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Fed Harker: Shelter inflation and food particularly alarming
Philadelphia Fed President Patrick Harker said in an article, "inflation is far too high across most goods and services in our economy. But I find shelter inflation, along with food inflation, particularly alarming.... We must do everything we can to get shelter inflation under control."
"Monetary policy has a role to play here, and the Federal Reserve is working to stabilize inflation and put the economy on a firmer footing for the long haul," he said. "But getting shelter inflation under control will require action not just by the Fed, but also by federal, state, and local governments."
Fed Kashkari: We are moving at an appropriately aggressive pace
Minneapolis Fed Bank President Neel Kashkari said yesterday, "We are moving very aggressively. There's a lot of tightening in the pipeline. We are committed to restoring price stability but we also recognize given these lags there is a risk of overdoing it."
"We are committed to restoring price stability, but we also recognize, given these lags, there is the risk of overdoing it on the front end, and so I think we are moving at an appropriately aggressive pace," he said.
"The economy is sending us a lot of mixed signals right now," Kashkari said. "We need to keep tightening policy until we see some compelling evidence that core inflation is actually having peaked and is on its way down,"
"And then I think we need to sit there and we need to pause and wait and let the tightening work its way through the economy to see at that point, have we done enough?"
US Housing Data, Core PCE Inflation Next on the Calendar
With the Fed trying to get on top of inflation no matter what it takes and showing no interest to come to investors’ rescue, traders will keep looking for any cracks within the US economy this week. US housing data will feature the calendar on Tuesday and Wednesday at 14:00 GMT, while the Fed’s favorite core PCE inflation report will provide extra details about consumption on Friday at 12:30 GMT. The king US dollar has proved resilient to recession risks so far, therefore it might barely react to the data.
Recession watch
The slowing US housing market is rekindling some memories from the 2007-2009 Great recession but there is some confusion about whether it’s a red flag for the economy nowadays. New home sales have been trending downwards so far this year and the August reading is expected to mark a new low at 500k from 511k previously, the lowest in six years. Pending home sales due on Wednesday could show a steeper contraction of -1.4% from -1.0% previously, remaining negative for the third consecutive month.
The period of lockdowns lifted home sales to a 13-year high, but the uptrend took a halt after the government terminated the pandemic-related subsidies and the Fed started to hike interest rates in the face of rising inflation. With the average mortgage rate for a 30-year loan jumping to 6.29% recently and big property companies raising prices by 50% in the second quarter, households are reluctant to expose their finances to more expensive loans. Of course, selling existing houses could boost profits, but buying a new property at a significantly higher interest rate would eat up those benefits.
A stabilization in the red-hot rent market in August, perhaps on the back of state limits in some regions, was probably a catalyst to a softer house demand too. Though, more than half of renters are still facing elevated prices year-on-year and given the inflation in construction materials as well as the tight supply of houses, there is little prospect for a significant slowdown in the market.
Eyes on consumption
The strength in the labor market is also a tailwind for the real estate sector, delaying any defaults in loan payments. Personal income and consumption figures accompanying the core PCE inflation on Friday could provide some updates on that front. Although expectations are for a minor monthly pickup to 0.3% and 0.2% respectively, the indicators may not raise any concerns if they stay within normal levels. A potential mild increase in the core PCE inflation to 4.7% y/y would not be something new either after a similar pace in the core CPI inflation reading.
Fed comments are more important
Hence, unless a significant negative deviation from forecasts takes place, this week’s dataset may not have the power to shake the dollar. It’s obvious that monetary policy is the main player in town in global markets, therefore investors may appear more sensitive to speeches from Fed policymakers in the rest of the week, especially if comments shed more light on how big the size of future rate hikes will be. Chairman Jerome Powell, as well as Charles Evans and James Bullard will be commenting at events today, while James Bullard, Loretta Mester and John Willams will follow next later in the week.
USD/JPY
Looking at charts, all eyes are back on the 144.95 ceiling in dollar/yen following the full recovery from last week’s low of 140.34. Although the continuous depreciation in other major currencies is feeding speculation for a coordinated Japan-style FX intervention against the greenback, any downfalls could be short-lived as long as the US is magnetizing investors' interest by leading monetary tightening and through its relatively safer geopolitical and economic conditions. The Fed will need to enhance its hawkish tone if it aims to reach the 1998 peak of 147.71 this week.
