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Net reactions of the global markets to Fed's 75bps rate hike were rather negative. Global stocks ended generally lower after initial recovery. Additionally, SNB delivered a surprised 50bps rate hike while BoE's 25bps had a hawkish undertone with three members wanted more. BoJ stayed calm and kept interest rate unchanged while maintaining the 10-year JGB yield cap at 0.25%.

In the currency markets, Swiss Franc was overwhelmingly the strongest one. Dollar followed as second but there was clearly some hesitation towards the end, in particular against Euro. Canadian Dollar was the worst as dragged down additionally by falling oil prices. Australian Dollar was also weighed down by overall risk averse sentiment.

Could DOW defend 30k cluster support level?

DOW extended the correction from 36952.65 to close at 29888.78 last week, losing 30k handle. Ideally, it's a zone for bottoming, with 38.2% retracement of 18213.65 to 36952.65 at 29794.35, and 29568.57 resistance turned support (2020 pre-pandemic high). Also, it's now reasonably close to 55 month EMA (now at 38563.61) which should provide strong support.

However, break of gap resistance at 31144.91 is needed to be the first sign of bottoming. Or risk will stay heavily on the downside. Sustained trading below 29794.35 could bring even deeper fall to long cluster level at 25308/71 (61.8% retracement of 18213.63 to 36952.56 at 25371.94, 38.2% retracement of 6469.95 to 36952.56 at 25308.25).

Near term upside potential in 10-year yield limited

10-year yield surged to as high as 3.483 last week but retreated to close at 3.239. Another rise cannot be ruled out yet but upside potential should be limited for now. 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554 should limited upside to bring consolidations. Indeed, break of 3.167 support should confirm that a near term correction has started for 55 day EMA (now at 2.848). However, firm break of 3.554 could bring another round of upside acceleration to 200% projection at 4.077.

Dollar index lost momentum quickly after up trend resumption

Dollar index also resumed recent up trend and hit as high as 105.78, but quickly lost momentum and retreated. Some more consolidations would likely be seen in the near term, but downside should be contained by 55 day EMA (now at 102.16) to bring rally resumption. Current up trend should target 61.8% projection of 72.69 to 103.82 from 89.20 at 108.43 at a later stage. But to do so, risk aversion will need to continue while 10-year yield should extend up trend, while EUR/USD will need to break through 1.0339 support.

WTI crude oil in third leg of pattern from 131.82

The steep decline in oil price last week could be offering some hope to inflation outlook and risk sentiment ahead. WTI's break of 112.25 support argues that a short term top was already formed at 124.12. The whole rebound from 93.47 might be finished too. Sustained trading below 55 day EMA (now at 111.18) will affirm this case. Fall from 124.12 would then be seen as the third leg of the pattern from 131.82 high. Deeper decline should then be seen to 61.8% projection of 131.82 to 93.47 at 124.12 at 100.41 first. Firm break there could bring downside acceleration through 93.47 to 100% projection at 85.77, which is close to 85.92 resistance turned support.

USD/CAD is breaking through 1.3 key resistance

But of course, the reversal in oil price could also be seen as a result of lower demand due to dimmer economic outlook. That is, it's part of risk-aversion trades. If that's the case, Canadian Dollar could be double hit. USD/CAD has already breached 1.0375 resistance last week. Sustained trading above 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022 will suggest that it's reversal whole down trend from 1.4667. Further rally would be seen to 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. The dynamics between oil, stocks and Loonie is worth a close watch in the next two weeks.

EUR/CHF Weekly Outlook

EUR/CHF's sharp decline last week and break of 1.0216 support suggests that corrective rebound from 0.9970 has completed after failing 1.0505 long term resistance, as well as 55 week EMA. Initial bias stays on the downside this week. Break of 1.0086 support will affirm this bearish case and bring retest of 0.9970 low. On the upside, above 1.0232 minor resistance will turn intraday bias neutral first. But risk will stay on the downside as long as 1.0513 resistance holds.

In the bigger picture, as long as 1.0505 support turned resistance (2020 low) holds, long term down trend from 1.2004 (2018 high) is expected to continue. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. However, firm break of 1.0505 will suggest medium term bottoming, and bring stronger rebound towards 1.1149 structural resistance.

In the long term picture, capped below 55 month EMA, EUR/CHF is seen as extending the multi-decade down trend. There is no prospect of a bullish reversal until some sustained trading above the 55 month EMA (now at 1.0846).

