Fundamental News Facts for 27th March, 2024 :
10. NZ First Impressions: Budget Policy Statement Review
[News Details]
German and UK Bond Yields Increase as Rate-Cut Predictions Remain Unchanged
Following the issuance of German and Dutch government bonds, German Bund yields saw an increase, with the 10-year yield taking the lead. The trading volume of German Bund futures decreased for the second consecutive day to about 75% of the 20-day moving average. Predictions in the money market for rate cuts from the European Central Bank remained unchanged, with an expectation of 91 basis points of cuts by year-end. UK bond yields experienced a slight bull-flatten. The UK Debt Management Office has planned its next 10-year bond issuance for April 4. The trading volume of futures dropped to around 85% of the 20-day moving average due to the market being closed for a holiday on Friday. Predictions for the Bank of England’s rate cuts remained largely the same, with 74 basis points of cuts expected in 2024.
Potential Recession in the Eurozone
Luis de Guindos, Vice President of the European Central Bank, suggested on Tuesday that the Eurozone might be facing a recession. Data indicates a slowdown in economic activity in the third quarter of 2023, with a contraction of 0.1%, and further indicators suggest a contraction in December, confirming the possibility of a technical recession in the second half of 2023. The latest data suggests an uncertain future and a weaker outlook. While the easing of inflation is positive, the slowdown in growth is concerning. The weakness seems to be widespread, with construction and manufacturing being particularly affected. The services sector is expected to weaken in the coming months as activity in other areas of the economy has weakened.
Recall Crisis for McCarthy Following Temporary Spending Bill
US House Speaker Kevin McCarthy’s support for a bipartisan bill to prevent a government shutdown has led to dissatisfaction among far-right Republicans who are calling for his removal as Speaker of the House. Florida Republican Matt Gaetz announced on Sunday that he would file a motion to remove the speaker from office this week. However, such a procedure hasn’t led to a speaker’s recall since 1910. Gaetz’s reason for this action is McCarthy’s acceptance of a bipartisan bill that didn’t include the deep spending cuts demanded by hard-line conservatives, a promise McCarthy made when he was elected Speaker but did not fulfill.
European and US Economic Outlooks and Comparison
The world’s economy is predicted to grow more slowly than previously thought, with a global growth rate of 2.7% expected for 2024-2025, down from 2.8% in 2023. Developed economies are set to maintain a steady growth rate of 1.6%, while emerging economies will see a slowdown to 4%.
The geopolitical landscape is uncertain as the world economy becomes more decentralized and multipolar. The year 2024 will be significant due to major elections worldwide, which could increase uncertainty and social tensions.
Inflation is set to rebound due to persistent service price inflation. However, a relaxing labor market is expected to reduce inflation during the summer.
The Federal Reserve (Fed) is likely to lower interest rates by 100 basis points in July due to improving inflation and a more dovish stance. The European Central Bank (ECB) is also expected to start reducing rates in July, ahead of the Fed, due to lower inflation and stagnant output.
The US economy is predicted to grow by 2.4% this year, higher than the Fed’s projections. However, the growth momentum will slow down during the year. The Eurozone is expected to recover from economic stagnation and accelerate growth in the second half of this year.
The upcoming presidential and congressional elections in November could significantly impact the US economy’s outlook in 2025, particularly regarding fiscal and trade policies. The Eurozone, on the other hand, is expected to recover from its current economic stagnation, with growth expected to accelerate in the second half of this year.
Shunichi Suzuki Doesn’t Exclude Any Measures to Control Yen’s Weakness
Japan’s Finance Minister Shunichi Suzuki stated on Tuesday that the weak yen has both positive and negative impacts on the economy, but excessive exchange rate volatility will bring uncertainty to business operations, which could harm the economy. Suzuki did not comment on the possibility of authorities intervening in the currency market to halt the depreciation of the yen, but he mentioned that the speed of exchange rate fluctuations would be a factor in deciding whether to intervene. If there is excessive volatility, he will not exclude any measures.
Sharp Decline in UK Food Price Inflation
The annual rate for grocery inflation in the UK dropped to 4.5% over the four weeks to March 17 from 5.3% recorded in the previous month, according to data from market researcher Kantar. Food prices were the main driver of the fall in headline inflation, which declined to 3.4% in February from 4% in the previous month, and Kantar’s data suggests this trend is set to continue this month. The data also pointed to strong growth in sales of branded goods and purchases at higher-priced supermarkets, contrasting with the trend seen for much of the past two years.
