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The Federal Reserve (Fed) refrained from raising interest rates at this week’s monetary policy meeting.

Yet the median forecast on the Fed’s dot plot suggested that there could be two more rate hikes before the end of this year. That came as a slap on the face of those expecting a rate cut by the end of the year, even though, I think that the doves haven’t said their last word just yet. The credit conditions in the US are tightening, inflation is falling. Yesterday’s PPI data revealed a faster than expected contraction in producer prices in May, while both headline and core CPI figures continued to ease over the same month.

Why, on earth, has the Fed started playing a guessing game, instead of hiking the rates right away?

It is because the US policymakers know that the idea of a 25bp hike - or two 25bp hikes - is more powerful than a 25bp hike itself, as future rate hikes are more effective in managing market expectations. The market is keen to go back to pricing the end of rate hikes - and rate cuts - when they know that the Fed is coming toward the end of the tightening cycle. To avoid that end-of-tunnel enthusiasm from jeopardizing tightening efforts, the Fed keeps the tightening suspense alive, without however acting on the rates. If all goes well - if inflation continues easing, and tighter financial conditions begin weighing on US jobs market - the Fed will have the option to step back and simply… not hike.

But for now, ‘nearly all policymakers’ remain concerned with the moderate cooling in core inflation, and they don’t see inflation going below 3% this year.

Mild reaction

The US 2-year yield continues pushing higher, while enthusiasm at the long end of the yield curve is lesser, as higher rates increase recession odds. The S&P500 hit a fresh high since last year but closed almost flat. The US dollar rebounded off its 100-DMA, and the EURUSD rallied above its own 100-DMA and holds ground above the 1.08 mark this morning, into the widely watched European Central Bank (ECB) decision.

A hawkish ECB hike?

The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.

Note that 500-billion-euro TLTROS will mature on June 28th and will pull a good amount of liquidity out of the market. While there is still around 4 trillion euros of excess liquidity in the financial system, the draining liquidity could cause anxiety among investors, especially if some European banks fail to find enough financing in the market to replace their TLTRO funding – a scenario which could sap investors’ confidence and appetite in the coming weeks.

In this respect, Italian banks are under a close watch as they are behind their European pears in repaying their TLTRO and the funding through TLTROs are more than the excess cash its lenders parked with the ECB. That means that Italian banks must find money somewhere else – but where? – to repay their TLTROs.

I am not particularly worried about the stability of the European financial system, but I can hardly imagine European stocks extend rally in the environment of draining liquidity and rising rates. The Stoxx 600 index spiked above its 50-DMA yesterday, as a stronger euro may have reinforced appetite, yet European stocks will likely return to the 435-450 area.

China cuts

In China, we have a completely different ambiance when it comes to inflation and monetary policy. The Chinese inflation remains flat and under pressure near 26-month lows, growth is not picking up the anticipated post-Covid momentum, and the People’s Bank of China (PBoC) cut its one-year MLF rate by 10bp today, as broadly expected, to give a shake to the depressed Chinese economy. The problem is, there is now a talk that China could be entering a liquidity trap, meaning a period where lower rates fail to boost appetite and don’t translate into faster growth.

Market movers today

The main event today is of course the ECB meeting. A 25bp rate hike is widely expected, so interest should centre on new staff projections and any signals about the future rate path, ECB preview: Looking beyond next meeting, 8 June.

We should get a rate decision from the Bank of Japan early Friday morning CET, although at the last meeting it dragged out. We expect that yield control will be relaxed at some point this year, but not already at this meeting.

There is a string of US data coming out - Philly Fed, retail sales, jobless claims, import prices, Empire PMI, industrial production and TICS capital flow data. Even though the median FOMC member now expects to do 50bp more hikes, the actual decision still depends on what the data will be telling us about the inflation picture ahead of the next meeting.

In the Nordics, both the Swedish Prospera inflation survey (large version) and the Norwegian regional network survey are key releases for the local markets.

The 60 second overview

Hawkish Fed surprise: The Federal Reserve paused its rate hiking cycle last night as widely anticipated. However, the updated median rate projection signaled two more 25bp rate hikes by the end of 2023, which was clearly more hawkish than anticipated. The initial market reaction faded somewhat during the press conference, when Powell suggested that the hikes might not be that certain after all, as 'the things we need for disinflation are coming into play'. The 2023 GDP forecast was lifted to 1.1% (from 0.4%), suggesting that the outlook for more rate hikes relies on a fairly optimistic growth assumption. As we remain more pessimistic on the macro outlook for H2, we also think that the projected rate hikes will not end up materializing, and stick to our previous forecast of no rate changes by the Fed for the remainder of the year. Read more from our Fed review: Powell's hawkish bluff, 14 June, and see also our thoughts on the latest inflation data and outlook from Global Inflation Watch - Euro area inflation pressures remain sticky, 14 June.

