The Importance of Bonds

Summary:

We remain of the view that the US and global economy will be resilient and avoid recession over the coming months.

US Treasury yields recently reached their highest levels in over a decade across the curve as solid domestic data bolsters the outlook for a higher-for-longer interest rate environment.

Over the past two years, the US bond market has had to grapple with back-to-back negative shocks that had staying power: 2022 was the year of inflation surprises, when price pressures were consistently underestimated around the world; 2023 has been a year in which US growth has continuously exceeded expectations by a considerable margin.

We believe that the durability of the US economic expansion is still underappreciated, and we are positioned accordingly: overweight equities and preferring cyclical and inexpensive stocks. Our view is that markets are pricing in too much easing by the Federal Reserve in 2024 given the resilience in economic data.

Nonetheless, sovereign bonds are still a crucial component of balanced, multi-asset portfolios, even in a higher-for-longer environment for central bank policy rates. Compared to the October 2022 local peak in government bond yields, the tactical argument for holding duration is stronger now, in our view. And while elevated inflation has reduced some of the typical hedging properties of sovereign bonds recently, we believe that government debt will retain its place as the most effective source of portfolio ballast in the event of negative shocks to growth.

Growth to slow

The third quarter of 2023 will probably prove to be the high-water mark of this mini-reacceleration in US economic activity. The Atlanta Federal Reserve’s real-time “nowcast” of quarterly growth has approached six percent. While real growth is unlikely to come in this strong, consistent signs of US economic strength have forced traders to increase the market-implied probability that interest rates stay higher for longer.

But at the same time, we are also getting evidence that the US labor market is cooling. Job openings have declined, and the private sector quits rate has fallen to levels seen in the final years of the pre-pandemic economic expansion. Importantly, the slowing in nominal aggregate income growth will result in lower nominal spending growth, in our view, reducing both inflationary pressures and real economic activity. Fiscal policy is also less supportive of growth than it has been, with consumer spending further dampened by dwindling excess savings among lower-income earners and the restart of student loan repayments. We are of the view that this will be a slow slowdown, especially as we think inflation will continue to fall faster than nominal incomes, cushioning consumer spending. But markets often react forcefully to shifts in the second derivative – in this case, growth staying positive, but at a less robust pace. The Importance of Bonds_1

Certainly, other factors have played a role in pressuring bond yields to fresh cycle highs – most notably, larger than expected issuance plans for US Treasuries. While we acknowledge supply considerations can impact market pricing on a very short-term basis, history strongly suggests that cyclical variation in the economy will be the dominant driver of movements in government borrowing costs. The Importance of Bonds_3

Outside the US, economic activity looks softer, with factory activity around the world stagnating and filtering through to a deceleration in services, as well. We still anticipate that a US-driven inventory restocking cycle should help put a floor under global manufacturing production and mitigate the potential for any broad-based retreat in services sectors. However, our expectations on the magnitude of this rebound have been tempered by the ongoing weakness in Chinese economic data. The measured policy support from Chinese policymakers to date is unlikely to serve as a meaningful reflationary catalyst for commodity prices or global activity, in our view. The Importance of Bonds_4

Still the best recession hedge

The surge in inflation made price pressures not just a problem for safe assets like government bonds, but also a threat to the economic expansion and risk assets. High, accelerating inflation demands an aggressive central bank tightening campaign to cool demand. This attempt to dampen growth by significantly raising policy rates explains the positive correlation between stocks and bonds since 2022, as they have tended to rise or fall in tandem.

However, inflation is far from the only risk that can negatively impact returns. Growth shocks have historically been much more frequent than inflation shocks. Even as we see structural factors like fiscal policy, decarbonization, and deglobalization contributing to potentially higher trend inflation and inflation volatility going forward, protecting against declines in economic activity will remain a more common concern, in our view. After a slow start, the Fed has reasserted its credibility on inflation and for now we see little evidence to suggest monetary policymakers will allow inflation expectations to de-anchor.

Sovereign bonds have done a decent job of hedging during periods of relative underperformance in cyclical equities. In the event of more genuine evidence of economic softness, this negative correlation would intensify, in our view.

