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Is a 0.3% Miss on Headline CPI Really Worth a 77 bp Rise in the December Fed Funds Yield?

Overview: Better than expected Chinese data and an unscheduled ECB meeting are the highlights ahead of the North American session that features the May…



Overview: Better than expected Chinese data and an unscheduled ECB meeting are the highlights ahead of the North American session that features the May US retail sales report and other high frequency data before the outcome of the FOMC meeting. Asia Pacific equities outside of Hong Kong and China fell. Europe’s Stoxx 600 is up almost 1% as it tries to snap a six-day slide. US futures are posting modest gains. Bond markets in Europe and the US are rallying. The ECB meeting has spurred a dramatic narrowing of the peripheral premium. The 10-year US yield is off 8 bp to about 3.4%. The dollar is weaker against all the major currencies. The Australian dollar leads with almost a 1% gain. Most emerging market currencies are also firmer. The Hong Kong Monetary Authority intervened selling about $1.2 bln to defend the HKD peg. Gold found support ahead of $1800 yesterday and is near $1825 in Europe. July WTI peaked yesterday near $123.70 and is offered below $117.50 now. US natgas has stabilized after falling 16.5% yesterday. Europe’s benchmark is up almost 2.6% to extend yesterday’s 15.5% surge. Better than expected Chinese industrial output figures failed to provide much support of iron ore prices, which fell around 2.8% to extend the losing streak to the fifth consecutive session. Copper is slightly higher for the first time in five sessions. July wheat is off about 0.5% after a 2% fall yesterday.


Asia Pacific

Today's data dump showed that the Chinese economy began recovering last month from the disruption caused by the zero-Covid policy. Industrial output rose 0.7% year-over-year rather than contract by 0.9% as economists (median forecast in Bloomberg' survey) expected. In April, it had fallen by 2.9%. Retail sales were off 6.7% year-over-year in May after dropping 11.1% in April. This was also better than expected. Surveyed unemployment eased to 5.9% from 6.1%. Economists had expected an unchanged report. Fixed asset investment and property investment disappointed. Fixed asset investment rose 6.2% this year through May compared to a year ago, slowing from the 6.8% rise in April. Property investment was off 4% in May after falling 2.7% in the first four months.

China also left its one-year medium-term lending facility at 2.85%, where it has stood since the 10 bp cut in January. Some observers looked for a small cut on ideas that consumer price pressure is low and producer prices have continued to ease, while the economy looks off course to reach 5.5% growth target. Still, the PBOC has been reluctant to use monetary policy much so far preferring instead to use regulatory power, fiscal incentives, guidance, and suasion. The PBOC also rolled over in full CNY200 bln (~$30 bln) in maturing loans.

Australia's 10-year bond yield soared 24.5 bp today to almost 4.2%. The new government made good on its campaign promise to hike the minimum wage. During the campaign, Prime Minister Albanese advocated matching the 5.1% increase in consumer prices in the first quarter. The President of the Fair Work Commission announced a 5.2% increase starting next month. The minimum wage will increase by A$40 to A$812.6 a week. The new hourly rate is A$21.38. The 5.2% rise is twice the annual wage price index of Q1 (2.4%). The decision came after a hawkish speech by RBA Governor Lowe, who warned that inflation could hit 7% this year. Lowe said it was "reasonable" to expect rates will rise to 2.5% from 0.85% now. The cash rate futures see it reaching that in three meetings (July, August, and September). The futures market has 56 bp hike next month (July 5), while the swaps market is closer to 75 bp.

The dollar edged up to a new multi-year high late yesterday to reach almost JPY135.50. The upticks were extended marginally to JPY135.60 in early Asia turnover before sellers emerged. The greenback was driven to nearly JPY134.50 where is stabilized. Yesterday's low was slightly below JPY133.90. The dollar has not taken out the previous day's lows since May 26. The Australian dollar is recovered from the $0.6850 area approached yesterday. Recall that the two-year low set in mid-May was near $0.6830. The session highs ae being recorded in the European morning near $0.6940. Yesterday's higher was around $0.6970. A move above $0.7000 would stabilize the technical tone. The greenback slipped to a three-day low against the Chinese yuan by CNY6.7115. It peaked yesterday closer to CNY6.7610. The dollar's reference rate was set at CNY6.7518. The median projection in Bloomberg's survey was CNY6.7524. In four of the past five sessions, the dollar's reference rate was below the survey median.


