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US Empire State business conditions index plunges, fueling recession fears

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    ActionForex.com
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    In a significant downturn, New York Fed Empire State Business Conditions Index plummeted to -31.8 in May, a drastic drop of -42.6 points from its April reading of 10.8. This disappointing figure significantly underperforms market expectations of -1.9, and any reading below zero signals deteriorating conditions.

    This precipitous drop comes just a month after the index defied expectations with a 35.4 point surge to 10.8 in April. The recent plunge not only eradicates last month’s gains but also heightens concerns about a potential recession.

    In parallel with the overall index, new orders sub-index fell a whopping -53.1 points to -28 in May, effectively erasing the sharp 46.7 point increase seen in April. Additionally, shipments index witnessed a substantial decline, falling -40.3 points to -16.4, negating the 37.3 point gain from the previous month.

    Interestingly, amid this overall downturn, the six-month expectations measure managed to tick up slightly, gaining 3.2 points to reach 9.8.

    Full New York Fed Empire State survey release here.

    Fed’s Bostic indicates bias towards further hikes, no cut until well into 2024

      By
      ActionForex.com
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      In an interview with CNBC, Atlanta Fed President Raphael Bostic emphasized the importance of combating inflation, which he deems as “job No. 1”. He expressed his readiness to bear the cost necessary to achieve the Fed’s target, underscoring the need for a more aggressive stance on rate hikes given the current economic scenario.

      Bostic stated, “What we’ve seen is that inflation has been persistently high, consumers have been really resilient in terms of their spending, and labor markets remain extremely tight. All of those suggests that there’s still going to be upward pressure on prices.” His comments highlight the ongoing pressures that may trigger further inflationary spikes.

      He showcased leaning towards a proactive approach in dealing with inflation, stating, “If there’s going to be a bias to action, for me it would be a bias to increase a little further as opposed to cut.”

      Bostic remained confident in Fed’s policy measures, asserting, “There’s still a lot of confidence that our policies are going to be able to get inflation back down to our 2% target.” He made clear Fed’s determination to ensure this target is met, even if it means holding off on rate cuts until well into 2024.

       

      EU Spring Forecast: Upgraded GDP growth and inflation

        By
        ActionForex.com
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        In its Spring 2023 Economic Forecast, European Commission presented a cautiously optimistic outlook for the Eurozone, with GDP growth projections revised upwards to 1.1% and 1.6% for 2023 and 2024 respectively. This positive adjustment, credited to a stronger-than-expected start to the year, exceeds winter forecasts of 0.9% in 2023 and 1.5% in 2024.

        However, the report did not shy away from the challenges posed by inflation. Persisting core price pressures have led the Commission to revise its inflation forecasts for Eurozone to 5.8% in 2023 and 2.8% in 2024, up from winter’s projected 5.6% and 2.5% respectively. On an annual basis, core inflation is set to average 6.1% in 2023 before falling to 3.2% in 2024, remaining above headline inflation in both forecast years.

        While the overall picture painted by the Commission is one of steady recovery, it also acknowledges increase in downside risks to economic outlook. The report warned that persistent core inflation could continue to squeeze household purchasing power and necessitate stronger response from monetary policy, leading to wider macro-financial implications.

        Potential threats also include renewed financial stress, which could trigger tightening of lending standards, and exacerbation of inflation by expansionary fiscal policies.

        The forecast also flagged the ongoing turmoil in the banking sector and broader geopolitical tensions as possible sources of further economic challenges. On the other hand, the Commission noted that more favorable developments in energy prices could lead to a faster decline in headline inflation, boosting domestic demand.

        Full EU Spring 2023 Economic Forecast here.

        Eurozone industrial production down -4.1% mom in Mar

          By
          ActionForex.com
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          Eurozone industrial production contracted -4.1% mom in March, much worse than expectation of -1.2% mom. Production of capital goods fell by -15.4% mom, intermediate goods by -1.8% mom, energy by -0.9% mom and non-durable consumer goods by -0.8% mom, while production of durable consumer goods rose by 2.8% mom.

          EU industrial production declined -3.6% mom. Among Member States for which data are available, the largest monthly decreases were registered in Ireland (-26.3%), Sweden (-3.9%) and Germany (-3.1%). The highest increases were observed in Finland (+3.0%), Slovenia (+2.3%), Czechia and Slovakia (both +1.7%).