Asset allocation

We continue to favor more cyclical parts of the US equity market, including mid-caps and the S&P 500 equal weight index, based on our expectation that growth will continue to be resilient even as inflation comes down. However, we are also cognizant that as activity moderates, it may at times be difficult for investors to have confidence that the economy will have a soft landing rather than a more pronounced downturn.

In our view, maintaining a neutral weighting on government bonds is an appropriate way to balance the potential that investors’ faith in the durability of the economic expansion may be shaken relative to our base case: decent US growth means that the amount of interest rate cuts expected by the market in 2024 is unlikely to be delivered by the Fed. In constructing robust portfolios for the long term, we have high conviction that allocations to government bonds will help smooth returns by remaining an effective offset at times when risk assets come under stress because the growth outlook has darkened.

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Samantha Luan

Forex

USD: 2024 part of the USD curve driving dollar higher

September has so far seen the dollar's bullish momentum cement, and DXY is testing the 105.00 levels this morning – the highest seen since March. We want to stress that the bulk of the dollar strengthening is coming from easing bets in 2024 being scaled back rather than any expectations that the Federal Reserve will hike again this year.

Let's take the pricing of the USD forward rate curve for the two meetings in November 2023 and June 2024 as an example. The former has been stable in pricing in a peak rate of around 5.60-5.65% (less than one hike from the current 5.50%) since the start of July, having been capped by evidence of disinflation and Fedspeak that has gradually diverged from the dot plot projections. The June 2024 contract has faced multiple hawkish re-ratings, from a 4.75% bottom in mid-July to the current 5.25%.

A market that continues to push forward the start of Fed monetary easing, embracing a "higher for longer" narrative on the back of U.S. activity data resilience, is offering few reasons to doubt the dollar will stay supported for now. Yesterday, August's ISM services index beat expectations and also suggested re-building inflationary pressures, which should keep the Fed away from sounding too dovish as they are expected to keep rates on hold at the September policy meeting.

There are many Fed speakers to watch today: Patrick Harker, Austan Goolsbee, John Williams, Raphael Bostic and Michelle Bowman. On the data side, things are much quieter, and the focus will only be on the weekly jobless claim figures, which are expected to climb to 234k.

We discussed earlier this week how the dollar was overvalued in the near term against all G10 currencies. This is still the case, although a further hawkish repricing in Fed rate expectations would compress the mis-valuation, and the current market conditions can keep the dollar expensive for longer. A consolidation into the 105.00/105.50 in DXY looks plausible at this stage. Overnight, we saw a less pronounced slump in Chinese exports compared to expectations, but the beneficial impact on pro-cyclical currencies is proving quite modest, once again showing how the U.S. activity and dollar story is the predominant one.

EUR: Trying to survive above 1.0700 into the ECB

Our economics team has published its latest preview of next week's European Central Bank meeting. It's a close call, but we think policymakers will deliver one last 25bp rate hike. As things stand now, markets disagree with this view, pricing in a mere 9bp for September and 15bp to the peak. This means that there will be room for a sizeable rebound in the euro if we are right about the ECB.

We had warned EUR/USD would likely be vulnerable into the ECB meeting, and we are indeed seeing more USD strength keeping the pair pressured. It would already be a positive sign for EUR/USD bulls to see the 1.0700 support hold for another session, possibly indicating that could be the bottom into next week's risk events.

The eurozone calendar includes the final read of the second quarter GDP, as well as a number of ECB speakers, who however should refrain from discussing monetary policy given the quiet period before the ECB meeting kicked off today.

GBP: BoE dovish comments hit the pound

EUR/GBP has experienced a good rally in the past two sessions, now trading at around 0.8580 on the back of dovish comments by Bank of England members. Yesterday, BoE Governor Andrew Bailey stressed the downside potential of UK inflation and said that rates were likely near the top of the cycle. He was joined by two other MPC members at the Parliament testimony, Jon Cunliffe and Swati Dhingra, who also stressed inflation is at a turning point and gave few reasons to suggest multiple more hikes are on their way. It appears that the BoE may be transitioning to a higher-for-longer narrative.