The ECB is holding an unscheduled meeting to ostensibly talk about market developments. The key market development was not the euro's dip below $1.04 yesterday, but the dramatic increase in rates, and more importantly the widening of the peripheral spreads over the Germany. The "fragmentation" dilutes the effectiveness of the ECB's monetary policy. While the ECB ostensibly has a single mandate, to achieve it the ECB recognizes it must contain the divergence of interest rates among its members. The Italian premium over Germany widened to a two-year high near 225 bp yesterday, but to be sure, it is not just Italy. Spain's premium rose to 136 bp yesterday, also its highest level since the chaos when the pandemic struck.

It is not clear what the ECB can do. We noted that as a compromise last year when some advocated a new mechanism to contain the "fragmentation." It was to give the ECB greater flexibility to reinvest maturing proceeds. We have also argued that a tool already exists (European Stabilization Mechanism) but it the support is tied to conditionality. Market talk suggest a more formal agreement on reinvestment of the maturing issues under the Pandemic Emergency Purchase Program can be forthcoming. However, if that is all it is, the markets will likely be disappointed and unwind the euro and bond market gains. ECB's Schnabel, who oversees the central bank's market operations says commitment to resist fragmentation has no limits. A disappointed market may be tempted test the resolve.

There are a few other developments to note. First, the EMU aggregate April industrial production figures were in line with expectations. The 0.4% rise follows an upward revision to the March series to show a 1.4% contraction rather than loss of 1.8%. Second, the eurozone reported a record trade deficit of 31.7 bln euros in April, more than twice what economists (median, Bloomberg survey) anticipated. Rising energy prices seemed like the major driver. Third, much to the chagrin of the UK government, the European Court of Human Rights blocked the first flight that was going to deport refugees to Rwanda.

News of the emergency ECB meeting helped lift the euro, which for the third session found bids near $1.04. The euro traded above $1.05 in the European morning, though was unable to take out the week's high set on Monday slightly shy of $1.0525. The (38.2%) retracement of the euro's decline since the US CPI figures is closer to $1.0540. There are options for almost 610 mln euro that expire today at $1.05. We suspect that if the high is not in place on the ECB news it is close, and we are concerned that the market's may be disappointed with the results. Sterling closed below $1.20 for the first time since March 2020. It is firmer today and did not take out yesterday's low (~$1.1935). It rose to almost $1.21 but this too looks like the extent of the move of nearly so. The Bank of England meets tomorrow, and swaps market has a little less than a 1-in-3 chance of a 50 bp move discounted. 


The market's reaction to a 0.3% miss on the headline CPI (vs. Bloomberg survey median forecast) and 0.1% on the core rate (which still eased by 0.2% to 6.0%) was violent, triggering dislocations throughout the credit market. The implied yield of the December Fed funds futures was around 2.75% before the CPI report. The implied yield has risen 77 bp in the past three sessions and settled yesterday at about 3.55%. The increase expectation for the overnight rate can account for the 45 bp increase in the 10-year yield. Doesn't this seem a bit much?  The core rate did ease for the second consecutive month, and reason the core is discussed is not simply because it excludes volatile components, or that it is widely recognized that monetary policy has little impact on food or energy prices, but because over time, headline inflation converges to core inflation, not the other way around.

Before entering the quiet period ahead of this week's FOMC meeting, a solid consensus appeared to emerge for a 50 bp hike in June and July, with the usual caveats the preserved ultimate flexibility. The Fed funds futures market has nearly fully discounted a 75 bp hike today and in July before another 50 bp move in September. The swaps market has the terminal Fed funds rate at 4.17% now, up nearly 70 bp since the CPI report. Monetary policy impacts come with the famous variable lags and leads. Should we really be convinced that one high frequency measure of inflation that it does not target would so dramatically change the course of monetary policy?  Arguably a 75 bp hike that the market has discounted risks injecting more volatility into the disrupted Treasury market may altering is reaction function.

Mr. Market is trying to deliver a fait accompli to the central bank, which there seems to be universal recognition that it is behind the inflation curve. It has hiked market rates sharply and the precipitous drop in equities points to the tightening of financial conditions, as if the Fed has already tightened. If the Fed were to hike by only 50 today, would the financial conditions ease. A 50 bp cut could almost seem dovish especially for a market that tends to see Powell as dovish even though between the rate hikes and the balance sheet, the Fed has launched the most aggressive tightening cycle in a generation. Many observers begin with an unspoken premise that the Fed has lost its anti-inflation credibility, but maybe this is a prejudice. The jump in rates is expecting what the Fed will do, and that is to stabilize prices even if it boosts the chances of a recession. Is this anti-inflation cred? The FOMC statement, the up-dated economic projections (the dot plot), and press conference offer many channels through which the Fed could underscore its commitment to its stable price mandate,

