The US dollar has posted gains against the yen in Thursday trading. USD/JPY has pushed back above the 98 line and is trading in the low-98 range in the European session. On Wednesday, US GDP numbers disappointed, falling well below market expectations. On Thursday, there are two key US releases – Unemployment Claims and Pending Home Sales. In Japan, All Industries Activities came in at 0.4%, just shy of the estimate of 0.5%. There are a host of Japanese releases on Thursday, including Tokyo CPI and Household Spending.
The markets got a look at US GDP numbers on Wednesday, and the results were less than impressive. Final GDP did rise nicely, from 0.4% to 1.8%, but this was well short of the estimate of 2.4%. The Final GDP Price Index rose 1.2%, edging past the estimate of 1.1%. The weak GDP release put a damper on a bright market mood thanks to excellent US numbers on Tuesday. Core Durable Goods, CB Consumer Confidence and New Home Sales, all key releases, beat their estimates. Manufacturing data, often a sore spot, also looked good as the Richmond Manufacturing Index had its best performance since last November. The strong numbers are particularly encouraging as they come from a wide range of economic sectors.
Is the Federal Reserve backtracking on QE? The US dollar surged last week after Federal Reserve Chair Bernard Bernanke said that the Fed was planning to scale down QE. However, US (and global) stock markets fell sharply on the news, and the Fed finds itself trying to contain the damage and calm the nervous markets. Dallas Fed President Richard Fisher declared that “tapering” should not be confused with “tightening” and said that the Fed was not exiting from its accommodative policy action just yet. Minneapolis Fed President Naraya Kocherlakota reiterated that the Fed was continuing with an expansionary monetary policy event if QE was terminated, and said that it was a misperception to assume that the Federal Reserve had turned more hawkish. One can be excused for dismissing these statements as little more than linguistic acrobatics, and it is questionable if the markets will be reassured by these statements from the Fed, which are clearly aimed at damage control and reassuring nervous investors.
The Japanese government has launched an all-out attack on deflation, which has hampered economic growth for years. The government’s extreme monetary easing is aimed at creating inflation and kick-starting the economy, but we haven’t seen much improvement in the country’s inflation indicators. Earlier in the week, Corporate Services Price Index, which measures inflation in the corporate sector, posted a gain of 0.3%. The markets will be hoping that Tokyo Core CPI, considered the most important Japanese inflation indicator, will follow suit with a positive reading on Thursday. Stronger inflation numbers would be a vote of confidence in Prime Minister Abe’s economic policy and would likely give a boost to the yen.
Speaking in London last week, Japanese Prime Minster Shinzo Abe defended his government’s monetary policy of extreme easing. The government is hoping that this policy will kick-start the stagnant Japanese economy and stamp out deflation. Abe has defined his aggressive economic policy has having three prongs: extreme monetary easing, fiscal stimulus, and pro-growth moves. However, the program has severely eroded the value of the Japanese yen. Japan’s trading partners are not happy with the sinking yen, which has hurt their export markets. Abe dismissed criticism that he is purposely pushing the yen lower, saying that Abenomics is a win-win for the global and Japanese economies. He noted that GDP in Q1 climbed 4.1%, which he argued is proof that the Japanese economy is showing improvement. Later on Thursday, the markets will get a good look at the state of the Japanese economy, as Japan releases a string of indicators.
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