Yen shrugs off hawkish comments from BoJ policy makers

The Bank of Japan’s board members discussed the impact of a weak yen on inflation and noted that it might lead a faster pace of monetary policy normalization, according to a summary of the April policy meeting released Thursday morning. The summary also highlighted upward risks to the inflation outlook from high oil prices. However the BoJ maintained the pace of bond purchases, saying that reducing these would proceed “in a timely manner”. The yen strengthened briefly on the release of the meeting summary but has reversed its gains as of this writing.

Sweden’s Riksbank cut its policy rate by 25bp to 3.75%, ahead of the ECB and the Fed, in line with the median forecast from economists. This was the first rate cut from the Swedish central bank in eight years and will likely add pressure on the krona which has already depreciated around 10% against the dollar and more than 5% against the EUR this year. Further currency weakness could lead to higher inflation going forward. Nevertheless, the Riksbank statement indicated that a further two rate cuts are possible this year as it looks to support growth. Sweden’s economy has contracted for the last three consecutive quarters. The focus today is of course on the Bank of England, where we expect the MPC to keep rates on hold but perhaps signal a cut in the summer.

German industrial production came in better than forecast at -0.4% m/m (-3.3% y/y) in March, after weak factory output data released on Tuesday. This was the first monthly drop in IP this year and was due to weaker production of consumer and intermediate goods, and energy. The February reading was revised down from 2.1% m/m to 1.7% m/m.

Today’s Economic Data and Events

15:00 Bank of England MPC meeting, forecast 5.25% (no change)

16:30 US initial jobless claims (May 4) forecast 213k

Fixed Income

• US treasury yields ticked higher on Wednesday after a series of comments from Fed officials this week that indicated a higher-for-longer rate outlook. The 2y yield rose 1bp to 4.84% while the 10y yield rose 3bp to 4.49% on Wednesday.
• A similar trend was evident across most major bond markets with benchmark 10 yields higher in Europe yesterday and Asia this morning. 10y gilt yields rose 1.6bp to 4.1% while 10y bund yields gained 4.3bp to 2.5%.

FX

• The USD spot index rose for the third consecutive session on Wednesday, up 0.1% as most major currencies weakened. JPY lost 0.6% to 115.38 and while it strengthened briefly this morning after policy makers indicated they may tighten monetary policy faster if yen weakness results in higher inflation, JPY is still a touch weaker at 155.58 as of this writing.
• The commodity currencies fared better against the dollar yesterday with NZD up 0.2% and CAD and AUD up 0.1% respectively.

Equities

• US equities were little changed again overnight, although the DJIA continued its move higher for the sixth session, closing up 0.4% on Wednesday. European stock outperformed with the FTSE100 gaining 0.5% and Eurostoxx50 up 0.4% yesterday.
• Regional equity markets had a positive day on Wednesday, with ADXGI leading the gains at +1.2%. The DFMGI rose 0.9% on the day and the Tadawul ASI was up 0.8%.

Commodities

• Oil prices closed higher on Wednesday with Brent gaining 0.5% to USD 83.58/b and WTI up 0.8% to USD 78.99/b. Despite AEI data showing a unexpected increase in inventories at Cushing, official data from the EIA showed national crude stockpiles declined by 1.36mn barrels last week according to Bloomberg. Separately, the US energy department has indicated it will pay up to USD79.99/b to replenish the strategic oil reserve.