Calm FX, Yen Strengthens

The US dollar is little changed against most of the major currencies in choppy and directionless activity. The main exception is the Japanese yen which has strengthened across the board, ahead of the Golden Week holidays, which will close the Tokyo markets Monday and Friday next week. The dollar fell to new lows for the week near JPY98.20. It has steadied in the European morning to trading in a narrow JPY98.50-80 range.

Japan reported its latest inflation figures and most observers are looking at disappointing year-over-year figures. The headline CPI is -0.8% after -0.7% in February. What is called the core-core in Japan, which excludes fresh food and energy was also -0.8%. Tokyo inflation is for April and the headline CPI is -0.7% as is the core-core.

Yet, the year-over-year rate picks up the base effect and to get a better sense of the recent developments, it seems better to look at the monthly figures. The national CPI rose 0.2% in March, matching the strongest rise in a year. The Tokyo CPI for 0.3% in April for the second consecutive month, the strongest two month increase in more than two years. This does not mean that the BOJ will reach its inflation target. It simply means that the outlook is not necessarily as pessimistic as one might conclude by looking at the year-over-year rate.

The BOJ itself does not seem particularly confident of achieving its target. In its updated outlook, it raised its core (excluding fresh food) CPI forecast, adjusted for the impact of the retail sales tax hike in 2014 and 2015, to 1.4% and 1.9% In January, the BOJ forecast was that prices would rise by 0.9% in 2014. A Reuters poll earlier this week found a median expectation of 0.5% core CPI in 2014 and 1% in 2015.

In Europe, the week is winding down with monetary and banking figures. Money supply slowed more than expected in March. The year-over-year rate eased to 2.6% from 3.1% and the 3-month year-over-year rate, used to smooth out some of the noise, eased to 3% from 3.4% in February. Private credit contracted 0.8%, in line with the recent report indicating tighter credit conditions and the ECB's SME report noting the worsening of conditions over the past six months. While on the surface this would seem to favor those seeking a rate cut at next week's ECB meeting, it does not address the argument about the broken transmission mechanism. Greek and Portugal small and medium size enterprises are reportedly the hardest, while German SMEs are not constrained.

Separately, among the highlights of the ECB's report, Cypriot bank deposits fell for the tenth month in March, but despite attempt to tax insured depositors, there was not a generalized run on deposits and particularly noteworthy is that deposits in Slovenia, which many see as the next candidate for assistance, actually rose.

Italian and Spanish banks bought more sovereign bonds in March and this is paying off here in April. Over the past month Italy's 10 year bond yield has fallen almost 50 bp and the Spanish 10-year yield has rumbled nearly 70 bp. Italy sold 6-month bills today at record low yield. There appears to be progress toward forming a new government in Italy, but it is still seems several days away at least. The Spanish government is expected to unveil a 3-year growth plan before the weekend.

The euro has consolidated rather than extended yesterday's pullback after nearing $1.3100. Support is seen in the $1.2960-80 area, where Asian central banks have thought to be seen earlier this week. for its part, sterling is holding on to the lion's share of its GDP-induced gains. As long as it holds above $1.5400-25 area, the shorts are nervous.

The last major economic report ahead of the weekend is the first estimate of Q1 US GDP. The consensus is for about 3% annualized growth. However, a combination of the composition of that growth, especially, as it looks like it will be led by inventory rebuilding and the fact that the economy has clearly lost momentum in March and into April, means that the market reaction may be muted. The core PCE deflator that the Fed watches closely is expected to be little changed near 1%.

Separately, the Univ of Michigan reports its consumer confidence numbers and a modest upward revision to the initial estimate of 72.3 is expected. Recall that that reflected a sharp fall from the 78.6 reading in March, so an upward revision to 73.5, as the Bloomberg consensus forecasts, is still a soft number.

Lastly, the central bank of Mexico meets today and is widely expected to keep rates on hold at 4%. While some see scope for another rate cut later this year, especially if the peso continues to appreciate, the recent uptick in consumer prices (4.25% in March from 3.55% in February) favors the stand pat outcome.