PPI inflation lowered, worse US consumer sentiment with one-year inflation expectations [Video]

Previous week's events (week 10- 14.06.2024)

US economy

PPI, U.S. producer prices, unexpectedly fell in May providing another indication that inflation was subsiding after surging in the first quarter. The producer price index for final demand dropped 0.2% last month after advancing by an unrevised 0.5% in April.

Fed officials pushed out the start of rate cuts to perhaps as late as December, with policymakers projecting only a single quarter-percentage-point reduction for this year.

U.S. consumer sentiment declined in June. The University of Michigan's preliminary reading on the overall consumer sentiment index came in at 65.6 this month, down, compared to a final reading of 69.1 in May.

The survey's reading of one-year inflation expectations was unchanged at 3.3%. Its five-year inflation outlook increased to 3.1% from 3.0% in the prior month.

UK economy

The U.K.’s unemployment figure unexpectedly rose to the highest in more than two and a half years. The jobless rate climbed to 4.4% in the three months through April, a level not seen since the middle of 2021. Average weekly earnings in the private sector, which the central bank is keeping a close eye on, increased by 5.8% — the slowest pace in two years even though the minimum wage increased by almost 10%.

The figures indicate that inflation may be lowering even further, allowing the central bank to reduce the highest borrowing costs in 16 years. Average earnings are rising in real terms as inflation falls but they could remain an obstacle if they are kept steady.

Inflation

US

The U.S. inflation data showed cooling shaking the markets as the monthly and yearly inflation figures were reported unexpectedly lower. However, inflation likely remains too high for the Federal Reserve.

Excluding the volatile food and energy components, the CPI climbed 0.2% in May, less than April’s 0.3% rise. The core CPI increased 3.4% yearly, the smallest 12-month gain since April 2021, after a 3.6% advance in April. Inflation continues to run above the U.S. central bank’s 2% target.

Interest rates

Fed

The Federal Reserve held interest rates at a 23-year high while scaling back its estimate of rate cuts this year to one from three. The central bank kept its benchmark interest rate in a range of 5.25%-5.50% completing its two-day policy meeting.

Fed officials now see a median of four additional rate cuts happening in 2025. That is up from a prior forecast of three. The 2024 outlook for inflation, sees prices end the year at 2.8% from 2.6% previously as measured by their preferred inflation measure — the “core” Personal Price Expenditures (PCE) index.

The Fed needs better data to gain greater confidence that inflation is moving sustainably toward 2%. Fed Chair Powell has previously made it clear that, before cutting rates, the Fed will need more than a quarter’s worth of data to make a judgement on whether inflation is steadily falling toward the central bank’s goal of 2%.

Jerome Powell at the press conference declined to offer any guidance on when a first cut could happen. The odds of a first cut in September rose following the CPI report Wednesday morning and stayed at 58% following Powell’s comments.

BoJ

The Bank of Japan (BOJ) announced a quantitative tightening plan next month and kept interest rates unchanged. The BOJ said on Friday it would start trimming its bond purchases and announce a detailed plan to reduce its nearly $5 trillion balance sheet in July. It maintained its short-term policy target at 0%-0.1%.

BOJ is expected to raise interest rates at its next policy meeting on July 30-31.

Currency markets impact – Past releases (week 10- 14.06.2024)

Server Time/Timezone EEST (UTC+02:00).

Currency markets impact

• The change in the number of people claiming unemployment-related benefits during the previous month was reported way higher at 50.4K versus the expected 10.2K. Unemployment rate rose to 4.4%. The average Earnings Index (3m/y) was reported steady at 5.90%. The figures continue to show signs that the labour market may be cooling, with the number of vacancies still falling and unemployment rising. The market reacted with GBP depreciation at the time of the release. More than 14 pips drop for GBPUSD, reaching near 20 pips drop a while later, before retracing eventually.

• On the 12th of June, China’s CPI inflation dropped in May, and PPI declined at a slower pace. CPI rose 0.3% year-on-year in May. Month-on-month CPI inflation shrank 0.1%. CNH saw appreciation, however, and USDCNH dropped at the time of the release.

• The U.K.'s monthly real gross domestic product (GDP) is estimated to have shown no growth in April 2024. GDP is estimated to have grown by 0.7% in the three months to April 2024. GBP saw depreciation and GBPUSD dropped around 10 pips before a full reversal.

• At 15:30, the CPI data for the U.S. shook the markets as inflation was reported unexpectedly lower. Monthly calculation dropped to 0% versus the expected 0.10% while the annual calculation dropped by 0.10%, down to 3.30%. After a strong NFP reading people expected at least inflation to remain steady. The surprising news caused high USD depreciation. The EURUSD jumped around 85 pips at the time of the release before experiencing retracement.

