[Fed] Hawkish Signals from Several Officials

Remarks of Officials

Summary:

This is a very important time to remain patient; the economic data will be very complex and will take longer than I expect; inflation is expected to fall relatively slowly and rates will not be cut until the fourth quarter of this year.

In a speech on May 21, local time, Boston Fed President Susan M. Collins said as follows.

Economic uncertainty remains high and we should not overreact to any economic data. In times of high uncertainty, it is beneficial to remain patient regarding the inflation process. I believe this is a crucial period to exercise patience as economic data will be very complex and will take longer than I expect

Current monetary policy would need to be maintained for a longer period for inflation to meet the conditions required for a rate cut, and current restrictive interest rates could further weigh on economic growth.

Many factors have kept the labor market strong, but it is rebalancing under the influence of tight monetary policy. Companies showed "cautious optimism" as hiring became easier and pressure on wage growth declined.

On the same day, Atlanta Fed President Raphael Bostic said he expects inflation to fall relatively slowly and rates will not be cut until the fourth quarter of this year.

The Fed must exercise caution in the first rate cut, considering a delay in reducing rates later on to ensure it does not stimulate business and household spending, thus potentially reigniting inflation.

The effects of monetary policy may be weaker than in the past, but they are still limiting economic activity and contributing to lower inflation.

Sharing the same view on Bostic's rate-cutting path was New York Fed President Williams, who claimed that rates would not be cut before the fourth quarter of this year.

Cleveland Fed President Mester, speaking at the same conference hosted by Bostic, said she would like to see a few more months of declining inflation data before cutting rates. There is little risk of maintaining the current level of interest rates, as the labor market is performing healthily, meaning policy may not be as restrictive as thought.

In her latest forecast, she raised her estimate for the long-term neutral rate, and the current level of policy may not be as tight as expected (in Monday's speech, she also said that she had not made a decision on the interest rate expectations of the dot plot, and although she only raised the long-term interest rate expectations, this is a thorough indication of Mester's "disappointment" in the recent inflationary process).

After the April CPI inflation report boosted expectations for a rate cut, the overall stance of Fed officials in recent days has remained hawkish, indicating the need to maintain a restrictive policy for an extended period without exception. However, against this backdrop, and somewhat differently, views on the disinflation process have diverged, and it remains to be seen whether this is the case with other officials. If so, it is likely to affect expectations for interest rates by officials, as evidenced in subsequent speeches and the June dot plot. Mester's upward revision of the long-term neutral rate is a good example (although it is for the long term).

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Remarks of Officials

On May 21, local time, European Central Bank President Christine Lagarde, delivered a speech as follows:

With the energy crisis and supply chain issues easing gradually, I'm really confident that we have inflation under control. The forecast that we have for next year and the year after that is really getting very, very close to target, if not at target.

We have to be data-dependent, and it's a collective decision that is taken by all members of the Governing Council together. It is a case that if the data that we receive reinforces the confidence level that we have — that we will deliver 2% inflation in the medium term, then there is a strong likelihood of a move on June 6. However, Governing Council members refuse to commit to a certain rate path.

Bundesbank President Joachim Nagel made a similar statement about the path of interest rate cuts on the same day, "wages were heading in the right direction and there were no signs of a self-reinforcing wage-price spiral. "

"Even if rates are lowered for the first time in June, that does not mean we will cut rates further."

Although the words spoken by the two officials are different, the implication is the same. That is, inflation will continue to decline steadily, and rate cuts could start in June, but there is not a certain rate path after the cut.

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Economic

Forex

Important Takeaways for GBP/USD and EUR/GBP Analysis Today

The British Pound is attempting a fresh increase above 1.2700.
There is a key bullish trend line forming with support near 1.2690 on the hourly chart of GBP/USD at FXOpen.
EUR/GBP is trading in a bearish zone below the 0.8565 pivot level.
There is a connecting bearish trend line forming with resistance near 0.8540 on the hourly chart at FXOpen.