Weak Chinese data for May: Overnight China released its monthly batch of data for most sectors of the economy. As indicated by PMI's and other signals, the economy was struggling to keep momentum in May. Home sales dropped a bit further from April to May (chart) and property investments were weaker than expected at -7.2% y/y year-to-date (consensus -6.7%). Retail sales dropped from 18.4% y/y to 12.7% y/y (consensus 13.7%). However, the decline is due to base effects and looking at the m/m developments retail sales is still on a rising trend (chart), which rhymes with still strong service PMI's. Industrial production dropped to 3.5% y/y in May from 5.6% in April. It was in line with expectations but is weak growth rates for China and fits with the lower PMI for manufacturing lately. Overall the data confirms the image of a sputtering recovery due to manufacturing and housing, while consumption and services are holding up relatively well. The youth unemployment rate ticked higher yet again to 20.6% from 20.4% (chart), a key concern for policy makers. As expected the People's Bank of China lowered the policy rate the, 1-year Medium-Lending-Facility rate, from 2.75% to 2.65% as signalled by the cut in the reverse repo rate on Tuesday. More stimulus measures are likely in coming months.

Equities: Global equities mostly higher yesterday and remarkably resilient following the Federal Reserve's hawkish pause. Despite the Fed signalling two additional rate hikes, cyclical growth stocks managed to outperform while health care and energy were the only two sectors lower. In the US, Dow -0.7%, S&P 500 +0.1%, Nasdaq by 0.4% and Russell 2000 -1.2%. Asian markets are mostly higher this morning including Japanese markets (Nikkei 225 is up 8% in June alone and 30% YTD). European futures a tad lower while US futures are mixed this morning.

FI: Short end USD rates ended 8bp higher on a hawkish pause from the Fed. Although it was anticipated the extent of the hawkish communication surprised markets. While the short USD rates rose markedly, the 10y US treasuries were virtually unchanged seen through the day. After the meeting, markets now price an additional 20bp of rate hikes from the Fed to the peak policy rate. Regarding rate cuts, Powell said that we are 'talking about a couple of years out'. European rates were marginally higher in a flatter curve move amid stable intra-euro area spreads while waiting for the FOMC last night and ECB today.

FX: EUR/USD price action post the Fed announcement was V-like with the initial drop partly reversed later in the evening with EUR/USD settling around 1.0830 when the dust had settled. SEK, NOK and other cyclically sensitive currencies weakened on the Fed announcement while USD/JPY rebounded to the 140 mark on higher US yields.

Credit: Credit markets will use today to further digest the message from Fed and also have eyes on the ECB meeting. Overall, the interest in the asset class has been solid lately as underlying yields as well as credit spreads are at elevated levels compared to the levels seen in recent years. Overall, the secondary markets were calm with iTraxx Main unchanged at 77bp while iTraxx Xover tightened 2bp to 404bp.

Nordic macro

In Norges Bank's Q2 regional survey, growth is likely expected to remain moderate, but with big variations between sectors. Oil services and parts of the service sector are doing very well, but both retail and construction will probably report weak growth prospects. We nevertheless expect overall capacity utilisation to fall further, which will be key for Norges Bank as it is the main driver of domestic inflation in the medium term in the bank's models. Other leading indicators suggest that employment expectations may actually have improved slightly, but we are more interested to see what firms have to say about investment next year.

In Sweden we get the large version of Prospera's Inflation Expectations survey.

Daily Pivots: (S1) 176.76; (P) 177.09; (R1) 177.74; More...

GBP/JPY's rally continues today and accelerates to as high as 178.83 so far. 100% projection of 148.93 to 172.11 from 155.33 at 178.51 is already met but there is no sign of topping yet. Intraday bias remains on the upside for the moment. Sustained break of 178.69 (as mentioned below) will carry larger bullish implication, and target 161.8% projection of 148.93 to 172.11 from 155.33 at 192.83 next. On the downside, though, break of 176.42 minor support will turn intraday bias neutral first.

In the bigger picture, up trend from 123.94 (2020 low) is extending. Next target will be 161.8% projection of 122.75 (2016 low) to 156.59 (2018 high) from 123.94 at 178.69. Sustained break there will pave the way to 195.86 long term resistance (2015 high). For now, medium term outlook will remain bullish as long as 172.11 resistance turned support holds, even in case of deep pull back.

