Sample Category Title

EUR/CHF dives through 1.0216 support after surprised SNB rate hike. The development now argues that corrective rebound from 0.9970 has completed at 1.0513. More importantly, rejection by 1.0505 support turned resistance, as well as 55 week EMA, maintain medium term bearishness.

The development now raises the chance of down trend long term down trend resumption through 0.9970 low at a later stage. If that happens, next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650.

SNB surprises the markets by raising the sight deposit rate by 50bps to -0.25% today, "to counter increased inflationary pressure". It also adopts a tightening bias and said, "it cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term." SNB also maintains the willingness to intervene in the currency markets if necessary.

Even with higher interest rates, the conditional inflation forecasts were also raised across forecast horizon. Inflation is projected to peak at 3.2% in Q3, then slow to below 1.4% in Q4 2023, then rise back to 2.1% in Q1 2025. Average inflation is forecasts to be at 2.8% in 2022, 1.9% in 2023, and 1.6% in 2024, upgraded from 2.1%, 0.9% and 0.9% respectively.

As for the economy, SNB still expected 2.5% GDP growth in 2022 while unemployment is "likely to remain low". However, "if the energy supply in Europe were to be adversely affected, this could have a serious impact on the Swiss economy. The global supply bottlenecks and further increases in commodity prices could also slow growth. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out."

Full statement here.

The SNB is tightening its monetary policy and is raising the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25% to counter increased inflationary pressure. The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland. It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term. To ensure appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary.

The SNB policy rate change applies from tomorrow, 17 June 2022. With effect from 1 July 2022, the SNB is also adjusting the threshold factor used to calculate the level of banks' sight deposits at the SNB exempt from negative interest. The factor will be lowered from 30 to 28. This will ensure that the secured short-term Swiss franc money market rates are close to the SNB policy rate.

Inflation reached 2.9% in May and is likely to remain at an elevated level for the time being. The SNB's new conditional inflation forecast is based on the assumption that the SNB policy rate is −0.25% over the entire forecast horizon. The new forecast for the next three years is above that of March (cf. chart 1), and stands at 2.8% for 2022, 1.9% for 2023, and 1.6% for 2024 (cf. table 1). Without today's SNB policy rate increase, the inflation forecast would be significantly higher.

Global economic growth has slowed markedly recently. This slowdown is on the one hand attributable to the high level of inflation, which is weighing on purchasing power and thus reducing demand. On the other hand, the uncertainty stemming from the war in Ukraine as well as the coronavirus lockdowns in China are curbing the development of the global economy.

Since March, there has been a further considerable and broad-based increase in inflation in many countries. The war in Ukraine has been a significant factor here, too, in that the prices of many commodities have risen as a result. In addition, persisting supply bottlenecks have led to further price increases for various goods.

In its baseline scenario for the global economy, the SNB assumes that energy prices will remain high for the time being, but that there will not be an acute energy shortage in the major economic areas. The positive development of the economy should thus continue overall. Owing to the increased prices for energy and food, coupled with the supply bottlenecks, inflation is likely to remain high for some time. However, the importance of these factors should diminish over the medium term. With monetary policy also becoming increasingly tighter in many countries, inflation is likely to gradually return to more moderate levels.

This scenario for the global economy is subject to significant risks. For example, inflation could rise further and thus weigh even more heavily on real incomes and consumer demand. At the same time, high inflation could become entrenched as a result of increased second-round effects, requiring stronger monetary policy responses in other countries. Finally, there are still important downside risks to growth from the war in Ukraine and the pandemic.

The Swiss economy has continued the favourable development it has shown since the beginning of the year. After modest growth in the fourth quarter of 2021, GDP increased by just under 2% in the first quarter of this year. The signals remain positive for the current quarter. The situation on the labour market has also continued to improve.

The war in Ukraine has thus far had comparatively little adverse impact on economic activity in Switzerland. The effect has been most clearly felt in the higher energy prices and in the supply bottlenecks.

For 2022, the SNB still anticipates GDP growth of around 2.5%. Unemployment is likely to remain low. This favourable forecast is based, among other things, on the assumption that the global economy continues to grow and that the war in Ukraine does not escalate further.

The forecast for Switzerland, as for the global economy, is subject to large risks. If the energy supply in Europe were to be adversely affected, this could have a serious impact on the Swiss economy. The global supply bottlenecks and further increases in commodity prices could also slow growth. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out.

