USD/JPY has posted slight gains in the Thursday session. In North American trade, the pair is trading just below the 112 level. On the release front, US unemployment claims edged up to 234 thousand, lower than the forecast of 238 thousand. Japan will release a host of inflation indicators, led by Tokyo Core CPI, which an estimate of 0.0%. On Friday, leaders of the G-7 nations meet in Sicily. The US will release revised GDP for the first quarter, which is expected at 0.9%, compared to the initial GDP release, which came in at 0.7%. Other key US indicators include Core Durable Goods Orders and UoM Consumer Sentiment.
The currency markets have shown little response to the Federal Reserve’s minutes from the May policy meeting. Traders hoping for confirmation of a June rate hike came away disappointed, as the minutes conveyed a less hawkish tone than the markets had expected. Policymakers were careful in their message, saying that a rate hike was coming "soon". Does that mean a move at the June policy meeting? The markets clearly expect a rate hike, as Fed funds futures for a June increase remained at 78% after the minutes were released. At the same time, the Fed has given itself some wiggle room, and could opt to delay a hike until the second quarter if inflation or consumer indicators take an unexpected nosedive. The minutes stated that policymakers wanted to see additional evidence that the recent slowdown in the economy was temporary before raising rates. As for additional hikes in 2017, the markets remain skeptical. The odds for a September rate stand at just 37%. This pessimism is a result of a weak performance from the US economy in Q1, as well as doubts that President Trump, who is facing congressional investigations over his connections with the Russian government, will be able to pass his agenda of cutting taxes and government spending. Gone are the heady days at the end of 2016, when a red-hot US economy had analysts predicting four rate hikes in 2017. At the same time, a strong improvement in economic data could quickly change the cautious tone of the Fed and revive discussion of four rate hikes this year.
The White House presented President Trump’s 2018 budget proposal to lawmakers in Congress this week, but will it be dead-on-arrival? Trump has promised to slash government spending, and much of the funds for the budget would come from huge cuts to the Medicaid health program and food stamps. The budget proposes slashing more than $600 billion from Medicaid and over $192 billion from food stamps over a decade. Trump has promised to balance the budget within 10 years, claiming this can be achieved through tax cuts and annual growth of 3 percent. However, experts are at odds as to whether the economy can reach and maintain such levels of growth, which is much higher than current economic expansion. The budget proposal is unlikely to remain in its present form for very long on Capitol Hill. Democrats will want nothing to do with it, and Republicans will not want to make drastic cuts to federal programs that will incur the wrath of voters. Still, the Trump administration, which has been in damage-control mode for weeks over the firing of FBI director James Comey, can point to the budget as a step forward in trying to implement Trump’s pro-business agenda.
