Daily Market Outlook by Kate Curtis from Trader's Way

Forex Major Currencies Outlook (Jan 16 – Jan 20)

BOJ meeting with a small chance of widening YCC target or full removal of it will be the highlight of the week followed by China Q4 GDP, inflation from the UK and Canada, employment data from the UK and Australia and consumption data from the US. Monday is Martin Luther King day, banks will be closed in the US and liquidity will be lower.

USD

December inflation data came in line with expectations. Headline number at 6.5% y/y, down from 7.1% y/y in November and -0.1% m/m. Core number came in at 5.7% y/y, down from 6% y/y the previous number and 0.3% m/m. Energy prices saw biggest declines (fuel oil and gasoline especially), prices of used cars and new vehicles also declined. Food prices rose 0.3% m/m with index for eggs rising 11.1% m/m. Shelter increased 0.8% m/m. It is a lagging indicator and it will continue to stay elevated due to hot housing market in 2022. Core services, ex shelter are the main focus of Fed due to wage costs. The reading today has all but settled a 25bp rate hike at February meeting.

The yield on a 10y Treasury started the week and year at around 3.6%, fell after the CPI report below 3.43%, then rebounded and finished the week at around 3.5%. The yield on 2y Treasury reached 4.29% during the week and fell after the CPI report below 4.12%, then rebounded and finished the week at around 4.16%. Spread between 2y and 10y Treasuries started the week at -68bp and tightened slightly to -67bp. FedWatchTool sees the probability of a 25bp rate hike in February at 92.2% with a probability of a 50bp rate hike at 7.8%.

This week we will have consumption data.

Important news for USD:

Wednesday:

  • Retail Sales

EUR

ECB showed in its economic bulletin that wage growth should be very strong in the coming quarters as cost-of-living crisis intensifies and unions demand higher wages in the upcoming wage negotiations. In the future, however, expected economic slowdown will have negative impact on wages pushing them down. ECB policymaker Rehn commented that rates will need to go significantly higher with ECB policymaker De Cos echoing his statement. ECB policymaker Holzmann stated that their determination will not change until core inflation peaks. He added that the terminal rate could be reached by the summer and expressed caution regarding moving too quickly on quantitative tightening. Probability of a 50bp rate hike at February meeting is around 76%.

ECB’s economic bulleting for December sees headline inflation falling to 2% target in H2 of 2025. Inflation is seen at an averaging 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025. Core HICP inflation is seen staying above 2% over that time horizon. Inflation risks are seen as tilted to the upside.

GBP

BOE Chief Economist Huw Pill stated in a speech that rising food and energy prices, due to the war in Ukraine, have driven inflation higher and a shortage of workers in the economy has contributed to more inflation. He added that Monetary Policy Committee is acting to bring inflation back down in the months and years ahead. His strong commitment to bringing inflation down was interpreted as hawkish by markets who now see almost 70% probability of a 50bp rate hike at February meeting. BOE member Mann confirmed that more rate hikes are to come and added that there is no risk of over-tightening at the moment. She is a more hawkish member. November GDP came in at 0.1% m/m vs -0.2% m/m as expected which could help Q4 GDP come in flat or slightly positive. That will push back inflation into Q1 of 2023 and coming recession may prove milder than feared. That would explain hawkish stance by BOE members and continuation of rate hikes.

This week we will have employment and inflation data.

Important news for GBP:

Tuesday:

  • Claimant Count Change
  • Unemployment Rate

Wednesday:

  • CPI

AUD

Retail sales data for November improved 1.4% m/m from upwardly revised October reading of 0.4% m/m and 0.6% m/m as expected. Monthly CPI reading saw inflation rise to 7.3% y/y in November after a 6.9% y/y print the previous month. Motor fuels, holidays, recreation and fruits and vegetables were pushing inflation higher while alcohol and tobacco as well as clothing had negative m/m prints. Monthly CPI does not encompass full CPI basket, so the reading may be distorted, however it still shows inflation moving in unwanted direction which will prevent RBA from pausing at February meeting. Consensus is for a 25bp rate hike.

Inflation data for the month of December printed two up ticks. CPI came in at 1.8% y/y vs 1.6% y/y in November while PPI printed -0.7% y/y vs -1.3% y/y the previous month. With price pressures nowhere to be seen PBOC may freely engage on monetary loosening policy in order to stimulate economy after lockdowns. PPI showed third straight deflationary reading. December trade balance data saw surplus increase to $78bn. Exports fell 9.9% y/y, expectations were for a bigger decline of 11.1% y/y, while imports fell 7.5% y/y. In Yuan terms exports fell 0.5% y/y making it the first negative reading since beginning of 2020.

This week we will have employment data from Australia as well as Q4 GDP, industrial production and consumption data from China.

Important news for AUD:

Tuesday:

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

Thursday:

  • Employment Change
  • Unemployment Rate

NZD

Kiwi had a quiet week as all eyes were on the USD. Better news coming from China kept it stable against EUR and GBP while it managed to make gains against weak USD and CHF during the week, but the weak bank earnings pushed the Kiwi down as a part of risk-off mood in the market. NZDJPY was the biggest mover to the downside of all NZD pairs.

CAD

Building permits for the month of November rose by 14.1% m/m after a plunge of 5.3% m/m in October. CAD has not benefited greatly from rising Oil prices. It stood its ground against the EUR and GBP while it gained against weak USD and CHF. CADJPY was the biggest mover to the downside of all CAD pairs.

This week we will have inflation data.

Important news for CAD:

Tuesday:

  • CPI

JPY

December inflation data for the Tokyo area saw headline number continue to rise and come in at 4% y/y vs 3.8% y/y in November. It is a new 40-year high. Ex fresh food component also printed 4% y/y, up from 3.6% y/y the previous month. Ex fresh food and energy, so called core-core, came in at 2.7% y/y, up from 2.5% y/y in November. Both core and core-core measures have been steadily rising since February of 2022 and trend is set to continue in the coming months. BOJ Governor Kuroda is to retire in April and newly appointed BOJ Governor may take a firmer stance on inflation and tighten monetary policy as a result. Household consumption in November fell 1.2% y/y for the first drop in 6 months. The drop was attributed to lower spending on food.

This week we will have a BOJ meeting. Majority of surveyed economists expect no change at the meeting, but considering last meeting’s sudden change in YCC (Yield Curve Control) there is a growing feeling that entire YCC could be abandoned at this meeting.

Important news for JPY:

Wednesday:

  • BOJ Interest Rate Decision

CHF

SNB total sight deposits continued their downward trajectory in the new year and for a week ending January 6 came in at CHF533.5bn vs CHF539.2bn the previous week. The bank is selling USD and EUR in order to strengthen CHF to fight inflation. Swiss labour market continues to tighten with seasonally adjusted unemployment rate in December ticking down to 1.9%.

Forex Major Currencies Outlook (Jan 23 – Jan 27)

BOC meeting, inflation data from the US, Australia and New Zealand, preliminary Q4 GDP from the US and preliminary January PMI data from Eurozone and the UK will highlight the week ahead of us.

USD

Retail sales disappointed in December and came in at -1.1% m/m vs downwardly revised -1% m/m in November. Control group, the measure that goes into GDP calculation, fell by 0.7% m/m. Ex autos and gas, as well as ex autos categories also fell by 0.7% m/m and 1.1 m/m respectively. Industrial production data for the month of December fell by 0.7% m/m after November’s data was revised down to -0.6% m/m. Negative prints on consumption and production raised fears that US could already be in a recession which lead to USD gains and stock market loses.

The yield on a 10y Treasury started the week and year at around 3.52%, fell below 3.33%, then rebounded and finished the week at around 3.47%. The yield on 2y Treasury reached 4.24% during the week and fell below 4.06%, then rebounded and finished the week at around 4.16%. Spread between 2y and 10y Treasuries started the week at -69bp and widened slightly to -70bp. FedWatchTool sees the probability of a 25bp rate hike after Fed Waller speech in February at 99.8%.

This week we will get preliminary Q4 GDP reading and PCE inflation data.

Important news for USD:

Thursday:

  • GDP

Friday:

  • PCE

EUR

Rumours started to circulate that ECB is considering to continue with 25bp rate hikes from March meeting. ECB president Lagarde stated in December that we are in for a series of 50bp rate hike so the rumours caused EUR to weaken in the first half of the week. We see this change as premature and we think that ECB will continue with 50bp rate hikes at March meeting. ECB policy maker Villeroy stated that it is still too early to consider what their actions will be in March. Lagarde came out later in the week with a statement that confirms bank’s resolution to continue with further tightening of monetary policy and advised market participants to “revise their positions”.She added that “Staying the course” is the new mantra.

ZEW data for January, first data point of new 2023, showed increasing optimism in both Germany and Eurozone. Current conditions improved slightly to -58.6 from -61.4 in December while sentiment for both Germany and Eurozone returned into positive territory for the first time since the beginning of Russia-Ukraine conflict in February of 2022. Optimism is growing that recession will not be as deep as feared.

This week we will get preliminary January PMI data.

Important news for EUR:

Tuesday:

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

GBP

BOE Governor Bailey appeared in front of the Parliament and stated 3 main risks for the UK economy: 1. China’s sudden lifting of Covid restrictions, 2. Continuing fallout of the war in Ukraine 3. Shrinking of Britain’s labor force. According to Bailey, China reopening will have negative consequences in the short run, but it is not clear how long will they last. Later in the week he stated that BOE is not targeting particular peak in rates and added that inflation will probably start to decline rapidly in late spring.

Claimant count change for December rose by 19.7k while ILO unemployment rate for November remained unchanged at 3.7%. Weekly earnings continued to rise and came in at 6.4% for both earnings including and excluding bonus. It is hard to see how will inflation fall fast with wages steadily rising. Additionally, since inflation is running above wages real wages are falling (2.6% y/y).

December CPI saw headline ease to 10.5% y/y as expected from 10.7% y/y in November. The largest drop was seen in motor fuels, followed by prices for clothing and footwear. Prices for restaurants and hotels continued to rise and there was a historic rise in food and non-alcoholic beverages (16.8%) which makes it the highest increase since 1977. Core rate has stayed the same at 6.3% y/y but core services, excludes components like airfares, package holidays and education, continued to increase. BOE is particularly sensitive to core services component. Rising wages and high inflation will push BOE into continuing with rate hikes and markets are leaning in favor of a 50bp rate hike.

AUD

December employment report started to show cracks appearing in the tight labor market. Employment change came in at -14.6k, down from 58.2k in November. The unemployment rate remained unchanged at 3.5% since previous month’s was revised up. Participation rate dropped to 66.6% from 66.8%. One positive is that full-time employment continued to increase adding 17.6k jobs. All of job loses for the month were in part-time employment. With inflation running hot RBA will be on a pace for another 25bp rate hike and inflation report next week will provide more clarity to the picture.

PBOC kept the 1Y MLF rate at 2.75% but increased the volume of the facility, thus injected liquidity into the system in order to support the economy. Chinese data all beat expectations. Q4 GDP data came in flat vs -0.8% q/q as expected and 2.9% y/y vs 1.8% y/y as expected. Industrial production in December came in at 1.3% y/y vs 0.5% y/y as expected while retail sales fell by 1.8% y/y and the expectations were for a drop of 7.8% y/y.

This week we will get Q4 inflation data.

Important news for AUD:

Wednesday:

  • CPI

NZD

NZIER Quarterly Survey of Business Opinion saw business confidence in Q4 deteriorate to -70% from -42% in Q3, with net 73% of businesses expecting deterioration in general economic conditions in the coming months, thus making this the weakest reading in survey’s history. The report shows that companies are becoming much more cautious and are looking to reduce staff numbers and tone down on investment plans. Companies are also reporting shortages of skilled workers, lower demand as well as increasing number of them transferring higher costs to the consumers through price increases which points to inflation staying high in 2023. Second GDT auction of the year saw prices continuing to decline, although by negligible -0.1%.

This week we will get Q4 inflation data.

Important news for NZD:

Tuesday:

  • CPI

CAD

December CPI data fell more than expected. Headline CPI came in at 6.3% y/y vs 6.4% y/y and down from 6.8% y/y in November and -0.6% m/m vs -0.5% m/m as expected. The main reason inflation fell is gasoline prices which dropped 13.1 m/m. Core measures saw median and trimmed remain unchanged at 5% and 5.3% y/y respectively, while common slipped to 6.6% y/y. Inflation coming down will nudge BOC into a 25bp rate hike next week.

This week we will have a BOC meeting. Although labor market continues to be tight, weaker than expected inflation reading will lead BOC to raise 25bp and move toward pausing rate hikes in order to protect falling economy and housing market.

Important news for CAD:

Wednesday:

  • BOC Interest Rate Decision

JPY

BOJ decided to stand pat at their meeting and caught markets on the wrong side. Change in Japan comes gradually and markets got ahead of themselves. The rate remained at -0.1% and targeted yield on 10y JGB remained within -0.5/0.5% range. BOJ has unveiled their new program for YCC thus showing their strong resolve to protect the targeted range. Needless to say, JPY has tanked over 200 pips on the news on across the markets. Core-core CPI, that is excluding fresh food and energy, is projected to be at 1.8% in FY (fiscal year) 2023. up from 1.6% as seen in October. For FY 2024 it remains at 1.6% as in October. Real GDP has been revised down and is now seen at 1.7% for FY 2023 and 1.1% for FY2024 from 1.9% and 1.5% projected in October.

BOJ Governor Kuroda reiterated that bank will not hesitate to ease monetary policy further if need arises. The goal is to get inflation sustainably at 2% level with rising wages. He sees no issues with recent increases in bond purchases and adds that flexible market operations will be carried by using the fund-supplying operations against pooled collateral, their newly unveiled policy for keeping yields in range. The BOJ has reportedly bought JPY 34tn of JGBs since its decision to raise the targeted yield range in December. Trade minister Nishimura stated that he will advise companies to hike wages in excess of 5%. That way it will lead to a moderate demand-pull inflation which BOJ strives to achieve. Trade deficit for the year 2022 rose to record JPY19.97tn! With energy prices coming down we can see trade balance data starting to improve.

CHF

SNB total sight deposits for the week ending January 13 came in at CHF536.2bn vs CHF533.5bn the previous week. This is a sudden change in the long lasting downward trend, but it may be just a small correction and downside is set to continue. SNB Chairman Jordan stated in Davos that when looking back monetary policy everywhere was too expansionary. He added that price stability and bringing down inflation are top priorities.

Forex Major Currencies Outlook (Jan 30 – Feb 3)

We are up for a massive week where Fed, ECB and BOE will deliver additional rate hikes, we will get employment data from the US and New Zealand, GDP and inflation data from the Eurozone and newest PMI data from China.

USD

Q4 GDP came in at 2.9% annualized vs 2.6% annualized as expected. It was at 3.2% in Q3. The details of the report are less satisfying. Consumer spending rose 2.1% vs 2.9% as expected and contributed with 1.42pp to the overall reading, down from 1.54pp in previous quarter. Net exports showed the biggest drop from previous quarter as they contributed only 0.56pp vs 2.86pp in Q3. The biggest contributor was inventory build (1.46pp) which is never a good sign as it indicates weaker consumer demand. Headline PCE inflation for December came in at 5% y/y, down from 5.5% y.y in November. Core PCE came in at 4.4% y/y as expected and down from 4.7% y/y the previous month.

The yield on a 10y Treasury started the week and year at around 3.49%, fell below 3.43%, then rebounded and finished the week at around 3.54%. The yield on 2y Treasury reached 4.23% during the week and fell below 4.14%, then rebounded and finished the week at around 4.22%. Spread between 2y and 10y Treasuries started the week at -69bp and tightened to -67bp. FedWatchTool sees the probability of a 25bp rate hike in February at 98.1% while probability of a 50bp rate hike is at 1.9%.

This week we will have ISM PMI data, Fed meeting and to cap it all we will get NFP on Friday. Fed is set to deliver 25bp rate hike and markets will be interested if they will signal a pause or more hikes are on the way. Headline NFP is expected to be around 190k with the unemployment rate ticking to 3.6%.

Important news for USD:

Wednesday:​

  • ISM Manufacturing PMI​
  • Fed Interest Rate Decision​

Friday:​

  • NFP
  • Unemployment Rate
  • ISM Non-Manufacturing PMI

EUR

Preliminary PMI data for the month of January showed continued improvements in all three categories in Eurozone. Manufacturing rose to 48.8, inching closer back to expansion territory. Services returned into expansion with 50.7 vs 50.2 as expected and lifted composite back into expansion with 50.2. Input prices continue to fall indicating that inflation will fall substantially in the coming months. Labor shortages continue to dominate which may lead to wage price spiral. Eurozone started the year stronger than expected thanks to the milder than expected weather which led to lower gas consumption and sharp drop in energy prices. German manufacturing and French services though showed small declines which is a cause of concern and questions the health of the economy as a whole.

This week we will have preliminary Q4 GDP and preliminary January CPI report as well as ECB meeting where a 50bp rate hike is widely expected.

Important news for EUR:

Tuesday:​

  • GDP​

Wednesday:​

  • CPI​

Thursday:​

  • ECB Interest Rate Decision​

GBP

Preliminary PMI data in January saw a big drop in services as they cam in at 48 vs 49.7 as expected and down from 49.9 in December. Manufacturing saw improvement to 46.7 from 45.5 and composite dropped to 47.8 from 49. A huge fall in services, the lowest reading since January of 2021, will put BOE at a tough spot next week. Inflation is way high, labor market is tight, all causes for another 50bp rate hike, however PMI numbers indicate that economy is slowing down significantly.

This week we will have BOE meeting. The latest poll sees 29 of 42 economists see a 50bp hike which would bring rates to 4% and see 4.25% as a terminal rate which will be reached at March meeting.

Important news for GBP:

Thursday:​

  • BOE Interest Rate Decision​

AUD

Inflation data showed no signs of slowing down as it came in higher than both expected and in Q3. Headline number was 1.9% q/q and 7.8% y/y vs 1.6% q/q and 7.5% as expected, up from 1.8% q/q and 7.3% y/y in the previous quarter. The yearly increase is highest in almost three decades. Core reading, trimmed mean, came in at 1.7% q/q and 6.9% y/y vs 1.5% q/q and 6.5% y/y as expected. February meeting will see RBA deliver a 25bp rate hike with more to hikes to come. AUD was strong well after the CPI report as markets were positioned for RBA pause in February.