Monday, Jun 20, 2022

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Tuesday, Jun 21, 2022

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Wednesday, Jun 22, 2022

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Thursday, Jun 23, 2022

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Friday, Jun 24, 2022

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Summary

• Central banks were in the limelight this week, including the Swiss National Bank (SNB). At its June monetary policy meeting, SNB policymakers opted to raise its policy rate, which was a surprise in terms of timing, and also magnitude as the central bank delivered and 50 bps policy rate increase to -0.25%.
• With inflation having moved significantly higher, the SNB highlighted their actions were in an effort to protect against elevated inflation from becoming entrenched within the economy. In addition to the rate hike, SNB policymakers noted that the Swiss franc is no longer highly valued, and they now stand ready to intervene in FX markets in either direction.
• Going forward, we believe economic conditions are supportive of further SNB policy rate hikes. Activity growth is still sound, while SNB projections suggest inflation should remain somewhat elevated for the time being. In that context, we also forecast the SNB to lift policy rates by 25 bps in September 2022 as well as December 2022. In addition, we believe SNB rate hikes will continue in 2023 and expect another 25 bps rate hike in March 2023.

Swiss National Bank Delivers Sizeable Surprise Rate Hike

Among a flurry of central bank policy announcements this week, the Swiss National Bank (SNB) caught the attention of financial markets by delivering a surprise tightening of monetary policy. While SNB policymakers had in recent weeks expressed some increased inflation concerns and hinted at possible interest rate increases, only one of twenty economists surveyed by Bloomberg had forecast a policy change at the June meeting. In the event, not only did the SNB raise its policy rate at its June meeting, but also lifted that policy rate by a larger 50 bps to -0.25%.

In making the monetary policy adjustment, the SNB noted there were signs inflation was spreading to goods and services not directly affected by the war in Ukraine or by the pandemic. As a result, the central bank acted in an effort to avoid higher inflation becoming entrenched as a result of increased second-round effects, and added that it cannot be ruled out that further increases in the policy rate will be necessary over time. Indeed, the SNB's updated inflation forecasts hint at some possibility of those further rate increases. While CPI inflation is seen slowing gradually over much of the forecast horizon, the SNB projects some renewed pickup of inflation from mid-2024, a hint perhaps that further rate increases my still be needed.

In another significant change, the SNB also said the Swiss franc is no longer "highly valued". Indeed, the central bank said the franc had depreciated in trade-weighted terms, and that was adding to imported inflation in Switzerland. The SNB said it was willing to be active in the foreign exchange market as necessary, but also that such intervention could be in either direction - that is, it could be foreign currency purchases or foreign currency sales. Clearly, the SNB is less sensitive to Swiss franc strength than previously, and would be more likely to accommodate a stronger franc going forward in our view.

Swiss Economic Backdrop Consistent With Further Rate Hikes

In assessing recent Swiss data and indicators, we believe the economic backdrop will be supportive of further policy rate increases from the Swiss National Bank. From a growth perspective, the SNB projects GDP growth of around 2.5% in 2022, while we also note the Swiss economy started this year on a reasonable footing. Q1 GDP rose 0.5% quarter-over-quarter and by 4.4% year-over-year. With respect to quarterly sequential growth, private consumption rose 0.4%, government consumption rose 1.4% and goods exports rose 1.4%, and investment spending was disappointing, declining in Q1. We also note some decline in confidence surveys in recent months, including a decline in the KOF leading indicator to 96.8 in May. While that might portend a moderate slowing in economic growth going forward, our own outlook for Swiss GDP growth of 2.6% in 2022 is broadly consistent with the central bank's view, and overall supportive of further monetary tightening.

Meanwhile, CPI has quickened in recent months, with the headline CPI rising 2.9% year-over-year in May and trimmed mean CPI (a core inflation measure) rising 1.1% in April. We will be paying particular attention to trimmed mean inflation, as that could offer the best insight as to what extent broader second-round inflation pressures are emerging. In particular, should trimmed mean inflation move closer the 2% (the central bank's inflation target), that would in our view reinforce the likelihood of additional central bank tightening. Previously, we had forecast a cumulative 75 bps of rate hikes, with 25 bps increases anticipated at the December 2022, March 2023 and June 2023 announcement. However, after the surprise and large SNB policy rate increase in June, we now forecast a slightly more pronounced rate hike cycle. We expect the Swiss National Bank to follow through with 25 bps rate increases at the September 2022, December 2022 and March 2023 announcements, which would see the SNB's policy rate rise to +0.25% by the end of 2022, and to +0.50% by early next year.

