This increase was driven by higher energy costs following the expiration of government subsidies for public utilities.
However, it fell short of economists’ expectations, which had forecast a 3.1% rise.
On a monthly basis, prices rose by 0.3%, aligning with expert predictions.
Decline effect
The report also highlighted a 10.8% increase in yen-denominated import costs,
reflecting the impact of the yen’s depreciation on inflation.
Additionally, electricity, gas, and water costs increased by 6.7% compared to the same period last year.
The Yen’s Decline
The yen’s decline this year has exacerbated inflationary pressures by increasing the costs of importing raw materials, food, and fuel. Following the Bank of Japan’s decision to raise the benchmark interest rate on July 31, Governor Kazuo Ueda stated that the authorities would continue to raise rates if economic growth and price expectations were met. His firm stance led to a rebound in the yen and a drop in stocks, prompting his deputy, Shinichi Uchida, to emphasize last week that the bank would be cautious about raising rates if financial markets were unstable.
Producer Price Inflation Continues to Accelerate in Japan
Is the United States facing an economic recession?
If so, we can expect increased volatility as markets and central bank officials come to realize this.
The U.S. Federal Reserve may have pushed the world’s largest economy toward a devastating recession due to its stringent efforts to combat inflation. This troubling question has shaken global markets after a long period of stability, and it’s likely that more turbulence will follow before we get a clear answer.
Two weeks ago, I shifted my stance from tightening to easing, abandoning my support for raising interest rates in favor of an immediate rate cut to avoid a recession. It has become clear that this change was not premature. Since then, evidence has rapidly accumulated pointing to a weakening labor market and slowing inflation, indicating that the Federal Reserve may have delayed appropriate action for too long.
Notably, the average U.S. unemployment rate over three months has risen to 4.13%, an increase of 53 basis points from its lowest level over the past year. This increase surpasses the “stock Rule” threshold, which typically signals the onset of a recession and a further rise in unemployment.
Moreover, job growth and resignation rates have slowed, and unemployment claims, both initial and continuing, have increased, reinforcing signs of a weakening market. Regarding inflation, the Fed’s preferred measure, the core personal consumption expenditures deflator, showed a modest 0.2% increase in June, suggesting relative stability.
Average hourly earnings increased by 3.6% in July compared to the previous year, down from 3.8% in June, aligning with the slowing trend in the Employment Cost Index in the second quarter.
stock Rule
But will the “stock Rule” hold this time? Some economists argue that the rise in labor force participation, not layoffs, has driven up the unemployment rate. Even Jerome Powell, the Federal Reserve Chair, has noted that the rule is more of a statistical regularity rather than an economic law that can be wholly relied upon.
However, despite these doubts, the “stock Rule” has proven effective in the past, particularly during periods when the labor force was also expanding rapidly. It reflects a fundamental economic process in which labor market deterioration tends to be self-reinforcing, leading to higher unemployment.
So, what should the Federal Reserve do? The longer it waits, the higher the potential losses. The current monetary policy is restrictive and becoming more so as both price and wage growth slow. There is an urgent need to move towards a neutral stance.
Estimates by members of the Federal Open Market Committee place the neutral interest rate between 2.4% and 3.8%. This means the Fed has a long way to go to reach this level from the current effective federal funds rate of 5.3%. In the event of a recession, the Fed would need to cut rates to 3% or lower.
However,
an immediate rate cut seems highly unlikely, especially given that Federal Reserve Chair Jerome Powell rarely takes such actions outside of the regular monetary policy meetings—only in the face of a significant shock that dramatically changes economic forecasts or threatens financial stability.
This brings us to the upcoming monetary policy meeting on September 17-18. The Fed might lower rates by either 25 or 50 basis points, depending on the economic data available at that time. After that, the path is uncertain. We could see a gradual series of 25-basis-point rate cuts that bring rates below 4%, or perhaps a sharper move towards stimulative policy if the “stock Rule” persists.
Ultimately, uncertainty around the direction of monetary policy may linger for some time, which means we could witness additional volatility in the stock and bond markets.
