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Head of Japanese central bank calls sharp weakening of the yen undesirable

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The Bank of Japan raised its inflation forecast at Thursday’s meeting, but left its extremely low interest rates unchanged and warned of risks to the outlook for the economy. That means it will remain the black sheep among key central banks tightening monetary policy.

The BoJ lowered its GDP growth forecast and raised its inflation forecast. As expected, the Bank of Japan left the short-term interest rate at -0.1% and the yield target for 10-year government bonds at about 0%. Eight of the nine board members voted in favor of the decision.

The bank also raised its core inflation forecast for the current fiscal year ending March 2023 to 2.3% from 1.9% and for the next fiscal year to 1.4% from 1.1%. The bank lowered its GDP growth forecast for this fiscal year to 2.4% from 2.9%.

“It’s important that companies, whose profits have risen because of the weakening yen, increase capital investment and raise wages. This will reinforce the positive cycle in which rising profits lead to higher spending. With the rapid exchange rate changes that we are witnessing now, companies may be wary of making capital investments. Therefore a sharp weakening of the yen is undesirable. We will work closely with the government to monitor closely the dynamics of currencies and their impact on the economy,” said Bank of Japan Governor Haruhiko Kuroda at a press conference following the meeting.

Japan revealed the “disastrous” consequences of the sanctions battle.

“We expect companies to continue to pass on (rising) costs to consumers…It should be noted that short-term inflation expectations have strengthened quite noticeably, and they are also strengthening over the medium and long term. Nevertheless, we do not expect core inflation to reach 2% immediately,” he added.

“We have no plans to raise bond yield targets. Nor do we plan to widen the range of deviations from target yield levels. The economy is in the middle of a recovery from the effects of the pandemic. Japan’s deteriorating terms of trade are also draining profits, adding to the pressure on the economy. Therefore, we must continue to pursue a loose monetary policy to ensure that corporate profits rise to moderate wage and price growth,” Kuroda summarized. 


Forex

Positive news from the U.S. labor market has raised fears of further FED rate hikes this year

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fed rate hikes this year

FED rate hikes and inflation this year are at record highs. The U.S. jobs data released on Friday were truly unexpected by market participants, which had andwill still have consequences.

According to the July report on new jobs and total unemployment, the U.S. economy gained 528,000 jobs against a forecast of 250,000, and more importantly, the June numbers were also revised upward to 398,000. 

The unemployment rate fell to 3.5% from 3.6%, which was also a surprise since it had been expected to remain at 3.6%. Another positive piece of news was the average hourly earnings up 0.5% month-over-month and 5.2% year-over-year. Also, upward revisions were made to this indicator for the previous period under review.

Why did the overall previously positive sentiment in the markets change so drastically? It is connected with the fact that earlier the data showing the slowdown of the number of new jobs in the USA might have become the reason for the Federal Reserve’s decision to pause in raising interest rates in August, and in September to continue the cycle with a noticeably lower growth rate, for example at 0.25% per month. 

Here the main reason for such a scenario was the situation in the labor market. The Fed has an opportunity to continue the sharp FED rate hikes this year, not just to limit the growth of inflation, but to make it go backwards.

Such a change in sentiment could put pressure on demand for stocks of companies, which always have trouble growing if the Central Bank conducts aggressive interest rate hikes. But in this case, the dollar would be supported.

There is also a possibility that the Fed may not change its plans to relieve pressure by raising rates, assessing the current situation in the economy as positive and the inflation rate as the maximum, which may stop and go in the opposite direction in the near foreseeable future, and without continuing aggressive rate increases.




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Forex

The strength of the U.S. dollar delayed the recession announcement

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recession announcement

The jobs report was released at the end of last week’s work week. Economists were confident that 258,000 jobs were added during the previous month. But the Labor Department released data showing that more than 500,000 new jobs were added in the U.S. This shows that the economy continues to grow. 

The extremely strong numbers from Friday’s report reduce concerns that the United States will make an announcement. While this optimistic report bodes well for economic growth, it is certainly not about inflation.

At the same time, it dramatically alters the expectations of market participants, who have been focusing their attention on recent GDP reports. At the end of July, the second-quarter GDP estimate was presented. According to the report, GDP volume declined by 0.9%. Prior to that, the BEA had published data showing that GDP volumes declined by 1.6 percent during the first quarter. It is worth remembering that if a country’s economy contracted for two consecutive quarters, that is the classic definition of a recession.

Fear of a disappointing jobs report put pressure on U.S. Treasury yields and the dollar’s decline reversed. The dollar added 0.8%, matching Friday’s decline.



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Forex

The US market today maintains growth. Inflation Ahead

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us market today

The main U.S. index closed the week near the highs of recent months, the highest prices since early May. The US market today has rallied for four straight weeks as the S&P500-index closed above its 50- and 100-day averages.

At the end of last week, the July jobs report came out: more than +500K new jobs — almost double the estimate. The unemployment rate of 3.6% is a long-term low. Technically, the U.S. is in a recession — GDP decline in Q1 and Q2, but employment remains strong, although there are reports that the labor market has begun to cool noticeably.

Energy. Oil is up for the week opening, +1%, but oil is below $100; Brent is $95. Oil is under pressure on expectations of slowing demand in China and the U.S.

Europe faces a difficult winter in the economy and a difficult 2023 — said the president of Finland. The reasons are the sharp rise in energy prices and the difficulty in quickly restructuring the energy sector, especially in gas suppliers.

Grain crisis — signs of improvement, several grain carriers left the port of Odessa over the weekend.

U.S.-China trade increased in 7 months, +11.8%, to $452 bln.

The Palestinian-Israeli crisis appears to have been resolved by the beginning of the week — after intense mutual shelling, the sides stopped shelling under an agreement brokered by Egypt. Israel’s Iron Dome missile defense system is doing very well — it has shot down as many as 97% of the missiles the Palestinians have launched at Israel.

Warren Buffett’s Bershire Hathaway posted a very large loss, of $43 billion for Q2, compared to a profit a year earlier. The reason was the stock’s decline in Q2. Nevertheless, the company is in good shape and has significant assets in the money.

Tesla reported the release of its 3 millionth car.

The EU adopted by a majority a plan in case of an emergency gas supply shortfall — limiting gas demand. Hungary and Poland opposed it, but the decision was passed by a qualified majority.

The U.S. market remains up despite expectations of a +0.5% Fed rate hike in September, despite a slowing economy. The US market is buyable — but we have to wait for a strong pullback down to the 50-day average.



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