On Tuesday, The Conference Board (CB) will release the September update to its Consumer Confidence Index (CCI). The Consumer Confidence Survey reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates. The Conference Board Consumer Confidence Index® increased in August, following three consecutive monthly declines. The Index now stands at 103.2 (1985=100), up from 95.3 in July.

Federal Reserve Chair Jerome Powell vowed officials would crush inflation after they raised interest rates by 75 basis points for a third straight time and signaled even more aggressive hikes ahead than investors had expected. “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Powell told a press conference in Washington on Wednesday after officials lifted the target for the benchmark federal funds rate to a range of 3% to 3.25%. “Higher interest rates, slower growth, and a softening labor market are all painful for the public that we serve. But they’re not as painful as failing to restore price stability and having to come back and do it down the road again,” he said.

A hawkish Federal Reserve crushed whatever hope investors had, plunging the stock market into a doom spiral last week and sparking traders’ fears that even more losses are on the way. U.S. equity markets tumbled last week, with the Dow briefly falling into the bear market territory and closing at a new 2022 low as concerns about recession risks rose after the Federal Reserve hiked interest rates by 75 basis points (bps) to curb inflation. For the week the Dow declined 4% and the S&P 500 shed 4.7%, while the Nasdaq contracted 5%. Treasury yields rose to their highest levels in over a decade. The inversion of the yield curve deepened, as the yield on the two-year note rose above 4.2%, in a sign of growing pessimism regarding the near-term health of the economy.

Officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023, a more hawkish shift in their so-called dot plot than anticipated. That implies a fourth-straight 75 basis-point hike could be on the table for the next gathering in November, about a week before the US midterm elections.

Now, central banks around the world are racing each other to step up their fight against inflation at the cost of growth. last week, more than a dozen central banks moved to tighten monetary policy.

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients. 

And for the first time in 24 years, the Japanese government interfered as they have previously promised to combat the 20% depreciation of the Japanese Yen of the year. Japan last intervened with the currency during the Asian financial crisis that caused a sell-off in the yen and a swift flight of cash from the country. Japan sold dollars and bought yen but the scale of the intervention is not announced, and the authorities have declined to disclose whether they got informal consent from the G7 countries. The intervention caused the JPY to appreciate from around $146 to around $140 in few minutes after the disclosure of the news, as seen in the below chart. The currency showed a volatile day not seen since 2020, and until now the currency has lost around one-fifth of its value against its greenback.

Source: TradingView

Meanwhile, Haruhiko Kuroda, the governor of the Bank of Japan (BOJ), unlike the rest of the world, has maintained an interest rate of -0.1%, and he asserted that he will not be changing his monetary policy any time soon stating "There's absolutely no change to our stance of maintaining easy monetary policy for the time being. We won't be raising interest rates for some time." Even Switzerland has raised its interest rate by 75 basis points to reach positive territory for the first time in more than a decade of 0.5%. Kuroda said, “With clear differences in economic and price situation, there is no need for Japan to remove negative rates because others have done so.”

Furtherly, The BoJ declared that, like it has been doing since April, it will continue to purchase an unlimited number of bonds to defend the 0.25% cap each trading day. A pandemic relief loan program would be phased down, and the liquidity operation would be expanded to cover a wider variety of corporate funding obligations. Japan shall use its $1.33 trillion in foreign reserves for yen-buying intervention, which, while sizable, could swiftly run out if large sums are needed to affect interest rates. The BoJ also scrapped a plan to provide banks lending to small and medium-sized businesses discounted loans to help them weather the disruption caused by the pandemic, but it surprisingly prolonged other sections of its pandemic-related funding programs.

However, the intervention did not fully satisfy economists. Stuart Cole, the head economist at Equity Capital in London, has told Reuters "But currency interventions are rarely successful and I expect today's move will only provide a temporary reprieve (for the yen)." Also, Ben Lailder. Global markets strategist at Etoro in London told Reuters "As long as the Fed stays on the hawkish, rate-raising front foot, any yen intervention is likely to only slow, not halt, the yen slide."

Supporting an easing policy amid of a global tightening puts pressure on the Japanese economy as the interest rate gap widens between the country and the rest of the world; therefore, it is expected of the Japanese authorities to intervene again with stricter tools.

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

Next Thursday, September 22^nd, the monetary policy committee known as the MPC will meet and decide the interest rate for the British pound (GBP). The belated meeting will be held one week after the country’s mourning for the death of Queen Elizabeth in correspondence to challenging economic conditions like its peer economies. The bank of England – BoE is expected to raise its interest rate, the seventh interest hike since December 2021 when the base rate was 0.1%. Theoretically, the purpose of increasing interest rates is to offset inflation by dragging down consumer spending demonstrated by the consumer price index CPI.