GBP/USD Technical Analysis

On the hourly chart of GBP/USD at FXOpen, the pair remained well-bid above the 1.2520 level. The British Pound started a decent increase above the 1.2600 zone against the US Dollar.

The bulls were able to push the pair above the 50-hour simple moving average and 1.2640. The pair even climbed above 1.2700 and traded as high as 1.2726. Recently, there was a minor decline below the 23.6% Fib retracement level of the upward move from the 1.2656 swing low to the 1.2726 high, but the bulls were active above 1.2700.

Market Analysis: GBP/USD Climbs Steadily While EUR/GBP Struggles_1

On the upside, the GBP/USD chart indicates that the pair is facing resistance near 1.2725. The next major resistance is near 1.2740.

A close above the 1.2740 resistance zone could open the doors for a move toward 1.2780. Any more gains might send GBP/USD toward 1.2850. On the downside, there is a key support forming near a bullish trend line at 1.2690. It is close to the 50% Fib retracement level of the upward move from the 1.2656 swing low to the 1.2726 high.

If there is a downside break below 1.2690, the pair could accelerate lower. The next major support is at 1.2640. The next key support is seen near 1.2600, below which the pair could test 1.2520. Any more losses could lead the pair toward the 1.2500 support.

EUR/GBP Technical Analysis

On the hourly chart of EUR/GBP at FXOpen, the pair started a steady decline from well above 0.8590. The Euro traded below the 0.8565 and 0.8550 support levels against the British Pound.

The EUR/GBP chart suggests that the pair even declined below the 0.8540 level and tested 0.8535. It is now consolidating losses and trading below the 50-hour simple moving average. The pair is now facing resistance near a connecting bearish trend line at 0.8540.

Market Analysis: GBP/USD Climbs Steadily While EUR/GBP Struggles_2

It is close to the 23.6% Fib retracement level of the downward move from the 0.8588 swing high to the 0.8533 low. The next major resistance could be 0.8550.

The 50% Fib retracement level of the downward move from the 0.8588 swing high to the 0.8533 low is also at 0.8550. A close above the 0.8550 level might accelerate gains. In the stated case, the bulls may perhaps aim for a test of 0.8565. Any more gains might send the pair toward the 0.8590 level.

Immediate support sits near 0.8535. The next major support is near 0.8510. A downside break below the 0.8510 support might call for more downsides. In the stated case, the pair could drop toward the 0.8480 support level.

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

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ING

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Economic

Domestic developments in G10 are reinforcing the narrative of monetary policy divergence. Yesterday, lower-than-expected Canadian inflation reinforced our view of a June cut, while sticky UK services CPI and a hawkish RBNZ are boosting GBP and NZD this morning. The ECB appears to be sitting in the middle, with greater chances of a “hawkish” cut in June.

USD: Waller not as hawkish as it seemed

The dollar awaits any domestic input to make the first move, and domestic stories are taking centre stage. We are even more convinced the Bank of Canada will cut rates in June after lower-than-expected core inflation in April, while (as we discuss later in this note) easing expectations have been trimmed in the UK and New Zealand.

A few headlines from the Federal Reserve's hawkish-leaning member Chris Waller caught the market's attention yesterday. Those headlines have focused a bit more on the hawkish parts of his speech, quoting that he graded the April CPI report “C+” and that at least three more months of inflation progress are needed to consider cutting rates. However, Waller also said that those three good CPI reports are needed in the absence of significant weakening in the labour market, and that the April figures left him “hopeful that progress toward 2% inflation is back on track”. The overall message looked more centred around data-dependence than hawkish policy guidance.

Anyway, we should get a bit more clarity on the FOMC thinking in the May meeting minutes. While there should be evidence of increasing concern around the disinflation hiccups, Powell’s messaging seemed to denote a broad optimism on future price developments. Given the sub-consensus nonfarm payrolls and encouraging CPI were released after the meeting, comments from officials now should be more relevant than the minutes.

