Watch for key inflation updates from Japan, US this Easter
- The Japan inflation figure will tell us if the BoJ will go deeper into the red on rates
- Japan’s government bond yield curve continues to flatten out
- The Fed’s interest rate flight path is an aspiration, not a forecast
- US inflation data will reveal if the Fed's flight path is credible
- The odds of an April Fed cut are low, despite bullish talk from Fed's James Bullard
- There is plenty of scope for USDJPY volatility
By Max McKegg
Financial markets will be closed for four days in many places over the Easter break, but it will be business as usual for economic data releases. The main event will be inflation updates from Japan (on Good Friday) and the US (Easter Monday).
The first number will tell us whether the Bank of Japan is likely to lower its policy rate further into negative territory; the second if the Federal Reserve’s current flight path for the federal funds rate is credible. There is plenty of scope then for volatility in USDJPY.
Source: Bank of Japan
Kuroda will also be aware that the recent decline in USDJPY is largely offsetting the fall in crude oil. So, given that Kuroda’s mantra over the last couple of years that the BoJ will pursue the 2% target “with the utmost determination”, it’s a good bet that determination will include another cut to the bank’s policy rate, from the current level of –0.1% closer to –0.5%, or perhaps even stealth intervention in the FX markets, Swiss National Bank style.
In fact, intervention is the most likely outcome as interest rate differentials are not having much of an impact on the major FX crosses this year. The Bank of Japan has flattened the yield curve right out, so that 40 year government bonds yield barely 0.50%. Yet still the yen is on the rise. A further complication is that banks don’t want to sell bonds earning a positive return to the BoJ in exchange for a reserve deposit earning negative 0.1%, meaning there is a good chance the central bank will start to fall short of its monthly purchases target of ¥80 trillion. The end of the line for QE.
Japanese government bonds yields for the past 40 years
So what are the chances we will get it on Monday when the price index of personal consumption expenditures (PCE) is released?
This chart shows the current state of play with the PCE, the Federal Open Market Committee’s inflation benchmark.
This probably explains the Fed’s caution but, ironically, the market has taken it as sign Janet Yellen and her colleagues are prepared to risk the inflation genie getting out of the bottle: the break-even rate on 10 year Treasury Inflation Protected Securities has risen to its highest level since last August.
We’ve heard some positive talk from FOMC members this week, but most of them are non-voters. James Bullard was the exception. He said in a Bloomberg interview there is a risk the Fed may overshoot on inflation and the unemployment rate. FX markets seemed to take that as an indication the Committee’s April 27 meeting might be “live” for a rate hike and US dollar had a nice rally. Not so impressed were money market traders; the odds of a hike remain priced at 10% only.
Hopefully the Easter inflation updates in both Japan and the US will clear the waters.
– Edited by Robert Ryan
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Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts an article or trade, then click here to follow him.