Forex Fundamental News Facts for 29th May, 2024
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[Quick Facts]
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1. ECB’s Knot says rates can fall gradually and quarterly projections are key.
2. Fed’s Kashkari says rate hike not ruled out, with no more than 2 cuts expected.
3. U.S. consumer confidence rose for the first time in four months.
4. Home price growth in 20 major U.S. cities accelerates.
5. Russia’s seaborne crude oil exports fall before the OPEC+ meeting.
6. Oil Edges Up On US Fuel Demand Expectations Ahead Of OPEC+ Meeting.
7. Goldman Sachs Shifts Interest-Rate Outlook Ahead of Key Inflation Report.
8. New ‘Super Bull’ Commodities Phase Could Dramatically Change Budget Outlook.
9. Reviving Trilateral Ties: China, Japan, and South Korea Reconnect.
10. IMF: China’s Growth To Stay ‘Resilient’ At 5%.
11. Will Raisi’s Death Lead to Softer Iranian Policy Towards the West?
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[News Details]
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ECB’s Knot says rates can fall gradually and quarterly projections are key:
Klaas Knot, the Dutch Central Bank President and a member of the ECB’s Governing Council, emphasized that policy rates will gradually ease. He highlighted that the key meetings for interest rate decisions are the quarterly projection round meetings, where significant data justifying policy moves are released. Despite the March projections indicating the potential for three to four rate cuts this year, the ECB remains cautious due to high wage growth and weak productivity growth. As inflation slows down and the outlook improves, the ECB is growing confident that inflation will return to the 2% target level. Several ECB policymakers are advocating for a pause in rate cuts in July, shifting the focus to September. The market anticipates the ECB to reduce rates by approximately 60 basis points this year.
Fed’s Kashkari says rate hike not ruled out, with no more than 2 cuts expected:
Minneapolis Fed President Kashkari suggests that the Fed should wait for more evidence of cooling inflation before cutting rates. He points out the robust wage growth and the strong labor market as reasons for this caution. While the Fed’s policy stance is restrictive, Kashkari doesn’t rule out the possibility of additional interest-rate increases.
U.S. consumer confidence rose for the first time in four months:
The U.S. consumer confidence Index, as reported by the Conference Board, rose to 102 in May, marking the first unexpected rise in four months due to improved views of current business conditions and labor market conditions. However, the overall confidence gauge is on a downward trend due to high inflation, record household debt, and a softening job market. Consumers are generally pessimistic about the economy, especially with the Federal Reserve maintaining high interest rates and the upcoming presidential election.
In May, U.S. consumer confidence saw an unexpected rise, breaking a three-month decline. This improvement was driven by optimism about the labor market, despite ongoing concerns about inflation and the anticipation of higher interest rates in the coming year.
The Conference Board’s survey revealed mixed sentiments. While some consumers feared a potential recession within the next year, others remained positive about the stock market and planned to purchase major household appliances in the next six months.
Despite the Federal Reserve’s interest rate hikes since March 2022, aimed at curbing inflation, the economy is not expected to experience a downturn. Factors such as job growth, rising wages, a buoyant stock market, and healthy household balance sheets are predicted to sustain consumer spending.
The consumer confidence index rose to 102.0 this month, surpassing economists’ forecast and outperforming the University of Michigan’s sentiment index. This improvement was observed across all age groups, particularly among consumers with annual incomes over $100,000.
Perceptions of the labor market also improved, indicating a strong labor market. However, consumers’ 12-month inflation expectations rose, with prices, especially for food and groceries, impacting their view of the U.S. economy.
Despite concerns about higher prices and a potential economic downturn, consumers do not plan to significantly cut back on spending. The survey’s measure of buying plans for major appliances over the next six months increased, while plans for motor vehicles remained unchanged and those for houses dropped due to higher mortgage rates and elevated home prices.
A separate report showed a year-on-year increase of 6.7% in house prices in March, driven by a shortage of homes available for sale. Although supply is gradually improving, it remains well below pre-pandemic levels.
Home price growth in 20 major U.S. cities accelerates:
The S&P CoreLogic Case-Shiller 20-city home price index in the U.S. saw a 7.4% year-on-year increase in March 2024. The main issue is the shortage of second-hand homes for sale. With mortgage rates around 7%, home prices are accelerating, exacerbating the situation.
