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ECB Executive Board Isabel Schnabel told a panel in Berlin that "domestic prices pressures are driven by both profits and wages."

The key question moving forward, she indicated, hinges on whether firms will absorb wage increases into their profit margins or pass the costs on to consumers.

She noted the strength of the labour market, citing the historically high ratio of job vacancies to unemployed people. This, she suggested, has heightened the bargaining power of workers.

She offered a word of caution: "If wages rise faster than we thought and productivity growth doesn't recover, then there is a risk that this could turn into such a wage-price spiral," she warned.

Markets

UK May Inflation data and Fed Powell’s semi-annual Congressional testimony before the House Financial Services Committee were key today. Powell’s testimony still takes place after finishing this report, but the text of his statement is already published (cf infra). UK May inflation data awakened markets. Headline inflation rose 0.7% M/M holding the Y/Y measure unchanged at 8.7% (expected to slow to 8.4%). Core inflation also maintained an elevated monthly pace of 0.8% M/M raising the Y/Y reading from 6.8% to 7.1%, the highest level since March 1992. Looking at the monthly dynamics, price rises again were broad-based with clothing and footwear (1.3% M/M), restaurants and hotels (1.0%), communication (0.9%) and recreation (0.7%) catching the eye. Both goods inflation (0.6%M/M) and services (0.7% M/M) remained at elevated levels. Coming on the back of a very strong labour market report last week, markets couldn’t but conclude that the Bank of England is far ‘behind’ the curve in fulfilling its inflation mandate. Especially short-term UK Gits jumped, more than reversing yesterday’s correction. The 2-y yield again trades north of 5%, but off intraday peak levels. UK yields currently add between 13 bps (2-y) and 7.5 bps (30-y). The focus now evidently turns to tomorrow’s BoE meeting. Money markets see a 30% chance of a 50 bps rate hike tomorrow. A cumulative 75 bps rise is discounted for the June and August meetings combined. The cycle rate peak rate is now seen close to 6% toward the turn of the year. From a market stability point of view it’s difficult to say what will be the best/least worst BoE action. The inflation credibility point of view evidently calls for a 50 bps step. However, markets can see it as the BoE of England panicking on the deviation from its expected inflation path, with at the same time growing recessionary risks further out in time. On the other hand, a 25 bps hike might trigger additional selling pressure for the long end of the curve. So, whatever action the BoE takes, the consequences for UK asset markets remain highly uncertain. This high degree of uncertainty probably also explains the pound’s intra-day price pattern. After briefly dropping to the 0.8530 area immediately after the release, EUR/GBP rebounded back to 0.86 area (currently 0.8585).

From the BoE to Fed Powell’s prepared text of his testimony before the House. Understandably his assessment is very much in line with last week’s post-FOMC communication. ‘Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go’. Even as the Fed paused its hiking cycle last week, ‘Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year’. This morning, US and German yields spiked about 3-5 bps higher upon the UK CPI release, but the spill-over initially evaporated. The reaction of (US) bond markets to the Powell statement remains modest, but yields again took the path north. US yields currently add between 5.0 bps (2-y) and 3.5 bps (30-y). The German yield curve also inverts slightly further. (2-y +2 bps, 30-y unchanged). Equities continue this week’s (still gradual) correction (Eurostoxx -0.4%; S&P -0.35 %). The dollar gains modestly (DXY 102.6) with the yen again under pressure (USD/JPY revisiting the 142 big figure). EUR/USD is going nowhere (1.092).

News & Views

Belgian consumer confidence stabilized at -9 in June (vs long term average just below -6). Following last month’s slump (-6 from -9), consumers have revised their expectations of the general economic outlook upwards, returning to April’s level (-15 from -20). Concerns about rising unemployment over the next twelve months have also waned somewhat (17 from 18). On a personal level, households expressed slightly more apprehension and have revised downwards both their expectations of their financial situation (-5 from -3) and their savings intentions (1 from 2). Belgian June business confidence will be published on Friday with consensus expecting a deterioration from -9.2 to -10.5.

Daily Pivots: (S1) 141.02; (P) 141.63; (R1) 142.05; More...

USD/JPY's rally is resuming by breaking 142.24 temporary top. Intraday bias is back on the upside. Sustained trading above 61.8% retracement of 151.93 to 127.20 at 142.48 would extend the rise from 127.20 towards 151.93 high. However, break of 141.20 minor support will be the first sign of rejection by 142.48, and turn bias back to the downside for 55 D EMA (now at 137.62).