Otherwise, a surprisingly conservative communication could see the pair testing the 144.00 round level ahead of the 20-day simple moving average (SMA) at 142.78. Yet, only a freefall below July's high of 139.39 would ruin the bullish trend in the market.
Gold Price Turns Red Below $1,650, Upsides Capped
Key Highlights
- Gold price extended losses below the $1,650 support.
- A major bearish trend line is forming with resistance near $1,650 on the 4-hours chart.
- EUR/USD and GBP/USD might start a fresh downward move.
- USD/JPY could clear the last high at 145.90 and continue higher.
Gold Price Technical Analysis
Gold price remained in a bearish zone below the $1,688 resistance against the US Dollar. The price declined below the $1,665 support level to move into a bearish zone.
The 4-hours chart of XAU/USD indicates that the price extended losses below the $1,650 support, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).
The price even spiked below the $1,625 level and traded as low as $1,620. It is now consolidating losses above the $1,620 level. On the upside, the price might face sellers near the $1,646 level. There is also a major bearish trend line forming with resistance near $1,650 on the same chart.
The next major resistance is near the $1,662 level. Any more gains might send the price towards the $1,688 resistance level.
On the downside, an initial support is near the $1,620 level. The next major support is near the $1,600 level, below which the price could accelerate lower. In the stated case, the price may perhaps decline towards the $1,580 level.
Looking at EUR/USD, the pair is facing resistance near the 0.9680 and 0.9700 levels. If the bears remain in action, the pair could decline below 0.9550.
Economic Releases to Watch Today
- US Pending Home Sales for August 2022 (YoY) - Forecast -1.4%, versus -1.0% previous.
- Federal Reserve Chair Jerome Powell Speech.
AUDUSD Wave Analysis
- AUDUSD broke key support level 0.6500
- Likely to fall to support level 0.6300
AUDUSD currency pair recently broke the key support level 0.6500 coinciding with the support trendline of the wide down channel from the middle of April.
The breakout of the support level 0.6500 accelerated the active short-term impulse waves iii and (iii) – which belongs to the sharp impulse wave C from the start of August.
Given the overriding daily downtrend, AUDUSD can be expected to fall further toward the next support level 0.6300 (target for the completion of the active short-term impulse waves iii).
Eco Data 9/28/22
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Sunset Market Commentary
Markets
The sell-everything-trade took a breather today. Stock markets eke out a small gain of about half a percent. It’s not a lot but at least they stop dropping for a moment. The EuroStoxx50 remains in the technical danger zone though. Core bonds surged in Asian and European dealings. It shouldn’t come as a big surprise that UK notes outperformed US and European/German peers. British yields at some point tanked 37 bps but still found a bottom soon. Current changes range between -11.7 bps for the 2y – an impressive 25 bps intraday comeback – and +10.2 bps (10y) to another massive +28.3 bps (30y). The long end is still adding basis points amid a combo of expectations that the central bank will have to keep policy rates higher for longer, the idea that lavish fiscal stimulus blunts the sharp edges of a recession and increased risk premia. We see curves steepen in the US and Europe too. American yields ease 5.9-8 bps at the front while losing 2.6 bps in the 10y and adding 2.1 bps at the longest tenor. Durable goods orders/shipments more or less matched expectations and had little impact on trading dynamics. Bund rates swing between -3.1 bps and +7.8 bps. The 10y European swap yield (3.03%, +3.8 bps) does not intend to let its recently captured 3% target go. Commodities recover a bit as well. Brent oil prices rise 2% to $85.77/b. Natural gas jumps 7.5% (€186.5/MWh) following reports of leaks in the Nord Stream pipelines. There have been no gas flows through this route over the past month but it adds to the uncertainty of future Russian supplies.