Weak economic data from the United States have raised concerns about a significant slowdown or potential recession in the world’s largest economy, increasing bets that the Federal Reserve will need to cut interest rates more aggressively. Meanwhile, traders in Europe have increased their expectations for rate cuts by the European Central Bank, now anticipating an additional 90 basis points cut this year, with a potential 50 basis points cut in the September meeting.
Gold:
Gold prices stabilize after sliding in the global downturn Gold prices stabilized after the metal drifted in the global downturn on Monday, falling as some traders reduced their holdings to cover potential margin calls. Spot gold prices fell by about 3.2% in the previous session, marking the biggest daily drop since early June before trimming losses. Prices traded in a daily range exceeding $90 per ounce as stocks and commodities slumped.
Australian Dollar:
The Reserve Bank of Australia keeps interest rates at 4.35% The Reserve Bank of Australia (RBA) kept the interest rate unchanged at 4.35%, maintaining borrowing costs for the sixth consecutive meeting, matching market estimates.
However, the central bank remained concerned as inflation remained above the target range of 2-3% before approaching the midpoint by 2026.
The board emphasized the need to stay vigilant to rising inflation risks,
not ruling out any options as they will depend on data.
The policy will remain restrictive enough to guide inflation toward the target.
Simultaneously, the board acknowledged significant uncertainty regarding economic outlooks,
evident from slowing GDP growth, rising unemployment rates, and severe pressures on many businesses.
The RBA also stated that it would closely monitor the global economy, financial markets, domestic demand trends,
inflation expectations, and labor market conditions.
Bitcoin regained part of its value, temporarily exceeding the $56,000 mark on Tuesday, after a wave of risk aversion impacted global markets and caused significant losses for most major cryptocurrencies. On Tuesday, Bitcoin rose by 3.48%, partially recovering from the intense sell-off that led to its price dropping below $50,000. On the same day, Ethereum, the second-largest cryptocurrency, experienced its largest drop since the collapse of the FTX platform in 2022. Bitcoin was traded at $55,770 and Ethereum at $2,509, with an increase of nearly 3%, as of 10:13 AM Singapore time.
Mixed Fears and Expectations:
Traders fear that these gains might be short-lived and are awaiting a broad improvement in the macroeconomic environment with the easing of tensions in the Middle East.
Sean McNulty, Trading Director at Arbelos Markets, noted an increase in cryptocurrency purchases amid falling prices,
but cautioned that sentiment remains wary due to concerns that this could be the start of a new wave of investors moving away from high-risk assets.
Large Liquidation of Bets:
According to Coinglass data, total liquidations in cryptocurrency bets reached about $1.1 billion on Monday,
representing one of the largest levels of liquidation since early March.
Within just 36 hours, the sharp decline in Bitcoin resulted in a loss of over $150 billion in its total value,
prompting investors in U.S. exchange-traded funds directly investing in Bitcoin to withdraw approximately $423 million from these funds.
Cautious Optimism:
However, some traders hope for a swift rebound. Rich Rosenblum, Co-CEO and Co-Founder of GSR Markets,
said, “The Bitcoin community was at its most optimistic just nine days ago,
and the price of the cryptocurrency could rise above $70,000 as quickly as it fell.”
Bitcoin Recovery Thanks to Traders Buying at Attractive Prices
The Yen’s Crazy Surge Threatened by Imminent Collapse: The Japanese yen, which has experienced a “crazy” surge, faces a significant threat of collapse in the near future.
The Bank of Japan (BOJ) and the Federal Reserve meetings will be crucial in determining the yen’s future trajectory.
The yen’srecent gains could vanish just as quickly if the BOJ does not raise interest rates.
However, unstable economic data and weak consumer spending may prevent the BOJ from making this move.
The Japanese yen, which has experienced a “crazy” surge, faces a significant threat of collapse in the near future.
The Bank of Japan (BOJ) and the Federal Reserve meetings will be crucial in determining the yen’sfuture trajectory.
The yen’srecent gains could vanish just as quickly if the BOJ does not raise interest rates.
However, unstable economic data and weak consumer spending may prevent the BOJ from making this move.
