Germany PMI manufacturing dropped to 27-mth low, services to 28-mth low

    Germany PMI Manufacturing dropped from 48.3 to 49.1 in September, a 27-month low. PMI Services dropped from 47.7 to 45.4, a 28-month low. PMI Composite dropped from 46.9 to 45.9, a 28-month low.

    Phil Smith, Economics Associate Director at S&P Global Market Intelligence said:

    “The German economy looks set to contract in the third quarter, and with PMI showing the downturn gathering in September and the survey’s forward-looking indicators also deteriorating, the prospects for the fourth quarter are not looking good either.

    “The deepening decline in business activity in September was led by the service sector, which has seen demand weaken rapidly as customers pull back on spending due tightening budgets and heightened uncertainty about the outlook.

    “Whilst constraints on manufacturing output from material shortages looked to have eased somewhat, resulting in a shallower decline production levels in September, goods producers like their service sector counterparts have nevertheless grown increasingly concerned about activity in the coming months, with the energy crisis stoking recession fears.

    “Just when it looked like underlying inflationary pressures might be easing, a fresh surge in energy prices has seen business input costs rise at a faster rate for the first time in five months, in turn leading to a renewed acceleration in average prices charged for goods and services.”

    Full release here.

    France PMI manufacturing dropped to 28-mth low, services improved

      France PMI Manufacturing dropped from 50.6 to 47.8 in August, a 28-month low. PMI Services improved from 51.2 to 53.0. Overall, PMI Composite rose from 50.4 to 51.2.

      Joe Hayes, Senior Economist at S&P Global Market Intelligence said:

      “The upward movement in the Composite Output PMI should not take away from the clear message seen across the survey as a whole – the French economy is struggling. Weakness is its most striking in the manufacturing sector, where the downturn accelerated in September as overstocked warehouses, rapidly deteriorating demand for goods, heightened economic uncertainty and intense price pressures drove production volumes lower.

      “Another worrying find from the latest survey was the pick-up in inflationary pressures, despite more evidence that supply stress is fading. According to surveyed firms, this reflected higher energy tariffs and wage bills. Energy security is a principal concern of companies as we head into the colder months across Europe.

      “The overall improvement in September was services-driven as a renewed increase in new business supported a slight pick-up in activity growth. Nevertheless, trends in output and new orders on the services side were still subdued by historical standards. Given the large degree of weakness we’re seeing in the manufacturing sector, it’s likely that we’ll see some of this spill over into services, thereby raising the risk of a recession in France.”

      Full release here.

      Australia PMI composite edged up to 50.8, at risk of heading into contraction territory

        Australia PMI Manufacturing ticked up from 53.8 to 53.9 in September. PI Services also rose slightly from 50.2 to 50.4. PMI Composite Output rose from 50.2 to 50.8.

        Laura Denman, Economist at S&P Global Market Intelligence said: “September data indicated that the recent interest rate hikes made by the RBA have begun to have the desired effect in terms of prices…. At the same time, the private sector has remained in expansion territory with the pace of growth even accelerating very slightly…

        “On the negative side, the full effects of recent interest rate hikes will be lagged… Should the RBA continue to increase the base rate further, the private sector economy may be at risk of heading into contraction territory in the future as disposable incomes across the nation tighten and overall demand conditions remain subdued.”

         

        Full release here.

        UK Gfk consumer confidence dropped to new record low at -49

          UK Gfk consumer confidence dropped further from -44 to -49 in September, hitting another record low since 1974. Personal financial situation over next 12 months dropped -9 pts to -40. General economic situation over next 12 months dropped -8 pts to -68. Major purchase index was unchanged at -38.

          “Consumers are buckling under the pressure of the UK’s growing cost-of-living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments. They are asking themselves when and how the situation will improve.” Joe Staton, client strategy director at GfK, said.

          ECB Schnabel: Inflation pressures crept into all parts of economy

            ECB Executive Board member Isabel Schnabel said yesterday in Luxembourg, “What we are seeing is that the inflationary pressures have become much more broad-based. They have somehow crept into all parts of the economy.”

            “At the moment, we are not in a situation where the normalization of monetary policy harms the economy,” she said. “It’s more like we have to remove the accommodation that we still have in the system.”

            US initial jobless claims rose to 213k, below expectation

              US initial jobless claims rose 5k to 213k in the week ending September 17, below expectation of 220k. Four-week moving average of initial claims dropped -6k to 217k.

              Continuing claims dropped -22k to 1379k in the week ending September 10. Four-week moving average of continuing claims dropped -8k to 1405k.

              Full release here.

              BoE hikes 50bps, 3 members want 75bps, one want 25bps

                BoE raises Bank rate by 50bps to 2.25% as widely expected. The voting was not unanimous, with five MPC members Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, and Silvana Tenreyro, voted for the decisions. Three members, Jonathan Haskel, Catherine L Mann and Dave Ramsden voted for 75bps hike. One member, Swati Dhingra, voted or 25bps hike.

                The Committee voted unanimous to reduce the stock of purchased government bonds by GBP 80B over the next 12 months, to a total of GBP 758B, as set out in August meeting minutes.

