Sample Category Title

China CPI ticked up slightly from 0.1% yoy to 0.2% yoy in May, above expectation of 0.1% yoy. Core CPI, which excludes volatile food and energy prices, slowed from 0.7% yoy to 0.6% yoy.

Food price rose 1.0% yoy, up from prior month's 0.4% yoy. However, price for industrial consumer products dropped -1.7% yoy, worse than April's -1.5% yoy. On a month-on-month basis CPI dropped -0.2% mom, deeper than April's -0.1% mom.

PPI dropped from -3.60% yoy to -4.6% yoy, below expectation of -3.9% yoy. That's also the steepest decline in seven years since May 2016.

Dong Lijuan, an NBS statistician, said the consumer inflation picked up marginally with the gradual recovery in consumer demand, while the fall in factory-gate prices was affected by declining international commodity prices, weak demand for industrial products at both home and abroad, as well as a high comparison base in the previous year.

BoJ is committed to maintaining its monetary easing policy as it seeks to sustainably achieve its 2% inflation target, stated BOJ Governor Kazuo Ueda in a parliamentary address.

He acknowledged, "There's still some distance to sustainably and stably achieve our 2% inflation target. As such, we will patiently maintain our monetary easing policy."

Ueda explained that the central bank's strategy is to initiate a positive cycle in which inflation-adjusted wages will start to rise.

However, he also indicated that BOJ anticipates core consumer inflation to dip below 2% target in the latter half of the fiscal year. Despite this projection, Ueda expressed that there remains a substantial degree of uncertainty surrounding the inflation outlook.

One key factor he highlighted is corporate price-setting behaviour, which he stated was "somewhat overshooting expectations."

Paul Beaudry, Deputy Governor of BoC, has shed more light on the unexpected 25bps rate hike that took place this week. In a speech, he explained that the evidence gathered from a multitude of economic indicators had "tipped the balance" in favor of this decision. The persistent excess demand in Canadian economy, he observed, posed an increased risk of a stall in the decline of inflation, necessitating the rate hike.

Unanticipated robust economic growth was also a key factor that prompted the monetary tightening. "Economic growth rebounded in the first quarter of 2023 to 3.1%," Beaudry said, "Consumption growth, in particular, was very strong at 5.8%, with household spending on both goods and services sharply higher. This surprised us."

He then turned his attention to inflation, discussing April's unexpected increase to 4.4%, up from 4.3% in March. "While that might not seem like much," Beaudry continued, "it was in the opposite direction of what we expected, and the details behind the headline number were concerning." The sticking points were that three-month measures of core inflation remain high and appear to "have lost their downward momentum", and that goods inflation surprisingly accelerated in April, reversing months of deceleration.

Beaudry stated, "when we looked at the recent dynamics in core inflation combined with ongoing excess demand, we agreed the likelihood that total inflation could get stuck well above the 2% target had increased. Based on this accumulated evidence, we decided to raise the policy rate to slow demand and restore price stability."

The Deputy Governor promised more insight into these matters in the BoC's July forecast, indicating that the central bank remains vigilant and will adjust its policies as the economic climate necessitates.

Full speech of BoC Beaudry here.

Key insights from the week that was.

Q1 GDP for Australia came in broadly as anticipated at 0.2%, 2.3%yr. Household spending managed to lift by only 0.2% in Q1 after a similarly weak 0.3% gain in Q4. This was despite another fall in the savings ratio from 4.4% to 3.7% – freeing up roughly $2bn in funding for expenditure – as elevated inflation, interest rates and fiscal drags eroded nominal earnings and saw household’s real disposable income fall by 0.3% in the quarter to be 4% lower over the year.

As interest rates continue to rise and inflation only slowly abates, real discretionary spending capacity will remain under pressure. Regarding other areas of the domestic economy, conditions for investment were supportive in the quarter, a rise in construction work and equipment spending leading a 2.9% increase in new business investment overall. Note though, the outlook for investment is clouded given emerging weakness in household demand and global uncertainties.

On trade, Australia’s current account surplus widened from $11.7bn in Q4 (revised down from $14.1bn) to $12.3bn in Q1. This was primarily driven by an improvement in the trade surplus, up $2.1bn in the quarter upon sustained strength in Australia’s terms of trade which rose 2.8% in Q1. In real terms however, the lift in import volumes (+3.2%) outpaced exports (+1.8%), leading net exports to subtract from GDP growth in Q1, -0.2ppts.

The RBA’s decision to raise the cash rate by 25bps this week, which came as a surprise to markets, highlight’s the Board’s concern over inflation risks proving persistent as well as the implications for the economy if they do. Providing more colour around the decision, Governor Lowe delivered a speech the following day, highlighting four key areas critical for the RBA’s navigation of the ‘narrow path’. These include, the global economy, household spending, unit labour costs and inflation expectations.

