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Market movers today

With ECB's meeting behind us, the markets will remain sensitive to potential sources stories, which may indicate the difference on views on the size of rate hikes at the September meetings and onwards.

The big market mover today is however, the US CPI print for May. Given that base effects are playing into the annual numbers, key focus is on the monthly momentum where expectations are for further increases in the headline inflation while monthly increase in core inflation should remain around 0.6% which would be equivalent to 6-7% in annual terms, way above the Fed's comfort zone.

In both Denmark and Norway, we also get CPI data for May (see Nordic section for further detail).

Another interesting release is the Michigan consumer survey, where the overall index should stabilise after months of sharp drops. A key thing to watch out for in the report is the inflation expectations especially in the long term.

At today's policy meeting, the Russian central bank is expected to reduce its policy rate from 11% to 10% on the back of abating inflation pressures.

The 60 second overview

ECB: Yesterday's ECB meeting ended with wider spreads and flatter curves as ECB is beginning its hiking cycle where 50bp is the baseline for September in our reading. ECB guided for a rate hike of 25bp in July. We believe that it will take significant upside or downside surprise for ECB to deviate from this guidance. Net asset purchases will end on 1 July in line with previous guidance of Q3. We keep our rate hike expectations of a sequence of 25bp, with the exception of September where a 50bp hike is our baseline. Risks are still skewed for more than one 50bp rate hike, but with the current very uncertain outlook we expect the economic outlook will dampen the medium inflation pressure, making our preference for 25bp hike. Markets are now pricing in 148bp by year end (+14bp on the day).

EUR/USD fell on hawkish ECB: In our view, this ECB meeting confirms our view that rate hikes are a global phenomenon intended to make markets rotate towards less risky positions and a lower EUR/USD spot is part of such rotation. For Europe, widening spreads is also crucial to why EUR/USD heads south as we price in higher rates and as explained in, the ECB is fighting strong valuation forces when trying to strengthening the single currency. Looking ahead, we continue to see EUR/USD towards parity.

Getting towards the end of rate hikes in Eastern Europe? At the press conference yesterday following Wednesday's expected decision to hike its benchmark rate by 75bp to 6%, the Polish central bank governor signalled that a rate cut could come into play towards the end of 2023 and that NBP is "certainly closer to the end than to the beginning of the tightening cycle".

Equities: Another day with equities lower and both European and US equities finishing close to day-lows. Reasoning being ECB deciding to hit the brakes and thereby joining the increasing group of central banks around the world implicitly acknowledging they are behind the curve. Equity investors are trying to figure out whether central banks can super charge the tightening cycle and still manage a soft landing. Increased uncertainty is the primary result of this and hence the reason why cyclicals underperformed defensive by less than 50bp although MSCI world was down almost 2% yesterday. In US Dow -1.9%, S&P 500 -2.4%, Nasdaq -2.8% and Russell 2000 -2.1%. Most markets are lower in Asia this morning but much less than one could have expected on the back of the Wall Street session yesterday. European futures are down as result of the weak US performance yesterday while US futures are slightly higher this morning.

FI: Yesterday's ECB meeting ended with wider spreads and flatter curves as ECB is beginning its hiking cycle where 50bp is the baseline for September in our reading.

FX: Cyclically sensitive currencies took a hit in yesterday's session with AUD, NOK and ZAR leading losses in major space. The USD was the general top performer while the ECB meeting failed to deliver any meaningful support to EUR with EUR/USD falling back towards the 1.06 threshold level.

Credit: Credit markets were weak from the morning and the weakness intensified on the back of the ECB meeting, which made iTraxx Xover close almost 16bp wider and Main 3.4bp wider. Following the last days' widening, both indices are now close to 2022 highs, with Xover currently at 470bp and Main 94bp.

Nordic macro

Norwegian core inflation has been trending upwards since late last year, and we expect a new lift from 2.6 % to 2.8 % in May. This is clearly in the lower end of the forecasts, which ranges from 2.8-3.2% with an average of 3.1%, as we expect some of the typical Easter effects from April to be at least partly reversed. That said, we acknowledge the fact that the risk is tilted to the upside as global inflation clearly is trending upwards, as illustrated by the recent European and even Swiss figures. This will anyway be above Norges Bank's forecast of 2.6% in the March monetary policy report, so the question is whether it would be enough to confirm the market's aggressive expectations of the central bank ahead of the June rate meeting.

The roller coaster activity on US stock markets continued overnight, with Wall Street deciding that inflation and recessions were an issue for two days in a row. A tiny rise in US Initial Jobless Claims probably tilted Wall Street over the edge, following the European Central Bank’s tilt to a hawkish bias at their policy meeting earlier in the day.

