Fed keeps rates near zero, raised its inflation expectations, signals rate hike by the end of 2023 - as expected

• CAPITAL MARKETS OVERVIEW:

The Fed sharply raised its inflation expectations for this year and brought interest rate hikes earlier. The three major U.S. stock indexes fell on Wednesday. This change in outlook has once again raised concerns that the Chinese central bank may have to control its ultra-loose monetary policy to prevent the US economy from overheating. However, the Fed did not indicate when it would begin to cut its aggressive bond purchase program, and Wall Street cut some easing policies before the market closed. Selling is most obvious in the economically sensitive sectors that have rebounded recently, including the materials and industrial sectors. The Canadian stock market gave up early gains on Wednesday and was basically flat. The S&P/TSX Composite Index is still close to a record high, as the gains in the technology sector offset the decline in the heavyweight materials sector. After the Fed's tough remarks, the price of gold weakened, pushing the precious metals stock prices down sharply. The latest data show that the consumer price index rose 3.6% in May, the largest annual increase since May 2011. The CAC40 index resumed its upward trend and closed at 6653 points, an increase of 13 points or 0.2%, a record high in the past 21 years. European markets fluctuated. Market sentiment before the Federal Reserve’s monetary policy statement and Chairman Powell’s press conference later that day Cautiously optimistic. After the European Union included the United States on the safe travel list, the index was supported by travel and leisure stocks. On the other hand, the decline in bond benchmark yields weighed on bank stocks such as Societe Generale (-2.4%), Credit Agricole (-1.6%), and BNP Paribas (-1.1%). The index’s best performer was Worldline, which rose 2.0% after Goldman Sachs added the French payment company to its preferred stock list. The FTSE 100 index closed at 7185 on Wednesday, the highest closing point since February 2020. Investors await the outcome of the Federal Reserve's (Fed) policy meeting, which will mark the beginning of the process of declining bond purchases. Recent data shows that US consumer and producer prices have soared, triggering concerns about rising inflation, and Fed officials have reiterated that inflationary pressures are temporary. In terms of economic data, the UK inflation rate rose more than expected in May, reaching the highest level since July 2019, higher than the Bank of England’s 2.0% target. The Shanghai Composite Index fell 38.23 points on Wednesday to close at 3,518.33 points, a drop of 1.07%, continuing the 0.92% drop of the previous trading day and closing at a 3-week low under lower-than-expected local data. Industrial production and retail sales were lower expected. There are reports that China has stepped up its crackdown on shadow banking activities. Banks and wealth management companies can no longer use funds invested in so-called cash management products to buy long-term debt or bonds rated below AA+, which has suppressed market sentiment. Although many market participants are waiting for the Federal Open Market Committee (FOMC) results, the pressure of rising prices may change the Fed's monetary policy stance. Recent data shows that US retail sales fell more than expected in May; although producer prices in the world’s largest economy rose more than expected; and despite rising cost pressures, US homebuilders’ confidence hit a 10-month low in June. . At the same time, the Hang Seng Index fell 221.11 points to close at 28417.42 points, a decrease of 0.77%. The Nikkei 225 Index fell 150.29 points or 0.51% on Wednesday to close at 29291.01 points, which declined from the 5-week high after rising 0.74% from the previous trading day due to risk sentiment during the two-day Federal Open Market Committee meeting. Some relief. However, the Japanese government lifted the COVID-19 emergency in Tokyo earlier this week and reduced the COVID-19 emergency in the three prefectures to a quasi-emergency. The number of infections has steadily declined, so the losses are limited. In the stock market, share prices of department stores rose due to hopes of economic reopening, Takashimaya shares rose 2.07%, and Isetan Mitsukoshi Holdings shares rose 0.24%. In terms of data, Japan’s trade deficit dropped sharply from 856.7 billion yen in the same period last year to 187.1 billion yen in May 2021. Exports increased by 49.6% year-on-year, while imports grew by a softer 27.9%.

 

• REVIEWING ECONOMIC DATA:

Looking at the last economic data:

- USD: The Federal Reserve said that the PCE inflation rate this year is expected to be 3.4%, which is much higher than the 2.4% in March. The yield on the benchmark 10-year US Treasury note jumped by about 5 basis points at 1.54% on Wednesday. Nonetheless, next year's price pressure is expected to slow, the annual interest rate of PCE will drop to 2.1%, the annual interest rate of the 202220 bonds will reach 2.2%, and the $16 billion 5-year TIPS will be auctioned on Thursday.

