From the strongest to the weakest among the major currencies
The day and week ends with the British pound being the strongest and the Japanese yen the weakest.
The reason for the sharp decline of the Japanese yen was the Bank of Japan’s interest rate decision. The Bank of Japan (BOJ) decided to keep its target short-term interest rate at -0.1% and the 10-year Japanese Government Bond (JGB) yield around 0%, with a range of ups and downs of 0.5% each. This decision, which is part of the Bank of Japan’s Yield Curve Control (YCC) strategy, was taken unanimously. In the statement, the Bank of Japan noted that the Japanese economy is improving, and expects the moderate recovery to continue. They noted that key economic indicators such as exports, production, capital expenditure and consumption are showing moderate increases. However, core consumer inflation is expected to slow in the middle of the fiscal year. The Bank of Japan indicated that inflation expectations, which had previously been rising, are now moving sideways. The Bank of Japan emphasized that there is significant uncertainty surrounding Japan’s economic outlook, mainly driven by global factors.
New Bank of Japan Governor Kazuo Ueda made additional remarks, stating that more time is needed to achieve the 2% inflation target. Inflation is expected to slow around the middle of fiscal year 2023. He noted the need for close monitoring of foreign exchange and financial markets and that the Bank of Japan refrained from changing its policy because inflation in Japan is not sustainable.
The news – ahead of the American session – sent the USDJPY and JPY pairs sharply higher (yen down). GBPJPY was the biggest mover at 1.44%, and all but the Swiss Franc moved over 1% on the day.
In the North American session, consumer confidence data from the University of Michigan (UMich) for June 2023 beat expectations. The General Consumer Confidence Index came in at 63.9, higher than the expected 60.0 and the previous value of 59.2.
The data reflects an increase in confidence in the current economic conditions, which came in at 68.0, surpassing expectations of 65.5 and 64.9 previously. Consumer expectations also rose to 61.3 beating the expected 56.5 and 55.4 previously.
One-year inflation expectations eased to 3.3%, down from 4.2%, marking the lowest value since March 2021. If only core/services inflation were to follow this trend. The movement in 5-10 year inflation expectations was not very dramatic, declining slightly to 3.0% from the previous 3.1%.
Consumer sentiment is likely buoyed by the decision on debt ceiling talks which may have given a temporary boost to confidence simply because it wasn’t a default disaster.
The Fed’s Semi-Annual Monetary Policy Report was also released ahead of Fed Chair Bowles’ testimony on Capitol Hill on Wednesday and Thursday (a key event next week). In the report, the Fed noted that the outlook for the funds rate is subject to significant uncertainty, as further policy actions depend on evolving economic conditions. The Federal Reserve has confirmed that passive income does not affect its operations. He highlighted that slowing inflation may depend in part on further easing of tightening labor market conditions. Moreover, the report indicated that the inflation of basic services, with the exception of housing, showed no signs of abating, which means that inflationary pressures will continue.
In the international context, several major foreign central banks continued to tighten their monetary policy but stressed the need for caution due to uncertainty and a slowdown in the transmission of policy actions. Moreover, the Fed raised concerns about fairly high indicators of future business defaults.
The report indicated that financial conditions have tightened further since January, with bank credit conditions tightening further since March. The Fed said it stands ready to adjust the pace of balance sheet contraction if necessary, underscoring its flexible approach to policy adjustment.
Significantly, the Fed noted that the turmoil in the banking system in March left an imprint on bank lending conditions, especially for medium-sized and small-sized banks. According to the report, bringing inflation down to the target level is likely to require a period of sub-trend growth and some easing of labor market conditions. All of this comes against the backdrop of inflation running above target and the job market very tight.
A few members of the Federal Reserve retweeted his speech after two weeks of silence ahead of Wednesday’s interest rate decision.
- Richmond Fed President Barkin indicated that he was comfortable with further rate increases if incoming data did not show a slowdown in demand, which would bring inflation back to the 2% target. He conceded that higher interest rates could risk a more significant slowdown, but highlighted that experiences from the 1970s show the Fed should not back down from fighting inflation prematurely. He confirmed that the 2% target was effective for a generation. Despite this, he noted that inflation was stubbornly going on, and he remained unconvinced that weak demand would rule him out.
- FOMC member Waller noted that the US economy is still “tearing”, as the banking system appears calm for the time being. He noted that the global effects of the expected coordinated tightening of the central bank have not been fully realized. While acknowledging recent bank failures, he noted that they did not appear to have a significant impact on credit conditions and that monetary policy should not be changed due to mismanagement in a few banks. Waller emphasized the Fed’s role in using monetary policy to fight inflation and the responsibility of bank leaders to manage interest rate risk. He expressed concern that core inflation was not improving and predicted that it would likely require further tightening, revealing that it had not fallen as he had previously predicted. However, he acknowledged that the job market appears to be declining without a significant increase in unemployment.
Have a look around the market today:
- Crude oil rose $1.04 to $71.85.
- Gold is trading up $2.51, or 0.13%, at $1957.45. For the week gold was little changed at -0.16%
- Silver rose $0.36, or 1.49%, to $24.18. Silver ends the week down -0.34%
- Bitcoin found a supply and traded at $26,378
In the US stock market, the main indices fell today but closed higher for the week:
- The Dow Jones Industrial Average is down -0.32%, but is up 1.25% this week
- The S&P fell -0.37%, but rose 2.58%. The move higher was the largest since the week of March 27th and was the fifth consecutive week higher
- The Nasdaq fell -0.68%, but gained 3.25% for the week. The gain was for the eighth consecutive week higher.
In the US in this market, yields are rising despite the lower inflation reading from the Michigan survey:
- 2 years yield 4.714% +6.6 basis points
- 5-year yield of 3.982% +5.9 basis points
- 10-year yield of 3.765% +3.5 basis points
- 30-year yield of 3.854% +1.5 basis points
For the trading week:
- The two-year yield increased by 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 decreased by 3 basis points