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Week Ahead: Hawkish BOE, US and China CPI, but is the Fed Really Going to Cut Rates by 75-100 bp This Year?

Started by PocketOption, May 27, 2023, 08:58 am

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PocketOption

Week Ahead:  Hawkish BOE, US and China CPI, but is the Fed Really Going to Cut Rates by 75-100 bp This Year?

The combination of the US bank stress, the approaching debt
ceiling, and the Fed's opening the door to a pause in rates weighed on risk
sentiment and dragged the greenback lower. KBW's indices for large and regional
bank shares bled 7.4%-8.0% lower last week to cut through March's lows like a hot
knife through butter. Still the price action was constructive ahead of the
weekend. US Treasury Secretary Yellen warned that the X-date when the
government's cash runs out and the extraordinary measures are exhausted can be
as early as June 1 cast a heavy pall over the US money markets. 





The drop in US
interest rates helped the yen recover impressively from the sell-off sparked by
the Bank of Japan meeting at the end of April. The greenback shot up to
nearly JPY137.80 from about JPY134.00 before the BOJ meeting. It gave it all
back last week. Indeed, the yen's 1.1% gain was its best in seven weeks, and
third best in the G10's advance after the Antipodeans. Sterling's gains more
considerably more modest (~0.40%) but they were sufficient to send it to a new
high since last June (~$1.2650). The Bank of England is the only major central
bank to meet in the week ahead, and a quarter-point hike is understood to be as
done of a deal as these things go. The euro came within a few hundredths of a
cent of its highest level since April 2022 before profit-taking was seen after
the ECB meeting. The greenback also fell to new six-year lows against the
Mexican peso, which is up about 8.6% this year and offers a juicy yield, with
policy rate set at 11.25%. 





In addition to
the Bank of England meeting and a meeting on the debt ceiling at the White
House, the highlight of the week ahead includes the US April CPI, where the
headline is expected to be steady at 5.0% and the core rate to ease to 5.4%
from 5.6%. China reports lending figures (debt-financed growth), trade (a
smaller surplus is expected) and inflation gauges (CPI is seen at 0.3% from
0.7% year-over-year, while PPI sinks further into negative territory, -3.2% vs.
-2.5%).





United
States: 
 With the Fed hike and the April jobs report behind it, the
market now looks toward the US inflation reports. April CPI (May 10) is
expected to have risen by 0.4%, which would leave the year-over-year rate
unchanged at 5.0%. It would halt the streak of improvement uninterrupted since
last July. A 0.4% increase would translate into a 4.5% annualized rate of
increase through the first four months of the year. Still, the base effects
still auger well for lower headline CPI in May and June. Recall that in 2022,
it rose by 0.9% and 1.2%, respectively. With conservative assumption of a 0.4%
increase this month and next, the year-over-year rate can fall to the high-3%
area by mid-year. The core rate is projected to rise by 0.3%, which
matches the smallest over the past six months. At an annualized rate, through
April, it would have risen a little more than 4.8%.
The year-over-year is set is to slow to 5.4%, which would the slowest since
November 2021. Producer prices are reported the next day (May 11) and typically
do not elicit much of a market response. Headline producer prices are expected
to moderate for the tenth consecutive month and are seen dipping below 2.5% for
the first time since January 2021. Core producer price inflation slowed for 12
months through March (from 9.7% to 3.4%) and are expected to have ticked down
to 3.3% last month. 





