USD/JPY continues to have a quiet week. In Tuesday’s North American session, the pair is trading just above the 111 line. On the release front, Japanese Flash Manufacturing PMI dropped to 52.2, short of the forecast of 52.9 points. Japanese All Industries Activity declined 0.6%, weaker than the forecast of -0.4%. US data also stumbled on Tuesday. New Home Sales dropped to 569 thousand, well short of the forecast of 611 thousand. As well, the Richmond Manufacturing Index dropped to just 1 point, compared to a forecast of 15 points. On Wednesday the Federal Reserve will release the minutes of its policy meeting earlier this month.
The Fed is likely to raise rates at the June policy meeting, but the odds of a rate hike have been showing an unusual amount of movement. In late April, a rate hike was priced in at just 50%. The odds have jumped higher in May, and currently the markets have priced in a hike at 78%. Leaving a June hike aside, a key question is how many more hikes does the Fed have in mind for 2017? On Monday, FOMC member Robert Kaplan stated that three interest increases in 2017 was "appropriate". Earlier in the year, there was speculation that the Fed might raise rates four times in 2017, but with inflation still below the Fed target of 2.0%, three moves is a more likely scenario. The Fed minutes are expected to underscore support for a June move, but many not shed much light on what happens after that.
With President Trump overseas for his first trip abroad, the White House presented Trump’s 21018 budget to lawmakers in Congress on Tuesday. Trump campaigned on slashing government spending, and the budget lives up to that promise, with major cuts to the Medicaid and the food stamp programs. Trump has outlined an ambitious program to cut government spending by $3.6 trillion in the next 10 years and achieving a balanced budget by 2020. The budget includes $25 billion for paid leave after childbirth and some $200 billion for infrastructure programs. Trump’s budget will face a tough sale on Capitol Hill, with both Democrats and Republicans likely to demand changes. Still, with the cloud of scandals around dismissed FBI director James Comey lingering in the air, Trump can point to the budget as a step forward in his agenda to rein in government spending.