                BoE also said that the MPC will consider and make decision on the Bank Rate “at each meeting”. The scale, pace and timing of any further changes will reflect the assessment of economic outlook and inflationary pressures. It maintain the pledge to “respond forcefully” if outlook suggests “more persistent inflation pressures”.

                Full statement here.

                Yen rebounds as Japan confirmed decisive intervention action taken

                  Yen reverses earlier decline and rebounds strongly, after a top currency diplomat confirmed that the government have intervened in the foreign exchange market for the first time since 1998. Masato Kanda , vice finance minister for international affairs, told reporters, “we have taken decisive action” on in the markets.

                  USD/JPY is hammed down after jumping to 145.89 earlier today, on hawkish Fed. It now seems that Japan could become more active when USD/JPY get close to 1998 high at 147.68.

                  SNB hikes 75bps, signalling possibility of a pause

                    SNB raises policy rate by 75bps to 0.50% as widely expected, to counter “renewed rise in inflation pressure”. It “cannot be ruled out” that further rate hikes will be “necessary”. The reference to the timeframe of “in the foreseeable future” was dropped. The statement suggests that it’s probably a pause for SNB now.

                    SNB expects that inflation is “likely to remain at an elevated level for the time being”. Based on the assumption that policy stays at 0.50% over the entire forecast horizon, inflation will peak at 3.4% in Q3, and stay slowing from Q2 2023 to 1.6% in Q2 2024. Inflation will average 3.0% in 2022, 2.4% in 2023, and then 1.7% in 2024.

                    Regarding the economy, SNB expects GDP growth of around 2% this year, roughly 0.5% lower than the last monetary policy assessment. Uncertainty remains high and the biggest risks are a “a global economic downturn, a worsening of the gas shortage in Europe and a power shortage in Switzerland”.

                    Full statement here.

                    SNB and BoE next, GBP/CHF accelerating down

                      SNB and BoE rate decisions are the remaining focuses of the day. SNB is widely expected to rise interest rate by 75bps to 0.50%, back in positive region. There are some speculations of a larger hike, but it’s unlikely. The central would also repeat that appreciation of the Swiss Franc is welcome for now, as it helps curb imported inflation.

                      Meanwhile, BoE is expected to deliver another 50bps hike to 2.25%. The UK economy is stuck between a rock and a hard place. While inflation appeared to be slowing, “slightly”, it remained close to multi-decade high. On the other hand, weakness has been seen in spending while the economy is already in recession. The voting of today’s decision could contain some surprises.

                      Some previews on SNB and BoE:

                      GBP/CHF broke through pandemic low at 1.1107 earlier this month, and the down trend is still in acceleration mode. Near term outlook will stay bearish as long as 1.1056 resistance holds. Next target is 200% projection of 1.3070 to 1.2134 from 1.2598 at 1.0726.

                      There is risk of further downside acceleration, either on dovish BoE or deterioration in geopolitical risks. In that case, break of 1.0726 could pave the way to 1.0148.

                      BoJ stands part, interest rate to remain at present or lower levels

                        BoJ kept monetary policy unchanged as widely expected. Under the yield curve control framework, short-term policy interest rate is held at -0.10%. BoJ will continue to purchase Japanese government bonds, without setting an upper limit, to keep 10-year JGB yield at around 0%. Also, BoJ will offer to purchase 10-year JGBs at 0.25% every business day through fixed -rate purchase operations, to cap the upside. These decisions were made by unanimous vote.

                        BoJ also pledge to continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control to achieve 2% price target, “as long as it is necessary for maintaining that target in a stable manner”. The bank will not hesitate to take additional easing measures if necessary”. It expects short- and long-term policy interest rates to “remain at their present or lower levels”.

                        Full statement here.

                        DOW to break 30k soon on hawkish Fed

                          US stocks tumbled broadly after Fed raised interest rate by 75bps overnight, and indicated that rate could reach 4.4% by year end. Chair Jerome Powell reiterated that pledge that “the FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.” Meanwhile, against members’ expectations, “we have seen some supply side healing but inflation has not really come down,” he noted.

                          DOW’s -1.70% decline indicates that fall from 34281.36 is extending and break of 30k handle would be seen soon. Such fall is seen as part of the whole medium term corrective pattern from 36952.65. Near term outlook will stay bearish as long as 31026.89 resistance holds. Next target is a retest of 29653.29 low. Firm break there will target 100% projection of 36952.65 to 29653.29 from 34281.36 at 26982.00. There’s where the correction would probably end.

                          EUR/USD downside breakout after Fed rate hike

                            EUR/USD finally breaks out to the downside after Fed hikes 75bps and projects interest rate to hit 4.4% by year end. For the near term, EUR/USD’s next target is 100% projection of 1.0368 to 0.9863 from 1.0197 at 0.9692, and then 161.8% projection at 0.9380.

                            For the medium term, next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694.

                            In any case, break of 1.0049 minor resistance is needed to indicate short term bottoming. Or, outlook will stay bearish even in case of recovery.