Thankfully, Friday is here on a number of levels, but most especially because we will see the release of US Inflation and Core Inflation data. Markets have been tying themselves up in knots over this all week, thanks to a thin data calendar. Like last Friday’s Non-Farm Payrolls, I am expecting a very binary outcome this evening with median forecasts for the headline at 8.30%, and core inflation at 5.90% YoY. A number at 8.40% or higher probably sparks a risk aversion sell-off across asset markets with the US Dollar winning. Conversely, a print at 8.20% or lower probably sees a buy everything, sell US Dollars rally, as Fed hiking expectations are pared ahead of next week’s FOMC.

China inflation this morning has passed without incident this morning. Inflation YoY for May was just under expectations at 2.10%. Inflation MoM fell to -0.20%, slightly higher than forecasts of -0.30%. The covid-led consumer and industrial led slowdown continues acting as a brake on inflation. Markets in China today have their eyes focused elsewhere. President Xi Jinping sent out mixed messages overnight, exhorting officials to maintain covid-zero, while also supporting economic growth. Good luck with that.

A potential on again, off again Ant Financial IPO is also doing the rounds. Bloomberg ran a story yesterday saying Chinese officials had indicated a willingness for it to go ahead. Alibaba ADRs rallied 7.0% in New York before reversing all those gains after Chinese officialdom denied the report. Today, Reuters is also running an exclusive the IPO had received a tentative blessing from officialdom as well. Hong Kong equity markets though are showing no signs of taking the bait this time. Where there’s smoke there’s fire I suppose, but with a valuation of around half of what it was around the abortive 2020 date, you’d probably ask why Alibaba and Ant would bother right now. Perhaps the main message would be that China was moving past “peak crackdown” as the economy slows.

Far more front and centre for Mainland China markets, and Asian ones and sentiment, in general, are developments from Shanghai. One district was locked down yesterday and today it was announced that mass testing would take place in seven of its 16 districts, so basically half the city. Markets have naively assumed that China was “one and done” with Beijing and Shanghai, ignoring the experience of Covid-zero nations elsewhere. That reality might finally be permeating the most ardent dip-buyers now, and the prospect of a wave of renewed covid lockdowns in Shanghai would have subdued Asian sentiment today, even without the bonfire on Wall Street last night.

The overnight ECB policy meeting outcome has already been analysis paralysis’ ed to death already. What stands out to me is the price action of EUR/USD, which after the hawkish pivot overnight, still closed 100 points lower at 1.0620. The devil is in the detail I suppose. ECB projections on growth and inflation suggest two years of stagflation ahead. A hike of 0.25% next month and one in September (they left the door open to a larger one), isn’t earth-shattering. It is telling that despite a pedestrian hiking schedule to errrr 0.0%, the Bund/BTP spread still blew out.

But I think the kicker is that the ECB will keep rolling over maturing bond purchases even if they stop adding more from July 1st. So effectively, their answer to stagflation is raising interest rates to 0.0%, while at the same time continuing quantitative easing under the surface. In their defence, the war in Ukraine has thrown a stagflation spanner in the works, but they would have arrived at this point to some degree anyway. Given the ECB’s response, I’d sell Euro and European equities as well.

Shanghai nerves weigh on Asian equities.

US markets couldn’t shake off the inflation/recession hoodoo last night after European markets endured a torrid session as the ECB swung to a hawkish stance. The S&P 500 slumped by 2.38%, the Nasdaq tumbled by 2.75%, and the Dow Jones lost 1.95%. In Asia, US futures have seen some modest short covering, lifting the S&P and Dow futures 0.20% higher, with Nasdaq futures gaining 0.35%.

In Asia, the overnight Wall Street performance was never going to give local markets a good start. But with US data and weekend risk ahead, as well as lockdown nerves around widening mass testing in Shanghai this weekend, regional markets are almost all in the red today. Japan’s Nikkei 225 has fallen by 1.35% today, with South Korea’s Kospi falling by 1.15%.

In Mainland China, equity markets have reversed earlier losses and are in modest positive territory. The Shanghai Composite is now 0.22% higher, while the CSI 300 is flat. I suspect that the authorities' “national team” might be “smoothing” today. Hong Kong is performing better than expected, perhaps lifted by Ant Financial IPO hopes. Nevertheless, it remains 0.55% lower.

In regional markets, Singapore has fallen by 0.65%, with Taipei losing 0.85%. Kuala Lumpur has dropped by 1.0%, with Jakarta just 0.15% lower. Bangkok is 0.45% lower as it removes its last covid restrictions on inbound travellers, but Manila has slumped by 1.90%. Australian markets are tracking Wall Street and China nerves, the All Ordinaries falling 1.0%, with the ASX 200 losing 0.85%.

The tone in Asia, ahead of crucial US inflation data, means that European equities are poised to open lower once again this afternoon. If Bund/BTP spreads widen once again today, nerves will be further frayed. Only a lower US inflation number this evening is likely to bring any solace to European markets. US markets are a 100% binary outcome of the US inflation data.

US Dollar strengthens overnight.