This week we will get official and Caixin PMI data from China.

Important news for AUD:

Tuesday:​

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

Wednesday:​

  • Caixin Manufacturing PMI (China)​

Friday:​

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

NZD

Q4 inflation data continued to run hot as it came in at 1.4% q/q and 7.2% y/y while expectations were for increases of 1.3% q/q and 7.1% y/y respectively. Accommodation services have printed a 14% y/y increase as international tourism returns. RBNZ sectoral model of CPI rose to 5.8% y/y from 5.4% y/y in Q3. Since RBNZ targets that number to be in 1-3% range we can safely say that February meeting will deliver another 50bp rate hike.

This week we will get a Q4 employment report.

Important news for NZD:

Tuesday:​

  • Employment Change
  • Unemployment Rate

CAD

BOC delivered a 25bp rate hike as expected and lifted it to 4.5%. They have signaled their intention to pause as they assess the effects of previous rate hikes on the economy. The bank sees GDP at around 1% in 2023 and around 2% in 2024. Projections are that lower energy prices and higher rates will bring inflation significantly down. It should be at around 3% by the middle of the year and then at targeted 2% in 2024. Bank members acknowledged that “there is growing evidence that restrictive monetary policy is slowing activity”. At the accompanying press conference BOC Governor Macklem stated that this pause is conditional and it depends on the incoming data and economic forecast. He added that if they see that inflation is not coming down they are prepared to act further and raise interest rates. He also clarified that they are not thinking about cutting interest rates. CAD has weakened after the interest rate announcement and press conference. BOC is the first major central bank signalling pause and it will weaken investors’ interest in CAD.

JPY

Preliminary January PMI data can be taken as a positive. Manufacturing remained unchanged at 48.9, still in contraction, but services jumped to 52.4 from 51.2 in December and dragged composite back into expansion territory with 50.8 print. Japanese government has downgraded assessment of the Japanese economy in the latest monthly economic report stating “The Japanese economy is picking up moderately, although some weaknesses have been seen recently.” Tokyo area inflation data for January continued to run hot. Headline number came in at 4.4% y/y up from 4% y/y in December. Excluding fresh food category rose by 4.3% y/y which is the highest in over 40 years. Excluding fresh food, energy, the so-called core core, came in at 3% y/y up from 2.7% y/y the previous month.

CHF

SNB total sight deposits for the week ending January 20 came in at CHF531.6bn vs CHF536.2bn the previous week. After a small pause last week, total sight deposits continued to decline as SNB tweaks its policy.​

Forex Major Currencies Outlook (Feb 6 – Feb 10)

After a massive week we are in for a quiet week where markets will have time to digest impacts of central bank’s policy decisions. The week ahead of us will bring us RBA meeting, preliminary Q4 GDP from the UK and employment data from Canada.

USD

Fed delivered a 25bp rate hike as expected, lifting the rate to 4.5-4.75%. Statement shows that “ongoing increases in the target range will be appropriate” indicating that they will continue raising interest rates at the future meetings. QT will continue as before, no changes. Statement also showed that for future rate hikes “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Powell stated at a press conference that there is more work to be done. He added “We’re talking about a COUPLE of more rate hikes to get to that level we think is appropriately restrictive.” He later added that if inflation starts coming down more quickly it will be incorporated in their policy setting. Powell mentioned that they are not seeing rate cuts in 2023, although markets are positioned for the first rate cuts to come in November. Powell was given opportunity to push back on the looser financial conditions and he did not take it so we had broad USD declines and rise in stock markets. He stated that terminal rate should be between 5-5.25%. According to him, disinflation period has started.

ISM manufacturing PMI continued to decline in January and came in at 47.4 from 48.4 in December. New orders plunged even deeper in contraction indicating weakening of demand. Prices paid index rose indicating that inflation pressures are not fully going away. Most probable reason for increase in prices is widespread rise in commodity prices on the back of China reopening. Employment index remained in expansion territory, although slowed down a bit.

ISM Non-Manufacturing for January smashed expectations by coming in at 55.2 vs 50.4 as expected and returned into expansion after shortly dipping in contraction in December with 49.2 reading. New orders index surged back into expansion with astonishing 60.4 reading with new export orders printing 59. Business activity also printed 60.4. Prices paid continued to decline and employment index ticked up to exactly 50. There are no signs of economy slowing down in the services sector which will allow Fed to continue with rate hikes.

January NFP report smashed expectations by coming in at 517k vs 185k as expected. The unemployment rate slipped to 3.4% while participation rate inched up to 62.4%. Average wages rose 0.3% m/m and 4.4% y/y, down from 0.4% m/m and 4.9% y/y in December. Most jobs were added in leisure and hospitality followed by professional and business services. Wages are easing, but labor market continues running red hot so Fed may feel comfortable continuing with rate hike increases.

The yield on a 10y Treasury started the week and year at around 3.5%, fell below 3.35% after the FOMC meeting and finished the week at around 3.54% thanks to the strong NFP number. The yield on 2y Treasury reached 4.25% during the week and fell below 4.18%, then rebounded and finished the week at around 4.22% post NFP. Spread between 2y and 10y Treasuries started the week at -69bp and tightened to -74bp. FedWatchTool sees the probability of a 25bp rate hike in March at 94.5% while probability of a no change is at 5.5%.

EUR

Preliminary Q4 GDP reading saw Eurozone escape contraction as it came in at 0.1% q/q vs -0.1% q/q as expected. Germany and Italy had negative readings while France and Spain had positive readings. Ireland surprised everyone with 3.5% q/q and it pushed Eurozone reading above zero. Domestic demand is stumbling with household consumption falling.

Although French and Spanish readings showed that inflation reaccelerated, preliminary Eurozone inflation for the month of January declined to 8.5% y/y from 9.2% y/y in December. There was a drop of 0.4% m/m. Falling energy prices have dragged inflation down with it, but core inflation remained stubbornly high at 5.2% y/y. Additionally, when we exclude energy inflation rose 7.3% y/y vs 7.2% y/y previous month on the back of rising food, alcohol and tobacco. One caveat to these numbers is that they do not include inflation numbers from Germany. German data has been postponed until next week. Eurozone inflation reading was calculated using model for German inflation data, so we may see a big revision to the number when final reading is published on February 23.

ECB raised by 50bp as widely expected lifting the interest rate to 3%. The statement showed intent for another 50bp rate hike at March meeting after which there will be evaluation of future path of rates. Future rate hikes will continue to be data-dependent and will be meeting-by-meeting decisions. QT will start from March 1 and last till the end of June and will average €15bn per month.

Risks for growth and inflation were described as more balanced. ECB President Lagarde clarified that today’s decision is not the March decision. She added that peak in rates is not reached and there is more work to be done. However, she did not provide clear direction on rates from March meeting so markets interpreted that as a sign that smaller rate hikes will come after March meeting or it will be outright pause. On Friday ECB policymakers came out with statements that March rate hike will not be the last.

GBP

BOE proceeded as expected and raised interest rate by 50bp to 4%. The vote was 7-2 with Tenreyro and Dhingra voting to keep rates unchanged. Inflation has likely peaked but if the price pressures continue mounting new rate hikes may be required. Inflation is now expected to drop to 3.92% by Q4 of 2023, which is a big downgrade from 5% as seen in December. BOE Governor Bailey reiterated that inflation is expected to fall sharply in second half of 2023 and added that inflation risks are still skewed to the upside. Lower inflation projections combined with higher projected growth should lead BOE toward the pause or if inflation remains stubbornly high to 25bp rate hikes. It could be a final 25bp rate hike of this cycle.

This week we will have a preliminary Q4 GDP reading.

Important news for GBP:

Friday:​

  • GDP​

AUD

Australian building permits exploded higher in January 18.5% m/m which pushed AUD higher since housing is a very big part of the economy. In combination with weak USD the data point propelled AUDUSD to a new seven- month high of 0.7158. After FOMC and NFP data AUDUSD was slammed down to almost 0.69.

First full month after economy reopened saw Chinese PMI data return into expansion territory. Manufacturing came in at 50.1 from 47 in December while services made astonishing jump to 54.4 from 41.6 the previous month! This all led to composite coming in at healthy 52.9 from 42.6 in December. Caixin readings also saw improvements across the board with manufacturing coming in at 49.2, services at 52.9 and composite at 51.1.

This week we will have RBA meeting from Australia where another 25bp rate hike is expected. We will also get inflation data from China.

Important news for AUD:

Tuesday:​

  • RBA Interest Rate Decision​

Friday:​

  • CPI (China)​

NZD

The employment report for Q4 of 2022 showed employment change continue to rise but at a modest 0.2% q/q vs 1.3% q/q in Q3. The unemployment rate ticked up to 3.4% while participation rate remained at 71.7%. On the wages front private wages increased 4.3% y/y while public wages increased 3.6% y/y. RBNZ is seen raising 50bp later in the month after a strong inflation report published previous week, however this report may cause them to slow down with future rate hikes. Analysts are already dialing down their calls for terminal rate to 5%,

CAD

November GDP, a very late data point but still relevant for calculation of Q4 GDP, came in at 0.1% m/m as expected thanks to rise in services of 0.2% m/m. With advanced GDP for December at 0.1% m/m it is projected that Q4 GDP will be 0.4% q/q and 3.8% y/y.

This week we will have employment data.

Important news for CAD:

Friday:​

  • Employment Change​
  • Unemployment Rate​

JPY

BOJ governor Kuroda reiterated that the bank will continue with easy monetary policy in order to reach its inflation target of 2%. Kuroda will finish its term as governor on April 8 so his remarks do not carry the same weight as before. BOJ has bought record amount of JGBs in January, JPY23.69tn ($182bn) in order to defend the yield curve control.

CHF

SNB total sight deposits for the week ending January 27 came in at CHF528bn vs CHF531.6bn the previous week. Total sight deposits continue trending to the downside as SNB continues selling USD and EUR.​

Forex Major Currencies Outlook (Feb 13 – Feb 17)

US CPI will be the most watched data point in the coming week. We will also get inflation from the UK and Switzerland, Q4 GDP data from the Eurozone and Japan, consumption data from the US and the UK as well as employment data from Australia and the UK.

USD

Atlanta Fed President Bostic stated that the tight labour market seen in latest NFP data might mean that the peak in rates could be higher than where the market is currently pricing. Minneapolis Fed President Kashkari stated that the peak in the Fed funds rate is most likely to be around 5.4%. Fed Chairman Powell stated that he was surprised by the strong jobs report and that there is still ground to cover so further rate increases will likely be needed. He added that disinflation is seen in goods inflation and in manufacturing sector which constitutes around a quarter of economy. Core services ex housing remains the metric to be watched. Additionally, he believes that inflation will fall sharply in 2023 but it will get close to 2% target only in 2024.

The yield on a 10y Treasury started the week and year at around 3.54%, rose to 3.68% and finished the week at around 3.74% thanks to the strong NFP number. The yield on 2y Treasury reached 4.48% during the week and fell below 4.18%, then rebounded and finished the week at around 4.3% Spread between 2y and 10y Treasuries started the week at -82bp and widened to -87bp which is a record low. FedWatchTool sees the probability of a 25bp rate hike in March at 93.7% while probability of a 50bp rate hike is at 6.3%.

This week we will have inflation and consumption data. Inflation is expected to continue falling, but with used car prices printing a surprising increase in January the risks to the CPI number are on the upside.

Important news for USD:

Tuesday:​

  • CPI​

Wednesday:​

  • Retail Sales​

EUR

Retail sales for the Eurozone in the month of December came in weaker than expected -2.7% m/m and -2.8% y/y, but when we take into account positive revisions to the November reading, December data came in line with expectations. Retail sales for food, drinks and tobacco showed biggest decline while automotive fuels were positive. Delayed preliminary German CPI for the month of January ticked up to 8.7% y/y from 8.6% y/y in December but still came in below market expectations of 8.9% y/y.

ECB policymakers were reiterating last week’s decision to raise rate hikes by 50bp in March stating that risk of doing too little is much greater than the risk of overtightening. ECB Executive Board member Isabel Schnabel stated that inflation is coming down due to drops in energy prices, not because of the ECB’s rate hikes and that she is in favour of another 50bp rate hike in March as tackling inflation is their priority. ECB policymakers Klaas Knot and Joachim Nagel talked about stopping the reinvestments of the asset purchase program portfolio as the ultimate goal, adding that the reductions would need to pick up speed.

This week we will have a second reading of Q4 GDP.

Important news for EUR:

Tuesday:​

  • GDP​

GBP

BOE Governor Bailey spoke in the Parliament and stated that inflation is expected to come down sharply in 2023. Chief Economist Pill added that there is substantial monetary tightening yet to come and that they expect a prolonged period of weak economic growth in the UK. He warned that there is a danger of overtightening on rates given how monetary policy acts with a lag. Markets are pricing another 25bp rate hike in March and these comments add more certainty to that expectation.

Preliminary Q4 GDP reading saw UK economy come in flat while December GDP number was -0.5% m/m vs -0.3% m/m as expected. In the fourth quarter services output was flat, production was down -0.2% while construction was up 0.3%. Real household consumption grew 0.1% q/q with government expenditure rising 0.8% q/q. The bulk of gains came in from business investment that was particularly strong with a rise of 4.8% q/q.

This week we will have employment and inflation data.

Important news for GBP:

Tuesday:​

  • Claimant Count Change​
  • Unemployment Rate​

Wednesday:​

  • CPI​

AUD

RBA proceeded as expected and delivered a 25bp rate hike thus lifting the cash rate to 3.35%. Board members expect further rate hikes will be necessary to return inflation to target. Inflation is seen falling down this year due to combination of lower global growth and slower domestic demand. Inflation is seen at 4.75% in 2023 and around 3% by mid-2025. Growth will slow down and print around 1,5% in both 2023 and 2024. The unemployment rate should increase to 3.75% by the end of 2023 and 4.5% by mid-2025. The board will continue monitoring developments in labor market as well as with inflation. There are no hints that RBA is closing to the peak interest rates or that it plans to cut interest rates so their hawkish stance should keep AUD supported. Statement of Monetary Policy showed that inflation has likely peaked at the end of 2022 and forecasts for core inflation were revised higher (4.3% y/y at the end of 2023 and 3.1%y/y at the end of 2024) while GDP and the unemployment rate remained unchanged. All of the forecasts were made assuming that rate hike will peak at 3.75% and ease to 3% by June of 2025.

CPI in China rose 2.1% y/y in January vs 2.2% y/y as expected, but up from 1.8% y/y in December. PPI, on the other hand, continued to trend down as it fell by -0.8% y/y vs -0.7% y/y the previous month.

This week we will have employment data and a speech from RBA Governor Lowe.

Important news for AUD:

Thursday:​

  • Employment Change​
  • Unemployment Rate​
  • RBA Governor Lowe Speech​

NZD

January manufacturing PMI returned to expansion with 50.8 print after three consecutive months in restrictive territory and 47.2 print in December. Electronic retail card spending, which covers around 70% of retail sales in New Zealand, started the year strongly with 2.6% m/m and 2.7% y/y increases.

CAD

BOC Governor Macklem stated in his speech that if economy and inflation continue to develop as forecasted there will be no need for more rate hikes. GDP is expected to be 0% in first three quarters of 2023. He says inflation turning the corner and he sees that as result of monetary policy. Inflation is still way to high and it will take time to bring it down to the targeted 2% level. If wage growth does not subside along with inflation expectations more rate hikes will be needed. He added that one of the main reasons for pausing is the debt load. According to him, central bank will need time to assess the impact of higher interest rates on households and businesses before they make further rate hikes.

January employment report was another stellar one. Employment change came in at 150k vs 15k as expected! The unemployment rate stayed at 5% while participation rate returned to pre-pandemic level of 65.7%. Wages rose 4.5% y/y, slower increase than 4.7% y/y seen in December. Full-time employment was staggering with 121.1k while part-time employment rose by 18.9k. BOC is firmly set on pausing rate hikes, but this employment report is impressive and paints a picture of red hot labour market.

JPY

Nikkei newspaper has reported before markets opened on February 6 that deputy Governor Amamiya has the biggest chances to succeed Kuroda on April 8. Amamiya is seen as more dovish than any of the potential candidates and JPY gapped lower on market open. Japanese government will present nominees for new BOJ Governor next week on Valentine’s Day, February 14. Kazuo Ueda seems to have biggest chances to be Kuroda’s successor. He is a professor and has previously served as a BOJ board member. He is more hawkish than Amamiya who refused to take the post.

Total labour cash earnings for the month of December printed a 25-year high coming in at 4.8% y/y. When including inflation, real wages rose 0.1% y/y. BOJ has pointed that wage increases are main component of achieving sustainable inflation. This data print can nudge BOJ to reconsider their loose monetary policy, however it should be note that the bulk of wage increases came from increase in overtime pay which printed 3% y/y. Wage increases did not transfer directly into household spending in December as latter fell by -2.1% m/m and -1.3% y/y.

This week we will have preliminary Q4 GDP reading.

Important news for JPY:

Tuesday:​

  • GDP​

CHF

SNB total sight deposits for the week ending February 3 came in at CHF528.1bn vs CHF528bn the previous week. Virtually no change as SNB continues with adjusting its monetary policy with rate hikes from previous year. Seasonally adjusted unemployment rate in January remained at 1.9% showcasing incredible tightness of Swiss labor market.

This week we will have inflation data.

Important news for CHF:

Monday:​

  • CPI

Forex Major Currencies Outlook (Feb 20 – Feb 24)

RBNZ meeting with another 50bp rate hike, preliminary February PMI from the Eurozone, the UK and Japan as well as inflation data from the US, Canada and Japan will mark the week ahead of us.