Mortgage lending and residential property prices have risen further in recent quarters. The SNB will continue to monitor developments on the mortgage and real estate markets closely.

More detailed information on the monetary policy decision can be found in Thomas Jordan's introductory remarks, available from 10 am. Fritz Zurbrügg's remarks focus on developments in the area of financial stability, while Andréa Maechler's remarks address the situation on the financial markets.

Market movers today

Markets will continue to digest the FOMC meeting yesterday while focus turns to meetings in Bank of England (BoE) and SNB today. We look for BoE to hike the Bank Rate by another 25bp but simultaneously still send mixed signals by repeating that "some degree of further tightening in monetary policy may still be appropriate in the coming months".

In Switzerland, we do not expect the SNB to hike but the pressure is increasing, as the ECB is about to hike policy rates and CPI inflation is running close to 3%.

In the US data releases for housing starts, initial jobless claims and the Philadelphia Fed business survey is due out.

We will also keep an eye on German Chancellor Scholz, French President Macron and Italian PM Draghi's visit to Ukraine for talks with President Zelenskiy.

Early Friday, Bank of Japan (BoJ) finishes up a two-day policy meeting. Our base case is that they will keep steady but the chance of a tweak to the yield curve control set-up in order to ease JPY headwinds has increased just as is the case for the chance of BoJ intervening in the FX market on behalf of Tokyo.

The 60 second overview

Fed: In line with expectations, the Federal Reserve decided to hike the target range by 75bp to 1.50-1.75%. We have emphasised for a long time that the Fed could be forced to follow the "emerging market central bank playbook" by out-hiking expectations and yesterday's announcement seems to be the first step in that direction. While the Federal Reserve now says it is "strongly committed" to get inflation back to 2%, Chair Jerome Powell's press conference was interpreted dovishly, as he indicated that the Fed is not going to make a string of 75bp rate hikes. EUR/USD moved higher and 2yr US Treasury yields declined after this comment. We change our Fed call now expecting the Fed to hike by 75bp in July and 50bp in September, November and December, see Fed Research - Review: big rate hikes until inflation pressure eases., 15 June.

ECB: To address the recent spread widening in particularly Italy, ECB decided to announce that they will flexibly implement the PEPP reinvestments as well as accelerate the work on a new anti-fragmentation work for the governing council to consider. The political signal is strong, but the exact details will determine the actual strength of a potentially new anti-fragmentation tool. We see the decision today as the most likely outcome for now. Further, with ECB tasking the committees they have sent a signal that they are fully committed to ensuring the functioning of the monetary policy transmission. However, they have also bought themselves some time. We will likely only hear from the committees at the July or September meeting.

Japan posted its biggest trade deficit in eight years in May, as import costs continue to weigh heavily for one of the world's biggest energy importers following the big nose dive in yen. Nearly half of Japanese firms see the weak yen as bad for business according to a private survey, see Reuters.

Equities: Equities in a relief rally after a convincing Fed and deflationary macro data. Sector performance reversed with cyclical growth sector (tech) outperforming defensives. Hence, big gap between indices with S&P 500 rebounded 1.5% but Nasdaq 2.5%. Futures are pointing somewhat higher this morning too.

FI: The market reaction to the FOMC meeting yesterday may seem surprising as US Treasury yields/rates declined on the back of a fairly aggressive Federal Reserve and we are revising our forecast for the monetary policy path upwards. Similar to others we change our Fed call and now expect the Fed to hike by 75bp in July and 50bp in September, November and December. However, the market is focusing on the recession risk as well as the comments from Powell that they are not expecting a string of 75bp moves. Yesterday, the ECB announced that they will prepare a backstop facility to stop market fragmentation sooner rather than later. This lead to a massive rally in the periphery and solid spread tightening.

FX: EUR/USD had quite a volatile session yesterday. At some point, EUR/USD was above 1.05 before moving down below 1.04. The cross ended the day slightly above 1.04 after the cross was supported by dovish comments (at least compared to market pricing) from Fed Chair Jerome Powell. EUR/GBP started the day by moving above 0.87 but ended below 0.86. We could see slight relief for NOK and SEK near-term as Fed did little to tighten financial conditions more than what was already priced going into the meeting.

Credit: Credit markets took a pause yesterday from the past several trading days of widening. The indices closed ahead of the Fed decision, with iTraxx main closing some 3.5bp tighter at 105bp and Xover closing some 16.6bp tighter at 527.9bp.

A relief was what I expected after the Federal Reserve’s (Fed) fully priced decision to hike the rates by 75bp yesterday, but a rally is what happened.

