Yen shudders higher as the Bank of Japan disappoints
Both FX and equity markets have given the Bank of Japan’s unchanged policy decision the thumbs down, with the Yen rising as much as 2% against the US dollar and Japanese equities crumbling. Many were expecting Kuroda and the BoJ to step up the rate at which they purchase assets in order to send investors into riskier products and foreign markets, keeping the Yen weak against other global currencies while increasing inflationary pressure. So why didn’t the Bank of Japan ease further? The policy release came just after Japan’s CPI data showed prices falling on an annual basis for the first time since 2013. This slip into deflation is hardly strong evidence that Japan’s negative rate experiment undertaken in January has even started to have an effect. As such, a wait-and-see approach, twinned with a somewhat neutral Fed policy statement yesterday evening may have lifted hopes among the BoJ that the Fed’s tightening cycle will continue shortly and send USD/JPY back toward 120.00.
UK growth dented as businesses try to weather the storm of political uncertainty
Yesterday’s UK GDP was broadly as expected: overall growth slowed to 0.4%, with industrial output and construction falling and services growth decelerating. George Osborne was quick to blame Brexit fears for delayed spending and investment among UK PLC. And yes, this may well have been the case but it’s still unclear what true effect Brexit chatter had on the economy in Q1. The services sector also had to contend with the threat of a Chinese economic slowdown, a truly unpredictable evolution of the US Presidential race and the spectre of rising rates from the Federal Reserve, so to blame the slowdown entirely on the looming EU referendum (which wasn’t even announced until the second half of Q1) may be unfair.
US GDP growth expected to slow sharply
Growth on the other side of the Atlantic is not expected to have fared any better than the UK’s did yesterday, with annualized Q1 growth seen halving from 1.4% to 0.7% in Q1 – hardly a sign that the Federal Reserve can continue hiking rates and one of the justifications for leaving Fed policy unchanged yesterday. As we know, a further rate hike from the Fed is conditional on a stabilizing housing and commodities sector at home, and a recovery in markets overseas. The Fed’s statement indicated that their concerns over the global markets had eased somewhat since their March meeting, leaving more room for the Fed to lift rates again at some point in 2016. The Fed’s forecasts still see a further two interest rate rises by the end of the year, but markets are yet to receive the message – futures are pricing in only a 21% chance of US rates at 1% in December – leaving the onus on the Fed to either admit their forecasts are optimistic, or reinforce their tightening bias via stronger verbal intervention. US GDP is due at 13:30 UK time.