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Signs of Disinflation Continue

There are some promising signs on the inflation data which is released today for UK and Canada. UK producers lower the prices to 1.8%, which is the disinflation in the third consecutive month. Core CPI also showed to 0.4$ m/m which is also its third straight month on disinflation.

Canada’s producer prices also reduced -1.1% in June, first reduction since Aug 2021 and when it was on fast pace in May 2020. The annual rate peaking in April 2022 at 18.1% could be attributed to basing effects, it is good to see the m/m PPI prints trending their way into contraction. Expectation is lower PPI going forward. As producer prices are an input for consumer prices, it is a good news for consumers.

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European Central Bank Interest Rates

The European Central Bank also joined the global rate hike on yesterdays announcement, announcing a larger then expected 50 bps deposit rate increase, to 0.00%. The ECB said a further normalization of interest rates could be expected at upcoming meetings.

ECB also approved the Transmission Protection Instrument, a tool aimed at supporting orderly conditions across Eurozone, in particular the region’s peripheral makets such as Italy and Spain. Full details are not released yet, and the scale of TPI purchases depends on the severity of the risks facing policy transmission.

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EUR/USD – Euro US Dollar

Last week the European currency showed a slight growth to a high of 1.0272. Reason behind this was the most banal corrective rebound of EUR/USD breaking the equality level of 1.0000, the bottom at 0.9951 on 14th of July, the resumption of Russian gas supplies to Europe and the most important expectation of a rise in the euro interest rate of 50bp. This happened in reality for the first time in past 13 years.

The explanation given by ECB of the rate normalization was, obvious and consists of an updated assessment of inflation growth and the announcement from ECB for the launch of a new instrument which is the TPI.

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This Weeks’s currency pair, EURUSD

The ECB hike of last week is the highest hike in past 11 years which brought the interest rate from -0.50% to 0.00%. Further normalization of interest is appropriate, indicating that there will be another hike from ECM on their next meeting on 8th September. Another new program was introduced by the committee of new bond buying called Transmission Protection Instrument to be used if it is needed. TPI will allow ECB to buy bonds in any country which is in Eurozone whose yields may be surging due to unwarranted financial conditions.

Last weeks poor PMI data to the Eurozone with European PMIs showing that manufacturing was slowing. A number of country’s manufacturing readings fell below the 50 level, indicating manufacturing activity is in contractionary territory. For the Eurozone as a whole, the flash Manufacturing PMI was 49.6 vs 52.1 previously, while the flash Services PMI was 50.6 vs 53 previously. This brought the composite number down to 49.4 from 52 in June. On Monday, Germany released its Ifo Business Climate. The reading was 88.6 vs 90.2 in June. The expectations component fell from 85.5 in June to 80.3 in July, its lowest level since April 2020. This seemly confirmed the PMI data.

This week EU will release its flash CPI for July. Expectations are for 8.6% YoY vs 8.6% YoY previously. The core CPI is expected to go up 3.8% YoY from 3.7% YoY previously. If this print continues higher, the ECB will have some bring decisions to make.

The FOMC meets today and tomorrow to discuss interest rate policy. Expectations are that the committee will raise rates by 75bps, which will bring the Fed Funds rate from 1.75% to 2.50%. The last CPI reading for the US was 9.1% YoY. On Friday, PMI data of US was released. The Manufacturing component was 52.3 vs 52.7 in June.

EUR/USD has been moving in a lower channel since Feb 2022. It began moving aggressively by mid-June when it was at 1.1500 and reached 1.0340 which was the low since Jan 2017 but couldn’t break through. On July 14th it broke the level of 1.0000 since then the pair has been consolidating mid-range near 1.0250 as tomorrow’s FOMC meeting looms.

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AUD Second Quarter Increase | Xtreamforex

In the second quarter of 2022 Australian inflation data has increased to 6.1%, but below the agreed expectations relaxing the fear of a surprising 75bp rate increase when the RBA has a meeting next week.

CPI rose by 1.8% Quarter On Quarter(QoQ) and 6.1% Year On Year(YoY). This was the highest increase since the introduction of the Goods and Services tax in the beginning of 2000.