Fed clearly delivered a hawkish hold overnight, signaling that two more rate hikes are underway. However, market participants appear skeptical about the Fed's aggressive posture. According to Fed funds futures, markets are still projecting interest rate to peak at 5.25-5.00%, anticipating just one more 25-basis point rate hike in July. Moreover, there's over 60% chance that rates will remain at this level by year-end.

This sentiment was also reflected in performance of major U.S. stock indices, which closed mixed. While NASDAQ and the S&P 500 managed to end the day with gains, 10-year yield declined and settled marginally below the 3.8% mark. Although Dollar has been recovering, its upside momentum appears limited against European majors and commodity currencies.

Meanwhile, Yen is taking the limelight from ECB rate decisions, experience steep selloff in Asia which triggered verbal intervention from the government. Euro also softens as markets await another ECB hike, but more importantly any forward guidance and the new economic projections. Australian Dollar is the strongest one as supported by strong job data, managing to shake off the impact of weaker than expected Chinese economic data.

Technically, Bitcoin's break of 25242 cluster support (38.2% retracement of 15452 to 31011) is worth a note. The development argues that deeper correction is underway, with trend line support at around (now at 23230) as the first line of defense. Firm break there will pave the way to 61.8% retracement at 21393 or below. Any downside acceleration in Bitcoin could precede selloff in NASDAQ and overall stock markets. Let's see how it goes.

Fed stood pat, but projects two more hikes this year

Fed keeps interest rate unchanged at 5.00-5.25% as widely expected, by unanimous vote. The new economic projections are rather hawkish, with 2023 median rate projections raised to 5.6% (two more 25bps hikes). GDP growth and core PCE inflation were revised higher while unemployment rate was revised lower.

FOMC leaves the door open for more tightening, as "the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.:

Fed added that the assessments will take into account information including "readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.".

In the new economic projections, median federal funds rates for 2023 is raised from 5.1% to 5.6%, indicating two more 25bps hike. Median projections for 2024 was raised from 4.3% to 4.6%, for 2025 raised from 3.1% to 3.4%.

Regarding 2023 median economic projections, real GDP growth was raised sharply higher from 0.4% to 1.0%, unemployment rate sharply lower from 4.5% to 4.1%, core PCE inflation from 3.6% to 3.9%.

In the new dot plot, eleven members penciled in rate hikes to 5.50-5.75% this year, with four expecting rate at 5.25-5.50%, and only two at the current 5.00-5.25%.

Some reviews on FOMC:

• FOMC Skips June, But Signals Hikes Not Done Yet
• Fed Review: Powell's Hawkish Bluff

Japan starts verbal intervention as USD/JPY surges pass 140

The steep decline in Japanese Yen in Asian session trigger verbal intervention by a top government official.
Chief Cabinet Secretary Hirokazu Matsuno said at a press conference,
"It is important for foreign exchange markets to move in a stable manner reflecting fundamentals, and excessive changes are undesirable."

"There is no change to the government's stance that we will closely monitor movements in the currency market and take appropriate steps if necessary," he added.

USD/JPY surges pass 140.90 resistance to resume whole rally from 127.20 (Jan low). 61.8% retracement of 151.93 Further rise should be seen to 127.20 at 142.48. But the pair might start to feel heavy above there, as the government could step up rhetorics on intervention further.

Australia employment grew 75.6k in May, unemployment rate back to 3.6%

Australia employment rose 75.6k in May, well above expectation of 16.5k. Full time jobs grew 61.7k while part-time jobs grew 14.3k.

Unemployment rate dropped from 3.7% to 3.6%, below expectation of 3.7%. Participation rate rose from 66.7% to 66.9%. Monthly hours worked dropped -1.8% mom. Employment-to-population ratio rose 0.2% to 64.5%, a record high.

Bjorn Jarvis, ABS head of labour statistics, said: "Looking over the past two months, the employment increases average out to around 36,000 extra employed people each month. This is still around the average over the past year of 39,000 people a month."

"Just before the start of the pandemic almost 13 million people were employed in Australia. In May 2023, this had risen to just over 14 million people."

NZ GDP down -0.1% qoq in Q1, driven by inventory rundown and services exports

New Zealand GDP contracted -0.1% qoq in Q1 as expected. Primary industries fell -0.5%. Service industries fell -0.6%. Goods producing industries fell -0.4%.

