Weekly Market Recap (19-23 June)

<p>Monday: It was a US holiday, so it was a pretty dull trading
day. We had again some ECB speakers talking about a rate hike in July and
another one in September, if the data suggested so. </p><p>ECB’s Kazimir (hawk)
confirmed the support for a rate hike in July while keeping an open mind on
September. Later, ECB’s Simkus (hawk) said that he has no doubt that rates will
be raised in July and that they are close to the end of their rate hike cycle,
so there’s no need to rush with September assessment. </p><p>ECB’s Lane (dove)
expects inflation to come down fairly quickly to their 2% target in the next two
years and acknowledged that they need to be data dependent. He also confirmed a
July hike with another one in September being an open question. ECB’s Schnabel
(hawk) said that the risks to the inflation outlook are tilted to the upside and
a monetary policy stance that errs of the side of determination insures against
costly policy mistakes. In fact, she added that risks of both a de-anchoring of
inflation expectations and weaker monetary policy transmission suggest that
there is a limit to how long inflation can stay above 2%. </p><p>She’s saying that
inflation staying high for too long increases the risk of inflation
expectations getting de-anchored requiring eventually a more aggressive
tightening and a worse recession. In fact, she concluded that they need to keep
raising interest rates until they see convincing evidence that developments in
underlying inflation are consistent with a return to the 2% target. </p><p>The US NAHB
Housing Market Index came at 55 vs. 51 expected. This is the first time the
index prints above the 50 level (indicating expansion) since July 2022. </p><p>Tuesday: The PBoC has cut its LPR rates by 10 bps as expected
bringing the 1 year LPR to 3.55% and the 5 year LPR to 4.20%.</p><p>The RBA minutes
showed that the central bank decided to hike as the persistence of high
inflation raises the risk of inflation expectations de-anchoring. In fact, they
highlighted the risk that “wages and prices could become implicitly indexed to
past high inflation”. They are also wary of the risk that the lags from the
past tightening could lead to a sharper economic slowdown. Finally, they
reaffirmed their willingness to do what is necessary to bring inflation to
target. </p><p>RBA’s Deputy
Governor Bullock said that the economy and employment need to grow below trend
for a while. She also suggested that an unemployment rate of 4.5% would be the
right balance to bring inflation back to target without significant economic
pain. She highlighted that the current labour market is tight and above
estimates of full employment, and that entrenched inflation would lead to
higher rates and a deeper recession. Finally, she added that higher rates are
the only tool the RBA has to curb inflation.</p><p>ECB’s Vujcic
(hawk) said that core inflation pressures remain in the euro area and while acknowledging
that they have to consider the risks of doing too much versus doing too little,
he added that sometimes a soft landing is not possible. </p><p>ECB’s Villeroy
(Neutral) said that the duration of the terminal rate is more important than
the level and that future rate decisions are data-dependent. </p><p>ECB’s Simkus
(hawk) added to his comments earlier in the week that he wouldn’t be surprised
if the bank hiked in September as they need to provide very credible monetary
policy to make sure that they fulfil their mandate. </p><p>US Housing Starts
surged by most in three decades coming at 1.631M vs. 1400M expected, while
Building Permits came at 1.491M vs. 1.420M expected. Housing Starts can be
volatile but given the NAHB index on Monday, it’s pretty clear that the housing
market is roaring back, which may indicate that the Fed might have not done
enough. </p><p>Fed’s Jefferson
said that he remain focused on bringing inflation back to the 2% target and
that the Fed must remain attentive to inflation, banking-sector and
geopolitical uncertainty.</p><p>Later on, Fed’s
Cook confirmed that she’s also focused on inflation until the job is done and
has consistently supported Fed work to lower inflation. </p><p>Wednesday: BoJ’s Minutes showed that the current monetary
easing should be maintained. Later on, BoJ’s Adachi acknowledged that inflation
has risen faster than he expected but added that it’s too early to tweak
monetary policy as there are upside and downside risks to their price outlook
and longer-run downside risk appears to be bigger. BoJ’s Ueda further added to
Adachi’s comments confirming that they will patiently maintain easy policy to
achieve their 2% target. The BoJ looks too scared of deflation as they’ve been
fighting against it for decades. </p><p>The UK CPI report
has again beat estimates across the board with the CPI Y/Y coming at 8.7% vs.
