USD/JPY has posted gains on Tuesday, erasing the losses which marked the Monday session. In North American trade, the pair is trading at 112.26, up 0.47% on the day. On the release front, Japan Services Producer Price Index gained 0.8%, edging above the forecast of 0.7%. The Bank of Japan released the minutes of its August policy meeting. In the US, CB Consumer Confidence dipped to 119.8, just shy of the estimate of 119.9 points. New Home Sales slowed to 560 thousand, well off the forecast of 585 thousand. Later in the day, Fed Chair Janet Yellen will speak at an event in Cleveland. On Wednesday, the US will release Core Durable Goods Orders and Pending Home Sales.
BoJ minutes rarely have a flair for the dramatic, and such was the case on Tuesday, with the release of the minutes from the August meeting. Most policymakers supported the current, ultra-accommodative policy and said they expected inflation levels to move closer to the BoJ’s target of just below 2 percent. The Bank has projected that its inflation target will not be met until 2020, but so far the BoJ has balked at lowering this inflation target.
Japanese Prime Minister Shinzo Abe called a snap general election on Monday, which will be held on October 22. The announcement was not a surprise, with news outlets reporting last week that Abe would make the announcement on Monday. Abe has seen his ratings improve over the North Korean crisis and hopes to take advantage of a divided opposition and a stronger economy. Japan’s GDP expanded 2.5% in the second quarter, and the economy has now expanded for six consecutive quarters, as stronger global demand has boosted the manufacturing and export sectors. Like other industrialized countries, inflation remains the Achilles heel of the economy. Despite the BoJ’s radical stimulus program, inflation remains mired far below the BoJ’s target of just below 2.0%.
Will she or won’t she? The markets are having a tough time pinning down whether Fed Chair Janet Yellen will increase rates in December, which would mark the third rate hike this year. With policymakers sending out mixed messages, the markets really don’t know what to expect, and fed futures have priced in a December hike at 55%. On Monday, New York Fed President William Dudley made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed’s target of 2 percent in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. In last week’s rate statement, the Fed announced that it would reduce its $4.2 trillion balance sheet by $50 billion/mth, starting in October. Commenting on the decision to taper the balance sheet, FOMC member John Williams said on Friday that he did not "anticipate any sudden or large effects on rates or spreads", but acknowledged that the Fed could not predict how the markets would react, and policymakers would have to monitor market reaction to the reduction in the balance sheet.
