Markets in suspense ahead of ECB; Could EUR/USD bounce from here?

    As the global financial market eagerly anticipates today’s pivotal ECB rate decision, the pendulum of market expectations has been swinging vigorously, making it the most uncertain ECB meeting in recent times. Initial market sentiment leaned towards a pause; however, a recent Reuters report ignited speculation about a potential rate hike.

    The mentioned report suggested that ECB could revise its 2024 inflation forecast upwards, well pass the 3% mark, thereby strengthening the case for a rate increase. Consequently, odds for a 25bps hike escalated to nearly 70%, a significant rise from around 40% noted on Monday. If this materializes, we could see the main refinancing rate and deposit rate shift to 4.50% and 4.00% respectively.

    Adding a layer of complexity to the anticipations is Vice President Luis de Guindos’ earlier assertion, dating back to August 31, where he said that the impending inflation forecasts are “similar to what we had in June”, steering away from the prospect of an excessive upward revision. Moreover, European Commission had marginally adjusted Eurozone inflation rate from 5.8% to 5.6% for 2023 and increased the 2024 forecast from 2.8% to 2.9%. That casts further doubts on the aggressive inflation predictions noted in the Reuters report.

    The market is not just hinging on the rate verdict. A myriad of factors stand as potential catalysts in steering the financial markets post the announcement. The ECB is expected to maintain its stance of basing future verdicts on evolving data dynamics. However, there might be subtle indications given on whether interest rates have reached its peak, whether it hikes or not today.

    Furthermore, growth projections are on the verge of being revised to possibly match European Commission’s grim outlook. The Commission had notably scaled down the growth forecasts for 2023 and 2024 to 0.8% and 1.3% respectively, a decrement from the previous estimates of 1.1% and 1.6%.

    As for EUR/USD it’s now standing close to an important cluster support zone at 1.0634, (38.2% retracement of 0.9534 to 1.1274 at 1.0609). There is prospect of a near term bullish reversal from current level, to finish off the whole decline from 1.1274. But decisive break of 1.0944 resistance is needed to confirm this case, or risk will stay on the downside. On the other hand, sustained break of 1.0609/0634 will raise the chance of medium term term bearish trend reversal, and target 61.8% retracement at 1.0199.

    Australia’s employment grew 64.9k in Aug, eclipses expectation

      Australia’s job market demonstrated strength in August as employment numbers surged by 64.9k, a 0.5% mom increase, substantially eclipsing expectation of 24.3k. Dissecting this growth reveals a modest increment in full-time jobs, which saw rise of 2.8k, whereas part-time positions surged, accounting for 62.1k rise.

      Unemployment rate remained steady at 3.7%, aligning with market anticipations. Concurrently, there was a slight uptick in participation rate, which climbed by 0.1% to reach 67.0%. Monthly hours worked dropped -0.5% mom or -9m hours.

      Bjorn Jarvis, head of labour statistics at ABS, contextualized this development, linking the pronounced growth in August to a minor slump experienced in July, a period coinciding with school holidays. The two-month average employment increment was roughly around 32k monthly, mirroring the mean growth observed over the past year.

      “The strength in hours worked over the past year, relative to employment growth, shows the demand for labour is continuing to be met by people working more hours, to some extent,” Jarvis noted.

      Full Australia employment release here.

      UK RICS house price balance fell to 14-year low, deepening slump

        In the latest sign of mounting pressures in the UK property market, RICS house price balance deteriorated notably, plummeting to -68 in August, down from -55 in the previous month. This development has surpassed the grim expectation set at -56 and marks the most unfavorable reading since February 2009.

        Dissecting the UK reveals that almost every region is grappling with “relatively steep fall in house prices,” as noted by RICS.

        Looking ahead, surveyors anticipate that the upcoming months will not bring any reprieve. Short-term projections illustrate a more pronounced dip, with net balance drifting deeper into negative terrain at -67%, a decline from prior figure of -60%.