The Board still believes it can lower inflation whilst maintaining the economic gains from earlier expansionary policy, but the risks are considerable. Given their decision in June and associated communications, we now expect a further 25bp cash rate increase in July to 4.35%. Another move in August is a possibility depending on the data’s evolution. Rate cuts will have to wait until 2024.

The RBA wasn’t the only central bank to surprise this week – the Bank of Canada also raised its policy rate by 25bps to 4.75%, ending the pause which started in January. The stronger-than-expected Q1 GDP print of 3.1% annualised, with a “surprisingly strong and broad-based” contribution from household consumption, led policymakers to believe that a further rate hike was warranted to rein in excess demand. Strong core inflation also contributed to the decision as the bank expressed concern that “CPI inflation could get stuck materially above the 2% target”. Forward guidance was scant but, having been wrong-footed in June, market participants are now pricing in additional tightening, with a hike fully priced by September and a 50/50 chance of another by year end.

South of the border in the US, the ISM non-manufacturing survey weakened to 50.3 in May – a whisker above the neutral threshold and around six points below the five-year pre-COVID average. There was a broad-based fall in the sub-indices, with ‘backlog of orders’ and ‘new orders’ falling the most. Most notably though, the employment sub-index fell below 50, signalling a modest reduction in headcount at service firms. This is consistent with the uptick reported for initial claims this week and the reduction in hours found by the establishment survey last week; however, it is a stark contrast to the outsized 339k gain in nonfarm payrolls also reported by the BLS’ establishment survey.

The US trade deficit meanwhile widened to $74.6 billion in April as a result of both weaker exports and stronger imports which recovered much of the weakness seen last month. On the exports side, industrial supplies and consumer foods both saw a sizeable downshift. Exports to Germany contracted – an unsurprising result given Germany and the Euro Area overall are now estimated to have experienced a mild recession during Q4 and Q1. Exports to China also fell, but not by as much.

Reversing our perspective and moving a month forward in time to May, China’s trade surplus narrowed to US$65.8bn as exports weakened and imports rose. Exports to the US have declined on a year ago basis every month since August 2022. Offsetting growth in demand has however come from Asia, momentum that is likely to be sustained through 2023. Imports are expected to strengthen further following a pick-up in construction. Residential sales have already jumped higher and starts will follow. As these projects begin, demand for key inputs such as iron ore and timber will grow. China’s post-COVID consumer recovery is also likely to result in an increase in consumption of imported goods and services. This is good news for our region as Chinese visitors support tourism across Asia and Oceania.

Key Highlights

• USD/JPY started a downside correction from the 141.00 resistance.
• A key bearish trend line is forming with resistance near 140.00 on the 4-hour chart.
• EUR/USD is attempting a recovery wave above the 1.0780 level.
• GBP/USD climbed higher above the 1.2500 resistance zone.

USD/JPY Technical Analysis

The US Dollar started a downside correction from the 140.90 zone against the Japanese Yen. USD/JPY traded below the 140.00 level to move into a short-term bearish zone.

Looking at the 4-hour chart, the pair traded below the 139.50 support. There was a move below the 50% Fib retracement level of the upward move from the 137.42 swing low to the 140.93 high.

The pair tested the 100 simple moving average (red, 4 hours). There is also a bearish trend line forming with resistance near 140.00 on the same chart. Immediate support is near the 138.20 level. The next major support is near the 137.50 level.

If there is a downside break below the 137.50 support, the pair could decline toward the 137.00 support. If there is a fresh increase, the pair could face resistance near 140.00.

The first major resistance is near the 140.20 level. If there is a move above the 140.20 resistance, the pair could drift toward 141.00.

Looking at EUR/USD, the pair started a decent increase above the 1.0750 resistance and there could be a move above the 1.0820 resistance.

Economic Releases

• Canada’s employment Change for May 2023 – Forecast 23.2K, versus 41.4K previous.
• Canada’s Unemployment Rate for May 2023 - Forecast 5.1%, versus 5.0% previous.

Short Term Elliott Wave in Dow Futures (YM) suggests rally from 3.15.2023 low is in progress as a 5 waves impulse Elliott Wave structure. Up from 3.15.2023 low, wave 1 ended at 34363 and pullback in wave 2 ended at 32619. The Index has turned higher in wave 3 with internal subdivision as another 5 waves in lesser degree. Up from wave 2, wave (i) ended at 3330 and dips in wave (ii) ended at 32737. Up from wave (ii), wave i ended at 33212 and pullback in wave ii ended at 33060. Wave iii ended at 33863, wave iv ended at 33797, and wave v ended at 33894 which completed wave (iii).