• The Fed announced its decision to keep rates steady for now and stated that economic activity is expanding, labour market conditions remain strong and inflation has eased, even though it remains elevated still. The Fed projects that PCE inflation will be at 2.6% and core inflation at 2.8% at the end of 2024. Higher projections than last time. No major impact was recorded in the market at that time.

• On the 13th, Australia’s employment change was reported higher than expected at 39.7K versus the expected 30.5K, while the jobless rate fell by 0.10% as expected. These data show how strong the labour market conditions are and indicate that inflation has lower chances of lowering, despite the fact that the central bank raised interest rates in 2023 to 4.35%, keeping it high until now. The market reacted with AUD appreciation but the effect soon reversed, marking a low-level intraday shock. AUDUSD jumped just 12 pips before reversing.

• The U.S. PPI data were reported weak as expected with even worse figures. Jobless claims were reported higher than expected, up to 242K. These are the highest initial claims numbers since August last year. The rising jobless claims and worsening PPI data support the view that rate cuts are on track. The market reacted with the depreciation of the USD at the time of the release. However, the effect faded soon as the dollar experienced appreciation soon after the release lasting until the end of the trading day.

Forex markets monitor

Dollar Index (US_DX)

Last week the market was quite volatile due to the important scheduled releases and news that took place. Before the 12th of June, the dollar index was moving to the upside steadily with low volatility. The upside path was the result of a higher-than-expected NFP report that boosted expectations of a Fed rate cut delay. The path was interrupted on the 12th of June upon the release of the weaker U.S. CPI data release, causing the USD to depreciate heavily and the dollar index to drop, until it finally found support at near 104.27. After that event a reversal took place. Despite the weak figures for inflation the Fed kept interest rates steady and indicated that interest rate cuts could delay further past September. That caused the dollar to start strengthening significantly and the dollar index to follow an upward trend until the end of the week. 

EUR/USD

The pair was moving sideways around the mean with moderate volatility. The EUR is facing lower interest rates having an impact on the EURUSD. After the NFP the pair fell heavily around 80 pips before the sideways path started. On the 12th the U.S. inflation news caused the USD depreciation and a jump of the EURUSD pair. It eventually reversed to the downside and continued with a downward trend since the USD is currently experiencing strength.

USD/JPY

The pair was moving sideways as well as the USD was driving the pair. On the 12th of June the pair experienced a drop with the U.S. inflation data release and a reversal took place soon during the trading day, back to the 30-period MA. The JPY sees weakening occasionally and due to that reason, the USD gains a lot of ground against the JPY. However, on the 14th of June, the BOJ kept rates steady and announced its decision for a future quantitative tightening plan. At the time of the rate decision, the pair dropped heavily and reversed to the upside. After the start of the press conference at 9:00 the JPY appreciated heavily causing the pair to drop again, reversing to the 30-period MA.

Crypto markets monitor

BTC/USD

After some consolidation that lasted since the 11th of June, the price eventually crashed further, reaching a support near 67,200 USD. The price eventually retraced to the 61.8 Fibo level and settled at near 67.5K USD. On the 12th of June, the U.S. CPI news caused dollar depreciation and Bitcoin jumped to test again the 70K USD resistance. It was however unsuccessful and reversed to the 30-period MA. Volatility levels lowered but the price returned near the 67K USD support. On the 13th of June, the price tested the support without success and it reversed. Currently, volatility has lowered and the price remained close to the 67K USD level. On the 14th of June, after the U.S. news at 17:00, the price dropped and tested the support near 65K USD before it retraced to the 30-period MA. It remained low during the weekend and settled at near 66K USD.

This week's events (week 17- 21.06.2024)

Coming up:

• The RBA, SNB and BOE will announce their decision on rates. Interest rate policy is expected to remain steady, except SNB which has no expectation reading yet released.

• U.K. CPI inflation release.

• Retail sales figures release for China, Canada, the U.K. and the U.S.

Currency markets impact

• China in May managed to beat retail sales expectations, but industrial output and fixed asset investment were missed. The Industrial Production figure was reported as lower than expected. Retail sales were reported higher, up to 3.70% versus the previous 2.3% growth. No major impact was recorded in the market.

• The Empire State Manufacturing Index figure will be released at 15:30. The manufacturers in New York state are expected to report a better business conditions picture that will cause the figure to improve to -12.5. The USD pairs could be affected by a moderate shock at that time, especially if we have a surprise to the upside. In that case, the dollar is expected to strengthen intraday.

• On the 18th, the Reserve Bank of Australia (RBA) will announce their decision on rates at 7:30.  The central bank will likely hold its key interest rate at a 12-year high as it tries to restrain consumer prices. Inflation is not lowering at all, quite the opposite and the labour market is strong enough to keep the pressure on. Still, we could see a moderate intraday shock affecting the AUD pairs at that time.

