USD/JPY and EUR/JPY Inched Higher Following the Delay of Sales Tax Hike Until October 2019
The financial markets are closely scrutinising US economic releases to assess the strength of the US economy after being caught on the wrong foot with regard to the next Fed hike. Today, we are due to get two important indicators: (i) the Conference Board consumer confidence for May, which could reveal whether the US growth is driven by private consumption as many expect and (ii) PCE inflation figures for April on Tuesday. Headline PCE is the Fed's preferred price indicator and we expect headline inflation to be 1.1% y/y, driven mainly by higher gasoline prices, while the core index should increase 0.1% m/m (but it is a close call between 0.1% and 0.2%) implying a core inflation rate of 1.5% y/y (1.6% y/y).
In the Euro area, we expect the euro area HICP inflation figures for May to indicate a low inflation number at -0.2% y/y similar to the level in April. Core inflation should also remain unchanged at 0.7%, similar to April and thus not recovering to the 1.0% level seen in March. Data for the euro area money supply developments for April is also due out. Growth of the M3 money supply averaged 5.0% leading up to April and we estimate the growth rate remained high with a further modest increase in April. We expect focus to be on bank lending figures, as they are key indicators for economic growth and important for the ECB's TLTRO II loans, determining whether banks will have a negative or zero interest rate on the loans.
Finally, euro area unemployment rate data for April is due out and we expect the declining tendency to continue. Specifically, we expect the unemployment rate to decline to 10.1% in April from 10.2% in March and, hence, narrow further towards the European Commission's estimate of the structural unemployment rate of 9.7%.
Selected Market News
After a gruelling start to May, global risk sentiment has found a stronger footing recently as the market is starting to come to terms with the prospect of a Fed interest rate hike over the summer. Asian stock markets and commodity prices are generally higher this morning as markets seem to be finding comfort in a relatively strong US economy as the backdrop to the possible Fed move. Markets are generally pricing in more than a 50% chance that the Fed will hike interest rates in July. Figures for US inflation and consumer confidence today will in that regard be watched very closely.
Japanese stocks were also supported by comments by Finance Minister Taro Aso, who said this morning that weakness in private consumption means that now isn't the time to raise the sales tax, which is planned for April next year. The yen weakened against the US dollar as markets continue to increase the odds for both monetary and fiscal easing and we expect USD/JPY to move back into the 112-117 range.