        Furthermore, long-term outlook remains relatively unchanged but still under a cloud, with expectations cementing around a net balance of -48%, mirroring the sentiment recorded in both June and July.

        Full UK RICS house price balance release here.

        US CPI at 0.6% mom, 3.7% yoy; CPI core at 0.3% mom, 4.3% yoy

          US CPI rose 0.6% mom in August, matched expectations. CPI core (ex food and energy) rose 0.3% mom, above expectation of 0.2% mom. Energy index was up 5.6% mom. Food index was up 0.2% mom. Gasoline was the largest contributor to monthly CPI rise, accounting for over half of the increase. Another contributor was shelter index, which rose for the 40th consecutive month.

          For the 12 months period, headline CPI rose from 3.2% yoy to 3.7% yoy above expectation of 3.6% yoy. CPI core slowed from 4.7% yoy to 4.3% yoy, matched expectations. Energy index decreased -3.6% yoy. Food index rose 4.3% yoy.

          Full US CPI release here.

          Eurozone industrial production down -1.1% mom in Jul

            Eurozone industrial production fell -1.1% mom in July, worse than expectation of -0.7% mom. Production of capital goods fell by -2.7% mom and durable consumer goods by -2.2% mom, while production of intermediate goods grew by 0.2% mom, non-durable consumer goods by 0.4% mom and energy by 1.6% mom.

            EU industrial production was down -1.1% mom. Among Member States for which data are available, the largest monthly decreases were registered in Denmark (-9.1%), Ireland (-6.6%) and Lithuania (-4.4%). The highest increases were observed in Sweden (+5.1%), Malta (+3.4%) and Hungary (+2.9%).

            Full Eurozone industrial production release here.

            UK GDP down -0.5% mom in Jul, dragged by services contraction

              UK GDP contracted -0.5% mom in July, much worse than expectation of -0.2% mom. Services was down -0.5% mom, the main contributor to the fall in GDP. Production fell by -0.7% mom. Construction fell by -0.5% mom.

              In the three months to July compared with the prior three-month period, GDP increased by 0.2%. Production rose 0.6%, and was the main contributing sector. Services and construction both rose by 0.1%.

              Also released, industrial production came in at -0.7% mom, 0.4% yoy in July, versus expectation of -0.5% mom, 0.5% yoy. Manufacturing was at -0.8% mom, 3.0% yoy, versus expectation of -0.9% mom, 2.7% yoy. Goods trade deficit narrowed to GBP -14.1B, versus expectation of GBP -15.9B.

              Full UK GDP release here.

              US CPI to bounce to 3.6%, Fed seen firmly on hold next week

                Today, all eyes are on US August CPI data, with anticipation of a flare-up in inflation, primarily fueled by escalating oil prices. While broader CPI is expected to witness a surge, core CPI, which excludes volatile food and energy costs, is projected to experience moderated rise annually.

                Specifically, CPI is projected to rise by 0.6% mom, a significant jump from July’s 0.2% mom. It would mark an annual inflation rate of 3.6% yoy, up from the previous 3.2% yoy. On the other hand, Core CPI is anticipated to grow by 0.2% mom, translating to year-on-year rate of 4.3% yoy, deceleration from prior 4.7% yoy.

                Fed fund futures are decidedly leaning towards a Fed hold next Thursday, with 93% probability of federal funds rate being unchanged at 5.25-5.50%. There’s just over a 50% chance that interest rates will remain at this level by the year-end. Predictions for the initial rate cut before next June stay under the 50% mark.

                Further, a recent Reuters poll showcases the dominant stance among economists, with a whopping 95% (or 94 out of 97 economists) foreseeing a hold by Fed in the forthcoming week. Only one-fifth of the economists (17 out of 97) foresee at least one additional rate hike by the close of this year. Out of 87 economists who projected till mid-2024, 28 anticipate the first rate cut to materialize in Q1, while 33 expect it in the following quarter.

