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Markets

Markets took it slow yesterday. Neither consensus-matching European CPI (0.2% m/m, 2.5% y/y) nor the policy panel at Sintra featuring ECB president Lagarde and Fed chair Powell really moved the needle. The latter said that disinflation returned in April and May but wants additional evidence before contemplating cuts. He added, however, that risks are very much two-sided – referring to the labour market. Powell said that the US is nearing a place where further declines in job openings traditionally resulted in higher unemployment. May data yesterday showed JOLTS rising to 8.14 million though, be it from a downwardly revised level in April (7.92 million). It helped (front-end) yields in the US close off the intraday lows. Net daily changes ranged between -3.3 bps (7-yr) to -1.4 bps (2-yr). German yields were mostly flat on the day with a minor outperformance at the front (2-yr -1.8 bps). Spreads vs. Germany’s 10-yr yield eased across the periphery as well as in France. It became clear during the day that a significant number of third-placed centrist and left-wing candidates would withdraw from the ballot in order to prevent the RN from securing an absolute majority. Of the initial 300+ three-way run-offs, less than 100 remain going into Sunday’s second round. It remains tricky to call what it will mean for the outcome eventually. The euro reversed early losses against the dollar to end more or less unchanged at EUR/USD 1.0745. EUR/GBP 0.85 proved a bridge too far ahead of the UK elections tomorrow. The pair turned south to close at 0.847. The Japanese yen paused its march into the abyss (USD/JPY flat at 161.44).

The Sintra conference is headed for its final day. They saved the best for last with topics ranging from monetary policy cycles over productivity to the driver of (structurally higher?!) neutral rates. The remainder of the eco calendar favours the US. The ADP job report (+165k expected) is due ahead of Friday’s official payrolls. The US services ISM (June) is scheduled for release too. Consensus anticipates a softening to 52.6 after a surprise jump into solid expansionary territory last month (53.8). The FOMC June meeting minutes will offer some insights into the debate. The new dot plot penciled in just one cut for 2024 but it was a close call. We’re also keen to find out whether the recent increased sensitivity towards the labour market already filtered through in the discussions mid-June. With US markets closed tomorrow for Independence Day and with the payrolls looming we may see (US) markets erring to the side of caution. The US 10-yr yield finds first support around 4.32-4.35%. We expect rangebound and technical trading in EUR/USD and most likely EUR/GBP.

News & Views

China’s Caixin services PMI fell from 54 in May to 51.2 in June, the slowest growth pace in eight months and missing the 53.4 consensus by quiet a margin. Business activity and new orders grow for the 18th month in a row, although at a slower pace. External demand remained strong, driven by robust tourist spending. A decline in staff numbers led to increased backlog of work, pushing the gauge into expansionary territory for the first time since January. Costs of raw materials, wages and freight increased by varying degrees and some were passed on to consumers. Both prices paid and charged nevertheless declined from May, indicating limited inflationary pressure. Market optimism weakened to the lowest level since March 2020 over concerns of a slowing economy. The weaker services PMI also pulled the composite gauge down (52.8 from 54.1) after the manufacturing index showed a stabilization (51.8 from 51.7) earlier this week. The Chinese yuan extends this year’s weakening trend with USD/CNY (4.27) at the highest level since early November 2023.

Australian retail sales beat consensus in June, rising by 0.6% M/M (vs 0.3% expected and up from 0.1% M/M in April). The Bureau of Statistics indicated that retail turnover was boosted by watchful shoppers taking advantage of early end-of-financial year promotions and sales events. Retail business continue to rely on that to stimulate discretionary spending following restrained spending in recent months. Compared with last year, retail sales are up 1.7% Y/Y. AUD/USD continues hovering just below 0.67 resistance with the Reserve Bank of Australia contemplating the need for an additional rate hike.

Graphs

GE 10y yield

The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. Meanwhile, some of the save haven bids were reversed after the first round in the French elections. The 2.34%-2.4% support zone looks a solid one.

