Weekly Market Recap (24-28 July)

<p>Monday:</p><ul><li>Monday was the PMI
day for many advanced economies. Below you can see the data:</li></ul><ul><li>Australia
Manufacturing PMI printed at 49.6 vs. 48.0 prior while the Services PMI came at
48 vs. 50.3 prior. The Composite PMI was 48.3 vs. 50.1 prior. </li></ul><ul><li>Japan
Manufacturing PMI printed at 49.4 vs. 49.8 prior while the Services PMI came at
53.9 vs. 54.0 prior. The Composite PMI was 52.1 vs. 52.1 prior. </li></ul><ul><li>France
Manufacturing PMI printed at 44.5 vs. 46.0 prior while the Services PMI came at
47.4 vs. 48.0 prior. The Composite PMI was 46.6 vs. 47.2 prior. </li></ul><ul><li>Germany
Manufacturing PMI printed at 38.8 vs. 40.6 prior while the Services PMI came at
52.0 vs. 54.1 prior. The Composite PMI was 48.8 vs. 50.6 prior. </li></ul><ul><li>Eurozone
Manufacturing PMI printed at 42.7 vs. 43.4 prior while the Services PMI came at
51.1 vs. 51.5 prior. The Composite PMI was 48.9 vs. 49.9 prior. </li></ul><ul><li>UK
Manufacturing PMI printed at 45.0 vs. 46.5 prior while the Services PMI came at
51.5 vs. 53.7 prior. The Composite PMI was 50.7 vs. 52.8 prior. </li></ul><ul><li>US
Manufacturing PMI printed at 49.0 vs. 46.2 prior while the Services PMI came at
52.4 vs. 54.4 prior. The Composite PMI was 52.0 vs. 53.2 prior. </li></ul><p>China pledged
to step up policy support for its ailing economy. In fact, China's official Xinhua News Agency said
the ruling Communist Party’s 24-member Politburo met, and promised
counter-cyclical policy that includes actively expanding domestic demand,
resolving debt risks and it left out the slogan of “housing is for living, not
for speculation”, which might be a sign that it is considering easing
restrictions on the property sector. Later, the State-sponsored finance media
China Securities Journal said that there were rate cuts, tax cuts and fee
reductions expected. </p><p>Tuesday:</p><p>The German IFO
Business Climate Index came at 87.3 vs. 88.0 expected and 88.6 (revised from
88.5). The Expectations Index printed at 83.5 vs 83.4 expected and 83.8 prior
(revised from 83.6), while the Current Conditions Index printed at 91.3 vs 93.0
expected and 93.7 prior. </p><p>The US Consumer
Confidence report surprised again with a huge beat across the board coming at
117.0 vs. 111.8 expected and 109.7 prior. The Present Situation Index, which
correlates with labour market strength, printed at 160.0 vs. 155.3 prior,
while the Expectations Index printed at 88.3 vs. 79.3 prior. The 1-year
inflation expectations index was 5.7% vs. 6.0% prior, and jobs hard-to-get
was at 9.7 vs. 12.4 prior. </p><p>Wednesday:</p><p>The Australian Q2
Headline CPI Q/Q came at 0.8% vs. 1.0% expected and 1.4% prior, while the Y/Y
reading printed at 6.0% vs. 6.2% and 7.0% prior. The RBA Trimmed Mean CPI Q/Q
printed at 1.0% vs. 1.1% expected and 1.2% prior, while the Y/Y figure was 5.9%
vs. 6.0% and 6.6% prior. Overall, this report may be enough to keep the RBA on
hold at the next meeting. </p><p>The Bank of Canada
released its minutes from the July meeting with the key lines below:</p><ul type="disc"><li>Consensus among BOC
members was that the cost of delaying action was greater than the benefit
of waiting for more data.</li><li>Agreed they were
prepared to hike further if needed but “did not want to do more than they
had to”.</li><li>Concerned that
progress towards price stability could stall and inflation could rise
again if upside surprises materialize.</li><li>Felt the data
clearly indicated that excess demand and core inflation were proving to
be more persistent than expected.</li><li>Core inflation
measures suggest the return to 2% inflation will take longer than
anticipated.</li><li>Agreed that
household consumption should moderate as higher rates take effect.</li><li>Felt it was too
early to tell whether wage growth was easing.</li></ul><p>The Fed hiked interest
rates by 25 bps bringing the FFR to 5.25-5.50% as expected. The statement was
almost identical to the last one with just the line saying “economic activity
has been expanding at a modest pace” changed to “at a moderate pace”.