• The U.S. core retail sales figures will be reported at 15:30. At that time the USD pairs could see an intraday shock, causing one-sided direction movements that could spark trading opportunities. The NFP report showed a high enough figure to suggest that retail sales growth could see improvement and that is why economists are expecting a rise to 0.3% this time in retail sales.

• On the 19th, U.K. CPI inflation data will be released, probably causing an intraday shock to GBP pairs. It is an important figure that could determine the BOE’s next move in regard to interest rate policy. The BOE announced their intention to proceed with cuts soon, thus a lower inflation figure reported could cause a high GBP weakening. On the other hand, we see that the expectation is already at 2%. A higher-than-expected drop may not have that weakening effect.

• On the 20th of June, the SNB will decide on rates at 10:30. Investors remain uncertain about policymakers’ next step since the central bank switched to easing, cutting the policy rate down to 1.5% from 1.75%. The CHF pairs might see an intraday shock at the time of the announcement. Keeping rates low could cause the dollar to strengthen significantly against the CHF if the market conditions remain steady.

• The BOE will announce their decision on interest rates as well on the same day. The expectation is that there will be no change in rates. BOW is expected to keep OBR high at 5.35%. If inflation however is reported lower prior to this decision, there is a high probability of a surprise cut from the BOE and the GBP pairs to experience a huge level shock at the time of the release, obviously with GBP weakening.

• U.S. unemployment claims are expected to be reported lower, a pullback from the high 242K figure. The USD pairs could see some high volatility upon release if activity levels in the market remain high. The reduction in claims could be valid considering the fact that the labour market in the U.S. is showing strength still.

• On the 21st of June, the growth in retail sales is expected to be reported as a positive turning point since the previous figure was showing a decline instead of -2.30%. The GBP pairs will probably see more volatility and an intraday shock is not to be excluded, since the chance for a miss is high. The labour market in the U.K. is showing signs of suffering, as the recent data suggest, and retail sales forecasts might not reach that level of growth. A miss in the figure should weaken the GBP.

• Canada’s retail sales will be reported as well and the forecast in regards to the figures is optimistic as well. Analysts expect growth despite a reduction in interest rates and a recent elevated jobless rate announcement. The employment change was also reported lower. CAD pairs are expected to be affected heavily during the time of the release. A miss, with lower than expected growth could lead to CAD depreciation.

Commodities markets monitor

US Crude Oil

On the 12th of June, the resistance mentioned in our previous analysis was broken as predicted and the price moved higher. However, the U.S. inventories report released the same day at 17:30 had a negative impact on the price. Technically, that 79 USD/b level resistance looks like a turning point. On the 13th of June, the pierce remained on a sideways path despite the volatility, forming a triangle. That was broken on the 14th causing the price to jump and reach the resistance near 79 USD/b as mentioned in the previous analysis. The price finally reversed fully and stayed close to the mean, 78 USD/b. After a long-term uptrend, Crude oil is finally in a consolidation phase as it moves sideways in a 1.5 USD range. Why this is important because a breakout of that consolidation could cause the start of a new trend and price rapid moves in the relevant direction. 76.5 USD/b is the retracement 61.8% Fibo level and target if we have a downward breakout which is the logical thing to expect after a long way up that reached a near 6.5 USD move.

Gold (XAU/USD)

On the 12th of June, the U.S. CPI news caused the USD to depreciate and Gold to jump. After a jump of almost 30 dollars, it reversed when it found resistance at near 2,342 USD/oz. The reversal was quick. The dollar had not yet appreciated enough but the reversal started to happen indicating demand perhaps weakening, keeping the metal lower. On the 13th that view was confirmed as the price moved even lower. After reaching the support at 2,295 USD/oz the price retraced to 2,311 USD/oz, which acted previously as support, and settled there. On the 14th of June, the price reversed to the upside and tested the resistance again, at near 2,340 USD/oz unsuccessfully. It reversed back to the 30-period MA and is on this consolidation path for now with the mean price at near 2,320 USD/oz.

Equity markets monitor

SP 500 (SPX500)

Price Movement

A consolidation phase was broken to the upside on the 12th of June when finally the index moved higher. At 15:30 the U.S. CPI news caused the index to jump as inflation was reported lower than expected. This gave a hint that interest rates, and borrowing costs, could lower soon. After reaching resistance at near 5,450 USD the index retraced near 5,420 USD and continued sideways. The sideways path continued to the 13th of June as volatility lowered. The U.S. news that day did not have much impact. A triangle formation was broken to the downside on the 14th of June and support near 5,400 USD was reached as mentioned in our previous analysis. The index reversed fully after that and it moved slightly above 5,440 USD, above what looks like to be a channel now. The level 5,445 USD looks like the next important resistance.