Week Ahead – Acceptance – Forex Action
Towards a recession?
Last week was a great time for central banks, collectively, as well as for financial markets in general. It was the moment when the majority accepted that inflation is not just a problem, it is a problem that needs to be dealt with forcefully in order to prevent it from spiraling out of control and taking root in the world. ‘economy.
There are still those like the BoE who still believe that slow and steady will win the race, or the BoJ who doesn’t actually have an inflation problem but rather a monetary and political conundrum, or the CBRT who is so deeply involved that she doesn’t know what to do next. But for the majority, big rate hikes are the way to go, it’s just a matter of how much.
This means that market volatility is probably going nowhere. Recessions are increasingly becoming a strong possibility, if not the base case, and central banks are happy with that if it means inflation falls back to where it should be. Everything is going to be scrutinized in the future and could cause bouts of volatility at any time. Just look at Friday which was relatively quiet on the headline front.
A brutal week on Wall Street that included anger from central banks tightening monetary policy has many traders focused on when the U.S. economy will enter a recession. The Fed has signaled that it will take some time to bring inflation under control, fueling expectations of a steady stream of massive rate hikes that will soon lead to a broader slowdown in the economy.
The week ahead is filled with regional Fed surveys, housing data, flash PMI readings and the final consumer sentiment survey. On Tuesday, the May Existing Home Sales report is expected to show that the housing market continues to cool. Wednesday is all about Fed Chairman Powell’s semiannual testimony before the Senate panel. Thursday is Powell Day 2 on Capitol Hill and has 2 major economic releases; initial UI claims are expected to rise and flash PMI readings may show further weakness with manufacturing activity and flat service sector activity. Friday has the final sentiment readings from the University of Michigan and new home sales data which may rebound from the previous month’s tumble.
If there’s one thing we’ve learned this week, it’s that the ECB won’t necessarily wait for scheduled meetings when it comes to big monetary policy decisions. This time it was fragmentation issues, but next time it might be something more.
Next week we will have a variety of surveys that will be paid out for an indication of easing inflationary pressures and/or economic fears taking hold. There is currently intense scrutiny of the data, as well as central bank discourse, which will continue to be a major driver of market volatility.
Russia is cutting off some gas supplies to Germany and Italy, two of the last countries to agree to ruble terms. It was done under the guise of maintenance issues, but many see it as a threat as countries try to build up reserves ahead of the winter months.
French legislative elections in the second round take place on Sunday and Emmanuel Macron seems concerned about the prospect of losing his party’s majority.
The BoE forecast this week that inflation would peak above 11% in October, while showing no urgency to do much about it. The economic cost clearly weighs on their judgement, the belief being that 80% of the inflation overshoot is due to energy and basic goods and is therefore not impacted by changes in rates. It is unclear at this point whether the Bank is taking a massive gamble or preventing a severe recession. Either way, the markets still expect 1.75% increases by the end of the year.
Next week offers data on inflation and retail sales, as well as flash PMI surveys. The Central Bank’s discourse will naturally also be closely watched.
Russia is not shy about clashing economically with Europe, targeting gas flows to Germany and Italy and that could increase over the next week. That aside, he seems calm on the economic front.
The SARB stepped up its tightening last month with a 50 basis point hike, the fourth consecutive meeting of increases. Inflation data next week could tell us if this will become a trend or not, with the CPI currently at 5.9%, barely within the inflation target range of 3-6%.
The CBRT meeting next week is obviously the high point as the central bank’s resilience to the reality of its weak and damaging economic experience continues to be tested. Even if you set aside the mistaken beliefs that led to such bizarre political action, it leads the experiment to arguably the worst time in decades. How long before the CBRT accepts its poor judgment, swallows its pride and does the right thing? Inflation is running at 73.5% and the lira is back close to last December’s lows. Life isn’t going to get any easier until she does.
China’s calendar week is calm with only the prime rate decisions on one- and two-year loans on Monday. Given that they declined to cut the MTF this week, further cuts are unlikely. A surprise cut could be short-term positive for local equities.
It looks like China’s ‘national team’ has been supporting stocks this week ahead of Shanghai City’s mass testing this weekend (which it will continue to do every weekend through July). A threat to China’s covid-zero remains the biggest risk point in China right now. If cases are uncovered over the weekend that threaten a return to lockdowns, Chinese and regional stocks could fall, along with regional currencies.
