MNI US OPEN: Inflation Persistence Ups Pressure on BoE

NEWS

MNI BOE PREVIEW - JUNE 2023: Things Have Changed

Following the May MPC meeting the wide held view was that Bank Rate would see a final 25bp hike in June 2023 to a terminal 4.75%.However, since then we have seen both labour market and inflation data surprise notably to the upside, markets have added over 100bp to terminal pricing and all analysts (as well as the MNI Markets team) look for 25bp hikes in June and August, at the least. We expect little change to forward guidance and lean towards a 2-7-0 vote (unch-25-50).

MNI NORGES BANK PREVIEW - JUNE 2023: Concurrent Factors to Tip Balance to 50

The Norges Bank's model-based policy approach and sensitivity to the weaker local currency should tilt the Bank to conducting a 'double' hike of 50bps this week. Core inflation is re-accelerating, wage settlements remain elevated and a tight labour market suggests continued pressures ahead. Lastly, the resilient housing market justifies a faster pace of tightening in Norway.

MNI SNB PREVIEW - JUNE 2023: Hike Likely, Peak Nearing

The bank are likely to reinstate the rate differential with the ECB at the June meeting, hiking the policy rate by 50bps to 2.00%. A vigilant approach on inflation, bank fragility fading into the rearview mirror and higher foreign rates will be the key driver for policy this quarter. However, peak rates are approaching and the bank could stress that FX management will become the key policy tool going forward, restricting financial conditions inter-meeting.

ECB (BBG): ECB’s Kazimir Says Core Inflation Must Be Tamed for Rate Pause

The European Central Bank can only pause interest rate hikes at its September meeting if it’s certain that core inflation is under control, Governing Council member Peter Kazimir said on Wednesday. If the pace of underlying price increases persists, then there will be further monetary tightening, he told journalists at a news conference in Bratislava. "We must have a high level of certainty, based on actual data, showing that we have core inflation under control in the near future,” he said when asked about a possible pause in hikes in September.

US/CHINA (MNI): Biden's "Dictator" Comments "Violated China's Political Dignity" - MofA

Wires carrying comments from the Chinese foreign ministry regarding the comments made by US President Joe Biden at a campaign event in California, in which he labelled Chinese President Xi Jinping a "dictator"'. MoFA states China "Expresses strong dissatisfaction and firm opposition", and that the comments "Seriously violated China's political dignity, and amounted to public political provocation."

EU/UKRAINE (BBG): EU Sees Legal Hurdles to Seizing Russian Assets to Help Ukraine

The European Union has assessed that it can’t legally confiscate outright frozen Russian assets and instead is focusing on using those assets temporarily, according to a document obtained by Bloomberg. Even so, the EU is zeroing in on two options as it keeps exploring how it could harness more than €200 billion ($219 billion) in frozen Russian central bank assets and channel them to Ukraine, the report said. The bloc is expected to seek a mandate to work on this policy from EU leaders when they meet in Brussels next week.

CHINA (MNI): PBOC to Hold Key Rates, But RRR Reduction Eyed

The People’s Bank of China will likely hold off further cuts to key interest rates, though another reserve requirement ratio reduction cannot be ruled out in Q3 should stimulus measures fail to boost the economy, economists and analysts said. China's Loan Prime Rate was lowered Tuesday with the one- and five-year plus maturities reduced 10bp, the first cut since July 2022. The move was widely expected following the PBOC’s reduction to its 7-day reverse repo and medium-term lending facility rate early this month.

CHINA (MNI): China Stimulus to Boost Economy In H2

Chinese authorities will unveil fiscal and monetary support measures as necessary in the second half of the year to ensure the target for a 5% annual rise in GDP is met, a senior policy advisor to the National Development and Reform Commission told MNI in an interview. “China’s policymakers have an objective understanding and are fully prepared to deal with the complex challenges of the economic recovery... supportive policy will remain strong and be closely tailored to the difficulties we face,” said Wu Sa, deputy-director of a think tank with a focus on development issues under the NDRC.

CHINA (BBG): China Extends Tax Breaks for New Energy Vehicles Until 2027

China extended tax breaks for consumers buying clean cars through 2027, estimated to be worth 520 billion yuan ($72.3 billion) in the coming four years, in an effort to bolster its flagging electric-vehicle industry. The move, announced at a briefing in Beijing on Wednesday, is the latest in a series of steps to lift sales and production in the world’s biggest EV market.