US 10y yield

The Fed needs more evidence than just one slower-than-expected (May) CPI is providing. Upgraded inflation forecasts and a higher neutral rate complicate the timing of a first cut further. June dots suggest one move in 2024 and four next year. The long end of the curve is supported by increased odds of a Trump presidency after the debate with Biden. The spectre of increased spending (risk premia) pulled the 10-yr away from the 4.2% support area.

EUR/USD

EUR/USD is stuck in the 1.06-1.09 range. The desynchronized rate cut cycle with the ECB exceptionally taking the lead, strong US May payrolls and a swing to the right in European elections pulled the pair away from 1.09. The Fed meeting balanced the weaker than expected US CPI outcome. The increased probability of a hung French parliament after the first round offered the euro some relief.

EUR/GBP

Debate at the BOE is focused at the timing of rate cuts. May headline inflation returned to 2%, but core measures weren’t in line with inflation sustainably returning to target any time soon. Still some BoE members at the June meeting appeared moving closer to a rate cut. This might cap further sterling gains. The euro’s vulnerability to political event risk going into the French elections eased for now. EUR/GBP 0.84 is becoming solid support.

Federal Reserve (Fed) President Jerome Powell said that the Fed has made ‘quite a bit of progress’ on inflation and investors didn’t need more to jump back on the back of a bull. The S&P500 closed at a record high again, while Nasdaq 100 hit the 20’000 mark for the first time in history.

Tesla shares jumped 10% yesterday after the company reported a smaller decline in quarterly sales than expected. In numbers, Tesla deliveries fell almost 5%m and they fell for the second quarter in a row, and not around 5.8% that analysts were looking for. I understand that a smaller than expected drop in deliveries leads to a price correction but 10% jump seems a bit overdone. Bloomberg reported that deliveries from Tesla’s Shanghai factory fell 24% despite aggressive price cuts in China which stands for about a quarter of its market share. We don’t know how much of the Shanghai deliveries are delivered to China, but overall, the news was not good enough to trigger such enthusiasm. Tesla sales accounted for about 50% of EV cars sold as of May, down from 62% a year ago, whereas its competitors like BMW, Ford, Hyundai, Kia, Mercedes and Rivian boosted their sales by 50% or more. The growing competition will likely continue to squeeze Tesla’s advance in the EV space, unless the company finds something new to rely on. The supercharger business was a promising cash cow but Elon Musk decided to exit it. The robotaxis seem to be the next big thing at Tesla, but we are far from mass adoption that could boost profits in a significant manner in the foreseeable future. On the contrary, the robotaxi project will more likely boost spending first than boost profits. Price-wise, Tesla is now in the overbought territory, meaning that the shares have been bought too fast and in a too short period of time and a downside correction would only be healthy until the company announces earnings in about 20 days and gives more details on its robotaxi plans on August 8.

Data watch

Job openings in the US rose along with economic optimism but job openings in the private sector for example rose only 42K after falling nearly 500K in March and nearly 400K in April, so the aggregate 3-month average still showed a steep decline in job openings. There is also this new idea that the US jobs market is at an inflection point and that fewer openings will likely lead to a faster rise in the unemployment rate. Due today, the ADP report is expected to print 163K new private job additions in June. We will also have a look into the weekly jobless claims data today as the US will be closed due to July 4th holiday tomorrow. A sufficiently soft data should keep the Fed doves in charge before Friday’s all-important official jobs data.

In Europe, news were mixed as well. Headline inflation eased to 2.5% in June but core inflation remained steady at 2.9%, disappointing those who were expecting a decline to 2.8%. The lack of progress on the core inflation front gave reason to Lagarde’s cautious tone earlier this week regarding the progress toward the bank’s 2% inflation target. And the rising oil prices – which jumped 15% since the June dip – will likely cause some headache in the coming months. The barrel of US crude advanced to almost $85pb yesterday after the latest API data showed a 9-mio barrel fall in weekly inventories last week, versus a 150’000 fall expected by analysts.