In May, consumer confidence saw a slight increase despite ongoing concerns about grocery prices and job security. The Conference Board’s Consumer Confidence Index rose from 97.5 in April to 102 in May. However, the Expectations Index, which reflects consumers’ short-term outlook for income, business, and labor market conditions, remained below the recession-indicating threshold of 80.
Consumers’ perception of the current business conditions was less positive than the previous month, but the robust labor market continued to support their overall assessment of the present situation. The report indicated an improvement in labor market conditions, with fewer respondents finding jobs hard to get.
Despite this, consumers’ views on the U.S. economy were significantly influenced by prices, especially for food and groceries. Inflation expectations for the next 12 months increased slightly, leading to a rise in the proportion of consumers expecting higher interest rates in the coming year.
Recent research by PYMNTS Intelligence revealed that consumers are likely to use their savings for necessary items and services rather than nonessential purchases. This trend was observed across income brackets, with many consumers reducing their discretionary spending due to ongoing inflation.
Retailers have noticed this trend, with Ross Stores’ CFO Adam Orvos noting that prolonged inflation and macroeconomic uncertainty continue to impact their customers’ purchasing power. Macy’s CEO Tony Spring also observed that their customers are scrutinizing their discretionary purchases due to financial pressure.
Russia’s seaborne crude oil exports fall before the OPEC+ meeting:
Russia’s average crude exports over four weeks have fallen for the third consecutive week, reaching a two-month low ahead of the OPEC+ meeting. The increase in shipments from Pacific ports was offset by lower volumes from the Black Sea and the Arctic. Russian shipments reached a 10-week low due to a drop in volumes and a slight week-over-week decline in prices.
Oil Edges Up On US Fuel Demand Expectations Ahead Of OPEC+ Meeting:
Oil Prices Rise: Brent crude for July rose by 6 cents to $83.16 a barrel, while the more active August futures increased by 5 cents to $82.93. U.S. West Texas Intermediate (WTI) crude futures for July were at $78.80 a barrel, up $1.08, or 1.39%, from Friday’s close. Despite the public holidays in Britain and the United States, oil prices rose over 1% on Monday after a week dominated by the prospect of enduring high U.S. interest rates amid persistent inflation.
Strong Fuel Demand Expected: The onset of the U.S. summer driving and vacation season is expected to bolster fuel demand. Despite concerns that high interest rates could dampen oil demand growth, UBS analyst Giovanni Staunovo notes that real-time mobility data suggests robust oil demand growth.
Increase in Air Travel: Data from flight analytics firm OAG showed a 5% month-on-month and nearly 6% year-on-year increase in U.S. seat numbers on domestic flights for May, exceeding 2019 levels. International flight seat numbers for May rose by 11% year-on-year to around 14.2 million, also surpassing the same period in 2019.
Anticipation of OPEC+ Meeting: The upcoming online meeting of the OPEC+ is drawing attention, with traders and analysts expecting production cuts to continue, further supporting prices. Satoru Yoshida, a commodity analyst with Rakuten Securities, anticipates oil prices to rise in the coming days due to expected ongoing voluntary output cuts by oil producers and the potential easing of U.S. monetary policy. The start of the U.S. driving season is also expected to provide support.
China’s Investment in Semiconductor Industry: China’s establishment of its third planned state-backed investment fund to boost its semiconductor industry is expected to indirectly drive oil demand. The fund, known as Big Fund III, is the largest of its kind, with $47.5 billion allocated to support the local semiconductor industry as part of the National Integrated Circuit Industry Investment Fund, according to OANDA senior market analyst Kelvin Wong.
Goldman Sachs Shifts Interest-Rate Outlook Ahead of Key Inflation Report:
Recent signals from the U.S. Federal Reserve indicate that it is not prepared to cut interest rates in the immediate future. This stance is informed by the current inflation scenario, which has seen a halt in progress. The personal consumption expenditures price index, the Fed’s chosen measure of inflation, rose by 2.7% in the year leading up to March, exceeding the Fed’s 2% target.
Cleveland Fed President Loretta Mester expressed the need for maintaining the current restrictive stance to gain a clearer understanding of inflation’s trajectory. Furthermore, the labor market would need to exhibit more signs of weakness before the Fed considers reducing rates. Despite an increase of 175,000 in nonfarm payrolls in April, this figure falls short of the prior 12-month average of 242,000.
While economic growth was a modest 1.6% annualized in the first quarter, economists believe the underlying figures are robust. Surveys of purchasing managers in May also suggest a thriving economy. The Atlanta Fed’s GDPNow forecasting tool predicts a 3.5% GDP growth in the current quarter.
