Higher for Longer
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnDrCqDHSBNEEnJqZnzMo9ypPgrBbBvMU2ZW5xmTJzHXb68UuX_SIA4hUqIFVN8qfpORDFZpIXPhvnvWpK6NeXJPnBTSDhLTMURxHFo14eN4Dw2Ipongw3_8BcSro78Pk4Hm9zTWAWlvpzgCGJGrj0vpi_RGV2qmOQT0JVqA3m2QPJ6C2hbSBLcoW96zda/s297/CB.jpg"><img alt="" border="0" data-original-height="297" data-original-width="276" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnDrCqDHSBNEEnJqZnzMo9ypPgrBbBvMU2ZW5xmTJzHXb68UuX_SIA4hUqIFVN8qfpORDFZpIXPhvnvWpK6NeXJPnBTSDhLTMURxHFo14eN4Dw2Ipongw3_8BcSro78Pk4Hm9zTWAWlvpzgCGJGrj0vpi_RGV2qmOQT0JVqA3m2QPJ6C2hbSBLcoW96zda/s400/CB.jpg" /></a></div><p><b><span>Overview: </span></b><span>The central
banks of Norway and Switzerland have hiked rates by 50 bp and 25 bp,
respectively. Attention is on the Bank of England. A 25 bp hike is widely
expected but after strong inflation report, the risk is clearly for a 50 bp
hike. In fact, we suspect a quarter-point move could see sterling sold. With a
new orthodox economics team in Turkey, a large rate hike is expected today. Late
in the North American session, Mexico's central bank meets but previously
announced a pause as inflation is moderating. The dollar is on the defensive. The
recovery we expected has been more shallow than we anticipated as the market
remains unimpressed with the Fed's signal of further hikes, which Chair Powell
underscored in his testimony yesterday and will repeat it today. Since the Fed
delivered its hawkish pause last week, the two-year yield has risen by about
five basis points, half of which are being recorded today. The euro rose above
$1.10 for the first time in more than a month and the Canadian dollar is at new
highs for the year. </span><span><o:p></o:p></span></p>
<p><span>China
and Hong Kong markets on closed for a national holiday today and other Asia
Pacific equity markets were mostly lower, led by a 1.6% retreat in Australia. South
Korea and Taiwan managed to post modest gains. Europe's Stoxx 600 is lower for
the fourth consecutive session, which, if sustained, will be the longest losing
streak of the year. US equity futures are also trading lower. Benchmark 10-year
yields are most 1-3 bp higher in Europe. The 10-year US Treasury yield is also
three basis points higher near 3.75%. Gold is softer in a $1925-$1935 range. It
set a three-month low yesterday slightly below $1920. August WTI reached a
nine-day high yesterday around $72.70 and is consolidating so far today above
$71.50. </span><span><o:p></o:p></span></p>
<p><b><span>Asia
Pacific</span></b><span></span><o:p></o:p></p>
<o:p>
<p><b><span>Today's
quiet Asia Pacific session will likely be succeeded by a bigger day tomorrow
when Japan reports May CPI, and the flash PMI for Japan and Australia are
announced. </span></b><span>Like the eurozone's preliminary CPI estimate and the flash PMI,
Tokyo's CPI released a few weeks ago takes most of the thunder from the
national figure. Moreover, Tokyo's June CPI is reported at the end of next
week. The flash June PMI is likely more important for Australia than it is for
Japan. BOJ Governor Ueda is still pushing for patience and expects inflation to
ease over the next few months before rising again in the second half of the
fiscal year (starts October 1). Meanwhile, the futures market expectation for
another hike from the Reserve Bank of Australia when it meets on July 4 has
slipped to about 33% (from around 50%) following the RBA minutes earlier this
week that showed its surprise rate hike earlier this month was finely balanced
decision. However, since the RBA's meeting, investors and policymakers have
learned that the economy added nearly 62k full-time positions in May, the
participation rate rose, and the unemployment rate fell. That follows a softer
April report.</span><span></span><o:p></o:p></p>
