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Take Five: Give me an FOMC, BOE, BOJ and SNB

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© Reuters. FILE PHOTO: Buses travel past the Bank of England (BoE) building after the BoE became the first major world’s central bank to raise rates since the coronavirus disease (COVID-19) pandemic, London, Britain, December 16, 2021. REUTERS/Toby Melville/File Pho

It’s a central bank-heavy week ahead, with the U.S. Federal Reserve expected to deliver its second straight half-point rate hike (at least) to bring inflation under control.

Britain and Sweden, too, will likely lift interest rates again, while Switzerland may be getting ready to join the rate-hike club. In contrast, the Bank of Japan should confirm its ultra-dovish stance remains solid.

Here’s a look at the week ahead from Ira Iosebashvili in New York, Kevin Buckland in Tokyo and Sujata Rao, Julien Ponthus and Dhara Ranasinghe in London.

1/ GO BIG

It’s time to go big or go home in the battle to curb inflation. Wednesday will likely see the Federal Reserve hike interest rates by another 50 basis points (bps) and Friday’s red-hot U.S. inflation data has stoked worries about a more aggressive move.

How confident the Fed remains in squashing the highest inflation in decades without tipping the U.S. economy into a recession will come under scrutiny.

The jobs market is holding up well and retail sales data on Wednesday could show how consumers are doing as borrowing costs rise. Analysts expect a 0.2% monthly increase in retail sales for May. One big retailer is cutting its margin outlook.

Also watch the Fed’s projections for rate moves in the so-called “dot plot.” Unexpectedly aggressive rate-hike projections could pile pressure on U.S. Treasuries, with 10-year yields back above 3%.

GRAPHIC: The Fed’s balance sheet (https://fingfx.thomsonreuters.com/gfx/mkt/klvykowlevg/Pasted%20image%201654727036511.png)

2/ NO, DON’T GO (AT ALL)

There’s little doubt that the Bank of Japan will stick to its big stimulus guns on Friday, with Governor Haruhiko Kuroda in recent days repeatedly re-committing to ultra-easy monetary policy.

    But pressure to change tack is growing. Being the G-10’s lone dove means constantly pushing back against a global tide of rising yields. Japan’s 10-year bond yield is regularly bumping against the BOJ’s tolerance ceiling, 25 bps north of 0%.

    Pinning it there is costly and one casualty is the yen. Widening yield differentials have sent the currency to multi-decade lows.

    Japan’s imported energy has become expensive, crunching consumers and businesses at a sensitive time as crucial upper house elections loom this summer. Kuroda didn’t help matters by suggesting households were becoming more tolerant of rising prices, forcing a rare apology.

GRAPHIC: Yen heads for 135 per dollar (https://fingfx.thomsonreuters.com/gfx/mkt/jnpwezmyjpw/Pasted%20image%201654787299543.png)

3/ CRUEL SUMMER

Near-10% inflation, the worst cost-of-living squeeze in decades and planned labour strikes threaten a summer of discontent in Britain. The OECD predicts zero growth next year, the weakest performance for any G20 economy – except Russia.

But on June 16, the Bank of England will likely raise rates for the fifth time since December. Data on Monday showed Britain’s economy unexpectedly shrank in April. Jobs figures are due on Tuesday. As a reminder, Q1 joblessness touched 48-year lows at 3.7%. But adjusted for inflation, pay was down 2% on year-earlier levels, the biggest fall since 2013.

Meanwhile Prime Minister Boris Johnson, his authority shaken by a vote of confidence that revealed the degree of discontent with his leadership within his ruling Conservative Party, is forging on with “fiscal firepower” pledges and plans to amend some post-Brexit rules on trade with Northern Ireland. The former could exacerbate inflation, while the latter is likely to stoke tensions with the European Union.

GRAPHIC: UK pay (https://fingfx.thomsonreuters.com/gfx/mkt/lbpgndakxvq/Pasted%20image%201654764973737.png)

4/ INFLATION BUG

Switzerland has caught the inflation bug, having seen prices rise in May by the most in nearly 14 years. It could mean the days of deeply negative rates are numbered.

The Swiss National Bank may not make a change to its -0.75% interest rate – the world’s lowest – at its Thursday meeting. But price pressures and the prospect of the ECB hiking rates in July are persuading some rate-setters to change their dovish stance.

Franc strength has dampened inflation somewhat and the SNB has toned down franc selling. Still, it may join the rate-hike club soon, having watched such hitherto-dovish peers as Sweden’s Riksbank make policy U-turns.

Having upped rates in April, the Riksbank may do so again on Friday, with some chance of a 50 bps move.

GRAPHIC: Swiss catch the inflation bug (https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoxmaovr/chTHEME0906.PNG)

5/ ENSEMBLE?

