USD/JPY has posted gains in the Tuesday session. In the North American session, the pair is trading at 114.50, its highest level since March. On the release front, Japanese Preliminary Machine Tool Orders climbed to 31.1%. Later in the day, Japan releases PPI, which is expected to remain at 2.1%. In the US, JOLTS Jobs Openings dropped sharply to 5.67 million, well below the forecast of 5.98 million. On Wednesday, Federal Reserve Chair Janet Yellen will testify before the House Financial Services Committee. The markets will be listening closely, looking for clues regarding interest rate policy.
Japan’s economy has improved in 2017, buoyed by a stronger global economy. This has translated into increased demand for Japanese goods and this has boosted the manufacturing and export sectors. The Tankan Manufacturing Index jumped to 17 in the first quarter, its strongest showing since 2014. On Tuesday, Preliminary Machine Tool Orders improved in June to 31.1%, up from 24.4% a month earlier. We’ll get a look at Preliminary Industrial Production on Friday. The indicator recorded a strong gain of 4.0% in April, but the markets are braced for a sharp downturn in June, with an estimate of -3.3%.
The Federal Reserve has all but promised another rate hike in 2017, and Fed Chair Janet Yellen is sure to be questioned on whether the Fed is still expecting to raise rates in the second half of the year. The markets are not showing much confidence in a rate move, despite a strong Nonfarm Payrolls report last week. A rate increase in September is very unlikely, with the odds pegged at just 13%, according to the CME Group. As for December, the likelihood of a rate hike is 50%, so the markets will need plenty of convincing that the Fed plans to make a move. What factors will raise the odds of a rate increase? First, second quarter growth will have to improve, after a weak performance in the first quarter, in which GDP rose just 1.4%. Second, stronger inflation levels would boost speculation of a rate hike. Currently, inflation is well below the Fed’s target of 2%, and although Janet Yellen recently stated that the factors weighing on inflation were temporary, investors aren’t convinced. Third, the Fed has outlined plans to reduce its bloated balance sheet, but has avoided providing any specifics. If the Fed started to lower the balance sheet in September, such a move would mark a vote of confidence in the economy and raise speculation of a rate hike to follow in December.