<o:p>
<p><b><span>The
dollar is in a narrow range below JPY142.00, where options for around $920 mln
expires later today.</span></b><span> The session low is near JPY141.60. The week's low is
JPY141.20-30. With the policy divergence palpable, a lower yen still seems to
be the path of least resistance. <b>The Australian dollar is little changed and
hovering near $0.6800 in the European morning.</b> This area corresponds
to a (38.2%) retracement of the losses from last Friday's high near $0.6900
through yesterday's low around $0.6740. Above there, the next retracement (50%)
is about $0.6820. Separately, the Australian dollar appears to have carved a
double top against the New Zealand dollar and broke through the neckline today
near NZD1.0930. The measuring objective is near NZD1.0800. <b>China and Hong
Kong markets were closed to a national holiday today. </b>The greenback is
trading with a firmer bias against the offshore yuan (~CNH7.18), but off
yesterday's high when it briefly traded above CNH7.20. </span><span><o:p></o:p></span></p>
<p><b><span>Europe</span></b><span></span><o:p></o:p></p>
<o:p>
<p><b><span>The
Bank of England's rate hike announcement is due shortly. </span></b><span>After the
second consecutive upside inflation surprise reported yesterday, the swaps
market is discounting about a 30% chance of a 50 bp move instead of 25 bp.
There ae five meetings left this year counting today's and the market is
pricing in an almost 6.0% year-end rate, which is 150 bp above the current base
rate of 4.50%. That seems to imply a 50 bp hike at some juncture, even if not
today. Although the BOE has revised away the recession it previously forecast,
the risk is that it induces one to bring inflation down. Chancellor Hunt
earlier indicated that this was a risk worth taking. </span><span><o:p></o:p></span></p>
<p><b><span>Two
other European central banks hiked today. </span></b><span>Norway's
Norges Bank lifted the deposit rate by 50 bp to 3.75%. Although it was among
the earliest to hike rates among the G10, starting in September 2021, six
months before the Fed and 10 months before the ECB, Norway has seen little
progress against inflation. Headline CPI reached 6.7% in May. It peaked at 7.5%
last October. It eased to 6.3% in February before rising again. More
importantly from a policy perspective, the underlying rate, which excludes
energy and adjusts for tax changes, made a new cyclical high of 6.7% in May.
Meanwhile, the Norwegian krone had eclipsed the yen as the weakest G10 currency
so far this year (~-9.0% vs. -7.7%). The larger move and the guidance, warning
of another hike in August and a peak rate of 4.25% later this year, spurred a
1.30% rally of the krone. The Swiss National Bank, which meets quarterly, hiked
by 25 bp to 1.75%. The EU harmonized measure of CPI matches the national
measure with a 2.2% increase year-over-year in May. The swaps market has one
more hike discounted and around a 40% chance of an additional move. The Swiss
franc is the second strongest of the G10 currencies this year behind sterling,
with a roughly 2.85% gain against the greenback.</span><span></span><o:p></o:p></p>
<o:p>
<p><b><span>The
euro extended its recovery from Tuesday's low when it slipped below $1.0900 and
traded above $1.10 for the first time since May 10. </span></b><span>It is not
traded below $1.0980 in the European morning. There is little chart resistance
to note before $1.1050 and the year's high was set in late April near $1.1095. The
markets have more confidence of an ECB hike next month (~90%) than a Fed hike
(~70%). <b>Sterling is trading quietly ahead of the outcome of the BOE
meeting. </b>We suspect a 50 bp hike and hawkish guidance could lift sterling
toward last week's high near $1.2850, which was its best level since April 2022.