Given these factors, it’s unsurprising that Torsten Slok, chief economist for Apollo Global Management, anticipates the Fed will maintain the current rates this year. Similarly, former Treasury Secretary and Harvard economist Larry Summers estimates a 15% to 25% probability that the central bank’s next move will be an interest rate hike.
Goldman Sachs’s economists have revised their prediction for a Fed rate cut from July to September based on recent data. Interest-rate futures suggest a 50% likelihood of the central bank lowering rates by September, and a 61% chance by November.
The economists interpret Fed Chair Jerome Powell’s comments as indicating a gradual approach to rate cuts. This approach acknowledges the significant progress made in addressing inflation and the reality that inflation is likely to remain noticeably above target this year, despite the economy performing well at the current interest rates.
Powell has stated that the timing of potential rate cuts will depend on when the Fed gains sufficient confidence to make such a decision. Goldman’s economists highlight three reasons why predicting the timing of rate reductions is challenging:
- Rate cuts are seen as optional, reducing the urgency.
- By September, inflation is expected to have improved significantly, but it may still be at a level that doesn’t clearly warrant a cut.
- While the Fed leadership seems relaxed about the inflation outlook and appears ready to cut rates soon, some Fed officials are more concerned about inflation and more hesitant to cut rates.
The impact of these potential changes on individuals is significant. Higher interest rates would result in increased income from savings accounts and money-market funds, but they would also lead to higher payments on home, auto, credit-card, student, and personal loans. Conversely, lower rates would have the opposite effect.
New ‘Super Bull’ Commodities Phase Could Dramatically Change Budget Outlook:
The global demand for iron ore, Australia’s top export, remains strong, with HSBC predicting a surge that will keep prices high for the next year. As supplies tighten, demand for commodities like gold, copper, silver, and iron ore is increasing, potentially leading to a ‘super bull’ phase for commodity prices.
While China’s demand, being the largest buyer of Australia’s iron ore, is expected to decrease due to its faltering property market, the rise in renewable energy manufacturing globally is anticipated to compensate for this shortfall. A significant source of iron ore demand will come from projects funded by the US Inflation Reduction Act, which supports investment in capacity for the energy transition.
Despite the Treasury’s assumption that iron ore prices will average around $US60 per tonne, current prices are close to $US120 per tonne, and some economists predict they will remain around $US100 per tonne. If commodity prices stay high, the extended deficits forecasted by the Treasury for the next few years could potentially shrink or even turn into a surplus.
However, this depends on various other economic factors, including spending, unemployment, and inflation. Independent economist Chris Richardson also expects a significant improvement in next year’s forecast budget deficit, currently predicted to be over $20 billion.
Even with an expected rise in Australia’s unemployment rate to 4.5% later this year, the government is still expected to collect a larger personal income tax next financial year. This is mainly due to an increase in the population and a slowdown in job creation, rather than widespread job losses.
The question remains as to why governments would significantly undershoot the forecast price of Australia’s biggest export. According to Richardson, it’s because treasurers prefer to have that wiggle room, allowing them to announce extra dollars and attribute it to their excellent management skills, rather than something that was always going to happen.
Reviving Trilateral Ties: China, Japan, and South Korea Reconnect:
Restart in Relations: Chinese Premier Li Qiang, South Korean President Yoon Suk Yeol, and Japanese Prime Minister Fumio Kishida met in Seoul for the first three-way talks in four years. The leaders aim to revive trade and security dialogues and will adopt a joint statement on six areas, including economy and trade, science and technology, people-to-people exchanges, and health and the aging population.
Resumption of Free Trade Agreement Negotiations: The leaders may agree to resume the three-party free trade agreement negotiations, which have been stalled since 2019. Li called for the comprehensive resumption of trilateral cooperation with an open attitude and transparent measures.
Managing Rising Distrust: Amid the rivalry between Beijing and Washington and tensions over Taiwan, China, South Korea, and Japan are trying to manage rising distrust. Yoon and Kishida have charted a closer course with each other and to Washington, embarking on unprecedented three-way cooperation with the United States on military and other measures.
Bilateral Talks and North Korea: Following separate bilateral talks, Li and Yoon agreed to a diplomatic and security dialogue and resume free trade talks, while Kishida and Li discussed Taiwan and agreed to hold a new round of bilateral high-level economic dialogue. Yoon also asked China to play a constructive role with its partners in North Korea, which is expanding its nuclear weapons and missile arsenal in defiance of United Nations Security Council resolutions.
