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The USDJPY eases from new highest (137.00) since 1998, posted on Wednesday, as dollar loses traction on concerns that economic growth slowdown and possible recession may shorten Fed’s tightening cycle, that signaled traders to take profits.

Larger uptrend remains intact and the pair is on track for 5.6% monthly gain, though risk of deeper correction was signaled by daily RSI and stochastic diverging from the price action for some time and fading bullish momentum, but Q3 results will be eyed for further signals.

Fresh weakness initial support at 135.70 (10DMA), which guards more significant levels at 134.56/26 (20DMA / June 23 trough, where dips should find firm ground, while break would lead to stronger correction and put bulls on hold.

Res: 137.00; 137.28; 137.63; 137.92
Sup: 135.70; 135.11; 134.26; 132.93

Stock markets have fallen heavily in June so it seems only fitting that they're ending the month with big losses as reality continues to bite.

There's no getting away from recession chat and while the heads of the Fed, ECB and BoE didn't exactly fuel that during their panel discussion on Wednesday, they didn't do anything to dispel it either. They all know that there's a strong likelihood of recession this year or next and investors are increasingly accepting that fate as well.

There's been a plethora of economic data from across Europe this morning, mostly tier two and three, and it was a bit of a mixed bag. The labour market figures, for example, remain strong with the anomaly being Germany but this was heavily distorted by the integration of Ukrainian refugees into the labour market. Underlying numbers remain in good shape even if across the bloc, employment growth is expected to slow.

It's impossible to ignore the fact that households are being squeezed and we're seeing that appear in the data, particularly in the UK which will probably fall into recession later this year. But it is unlikely to be alone in that which is why bear-market rallies are proving to be so short-lived.

US inflation boost but spending slips

US inflation data was unusually encouraging ahead of the open. Perhaps that's getting a little carried away but it didn't deliver another crushing below so maybe this feeling is actually relief rather than joy. The core reading was a little better than expected at 0.3%, in line with April, while the headline also fell a little short of expectations at 0.6%.

The income and spending data were arguably less encouraging. Earnings rose 0.5% as expected, a slight acceleration from April, while spending rose only 0.2%, a big drop from 0.9% a month earlier and half the forecast. Another sign of the squeeze taking a toll on households? The US economy is among the best positioned to fend off a recession but it's not completely immune to the cost-of-living crisis. It may be catching up.

Oil lower as OPEC+ sticks to August target

Oil prices are modestly lower on Thursday, further paring recent gains following yesterday's reversal. As expected, OPEC+ stuck to its planned 648,000 barrel increase in August and refrained from any decision beyond then which could add an element of uncertainty to future targets, particularly given recent reports that even Saudi Arabia and UAE are running near capacity.

The global economic uncertainty doesn't make planning ahead any easier, either. The prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude as China reopened and the OPEC+ deficit increased. ​

Gold slightly buoyed by inflation data

Gold has been trending lower over the last couple of weeks but remains in its early summer range between $1,800 and $1,870. It's really struggled for direction over the last couple of months despite the volatility in the broader financial markets. It has been like a deer in the headlights, unable to process and respond to the wicked combination of higher inflation, faster monetary tightening and recession fears.

It received a boost from the slightly softer PCE reading from the US, a rare bit of good news when it comes to inflation data. It's not exactly a massive win, especially when paired with weak spending but it could be worse. Yields fell a little after the data, enabling gold to get back into positive territory for a while.

Bitcoin crumbling

Bitcoin has been hanging on in there around $20,000 but its resilience may finally be crumbling under pressure, with the cryptocurrency sliding more than 5% today to trade around $19,000. This could be really bad news for the crypto space and may even trigger much more severe declines in the coming weeks.

The forced liquidation of Three Arrows Capital may have contributed to the latest decline as traders are left to wonder what other leveraged firms will follow in its footsteps. The fear alone could deliver another hammer blow to crypto valuations before the dust settles.

Personal income rose 0.5% month-on-month (m/m) in May, meeting the consensus estimate. April's growth was revised up to 0.5% (from the 0.4% m/m reported the month prior). Compensation of employees (+0.5% m/m) and proprietors' income (+1.5% m/m) were the biggest contributors to income growth.

