The day and week ends with GBP the strongest and JPY the weakest.
The sharp fall in the JPY was triggered by the Bank of Japan’s rate decision. The Bank of Japan (BOJ) decided to keep its short-term interest rate target at -0.1% and the 10-year Japanese government bond (JGB) yield target at around 0%, with an upside and downside band of 0.5%. The decision, part of the BOJ’s yield curve management (YCC) strategy, was taken unanimously. In a statement, the BOJ noted that Japan’s economy is improving and expects the modest recovery to continue. They noted that key economic indicators such as exports, output, capital expenditure and consumption showed modest increases. However, core consumer inflation is expected to moderate in the middle of the fiscal year. The BoJ noted that inflation expectations, which had previously been rising, are now moving sideways. The BOJ reiterated that there is considerable uncertainty surrounding Japan’s economic outlook, which is mainly caused by global factors.
New BOJ Governor Kazuo Ueda made further comments that more time is needed to reach the 2% inflation target. He expects inflation to slow around the middle of fiscal 2023. He cited the need to closely monitor foreign exchange and financial markets and that the BOJ has refrained from changing its policy because Japan’s inflation is unsustainable.
The report – ahead of the US session – sent USDJPY and JPY crosses sharply higher (JPY lower). GBPJPY was the biggest mover at 1.44% and all but CHFJPY moved more than 1% on the day.
In the North American session, University of Michigan (UMich) consumer sentiment data for June 2023 beat expectations. Overall consumer sentiment came in at 63.9, which was higher than the expected 60.0 and the previous reading of 59.2.
The data reflected increased confidence in current economic conditions, which came in at 68.0, beating expectations of 65.5 and the previous 64.9. Consumer expectations also rose to 61.3, beating the expected 56.5 and the previous 55.4.
One-year inflation expectations fell to 3.3% from 4.2%, the lowest since March 2021. If only core/services inflation followed this trend. The shift in 5-10 year inflation expectations was not as dramatic, falling slightly to 3.0% compared to the previous 3.1%.
Consumer sentiment was likely helped by the resolution of debt ceiling negotiations, which may have temporarily boosted confidence simply because it was not a disaster of a default.
The Fed’s semi-annual monetary policy report was also released ahead of Fed Chair Powell’s testimony on Capitol Hill on Wednesday and Thursday (a key event next week). In a report, the Federal Reserve said the outlook for the funds rate is subject to significant uncertainty, with further policy action dependent on evolving economic conditions. The Fed reiterated that negative income does not affect its operations. She emphasized that the slowdown in inflation may partly depend on further easing of tight labor market conditions. In addition, the report said that core services inflation, excluding housing, showed no signs of easing, suggesting persistent inflationary pressures.
In the international context, several major foreign central banks continued to tighten their monetary policy, but emphasized the need for caution due to uncertainties and delays in the transmission of policy measures. In addition, the Fed expressed concern about somewhat elevated indicators of future defaulted trades.
The report details that financial conditions have tightened further since January, with bank lending conditions tightening further since March. The Fed said it was ready to adjust the pace of its balance sheet contraction if necessary, underscoring its flexible approach to adjusting policy.
Significantly, the Fed noted that the turmoil in the banking system in March reportedly left its mark on bank lending conditions, particularly at mid-sized and small banks. Bringing inflation down to the target level is likely to require a period of below-trend growth and some softening of labor market conditions, according to the report. All of this comes against a backdrop of inflation that is well above target and a very tight labor market.
Several Fed members resumed talking about the Fed after two weeks of silence before Wednesday’s rate decision.
- Richmond Fed President Barkin indicated he was comfortable implementing another rate hike unless incoming data showed a slowdown in demand that would bring inflation back to the 2% target. He admitted that higher rates may risk a more significant slowdown, but stressed that the experience of the 1970s showed that the Fed should not retreat prematurely from the fight against inflation. He argued that the 2% target has been effective for a generation. Despite this, he notes that inflation has been stubbornly persistent and he was not convinced that it will be subdued by weakening demand.
- Federal Open Market Committee (FOMC) member Waller pointed out that the US economy is still “tearing apart”, while the banking system appears calm so far. He indicated that the global effects of the expected coordinated central bank tightening had not fully manifested themselves. While acknowledging the recent bank failures, he noted that they do not appear to have had a significant impact on credit conditions and that monetary policy should not change due to the mismanagement of a few banks. Waller emphasized the Fed’s role in using monetary policy to fight inflation and the responsibility of bank executives to manage interest rate risk. He expressed concern that core inflation was not improving and suggested that further tightening was likely to be required, revealing that it had not fallen as he had previously expected. Still, he acknowledged that the labor market appears to be softening without a significant rise in unemployment.
Today’s Market View:
- Oil rose by $1.04 to $71.85.
- Gold is trading up $2.51, or 0.13%, at $1,957.45. For the week, gold is little changed at -0.16%
- silver was up $0.36, or 1.49%, at $24.18. Silver ends week down -0.34%
- Bitcoin actually found a bid, trading at $26,378
In the U.S. stock market, major indexes fell on the day but closed higher for the week:
- The Dow Industrials fell -0.32% but gained 1.25% this week.
- The S&P index fell -0.37% but gained 2.58%. The move higher was the largest since the week of March 27 and was the 5th week higher in a row
- The NASDAQ index fell -0.68% but rose 3.25% for the week. The profit was higher for the 8th week in a row.
In the US, yields are moving higher in this market despite lower inflation from the Michigan survey:
- Two-year yield 4.714% + 6.6 basis points
- 5-year yield 3.982% + 5.9 basis points
- 10-year yield 3.765% + 3.5 basis points
- 30-year yield 3.854% + 1.5 basis points
for the business week:
- The two-year yield rose 11.6 basis points
- The 5-year yield rose 7.0 basis points
- The 10-year yield rose 2.0 basis points
- The 30-year yield fell 3 basis points