Heading for a recession?

This past week felt like a big moment for central banks, collectively, as well as financial markets more broadly. It was the moment when the majority accepted that inflation isn’t just a problem, it’s one that needs to be dealt with powerfully in order to prevent it from spiralling out of control and becoming ingrained in the economy.

There are still those like the BoE that still believe that slow and steady will win the race, or the BoJ that doesn’t actually have an inflation problem, but rather a currency and policy conundrum, or the CBRT that is in so deep that it doesn’t know what to do next. But for the majority, large rate hikes are the way forward, it’s just a case of how many.

What that means is volatility in the markets is probably going nowhere. Recessions are increasingly becoming a strong possibility, if not the base case, and central banks are content with that if it means inflation falls back to where it should be. Everything is going to be scrutinized going forward and could cause surges in volatility at any moment. Just look at Friday which was comparatively calm on the headline front.

US

A brutal week on Wall Street that included a wrath of central banks tightening monetary policy has many traders focused on how soon the US economy will see a recession.  The Fed has signalled that it will take some time to tame inflation and that has driven expectations for a steady stream of massive rate hikes that will soon lead to a broader slowdown in the economy.

The upcoming week is filled with Fed regional surveys, housing data, the flash PMI readings, and the final consumer sentiment survey.  On Tuesday, the May existing home sales report is expected to show the housing market continues to cool. Wednesday is all about Fed Chair Powell’s semi-annual testimony before the Senate panel.  Thursday is day 2 of Powell on Capitol Hill and has 2 big economic releases; initial jobless claims is expected to rise and the flash PMI readings could show further weakness with manufacturing activity and steady service sector activity.  Friday has the final University of Michigan sentiment readings and new home sales data that might bounce back after the prior month’s plunge.

EU

If there’s one thing we learned this week it’s that the ECB won’t necessarily wait for scheduled meetings when it comes to big monetary policy decisions. This time it was fragmentation issues but next time it may be something more.

Next week we have a variety of surveys that will be poured over for an indication of inflationary pressures abating and/or economic fears taking hold. There’s enormous scrutiny on the data now, as well as central bank speak, which will continue to be a major driver of market volatility.

Russia is cutting off some gas supplies to Germany and Italy, two of the remaining countries that have agreed to rouble terms. It’s been done under the guise of maintenance issues but many see it as a threat as countries try to build reserves ahead of the winter months.

French parliamentary second-round elections take place on Sunday and Emmanuel Macron appears concerned about the prospect of losing his party’s majority.

UK

The BoE this week forecast inflation to peak above 11% in October while showing no urgency to do much about it. The economic cost is clearly weighing heavily on their judgement, with the belief being that 80% of the inflation overshoot is driven by energy and core goods and therefore not impacted by changes in rates. It’s hard to know at this point if the Bank is taking a massive gamble or preventing a severe recession. Either way, markets are forecasting another 1.75% of hikes between now and the end of the year.

Next week offers inflation and retail sales data, along with flash PMI surveys. Central Bank speak will naturally be closely monitored as well.

Russia

Russia isn’t shying away from economic confrontation with Europe, targeting gas flows to Germany and Italy and that could ramp up over the next week. That aside, it’s looking quiet on the economic front.

South Africa

The SARB ramped up its tightening last month with a 50 basis point hike, the fourth consecutive meeting of increases. Inflation data next week could tell us whether this will become a trend or not, with the CPI number currently running at 5.9%, barely within the 3-6% inflation target band.

Turkey

The CBRT meeting next week is obviously the highlight as the central bank’s resilience to the reality of its spineless, damaging economic experiment continues to be put to the test. Even if you put to one side the misguided beliefs that have driven such a bizarre policy action, it’s conducting the experiment at arguably the worst time in decades. How long until the CBRT accepts its poor judgement, swallows its pride and does the right thing? Inflation is running at 73.5% and the lira is back near last December’s lows. Life isn’t going to get any easier until it does.

China

China’s calendar week is quiet with just the one and two-year Loan prime Rate decisions on Monday. Given they declined to cut the MTF this week, further cuts are unlikely. A surprise cut could be a short-term positive for local equities.