Markets are now for the first time starting to cast some doubts about whether the BoE will hike rates at all at the 21 September meeting, with pricing having dropped below 20bp after yesterday's Parliament testimony. For now, our base case is that they will go ahead with a hike but that it will be the last one, meaning markets will have to price out the additional hike still priced for later this year. EUR/GBP upside potential remains decent in our view.

Today, keep an eye on the BoE decision-making panel survey and on any evidence of abating inflationary pressure.

SEK: Still vulnerable in the near term

We have published two updates on Sweden for both its economic outlook and the krona's near and medium-term outlook. The key points of our economic and FX updates are:

The Swedish economy is facing significant headwinds, but investors may have overestimated the magnitude of some downside risks, including in the real estate sector
The Riksbank should hike rates in September but will need to signal another hike in its rate path to halt the slump in the krona
Before the Riksbank meeting, EUR/SEK might test 12.00 as the external environment remains very challenging for pro-cyclical currencies
We still expect a rebound in the krona in 2024, but the timing is very uncertain and is tied to a turn in global FX dynamics (i.e., a turn in the dollar) more than in domestic factors

Source: ING

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Samantha Luan

Central Bank

Forex

Why it's still hard to pick the bottom for the krona

Back in May, we published a note entitled "Sweden: Hard to pick a bottom for the unloved krona". More than three months later, it is still hard to pinpoint an end to the EUR/SEK rally, and the key drivers behind the strength in the pair have not changed materially. Back then, the Riksbank had just lifted the cap on the pair with a dovish surprise, and while it later attempted to restore a currency-supportive hawkish stance, markets have continued to price a good deal of domestic downside risk into SEK.

In the broader FX picture, pro-cyclical currencies like SEK are primarily responding to US data at the current juncture: the recent resilience in activity indicators has kept market expectations for Fed easing capped, global rates elevated, the dollar strong and high-beta currencies under pressure.

Remember how NOK and SEK emerged as the two biggest underperformers during the core of the Fed tightening cycle? As the higher-for-longer narrative in the US consolidates, investors are once again turning their backs on the illiquid Scandinavian currencies. And with Sweden facing domestic headwinds and the eurozone's economic outlook deteriorating, EUR/SEK is trading at fresh highs, and at risk of touching the 12.00 pain level. Swedish Krona Still Searching for The Bottom, But the Riksbank Can Help_1

Swedish Krona Still Searching for The Bottom, But the Riksbank Can Help_1

The Riksbank can cap krona weakness

The chart below shows the risk premium (orange line) that has been built in for the krona (against the euro) since the start of the year. That tells us how much higher EUR/SEK is trading compared to what we estimate is its fair value according to market drivers (like rates and equities). Swedish Krona Still Searching for The Bottom, But the Riksbank Can Help_2

Swedish Krona Still Searching for The Bottom, But the Riksbank Can Help_2

Despite perceived real estate concerns building steadily into the end of April, EUR/SEK traded close to its fair value thanks to the Riksbank's currency-supportive hawkish tone. The shift in narrative at the April meeting (when two members voted against a 50bp hike, and the rate path was more dovish than expected) led to a spike in SEK undervaluation, which lasted for two months. Crucially, the return of a currency-supportive hawkish stance at the Riksbank's June meeting saw the EUR/SEK mis-valuation drop to zero. The following build-up in the EUR/SEK risk premium was much more short-lived compared to the one in May-June, and primarily a consequence of the bond sell-off in the US.

So, what is this telling us? The Riksbank can still impact the krona substantially. Despite not being able to fully insulate a high-beta currency like SEK from external drivers, it can prevent it from trading below its short-term fair value. To do this, it must meet or exceed market expectations on future rate tightening (i.e. via rate path projections), which has the additional benefit of signalling that the Bank is not so worried about the economic outlook and the risks to financial stability as to overlook its inflation mandate and the need to stabilise the currency.

Markets are fully pricing in a 25bp hike in September, with a 50% implied probability of another 25bp hike at the November meeting. The Riksbank will likely have to signal one more hike in its rate path projections to support the krona when it raises rates in September.

