Reserve Bank of Australia raises rates again

The Reserve Bank Board should slow the pace of rate increases once it reaches its assessment of neutral. That is particularly because of the treacherous lags that will have built up as the inevitable result of such a sharp rate increase in rates, from 0.1% back in May.

The Governor has certainly indicated that intention, both in the speech to the Australian Business Economists on September 8 and in the Parliamentary hearing last Friday.

The scaling back to a slower pace of tightening could begin from the October meeting, with the cash rate having reached the neutral zone at 2.35%.

There has always been some uncertainty as to whether a starting point of 2.35% would be too far below the Governor’s assessment of neutral. He has argued in the past that the real neutral is at least zero, implying a 2.5% nominal rate given longer term inflation expectations. That is above the 2.35% starting point for the October meeting.

That 1% growth rate now has some downside risks but for now given the current momentum in the economy, it’s decided not to mark 2023 growth down any further. It’s also noted that since the forecast is 1% growth rate in 2023 we have revised down our 2022 growth rate from4.4% to 3.4% meaning that the level of GDP by end 2023 will be considerably lower than we had expected when we first made the 1% growth forecast.

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How Much FOMC Interest Rate Hike By Fed?

The Federal Reserve Open Market Committee lifted the federal funds rate to the 3.0% to 3.25% range and reaffirmed a continuation of its balance sheet runoff. The Fed updated its language stating the “recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to pandemic, higher food and energy prices, and broader price pressures”.

The Summary of Economic Projections was updated from June:-

The median projection for real GDP growth was downgraded in 2022. The forecast for 2023,2024,2025 and the longer run came in at 1.2%, 1.7%, 1.8% and 1.8% respectively.

The median unemployment rate forecast was 3.8% for 2022. 4.4% for 2023, 4.4% in 2024 and 4.3% in 2025. The longer-run estimate of the unemployment rate stayed the same at 4.0%.

On inflation, the median estimate for core PCE was assumed to be 4.5% in 2022, 3.1% in 2023, 2.3% in 2024 and 2.1% in 2025.
The median projection for the fed funds rate was lifted to 4.4% in 2022, 4.6% in 2023, 3.9% in 2024, and 2.9% in 2025. The long-run neutral rate was assumed to be 2.5%.

All the members of the FOMC voted in favor of the decision:-

Another Fed meeting, another 75 basis point hike. Even though headline inflation has shown signs of peaking, underlying measures of core inflation have yet to turn decisively enough for the Fed to slow the pace of rate hikes. With Fed members now expecting that core inflation will remain above 3% through 2023, they have signaled even more hikes are on the deck over the next few months and into 2023. This has Treasury yields rising, with the U.S.

GBP down during Asian Trade

The pound was aggressively lower during Asian trade. CME stopped trading of GBP futures. GBP/USD touched a record low. Combination of the UK’s mini budget and flight to the dollar weigh on sterling.

The GBP was already facing heavy selling pressure on Friday when the UK’s new chancellor unveiled his new mini budget. The plan has been perceived as a tax cut for the rich alongside higher levels of debt, with one former treasury minister calling budget a “high risk gamble. The week closed with GBP/USD falling to just shy of its all time low set in 1985. And that level did not last very long.

In today’s session there is an aggressive selloff for the British pound, which has sent GBP.USD to a fresh record low. Currently down around -2.4%, its within its fifth consecutive down day, which includes a -3.6% decline on Friday. Such levels of volatility have not been seen since March 2020, and not restricted to GBP/USD.

It’s currently the most volatile month for GBP/JPY since November 2016 and the most bearish month since June 2016. EUR/GBP has accelerated nearly 4% higher and sliced through 0.9000 like a hot knife through butter. And with higher levels of volatility come higher levels of implied volatility. Overnight IV for GBP/USD has increased to an annualized rate of 34.45%, which is its highest level since December 2019.