USD

January inflation report saw CPI drop by less than expected. December print was 6.5% y/y, January printed 6.4% y/y but it was expected for it to drop to 6.2% y/y. There were talks about inflation coming higher than expected, as we pointed in our previous week’s outlook, it caused a lot of volatility in the market with GBPUSD going almost 150 pips up only to give it all back. Core CPI also slipped but higher than expected (5.6% y/y vs 5.5% y/y). The report states “The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase, with the indexes for food, gasoline, and natural gas also contributing”. Also the weight of shelter in the CPI basket has been increased from 32.9% to 34.4%, Powell told us repeatedly that services ex shelter inflation is most watched and it came at 7.2%.

January retail sales smashed even elevated expectations. Headline number came in at 3% m/m vs 1.8% m/m as expected and -1.1% m/m in December. Control group, the reading used for GDP reading, rose 1.7% m/m vs 0.8% m/m as expected indicating that consumer started the year strong and it will lead to some positive revisions to Q1 GDP forecast. Ex autos category also smashed expectations by coming in at 2.3% m/m vs 0.8% m/m as expected. Warmer than expected weather has certainly helped the reading. The biggest gains were seen in sales at department stores (17.5%) followed by eating and drinking out (7.2%).

Vice-President of the Fed Lael Brainard, the biggest dove in FOMC, will step down from her position and take a new one as economic advisor to the White House. First reports indicate that Chicago Fed President Austeen Goolsbee has the most chances to succeed her as new Vice-President. With Brainard gone we could see Fed turning more hawkish. Cleveland Fed President Mester confirmed her hawkish stance stating that Fed will need to go above 5% and stay there for a while adding that if inflation surprises to the upside they will have to take more aggressive stance.

The yield on a 10y Treasury started the week and year at around 3.75%, rose to 3.92% and finished the week at around 3.89%. The yield on 2y Treasury reached 4.72% and finished the week at around 4.67%. Spread between 2y and 10y Treasuries started the week at -81bp and widened to -90.8bp which is the lowest it has been since 1980 and then tightened back to -79bp on the back of higher yields in 10y Treasureies. FedWatchTool sees the probability of a 25bp rate hike in March at 79% while probability of a 50bp rate hike is at 21%.

This week we will get FOMC Minutes, second estimate of Q4 GDP and PCE inflation data.

Important news for USD:

Wednesday:​

  • FOMC Minutes​

Thursday:​

  • GDP​

Friday:​

  • PCE​

EUR

ECB policymaker Makhlouf, a well known hawk, stated that he could see rates going above 3.50%. He added that he is open to acting forcefully in order to bring down inflation toward their target level. According to him, trajectory of rates is up and then plateauing there without any considerations about rate cuts. ECB President Lagarde reiterated bank’s decision to raise by 50bp in March as inflation is running way too high. Executive Board member Isabel Schnabel echoed madame Lagarde’s words adding that a 50bp rate hike in March is very much needed.

This week we will get preliminary PMI data for the month of February.

Important news for EUR:

Tuesday:​

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

GBP

The number of unemployment claims in January fell again as it came in at -12.9k vs -3.2k in December. The number of payrolled employees came in at 102k vs 47k the previous month. ILO unemployment rate for December was steady at 3.7% while average weekly wages (ex bonus) continued to rise and printed 6.7% 3m/y, up from 6.5% 3m/y the previous month. Although wages keep growing in nominal terms, inflation is keeping them depressed in real terms. Real wages for that period fell by 2.5% which indicates devastating effects of high inflation in producing cost-of-living crisis. The number of people whore not employed nor actively seeking a job has moved lower.

Inflation in January fell by more than expected 10.1% y/y vs 10.3% y/y. December print was 10.5% y/y. This a third consecutive monthly decline and it was led by a drop in transport category (petrol/diesel prices fell almost 4%) as well as restaurants and hotels. Slower increases were seen in food and non-alcoholic beverages and clothing and footwear while inflation accelerated for housing and utilities, recreation and culture and alcoholic beverages and tobacco. Core CPI also declined to 5.8% y/y from 6.3% y/y the previous month with core services also reporting a decline. BOE will be satisfied with these numbers and will cement their decision to raise by 25bp at the March meeting and increase the probability of a pause in May.

This week we will get preliminary PMI data for the month of February.

Important news for GBP:

Tuesday:​

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

AUD

Employment report in January was a weak one. Employment change came in at -11.5k vs 20k as expected for a second consecutive month of job loses. The unemployment rate rose to 3.7% from 3.5% in December while participation rate inched lower to 66.5% from 66.6% the previous month. Entirety of job loses were full-time (-43.3k) which only adds to the bleakness of report. Part-time employment held with 31.8k jobs added. RBA will have to reevaluate its monetary policy stance as they are now in a tough position with employment falling and inflation rising. We still think that 25bp rate hike is coming in March, but after that there may come a pause.

RBA Governor Lowe stated in his first appearance in front of the Senate and reiterated that inflation is way too high and that they have not reached peak in rates, but that he is unsure how far they will be going with further rate increases. In his second appearance, which came after the employment report was published, he stated that if another weak job report came out they will need to reconsider tight labour market. He added that current assessment is that rates will need to go higher, which prompted some analysts to raise their peak rate forecast to 4.1%. If top in inflation occurs during 2023 then there is a possibility of rates coming down in 2024.

NZD

RBNZ published its 2yr inflation expectations and it was lower than previous (3.3% vs 3.6%). As inflation expectations slide down RBNZ will find itself in more comfortable position and not need to aggressively continue with rate hikes after the February meeting. Kiwi did not like the news and lost some ground.

This week we will get a Q4 consumption data and RBNZ meeting. A 50bp rate hike is fully priced in by markets, therefore if RBNZ does not send a strong hawkish message on future rate hikes and if they only hints at pausing we will get NZD weakness.

Important news for NZD:

Wednesday:​

  • RBNZ Interest Rate Decision​

Sunday:​

  • Retail Sales​

CAD

BOC Governor Macklem spoke in Parliament and stated that inflation is turning the corner. He said that economy is overheating and is clearly in excess demand and there are some evidence emerging that rate hikes are slowing down demand. He is forecasting inflation to fall to 3% in the middle of 2023 and fall back further to their target in 2024. On labour market he said that it is too tight and it needs to get balanced. Reminder that last employment report showed 150k jobs added while only 15k was expected.

This week we will get inflation data and see if it will confirm Macklem’s words.

Important news for CAD:

Tuesday:​

  • CPI​

JPY

Q4 GDP rebounded but much weaker than expected. It came in at 0.2% q/q vs 0.5% q/q as expected with Q3 reading being downwardly revised to -0.3% q/q. Private consumption was the driving force of growth with 0.5% Business investment fell -0.5% while net exports added 0.3pp to the GDP with exports growing 1.4% and imports falling -0.4%. January trade balance printed the biggest deficit in history -JPY3496.6bn. Exports were up 3.5% y/y but imports were at 17.8% y/y. This is the 18th consecutive month of trade deficits.

The government has confirmed nomination of Kazuo Ueda as new Governor of BOJ. Former head of FSA Himino will be a new Deputy Governor. With a weak Q4 reading it is questionable how fast or whether new Governor will be able to move BOJ from its ultra loose monetary policy.

CHF

SNB total sight deposits for the week ending February 10 came in at CHF525.6bn vs CHF528.1bn the previous week. Continuation of well established trend as SNB looks to adjust its monetary policy. January inflation came in hot with 3.3% y/y vs 2.9% y/y as expected and up from 2.8% y/y in December. Core inflation also rose printing 2.2% y/y vs 2% the previous month. SNB will have no option but to raise in March. Markets are pricing a 25bp rate hike but talks of a 50bp rate hike might creep in to give Swissy some push.​

Forex Major Currencies Outlook (Feb 27 – Mar 3)

Preliminary inflation data from the Eurozone, Q4 GDP data from Australia, Canada and Switzerland as well as ISM PMI data from the US will highlight the week ahead of us.

USD

Second Q4 GDP report saw it slide to 2.7% vs 2.9% annualised as preliminary reported. Personal consumption contribution was revised down from 1.42pp to 0.93. Fixed investment improved to -0.81pp from -1.2 as preliminary reported. Net trade attributed 0.46pp to the GDP down from 0.56pp as preliminary reported. Fed’s preferred inflation metric PCE printed an increase in January. Headline number came in at 5.4% y/y vs 5.3% y/y in December while core PCE rose 4.7% y/y vs 4.6% y/y the previous month. Inflation has made a turn up which will cause Fed to step up its hawkish rhetoric. Additionally, personal spending rose 1.8% m/m while personal income rose 0.6% m/m.

The yield on a 10y Treasury started the week and year at around 3.82%, rose to 3.976% and finished the week at around 3.95%. The yield on 2y Treasury finished the week at around 4.79%. Spread between 2y and 10y Treasuries started the week at -80bp, tightened back to -74bp and then widened to -83bp post PCE report. FedWatchTool sees the probability of a 25bp rate hike in March at 58.3% while probability of a 50bp rate hike is at 41.7%.

This week we will get ISM PMI data.

Important news for USD:

Wednesday:​

  • ISM Manufacturing PMI​

Friday:​

  • ISM Non-Manufacturing PMI​

EUR

Preliminary February PMI for the Eurozone saw manufacturing slip to 48.5 from 48.9 in January on the back of big drops in German and French readings. Services ripped stronger and came in at 53 vs 50.8 the previous month with both German and French readings improving. This has pushed composite to 52.3 from 50.3 in January which is the highest since May of last year. S&P Global notes that: “Business activity across the Eurozone grew much faster than expected in February” and that “February’s PMI is broadly consistent with GDP rising at a quarterly rate of just under 0.3%.” Additionally, signs of inflation pressures are still seen in the services sector and are connected to the rising wages.

Final inflation reading for the month of January came in a bit hotter than previously reported. Headline CPI came in at 8.6% y/y vs 8.5% y/y as preliminary reported with -0.2% m/m vs -0.4% m/m as preliminary reported. Core CPI also ticked higher compared to preliminary report and came in at 5.3% y/y vs 5.2% y/y. Revisions are due to delay of German data that happened before the preliminary inflation reading was reported. Final reading of German Q4 GDP came in at -0.4% q/q vs -0.2% q/q as preliminary reported. Household consumption was down -1% q/q while gross fixed capital formation (capital investment) was down -2.5% q/q. German economy will have a low base for Q1 GDP reading but incoming data (manufacturing PMI, Ifo current situation, consumer confidence) all pointed to a negative growth in the first quarter. This will make two consecutive quarters of negative GDP, a definition of technical recession.

This week we will have preliminary February inflation data.

Important news for EUR:

Thursday:​

  • CPI​

GBP

Preliminary PMI data in February smashed expectations and provided us with a very strong report. Manufacturing came in at 49.2 vs 47 in January while services came in at 53.3 vs 48.7 the previous month. Combined together they lifted composite to 53 from 48.5 in January. The report shows great resilience of the economy and business sentiment has been improved due to signs of peak in inflation and lowering of recession fears. GBP has reacted strongly on the news with GBPUSD gaining more than 100 pips. In the end, S&P notes that: ”However, while the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern, especially in the service sector. As such, the resilience of the economy and the stickiness of the survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively, which may dampen future growth expectations and suggests that the possibility of recession later in the year should not be ruled out.” BOE member Catherine Mann, a well-known hawk, stated that financial markets have absorbed substantial degree of tightening and added that further tightening and sooner rate hikes will most likely be needed.

AUD

RBA minutes from February meeting revealed that the board considered a 50 bp hike and that pausing was not an option. Falling real incomes persuaded them to go for a 25bp rate hike. Board members agreed that further rate hikes would likely be needed and they have modelled their inflation forecasts based on a 3.75% cash rate. This is a continuation of hawkish message we saw in statement and in Governor Lowe’s speech in parliament. Wage data for Q4 came in at 0.8% q/q vs 1% q/q as expected and as was in Q3 and 3.3% y/y vs 3.5% y/y as expected. Wages rising slower than expected will ease fears of dreaded wage-price inflation dynamic. Q4 CAPEX data was very encouraging as it came in at 2.2% q/q vs 1.3% q/q as expected. Q3 CAPEX was revised up to 0.6% q/q from -0.6% q/q. Building CAPEX was the most prominent with 3.6% q/q increase showing that investments are pouring in into construction sector. CAPEX reading gave AUD a small boost.

PBOC has left 1-Year and 5-Year LPR (Loan Prime Rate) unchanged at 3.65% and 4.3% respectively. 1-Year LPR is used as benchmark for most new and outstanding loans while 5-Year LPR is used as benchmark for most home mortgage rates.

This week we will get Q4 GDP data from Australia and official PMI data from China.

Important news for AUD:

Wednesday:​

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

NZD

RBNZ delivered a 50bp rate hike as expected and lifted Official Cash Rate (OCR) to 4.75% from 4.25%, Board members have even considered a 75bp rate hike. Monetary conditions will need to tighten further as inflation is too high and employment is beyond maximum sustainable level. Balance of risks surrounding inflation is to the upside while housing and household balance sheets are two main downside risks. RBNZ now see OCR at 5.14% in June 2023 vs 5.41% previously. OCR is seen at 5.5% in March of 2024 as before while annual inflation projection for the same period is lifted to 4.2% from previous number of 3.8%. Hawkish rhetoric coming from RBNZ to give NZD some love after previous weeks’ declines. RBNZ Governor Orr stated that some early signs of inflation abating are starting to form but core inflation is still too high. He added that due to cyclone Gabrielle there will be some increased price pressures to come which may require higher rates for longer. Cyclone Gabrielle has caused floods and landslides in the North Island of New Zealand taking 5 lives and causing massive material damage that is estimated to be north of NZD13bn.

CAD

January inflation numbers came in softer than expected with headline CPI coming in at 5.9% y/y vs 6.1% y/y as expected and 6.3% y/y in December. Median and common core measures were unchanged at 5% y/y and 6.6% y/y while trim came down to 5.1% y/y from 5.3% y/y the previous month. BOC already announced they will pause with rate hikes and with inflation coming down it will only reinforce their stance.

This week we will get Q4 GDP data .

Important news for CAD:

Tuesday:​

  • GDP​

JPY

Preliminary PMI data for the month of February was a mixed bag. Manufacturing dropped to 47.4 from 48.9 in January making it fourth consecutive month of contraction and lowest reading since August of 2020. Output and new order components dropped, same as input prices but output prices rose indicating that inflation is being passed on to consumers. Services PMI jumped to 53.6 from 52.3 the previous month with reading being sixth in expansion and highest since June of 2022. New orders continued to grow and business sentiment strengthened. Input and output prices rose as combination of rising fuel and wage costs. Composite remained unchanged at 50.7.

January CPI for the entire country saw headline number come in at 4.3% y/y vs 4.5% y/y as expected and up from 4% y/y in December. CPI ex energy came in at 4.2% y/y as expected, up from 4% y/y the previous month while CPI ex energy, fresh food came in at 3.2% y/y as expected, up from 3% y/y in December. BOJ Governor nominee Ueda spoke at length in the parliament stating that inflation is transitory (driven by the supply side, cost-push) and that it is expected for it to come down to the 2% target in the middle of next fiscal year. Fiscal year starts on April 1 so inflation should hit the target at around October. It is necessary to continue with monetary policy easing in order to realise wage hikes. He added that there are various possibilities for what YCC might look like going forward but he did not want to comment on it now. Targetting short-term yields might be one of the strategies. Monetary normalization will be appropriate if trend inflation improves significantly.

CHF

SNB total sight deposits for the week ending February 17 came in at CHF526.8bn vs CHF525.6bn the previous week. A small increase in sight deposits as SNB further calibrates its policy.

This week we will get Q4 GDP data

Important news for CHF:

Tuesday:​

  • GDP

Forex Major Currencies Outlook (Mar 6 – Mar 10)

RBA, BOC and BOJ meetings but only RBA is expected to raise rate will be followed by employment data from the US and Canada as well as inflation data from China and Switzerland.

USD

February ISM manufacturing PMI rose to 47.7 from 47.4 in January. Expectations were for it to go to 48. Employment fell back into contraction while new order, new export orders improved but are still stuck in contraction. Prices paid component garnered the most attention as it rose to 51.3 from 44.5 in January indicating that inflation pressures are still hanging on. This will put pressure on Fed to continue with rate hikes and it gave a solid boost to USD strength.

ISM services PMI came in at 55.1 vs 54.5 as expected and ticked down from 55.2 in January. Employment index showed a healthy rise and return into expansion. New orders showed a big increase indicating that economy is faster expanding. Prices paid component was down but far less than expected showing that, same as in manufacturing sector, inflation is proving resilient.

The yield on a 10y Treasury started the week and year at around 3.96%, rose toward 4.09% and finished the week at around the 4% level. The yield on 2y Treasury reached 4.94%. Spread between 2y and 10y Treasuries started the week at -88bp and widened to -89bp. FedWatchTool sees the probability of a 25bp rate hike in March at 73.8% while probability of a 50bp rate hike is at 26.2%.

This week we will have NFP data. Headline number is expected to be around 210k with the unemployment rate rising to 3.6%. Additionally, we will get Fed Chairman Powell testimony in front of the Senate Banking Committee.

Important news for USD:

Friday:​

  • NFP​
  • Unemployment Rate​

EUR

Sentiment data for the Eurozone in February started to decline. Additionally, January readings were revised down indicating that optimism about Eurozone is starting to wane. Services sentiment dropped to 9.4 from 10.5 the previous month while industrial confidence barely hang above the 0 line with 0.5. On the positive side, consumer confidence improved to -19 from -20.9 the previous month.

French and Spanish inflation readings accelerated in February and contributed to hotter than expected inflation reading for the Eurozone. German inflation came in hotter than expected but unchanged from January. Eurozone inflation came in at 8.5% y/y vs 8.2% y/y as expected, just slightly down from 8.6% y/y the previous month. Core CPI made a sizeable jump as it came in at 5.6% y/y vs 5.3% y/y in January. Markets were already pricing in 50bp rate hike at March meeting, as pre-announced by Lagarde and this will cement it. The door for a surprise 75bp rate hike is opened, but we think it will be a long shot at this moment. Higher for longer scenario is more realistic with rates reaching 4%.