Pre US inflation nerves triggered a wave of risk aversion in equity markets overnight, which translated into haven inflows to the US Dollar, which booked gains in the DM and EM space. The dollar index leapt 0.74% higher to 1.0330 overnight, although the rally’s scope was flattered by the Euro sell-off, the index's largest component. How the Euro performs today will dictate whether we have seen a low put in place or not. Higher US inflation tonight should lift the US Dollar, with a lower print seeing renewed selling as Fed hiking expectations are pared. The index is almost unchanged in Asia, and has resistance at 104.00, with support at 1.0285.

EUR/USD slumped by 0.91% to 1.0620 post-ECB, adding a modest 0.13% to 1.0630 in Asia. EUR/USD may come under further pressure today if Eurozone sovereign spreads widen, or if US inflation prints above forecast. Support at 1.0650 overnight becomes nearby resistance, while the 1.0770 and 1.0830 zone remains as formidable as ever. Support is between 1.0610 and 1.0600, and failures signal a retest of 1.0500 early next week. ​

Sterling fell 0.32% to 1.2500 overnight, where it remains in Asia. Economic worries, leadership concerns, and the Northern Island protocol continue weighing on the Sterling. Resistance is at 1.2600 and 1.2670. Support is still at 1.2460 and 1.2400.

USD/JPY endured a torrid session overnight, selling off from 134.10 to near 133.20 at one stage, likely on EUR/YEN selling. Firm US bond yields saw it recover all those losses to finish almost unchanged at 134.35. Some long-covering today has seen it ease back to 134.15 in Asia. The Bank of Japan is unlikely to change policy next Friday post-FOMC, which will have hiked another 0.50%. The US/Japan rate differential should ensure that USD/JPY does not fall much further than 133.00 today, with its next target being 135.00. Soft US inflation though, could spur a US bond rally and see an abrupt fall by USD/JPY.

The price action on the Australian and New Zealand Dollars was ugly overnight. AUD/USD fell 1.30% to 0.7100, where it remains in Asia. NZD/USD fell by 1.0% to 0.6385, before edging up to 0.6400 in Asia. A combination of US inflation concerns and renewed mass testing in Shanghai seem to have created a toxic risk sentiment cocktail for the Australasians. Both remain acutely vulnerable to negative developments on both fronts. AUD/USD support resistance is at 0.7050 and 0.7200. NZD/USD support/resistance is at 0.6300 and 0.6450.

USD/Asia strengthened overnight with the KRW the worst performer, losing over 0.55% to 1263.80. Asian currencies are steady in Asia after the PBOC set a neutral USD/CNY fix at 6.6994, but several currencies are near their recent lows versus the US Dollar. USD/MYR is near 4.4000, USD/PHP is just below 53.00, USD/THB is 0.20% higher today at 34.640, and USD/INR is once again testing resistance at the 77.80 region. A high US inflation number today likely spurs another wave of Asian FX weakness to round out the week.

Oil eases in Asia on China fears.

Oil prices consolidated their recent gains overnight, with Brent crude edging 0.70% lower to $122.85, and WTI easing by 0.80% to $121.45 a barrel. Oil has continued retreating in Asia, driven by China slowdown fears after widened covid mass testing was announced for Shanghai this weekend. Brent crude is 0.53% lower at $122.20, and WTI is 0.60% lower at 120.70 a barrel.

Oil markets probably have more downside risk in the short-term, with another wave of China slowdown fears capping the upside. Somewhat counterintuitively, higher than forecast US inflation tonight may also spur more selling as markets price in a higher recession likelihood. Any losses are going to be limited though, as the physical tightness of both crude and refined products globally remain powerful supportive factors. Weekend event risk should also limit pullbacks.

Brent crude has traced out a series of highs at $124.25 marking initial resistance. After that, the road opens to $125.00 and $128.00 a barrel, bringing the Ukraine invasion highs back into sight. Support is at $120.50 and $118.50 a barrel. WTI has resistance at $123.15, the overnight high, and then $125.00 and $127.00 a barrel. Support is at $119.35 and $117.50 a barrel.

Gold remains in a coma.

Gold remains confined to a narrow $1840.00 to $1860.00 an ounce range, comfortably continuing to move in an inverted manner to US Dollar moves. Gold’s main hope for a directional breakout rests with US Inflation data moving the US Dollar materially one way or the other. In the meantime, bring a good book.

Gold has resistance at $1870.00, followed by the 100-DMA at $1890.00, and then $1900.00, where I expect there to be options-related sellers in the first instance. Support is at $1837, $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails. The wider $1830.00 to $1870.00 range seems set to continue until the US data.

Daily Pivots: (S1) 1.0561; (P) 1.0668 (R1) 1.0724; More...

EUR/USD's breach of 1.0626 minor support argues that rebound from 1.0348 has completed at 1.0786 already, after multiple rejection by 55 day EMA. Intraday bias is back on the downside for retesting 1.0348 low, and more importantly 1.0339 long term support. On the upside, though, break of 1.0786 will resume the rebound from 1.0348 to 1.1112 fibonacci resistance.

