BoJ to persist with monetary easing amid inflation uncertainty, says Ueda

    BoJ is committed to maintaining its monetary easing policy as it seeks to sustainably achieve its 2% inflation target, stated BOJ Governor Kazuo Ueda in a parliamentary address.

    He acknowledged, “There’s still some distance to sustainably and stably achieve our 2% inflation target. As such, we will patiently maintain our monetary easing policy.”

    Ueda explained that the central bank’s strategy is to initiate a positive cycle in which inflation-adjusted wages will start to rise.

    However, he also indicated that BOJ anticipates core consumer inflation to dip below 2% target in the latter half of the fiscal year. Despite this projection, Ueda expressed that there remains a substantial degree of uncertainty surrounding the inflation outlook.

    One key factor he highlighted is corporate price-setting behaviour, which he stated was “somewhat overshooting expectations.”

    BoC’s Beaudry: Data since April tipped the balance for rate hike

      Paul Beaudry, Deputy Governor of BoC, has shed more light on the unexpected 25bps rate hike that took place this week. In a speech, he explained that the evidence gathered from a multitude of economic indicators had “tipped the balance” in favor of this decision. The persistent excess demand in Canadian economy, he observed, posed an increased risk of a stall in the decline of inflation, necessitating the rate hike.

      Unanticipated robust economic growth was also a key factor that prompted the monetary tightening. “Economic growth rebounded in the first quarter of 2023 to 3.1%,” Beaudry said, “Consumption growth, in particular, was very strong at 5.8%, with household spending on both goods and services sharply higher. This surprised us.”

      He then turned his attention to inflation, discussing April’s unexpected increase to 4.4%, up from 4.3% in March. “While that might not seem like much,” Beaudry continued, “it was in the opposite direction of what we expected, and the details behind the headline number were concerning.” The sticking points were that three-month measures of core inflation remain high and appear to “have lost their downward momentum”, and that goods inflation surprisingly accelerated in April, reversing months of deceleration.

      Beaudry stated, “when we looked at the recent dynamics in core inflation combined with ongoing excess demand, we agreed the likelihood that total inflation could get stuck well above the 2% target had increased. Based on this accumulated evidence, we decided to raise the policy rate to slow demand and restore price stability.”

      The Deputy Governor promised more insight into these matters in the BoC’s July forecast, indicating that the central bank remains vigilant and will adjust its policies as the economic climate necessitates.

      Full speech of BoC Beaudry here.

      Gold recovering after poor US job data, but bounded in range

        Gold recovered notably in early US session, following the selloff in Dollar on much worse than expected US jobless claims data.

        But after all, Gold is just seen as extending the consolidation pattern from 1931.84 short term bottom. That is, another fall remains in favor. Break of 1931.84 support will firstly confirm resumption of whole fall from 2062.95. Secondly, that should also have medium term channel support firmly taken out. In this case, Gold should target 38.2% retracement of 1614.60 to 2062.95 at 1891.68.

        However, break of 1985.08 resistance will argue that the channel support is defended, and maintains medium term bullishness. Stronger rise should then be seen to retest 2062.95, even further to 2074.48 high.

        SNB Jordan: It’s really important to bring inflation down to price stability level

          Swiss National Bank Chairman Thomas Jordan said today “It’s really important to bring Swiss inflation to a level of price stability.”

          He added that inflation is more persistent that the bank thought, adding that there are signs of second and third round effects.

          Jordan also emphasized that it would not be a good idea to wait for inflation to rise and then have to raise interest rates.

          “When inflation remains under 2% for a long time, we don’t have a problem,” Jordan noted.

          US initial jobless claims rose to 261k, highest since Oct 2021

            US initial jobless claims rose 28k to 261k in the week ending June 3, well above expectation of 235k. That’s also the highest level since October 30, 2021, when it was 264k. Four-week moving average of initial claims rose 7.5k to 237k.

            Continuing claims dropped -37k to 1757k in the week ending May 27. Four-week moving average of continuing claims dropped -12.5k to 1785k.

            Full US jobless claims release here.