GBP

UK Prime Minister Sunak and EU Commission President von der Leyen outlined a trade deal regarding the situation in Northern Ireland. It has been named Windsor Framework and it will enable smooth transport of goods between Great Britain and the European Union by substantially reducing customs checks. Goods going from Great Britain to Northern Ireland will pass through a “green lane” requiring minimal paperwork and will be labelled “Not for EU”. On the other hand, goods heading for the EU single market in the Republic of Ireland will undergo full EU customs checks in Northern Ireland’s ports under a “red lane.” BOE Governor Bailey was unclear regarding the path of future rate hikes in his latest speech by saying that nothing is decided yet and leaving all options open.

AUD

Q4 GDP posted a big miss as it came in at 0.5% q/q vs 0.8% q/q as expected. Household consumption rose by mere 0.3% while government consumption rose by 0.6%. Net trade was positive with exports rising 1.1% while imports fell -4.3%. On the other hand, both private and public investment decreased.

Monthly CPI reading for the month of January came in at 7.4% y/y vs 8.1% y/y as expected, The print was at 8.4% y/y in December so faster than expected drop may give positive signals that inflation is peaking. Be mindful that this is not a complete reading as it covers around 60% of price changes. Better measure is quarterly print, but this is more timely print. Building permits saw a huge drop in January of 27.6% m/m. Housing is a huge part of Australian economy and with RBA hiking interest rates it is taking its toll on their business. Also, higher input costs are not helping as well.

Official PMI data from China for the month of February came in very strong. Manufacturing was at 52.6, up from 50.1 in January. Services jumped to 56.3 from 54.4 the previous month composite was at 56.4, up from 52.9 in January. Caixin manufacturing PMI returned to expansion in February with a 51.6 print, up from 49.2 the previous month. AUD benefited greatly from improved China data regardless of misses on growth and inflation. ING analyst Iris Pang sees that Chinese authorities will set GDP target at incoming Two Sessions (March 4) in the range of 5.5-6%. High PMI numbers support the case.

This week we will have RBA meeting where a 25bp rate hike is penciled in. We should get messages that inflation is too high and that more rate hikes are needed. We will also have inflation data from China.

Important news for AUD:

Tuesday:​

  • RBA Interest Rate Decision

Thursday:​

  • CPI (China)​

NZD

Retail sales for the Q4 came in at -0.6% q/q vs 0.6% q/q in Q3 and -4% y/y vs 4.9% y/y the previous quarter. The biggest decrease was seen in sales at electrical and electronic goods retailing while the biggest increase was seen for food and beverage services. Core retail sales were down -1.3% q/q vs 0.5% q/q in Q3. The massive drop shows that households are struggling to keep up with price increases and that their disposable income is massively falling. Business confidence in February improved to -43.3 from -52 in January. ANZ commented on report “Pricing intentions continue to inch lower but inflation expectations remain stuck around 6%”.

CAD

Canada managed to escape a down quarter with GDP in Q4 coming in flat vs 1.5% q/q as expected. Household consumption was up 0.5% q/q while government consumption was up 0.1% q/q. Net foreign demand contributed positively to GDP with exports growing 0.2% while imports fell 3.2% December monthly reading printed -0.1% m/m. Advanced January GDP reading sees a decent 0.3% m/m print.

This week we will have a BOC meeting. Pause has been telegraphed up front so this will be the base case scenario. We will also get employment data.

Important news for CAD:

Tuesday:​

  • BOC Interest Rate Decision​

Friday:​

  • Employment Change​
  • Unemployment Rate​

JPY

Retail sales in January provided a good beat on the estimates as they came in at 1.9% m/m and 6.3% y/y vs 0.4% m/m and 4% y/y as expected. The biggest increases were seen in general merchandise and food and beverage categories. Industrial production, on the other hand, missed expectations in January as it dropped -4.6% m/m. Q4 CAPEX came in at healthy 7.7% q/q as firms are continuing with investments in plant and equipment.

February CPI data for Tokyo area plunged to 3.4% y/y from 4.4% y/y in January. BOJ members were repeating that inflation is transitory and they must feel vindicated by this report. Ex fresh food component also fell to 3.3% y/y from 4.3% y/y the previous month. On the other hand, ex fresh food, energy (considered a core-core measure) ticked up to 3.2% y/y from 3.1% y/y in January. So inflation may prove to be stickier than expected. The unemployment rate ticked down to 2.4% to the lowest level since February of 2020.

This week we will get a final Q4 GDP reading as well as BOJ meeting where no change to rate or monetary policy will take place as this is Governor Kuroda’s last meeting.

Important news for JPY:

Thursday:​

  • GDP​

Friday:​

  • BOJ Interest Rate Decision​

CHF

Another week, another decline for SNB total sight deposits which came in for the week ending February 24 at CHF520.7bn vs CHF526.8bn the previous week. Q4 GDP came in flat q/q and up 0.7% y/y vs 0.2% q/q and 0.9% y/y in Q3. The economy grew 2.1% in 2022.

This week we will get inflation data.

Important news for CHF:

Monday:​

  • CPI

Forex Major Currencies Outlook (Mar 13 – Mar 17)

ECB meeting, inflation and consumption data from the US will be the highlights of the week ahead of us followed by employment data from Australia and the UK.

USD

Fed Chairman Powell testified in front of the Congress and came out with hawkish message. He stated that terminal rate is likely to be higher than previously expected and that “If totality of incoming data indicates faster tightening is warranted, we are prepared to increase pace of hikes”. He added that there are little signs of disinflation in core services ex housing, that is inflation measure most closely watched by the Fed. Additionally, he stated that “inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee”. His hawkish comments signal that dot plot will be revised up at the upcoming March 22 meeting. On the second day of his testimony he said that 50bp is not planned at March meeting and that they remain data dependent.

NFP data for February saw headline number come in at 311k vs 205k as expected. This is eleventh straight month that headline number beats expectations. The unemployment rate jumped to 3.6% from 3.4% in January while participation rate ticked up to 62.5%. Average hourly earnings continued to rise 0.2% m/m and 4.6% y/y which was less than 0.3% m/m and 4.7% y/y as expected. Average weekly hours slipped lower as well and the underemployment rate rose to 6.8%. With unemployment rate rising and wages rising slower than expected this will nudge Fed toward the 25bp rate hike.

The yield on a 10y Treasury started the week and year at around 3.95%, rose toward 4.1% and finished the week at around the 3.75% level. The yield on 2y Treasury reached the 5.1% level post Powell testimony. It was the first time that yield on a 2y note was higher than 5% since 2007. After initial claims, SVB meltdown and NFP the 2y yield fell almost 45bp, well bellow 5%. Spread between 2y and 10y Treasuries started the week at -91bp and widened to -110bp for the highest it has been since 1981. Post NFP report the spread tightened back to -91bp. FedWatchTool sees the probability of a 25bp rate hike in March at 19.2% while probability of a 50bp rate hike jumped to 80.8% post Powell testimony. Post NFP probability of a 25bp rose to 53.1% while probability of a 50bp rate hike fell to 46.9%.

This week we will get inflation and consumption data. Given Powell’s recent comments importance of data points cannot be overstated.

Important news for USD:

Tuesday:​

  • CPI​

Wednesday:​

  • Retail Sales​

EUR

January retail sales were up 0.3% m/m vs 1% m/m as expected but with December reading being revised up it cam be said that January was in line with expectations. Biggest increase was seen in food, drinks and tobacco while on-line trade posted the biggest decline. Final reading of Q4 GDP for the Eurozone saw it come flat vs 0.1% q/q as reported in the second reading. Downward revisions to German and Irish readings were the main cause. Household consumption saw a biggest negative print since 1999 when the Eurozone started while investment fell 3.5% q/q. Net exports were positive followed by government consumption and inventories. The area managed to barely avoid recession but it did not generate any growth for the entire quarter.

This week we will have ECB meeting where 50bp rate hike is certain. Investors will be watching closely for signs of what ECB will do at their future meetings.

Important news for EUR:

Thursday:​

  • ECB Interest Rate Decision​

GBP

January GDP reading came in at 0.3% m/m vs 0.1% m/m as expected. A nice beat on a monthly figure was overshadowed by flat figure on 3m/3m basis. Services sector is holding the economy as it grew by 0.5%. Construction sector was particularly weak, dropping by the largest amount in last 6 months (-1.7% m/m).

This week we will have employment data and spring budget on Wednesday.

Important news for GBP:

Tuesday:​

  • Claimant Count Change​
  • Unemployment Rate​

AUD

RBA delivered another 25bp rate hike as expected and lifted the cash rate to 3.6%. The message was less hawkish than expected as it stated that RBA will continue rate hikes but in assessing how much rates will need to go up the board will closely follow developments in the global economy. Basically, they are moving from strong rate hike path and suitable forward guidance to more data dependent approach. Monthly inflation data suggest that inflation has peaked and central projections are for inflation to come down in this and next year and be around 3% in mid-2025. Governor Lowe stated in a speech that they are getting closer to the point where it will be appropriate to pause rate hikes and that the timing of pause will be determined by incoming data.

Two sessions parliamentary meeting has started over the weekend in China and authorities stated that GDP for 2023 will be around 5%. This is lower than markets were expecting which led to AUD and NZD being taken down on the open. Trade balance surplus for the January-February period increased to $116.8bn but it was done on the back of large drop in imports (-10.2%) indicating a very weak domestic demand. CPI in February more than halved to 1% y/y from 2.1% y/y in January. Expectations were for a rise of 1.9% y/y. PPI also fell and printed -1.4% y/y vs -0.8% y/y the previous month. With inflation declining there will be no obstacles to further monetary stimulus.

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

Important news for AUD:

Wednesday:​

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

Thursday:​

  • Employment Change​
  • Unemployment Rate​

NZD

Electronic card retail sales for February were flat m/m and up 11.7% y/y. They comprise almost 70% of total retail sales reading so they are used as a good indicator. January was a nice positive month, but with February being flat we can see another weak quarterly reading as consumption is slowing down.

This week we will have Q4 GDP data.

Important news for NZD:

Wednesday:​

  • GDP​

CAD

BOC has left rates unchanged at 4.5%. After a year of rate hikes at every meeting this is the first meeting where no change was made. They concluded that monetary policy is showing effects as it weighs in on household spending and investment and that inflation will come down to 3% by mid-2023. They are moving towards data dependent stance and if data continues to come in as expected by their projections they will keep rates steady. The statement finishes with “Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target.” It shows that they are keeping the door open toward future rate hikes if inflation starts increasing.

February employment report brought another, third in a row, beat on the estimates with headline number printing 21.8k jobs added vs 10k as expected. The unemployment rate and participation rate remained unchanged at 5% and 65.7% respectively. All of the jobs added were full-time jobs (31.1k) while part-time jobs saw loses of 9.3k. BOC just paused with rates and wages jumped by 5.4% y/y which will certainly add to inflation pressures. Increasing inflation pressures will force BOC to reconsider their pause stance.

JPY

Over the weekend it was announced that Spring wage negotiations, better known as “Shunto”, will see Japan Trade Unions ask for a pay raise in average of 4.49%. This will be the highest wage increase since 1998. BOJ thinks this will cause demand-pull inflation, which is much more sustainable and stable. Final Q4 GDP reading was revised down to flat q/q from 0.2% q/q as preliminary reported.

Governor Kuroda did not go out with a bang as at the last meeting under his leadership BOJ left the rate and monetary policy unchanged. The statement shows assessment of economy as picking up as pandemic and supply chain issues fade away. Core consumer inflation is seen around 4% and inflation expectations are heightening.

CHF

SNB total sight deposits for the week ending March 3 came in at CHF519.4bn vs CHF520.7bn the previous week. February inflation data came in hotter than expected. Headline number was at 3.4% y/y vs 3.1% y/y as expected and up from 3.3% y/y in January. A 25bp rate hike is penciled in for the March meeting.

Forex Major Currencies Outlook (Mar 20 – Mar 24)

Fed, BOE and SNB meetings will all deliver rate hikes in the week ahead of us and we will get preliminary March PMI data for the Eurozone and the UK as well as inflation data for Canada.

USD

The US government has guaranteed safety of all deposits in SVB and Signature Bank. They said that this is not a bailout as SVB equity and bond investors will get wiped out, only depositors will be protected. US Treasury announced new Bank Term Funding Program (BTFP) which will allow banks to pledge collateral at par, meaning holdings of long-dated Treasuries or MBS with mark-to-market losses can unlock liquidity based on original value. With Fed hiking interest rates in the past 12 months value of long-dated Treasuries and MBS decreased significantly causing losses and illiquidity. First Republic Bank, another troubled bank, received $30bn in additional funds from a group of 11 big banks with JP Morgan, Citibank, Bank of America and Wells Fargo depositing $5bn each while Goldman Sachs and Morgan Stanley each deposited $2.5bn. Fed document showed that for the week ending on Wednesday March 15, banks borrowed $152.85bn from the lender of last resort which was up from less than $5bn the previous week. The amount borrowed is higher than the previous all-time high of $111bn seen in the 2008.

February inflation report came in at 6% y/y as expected and down from 6.4% y/y in January. Core CPI slipped to 5.5% y/y from 5.6% y/y the previous month. Inflation has been coming down for eighth straight month. Shelter was the biggest contributor as it accounted for over 70% of the increase followed by food prices and energy index. Core services ex. shelter & healthcare rose by 0.8% m/m. Considering falling inflation and potential systematic risks in banking sector Fed will opt for a 25bp rate hike next week.

Retail sales in February declined -0.4% m/m as expected. Retail sales ex autos were down -0.1% m/m while ex autos and gas were flat on the month. A very surprising reading and a positive for the economy was control group, which excludes volatile components such as building materials, gasoline, autos and food service. It rose 0.5% m/m and January reading was revised up to 2.3% m/m from 1.7% m/m.

The yield on a 10y Treasury started the week and year at around 3.7%, rose toward 4.1% and finished the week at around the 3.4% level. The yield on 2y Treasury dropped more than 100bp from last week’s high at 5.08% as it fell to 3.814% and finished the week at around 4.1%. Spread between 2y and 10y Treasuries widened over the weekend and started the week at -75bp then tightened further due to sharp drop in 2y yield to -51bp. It finished the week at around -62bp. FedWatchTool sees the probability of a 25bp rate hike in March at 84.9% while probability of no change is at 15.1%. Probability of a 50bp rate hike is at 0 and it finished the last week at 40%.

This week we will have FOMC meeting. A 25bp rate hike is the most probable outcome. We will get a new Summary of Economic Projections and a revised dot-plot. According to statements from FOMC members that dot-plot will be revised up to show higher terminal rate. Fed members entered a quiet period right as the turmoil in banking sector occurred so we may see some tweaks to the terminal rate.

Important news for USD:

Wednesday:​

  • Fed Interest Rate Decision​

EUR

ECB delivered on a 50bp rate hike as announced thus lifting the rate to 3.5%. The statement started with “Inflation is projected to remain too high for too long.” They are switching to data dependent approach with inflationary data and outlook as the main data points. Macroeconomic projections were done prior to the tensions in the financial markets so they should be interpreted with added uncertainty. “ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.” Core inflation is seen averaging 4.6% in 2023, 2.5% in 2024 and 2.2% in 2025. Growth has been revised to 1% in 2023 due to surrounding uncertainties and is expected to pick up to 1.6% in both 2024 and 2025. APP portfolio will remain declining by €15bn per month until the end of June of 2023.

At the press conference President Lagarde stated that ECB is closely monitoring tensions in the financial markets. She stated that underlying price pressures are staying strong and that wage pressures are gaining strength. Falling energy prices could give a boost to the growth as companies adjust as well. Stronger rebound in China could lead to increase in foreign demand which could also boost growth. She reiterated data dependence stating that it is impossible to determine what the rate path will be. The decision at ECB meeting was adopted by very large majority of members.

This week we will have preliminary March 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

February payroll change came in at 98k vs 42k in January. ILO unemployment rate for January remained at 3.7% while employment change for 3 months leading to January rose by 65k. Wages are still elevated but came in weaker than compared to the previous month (5.7% 3m/y vs 6% 3m/y for average weekly earnings and 6.5% 3m/y vs 6.7% 3m/y when bonus is excluded). The report underscores tightness in labor market. Even though nominal wages are high, high inflation is keeping real wages in negative territory. Real wages for total pay fell 3.2% 3m/y for the biggest decline since 2009.

This week we will have inflation data, BOE meeting and preliminary March PMI readings. Base case for BOE is still a 25bp rate hike but with the fallout of SVB and wages coming down there is a rise in probability of a no-change.

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 couple of months of weak employment reports, February jobs report smashed expectations along all of the major components. Employment change came in at 64.6k vs 48.5k as expected. The unemployment rate ticked down to 3.5% while participation rate ticked up to 66.6%. The economy added 74.9k full-time jobs while part-time jobs declined by 10.3k. Majority of declines in part-time jobs can be attributed to their move to full-time jobs which is a great sign for the economy. Underemployment and underutilization declined to their historic lows. Due to the issues with the banking sector around the globe RBA will not feel forced to raise rates at their April meeting but this report underscores how tight labour market in Australia is.

China has cut RRR rate by 25bp in order to stimulate economy. RRR now stands at 10.75%, The cutting of RRR releases huge amount of liquidity in the system which should help cushion it from the turmoil that catches banking system around the world. The cut should also allow easier access to credit.

NZD

Q4 GDP went into negative for the quarter as it printed -0.6% q/q and 2.2% y/y. Q3 reading was revised down to 1.7% q/q from 2% q/q adding more to the weak reading. Digging into details we can see that consumption was flat while investment dropped. Finance minister Robinson stated that despite poor Q4 reading economy remains resilient. Probability of a 25bp rate hike in April is increasing as markets price out another 50bp rate hike and it can be seen in NZD weakening.

CAD

Wholesale sales for January came in at 2.4% m/m, up from -0.7% m/m in December. The increase showed higher sales in the machinery, equipment and supplies and food, beverage, & tobacco products. The declines were seen in motor vehicles & motor vehicle parts & accessories. Housing starts rebounded in February and rose by 244k, up from 215.4k in January.

This week we will have inflation data.