                Japan’s CGPI records eighth consecutive month of slowdown in August

                  Japan’s annual wholesale inflation, as measured by Corporate Goods Price Index, registered a slowdown for the eighth consecutive month in August. CGPI eased to 3.2% yoy, aligning with market expectations and continuing its downward trend from the peak of 10.6% yoy recorded in December.

                  Export price index recorded a lesser contraction of -0.8% yoy compared to -2.6% yoy in July. Meanwhile, import price index also demonstrated a slight moderation in its decline, posting a -15.9% yoy compared to -16.0% yoy observed in the preceding month.

                  On a month-on-month basis, PPI saw an uptick of 0.3% mom. Delving into the specifics, export price index witnessed a recovery, improving by 0.5% mom. In contrast, the import price index reported a decline of 0.9% mom. within the same period.

                  Full Japan PPI release here.

                  WTI oil eyes critical resistance zone at 90 amid supply constraints

                    Oil prices climbed to their highest level in 10 months today, as robust demand coupled with supply restrictions imposed by the top members of OPEC+ significantly tightened global fuel markets. WTI crude oil is now facing an important resistance zone at 90.

                    OPEC’s Monthly Oil Market Report underscored a looming supply crunch that threatens to eclipse anything seen in over a decade, indicating a daily shortfall exceeding 3 million barrels. On the other hand, OPEC maintained its upbeat forecasts of daily global oil demand increase of 2.25m barrels in 2024, just slightly less than growth of 2.44m barrels expected in 2023.

                    Technically, WTI crude oil is now heading very close to an important resistance around 90 psychological level, with 38.2% retracement of 131.82 to 63.67 at 89.70. Decisive break of level raise the chance that the rally from 63.67 is developing into a more sustainable medium term up trend. Next target would be 100% projection of 66.94 to 84.91 from 77.95 at 95.20. Meanwhile, outlook will only be neutral at worst as long as 84.91 resistance turned support holds, even in case of rejection by 90.

                    Incoming BoE Breeden sees relatively flat UK GDP growth next few years

                      Sarah Breeden, the incoming Deputy Governor for BoE, shared her economic forecast during a parliamentary Treasury Committee approval hearing today. She is slated to replace Jon Cunliffe as come November.

                      Breeden conveyed her anticipation for the inflation rate to be near the 2% target within a span of two years, an outlook that is based on the premises outlined in BoE’s August forecast.

                      Despite the somewhat optimistic perspective on inflation, Breeden aired her expectation of “relatively flat GDP in the UK over the next couple of year”.

                      The expectation for a subdued GDP is rooted in the “impact of past increases in Bank Rate increasingly push down on demand, and supply remains very weak.”

                      Breeden concurred with the MPC’s perspective that inflation risks pertaining to the August forecasts are “skewed to the upside”. She acknowledged that “second-round effects via price and wage setting are stronger than had previously been expected.” When it comes to growth and unemployment, Breeden sees a pathway filled with “balanced risks”, which could swing in either direction.

                       

                      German ZEW improves to -11.4, but situation tumbles to -79.4

                        Germany’s ZEW Economic Sentiment for September experienced an uptick, rising from -12.3 to -11.4, surpassing the anticipated drop to -15.0. However, not all was rosy for the nation, as Current Situation index witnessed a downturn, descending from -71.3 to -79.4, which was a more significant dip than forecasted 75.0.

                        On a broader scale, Eurozone’s ZEW Economic Sentiment slid from -5.5 to -8.9, trailing the predicted -6.2. Current Situation for the zone also decreased marginally, moving by -0.6 to rest at -42.6.

                        Shedding light on these figures, ZEW President Professor Achim Wambach remarked, “The assessment of the current economic situation in Germany by the financial market experts is even more pessimistic than in August 2023.” While this paints a subdued picture of the present scenario, Wambach highlighted a silver lining, pointing to the “slight improvement in expectations regarding Germany’s economic situation over the next six months.”

                        Drawing connections to the international arena, Wambach added, “The brighter economic prospects for Germany align with a notably more optimistic view of international stock market developments.” He attributed this, in part, to the growing segment of respondents who foresee stability in interest rates within both Eurozone and US. Furthermore, experts are looking eastwards, projecting a relaxation in China’s interest rate policy.