Our SEK forecast: the question is timing, not direction

One aspect of the lingering SEK risk premium is that it has detached from short-term rate dynamics, which had been a key driver until April/May last year. Based on the EUR:SEK two-year swap spread alone, EUR/SEK should be trading around 11.00 (chart below). In the current market conditions that is, obviously, inconceivable. Swedish Krona Still Searching for The Bottom, But the Riksbank Can Help_3

Swedish Krona Still Searching for The Bottom, But the Riksbank Can Help_3

We continue to base our medium-term forecast on the evidence that the krona is significantly undervalued, both against the euro and the dollar. On the back of this, our forecast profile for EUR/SEK is downward-sloping for 2024, and we expect the pair to trade below 11.00 by next summer.

We must admit, however, that the timing of the SEK recovery remains quite uncertain. In our view, this is not excessively dependent on domestic factors; the krona is already pricing in a sizeable amount of weakness in the domestic economy, and markets will either see the most dramatic scenarios for the real estate sector materialise (not our base case) or will have to price them out of the krona next year. Missteps by the Riksbank, if anything, have a higher chance of causing FX damage.

External drivers hold the key to the recovery

We think, instead, that SEK's reconnection with its stronger fundamentals will be driven by the global FX narrative. A strong dollar on the back of higher-for-longer rates in the US is incompatible with a recovery in the krona. The past few months have been a clear testament to this.

We expect US activity data to start turning from 4Q23, and the Federal Reserve to start cutting from March 2024, and that is the window when pro-cyclical currencies like SEK can stage a good rebound. However, we admit that the resilience in US economic data could persist for longer than we estimate, and delay as well as reduce the scope of the recovery in pro-cyclical currencies. A further deterioration in the eurozone growth outlook can also make the krona's recovery harder.

Until a US data/dollar turn occurs, the krona will remain vulnerable, and we only see 12.00 as the really strong resistance level for EUR/SEK. So far, the Riksbank has ruled out FX intervention but might start throwing that idea around to gauge market reaction (the effective applicability remains doubtful) should we break above the 12.00 mark.

We see room for a SEK rebound around the Riksbank's upcoming meeting when we expect the SEK-supportive narrative to prevail and a good chance of another hike to be added to the rate path. EUR/SEK could be easing back to 11.70 by the end of September.

Source: ING

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Cohen

Economic

Bond

Another ratchets up in US Treasury yields, and for good reason

Another leg higher in US Treasury yields, this time driven by ISM services. New orders and prices paid in the high 50s were the standout contributors. An interesting outcome was the re-inversion of the curve as the front end began to raise the discount for one more 25bp rate hike. It's still priced for no further hikes but has moved closer to a balanced probability. A more neutral to downbeat Beige Book later in the day tempered enthusiasm, but not by enough to materially take yields off their highs. It still appears to us that the marketplace is not getting a green light to re-test lower, and we continue to read the path of least resistance as pointing higher for market yields.

The market discount for the funds rate is now up to 4.3% for January 2025. Remember that was at 2.5% when Silicon Valley Bank went down in March this year. The market continues to discount rate cuts, but nowhere near to the extent they once were. The US 10yr Treasury yield is also at 4.3% and does not look wrong there. There is still a greater likelihood that it heads to the 4.5% area than the 4% one in the weeks ahead. Ultimately there is much more room to the downside for yields when something actually breaks, but for now, things are very much holding together – or at least there is enough constructiveness in the service sector to support ongoing elevation in official rates and market yields. Service Sector Oomph_1

Today's events and market views

The goldilocks scenario is a narrow path; things can easily break precipitating a sharper downturn, or stay too hot and keep inflation elevated. The services ISM moved the needle a little to the latter scenario, bear flattening the curve as markets also pushed the implied probability for a Federal Reserve hike before year-end to 50%. The Fed Beige Book however was more downbeat, arguing for a Fed pause this month.

Today's calendar features the weekly initial jobless claims data, a more contemporaneous read of job market conditions than the payrolls data. Markets will also be confronted with another busy slate of Fed speakers.

