MNI US OPEN - EZ Consumer Inflation Expectations Dip Again in May

NEWS

MNI FOMC MINUTES PREVIEW - July 2023

The June Summary of Economic projections brought an unexpectedly hawkish dot plot which included a median of two further 25bp rate hikes implied by the end of 2023. Most market participants interpreted this to mean a hike at the July meeting (and Powell effectively endorsed this by calling the next FOMC “live”), but have remained less convinced of a second increase beyond that. The main question for the June meeting minutes (out Jul 5 at 1400ET/1900UK) is the degree to which the FOMC was divided over the decision to deliver a “hawkish pause/skip”, and to what degree the communications were crafted in a hawkish direction to appease those who would have preferred to hike at that meeting.

ECB (MNI): Eurozone Consumer Inflation Expectations Dip Again

Eurozone consumer price expectations slowed again in May, the latest ECB survey shows, dipping to 3.9% from 4.1% in the previous month, although the outlook for inflation three years ahead remained stable at 2.5%. Uncertainty about inflation expectations for the coming year fell to its lowest level since March 2022, although remains above levels observed prior to this. Inflation expectations remained well below the perceived past inflation rate, particularly at the three-year horizon, the Consumer Expectations survey showed.

ECB (MNI): Inflation Outlook Still Highly Uncertain - Nagel

Euro area interest rates will have to rise further, but it is not yet possible to say by how much or for how long they will need to remain elevated to bring inflation back to the ECB’s 2% target in a timely fashion, Bundesbank chief Joachim Nagel said in a speech Wednesday, with the course of inflation subject to high levels of uncertainty.

BOE (FT): BOE Weighs Plan for Foreign Banks to Set Up UK Subsidiaries: FT

The Bank of England examines plans to force more international banks to set up UK subsidiaries, Financial Times reports, citing unidentified people familiar with the matter. May cut thresholds for foreign banks with UK corporate business to set up subsidiaries. BOE guidance currently suggests banks with £100m retail, small company deposits to establish subsidiary. Guidance also indicates banks with more than 5,000 customers may also need a subsidiary

FRANCE (BBG): Macron Pledges to Repair Riot-Damaged Schools and Town Halls

Emmanuel Macron pledged swift government support to help mayors rebuild schools, libraries and town halls destroyed during a week of violence that swept across France after the police shooting of a teenager.Thousands of insurance claims have started to pour in as small business owners seek to repair stores and offices attacked during the riots, with Finance Minister Bruno Le Maire promising additional support for those worst hit.

US (WaPo): Biden Faces Renewed Pressure to Embrace Supreme Court Overhaul

As Democrats reel from another painful set of defeats at the Supreme Court in recent weeks, President Biden is facing renewed pressure from a range of elements in his party, from liberal lawmakers to abortion rights activists, to more forcefully embrace far-reaching changes to the high court. Biden has harshly criticized the Supreme Court's sharp pivot to the right, but he has stayed away from endorsing any of the broad array of reforms — including court expansion, term limits and mandatory retirements — that are being pushed by the left flank of his party and increasingly backed by core parts of his base.

US/CHINA (BBG): Yellen China Visit Seeks to Usher In More Talks Amid Tensions

US Treasury Secretary Janet Yellen visits China this week with the goal of finding areas of common economic ground and opening communication channels amid an increasingly turbulent relationship between the world’s two biggest economies. It will be the first major test of a policy she outlined in April that’s geared toward defending and securing US national security without trying to hold China back economically.

CHINA (MNI): New PBOC Party Chief to Push Prudent Policy, FX Reform

The newly appointed Party Secretary of the People’s Bank of China will insist on prudent policy, highlight flexibility of the yuan exchange rate and enhance Communist Party oversight of the financial sector, policy advisors told MNI. Chinese authorities recently appointed Pan Gongsheng, vice-governor at the PBOC, Party Secretary – the top party post at the Bank. Pan joined the PBOC in 2012 and remains a likely candidate to replace Governor Yi Gang, who has led the Bank since 2018. Pan has worked in the financial sector for 30 years and has also led the State Administration of Foreign Exchange.