                        Full Germany ZEW release here.

                        UK payrolled employment down -1k in Aug, median monthly pay growth slowed

                          In August, UK saw a minimal decline in payrolled employment by -1,000 (-0.0% mom) bringing the total to 30.1 million. In a positive revision, prior month’s figures were adjusted from a -4k decrease to a substantial increase of 97k. Despite this, there is no dismissing the slowed momentum in the job market as reflected in the slight decline in August.

                          Dive deeper into the earnings, and one notices a yoy rise of 6.7% for the median monthly pay, touching GBP 2,260. The service activities sector led this growth, clocking an 8.7% yoy rise, while the finance and insurance sector recorded the lowest at 3.2% yoy. However, there was a perceptible deceleration in the growth rate of median monthly pay, down from July’s 7.6% yoy and notably from June’s 9.6% yoy, with the latter month having a peak of GBP 2,305.

                          Turning to median monthly pay, service activities sector spearheaded growth, showcasing an 8.7% yoy increase, attaining the highest growth rate across sectors. Contrastingly, finance and insurance sector lagged, recording the lowest annual growth rate at 3.2% yoy. Overall, median monthly pay elevated by 6.7% yoy to GBP 2,260. However, there was a perceptible deceleration in growth rate of median monthly pay, down from July’s 7.6% yoy and notably from June’s 9.6% yoy, with the latter month having a peak of GBP 2,305.

                          The three months leading to July painted a similar picture of mixed outcomes. Unemployment settled at 4.3%, rising by 0.5% from the previous quarter, in line with market anticipations. Meanwhile, employment rate dropped by 0.5% to 75.5% alongside a modest increase in economic inactivity rate to 21.1%, up by 0.1%.

                          Total weekly hours dropped -18.5% over the three-month period. Average earnings excluding bonus was unchanged at 7.8% 3moy, matched expectations. Average earnings including bonus rose to 8.5% 3moy, above expectations of 8.2%.

                          Full UK labor market release here.

                          Japan’s FM Suzuki expects BoJ to liaise with government closely

                            In the wake of the spike in Yen, prompted by BoJ Governor Kazuo Ueda’s remarks, Finance Minister Shunichi Suzuki made clarifying comments today. Yen’s climb was chiefly attributed to Ueda’s interview with Yomiuri Shimbun, where he hinted at the possibility of exiting negative rates policy in the coming year.

                            At a regular press conference, Suzuki underlined the autonomy of BOJ, stating that the “specific monetary policy conduct is up to the BOJ to decide.”

                            However, the minister did not hold back from expressing the government’s expectations . Suzuki conveyed his aspirations for BOJ, emphasizing its collaboration with the government. He said, “I expect the BOJ to continue to liaise with the government closely and conduct monetary policy appropriately.”

                            The guiding principle for this collaboration, as Suzuki suggests, should be a comprehensive evaluation of the economy, considering factors like pricing and prevailing financial conditions. The ultimate aim is to “achieve its price stability target in a stable and sustainable way.”

                            The remarks by the Finance Minister, while emphasizing BOJ’s autonomy, also subtly convey the weight of responsibility the central bank carries in managing the nation’s economic health, especially in unpredictable financial climates.

                            Australia consumer sentiment fell to 79.7, languishes at deeply pessimistic levels

                              Australia’s consumer sentiment, as depicted by Westpac Consumer Sentiment Index, witnessed a dip of -1.5% mom, settling at 79.7 in September. The sentiment has been gloomily “languished at deeply pessimistic levels”.

                              Westpac draws attention to the historical context, pointing out that since the initiation of the survey back in 1974, such enduring periods of pessimism have been rare. The most notable instance was during early 1990s’ recession when sentiments dipped even lower and remained so for a duration exceeding two years.