- USD: The Fed sharply raised its inflation expectations for this year and brought interest rate hikes earlier. On Wednesday, the three major U.S. stock indexes fell sharply. This change in outlook has once again raised concerns that the People's Bank of China may have to control its ultra-loose monetary policy to prevent the US economy from overheating. However, the Fed did not indicate when it will begin to reduce its aggressive bond purchase program. The most obvious declines were those economically sensitive sectors that rebounded recently, including materials and industrial stocks.

- USD: The Federal Reserve kept the target range of the federal funds rate unchanged at 0-0.25% and said it would continue to buy bonds at an interest rate of $120 billion per month in June. This decision is in line with expectations. Policymakers say that progress in vaccination and strong policy support has led to strong economic activity and employment growth.

- USD: In May 2021, U.S. import prices rose 1.1% from the previous month, higher than the 0.8% growth rate in April and higher than the 0.8% market expected. Since the index fell slightly by 0.1% in October, the prices of US imported goods have not fallen. Due to rising oil and natural gas prices, fuel prices rose 4%, much higher than the 1.6% increase in April. In addition, non-fuel import prices rose by 0.9%, higher than the 0.7% increase in April, mainly due to the increase in non-fuel industrial supplies and materials, consumer goods, and automobiles. On an annual basis, import prices rose 11.3% in May, the largest annual increase since September 2011.

- USD: The US construction permits fell by 3.0% year-on-year. The seasonally adjusted annual rate of 1.681 million by May 2021 was the second consecutive period of decline, which was lower than market expectations of 1.73 million. Single-family licenses fell 1.6% to 1.13 million, while unstable multi-sector licenses fell 5.8% to 551,000.

- OIL: According to data from the EIA Oil Condition Report, in the week of June 11, US crude oil inventories fell by 7.355 million barrels, which was the fourth consecutive decline and the largest since the last week of April. This number is also compared with the predicted drop of 3.29 million people. At the same time, gasoline inventories increased by 1.954 million barrels, which is contrary to the market's consensus decline of 614,000 barrels.

- CAD: In April 2021, Canadian wholesale sales increased by 0.4% from the previous month to 71.5 billion Canadian dollars, which was the third increase in three months, and was initially estimated to be down by 0.8%. In April, activity in the industry was mixed. Sales of building materials and supplies continued to grow strongly, mainly offset by the decline in sales in the automotive and auto parts and accessories sub-sectors and miscellaneous sub-sectors.

- EUR: In the first quarter of 2021, hourly labor costs in the Eurozone increased by 1.5% year-on-year, lower than the 2.8% reduction in the previous three months. Hourly wages increased by 2.2%, while the non-wage portion fell by 0.9%.

- GBP: On Wednesday, economic data showed that British consumer price inflation jumped to 2.1% in May, higher than the Bank of England’s 2.0% target and the highest level since July 2019. As the UK economy reopens from the lockdown caused by the coronavirus, inflationary pressures will further increase in the coming months. Data released earlier this week also showed that the British labor market continued to consolidate the momentum of recovery. The number of employees on the company’s payroll increased at a record rate in May. In the year to April, wage growth reached the level since 2007. The fastest level. In other respects, investors continue to digest news about the UK-Australia trade agreement and the postponement of the British blockade easing plan while waiting for the outcome of the Fed’s policy meeting.

- CNY: In the first five months of 2021, China's fixed-asset investment increased by 15.4% year-on-year, lower than the expected 16.9%. The growth of the public sector (11.8% vs. 18.6% in January-April) and the private sector (18.1% vs. 21%) and all major economic sectors have slowed down: the primary sector (28.7% vs. 35.5%), the secondary sector (18.1% vs. 21.7%) and the third sector (11.8% vs. 18.7%).

- CNY: The urban unemployment rate surveyed by China fell slightly to 5.0% in May 2021, the lowest level in two years. The unemployment rates of the population aged 16-24 and the surveyed population aged 25-59 were 11.8% and 4.4%, respectively. At the same time, the surveyed unemployment rate in 31 major cities and towns was 5.2%, the same as in April. The average weekly working time of employees in enterprises across the country is 47.3 hours. From January to May, 5.74 million new jobs were created in cities and towns across the country.