Moving on to the press conference, Fed Chair Powell in the opening statement
said that the full effect of their tightening has yet to be felt and that
without price stability, the economy doesn’t work for anyone. He highlighted
the strong pace of jobs growth, and that labour demand still “substantially”
exceeds supply. He concluded that they are strongly committed to getting
inflation back to target and that the process of reaching the 2% target “still
has a long way to go”. Below you can read the main comments from the Q&amp;A
session:</p><ul type="disc"><li>Inter-meeting data
was broadly in line with our expectations.</li><li>CPI was a bit better
than expectations.</li><li>We haven't made any
decisions about future meetings.</li><li>We're looking for
moderate growth, we're looking for a better balance in supply and demand, particularly
in labour market.</li><li>We get 2 more jobs
and CPI reports before the Sept meeting.</li><li>It is certainly
possible that we would hike in September, also possible we would hold.</li><li>June CPI is just one
reading.</li><li>We will be looking
at everything in deciding on what to do next, growth and inflation very
closely, but inflation in particular.</li><li>How do you balance
the risks of doing too much or too little? I would say "we're coming
to a place" where there are challenges on both sides.</li><li>We need to see
inflation is durably down.</li><li>We think core
inflation is a better signal of where inflation is going.</li><li>We want to see core
inflation coming down.</li><li>There are reasons to
see core coming down but it's still quite elevated.</li><li>The historical
record suggests softening in labour market conditions, so that's still the
likely outcome.</li><li>The worst outcome
for everyone would be to not deal with inflation and not get it done.</li><li>Whatever the short-term
costs of getting inflation down, they outweigh the longer-term costs of
not getting the job done.</li><li>Monetary policy is
restrictive, more so today.</li><li>Inflation has
proved, repeatedly, stronger than we and other forecasters expected.</li><li>We'll move rates when
we move rates, but it won't be this year, I don't think.</li><li>Rate cuts next year
will be about our certainty that inflation has come down.</li><li>The economy is
weathering banking turmoil well, still watching.</li></ul><p>The TL;DR of the meeting
is that the Fed is data dependent and that they don’t know if they will hike or
skip the September meeting yet. They will see two more NFP and CPI reports
before the next meeting and the focus is on the labour market and core
inflation, so you can ignore headline CPI. I think that if the data starts
to really come in hot, Fed Chair Powell will have the chance of delivering a
“verbal” hike at the Jackson Hole Symposium scheduled for 24-26 August. </p><p>Thursday:</p><p>The ECB raised rates by
25 bps as expected bringing the deposit rate to 3.75%. Below you can see the
key lines from the statement:</p><p>· Inflation continues to
decline but is still expected to remain too high for too long.</p><p>· Expectation is that
inflation will drop further over the remainder of the year, but it will stay
above target for an extended period.</p><p>· ECB decides to set the
remuneration of minimum reserves at 0%. This is to preserve the effectiveness
of monetary policy transmission.</p><p>· ECB stands ready to
adjust all of its instruments within its mandate to ensure that inflation
returns to its 2% target over the medium term.</p><p>· To follow a data-dependent
approach to determining the appropriate level of interest rates.</p><p>There was a subtle
change to a passage that weighed on the Euro. In fact, in June they said "The
Governing Council’s future decisions will ensure that the key ECB interest
rates will be brought to levels sufficiently restrictive to achieve a
timely return of inflation to the 2% medium-term target and will be kept at
those levels for as long as necessary." In July it was changed to "The
Governing Council’s future decisions will ensure that the key ECB interest