Removing the effect of price changes and taxes, real personal disposable income was down 0.1% m/m in May, while April's figure was revised up to 0.3% m/m (from a flat reading released earlier).

Nominal personal spending rose by 0.2% m/m in May, below the consensus estimate (+0.4% m/m). April's print was revised down to +0.6% m/m vs. +0.9% m/m reported in the preliminary estimate.

• Goods spending was down by 0.7% m/m from downwardly revised growth of 0.2% in April (originally +0.8% m/m). Higher prices of gasoline supported growth in non-durables (+0.7% m/m), while spending on durable goods were down by 3.2% m/m.
• Services spending rose by 0.7% m/m, while the April reading was adjusted down to 0.7% m/m (originally +0.9% m/m). The gains were led by housing, "other" services (including international travel), and health care.

Adjusted for price changes, real spending was down -0.4% m/m – a tenth of a percentage point below expectations. April's reading was revised down to 0.3% m/m (vs. 0.7% m/m reported earlier).

On the prices side, the PCE deflator increased by 0.6% m/m, surprising markets by +0.1 percentage points (0.7% m/m expected). This translates to a 6.3% gain relative to last year (vs. the 6.4% expected). Stripping out food and energy prices, the core PCE deflator was up 0.3% m/m in May, matching April's print. In year-over-year terms, core inflation stood at 4.7% last month (vs. 4.8% expected).

The personal saving rate remained below its pre-pandemic average of 7.5% with a reading of 5.4%, indicating that consumers continue to tap into their pool of excess savings. Current estimates suggest that excess savings remain elevated at roughly $2.4 trillion.

Key Implications

Consumer spending lost momentum last month, but it's not entirely surprising given the strength in May and relentless increases in prices. As was anticipated, services spending continued to make good strides in regaining ground lost during the pandemic, but just not enough to offset the pull-back in goods spending. Accounting for today's print and last months' revisions, we now expect real personal expenditures to grow at roughly 1.5% (annualized) in the second quarter, meaningfully slower than we expected in our Quarterly Economic Forecast.

A healthy level of demand destruction is exactly what the Fed is looking for, so today's release won't stop it from acting decisively. With its preferred inflation measure – the core PCE deflator – more than two percentage points above its target, the Fed is expected to raise the policy rate by another 75 basis points (bps) at its next meeting in July.

The Canadian economy expanded by +0.3% month-over-month (m/m) in April, beating Statistics Canada's flash estimate of +0.2%. Surprisingly, the flash estimate for May showed a decrease of 0.2% m/m.

April's increase in activity was fairly broad, with output expanding in 13 of the 20 industries. The goods-producing sector rose 0.9%, while the service-producing sector rose 0.1%.

Substantial growth was seen in the mining, quarrying and oil and gas sectors, which grew at 3.3% on the month. This was a product of high production growth in oil, natural gas, and potash.

The increasing demand for in person services continued to push the accommodation and food services sector higher (+4.6%). This was led by a 3.5% rise in the food services and drinking places sector.

Key Implications

Though the data for April was upgraded, the drop in the flash estimate for May is certainly a worry. Despite May's flash print being only a preliminary estimate and there is a lot of volatility in the data, there is risk that Canada's recent outperformance relative to its global peers may be coming to an end. As we highlighted in our recent Quarterly Economic Forecast, the impact of rising interest rates and high inflation will cause a deceleration in Canadian economic growth.

Though this report is sure to raise eyebrows, we don't expect it to stop the Bank of Canada (BoC) from raising its policy rate by 75 basis points at its meeting on July 13th. With the economy remaining in excess demand and current inflation pressures showing no signs of abating, more aggressive action by the BoC is warranted.