            USD/CAD and EUR/CAD eyeing important cluster support levels

              Canadian Dollar is currently the second best performer of the week after yesterday’s surprised 25bps rate hike by BoC to 4.75%. Most economists see the move after a 2-meeting pause as a “restart” of the tightening cycle rather than a “one-off”. Another rate hike is now generally expected in July to bring interest rate to 5.00% level.

              The biggest question is whether 5.00% is “sufficiently restrictive” enough to bring supply and demand back into balance and return inflation to 2% target. It’s a big unknown for the markets as well as BoC.

              Technically, while Canadian Dollar is strong this week, tough resistance levels lie just ahead. The key level is 1.3224 cluster support, with 38.2% retracement of 1.2005 to 1.3976 at 1.3233. Price actions from 1.3976 could still be considered a sideway corrective pattern as long as 1.3224/33 holds. That is, larger up trend would remain intact.

              However, firm break of 1.3299 support would risk downside acceleration to push USD/CAD through 1.3224/33 decisively. 100% projection of 1.3860 to 1.3299 from 1.3653 at 1.3092 would be the immediate target, with risk of even deeper decline in the medium term.

              As for EUR/CAD, it’s now quickly approaching the key zone of 1.4236 cluster support (38.2% retracement of 1.2867 to 1.5111 at 1.4254). There is still prospect of a bounce from the zone. Break of 1.4510 minor resistance will suggest that the corrective fall from 1.5111 has completed and bring stronger rebound back to 55 D EMA (now at 1.4601) and above.

              However, sustained decisive break of 1.236 could trigger further downside acceleration to 61.8% retracement at 1.3724, even just as a deep corrective move.

              Top mover AUD/NZD on track to 1.1085, what next?

                AUD/NZD is currently the biggest mover for the week, trading up around 1%. Near term rally from 1.0556 accelerated further after surprised RBA rate hike earlier in the week. At the same time, market participants are also factoring in the possibility of further rate hikes from RBA.

                In a recent Reuters poll, a snapshot of economists’ expectations reveals a divide: 16 out of 26 expect RBA to hit the pause button in August, while 10 predict another 25bps hike. Looking beyond, a majority (20 out of 26) anticipate another 25bps increase by the end of September.

                There’s a consensus among the major local banks – ANZ, CBA, and NAB – that a pause in July is likely, while Westpac is bracing for another 25bps bump. All four banks foresee a terminal rate of 4.35% by the close of September. However, given the uncertainty that even RBA is grappling with regarding the road ahead, these forecasts are subject to revision ahead of each upcoming meeting.

                Contrarily, the question of whether RBNZ rate has already peaked at the current 5.50% is under debate. Views are split on the prospect of a further 25bps hike in August.

                Technically, this week’s rally should confirm that AUD/NZD’s correction from 1.1085 has completed with three waves down to 1.0556. Near term outlook will stay bullish as long as 1.0881 support holds. Next target is 1.1086 resistance. Firm break there will resume whole rise from 1.0469 (2022 low) to 100% projection of 1.0469 to 1.1085 from 1.0556 at 1.1172.

                The second half of the year will likely be marked by whether AUD/NZD can hurdle this key 1.1172 projection level. Rejection at this level could frame the rise from 1.0469 as merely a corrective move, and potentially set the stage for a later resumption of overall decline from 2022 high of 1.1489 at a later stage However, a decisive break above 1.1172 could catalyze a more substantial upside move, potentially retesting 1.1489 high.

                The outcome will largely hinge on the future steps of RBA and RBNZ post their next move.

                BoC hikes 25bps, inflation concerns increased

                  BoC surprises the markets by raising the overnight rate by 25bps to 4.75% today. Correspondingly, the Bank Rate now sits at 5.00%, and deposit rate at 4.75%.

                  In the accompany statement, BoC noted that the “accumulation of evidence” reflected that monetary policy was “not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target”.

                  The Governing Council will “continue to assess the dynamics of core inflation and the outlook for CPI inflation”, in particular the “evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour”.

                  The central bank also noted that the economy was “stronger than expected” in Q1, and ” excess demand in the economy looks to be more persistent than anticipated.”