We say that that Fed will tighten policy until something breaks. The University of Michigan's preliminary June results showed a rise in inflations but also sentiment readings that have been associated with a recession in the past. With 30-year mortgage rates rising about 6%, it is reasonable to expect some slowing in the housing market. Before the FOMC meeting concludes, investors and policy makers will see the weekly mortgage market activity index, which has fallen for the past four week. The NAHB Housing Market Index, the Empire State manufacturing survey, and import/export prices may draw some interest, but the real focus is elsewhere. May retail sales will have been held back by disappointing auto sales, though a broad slowing is expected. The components which GDP models picked up from different time series, like auto sales, gasoline, food services, and building materials, can be excluded. The remaining "core" retail sales measure rose 1.1% in March and 1.0% in April. It is expected (median Bloomberg survey) seen at 0.3% last month. Remember retail sales is reported in nominal terms, which means that rising prices inflate the numbers.

Over the last five sessions, the US dollar jumped about a little more than 3.6% against the Canadian dollar to reached CAD1.2975 yesterday. It was the highest level in a month. Today is the first session in five that the greenback may not take out the previous day's high, but do not bet on it. The flattish consolidation is not inspiring, and the Loonie is the poorest performing major currency through the European morning with a gain of less than 0.05%. The general risk environment is the most important near-term driver, so watch the S&P 500. The Canadian two-year premium, which fell from 30 bp last week to less than 3 bp yesterday has widened back to around 12 bp today. In the four sessions through yesterday, the greenback rose almost 6% against the Mexican peso to reach MXN20.69. It too is consolidating today in a narrow range mostly above MXN20.53. The central bank is seen hiking 75 bp next week, but there is a risk of a 100 bp move. Brazil's central bank is expected to hike the Selic rate 50 bp to 13.25% later today. The central bank is getting close to the peak, but the swaps market sees the risk of another 100 bp before it is over. The next meeting is August 3. Year-to-date, the Brazilian real has appreciated almost 9% against the US dollar, the best performing EM currency (excluding Russia). However, so far in June, the real has been the worst performer, falling about 7.5%. 


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Yom Kippur is coming soon – what does Judaism actually say about forgiveness?

Many religions value forgiveness, but the details of their teachings differ. A psychologist of religion explains how Christian and Jewish attitudes co…




Two women embrace before a Yom Kippur service held outdoors during the COVID-19 pandemic in Los Angeles. Al Seib/Los Angeles Times via Getty Images

The Jewish High Holidays are fast approaching: Rosh Hashana and Yom Kippur. While the first really commemorates the creation of the world, Jews view both holidays as a chance to reflect on our shortcomings, make amends and seek forgiveness, both from other people and from the Almighty.

Jews pray and fast on Yom Kippur to demonstrate their remorse and to focus on reconciliation. According to Jewish tradition, it is at the end of this solemn period that God seals his decision about each person’s fate for the coming year. Congregations recite a prayer called the “Unetanah Tokef,” which recalls God’s power to decide “who shall live and who shall die, who shall reach the ends of his days and who shall not” – an ancient text that Leonard Cohen popularized with his song “Who by Fire.”

Forgiveness and related concepts, such as compassion, are central virtues in many religions. What’s more, research has shown that it is psychologically beneficial.

But each religious tradition has its own particular views about forgiveness, as well, including Judaism. As a psychologist of religion, I have done research on these similarities and differences when it comes to forgiveness.

Person to person

Several specific attitudes about forgiveness are reflected in the liturgy of the Jewish High Holidays, so those who go to services are likely to be aware of them – even if they skip out for a snack.

In Jewish theology, only the victim has the right to forgive an offense against another person, and an offender should repent toward the victim before forgiveness can take place. Someone who has hurt another person must sincerely apologize three times. If the victim still withholds forgiveness, the offender is considered forgiven, and the victim now shares the blame.

The 10-day period known as the “Days of Awe” – Rosh Hashana, Yom Kippur and the days between – is a popular time for forgiveness. Observant Jews reach out to friends and family they have wronged over the past year so that they can enter Yom Kippur services with a clean conscience and hope they have done all they can to mitigate God’s judgment.

The teaching that only a victim can forgive someone implies that God cannot forgive offenses between people until the relevant people have forgiven each other. It also means that some offenses, such as the Holocaust, can never be forgiven, because those martyred are dead and unable to forgive.

Many people dressed in black and white stand in a courtyard between ancient walls.
Thousands of Jewish pilgrims attend penitential prayers at the Western Wall in Jerusalem ahead of the Jewish High Holiday of Rosh Hashana. Menahem Kahana/AFP via Getty Images

To forgive or not to forgive?