In Europe, we will get the final reading for second quarter GDP growth. The list of scheduled European Central Bank speakers is long, but the black-out period has started. Yesterday Klaas Knot suggested markets were underestimating the chances for a hike this month, nudging rates higher to now discount a one-in-three chance.

A greater focus will be on the Bank of England publishing the results of the decision-maker panel survey on price expectations. Yesterday Governor Andrew Bailey remarked the Bank was probably "near the top of the cycle", causing markets to pare their hike expectations. Two more hikes are fully priced, but we think chances still are we get one less.

In government bond primary markets, France and Spain will be active with auctions.

Source: ING

To stay updated on all economic events of today, please check out our Economic calendar

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Devin

Economic

Germany's industrial production continues its nosedive and even diehard pessimists are nervous. German industry dropped by 0.8% Month-on-Month in July, from -1.4% MoM in June; the third consecutive monthly drop. For the year, industrial production was down by 2.1%. Industrial production is now more than 7% below its pre-pandemic level, more than three years since the start of Covid-19. Production in energy-intensive sectors also decreased, by 0.6% MoM in July, and is still down by more than 11% over the year. The only positive news in today's report is the increase in construction activity by 2.6% MoM, from – 3.1% MoM in June.

Risk of falling back into contraction remains high

Today's industrial production data will do little to change the current hangover mood in Germany. A stagnating economy in the second quarter after two quarters of contraction gave hope to some that the economy is on the way to improvement. However, the full batch of hard macro data for July suggests that the risk of recession is high again. Retail sales, exports and now also industrial production all dropped in July, giving the German economy a very weak start to the third quarter.

Yesterday's very disappointing drop in industrial orders - by almost 12% month-on-month in July - illustrates the current problem of German industry, that of shrinking order books and high inventories; a combination that simply doesn't bode well for industrial production in the months ahead.

The country finally seems to have woken up to the reality that it has lost international competitiveness over the last decade on the back of not enough investment and hardly any structural reform. The pandemic and the war in Ukraine have both worsened the problems without being the root cause. It doesn't come as a surprise that, according to a recent survey, German companies have never been more pessimistic about the country's international competitiveness. With earlier investment and reforms, the economy could have mastered the current challenges better. Economic stagnation is the new normal. Yesterday, German Chancellor Olaf Scholz called for a "Germany pact" - appealing to the country's democratic parties to unite in a concerted effort to modernise Germany, speed up bureaucracy and combat the current economic crisis. This call comes only a week after the government had announced a small programme to incentivise corporate investments in the energy transition, the construction sector and digitalisation. No details of how such a "Germany pact" could look were revealed.

The positive news is that the sense of urgency has finally increased. Let's now wait for more concrete policy action. Until then, stagnation in industry and the broader economy looks like the new normal.

Source: ING

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Alex

Economic

Stocks

Energy

Eurozone services PMI were disappointing in August, yet the ISM services index printed its strongest expansion across the Atlantic Ocean. The U.S. ISM services index flirted with 55; employment, new orders, and ISM prices also showed significant progress last month. The strong ISM data bolstered the speculation that the Federal Reserve (Fed) could opt for another rate hike before the year end and keep the rates at restrictive levels for longer. The U.S. 2-year yield advanced above 5%, the 10-year yield is around the 4.30% mark. Oh, and by the way, the U.S. yield curve has been inverted since more than a year, but the resilience of the U.S. economy continues surprising, and recession is nowhere around (at least in the data).

The U.S. dollar index extends gains toward the 105 level. At 105.40, traders will decide whether the dollar deserves to reverse its yearly bearish trend, and step into a medium-term bullish configuration. Even though Fed's Waller sounded happy and satisfied with last week's weakish economic data – both for inflation and jobs – James Bullard said that the Fed should stick with a plan of one more hike this year. Maybe in November? For now, the market is positioned for no rate hike this year, but strong data and rising oil prices could change that expectation in the next few weeks. There is a growing chatter that the Fed could double its growth projection when it publishes an updated outlook later this month. I hope for the rest of the world that that does not happen!

Oil consolidates gains

Brent consolidates gains above $90pb, and U.S. crude is at $87pb with little conviction from the bears to counter the positive trend after the latest API data showed around 5.5-mio-barrel fall in U.S. inventories last week.