It appears China’s “national team” has been supporting equities this week ahead of mass testing of the city of Shanghai this weekend (something they will keep doing each weekend into July). A threat to China’s covid-zero remains the biggest risk point in China right now. If cases are discovered over the weekend that threatens a return to lockdowns, Chinese and regional equities could fall, as well as regional currencies.

India

No significant data. Attention remains focused on the Indian rupee which has traced out record lows this week. A rise again in energy prices next week could trigger more weakness.

Australia 

RBA Governor Lowe speaks on Monday and Tuesday and the RBA Minutes are released. Markets will be looking for more signs of increased hawkishness by Lowe and the minutes and could be a negative for local equities.

The Aussie dollar continues to move entirely on global sentiment, and new lockdowns in China, or a stronger US dollar, could unwind the gains of this week.

New Zealand

New Zealand releases consumer confidence and the balance of payments data on Wednesday. Given the weak GDP this week, both numbers have downside risk as the cost of living spirals out of control in New Zealand. The New Zealand dollar has underperformed the Aussie dollar this week as sentiment recovered post-FOMC, and seems likely to continue doing so.

Japan

Japan releases manufacturing and services PMIs on Thursday, but the only game in town is USD/JPY after the BOJ left monetary policy unchanged. USD/JPY is rallying into the end of the week and the BOJ has had to offer to buy unlimited amounts of JGBs to keep the yield cap in place. USD/JPY could continue to rise next week as markets test the BOJ’s mettle, with 140.00 now in sight as the US/Japan interest rate differential widens.

The Nikkei continues to slavishly track overnight Nasdaq moves.

Japan’s inflation release on Friday could heap more pressure on the BOJ and the yen if the reading is high.

Singapore

Singapore releases May inflation data on Wednesday, and a very high print will add pressure on the MAS to announce an unscheduled tightening of policy after NODX data outperformed as well today. That could be positive for the Singapore dollar and negative for equities,

Economic Calendar

Saturday, June 18

Economic Data/Events

• Fed’s Waller Discusses Monetary Policy

Sunday, June 19

Economic Data/Events

• Colombian presidential elections runoff
• IATA Annual General meeting in Doha
• Second round of France parliamentary elections

Monday, June 20

Economic Data/Events

• China loan prime rates
• New Zealand performance services index
• US markets closed for Juneteenth holiday
• EU foreign affairs ministers talk about Ukraine

Tuesday, June 21

Economic Data/Events

• US existing home sales
• Canada retail sales
• New Zealand consumer confidence
• Mexico international reserves
• RBA Gov Lowe speaks at an American Chamber of Commerce event in Sydney
• Primaries in Virginia and Washington, DC. Alabama, Georgia run-off elections
• RBA minutes of its June interest rate meeting
• German Chancellor Scholz, Economy Minister Habeck, Finance Minister Lindner speak at the BDI congress
• South Africa President Ramaphosa, Finance Minister Godongwana and SARB Gov Kganyago speak at investor conference

Wednesday, June 22

Economic Data/Events

• Fed’s Powell delivers semi-annual testimony before Senate panel
• UK CPI
• Canada CPI
• South Africa CPI
• New Zealand Trade
• Thailand Trade
• Australia leading index
• Japan machine tool orders
• New Zealand credit card spending
• Eurozone consumer confidence
• Bank of Japan minutes of April meeting
• IEA World Energy Investment annual report

Thursday, June 23

Economic Data/Events

• Fed’s Powell testifies before House Financial Services Panel
• US initial jobless claims, US flash PMIs
• Fed releases bank stress test results
• European flash PMIs: Eurozone, France, Germany
• UK PMIs
• Australia PMIs
• Mexico Rate Decision: Expected to raise rates by 25bps to 7.75%
• Norway Rate Decision: Expected to raise rates by 25bps to 1.00%
• Turkey Rate Decision:  Expected to keep rates steady at 14.00%
• Japan PMI, department store sales
• Singapore CPI
• China SWIFT payments, Bloomberg economic survey
• South Korea PPI
• Taiwan jobless rate, industrial production
• Summit of EU leaders starts in Brussels
• Eurozone ECB Publishes Economic Bulletin
• EIA Crude Oil Inventory Report