JAPAN (MNI): Upside Price Risks Exist - BOJ's Adachi

Bank of Japan board member Seiji Adachi said on Wednesday that the BOJ must monitor the upside risks to prices, but should prepare for prices to fall soon after. Adachi told business leaders in Kagoshima City that that the y/y rise in the “flexible” consumer price index may not fall in line with the BOJ's estimate on the back of persistent "sticky" inflation. The y/y rise of Japan’s inflation rate is faster than initially expected and the deflationary mindset, or the view that prices will not rise, seems to be changing, he said.

JAPAN (MNI): Kishida Claims "Positive Moves Appearing" In Japanese Economy

Prime Minister Fumio Kishida speaking at an end-of-parliamentary session press conference claims that "Positive moves are appearing in Japan's economy". Says that his gov't "Will create [a] new investment package for areas including semiconductors and energy". Says that he "Will continue to keep channels of dialogue open with China." States that he "Hopes to have a summit with North Korean leader Kim Jong-Un in the near future."

JAPAN (MNI): More Time Needed to Review YCC - BOJ Minutes

Bank of Japan board members agreed not to revise yield curve control conduct, while one board member noted global financial market turmoil warranted a wait-and-see approach in regards to any review, despite the programme's distortionary impact on bond markets, according to the recently released minutes of the April 27-28 meeting.

JAPAN (MNI): Japan CPI Unlikely to Remain Elevated - BOJ Minutes

Some Bank of Japan board members maintained a cautious price view and shared the view Japan’s inflation rate will not stay elevated as demand-driven price hikes remain weak, according to the April 27-28 meeting minutes released Wednesday. “A few members were of the view that, in order for CPI to rise again toward 2% after decelerating, it was necessary that underlying factors including wage developments, firms' growth expectations, and medium- to long-term inflation expectations be improved and that sticky prices such as services prices rise,” the minutes showed.

DATA

UK DATA (MNI): Further Inflation Persistence Ups Pressure on BOE

• UK MAY CPI +0.7% M/M, +8.7% Y/Y
• UK MAY CORE CPI +0.8% M/M, +7.1% Y/Y
• UK MAY OUTPUT PPI -0.5% M/M, +2.9% Y/Y
• UK MAY INPUT PPI -1.5% M/M, +0.5% Y/Y
• UK MAY RPI +0.7% M/M, +11.3% Y/Y

UK inflation data offered not relief for embattled Bank of England rate setters, as core inflation accelerated further and the headline number was unchanged on the higher-than-expected April outturn. The headline rate was again at 8.7%, outpacing both analyst and BOE forecasts, while core rose to 7.1%, beating the expected 6.8%. The MPC meet Wednesday to decide the next move on interest rates and while a 25bps hike to 4.75% remains the most likely outcome, the chances now increase that a stronger argument will be made by the hawks for a return to 50bps increments.

UK DATA (MNI): XpertHR Signals Wage Growth Plateauing at 6%

The UK XpertHR Pay Awards survey found median basic pay deals in the private sector held steady at 6% in the three months to May, unchanged for a fifth-straight rolling quarter. This follows last week's ONS April/May data, which signalled tighter labour market conditions as both employment and wages recorded substantial growth. According to the ONS, April wages rose +7.2% 3m/yoy (weekly earnings ex bonuses), a 0.4pp acceleration to a series-high increase outside the pandemic years (the series began 2001).

UK MAY PSNB GBP+19.22 BN (MNI)
UK MAY PSNB-X GBP+20.05 BN (MNI)
UK MAY CGNCR GBP17 BN (MNI)

GERMAN DATA (MNI): IFO Summer Projections See Stronger Deceleration in 2024 CPI

The IFO summer projections for the German economy were slightly more optimistic than the Bundesbank's semi-annual projections released last week. IFO sees GDP contracting by -0.4% in 2023, before recovering to +1.5% in 2024. This is 0.1pp weaker than the BuBa June forecast for 2023, however represents a 0.3pp stronger uptick than BuBa in 2024. IFO projects German inflation to ease to +5.5% in 2023, before falling back to +1.9% in 2024. These forecasts are lower than the +6.0% for 2023 and substantially softer than the +3.1% for 2024 Bundesbank projections.

FOREX: Sterling Softer Despite Stubborn CPI

• GBP trades at the bottom-end of the G10 FX table despite a higher-than-expected CPI reading for May. Headline Y/Y topped expectations by 0.3ppts, stalling at 8.7% for a second month. Meanwhile core CPI crept higher to 7.1% - supported primarily by services inflation - to hit a new cycle high.
• Despite stronger inflation, GBP has softened to put GBP/USD lower for a third consecutive session as markets price in a more prolonged period of high inflation, low growth in the UK - and possibly assign little likelihood of a more activist Bank of England in response to today's release. GBP/USD traded a post-data high of 1.2802 before fading by close to 100 pips off the session high.
• Outside of the UK, AUD trades poorly - dropping for a fourth consecutive session against the USD to keep support at the weekly low of 0.6753 under pressure. A break below here opens the 100-dma at 0.6719 and would erase the 38.2% of the early June rally.
• Focus ahead turns to Canadian retail sales and an appearance from ECB's Schnabel and Nagel. Fed's Powell is also set to speak, appearing in front of the House Financial Services Panel. A release of text is expected.