          Full Eurozone industrial production release here.

          Japan cabinet office stresses importance of avoiding relapse into deflation

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            ActionForex.com
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            Japan cabinet office stresses importance of avoiding relapse into deflation Japan’s Cabinet Office emphasized, at a meeting of the government’s economic council, the need for stability and sustainability in these positive signs to ensure that Japan does not fall back into a deflationary spiral. They stated, “While there have been some positive signs in recent data, we must ensure they are stable and sustainable so that Japan won’t revert to deflation.”

            In a separate discussion involving academics and private-sector experts, some participants called for BoJ to end quantitative easing once inflation stabilizes around its 2% target. Meanwhile, some participants suggested BoJ should mull over altering its extraordinary stimulus measures if inflation and wages continue their upward trajectory.

            Prime Minister Fumio Kishida emphasized the need for a coordinated approach between the government and the BoJ amidst the growing uncertainty surrounding the economic outlook. He said, “We’re aiming to pull Japan out of deflation and achieve sustained, private demand-driven economic growth” by influencing public perceptions that growth and inflation will continue to rise.

            ECB de Guindos indicates final phase of monetary policy tightening

              By
              ActionForex.com
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              In an interview with Il Sole 24 Ore, ECB Vice President Luis de Guindos highlighted the central bank’s shift towards a more conventional monetary policy approach, stating, “We have now entered the home stretch of our monetary policy tightening path,” adding, “And that’s why we are returning to normality, to 25 basis-point steps.”

              He reiterated ECB’s position that future policy decisions will be determined on a meeting-by-meeting basis, reliant on incoming data. The decisions will hinge on “the evidence of how the tightening of financing conditions has worked — and on the path of inflation, headline and core,” Guindos explained. He voiced concern over service prices, which constitute a significant portion of core inflation.

              Guindos also pointed to the impact of quantitative tightening, noting it “has led to an increase of 60-70 basis points in ten-year government bond yields.”

              NIESR forecasts UK GDP to bounce back by 0.3% in Apr

                By
                ActionForex.com
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                National Institute of Economic and Social Research (NIESR) forecasts a modest rebound in UK’s monthly GDP in April with growth of 0.3%, largely driven by services sector. However, this is viewed as a modest increment rather than the robust ‘jump-start’ the UK economy may need. Paula Bejarano Carbo, Associate Economist at NIESR, highlighted the situation as “(welcome) low growth”.

                Meanwhile, the think tank significantly downgrades annual GDP outlook for 2023 to a mere 0.3%, a stark contrast to 4.1% achieved in 2022. This economic stagnation is attributed to persistently high inflation and interest rates, which continue to weigh heavily on household and corporate budgets, and is expected to suppress demand in the forthcoming months.

                The forecast paints a paradoxical picture of the UK’s economic future. While there is cautious optimism as it appears the worst of the energy price shock has passed and the country seems poised to avoid an imminent recession, the subdued outlook suggests that it will feel like a recession for many households. NIESR predicts an average fall in real personal disposable incomes of approximately 2% over the next three years, further pressuring households already grappling with the economic challenges.

                Full NIESR release here.

                Fed Bowman suggests potential for further monetary tightening

                  By
                  ActionForex.com
                  -

                  Fed Governor Michelle Bowman highlighted concerns over persistently high inflation and a tight labor market. In a speech, she suggested the need for additional monetary policy tightening should these conditions persist.

                  She stated, “The most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path, and I will continue to closely monitor the incoming data as I consider the appropriate stance of monetary policy going into our June meeting.”

                  She emphasized the necessity of a “sufficiently restrictive” policy stance to curtail inflation over time, especially if inflation remains elevated and the labor market continues to be tight.

                  She further added, “I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market.”

                  Despite her clear inclination towards policy tightening, Governor Bowman was careful to stress the uncertainty of economic outlook and the adaptability of Fed’s policy actions.

                  “Of course, the economic outlook is uncertain and our policy actions are not on a preset course,” she concluded, indicating Fed’s readiness to adjust its approach as necessary in response to evolving economic conditions.

                  Full speech of Fed Bowman here.