The U.S. dollar's appreciation adds an additional layer of complexity for the rest of the world, as not only crude prices rise, but the U.S. dollar used to trade oil gains in value as well. Big Asian economies are reacting to the U.S. dollar's renewed strength. China defends its yuan by offering forceful guidance with its daily reference rate, while the Japanese issued a strong warning this week, threatening investors that if the USD/JPY continued to rise, they would intervene. But in vain, the USD/JPY 147.80 and consolidates above 147.50 this morning. However, the upside potential is clearly limited as the Japanese have been vocal about the fact that they won't let the dollar-yen hit 150.

Elsewhere, the USD/CAD advanced to the highest levels since March as the Bank of Canada (BoC) kept its policy rate unchanged at 5% as expected, Cable slipped below 1.25, while the selloff in the EUR/USD slowed into the 1.07 support. What's next? The European Central Bank (ECB) doves may have gotten ahead of themselves on the back of the recent weakness in economic data, but the fact that the softness in inflation is at jeopardy means that an ECB pause this month is not warranted. ECB's Knot said that the markets are underestimating the chance of a rate hike next week. He reminded that a rate hike is 'still a possibility', just not a 'certainty'. Peter Kazimir also said that one more rate hike should happen in Europe. Yes, the 11% slump in German exports make the ECB hawks sound less powerful, but you must keep somewhere in the back of your mind that economic weakness is needed to slow inflation – at least this is what the theory tells – therefore, the ECB hawks will fight for their last 25bp hike this month.

iPhones banned in Chinese offices

The S&P500 didn't like the rising U.S. yields and slipped below the 4500 level and the 50-DMA yesterday. Nasdaq 100 also fell 0.88%, as Apple dived more than 3.50% on a report that the Chinese government agencies banned staff from bringing iPhone and other foreign-branded devices into the office. This is now something new, the government employees were always expected not to bring iPhones to the office since the Trump-era trade war. But the news was perceived as further escalation of technology war between the U.S. and China, amid other news including Huawei unveiling a new phone that is powered by a chip 'that appears to be the most advanced version of China's homegrown technology to date' – as a demonstration of power that the U.S.' chip export ban is not holding the Chinese companies back from progressing. And the announcement came in the middle of U.S. commerce secretary's goodwill tour in China. Released this morning, Chinese trade data confirmed a 4th consecutive month of drop in Chinese exports. Although the drop itself was lower than expected, China's share of U.S. imports fell to the lowest levels since 2006.

Source: Swissquote Bank SA

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Central Bank

Economic

Forex

Dollar is enjoying another rally, further solidifying its position as the strongest currency for the week so far, following an upbeat ISM Services report that well exceeded market expectations. The data affirms services sector's dominant role in driving U.S. economy. Additionally, it highlighted a robust uptick in both employment and prices, arguing the specter of services-led inflation looks set to linger.

Canadian Dollar holds steady after BoC opts to keep interest rates unchanged, a move widely anticipated by the markets. While Loonie emerges as the second-strongest currency for the week, this appears to be more a function of weakness in other currencies rather than inherent strength.

Euro is showing signs of resilience, ranking as the third-strongest currency. It is making an attempt to reverse its position against both Sterling and Swiss Franc. Australian and New Zealand dollars, continue to lag as the weakest performers. Yen has experienced a slowdown in its recent selloff, aided by increased verbal intervention from Japanese authorities.

Looking ahead, EUR/AUD would be an intriguing pair to monitor, especially given Aussie's vulnerability to any negative surprises in the forthcoming Chinese trade balance data to be released at the upcoming Asian session. Moreover, rebounds in EUR/CHF and EUR/GBP could potentially bolster Euro in crosses.

