Japan’s GDP was finalized at -0.1% qoq in Q1, better than earlier estimate of -0.3% qoq. In annualized term. GDP contracted -0.5%.
Private consumption, which accounts for more than half of the GDP, was revised up to 0.06% qoq rise, from -0.03% decline. Capital expenditure dropped -0.7%, down graded from -0.5%. Exports grow was unchanged at 1.1% while imports rose 3.3%, downgraded from 3.4%.
GDP deflator was finalized at -0.5% yoy, revised form -0.4% yoy.
US exports of goods and services rose 3.5% mom to USD 252.6B in April. Imports dropped -3.4% mom to USD 339.7B. Trade deficit narrowed from USD 107.7B to USD 87.1B, versus expectation of USD 89.3B.
In Q1, goods and services trade deficit with China increased USD 22.9B to USD 112.7B. The deficit with Canada increased USD 9.6B to USD 19.1B. The surplus with the United Kingdom increased USD 2.5B to USD 5.8B.
UK PMI Services was finalized at 53.4 in May, down from April’s 58.9. That’s the weakest level since February 2021. PMI Composite was finalized at 53.1, down from April’s 58.2. S&P Global added that business activity expansions eased for the second month running. Input cost and prices charged inflation hit fresh record highs. Growth projections were lowest since October 2020.
Tim Moore, Economics Director at S&P Global Market Intelligence: “May data illustrate a worrying combination of slower growth and higher prices across the UK service sector. The latest round of input cost inflation was the steepest since this index began in July 1996, while the monthly loss of momentum for business activity expansion was a survey-record outside of lockdown periods.”
Eurozone Sentix Investor Confidence rose from -22.6 to -15.8 in June, above expectation of -20.0. Current Situation Index rose from -10.5 to -7.3. Expectations Index rose from -34.0 to -24.0.
Sentix said, “the real economy is not suffering as quickly and as severely from phenomena such as rising inflation and supply chain problems as one might have suspected.
“While consumers are already suffering much more from rising prices, many companies are still benefiting from inflation-related pull-forward effects. So far, many companies have also been able to pass on their sharply rising costs to their customers.
“But this is likely to be a finite phase. At a certain point, end consumers will have to cut back. Then, at the latest, the ability of companies to pass on their costs without restriction will also come to an end. In addition, there is a foresee-able change in monetary policy, which could also become more restrictive in the Eurozone from July.
“On the other hand, it should be positive that according to the sentix topic barometer the inflation peak should have been passed for the time being.”
RBA raises cash rate target by 50bps to 0.85% today, larger than expectation of 40bps. Interest rate on exchange settlement balances is also lifted by 50bps to 75bps. The central bank also maintains tightening bias, as “the Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead.”
In the accompanying statement, RBA said inflation in Australia has “increased significantly”, and is “expected to increase further”, before declining back towards the 2-3% target range next year. The economy is “resilient” while labour market is “strong”.
One source of uncertainty is “how household spending evolves”, given the “increasing pressure” from higher inflation, and interest rates. The central scenario is for strong household consumption growth this year, but RBA will pay close attention to various influences on consumption.
BoJ Governor Haruhiko Kuroda said that a weak Yen is “beneficial” for Japan’s economy if the moves are “not too sharp”. He emphasized again that the moves in currency markets should reflect “fundamentals”, and the central bank is “carefully watching” the impact.
The comments came as Yen was sold off broadly, triggered by US 10-year yield reclaimed 3% handle overnight. Germany 10-year bund yield also jumped to fix at 1.323. USD/JPY hit the highest level in over two-decades while CAD/JPY is also getting close to 2014 high at 106.48.
For now, near term outlook in CAD/JPY will stay bullish as long as 103.60 support holds, targeting 61.8% projection of 89.21 to 102.93 from 97.78 at 106.25, which is close to above mentioned 106.48. Sustained break there will pave the way to 100% projection of 68.38 to 106.48 from 73.80 at 111.90. That is the key hurdle for CAD/JPY to overcome in the medium term.
Australia AiG Performance and Services Index dropped sharply from 57.8 to 49.2 in May, indicating mild contraction. Sales dropped -13.0 pts to 50.7. Employment dropped -10.4 to 47.4. New orders dropped -3.3 to 49.7. Input prices dropped -9.1 o 68.7. Selling prices dropped -3.6 to 61.9. Average wages dropped -9.8 to 57.4.