The BoE forecasted the CPI to peak at 13% in the last quarter of 2022 while economists from Citigroup and Goldman Sachs estimated inflation would eventually reach a peak of 18% or even 20% with the need for the BoE to raise the interest rate near 7% soon reacting to soaring energy prices. the annual energy tariff increase by Energy regulator Ofgem was 1,971 British pounds compared to 1,278 following a surge in natural gas prices after Russia’s invasion to Ukraine.

source: www.tradingview.com

Liz Truss the newly elected prime minister capped energy bills at 2,500 for two years which is below the forecasted October 2022 and January 2023 price caps of 3,549 and 4,567 respectively as forecasted by Citi Group. Core CPI witnessed a steeper upward rally since September 2021 from its 3.10% till August this year recording 6.3%, notably as well it is the highest since April 2011 4.5%. lately, energy prices are contributing the highest share of the headline CPI however, both Core and headline CPI were marathoning since February 2021, one year after Brexit. 

As stated by the office of national statistics, retail sales fell by 1.6% in August 2022 continuing a broad downtrend since the summer of 2021. This monthly fall in sales volumes is the joint largest fall in sales volumes (along with December 2021 where sales volumes fell by 1.6% over the month) since July 2021 when all legal restrictions on hospitality were lifted. Non-food stores’ sales volumes fell by 1.9% over the month and were 2.0% below their pre-coronavirus February 2020 levels. Other non-food stores, such as sports equipment and toy stores, reported a monthly fall in sales volumes of 2.8% in August 2022, while department stores fell by 2.7%.

Source: www.ons.gov.uk

Household goods stores’ sales volumes fell by 1.1% in August 2022, mainly because of falls in furniture and lighting stores. Feedback from retailers suggests that consumers are cutting back on spending because of increased prices and affordability concerns. Clothing stores’ sales volumes fell by 0.6% in August 2022 and were 5.7% below their February 2020 levels.

The British economy expanded 2.9% year-on-year, slightly above the 2.8% forecast however contracted by 0.1% month-on-month compared to 2022’s Q1 and a 0.2% forecast. As stated by trading economics, the annual GDP is forecasted to be 1.3% by the end of this year.

Source: www.tradingeconomics.com 

UK’s FTSE 100 is down 3.8% YTM failing for the third time to retest May 2018 7,903 peak. The 6780-support level is a critical price zone for the index to maintain the upward momentum and sustain trading in a range bounded by the 7,687.3-resistance zone.

Source: www.tradingview.com 

The interest rate in the United Kingdom is forecasted to be 2.25% by the end of this quarter. The bank of England stated in its August report that the direct contribution of energy to CPI inflation was projected to reach 6½ percentage points in 2022 Q4, nearly 2½ percentage points higher than in the May Report and expected to account for more than half of the overshoot of CPI inflation relative to the 2% target. The rise in energy prices was likely to have additional indirect effects on CPI inflation by increasing firms’ costs, which were then likely to be passed on to a wide range of prices for non-energy goods and services. Bank staff estimated that these indirect effects would contribute around 1 percentage point to CPI inflation in 2022 Q4 and, assuming gas prices would continue to add significantly to inflation during the following year.

Market strategists project higher interest rates, Nomura estimates that the MPC will raise the rate to 3.75% while NatWest markets added 0.55pp to its outlook – 3.5%, and capital economics stated its projection for rates to peak to 4% next year up from its previous forecast of 3%.

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients

Canada's inflation data for August will be released on Tuesday, with analysts forecasting the headline rate will edge down to 7.3%, from 7.6% in July. Six of eight economists surveyed by Reuters see core inflation peaking in the fourth quarter as underlying domestic and global pressures start to ease, though the path back to the 2% target will not be brisk.

Over the summer, the consumer price index dropped slightly to 7.6% in July from 8.1% in June. While overall inflation may have peaked, most of the drop was due to gasoline prices. Inflation has continued to rise and broaden across goods and services. And globally, we’re still seeing supply chain bottlenecks and high commodity prices, both of which contribute to inflation here in Canada. Domestically, demand continues to outpace supply. Consumer spending, particularly on services, was robust in the second quarter of 2022. And significant labor shortages persist, with the unemployment rate at its lowest level ever.

The unemployment rate in Canada rose to 5.4% in August of 2022 from the record-low of 4.9% observed in the previous two months, well above market expectations of 5%. It was the first increase in the jobless rate in seven months.

Inflation is forecast to fall sharply to near target by the end of 2024, from about 8% currently. Economists see that happening without borrowing costs rising too far into restrictive territory, with the policy rate peaking in October at 3.75%, according to the median estimate in the survey.