Important news for CAD:

Tuesday:​

  • CPI

JPY

Core machinery orders, a good proxy for CAPEX 6-9 months down the line, rebounded heavily in January and printed 9.5% m/m and 4.5% y/y. Japan Center for Economic Research now estimates that wage hikes for this year will be at 3.05% which is up from 2.85% seen in January. This will be the highest yearly increase since 1997. Higher wages should lead to higher consumption and a demand-pull inflation which is much more sustainable and easier to manage.

CHF

SNB total sight deposits for the week ending March 10 came in at CHF510.8bn vs CHF519.4bn the previous week. After a hot CPI reading previous week SNB is selling USD and EUR and buying CHF in order to prop up Swissy strength and keep inflation in check.

Credit Suisse was in trouble this week. Their main shareholder declined to add more financial assistance to the bank and it led to Credit Suisse CDS shooting up higher on concerns that it will be the next bank to go bust. Their stock fell 20%. Later in the week it was announced that bank will borrow CHF50bn from the SNB thus effectively getting a bailout from the central bank.

This week we will have SNB meeting. There is a consensus of a 50bp rate hike in order to subdue rising inflation.

Important news for CHF:

Thursday:​

  • SNB Interest Rate Decision

Forex Major Currencies Outlook (Mar 27 – Mar 31)

Inflation data from the US and the EU will be highlights of the rather quiet week as markets digest latest central bank meetings.

USD

On late Sunday afternoon Fed has announced that they will be improving effectiveness of USD funding abroad by allowing swap facilities to be used daily instead of weekly. “These swap facilities are designed to improve liquidity conditions in global money markets…” Existing home sales in February jumped to 4.58m from 4m in January. They have been falling for twelve consecutive months and as the mortgage rates start coming down the trend will reverse.

Fed has delivered another 25bp rate hike as widely expected and thus lifted the rate to 4.75-5% range. The statement showed that Fed will now switch fully to data dependent mode. The reference to “ongoing increases” in rates was omitted and switched with “some additional policy firming may be appropriate". The accompanying Summary of Economic Projections saw median rate for the end of 2023 unchanged at 5.1%. 2024 rate was revised up to 4.3% from 4.1% while rate for the end of 2025 was kept at 3.1%. Both headline and core PCE inflaton for 2023 were moved higher while GDP and the unemployment rate were moved lower.

Chairman Powell has started the press conference by saying that inflation is too high adding that they will need to closely monitor banking conditions as well as that they have the tools to deal with the issue. In the Q&A section he stated that FOMC members thought they will need a higher terminal rate couple of weeks ago. He acknowledged that crisis in the banking sector could have effects as a rate hike. This means that due to potential bank runs banks will limit loans/credit creation and thus sack the liquidity from the market, creating tighter monetary conditions, which is what Fed is doing with rate hikes. Powell was adamant that there will be no rate cuts.

The yield on a 10y Treasury started the week and year at around 3.45%, rose toward 3.6% and finished the week at around the 3.4% level. The yield on 2y Treasury reached at around 4.15% and then fell sharply post-FOMC to around 3.55%. Spread between 2y and 10y Treasuries tightened over the weekend and started the week at -36bp then widened further to -55bp, tightened again post-FOMC to -36bp. FedWatchTool sees the probability of no change in May at 85% while probability of a 25bp hike is at 15%.

This week we will get Fed’s preferred inflation measure.

Important news for USD:

Friday:​

  • PCE​

EUR

ZEW survey for the month of March showed first declines in four months. Current conditions declined to -46.5 from -45.1 in February while outlook for Germany dropped to 13 from 28.1 the previous month. Outlook for the Eurozone also plunged printing 10, down from 29.7 in February. Turmoil in financial system is destroying optimism among financial participants and it is clearly reflected in this survey.

Preliminary March PMI data for the Eurozone saw further declines in manufacturing sector as headline number printed 47.1, down from 48.5 in March. The reading was dragged down by the weak German sector while French sector posted a small improvement. Services sector, on the other hand, posted a healthy rebound with 55.6, up from 52.7 in February and thus lifted composite to 51. from 52 the previous month. This now makes a new ten-month high in composite reading. Inflationary pressures have continued to moderate.

This week we will have preliminary March inflation data.

Important news for EUR:

Friday:​

  • CPI​

GBP

Inflation in the UK for the month of February accelerated, thus braking the three consecutive months of declines, and remained in double digits as it came in at 10.4% y/y vs 10.1% y/y in January. Expectations were for a drop to 9.9% y/y. Restaurants and cafes, food, and clothing showed the biggest jump in prices while prices for recreational and cultural goods and services and motor fuels declined on the month. Core CPI reading is very concerning as it came in at 6.2% y/y vs 5.7% as expected and up from 5.8% y/y the previous month.

BOE has decided to hike interest rate by 25bp to the 4.25% level. The vote was split 7-2 with two members, Tenreyro and Dhingra, voting to keep rate unchanged. Inflation has unexpectedly turned higher but according to bank’s projections it will fall significantly in Q2 of 2023. Fiscal support should add 0.3% to the GDP. The statement shows “The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” BOE is turning to data dependent mode as well. Governor Bailey added that they are not certain yet if 4.25% will be the peak in rates. Currently the markets are pricing a 50/50 chance of another 25bp rate hike in May.

Consumption data showed a nice improvement as headline retail sales rose 1.2% m/m while core retail sales rose 1.5% m/m. The details are less rosy with headline retail sales getting a boost from sales at non-food stores such as discount department stores, clothing, second-hand goods stores, such as auction houses and charity shops. Preliminary PMI data in March showed slowdown across the economy. Manufacturing declined further into restriction territory followed by services who are still hanging in expansion at 52.8 which managed to keep composite reading at 52.2.

AUD

Minutes from the latest RBA meeting showed that the Board agreed to reconsider case for pausing at April meeting as pausing would allow time to reassess the outlook for the economy. They are watching data on jobs, inflation, retail sales, business surveys, global developments. Current assessment is that inflation is too high, labour market is tight and business surveys are solid. Recent data were beyond expectations. AUD was sent lower by this as markets are pricing out further rate hikes and pricing in pause from RBA.

After last week’s surprising RRR cut PBOC decided to leave LPR rates unchanged. LPR for 1-year is at 3.65% and this rate is used for a great majority of new and outstanding loans. LPR 5-year is at 4.30% and this rate is used for mortgages, great majority of mortgages are based on a 5-year LPR.

NZD

Westpac quarterly consumer confidence printed 77.7 in Q1, a nice jump from 75.6 in Q4 of 2022. RBNZ speakers were adamant stating their intent to fight against inflation, to bring it down from very high levels. Chief economist Conway added that if inflation expectations do not fall they will be forced to do more.

CAD

February inflation report saw CPI fall more than expected. Headline number came in at 5.2% y/y vs 5.4% y/y as expected and down from 5.9% y/y in January. Food prices were the biggest contributor as they rose by 10.6% y/y. This is the seventh consecutive month of reading printing in double digits. Energy prices declined with gasoline prices leading the way (-4.7% y/y). All of the core readings declined with median coming in at 4.9% y/y vs 5% y/y, trimmed at 4.8% y/y vs 5.1% y/y and common at 6.4% y/y vs 6.6% y/y the previous month. BOC is the first central bank that halted rate hiking cycle and with inflation continuing to fall combined with banking woes around the globe it is very likely that current rate level of 4.5% will represent terminal rate. Additionally, the new move in rate hikes seems to be tilted toward a rate cut.

JPY

February inflation data for the entire country of Japan showed slowdown similar to numbers from Tokyo area. Headline number came in at 3.3% y/y vs 4.3% y/y in January. Ex fresh food category fell to 3.1% y/y from 4.2% y/y the previous month. CPI ex fresh food and energy came in higher then expected at 3.5% y/y vs 3.2% y/y in January. This is a new 40-year high and it showcases that inflationary pressures are stickier than BOJ thought and hoped for. Preliminary March PMI data showed continued improvement along the sectors with manufacturing coming in at 48.6 vs 47.7, services at 54.2 vs 54 and composite at 51.9 vs 51.1 the previous month.

CHF

SNB total sight deposits for the week ending March 17 came in at CHF515.1bn vs CHF510.8bn the previous week. A rare jump in the sight deposits whose trend in last 6 months is clearly to the downside. It is yet to be seen if this is a one-off or beginning of a reversal in trend.

Over the weekend Switzerland’s biggest bank UBS has purchased distressed Credit Suisse bank. The move should bring some peace in the financial markets which are in turmoil after collapse of SVB and Signature banks. The deal is worth around CHF3bn and it will not require approval of shareholders as Swiss government decided to change laws in order to facilitate the deal coming through.

SNB has delivered a 50bp rate hike thus lifting the rate to 1.5%. The main goal of rate hike is to subdue renewed increase in inflationary pressures which are characterized as broad-based. Additional rate hikes cannot be ruled out and bank remains ready to intervene in the financial markets if the need arises. “The new forecast puts average annual inflation at 2.6% for 2023, and 2.0% for 2024 and 2025”. GDP is seen increasing by around 1% in 2023.​

Forex Major Currencies Outlook (Apr 3 – Apr 7)

RBA and RBNZ meetings, followed by employment data from the US and Canada will be the highlights of the week ahead of us. Please note that Friday is Good Friday holiday, liquidity will be thinner than usual and with NFP being published we could have greater than usual volatility.

USD

March consumer confidence improved to 104.2 from upwardly revised 103.4 in February. Households managed to look past banking turmoil and show us a picture of a healthy consumer. Final reading of Q4 GDP showed that consumer struggled mighty in the previous quarter with GDP coming in at 2.6% vs 2.7% annualized in second reading and personal consumption attributed only 0.7% to the reading, down from 0.93% in second and 1.42% in first reading.

Headline PCE inflation in February came in at 5% y/y vs 5.4% y/y in January. while core PCE slipped to 4.6% y/y from 4.7% y/y the previous month. Inflation continues to come down making it a 50/50 whether there will be a pause or a 25bp rate hike in May. Personal spending and personal income both continued to increase by 0.2% and 0.3% respectively.

The yield on a 10y Treasury started the week and year at around 3.38%, rose toward 3.59% and finished the week at around the 3.4% level. The yield on 2y Treasury reached at around 4.17%. Spread between 2y and 10y Treasuries started the week at -47bp then widened further to -60bp. FedWatchTool sees the probability of no change in May at 58.5% while probability of a 25bp hike is at 41.5%.

This week we will have ISM PMI data as well as NFP data on Friday. Headline number is expected to print around 250k while the unemployment rate should tick down to 3.5%.

Important news for USD:

Monday:​

  • ISM Manufacturing PMI​

Wednesday:​

  • ISM Non-Manufacturing PMI​

Friday:​

  • NFP​
  • Unemployment Rate​

EUR

German Ifo index in March showed improvement across all three categories, current conditions, business climate and expectations. Ifo economist Klaus Wohlrabe stated that winter recession became more unlikely. The number of companies that were planning to raise prices is declining. Sentiment data for the Eurozone in the month of March saw slight declines and consumer confidence ticked down for the first time after five consecutive months of improvement.

German inflation in March declining due to base effects, Russia invasion of Ukraine sent energy prices through the roof in March of 2022, it came in at 7.4% y/y vs 8.7% y/y in February. More attention should be paid to monthly figures and there the number was unchanged from February 0.8% m/m indicating that there are still strong price pressures brewing. French inflation reading declined to 5.6% y/y from 6.3% y/y the previous month with monthly figure slipping to 0.8% m/m from 1% m/m in February. Eurozone inflation dropped to 6.9% y/y vs 7.1% y/y as expected and down from 8.5% y/y the previous month but monthly reading still printed an increase of 0.9% m/m. Core inflation is of concern, it ticked up to a new high of 5.7% y/y as expected. This data should keep ECB firm on the rate hike path.

GBP

Final reading of Q4 GDP saw a slight improvement to 0.1% q/q from being flat. GDP rose 0.6% y/y vs 0.4% y/y as preliminary reported. The services sector grew by 0.1% and the construction sector grew by 1.3%, while the production sector growth was flat. Real household consumption was revised up to 0.2% and it helped improve the overall reading as business investment and government consumption were down.​

AUD

February CPI data showed a much welcomed decline. CPI came in at 6.8% y/y vs 7.1% y/y as expected and down from January figure of 7.4% y/y. This is not official data point, but it will be incorporated in RBA’s decision next week and we think they will see weakening in inflation as a sign to pause with rate hikes.

Chinese official PMI data for March saw manufacturing beating expectations and coming in at 51.9, down from 52.6 in February. Non-Manufacturing rose to astonishing 58.2 from 56.3 the previous month and it lifted composite to 57 from 56.4 in February. The economy continues to expand.

This week we will have RBA meeting. Markets are split 50/50 whether there will be no change or a 25bp rate hike. We think that RBA will use this opportunity to be the second major central bank to take a pause. Inflation is still very high but it seems to be peaking and housing market looks like it could do with a pause.

Important news for AUD:

Tuesday:​

  • RBA Interest Rate Decision​

NZD

ANZ survey for March showed business confidence ticking down to -43.4 from -43.3 in February while activity outlook improved to -8.5 from -9.2 the previous month. ANZ comments state “Retail, construction and agriculture respondents were generally more upbeat, while manufacturing and services firms became more pessimistic.” Additionally, although inflation seems to ease with inflation expectations coming lower the report shows that “The net proportion of firms experiencing higher costs remains extremely high.” Residential construction saw improvement while employment when compared to year ago declined significantly. Inflation expectations jumped to 5.4% from 5.2% which will concern RBNZ.

This week we will have RBNZ meeting. We think that RBNZ will follow RBA and BOC and announce pause. Their Official Cash Rate is at 4.75% making it second highest in the developed world, behind only Fed. There is also a possibility of a 25bp rate hike.

Important news for NZD:

Wednesday:​

  • RBNZ Interest Rate Decision​

CAD

Canadian budget published growth forecasts and it sees GDP at 0.3% in 2023, 1.5% in 2024 and 2.3% in 2025. CAD has benefited this week from surge in oil prices as well as the fact terminal rate for other central banks seems to be smaller than markets have been pricing in. This has caused repricing in CAD as it strengthened around 150 against USD.

This week we will have employment data.

Important news for CAD:

Thursday:​

  • Employment Change​
  • Unemployment Rate​

JPY

We had a slew of data from Japan with Tokyo area CPI for the month of March being the most prominent. Headline number came in at 3.3% y/y vs 3.4% y/y in February while ex-fresh food came in at 3.2% y/y vs 3.3% y/y the previous month. Both numbers fell by less than expected. On the other hand, ex-fresh food, energy came in at 3.4% y/y, up from 3.2% y/y in February. It has been rising every month since February of 2022 and it indicates that price pressures are much stickier. The unemployment rate in February rose to 2.6% from 2.4% it may pose cause for concern, but it is still at an incredibly low level.

CHF

SNB total sight deposits for the week ending March 24 came in at CHF567bn vs CHF515.1bn the previous week. This is the second consecutive week of rising sight deposits as SNB reverts to buying USD and EUR. This may be influenced by Credit Suisse debacle.​

This week we will have inflation data.

Important news for CHF:

Monday:​

  • CPI​

Forex Major Currencies Outlook (Apr 10 – Apr 14)

BOC meeting, inflation and consumption from the US along with employment data from Australia and trade data from China will grab investors’ attention in the week ahead of us. Majority of markets will be closed on Monday for Easter Monday so liquidity will be thinner than usual.

USD

OPEC has made announcement over the weekend about unexpected production cut of 1.16mb/day that will go on from May 1 until the end of the year. With Russia already announcing 500kb/day cut this will lower supply by 1.66mb/day. Oil prices have gaped to $81 on the market open, an increase of 7%. Increase in oil prices will be inflationary and should cause central banks around the world to reconsider their decision to pause. Additionally, it will present major difficulties for the current Biden administration to refill SPR. JOLTS job openings have printed 9.931m in February for the first drop below 10m since May of 2021.

ISM Manufacturing PMI for March slipped further into contraction and came in at 46.3 vs 47.7 in February. This is now fifth consecutive month that index is below 50. New orders, new export orders and employment fell further while production remained unchanged at a low level of 47.3. One positive is that prices paid component fell into contraction indicating ease of price pressures.

ISM services for March came in at 51.2, down from 55.4 in February. The reading has fallen to the low levels seen during the pandemic of 2020. New orders and new export orders showed huge declines with latter even falling into contraction while employment index also declined. With inventories increasing we have a deadly combination of falling new orders and rising inventories. A small positive in otherwise weak report is that prices paid continued to decline.

NFP employment in March came in at 236k vs 230k as expected. The unemployment rate ticked down to 3.5% while participation rate ticked up to 62.6%. Average wages rose 0.3% m/m and 4.2% y/y vs 0.2% m/m and 4.5% y/y the previous month. Leisure and hospitality added 72k jobs while government added 47k jobs. Employment in professional and business services added 39k while health care added 34k jobs. Fed may take comfort in average wages slowly coming down but labour market is still very tight. Odds of a 25bp Fed rate hike surged post NFP.

The yield on a 10y Treasury started the week and year at around 3.52%, fell below a strong support of 3.30% and finished the week at around the 3.4% level. The yield on 2y Treasury reached at around 4.14%. Spread between 2y and 10y Treasuries started the week at -59bp then tightened to -52bp. FedWatchTool sees the probability of no change in May at 30.7% while probability of a 25bp hike is at 69.3%.

This week we will have inflation and consumption data as well as minutes from the latest FOMC meeting.

Important news for USD:

Wednesday:​

  • CPI​
  • FOMC Minutes​

Friday:​

  • Retail Sales

EUR

Final manufacturing PMI for the month of March was revised up to 47.3 from 47.1 as preliminary reported. Upside revision to German and stronger than expected Spanish reading managed to improve overall Eurozone reading despite downward revision to the French reading. The report shows improvement in supplier delivery times but warns that production will weaken in coming months. Lower demand and energy prices contributed to lower input costs which lead to lower selling prices and thus lower inflation.

Final services PMI was revised down to 55 from 55.6 as preliminary reported due to a big revision down in French reading. It is still a very healthy number, a ten-month high, and great improvement from February. Spain services were astonishing, coming in at 59.4 vs 57.5 as expected. There was additionally a big beat in expectations for Italy. Composite was revised down as well, 53.7 from 54.1 and it also represents a ten-month high.