Trade Relations: The trade relationship between China, South Korea, and Japan has evolved over the past decade to become increasingly competitive. These ties have been further tested by U.S. calls for its allies to shift their supply chains for key products, such as semiconductors, away from China.
Three-way FTA Negotiations: South Korea, Japan, and China held 16 rounds of official negotiations over a three-way FTA after they first kicked off in 2012. At their last negotiation in November 2019, the three countries agreed on liberalisation at a level higher than the Regional Comprehensive Economic partnership (RCEP), encompassing areas from trade of goods and services to investment, customs, competition, and e-commerce.
IMF: China’s Growth To Stay ‘Resilient’ At 5%:
China’s economic growth is projected to “remain resilient” at 5 percent this year, driven by its strong first-quarter data and recent policy measures, the International Monetary Fund said on Tuesday after its team concluded a visit to the country.
That forecast reflects an upward revision of 0.4 percentage point, compared with the IMF’s World Economic Outlook 2024 projections released in April.
For next year, the world’s second-largest economy is expected to grow at 4.5 percent, also a 0.4 percentage point-higher revision, the IMF team said in its preliminary findings issued at the end of the 2024 Article IV Consultation trip to China, led by Sonali Jain-Chandra, IMF’s China mission chief.
The consultation, based on Article IV of the IMF’s Articles of Agreement, usually involves bilateral discussions between the IMF and a member to assess the latter’s economic health and financial risks.
“China’s economic development over the past few decades has been remarkable, driven by market-oriented reforms, trade liberalization and integration into global supply chains,” IMF First Deputy Managing Director Gita Gopinath said in a statement.
Gopinath joined the policy discussions and met with Chinese government and banking officials during the consultation.
She said that China’s achievements have been accompanied by “imbalances and rising vulnerabilities”, and headwinds to growth have emerged.
“Recognizing these challenges, the authorities have focused on achieving high-quality growth by supporting innovation, especially in green and high-tech sectors, upgrading financial sector regulations and introducing some policies to mitigate property and local government risks,” she said.
However, a more comprehensive and balanced policy approach would help China navigate headwinds facing the economy, she added.
In the statement, the IMF noted that China’s inflation is expected to rise but stay low as output remains below potential, with core inflation increasing only gradually to average 1 percent in 2024.
It said that over the medium term, growth is expected to decelerate to 3.3 percent by 2029 due to aging and slower productivity growth.
Furthermore, the risks to growth are tilted to the downside, including a greater or longer-than-expected property sector adjustment and increasing fragmentation pressures, according to the statement.
Gopinath said that the ongoing housing market correction, which is necessary for steering the sector toward a more sustainable path, should continue.
She said China’s authorities have implemented various “welcome” measures to guide the property market transition, including recent policy announcements regarding lending support for affordable housing.
“A more comprehensive policy package would facilitate an efficient and less costly transition while safeguarding against downside risks,” she said.
The IMF statement also noted that China faces “significant” fiscal challenges, especially for local governments.
“To tackle elevated financial stability risks, the authorities have appropriately focused on addressing vulnerabilities in the property sector, local government debt and smaller financial institutions,” Gopinath said.
Strengthening the bank resolution framework and strictly applying prudential standards will help enhance financial stability and mitigate risks, she added.
She also said that achieving high-quality growth will require structural reforms to counter headwinds and address underlying imbalances.
Key priorities include rebalancing the economy toward consumption by strengthening the social safety net and liberalizing the services sector to enable it to boost growth potential and create jobs, according to Gopinath.
Domestic consumption contributed 73.7 percent to China’s economic growth in the first quarter, which expanded overall by 5.3 percent year-on-year, following 5.2 percent GDP growth recorded in the fourth quarter of last year, according to data from the National Bureau of Statistics.
The figures are above the annual growth target of around 5 percent set for this year, indicating the fundamentals of China’s macroeconomy remained solid, according to Wang Guanhua, spokesperson for the National Bureau of Statistics.
Following China’s robust first-quarter performance, a group of organizations, such as Goldman Sachs, Citigroup and Bank of America, have all raised their outlook for the country’s full-year GDP growth to 5 percent.