Nasdaq jumped 2.5% and the S&P500 recovered 1.5%.

The reason for the post-Fed rally is perhaps not that the market was happy to hear that Powell doesn’t think that 75bp hikes would become ‘common’ in the near future - as we may see at least one more 75bp hike this summer, but it was the fact that the market had gone well ahead of itself in terms of hawkish pricing, and a part of the hawkish bets were cut after the announcement.

And the announcement was all but dovish. The dot plot showed that the Fed officials mostly think that the rates would reach 3.4% late this year, up from 1.9% plotted in March.

US yields eased as the Fed hawks scaled back their expectations to a softer reality, and the US dollar index came down from a fresh two-decade high. The futures are in the positive at the time of writing, but the optimism may not last long, as the economic picture and the Fed news are, in fact, less than ideal.

Yesterday’s retail sales data printed an unexpected negative number in May, hinting that inflation may be taking a toll. Jerome Powell said he sees ‘no signs’ of a broader slowdown in the economy. But, he was also saying that inflation would be transitory last year.

What now?

We will likely continue seeing choppy market conditions.

One good news is the softening oil prices, as investors price a higher chance of recession, which would curb oil demand and ease prices. The barrel of US crude is down to $115 level this morning, even after the weekly data showed that the US inventories grew slower than expected.

But the price pullbacks will likely attract fresh long positions, as recovery in Chinese demand, the global pickup in travel, and the tight crude supplies should support the bullish market in the medium run.

Alors, Christine?

The aggressive hawkish shift in Fed policy, the rising US rates and the soaring US dollar are not a gift for the other central banks.

The European Central Bank had an emergency meeting yesterday, to discuss how to slow the soaring bond yields after they announced the end of the asset purchases program last week, but more importantly how to prevent the peripheral yields from soaring faster than the core yields.

Now that the Fed steps on gas to raise rates faster, the ECB and the other central banks need to catch up with the Fed. Otherwise, the stronger US dollar would make the other countries’ imports, especially the energy and commodity imports, way more expensive than they already are. And that would lead to higher inflationary pressures and hawkish central bank policies.

We know Christine Lagarde doesn’t want to conduct a catch-up policy with the Fed, and that Mario Draghi thinks that raising the interest rates in Europe is a terrible idea as the European inflation comes from high energy prices, and not from high demand.

But the European inflation is boosted by the soaring dollar as energy purchases happen in USD.

Therefore, the ECB must make sure that the highly indebted peripheral countries will be able to withstand a tighter ECB policy, to avoid throwing a renewed debt crisis on top of the pandemic, war and soaring inflation. As a result, the ECB will apparently invent another instrument, an anti-fragmentation instrument, to buy the most fragile countries’ debt, hoping to reduce the differential between the core and the periphery yields.

Good luck making the Germans buy the idea.

BoE & SNB: No fireworks expected

We watch two other monetary policy meetings today, the Bank of England (BoE) and the Swiss National Bank (SNB).

The BoE is set to raise the bank rate for the 5th straight meeting, but the pound will hardly gain on that decision unless we see a bigger hike.

Some expect the SNB to move in tandem with the ECB to tame inflation. But the truth is, the SNB has little incentive to tighten hurriedly as long as the franc helps tame inflation. The SNB is also expected to say goodbye to the negative policy rates in the coming quarters. We shall see the negative rates vanish by the end of the Q1 of next year. But there is probably no hurry from the SNB to tighten quickly. The longer the Swiss could keep the rates at supportive levels, the better it is for their economy!

Daily Pivots: (S1) 0.9899; (P) 0.9974; (R1) 1.0017; More...

Intraday bias in USD/CHF is turned neutral again as it lost momentum ahead of 1.0063 resistance. On the upside, firm break of 1.0063 will resume larger up trend. Next target is 100% projection of 0.9193 to 1.0063 from 0.9543 at 1.0413. On the downside, below 0.9872 minor support will turn intraday bias to the downside, to extend the corrective pattern from 1.0063 with another falling leg.

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.

US stocks recovered overnight after Fed delivered the 75bps rate hike as market priced in, while Dollar and yields retreated. Asian markets are mixed with some weakness seen in Hong Kong HSI. For the week, the greenback remains the strongest one, except versus Yen which it's paring gains against. Sterling is the worst performing as focus now turns to SNB and then BoE rate decision.