GBP

March final manufacturing PMI was revised down to 47.9 from 48. Same as in Europe input prices are falling which is contributing to lower selling prices and pushes inflation down. Services were revised slightly up to 52.9 from 52.8 while composite remained unchanged at 52.2. The report notes sustained improvement in new orders as well as business and consumer confidence. Additionally, new export orders also attributed to stronger services reading while prices paid component continues declining.

AUD

RBA has decided to leave the cash rate target at 3.60% as majority of market participants expected. Monetary policy works with a lag and this pause will give board more time to assess the impact of higher interest rates on economic outlook. With monthly inflation reading coming down there are signs that inflation is peaking and base case remains for it to fall this and next year and print around mid-3% in 2025. The bank seems like it is preparing to pause with rate hikes as their statement says: “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.”

In his speech Governor Lowe stated that this pause does not mean that the bank is done with rate hikes. At the next meeting there will be a review of monetary policy with updated forecasts. He added that “Board prepared to have slightly slower return to inflation target than some other central banks” which can be interpreted as a very dovish comment and should weigh in on AUD.

Caixin manufacturing PMI in March came in at 50 vs 51.6 in February. It was expected to rise to 51.7. The report shows that weak external demand caused a huge drop in new export orders which fell into contraction territory. Employment worsened as well. The report concludes “The foundation for economic recovery is not yet solid. Looking forward, economic growth will still rely on a boost in domestic demand, especially an improvement in household consumption. Only by working hard to stabilize employment, increase household income, and improve market expectations, can the government reach its goal of restoring and expanding consumption”. Caixin services smashed expectations and came in at 57.8, highest since November 2020, vs 55 as expected and in February which pushed composite to 54.5. The report shows that production, demand and employment showed increases with business optimism increasing while input prices reached a new seven-month high.

This week we will have employment data from Australia as well as inflation and trade data from China.

Important news for AUD:

Tuesday:​

  • CPI (China)​

Thursday:​

  • Employment Change​
  • Unemployment Rate​
  • Trade Balance (China)​

NZD

Over the weekend Fonterra cut Farmgate Milk Price to $8.30/kgMS from $8.50/kgMS. They have cited weak short-term demand and increase in production in the US and the EU. Milk and dairy products are major export for New Zealand so this could lead to lower revenues and lower demand for NZD.

RBNZ has delivered a surprise rate hike of 50bp and thus lifted the Official Cash Rate to 5.25%. Markets were expecting a 25bp rate hike and minutes of the meeting showed that the Committee debated whether to go for a 25bp or a 50bp rate hike. Inflation is described as still being too high and the rate hike was necessary in order to bring it down to bank’s 1-3% target. They see demand still outpacing supply which puts upward pressure on prices. GDP is expected to slow down throughout the year as lower global demand and effects of tighter monetary policy take its toll on economic growth. Decline in global demand will affect demand for New Zealand’s key exports, we saw that Fonterra cut prices, while it is expected that tourism services will partially offset the loss of lower exports revenues.

CAD

Employment report for March show another beat on expectations as employment change came in at 34.7k vs 12k as expected. The unemployment rate stayed unchanged at 5% while participation rate ticked down to 65.6%. Average weekly wages rose 5.2% y/y vs 5.4% y/y in February. Full-time employment rose by 18.8k while part-time employment rose by 15.9k. BOC is on the pause and this report that shows healthy labour market and easing wages will keep them firm on that path.

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

Important news for CAD:

Wednesday:​

  • BOC Interest Rate Decision​

JPY

BOJ Tankan survey of large manufacturing and non-manufacturing firms in Q1 showed a stark divergence between sectors. Non-Manufacturing showed improvements in both outlook and index while manufacturing fell in both categories. Manufacturing index fell for five straight quarters. Increases in raw material and energy prices as well as weak external demand are main causes for decline in manufacturing while ease of Covid 19 restrictions and government tourism subsidies propelled non-manufacturing sector. The survey also showed that inflation expectations for one year ahead ticked up to 2.8% from 2.7% as seen in the previous quarter. Final PMIs saw very nice improvements to preliminary readings as manufacturing drew close to expansion with 49.2 while services moved away further in expansion with 55 thus lifting composite to a new nine-month high of 52.9.

CHF

Inflation print in March saw headline inflation decline to 2.9% y/y from 3.4% y/y in February. This is mainly due to base effects as sudden energy price increase that happened due to Russia invasion of Ukraine drops out of calculation. SNB will be satisfied that core inflation declined to 2.2% y/y from 2.4% y/y the previous month. SNB total sight deposits for the week ending March 31 came in at CHF563.6bn vs CHF567bn the previous week. Seasonally adjusted unemployment rate remained at 1.9% in March.

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Forex Major Currencies Outlook (Apr 17 – Apr 21)

Preliminary April PMI data from Eurozone and the UK coupled with GDP data from China and inflation data from Canada and New Zealand will garner attention in the week ahead of us.

USD

CPI in March fell a full percentage point to 5% y/y from 6% y/y in February. Expectation was for it to drop to 5.2% y/y. Energy component was most responsible for the huge fall with -3.5% m/m out of which gasoline was -4.6% m/m. CPI rose 0.1% m/m vs 0.2% m/m as expected. Core CPI came in at 5.6% y/y as expected, ticking up from 5.5% y/y the previous month. Shelter category rose 0.6% m/m vs 0.8% m/m in February. Shelter has the biggest weighting o all the goods and services used to calculate inflation. Fed will continue raising rates with another 25bp in May, but after that they may pause. FOMC minutes showed that forecasts were made considering mild recession starting later this year and several participants considered leaving rates unchanged.

Retail sales fell -1% m/m in March vs -0.4% m/m as expected. Control group came in at -0.3% m/m as expected hurting the Q1 GDP reading. Ex autos and ex autos, gas also declined coming in at -0.8% m/m and -0.3% m/m respectively. Looking at the details sales at gasoline stations fell by 5.5% m/m and 14.2% y/y while only increase in retail sales came from nonstore retailers (online) which rose 1.9% m/m and 12.3% y/y. High inflation is killing disposable income as consumers restrict their spending.

Board of Governors member Waller, who is considered voice of the hawks, delivered a hawkish message in his speech. He stated that Fed’s job is not done and that rates will need to rise further. He added that extent of future rises will depend on the incoming data. He hammered the remark that monetary policy will need to remain tight for longer than markets anticipate. Yields have risen on his remarks.

The yield on a 10y Treasury started the week and year at around 3.37%, rose to 3.53% and finished the week at around the 3.52% level. The yield on 2y Treasury reached at around 4.13%. Spread between 2y and 10y Treasuries started the week at -57bp then widened to -61bp. FedWatchTool sees the probability of no change in May at 17.8% while probability of a 25bp hike is at 82.2%.

EUR

Retail sales in February fell 0.8% m/m as expected and -3% y/y. The drop was caused by drops in automative fuels, non-food and food, drinks and tobacco categories. Mail orders and internet was a positive input rising 2.6% m/m. Industrial production rose 1.5% m/m in February vs 1% m/m as expected and January reading was revised up to 1% m/m from 0.7% m/m. Strong industrial production numbers will boost Q1 GDP. Divergence between production and consumption is strong, but with inflation being so high ECB will continue with rate hikes and markets are currently pricing in 3.75% as the terminal rate, meaning 75bp more rate hikes to come.

This week we will have preliminary April PMI readings.​

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

February GDP figure came in flat vs 0.1% m/m as expected. Services sector and production output notched declines which were covered up by an increase in construction sector. January figure was revised up to 0.4% m/m from 0.3% m/m as previously reported.

This week we will have employment and inflation data as well as preliminary April PMI readings.

Important news for GBP:

Tuesday:​

  • Claimant Count Change​
  • Unemployment Rate​

Wednesday:​

  • CPI​

Friday:​

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

AUD

Employment report in March was another strong one. Employment change came in at 53k vs 20k as expected. The unemployment rate stayed at historically low level of 3.5% while expectations were for it to tick up to 3.6%. Participation rate ticked up to 66.7% giving another star to the report. Finally, to finish off a great report, all of the jobs added were full-time jobs (72.2k). Part-time jobs declined (19.2k) indicating that they have been switched to the full-time jobs. Higher rates are not having negative impact thus far on labor market which remains incredibly tight. Chances of a 25bp rate hike in May have surged after the employment report.

Chinese inflation continued to decline in March as it came in at 0.7% y/y vs 1% y/y as expected and in February. On the other hand, PPI came in at -2.5% y/y as expected and down from -1.4% y/y the previous month. Baring short stops in November and December of 2022 PPI has been declining every month since November of 2021. Additional fiscal stimulus can be added into the economy without fear of pushing inflation out of the hand and it seems necessary in order to stimulate the economy. This should support AUD. Trade balance data for March saw a huge jump in exports. They came in at 23.8% y/y in CNY terms and 14.8% y/y in USD terms.

This week we will get Q1 GDP, production and consumption data from China.

Important news for AUD:

Tuesday:​

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

NZD

Electronic card retail sales, they amount to almost 70% of overall retail sales, came in at 0.7% m/m and 15.5% y/y in March vs 1.5% m/m and 9.5% y/y as expected. Finance Minister Robertson said in an interview with CNBC that New Zealand may experience a recession, but it would be a shallow one adding that economy is resilient and robust.

This week we will get Q1 inflation data.

Important news for NZD:

Thursday:​

  • CPI​

CAD

BOC has left interest rate unchanged at 4.50% while continuing their quantitative tightening policy as was expected. The bank says that global growth surprised to the upside and it now sees global GDP at 2.6% in 2023, 2.1% in 2024 and 2.8% in 2025. “In Canada, demand is still exceeding supply and the labor market remains tight.” The statement shows that “As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment.” As a result of that GDP is seen rising 1.4% in 2023 and 1.3% in 2024. Inflation is seen falling to around 3% of 2023 and Governing Council remains prepared to raise further if need arises to return inflation to 2% target. Markets were pricing in some cuts in the Q4 but Governor Macklem dismissed them as they firmly in the pause mode with a slight lean toward more rate hikes.

This week we will get inflation data.

Important news for CAD:

Tuesday:​

  • CPI​

JPY

Newly appointed BOJ governor Ueda met with Prime Minister Kishida and they agreed that there was no immediate need to change joint statement from 2013 with government while they discussed the need to for flexibility in monetary policy given the economic uncertainty. Governor Ueda reiterated BOJ’s commitment to achieve price stability while characterizing current monetary policy as “intense”. Ueda is expected to return monetary policy to normality, but it will not happen in the near future as he stated that it is appropriate to continue with negative rates for now and that changes in policy may come in December if data supports it.

CHF

SNB total sight deposits for the week ending April 7 came in at CHF532.2bn vs CHF563.3bn the previous week. After two weeks of rising sight deposits, new data points to a resumption of a downward trend. SNB chairman Jordan stated that they cannot exclude the possibility that further tightening will come. Markets are now leaning toward the 25bp with above 60% probability of the move.

Forex Major Currencies Outlook (Apr 24 – Apr 28)

BOJ meeting, PCE, Q1 GDP from the Eurozone and the US as well as Q1 inflation from Australia will dominate the markets in the week ahead of us.

USD

Housing starts in March printed 1420k vs 1400k as expected, slightly down from 1432k in February while building permits showed 1413k vs 1450k as expected and 1550k the previous month. It is a mixed report, but overall trend is to the downside. High mortgage rates combined with tighter credit after the SVB collapse are constraining demand for housing and pushing the overall trend to the downside.

The yield on a 10y Treasury started the week and year at around 3.53%, rose to 3.62% and finished the week at around the 3.56% level. The yield on 2y Treasury reached at around 4.26%. Spread between 2y and 10y Treasuries started the week at -61bp then widened to -65bp and finished the week around -58bp. FedWatchTool sees the probability of a 25bp hike at 84% while probability of no change in May is at 16%.

This week we will have advanced Q1 GDP reading and Fed’s preferred inflation measure.

Important news for USD:

Thursday:​

  • GDP​

Friday:​

  • PCE​

EUR

ECB’s Chief Economist Phillip Lane said in an interview with Bloomberg that current base case is a rate hike in May. The size of a rate hike will depend on the incoming data. Final inflation data for March was unchanged at 6.9% y/y for headline and 5.7% y/y for core.

The story of preliminary PMI data for April is divergence. Manufacturing PMI continued to decline and came in at 45.5 vs 47.3 in March while services PMI continued to rise and it came in at very healthy 56.6 vs 55 the previous month. The rise in services managed to push composite up and it came in at 54.4 vs 53.7 in March. Price pressures are falling in manufacturing due to improved supply chains and in services sector. Overall numbers indicate that Eurozone started Q2 better than expected and that fears of negative growth seem unfounded.

This week we will have a preliminary Q1 GDP reading.

Important news for EUR:

Friday:​

  • GDP​

GBP

March employment report saw the unemployment rate tick up to 3.8% but other data showed strong and tight labour market. Employment change for three months ending February was up 169k vs 65 in previous month. Wages have beaten expectations and came in at 5.9% y/y and 6.6% y/y when bonus is excluded. Still elevated wages will keep pressure on prices and make BOE’s job of bringing down inflation harder.

March inflation failed to drop below double digit as it printed 10.1% y/y vs 9.8% y/y as expected. It has come down from 10.4% y/y in February but still it came in hotter than expected rising by 0.8% m/m. Inflation has been in the double digits for more than half a year. Food and non-alcoholic beverages prices as well as recreation and culture categories saw increases in prices while transport and housing and household services printed decline in prices. Core reading remained at 6.2% y/y while expectations were for it to fall to 6% y/y. This report, in combination with higher wages from employment report, will move central bank toward a 25bp rate hike in May. Markets are already pricing almost a 95% probability of a 25bp rate hike.

Preliminary April PMI data showed the same divergence as was seen in the Eurozone data. Manufacturing declined to 46.6 while services improved to 54.9 dragging the composite with them to 53.9. S&P Global notes that: “Services saw the fastest new order growth for 13 months as consumer confidence grew and spending on a few more luxuries increased. Whereas the manufacturing sector received another body blow and became more entrenched in contraction with a fall in new orders and another round of job shedding.”

AUD

Minutes from the latest RBA meeting saw board contemplate raising rates in April and then pausing before arguing that it would be better to pause right away and assess effects of monetary policy. Jobs, inflation, consumer spending and business confidence are main data point to be assessed and these data points will highest impact on AUD going forward. Inflation remains too high while jobs market remains tight. Quarterly NAB business confidence for Q1 dropped to -4 from -1 while improvement to 2 was expected. Although last week monthly survey showed improvement, quarterly has a larger sample size and tells us that companies are still struggling.

Q1 GDP from China came in at 2.2% q/q as expected and 4.5% y/y vs 3.8% y/y as expected. GDP for Q4 of 2022 was revised up to 0.6% q/q from being flat. Industrial production for March came in at 3.9% y/y, up from 2.4% y/y in February while retail sales smashed expectations and came in 10.6% y/y vs 7.4% y/y as expected and up from 3.5% y/y the previous month. Domestic consumption was the main driver of robust Q1 GDP and it is a very encouraging sign. The report removes any need for further easing to stimulate the economy and indeed one day before GDP was published PBOC has decided to keep 1Y MLF rate, 1Y LPR rate and 5Y LPR rate unchanged at 2.75%, 3.65% and 4.30% respectively.

This week we will get Q1 inflation data which will be key data point for RBA’s next decision.

Important news for AUD:

Wednesday:​

  • CPI​

NZD

Q1 inflation came in at 1.2% q/q and 6.7% y/y vs 1.7% q/q and 7.1% y/y as expected. Overall lower energy prices have helped bring inflation down, but it is still at highly elevated levels. Core CPI, it is RBNZ “Sectoral factor model” ticked down to 5.7% y/y from 5.8% y/y in Q4. This report should not stop RBNZ from delivering another 25bp rate hike in May. Global dairy auction saw prices rise by 3.2% for the first increase after four consecutive auctions of falling prices. Skim milk powder showed the biggest increase in prices. This will give some pause to the NZD declines as dairy is their main export.

CAD

March headline CPI number came in at 4.3% y/y as expected, down from 5.2% y/y in February. Prices have been increasing at a slower pace since July of 2022 and it will keep BOC satisfied with their current monetary policy stance. Core measures are showing declines as well with median printing 4.6% y/y vs 4.9% y/y in February, trim is at 4.4% y/y vs 4.8% y/y the previous month and common is at 5.9% y/y 6.4% y/y in February. A small concern is that headline monthly figure rose 0.5% m/m which means that it will take longer than expected for yearly figure to go back down to 2%.

BOC Governor Macklem commented that further declines in inflation are expected as inflation is expected to fall to around 3% in the summer. Inflation is expected to go down to 2% by the end of 2024. Inflation expectations will need to come down further while services price inflation and wage growth needs to moderate and corporate pricing behavior has to normalize in order for inflation to go back down to the target. He added that they are prepared to tighten further if inflation does not continue to move to the target. He said that soft landing is possible and that weak growth is needed as demand is too strong.

JPY

Headline inflation in March declined for a second consecutive month as it came in at 3.2% y/y vs 3.3% y/y in February, however core measures prove to be much more resilient. Ex fresh food came in at 3.1% y/y same as the previous month while ex fresh food, energy increased by 3.8% y/y vs 3.5% y/y in February for a twelfth consecutive monthly increase. Core measures indicate that underlying inflationary pressures are becoming more persistent.

Preliminary April PMI data showed manufacturing improving to 49.5 from 49.2, services ticking down to 54.9 from 55 and composite at 52.5 vs 52.9 the previous month. When we dig into details we see that new orders show stronger growth, same as employment, but output and shows weaker growth. Output prices show stronger inflation while input prices show weaker inflation. Overall, there is a stronger positive outlook regarding future output.

This week we will have BOJ meeting. There will be no change to interest rate but as this is the first meeting led by new Governor Ueda we may get a surprise in change of Yield Curve Control.