                              On the brighter side, households showcased reduced apprehension about potential rate hikes, with noticeable surge in confidence, up 7.8%, particularly among mortgagors. However, looming worries about cost of living and inflation continue to weigh down on consumer spirits. Although job confidence has steadied itself, it has drastically plummeted, down -33% from its peak levels. One silver lining is the buoyed expectations around house prices.

                              Westpac expects RBA to maintain their status quo until August 2024. By this timeframe, Westpac envisions inflation receding to 3.4%, a jump in unemployment rate to 4.5%, and a noticeable slowdown in the annual growth rate of consumer spending, tapering to a mere 0.8%.

                              Full Australia Westpac consumer sentiment release here.

                              New York Fed Survey: Consumer inflation expectations rise slightly

                                The August 2023 New York Fed Survey of Consumer Expectations has revealed a moderate increase in the median one- and five-year-ahead inflation expectations, both witnessing a rise of 0.1% to sit at 3.6% and 3.0%, respectively. However, expectations for three-year-ahead inflation demonstrated a dip, dropping by -0.1% to 2.8%.

                                On the unemployment front, there was a noticeable increase in mean unemployment expectations, with the mean probability of a higher unemployment rate one year from now spiking by 1.8%, settling at 38.5%. Despite this increase, the figure remains beneath its 12-month trailing average which stands at 40.2%.

                                Median expectation for growth in household income experienced a decrement, falling by -0.3% to arrive at 2.9% in August, marking the lowest figure since July 2021.

                                New York Fed Survey of Consumer Expectations release here.

                                BoE Mann: Risk of tightening too little more salient

                                  BoE MPC member Catherine Mann expressed a potent concern regarding the UK’s current economic landscape, emphasizing the “salient” risk of “tightening too little” in her speech today.

                                  Mann cited alarming data where inflation in core and services has consistently remained above 6% for over a year now. Drawing from econometric analyses which break down inflation dynamics into components of “expectations and inertia”, she highlighted an unsettling trend — a steady increase in these components, encouraging continuation of inflation persistence. “Worrying to me,” Mann noted, “is that a statistically-derived time-varying trend of inflation has drifted above 2%.”

                                  Mann elucidated the channels through which monetary policy transmits its effects on financial markets, influencing price settings and impacting the real economy prominently through an “expectations channel”.

                                  She emphasized that “duration above target matters for policy risk assessment”, pointing out that the longer the inflation rates hover markedly above target levels, the more challenging and costly it becomes to rein it back to the desired target.

                                  In her assessment, “to pause or to hold the policy rate lower for longer” poses a substantial risk, potentially embedding inflation more deeply and necessitating a more intensive future tightening to alter inflationary expectations and to eliminate the ingrained inflation resulting from a prolonged above-target duration.

                                  To mitigate such adverse outcomes, she championed an approach inclined towards over-tightening, arguing that this strategy would act as a preventive measure against the deeper entrenchment of inflation.

                                  However, Mann remained adaptive to changing economic narratives. She conveyed a readiness to “not hesitate to cut rates” if she observes faster deceleration in inflation paired with notable dip in economic activities.

                                  Full speech of BoE Mann here.

                                  EU downgrades Eurozone growth forecasts, Germany in contraction this year

                                    European Commission, in its Summer 2023 interim forecast, revised down its growth projections for Eurozone. For 2023, growth outlook was cut from 1.1% to 0.8%, while 2024 projection was trimmed from 1.6% to 1.3%. On the inflation front, expectations for 2023 was djusted downward from 5.8% to 5.6%, yet 2024 forecast saw a minor uptick from 2.8% to 2.9%.

                                    Delving into individual nations, Germany’s economic forecast has been dampened significantly. Growth projection for 2023 is now set at a contraction of -0.4%, a stark difference from prior 0.2% growth prediction. 2024 projection has been revised down from 1.4% to 1.1%.

                                    On the contrary, France has seen a boost in its 2023 growth projection, raised from 0.7% to 1.0%. However, its 2024 growth forecast was trimmed slightly, from 1.4% to 1.2%.