Technically, there is some downside prospect for Dollar for the near term, given then it was rejected against near term resistance levels against most peers. The levels include 1.0348 in EUR/USD, 0.6828 support in AUD/USD, 1.0063 resistance in USD/CHF and 1.3075 resistance in USD/CAD. Euro is the exception as it's clearly weak against Sterling, Aussie and Canadian. In particular, eyes will be on whether side of the range of 0.8484/8720 would EUR/GBP breaks through.

In Asia, at the time of writing, Nikkei is up 0.82%. Hong Kong HSI is down -1.14%. China Shanghai SSE is down -0.28%. Singapore Strait Times is up 0.69%. Japan 10-year JGB yield is down -0.0118 at 0.244. Overnight, DOW rose 1.00%. S&P 500 rose 1.46%. NASDAQ rose 2.50%. 10-year yield dropped -0.088 to 3.395.

Fed hikes by 25bps, forecasts rate at 3.4% by end of 2022

Fed hikes by 75bps to 1.50-1.75%. Esther George dissented and voted for a 50bps hike only. Fed said that it's "highly attentive to inflation risks" in the statement. Also, Fed now forecasts interest rate to be at 3.4% by the end of this year, sharply higher than prior estimate of 1.9%. Also, in the new dot plot, all members penciled in rate hikes to 3.125% and above by the end of 2022.

In the new median economic projections, federal funds rate is forecast to be at:

• 3.4% by the end of 2022 (up from 1.9%)
• 3.8% by the end of 2023 (up from 2.8%)
• 3.4% by the end of 2024 (up from 2.8%)

GDP growth is forecast to be at:

• 1.7% in 2022 (down from 2.8%)
• 1.7% in 2023 (down from 2.2%)
• 1.9% in 2024 (down from 2.0%)

PCE inflation is forecast to be at:

• 5.2% in 2022 (up from 4.3%)
• 2.6% in 2023 (down from 2.7%)
• 2.2% in 2024 (down from 2.2%)

Core PCE inflation is forecast to be at:

• 4.3% in 2022 (up from 4.1%)
• 2.7% in 2023 (up from 2.6%)
• 2.3% in 2024 (unchanged).

Unemployment rate is forecast to be at:

• 3.7% in 2022 (up from 3.5%)
• 3.9% in 2023 (up from 3.5%)
• 4.1% in 2024 (up from 3.6%)

S&P 500 rose as traders covered on Fed news

US stocks closed higher overnight even though FOMC delivered an "uncommon" mega hike of 75bps. Fed Chair Jerome Powell also indicated at the post-meeting press conference that "either a 50 basis point or a 75 basis point increase seems most likely at our next meeting" while "ongoing rate increases will be appropriate."

The recovery in stocks is more seen as a "sell-on-rumors-cover on news" move. Fed delivered what the markets have expected and the selloff was already done earlier in the week. Also, some would give a nod to Fed's determination to combat inflation and create the conditions for a soft-landing, even though it's a big challenge.

The condition for a stronger rebound in S&P 500 is there, give that it's close to 3666.44/3672.97 cluster projection (61.8% projection of 4637.30 to 3810.32 from 4177.51 at 3666.44, 161.8% projection of 4818.62 to 4222.62 from 4637.30 at 3672.97). Yet, SPX will need to break through the top end of the latest gap at 3900.16 to indicate stabilization first. Otherwise, risk will remain heavily on the downside. Deeper fall into support zone between 3195.28 and 3505.24 (61.8% and 50% retracement of 2191.86 to 4818.62) is too early to be ruled out at this point.

Australia employment rose 60.6k in May, strong growth in hours worked

Australia employment rose 60.6k in May, better than expectation of 25.0k. Full-time jobs rose 69.4k while part-time jobs dropped -8.7k. Unemployment rate was unchanged at 3.9%, above expectation of 3.8%. Participation rate rose 0.3% to 66.7%. Monthly hours worked rose 0.9% mom or 17m.

Bjorn Jarvis, head of labour statistics at the ABS, said: "The increase in May 2022 was the seventh consecutive increase in employment, following the easing of lockdown restrictions in late 2021. Average employment growth over the past three months (30,000) continues to be stronger than the pre-pandemic trend of around 20,000 people per month.

"In addition to the continuing trend of increasing employment, we have continued to see relatively stronger growth in hours worked. This is something we also saw this time last year, before the Delta outbreak."

New Zealand GDP fell -0.2% qoq in Q1, primary industries drove contraction

New Zealand GDP contracted -0.2% qoq in Q1, much worse than expectation of 0.6% qoq.