Pullback in wave (iv) ended at 33448 as a zigzag structure. Down from wave (iii), wave a ended at 33665, wave b ended at 33780 and wave c lower ended at 33448. This completed wave (iv). Wave (v) of ((i)) is currently in progress. Up from wave (iv), wave i ended at 33745 and pullback in wave ii ended at 33635. Expect the Index to extend higher a few more highs to end wave v of (v) of ((i)). Then it should pullback in wave ((ii)) to correct cycle from 5.25.2023 low in 3, 7, or 11 swing before the rally resumes. Near term, as far as pivot at 32616 low stays intact, expect dips to find support in 3, 7, 11 swing for further upside.

Dow Futures (YM) 1 Hour Elliott Wave Chart

YM Elliott Wave Video

https://www.youtube.com/watch?v=FMnW-0WtdkY

• USDCHF reversed from pivotal resistance level 0.9100
• Likely to fall to support level 0.8940

USDCHF recently reversed down sharply from the pivotal resistance level 0.9100 (former strong support from January to March), coinciding with the upper daily Bollinger Band.

The downward reversal from the resistance level 0.9100 continues the active short-term impulse wave 3, which belongs to wave (3) from the start of March.

Given the clear daily downtrend, USDCHF can be expected to fall further toward the next support level 0.8940 (low of the previous minor correction (b)).

• EURCAD reversed from support level 1.4280
• Likely to rise to resistance level 1.4500

EURCAD recently reversed up from the key support level 1.4280 (which stopped the previous corrections 4 and (4) in January and February respectively).

The upward reversal from the support level 1.4280 stopped the two of the active downward impulse waves – 1 and (C).

Given the strongly bullish euro sentiment and the oversold daily Stochastic, EURCAD can be expected to rise further toward the next resistance level 1.4500 (former support from the middle of May).

Fed Preview: On Hold

• We expect the Fed to maintain rates unchanged next week, markets price in a modest 25% probability of a 25bp hike.
• Focus will be on communication around potential hike in July & the updated dots. The Fed is unlikely to close the door for hikes, but we doubt they will materialize.
• We see downside risks to consensus expectations for May CPI, and forecast +0.2% m/m (4.2% y/y) for headline & +0.3% m/m (5.2% y/y) for core.

Markets have focused on the renewed uptick in macro momentum, which has resurfaced fears of inflation turning more persistent. But we doubt the rise in leading indicators will be sustained, and see evidence of underlying inflation continuing to gradually ease.

While the May NFP surprised markedly to the upside, the underlying details were much weaker. Employment growth is heavily concentrated on sectors such as leisure & hospitality, which have for a long time suffered from labour shortages. As labour force participation is recovering, employment rises even if broader labour demand is weakening. But importantly, supply-driven employment growth is not inflationary, rather the opposite.

The number of employed workers declined by 310k, which together with labour force growth of 130k suggests that slack is finally forming into labour markets. As such, wage sum growth remains on a downtrend, and our preferred measure of underlying inflation, core services CPI & ex. housing & health care, has also stabilized in the last two releases.

We expect the May CPI, released just ahead of the FOMC meeting, to slow down to 0.2% m/m (4.2% y/y) driven by negative contribution from energy prices. We also forecast Core CPI to continue cooling to 0.3% m/m (5.2% y/y). Manufacturing PMI price indices and used car prices suggest that the April uptick in core goods CPI will not be sustained, while we also look for continuing gradual slowdown in core services and shelter components.

Markets are pricing in a larger (75-80%) probability for a hike in July. Notably, it would only require two individual FOMC participants to shift their 2023 rate projections higher to lift the median 'dot' to 5.25-5.50%, which could spark a hawkish initial reaction in the markets. We still think the bar for restarting hikes in July will be high unless inflation pressures clearly accelerate over summer, which we consider unlikely. Private consumption has so far remained markedly resilient compared to the plunge in real disposable income, but with excess savings soon depleted, we think growth backdrop will remain weak.

Negative signals from longer-lead monetary indicators combined with the risk of tightening liquidity conditions over summer will further discourage rate hikes when inflation has already turned lower. Consumers' inflation expectations have continued declining, and currently hover around 4-5%, suggesting that holding nominal rates at 5% will maintain monetary policy stance sufficiently restrictive.

We make no changes to our forecasts, and expect the Fed to maintain rates at the current level for the remainder of the year. A pause could pose near-term upside risks to EUR/USD, but we still maintain a bearish view on the cross towards H2.