The GBP is the strongest currency at the conclusion of the day and week, while the JPY is the weakest.
The steep drop in the yen was precipitated by the Bank of Japan’s rate decision. The Bank of Japan (BOJ) opted to maintain its short-term interest rate objective of -0.1% and its 10-year Japanese Government Bond (JGB) yield target of about 0%, with a 0.5% range. This decision was adopted unanimously as part of the BOJ’s yield curve control (YCC) strategy. The BOJ stated in the statement that Japan’s economy is recovering and that it expects the moderate recovery to continue. They observed that major economic indices such as exports, output, capital expenditure, and consumption are increasing moderately. Core consumer inflation, on the other hand, is predicted to slow towards the middle of the fiscal year. The BOJ noted that formerly elevated inflation expectations are now heading sideways. The BOJ reaffirmed that there is significant uncertainty surrounding Japan’s economic prospects, owing mostly to global factors.
The BOJ’s new Governor, Kazuo Ueda, stated that more time is needed to attain the 2% inflation objective. He expects inflation to moderate in the middle of fiscal year 2023. He emphasized the importance of closely monitoring foreign exchange and financial markets, as well as the fact that the BOJ has refrained from modifying its policy because Japan’s inflation is unsustainable.
The news sent the USDJPY and JPY crosses substantially higher (JPY down) in the pre-US session. The GBPJPY moved the most, at 1.44%, and all currencies moved more than 1% on the day except the CHFJPY.
The University of Michigan’s (UMich) Consumer Sentiment report for June 2023 outperformed expectations during the North American session. The overall consumer sentiment was 63.9, higher than the projected 60.0 and the prior result of 59.2.
The findings show increasing confidence in present economic conditions, which came in at 68.0, exceeding the projected 65.5 and previous 64.9. Consumer expectations rose to 61.3, beating the expected 56.5 and the prior 55.4.
One-year inflation forecasts fell to 3.3% from 4.2%, the lowest level since March 2021. If only core/services inflation will follow suit. The change in 5-10 year inflation estimates was not as substantial, falling marginally to 3.0% from 3.1% previously.
The settlement of the debt ceiling talks, which may have offered a momentary lift to confidence merely because it was not a default calamity, undoubtedly benefited consumer mood.
The Fed’s semi-annual monetary policy report was also released ahead of Fed Chair Powell’s hearing on Capitol Hill on Wednesday and Thursday (a significant event next week). The Federal Reserve stated in the report that the outlook for the funds rate is subject to considerable uncertainty, with future policy actions contingent on changing economic conditions. The Fed maintained that negative earnings have no effect on its operations. It emphasized that further easing of tight labor market conditions could contribute to slower inflation. Furthermore, the report observed that core services inflation, excluding housing, has not slowed, signaling that inflationary pressures remain.
In the international setting, several major foreign central banks maintained tightening monetary policy while emphasizing the need for prudence due to uncertainties and lags in policy transmission. In addition, the Fed expressed concern about somewhat higher indicators of probable company failures.
According to the research, financial conditions have tightened significantly more since January, with bank lending conditions tightening even more since March. The Fed stated that it is prepared to change the pace of balance sheet shrinking if necessary, emphasizing its adaptability in policymaking.
Notably, the Fed noted that the March banking system instability had allegedly left an effect on bank lending conditions, particularly for mid-sized and small banks. According to the research, bringing inflation down to the target level will likely necessitate a period of below-trend growth and some weakening of labor market conditions. All of this takes place against a backdrop of inflation substantially above goal and a labor market that is extremely tight.
Following two weeks of silence, a few Fed members resumed Fed-speak ahead of the rate decision on Wednesday.
- Richmond Fed President Barkin stated that he is comfortable with further interest rate hikes if incoming data does not reveal a downturn in demand, which would return inflation to the 2% target. He agreed that higher rates could cause a more serious downturn, but emphasized that the Fed should not abandon its fight against inflation too soon. He argued that the 2% target had been effective for a generation. Despite this, he observes that inflation has been frustratingly persistent, and he is sceptical that declining demand would manage it.
- Waller, a member of the Federal Open Market Committee (FOMC), stated that the US economy is still ‘ripping away,’ with the banking sector remaining tranquil for the time being. He claimed that the projected global effects of coordinated central bank tightening had not yet manifested. While acknowledging recent bank failures, he stated that they do not appear to have had a significant impact on credit conditions and that monetary policy should not be changed as a result of poor management at a few banks. Waller stressed the Fed’s role in utilizing monetary policy to combat inflation, as well as the obligation of bank leaders to manage interest rate risk. He expressed concern that core inflation isn’t improving and predicted that more tightening will be needed, noting that it hasn’t fallen as much as he had anticipated. Nonetheless, he recognized that the labor market looks to be deteriorating without a large increase in unemployment.
Looking around the market today:
- Crude oil is up $1.04 to $71.85.
- Gold is up $2.51, or 0.13%, to $1957.45. Gold’s weekly change was -0.16%.
- Silver is up $0.36, or 1.49%, to $24.18. Silver is down -0.34% on the week.
- Bitcoin did find a bid and traded for $26,378.
The major indices in the US stock market dipped on the day but ended the week higher:
- This week, the Dow Industrial Average lost -0.32% but gained 1.25%.
- The S&P 500 index dipped -0.37% but gained 2.58%. The increase was the greatest since the week of March 27th, and it was the 5th consecutive week of gains.
- The NASDAQ lost -0.68% but increased 3.25% for the week. The increase was the eighth week in a row.
In the United States, rates are rising despite the Michigan survey’s lower inflation reading:
- 4.714% +6.6 basis points on the 2-year yield
- 3.982% 5-year yield +5.9 basis points
- 3.765% +3.5 basis points on the 10-year yield
- 3.854% 30-year yield +1.5 basis points
For the coming trading week:
- The 2-year yield increased by 11.6 basis points.
- The 5-year yield increased by 7.0 basis points.
- The 10-year yield increased by 2.0 basis points.
- The 30-year yield declined three basis points.