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. Rise from 1.0348 is at least a correction to the down trend from 1.2348. Stronger rebound would be seen to 38.2% retracement of 1.2348 to 1.0348 at 1.1112.

Euro's post ECB rally was very short-lived, while market turned into risk-off mode later in US session. Negative sentiment continues in Asia today as US consumer inflation data is awaited. So far, Sterling is the strongest one for the week followed by Dollar, and then Canadian. Yen is the overwhelming loser, extending recent down trend of extended rally in global benchmark yields. Swiss Franc is second weakest even though it rebounds against Euro.

Technically, EUR/USD's breach of 1.0626 minor support is a bearish sign. Sustained trading below this level will likely bring retest of 1.0348 low. USD/CAD's breach of 1.2685 minor resistance also suggest that Dollar is on the way up for the near term. To confirm this development, attention will be on 1.2429 minor support in GBP/USD, and 0.7034 minor support in AUD/USD.

In Asia, Nikkei closed down -1.43%. Hong Kong HSI is up 0.01%. China Shanghai SSE is up 1.11% Singapore Strait Times is down -0.84%. Japan 10-year JGB yield is up 0.0026 at 0.253. Overnight, DOW dropped -1.94%. S&P 500 dropped -2.38%. NASDAQ dropped -2.75%. 10-year yield rose 0.015 to 3.044

China PPI slowed to 14-mth low, CPI unchanged

China PPI slowed notably from 8.0% yoy to 6.4% yoy in May, below expectation of 6.5% yoy. That's also the lowest level in 14 months since March 2021. CPI was unchanged at 2.1% yoy, below expectation of 2.5% yoy. Core CPI, excluding food and energy, was unchanged at 0.9% yoy.

"In May, the pandemic control continued to improve, with overall sufficient supplies in the consumer market, CPI has decreased compared to last month, and the year-on-year increase remained stable," said senior NBS statistician Dong Lijuan. "As a great amount of fresh vegetables entered the market and logistics gradually smooth, prices of fresh vegetables fell by 15 per cent".

DOW lost -638pts as markets await US CPI

US stocks tumbled sharp in late trading overnight, as traders turned into defense mode ahead of today's consumer inflation report. Headline CPI is expected to tick down from 8.3% yoy to 8.2% yoy in May. Core CPI is also expected to slow from 6.2% to 5.9% yoy.

Headline CPI appeared to have peaked at 8.5% yoy and core CPI at 6.5% yoy in March. Markets will look for validation that these levels were the peak. But the more important question is whether inflation is plateauing, or reversing. That is important for Fed officials to decide whether a pause in tightening is needed in September.

Technically, DOW's picture is not looking good with the sharp -638pts decline, which suggests rejection by the falling 55 day EMA. If there is no come back to push for a strong rebound in DOW in the next few days, it will likely extend the correction from 36952.65 through 30635.76 low before finally finding a bottom.

Elsewhere

New Zealand manufacturing sales rose 1.2% in Q1. Japan PPI slowed from 9.8% yoy to 9.1% yoy in May, below expectation of 9.8% yoy. Looking ahead, Italy industrial production is a feature in European session. Canada will release job data later in the day, together with US CPI and U of Michigan consumer sentiment.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0561; (P) 1.0668 (R1) 1.0724; More...

EUR/USD's breach of 1.0626 minor support argues that rebound from 1.0348 has completed at 1.0786 already, after multiple rejection by 55 day EMA. Intraday bias is back on the downside for retesting 1.0348 low, and more importantly 1.0339 long term support. On the upside, though, break of 1.0786 will resume the rebound from 1.0348 to 1.1112 fibonacci resistance.

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. Rise from 1.0348 is at least a correction to the down trend from 1.2348. Stronger rebound would be seen to 38.2% retracement of 1.2348 to 1.0348 at 1.1112.

Economic Indicators Update

US stocks tumbled sharp in late trading overnight, as traders turned into defense mode ahead of today's consumer inflation report. Headline CPI is expected to tick down from 8.3% yoy to 8.2% yoy in May. Core CPI is also expected to slow from 6.2% to 5.9% yoy.

Headline CPI appeared to have peaked at 8.5% yoy and core CPI at 6.5% yoy in March. Markets will look for validation that these levels were the peak. But the more important question is whether inflation is plateauing, or reversing. That is important for Fed officials to decide whether a pause in tightening is needed in September.

Technically, DOW's picture is not looking good with the sharp -638pts decline, which suggests rejection by the falling 55 day EMA. If there is no come back to push for a strong rebound in DOW in the next few days, it will likely extend the correction from 36952.65 through 30635.76 low before finally finding a bottom.

China PPI slowed notably from 8.0% yoy to 6.4% yoy in May, below expectation of 6.5% yoy. That's also the lowest level in 14 months since March 2021. CPI was unchanged at 2.1% yoy, below expectation of 2.5% yoy. Core CPI, excluding food and energy, was unchanged at 0.9% yoy.

