. Caixin services came in at 54.1 vs 52.5 and up from 53.9 the previous month. Composite was dragged down to 51.9 due to weak manufacturing but it still shows that economy comprised of small and medium-sized companies is in expansion.

This week we will have trade balance and inflation data from China.

Important news for AUD:

Tuesday:​

• Trade Balance (China)​

Wednesday:​

• CPI (China)​

NZD

Business confidence in July improved to -13.1 from -18 in June. Both cost and wages expectations went up while pricing intentions and inflation expectations declined. The biggest improvement was seen in residential construction which showed highest jump since February of 2022. Employment report for the Q2 saw employment change rise by 1% q/q, doubling the expectations of a 0.5% q/q increase and coming higher from 0.8% q/q in the previous quarter. The unemployment rate has gone up to 3.6% but it was due to large jump in participation rate 72.4% (from 72% in Q1). Labor Cost Index has declined to 4.3% y/y from 4.5% y/y in the previous quarter. Labor market seems to be getting even tighter with great number of jobs added and participation rate jumping. On the other hand, loosening of wage price pressures may give some comfort to RBNZ in their fight against inflation.

CAD

July employment report missed expectation and showed 6.4k job losses. Projection was for a 21.1k increase. The unemployment rate ticked higher to 5.5% which is the third consecutive month of increases in the unemployment rate. Participation rate ticked down to 65.6% from 65.7% in June. One positive is that economy added 1.7k full-time jobs while part-time jobs declined by 8.1k. Wage increases jumped to 5% y/y from 4.2% y/y the previous month. BOC will be happy that its tightening is having effects as seen by employment change and the unemployment rate, however surge in wages will cause them to reevaluate their stance.

JPY

Retail sales in June declined 0.4% m/m but rose 5.9% y/y vs 5.8% y/y in May. Sales in the automotive sector led the way with biggest gains followed by pharmaceuticals & cosmetics and food & beverages. Preliminary industrial production for June showed 2% m/m increase due to positive contributions from motor vehicles and electronic parts and devices.

The yield on 10y JGB traded above 0.60% for the first time since 2014 and then BOJ announced unscheduled bond-buying program of JPY300bn in the 5-10y JGBs. This injection led to broad JPY weakness. BOJ Deputy Governor stated that BOJ needs to continue with easy policy. He added that they their move on making YCC flexible is not a step toward exit from the ultra loose policy. Additionally, he clarified that they may step in and buy more JGBs before the yield on 10y reaches 1%. It will all depend on the speed of the move, according to him, meaning that there is a heightened uncertainty about BOJ intervention through bond market. On Wednesday 10y JGB reached a new high in yields since 2014 of almost 0.65%.

CHF

SNB total sight deposits for the week ending July 28 came in at CHF490.1bn vs CHF489.3bn the previous week. July CPI report saw further declines as both headline and core numbers slipped lower to 1.6% y/y and 1.7% y/y respectively. Inflation coming down is a very welcoming sign for the SNB that may lean towards pausing in September.​

 

[katetrades]

Forex Major Currencies Outlook (Aug 14 – Aug 18)

RBNZ meeting, inflation data from the UK and Canada, consumption data from the US and China as well as employment data from Australia will be the highlights of the week ahead of us.

USD

Fed Governor Michelle Bowman spoke over the weekend and came out with some hawkish remarks. She clearly stated that additional rate hikes will be needed and acknowledged that although inflation coming down is a positive input, inflation still remains too high. Bowman is a permanent Fed voting member and is considered to be neutral so some extra weight should be attributed to her statements. President of the New York Fed, also a permanent voter, stated in an interview with New York Times that he cannot rule out possibility of a rate cut in 2024. Markets are pricing five rate cuts in 2024. Williams reiterated Fed’s data dependence. He added some hawkish comments as well as he stated that rates will have “to be kept restrictive for some time” and added that he is open to future rate hikes. Philadelphia Fed president stated that if there are no new alarming data by September meeting he can see Fed pausing and hold rates steady at that level.