BOE’s Mann Believes Markets are Overestimating Rate Cuts
Catherine Mann, the Bank of England’s chief economist, expressed in an interview on Tuesday that she believes the market has overestimated the number of rate cuts. She suggested that she doesn’t need to cut rates because the market already has. She also hinted that the markets might be too complacent about how long they think the Bank of England will hold rates. Wage dynamics in the UK are stronger and more persistent than those in either the United States or the euro area. Underlying services dynamics are also more persistent than either the US or the euro area. Therefore, it’s difficult to argue that the BOE will be ahead of the other two regions, especially the US.
Bank of Canada Anticipated to Reduce Rates Before US Federal Reserve
Analysts predict that the Bank of Canada (BoC) will likely lower its rates before the US Federal Reserve due to slow economic growth and a decrease in inflation. The Canadian economy, which is highly sensitive to interest rates because of its high household debt, may require more significant rate reductions in this cycle.
A strong US economy usually benefits Canada, as about 75% of Canada’s international trade is tied to the US. However, with the Canadian economy growing at a rate of 1% in the fourth quarter, compared to a 3.2% increase in the US, the BoC may take a different path.
Simon Harvey, head of forex analysis at Monex, stated that the Canadian economy has struggled under higher interest rates and therefore cannot keep pace with the Fed. He anticipates a 25 basis point cut in June. Money markets are factoring in a 70% probability of a quarter-point cut at the BoC’s June 5 meeting. The odds for a cut at its April 10 meeting have increased to 20% following last week’s unexpected inflation slowdown.
The Fed is broadly expected to make its first rate cut at its June 11-12 meeting. Aggressive rate cuts could alleviate the financial burden for Canadian consumers grappling with high living costs amid mortgage, auto loan, and credit card payments. Approximately one-fifth of Canadian mortgage holders are expected to renew their contracts next year, and rate cuts could provide some relief.
However, deeper and quicker cuts could weaken the Canadian dollar, potentially sparking inflationary pressures, according to forex analysts. Last week, the Swiss National Bank unexpectedly became the first major central bank to cut interest rates due to easing inflation, a move that caught markets off guard. Other banks are expected to follow suit.
In Canada, inflation dropped to an eight-month low of 2.8% in February, while US consumer prices saw a significant increase, fueling expectations of a BoC lead over the Fed’s move. Douglas Porter, chief economist at BMO Financial Group, noted in a report last week that both headline and underlying inflation in Canada are somewhat cooler, with the unexpected drop in February driving an even larger gap.
Despite two consecutive soft inflation reports, BoC Governor Tiff Macklem stated that underlying price pressures in the economy still exist and it’s too early to consider a cut. The bank’s key interest rate has been at 5.0% since July. However, whenever the BoC begins, economists and analysts believe that Canada will need deeper rate cuts than its neighbor. Karl Schamotta, chief market strategist at Corpay, stated that Canada is expected to cut more aggressively over a longer timeframe.
Gold’s Behavior Points to Sustained Strong Demand
In March, gold experienced a significant rally, reaching a new record high of USD 2,221 per ounce. This was due to the Federal Open Market Committee (FOMC) maintaining their projections for three rate cuts this year. However, gold prices faced a slight dip as the dollar continued to strengthen. Despite this, gold is set to achieve a 7% gain in March, while silver is on track for a near 10% rally. Both metals had minor setbacks in January and February due to the rising dollar and US Treasury yields.
Gold has managed to resist the usual negative effects of a strong dollar and yield strength, both of which have increased this year. Instead, gold has been bolstered by safe-haven demand due to global geopolitical risks, and strong support from central banks and retail buyers, particularly in India and China. In early March, gold prices breaking above USD 2,088 per ounce triggered aggressive buying from hedge funds driven by technical and momentum factors. Over a two-week period ending March 12, these funds purchased 9.2 million ounces or 285 tons of gold, an amount that took ETF investors over seven months to sell.
These traders typically anticipate, accelerate, and amplify price changes based on market fundamentals. They often buy when prices are rising and sell when prices are falling. They usually have tight stop-loss orders and no underlying exposure that needs hedging, making them highly responsive to changes in market fundamentals or technical developments. In the short term, gold needs to maintain key support levels to avoid further profit-taking.
After reaching a new record high last week, gold underwent a mild consolidation without challenging support at USD 2,146 and USD 2,132. The market continues to show a strong “buy the dip” mentality. The 2024 forecast for gold is USD 2,300, and for silver, it’s USD 28, with potential for even higher levels.
Silver, on the other hand, has struggled compared to gold, primarily because it hasn’t received the same level of support from central banks. However, over the past month, silver, which derives about half of its demand from industrial applications, has benefited from a recovery in the industrial metal sector, particularly copper, which recently hit an 11-month high. This improvement temporarily lowered the gold-silver ratio to a new year-to-date low of around 85 ounces of silver to one ounce of gold, before reverting higher to the current 88.40. While gold has hit several new record highs this past month, silver has yet to break through a key resistance area between USD 25.75 and USD 26.15 per ounce.