Today, Raphael Bostic, Susan Collins, Loretta Mester and Austan Goolsbee are scheduled to speak, while on the data side, MBA mortgage applications and existing home sales are the only releases on the day. It looks more likely that the FX market will be impacted indirectly by the release of Nvidia’s quarterly results (expected after today’s US market close) than that data. We retain our neutral-to-slightly-bullish view on the dollar in the near term.

Elsewhere, New Zealand’s central bank kept rates on hold as expected overnight and struck an even more hawkish tone due to sticky services inflation. Policymakers discussed the possibility of hiking at this meeting and rate projections showed a slightly increased chance (60%) of another rate increase, with rate cuts from the current 5.50% only starting in 3Q25. The New Zealand dollar is significantly stronger this morning, and we think there is more upside room against other high-beta currencies as markets still price in more than one cut (34bp) by year-end. We now expect 25bp of easing by year-end in New Zealand, but the risks are skewed to no cuts at all.

ECB: Lagarde further endorses June cut

European Central Bank President Christine Lagarde sounded cautiously dovish in line with most comments from her Governing Council members in a speech yesterday. She claimed to be “really confident that we have inflation under control” and there is a “strong likelihood” rates will be cut in June if inflation remains encouraging. Markets are pricing in 24bp of easing for next month and are therefore disregarding more comments on the June meeting.

However, markets are slowly trimming rate cut expectations by year-end (now at -66bp) as the ECB communications have signalled some a cautious approach to future easing. Expectations are increasingly centred on a “hawkish cut” in June, with the focus on data dependency and still some emphasis on lingering upside risks to prices. If this proves to be the case, an idiosyncratic EUR decline would not be warranted.

The dollar can indeed gain some more ground on higher rates and the divergence narrative with other central banks (not just the ECB), and ultimately take EUR/USD a few notches lower; but the case for a move back below 1.05 – which was very popular only a month ago – does not look strong. Crucially, the euro retains a decent fundamental position (e.g. the eurozone’s terms of trade), which would make a move towards parity increasingly unsustainable.

We still think EUR/USD can ease back to 1.08 in the near term, but our 3Q forecast remains for 1.10 as the Fed transitions to easing and the ECB broadly matches the market’s rate cut expectations. The only event in the eurozone today is another speech by Lagarde.

GBP: Stronger on slower disinflation

This morning, UK services inflation came in at 5.9% for April, exceeding both consensus estimates (5.4%) and the Bank of England’s projections (5.5%). Headline inflation slowed from 3.2% to 2.3% and core from 4.2% to 3.9%, but those were also above consensus and we know the BoE is mostly focused on the services price dynamics. Notably, rents surged, and other service categories also saw strong increases.

While this doesn’t significantly alter the BoE’s trajectory, it may prompt them to delay rate cuts for another month. Our base case remains a first rate cut in August.

Markets are understandably scaling back rate cut bets in the UK and the pound has jumped on the release. We had forecasted a move below 0.8550 in EUR/GBP at the start of this week, but we are seeing even more pressure on the policy-sensitive EUR/GBP. The pair may be on track to test the March lows at 0.8506, and we are marginally favouring some support at that level as opposed to another break lower. Our view beyond the short term remains positive on EUR/GBP as we see the ECB delivering a hawkish cut and the BoE cutting rates 100bp from August, but it now looks likely this strength will take some more time to show.

CEE: Data in Poland may support further gains for the zloty

Today begins a two-day series of Polish data. This morning we will see labour market numbers including wage growth, which have surprised rather to the upside in recent months and triggered some market reaction. We expect wage growth above market expectations this time as well. Industrial production will also be published, which should show a decline from the previous month but growth year-on-year. And also today we will see the PPI for April in Poland.