StatsNZ noted, "The expenditure measure of GDP fell 0.2 percent this quarter. This decline was driven by run downs in inventories held by businesses, and a fall in exports of services."

"A 2.4 percent increase in household consumption expenditure and 2.0 percent growth in investment in fixed assets partially offset the falls."

China production and investment data show struggling private sector

China's industrial production growth for May came in at 3.5% yoy, aligning with market expectations. However, a discrepancy was observed in growth rates of private and state-owned businesses. Industrial output from private businesses only managed to expand by 0.7% yoy, a stark contrast to the 4.4% yoy growth posted by state-owned enterprises.

Furthermore, China's fixed asset investment rose 4.0% ytd yoy, a figure falling short of the anticipated 4.4% and a marked deceleration from 4.7% recorded during the first four months of 2023. Notably, private businesses experienced a dip in their fixed asset investment by -0.1% ytd yoy, while state-owned enterprises reported robust growth of 8.4%.

Meanwhile, retail sales failed to meet expectations, recording a rise of 12.7% yoy, lower expectation of 13.9% yoy increase.

In a separate but related development, People's Bank of China announced a cut in rate on its one-year medium-term lending facility loans to financial institutions. The rate was lowered from 2.75% to 2.65%, following the bank's decision to cut seven-day reverse repo and standing lending facility rate earlier this week.

ECB to hike 25bps, can EUR/CHF extend rebound?

ECB is widely expected to raise interest rates today, and lift the main refinancing rate by 25bps to 4.00%, the highest level since 2001. The deposit rate, once negative, will correspondingly be raised to 3.50%. The bigger question is about forward guidance, but it's unlikely for President Christine Lagarde to shift from the "data-dependent", "meeting-by-meeting" approach for any future decisions. Nevertheless, the new economic projections could still reveal some hints on ECB's thought.

Some previews on ECB:

• ECB Policy Meeting: More Rate Hikes to Come
• ECB Preview – Looking Beyond Next Week

As for market reactions, we'd be closely watching EUR/CHF. A short term bottom should be in place at 0.9670, after hitting 61.8% retracement of 0.9407 to 1.0095 at 0.9670. Sustained trading above 55 D EMA will add to the case that whole correction from 1.0095 has completed today. Such development will also bolster the case that whole rise from 0.9407 (2022 low) is ready to resume later in the year. But, that might require something hawkish from ECB as a trigger.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 176.76; (P) 177.09; (R1) 177.74; More...

GBP/JPY's rally continues today and accelerates to as high as 178.83 so far. 100% projection of 148.93 to 172.11 from 155.33 at 178.51 is already met but there is no sign of topping yet. Intraday bias remains on the upside for the moment. Sustained break of 178.69 (as mentioned below) will carry larger bullish implication, and target 161.8% projection of 148.93 to 172.11 from 155.33 at 192.83 next. On the downside, though, break of 176.42 minor support will turn intraday bias neutral first.

In the bigger picture, up trend from 123.94 (2020 low) is extending. Next target will be 161.8% projection of 122.75 (2016 low) to 156.59 (2018 high) from 123.94 at 178.69. Sustained break there will pave the way to 195.86 long term resistance (2015 high). For now, medium term outlook will remain bullish as long as 172.11 resistance turned support holds, even in case of deep pull back.

Economic Indicators Update

ECB is widely expected to raise interest rates today, and lift the main refinancing rate by 25bps to 4.00%, the highest level since 2001. The deposit rate, once negative, will correspondingly be raised to 3.50%. The bigger question is about forward guidance, but it's unlikely for President Christine Lagarde to shift from the "data-dependent", "meeting-by-meeting" approach for any future decisions. Nevertheless, the new economic projections could still reveal some hints on ECB's thought.

Some previews on ECB:

• ECB Policy Meeting: More Rate Hikes to Come
• ECB Preview – Looking Beyond Next Week

As for market reactions, we'd be closely watching EUR/CHF. A short term bottom should be in place at 0.9670, after hitting 61.8% retracement of 0.9407 to 1.0095 at 0.9670. Sustained trading above 55 D EMA will add to the case that whole correction from 1.0095 has completed today. Such development will also bolster the case that whole rise from 0.9407 (2022 low) is ready to resume later in the year. But, that might require something hawkish from ECB as a trigger.

The steep decline in Japanese Yen in Asian session trigger verbal intervention by a top government official. Chief Cabinet Secretary Hirokazu Matsuno said at a press conference, "It is important for foreign exchange markets to move in a stable manner reflecting fundamentals, and excessive changes are undesirable."