Important news for JPY:

Friday:​

  • BOJ Interest Rate Decision​

CHF

SNB total sight deposits for the week ending April 14 came in at CHF544.1bn vs CHF532.2bn the previous week. SNB Maecheler stated that although inflation is coming down, rate hike in March was necessary to bring down inflation toward their 2% target. SNB Chairman Jordan acknowledged risk of correction in the housing market adding that although expectations are for inflation to decline this year there is still work to be done.

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Forex Major Currencies Outlook (May 1 – May 5)

This week we will have Fed, ECB and RBA meetings with first two delivering rate hikes while later standing pat, additionally, there will be inflation data from the Eurozone and employment data from Canada and New Zealand.​

USD

Preliminary A1 GDP reading rose by 1.1% annualized vs 2% annualized as expected. Consumer spending rose by 3.7% vs 1% as in previous quarter, contributing 2.48pp to the GDP number, with great majority of this being spending on durables (16.9% vs -1.3% in Q4). GDP deflator rose again as core PCE increased by 4.9% vs 4.7% as expected and up from 4.4% in Q4. The biggest drop was caused by inventories. USD has rallied on report due to the details showing strong demand as described by spending on durables. Inflation running hotter adds more credibility to future rate hikes. Ultimately, if there was no such big drop in inventories, indicating strong demand, GDP reading would be much higher and most likely beat the expectations. Once concerning factor is that fixed investment contributed negatively 0.07pp to GDP thus marking fourth consecutive quarter of falling investments.

PCE inflation in March continued to decline, now at a faster pace, as headline number came in at 4.2% y/y vs 5.1% y/y in February. Core inflation ticked down to 4.6% y/y but it stays stubbornly high and comes down slowly. This may nudge Fed toward raising 25bp next week and then deciding to pause.

The yield on a 10y Treasury started the week and year at around 3.56%, fell to 3.4% and finished the week at around the 3.46% level. The yield on 2y Treasury reached at around 4.17%. Spread between 2y and 10y Treasuries started the week at -62bp then tightened to -51bp and finished the week around -60bp. FedWatchTool sees the probability of a 25bp hike at 87.4% while probability of no change in May is at 12.6%.

This week we will have ISM PMI data, Fed meeting and NFP on Friday. Markets are pricing in a 25bp rate hike so much more attention will be paid to Fed’s language and whether they will continue hiking or pause. Headline NFP is seen at around 190k with the unemployment rate staying at 3.5%.

Important news for USD:

Monday:​

  • ISM Manufacturing PMI​

Wednesday:​

  • Fed Interest Rate Decision​
  • ISM Non-Manufacturing PMI​

*Friday:*​

  • NFP​
  • Unemployment Rate​

EUR

German Ifo survey in April showed that business climate continues to improve by coming in at 93.6 vs 93.2 in March. The data has been improving for seven consecutive months. Current conditions declined to 95 from 95.4 the previous month while expectations continued to improve to 92.2 from 91 in March. Ifo economist Klaus Wohlrabe noted that although industry export expectations have risen and that there is a smaller number of companies wanting to increase prices, German economy still lacks momentum.

ECB executive board member Isabel Schnabel stated in an interview that headline inflation is coming down quickly but given the developments around the core inflation it is still far too early to declare victory. Core inflation is expected to peak soon, but they are more concerned with direction of it, they want to see it coming down. She highlighted several times that ECB is fully data dependent and that 50bp rate hikes in May cannot be ruled out. ECB Chief Economist Philip Lane confirmed ECB’s data dependence and that hikes after May meeting will depend on incoming data.

Preliminary Q1 GDP came in at 0.1% q/q vs 0.2% q/q as expected. French, Italian and Spanish reading helped to keep it in positive while German reading came in flat, barely escaping recession since it printed -0.4% q/q in Q4. Still German reading printed -0.1% y/y. Inflation in France in April increased to 5.9% y/y from 5.7% y/y in March with a 0.6% m/m reading. German inflation slipped to 7.2% y/y from 7.4% y/y in March and monthly reading showed a much lower increase at 0.4%.

This week we will have preliminary April inflation data and ECB meeting. Another 25bp rate hike is the market consensus but a 50bp rate hike is sill on the table as a realistic possibility.

Important news for EUR:

Tuesday:​

  • CPI​

Thursday:​

  • ECB Interest Rate Decision​

GBP

BOE Chief Economist Huw Pill sparked the outrage by stating that people in the UK should accept that they are worse off and that their real spending power is declining, basically that they are poorer, and avoid bidding up prices through demands for higher wages. This just follows remarks stated by BOE Governor Bailey in 2022 that people should not be asking for higher wages. Blatant lack of empathy is coming out as a result of their incompetence to reign in inflation that is still running in double digits despite “best” efforts from monetary authorities.

AUD

Q1 inflation data saw headline CPI print at 1.4% q/q vs 1.3% q/q as expected and 7% y/y vs 6.9% y/y as expected. The numbers came down from 1.9% q/q and 7.8% y/y in Q4 of 2022 but the decline was not as big as expected. Trimmed mean measure, that is core CPI, slowed down to 1.2% q/q and 6.6% y/y. This is the second consecutive quarter that shows slower inflation on a quarterly basis. Although both headline and core reading are well above bank’s target range of 2-3% RBA will be satisfied with core coming down faster than expected.

This week we will have RBA meeting where no change to the rate is expected.

Important news for AUD:

Tuesday:​

  • RBA Interest Rate Decision​

NZD

Trade balance data for March saw big increases in both exports (NZD6.51 vs NZD5.06 in February) and imports (NZD7.78bn vs NZD5.86bn in February) indicating return of strength to the New Zealand economy. ANZ business confidence survey saw another decline as April figure printed -43.8 vs -43.4 in March. The report showed increases in wage expectations and export intentions as well as improvement in commercial construction and activity and employment on a yearly basis. The biggest declines are seen in residential construction and profit expectations. Inflation expectations continue to decline but are still very elevated at 5.7%. Still they are at the lowest level since March of 2022.

This week we will get Q1 employment data.

Important news for NZD:

Wednesday:​

  • Employment Change​
  • Unemployment Rate​

CAD

February GDP number came in at 0.1% m/m vs 0.2% m/m as expected. January reading was revised up to 0.6% m/m and March reading is projected to be negative 0.1% m/m which in total would put Q1 GDP at 0.6% q/q. Both goods and service producing sectors made a 0.1% growth while wholesale trade and retail trade contracted -1.3% and -0.5% respectively. CAD has been hammered this week and falling alongside oil.

This week we will get employment data.

Important news for CAD:

Friday:​

  • Employment Change​
  • Unemployment Rate​

JPY

We had a slew of economic data published before the BOJ interest rate announcement and they were painting a picture of slowing economy with increasing inflation. Headline CPI number for Tokyo area in April printed 3.5% y/y vs 3.1% y/y as expected and up from 3.3% y/y in March. Excluding fresh food category also rose by 3.5% y/y vs 3.2% y/y the previous month while “core core”, ex fresh food, energy, increased by 3.8% y/y, up from 3.4% y/y in March and highest since 1982! The unemployment rate unexpectedly rose to 2.8% from 2.6% the previous month while retail sales continued to increase but at a slower pace both on monthly and yearly readings.

BOJ decided to leave interest rate unchanged at -0.10% and there were no tweaks to the Yield Curve Control. They have, however, make changes to the forward guidance. Changes include removing references to Covid-19 and pledge to keep rates at current or lower levels. The decision on not changing YCC was unanimous and the bank is not in a rush to change it. BOJ will spend 12 to 18 months to conduct a review of monetary policy guidance. This is a way to long period and overall the message from the meeting was dovish thus JPY suffered. This was Ueda’s first meeting as a Governor and he may prove to be more dovish than Kuroda.

CHF

SNB total sight deposits for the week ending April 21 came in at CHF538.4bn vs CHF544.1bn the previous week. The decline continues as SNB sells EUR and USD. Retail sales in March declined by -1.9% y/y as sales for food, beverages and tobacco continued to decline.

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Forex Major Currencies Outlook (May 8 – May 12)

BOE meeting with expected final hike, inflation from the US and China as well as GDP from the UK will be the highlights of the week.

USD

ISM Manufacturing PMI for April came in at 47.1 vs 46.8 as expected and up from 46.3 in March. Manufacturing sector spends sixth consecutive month below 50 and now prices paid index is increasing indicating mounting pressures from prices of raw materials. New orders, new export orders and production all showed increases but are still below 50 while employment index managed to return into expansion territory with a 50.2 print.

ISM Non-Manufacturing printed 51.9 in April, up from 51.2 in March. Prices paid index nudged a bit higher but there was a monumental jump in new export orders and imports with former printing above 60. Additionally, new orders index also rose substantially. Employment index declined but it is still in the expansion territory.

Fed has delivered a 25bp rate hike as was widely expected, lifting the rate into the 5-5.25% range. The statement and the accompanying press conference seem to lean toward the scenario that this will be the last rate hike and that long pause ensues from June. Markets are still not convinced and are pricing in rate cuts from September. Chairman Powell has reiterated that Fed will be data dependent. He strongly emphasized that banking sector is sound and resilient. They seem to expect that credit tightening conditions exacerbated by recent bank issues will help bring demand and inflation down. Mike McGee from Bloomberg asked him whether there will be rate cuts this year and Powell completely dismissed the question, again pointing to their data dependence.

NFP for April printed 253k vs 180k as expected. March reading was revised down to 165k from 236k as preliminary reported for a big revision. Professional and business services and health care saw biggest job increases, The unemployment rate slipped to 3.4% while participation rate remained at 62.6%. An unpleasant surprise for Fed came from average wages which rose 0.5% m/m and 4.4% y/y. Fed will not be satisfied how things are going on in the labour market. They are hinting at a pause, but such a tight labour market, with NFP report beating estimates for thirteenth consecutive month, is not what they want to see.

The yield on a 10y Treasury started the week and year at around 3.46%, fell to 3.34% and finished the week at around the 3.46% level. The yield on 2y Treasury reached at around 4.16%. Spread between 2y and 10y Treasuries started the week at -60bp then tightened to -42bp. FedWatchTool sees the probability of a 25bp hike at 2% while probability of no change in June is at 98%.

This week we will have inflation data.

Important news for USD:

Wednesday:​

  • CPI​

EUR

Preliminary inflation data for the month of April saw headline number tick higher to 7% y/y, as expected, from 6.9% y/y in March. The increase was due to rising energy and services prices. On the other hand, core CPI ticked down to 5.6% y/y from 5.7% y/y the previous month. Inflation increased 0.7% m/m which is still way above the trend needed to bring it down to targeted 2%.

ECB delivered a 25bp as widely expected and main refinancing rate is now at 3.75%. The statement opened with talk about inflation outlook being too high for too long. ECB will remain data dependent in deciding about future hikes with inflation outlook and incoming economic and financial data as most important. APP will continue to shrink by €15bn until June 2023 and reinvestments will stop from July of 2023. PEPP reinvestments are planned to go on at least until the end of 2024. At the press conference The statement is suggesting that ECB is getting near to the rate hike peak. President Lagarde was adamant that the bank is not pausing as there is more ground to cover. She was delivering a more hawkish message, leaving door open for future rate hikes. She added that stopping of APP reinvestments from July will amount to €25bn reduction on average on a monthly basis. This move opens the door for another rate hike in June and then pause from there.

GBP

Final manufacturing PMI for the month of April was revised up to 47.8 and now it is just a tick down from 47.9 printed in March. S&P Global notes that new orders and output continued to contract. Improvements are seen in supply chains as lead times are now shortened which in turn led to pushing down of input prices. Services PMI showed even bigger improvement on the back of increase in demand and it printed 55.9 vs 54.9 as preliminary reported. This has in turn lifted composite to 54.9 from 53.9 as preliminary reported and, as stated in report, it means that UK economy started Q2 with a bang as new orders rose at the fastest pace in 13 months.

This week we will have preliminary Q1 GDP reading and BOE meeting. Expectations are for a final 25bp rate hike.

Important news for GBP:

Thursday:​

  • BOE Interest Rate Decision​

Friday:​

  • GDP​

AUD

RBA has surprised markets and delivered a 25bp rate hike, thus moving the cash rate to 3.85%. There was an overwhelming consensus for no change. The statement shows that although inflation is coming down, it is still too high and that is why the Board decided to proceed with a rate hike. The central forecast on inflation remains unchanged, 4.5% in 2023 and 3% in mid-2025. The central forecast is for GDP to rise at a below-trend pace and to increase by 1.25% in 2023 and “around 2 per cent over the year to mid-2025”. “The unemployment rate is forecast to increase gradually to be around 4½ per cent in mid-2025.“ The statement concludes with another modification to forward guidance stating “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.“

Statement of Monetary Policy, a document that is published quarterly, showed that RBA is willing to hike further, it may be required, in order to bring inflation down in the reasonable time frame. New forecasts show inflation at 4.5% by the end of 2023, 3.2% by the end of 2024 and at 3$ by mid-2025. GDP growth has been revised down and it now shows 1.2% by the end of 2023, 1.7% by the end of 2024 and 2.1% by mid-2025. The unemployment rate is expected to go up to 4% by the end of 2023, 4.4% by the end of 2024 and 4.5% by mid-2025. Wage growth is seen declining but still rising at a healthy 4% by the end of 2023, 3.8% by the end of 2024 and 3.7% by mid-2025. All of the projections were made with peak interest rate at 3.75% and falling to 3% by mid-2025.

Over the weekend official Chinese PMI for April were published and they showed signs of slowdown. Manufacturing PMI returned to contraction with a 49.2 reading vs 51.9 in March. NBS has commented on weak reading “A lack of market demand and the high-base effect from the quick manufacturing recovery in the first quarter”. Non-Manufacturing held much better as it slid to still very elevated 56.4 from 58.2 the previous month. Composite has declined to 54.4 from 57 in March. Caixin manufacturing PMI also dipped into contraction with 49.5 from 50 in March due to slowing demand. Caixin services also slipped to 56.4 from 57.3 thus dragging composite to 53.6 from 54.5 the previous month, but the numbers are still elevated and healthy growth in new orders and activity is seen.

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

Important news for AUD:

Tuesday:​

  • Trade Balance (China)​

Thursday:​

  • CPI (China)​

NZD

Employment data for the first quarter showed a very strong labour market. Employment change came in at 0.8% q/q vs 0.4% q/q as expected for a huge beat. The unemployment rate was unchanged at 3.4% while participation rate increased to 72% from 71.7% as expected and as in Q4. Wages rose 4.5% y/y vs 4.6% y/y as expected. Prior to the report Governor Orr stated that financial system was well positioned to support the economy and sustain higher interest rates. In combination these two are opening doors for more rate hikes coming from RBNZ.​

CAD

Employment report for April showed very tight market. Employment change came in at 41.4k vs 20k as expected. The unemployment rate slipped to new low of 5% while participation rate remained unchanged at 65.6%. Average hourly wages also remained at very strong 5.2% y/y. One of the stains on this report is that all of the jobs created were part-time (47.6k) while full-time jobs declined (-6.2k). A strong report should not derail BOC from their current stance, a pause.

JPY

Final Manufacturing PMI in April was unchanged at 49.5. The report shows that new orders printed slowest reduction since July of 2022 and that supply chains are improving. Inflationary pressures remain elevated and firms have passed costs to consumers, thus increasing their profit margins and accelerating the rate of change of inflation.

CHF

SNB total sight deposits for the week ending April 28 came in at CHF523.9bn vs CHF538.4 the previous week. Deposits continue to decline as SNB sells EUR and USD. Seasonally adjusted unemployment rate for April stayed at 1.9% for the fifth consecutive month. Inflation data for the same month were very encouraging as it saw headline inflation print 2.6% y/y vs 2.8% y/y as expected and down from 2.9% y/y in March and it was flat on a monthly basis. Core inflation was unchanged at 2.2% y/y.

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Forex Major Currencies Outlook (May 15 – May 19)

Consumption data from the US and China, employment data from Australia and the UK and preliminary Q1 GDP from Japan will highlight the week ahead of us.

USD

Headline CPI for the month of April came in at 4.9% y/y vs 5% y/y as expected and in March. Monthly reading was 0.4% as expected, which is still high for the 2% y/y target. Energy was down 5.1% y/y. The report shows “The index for shelter was the largest contributor to the monthly all items increase, followed by increases in the index for used cars and trucks and the index for gasoline. The increase in the gasoline index more than offset declines in other energy component indexes, and the energy index rose 0.6 percent in April”. Core CPI slipped to 5.5% y/y as expected from 5.6% y/y the previous month. Inflation is coming down, but some categories that were previously falling are starting to increase again. Core is proving to be stickier than projected and Fed will have hard time bringing it down. One positive is that core services ex shelter category, that is the measure Chairman Powell closely follows, came in at 0.11% m/m. Senior Loan Officers Opinion Survey showed that credit is tightening further and it leads to increase in recessionary risks as rising borrowing costs weigh in on companies. Additionally, the report also showed that demand for loans is also waning.

The yield on a 10y Treasury started the week and year at around 3.43%, rose to 3.53% and finished the week at around the 3.46% level. The yield on 2y Treasury reached around 4.07%. Spread between 2y and 10y Treasuries started the week at -50bp then tightened to -53bp. FedWatchTool sees the probability of a 25bp hike at 25.8% while probability of no change in June is at 74.2%.

This week we will have consumption data.​

Important news for USD:

Tuesday:​

  • Retail Sales​

EUR

ECB’s uber hawk member Knot, president of Dutch central bank, stated he voted for a 25bp rate hike in May but could see himself supporting further rate hikes. He says he is prepared to go above 5% if that proves to be necessary. ECB board member Kazaks, another hawk, stated that rate hikes may not be over in July and that market betting on rate cuts in Spring of 2024 may prove to be premature. He added that it is possible to ECB to pause or even hike as Fed cuts. ECB’s Kazimir, a more neutral member, stated that there is still a lot of ground to cover and that slowing down of rate hikes allows them to go higher for longer. He added that September is the earliest when they can assess effectiveness of past rate hikes. ECB’s Nagel agreed that meeting-by-meeting approach is the correct one adding that it will take almost 18 months for core inflation to get back close to 2%.