Technically, firm break of 1.6887 resistance in EUR/AUD will confirm that correction from 1.7062 has completed. Further rally would then be seen through this resistance to resume larger up trend from 2022 low at 1.4281. Dollar Strengthens on Strong ISM Services; Canadian Dollar Steady After BoC Hold_1

Dollar Strengthens on Strong ISM Services; Canadian Dollar Steady After BoC Hold_1

BoC stands pat, keeps hawkish bias

As anticipated, BoC keeps its overnight rate unchanged at 5.00%, alongside the Bank Rate at 5.25% and the deposit rate at 5.00%. Despite the steady rates, the tone of the announcement underscored ongoing concerns about inflation, coupled with a softer outlook on economic growth.

BoC explicitly stated that it remains "concerned about the persistence of underlying inflationary pressures," signaling a continued tightening bias. In its words, the central bank is "prepared to increase the policy interest rate further if needed," highlighting its willingness to act if inflation doesn't abate.

U.S. ISM services rose to 54.5, employment and prices jump

U.S. ISM Services PMI rose from 52.7 to 54.5 in August, comfortably above expectation of 52.6. Looking at some details, business activity/production ticked up from 57.1 to 57.3. New orders rose from 55.0 to 57.5. Employment rose strongly from 50.7 to 54.7. Prices also rose from 56.7 to 58.9.

ISM said: "The past relationship between the Services PMI and the overall economy indicates that the Services PMI for August (54.5 percent) corresponds to a 1.6-percent increase in real gross domestic product (GDP) on an annualized basis."

Fed's Collins advocates patience and holistic data assessment

Boston Fed President Susan Collins struck a note of caution and restraint in today's remarks, suggesting that while policy rates may be reaching their peak, further tightening could still be on the table, dependent on "holistic data assessment."

"This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course," Collins asserted.

Collins emphasized the challenge of discerning meaningful trends in economic data, cautioning that "it is difficult to extract the signal from the noise."

"If the improvement is fleeting, further tightening could be warranted," she warned.

Most notably, Collins was reluctant to embrace the notion that recent improvements in economic indicators necessarily signal a taming of inflationary pressures.

"There are promising developments, but given the continued strength in demand, my view is that it is just too early to take the recent improvements as evidence that inflation is on a sustained path back to 2%," she said.

ECB Kazimir prefers to hike next week, and take a breather thereafter

ECB Governing Council member Peter Kazimir offered two distinct pathways for the central bank's next move, strongly advocating for a 25-bps rate hike in the upcoming meeting next week.

Kazimir laid out the two scenarios: either to pause during the September meeting and opt for a "hopefully final" hike in October or December, or to proceed with a 25-basis point increase immediately, and "take a breather thereafter."

"The second option seems preferable, reasonable, to me," Kazimir emphatically stated. According to him, taking the latter route would be a "more straight forward and efficient solution," providing the markets with clearer signals. Furthermore, it would allow policymakers additional time to confirm that inflation is moving towards the 2% target in a sustainable manner.

Kazimir's recommendation comes at a time when there are increasing uncertainties surrounding the economic outlook. He acknowledged that "forecasts for inflation and economic growth are yet to be updated," but insisted on taking pre-emptive action. "It is, therefore, necessary to take one more step. As they say, better to be safe than sorry," he remarked.

ECB Villeroy: Keeping rates sufficiently long counts more than hikes

ECB Governing Council member Francois Villeroy de Galhau refrained from detailing specific plans for the upcoming September 14 meeting. But he added, "I'm convinced we are close or very close to the high point of interest rates."

Also, "In our fight against inflation, maintaining rates for a sufficiently long period now counts for more than further significant rises", he said.

Villeroy also weighed in on inflation and economic growth trends, asserting that inflation passed its peak at the start of the year." He added that recent fluctuations in oil prices "should not change the underlying dis-inflationary trend." i

As for growth, Villeroy offered a measured outlook. "For the entire euro zone, we don't see a recession today," he noted. "The picture for France and the euro zone is slightly positive growth, slower growth," Villeroy added.

ECB Knot: A further hike still a possibility, but not a certainty

ECB Governing Council member Klaas Knot made it clear that reaching 2% inflation target by the end of 2025 is non-negotiable. "I continue to think that hitting our inflation target of 2% at the end of 2025 is the bare minimum we have to deliver," said Knot.