Yesterday's meeting of the National Bank of Hungary didn't bring too many surprises or impetus to the markets. The NBH cut rates by 50bp to 7.25% but we didn't learn much new regarding the June meeting. For now, we lean towards a 25bp rate cut but the odds are almost even with the 50bp alternative, which is also reflected in market pricing.

Poland's zloty and Hungary's forint continue to strengthen this week while the Czech koruna is steady and data in Poland today may support a view of no rate cuts this year and push EUR/PLN below 4.250.

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

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Alex

Economic

Japan’s imports rebounded in April as the weak yen boosted their value, pushing the nation’s trade balance into deficit and highlighting the increasing economic burden stemming from the currency’s plunge.

Imports gained 8.3% from a year ago, the Finance Ministry reported Wednesday, compared with the consensus estimate of an 8.9% increase. The trade balance registered a ¥462.5 billion ($3 billion) deficit, flipping from a ¥387 billion surplus.

Exports advanced 8.3%, compared with the consensus of an 11% increase.

Japan Trade Deficit Shows Weak Yen Is Weighing on Economy_1

Exports were boosted by shipments of cars, as the sector recovered from a certification scandal that disrupted factory operations at Daihatsu Motor Co., a Toyota subsidiary, for most of the first quarter. Exports of semiconductor manufacturing equipment and electronic components including chips also advanced. Imports got a boost from crude and aircraft.

The trade deficit, a negative factor for gross domestic product, reflects the growing economic pain associated with Japan’s beleagured currency. While the weak yen has helped boost earnings for exporters such as Toyota Motor Corp., it has also driven up costs of imports of everything from fuel and food to raw materials needed for manufacturing.

“My main scenario is that things will go in the right direction as cost-push inflation cools and consumption recovers with the impact of wage hikes,” said Taro Saito, an economist at NLI Research Institute. “But my risk scenario is that a weaker yen will worsen ongoing cost-push inflation and damage consumption.”

With Japan’s currency trading around a 34-year low versus the dollar, a majority of Japanese firms in a survey reported it’s becoming more of a problem as it pressures them to pass on rising costs of raw materials to customers via price hikes. Some have looked for the Bank of Japan to respond, as the wide interest gap versus the US is a key factor driving the trend. Governor Kazuo Ueda warned against excessive yen weakness earlier in May.

Strong demand in overseas markets, especially in the US, carries mixed ramifications for Japan. It may help the economy return to growth in the current quarter thanks to robust exports. It also underscores the strength of the US economy. By region, exports to the US and China rose 8.8% and 9.6%, respectively, while those to Europe fell 2%.

Strength in the US economy has prompted economists to push back their expectations for rate cuts by the Federal Reserve. The dollar has benefited as a result.

The yen averaged 151.66 to the dollar in April, almost 15% weaker than a year ago, the Finance Ministry said. Recent sharp moves in the yen after it fell beyond 160 per dollar in late April suggest that ministry authorities intervened in the foreign exchange market to support it.

The weak yen has become a focal point not only for trade, but also for the economy and policymaking. It revives concerns over cost-push inflation, which weighs on consumption, as the Bank of Japan waits and sees if high wage growth would help consumers shrug off rising living costs with resurgent spending, which could kindle demand-led inflation.

The world’s fourth-largest economy contracted in the three months through March with consumers and companies cutting spending. It’s largely projected to rebound in the quarter through June, although there are some concerns over the potential for stagflation, wherein prices rise even as growth sputters.

Source:Bloomberg

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Samantha Luan

Economic

Political

Central Bank

Yet this spending is rapidly being eclipsed by the fastest-growing portion of federal outflows: interest payments on the national debt.

For the first seven months of fiscal year 2024, which began last October, net interest payments totaled $514 billion, outpacing defense by $20 billion. Budget analysts think that trend will continue, making 2024 the first year ever that the United States will spend more on interest payments than on national defense.