In psychological research, I have found that most Jewish and Christian participants endorse the views of forgiveness espoused by their religions.

As in Judaism, most Christian teachings encourage people to ask and give forgiveness for harms done to one another. But they tend to teach that more sins should be forgiven – and can be, by God, because Jesus’ death atoned vicariously for people’s sins.

Even in Christianity, not all offenses are forgivable. The New Testament describes blaspheming against the Holy Spirit as an unforgivable sin. And Catholicism teaches that there is a category called “mortal sins,” which cut off sinners from God’s grace unless they repent.

One of my research papers, consisting of three studies, shows that a majority of Jewish participants believe that some offenses are too severe to forgive; that it doesn’t make sense to ask someone other than the victim about forgiveness; and that forgiveness is not offered unconditionally, but after the offender has tried to make things right.

Take this specific example: In one of my research studies I asked Jewish and Christian participants if they thought a Jew should forgive a dying Nazi soldier who requested forgiveness for killing Jews. This scenario is described in “The Sunflower” by Simon Wiesenthal, a writer and Holocaust survivor famous for his efforts to prosecute German war criminals.

A color photograph of an older, balding man in a blue shirt and striped tie.
Simon Wiesenthal at the White House during the Reagan administration. Diana Walker/The Chronicle Collection via Getty Images

Jewish participants often didn’t think the question made sense: How could someone else – someone living – forgive the murder of another person? The Christian participants, on the other hand, who were all Protestants, usually said to forgive. They agreed more often with statements like “Mr. Wiesenthal should have forgiven the SS soldier” and “Mr. Wiesenthal would have done the virtuous thing if he forgave the soldier.”

It’s not just about the Holocaust. We also asked about a more everyday scenario – imagining that a student plagiarized a paper that participants’ friends had written, and then asked the participants for forgiveness – and saw similar results.

Jewish people have a wide variety of opinions on these topics, though, as they do in all things. “Two Jews, three opinions!” as the old saying goes. In other studies with my co-researchers, we showed that Holocaust survivors, as well as Jewish American college students born well after the Holocaust, vary widely in how tolerant they are of German people and products. Some are perfectly fine with traveling to Germany and having German friends, and others are unwilling to even listen to Beethoven.

In these studies, the key variable that seems to distinguish Jewish people who are OK with Germans and Germany from those who are not is to what extent they associate all Germans with Nazism. Among the Holocaust survivors, for example, survivors who had been born in Germany – and would have known German people before the war – were more tolerant than those whose first, perhaps only, exposure to Germans had been in the camps.

Forgiveness is good for you – or is it?

American society – where about 7 in 10 people identify as Christian – generally views forgiveness as a positive virtue. What’s more, research has found there are emotional and physical benefits to letting go of grudges.

But does this mean forgiveness is always the answer? To me, it’s an open question.

For example, future research could explore whether forgiveness is always psychologically beneficial, or only when it aligns with the would-be forgiver’s religious views.

If you are observing Yom Kippur, remember that – as with every topic – Judaism has a wide and, well, forgiving view of what is acceptable when it comes to forgiveness.

Adam B. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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EasyJet share price has collapsed by 53% in 2022. Is it a buy?

The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest…



The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest level since November 2011. It has plummeted by more than 82% from its all-time high, giving it a market cap of more than 2.5 billion pounds.

Is EasyJet a good buy?

EasyJet is a leading regional airline that operates mostly in Europe. It has hundreds of aircraft and thousands of employees. In 2021, the firm’s revenue jumped to more than 1.49 billion pounds, which was a strong recovery from what it made in the previous year.

EasyJet’s business is doing well as demand for flights rises. In the most recent results, the firm said that forward bookings for Q3 were 76% sold and 36% sold for Q4. For some destinations, bookings have been much higher than before the pandemic.

EasyJet’s business made more than 1.75 billion in revenue in the first half of the year. This happened as passenger revenue rose to 1.15 billion while ancillary revenue jumped to 603 million pounds. The firm managed to make a loss before tax of more than 114 million pounds. It attributed that loss to higher costs and forex conversions.

As I wrote on this article on IAG, EasyJet share price has collapsed as investors worry about the soaring cost of doing business. Besides, jet fuel and wages have jumped sharply in the past few months. Also, analysts and investors are concerned about flight cancellations in its key markets.

Still, there is are two key catalysts for EasyJet. For one, as the stock collapses, it could become a viable acquisition target. In 2021, the management rejected a relatively attractive bid from Wizz Air. Another bid could happen if the stock continues tumbling.

Further, the company could do well as the aviation industry stabilizes in the coming months. A key challenge is that confidence in Europe and the UK.