The EURUSD trades rangebound within 1.07 and 1.0750 range. The French political shenanigans remain in the headlines and should limit the topside potential into the second round of the legislative election this weekend. Sellers will likely sell into and above 1.0750 while buyers could buy into 1.07 on hope that the Le Pen majority worries are overdone and that the French will successfully prevent her from gaining an outright majority in the Parliament. In all cases, we won’t have a clearer picture on the euro’s next direction before next Monday.

In Japan, the yen continues its race to the bottom. The USDJPY is gently trending toward the 162 level, but the direct intervention risks keep the bears contained. Otherwise, shorting the yen would be one of the most obvious trades out there. Therefore, any price pullback will be interesting for those who have the guts to go against the Bank of Japan’s (BoJ) efforts to stop bleeding in the yen without fixing its policy problems.

Elsewhere, sterling doesn’t look like a currency that will go undergo a general election in a day. Cable fluctuates with global dynamics and the bulls remain calm and confident that a landslide Conservative victory tomorrow could further boost gains in the British currency. On the data front, the latest data from the BRC showed that inflation in British shops hit zero for the first time since October 2021, fueling the expectations that the Bank of England (BoE) will soon roll up its sleeves and cut the rates to give a much expected relief to the British economy. The latter could limit the anticipated post-election gains in sterling.

Daily Pivots: (S1) 204.18; (P) 204.53; (R1) 205.17; More...

GBP/JPY's rally continues today and intraday bias stays on the upside. Current up trend should target 100% projection of 191.34 to 200.72 from 197.18 at 206.56 next. On the downside, below 203.87 minor support will turn intraday bias neutral and bring consolidations. But outlook will remain bullish as long as 201.59 resistance turned support holds, in case of retreat.

In the bigger picture, long term up trend is still in progress. Next target is 100% projection of 155.33 to 188.63 from 178.32 at 211.62. Outlook will stay bullish as long as 197.18 support holds, even in case of deep pullback.

Yen's renewed selloff captured some attention in the otherwise subdued Asian session today. With no new comments from Japanese authorities, market participants are left to speculate on when and where the next intervention might occur. A pivotal moment on the horizon is BoJ's meeting on July 31, where the central bank is expected to outline its tapering plans for bond purchases. Additionally, there is prospect that BoJ might raise interest rates again to counteract the negative impacts of Yen's depreciation on the economy. Some analysts suggest that if BoJ's measures fail to meet market expectations, Yen could plunge straight to 170 level against Dollar. However, the immediate focus remains on whether 165 is the intervention threshold.

In the broader currency markets this week, Sterling and Euro are currently the strongest currencies, followed by Dollar and Aussie. It is worth noting, however, that these four currencies are still trading within last week's ranges relative to each other, indicating a lack of decisive strength among them. Swiss Franc is the weakest performer, followed by Yen and Kiwi, with Loonie positioned in the middle.

Technically, NASDAQ's rally resumed overnight and closed at record high above 18k handle. For now, near term outlook will stay bullish as long as 17494.01 support holds. Next target is 100% projection of 12543.85 to 16538.86 from 15222.77 at 19217.78. A key focus for Q3 will be whether this risk-on sentiment, particularly in the tech sector, will persist.

In Asia, at the time of writing, Nikkei is up 1.24%. Hong Kong HSI is up 1.00%. China Shanghai SSE is down -0.41%. Singapore Strait Times is up 1.20%. Japan 10-year JGB yield is up 0.0118 at 1.104. Overnight, DOW rose 0.41%. S&P 500 rose 0.62%. NASDAQ rose 0.84%. 10-year yield fell -0.043 to 4.436.

Australia's retail sales rises 0.6% mom on sales events boost

Australia's retail sales turnover increased by 0.6% mom to AUD 35.94B in May, well above expectation of 0.3% mom. On an annual basis, sales grew by 1.5% yoy.

Robert Ewing, ABS head of business statistics, highlighted the influence of early end-of-financial-year promotions and sales events on the boosted turnover.

Despite this seasonally adjusted rise, the underlying trend in spending remains flat. Retail businesses have increasingly relied on discounting and sales events to drive discretionary spending, following several months of restrained consumer activity.