Friday, June 24

Economic Data/Events

• US new home sales, University of Michigan consumer sentiment
• Germany IFO business climate
• Japan CPI
• Thailand forward contracts, foreign reserves, capacity utilization, production index
• China BoP
• Singapore industrial production
• Spain GDP
• RBA Gov Lowe speaks at a UBS panel discussion about global monetary policy challenges in Zurich
• BOJ Gov Amamiya speaks at the National Shinkin Conference

Summary

United States: Recession Risks Rise

• Last week's stronger-than-expected CPI print laid the groundwork for this week, sending markets into a churn and raising the risks of recession. We now look for the U.S. economy to experience a mild contraction in mid-2023. Economic data released this week add to evidence that the chances of a soft landing are fading.
• Next week: Existing Home Sales (Tues), New Home Sales (Fri)

International: Bank of England Raises Rates by 25 bps as Growth Unexpectedly Contracts

• The outlook for the U.K. economy may be starting to cloud, as the economy saw an unexpected contraction, with GDP falling 0.3% month-over-month in April. Against a backdrop of slowing growth and high inflation, the BoE delivered a 25 bps rate hike at its June monetary policy meeting, bringing the Bank Rate to 1.25%.
• Next week: Canada CPI (Wed), U.K. CPI & PMIs (Wed/Thurs), Eurozone PMIs (Thurs)

Interest Rate Watch: Treasuries Tumble as Yields React to CPI, Fed

• New economic data and aggressive Federal Reserve actions sent Treasury yields up sharply this week.Monday, in particular, was one of the most volatile days of the year for bond markets as yields spiked roughly 30 bps across most parts of the Treasury curve.

Topic of the Week: So What's Happening with Our Old Friend Supply Chains?

• There is still ample backlog to be chipping away at, but overall things tend to be gradually improving on the supply front. That doesn't mean we are out of the woods yet, as there are still mentions of supply chain disruptions among many industries, particularly in reference to lockdowns in China.

Full report here.

Canada’s May inflation report will be the main event next week—especially in the wake of a surprisingly large U.S. reading (8.6%) for the same month. We expect Canadian CPI to have jumped yet again, to 7.4% from 6.8% in April, driven mainly by surging prices at the pump and grocery bills. Pressure on energy and food prices in particular will persist as the war in Ukraine continues to raise agricultural and oil prices. But prices are rising across the board. Almost 60% of the CPI basket was growing faster than the top end of the Bank of Canada’s 1% to 3% target range as of April. These factors, together with the U.S. Fed’s large rate hike (75 bp) this week—raise the odds that the Bank of Canada will follow suit with their next policy decision in July.

The pace and magnitude of future central bank rate hikes still depends heavily on inflation going forward. And roughly half of Canada’s current headline rate is driven by global rather than domestic cost pressures. That includes food and energy products that are directly tied to the war but also a portion of other goods purchases (like motor vehicles) that are being affected by global supply chain disruptions. Growth in domestic home buying related expenses has accounted for roughly 20% of headline inflation, and will start to slow in coming months as home resale markets cool . Higher interest rates are lifting mortgage interest costs, but not enough to offset the downward contribution from other shelter components in coming months, we expect. Supply chain constraints that have underpinned goods inflation over the pandemic have also shown early signs of easing, with ocean transport times and shipping costs dropping in recent weeks. Overall, we still expect global central banks to hike interest rates aggressively near-term to take the heat off consumer demand and bring inflation back closer to the target range.

Week ahead data watch:

• We don’t expect April’s Canadian retail sales to deviate from StatCan’s preliminary estimate for a 0.8% month over month increase. Sales likely ticked lower in May on lower auto purchases but remain elevated from levels pre-pandemic. Spending on services including travel have also continued to bounce back according to tracking of our own card spending data.

In a statement explaining her dissent to Fed's 75bps rate hike this week, Kansas City Fed President Esther George said, "I viewed that move as adding to policy uncertainty simultaneous with the start of balance sheet runoff."

"The speed with which we adjust the policy rate is important," she explained. "Policy changes affect the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments. It also has implications for the yield curve and traditional bank lending models, such as those prevalent among community banks."

Full statement here.

Minneapolis Fed President Neel Kashkari said in an article, " I supported increasing the federal funds rate by 75 basis points at this week's meeting, and could support another such move in July". But he also warned to "too much more front-loading".

"A prudent strategy might be, after the July meeting, to simply continue with 50-basis-point hikes until inflation is well on its way down to 2 percent," he said. "Obviously, in such a scenario, the FOMC would still need to remain data-dependent and have the flexibility to account for economic developments that might arise."