"In May, the pandemic control continued to improve, with overall sufficient supplies in the consumer market, CPI has decreased compared to last month, and the year-on-year increase remained stable," said senior NBS statistician Dong Lijuan. "As a great amount of fresh vegetables entered the market and logistics gradually smooth, prices of fresh vegetables fell by 15 per cent".

DXY:

On the H4, with prices moving above the ichimoku indicator, we have a bullish bias that price will rise to our 1st resistance at 103.902 where the horizontal swing high resistance, 127.2% fibonacci extension and 100% fibonacci projection are from our 1st support at 103.206 in line with the horizontal overlap support. Alternatively, price may break 1st support structure and head for 2nd support at 102.707 where the horizontal overlap support.

Areas of consideration:

• H4 time frame, 1st resistance at 103.902
• H4 time frame, 1st support at 103.206

XAU/USD (GOLD):

On the H4, with RSI moving along an ascending trendline, we have a bullish bias that price will rise from our 1st support at 1846.39 where the horizontal swing low support is to our 1st resistance at 1873.03 in line with swing high resistance, 61.8% fibonacci retracement and 38.2% fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support at 1830.10 in line with overlap support and 50% fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st Resistance at 1873.03
• H4 time frame, 1st Support at 1846.39

GBP/USD:

On the H4, with prices moving below the ichimoku indicator and within our descending channel, we have a bearish bias that price will drop from our 1st resistance at 1.25486 where the horizontal swing high resistance is to our 1st support at 1.23905 in line with the 50% Fibonacci retracement, 78.6% fibonacci retracement and overlap support. Alternatively, price may break 1st resistance structure and head for 2nd resistance at 1.26592 where the horizontal swing high resistance and 61.8% fibonacci projection are.

Areas of consideration:

• H4 1st resistance at 1.25486
• H4 1st support at 1.23905

USD/CHF:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 0.98833 where the pullback resistance is from our 1st support at 0.97561 in line with the swing low support and 38.2% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support at 0.95548 where the swing low support and 61.8% fibonacci retracement are..

Areas of consideration

• 1st support level at 0.97561
• 1st resistance level at 0.98833

EUR/USD :

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from the 1st resistance at 1.07630 at the multiple swing highs in line with the 78.6% fibonacci projection to the 1st support at 1.04577 in line with the 78.6% fibonacci retracement and swing low. Alternatively, price may reverse off the 1st resistance and rise to the 2nd resistance at 1.09220 at the multiple swing highs in line with the 61.8% fibonacci retracement.

Areas of consideration :

• H4 1st resistance at 1.07630
• H4 1st support at 1.04577

USD/JPY:

On the H4, with prices moving above the ichimoku indicator, we have a bullish bias that price will rise from our 1st support at 133.020 where the horizontal pullback support is to our 1st resistance at 136.449 in line with the 200% fibonacci extension and 100% fibonacci projection. Alternatively, price may break 1st support structure and head for 2nd support at 131.259 where the horizontal overlap support is.

Areas of consideration:

• H4 time frame, 1st resistance at 136.449
• H4 time frame, 1st support at 133.020

AUD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from the 1st resistance at 0.72318 at the multiple swing highs in line with the 61.8% fibonacci retracement to the 1st support at 0.69583 at the swing low in line with the 78.6% fibonacci projection. Alternatively, price may reverse off 1st resistance and rise to the 2nd resistance at 0.74601 in line with the pullback resistance.

Areas of consideration

• H4 1st resistance at 0.72318
• H4 1st support at 0.69583

NZD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from the 1st resistance at 0.64770 in line with the 61.8% fibonacci projection to the 1st support at 0.62918 in line with the 78.6% fibonacci retracement. Alternatively, price may bounce off the 1st resistance and rise to the 2nd resistance at 0.65641 in line with the multiple swing highs.

Areas of consideration:

• H4 time frame, 1st support at 0.62918
• H4 time frame, 1st resistance at 0.64770

USD/CAD:

On the H4, with price expected to reverse off the ichimoku cloud resistance, we have a bearish bias that price will drop to our 1st support at 1.26079 in line with the horizontal pullback support from our 1st resistance at 1.26841 where the pullback resistance, 50% fibonacci retracement are. Alternatively, price may break structure and head for our 2nd resistance at 1.27639 in line with overlap resistance and 61.8% fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st resistance at 1.26841
• H4 time frame, 1st support at 1.2607

OIL:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise from our 1st support at 121.15 where the horizontal pullback support is to our 1st resistance at 125.53 in line with the 78.6% fibonacci projection and 161.8% Fibonacci extension. Alternatively, price may break structure and head for 2nd support at 117.76.