CHINA (MNI): Banks to Cut Corporate's USD Deposit Rates in Latest Stimulus Drive

Bloomberg report that China's largest banks are cutting rates for their corporate USD deposit facilities for the second time in a fortnight - an extension of a recent policy drive to stabilise the currency. The report writes that at least nine large banks in China would be removing the spread they had offered over SOFR for their corporate clientbase. Previously, the facilities had offered 5.7% for one-year deposits, down from 6% previously.

CHINA (BBG): Xi Urges Open Supply Chains After Curb on Key Metal Exports

Chinese leader Xi Jinping called on nations to spurn decoupling and the cutting of supply chains, one day after his nation imposed limits on exports of two key metals used to make chips to counter Western restrictions on Beijing. The world’s No. 2 economy wants to work with nations to “reject the moves of setting up barriers, decoupling and severing supply chains,” Xi said in a virtual speech to Shanghai Cooperation Organization leaders.

MNI RBA REVIEW - JULY 2023: Pause Doesn’t Mean Hiking Done

The RBA Board decided to hold rates at 4.1% at its July meeting in what would have been a very “finely balanced” decision. The tightening bias was retained though (“some further tightening”), and the inflation warnings remained signalling that rate hikes are unlikely to be over yet. It decided to pause to have time “to assess the state of the economy and the economic outlook and associated risks” given the “uncertainty surrounding the economic outlook”, very similar language to the April reasoning for a pause, which was the first meeting of the quarter too.

TURKEY (BBG): Turkey’s Inflation Letup Still Intact But at Risk From Lira

Turkey had the smallest deceleration in consumer prices since a slowdown that began last November as one of the lira’s worst stretches in decades makes imports more expensive. Inflation reached 38.2% in June from a year earlier, according to official data published Wednesday, slightly less than forecast and down from 39.6% in May. On a monthly basis, it picked up sharply after household gas prices were recorded as zero in May following an election pledge made by President Recep Tayyip Erdogan.

ISRAEL (BBG): Israel Ends West Bank Military Raid That Killed 12 Palestinians

Israel said it’s withdrawn more than 1,000 troops from the Palestinian refugee camp of Jenin, after sending them in to fight what it called an Iran-funded terrorist network. The 44-hour raid, which included missile-laden drones and was the biggest air attack on the occupied West Bank in two decades, killed 12 Palestinians, some of them known militants. An Israeli soldier was shot dead during the overnight withdrawal, the army said on Wednesday. “Over the past two years, Jenin has become a ‘production site’ for terrorism,” said Defense Minister Yoav Gallant. “As a result of our activities over the past two days, this has come to an end. We have intercepted weapon production lines and confiscated thousands of explosive devices.”

DATA

EUROZONE DATA (MNI): May Eurozone PPI Down Slightly Faster than Consensus

• EUROZONE MAY PPI -1.9% M/M, -1.5% Y/Y

Eurozone PPI was -1.9 m/m and -1.5% y/y in May, declining slightly faster than expectations of -1.7% m/m and -1.3% y/y. Energy led the fall, at -5.0% m/m and -13.3% y/y.* PPI in Ireland remained very volatile, at -7.4% m/m and -9.7% y/y, continuing to distort the picture mildly.* PPI in Germany and France was -1.3% m/m and -1.4% m/m respectively. The PPI data is unlikely to alter expectations that the ECB will hike its three key rates by a further 25bp in July, after a 25bp increase in June (ahead of the data, markets price 23bp).

