USD/JPY has edged higher on Monday. In the North American session, USD/JPY is trading at 110.40. On the release front, the US ISM Non-Manufacturing PMI pointed to a slowdown in the services sector, dropping to 56.9 points. This was a bit short of the estimate of 57.1 points. Later in the day, Japan releases Average Cash Earnings, which is expected to rebound with a gain of 0.3%. On Wednesday, Japan releases Final GDP for the first quarter. The Japanese economy has been improving, and the markets are expecting a strong showing, with the estimate standing at 0.6%.
The markets have become accustomed to strong employment data out of the US, so a soft Nonfarm Payroll report for May was certainly a surprise. The US economy produced just 131 thousand jobs in May, well short of the forecast of 181 thousand. Wage growth remains soft, and edged down from 0.3% to 0.2%. The unemployment rate dropped to 4.3%, but this reading can be largely explained by a decline in the participation rate. The disappointing employment reports are unlikely to alter the Fed’s plan to raise rates next week, but policymakers remain cautious, and if upcoming data misses expectations, additional rate hikes could be in jeopardy.
Is a June rate hike in the US a done deal? The markets seem to think so. The Federal Reserve holds its policy meeting on June 14, and the odds of a quarter-point increase continue to climb. According to the CME Group, the odds of a hike have climbed to 96%, up from 88% just a week ago. The markets have priced in a June move, and a dismal Nonfarm Payroll report has failed to put a dent in market confidence in a June rate hike. Traders should note that ahead of the March hike, the odds of a rate hike were also close to 100%, and the dollar actually lost ground after the Fed followed through with a quarter-point increase. An increase in interest rates represents a vote of confidence in the US economy, but the Fed continues to have some concerns. Inflation remains stubbornly low, despite a labor market that remains close to capacity. Fed policy makers are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets are skeptical, with the odds of a September rate hike at just 26%.