Japan's PMI services finalized at 49.3, ending 21-month growth streak

Japan's PMI Services was finalized at 49.4 in June, a significant drop from May's 53.8, ending a 21-month growth sequence. PMI Composite was finalized at 49.7, down from May's 52.6, marking the first contraction in seven months.

Trevor Balchin, Economics Director at S&P Global Market Intelligence, highlighted the service sector's recent strong upturn "ended abruptly". He noted that the Business Activity Index dropped by -4.4 points during was the largest decline since January 2022 and among the biggest on record.

Despite the concerning headline figures, Balchin pointed out that the underlying details were "less concerning". The fall in new business was merely a "pause" rather than an "outright decline" in demand. This pause is partly due to the weak yen boosting international new business. Additionally, the 12 month outlook and job growth remained "relatively strong".

China's Caixin PMI services drops sharply to 51.2

China's Caixin PMI Services fell sharply to 51.2 in June, down from 54.0 in May, significantly below expectations of 53.4. This marks the lowest reading since October 2023 but remains in expansionary territory for the 18th consecutive month. PMI Composite also declined from 54.1 to 52.8, signaling an eighth month of expansion.

Wang Zhe, Senior Economist at Caixin Insight Group, stated, "Supply and demand expanded, with the manufacturing sector outperforming services." He noted that employment at the composite level contracted, while price levels remained stable. However, price levels in the services sector were weaker compared to manufacturing.

"Notably, the gauge for future output expectations recorded a five-year low," Wang added, indicating weak optimism among both manufacturers and service businesses. This suggests that while current activity remains in growth territory, there are significant concerns about future performance across sectors.

Looking ahead

Eurozone will release PMI services final and PPI in European session while UK will release PMI services final. Later in the day, US will release ADP employment, jobless claims, trade balance, ISM services and factory orders. FOMC minutes will be featured too. Canada will also publish trade balance.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 204.18; (P) 204.53; (R1) 205.17; More...

GBP/JPY's rally continues today and intraday bias stays on the upside. Current up trend should target 100% projection of 191.34 to 200.72 from 197.18 at 206.56 next. On the downside, below 203.87 minor support will turn intraday bias neutral and bring consolidations. But outlook will remain bullish as long as 201.59 resistance turned support holds, in case of retreat.

In the bigger picture, long term up trend is still in progress. Next target is 100% projection of 155.33 to 188.63 from 178.32 at 211.62. Outlook will stay bullish as long as 197.18 support holds, even in case of deep pullback.

Economic Indicators Update

China's Caixin PMI Services fell sharply to 51.2 in June, down from 54.0 in May, significantly below expectations of 53.4. This marks the lowest reading since October 2023 but remains in expansionary territory for the 18th consecutive month. PMI Composite also declined from 54.1 to 52.8, signaling an eighth month of expansion.

Wang Zhe, Senior Economist at Caixin Insight Group, stated, "Supply and demand expanded, with the manufacturing sector outperforming services." He noted that employment at the composite level contracted, while price levels remained stable. However, price levels in the services sector were weaker compared to manufacturing.

"Notably, the gauge for future output expectations recorded a five-year low," Wang added, indicating weak optimism among both manufacturers and service businesses. This suggests that while current activity remains in growth territory, there are significant concerns about future performance across sectors.

Full China Caixin PMI services release here.

Japan's PMI Services was finalized at 49.4 in June, a significant drop from May's 53.8, ending a 21-month growth sequence. PMI Composite was finalized at 49.7, down from May's 52.6, marking the first contraction in seven months.

Trevor Balchin, Economics Director at S&P Global Market Intelligence, highlighted the service sector's recent strong upturn "ended abruptly". He noted that the Business Activity Index dropped by -4.4 points during was the largest decline since January 2022 and among the biggest on record.

Despite the concerning headline figures, Balchin pointed out that the underlying details were "less concerning". The fall in new business was merely a "pause" rather than an "outright decline" in demand. This pause is partly due to the weak yen boosting international new business. Additionally, the 12 month outlook and job growth remained "relatively strong".

