The strongest to weakest of the major currencies

The NZD is the strongest and the JPY is the weakest as the North American session begins. The USD is mixed. However, take note that the price action is limited. Looking at the table below, the largest low-to-high trading range is 54 pips (USDJPY). That still is much lower than the 107 pip average over the last 22 trading days. The other pairs have ranges of 32 pips or less. That is not a lot of movement.

It is Friday. We can always chalk it up to that. Fundamentally, the Fed is not going anywhere and the market knows that story. Apart from the run up in 2023, the 10-year yield is at the highest level since 2008. Other central banks may be tilting one way or the other but not by much (or without the Fed going, will they go?). The BOJ can't tighten if 2 quarters of negative growth but 150.00-itis may limit the run for a little bit.

Overnight, BOJ Governor Kazuo Ueda discussed expectations and current observations regarding Japan's labor market and wage trends, alongside the central bank's monetary policy stance. Key points from Ueda's remarks include:

  • Positive Real Wages: Ueda expects real wages in Japan to gradually turn positive, indicating an improvement in workers' purchasing power as wages rise faster than inflation.

  • Tight Labor Market: The labor market in Japan remains tight, which typically puts upward pressure on wages as employers compete to attract and retain employees.

  • Cost-Pass-Through: The tight labor market condition is likely to lead firms to pass on rising costs to consumers through price increases. This scenario suggests an anticipation of inflationary pressures stemming from higher labor costs.

  • Wage Growth Expectation: Ueda expects wages to rise slightly more than the inflation forecast of 1.8% for the fiscal year 2025. This indicates an optimistic view that wage growth will outpace inflation, contributing to positive real wage growth.

  • Spring Wage Negotiations: The outcome of spring wage negotiations is a focal point for the BOJ, as these negotiations can significantly influence wage trends. Ueda reaffirms the central bank's focus on these negotiations among various factors currently under consideration.

  • Virtuous Cycle of Wages and Prices: The central bank is keen on confirming the strengthening of a virtuous cycle between wages and prices. A virtuous cycle refers to the positive feedback loop where increasing wages lead to higher consumer spending, which can stimulate the economy and potentially lead to further increases in wages and employment.

In the European morning session, ECBs Schnabel said that monetary policy needs to be restrictive until confident that inflation will sustainably return to medium term target. She added:

  • Monetary Policy Caution: It's crucial not to adjust the policy stance prematurely, ensuring that inflation expectations are well-anchored towards the target.

  • Role of Productivity Growth: Schnabel pointed out that productivity growth is a significant determinant of medium-term inflation and real interest rates, which in turn directly impacts the conduct of monetary policy. There's a direct correlation between productivity growth and the ability to manage inflation and interest rates effectively.

  • Impact of Low Productivity Growth: The persistent low, and in recent times, negative productivity growth has been exacerbating the impact of strong nominal wage growth on unit labor costs for firms. This situation could lead to firms passing higher wage costs onto consumers, potentially delaying the return of inflation to the ECB's 2% target.

  • Consequences of Higher Wage Costs: The risk associated with firms transferring higher wage costs to consumers is a significant concern as it could hinder the process of bringing inflation back to the desired level.

  • Productivity Growth and Monetary Policy: New estimates indicate that an increase in trend productivity growth by one percentage point could raise the natural rate of interest (r*) by 0.6 percentage points. A higher r* would lessen the need for unconventional policy measures, which often entail larger side effects.

ECBs Villeroy said that there is still some question on the exact timing of rate cuts. He added:

  • Several reasons as to why we should not wait too long before first rate cut
  • The principle of a rate cut this year seems to be a given
  • We have significant margin to maneuver on rate cuts without necessarily having to return to accommodative monetary policy

Good news out of the European morning is that UK GDP came in stronger at 3.4% vs 1.5% estimate. It was better, but it offset the -3.3% decline last month too. The GBPUSD spiked higher on the news but into resistance near its 200-hour MA at 1.26015, and swing area between 1.2602 to 1.26137. The high reached 1.2605. The price is near 1.2590.