EUROZONE FINAL JUN SERVICES PMI 52.0 (FLASH 52.4); MAY 55.1 (MNI)
UK FINAL JUN SERVICES PMI 53.7 (= FLASH); MAY 55.2 (MNI)
GERMANY FINAL JUN SERVICES PMI 54.1 (= FLASH); MAY 57.2 (MNI)
FRANCE FINAL JUN SERVICES PMI 48.0 (= FLASH); MAY 52.5 (MNI)

ITALY JUN SERVICES PMI 52.2 (FCST 53.1) MAY 54.0 (MNI)

SPAIN DATA (MNI): Softer But Largely Solid Services PMI

• SPAIN JUN SERVICES PMI 53.4 (FCST 55.7); MAY 56.7

This was the weakest Services print since January, with the HCOB/S&P Global report pointing to a "healthy demand environment" albeit slowing rates of expansion in the key categories of activity, new business, and employment. Inflation pressures continued to ease (input and output cost inflation) though remained at elevated levels, with "strong wage pressures" the "principal driver" of inflation. Firms "continued to partly transfer increasing costs on to their clients and subsequently signalled another solid increase in their charged prices" but "the rate of input cost inflation was the softest in just over two years and the increase in selling prices was the least pronounced since October 2021."

FRANCE DATA (MNI): Upside Surprise in Robust May Industrial Production

• FRANCE MAY INDUSTRIAL PROD +1.2% M/M (FCST -0.2%); APR +0.8% M/M
• FRANCE MAY INDUSTRIAL PROD +2.6% Y/Y (FCST +0.6%); APR +1.7%r Y/Y

French industrial production beat expectations, posting a healthy +1.2% m/m increase against expectations of a -0.2% m/m contraction. With strikes at refineries easing, coking and refining production jumped markedly by +45.1% m/m (after +22.1% in April). Further rebounds were recorded in auto (+5.8% after -1.7%) and agro-food industries (+1.5% after -0.5%). Barring a pronounced June contraction, French IP now looks likely to post a positive contribution to Q2 q/q GDP.

CHINA DATA (MNI): PMIs Show Slowdown in Growth

The composite Caixin PMI for June fell to 52.5 from 55.6 driven by a sharp weakening in services activity. The services PMI eased to 53.9 from 57.1 in May, significantly weaker than the 56.2 expected. Earlier in the week manufacturing posted 50.5 down from 50.9. This data is further evidence that China's recovery is looking lacklustre. The slowdown in services was driven by weaker sales and orders growth, but business confidence improved for the first time in five months and employment grew at its highest in three months.

JAPAN DATA (MNI): Japan Q1 Output Gap Narrows to -0.34pp - BOJ

Japan's estimated Q1 output gap has narrowed to -0.34pp from -0.37pp in Q4 2022 – the 12th straight negative read, indicating upward pressure on prices is increasing slightly with a time lag, Bank of Japan data showed Wednesday. The BOJ expects the gap to turn positive around the middle of fiscal 2023 and to expand moderately toward the end of the projection period to March 2026. The Bank estimated a smaller output gap, based on capital and labour stocks, than the Cabinet Office's latest estimate of -0.7pp in Q1 (vs. -1.2pp in Q4), which was based on second preliminary Q1 GDP data showing a 0.7% q/q rise, or an annualised rate of 2.7%.

FOREX: EUR Shrugs Off Slip in Inflation Expectations, Soft PMIs

• The EUR trades well, shrugging off early weakness on the back of a shaky set of final PMI numbers from across the EU: Italian, Spanish, German and the Eurozone composite PMIs came in short of expectations. Added weight went through on the Eurozone consumer survey, showing a further retreat for short-term inflation expectations in the Euroarea - a release that tipped EUR/USD to a daily low of 1.0866.
• Traders were clearly content to buy the dip in the single currency, helping put the likes of EUR/GBP, EUR/USD back in minor positive territory ahead of the NY crossover.
• CNY trades poorly, with USD/CNH back above 7.25 despite a continued push from Chinese authorities for more stability across the yuan. Many large Chinese banks are to cut their USD deposit rates on corporate accounts for the second time in as many weeks, however a lower-than-expected Caixin services PMI has weighed, keeping the pair within striking distance of the 7.2857 cycle highs.
• US Factory Orders for May are the data highlight ahead, with markets expecting orders to have risen by 0.8% on the month. The data precedes the FOMC minutes for the last rate-setting meeting at which the Fed paused the pace of tightening for the first time this cycle.
• The speaker slate sees ECB's Villeroy and de Cos as well as Fed's Williams at the US market close.