Investor Bets
Investors have flocked to buy the yenrecently,
betting that the interest rate differential between the United States and Japan will shift in favor of the latter.
They will face their moment of truth on Wednesday.
The yenis holding onto a nearly 5% gain against the dollar before it began rising on July 11,
a move bolstered by talk of BOJ intervention in the market. Some investors warn that the surge is fragile,
as evidenced by the yen’squick retreat from gains after stronger-than-expected U.S. economic growth figures.
Probability of Raising Interest Rates
Swap markets indicate a 43% chance that the BOJ will raise interest rates by 15 basis points
by the end of its monetary policy meeting on July 31, signaling considerable caution.
Only 30% of BOJ watchers polled by Bloomberg expect a rate hike,
even though over 90% see it as a risk.
This makes yenbulls vulnerable, especially if the BOJ also disappoints expectations
with a significant reduction in bond purchases or if the Federal Reserve
does anything later that day to dampen hopes for U.S. rate cuts in the coming months.
The Crazy Rise
Nick Twidale of ATFX Global Markets, who has been trading the Japanese currency for a quarter of a century, said:
“This is a crazy rise for the yen.
The BOJ could spoil the party and not play its role in tightening policy.”
Twidale added that if the BOJ does not meet market expectations, carry trades,
which profit from interest rate differentials and have kept the yen weak,
“could come back strongly.” Others, from BlackRock to former central bank officials,
expect the BOJ to keep rates steady for longer.
Economic Data
Unstable economic data lends credibility to this view:
while a key index tracking the strength of Japan’s service sector rebounded in July,
a measure of factory activity contracted.
People familiar with the matter say weak consumer spending complicates the BOJ’s decision this week.
Market Expectations
Amir Anvarzadeh, a strategist at Asymmetric Advisors who has tracked Japanese markets for over thirty years, said,
“If the BOJ does nothing, the dollar could rise against the yenagain.”
Nonetheless, the yen rose 0.2% to 153.62 against the dollar at 9:07 a.m.
in Tokyo, following a third month of accelerating inflation in the Japanese capital.
Demand for the Yen
After last week’s significant move, Nathan Sowell,
managing director of foreign exchange trading at Citigroupin Singapore,
saw additional demand for bullish yen options. He said:
“It’s still too early to tell if this signals a long-term shift in investor sentiment,
so it’s more likely to be a tactical shift in positioning or short-term hedging activity for now.”
State of Uncertainty
Other traders note that some hedge funds have stayed out of the market amid uncertainty
about how much the currency can gain before the BOJ’s policy meeting this week.
If the BOJ does not fully meet expectations,
The yencould weaken to 158 against the dollar, according to Rodrigo Catril of National Australia Bank.
Support for the BOJ’s Stance
However, even if the BOJ tightens policy on Wednesday,
there is still reason to support its stance in carry trades.
In these, investors use Japan’s ultra-low interest rates to borrow in yen and invest in higher-yielding currencies.
The yen’simplied yields would still be about 90 basis points
lower after a rate hike than those of the Swiss franc,
an alternative funding currency for carrying trades.
U.S. Interest Rate Risks
There are also many risks associated with U.S. interest rates.
If the chances of the Federal Reserve cutting rates diminish, the Japanese currency could face pressure again.
Charo Chanana, head of currency strategy at Saxo Capital Markets, said:
“The yen could test 160 if the Fed does not signal
rate cuts in September and U.S. data gains strength again.”
The Yen’s Crazy Surge Threatened by Imminent Collapse
The US dollar traded steadily in Europe on Tuesday, while the Japanese yen rose following suspected intervention by the Japanese government last week.
The US dollar index recorded 104.190 against a basket of foreign currencies, an increase of 0.14%.
The dollar is awaiting the release of important data that could affect its movement and the price of gold.
Gold rose by 0.43% to $2404 for futures contracts per ounce, and the spot gold price increased by 0.3% to $2403.9.
Wall Street indices also saw varying rises at the start of today’s trading.
The US dollar remained steady on Tuesday as traders seemed to take a breather in the absence of significant economic data until the release of the US Personal Consumption Expenditures (PCE) inflation data for June on Friday.