                  UK GDP contracted -0.3% mom in March; services main contributor to decline

                    By
                    ActionForex.com
                    -

                    UK GDP saw a contraction of -0.3% mom in March, significantly underperforming against expectations of being flat. The contraction was primarily driven by the services sector, which slipped by -0.5% in the month, following an unrevised dip of 0.1% in February.

                    However, not all areas of the economy were in decline. Production output experienced its strongest monthly growth since May 2021, with a 0.7% increase in March, rebounding from a 0.1% fall in February. Similarly, construction sector showed modest growth of 0.2% in March, albeit much slower than February’s robust 2.6% rise.

                    On a quarterly basis, GDP growth for Q1 met expectations at 0.1% qoq. In output terms, services sector eked out 0.1% growth over the quarter, fueled by advancements in information and communication, and administrative and support service activities. Construction sector also saw growth at 0.7%, while the production sector managed a marginal 0.1% increase, with a slightly better 0.5% growth in manufacturing.

                    Year-on-year, the implied GDP deflator for Q1 2023 rose by 6.3%, indicating a slowdown from the 7.3% seen in Q4 2022. This suggests a softening of inflationary pressures within the UK economy over this period.

                    Full UK monthly GDP release here.

                    Full UK quarterly GDP release here.

                    RBNZ survey sees notable decline in inflation expectations, NZD/USD tumbles

                      By
                      ActionForex.com
                      -

                      According to RBNZ Q2 Survey of Expectations (Business), inflation expectations for the year ahead took a notable dip, marking the largest drop since June 2020. The one-year-ahead inflation expectation declined by -83 basis points, moving from 5.11% down to 4.28%.

                      Further into the future, expectations for inflation over a two-year period also demonstrated a decrease. The mean two-year-ahead inflation expectation fell by -51 basis points from 3.30% to 2.79%, placing it back within RBNZ’s target band of 1-3% for the first time since December 2021. The survey also found that the spread of responses has narrowed compared to the previous quarter, with a lower quartile of 2.00% and an upper quartile of 3.00%.

                      The survey’s respondents also projected changes in the Official Cash Rate. By the end of June 2023, the OCR is expected to rise to 5.47%, an increase of 58 basis points from the last quarter’s mean estimate of 4.89%. However, expectations suggest the OCR will fall back to 4.84% by March 2024, down from the previous quarter’s estimate of 5.00%.

                      NZD/USD falls notably after the release and broke through 55 4H EMA decisively. The development suggests that rebound from 0.6110 has completed at 0.6383. More importantly, whole corrective pattern from 0.6083 might finished in a three-wave structure too. Deeper decline is now in favor back to retest 0.6083/6110 support zone. Decisive break there will resume whole fall from 0.6537. Meanwhile, break above 0.6302 minor resistance will mix up the near term outlook first.

                      Full RBNZ Survey results here.

                      Copper plummets on China outlook, may drag down AUD/USD

                        By
                        ActionForex.com
                        -

                        Copper prices experienced a precipitous drop this week, puncturing 3.8229 support level and reaching a nadir last seen in November. This sell-off was largely catalyzed by a stark contraction in Chinese import data, which plummeted by -7.9% yoy in April. Specifically, copper imports in the first four months lagged -13% behind 2022’s pace.

                        This downward trend was exacerbated by release of China’s CPI data, which showed a meager 0.1% yoy rise in April – the lowest since February 2021. Additionally, China’s PPI took a nosedive by -3.6%, marking the steepest descent since May 2020.

                        These data, combined with recent PMI figures indicating a contraction in manufacturing in April, paint a picture of a modest post-lockdown rebound at best, with risks skewed to the downside.

                        From a technical perspective, resumption of fall from 4.3556 puts immediate focus on 100% projection of 4.3556 to 3.8229 from 4.1743 at 3.6416. Should this level provide strong support and instigate a rebound through 3.950 resistance level, there’s potential for a bullish resurgence leading to another rise above 4.3556. This would likely resume the whole rebound from 3.1314.

                        However, sustained break of 3.6416 could prompt downside acceleration towards 161.8% projection at 1.3124. It’s premature to anticipate resumption of the whole fall from 5.0332. Decline from 4.3556 might just be the second leg of the pattern from 3.1314, even in a bearish scenario. But that would depend on the downside momentum of the move.