The RBA’s preferred measure of inflation, increased by 1.4% Quarter On Quarter and 4.9% Year On Year, which was above the market expectations of 1.2% QoQ and 4.7% YoY.

Necessary inflation is now 190bp above the top of the RBA’s 2-3% target band, and the yearly trimmed means was highest since the ABS first published the series back in 2003.

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The FOMC raised rates by 75 bps which was widely expected

As widely expected, the Federal Open Market Committee raised the range of its target for the the federal funds rate by 75 bps, which brings the top end of the range to 2.50%. There was widespread support for another supersized rate increase-the FOMC raised rates by 75 bps at its last meeting in June. The FOMC has now hiked rates by 225 bps since March, this much increase never happened in past 40 years.


In todays decision, the committee again pointed to that fact that inflation remains high. For sure the YoY rate of CPI inflation rose from 8/6% in May to 9.1% in June, which was higher then others, and likely most FOMC members, had expected at the time. The statement also repeated that “the committee is strongly committed to returning inflation to its 2 percent objective”. This sentence, which was used previously in the June statement, in connection with the unanimous vote to raise rates by another 75bps today, indicates that inflation remains forefront in the minds of most FOMC members.


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The US Economy || US rate hike cycle concludes in 2022

Last week was very active for global rebirth in risk appetite despite a run of data which pointed to deteriorating US economic growth. This is because the softer tone of US data and the FOMC’s acceptance of it implies a reducing risk of the rate hikes in excess of those already increased.

Increasing the rate hike for the second time to a mid-point of 2.375%, Chair Powell showed a greater degree of comfort over the outlook for inflation in the July press conference. In part this stems from 2.375% being within the 2.3% interest rate range th FOMC believe to be neutral for their economy. However, the greater comfort of inflation is also a consequence of building apprehension over the outlook for growth. The press conference also made clear that the FOMC wish to undertake “just the right amount of tightening” to bring about below trend growth, not to make mistake by creating the pre conditions for recession.

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Upcoming News for this Week:- FOMC, RBA, BOE

FOMC

The FOMC increased rates by 75bps increasing the Fed Funds rate from 1.75% to 2.50%. The statement confirmed that spending and production were soft, however job increase remain strong. The Fed put softer data aside by saying that it anticipates ongoing increase in the Fed Funds rate. It was announced by the Fed Chairman Powell that the rate decisions will be made on a meeting to meeting basis which depends on the incoming data. On one side it was announced that another unusual large market rate hike could be expected and it could also be possible to slow down the rate hikes to get more restrictive. For now the Fed is data dependent. IF the labor markets continue to be strong, the Fed will continue hiking. If there are cracks in the labor market, the Fed may pull back the pace of rate hikes.

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Upcoming Market Updates: AUD, NZD, EUR, GBP, USD, JPY

AUD: AIG Manufacturing Index, it measures level of a diffusion index based on surveyed manufactures.

NZD: Building Consents m/m, it measures change in the number of new building approvals issued.

JPY: Final Manufacturing PMI, it measures level of a diffusion index based on surveyed purchasing managers in the manufacturing industry.

AUD: MI Inflation Gauge m/m, it measures change in the price of goods and services purchased by consumers.

AUD: ANZ Job Advertisements m/m, it measures change in the number of jobs advertised in the major daily newspapers and websites covering the capital cities.

EUR: Spanish Manufacturing PMI, it measures level of a diffusion index based on surveyed purchasing managers in the manufacturing industry.

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Swiss National Bank, CHF

A message from Swiss National Bank was sent to market last week which was that it may take monetary policy measures at any time between regular assessment dates if circumstances require that. Last meeting of SNB on 16th June surprised markets and hiked interest rates by 50bps from record low of -0.75% to -0.25%. There is no schedule meeting of SNB until 22nd September this year. The Central Bank cited increased inflationary pressures as the reason for the rate hike after CPI reached a high of 2.9% YoY in May which was the highest in last 14 years. In June, inflation rose to 3.4% YoY and with CPI for July to be increased today, the SNB knows it may have to act inter-meeting if inflation, continues to rise. The expectation for the July SPI is 3.5% YoY. If the data comes in hotter than expected, be on the lookout for another rate hike before next meeting.

