It’s been an uneventful Thursday for the yen, as USD/JPY is unchanged on the day. In the North American session, the pair is trading at 113.30. On the release front, there are no Japanese events on the schedule. In the US, PPI posted a weak gain of 0.1%, above the forecast of 0.0%. Unemployment claims ticked lower to 247 thousand, above the estimate of 245 thousand. On Friday, the US releases CPI and retail sales numbers, so traders should be prepared for some movement from USD/JPY.
Janet Yellen’s testimony on Capitol Hill on Wednesday was largely a non-event, and her testimony before a Senate Committee on Thursday will likely be more of the same. Yellen’s message didn’t veer from what the markets have already heard from other Fed policy makers. Yellen reiterated that the Fed planned to raise rates "gradually", and added that the Fed would begin trimming its balance sheet before the end of the year. The Fed chair didn’t provide any timelines, but many analysts are circling September for a balance sheet reduction, with a rate hike to follow in December. However, despite Yellen’s assurances, the markets remain lukewarm about a rate hike before the end of the year. Investors are concerned that the US economy has slowed down in 2017 and may not need another rate hike. In her testimony, Yellen reiterated said that she believes the factors weighing on inflation are temporary. However, she acknowledged that with inflation well below the Fed’s target of 2%, adding that there could be more going on there". For their part, the markets remain skeptical about a rate hike. The CME Group has pegged a December rate increase at just 47%, while other forecasts are pointing to odds as low as 40%. Hints from the Fed will not suffice to bring investors on board – unless growth and inflation numbers move higher, the markets are likely to remain lukewarm about the likelihood of a third rate hike in 2017.
The Bank of Japan will hold a policy meeting next week, and is expected to upgrade its economic growth forecasts in response to the stronger economy. The bank has hinted that it will push back its timeline for inflation reaching the 2% target, which currently does not seem a realistic goal, despite years of ultra-loose monetary policy. Will this happen at the July meeting? The markets may not get an answer until the rate statement is released, as the board members are split between those who expect inflation to rise due to the stronger economy, and those who don’t think inflation levels will move upwards. If the pessimists prevail, the bank will delay the timing for hitting the 2% target from its current forecast of "around fiscal 2018" to a later date. The bank has said that it will not reduce its radical stimulus program until inflation levels move higher.
After a short break, the Trump administration’s alleged ties with Russia are once again front-page news. This week, Washington is abuzz that Donald Trump Jr. admitted that a Russian official contacted him and offered to provide him with evidence incriminating Hillary Clinton. Predictably, the White House has attacked the media and is trying to distance itself from Trump Jr.’s meeting, but the miscue is one more example of the White House having to shift to damage control mode, rather than focus on its agenda. Trump hasn’t been able to pass health care or other legislation through Congress, even though Republicans control both the House of Representatives and the Senate. The latest dark cloud over the White House has dampened investor confidence, and it’s a safe bet that this latest crisis is not the last.