CPI July number came in at 3.2% y/y vs 3.3% y/y as expected and markets rallied on a smaller than expected increase in inflation (it was 3% y/y in June). This is is the first increase in headline number since June of 2022. Core CPI ticked down to 4.7% y/y from 4.8% y/y in June. Both headline and core rose 0.2% m/m as expected and as previous month. Energy component of inflation fell -12.5% y/y, a smaller than -16.7% y/y drop the previous month. Used car prices dropped 1.3% m/m. Shelter was the biggest contributor to the number as it accounted fore more than 90% of the total reading and increased 0.5% m/m and 7.7% y/y. After the details of the report were out and after San Francisco Fed President Daly reiterated Fed’s commitment to keep tight monetary policy conditions dollar regained its strength.

The yield on a 10y Treasury started the week and year at around 4.04%, fell to to 3.98% post inflation report and finished the week at around the 4.14% level post PPI report. The yield on 2y Treasury reached the high of around 4.9%. Spread between 2y and 10y Treasuries started the week at -73bp then widened to -80bp post CPI only to come back down and finish the week at around -72bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 10% while probability of no change is at around 90%.

This week we will get consumption data and July FOMC minutes.

Important news for USD:

Tuesday:​

• Retail Sales

Wednesday:​

• FOMC Minutes​

EUR

German final inflation reading for July was unchanged at 0.3% m/m and 6.2% y/y. Yearly figure has declined from 6.4% y/y in June. France reading was also unchanged at 4.3% y/y, down from 4.5% y/y in June. Italy printed a decline in inflation to 5.9% y/y from 6.4% y/y the previous month. Spain saw an increase in inflation to 2.3% y/y from 1.9% y/y in June. We will get final Eurozone reading next week. The picture is still not clear for the September ECB meeting, but August inflation readings will give us more clarity.

GBP

Preliminary Q2 GDP reading surprised to the upside as it printed an increase of 0.2% q/q while it was expected to come out flat. It was helped by a strong June reading which printed an increase of 0.5% m/m vs 0.2% m/m as expected. Production led the way for quarterly reading with 0.7% increase, with manufacturing surging 1.6%, followed by construction at 0.3% and services at 0.1%. Household consumption rebounded strongly from Q1, where it was flat, and rose 0.7% while business investment rose 3.4%. There was a big surge in government spending of 3.1%. Net exports were a drag on the GDP.

This week we will have employment and inflation data.

Important news for GBP:

Tuesday:​

• Claimant Count Change​
• Unemployment Rate​

Wednesday:​

• CPI​

AUD

July trade balance from China saw another jump in trade surplus as it printed $80.6bn, up from $70.62bn the previous month. However, as we dig deeper into the details we see that there is no reason for cheering the report. Exports have increased their declines and they fell 14.5% y/y while imports almost doubled their declines from June and fell 12.4% y/y. Weak international demand is responsible for decline in exports, but now that domestic demand is declining at a rapid pace imports are dwindling. Inflation data showed China experiencing deflation for the first time since February of 2021. CPI for July printed -0.3% y/y. PPI has experienced a small rebound by coming at -4.4% y/y vs -5.4% y/y in June, but it is still deep in deflation.

This week we will get employment data from Australia as well as production and consumption data from China.

Important news for AUD:

Tuesday:​

• Industrial Production (China)​
• Retail Sales (China)​

Thursday:​

• Employment Change​
• Unemployment Rate​

NZD

Electronic retail card sales, comprising about 70% of total retail sales, were flat in July. Inflation expectations were adjusted. Looking 1 year ahead inflation expectation was lowered to 4.17% from 4.28% the previous quarter while 2 year ahead inflation expectation was raised to 2.83% from 2.79% the previous quarter.

This week we will have RBNZ meeting where no change to monetary policy is expected.

Important news for NZD:

Wednesday:​

• RBNZ Interest Rate Decision​

CAD

Building permits in June rose 6.1% m/m. It printed a great jump of 12.6% m/m in May. Trade balance for the month of June fell deeper in deficit as exports fell more than imports. Although oil ripped throughout the week CAD has not benefited from it as it was dragged down by the strong risk off sentiment in the market.

This week we will have inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

Labor cash data for the month of June saw increase of 2.3% y/y vs 2.9% y/y in May. Household spending saw surprising increase of 0.9% m/m in the month of June but yearly figure continued to deteriorate and fell to -4.2% y/y. The yield on a 10y JGB fluctuated between 0.57% and 0.64% this week and BOJ did not intervene in the markets.

This week we will have preliminary Q2 GDP data.