In the bigger picture, rise from 151.93 are seen as a corrective pattern to up trend from 102.58. The first leg has completed at 127.20. Rebound from there is seen as the second leg, and should be limited below 151.93. Sustained trading below 55 D EMA (now at 137.47) will argue that the third leg has started back to 127.20 and possibly below.

Daily Pivots: (S1) 0.8952; (P) 0.8977; (R1) 0.9001; More...

No change in USD/CHF's outlook and intraday bias remains neutral. Risk stays on the downside as long as 0.9146 resistance holds. Below 0.8900 will target 0.8818 and possibly below. But strong support is still expected from 0.8756 to bring reversal.

In the bigger picture, fall from 1.1046 (2022 high) is seen as a leg in the long term range pattern from 1.0342 (2016 high), which might have completed at 0.8818 already, just ahead of 0.8756 long term support. Sustained trading above 0.9058 support turned resistance should confirm medium term bottoming.

Daily Pivots: (S1) 1.0892; (P) 1.0919; (R1) 1.0945; More...

EUR/USD is extending the consolidation from 1.0969 temporary top and intraday bias remains neutral. With 1.0803 support intact, further rally is expected. On the upside, above 1.0969 will resume the rise from 1.0634 to retest 1.1094 high. Decisive break there will confirm resumption of whole up trend from 0.9534. However, firm break of 1.0803 will extend the corrective pattern from 1.1094 with another falling leg, targeting 1.0634 and below.

In the bigger picture, as long as 1.0515 support holds, rise from 0.9534 (2022 low) would still extend higher. Sustained break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Retail sales rose 1.1% month-on-month (m/m) in April, much stronger than the Statistics Canada's advanced estimate of 0.2% and consensus forecast of 0.4%. March's print was revised down to -1.5% m/m from an originally reported loss of 1.4%.

Adjusting for the impact of inflation, the volume of retail sales was 0.3% higher on the month.

Sales at motor vehicle and parts dealers (+0.5% m/m) recovered some of the losses reported in March, while gasoline stations and fuel vendors registered  a 0.3% m/m gain after two months of sizeable declines.

Excluding these volatile categories, core retail sales were 1.5% m/m higher in April, above the consensus estimates of 1.3% m/m.

The gain in core sales was led by higher sales at general merchandise retailers (+3.3% m/m) and food and beverage retailers (+1.5% m/m), which together accounted for more than 60% of April's jump. Sales were also strong at clothing and clothing accessories stores (+3.1%) m/m, health and personal care retailers (+1.0% m/m), sporting goods, hobby items, musical instruments and books stores (+1.0%), and building material and garden equipment and supplies dealers (+0.7% m/m).

Home furnishings stores (-1.8% m/m), electronics and appliance stores (-1.3% m/m) and miscellaneous retailers (-0.5% m/m) were in the red in April, but their losses only took one tenth of a percentage point off of today's strong headline reading.

E-commerce sales, which are not included in the headline tally, declined by 6.1% m/m after three months of strong growth.

Statistics Canada's advanced estimate for May indicates a 0.5% m/m gain – slightly stronger than our internal card spending data (which excludes auto sales and tilts toward housing-related categories).

Key Implications

Retail sales entered the second quarter beating expectations with growth powered not only by insatiable demand for cars but also by strong gains in core categories – revealing a reacceleration in spending momentum. This results in a stronger handoff to the second quarter with real consumer spending now tracking 1.0% quarter-on-quarter (annualized).

Such broad based growth vindicates the Bank of Canada's decision to raise its policy rate. Amid its continuous effort to stymie persistent excess demand, and stop the decline in inflation from stalling, the Bank is likely to hike again in July. Markets agree, and are pricing the probability of a July hike at more than 60%.

Daily Pivots: (S1) 1.2717; (P) 1.2762; (R1) 1.2810; More...

GBP/USD is extending the retreat from 1.2847 but stays above 1.2628 support. Intraday bias remains neutral and further rally is expected. On the upside, firm break of 1.2847 will resume larger up trend and target 100% projection of 1.1801 to 1.2678 from 1.2306 at 1.3183 next. However, firm break of 1.2628 will turn bias to the downside, for deeper fall to 1.2306 support instead.

In the bigger picture, the strong support from 55 W EMA (now at 1.2345) is a medium term bullish sign. Outlook will stay bullish as long as 1.2306 support holds. Rise from 1.0351 medium term bottom (2022 low) is expected to extend further to retest 1.4248 key resistance (2021 high).