- CNY: In May 2021, the year-on-year growth rate of China's retail industry slowed down from 17.7% last month to 12.4%, which was lower than market expectations of 13.6%. The latest data continue to show that domestic demand is improving steadily, but it also shows increasing pressure on consumption recovery. The growth rate of clothing sales has slowed down (31.2% in April and 12.3% year-on-year); cosmetics (14.6% vs. 17.8%); jewelry (31.5% vs. 48.3%); personal care (13.0% vs. 17.2%); telecommunications ( 8.8% vs. 14.2%); household appliances (3.1% vs. 6.1%); furniture (12.6% vs. 21.7%); automobiles (6.3% vs. 16.1%); building materials (20.3% vs. 30.8%).

- JPY: Japan’s core machinery orders (excluding orders from ships and power companies) increased by 0.6% month-on-month in April 2021, while market expectations were for an increase of 2.7%, compared with an increase of 3.7% a month ago. This is the second consecutive month of increase in machinery orders.

- JPY: In May 2021, Japanese imports increased by 27.9% year-on-year to 6.448 billion yen, higher than the market’s forecasted growth rate of 26.6%. In April, they increased by 12.8%. This was due to the further recovery of domestic demand after the influenza pandemic.

- JPY: Japan’s trade deficit dropped sharply from 856.7 billion yen in the same period last year to 187.1 billion yen in May 2021, but it did not reach the market consensus of 91.2 billion yen. Exports increased by 49.6% year-on-year to 6,261 billion yen, while imports increased by 27.9% to 6,448 billion yen.

- RUB: Russia's gross domestic product in the first quarter of 2021 shrank by 0.7% year-on-year, which has eased from the 1.8% contraction in the previous three months and is initially estimated to shrink by 1.0%.

 

• LOOKING AHEAD:

Today, investors will receive:

- JPY: Monetary Policy Statement, BOJ Policy Ratel, National Core CPI y/y, and BOJ Press Conference.

- CNY: Foreign Direct Investment ytd/y.

- GBP: Retail Sales m/m, and Consumer Inflation Expectations.

- EUR: German PPI m/m, Current Account, and ECOFIN Meetings.

 

• KEY EQUITY MARKET DRIVERS:

- CATSX grows to an all-time high in 20271.

- AU200 rose to an all-time high of 7399 points.

- On Wednesday, the benchmark US 10-year Treasury bond yield changed little, at 1.5%, which was higher than the three-month low of 1.428% last Friday, but well below the one-year high of 1.78% in March. Traders are waiting for the outcome of the Fed’s monetary policy meeting. They will look forward to any updates regarding the gradual shortening of timetables and policymakers’ perceptions of rising prices resulting from rising inflation. Despite increasing price pressures, the labor market recovery is still uneven, and new retail sales indicate that the lack of further stimulus may slow the overall economic rebound. At the same time, the U.S. Treasury Department saw strong demand for the sale of US Treasury bonds for $24 billion, 20-year bonds, and $16 billion for 5-year bond auctions due on Thursday.

- The yield on German 10-year government bonds was reported at around -0.23%, deviating from the seven-week low touched last week. The market expects that the Federal Reserve may maintain a dovish stance at the two-day meeting. Investors are looking for reduction negotiations—clues to timing. Elsewhere, the European Union has received more than €76 billion in initial demand for bond issuance to support the EU Recovery Fund. However, ECB officials continue to reiterate that they are not in a hurry to reduce the central bank's large-scale emergency stimulus plan. President Lagarde said Monday that monetary and fiscal stimulus measures should continue to be effective until there are clear signs that a "firm, solid and sustainable" economic recovery is underway. Last week, the People's Bank of China confirmed its very loose monetary policy stance and promised to continue emergency bond purchases at a "significantly higher rate" than at the beginning of this year.

- European stock market futures hovered at yesterday's level, and global investors paid attention to the Federal Reserve's (fed) policy statement announced later in the day to find clues about the timing of volume reduction negotiations. Although US consumer prices and producer prices have risen sharply recently, Fed officials are not worried about market inflation concerns because they believe the price spike will be temporary.

 

• STOCK MARKET SECTORS:

- High: Consumer Discretionary.

- Low: Utilities, Consumer Staples, Materials.

 

• TOP CURRENCY MARKET DRIVERS:

- USD: The U.S. dollar appreciated against a basket of currencies to $91.10 on Wednesday, the highest level since May 5, after the Fed sharply raised its forecast for this year's inflation and advanced the time frame for raising interest rates. This change in outlook benefits bullish investors, who expect that Jay Powell and his interest rate-setting colleagues will need to consider scaling back their quantitative easing policies to prevent the US economy from overheating. In terms of economic data, US retail sales fell by 1.3% in May, while the market expected a drop of 0.8%, and the producer price index climbed more than expected. In addition, data released last week showed that the US consumer price inflation rate reached the highest level since 2008.