Markets

Moves on core bond markets are once again impressive today. Recession fears are holding a tight grip. Investors are pricing out central bank rate tightening, especially for the euro zone. This is happening even as (or is it because?) French and Portuguese inflation, just as was the case in Belgium and Spain yesterday, accelerated further. Prices in the former country rose by 6.5% y/y in June, up from 5.8% in May. Portuguese inflation came in at 9% vs 8.1% the month before. The numbers confirm the cooldown in Germany is a (statistical) fluke. The outdated US PCE deflator stabilized at 6.3% in May with the core reading slowing to 4.7% from 4.9%. Both were slightly below expectations but left no material market trace. Still, German bond yields tank 10 to 18 bps in a bull steepener. Markets currently price the peak in the ECB policy rate back below 2%. US Treasuries underperform with yields 6.7-8.1 down at the front end (2y-5y) and 4.6-6 bps further out (30y-10y). UK Gilts yields forfeit up to 11 bps (2y). Other markets fit the recession narrative as well with European stocks tumbling another 2.5%+. The EuroStoxx50 is testing the June lows around 3430 and just a whisker away of the March 2022 post-invasion trough of 3387. Wall Street opens with losses of about 1.5%. Commodity prices are also under pressure. Copper loses 2.5%, iron ore is down for the day. Brent oil loses marginally ($115.85/barrel) after OPEC+ ratified the planned August oil supply hike of 648k barrels/day at its meeting today. With the move, it restored the final step of the 9.7mln barrels a day production cut after the pandemic broke out two years ago. The oil cartel didn’t elaborate on what its next move will be. Gas prices are the exception to the commodity rule. The Dutch future jumps to the highest level since early March amid intensifying worries over shortages.

Euro bulls are sounding the alarm on FX markets. The common currency is under continuous selling pressure this week, sliding from EUR/USD 1.06 at the start to heavily test the 1.04 big figure today. Crucial support kicks in at 1.0354 (May multiyear low) and/or 1.0341 (2017 low). It serves as the last line of defense before parity. The Japanese yen gains slightly vs the dollar (USD/JPY down to 136.13) but more vs the euro (EUR/JPY down to 141.65). The Swiss franc edges higher. EUR/CHF nudges below the March intraday low of 0.997. Heavy Bund outperformance relative to UK Gilts (yields up to 10 bps lower) is even allowing sterling to take the upper hand over the euro. EUR/GBP (0.857) is at risk losing the upward sloping trend channel even as the economic future eyes at least as dark in the UK.
 
News Headlines

The Swedish Riksbank (RB) joined the broader trend of CB’s frontloading policy normalization, raising the policy rate by 50bps to 0.75%. CPIF, the RB’s preferred inflation measure, rose 1.0% M/M and to 7.2% Y/Y in May. Core inflation (ex energy) printed at 5.4% Y/Y. The Riksbank upwardly revised its 2022 average CPIF inflation forecast to 6.9% (from 5.5%). Prices rises are still seen at 4.2% next year but expected to return to 2.0% in 2024. It expects the policy rate to be close to 2% at the start of next year. This implies two rate hikes of at least 50 bps at the regular meetings in September and November. Governor Ingves didn’t exclude a 75 bps hike if necessary but dismissed the idea of additional rate moves in between regular meetings. The Riksbank will also shrink its asset holdings faster an expected, reducing reinvestments in H2 of this year to SEK 18.5 bln instead of SEK 37 bln as planned in April. The Swedish krone doesn’t profit, on the contrary. The RB believes that a policy rate peak near 2% will be enough to bring inflation back to 2% but markets apparently don’t. The krone weakened further to EUR/SEK 10.735.

According to Bloomberg reporting, German energy companies are asking the government to be allowed to pass on higher gas prices to their customers. Due to lower gas deliveries from Russia, the companies are coming under financial stress as they have to replace missing reserves at an extra cost. In this respect, Germany’s biggest buyer of Russian gas is reported to be in talks with the German government on a bail-out or other forms of government support.

Daily Pivots: (S1) 135.93; (P) 136.46; (R1) 137.14; More...

Intraday bias in USD/JPY is turned neutral with current retreat, but further rally is expected as long as 134.25 support holds. On the upside, sustained trading above of 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81 will extend larger up trend to 100% projection at 143.29. However, break of 134.25 will turn bias back to the downside for 131.48 support instead.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9504; (P) 0.9542; (R1) 0.9588; More...