                  Good price inflation “increased” while services price inflation “remained elevated”. It continues to expect CPI inflation to east to around 3% in the summer.

                  However, “with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”

                  Full BoC statement here.

                  OECD upgrades global growth outlook, advocates for restrictive monetary policies

                    In the latest Economic Outlook, OECD has slightly upgraded global growth forecasts, and stressed the need for central banks to maintain restrictive monetary policies to curtail inflation.

                    OECD now projects global economic expansion at 2.7%, a slight upgrade from its previous forecast of 2.6% in March. The US and China, the world’s two largest economies, saw their growth forecasts for 2023 nudged upwards by 0.1%, to 1.6% and 5.4% respectively.

                    In Eurozone, growth forecast was modestly bumped up by 0.1 points to 0.9%. However, Germany, the zone’s largest economy, saw a significant downgrade with zero growth now expected. UK, on the other hand, received a boost with OECD predicting 0.3% growth rather than an economic contraction. Japan’s GDP growth forecast was slightly revised down to 1.3%.

                    Despite the optimistic revisions, OECD chief economist Clare Lombardelli underscored the challenges ahead in a commentary accompanying the report.

                    “The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” Lombardelli stated. She added, “The recovery will be weak by past standards.”

                    Highlighting the ongoing inflationary pressures globally, Lombardelli advocated for a continued restrictive monetary stance from central banks. “Central banks need to maintain restrictive monetary policies until there are clear signs that underlying inflationary pressures are abating,” she urged.

                    Full OECD economic outlook here.

                    ECB Knot: Financial markets extraordinarily optimistic on inflation

                      Speaking at a Dutch parliamentary hearing, ECB Governing Council member and Dutch central bank head Klaas Knot highlighted the optimistic stance of financial markets about inflation, and warned about the potential pitfalls.

                      “Financial markets are extraordinarily optimistic and are expecting inflation to drop as fast as it rose. For next year even rate decreases are already priced in,” Knot observed.

                      However, the Dutch central bank chief noted that this rosy outlook might invite unforeseen challenges, especially if the path to inflation stabilization necessitates a longer than anticipated period of monetary tightening. This could potentially reignite tension within the financial markets.

                      “Exactly in such a situation, a longer than expected period of monetary tightening to keep inflation in check will increase the risk of renewed stress on financial markets,” he cautioned.

                      ECB Schnabel: Peak in underlying inflation insufficient to declare victory

                        In an interview by De Tijd, ECB Executive Board member Isabel Schnabel noted that “given the high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much.”

                        She emphasized “once inflation has become entrenched in the economy, it becomes much more costly to fight it,” adding that “We have more ground to cover. It will depend on the incoming data by how much more rates will have to increase.”

                        On the topic of market expectations of two more additional 25bps hikes, Schnabel remained data-driven. She responded, “That will depend on the incoming data. Let me be very clear: A peak in underlying inflation would not be sufficient to declare victory: we need to see convincing evidence that inflation returns to our 2% target in a sustained and timely manner. We are not at that point yet.”

                        Regarding monetary policy transmission precess, Schnabel explained, “A rise in the policy rate first has an impact on financing conditions, then on the real economy, and ultimately on wages and prices.” She revealed that ECB’s staff analysis suggests the effects of tighter monetary policy are currently in progress, with the impact on inflation expected to peak in 2024.

                        However, Schnabel cautioned that uncertainty persists around the strength and speed of this process, admitting, “it may take longer than was previously the case to see the impact of our policy.”

                        Full interview of ECB Schnabel here.

                        BoC in focus, a coin flip for hold or hike?

                          As BoC meets today, many observers anticipate the bank will maintain its pause, leaving interest rates untouched at 4.50%. However, recent economic developments have injected a dose of doubt into the mix. Market speculation reveals that there is approximately a 45% probability of a 25-basis point adjustment, making this rate decision look more like a coin toss.