                                    Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People,said: “The persistently high inflation rate has exacted a heavy cost, although signs of its abating are visible. Following a spell of economic slack, we anticipate a modest rebound in growth in the coming year. This optimism is driven by a resilient labor market, historical lows in unemployment, and diminishing price pressures. Nonetheless, the economic trajectory remains uncertain, necessitating vigilant risk monitoring.”

                                    Echoing these sentiments, Paolo Gentiloni, Commissioner for Economy, stated, “Our economies have been battling numerous challenges this year, culminating in softer growth than our spring projections had indicated. While inflationary pressures are waning, the rate varies across the EU. Furthermore, Russia’s aggressive actions against Ukraine persist, leading not just to human distress but also significant economic upheaval.”

                                    Full EC Summer 2023 Economic Forecast here.

                                    10-year JGB yield hits 9-year high on BoJ Ueda, Yen rebounds

                                      Yen saw a notable uptick in Asian session, buoyed by hawkish sentiments by BoJ Governor Kazuo Ueda. Concurrently, 10-year JGB yield scaled its highest level in nine years, breaching 0.7% mark.

                                      In an interview with Yomiuri newspaper published over the weekend, Ueda hinted at the possibility that BoJ might have sufficient data by the close of the year to contemplate ending its negative interest rate policy. Such remarks from Ueda have spurred speculation among market analysts, with some interpreting them as early signals for the markets, suggesting a potential end to negative interest rates by Q1 2024. Before this step, there also are anticipations of yield curve control being phased out later this year.

                                      On the flip side, certain analysts, referencing recent data which highlights decelerating wage growth, argue that the transition from negative rates might not be imminent. They believe Ueda’s remarks might be more of a countermeasure to Yen’s recent depreciation.

                                      Ueda, during the interview, emphasized the need for Japan to witness a consistent rise in inflation, complemented by wage growth, before implementing changes. “If we judge that Japan can achieve its inflation target even after ending negative rates, we’ll do so,” Ueda asserted. However, he also reiterated the central bank’s stance on maintaining its ultra-loose policy for now, until there’s firm confidence that inflation will consistently hover around the 2% mark, bolstered by robust demand and wage growth.

                                      He cautioned, “While Japan is showing budding positive signs, achievement of our target isn’t in sight yet.” Looking ahead, Ueda underscored the importance of wage trajectories in the coming year, indicating that conclusive decisions would be data-driven. “We can’t rule out the possibility we’ll get enough information and data by year-end,” Ueda added.

                                       

                                      Canada employment grew 39.9 in Aug, unemployment rate steady at 5.5%

                                        Canada employment grew 39.9k in August, well above expectation of 20.0k. Unemployment rate was unchanged at 5.5%, below expectation of 5.6%, stabilized after three consecutive monthly increases. Employment rate fell -0.1% to 61.9%.

                                        Average hourly wages rose 4.9% yoy, down from July’s 5.0% yoy. Total hours worked rose 0.5% mom, 2.6% yoy.

                                        Full Canada employment release here.

                                        Germany poised for mild economic contraction in 2023, DIW reports

                                          Germany stands on the brink of being the only major economy to register a contraction in 2023, with German economic research institute, DIW, projecting a -0.4% dip in the nation’s economic output for the year. This downturn is primarily attributed to sluggish domestic consumption and a falter in export dynamics, exacerbated by a slowed Chinese economy.

                                          Looking forward, however, the institute holds a more positive outlook, forecasting a steady 1.2% growth in both 2024 and 2025. Geraldine Dany-Knedlik, the co-head of forecasting and economic policy at DIW, envisages that a pronounced increase in wages and salaries would spur household expenditure, kickstarting a recovery phase.

                                          Timm Bönke, also a co-head at the DIW’s forecasting department, anticipates a notable improvement in the consumer sentiment owing to a substantial dip in inflation rates in the forthcoming period. Households will be encouraged to enhance their spending, propelled by improved financial conditions and a potentially steadier inflation environment.

                                          Full DIW release here.