EasyJet share price forecast

EasyJet share price

The daily chart shows that the EasyJet stock price has been in a strong bearish trend in the past few months. During this time, the stock has tumbled below all moving averages. It has also formed what looks like a falling wedge pattern, which is usually a bullish sign.

The Relative Strength Index (RSI) has dropped below the oversold level while the Awesome Oscillator has moved below the neutral point.

Therefore, in the near term, the stock will likely continue falling as sellers target the support at 270p. In the long-term, however, the shares will likely rebound as the falling wedge reaches its confluence level.

The post EasyJet share price has collapsed by 53% in 2022. Is it a buy? appeared first on Invezz.

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August data shows UK automotive sector heading for a “cliff-edge” in 2023

With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly…



With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly towards the tail end of the yield curve (details of which were reported on Invezz here).

Car manufacturing is a key industry in the UK. Recently, it registered a turnover of roughly £67 billion, provided direct employment to 182,000 people, and a total of nearly 800,000 jobs across the entire automotive supply chain, while contributing to 10% of exports.

Just after midnight GMT, data on fresh car production for the month of August was released by the Society of Motor Manufacturers and Traders Limited (SMMT).

Strong annual growth but monthly decline

Car production in the UK surged 34% year-over-year settling at just under 50,000 units. This marked the fourth consecutive month of positive growth on an annual basis.

However, twelve months ago, production was heavily dampened by a plethora of supply chain bottlenecks, work stoppages on account of the pandemic, and a worldwide shortage of microchips. The August 2021 output of 37,246 units was the lowest recorded August volume since way back in 1956.

Although the improvement in output is a good sign, equally it is on the back of a heavily depressed performance.

Source: SMMT

To place the latest data in its proper context, production is still 45.9% below August 2019 levels of 92,158 units, showing just how far adrift the industry is from the pre-pandemic period.

Since July, production in the sector fell 14%.

The fact that the UK is facing a deep economic malaise becomes even more evident when we look at full-year numbers for 2020 and 2021.

In 2020, total output came in at 920,928 units, while 2021 was even lower at 859,575. The last time that the UK automotive sector produced less than one million cars in a calendar year was 1986.  

Unfortunately, 2022 has seen only 511,106 units produced thus far, a 13.3% decline compared to January to August 2021.

In contrast, the 5-year pre-pandemic average for January to August output from 2014 – 2019 stands well above this mark at 1,030,527 units.

With car manufacturers tending to pass price rises on to consumers, demand was dampened by surging costs of semiconductors, logistics and raw materials.

The SMMT noted,

The sector is now on course to produce fewer than a million cars for the third consecutive year.

Ian Henry, managing director of AutoAnalysis concurred with the SMMT’s analysis,

It is expected that by the end of this year car production will reach 825,000, compared to 850,000 a year ago, but that’s 35% down on 2019 and a whopping 50% on the high figure of 2017.

Sector challenges

Other than the obvious fact that the UK’s economic atmosphere is in hot water, the automotive industry (including component manufacturers) has been struggling to stave off the high energy costs of doing business.

In a survey, 69% of respondents flagged energy costs as a key concern. Estimates suggest that the sector’s collective energy expenditure has gone up by 33% in the last 12 months reaching over £300 million, forcing several operations to become unviable.

Although the government enacted measures to cap the price of energy and ease obstacles to additional production, Mike Hawes, the CEO of SMMT, said,

This is a short-term fix, however, and to avoid a cliff-edge in six months’ time, it must be backed by a full package of measures that will sustain the sector.

Due to the meteoric rise in costs across the automotive supply chain, 13% of respondents were cutting shifts, 9% chose to downsize their workforce and 41% postponed further investments.

Bleak outlook

Uncertainties around Brexit and the EU trade deal are yet to be resolved.

Moreover, the energy crisis is poised to get even more acute unless Russia withdraws from the conflict, or international leaders ease restrictions on Moscow. Last week, I discussed the evolving energy crisis here

With global central banks expected to tighten till at least the end of the year, demand is likely to be squeezed further pressurizing British car manufacturers.

Electric vehicles made up 71% of car exports from the UK in August, but robust growth in the sector looks challenging in the near term, in the absence of widespread charging infrastructure, high electricity prices and globally low consumer confidence.

Although energy subsidies could provide some relief in the immediate future, the industry will remain in dire straits while investments stay low and the shortage in human capital persists, particularly amid the push for EVs.

Given the prevailing macroeconomic environment, and severe market backlash to Truss’s mini-budget (which I discussed in an earlier article), the sector is unlikely to turn the corner any time soon.

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