Full Japan PMI services final release here.

Australia's retail sales turnover increased by 0.6% mom to AUD 35.94B in May, well above expectation of 0.3% mom. On an annual basis, sales grew by 1.5% yoy.

Robert Ewing, ABS head of business statistics, highlighted the influence of early end-of-financial-year promotions and sales events on the boosted turnover.

Despite this seasonally adjusted rise, the underlying trend in spending remains flat. Retail businesses have increasingly relied on discounting and sales events to drive discretionary spending, following several months of restrained consumer activity.

Full Australia retail sales release here.

• We expect the RBNZ to leave the OCR at 5.5%.
• We expect a short statement as with the April Review.
• The RBNZ will emphasise the upside risks to consumer spending and inflation emanating from the less contractionary than expected Budget 2024.
• But they will balance this with some dovish messages associated with potential downside risks to growth as the economy continues to stall and the labour market eases.
• We don't see any net dovish tilt that might bring an easing in 2024 into play – if that's coming it would be at the August Monetary Policy Statement.

OCR to remain on hold awaiting definite signs of inflation returning sustainably to the target range.

The RBNZ presented an unexpectedly hawkish tone at its May Statement by revising up its forward OCR profile. The new profile indicated both an increased probability of a further increase in the OCR (at the November 2024 Statement) and a delay in the timing of an eventual reduction in the OCR to August 2025. The RBNZ tended to de-emphasise the tightening risk in its post-Statement communications but leaned heavily into the message that the OCR needed to remain at 5.5% for "a sustained period" to ensure annual CPI inflation returns to the 1 to 3% range.

The RBNZ noted that some upside risks potentially could come from the fiscal outlook and noted a full assessment would need to await the release of Budget 2024. This Review is the RBNZ's first opportunity to update its view now the Budget is public. We anticipate the RBNZ will continue to retain a hawkish perspective with respect to fiscal risks as Budget 2024 ended up being less contractionary than the HYEFU projections the RBNZ's forecasts were based on. We doubt they will be drawing definitive conclusions as no forecasts will be presented at this Review and it is too early to judge the impact that tax cuts (timed to begin at the end of July) will have on consumer spending and inflation.

Economic activity assessment.

What will be interesting is the RBNZ's take on the (sparse) data on economic growth that has emerged since the May Statement. High on the RBNZ's mind was the uncertainty of how the economy would perform during the year ahead now that we are in the period where monetary policy is at "peak transmission" from the interest rate rises that finished in May 2023. The RBNZ also raised the possibility that labour "hoarding" which had prevented firms from adjusting to tighter monetary conditions might suddenly reverse and cause a more rapid adjustment in the labour market in the period ahead. These concerns, if crystalised, could lead to a faster decline in non-tradables inflation and an earlier return of inflation to the middle of the 1 to 3% target range and an earlier easing profile. In this regard we note that since the May Statement:

• Q1 GDP was in line with the RBNZ's forecasts and hence won't lead to much of a starting point difference (although consumption was stronger which might be a hawkish indicator at the margin).
• Labour market indicators have been weak, but not weaker than expected (monthly filled jobs were down 0.1% net in April and May - and may be further revised down - while Westpac's Employment Confidence survey seems consistent with the 4.6% unemployment rate forecast by the RBNZ for the June quarter).

• Forward activity indicators (consumer and business confidence, PMIs) have remained weak in April, May and June and might suggest some downside risks to the RBNZ's 0.1% GDP forecast for Q2 and 0.3-0.4% forecasts for Q3 and Q4 this year.

• The recently released NZIER QSBO confirmed that economic activity remains weak – particularly in the interest-sensitive construction sector. The outlook for investment looks weak. The labour market indicators confirm that the uptrend in the unemployment rate remains firmly in place and the RBNZ might be thinking they have some upside risks to their unemployment rate projections (which are 0.2% lower than Westpac's by end 2024).

Inflation assessment.