In addition to
the macroeconomic data, there are two other issues that are also dominating
discussions. First is the bank stress. When SVB and Signature issues came to
light, there was a list of 6-10 banks that were seen as vulnerable for
idiosyncratic reason. They each have their own comorbidities, as it were.
Despite some favorable earnings and deposit flows, the market seems to be
working through the list. Still, the bank stress appears to have morphed from a
run on deposits to a run on shares. The quarterly results of the Fed's Senior
Loan Officer Opinion Survey (SLOOS) will draw attention (May 8). It his press
conference, Chair Powell suggested that the results are "broadly
consistent" with the recent reports showing that while lending has
continued to grow, it has been slowing since H2 22. To the extent that
businesses are concerned about their exposures in excess of the FDIC insurance,
there is a page from the 2008-2009 playbook that could help. It was called the
Temporary Liquidity Guarantee Program (TLGP), which protected transactional
accounts (mostly non-interest and NOW accounts). Resurrecting it could help
take stem the pressure on banks. The Dodd-Frank reforms require Congressional
approval for resurrecting the TLGP. The second issue is the debt ceiling. Treasury
Secretary Yellen warned that the X-date could be less than a month away. There
will an important meeting at the White House on May 9. In the US presidential
system that frequently has led to a divided government, the party not in
control of the executive branch often seeks to secure concessions in exchange
for lifting the debt ceiling or suspending it. Besides the bellicose rhetoric,
it is not clear what has changed this time, but many sense this time is
different and some of bill spreads and indicative pricing in the credit-default
swaps market are extreme. Still, the Biden administration seems to be soften its stance and may try to negotiate a short-term agreement.  



The Dollar
Index appears to have carved a shelf in the 100.80-101.00 area. A break would
target the 99.00 area, the (61.8%) retracement of the rally since the January
2021 low (~89.20). A move above the 102.00-40 area would help stabilize the
technical tone. 



United
Kingdom:  
The UK will be on holiday on Monday to celebrate the weekend
coronation of King Charles. With the calendar quirk, UK markets are closed
three of the five Mondays this month (May 29 is the third one). Still, it is a
big week for the UK. March monthly GDP, and details and the Q1 GDP will be
reported. GDP for Q1 23 will be reported on May 11. The median forecast in
Bloomberg's monthly survey sees a 0.1% contraction. The risk seems to be on for
a small increase after the monthly GDP showed 0.4% growth in January and a flat
February. A few hours later the Bank of England will announce its rate
decision. Headline CPI has been above 10% for the seven months through March.
Net-net the core rate is little changed since peaking at 6.5% last September
and October. The market is confident that the BOE will deliver another
quarter-point hike to lift the base rate to 4.50%. The peak is seen between
4.75% and 5.0%, with a clear leaning toward the latter.





Sterling
reached its best level since last June at the end of last week near $1.2635. It
has been helped by the upgraded economic outlook. The rise of the April
composite PMI to 54.9, its highest since April 2022 illustrate the improved
prospects. The next nearby target is $1.2660-70 area. Further afield, the
$1.2760 area is the (61.8%) retracement of sterling's decline from the June
2021 high near $1.4250. The momentum indicators are not overbought. However,
the upper Bollinger Band is at $1.26. Initial support may be found in the
$1.2500-25 band. 



China: China's
Q1 GDP was firmer than expected and this prompted some economists to revise
higher this year's growth projections. The world's second-largest economy
expanded by 4.5%, led by domestic consumption and a nearly 15% increase in
exports. Then, the April PMI disappointed, and the "peak China
growth" stories were dusted off and recycled. China reports three
high-frequency data points in the days ahead, but the impact on the highly
managed currency is slim to none. First, China growth has been debt-financed.
Aggregate lending (banks and shadow banks) boosted lending by CNY14.5 trillion
(~$2.1 trillion) in Q1 23. It is more than previous two quarters combined
(CNY11 trillion). Lending often slows in April, and March was high (CNY5.38
trillion). Second, China's reports its April trade balance surplus.
It averaged $68.2 bln a month in Q1, the least of any quarter last year. In Q1
22, the surplus averaged almost $51.3 bln a month. Still, the surplus is
expected to have narrowed in April. In dollar terms, exports rose 14.8%
year-over-year in March, and imports slipped 1.4%. However, in yuan terms,
exports were rose 23.4% and imports increased by 6.1%. Third, China reports its
inflation measures, CPI and PPI. Through March, CPI has risen by less than 1%
(0.7%) and producer prices have fallen by 2.5%. Deflation and
disinflationary forces likely strengthened Conventional wisdom seems to
attribute the weak consumer price pressures to weak demand, and while this may
be partly true, it also seems that excess capacity is also a key factor, and
this may be the key behind falling auto prices, for example.