No change in USD/CHF's outlook and intraday bias remains neutral. Fall from 1.0048 is still seen as the third leg of the consolidation pattern from 1.0063. Strong support should be seen around 0.9543 to bring rebound. On the upside, above 0.9731 minor resistance will turn bias back to the upside for retesting 1.0063 resistance. However, sustained break of 0.9543 will bring deeper fall back to 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Daily Pivots: (S1) 1.2081; (P) 1.2147; (R1) 1.2188; More...

No change in GBP/USD's outlook and intraday bias remains neutral. Further fall is in favor as long as 1.2331 minor resistance holds. Firm break of 1.1932 will resume larger down trend from 1.4248. On the upside, above 1.2331 will resume the rebound from 1.1932 to 1.2666 resistance. Firm break there will indicate medium term bottoming.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3140).

Daily Pivots: (S1) 1.0406; (P) 1.0471 (R1) 1.0506; More...

EUR/USD is still staying above 1.0339/58 support zone with today's decline. Intraday bias stays neutral first. Further fall is in favor with 1.0614 minor resistance intact. On the downside, sustained break of 1.0339/48 will resume larger down trend. Next target is long term projection level at 1.0090. On the upside, above 1.0614 will turn bias back to the upside for 1.0786 resistance instead.

In the bigger picture, focus stays on 1.0339 long term support (2017 low). Decisive break there will resume whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. However, firm break of 1.0805 support turned resistance will delay this bearish case, and bring stronger rebound first.

Euro is under broad-based pressure today as selloff against Swiss Franc spreads to other pairs. Yen is currently the best performer following another round of pull back in Germany, and to a lesser extent US, benchmark yields. Aussie and Kiwi are also recovering while Dollar is firm. But for the week, Swiss Franc is still the winner followed by Dollar. Euro is the biggest loser so far, followed by Kiwi.

Technically, as Euro's decline is gathering momentum, first focus will be on 1.0339/58 support zone in EUR/USD. Firm break there will confirm long term down trend resumption. Similarly, break of 1.3383 support in EUR/CAD will confirm down trend resumption for 61.8% projection of 1.4633 to 1.3383 from 1.3713 at 1.2941. Additionally, break of 141.39 minor support in EUR/JPY and 1.5083 minor support in EUR/AUD will also add more pressure to Euro.

In Europe, at the time of writing, FTSE is down -1.91%. DAX is down -2.27%. CAC is down -2.30%. Germany 10-year yield is down -0.1332 at 1.391. Earlier in Asia, Nikkei dropped -1.54%. Hong Kong HSI dropped -0.62%. China Shanghai SSE rose 1.10%. Singapore Strait Times dropped -1.04%. Japan 10-year JGB yield dropped -0.0016 to 0.231.

US PCE price index unchanged at 6.3% yoy, core PCE slowed to 4.7% yoy

US personal income rose 0.5% mom, or USD 113.4B, in May, matched expectations. Personal spending rose 0.2% mom, or USD 32.7B.

For the month, PCE price index rose 0.6% mom while core PCE price index rose 0.3% mom. For the 12-month period, PCE price index was unchanged at 6.3% yoy while core PCE price index slowed from 4.9% yoy to 4.7% yoy. Energy prices rose 35.8% yoy while food prices rose 11.0% yoy.

US initial jobless claims dropped to 231k

US initial jobless claims dropped -2k to 231k in the week ending June 25, above expectation of 229k. Four-week moving average of initial claims rose 7.25k to 232k.

Continuing claims dropped -3k to 1328k in the week ending June 18. Four-week moving average of continuing claims rose 5.5k to 1320k.

Canada GDP grew 0.3% mom in Apr, but to contract -0.2% in May

Canada GDP grew 0.3% mom in April, matched expectations. Both goods-producing (+0.9%) and services-producing (+0.1%) industries were up, as 13 of 20 industrial sectors expanded.

However, advanced information suggests that real GDP contracted -0.2% mom in May, with output down in mining, quarrying and oil and gas extraction, manufacturing and construction sectors.