On the pricing side of the ledger, we don't see very much to have moved the RBNZ's short term inflation forecasts. The monthly Selected Price Indices suggest the Q2 CPI will be in line with the RBNZ and our forecast of 0.6%. House prices have been flat recently and might have some modest downside risks in the RBNZ's forecasts given recent trends. Pricing indicators in recent business surveys and the QSBO suggest that inflation pressures are receding but remain somewhat elevated. Businesses still report that cost pressures are elevated. We don't think on balance that there will have been much to change the RBNZ's view that they need additional confidence that inflation is reverting sustainably within the 1-3% target range. The most recent pricing intentions data will have added to the RBNZ's confidence, but future hard data in the form of the next couple of quarterly CPI prints will be most important in that regard.

Communication issues.

The RBNZ likely has no change in message to communicate. This is a similar situation to the April Review and resulted in a very short statement. We see something similar here. The objective would be to punt any reassessments of the outlook to the August Statement where full forecasts can be presented and key data (the Q2 CPI and labour market data especially) will be available.

The short statement will likely:

• Reiterate the core message that conditions need to be restrictive for a sustained period.
• Note that little has come to light to change their assessment of the near-term inflation outlook.
• Note that Budget 2024 was less contractionary than previously assumed with the ultimate impact on the economic outlook yet to be seen.
• Note that Q1 GDP printed in line with expectations but acknowledge recent indicators pointing to risks of a weaker economy and labour market further out.

We don't think the markets will get a dovish tilt that supports recent market pricing (around a 50% chance of an easing in the October Review and around 35bps priced in by end 2024). If anything like that is coming, we will see it at the August Statement.

Key Highlights

• AUD/USD is trading in a range below the 0.6700 resistance.
• A key rising channel is forming with support at 0.6625 on the 4-hour chart.
• Oil prices extended gains and approached the $85.00 resistance.
• The US ISM Manufacturing Index could remain below 50.0 at 49.0 in June 2024.

AUD/USD Technical Analysis

The Aussie Dollar remained above 0.6600 against the US Dollar. AUD/USD recovered losses, but it remained in a range below the 0.6700 resistance.

Looking at the 4-hour chart, the pair seems to be trading in a broad range below the 0.6700 resistance. However, it is stable above the 100 simple moving average (red, 4-hour) and the 200 simple moving average (green, 4-hour).

There is also a key rising channel forming with support at 0.6625 on the same chart. The pair is now facing resistance near the 0.6675 level or the 76.4% Fib retracement level of the downward move from the 0.6689 swing high to the 0.6634 low.

The next resistance sits at 0.6690. The main hurdle sits at 0.6700. A clear move above the 0.6700 resistance might send it toward the 0.6740 level. Any more gains might open the doors for a test of the 0.6800 zone in the coming days.

Immediate support is near the 0.6650 level. The next major support is near the 0.6625 level. A downside break and close below the 0.6625 support zone could open the doors for a larger decline. In the stated case, the pair could decline toward the 0.6520 level.

Looking at Oil, the bulls remained in action and soon they might aim for more upsides above the $85.00 resistance zone in the near term.

Economic Releases

• Euro Zone Services PMI for June 2024 – Forecast 52.6, versus 52.6 previous.
• UK Services PMI for June 2024 – Forecast 51.2, versus 51.2 previous.
• US Services PMI for June 2024 – Forecast 55.1, versus 55.1 previous.
• US ISM Services PMI for June 2024 – Forecast 52.5, versus 53.8 previous.
• US Initial Jobless Claims - Forecast 235K, versus 233K previous.
• US ADP Employment Change for June 2024 - Forecast 160K, versus 152K previous.

• CADJPY broke key resistance level 117.00
• Likely to reach resistance level 119.00

CADJPY currency pair recently broke through the key resistance level 117.00 (which stopped the pervious sharp upward impulse wave (1) at the end of April, as can be seen below).

The breakout of the resistance level 117.00 accelerated the active impulse wave 3 of the higher order impulse wave (3) from the start of May.

Given the clear daily uptrend and the continuation of the strong yen sales, CADJPY currency pair can be expected to rise further toward the next resistance level 119.00.