Full article here.

Recession worries are mounting as central banks around the world step up their fight against soaring inflation. The flash PMI readings for June will be watched for any clues that tighter monetary policy is choking economic growth. In the meantime, inflation numbers in Canada, Japan and the United Kingdom could add yet more pressure on policymakers to do more. However, after hiking rates by the most in 28 years, Fed chief Jerome Powell could steal the limelight again in the coming week when he testifies before lawmakers.

June PMIs might worsen euro’s woes

A hawkish European Central Bank has been unable to come to the euro’s aid despite Eurozone government bond yields surging to multi-year highs. An even more hawkish Federal Reserve is keeping the bias in the dollar’s favour. But that’s not the only reason for the euro’s weakness. Investors are worried that the risk of a sharp economic downturn is greater in Europe where the spike in energy prices has been more pronounced than in America as the continent is more reliant on Russian oil and gas.

So far, Eurozone growth has held up relatively well, but the picture is deteriorating fast as the situation in Ukraine remains dire. With energy prices staying elevated and loose monetary conditions coming to an end, Thursday’s flash PMI reports are expected to point to a further moderation in business activity in June.

However, a lot of the pessimism has already been priced into the markets by now, so unless the PMIs are substantially lower than forecast, the euro might not necessarily suffer significant losses. Germany’s Ifo business climate index will follow on Friday.

Pound on recession alert amid a slew of UK data

Across the channel, the economic pain from the Ukraine conflict and supply chain problems is proving to be even more acute in the United Kingdom. Inflation is rampant, the government keeps stepping from one crisis into another, supply and labour shortages have been exacerbated by Brexit, and tensions between London and Brussels are simmering again over Northern Ireland.

It’s no wonder that businesses are feeling gloomy and the June PMIs due Thursday are expected to reflect the worsening climate. However, before that, all eyes will be on the latest consumer price index on Tuesday.

The UK’s headline inflation rate jumped to 9.0% y/y in April and is projected to have inched up to 9.1% in May – the highest among the major economies. The Bank of England raised interest rates by 25 basis points for the fifth consecutive meeting in June as it attempts to rein in spiralling prices. If CPI continues to rise rapidly, the BoE may have no choice but to switch to a more aggressive pace of tightening, threatening to push the economy into a full-blown recession.

Many indicators already suggest UK GDP is headed for contraction in the second quarter. Retail sales figures out on Friday will be watched to gauge the strength of consumer spending in May.

Given the risks of stagflation, hot inflation numbers are unlikely to provide much support to sterling, but better-than-expected retail sales data might, as it would ease concerns about growth turning negative.

Canadian CPI could boost hawkish BoC bets

Inflation and retail sales will be the focal point for traders in Canada too. The Canadian economy is booming and is possibly in better shape than America’s. But that hasn’t stopped the Canadian dollar from coming under pressure against its US counterpart as the commodity-linked loonie is sensitive to risk sentiment.

Bank of Canada Governor Tiff Macklem hinted earlier this month that the central bank is open to hiking rates by 75-basis-point increments. And after the Fed did exactly that in this past week, the odds of the BoC doing the same at its next meeting have risen.

Tuesday’s retail sales report and Wednesday’s CPI readings will likely support the need for bigger rate hikes, while slightly disappointing numbers would probably not get in the way of policymakers stepping on the brakes much harder.

Aussie: one eye on RBA and another on China

Another risk-driven currency is the Australian dollar. Worries about a slowdown in China and elsewhere have partially offset the boost from higher commodity prices. Nevertheless, the aussie’s year-to-date losses are notably less than many of its peers’.

The Reserve Bank of Australia will publish the minutes of its last policy meeting on Tuesday. Any signs of a further hawkish shift could give the aussie a modest nudge up, though there could be some downside risks from Thursday’s flash PMIs.

Aussie traders will also be keeping an eye on the People’s Bank of China policy decision on Monday. There is some speculation that the prime rate will be cut for the second straight meeting. Such a move could lift sentiment at the start of the week’s trading.

No inflation joy for the yen

The Bank of Japan is now the only central bank not to join the global tightening race after the Swiss National Bank took markets by surprise and hiked its policy rate by 50 bps. However, it will likely be only a matter of time before the BoJ is forced to change course as well and begin withdrawing some of its massive stimulus.