rates will be set at sufficiently restrictive levels for as long as
necessary to achieve a timely return of inflation to the 2% medium-term
target." </p><p>Moving on to the
press conference, President Lagarde in her opening statement said:</p><ul type="disc"><li>Near-term economic
outlook for the eurozone has deteriorated owing largely to weaker domestic
demand.</li><li>We will continue to
follow a data-dependent path.</li><li>Momentum is slowing
in the service sector, though it remains a sign of strength.</li><li>Housing and business
investment are showing signs of weakness.</li><li>Over time, improving
supply conditions and falling inflation should support recovery.</li><li>Many new jobs are
being created, especially in services sector.</li><li>Jobs may turn
negative for manufacturing.</li><li>As energy crisis
fades, governments should roll back supports.</li><li>Domestic price
pressures, including from wages and profit margins, are becoming an
increasing source of inflation.</li><li>The outlook for
economic growth and inflation remains highly uncertain.</li><li>Upside risks to
inflation include possible pressures on energy and food.</li><li>Demand for mortgages
has fallen for a fifth quarter in a row.</li><li>We stand ready to
adjust all instruments.</li></ul><p>In the Q&amp;A Session,
President Lagarde emphasised that the slight change of the verb “be brought” to
“be set” in the statement was not random or irrelevant. She said that the
decision was unanimous, and they are deliberately data dependent as they may
hike, or they may hold. She continued saying that they are not in the domain of
forward guidance, but they are strongly rooted in their desire to break the
back of inflation. She highlighted that they would see two more inflation
readings before the September meeting, so they keep an open mind. She added
that they know that they are getting closer to the end, but the options of
continuing to hike or hold are available. Finally, she concluded by saying that
the only thing they know is that they won’t cut rates. </p><p>In the final few minutes
of the press conference Lagarde interrupted the moderator who was going to the
next question and said: “Oh no, I wanted to add for Tom: You asked, do we
have more ground to cover? At this point in time, I wouldn’t say so,
because as I said, the data that we just discussed and the assessment of data
will actually tell us whether and how much ground we have to cover, in
September and at subsequent meetings. And as I said in the early part of this
press conference, it may vary from one month to the other”. The phrase
highlighted in bold weighed on the Euro as it seemed like Lagarde slipped and
signalled the end of the hiking cycle. But as Adam highlighted <a href="https://www.forexlive.com/centralbank/why-lagarde-likely-misspoke-in-indicating-they-dont-have-more-ground-to-cover-20230727/">here</a> it may have been just a
mistaken turn of phrase and what Lagarde actually meant with the “wouldn’t say
so” was just a “couldn’t say so”. </p><p>The US Q2 Advance GDP
came at 2.4% vs. 1.8% expected:</p><p>·
Consumer spending +1.6% vs +4.2% prior</p><p>·
GDP final sales +2.3% vs +1.4% expected</p><p>·
GDP deflator +2.2% vs +3.0% expected</p><p>·
Core PCE +3.8% vs +4.0% expected (4.9% prior)</p><p>·
Exports -10.8%</p><p>·
Imports -7.8%</p><p>·
Business investment +4.9%</p><p>The US Jobless Claims
beat again expectations by a big margin across the board with Initial Claims
coming at 221K vs. 235K expected and 228K prior, and Continuing Claims printing
at 1690K vs. 1750K expected and 1749K prior (revised from 1754K). </p><p>A Nikkei report
stating that the BoJ was going to discuss tweaking YCC policy triggered a huge
rally in the JPY and some risk off flows in other markets as well. The key
lines in the report were:</p><p>· Will discuss letting
long-term rates rise above 0.50% limit "by a certain degree".</p><p>· Under the more flexible
policy being considered, the BOJ would permit gradual increases above the 0.5%
threshold, but still clamp down on any sudden spike.</p><p>· The proposed change