US Federal Budget Crosses Grim Milestone As Interest Payments Overtake Defense Spending_1

Just two years ago, interest payments were the seventh-largest federal spending category, behind Social Security, health programs other than Medicare, income assistance, national defense, Medicare, and education.

Interest is now the third-biggest expenditure after Social Security and health. And not because any of the other programs are shrinking. While most government expenditures grow modestly from year to year, interest expenses in 2024 are running 41% higher than in 2023.

Interest payments are ballooning for two obvious reasons.

The first is that annual deficits have exploded, leaving the nation with a gargantuan $34.6 trillion in total federal debt, 156% higher than the national debt at the end of 2010.

In the 1990s, the average federal deficit was $138 billion per year. In the 2000s, it was $318 billion. In the 2010s, it was $829 billion. Since 2020, the annual deficit has swelled to $2.24 trillion, largely due to pandemic-related stimulus measures in 2020 and 2021. The projection for 2024 is a $1.5 trillion shortfall.

US Federal Budget Crosses Grim Milestone As Interest Payments Overtake Defense Spending_2

As a percentage of GDP, the annual deficit has nearly doubled in just 10 years, from 2.8% in 2014 to a projected 5.3% in 2024. So there's just a lot more borrowing to pay interest on.

The government is also paying more to borrow as interest rates have shot up over the last two years. Like consumers buying homes and cars, Uncle Sam benefits from cheap money when rates are low and bears a heavier burden when rates are high.

From 2010 through 2021, the average interest rate on all Treasury securities sold to the public was just 2.1%, which helped keep total interest payments manageable.

But in 2022, the Federal Reserve started jacking up rates to tame inflation, and the government now pays an average interest rate of 3.3%. So, the amount of borrowed money keeps going up, and the cost of borrowing that money is rising too.

US Federal Budget Crosses Grim Milestone As Interest Payments Overtake Defense Spending_3

More taxpayer money going to interest expenses will eventually leave less money for everything else, and at some point, the Treasury won't be able to borrow its way out of the problem anymore.

It's an unsustainable situation, which could lead investors to lose faith in the government's creditworthiness and demand even higher rates to buy Treasurys.

The urgency of the problem, however, is open to debate.

At the recent Milken Institute conference in Los Angeles, luminaries such as billionaire investor Ken Griffin and former House Speaker Paul Ryan warned of a looming debt crisis if the government's interest costs continue to mushroom. But many prominent financiers also touted the United States as the best destination in the world for investment, despite all its problems.

And many predictions of a debt crisis when interest expenses were a lot lower have so far turned out to be wrong.

Two people who seem unperturbed by America's debt burden are President Joe Biden and former President Donald Trump, the two leading candidates in this year's race for the White House. Neither is making deficit reduction a focus of his presidential campaign.

Biden does have a plan of sorts. He'd raise taxes on businesses and the wealthy and use some of that revenue to trim annual deficits. But Biden also wants to spend more on social programs, which could offset any savings.

Trump says he'd encourage more oil and natural gas drilling, which would somehow produce a windfall of tax revenue that would pay down the debt. But there's no obvious way that would happen, no matter how much drilling takes place.

Besides, both men have presided over a huge run-up in the national debt.

The national debt rose by $7.8 trillion during Trump's four years as president and $6.8 trillion during Biden's first three years and four months.

Earlier this year, the Committee for a Responsible Federal Budget helped Yahoo Finance analyze who's responsible for the national debt, and the blame falls more or less equally on administrations of both parties borrowing to finance wars, tax cuts, spending programs, and stimulus measures during recessions.

When the time does arrive to fix the debt, the inevitable solution will be a mix of spending cuts and tax hikes that will make a lot of people unhappy.

Which reveals the real reason no politician wants to address the problem — everyone hopes it'll be the guy after them.