US Housing data, Core PCE inflation

The slowing US housing market is making alive some memories from the 200—2009 great recession but there is some confusion about whether it’s a red flag for the economy these days. New home sales have been trending downwards so far this year and the August reading is expected to mark a new low at 500k from 511k previously, the lowest in six years. Pending home sales due today could show a steeper contraction of -1.4% from -1.0% previously, remaining negative for the third consecutive month.

A stabilization in the red-hot rent market in August, perhaps on the back of state limits in some regions, was probably a catalyst to a softer house demand too. However, more than half of the renters are still facing elevated prices year-on-year and given the inflation in construction materials as well as the tight supply of houses, there is little prospect for a significant slowdown in the market.

The strength in the labor market is also a tailwind for the real estate sector, delaying any defaults in loan payments. Personal income and consumption figures and together the core PCE inflation on Friday could provide some updates on that front. Although expectations are for a minor monthly pickup to 0.3% and 0.2% respectively, the indicators may not rise any concerns if they stay within normal levels. A potential mild increase in the core PCE inflation to 4.7% y/y would not be something new either after similar pace in the core CPI inflation reading.

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Recession Fears: The Ukraine war is affecting markets

The Ukraine ware is affecting markets around the world and generating extreme volatility. Worries over inflation in Europe have been brewing even before Russia war with Ukraine in February. While some considered it was temporary, others warned that it was a sign of a deeper crisis. Now, six months since the start of the war in Ukraine, is a recession inevitable in Europe?

The impacts of the conflict will likely vary depending on geographical location. Europe, and countries such as the Baltic states and Poland, are likely to experience more difficulties than countries that depend less on Russia for energy. Western Europe, in particular Germany, also has no easy alternative energy source to replace natural gas from Russia. After Moscow decided to temporarily suspend its gas supply to Germany, gas prices climbed to 295 Euro per Megawatt-hour. Recent data showed that business activity in Germany and France contracted in August due to falling demand and rising prices.
The Euro hit a new 20-year low against the USD, making it more expensive to buy energy on international markets, which is paid with the USD. Bundesbank, Germany’s central bank, forecast that inflation, which is at 7.5%, will hit double figures in autumn.

In the US there are already signs of improvement as inflation fell in July from 9.1% to 8.5% due to drop in gas prices. However, Europe continues to pay for its dependence on gas and inflation in Europe is already greater than the figure in the US. Falling food prices and fall in oil prices have not been enough to counteract the increase in gas prices in Europe. But some analysts argue that a recession could help deal with inflation, as long as it is not a prolonged recession.

Due to the global nature of financial markets, this could mean the US investors will see more volatility in the coming months, even if the US avoids recession in comparison to Europe. The European Union’s economy is larger than that of the US and many US-listed companies depend on European consumers spend less due to fear of becoming unemployed in a recession, company earnings and prices of stocks in US investors portfolios could also decline.

Apart from Russia war, uncertainty is also likely to be raised by the prospect of unintended consequences resulting from western sanctions against Russia and the risks that policymakers will involve the US in a conflict that the US could otherwise mainly avoid the effects of.

U.S. Dollar Index Overview

The USD was the most strongest currency yesterday, supported by rising US yields and softer import/export data. And whilst the prices paid component of the ISM services PMI softened to a 20-month of 68.8, it remains historically high relative to its long-term average of 59.8- which suggests the aggressive Fed tightening is yet to make an impact on the inflationary forces of the robust services sector.

The main economic event for the dollar this week is tomorrow’s NFP report. There was some excitement that it may come in soft due to the notable fall in job openings, but ADP employment came in slight above expectations at 280k yesterday. But it is all to easy to get caught in the noise of individual data prints, so best to take a wider broader view of underlying trends.

EUR/USD trades below 0.9535 as US dollar recovers

EUR/USD updated another 20 years low last month, lowest at 0.9535. This was followed by a correction, and the pair came close to the equality level on Tuesday, October 04, rising to 0.9999. However, the happiness of the bulls was short, followed by another reversal to the south and the finish line at 0.9737.