                          The prevailing viewpoint among economists is that BoC might defer any rate changes until its July meeting. Two crucial reasons fortify this standpoint. First, the July assembly aligns with the release of a fresh batch of economic projections, offering BoC ground to justify any rate recalibrations. Second, the subsequent press conference would grant Governor Tiff Macklem the opportunity to explain their decision to a watchful audience.

                          However, if the central bank is indeed leaning towards a rate adjustment in July, then today’s announcement might carry a hint of hawkishness. If so, this shift could be a strategic move to prepare the markets for potential changes ahead, and give Canadian Dollar a lift.

                          Some previews on BoC:

                          CAD/JPY has been losing upside momentum as seen in 4H MACD, even though the rally from 94.04 extended. Such rise is seen as the second leg of the corrective pattern from 110.87. It’s now pressing an important fibonacci resistance of 61.8% retracement of 110.87 to 94.04 at 104.44.

                          Decisive break of 104.44, as prompted by hawkish BoC, could trigger upside re-acceleration to retest 110.87 high. But for now, firm break there is not expected yet.

                          On the other hand, break of 102.12 support will indicate rejection by 104.44. More importantly, the pattern from 110.87 might have then started the third leg. Sustained trading below 55 D EMA (now at 100.88) would bring deeper fall back towards 94.04.

                          China’s exported fell -7.5% yoy in May, trade surplus shrank to USD 65.8B

                            In May, China’s exports significantly contracted, defying expectations. The country’s exports shrunk by -7.5% yoy to USD 283.5B, which was far below expectation of -0.4% yoy contraction. This marks the second-lowest export value since May 2022, with the only lower figure being the seasonally affected USD 213.8B recorded in February. Imports also contracted by -4.5% yoy to USD 217.7B, outperforming the forecasted 8.0% yoy contraction.

                            However, the most striking observation comes in the form of China’s trade surplus. It fell sharply from USD 90.2B to USD 65.8B, defying the predicted figure of USD 94.2B. This represents the lowest level since the COVID-driven decline observed in April 2022.

                            Australia’s Q1 GDP grew only 0.2% qoq, domestic price growth decelerated

                              Australia’s GDP expanded by 0.2% qoq in Q1, missing expectations of 0.3% qoq growth. This marked the slowest rate of growth since the September 2021 quarter.

                              Head of National Accounts at the Australian Bureau of Statistics, Katherine Keenan, remarked on this development. “This is the sixth straight rise in quarterly GDP but the slowest growth since the COVID-19 Delta lockdowns in September quarter 2021,” she said.

                              The GDP implicit price deflator, a measure of price changes, climbed by 1.9% in the quarter and by 6.8% from March 2022. A significant contributor to this increase was rise in terms of trade by 2.8%, led by steeper decline in import prices (-4.0%) than export prices (-1.4%).

                              Fall in import prices, the largest since December 2010, was propelled by global drop in oil prices and appreciation of Australian dollar. Meanwhile, a decrease in export prices was led by rural and mining commodities.

                              Domestic price growth decelerated to 1.1% as goods inflation eased. This is a downturn from the 1.4% increase observed in the December 2022 quarter.

                              Full Australia GDP release here.

                              RBA Lowe: Some further tightening of monetary policy may be required

                                In a speech, RBA Governor Philip Lowe revealed further insight into the central bank’s decision-making process and concerns regarding inflation. Lowe underscored RBA’s decision to raise interest rates once more yesterday as an effort to confidently bring inflation back to target within a reasonable timeframe.

                                Governor Lowe said, “Yesterday’s decision to increase interest rates again was taken to provide greater confidence that inflation will return to target within a reasonable timeframe.”

                                He attributed this decision to a recent influx of data, suggesting “greater upside risks” to the Bank’s inflation outlook. Persistent inflation in services prices, both domestically and abroad, combined with recent data on inflation, wages, and housing prices outpacing forecasts, were contributing factors.

                                The Governor noted, “Given this shift in risks and the already fairly drawn-out return of inflation to target, the Board judged that a further increase in interest rates was warranted.”

                                However, he also highlighted various factors the Board will monitor closely in the coming months, including developments in the global economy, domestic household spending, the growth rate in unit labour costs, and inflation expectations.