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                              Fed hikes 75bps, rate to reach 4.4% by year end

                                Fed raises interest rate by 75bps to 3.00-3.25% as widely expected, by unanimous vote. In the accompanying statement, Fed said job gains have been “robust” with unemployment rate “remained low”. Inflation remains “elevated”. FOMC would be ” prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

                                In the new economic projections, Fed projects (median) interest rates to reach 4.4% in 2022, 4.6% in 2023, before falling back to 3.9% in 2024, and then 2.9% in 2025. GDP growth is projected to be at 0.2% in 2022, 1.2% in 2023, 1.7% in 2024, and then 1.8% in 2025. Unemployment rate is projected to be at 3.8% in 2022, 4.4% in 2023, 4.4% in 2024, and then 4.3% in 2025. Core PCE inflation is projected to be at 4.5% in 2022, 3.1% in 2023, 2.3% in 2024, and then 2.1% in 2025.

                                Full statement here.

                                Full projection here.

                                EUR/CHF holding above 0.9530 temp low after selloff

                                  Euro drops broadly today, in particular against Swiss Franc. The selloff came after Russian President Vladimir Putin announced partial military mobilization for the invasion of Ukraine. That’s the first such mobilization since World War II, and would call up 300k reservists. Putin also warned that Russia has “various means of destruction”. “If the territorial integrity of our country is threatened, we will certainly use all the means at our disposal to protect” he said, adding that “this is not a bluff!”.

                                  Last week, Putin had the first face-to-face meeting with Chinese President Xi Jinping since the pandemic, in Uzbekistan. China’s official news agency reported that Xi told Putin China will work with Russia to deepen practical cooperation in trade, agriculture, connectivity and other areas.

                                  For now, EUR/CHF is still holding above 0.9530 temporary low, and down trend resumption is not confirmed yet. On break of 0.9530, EUR/CHF should target 61.8% projection of 1.0512 to 0.9550 from 0.9864 at 0.9269.

                                  Fed to hike 75bps as 10-year yield resumed up trend

                                    FOMC rate decision is the main focus of the day and another jumbo rate hike is expected. Based on current market pricing, there is 82% chance of a 75bps hike to 3.00-3.25%, and just 18% chance of a 100bps hike to 3.25-3.50%. Thus, there is little chance for Fed to upset the markets.

                                    Overall rhetoric should be unchanged that tightening is set to continue while Fed is committed to bring inflation down to target. The bigger questions are on the new economic projections and the dot plot. Some hawkish surprise could be seen there, which indicates higher terminal rate for current cycle, and a longer period to stay there.

                                    Here are some previews:

                                    US 10 year yields rose another 0.81 to close at 3.571 overnight, break through prior high at 3.483. The development confirmed resumption of up trend from 2020 low at 0.398. Next target will be 61.8% projection of 1.343 to 3.483 from 2.525 at 3.847. Hawkish surprise in today’s FOMC projections could accelerate TNX’s path to this target.

                                    ADB slashes developing Asia growth forecast to 4.3%, China to 3.3%

                                      The Asian Development Bank slashed growth forecasts for developing Asia from 5.2% (April forecast) to 4.3% in 2022, and 5.3% to 4.9% in 2023. It said, “The revised outlook is shaped by a slowing global economy, the fallout from Russia’s protracted invasion of Ukraine, more aggressive monetary tightening in advanced economies, and lockdowns resulting from the People’s Republic of China’s zero-COVID policy.”

                                      As for China, growth forecasts was downgraded sharply from 5.0% to 3.3% in 2022, and from 4.8% to 4.5% in 2023. India’s growth forecast was also cut from 7.5% to 7.0% in 2022, and from 8.0% to 7.2% in 2023.

                                      On the other hand, inflation forecast was raised from 3.7% to 4.5% in 2022, and from 3.1% to 4.0% in 2023, “due to higher energy and food prices”.

                                      Full release here.

                                      RBA Bullock: Interest rate not yet restrictive

                                        RBA Deputy Governor Michele Bullock said interest rate at 2.35% is not yet restrictive. But the central was already looking for opportunities to slow the pace of tightening at some point. The monthly inflation data to be released next week would have a lot of statistical noises, and would unlikely be having much impact of the deliberations at the October meeting.

                                        Regarding the asset purchased during the pandemic bond buying program, Bullock said RBA had taken a mark-to-market valuation loss of AUD 33.9B in 2021/22. That would let the central bank in a negative net equity position of AUD 12.4B. But she added, since it has the ability to create money, the Bank can continue to meet its obligations as they become due and so it is not insolvent… The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job.”

                                        ECB Lagarde: We will reassess whether a normalization strategy is sufficient

                                          In a speech, ECB President Christine Lagarde said, discussed two considerations for monetary policy, the “destination” and the “pace” to get there.

                                          As for the “destination”, she said, “as we move forward, we will reassess whether a normalization strategy is sufficient to bring us back to 2% inflation over the medium term,” hinting that interest rate could go into restrictive region.

                                          Meanwhile, the “appropriate pace of future rate increases will be decided on a meeting-by-meeting basis.”

                                          Full speech here.