Knot didn't rule out the possibility of further tightening on at September 14 meeting. "We've reached the finessing phase of the tightening cycle," he noted. "Tightening—a further hike—is still a possibility, but not a certainty."

The ECB member also underscored the importance of wage growth in achieving the central bank's inflation target. According to him, "It's quite crucial in the disinflation process toward 2% by the end of 2025 that wage growth decelerates visibly."

Knot expressed concerns about current wage agreements, stating that they are "still pretty far off longer-run compatibility with a 2% inflation target plus half a percent productivity growth."

Eurozone retail sales down -0.2% mom in Jul, EU fell -0.3% mom

Eurozone retail sales volume fell -0.2% mom in July, matched expectations. Volume of retail trade decreased by -1.2% mom for automotive fuels, while it increased by 0.4% mom for food, drinks and tobacco and by 0.5% mom for non-food products.

EU retail sales decreased -0.3% mom. Among Member States for which data are available, the largest monthly decreases in the total retail trade volume were registered in Denmark and Ireland (both -2.3%), the Netherlands (-1.4%) and Luxembourg (-1.3%). The highest increases were observed in Portugal (+1.1%), Sweden (+1.0%) and Cyprus (+0.8%).

Japan's Kanda flags "high urgency" as Dollar bears 148 Yen

Japan's Vice Minister of Finance for International Affairs, Masato Kanda, issued a strong warning as Dollar approaches 148 yen, marking a high for this year.

Kanda stated, "We are closely monitoring the situation, with a high sense of urgency. If such moves continue, the government will take appropriate measures, and all options are on the table."

These remarks are the first significant warning since the Ten dropped below the 145-per-dollar mark in mid-August. Since then, Japanese authorities had been relatively silent.

With the declared "high sense of urgency", Japan has effectively put currency traders on alert for potential intervention or other policy moves. The "all options are on the table" comment raises the possibility of multiple policy actions, ranging from more verbal warnings to more market interventions to curb yen's fall.

Australia GDP grew 0.4% qoq on capital investment and services exports

Australia's GDP saw 0.4% qoq growth in Q2, aligning perfectly with market expectations. This marks the seventh consecutive quarter of economic growth for the nation. The economy exhibited resilience with a 3.4% annual growth rate for 2022-23 financial year, comfortably surpassing 10-year pre-pandemic average of 2.6%.

However, it wasn't all good news: nominal GDP dropped by -1.2% qoq in the June quarter. GDP implicit price deflator also fell -1.5%, primarily due to -7.9% decline in terms of trade. Export prices fell by -8.2%, exceeding -0.3% fall in import prices. Despite this, domestic price growth remained stable at 1.2%, buoyed by increases in household rents, food prices, and the cost of capital goods, which escalated due to Australian Dollar's depreciation.

The positive quarterly GDP numbers were largely driven by two key factors: capital investment and the exports of services. Total gross fixed capital formation surged by 2.4%, reflecting growth in both public and private investment sectors.

Services exports soared 12.1%, with a significant push coming from 18.5% uptick in travel services.

Net trade in goods added 0.5% to GDP, with 2.5% rise in goods exports led mainly by mining commodities.

Household spending, on the other hand, remained rather muted, contributing just 0.1T to the GDP growth with modest 0.1% increase.

GBP/USD Mid-Day Outlook

GBP/USD's decline continues today and hits as low as 1.2480 so far. Intraday bias remains on the downside. Firm break of 61.8% projection of 1.3141 to 1.2618 from 1.2799 at 1.2476 could prompt downside acceleration to 100% projection at 1.2276. On the upside, above 1.2586 minor resistance will turn intraday bias neutral first. Dollar Strengthens on Strong ISM Services; Canadian Dollar Steady After BoC Hold_2

Dollar Strengthens on Strong ISM Services; Canadian Dollar Steady After BoC Hold_2

In the bigger picture, fall from 1.3141 medium term top is seen as a correction to up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3141 at 1.2075. Strong support would be seen there to bring rebound on first attempt. But outlook will be neutral at best as long as 1.3141 resistance holds, and consolidation from there is set to extend, until further development. Dollar Strengthens on Strong ISM Services; Canadian Dollar Steady After BoC Hold_3