On the other hand, a 25 bp hike could see it sold and return toward $1.2700.</span><span> </span><span><o:p></o:p></span></p>
<p><b><span>America</span></b><span></span><o:p></o:p></p>
<o:p>
<p><b><span>Fed
Chair Powell showed no sign of wavering in his congressional testimony. </span></b><span>He is before
the Senate Banking Committee today. The questions from the lawmakers will
change but the answers won't. Powell continues to argue that there is a
"long way" to get inflation under control. The market was not
persuaded at last week's FOMC meeting when Powell suggested this and was
nonplus in yesterday's reiteration. The implied yield of the January Fed funds
futures contract has risen 4 bp this week to 5.24%. Given the 5.08% current
effective average Fed funds rate, fair value assuming 50 bp more in hikes would
be 5.58%. Ironically, the market acts as if Atlanta Fed's Bostic, a non-voting
member, who said yesterday, his base case was a pausing for the remainder of
the year, is going to win over the Board of Governors and the other regional
presidents. We expect next week's PCE deflator to push the market more in the
Fed's direction. While the headline rate (annualized through May) could be
around half the pace seen in the Jan-May 2022 period, the core rate might be
running slightly faster. That underscores the argument that there has not been
meaningful improvement. And given that, it does not seem as if a dissent from a
possible rate hike decision next month is a done deal. </span><span><o:p></o:p></span></p>
<p><b><span>The
US reports Q1 current account deficit today.</span></b><span> It tends not to move
markets. One of the most notable developments in the US external balance this
year is the decline in imported goods from China. Through April, they account
for a little less than 15.5% of US goods imports, which if sustained would be the
lowest level since 2006, down from the 21.6% peak in 2017. Note that the US
recorded a goods deficit of $361 bln in the first four months of this year. It
is more than a quarter larger than in 2019 and about 38.5% larger than in 2017.
The US current account deficit was about 1.9% of US GDP in 2017 and this year
may be a little more than 3% of GDP. Just like China replaced Japan in a common
narrative that <i>blames</i> others for the US deficit, China will be
superseded by other countries too. The constant is the US shortfall.
Separately, the Leading Economic Indicators Index is due as well. As we have
noted the six-month pace of decline has not been seen outside of recessions,
but it is also not a market mover. Existing home sales are seen softer. Weekly
initial jobless claims have been pushing higher, while the Memorial Day holiday
and labor activity might have distorted, the four-week moving average is at the
highest since November 2021 and looks poised to move higher.</span><span></span><o:p></o:p></p>
<o:p>
<p><b><span>Canada's
April retail sales blew away expectations with a 1.1% jump (1.3% excluding
autos). </span></b><span>After weakness in March, it suggests Q2 has begun off on firm
footing. The median forecast in Bloomberg's survey is for the Canadian economy
to be flat this quarter after it expanded by 3.1% at an annualized pace in Q1
and this seems unreasonable low. The swaps market sees the likelihood of not
just one but probably two more rate hikes by the Bank of Canada this year. Next
week's May CPI figures will likely help solidify sentiment. Mexico reports
inflation for the first half of June today. Both the headline and core rates
are expected to slip lower. The central bank meets later in the session, and it
has signaled a pause. The swaps market is pricing a cut in Q4. </span><span><o:p></o:p></span></p>
<p><b><span>The
US dollar is extending its losses against the Canadian dollar today and reached
CAD1.3140, its lowest level since last September.</span></b><span> Options
for around $800 mln struck between CAD1.3100 and CAD1.3115 expire today. A
break of this area targets CAD1.30. The greenback is continuing to consolidate
against the Mexican peso. The multiyear low was set last Friday near MXN17.02.
It recorded a six-day high yesterday by MXN17.2570 before returning below
MXN17.1060. The dollar looks poised to move higher ahead of the Banxico's
decision today. Initial resistance is seen around MXN17.15 and then MXN17.20.</span><span><o:p></o:p></span></p>
</o:p></o:p></o:p></o:p></o:p></o:p><p> <span> </span></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p><p><br /></p>
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