BONDS: European Data and UK Gilt Auction Help Push FI Higher

• EGBs are leading the way higher this morning after the disappointing Spanish and Italian services PMI prints saw the pan-Eurozone print revised lower - with the composite Eurozone PMI falling below 50 for the first time in 2023. PPI was also marginally weaker than expected.
• Gilts have also benefitted both from following EGBs and from a strong short-dated gilt auction.
• Going forward, attention will switch to the FOMC Minutes where the focus will be the degree to which the FOMC was divided over the decision to deliver a “hawkish pause/skip”, and to what degree the communications were crafted in a hawkish direction to appease those who would have preferred to hike at that meeting (see our preview here).
• We will also receive US factory orders and the final print of durable goods.
• TY1 futures are up 0-5+ today at 112-03+ with 10y UST yields down -2.5bp at 3.832% and 2y yields down -5.6bp at 4.882%.
• Bund futures are up 0.58 today at 133.64 with 10y Bund yields down -4.7bp at 2.404% and Schatz yields down -3.6bp at 3.176%.
• Gilt futures are up 0.32 today at 953.34 with 10y yields down -2.4bp at 4.387% and 2y yields down -3.7bp at 5.265%.

EQUITIES: E-Mini S&Ps Trade Close to Recent Highs

The Eurostoxx 50 futures uptrend remains intact and the latest pullback is considered corrective. Price has traded through resistance at 4438.00, the Jun 16 high and a bull trigger. The break confirms a resumption of the primary uptrend and paves the way for gains towards 4472.40, a Fibonacci projection. Initial key support is seen at 4368.30, the 20-day EMA. A pullback would be considered corrective. A bull theme in S&P E-minis remains intact and last Friday’s gains reinforce this condition. The contract has pierced key resistance and the bull trigger at 4493.75, the Jun 16 high. A clear break of this level would confirm a resumption of the uptrend and pave the way for a climb towards 4532.08, a Fibonacci projection. On the downside, key trend support has been defined at 4368.50, the Jun 26 low.

• Japan's NIKKEI closed lower by 83.82 pts or -0.25% at 33338.7 and the TOPIX ended 0.34 pts lower or -0.01% at 2306.03.
• Elsewhere, in China the SHANGHAI closed lower by 22.402 pts or -0.69% at 3222.947 and the HANG SENG ended 305.3 pts lower or -1.57% at 19110.38.
• Across Europe, Germany's DAX trades lower by 80.06 pts or -0.5% at 15959.19, FTSE 100 lower by 38.79 pts or -0.52% at 7480.93, CAC 40 down 35.22 pts or -0.48% at 7334.71 and Euro Stoxx 50 down 24.31 pts or -0.55% at 4366.68.
• Dow Jones mini down 96 pts or -0.28% at 34541, S&P 500 mini down 12.75 pts or -0.28% at 4479.5, NASDAQ mini down 66.25 pts or -0.43% at 15298.75.

COMMODITIES: Recent Gains in WTI Futures Considered Technically Corrective

WTI futures remain in a bear mode condition and recent gains appear to be a correction. The contract is trading below resistance at $75.70, the Jun 5 high. Clearance of this level would signal a reversal. Initial resistance is $72.72, the Jun 21 high. Support at $67.21, the May 31 low, was pierced last week, a clear break of this level would open $64.41, the May 4 low. Moving average studies are in a bear mode position highlighting a downtrend. Trend conditions in Gold remain bearish and gains are considered corrective. Fresh trend lows last week reinforce bearish conditions, confirming a resumption of the downtrend and extending the price sequence of lower lows and lower highs. MA studies are in a bear mode position highlighting current sentiment. The focus is on $1885.8, Mar 15 low. Key resistance is $1985.3, May 24 high. Initial resistance is $1933.9, the 20-day EMA.

• WTI Crude up $0.82 or +1.18% at $70.65
• Natural Gas up $0.07 or +2.58% at $2.779
• Gold spot up $1.77 or +0.09% at $1927.34
• Copper down $5 or -1.32% at $374.3
• Silver down $0.12 or -0.53% at $22.8473
• Platinum down $1.61 or -0.18% at $918.23