The depressed state of the economy against the background of continuing inflation suggests the threat of stagflation in the Eurozone. The increase in energy prices adds to the negative. And it is likely to continue, as the OPEC + countries decided to seriously reduce oil production. Recall that these prices were one of the most powerful triggers for the global wave of inflation. Another negative factor is the proximity of the EU countries to the theater of Russian-Ukrainian military operations, especially since Russian President V. Putin constantly threatens to use nuclear weapons.

AUD/USD falls to new 18-month low

AUD/USD continues to lose ground and can’t find its footing. The Aussie started the week on the wrong foot, with a decline of 1.0% on Monday. AUD/USD is trading at 0.6266 down 0.52%. Earlier the day, the Australian dollar fell to 0.6247, its lowest level since April 2020.

Australia has posted weak numbers this week, adding to the downward pressure on the ailing Australian dollar. The Services PMI fell into contraction territory with a reading of 48.0 in September, down from 53.3 in August, as the uncertain economic outlook is weighing on business activity. Business confidence levels are down, with NAB business confidence slowing to 5 in September, down from 10 in August. Westpac Consumer Sentiment indicated that consumers are also in a sour mood, with a reading of -0.9% in September after a gain of 3.9% in August, which was the sole gain over the past 11 months.

EUR/USD displays a range bound structure around 0.9700 ahead of US Inflation

EUR/USD moved sideways along the 0.9700 horizon as markets waited for the release of US inflation data last week. October 14th the Department of Labor Statistics of the country published fresh values of the Consumer Price Index, which exceeded the forecast values. In monthly terms, the September CPI reached 0.6% against the forecast of 0.5%, in annual terms – 6.6% against the forecast of 6.5% and the previous value of 6.3%.

The dollar began to lose its position rapidly: DXY fell to 112.46, and EUR.USD broke through 0.9800. On the contrary, the S&P500 was positive by the end of Thursday and grew by 2.6%. Analysts cite the strong oversold stock market as the main reason for this change in sentiment and the sharp increase in risk appetites. It is believed that stocks lose about 30% during recessions.

Canadian Inflation Higher than Expected

Canadian CPI for September was 6.9% YoY vs and expectation of 6.8% YoY and an August reading of 7%. The headline number was higher than expectations, it was the third straight month the inflation reading has declined since reaching a 39 year high in June. However, the core CPI increased to 6% YoY va an expectation of a drop to 5.7% YoY and an August reading of 5.8% YoY. The Canadian CPI release comes just hours after the UK reported an uptick in its inflation to 10.1% YoY.
As inflation continues to remain high in Canada, will the BOC be less aggressive, or pivot , as some have suggested after the RBA reduced its pace of rate increases at its last meeting? Expectations are closer to a 75bps rate hike than a 50bps rate hike when BOC meetings next Wednesday. Governor Macklem spoke earlier in the month and was hawkish, noting that further interest rate increases and warranted to tame inflation.

EUR USD | Euro US Dollar News

EUR/USD continues to power forward and has breached the parity line for the first time since 20th September. The euro is red hot, having gained 2.1% this week, as the USD has hit a dump in the road and is lower against all major currencies. In the North American session, EUR/USD is trending at 1.0069, up 1.02%.

The German economy, the largest in the eurozone, continues to show signs of weakness. September PMIs pointed to contraction in manufacturing and business activity, and these are unlikely to rebound as the Ukraine war continues and an energy crisis looms, with winter close by. The Ifo Business Confidence index fell for a fourth straight month in October and Gfk Consumer sentiment, which will be released today, is expected to remain deep in negative territory.

Euro area annual inflation up to 10.7% – European Union

Eurostat’s preliminary estimate indicated an acceleration of annual inflation in the euro region from 9.9% immediately to 10.7%. Economists are expecting no change, and the difference of 0.8 points is one of the most prominent indicators economists predict quite accurately on average.

But it’s not only this surprise that we want to point out, but also how fast price growth has spread beyond energy and food categories. Core inflation accelerated to 5% YoY in September, adding 0.6% MoM. Non-energy industrial goods rose at 1.2% MoM and 6.0% YoY.

These dynamics should signal that the ECB should not reduce the pace of monetary tightening.