U.S. Inflation Comes In As Expected

U.S. equity and bond markets were closed on Friday in observance of Good Friday, but that didn’t stop the U.S. government from releasing its latest Personal Consumption Expenditures Index (PCE). Considering that this is the Federal Reserve’s favorite measure of inflation that will leave markets catching up on Monday.

Fortunately the report shouldn’t cause much disruption in markets as it came in right as expected, showing annual PCE inflation of 2.8%. That leaves expectations for Fed rate cuts unchanged, with a 70% chance of a cut at the June meeting, and then two more cuts by the end of 2024. Of course that could change, given that inflation is not yet at the 2% target mandated by the Fed.

On a monthly basis the PCE showed a 0.3% increase, and when stripping out volatile food and energy prices, called the core PCE, the rise was a more modest 2.5% on an annual basis. The Fed does consider the core PCE as a more important measure, but takes both values into account. Core PCE hasn’t dropped to the 2% level or below in three years, though it has been trending lower.

Analysts believe markets will move quickly past these expected PCE readings and focus immediately on the upcoming non-farm labor numbers due out at the end of next week. If those come in as weaker than expected it could well offset a bit of stickiness in the inflation data.

Rising energy costs, which were up by 2.3% contributed to the headline PCE reading. Goods inflation, which came in at 0.5% was also a contributing factor, though service inflation dropped to 0.3% versus the 3.8% level seen at the same time last year.

Asian Daily Market Review

Asian markets ended Thursday mixed as investors digested the possibility of delays to interest rate cuts in the U.S. after a Fed official floated the idea on Wednesday. Japan’s Nikkei was the biggest loser in the region, with the Yen remaining near a 34-year low amid speculation that the Bank of Japan is preparing for stimulus to prop up the languishing currency. Meanwhile Australia’s major index hit a record high, helped by gains from the mining sector.

Japan’s Nikkei ended the session 1.5% lower, underperforming the entire Asian region. Shares of Softbank Group fell by 0.7%, while Sony shares finished 1.8% lower. Among the major exporters Toyota lost 1.2%, Panasonic shares slipped 0.5% lower, and Canon edged lower by 0.2%.

In Australia the S&P/ASX 200 rallied to a new record high, adding 1% for the day. The gains for the broader market came despite a mixed performance for the big four banks, where ANZ gained 0.5%, Commonwealth Bank advanced by 0.3%, Westpac tacked on 0.4%, but NAB slipped slightly lower by 0.1%. The major miners had a good day, supporting the broader market with a 1.4% gain from BHP and a 0.7% move higher in Rio Tinto.

Mainland Chinese markets recovered from their losses of the prior session, with the benchmark Shanghai Composite rising by 0.6% and the smaller cap Shenzhen Composite adding 1.3%. Over in Hong Kong the Hang Seng followed the mainland higher, gaining 0.9% on the day.

In South Korea the Kospi slipped 0.3% lower, and in Taiwan the Taiex did the same, ending the day with a 0.3% loss.

Southeast Asian markets were also weaker on the day, with Singapore’s Straits Times Index declining by 0.9% while the KLCI in Malaysia fell by 0.5%.

Oil Prices Rallied

Oil prices are into solid positions, following two consecutive days of losses.

Crude Oil Daily Chart

This is the case as markets predict more limited supply levels.OPEC+ producer alliance are very expected to preserve the present production reduction levels.

Now, oil trades at $82.56, which is a gain of $0.91 or 1.12% from the previous close of $81.65.

The daily trading range is from $81.54 to 82.63.

In the prior session, oil prices were pressured following last week’s unexpected surge U.S. crude oil accompanied with falling demand, as reported by the Energy Information Administration.

However, the crude stock increase was smaller than the build projected by the American Petroleum Institute, and analysts pointed out that the increase was lower than what would be expected for this time of year.

Moreover, a boost to U.S. refinery served the utilisation rates, which soared 0.9 % points last week.

In fact, OPEC+ is not very expected to make any oil output policy changes until its next meeting in June.

Will The Bank Of Japan Intervene With The Yen?

Talk of intervention by the Bank of Japan is heating up as the Yen remains near a 34-year low against the U.S. dollar. The Yen reached a level of 151.97 against the U.S. dollar on Wednesday, something not seen for the currency pair since 1990. After hitting that level the Yen pared some of its losses, but remains at the 151.38 level late Thursday in New York.

Even during the Asian currency crisis of 1997 the Yen didn’t reach such levels, although it was recently as low as 151.95 in October 2023.

The continued weakness in the Yen, even as Japan’s central bank has abandoned negative interest rates for the first time in 17 years, and expectations for U.S. interest rate cuts increase, is driving the speculation for the BoJ to intervene in currency markets and prop up the Yen. Recently Japan’s finance minister Shunichi Suzuki indicated that measures to “respond to disorderly FX moves” were not off the table.

On Wednesday Masato Kanda , the vice finance minister for international affairs said that the moves in the Yen are being closely and urgently monitored by Japanese policymakers. He noted that recent moves in the Yen, which have been as large as 4% in two weeks, have been seen as excessively volatile. BoJ members have also spoken against the recent volatility, saying that if currency fluctuations begin impacting the economy the BoJ would react with monetary policy changes.

While many global analysts admit that intervention is the likely course for the Yen in the short-term, they also point out that it isn’t a long-term solution. They also point out that there are some upsides to the weaker Yen such as increased tourism and a stronger stock market.