No significant data. Attention remains focused on the Indian Rupee which charted record lows this week. A further rise in energy prices next week could trigger further weakness.
RBA Governor Lowe speaks on Monday and Tuesday and the RBA minutes are released. Markets will be looking for more signs of increased hawkishness from Lowe and minutes and could be negative for local stocks.
The Aussie dollar continues to move entirely on global sentiment, and further lockdowns in China, or a stronger US dollar, could undo this week’s gains.
New Zealand publishes consumer confidence and balance of payments on Wednesday. Given weak GDP this week, both numbers pose downside risk as the cost of living spirals out of control in New Zealand. The New Zealand Dollar underperformed the Australian Dollar this week as sentiment recovered after the FOMC, and looks likely to continue to do so.
Japan released manufacturing and services PMIs on Thursday, but the only game in town is USD/JPY after the BOJ left monetary policy unchanged. USD/JPY rallied over the weekend and the BOJ had to offer to buy unlimited amounts of JGB to keep the yield cap in place. USD/JPY may continue higher next week as markets test the BOJ’s mettle, with 140.00 now in sight as the US/Japan interest rate differential widens.
The Nikkei continues to slavishly follow the movements of the Nasdaq overnight.
Japan’s inflation release on Friday could increase pressure on the BOJ and the yen if the reading is high.
Singapore releases May inflation data on Wednesday, and a very high print will add pressure on the MAS to announce an unanticipated policy tightening after NODX data also outperformed today. This could be positive for the Singapore dollar and negative for equities,
Saturday June 18
- Fed’s Waller discusses monetary policy
Sunday June 19
- Second round of the Colombian presidential elections
- IATA Annual General Meeting in Doha
- Second round of legislative elections in France
Monday, June 20
- Prime rates for Chinese loans
- New Zealand Performance Services Index
- US markets closed for June 16 holiday
- EU foreign ministers talk about Ukraine
Tuesday, June 21
- Sales of existing homes in the United States
- Retail sales in Canada
- New Zealand consumer confidence
- Mexico’s international reserves
- RBA Gov Lowe speaks at an American Chamber of Commerce event in Sydney
- Primaries in Virginia and Washington, DC. Runoff elections in Alabama and Georgia
- RBA June Interest Rate Meeting Minutes
- German Chancellor Scholz, Economics Minister Habeck and Finance Minister Lindner speak at the BDI congress
- South African President Ramaphosa, Finance Minister Godongwana and SARB Governor Kganyago speak at an investor conference
Wednesday June 22
- Fed’s Powell delivers semi-annual testimony to Senate panel
- UK CPI
- IPC Canada
- IPC South Africa
- New Zealand trade
- Trade of Thailand
- Australia Leading Index
- Machine tool orders in Japan
- Credit card spending in New Zealand
- Eurozone consumer confidence
- Bank of Japan April Meeting Minutes
- IEA Global Energy Investment Annual Report
Thursday June 23
- Fed’s Powell testifies before the House Financial Services Panel
- US Initial Unemployment Insurance Claims, US Flash PMI
- Fed releases bank stress test results
- Flash European PMIs: Euro zone, France, Germany
- British PMIs
- PMI Australia
- Mexico Rate Decision: Expected Rate Increase of 25bps to 7.75%
- Norway Rate Decision: Expected Rate Increase of 25bps to 1.00%
- Turkey Rate Decision: Expected to Keep Rates at 14.00%
- Japan PMI, department store sales
- Singapore CPI
- SWIFT Payments in China, Bloomberg Economic Study
- PPI South Korea
- Unemployment rate in Taiwan, industrial production
- Beginning of the summit of European leaders in Brussels
- Eurozone ECB publishes economic bulletin
- EIA Crude Oil Inventory Report
friday june 24
- US New Home Sales, University of Michigan Consumer Sentiment
- IFO business climate in Germany
- CPI Japan
- Thailand futures contracts, foreign exchange reserves, capacity utilization, production index
- China BoP
- Singapore Industrial Production
- GDP of Spain
- RBA Gov Lowe speaks at a UBS roundtable on global monetary policy challenges in Zurich
- BOJ Gov Amamiya speaks at National Shinkin Conference