8.4% expected and the Core CPI Y/Y rising to a new high at 7.1% vs. 6.8%
expected. The market now sees the terminal rate at 6% by the end of the year. </p><p>ECB’s Kazimir said
that the September hike will depend on the data and that they would need to
have core inflation under control to stop tightening. </p><p>Fed Chair Powell
during his testimony to Congress pretty much repeated what he said last week
during the FOMC press conference. He said that the process of getting inflation
back to the 2% target has a long way to go and that they remain data-dependent
with more rate hikes probably being appropriate if the economy performs as
expected. The next day he added that they haven’t seen much progress in the way
of services inflation and that headline inflation has come down largely due to
food and energy, not principally a function of monetary policy. He added that
his forecasts are similar to the committee’s forecasts as he believes two more
rate hikes are expected for this year. </p><p>ECB’s Nagel (hawk)
said that he’s confident inflation will get back to target and that there is
still a way to go until then and that’s why they have to be stubborn because
inflation is stubborn. Later on, ECB’s Schnabel (hawk) added that domestic
inflation is driven by profits and wages. </p><p>Fed’s Cook (dove)
said that the Fed is not there yet on getting inflation back to target and that
there’s the risk that economic growth could slow. </p><p>Fed’s Goolsbee
(dove) said that the decision last week was a close call for him and that it’s
perfectly appropriate to have a reconnaissance mission now. He still hasn’t
decided on what to do in July and acknowledged that he won’t gain enough info
in 6 weeks, but he will still learn something more. </p><p>BoC’s Minutes
showed that the Governing Council agreed to assess need for further hikes based
on data and that they were concerned that the disinflationary momentum seemed
to be waning with the 3 month trend of core inflation not showing a downward
trend. </p><p>Fed’s Bostic
(hawk) said that he wants to give the economy more time to adjust to rate hikes
before doing more, adding that policy hasn’t been restrictive long enough for
effects to hit. He acknowledged that there’s a risk that inflation rebounds but
it’s not his base case. </p><p>Thursday: BoJ’s Noguchi said that what's most important is to
ensure momentum for wage growth becomes trend, by maintaining easy policy and
that the inflation expectations of the Japanese public are yet to be anchored
at 2%.</p><p>The SNB hiked
interest rates by 25 bps as expected bringing it to 1.75% adding that
additional hikes cannot be ruled out to ensure price stability. SNB’s Governor
Jordan said that there is a danger that inflation becomes entrenched above the
2% level as underlying inflation pressures have risen further. </p><p>The BoE surprised
with a 50 bps hike vs. 25 bps expected bring the bank rate to 5.00%. Again,
Tenreyro and Dhingra voted for no change. BoE’s Governor Bailey (hawk) said
that they are not signalling what will come next on rates and that they are not
seeking to precipitate the economy into a recession, but it was absolutely
imperative that the BoE raised rates. As other central banks, they remain
data-dependent. </p><p>US Jobless Claims
missed expectations again coming at 264K vs. the previous upwardly revised 264K
figure. Continuing Claims, which is an indicator of hard it is for people to
find jobs after being unemployed, beat expectations printing at 1759K vs. 1782K
expected and 1772K prior. </p><p>Fed’s Bowman
(hawk) said that additional hikes will be needed as core inflation has
essentially plateaued since the fall of 2022. Later, Fed’s Barkin
(hawk) repeated that inflation is still too high despite falling from its peak
and that demand is still elevated compared with its pre-pandemic trend. He
confirmed that he would be content with more rate hikes if inflation is not
progressing toward their goal but he won’t prejudge the July meeting. </p><p>Friday: It was the PMIs day with a slate of releases you can
see below:</p><ul><li>Australia
Manufacturing PMI 48.6 vs. 48.4 prior and Services PMI 50.7 vs. 52.1 prior.</li><li>Japan
Manufacturing PMI 49.8 vs. 50.6 prior and Services PMI 54.2 vs. 55.9 prior.</li><li>France
Manufacturing PMI 45.5 vs. 45.7 prior and Services PMI 48.0 vs. 52.5 prior. </li><li>Germany
Manufacturing PMI 41.0 vs. 43.2 prior and Services PMI 54.1 vs. 57.2 prior. </li><li>Eurozone
Manufacturing PMI 43.6 vs. 44.8 prior and Services PMI 52.4 vs. 55.1 prior. </li><li>UK
Manufacturing PMI 46.2 vs. 47.1 prior and Services PMI 53.7 vs. 55.2 prior. </li></ul><p>Japan CPI Y/Y came
at 3.2% vs. 4.1% expected and 3.5% prior. The Core CPI Y/Y printed at 4.3% vs.
4.4% expected and 4.1% prior. </p><p>ECB’s de Cos
(dove) said that they will hike again in July, but can’t say what they will do
afterwards. </p><p>Fed’s Bostic (dove)
said that he expects the jobless rate to rise from historically low level and
that he favours no more rate hikes for the rest of the year. </p><p>Fed's Daly (hawk) said that two more rate hikes this year is a "very reasonable" projection but it will depend on the data. She continued that the risks of overtightening and undertightening are about balanced and that it's prudent to slow the pace of hikes as they approach their destination. She also added that community contacts are worried that housing has hit a bottom and that rents are reaccelerating. </p><p>The S&amp;P Global US Manufacturing PMI came at 46.3 vs 48.5 expected, while Services PMI printed at 54.1 vs. 54.0 expected. The big divergence between the Manufacturing Sector and the Services Sector continues and for Core inflation to ease the latter should go in the opposite direction. </p><p>The highlights for next week include:</p><ul><li>Canada CPI on Tuesday</li><li>US Jobless Claims on Thursday</li><li>EZ CPI and US Core PCE on Friday</li></ul><p>That's all folks, have a great weekend!</p>

This article was written by Giuseppe Dellamotta at www.forexlive.com.