Areas of consideration:

• H4 time frame, 1st resistance of 125.53
• H4 time frame, 1st support of 121.15

Dow Jones Industrial Average:

On the H4, with price breaking the ascending trend line on the RSI, we have a bearish bias that price will drop to our 1st support at 31876 in line with the horizontal pullback support and the 76.8% Fibonacci retracement and 61.8% Fibonacci projection from our 1st resistance at 32625 where the pullback resistance is. Alternatively, price may break structure and head for our 2nd resistance at 33313 in line with the horizontal swing high resistance.

Areas of consideration :

• H4 time frame, 1st resistance at 32625
• H4 time frame, 1st support at 31876

Key insights from the week that was.

The RBA and ECB were the focus for market participants this week. Both made a stand against inflation and associated risks consistent with their individual circumstances.

The 50bp hike delivered by the RBA in June was twice the market’s expectation of 25bps. It signals greater concern over the inflation outlook which the statement suggests is based on both external (global supply concerns and energy prices) and domestic pressures (the historically-tight labour market and other supply restrictions). The breadth and scale of these pressures warrants further decisive action by the RBA in coming months to highlight their determination to remove inflation risks.

As a result, we now look for an additional 50bp hike in July followed by a 25bp increase in August after the next CPI report and another 50bps split over the November and December meetings, taking the cash rate to 2.10% at year end. One final 25bp hike is anticipated to be delivered at the February 2023 meeting to leave the cash rate at 2.35% at peak, a level we believe to be materially above neutral given households’ high debt levels.

A full view of the outlook for the RBA and the risks was provided by Chief Economist Bill Evans in this week’s video update. Detail on our revised inflation view was also released. On the latter, the startling surge in domestic energy prices being seen currently in Australia leads us to believe that headline CPI inflation will now peak at 6.6%yr at end-2022 and only slowly decline to the top of the target range through 2023. Annual trimmed mean inflation is expected to peak at 4.8%yr in the second half of 2022, but also come back to around 3.0%yr through 2023.

The circumstances being experienced by the Euro Area and the ECB are very different to those Australia faces. Of particular note for Europe: growth is at risk of stalling for an extended period; considerable slack remains outside their labour market; and, of course, Russia’s invasion of Ukraine is creating immense uncertainty for the region. Nonetheless, the ECB finds itself needing to fight against historic inflation pressures and risks.

The ECB’s revised profile for inflation makes clear the scale of the threat, headline inflation now forecast to end 2022 at 6.8%yr (prev 5.1%yr), 2023 circa 3.5%yr (prev 2.1%yr) and 2024 2.1%yr (prev 1.9%yr). President Lagarde was clear in the press conference that the above view of inflation requires decisive action, starting with a 25bp increase in July. However, the underlying interest rate assumption for their June forecasts, average short-term interest rates of “0.0% in 2022” and “1.3% in 2023”, makes clear that the July decision is just the start of Europe’s policy normalisation.

Beginning with the September decision, in her prepared remarks President Lagarde stated that if “the medium-term inflation outlook persists or deteriorates, a larger increment [than 25bps] will be appropriate at our September meeting”. In the Q&A, she clarified this position, outlining that if inflation is seen “at 2.1% in 2024 or beyond” then “yes”, “the increment adjustment will be higher”.

What is also important to recognise is that these early rate hikes do not only apply to the deposit rate, “the key ECB interest rates – the three of them” will all be raised. Later in the press conference, President Lagarde mentioned that “keep[ing] those spreads or return[ing] to a better symmetry between those three [rates]” was still to be debated for hikes beyond September.

Given the Council’s concern over inflation to end-2024 and belief in the underlying strength of the economy, it seems most probable that July’s 25bp hike will be followed by a 50bp move in September, taking the refi rate to 0.75%. Assuming that risks to growth subside between now and November, another 50bp hike at that meeting seems consistent with their focus of making sure medium-term inflation is at or below 2.0%yr. Another 25bps in December would bring the refi rate to 1.50%, the mid-point of the neutral range of 1.0-2.0% previously cited (but still being debated), and be a clean end to the tightening cycle.

Our more bearish view on growth in 2022 and 2023 2023 (2.1% and 1.5% respectively versus the ECB’s 2.8% and 2.1%) makes clear the risks to this course of action. Further, history suggests that, when rates rise in Europe, often there are consequences for credit availability and spreads. If our view of growth and/or the concerns we have over credit prove more accurate than the ECB’s over the coming half year, some of the above rate hikes could be delayed and/ or jettisoned.

One final point on China before concluding for the week. We remain more optimistic on the rebound from the recent COVID-zero lockdowns. This week’s May trade balance gave us more reason to be so. From 1.9%yr in April, annual export growth rebounded to 15.3%yr in May against market expectations of a 9.2%yr result. Further, the snap back in import growth was not as strong as anticipated, from -2.0%yr in April to 2.8%yr in May. As a result, the trade balance widened from $51.1bn last month to $78.8bn, some $20bn above the consensus estimate. Clearly authorities are prioritising removing impediments to trade, particularly for exports; GDP in Q2 should therefore receive strong support from net exports, as we have long held. The real test for China’s economy will come as investment then consumption is ramped up through the remainder of the year.