Despite Fed Chair Jerome Powell's firm indications that further monetary tightening is needed, Dollar is struggling find momentum for its near-term rebound. The greenback is yet to break through its weekly high even against the weaker Yen and is primarily bounded within the confines of yesterday's range, barring its performance against Australian dollar.

Meanwhile, Canadian dollar emerges as the day's stronger performers so far, buoyed by unexpectedly robust retail sales data. New Zealand Dollar follows closely, aided by a rebound against Australian, while Euro is the third strongest.

On the other end of the spectrum, Aussie languishes as the day's weakest performer, followed by Yen and British Pound. Despite a short-lived rally following the release of UK CPI data, Sterling's momentum faded quickly, even as economists are revising their forecasts upwards for BoE's terminal rate.

On a technical note, EUR/GBP is worth some attention in lead up to tomorrow's BoE rate decision. For now, near term outlook will stay bearish as long as 0.8611 resistance holds. Another fall should be seen through 0.8517 to 161.8% projection of 0.8977 to 0.8717 from 0.8874 at 0.8453. However, considering bullish convergence condition in 4H MACD, firm break of 0.8611 will indicate short term bottoming, and bring stronger rise back to 0.8717 support turned resistance.

In Europe, at the time of writing, FTSE is down -0.47%. DAX is down -0.43%. CAC is down -0.58%. Germany 10-year yield is up 0.0254 at 2.431. Earlier in Asia, Nikkei rose 0.56%. Hong Kong HSI fell -1.98%. China Shanghai SSE lost -1.31%. Singapore Strait Times gained 0.11%. Japan 10-year JGB year dropped -0.0162 to 0.374.

Fed Powell: Nearly all FOMC members expect further tightening this year

Fed Chair Jerome Powell indicated that it's appropriate to continue tightening. But the Committee would like to assess additional information, before making meeting-by-meeting decisions.

In the prepared remarks for the Semiannual testimony to Congress, Powell said, "Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year."

"But at last week's meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy," he added.

In determining future actions, Fed will take into account, "account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments".

"We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks," He said.

Canada retail sales rose 1.1% mom in Apr, well above expectation

Canada retail sales rose 1.1% mom to CAD 65.9B in April, well above expectation of 0.3% mom. Sales increased in eight of nine subsectors and were led by increases at general merchandise retailers (+3.3%) and food and beverage retailers (+1.5%). Ex auto and fuel sales rose 1.5% mom, its fifth consecutive monthly increase. In volume terms retail sales rose 0.3% mom.

Advance estimates suggests that sales rose 0.5% mom in May.

Ifo: German economy to contract -0.4% this year, inflation down slightly to 5.8%

German economy endured a "sharp setback" in the winter half-year, primarily due to soaring inflation and noticeably weakened demand, as per the latest report from Germany's Ifo Institute.

The country's GDP is predicted to decline by -0.4% this year, before witnessing a rebound with a 1.5% growth next year. The institute also anticipates a gradual decrease the inflation rate, dropping from 6.9% in 2022, to 5.8% in 2023, and then 2.1% in 2024.

In terms of inflation, the Ifo Institute anticipates a further decrease in inflation rates in the coming months, with producers likely to pass on price reductions for intermediate input costs, particularly energy, to their customers.

Nevertheless, wage growth is likely to accelerate throughout the year due to more inflation bonuses being distributed and the effect of noticeable increases in collectively agreed wages.

UK CPI unchanged at 8.7% yoy in May, core CPI rose to 7.1% yoy

UK annual CPI was unchanged at 8.7% yoy in May, above expectation of 8.5% yoy. Core CPI (excluding energy, food, alcohol and tobacco) accelerated to 7.1% yoy, up from prior month's 6.8% yoy, and the highest rate since March 1992. CPI goods eased from 10.0% yoy to 9.7% yoy. But CPI services rose from 6.9% yoy to 7.4% yoy. For the month, CPI rose 0.7% mom, slowed from April's 1.2% mom, but was well above expectation of 0.4% mom.

Also released. RPI ticked down from 11.4% yoy to 11.3% yoy, above expectation of 11.1% yoy. PPI input came in at -1.5% mom, 0.5% yoy, versus expectation of -0.6% mom, 1.2% yoy. PPI output was at -0.5% mom, 2.9% yoy, versus expectation of -0.1% mom, 3.6% yoy. PPI output core was at -0.3% mom, 4.1% yoy, versus expectation of 0.1% mom, 4.7% yoy.