BONDS: Gilts the Big Movers; Powell Still to Come

• Gilts have been the biggest movers today following another upside surprise to UK inflation (both core and headline) this morning. Market pricing for tomorrow's meeting is now around 33bp (from 29bp yesterday and an intraday peak of almost 37bp on the open today) while terminal pricing has moved from 139bp in February 2024 at yesterday's close, hitting a peak over 160bp today and we now trade around 147bp. 2-year gilt yields have followed a similar pattern and are up almost 7bp at writing with 2s10s gilts (which was already the most inverted since 2000) inverting further this morning.
• Gilts had led USTs and EGBs lower but those moves have largely reversed.
• Focus now switches to Powell's testimony later today.
• TY1 futures are down -0-1 today at 113-09 with 10y UST yields up 0.2bp at 3.726% and 2y yields up 1.1bp at 4.699%.
• Bund futures are up 0.01 today at 133.78 with 10y Bund yields down -0.6bp at 2.396% and Schatz yields up 0.4bp at 3.101%.
• Gilt futures are down -0.57 today at 952.20 with 10y yields up 3.6bp at 4.368% and 2y yields up 6.5bp at 5.001%.

EQUITIES: Uptrend in Eurostoxx 50 Futures Intact

The Eurostoxx 50 futures uptrend remains intact and this week’s move lower is considered corrective. Resistance at 4380.00, May 29 high, was cleared last week and key resistance at 4434.00, May 19 high, has been pierced. A clear break of this hurdle would represent an important bullish development and open 4448.00, Jan 2008 high (cont). MA studies are in bull-mode condition highlighting an uptrend. Initial firm support is 4303.00, Jun 7 low. A bull theme in S&P E-minis remains intact and this week’s pullback appears to be a correction. Last week’s gains confirmed a resumption of the uptrend, marking an extension of the bull cycle that started in October 2022. The focus is on 4497.21, the top of a bull channel drawn from the Oct 2022 low (cont). Initial support is at 4381.75, the Jun 13 low. A firmer support lies at 4342.60, the 20-day EMA.

• Japan's NIKKEI closed higher by 186.23 pts or +0.56% at 33575.14 and the TOPIX ended 11.16 pts higher or +0.49% at 2295.01.
• Elsewhere, in China the SHANGHAI closed lower by 42.464 pts or -1.31% at 3197.901 and the HANG SENG ended 388.73 pts lower or -1.98% at 19218.35.
• Across Europe, Germany's DAX trades higher by 18.92 pts or +0.12% at 16129.52, FTSE 100 lower by 8.64 pts or -0.11% at 7560.54, CAC 40 down 8.77 pts or -0.12% at 7284.93 and Euro Stoxx 50 up 1.08 pts or +0.02% at 4343.86.
• Dow Jones mini down 16 pts or -0.05% at 34340, S&P 500 mini down 1.75 pts or -0.04% at 4433, NASDAQ mini down 9.25 pts or -0.06% at 15246.75.

COMMODITIES: Gold Softens Close to Recent Lows

WTI futures remain below resistance at $75.70, the Jun 5 high and the outlook remains bearish, despite the recent recovery. The pullback from $75.70 reinforces a bearish theme. Support at $67.21, May 31 low, has recently been pierced, a clear break would open $64.41, May 4 low. Moving average studies are in a bear mode position highlighting a downtrend. A break of $75.70 would signal a reversal. The bear cycle in Gold remains intact. The yellow metal breached trendline support last week, drawn from the Nov 3 2022 low. The trendline intersects at $1973.5. The break of this line reinforces a bearish condition and marks a resumption of the downtrend. The focus is on $1903.5, 61.8% of the Feb 28 - May 4 bull cycle. Initial firm resistance is $1985.3, the May 24 high. Clearance of this resistance would signal a short-term reversal instead.

• WTI Crude up $0.12 or +0.17% at $71.31
• Natural Gas up $0.02 or +0.88% at $2.515
• Gold spot down $2.12 or -0.11% at $1934.17
• Copper down $0.55 or -0.14% at $388.8
• Silver down $0.08 or -0.33% at $23.06
• Platinum down $9.49 or -0.98% at $954.82