GBP

BOE has delivered a well expected 25bp rate hike and lifted the interest rate to 4.50%. The vote was 7-2 with Dhingra and Tenreyro voting to keep rates unchanged. The statement shows that risks around inflation projections are skewed to the upside as there is uncertainty regarding the pace at which inflation will return sustainably at 2%. Additionally, they see H1 GDP coming in flat, however GDP for Q2 of 2024 was revised from -0.3% q/q to 0.9% q/q for the biggest revision in BOE’s history. During the press conference Governor Bailey reiterated that inflation remains way too high and that outlook for unemployment and growth improved with economic activity, as shown by data, came in stronger than expected. Inflation is projected to drop sharply from April. The bank is data dependent.

Preliminary Q1 GDP came in at 0.1% q/q as expected and as was in Q4 of 2022. The report shows that construction sector grew by 0.7% while services and production sector both grew by 0.1%. Real household consumption was flat on the quarter as high inflation dampened it while business investment grew by 0.7%. Net trade contributed negatively to the print.

This week we will have employment data.

Important news for GBP:

Tuesday:​

  • Claimant Count Change​
  • Unemployment Rate​

AUD

Chinese trade balance data for April saw widening of surplus to $90.21bn, but the composition of it was less favorable. Exports have risen 8.5% y/y, a drop from 14.8% y/y in March while imports continued to plunge and came in at -7.9% y/y vs -1.4% y/y the previous month. Declining imports are indicating that domestic demand is weak. Additionally, imports are basis for future exports so their decline poses a big concern for the export sector. April inflation data saw CPI at just 0.1% y/y vs 0.4% y/y as expected and down from 0.7% y/y in March. PPI plunged even further into negative by coming in at -3.6% y/y vs -3.2% y/y as expected and down from -2.5% y/y the previous month. PPI has been declining since November of 2021 and this is the seventh consecutive month of it being in the red. Very low inflation readings have opened the possibility of strong stimulus package from China to stimulate the economy and AUD benefited.

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

Important news for AUD:

Tuesday:​

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

Wednesday:​

  • Wage Price Index​

*Thursday:*​

  • Employment Change​
  • Unemployment Rate​

NZD

Kiwi had a roller coaster week. It managed to gain strength until Wednesday then pause on Thursday and on Friday it weakened after RBNZ published data on inflation expectations. They have revised both 1-year and 2-year expectations down. The numbers showed 2.79% vs 3.3% for 1-year and 4.28% vs 5.11% for 2-year. Lower inflation expectations mean that RBNZ could consider stopping rate hikes.

CAD

Building permits in March recorded a major bounce back increasing by 11.3% while expectations were for a decline of -2.9%. The data shows that some major projects have been undertaken and that moved the numbers toward the high side. Additionally, when BOC stopped increasing rates it sent a positive signal to builders as mortgage costs will stabilize.

This week we will have inflation data.

Important news for CAD:

Tuesday:​

  • CPI​

JPY

Final services PMI for April was revised up to 55.4 and now comes up from 55 in March. This marks eighth consecutive month that reading is above 50. Details of report show the biggest jump in rate of output since 2007 helped by international tourists. Services companies are passing their increased costs to the consumers which pushes both output and inflation up. Composite was also revised up to 52.9 and now it sits unchanged from previous month’s reading. Wages data for March saw total wages rise 0.8% y/y, same as in February with inflation adjusted wages falling -1.9% y/y vs -2.9% y/y the previous month. Household spending was abysmal as it fell -1.9% y/y vs 1.6% y/y in February. Expectations were for a moderate increase of 0.4% y/y. Falling wages in real terms must reflect in declining household spending.

BOJ Governor Ueda stated that if price target is reached in a sustainable and stable matter BOJ will end Yield Curve Control. After that BOJ will shrink its massive balance sheet. He added that inflation expectations have risen and that they are at elevated levels.

This week we will have preliminary Q1 GDP data.

Important news for JPY:

*Wednesday:*​

  • GDP​

CHF

SNB total sight deposits for the week ending May 5 came in at CHF525.6bn vs CHF523.9bn the previous week. This may mark the start of rising total sight deposits as inflation is coming down so SNB will not need to proactively strengthen the currency.

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Forex Major Currencies Outlook (May 22 – May 26)

RBNZ meeting with almost certain rate hike, preliminary PMI data from the Eurozone and the UK as well as inflation data from the UK and the US will be the highlights of the week ahead of us.

USD

Retail sales in April posted a gain of 0.4% m/m after a -0.6% m/m loss in March. Expectations were, however, for a stronger 0.8% m/m increase. Miscellaneous store retailers and nonstore retailers were the biggest contributors while the biggest drops were seen in sport goods. Control group, the one going into GDP calculation and excludes automobiles, gasoline, building materials and food services, came in at a strong 0.7% m/m vs 0.3% m/m as expected and it points to strong start of Q2.

The yield on a 10y Treasury started the week and year at around 3.48%, rose to 3.65% and finished the week at around the 3.46% level. The yield on 2y Treasury reached around 4.27%. Spread between 2y and 10y Treasuries started the week at -51bp then widened to -62bp. FedWatchTool sees the probability of a 25bp hike at 37.8% while probability of no change in June is at 62.2%.

This week we will have FOMC minutes, second reading of Q1 GDP and Fed’s preferred measure of inflation PCE.

Important news for USD:

Wednesday:​

  • FOMC Minutes​

Thursday:​

  • GDP​

Friday:​

  • PCE​

EUR

Over the weekend, ECB Vice President de Guindos gave an interview in which he accentuated that the bank is now in the final stretch of rate hikes and therefore it is normal for them to go back to the pace of 25bp rate increases. European Commission came out with latest grown and inflation projections, revising them both up. GDP in 2023 is seen at 1.1% vs 0.9% in February while in 2024 it is seen at 1.6% vs 1.5% in February. Inflation in 2023 is at 5.8% vs 5.6% in February while in 2024 it is seen at 2.8% vs 2.5% in February. Higher than expected inflation will keep ECB on a rate hike path and could provide support for EUR. Final inflation reading for April was unchanged printing 7% y/y for headline and 5.6% y/y for core.

This week we will have preliminary PMI data for May.

Important news for EUR:

Tuesday:​

  • HCOB Manufacturing PMI (EU, Germany, France)​
  • HCOB Global Services PMI (EU, Germany, France)​
  • HCOB Global Composite PMI (EU, Germany, France)​

GBP

Employment report for April showed first cracks in the labor market. Payroll change was negative and it showed first decline in over two years. Claimant count continued to increase and almost doubled from the previous month’s figure by printing 46.7k. The unemployment rate ticked up to 3.9%, still at a very low level. Average wages ticked down to 5.8% 3m/y while ex bonus wages ticked up to 6.7% 3m/y but lower than expected 6.8% 3m/y. With inflation still running in the double digits, real purchasing power of workers continues to deteriorate. This report will push the needle for BOE towards a pause in June.

This week we will have preliminary PMI data for May and April inflation data. BOE Governor Bailey emphasized importance of this inflation report.

Important news for GBP:

Tuesday:​

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

Wednesday:​

  • CPI​

AUD

Wage price index for Q1 increased by 0.8% q/q as in previous quarter and 3.7% y/y vs 3.3% y/y in Q4 of 2022. Consumer price inflation expectations in May jumped to 5.2% from 4.6% in April. Employment report for April was a miss. Employment change showed a decline of 4.3k jobs while increase of 25k jobs was expected. The unemployment rate jumped to 3.7% from 3.5% the previous month while participation rate remained unchanged at 66.7%. All of the jobs lost were full-time (-28.7k) while part-time added 22.8k. RBA pays close attention to wages and it may lead them to further tightening, however after such a week employment report everything points to a pause at the June meeting.

PBOC has left 1-year MLF rate unchanged at 2.75%. MLF (Medium-term Lending Facility) rate is the rate that PBOC charges to commercial banks when they want to borrow funds from the PBOC. MLF loans are backed by collateral which means that PBOC can get back their funds if the borrowing bank defaults on their loan. The rate remained the same, but PBOC has injected CHN25bn of liquidity into the system in order to stimulate economic growth. Industrial production in April rose by 5.6% y/y vs 3.9% y/y in March but expectations were for a 10.9% y/y increase. Retail sales rose by astonishing 18.4% y/y, but with expectations for a 21% y/y increase markets were left disappointed as both readings fell short of the target.

NZD

GDT price index for the second auction in May saw prices decline -0.9%. PPI output for the first quarter came in at 0.3% q/q vs 1.3% q/q as expected while PPI input came in at 0.2% q/q vs 1.5% q/q as expected indicating that price pressures eased in Q1 as shown by the Q1 CPI report. Despite this, NZD was rallying throughout the week on the back of rate hike expectations by RBNZ next week.

This week we will have RBNZ meeting. Markets are pricing in 85% probability of a 25bp rate hike.

Important news for NZD:

Wednesday:​

  • RBNZ Interest Rate Decision​

CAD

April inflation report provided one unpleasant surprise with headline number coming in at 4.4% y/y vs 4.3% y/y in March, thus making it a first increase since July of 2022. Expectations were for a drop to 4.1% y/y. Monthly increase was 0.7% vs 0.4 as expected. Core measures continued to decline and came in at 4.2% y/y for Median and Trim and 5.7% y/y for Common. BOC should not get pushed out of the pause regime by a single report, but this makes May reading all that much more interesting.

JPY

Preliminary Q1 GDP reading showed a strong rebound as data printed increases of 0.4% q/q vs 0.1% q/q as expected and 1.6% y/y vs 0.7% y/y as expected. Private consumption was up on the quarter 0.6% with business spending unexpectedly rising 0.9% q/q. Net external demand deducted from the reading as exports fell 4.2%, more than imports which were at 2.3%. It is a positive reading and it spurs talks about widening of YCC band at BOJ’s June meeting and overall policy normalization in the future. April CPI data for all of Japan continued to run hot. Headline number came in at 3.5% y/y vs 2.5% y/y as expected and up from 3.2% y/y in March. Core reading, excluding fresh food increased to 3.4% y/y from 3.1% y/y the previous month while ex fresh food, energy component, so-called core core, increased by 4.1% y/y from 3.8% y/y in March. BOJ continues to state that inflation is transitory and that it will start coming down in Q4.

CHF

SNB total sight deposits for the week ending May 12 came in at CHF520.1bn vs CHF525.6bn the previous week. One week up and another week down for the total sight deposits but overall trend is to the downside as SNB keeps selling EUR and USD to strengthen the value of its currency and help fight inflation.

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Forex Major Currencies Outlook (May 29 – June 2)

Preliminary inflation data from the Eurozone, employment data from the US and official PMI data from China will be the main economic news in the week ahead of us. Please note that Monday is a Memorial Day Holiday, markets in the US will be closed, therefore liquidity will be lower.

USD

FOMC minutes from May meeting showed unanimous decision for May but a split in regards of what to do in the future. “Some” members stated that inflation is falling slower than expected and that it could mean more rate hikes in the meetings ahead. On the other hand, “several” members stated that if economy continues to perform as expected there will be no need for further rate hikes. Both camps agreed that inflation is “unacceptably high” and that they will be data dependent.

Second reading of Q1 GDP was revised higher to 1.3% annualized from 1.1% annualized as reported in advanced reading. Personal consumption helped push the number up with a contribution of 2.52% followed by government spending. Net exports were basically flat while fixed investment were a drag on the reading. PCE data for April saw headline number rise to 4.4% y/y from 4.2% y/y in March with core PCE ticking up to 4.7% y/y from 4.6% y/y the previous month. Personal spending rose 0.8% m/m while personal income rose 0.4%. Deadly combination of rising inflation and rising income means that Fed will keep the foot on the rate hike pedal.

The yield on a 10y Treasury started the week and year at around 3.67%, rose to 3.85% and finished the week at around the 3.82% level. The yield on 2y Treasury reached around 4.6%. Spread between 2y and 10y Treasuries started the week at -57bp then widened to -75bp. FedWatchTool sees the probability of a 25bp hike at 58.5% while probability of no change in June is at 41.5%.

This week we will have ISM Manufacturing PMI and NFP data. Headline NFP number is expected to come at around 180k with the unemployment rate ticking up to 3.5%.

Important news for USD:

Thursday:​

  • ISM Manufacturing PMI​

Friday:​

  • NFP​
  • Unemployment Rate​

EUR

ECB policymaker Villeroy, a hawkish leaning member, stated that main question is the pass-through effect or prior rate hikes. He added that he expects ECB to be at the terminal rate by September also stating that it is far more important how long will rates stay high than what the terminal rate will be. He reiterated that bank is data dependent and that in next 3 meetings they could hike or pause.

German Ifo business climate for April snapped the streak of seven month’ increases and came in at 91.7, down from downwardly revised 93.4 in March. Ifo economist has stated that German economy is heading towards stagnation in Q2. Second reading of German Q1 GDP came in at -0.3% q/q and with Q4 reading printing -0.5% q/q Germany hash entered a technical recession, defined as two consecutive quarters of negative growth. Private and public consumption were drag on the reading while net exports, helped by China reopening, managed to contribute positively.

Preliminary PMI data for the month of May showed slowdown of the economy. Manufacturing PMI slipped to 44.6 from 45.8 in April due to dreadful German reading of 42.9. Services PMI managed to beat expectations with 55.9 vs 55.6 but it fell from 56.2 the previous month, German reading managed to climb to 57.8 thus accentuating different paths with manufacturing going down, while services going up. Composite was slightly down to 53.3 from 54.1 in April. The report states how production and new orders are declining rapidly but are still well above averages for this time of year. Additionally, price pressures in service sector, ECB pays close attention to that inflation, are seen rising which will be another input for ECB to continue hiking rates. Employment index is on the rise as companies continue to hire.

This week we will have preliminary May inflation data and it is expected to go down.

Important news for EUR:

Thursday:​

  • CPI​

GBP

Preliminary May PMI data were all on decline. Manufacturing fell deeper into contraction with 46.9, services declined to 55.1 from high of 55.9 in April and composite was dragged down to 53.9. The report shows that economy is still expanding but at a slower pace. The divergence between sectors is also seen in the prices charged. Services sector sees increases in prices while manufacturing sees decreases in prices.

April CPI data was not something BOE wanted to see. Headline number declined from 10.1% y/y to 8.7% y/y but expectations were for a bigger decline, down to 8.2% y/y. Monthly inflation rose 1.2% vs 0.8% as expected. Details show that food inflation was the biggest contributor to rising prices as it rose astonishing 19% y/y. The drop in headline number was due to prices of housing and housing services, that is electricity and gas prices, as well as Ofgem energy price cap going out of the calculation. Core CPI rose to 6.8% y/y from 6.2% y/y in March with a monthly increase of 1.3%! almost doubling the expected number. Core inflation is at the highest level in over 30 years.

BOE Governor Bailey stated the day before the inflation report that inflation is turning the corner and that bank is drawing nearer to the peak rates. After the report his statements cannot be taken seriously and markets are repricing rate expectations higher, toward 5.34% as a terminal rate. Post report he said he was satisfied with inflation coming down into single digits. He also argued that only one-third of the rate hikes had actually had effect on the economy and that there is still room for current rate hikes to show their effects. Markets are, however, pricing three more rate hikes.

AUD

PBOC has left LPR rates unchanged as was widely expected as they stand at 3.65% for 1-year and 4.3% for 5-year. The former is used as a benchmark for most new and outstanding loans while latter is used for most mortgage loans.

This week we will have official PMI data from China.

Important news for AUD:

Wednesday:​

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

NZD

RBNZ meeting was a live one where options for pause, 25bp rate hike and 50bp rate hike were all on the table. In the end decision was to go for a 25bp rate hike and bring Official Cash Rate (OCR) to 5.5%, This will be a peak in interest rates as projections show it will stay there until at least June of 2024. September of 2024 could see first rate hike while OCR is seen at 3.31% in June of 2026. The bank sees GDP for Q2 and Q3 to be negative which will bring a technical recession, two consecutive quarters of negative GDP growth, while CPI for 2024 is seen at 3.6%. The statement reiterated that “The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1% to 3% annual target range, while supporting maximum sustainable employment.“ Significant sign that this will be a pause in rates led to big repricing of NZD down. Additionally, Q1 retail sales data were abysmal. They came in at -1.4% q/q vs 0.2% q/q as expected and down from downwardly revised -1% q/q in Q4 of 2022.

CAD

Preliminary manufacturing sales for April came in at -0.2% m/m vs 0.7% m/m in March. Food and primary metal industries were the biggest drags. Wholesale trade in April rose 1.6% m/m vs -0.1 m/m the previous month on the back of higher sales of petroleum and petroleum products. CAD took advantage of week JPY and rose to 103, it fell against USD while it was mostly flat against other currencies.

JPY

Preliminary May PMI data saw manufacturing return to expansion territory after six months. The reading printed 50.8, up from 49.5 in April. The report showed growth after decline for output and new orders as well as weaker input and output prices inflation. Services continued to increase and came in at 56.3, up from 55.4 the previous month. The report showed stronger growth for output as well as new and new export orders, weaker inflation for output prices but input prices showed stronger inflation. Composite was lifted to 54.9 from 52.9 in April and it is a level not seen for almost a decade!

CPI data for the Tokyo area in the month of May showed headline number easing to 3.2% y/y from 3.5% y/y in April. Ex fresh food category also printed 3.2% y/y and was down from 3.5% y/y the previous month. Both readings came in weaker than expected. On the other hand, ex fresh food, energy category, so called “core-core”, ticked up to 3.9% y/y from 3.8% y/y in April and marked a new 40-year high. BOJ Governor Ueda is mulling a possibility of changing Yield Curve Control from 10y bonds to 5y bonds. Core machinery orders, a good proxy for the business investment 6-9 months into the future, fell in March 3.5% m/m and 3.9% y/y. Both numbers missed expectations by a large amount. This data point is very volatile but still this is a huge drop in y/y reading from 9.8% in February.

CHF

SNB total sight deposits continued to decline and came in at CHF515.7bn vs CHF520.1bn the previous week. SNB is firm on the path of strengthening the Swissy to contain inflation.

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