Vice President Kamala Harris has become the Democratic candidate for the presidency but still needs to be formally nominated.
Meanwhile, poll data showed Republican candidate Donald Trump leading President Biden and Harris.
Expectations of Trump’s return to the presidency have bolstered the dollar,
as he is expected to pursue protectionist trade policies.
Currencies
Ahead of the release of major economic data, the EUR/USD pair fell by about 0.2% to 1.0873.
Despite the ongoing economic slowdown in the Eurozone, a strong services sector,
supported by tourism activity, has kept inflation pressures high.
This presents a challenge for the European Central Bank (ECB), which will closely monitor the Purchasing Managers’ Index (PMI) data on Wednesday,
after keeping interest rates at 3.75% last week, indicating that future decisions will depend on data.
In the market, two rate cuts are being priced in for the ECB for the remainder of the year.
On the other hand, the GBP/USD pair fell by about 0.1% to 1.2919, retreating from the 1.30 level it reached last week for the first time in a year. The pound was supported by political stability in the UK following the Labour Party’s victory in the recent elections. It is also believed that the Bank of England will raise interest rates for a longer period compared to its peers.
Japan’s exports rose by 5.4% in June compared to the previous year,
driven by strong demand for chip-making equipment and non-ferrous metals.
This marks the seventh consecutive month of export growth,
supporting optimism for an economic recovery in the second quarter.
Despite expectations for a 9.6% increase in imports, the actual rise was only 3.2%.
This discrepancy led to a trade surplus of 224 billion yen ($1.4 billion) in June,
compared to a deficit of 1.22 trillion yen in May.
Expert Opinions
Yutaro Suzuki, an economist at Daiwa Securities, anticipates GDP growth in the second quarter but cautions that it will not be robust due to weak domestic demand and consumption.
Impact of a Weaker Yen
The yen’s weakness, averaging 156.64 against the dollar in June, helped boost the value of export shipments. However, it also raises concerns about inflation in energy, food, and materials.
Geographic Performance of Exports Exports to the United States increased by 11%, though this growth rate was slower compared to the previous month. Similarly, exports to China slowed to 7.2%, and shipments to the European Union fell by 13.4%.
Future Challenges China’s unexpected economic slowdown adds pressure on policymakers in Japan to increase support. Meanwhile, the Bank of Japan is monitoring the impact of a weaker yen on the economy ahead of its upcoming monetary policy decision, with expectations for reduced bond purchases and potential interest rate hikes.
Economic Outlook Japan’s economy needs strong export performance to achieve recovery in the second quarter, especially given weak consumer spending. With ongoing government interventions to support the yen, the future of Japan’s economy remains closely tied to both domestic and international market developments.
History of Dollar Movements Patterns of Dollar Movements During Easing Cycles Experts at Société Générale Bank released a research note discussing the historical performance of the dollar during past easing cycles of the Federal Reserve, coinciding with market expectations of the beginning of a U.S. easing cycle in September.
The experts at the French bank noted that the chances of U.S. monetary easing starting in September have increased, and past easing cycles had varied effects on the performance of the U.S. dollar. Nevertheless, the general trend indicates a delayed response of the dollar index rather than an immediate drop.
Société Générale economists highlighted that since 1984, there have been 7 tightening cycles and about 6 easing cycles by the Federal Reserve, as follows:
Easing Cycle 1984-1986: The dollar reached its peak in February 1985 after a rate cut of about 175 basis points.
Easing Cycle 1989-1994: The dollar reached its peak shortly after the first rate cut.
Tightening Cycle 1994-1995, followed by Easing in 1995-1996: The dollar continued to rise until 1998 before declining ahead of monetary easing due to the LTCM collapse.
Easing Cycle 2000: The dollar fell by the time the Federal Reserve cut rates in December 2000, then recovered to a new high in 2001 but trended downward in 2002.
Tightening Cycle 2004-2006, followed by Easing starting in 2007: The dollar was already in decline during this period.
Easing Cycle 2019: The dollar fell after the second and third rate cuts in late 2019, rose in early 2020, increased during the COVID-19 crisis, then fell after Federal Reserve intervention.