"There is no change to the government's stance that we will closely monitor movements in the currency market and take appropriate steps if necessary," he added.

USD/JPY surges pass 140.90 resistance to resume whole rally from 127.20 (Jan low). 61.8% retracement of 151.93 Further rise should be seen to 127.20 at 142.48. But the pair might start to feel heavy above there, as the government could step up rhetorics on intervention further.

China's industrial production growth for May came in at 3.5% yoy, aligning with market expectations. However, a discrepancy was observed in growth rates of private and state-owned businesses. Industrial output from private businesses only managed to expand by 0.7% yoy, a stark contrast to the 4.4% yoy growth posted by state-owned enterprises.

Furthermore, China's fixed asset investment rose 4.0% ytd yoy, a figure falling short of the anticipated 4.4% and a marked deceleration from 4.7% recorded during the first four months of 2023. Notably, private businesses experienced a dip in their fixed asset investment by -0.1% ytd yoy, while state-owned enterprises reported robust growth of 8.4%.

Meanwhile, retail sales failed to meet expectations, recording a rise of 12.7% yoy, lower expectation of 13.9% yoy increase.

In a separate but related development, People's Bank of China announced a cut in rate on its one-year medium-term lending facility loans to financial institutions. The rate was lowered from 2.75% to 2.65%, following the bank's decision to cut seven-day reverse repo and standing lending facility rate earlier this week.

Australia employment rose 75.6k in May, well above expectation of 16.5k. Full time jobs grew 61.7k while part-time jobs grew 14.3k.

Unemployment rate dropped from 3.7% to 3.6%, below expectation of 3.7%. Participation rate rose from 66.7% to 66.9%. Monthly hours worked dropped -1.8% mom. Employment-to-population ratio rose 0.2% to 64.5%, a record high.

Bjorn Jarvis, ABS head of labour statistics, said: "Looking over the past two months, the employment increases average out to around 36,000 extra employed people each month. This is still around the average over the past year of 39,000 people a month."

"Just before the start of the pandemic almost 13 million people were employed in Australia. In May 2023, this had risen to just over 14 million people."

Full Australia employment release here.

New Zealand GDP contracted -0.1% qoq in Q1 as expected. Primary industries fell -0.5%. Service industries fell -0.6%. Goods producing industries fell -0.4%.

StatsNZ noted, "The expenditure measure of GDP fell 0.2 percent this quarter. This decline was driven by run downs in inventories held by businesses, and a fall in exports of services."

"A 2.4 percent increase in household consumption expenditure and 2.0 percent growth in investment in fixed assets partially offset the falls."

Full NZ GDP release here.

Nikkei 225 Technical: Overstretched Rally

• Nikkei 225 has hit a 33-year high with a 2023 YTD return of +29%.
• Its 3-month up move has reached overstretched condition, more than two standard deviations above its 20-day moving average for three consecutive days.
• At the risk of a corrective pull-back with short-term bullish momentum dissipating.

Fig 1:  Japan 225 short-term trend as of 15 Jun 2023 (Source: TradingView, click to enlarge chart)

Since its 16 March 2023 low, the Japanese benchmark cash stock index, Nikkei 225 has staged a magnificent rally of 26.7% based on the current, 15 June intraday level of 33,720 at this time of the writing, a 33-year high and notched a 2023 year-to-date return of +29%, one of the top performing major stock indices (second to the US Nasdaq 100 at 37% YTD).

Rally hit overstretched condition

The 3-month of medium-term up move has reached an overstretched condition where its price actions have traded beyond two standard deviations above its 20-day moving average for three consecutive days.

The Japan 225 (a proxy of the Nikkei 225 futures) has almost reached a key short-term resistance of 33,640, defined by the upper boundary of a minor ascending channel in place since the 11 May 20023 low and a Fibonacci extension cluster.

Exhaustion elements surfaced, at risk of minor corrective decline

In addition, several bullish exhaustion elements have emerged, and the daily price action of 14 June 2023 has formed a “Spinning Top” Japanese candlestick pattern. In the shorter-term frame, the 1-hour RSI oscillator has formed a bearish divergence signal after it reached a 5-day high overbought level of 80.36 on 13 June 2023.

Watch the 33,640 key short-term pivotal resistance with near-term support at 32,700 and a break below it exposes the next support at 31,900 (the 13-day moving average & the lower boundary of the minor ascending channel). On the flip side, a clearance above 33,640 negates the bearish tone to see the next resistances coming in at 34,200 and 35,000.