EUR/CHF is trading at its lowest level since Jan 2015 if we look at the weekly timeframe, when SNB dropped the peg of the Swiss Franc to the Euro. The last weekly low was 0.9776, which happened the week after the peg.

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AUD/USD After RBA Meeting

Policy rate as expected by RBA was raised by 50 bps to 1.85% last Tuesday. This is the fourth consecutive hike and steepest in almost 30 years. This helped a little to raise AUD/USD which was down by almost 1% from the beginning of this week. This release leaves the pair to trade below psychological level of 0.70. The recent tensions between China and Taiwan have added to weaker AUD, but some of the factors have been primary driver behind this latest move.

Latest guidance from the RBA that near-term future hikes may not be standing as the one this week was likely the bug factor behind the fall of AUD/USD. RBA also admits that it is trying hard to slow down the inflation, which hit 6.1% in second quarter without any big impact on Australian economy. A cadre of Fed speakers this week haven’t given any indication that Fed is looking to ease up on raising interest rates. Currently, the RBA, like many other major central banks, doesn’t appear capable of keeping pace with the Fed in terms of policy tightening.

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Employment Rate Change In Canada

Employment change in Canada is better than expected and this will help Bank Of Canada to hike again in next meeting which will be in September.

NFP tomorrow, markets will be focusing on the data, and Canada will release the July Employment Change data as well. It is expected that the Unemployment rate will remain unchanged at 4.9%. 25,000 gain for Employment change is expected vs a June reading of -43,200. Most of the job losses from June headline were due to a decrease of 39,100 part-time jobs.

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RBNZ survey of Expectations, NZD

The expectations form RBNZ ‘s latest survey shows inflation over coming years will remain high. The trend is seen higher in recent quarters looks like arrested and the expectations easing at some of the key medium-term horizons.

Lets look at the details, expectations for inflation one year ahead is consistent at 4.9%. Expectations at this short horizon will follow actual inflation closely. And the latest survey expects the risk of high inflation of 7.3%int the year to June, that lack of movement will be welcome news for the RBNZ.

Central Bank’s main focus is on expecting long horizon for the next couple of years. This is a better guide to how businesses will adjust between prices and wages, and signal if the inflation target is viewed as decent. Today’s news will also have been welcomed by the central bank.

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US CPI Preview: Are we past peak inflation?

Price pressure may show slowing down while the Fed’s preferred Core CPI measure shows that underlying inflation is still rising.

Tomorrow the US Bureau of Labor Statistics will release the July Consumer Price Index report.

Economists are expecting CPI headline to come in at 0.2% MoM , 8.8% YoY, with the core CPI report expected to print at 0.5% MoM, 6.1% YoY. Last month’s headline CPI printed 9.1% YoY, while the core CPI was 5.9%.

The biggest factor could be the gas prices, which have now fallen for over 50 days straight. Analysists estimated that the gas prices fell at least 10% in July from June levels, likely subtracting 0.5% or more off the headline CPI reading this month. Food prices were also lower to some extent in July than August, setting up a dynamic where the headline inflation reading may show price pressures fading while the Fed’s preferred “core” CPI measure shows that underlying inflation is still rising as home prices and pent-up demand for economic reopening offset the more volatile components.

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USD/CAD: A Tale Of Two Labor Markets

Traders are still trying to digest last week’s US jobs report, but one thing is clear that The US labor market is outperforming Canada’s labor market.

Markets are starting to settle into the traditional “Dog Days of Summer” trade, major indices, commodities and currency pairs seeing relatively little movement on the day ahead of tomorrow’s highly expected UC CPI report.

Traders are still trying to digest last week’s US jobs report, but one thing is clear: The US labor market is outperforming Canada’s market. Whereas the US just saw its strongest job growth in five months, a new revolving low in its unemployment rate, and has fully recovered all of the job losses since the start of the pandemic, Canada has now seen two consecutive months of outright declines in full-time employment.

Central banks world wide remained hyper-focused on inflation, but an outright contraction in employment, especially against a backdrop of falling commodity prices and a slowing global economy, could certainly prompt some to slow or pause their tightening cycles. This now is the reality that the BOC has to wrestle with, presenting a possible bullish catalyst for the US dollar relative to the loosie.

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