Innes Willox, Chief Executive of Ai Group, said: “The Australian services sector contracted mildly in May after a period of healthy expansion in the earlier months of 2022. Performance was mixed across the sector with strong growth in logistics, retail trade and personal, recreational & other services offset by sharp declines in business & property services and health & education services.”
USD/JPY powers through 131.34 resistance as 10-year yield reclaims 3% handle. Medium term up trend in USD/JPY is resuming and should target 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81 first.
More importantly, sustained trading above a long term projection level at 61.8% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 130.04 will pave the way to 100% projection at 149.26, which is close to 147.68 (1998 high).
But of course, that would likely need 10-year yield to break through 3.167 with some conviction too. There is no hints on that happening yet. Let’s see.
Riding on broadly positive risk sentiment, Japan’s stock indexes surged to highest level in over two months. Topix finished 0.31% higher while Nikkei rose 0.56%. Among the gainers, air and land transportation shares are lifted by optimism that tourism is coming back to Japan.
Based on current momentum, Nikkei should be ready to resume the whole rebound from 24681.74. 28338.81 resistance is the first test, and break will target 100% projection of 24681.74 to 28338.81 from 25688.10 at 29345.17. For now, it’s still too early to call for long term up trend resumption in the index. 30k handle could still present huge psychological resistance. But in any case, further rally will remain in favor as long as 27251.24 minor support holds.
Meanwhile, it should also be noted that the long term outlook in Nikkei is staying bullish, despite the correction that lasted one and half year. It’s holding comfortably above 24129.34 structural resistance, as well as 55 month EMA. Both are keeping the up trend from 6994.89 (2008 low) intact.
China Caixin PMI Services rose form 36.2 to 41.4 in May, but missed expectation of 47.3. Caixin said services activity fell at softer, but still sharp rate amid COVID-19 restrictions. Drop in overall new work moderated. Input cost inflation eased to nine-month low. PMI Composite rose from 37.2 to 42.2.
Wang Zhe, Senior Economist at Caixin Insight Group said: “Overall, in May, local Covid outbreaks continued and manufacturing and services activity improved slightly, but continued to contract, with services hit harder. Demand was slightly stronger than supply. The fallout from the epidemic on market supply and demand has been transmitted to the labor market, which is deteriorating at a faster pace in both the manufacturing and services sectors. Disrupted supply chains and longer logistics delivery times have yet to improve. Businesses remained under great cost pressure.”
BoJ Governor Haruhiko Kuroda said in a speech that the economy is “still on its way to recovery from the pandemic and has been under downward pressure from the income side due to rising commodity prices”. In this situation, “monetary tightening is not at all a suitable measure”.
He added that the top priority is to “persistently continue with the current aggressive monetary easing centered on yield curve control”. And, unlike other central banks, BoJ has noted faced the “the trade-off between economic stability and price stability”. Hence, it’s “certainly possible for the Bank to continue stimulating aggregate demand from the financial side.”
He concluded that BoJ “will take a strong stance on continuing with monetary easing, in that it will provide a macroeconomic environment where wages are likely to increase so that the rise in inflation expectations and changes in the tolerance of price rises — which have started to be seen recently — will lead to sustained inflation.”
US ISM Services PMI dropped from 57.1 to 55.9 in May, below expectation of 56.7. Business activity/production dropped -4.6 to 54.5. New orders rose 3.0% to 57.6. Employment rose 0.7 to 50.2. Prices dropped -2.5 to 82.1.
ISM said: “The past relationship between the Services PMI and the overall economy indicates that the Services PMI for May (55.9 percent) corresponds to a 2.1-percent increase in real gross domestic product (GDP) on an annualized basis.”
US non-farm payroll employment grew 390k in May, above expectation of 325k. Prior month’s growth was also revised up from 428k to 436k. Overall non-farm employment was still down by -822k, or -0.5% from its prepandemic level.
Unemployment rate was unchanged at 3.6% for the third month in a row, above expectation of 3.5%. No of unemployed was essentially unchanged at 6.0m. Participation rate rose 0.1% to 62.3%.
Average hourly earnings rose only 0.3% mom, below expectation of 0.4% mom.
Eurozone retail sales dropped -1.3% mom in Apr, much worse than expectation of 0.3% mom rise. Volume of retail trade decreased by -2.6% for food, drinks and tobacco and by -0.7% for non-food products, while it increased by 1.9% for automotive fuels.