Eurozone unemployment rate dropped to 6.6% in May, EU unchanged at 6.1%

Eurozone unemployment rate dropped from 6.7% to 6.6% in May, better than expectation of 6.8%. EU unemployment rate was unchanged at 6.1%. Eurostat estimates that 13.066m men and women in the EU, of whom 11.004m in the Eurozone , were unemployed in May

France consumer spending rose 0.7% mom in May, almost exclusively on manufactured goods

France consumer spending rose 0.7% mom in May, slightly above expectation of 0.6% mom. That's the first increase after five months of contraction. The increase was almost exclusively due to the clear rebound in consumption of manufactured goods (+2.7% after -1.3% in April). Food consumption was stable (+0.1% after -1.2%) while energy consumption decreased significantly (-2.6% after +1.9%).

From Germany, retail sales rose 0.6% mom in May, below expectation of 0.8% mom. Import price index rose 0.9% mom, below expectation of 1.6% mom. Unemployment rate rose from 5.0% to 5.3% in June.

Swiss KOF economic barometer dropped to 96.9 in Jun, subdued outlook in upcoming months

Swiss KOF Economic Barometer dropped from 97.7 to 96.9 in June, slightly above expectation of 96.8. It's now below long-term average for the second month in a row. KOF said, "the outlook for the Swiss economy in the upcoming months therefore remains subdued."

KOF added: "The downward movement of the barometer is primarily driven by bundles of indicators for foreign demand and manufacturing. Only indicators for the financial and insurance services sector and for the construction sector are at a nearly constant level. However, indicator bundles for private consumption show a slight positive trend."

Real retail sales dropped -1.6% mom in May, below expectation of 3.8% mom rise.

Japan industrial production dropped -7.2% mom in may, worst in two years

Japan industrial production dropped -7.2% mom in May, much worse than expectation of -0.3% mom. That was also the worst contraction in two years, since the -10.5% mom decline in May 2020.

The index of production at factories and mines stood at 88.3 against the 2015 base of 100. Index of industrial shipments dropped -4.3% mom to 89.0. Inventories dropped -0.1% mom to 98.5.

Nevertheless, manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to rebound 12.0% in June, followed by a 2.5% expansion in July.

China PMI manufacturing rose to 50.2 in Jun, non-manufacturing up to 54.7

China official PMI Manufacturing rose from 49.6 to 50.2 in June., above expectation of 49.6. Sub-index for production rose to 52.8, highest since March 2021. PMI Non-Manufacturing rose from 47.8 to 54.7, above expectation of 52.5. That's also the highest level in 13 months.

"Even though the manufacturing sector continued to recover this month, 49.3 percent of the companies reported orders were insufficient," said Zhu Hong, senior statistician at NBS. "Soft market demand is still the main problem facing the manufacturing industry."

New Zealand ANZ business confidence dropped to -62.6, supply-side issues remain firms' biggest problems

New Zealand ANZ Business Confidence dropped from -55.6 to -62.6 in June. Own activity outlook dropped from -4.7 to -9.1. Investment intentions dropped from 8.6 to -3.2. Employment intentions dropped form 6.1 to 0.7. Cost expectations eased from 95.5. to 93.5. Pricing intentions rose from 71.0 to 73.7. Inflation expectations eased from 6.18 to 6.02.

ANZ said: " For now, supply-side issues remain firms' biggest problems: finding skilled labour, costs, and wages being the top three. The RBNZ needs those problems to ease, and weakening demand to move up the charts. That's what's required to bring inflation pressure down.

"Of course, weaker demand might ease the overtime, but it's unlikely to enhance profitability. That moment of happy equilibrium between demand and supply may prove fleeting, with the RBNZ entirely willing to incur the risk of a hard landing to ensure the long-term structural health of the economy in terms of well-anchored inflation expectations."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0406; (P) 1.0471 (R1) 1.0506; More...

EUR/USD is still staying above 1.0339/58 support zone with today's decline. Intraday bias stays neutral first. Further fall is in favor with 1.0614 minor resistance intact. On the downside, sustained break of 1.0339/48 will resume larger down trend. Next target is long term projection level at 1.0090. On the upside, above 1.0614 will turn bias back to the upside for 1.0786 resistance instead.

In the bigger picture, focus stays on 1.0339 long term support (2017 low). Decisive break there will resume whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. However, firm break of 1.0805 support turned resistance will delay this bearish case, and bring stronger rebound first.

Economic Indicators Update