New Zealand GDP contracted -0.2% qoq in Q1, much worse than expectation of 0.6% qoq.
StatsNZ said: “Primary industries drove the decrease in GDP, down 1.2 percent in the quarter. Goods producing industries also experienced a slight decline, down 0.1 percent.
“The service industry group, which makes up approximately two thirds of the economy, remained flat. This result reflects falls in some industries being offset by rises in others.”
US stocks closed higher overnight even though FOMC delivered an “uncommon” mega hike of 75bps. Fed Chair Jerome Powell also indicated at the post-meeting press conference that “either a 50 basis point or a 75 basis point increase seems most likely at our next meeting” while “ongoing rate increases will be appropriate.”
The recovery in stocks is more seen as a “sell-on-rumors-cover on news” move. Fed delivered what the markets have expected and the selloff was already done earlier in the week. Also, some would give a nod to Fed’s determination to combat inflation and create the conditions for a soft-landing, even though it’s a big challenge.
The condition for a stronger rebound in S&P 500 is there, give that it’s close to 3666.44/3672.97 cluster projection (61.8% projection of 4637.30 to 3810.32 from 4177.51 at 3666.44, 161.8% projection of 4818.62 to 4222.62 from 4637.30 at 3672.97). Yet, SPX will need to break through the top end of the latest gap at 3900.16 to indicate stabilization first. Otherwise, risk will remain heavily on the downside. Deeper fall into support zone between 3195.28 and 3505.24 (61.8% and 50% retracement of 2191.86 to 4818.62) is too early to be ruled out at this point.
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Fed hikes by 75bps to 1.50-1.75%. Esther George dissented and voted for a 50bps hike only. Fed said that it’s “highly attentive to inflation risks” in the statement. Also, Fed now forecasts interest rate to be at 3.4% by the end of this year, sharply higher than prior estimate of 1.9%. Also, in the new dot plot, all members penciled in rate hikes to 3.125% and above by the end of 2022.
In the new median economic projections, federal funds rate is forecast to be at:
GDP growth is forecast to be at:
PCE inflation is forecast to be at:
Core PCE inflation is forecast to be at:
Unemployment rate is forecast to be at:
US retail sales dropped -0.3% mom to USD 672.9B in May, worse than expectation of 0.2% mom rise. Ex-auto sales rose 0.5% mom, below expectation of 0.8% mom. Ex-gasoline sales dropped -0.7% mom. Ex-auto, ex-gasoline sales rose 0.1% mom. Retail trade sales were down -0.4% mom.
For the 12-month period, retail sales rose 8.1% yoy. Gasoline station jumped 43.2% yoy. Food & beverage stores rose 7.9% yoy.
ECB said the Governing Council in an ad hoc meeting today to “exchange views on the current market situation” and reiterated the pledged to “act against resurgent fragmentation risks”.
The council decided to “apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism”.
Also, it decided to “mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument”.
Eurozone goods exports rose 12.6% yoy in April to EUR 223.9B. Imports rose 39.4% yoy to EUR 256.4B. Trade deficit came in at EUR -32.4B. Intra-Eurozone trade rose 20.8% yoy to EUR 212.1B.
In seasonally adjusted term, exports rose 1.5% mom to EUR 229.7B. Imports rose 7.1% mom to EUR 261.4%. Trade deficit widened to EUR -31.7B, much larger than expectation of EUR -14.5B. Intra-Eurozone trade rose slightly from 211.2B to 215.1B.
Eurozone industrial production rose 0.4% mom in April, below expectation of 0.5% mom. Production of energy rose by 5.4%, intermediate goods by 0.7%, non-durable consumer goods by 0.4% and durable consumer goods by 0.2%, while production of capital goods fell by -0.2%.
EU industrial production rose 0.3% mom. Among Member States for which data are available, the highest monthly increases were registered in the Netherlands (+5.6%), Finland (+3.5%) and Luxembourg (+3.2%). The largest decreases were observed in Ireland (-9.6%), Greece (-7.4%) and Lithuania (-7.1%).