EU retail sales dropped -1.3% mom. Among Member States for which data are available, the largest monthly decreases in the total retail trade volume were registered in Slovenia (-7.7%), Germany (-5.4%) and Latvia (-3.9%). The highest increases were observed in Spain (+5.3%), Luxembourg (+3.7%) and Ireland (+1.9%).
Eurozone PMI Services was finalized at 56.1 in May, down from April’s 57.7. PMI Composite was finalized at 54.8, down from April’s 55.8, a 4-month low. Looking at some member states, Ireland PMI composite dropped to 4-month low at 57.5. France dropped to 2-month low at 57.0. Spain was unchanged at 55.7. Germany dropped to 5-month low at 53.7. Italy dropped to 2-month low at 52.4.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “Strong demand for services helped sustain a robust pace of economic growth in May, suggesting the eurozone is expanding an underlying rate equivalent to GDP growth of just over 0.5%. However, risks appear to be skewed to the downside for the coming months…
“The near-term fate of the eurozone economy will therefore depend on the extent to which a fading tailwind of pent-up demand can offset the headwinds of geopolitical uncertainty amid the Ukraine war, supply chain disruptions and the rising cost of living, the latter likely exacerbated by tightening monetary conditions.”
US non-farm payroll employment is the main focus for today. The US economy is expected to add 325k jobs in May. Unemployment rate is expected to drop from 3.6% to 3.5%. Average hourly earnings are expected to rise another 0.4% mom. Looking at related data, ADP private jobs grew just 128k, well below expectations. ISM manufacturing employment dropped into contraction reading of 49.6. Four-week moving average of initial claims also rose notably from 188k to 206k. There is risk of downside surprise in the heading NFP number today. But wages growth would be the one that matters more.
US stocks are trying to extend rebound this week, even though some Fed officials tried to talk down the prospect of a September pause in tightening. NASDAQ’s rebound form 11035.68 is in progress for 55 day EMA (now at 12610.13). Sustained break there will raise the chance that whole fall from 16212.22 has completed in form of a three wave correction. Stronger rally would then be seen back towards trendline resistance at around 13800 later in the month. Such development would cap rally attempts in the greenback.
Cleveland Fed President Loretta Mester said yesterday, “if by the September FOMC meeting, the monthly readings on inflation provide compelling evidence that inflation is moving down, then the pace of rate increases could slow. But if inflation has failed to moderate, then a faster pace of rate increases could be necessary.”
“I will need to see several months of sustained downward monthly readings of inflation. I have not seen that yet,” she said, thus she could not conclude that inflation has peaked.
On the economy, Mester said, “the risk of recession has risen, but because underlying aggregate demand momentum and the demand for labor are so strong, a good case can still be made that as demand and supply come into better balance, a sharp slowdown can be avoided, with growth slowing to a trend pace this year, labor market conditions remaining healthy, and inflation moving down to a 41/2 to 51/2 percent range this year and declining further next year,” Mester said.
BoC Deputy Governor Paul Beaudry said in a speech, “we noted that price pressures are broadening and inflation is much higher than we expected and likely to go higher still before easing.”
“This raises the likelihood that we may need to raise the policy rate to the top end or above the neutral range to bring demand and supply into balance and keep inflation expectations well anchored,” he added.
Beaudry also indicated that the neutral range, a rate that “neither stimulates nor weighs on growth”, is estimated to be “between 2% and 3%”
Fed Vice Chair Lael Brainard told CNBC today, “right now, it’s very hard to see the case for a pause… We’ve still got a lot of work to do to get inflation down to our 2% target.” Atlanta Fed President Raphael Bostic noted earlier that a pause in September might make sense to see how the economy evolves after successive rate hikes.
“We’re certainly going to do what is necessary to bring inflation back down,” Brainard said. “That’s our No. 1 challenge right now. We are starting from a position of strength. The economy has a lot of momentum.”
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CHF/JPY resumes up trend, targeting 140 next
While Swiss Franc and Yen are both the biggest losers for the month so far, Yen is worse by a mile. BoJ is clear that it’s going to maintain the current ultra-loose monetary easing. On the other hand, SNB is sounding more and more open to adjustments on its monetary policy to counter inflation. In particular, if ECB is going to exit negative interest rates later in the year, there is prospect of SNB following, at least with a rate hike.
Technically, the break of 136.16 high confirms resumption of larger up trend from 101.66 (2016 low). That came after the deep pull back was support slightly above 127.05 resistance turned support. For now, near term outlook will stay bullish as long as 134.88 support holds. Next medium term target will be 200% projection of 101.66 to 118.59 from 106.71 at 140.57.