BoJ Ueda: Will patiently maintain easy monetary policy

In his address to the annual trust association's meeting, BoJ Governor Kazuo Ueda highlighted the central bank's commitment to maintaining accommodative monetary policy. According to Ueda, BoJ "will patiently maintain an easy monetary policy to stably and sustainably achieve the 2% price target accompanied by wage growth."

Governor Ueda provided a cautiously optimistic outlook for Japan's economy, describing it as "picking up" and likely to "recover moderately." In terms of inflation, he reiterated the expectation of slowdown in Japan's consumer inflation towards the middle of the current fiscal year.

Ueda also offered reassurances about the stability of Japan's financial system, noting it was "stable as a whole." Despite recent failures of several US banks, Ueda claimed the impact on Japan's financial system was limited.

BoJ Adachi: Appropriate to continue monetary easing with YCC

BoJ board member Seiji Adachi voiced support for continued monetary easing amid a climate of significant uncertainty regarding price outlook. Adachi relayed these views during a discussion with business leaders in Kagoshima.

Adachi said, "My view is that it's appropriate to continue monetary easing with the yield curve control framework." He added, "The shape of the yield curve has become smooth overall and there is improvement in market functioning."

"Amid huge uncertainty over the price outlook, there are upside and downside risks. In the long run, however, the downside risks appear to be larger," he warned. These risks, according to Adachi, must be carefully considered when deciding on changes to monetary policy.

Adachi also noted an interesting shift in public's perception of inflation, suggesting that Japan's long-standing deflationary mindset is starting to change. "We're seeing some changes in the public's deflationary mindset, or the perception that prices won't rise," he said.

"In a sense, we're moving closer to achieving our price target. But there's high uncertainty over our baseline inflation outlook, so it's premature to tweak monetary policy," Adachi concluded.

Australia's Westpac leading index fell to -1.09%, weakness to extend into 2024

Australia Westpac Leading Index growth rate fell from -0.78% to -1.09% in May. This is the lowest read of the growth rate since the pandemic. The tenth consecutive negative print for the index. The negative Index growth rates point to below-trend economic growth.

Westpac expects the weakness to extend through 2023 and into 2024. Westpac recently revised down growth forecast 2023 and 2024, from 1% and 1.5% to 0.6% and 1.0% respectively. This weakness in the economy is centred around consumers but also reflects slowing global economy; downturn in dwelling construction; and progressive weakening in labour market.

Regarding RBA policy, Westpac expects the central bank to raise cash rate by a further 0.25% at July 4 meeting. "As we saw at the June Board meeting, we expect that the July meeting will see these considerations of inflation risks again overriding concerns about the poor growth outlook."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2717; (P) 1.2762; (R1) 1.2810; More...

GBP/USD is extending the retreat from 1.2847 but stays above 1.2628 support. Intraday bias remains neutral and further rally is expected. On the upside, firm break of 1.2847 will resume larger up trend and target 100% projection of 1.1801 to 1.2678 from 1.2306 at 1.3183 next. However, firm break of 1.2628 will turn bias to the downside, for deeper fall to 1.2306 support instead.

In the bigger picture, the strong support from 55 W EMA (now at 1.2345) is a medium term bullish sign. Outlook will stay bullish as long as 1.2306 support holds. Rise from 1.0351 medium term bottom (2022 low) is expected to extend further to retest 1.4248 key resistance (2021 high).

Economic Indicators Update

Fed Chair Jerome Powell indicated that it's appropriate to continue tightening. But the Committee would like to assess additional information, before making meeting-by-meeting decisions.

In the prepared remarks for the Semiannual testimony to Congress, Powell said, "Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year."

"But at last week's meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy," he added.

In determining future actions, Fed will take into account, "account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments".

"We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks," He said.

Full remarks of Fed Powell here.

Canada retail sales rose 1.1% mom to CAD 65.9B in April, well above expectation of 0.3% mom. Sales increased in eight of nine subsectors and were led by increases at general merchandise retailers (+3.3%) and food and beverage retailers (+1.5%). Ex auto and fuel sales rose 1.5% mom, its fifth consecutive monthly increase. In volume terms retail sales rose 0.3% mom.

Advance estimates suggests that sales rose 0.5% mom in May.

Full Canada retail sales release here.