US stocks are higher (well the Nasdaq and the S&P is higher. The Dow is lower). At risk is that the Nasdaq closed down around -0.53% on the week yesterday, put the 5 week gain in that index in jeopardy. The S&P is unchanged.

At 8:30 AM US PPI data will be released with expectations of 0.1% on the month and year on year at 0.6% (versus 1.0% last month). The good news for inflation is the pipeline inflation costs are certainly down US housing starts and building permits for also be released at 8:30 AM with housing starts expected at 1.460 million annualized rate (unchanged from last month), and building permits at 150 9 million up from 1.495 million last month. The University of Michigan said that will be released at 10 AM (preliminary) with expectations of 80.0 versus 78.8 last month.

Richmond Fed Pres Barkin, Daly and Barr are all expected to speak

A snapshot of the markets as the North American session begins currently shows:

  • Crude oil is trading down $-0.63 or -0.81% at $76.96. At this time yesterday, the price was trading at $75.77. The ups-and-downs in crude oil continue. The commodity is up 0.17% on the week.
  • Gold is trading up $3.17 or 0.16% at $2007.28. At this time yesterday, the price was trading at $1997.70. Gold prices are down -0.83% this week
  • Silver is trading up eight cents or 0.35% at $22.97. At this time yesterday, the price was trading at $22.61. For the trading week silver prices are up 1.68%
  • Bitcoin trades at $52,331. At this time yesterday, the price was trading at $52,257. The price bitcoin is up 8% this week. In related news Coinbase shares are up 16% in premarket trading after reporting better-than-expected earnings after the close yesterday.

In the premarket for US stocks are mixed after rising yesterday for the second consecutive day. Coming into the day, the Dow industrial average is up 0.26%. The S&P is unchanged, and the NASDAQ index is down -0.53%. At risk is the five weeks of gains. The broader indices have risen 14 other 15 trading weeks (which is amazing).

  • Dow Industrial Average futures are implying a decline of -28 points. Yesterday, the index gained 348.85 points or 0.91% at 38773.13
  • S&P futures are implying a gain of 7.52 points. Yesterday, the index rose 49.09 points or 0.58% at 5029.72.
  • Nasdaq futures are implying a gain of 81 points. Yesterday, the index rose 47.03 points or 0.30% at 15906.17

In the European equity markets, the major indices are trading higher. For the week the major indices are trading higher currently:

  • German DAX, +0.59%. For the week the index is currently up 1.3%.
  • France CAC +0.47%. For the week the index is up 1.74%.
  • UK FTSE 100, +1.30%. For the week the index is up 1.64%.
  • Spain's Ibex, -0.11%. For the week the index is currently up 0.20%
  • Italy's FTSE MIB, 0.32% (delayed by 10 minutes).

Shares in the Asian Pacific markets were higher (China closed):

  • Japan's Nikkei 225, +0.86%. For the week the index rose 4.31% despite the lower GDP
  • China's Shanghai composite index , Bank holiday market closed
  • Hong Kong's Hang Seng index, +2.48%. For the week the index rose 3.77%
  • Australia S&P/ASX, +0.69%. The week the index rose 0.20%

Looking at the US debt market, yields are moving higher.

  • 2-year yield 4.622% +5.4 basis points. At this time yesterday, the yield was at 4.554%. For the week, the yield is up 13.8 basis points
  • 5-year yield 4.264% +4.8 base points. At this time yesterday, the yield was at 4.207%. For the week the yield is up 12.7 basis points.
  • 10-year yield 4.273% +3.3 basis points. At this time yesterday, the yield was at 4.220%. For the week the yield is up 9.8 basis points
  • 30-year yield 4.438% +1.7 basis points. At this time yesterday, the yield was at 4.391%. For the week the yield is up 6.5 basis points
  • The 2-10 year spread is at -34.9 basis points. At this time yesterday, the spread was at - -33.5 basis points
  • The 2-30 year spread is at -18.6 basis points. At this time yesterday, the spread was at -15.8 basis points.

European benchmark 10-year yields are mixed:

European benchmark 10 year yield