Key resistance markers at $2186.06, $2200.59, and $2222.70 delineate potential ceilings, while supports at $2149.29, $2134.65, and $2120.02 provide floors against downtrends.
The 50-day and 200-day Exponential Moving Averages, positioned at $2169.82 and $2116.92 respectively, underscore a supportive trendline, reinforcing the bullish outlook as long as prices remain above the pivot, with a downside break signaling possible selling pressure.
NZ First Impressions: Budget Policy Statement Review
The new coalition Government has released its first Budget Policy Statement (BPS), outlining its priorities, an updated economic outlook, and high-level fiscal goals. Here are the key points:
Tax Relief: The Government plans to provide significant personal tax relief in Budget 2024, with details to be announced on May 30.
Operating Spending: The operating spending allowance for Budget 2024 will be less than $3.5 billion. The allowances for subsequent years will be revealed in Budget 2024.
Capital Investment: Up to $7 billion will be added to the Multi-Year Capital Allowance (MYCA) in Budget 2024 to fund new capital investment spending over the next four years. This could increase the government’s four-year borrowing requirement by about $5 billion.
Economic Outlook: The Treasury has downgraded its economic outlook. It now expects real GDP growth of 0.1% in the 2023/24 fiscal year, down from the previous forecast of 1.5%. Growth is expected to pick up to 2.1% in 2024/25 and 3.1% in 2025/26.
Inflation Forecast: The Treasury is forecasting a lower trajectory for inflation, with CPI inflation expected to be close to the RBNZ’s 2% midpoint by mid-next year. This results in a significantly lower forecast for nominal GDP across the forecast horizon.
Tax Revenue: The weaker outlook for nominal GDP means that core Crown tax revenue in the current 2023/24 fiscal year is forecast to fall $1.2 billion short of the previous forecast. The shortfall grows to $3.2 billion by 2026/27 and to $4.2 billion by 2027/28.
Operating Surplus: These revenue projections suggest that the Government would not achieve an operating surplus in either 2026/27 or 2027/28. However, these revised tax revenue forecasts do not include the impact of the personal income tax cuts that the Government is seeking, or potential new revenue measures.
Debt Reduction Goal: The government aims to reduce net core Crown debt to below 40% of GDP, compared with the forecast level of around 44% of GDP in 2023/24. Once achieved, the Government intends to maintain core net Crown debt in a range of 20-40% of GDP.
Operating Surplus Goal: The government aims to achieve an operating surplus that is sufficient to ensure consistency with the debt objective. This will be partly achieved by managing core Crown expenses down towards 30% of GDP from the current 33%.
In summary, the government borrowing program will likely be significantly increased when Budget 2024 is released on May 30. The size of the increase could be as much as $15 billion across four years. However, the final decision will depend on decisions taken between now and the Budget, especially regarding the size and timing of tax cuts.
Australian Dollar: Why the Knee-jerk Inflation Data Sell-off Was Quickly Faded
The Australian Dollar experienced a dip following the release of lower-than-anticipated monthly inflation figures. However, this decline was temporary as analysts identified some worrying trends upon closer examination.
Australia’s Consumer Price Index (CPI) inflation remained steady at 3.4% year-on-year for the third consecutive month in February. Some economists interpret this as a sign that price pressures are easing.
The Australian Dollar’s value dropped after the data was released because the market was anticipating a stronger outcome of 3.5%. However, the currency soon recovered as the report’s details indicated that the weakness was fleeting.
The exchange rate of the Pound to the Australian Dollar increased to 1.9368 following the data release before settling back to 1.9337. The Australian Dollar to U.S. Dollar exchange rate initially fell to 0.6511 but later recovered to 0.6531.
Analysts at the Commonwealth Bank of Australia noted that the Australian Dollar fell by around 30 pips following the release of the weaker-than-expected Australian CPI indicator for February. However, most of this decline was later reversed.
Economists at ANZ observed signs of persistent inflation in some sectors despite the seemingly positive headlines. They noted that the Reserve Bank of Australia (RBA) would be comforted by the current inflation trajectory, which is on track to fall short of their Q1 forecast of around 0.8% quarter-on-quarter.
However, there are indications that we may face the ‘last mile’ challenge, with ‘sticky’ inflation dynamics still observed in the services and non-tradables components at 4.2% and 4.8% year-on-year, respectively.
The RBA stated in its March update that it sees risks to inflation as being evenly balanced and wants to see services sector inflation decrease before considering a rate cut. The market consensus is that the first cut will be delivered in September.
If inflation falls at a faster pace than expected in the coming months, the start date for rate cuts could be brought forward, which would negatively impact the Australian Dollar.
Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc
Prepared to you by “Akif Matin”
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