                        Furthermore, should the bearish Copper scenario materialize with a firm break of 3.6416 Fibonacci projection, AUD/USD could be dragged down through 0.6563 support level, thereby resuming the overall decline from 0.7156.

                        New Zealand BNZ PMI rose to 49.1, but struggles continue

                          By
                          ActionForex.com
                          -

                          New Zealand’s manufacturing sector is continuing to grapple with challenges as BusinessNZ Performance of Manufacturing Index edged up to 49.1 in April, from 48.1 in March, remaining below neutral 50.0 mark that separates expansion from contraction.

                          While the index ticked higher, five of the last seven months have seen contraction, indicating ongoing stress in the sector. In fact, the proportion of negative comments rose to 70.3% in April, compared with 63.2% in March and 60.2% in February. Manufacturers expressed concerns over price pressures, staffing issues, and lower demand, mirroring the broader economic challenges faced by the country.

                          Digging deeper into the data, we see that production rose from 43.4 to 47.0 and employment edged up from 47.3 to 47.8. New orders also improved, rising from 46.9 to 49.8, but these sub-indexes remained in contraction territory. Finished stocks increased from 48.5 to 52.5, while deliveries dropped from 53.9 to 51.5.

                          Catherine Beard, BusinessNZ’s Director of Advocacy, commented on the tough conditions, noting the stresses and strains of the wider economy appear to be playing out in the manufacturing sector. She further added that despite the overall activity not straying too far into contraction, the sector seems unable to regain expansion mode, with key indicators of production and new orders failing to return positive results in April.

                          Full NZ BNZ PMI release here.

                          ECB de Guindos: What worries me is trend in service prices

                            By
                            ActionForex.com
                            -

                            ECB Vice President Luis de Guindos assured yesterday that “There is no doubt headline inflation will continue to ease”. However, he added a note of caution, “But there are more doubts about underlying inflation.”

                            De Guindos expressed particular concern about the inflation trend in service prices, a sector showing increased momentum due to rising demand and accelerating salary increases. “What worries me the most in the underlying inflation trend is the trend in service prices,” he revealed. “Momentum in services… is rising. There’s demand and that’s because salary increases are accelerating.”

                            When discussing future interest rate hikes, de Guindos stated, “There could be more interest rate hikes, but their size will depend on upcoming data and the effect tighter credit will have on economic activity.”

                            Market expectations lean towards a 25bps increase at the June meeting, with a potential additional hike by summer’s end, followed by rate cuts in early next year. However, de Guindos urged caution in predicting these outcomes. “Don’t believe anybody who tells you what the terminal rate is going to be,” he said. “I don’t feel comfortable or uncomfortable but markets can be wrong about this.”

                            BoE Bailey hints at possible pause in rate hikes

                              By
                              ActionForex.com
                              -

                              BoE Andrew Bailey, in an interview with Bloomberg TV, suggested that the central bank could soon hit a plateau in its cycle of rate hikes. However, he underscored the need for clear evidence before making such a call.

                              “We are approaching a point when we should be able to in a sense rest in terms of the level of rates,” Bailey stated. However, he was quick to caution that BoE hadn’t seen sufficient evidence yet to make that determination. “We have to be evidence driven,” he emphasized.

                              When queried if BoE was nearing a pause in rate increases, Bailey responded, “Well, I’m going to say I hope we are because this is the 12th consecutive increase in rates.” He reiterated, however, BoE’s dependence on tangible data, adding “we will be guided by the evidence as it comes to us.”

                              Bailey’s comments reflect a careful balancing act. While he hints at a potential easing in rate hikes, he firmly anchors this possibility to empirical data, thereby preventing premature conclusions. He also clarified that BOE is not “giving a direction one way or the other” on rates and that their future moves would be “shaped by the evidence.”

                              Fed Kashkari: The real question is, when is inflation going to come down

                                By
                                ActionForex.com
                                -

                                Minneapolis Fed President Neel Kashkari said at an event in Marquette, Michigan, “The real question is, when is inflation going to come down.”

                                He warned of the potential risks to banks should high inflation persist, necessitating an extended period of tight monetary policy and an inverted yield curve. Such a scenario, Kashkari cautioned, “creates real problems for banks of all sizes. We are very aware of that.”