Conclusion
Société Générale experts emphasized that historically, the U.S. dollar has a delayed reaction to the Federal Reserve’s easing policies. However, significant declines occurred between 1985-1987 and 2001-2008, while smaller cycles had varied impacts. The historical context suggests that any effect on the U.S. dollar may not be immediate, and the extent of the easing cycle will play a crucial role in determining the dollar’s trajectory.
The Japanese yen saw an increase in the Asian market on Tuesday against several major and minor currencies.
It continued to make gains for the second consecutive day against the US dollar,
as part of a short-term recovery from its three-week low.
The yen’s rise is attributed to the increase in the yield of the Japanese 10-year treasury bonds,
while the yield of the US treasury bonds for the same period is witnessing a decline.
This reduces concerns related to the yield gap between Japan and the United States.
Meanwhile, Japan’s finance minister has warned about the negative aspects of weakening the local currency.
The Japanese yen still faces pressure from the declining strength of the currency,
which affects exports and the country’s overall economy.
The Japanese finance minister closely monitors market developments
and expresses the need for measures to address local currency fluctuations and maintain economic stability.
Gold
Stability in Gold Prices:
Gold prices stabilized on Tuesday as the dollar declined, with investors awaiting the release of the core US inflation data that could provide indicators on the Federal Reserve’s ability to lower interest rates. The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, is set to be released next Friday.
Minutes from the Federal Reserve meeting released last week showed that the current monetary policy includes maintaining interest rates at their current level, but also indicated discussions about the possibility of further increases in the future.
Oil
Rise in Oil Prices:
Oil prices rose in Asian trading on Tuesday, continuing gains from the previous session, thanks to strong fuel demand expectations in the United States during the summer, ahead of the OPEC+ meeting on June 2nd to make decisions regarding production policy.
Some analysts indicated that strong fuel demand expectations during the summer driving season and holiday period in the United States have supported oil prices. On the New York Mercantile Exchange, crude oil contracts for July traded at $78.89 per barrel, up 0.43%. Previously, crude oil contracts were traded at $78.94 per barrel in the previous session. Crude oil could find support points at $76.15 and resistance points at $78.94 per barrel.
In the early trading session yesterday, the US dollar showed stability,
then gained strength in subsequent trading.
This comes as markets eagerly await the results of the US Federal Reserve meeting in May,
scheduled for Wednesday evening.
In the currency market today, the US Dollar Index
(which measures the dollar’s performance against a basket of other currencies)
stabilized at 104.682 points, recording a 0.06% increase.
European Central Bank
The European Central Bank will not continue to cut interest rates
Joachim Nagel, a member of the European Central Bank’s Governing Council and President of the Deutsche Bundesbank, stated in a press interview on Tuesday that a rate cut at the June meeting does not necessarily mean that the ECB will continue to cut rates in subsequent meetings.
Nagel also confirmed that wage developments in the Eurozone are moving in the right direction,
with no signs of a wage-price spiral.
Earlier, Nagel mentioned that the ECB’s tight monetary policy is yielding results,
and the bank has successfully curbed inflation in the Eurozone so far.
Nagel added that wage and productivity developments, along with profit margins,
will be decisive factors for the ECB’s decision on cutting rates at the June meeting.
He also warned that inflation expectations in the Eurozone remain unclear amid the current uncertainty.
Russian Oil
Decline in China’s imports of Russian oil
According to data from the General Administration of Customs in Beijing,
China’s imports of Russian oil decreased by 11.8% in April compared to March,
and also fell from their record level in June 2023 by 12.1%, amounting to 2.56 million barrels per day.
Additionally, the data revealed that China’s total imports of Russian oil, both seaborne and overland,
dropped to 9.26 million metric tons in April (equivalent to 2.25 million barrels per day),
compared to 2.55 million barrels per day in March.
However, the data showed that China’s imports of Russian oil have increased
by 17% since the beginning of the current year,
reaching approximately 37.79 million tons (equivalent to 2.28 million barrels per day),
representing about 21% of China’s total imports.
