USD/JPY has reversed directions on Thursday, as the pair has climbed 0.70 percent. In the North American session, the pair is trading at 110.30. In the US, unemployment claims dipped to 237 thousand, marking a 3-week low. On the manufacturing front, the news was mixed. The Empire State Manufacturing Index rebounded with a strong gain of 19.8, crushing the estimate of 5.2 points. The Philly Fed Manufacturing Index dropped sharply to 27.6, but still beat the estimate of 25.5 points. The Bank of Japan will release a rate statement later in the day, with interest rates expected to remain pegged at -0.10%.
The BoJ will be on center stage later on Thursday, as it releases a rate statement, followed by a press conference with BoJ Governor Haruhiko Kuroda. The BoJ has maintained an ultra-loose monetary policy in order to prop up inflation and domestic demand. Although the economy has recently received a boost from stronger global demand, inflation remains well below the central bank’s 2.0% target, and consumer demand has been soft. The BoJ is unlikely to shift directions and tighten policy anytime soon, but analysts will be combing through the rate statement and Kuroda’s follow-up comments, looking for nuances in BoJ language. A key component of the BoJ’s policy has been bond purchases, but the bank has slowly been reducing these purchases, and could make reference to the slowdown in the bond-buying program on Thursday. If the rate statement or Kuroda’s comments are more hawkish than expected, the yen could respond with gains.
After months of broad hints from policymakers, the Federal Reserve raised rates on Thursday by 25 basis points, to a target range of 1.00 percent to 1.25 percent. The rate statement portrayed an optimistic picture, noting that the economy was growing, and the labor market remained strong. The statement acknowledged that inflation remains below the Fed’s target of 2.0%, but expected that goal to be reached in the "medium term". The Fed projected one more rate hike in 2017, and the markets are circling the December meeting as the most likely date. The odds for a September increase are at 18%, compared to 23% a week ago, according to the CME Group. As for a December increase, the odds are currently at 38%. One surprising development was that Fed Chair Janet Yellen outlined a plan to reduce its $4.2 trillion balance sheet (comprised of Treasury bonds and mortgage-backed securities). Yellen was short on specifics, saying that the goal was to begin the normalization "relatively soon". The balance sheet ballooned after the financial crisis in 2008, as the Fed implemented a massive quantitative easing program as part of its accommodative monetary policy, together with interest rates of zero. The gradual reduction in the purchase of these assets signifies an important vote of confidence in the strength of the US economy.
US consumer indicators in May disappointed the markets, as CPI and retail sales reports missed estimates. CPI declined 0.1%, short of the estimate of 0.2%. This was the second decline in three months, as inflation is currently at 1.5%, well below the Federal Reserve’s target of 2.0%. Retail Sales, the primary gauge of consumer spending was dismal, coming in at -0.3%, compared to a forecast of +0.1%. This marked the indicator’s weakest reading since August 2016. Soft consumer spending could drag down GDP for the second quarter, as consumer spending accounts for more than two-thirds of economic growth. Although surveys continue to show that US consumers remain optimistic about the economy, this hasn’t translated into stronger consumer spending.