Will Raisi’s Death Lead to Softer Iranian Policy Towards the West?:
The sudden demise of Iranian President Ebrahim Raisi in a helicopter crash has sparked hope among some observers that Iran might revert to the more pragmatic approach of his predecessor, President Hassan Rouhani. Currently, Vice President Mohammad Mokhber has assumed presidential duties, with a snap election scheduled for 28 June to elect the next president.
Rouhani, elected president on 3 August 2013, was pivotal in opening Iran’s key sectors, including its vast but underdeveloped oil and gas industries, to Western companies. This was in return for greater scrutiny of Iran’s nuclear program. This strategy aimed to attract substantial Western investment, boosting an economy crippled by decades of international sanctions, and appeasing Iran’s young, educated, and non-fundamentalist population. However, the Joint Comprehensive Plan of Action (JCPOA), or ‘the nuclear deal’, began to unravel when the P5+1 group of nations (the U.S., U.K., France, Russia, China, and Germany) expressed their intention to dismantle the power of Iran’s Islamic Revolutionary Guards Corps (IRGC) across all key areas of Iran’s political and economic life.
The failure of the deal highlighted that there is no ‘moderate’ Iranian politician in the truest sense. Rouhani’s eagerness to re-engage with the West was based solely on Iran’s economic benefits, not on any deeper ideological shift towards anything other than Iran as a fundamentalist Islamic state. Crucially, he could only do so with the full approval of Iran’s Supreme Leader, Ali Khamenei, and the IRGC. When the powers of both were threatened by the evolving JCPOA, the deal was effectively dead from the Iranian side.
The guiding principle for all top-level Iranian politics is the concept of Velayat-e-Faqih, which entrusts all significant political and religious authority to the Shia clergy, subject to the approval of the Supreme Leader, and enforced by the IRGC. The Majlis, Iran’s 290-member parliament, is an elected body, but its real powers are limited to determining non-essential matters. Even these decisions can be overturned by the Guardian Council of the Constitution, which approves all legislation. This 12-member body acts as a general constitutional overseer, with half of its membership always being Shia theologians directly chosen by the Supreme Leader himself.
The final element of pre-determination in the upcoming Iranian presidential elections is the pre-selection process for ‘suitable candidates’ by the Expediency Discernment Council of the System. This council vets all candidates and then passes the list to the Guardian Council, which publishes the official shortlist shortly before the election date. The Expediency Council was originally created by the Supreme Leader to resolve any differences between the Guardian Council and the Majlis, but it now also functions as a key advisory body to the Supreme Leader.
The late President Raisi, termed a hardliner by the West, had no say in Iran’s backing for Hamas’s 7 October 2023 attacks on Israel or the 13 April drone and missile attacks directly on Israel. All key decisions will continue to be made by the Supreme Leader in conference with the IRGC. A far more significant appointment for Iran’s future may come from the replacement of Raisi on the Assembly of Experts, which chooses the new supreme leader when Khamenei dies. Khamenei has long considered his son, Mojtaba, to replace him as Supreme Leader, and he could well be appointed to the Assembly of Experts. This would be the genuinely big event following Raisi’s death.
28/05 Tue 7:00pm USD S&P/CS Composite-20 HPI y/y
28/05 Tue 8:00pm USD CB Consumer Confidence
29/05 Wed All Day EUR German Prelim CPI m/m
29/05 Wed 8:00pm USD Richmond Manufacturing Index
29/05 Wed 11:45pm USD FOMC Member Williams Speaks
30/05 Thu 12:00am USD Beige Book
30/05 Thu 4:50am AUD RBA Assist Gov Hunter Speaks
30/05 Thu 5:00am USD FOMC Member Bostic Speaks
30/05 Thu 6:00am CHF SNB Chairman Jordan Speaks
30/05 Thu 7:30am AUD Building Approvals m/m
30/05 Thu 6:30pm CAD Current Account
30/05 Thu 6:30pm USD Prelim GDP q/q
30/05 Thu 6:30pm USD Unemployment Claims
30/05 Thu 8:00pm USD Pending Home Sales m/m
30/05 Thu 10:05pm USD FOMC Member Williams Speaks
31/05 Fri 7:30am CNY Manufacturing & Non-Manufacturing PMI
31/05 Fri 8:00am NZD Annual Budget Release
31/05 Fri 6:30pm CAD GDP m/m
31/05 Fri 6:30pm USD Core PCE Price Index m/m
N.B. Time mentioned here is on Gmt +6
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