In line with the dust settling a bit on markets, we also see the US dollar taking it down a notch or two in uneventful trading. It loses out against all G10 peers. The move is the sharpest vs the pound. Again no surprise here after the violent GBP dump. Cable rebounds from 1.069 to 1.078, recouping a mere fraction of what it lost on Friday and yesterday. Sterling performs better against the euro too. EUR/GBP erases Monday’s daily gain to trade at 0.892. Back to the dollar then. The trade-weighted DXY fell from 114.1 to 113.3. But underscoring its fundamental strength, DXY clawed back and pared losses to 113.84 currently. EUR/USD is going nowhere just north of 0.96. In USD/JPY, markets are close in testing the Japanese governments’ resolve. The pair neared 145 yesterday and is only marginally backing away (144.54) from that line in the sand officials drew last week by intervening in FX markets.
News Headlines
According to the German IFO export expectations survey, sentiment among German exporters has cooled further in September. Export expectations dropped to -6.0, down from -2.8 in August, bringing it to the lowest level since May 2020. IFO currently sees no sign of export growth and expects no major change in the medium term as the global economy is slowing. Export expectations are negative in most manufacturing industries. The chemical and furniture industry expect a significant further decline. The metal industry has also become considerably more pessimistic. Beverage producers are turning more positive and the automotive industry also expects exports to rise in Q4.
The National bank of Hungary today raised its main policy rates by 125 bps, bringing the base rate to 13.00%. Most analysts expected another additional 100 bps step. A minority expected an even smaller step. In the statement published after the decision, the MNB says ‘by the current level of the base rate, interest rate conditions have become sufficiently strict, which ensures the achievement of the inflation target. The Monetary Council has decided to stop the cycle of base rate hikes after the step in September.’ Tightening liquidity and further enhancing monetary transmission will be in the MNB’s focus. The forint strengthened from EUR/HUF 408 to below 405 upon the announcement of the decision, but returned part of this gain after the MNB statement formally announced the end of the hiking cycle. EUR/HUF currently trades again near 406.
Dollar Edges Higher after Consumer Confidence, But Stays in Consolidations
Dollar edges mildly higher after better than expected consumer confidence reading, but stays range bound. Overall, the forex markets are in consolidation mode. Sentiment appears to be supported as US stocks open higher, which European indexes are steady. One focus for the rest of the day is US 10-year yield's reaction to 4% handle, and subsequent reactions in other markets.
Technically, USD/JPY is extending the recovery from 104.33 temporary low. There is prospect of a retest on 145.89 high, and even a break. But BoJ might come into the market again in that case, to intervene to cap USD/JPY below 1998 high at 147.68. Consolidation from 145.89 should extend with more legs.
In Europe, at the time of writing, FTSE is down -0.13%. DAX is down -0.30%. CAC is down -0.01%. Germany 10-year yield is up 0.072 at 2.195. Earlier in Asia, Nikkei rose 0.53%. Hong Kong HSI rose 0.03%. China Shanghai SSE rose 1.40%. Singapore Strait Times dropped -0.52%. Japan 10-year JGB yield rose 0.0012 to 0.254.
US consumer confidence rose to 108.0, second month of improvement
US Conference Board Consumer Confidence rose from 103.2 to 108.0 in September, above expectation of 104.5. Present Situation index rose from 145.3 to 149.6. Expectations Index also rose from 75.8 to 90.3.
"Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
"The Present Situation Index rose again, after declining from April through July. The Expectations Index also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation dissipated further in September—prompted largely by declining prices at the gas pump—and are now at their lowest level since the start of the year."
US durable goods orders dropped -0.2% mom in Aug, ex-transport orders up 0.2% mom
US durable goods orders dropped -0.2% mom to USD 272.7B in August, slightly worse than expectation of -0.1% mom. Ex-transport orders rose 0.2% mom, below expectation of 0.3% mom. Ex-defend orders dropped sharply by-0.9% mom. Transportation equipment dropped -1.1% mom to USD 92.0B.
Fed Evans agrees to get to the peak funds rate by March
Chicago Federal Reserve President Charles Evans told CNBC, "There are lags in monetary policy and we have moved expeditiously. We have done three 75 basis point increases in a row and there is a talk of more to get to that 4.25% to 4.5% by the end of the year, you're not leaving much time to sort of look at each monthly release. "
"I still believe that our consensus, the median forecasts, are to get to the peak funds rate by March — assuming there are no further adverse shocks. And if things get better, we could perhaps do less, but I think we are headed for that peak funds rate," Evans said.