Source: Yahoo Finance

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Warren Takunda

Economic

The Reserve Bank of New Zealand warned on Wednesday that it may resume raising interest rates due to sticky inflation, wrong-footing traders who had anticipated the central bank would signal rate cuts given the economy is in recession.

The central bank held, as expected, the cash rate at a 15-year peak of 5.5 per cent for the seventh straight meeting on Wednesday but surprised the market by saying it considered a rate increase. It also pushed out the likely timing of monetary easing.

The RBNZ said it could tighten and/or remain restrictive for longer depending on the trajectory of wages, prices and productivity growth rate, and considered a rate increase at the meeting.

“Shock and awe”: Adrian Orr, governor of the Reserve Bank of New Zealand. Bloomberg

“There’s a phrase that plays on governor Adrian Orr’s name – ‘shock and awe from the RBNZ’ – and we can see that at every meeting because he is unpredictable,” said Barrenjoey’s chief rates strategist, Andrew Lilley.

“He did telegraph, most surprisingly, that a hike was under serious consideration at this meeting, whereas most market participants had been looking for him to ready for cuts to come as soon as August.”

Indeed, the central bank forecast on Wednesday that the first fully priced quarter-point reduction in the cash rate would happen late next year, about six months later than its February forecasts had indicated.

$NZ/$US, Wednesday (US¢)

Traders Wrong-footed After RBNZ Shocks With Rate Rise Talk _1

More worryingly, it anticipates the cash rate to peak at 5.7 per cent by Christmas, suggesting the next interest rate could be up, not down.

On the bond market, two-year swaps, which reflect interest rate expectations, rallied 13 basis points to 5 per cent and the New Zealand dollar jumped 0.5 per cent to US61.15¢.

Money markets peeled back expectations of rate cuts. They now imply a 50 per cent chance of a move in October, from 77 per cent before the policy meeting. They are fully priced for a move in November.

‘A calculated bluff’

Central banks are struggling in their last-mile attempts to return inflation to target, clouding the outlook for eventual rate cuts.

Yet, the Bank of Canada could be the first among major policymakers to lower its 5 per cent policy rate after data overnight showed the annual inflation pace slowed to a three-year low of 2.7 per cent in April.

The outcome prompted traders to ramp up bets of an interest rate cut as early as June.

In contrast, NZ’s annual consumer price index is running at 4 per cent, well outside the RBNZ’s 1 per cent to 3 per cent target band as non-tradable inflation proves stubborn. This is despite the central bank being among the first to start tightening to get on top of inflation. It has lifted the cash rate 5.25 percentage points since 2021.

“New Zealand seems to be considering rate hikes with as much seriousness as the Australian central bank is in spite of the fact that the country is in recession, and Australia is not,” Mr Lilley said. Barrenjoey expects the RBNZ to ease in November.

Indeed, the Reserve Bank of Australia discussed raising the cash rate at its meeting earlier this month but decided to hold at a 12-year peak of 4.35 per cent to avoid “excessively fine-tuning” policy.

Even so, traders and economists still believe the next RBNZ rate move is down.

“The RBNZ’s move is something of a calculated bluff,” said Abhijit Surya, an economist at Capital Economics. “If we’re right that inflation will return to target by Q3, the bank should have no qualms about easing policy this year.”

Financial markets imply zero chance of a rate increase.

ANZ chief economist for NZ Sharon Zollner is pencilling in the first easing in one year. “Despite the hawkish monetary policy statement today, we still see the risks tilted towards earlier rather than later,” she said.

Overseas, US Federal Reserve officials tempered optimism about looming rate cuts, saying they are not ready to state that inflation is heading to the central bank’s 2 per cent target. That’s after data last week showed a welcome easing in consumer price pressures in April.

Fed governor Christopher Waller said he would need to see several more months of good inflation data before he would be comfortable supporting monetary easing.

Atlanta Fed president Raphael Bostic reiterated caution, saying “one number is not a trend” and he does not expect a rate cut before late this year.