                                While acknowledging that the RBA remains on a narrow path, Lowe pointed out “significant risks”, particularly the possibility that “inflation stays too high for too long”.

                                He concluded, “Some further tightening of monetary policy may be required, but that will depend upon how the economy and inflation evolve. The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.”

                                Full speech of RBA Lowe here.

                                World bank upgrades 2023 global growth forecast to 2.1%

                                  In the latest Global Economic Prospects, World Bank raised 2023 global growth forecast to 2.1%, from January’s projection of 1.7%. Nevertheless, growth forecast for 2024 was downgraded from 2.7% to 2.4%. Growth is expected to accelerate further to 3.0% in 2025.

                                  “Growth over the rest of 2023 is set to slow substantially as it is weighed down by the lagged and ongoing effects of monetary tightening, and more restrictive credit conditions,” the report said.

                                  “These factors are envisaged to continue to affect activity heading into next year, leaving global growth below previous projections.”

                                  Full Global Economic Prospects here.

                                  ECB Survey: Inflation expectations dropped significantly

                                    According to the latest Consumer Expectations Survey conducted by ECB in April, consumer inflation expectations have taken a significant downturn, reversing most of the gains made in the previous month.

                                    The survey revealed that mean inflation expectations for the coming 12 months dropped from 6.3% to 5.3%. Median inflation expectations for the same period also saw a decline, dropping from 5.0% to 4.1%. These results mark a decrease even below February readings, which were at 5.8% and 4.6% respectively.

                                    Looking further ahead, mean inflation expectations for three years in the future also slid down from 4.3% to 3.8%. Similarly, median expectations for this timeline dropped from 2.9% to 2.5%.

                                    However, consumer sentiment regarding economic growth over the next 12 months displayed less negativity. The mean expectations for economic growth in the next year edged up from -1.0% to -0.8%. Meanwhile, median growth expectations remained static at 0.0% for the next 12 months.

                                    Full ECB Consumer Expectations Survey here.

                                    Eurozone retail sales flat in April, EU up 0.1% mom

                                      Eurozone retail sales was unchanged for the month in April, below expectation of 0.2% mom. Volume of retail trade increased by 0.5% mom for non-food products, while it decreased by -0.5% mom for food, drinks and tobacco and by -2.3% mom for automotive fuels.

                                      EU retail sales rose 0.1% mom. Among Member States for which data are available, the highest monthly increases in the total retail trade volume were registered in the Croatia (+3.4%), Luxembourg (+3.3%) and Sweden (+3.1%). The largest decreases were observed in Slovakia (-5.8%), Romania (-3.7%) and Slovenia (-2.4%).

                                      Full Eurozone and EU retail sales release here.

                                      UK PMI construction rose to 51.6, mixed picture

                                        UK PMI Construction rose from 51.1 to 51.6 in May, above expectation of 50.9. S&P Global noted that total activity increased at the fastest pace for three months. Growth was driven by commercial and civil engineering activity. House building, however, fell at the steepest rate since May 2020.

                                        Tim Moore, Economics Director at S&P Global Market Intelligence, said: “May data highlighted a mixed picture across the UK construction sector as solid growth rates in commercial and civil engineering activity contrasted with a steeper downturn in house building….

                                        “Inflationary pressures meanwhile eased considerably May, with purchase prices increasing to the smallest extent since September 2020. Supply chain normalisation helped to moderate cost inflation, as signalled by the strongest improvement in delivery times for construction products and materials for almost 14 years.”

                                        Full UK PMI construction release here.

                                        AUD/NZD breaks structural resistance after RBA hike

                                          AUD/NZD surges after RBA’s surprised rate hike and breaks through 1.0928 structural resistance. The development should confirm that corrective fall from 1.1085 has completed with three waves down to 1.0556.

                                          Intraday bias is now on the upside as long as 1.0881 minor support holds. Sustained trading above 1.0928 could prompt upside acceleration 1.1085 resistance. Break there will resume whole rally from 1.0469 (2022 low) to 100% projection of 1.0469 to 1.1085 from 1.0556 at 1.1172.