Policymakers led by Governor Tiff Macklem raised the benchmark overnight rate by 75 basis points to 3.25% at the last meeting on September 7th, giving Canada’s central bank the highest policy rate among major advanced economies. Officials said they expect to continue raising rates in the coming months. “Given the outlook for inflation, the governing council still judges that the policy interest rate will need to rise further,” officials said in the statement. Markets are pricing in a strong chance of another half-percentage-point increase in October.

The rate increase follows a surprise 100-basis-point hike in July, and half-point moves in April and June, making the current tightening effort one of the most aggressive ever. The overnight rate sat at an emergency pandemic low of 0.25% until the beginning of March.

Tiff Macklem, governor of the central bank, said in a National Post op-ed Tuesday following the Statistics Canada release that while it looks like inflation “may have peaked,” high prices will stick around for a while longer. He explained that the Bank of Canada’s role is to raise borrowing rates to make spending less attractive, thereby weakening demand and bringing price acceleration back down towards its two percent target.

"We think aggressive interest rate hikes will be followed by a recession next year which would prevent expectations from coming fully unanchored," said Nathan Janzen, assistant chief economist at Royal Bank of Canada.

“The scenario that we’re worried about is that Canadians look at the current rate of inflation, they think it’s here to stay, they start incorporating that thinking into long-term decision making,” the newspaper quoted Rogers as saying in a news conference after the rate hike.

Despite a more than 4% decline this year against its American counterpart, the Canadian dollar remains one of the best-performing developed-market currencies in 2022. The country’s economy has been helped by higher prices for commodities and energy and a scaling back of Covid restrictions, with growth actually accelerating in the second quarter even as global recessionary concerns mounted.

Gross domestic product rose at a 3.3% annualized rate after a 3.1% increase in the first three months of the year, Statistics Canada reported Wednesday. Growth was led by stronger household consumption and business spending on inventories. Economists surveyed by Bloomberg expected 4.4% annualized growth in the second quarter. Economists anticipate Canada’s growth rate will fall to below 1.5% annualized in the second half of this year and into 2023 amid one of the most aggressive hiking cycles ever by the Bank of Canada.

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients. 

The USD/ JPY has seen unprecedented levels not seen since August 1998 surpassing the 140 per USD level as the US economy is pressured by entrenched inflation figures, as seen in figure (1) below. The Japanese government is warning the BOJ of the weakness of the currency and is calling for acting to counter the excessive declines in the JPY. Bank of Japan Governor Haruhiko Kuroda said that the fast movements within the currency “are undesirable as they destabilize corporate business plans and heighten uncertainty”.

Figure 1: USD/ JPY Chart| Source: TradingView

The Bank of Japan has cut its FY 2022 GDP Growth forecast, while it revised it higher for the FY 2023 and 2024 from 1.9% to 2%, and from 1.1% to 1.3%, respectively. As seen below in figure (2), the bank also raised its expectations for the annual inflation rate in 2022 from 1.9% to 2.3% due to the global geopolitical tensions that are affecting energy and food prices, and as the Yen further weakens, prices are pushed upward furtherly. 

Figure 2: Actual and Forecasted Japanese Annual Inflation Rate (2018-2014) | Source: Trading Economics, Japanese Ministry of Internal Affairs and Communications

A weak JPY means that Japanese exports are cheaper for the world; thus, increasing the demand for Japanese goods. Meanwhile, a weaker currency translates into more expensive imports; hence, reducing the Japanese consumers’ purchasing power. On the other hand, a strong JPY means more expensive exports besides the already hurt export business due to the globally strained supply chain, lower competitive advantage, and less demand; thus, adversely affecting one of the biggest world exporters, while imports become cheaper and hence higher consumption.

The USD/ JPY is one of the most important currency pairs. Economic factors, political conditions and market psychology can all affect the price of a currency. One main factor affecting the pair’s recent depreciation is the divergence in policy between the Federal Reserve and the Bank of Japan. The USD/JPY pair has always been linked to carry trading, a strategy that entails borrowing at a low interest and converting the borrowed amount to another currency with a higher interest. Bank of Japan is known for its negative interest rate of -0.1% which it has maintained since 2016 as a tool to combat deflation, while the Federal Reserve is currently showing a hawkish tone and has already started its cycle of hiking interest rates and it is expected to keep on increasing the rates until the inflation figures becometh under control.It is not expected that inflation in Japan to increase to 1% until 2023. it is highly unlikely to see a rate hike with a further decline in the currency as per ING and HSBC expectations.