The RBA Board decided to raise the cash rate by 50 basis points at its meeting on June 7.

The bold decision came as quite a surprise to many analysts. Even the decidedly hawkish market was priced for a more modest move.

In our latest preview on June 3, we noted that "The arguments set out above would also be consistent with a 50 basis point move. However, given that the Board actively considered 40 basis points at the May meeting we think it more likely that the 40 basis point option will be taken."

Readers will be aware that since the Board raised the cash rate by 0.25% on May 2 and the Governor indicated that 25 basis point moves would be business as usual Westpac took a different view. We argued at the time that while the guidance seemed to be consistent with a 25 basis point move in June such a decision would be the wrong policy. We argued that the right policy would be a "large" move and opted for 40 basis points.

Over the 5 weeks leading to the June 7 decision we consistently made the case for a large move in June. That was supported by the May minutes; aspects of the WPI report; the surge in hours worked in the April employment report; a sharp increase in domestic inflation and average wage inflation in the national accounts. We also pointed out that inflationary expectations, particularly amongst trade unions, had been significantly boosted in recent surveys.

Consistent with our analysis was the key observation in the Governor's statement, "Inflation… is higher than earlier expected. Global factors account for much of the increase. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to upward pressure on prices."

That statement clearly signals that the Bank now recognises that it has a significant challenge to contain inflation and Tuesday's decision points to it now being prepared to act decisively. That decisive action will, in particular, assist with the important objective of containing those inflationary expectations we referred to above.

For those reasons, we predicted on June 7, following the RBA announcement, that the next move in July will also be a 50 basis point increase.

That would push the cash rate to 135 basis points. Having eliminated the emergency policy settings of 2020, the next move would be to take back the 75 basis points of cuts from 1.5% to 0.75% seen in 2019 when the Bank was frustrated at the consistently low inflation prints.

A slowdown in the pace of hikes in August can be expected but a response will still be necessary to the likely strong inflation print for the June quarter with a further 25 basis point move required. With the cash rate having reached 160 basis points by August it will be prudent for the Bank to pause. Our analysis of the leverage in household balance sheets points to a cash rate of around 160 basis points being "in the neighbourhood" of neutral – better to pause at that point to assess the impact on household consumption; house prices; the labour market; consumer and business confidence; and the response of wages growth to these inflation pressures.

In the Governor's statement he highlighted the uncertainties around these issues indicating to us that they such thinking would at least justify a pause.

The Board has pointed to other central banks wanting to quickly return to neutral. A total of 150 basis points in only three months (May to August) by the RBA is a very solid pace even compared to the FOMC; the BOC; and the RBNZ.

This is partly because the RBA meets more frequently than those central banks. The RBA meets eleven times per year compared to FOMC and BOC at eight times and RBNZ at seven times.

RBNZ has taken nine months to raise the OCR by 175 basis points; we expect that the FOMC will take four months to increase the federal funds rate by 175 basis points; and the BOC has taken three months to move by 125 basis points.

After that pause we expect further increases of 25 basis points will be required in November and December in response to another disturbing inflation print for the September quarter. That would see 200 basis points of rate increases in seven months for the RBA.

Even with the expected pause in September/October the RBA would have taken seven months to tighten by 200 basis points; we expect the FOMC will take nine months to tighten by 250 basis points.

2022 would end with a cash rate of 2.1% – a policy stance that we would assess to be in the contractionary zone.

Readers will be aware that we expect that the FOMC will have paused following its December rate move (total of 250 basis points) and the RBA is likely to take some guidance from that decision. We expect that the 25 basis point increase from the RBA in February, following another high inflation report, will be the last in this tightening cycle with the terminal rate settling at 2.35%.

That terminal rate is only slightly higher than the 2.25% terminal rate we forecast following the May Board meeting, mainly because we anticipated an outsize move in June.

Even though the RBA's forecasts and our own forecasts point to a larger inflation task than expected in May the decision to front end load the hikes (we expected one hike of 40 basis points in June to be followed by 25's) will prove to be much more effective in meeting the inflation challenge by signalling clearly to economic agents that the RBA is very serious about its role in returning inflation to within the band by 2024.

Containing inflationary expectations must be the most urgent task of a central bank and front loaded moves assist in that regard.

Critical to our "on hold" view for the RBA and FOMC for the bulk of 2023 is our forecast for inflation in 2023 which relies upon a flattening of some key prices, admittedly at high absolute levels.

Our forecast slowing in inflation in Australia from 6.6% in 2022 to 3.0% in 2023 will be largely achieved by a reduction in the contribution to inflation from house building costs from 1.11 ppt's to 0.23 ppt's (a global slump in building activities); a reduction in the contribution from fuel from 1.16 ppt's to – 0.76 ppt's (supply increases and demand slowdown to see oil prices fall through 2023); a reduction in the contribution from electricity from 1.45 ppt's to 0.63 ppt's (prices still rising but at a slower pace); and a reduction in the contribution from food from 0.70 ppt's to 0.43 ppt's (improved conditions in Ukraine/domestic weather).