Swiss SECO downgraded 2022 GDP growth forecasts (sport event adjusted) from 2.8% to 2.6%. 2023 GDP growth was also lowered from 2.0% to 1.9%. On the other hand, CPI forecast for 2022 was raised from 1.9% to 2.5%. CPI for 2023 was also raised from 0.7% to 1.4%. Unemployment rate forecast was left unchanged at 2.1% in 2022 and 2.0% in 2023.
SECO said: “The Swiss economy made a solid start to the year, but prospects for the international environment have waned. In particular, the global economy is at risk from the war in Ukraine and developments in China.”
It also warned: “The Swiss economy would be significantly affected if its key trading partners were to suffer a major economic downturn. This could happen, for example, as a result of widespread short-falls in energy supplies from Russia… In the face of rising interest rates, the risks associated with the surge in international debt levels are intensifying. There is an increased probability of financial market corrections.”
FOMC rate decision is the major focus today. Just before last Friday, markets have well received Fed’s communication on the 50bps hike per meeting “plan”. But it’s another world now after data showed CPI inflation reaccelerated in May. Fed fund futures are pricing in near 100% change of a 75bps rate hike at this meeting. The question now is what Fed is going to deliver.
The new economic projections will also be closely watched too. The stubborn inflation reading should be reflected in the new forecasts, as well as it’s impact on growth and employment. More importantly, the dot plot will again catch most attention. Back in March, only 7 of 16 FOMC member penciled in interest rate above 2% by the end of 2022. The balance would likely shift further to the hawks’ side. But by how far?
Some suggested readings on FOMC:
The strong rally, with acceleration in 10-year yield this week is a big surprise. 2018 high at 3.248 was taken out with ease and it’s now close to 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554. Break of 3.167 resistance turned support is needed to signal short term topping, or any retreat should be relatively brief. Sustained break of 3.554 will pave the way to 200% projection at 4.077, which is close to 4% handle.
China industrial production rose 0.7% yoy in May, much better than expectation of -1.0% yoy decline. Retail sales dropped -6.7% yoy, above expectation of -7.3% yoy. Fixed asset investment rose 6.2% ytd yoy, above expectation of 6.0%.
The National Bureau of Statistics said the economy “showed a good momentum of recovery” in the month, “with negative effects from Covid-19 pandemic gradually overcome and major indicators improved marginally.”
Still, it warned, “we must be aware that the international environment is to be even more complicated and grim, and the domestic economy is still facing difficulties and challenges for recovery.”
Australia Westpac Consumer Sentiment dropped from 90.4 to 86.5 in June. Over the 46-year history of the survey, the reading was only at or below this level during “major economic dislocations”, including during COVID-19, the Global Financial Crisis, early 90s recession, mid-80s slowdown and early 80s recession.
Westpac said: “The survey detail shows a clear picture of a slump in sentiment being driven by rising inflation; an associated lift in interest rates; and a loss of confidence around the economic outlook, both here and abroad.”
Regarding RBA policy, Westpac expects another 50bps rate hike in July, as the central bank needs to move quickly in the early stages in a tightening cycle when interest rates are clearly below neutral and risk of over-tightening is moderate.
US PPI for final demand rose 0.8% mom in May, matched expectations. For the 12-month period, PPI rose 10.8% yoy, down from April’s 10.9% yoy, below expectation of 10.9% yoy. PPI less food, energy and trade services rose 0.5% mom, 6.8% yoy.
In an interview, RBA Governor Philip Lowe said, “Australians need to prepare for higher interest rates”. He expects inflation to get to 7% by the end of the year, and “we need to be able to chart a course back to 2 to 3 per cent inflation”.
