USD/JPY is showing little movement in the Monday session, and with US markets closed for Memorial Day, that trend is likely to continue during the day. There are no US releases on the schedule. Japan will publish two consumer spending reports – household spending and retail sales. On Tuesday, the US releases CB Consumer Spending.
Japan’s economy has looked solid early in 2017, as GDP in the first quarter expanded at an annualized rate of 2.2%. As stronger global economy has increased demand for Japanese products, which has been a boon for the Japanese manufacturing and export sectors. Still, the markets aren’t expecting the Bank of Japan to tighten its ultra-accommodative monetary policy any time soon, despite a more robust economy. The reason? Inflation levels remains stubbornly low, well below the central bank’s target of 2.0%. Consumer spending remains soft and wages actually contracted in the first quarter, compared to Q4 of 2016. Unless wages and consumer spending improves and raises inflation, the BoJ is likely to sit tight and hold course with its quantitative easing program and low interest rates. A stronger Japanese economy has rubbed off on the Japanese yen, as USD/JPY has slipped 4.9% since the start of the year.
The US economy slowed down considerably in the first quarter of 2017, but there was some good news on Friday, as GDP was revised upwards. The US economy expanded at an annual rate of 1.2%, considerably higher than the 0.7% gain which was reported in the first estimate in April. Still, this figure is the lowest in a year, and well below the 2.1% gain in Q4. Business spending remains weak, and although consumer confidence remains at high levels, consumer spending has not kept up, as retail sales was softer than expected in April. The manufacturing sector is showing signs of fatigue, with Core Durable Goods Orders posting a decline of 0.4% in April, its third decline in four months. After a shaky first quarter for the US economy, there are no indications as of yet that we will see a rebound in the second quarter. Is the Federal Reserve still on track for a rate hike in June? The markets remain confident that the Fed will act, as the odds of a rate increase in June have increased to 84%, according to the CME Group. At the same time, the likelihood of a rate hike in the second half of 2017 remain low. The odds for a September rate are just 26%, with the markets unclear on whether the Fed will make further moves this year if inflation remains below the Fed target. Even if soft first quarter data was a blip, the markets (and possibly Fed policymakers) are concerned that President Trump, who is facing several congressional investigations over his connections with the Russian government, may not be able to pass his agenda of cutting taxes and reigning in government spending.