French President Emmanuel Macron faces a tough fight to win an absolute majority in parliament that would allow him to govern with a free hand after a strong showing by a new left-wing alliance in Sunday’s first-round election.

Much has changed since his 58% win against far-right candidate Marine Le Pen on April 24.

Initial estimates by Elabe put the hard-left veteran Jean-Luc Melenchon’s NUPES bloc neck-and-neck with Macron’s Ensemble (Together) alliance in the first round, with 26.20% and 25.8% respectively.

Falling short of an absolute majority would be a big setback, forcing Macron to broaden his alliance or face the uncertainty of governing without a majority.

The broader the alliance, the more complicated deal-making, and dictating policy decisions, becomes. Some amount of political risk would kick in as investors reconsider the premium paid for French assets.

GRAPHIC: French stocks versus the broader European market (https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrnwwopm/FRTHEME0906.PNG)

Economy

South Korean exports dropped 14% in November, the highest in 2.5 years

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exports South Korea

South Korea’s exports fell 14 percent year-on-year to $51.91 billion in November, preliminary data from the Ministry of Commerce, Industry and Energy showed. The November drop was the biggest in 2.5 years since May 2020 and was caused both by the deteriorating global economy, which even a Google price chart showed, and a truckers’ strike in the country.

South Korea exports 2022 – reasons for the drop

Exports fell for the second month in a row. Analysts on average expected an 11% decline, according to Trading Economics. Respondents to MarketWatch predicted a 10.5% decline.

Shipments of semiconductor products overseas, the country’s top export item, fell 29.8%; petrochemicals fell 26.5% and steel exports fell 10.6%. Meanwhile, exports of automobiles jumped 31% and petroleum products 26%.

Exports to China, South Korea’s largest trading partner, fell by 25.5%, and to Asian countries – by 13.9%. Below, supplies to the USA grew by 8% and to the European Union – by 0.1%.

In January-November exports rose by 7.8% on the same period last year and reached a record $629.1 billion.

South Korean imports rose 2.7% to $59.2 billion in November, marking the 23rd consecutive month of gains, but the current rate of growth is the lowest since November 2020. Experts had predicted an increase of only 0.2%.

South Korea’s trade deficit last month was $7.01 billion, compared with a surplus of $2,973 billion a year earlier.

The negative balance was recorded for the eighth month in a row. As a result, by the end of 2022, the country may record a foreign trade deficit for the first time since the financial crisis in 2008.

Earlier we reported that the UN estimates the cost of humanitarian aid in 2023 at a record $51 billion.

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Economy

The UN estimates humanitarian aid costs in 2023 at a record $51 billion because of an impending humanitarian crisis

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a humanitarian crisis

Joint humanitarian operations will require a record $51.5 billion in 2023 to address urgent problems.

The UN Office for the OCHA estimates that 339 million people will need urgent aid in 2023. At the same time, OCHA called on donor countries to provide funds for assistance in 2023 to the 230 million people most in need, living in 68 countries.

Griffiths explained that aid is needed not only for people experiencing conflicts and disease outbreaks. but also for those suffering the effects of climate change, such as people in peninsular Somalia facing drought and those in Pakistan experiencing severe flooding. For the first time, the growing humanitarian crisis has brought the number of displaced people worldwide to the 100 million mark. Also worsening an already bad situation is the worldwide coronavirus pandemic, which affects the poor. Note that the general economic crisis has begun to negatively affect even the Netflix price chart.

Earlier we reported that house prices in the UK fell by 1.4% in November.

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Economy

Average house prices in the UK fell 1.4% in November

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average house prices in the uk

Average house prices in the UK fell 1.4% in the previous month in November to 263,788 thousand pounds (about $319,000), according to the British mortgage company Nationwide Building Society.

The decline was recorded at the end of the second consecutive month and was the most significant in almost 2.5 years – since June 2020. Analysts on average had forecast a decline of only 0.3%, according to Trading Economics.

Are house prices in the UK going to fall even more?

Residential real estate prices in November compared to the same month last year increased by 4.4%. At the same time, experts expected a larger increase of 5.8%. The growth rate slowed down significantly compared with 7.2% in October. Because of the difficult economic situation, British investors are investing in other instruments. The Microsoft price chart, for example, is showing potential for growth, so many are interested in the U.S. stock market. 

“The market looks set to remain under pressure in the coming quarters. Inflation will remain high for some time, and interest rates are likely to continue to rise,” believes Nationwide Senior Economist Robert Gardner. – The outlook is unclear, and much will depend on how the overall economy behaves, but a relatively soft landing is still possible.”

Earlier we reported that Sanctions Circumvention was included in the EU’s list of criminal offenses.

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