- RUB: The exchange rate of the Russian ruble to the US dollar is 71.9, not far from the highest point of 71.5 rubles since July 2020 that was reached last week after the first meeting between US President Biden and Russian President Vladimir Putin in Geneva on Wednesday. However, the geopolitical discount of the ruble is still huge because in April 2019, the oil price, one of the main drivers of the ruble exchange rate, was close to the current level of around US$74.5 per barrel, and the ruble-to-dollar exchange rate was around US$65. Last week, the Central Bank of Russia raised interest rates for the third time this year and said it would further tighten monetary policy at an upcoming meeting. Furthermore, after economic data showed that Russia’s annual consumer price inflation rate in May exceeded expectations, reaching 6.0%, policymakers expressed concern about increasing inflationary pressures.

- CNY: The yuan rose 0.0065 points or 0.1% to 6.3992 points against the US dollar on Wednesday after the onshore exchange rate was previously set at 6.4078 points. In the context of thin trading, the market’s confidence in the renminbi proved to be slightly optimistic, as investors are waiting for the outcome of the Federal Reserve (fed) meeting to find clues to its policy trajectory. At the same time, there are reports that China has stepped up its crackdown on shadow banking activities, and banks and wealth management companies are no longer allowed to use funds invested in so-called cash management products to purchase long-term debt or bonds rated below AA+. , Which also suppressed market sentiment. In May, local data show that in May, retail sales growth slowed to 12.4% year-on-year, indicating a steady improvement in domestic demand and increasing pressure on consumption recovery. At the same time, industrial production increased by 8.8% over the same period, the lowest level in five months, due to weak export orders, rising commodity prices, factory costs, and the virus outbreak in southern China disrupting port services and delayed deliveries.

- JPY: The yen fell 0.079 points or 0.07% against the US dollar on Wednesday to close at 110.091 points, refreshing the two-week low hit in the previous trading day. The Bank of Japan announced earlier this week that it would extend the pandemic relief plan a later week. To support the fragile economic recovery. In addition, investors remain cautious before the Federal Open Market Committee (FOMC) announces the results because rising price pressures may change the Fed's monetary policy stance. Although the Fed's continued to downplay of pricing pressure is temporary, recent data shows that prices continue to soar. In terms of data, Japan’s trade deficit has fallen sharply from 856.7 billion yen in the same period last year to 187.1 billion yen in May 2021, and exports have increased by 49.6% year-on-year. This is Japan’s third consecutive month of growth, also in April 1980. The fastest growth rate since imports are growing for the fourth consecutive month, an increase of 27.9%.

- NZD: The New Zealand dollar rose 0.00212 points, or 0.3%, to 0.71404 against the U.S. dollar on Wednesday, rebounding from the 10-week low hit the previous trading day as the Federal Reserve (Federal Reserve) began a two-day policy meeting. Although the U.S. central bank is not expected to take any policy measures, this may mean that it is starting to consider relaxing its bond purchase policy. The local 10-year bond yield was 1.669%, while the U.S. 10-year bond yield was 1.496%. Later this week, the GDP report is expected to show that after a 0.9% contraction in the last three months of 2020, the growth rate in the first quarter of this year will rebound by 0.9%. In addition, local data show that food prices in May rose 1.8% year-on-year, higher than 0.7% last month, and the highest value since May 2019.

 

• CHART OF THE DAY:

The Australian dollar continued to fall to a 7-week low below 77 against the US dollar on Wednesday after the Federal Reserve (fed) set a tougher tone and advanced the time frame for interest rate hikes. At the same time, traders are also waiting for further signs of when the Bank of Australia and the Bank of New Zealand will withdraw from the stimulus plan. The minutes of the June meeting released by the Bank of Australia earlier this week showed that policymakers believe that the economic expansion is faster than previously expected. Investors will continue to pay attention to the central bank governor Philip Low’s speech on Thursday and the government’s end of the unemployment policy at the end of March. Employment data for employees in May after wage subsidies. The market predicts that the unemployment rate will stabilize at 5.5%, and employers will add 30,000 jobs.

• AUDUSD - D1, Resistance around ~ 0.77392 and 0.78924 Support (target zone) around ~ 0.75535 and 0.74161

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