"That offers a path for employment, you know, stabilizing at something that still is not a recession, but there could be shocks, there could be other difficulties," he added.
"Goodness knows every time I thought the supply chains were going to improve, that we were going to get auto production up and used car prices down and housing and all of that something has happened. So, cautiously optimistic."
BoE Pill: Recent significant fiscal news require a significant monetary policy response
BoE chief economist Huw Pill said at a conference, "We have all seen recent significant fiscal news in the past few days. That has had significant market consequences as well as significant implications for the macro outlook…
"It's hard not to draw the conclusion that all this will require a significant monetary policy response," he added.
RBNZ Orr said tightening cycle very mature, AUD/NZD topping soon?
RBNZ Governor Adrian Orr today, "We believe we still have some work to do, but the good news is because we've done so much already, the tightening cycle is very mature, it's well advanced."
There's "a little bit more to do before we can drop to our normal happy place, which is to watch, worry and wait for signs of inflation up or down," he said.
World Bank cut China growth forecasts to 2.8% in 2022
For 2022, the World Bank downgraded China's growth forecasts sharply from 5.0% (April's) to just 2.8%. On the other hand, ASEAN-5 growth forecasts was upgraded from 4.9% to 5.4%. East Asia & Pacific (excluding China) growth was upgraded from 4.8% to 5.3%. However, East Asia & Pacific as a whole was down graded from 5.0% to 3.2%,
The World Bank said in the release: "Growth in much of East Asia and the Pacific has been driven by recovery in domestic demand, enabled by a relaxation of COVID-related restrictions, and growth in exports. China, which constitutes around 86% of the region's output, uses targeted public health measures to contain outbreaks of the virus, inhibiting economic activity."
EUR/USD Mid-Day Outlook
Daily Pivots: (S1) 0.9538; (P) 0.9624; (R1) 0.9694; More...
Intraday bias in EUR/USD is turned neutral with a temporary low formed at 0.9551. Some consolidations could be seen, but upside should be limited by 0.9863 support turned resistance. Break of 0.9551 will resume larger down trend to 161.8% projection of 1.0368 to 0.9863 from 1.0197 at 0.9380 next.
In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.
Economic Indicators Update
| GMT | Ccy | Events | Actual | Forecast | Previous | Revised |
|---|---|---|---|---|---|---|
| 23:50 | JPY | Corporate Service Price Index Y/Y Aug | 1.90% | 2.20% | 2.10% | 2.00% |
| 08:00 | EUR | Eurozone M3 Money Supply Y/Y Aug | 6.10% | 5.50% | 5.50% | 5.70% |
| 12:30 | USD | Durable Goods Orders Aug | -0.20% | -0.10% | -0.10% | |
| 12:30 | USD | Durable Goods Orders ex Transportation Aug | 0.20% | 0.30% | 0.20% | |
| 13:00 | USD | S&P/Case-Shiller Home Price Indices Y/Y Jul | 16.10% | 16.90% | 18.60% | |
| 13:00 | USD | Housing Price Index M/M Jul | -0.60% | 0.00% | 0.10% | |
| 14:00 | USD | Consumer Confidence Sep | 108 | 104.5 | 103.2 | |
| 14:00 | USD | New Home Sales Aug | 685K | 500K | 511K |
US consumer confidence rose to 108.0, second month of improvement
US Conference Board Consumer Confidence rose from 103.2 to 108.0 in September, above expectation of 104.5. Present Situation index rose from 145.3 to 149.6. Expectations Index also rose from 75.8 to 90.3.
"Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
"The Present Situation Index rose again, after declining from April through July. The Expectations Index also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation dissipated further in September—prompted largely by declining prices at the gas pump—and are now at their lowest level since the start of the year."
EUR/USD Mid-Day Outlook
Daily Pivots: (S1) 0.9538; (P) 0.9624; (R1) 0.9694; More...
Intraday bias in EUR/USD is turned neutral with a temporary low formed at 0.9551. Some consolidations could be seen, but upside should be limited by 0.9863 support turned resistance. Break of 0.9551 will resume larger down trend to 161.8% projection of 1.0368 to 0.9863 from 1.0197 at 0.9380 next.
In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.