                                However, he also offered a more positive outlook tied to market expectations of easing inflation. If inflation does indeed fall rapidly, Kashkari suggested that “one might imagine interest rates normalizing, the yield curve uninverting and then the pressure on banks and their deposit bases becomes much smaller.”

                                US PPI up 0.2% mom, 2.3% yoy in Apr

                                  By
                                  ActionForex.com
                                  -

                                  US PPI for final demand rose 0.2% mom in April, below expectation of 0.3% mom. 80% of the rise in PPI attributable to a 0.3% mom increase in prices for services. The index for goods advanced 0.2% mom. Prices for final demand less foods, energy, and trade services rose 0.2% mom.

                                  For the 12 months ended in April, PPI slowed from 2.7% yoy to 2.3% yoy, above expectation of 1.4% yoy. PPI less foods, energy, and trade services slowed from 3.4% yoy to 3.2% yoy, above expectation of 2.7% yoy.

                                  Full US PPI release here.

                                  US initial jobless claims rose to 264k, highest since Oct 30, 2021

                                    By
                                    ActionForex.com
                                    -

                                    US initial jobless claims rose 22k to 264k in the week ending May 6, above expectation of 245k. That’s the highest level since October 30, 2021. Four-week moving average of initial claims rose 6k to 245k, highest since November 20, 2021.

                                    Continuing claims rose 12k to 1813k in the week ending April 29. Four-week moving average of continuing claims rose 2k to 1830k.

                                    Full US jobless claims release here.

                                    BoE Bailey: CPI on course to halve by end of year

                                      By
                                      ActionForex.com
                                      -

                                      BoE Governor Andrew Bailey said in the post meeting press conference, “we have to stay the course to make sure inflation falls all the way back to the 2% target.”

                                      Nevertheless he expected the rise in bank rates since December to “weigh more on the economy in the coming quarters”.

                                      Inflation is “expected to fall sharply over the coming months, starting in April.” He added, “consumer price inflation is on course to halve by the end of this year.”

                                      As for the economy, he said, “today we are forecasting modest but positive growth and a much smaller increase in unemployment.”

                                      BoE hikes 25bps, leaves door open for more

                                        By
                                        ActionForex.com
                                        -

                                        BoE raises Bank Rate by 25bps to 4.50% as widely expected. The decision was made by 7-2 vote with known doves Silvana Tenreyro and Swati Dhingra voted for no change.

                                        In the accompanying statement, BoE left open the door for further rate hike, noting that “if there were to be evidence of more persistent (inflation) pressures, then further tightening in monetary policy would be required.”

                                        BoE expects inflation to “fall sharply from April” and decline to “a little above 1% at the two and three-year horizons”. That would be “materially below the 2% target then. “This reflects the emergence of an increasing degree of economic slack and declining external pressures that are expected to reduce CPI inflation,” it added.

                                        Regarding the economy, GDP is expected to be “flat over the first half” of 2023. Economic activity has been “less weak than expected in February”, with the path of demand “materially stronger than expected. Labor market remains tighter than February report.

                                        Full BoE statement here.

                                        BoE to hike 25bps, will there be hint on pause?

                                          By
                                          ActionForex.com
                                          -

                                          Today marks BoE’s much-anticipated “Super Thursday,” with markets bracing for a 25 bps increase that brings interest rate to 4.50%. While some speculate that BoE may hit the pause button post today’s rate hike, opinions are far from unanimous. Notably, Goldman Sachs anticipates interest rate to reach a terminal rate of 5.00% by August, implying two more rate hikes in the pipeline.

                                          Attention will be focused on voting too. Known doves Silvana Tenreyro and Swati Dhingra are anticipated to vote against any change. However, given that inflation remained in double digits at 10.1% in March, any dissent from the remaining seven MPC members could be viewed as a dovish surprise. Conversely, hawkish surprises could arise if any members vote for a more aggressive 50bps hike today.

                                          Further intrigue lies in the new economic projections, which will be closely examined for hints of the future rate path. Outlook for inflation remains shrouded in uncertainty. A report released today by NIESR suggests that inflation will remain “persistently elevated,” decreasing only to 5.4% by the end of 2023. This forecast markedly exceeds prediction by the Office for Budget Responsibility, which anticipated inflation to drop to 2.9%.

                                          Here are some previews on BoE:

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