Important news for JPY:

Tuesday:​

• GDP​

CHF

SNB total sight deposits for the week ending August 4 came in at CHF492.9bn vs CHF490.1bn the previous week. Deposits have been hovering around 490bn for the previous six weeks. This could be the sign of bottoming and no more Swissy buying from SNB. Seasonally adjusted unemployment rate for July ticked up to 2.1% but is still at exceptionally low levels, lower than pre-pandemic.​

 

[katetrades]

Forex Major Currencies Outlook (Aug 21 – Aug 25)

Jackson Hole Symposium, preliminary PMI data from the Eurozone and the UK as well as potential for more rate cuts from China will highlight the week ahead of us.

USD

July retail sales report showed that US consumer is not backing down. Headline number came in at 0.7% m/m vs 0.4% m/m as expected. Control group, which excludes volatile components and is used for GDP calculation, rose 1% m/m vs 0.5% m/m as expected. Ex autos category also rose 1% m/m vs 0.4% m/m as expected as car sales were down. One thing that surely impacted the reading was Amazon’s Prime Day as sales at nonstore retailers rose 1.9% m/m. Sales were down at furniture stores and for electronics and appliances.

FOMC minutes were more hawkish as they showed that “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". Some participants do not see recession in 2023 and now see "real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level". September looks to be a pause while Fed remains in data dependent mode but probability of a November or December hike is increasing.

The yield on a 10y Treasury started the week and year at around 4.14%, rose to 4.33% and finished the week at around the 4.22%. The yield on 2y Treasury reached the high of above 5%. Spread between 2y and 10y Treasuries started the week at -73bp then widened to -75bp only to come back down and finish the week at around -68bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 14% while probability of no change is at around 86%.

This week we will have Jackson Hole Symposium with Powell set to speak on Friday.

Important news for USD:

Thursday – Saturday:​

• Jackson Hole Symposium​

EUR

Second estimate of Q2 GDP was unchanged from preliminary reading at 0.3% q/q and 0.6% y/y. Industrial production for June came in at 0.5% m/m, up from being flat in May and thus finished the second quarter on a strong note and could give some boost to start of Q3. Final inflation print for the month of July was unchanged with headline at 5.3% y/y and core at 5.5% y/y. Core inflation peaked at 5.7% y/y in March and has not made any significant progress to the downside since then. ECB remains data dependent and this reading does not provide much information about their September move.

This week we will have preliminary PMI data for the month of August.

Important news for EUR:

Tuesday:​

• S&P Global Manufacturing PMI (Eurozone, Germany, France)​
• S&P Global Services PMI (Eurozone, Germany, France)​
• S&P Global Composite PMI (Eurozone, Germany, France)​

GBP

The employment report was a a very mixed one. On the one hand, BOE got what it was looking for, the ILO unemployment rate for June rose to 4.2% from 4 in May and employment change saw a drop of 66k jobs. On the other hand, wages have continued their march up. Average weekly earnings for June came in at 8.2% 3m/y vs 7.3% 3m/y while May’s reading was revised up to 7.2% 3m/y. Average weekly earnings ex bonus rose 7.8% 3m/y vs 7.4% 3m/y as expected and up from upwardly revised May reading of 7.5% 3m/y. BOE has emphasized importance of wage data and this report may nudge markets towards pricing a higher terminal rate.

Headline inflation number in July fell to 6.8% y/y as expected, down from 7.9% y/y in June on the back of declines of almost 20% in household electricity bills. Food prices have also declined, but they still show double digit inflation (14.9% vs 17.4% in June). The biggest contributor were hotels and airfares. Core inflation ticked up to 6.9% y/y from 6.8% y/y the previous month as services inflation rose to 7.4% y/y from 7.2% y/y in June. Peak core reading was 7.1% y/y in May and July reading is moving towards it instead of away from it. Markets are fully pricing in a 25bp rate hike in September and are moving closer to pricing 6% terminal rate.

This week we will have preliminary PMI data for the month of August.

Important news for GBP:

Tuesday:​

• S&P Global Manufacturing PMI​
• S&P Global Services PMI​
• S&P Global Composite PMI​

AUD

July employment report was abysmal. The employment change showed a loss of 14.6k jobs vs 15k jobs added as expected. The unemployment rate rose to 3.7% from 3.5% in June while participation rate ticked down to 66.7%. Adding to the disappointment, all of the jobs lost were full-time jobs (-24.2k) while part-time jobs added 9.6k. This is a single report but it indicates that RBA has managed to loosen up previously tight labor market. Wages data for Q2 grew slower than expected and printed 0.8% q/q and 3.6% y/y vs 1% q/q and 3.7% y/y as expected. Subdued wage growth and weak employment data will lower fears around wage-price spiral in the economy and will keep RBA in the pause mode for September.