Readers will notice that these numbers are reliant on the fuel price forecast in particular. We are forecasting the oil price (Brent) to fall from USD110/bbl. to USD85/bbl. over the course of 2023 with a modest improvement in refinery costs. On those numbers fuel subtracts 0.76 ppt's from inflation in 2023. Without that fall, headline inflation would only fall from 6.6% to 3.8% and pose some challenges for policy.

The combined turnaround in those supply related factors is forecast to lower inflation by 4.00 ppt's. That allows some room for a boost in the pressures from the labour intensive sectors such services as wages growth (WPI) lifts to 4% to reflect the tight labour market.

Critically, an easing in inflation from the supply side and the slowdown in demand, will be sufficient for a boost in real wages in 2023 taking pressure off a damaging wage/ price spiral. Our rate profile is consistent with the revised growth forecasts we released on June 3 (which were predicated on the outsize move in June).

Growth in the June and September quarters of 2022 is expected to be resilient reflecting the ongoing opening of the economy; the release of additional funds from a continuing fall in the savings rate, and the confidence associated with a 48 year low in the unemployment rate.

But as we move into the December quarter; the cash rate moves above 1.6% and policy pivots into the contractionary zone; the near term boost to spending in the June and September quarters fades with growth momentum slowing appreciably. The December quarter will be much weaker than the earlier quarters in 2022.

We are forecasting growth in 2023 to slow from 4% in 2022 to a below trend 2% in 2023. A contraction in dwelling investment in the second half; a slump in consumer spending; a step up in the pace of falls in dwelling prices; softer business investment; prospects of a rise in the unemployment rate during the year and a marked easing in inflation will all be sufficient to signal to the RBA that, having paused after February, policy can go on hold for the remainder of the year.

The lagged effect of a lift in the cash rate from 0.1% to 2.35% in the space of only nine months will take its toll.

In the past two weeks WTI’s price was on the rise and the commodity seems to be enjoying some support from its fundamentals as the price action is currently just above $120 per barrel. The supply side for the commodity, seems to remain tight and currently production levels are raised at a very slow pace. It’s characteristic that last week, in its 29th OPEC and non-OPEC ministerial meeting, members of the oil production block decided to raise production levels only by 432k barrels per day (bpd) for July, practically reaffirming their production adjustment plan. Yet we must note that supply chains for oil seem strained, while reports tend to mention that full production capacity levels are nearing for countries such as Saudi Arabia, which tends to intensify market worries for the supply side of the commodity.

On the demand side the reopening of China, given that lockdown measures are lifted, provided grounds for higher demand expectations to surface. It should be noted that China’s trade data for May tended to reinforce for the awakening of China’s manufacturing sector, given that the import growth rate accelerated beyond the market’s expectations and the trade surplus still widened substantially. A note of warning though for China, should also be mentioned as parts of the key port of Shanghai have started reimposing lockdown measures, creating worries for another strict zero COVID cases policy from China, which could have an adverse effect on the demand side of the oil market.

The situation on the ground for the US oil market on the other hand seems to allow for some doubt as there seems to be a slack. It’s characteristic that the number of active oil rigs in the US seems to have paused at the number of 574, according to a report by Baker Hughes. Also the American Petroleum Institute reported that oil reserves unexpectedly risen by 1.8 million barrels in contrast to the respective drawdown which was expected by the market. For the same period the Energy Information Administration office showed also a rise of oil inventories for the same period, this time even higher, specifically 2.025 million barrels, once again in contrast to market expectations for a 1.9 million barrels drawdown.

Technical Analysis

On a technical level, we note that WTI’s price was on the rise yesterday testing the 121.25 (R1) resistance line. We tend to maintain a bullish outlook for the commodity as long as it remains above the upward trendline incepted since the 11th of May. Please note though that he RSI indicator is above the reading of 50 which may also imply some bullish tendencies for the commodity yet seems to have a slight downward slope, reflecting the correction lower of the price action after hitting the 121.25 (R1) level. Also note that the price action corrected lower after breaking for a brief period the upper Bollinger band. Should the bulls maintain control over the commodity’s price, we may see it breaking the 121.25 (R1) resistance line and aim for the 126.50 (R2) resistance level, which is also a record high for WTI prices. Higher than that we have also noted the 132.00 (R3) resistance level as a possible target for the bulls should their appetite be substantial. On the flip side and should the bears take over, we may see WTI’s price reversing course, breaking the prementioned upward trendline as a sign of a changing trend, break also the 116.00 (S1) support line and aim if not breach the 110.30 (S2) support level. Even lower and as an ultimate target for the bears we note the 103.00 (S3) support barrier.

• Support: 116.00 (S1), 110.30 (S2), 103.00 (S3)
• Resistance: 121.25 (R1), 126.50 (R2), 132.00 (R3)