would keep the rate ceiling, but allow for moderate rises beyond that level.</p><p>· The report highlights positive effects on
inflation from a stronger yen.</p><p>Friday:</p><p>The Tokyo July CPI
Y/Y came at 2.9% vs. 2.8% expected and 3.1% prior, while the CPI ex-Food Y/Y
printed at 3.0% vs. 2.9% expected and 3.2% prior. The Core CPI ex-Food and
Energy rose to 4.0% vs. 3.8% prior. The Tokyo area inflation is regarded as a
leading indicator of nationwide inflation.</p><p>The BoJ left its
monetary policy unchanged with interest rates at -0.1%, the 10-year JGB yield
target around 0% and the YCC band at -/+ 0.5%. The BoJ also raised its
inflation forecast for this year to 3.2% vs. 2.5% in April, while keeping the
2024 and 2025 forecasts unchanged at 1.7% and 1.8% respectively. There was
indeed a tweak to the YCC policy though. In fact, the BoJ said that it will
operate the yield curve control more flexibly to respond nimbly to upside and
downside risks. Moreover, it will keep offering fixed-rate operations for
10-year JGB yield at 1.0%. So, they implicitly widened the band to have a hard
cap at 1.0% while maintaining a soft cap at 0.5%. Below you can see their
slide.</p><p>Moving on to the
press conference, BoJ’s Governor Ueda delivered his remarks on the latest
policy decision below: </p><ul type="disc"><li>The uncertainty
remains very high on the economy and prices.</li><li>Will not hesitate to
ease policy further if needed.</li><li>Decision today is
aimed at making YCC more sustainable.</li><li>Long-term rates
could move beyond 0.50% cap.</li><li>BOJ will step in if rates
exceed 1% mark.</li><li>There is still a
distance to achieving 2% inflation target.</li><li>We aim to rely on
markets to determine long-term rates but there are limits.</li><li>The 0.50% to 1.00%
frame is to respond to future risks.</li><li>Now, we have added
room to deal with upward moves in interest rates.</li><li>Policy decision not
biased towards tightening.</li><li>The 1.00% mark is
defined as a "just in case" cap.</li><li>It is appropriate to
maintain strong monetary easing.</li></ul><p>As the blackout
period ended, the ECB speakers are out in force. Below a slate of comments from
different members:</p><p>ECB’s Simkus
(hawk):</p><ul><li>Choice
in September is between 25 bps rate hike and no change.</li></ul><p>ECB’s
Stournaras (dove):</p><ul><li>September
rate hike is "unlikely" but if it were to be the case, it would be
the last for this year.</li></ul><p>ECB’s Kazimir
(hawk): </p><ul type="disc"><li>We should take a
firm step further on our way to the top.</li><li>Even if we do take a
break in September, it would be premature to automatically consider it the
end of the cycle.</li><li>There is still risk
of inflation coming in higher than expected.</li><li>We are looking for
the right place to stay for a large part of next year.</li></ul><p>ECB’s
Villeroy (hawk):</p><ul type="disc"><li>Need to be pragmatic and keep an open mind.</li><li>Perseverance is now key given the time
needed for full transmission of policy.</li><li>French inflation is falling even without a
recession.</li><li>Our growing confidence in inflation moving
towards the 2% target is based on good transmission of policy.</li><li>Upcoming meeting
decisions will be entirely data driven.</li></ul><p>The US June Core
PCE Y/Y came at 4.1% vs. 4.2% expected and 4.6% prior, while the Core M/M
reading printed at 0.2% vs. 0.2% expected and 0.3% prior. Headline PCE was 3.0%
vs. 3.0% expected and 3.8% prior, while the M/M reading was 0.2% vs. 0.2%
expected and 0.1% prior. </p><p>The US Employment
Cost Index (Q2) printed at 1.0% vs. 1.1% expected and 1.2% prior. </p><p>The
highlights for next week will be:</p><ul><li>Monday: China PMIs, EZ CPI.</li><li>Tuesday: RBA Policy Decision, EZ Unemployment Rate, ISM
Manufacturing PMI, US Job Openings.</li><li>Wednesday: NZ Jobs Report, US ADP.</li><li>Thursday: Swiss CPI, BoE Policy Decision, US Jobless Claims,
ISM Services PMI. </li><li>Friday: US NFP, Canada Jobs Report.</li></ul><p>That's all folks. Have a great weekend!</p>

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