StatsNZ said: "Primary industries drove the decrease in GDP, down 1.2 percent in the quarter. Goods producing industries also experienced a slight decline, down 0.1 percent.

"The service industry group, which makes up approximately two thirds of the economy, remained flat. This result reflects falls in some industries being offset by rises in others."

GBP/CHF staying bearish as SNB and BoE loom

SNB and BoE rate decisions are the next focuses for today. SNB is expected to policy unchanged today but start turning up a hawkish tone, setting the stage for the first rate hike in 15 years at the September meeting. Inflation reaching 2.9%, a 14-year high, in May isn't much of a problem comparing to other parts of the world. Yet, ECB's tightening stance is giving SNB much room to adjust policy now.

The situation for BoE is more complicated. A 25bps hike to 1.25% is the base case. There are arguments for a larger hike with inflation at 7.8% yoy. Yet, there are also arguments for a pause given that UK economy has already started a recession in Q2. The eventual decision and the voting could drive much volatility in the Pound.

Here are some previews for BoE and SNB:

• Bank of England Preview
• BoE Meeting Preview – 50bps or 25bps hike that is the question
• Bank of England: Steady as She Goes?
• SNB Meeting: Higher Rates or Patience?

GBP/CHF is staying in the down trend from 1.3070 for now and outlook remains bearish as long as 1.2292 resistance holds. But the structure of the decline suggests that it's more of a corrective move. Downside potential could be limited with strong support at around 61.8% retracement of 1.1107 to 1.3070 at 1.1857 to complete the down trend.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.9899; (P) 0.9974; (R1) 1.0017; More...

Intraday bias in USD/CHF is turned neutral again as it lost momentum ahead of 1.0063 resistance. On the upside, firm break of 1.0063 will resume larger up trend. Next target is 100% projection of 0.9193 to 1.0063 from 0.9543 at 1.0413. On the downside, below 0.9872 minor support will turn intraday bias to the downside, to extend the corrective pattern from 1.0063 with another falling leg.

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.

Economic Indicators Update

SNB and BoE rate decisions are the next focuses for today. SNB is expected to policy unchanged today but start turning up a hawkish tone, setting the stage for the first rate hike in 15 years at the September meeting. Inflation reaching 2.9%, a 14-year high, in May isn't much of a problem comparing to other parts of the world. Yet, ECB's tightening stance is giving SNB much room to adjust policy now.

The situation for BoE is more complicated. A 25bps hike to 1.25% is the base case. There are arguments for a larger hike with inflation at 7.8% yoy. Yet, there are also arguments for a pause given that UK economy has already started a recession in Q2. The eventual decision and the voting could drive much volatility in the Pound.

Here are some previews for BoE and SNB:

• Bank of England Preview
• BoE Meeting Preview – 50bps or 25bps hike that is the question
• Bank of England: Steady as She Goes?
• SNB Meeting: Higher Rates or Patience?

GBP/CHF is staying in the down trend from 1.3070 for now and outlook remains bearish as long as 1.2292 resistance holds. But the structure of the decline suggests that it's more of a corrective move. Downside potential could be limited with strong support at around 61.8% retracement of 1.1107 to 1.3070 at 1.1857 to complete the down trend.

Australia employment rose 60.6k in May, better than expectation of 25.0k. Full-time jobs rose 69.4k while part-time jobs dropped -8.7k. Unemployment rate was unchanged at 3.9%, above expectation of 3.8%. Participation rate rose 0.3% to 66.7%. Monthly hours worked rose 0.9% mom or 17m.

Bjorn Jarvis, head of labour statistics at the ABS, said: "The increase in May 2022 was the seventh consecutive increase in employment, following the easing of lockdown restrictions in late 2021. Average employment growth over the past three months (30,000) continues to be stronger than the pre-pandemic trend of around 20,000 people per month.

"In addition to the continuing trend of increasing employment, we have continued to see relatively stronger growth in hours worked. This is something we also saw this time last year, before the Delta outbreak."

Full release here.

New Zealand GDP contracted -0.2% qoq in Q1, much worse than expectation of 0.6% qoq.

StatsNZ said: "Primary industries drove the decrease in GDP, down 1.2 percent in the quarter. Goods producing industries also experienced a slight decline, down 0.1 percent.

"The service industry group, which makes up approximately two thirds of the economy, remained flat. This result reflects falls in some industries being offset by rises in others."

Full release here.