An expected move is to increase the interest rate slightly; however, the governor of the BOJ does not believe it would be an efficient move. He stated in July “It’s hard to believe that just by raising rates somewhat, you can stop the yen’s decline.” Analysts believe that any measures to appreciate the currency is unnecessary since there’s a wide gap between the Japanese interest rate and the rest of the world, and in the US in particular. But recently, the BoJ reaffirmed that it will not be hesitant to adopt more easing measures if necessary in a sign that it will continue to stand out among a worldwide tide of central banks tightening policy. The central bank also stated that, as it has been doing since April, it will continue to purchase limitless quantities of the bonds to preserve an implicit 0.25% cap each market day. With the weakened Yen, tourists would be attracted to visit the country; therefore, the government is also considering relaxing the measures previously taken at the time of the pandemic by removing the ceiling of daily visitors to the country with other further steps, according to a government official. Furthermore, not only the BOJ has vowed to intervene but also the government. The Japanese Finance Minister Shunichi Suzuki avowed that the country will take "appropriate" action to address the Yen's decline as “Excessive, disorderly currency moves could have a negative impact on the economy and financial conditions” Mr. Suzuki said in a conference. An official from the ministry of finance did not state exactly what measures will the bank of Japan take but he said “ “the government” – instead of “government and the BOJ” – was ready to use all available tools to battle excessive yen declines. “Each of us has our own mandate. That’s why I carefully used ‘government’ as the subject at times and ‘government and BOJ’ at other times,” Kanda told reporters.

In conclusion, we would like to state that the market is waiting for the decisions of the government to know the fate of the currency as the Japanese monetary policy committee meeting is on September 21-22.

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

US inflation data is coming this Tuesday with a broad measure of consumer prices likely to cool off even as a gauge of underlying pressures intensifies, US inflation data in the upcoming week may provide conflicting signals to the Federal Reserve ahead of a probable third consecutive big interest-rate hike.

The government’s report is expected to show an 8% increase in the overall consumer price index from the same month last year, down from 8.5% in July yet still historically elevated. Stripping out energy and food, the CPI is forecast to climb 6.1%, up from 5.9% in the year through July.

A drop in gasoline prices helped soften July inflation and gas prices have since continued to move lower. The average US price of gas was $3.78 a gallon as of Friday, according to motor club AAA, down from $4.03 a month ago.

Now it would take much weaker than expected August inflation data to revive talk of a smaller increase of 50 basis points, however, in recent speeches, US central bankers stressed that high inflation will indeed require higher borrowing costs that slow demand, though they kept the door open on the size of a hike at the conclusion of their Sept. 20-21 meeting.

 “We are in this for as long as it takes to get inflation down,” Fed Vice Chair Lael Brainard said at a conference on Wednesday. “Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”

Fed Governor Chris Waller signaled his backing Friday for a 75 basis point hike by saying he supported “another significant increase.” Earlier, St. Louis Fed President James Bullard said that he is leaning “more strongly toward” a jumbo move when officials gather Sept. 20-21. Both have been good bellwethers so far this year on where Fed policy is headed. “While I welcome promising news about inflation, I don’t yet see convincing evidence that it is moving meaningfully and persistently down along a trajectory to reach our 2% target,” Waller said.  “Until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy.” He also suggested that after this month’s meeting, the Fed will shift more toward data dependency, while spelling out that this meant he could not predict how high or quickly rates would have to rise.

Earlier, St. Louis Fed President James Bullard told Bloomberg in an interview that he leans toward a third consecutive 75-basis-point move in September. Kansas City Fed chief Esther George separately said there was a “clear cut” case to continue to act, though she argued that officials should prioritize steadiness over speed.

Economists trimmed their US inflation forecasts through the end of next year, likely an encouraging sign for the Federal Reserve as it tries to keep price expectations anchored. Projections for the year-over-year personal consumption expenditures price index, the Fed’s preferred inflation gauge, was lowered by 0.1-0.2 percentage point for each quarter. By the first quarter of 2024, it’s expected to average 2.4%, inching closer to the central bank’s 2% target.

The fed funds rate at 2.33% is “well, well below what you would consider being neutral in this current inflation environment,” former New York Fed President Bill Dudley said in an interview on Bloomberg Television on Friday. Policymakers have “made it very clear” that they need to get inflation back to 2%, “so they’re going to be tighter for longer than I think people expect,” he said. The Fed raised its target range for interest rates to 2.25% to 2.5% in July. Dudley expects rates will be “4% or higher” in the first half of 2023.

"Although we move to a 75bp rate hike in September, we acknowledge there are risks to a smaller 50bp hike," BofA said in a note published Thursday. In one risk, "next week's Consumer Price Index report may surprise to the downside, opening the door to a smaller hike," it said.

Goldman Sachs and Barclays also raised their rate-hike forecasts to 75 basis points for September and 50 basis points for November. Barclays said it now only sees an "outside chance" that softer-than-expected August inflation figures will swing the pendulum back toward an increase of 50 basis points at the September FOMC meeting.

The probability of a September hike of 75 basis points climbed to 86% on Friday from 57% a week earlier, according to the CME Fed Watch tool.

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.