Due to the
extended May Day holiday, the onshore yuan traded only in the last two sessions,
and it was virtually unchanged. Despite the volatility seen in the other major
exchange rates, the yuan was uncannily steady. Given the dollar's broader
weakness, we would have expected a stronger yuan. The greenback has traced out
a range of roughly CNY6.89-CNY6.9350 and we are inclined to see a downside
break. 



Eurozone:  The
economic calendar is light in the week ahead. There are some national reports
that will draw attention. Germany's March industrial output may garner
interest, after it reported horrible factory orders data (-10.7%) and French
industrial output tumbled by 1.1%. The recent release of Q1 GDP (flat after a
0.5% contraction in Q4 22) renders most Q1 data moot, but the dismal March
retail sales reported last week (-2.4% vs. the median forecast in Bloomberg's
survey for a 0.4% increase) saw the euro slump to a seven-day low (~$1.0940).
The slightly larger than expected March trade surplus, reported last week, may
sap whatever market interest there was in the German current account figures
that will be released on May 12. France reports its March trade and current
account (deficits) on May 9. Italy reports March industrial output on May 10.
Recall that in late April, Italy surprised with a 0.5% expansion in Q1.





The euro fell
below its 20-day moving average for the first time since March 17 on an
intraday basis three times last week and did not close below it once. This
seems to reflect the "buy on dips" bullish sentiment that continues
to prevail. The momentum indicators continue to trend lower with seemingly
little impact on prices. The euro has been capped in front of $1.1100. A convincing
break of it targets the $1.1175 area and then $1.1275, which corresponds to the
(61.8%) retracement of the euros's downtrend since the January 2021 high near
$1.2350. Last week's low was set slightly above $1.0940. 



Japan:  The
Bank of Japan's quarterly report released last week was upbeat on the wage
outlook and suggested it would support private consumption. This, coupled with
rising break-evens (spread between conventional yield and the
inflation-protected securities) help sustain speculation that the BOJ may
adjust its monetary policy settings as early as next month. Next week's data
will likely support the BOJ's assessment. March labor cash earnings likely rose
by around 1% from a year ago. Investors learned recently that retail sales rose
by 0.6% in March, twice the median forecast in Bloomberg's survey after the
February increase was revised to 2.1% from 1.4%. The broader measure of
household spending is seen increasing by 0.8% (year-over-year) in March. Japan
also reports March current account surplus. Seasonally, it tends to improve
over February before deteriorating in April. The March surplus is seen near
JPY2.9 trillion. Note that on a balance-of-payments basis, Japan has not
recorded a monthly trade surplus since October 2021. The current account
surplus is driven by interest on its foreign bond holdings, profits, and
licensing fees, and royalties.





The dollar
initially extended the post-BOJ gains to almost JPY137.80, shy of the year's
high set on March 8 (~JPY137.90) before the US banking stress emerged. However,
falling US rates dragged the dollar lower and it reached JPY133.50 on May 4,
the day after the Federal Reserve opened the door to a possible end to the
cycle (pause). The momentum indicators are weakening but the base that extends
to JPY133.00 looks formidable, and the upside may be the path of least
resistance. A move through JPY135.15 targets JPY135.65 and then JPY136.00-20.
The yen seems particularly vulnerable to correction from the extreme views that
see nearly 100 bp of Fed funds this year. 