The 10-year Japanese government bond yield has been stuck at the upper limit of the BoJ’s yield target while the yen has nosedived against the US dollar to 24-year lows. But the Bank of Japan is not budging as it wants the rise in inflation to be sustainable.

CPI data out on Friday is expected to show the core print holding steady just above the target in May at 2.1% y/y. But until the BoJ sees evidence that inflation is becoming broad based and is not driven solely by surging energy prices, the yen will probably continue to struggle.

In other data, the flash manufacturing PMI on Thursday will be important too.

Dollar to take cues from Powell’s testimony

It will be a relatively quieter week in the United States as the only key releases are existing home sales (Tuesday), manufacturing and services PMIs (Thursday), and new home sales (Friday). The PMIs by S&P Global do not tend to attract as much attention as the ISM ones but the flash estimates will be particularly crucial over the coming months as investors will want to get an earlier warning on possible recession risks.

After the Fed hiked interest rates by 75 basis points, there is a heightened sense of anxiety about a hard landing in the world’s largest economy as the Fed battles to keep a lid on exploding prices. Chair Powell is not ruling out another 75-bps hike so his words will be scrutinized when he testifies before Congress on the Semi-Annual Monetary Policy Report.

The dollar rally could catch more fire if Powell reinforces his hawkish stance on the need to bring inflation down. On the other hand, Powell will likely be mindful not to stoke any more panic, so the greenback could pull back from its recent highs if he plays down the danger of the Fed tipping the economy into recession.

It has been an eventful week on the central bank front. The Fed delivered a historical 75bp hike to a target range of 1.5-1.75% and signalled that another 75bp hike in July is possible if there are no signs inflation pressures ease. It is striking that just one year ago, the Fed did not expect to deliver any hikes in 2022. And now we are looking at the steepest hiking cycle since the 1980's. We look for another 75bp in July as we see no sign that inflation pressure is easing in the short term. We expect it to be followed by 50bp hikes in September, November and December to take the Fed funds rate to 3.75-4.00% by year-end, which is 25bp higher than current market pricing.

Since the 75bp hike was already signalled on Monday, the market reaction was quite muted. Initially yields dropped but on Thursday they rebounded again with the US 10-year yield trading close to 3.5%. German yields increased yet again to a new cycle high at 1.83%, partly lifted by a 'hawkish' 25bp hike by Bank of England, and a surprise 50bp hike by the Swiss central bank SNB. Equity markets also moved lower again on concerns that the aggressive rate hikes can trigger a deeper recession than already priced.

The ECB held an extraordinary meeting on Wednesday to discuss 'fragmentation' on the back of the recent sharp widening of the 10-year Italy-Germany bond yields spread, which had increased from 100bp in September last year to 240bp early this week. With the end of ECB's purchasing programmes investors have less confidence in holding Italian bonds setting off a negative spiral. In the meeting statement, the ECB said it would a) use flexibility in reinvesting redemptions in ECB's portfolio and b) accelerate the design of a new anti-fragmentation instrument for consideration by the Governing Council. The 10-year Italy-Germany spread has narrowed to 205bp in response. Whether the improvement will last will ultimately, depend on the details of the new instrument once it is ready.

On the data front, US data disappointed again. US retail sales was weaker than expected with total sales declining 0.3% m/m (corresponding to a real decline of 1.3% m/m due to the high inflation). Housing starts dropped 14.4% m/m in May and the Philadelphia Fed business outlook declined to the lowest level in two years. In the euro area, the German ZEW increased to -28 from -34.3 but is still at quite low level. China saw a new small covid outbreak in Beijing but seems to have it under control. Shanghai is going to test the whole city every weekend until end-July in order to catch outbreaks as early as possible and use more targeted lockdowns in order to avoid city-wide lockdowns. Chinese data on industrial production and retail sales showed a small rebound in May and they will likely recover further in June and July due to a re-opening effect and more forceful stimulus.

Looking into next week, we have a fairly light calendar with Flash PMI's in the US and euro area as well as German ifo business confidence being the most interesting. We look for a further decline due to the strong financial headwinds currently. Fed chairman Jerome Powell will deliver the semi-annual testimony in Congress but we doubt it will provide much news. On the political front EU leaders will meet for a summit on Thursday and Friday to discuss  Ukraine's EU membership application, and economic issues. On Sunday France goes to the polls for the second round in the parliamentary election.

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