July industrial production came in at 3.7% y/y vs 4.5% y/y as expected and down from 4.4% y/y in June. Retail sales, also missed expectations by coming in at 2.5% y/y vs 4.8% y/y as expected and down from 3.1% y/y the previous month. In a response to weak data and in a surprising move PBOC has cut 1-year MLF rate to 2.5% from 2.65%. MLF is used as a benchmark rate for commercial banks in China to borrow funds from PBOC on a 6-month to 1-year horizon. PBOC has also lowered a 7-day reverse repo rate to 1.8% from 1.9% previously. Further cuts were made to overnight, 7-day and 1-month SLF rates which were all cut by 10bps to 2.65%, 2.8% and 3.15% respectively. All of the moves are aimed at increasing liquidity and thus providing stimulus to the economy. Some major banks are slashing GDP forecasts for 2023 to 4.5%. Next week we will have LPR setting from PBOC and talks about 15bp rate cuts are growing louder.

NZD

RBNZ has decided to leave the Official Cash Rate (OCR) unchanged at 5.50% as was widely expected. New projections see OCR higher than previously and shown that rate in December of 2023 is seen at 5.54% vs 5.5% as seen in May and in December of 2024 will be at 5.50%. Headline inflation and inflation expectations have declined from their peaks but they are still too high. The statement shows that “In the near term, there is a risk that activity and inflation measures do not slow as much as expected.” Additionally, Committee is confident that keeping rates at restrictive levels will bring inflation down to the targeted range of 1-3%. Governor Orr stated that they are happy where rates are and that economy is still on the path of soft landing. He added that there are too many uncertainties to provide forward guidance and that projected cash rate will not deviate far from 5.5% in the next 2 years. GDT auction saw prices falling 7.4%, a disastrous reading for New Zealand’s term of trade.

This week we will have Q2 consumption data.

Important news for NZD:

Tuesday:​

• Retail Sales​

CAD

CPI report for the month of July surprised the markets and showed that inflation reaccalerated faster than expected. Headline number came in at 3.3% y/y vs 3% y/y as expected and up from 2.8% y/y in June. Core measures have all continued to decline with median printing 3.7% y/y, trim 3.6% y/y and common 4.8% y/y. Digging into the details of report we can see that increase in inflation owes to base effects in gasoline prices which fell 12.9% y/y vs a drop of 21.6% y/y the previous month. Additional factor that added to rise in prices were mortgage costs. Index for mortgage costs rose 2.4% in July. Due to the weakness in recent incoming data BOC was seen as pausing, but after today’s report markets will increase their pricing of another hike which should give CAD a short-term boost. We also need to be mindful that core measures continued to decline which is in line with what BOC is hoping for.

JPY

Q2 GDP data showed stunning rebound in the economy as it grew by 1.5% q/q vs 0.8% q/q as expected. Annualized growth was at 6% vs 3.1% as expected and 3.7% in the previous quarter. Digging into the details we see that private consumption fell 0.5% after it has risen steadily for the past quarters. Business spending was flat while government spending rose 0.1%. The biggest contribution came in from net trade, with exports growing the most in two years (3.2%) while imports fell for the third consecutive quarter (-4.3%). Weak JPY was very supportive of growing exports.

Headline inflation in July for the whole country stayed unchanged at 3.3% y/y with ex fresh food component dropping to 3.1% y/y from 3.3% y/y in June while “core-core” ex fresh food, energy inflation ticked up to 4.3% y/y from 4.2% y/y the previous month. BOJ remains adamant that inflation will start coming down from September/October and that there is no need for changes in their monetary policy. JGB had a disastrous 2y auction where the tail was highest since 1997. Rising yields on JGBs will have impact on rising yields around the world. Yield on 10y JGB 0.66 and there was no intervention by the BOJ.

CHF

SNB total sight deposits for the week ending August 11 came in at CHF484.8bn vs CHF492.9bn the previous week. Sight deposits are continuing their decline as SNB sells EUR and USD in order to prop Swissy strength and subdue inflation pressures.​