Australia: The Reserve
Bank of Australia surprised the market by exiting its pause after one month and
hiking the overnight cash target rate by 25 bp to 3.85%. The swaps market seems
to be pricing in a 15 bp hike by the end of Q3. The next meeting is June 6 and
expectations have yet to build. Melbourne Institute's consumer inflation
expectations survey for May could be the most important of the upcoming
surveys. The RBA's statement also drew attention to household consumption,
which it identified as "a significant source of
uncertainty."  In addition to consumption, the central bank put
emphasis on "trends in household spending, and the outlook for inflation
and the labor market." The RBA acknowledged that "some further tightening
of monetary policy may be required" to boost the chances that inflation
falls back toward its target "in a reasonable timeframe, but it lowered
its inflation, growth and wages forecast. The government will deliver its
budget on Tuesday. In the short run, the surge in tax revenues (from strong
commodity prices and strong labor market) will give the government some room to
maneuver (the deficit appears to be well below the 1.5% forecast made last
October). Some economists expect Treasury Minister Chalmers could even announce
the first budget surplus in 15 years for the year ending on June 30. 





The Australian
dollar frayed $0.6600 support on an intraday basis in late April, but did not
close below it, the lower end of where it has been for the past six months. It
was already recovering before the RBA goosed it. Indeed, the the Australian dollar rose every session last week for the first time this year. The Aussie reached a two-week
high slightly above $0.6755 ahead of the weekend. The $0.6800 area marks the upper end of
a two-month range. The momentum indicators are constructive, and the five-day
moving average is poised to cross back above the 20-day moving average. An
upside break could spur a move toward $0.6860 and then $0.6900-30. 



Canada:  The
April jobs report that showed loss of 6.2k full-time positions, though a 47.6
increase in full-time positions. Wages were unchanged at 5.2% year-over-year,
economists had expected a moderation. Still, nothing to move the Bank of Canada
off its conditional pause. The jobs report exhausted the near-term economic
diary. March building permits are due on May 10 and do not spur a market
reaction even in the best of times. Separately, last week, the strike of around
120k federal government workers ended a strike that began in mid-April,
accepting the government's offer for wage increase of about 12% over four years.
Previously, the government's offer was a 9% increase. Union members were
eligible for a one-off C$2500 (~$1840) payment. An agreement about remote work
was also struck. Of note, some 35k employees of the federal tax agency, seeking
a larger wage increase, remain on strike. 





For two-weeks,
the US dollar chopped in a roughly CAD1.3520-CAD1.3650 trading range. And
despite the key downside reversal on April 28, there was no follow-through
selling. The weakness in equities and oil seemed to weigh. However, as oil and
the risk appetite recovered dramatically, the greenback broke down. Ahead of the weekend, it
punched through the CAD1.3445 area that housed the 200-day moving average and
(61.8%) retracement of the rally since the mid-April low near CAD1.3300. Th US dollar's 1.15% loss ahead of the weekend was the largest in four-month.  It
seems like market positioning more than a change in interest rate expectations
were the driving force. The momentum indicators have turned lower and US dollar
looks poised to retest the mid-April low near CAD1.3300. 



Mexico:  International
investors may not look upon AMLO's economic policies with much favor, but the
near- and friend-shoring and the independence (and hawkishness) of the central
bank are doing wonders. The economy grew more than expected in Q1 (1.1%
quarter-over-quarter, which is what the US expanded by at an annualized pace).
It reported record exports in March even as the peso was around six-year highs
against the dollar. Inflation has been falling sufficiently for the governor of
the central bank to indicate that a pause will be considered at the next policy
meeting (May 18). The headline CPI was 6.85% higher year-over-year in March and
core rate was 8.09% higher. The bi-weekly readings suggest scope for further
slowing with the April report.





The peso
continued to march higher and reached a new high since 2017. When the US
banking stress first erupted the peso spiked lower but recovered quickly. It
remained more resilient in the face of subsequent tensions. Last week's US
dollar high was near MXN18.0775 and it reached a low ahead of the weekend near
MXN17.7465. It is difficult to talk about meaningful support at these levels
that have not been seen of almost six years. There was a congestion band in
2017 in the MXN17.45-MXN17.65 area. The 2016 low was closer to MXN17.00. The
momentum indicators are not overstretched, but the greenback settled below its
lower Bollinger Band (~MXN17.8340).
 


Disclaimer


Source: Week Ahead:  Hawkish BOE, US and China CPI, but is the Fed Really Going to Cut Rates by 75-100 bp This Year?