Lowe said, “it’s reasonable that the cash rate gets to 2½ per cent at some point… How fast we get to 2½ per cent, and indeed whether we get to 2½ per cent, is going to be determined by events.”
He expects inflation to peak at around 7% in the December quarter this year. Inflation will “clearly be coming down” into the second half of next year.
Germany ZEW Economic Sentiment rose from -34.3 to -28.0 in June, slightly below expectation of -27.5. Current Situation Index rose from -36.5 to -27.6, above expectation of -31.0.
Eurozone ZEW Economic Sentiment rose from -29.5 to -28.0, below expectation of -24.3. Current Situation Index rose 8.6 pts to -26.4.
“Financial market experts are less pessimistic about the economy. However, the economy is still exposed to numerous risks, such as the effects of the sanctions against Russia, the unclear pandemic situation in China and the gradual change of course in monetary policy. So although expectations have improved, they are still deep in negative territory,” comments ZEW President Professor Achim Wambach on current expectations.
US stocks closed sharply lower overnight with DOW, S&P 500 and NASDAQ making new lows of the year. As continued aftermath of last week’s CPI data, markets are now adding bets to more aggressive tightening by Fed. The original plan of 50bps hike per meeting seems out of favor.
Fed fund futures are now pricing in 99.4% chance of a 75bps hike this week (Wed) to 1.50-1.75%. Further, there is 79.9 chance of another 75bps hike in July to 2.25-2.50%. A pause in September is now a definite no, as markets are expecting another 50bps hike.
Still, the overall expectations would be reshaped by the updated economic projections and the dot plot to be published along with the rate decision.
UK payrolled employees rose 90k, or 0.3% mom in May. Claimant count dropped -19.7k, versus expectations of -42.5k. Median monthly pay rose 5.4% yoy to GBP 2076.
In the three months to April, unemployment rate was unchanged at 3.8%. Economic inactivity rate dropped -0.1% to 21.3%. Average earnings including bonus rose 6.8% over the year, below expectation of 7.6%. Average earnings excluding bonus rose 4.2% over the year, above expectation of 4.0%.
Australia NAB business confidence dropped from 10 to 6 in May. Business conditions dropped from 19 to 16. Looking at some details, trading conditions dropped from 27 to 24. Profitability conditions dropped from 21 to 17. Employment conditions rose from 11 to 12.
“Lower confidence in May likely reflects a range of risks on the horizon,” said NAB Group Chief Economist Alan Oster. “Businesses are facing a new environment of higher inflation, rising interest rates, and risks to global growth. However, confidence is still at a fairly robust level all things considered.”
10-year yield gaps up today and hits as high as 3.356 so far, as the rout in bonds and stocks continue. TNX’s power through 3.248 resistance (2018 high) is a surprise, and significant. It’s finally breaking the lower-highs lower-lows pattern that started back in 1981.
For now further rally is expected as long as 2.994 support holds. Next target is 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554. Overbought condition (in yields, and oversold in bonds) should limited upside there and bring a pull back. That, ideally, should come as the inflation situation stabilize and improve. However, sustained break of 3.554 would be another big warning on the economic outlook ahead.
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Australia employment rose 60.6k in May, strong growth in hours worked
Australia employment rose 60.6k in May, better than expectation of 25.0k. Full-time jobs rose 69.4k while part-time jobs dropped -8.7k. Unemployment rate was unchanged at 3.9%, above expectation of 3.8%. Participation rate rose 0.3% to 66.7%. Monthly hours worked rose 0.9% mom or 17m.
Bjorn Jarvis, head of labour statistics at the ABS, said: “The increase in May 2022 was the seventh consecutive increase in employment, following the easing of lockdown restrictions in late 2021. Average employment growth over the past three months (30,000) continues to be stronger than the pre-pandemic trend of around 20,000 people per month.
“In addition to the continuing trend of increasing employment, we have continued to see relatively stronger growth in hours worked. This is something we also saw this time last year, before the Delta outbreak.”
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