Sample Category Title

• The 10-year JGB yield has continued to push higher to 1% together with 3-month and 6-month overnight indexed swap (OIS) rates in Japan at 0.12% to 0.17%
• The JPY has failed to strengthen despite the bullish movements in JGB yields and OIS rates.
• Broad-based US dollar strength and the deceleration in the lagging core-core CPI inflation trend are the main drivers of short-term JPY weakness.
• Watch the key short-term support of 155.90 on the USD/JPY.

Since our last publication, the price actions of USD/JPY have continued to hold above its 20-day moving average acting as a support at 155.90 at this juncture despite a rise in both the 10-year and 30-year Japanese Government Bonds (JGB) yields since the start of this week to 1% (its highest level in almost 12 years) and 2.17% respectively (see Fig 1).

JGB yields and overnight index swap rates are pointing to a possible BoJ rate hike in July

Fig 1: JGB yields medium-term & major trends as of 24 May 2024 (Source: TradingView, click to enlarge chart)

Fig 2: Japan Overnight Indexed Swap Rates major trends as of 24 May 2024 (Source: MacroMicro, click to enlarge chart)

Even the overnight indexed swap rates (OIS) for 3-month and 6-month have risen at a faster pace to 0.12% to 0.17% over the 1-month OIS and their spreads have widened significantly which suggests the OIS market is pricing a higher chance of another Bank of Japan (BoJ) interest rate hike in the July meeting (see Fig 2).

So, what is causing the failure of the yen to stage a short-term bullish reversal?

Deceleration of consumer inflationary trend in Japan

Fig 3: Japan Producer & Consumer Price Indices as of April 2024 (Source: TradingView, click to enlarge chart)

Inflation data is one of the key matrices to guide BoJ’s path of normalizing its decade-long ultra-accommodative monetary policy after ending its short-term negative interest rate in March.

BoJ Governor Ueda has implied in his public speeches that an interest rate hike cycle in Japan can only take shape if the inflation trend maintains a virtuous cycle of sustained, stable achievement of BoJ’s 2% target coupled with strong wage growth.

So far, Japan’s producer prices (PPI) have started to show signs of turning the corner after close to a year of deceleration from December 2022 to January 2024.  In the past four months, the PPI has risen to 0.9% y/y in April from 0.2% y/y printed in January.

An interesting point to note is that the PPI tends to bottom out ahead of Japan’s consumer inflation as seen in the three past periods of August 2009, June 2016, and May 2020 (see Fig 3).

So far, the Japan core-core CPI (excludes fresh food and energy) which is closely watched by BoJ as a key gauge of broader inflation trends in Japan has failed to turn around and continued its path of deceleration since August 2023. It rose at a slower pace in April to 2.4% y/y from 2.9% y/y in March.

Broad-based US dollar strength revival

Fig 4: 5-day rolling performance of the US dollar against major currencies of 24 May 2024 (Source: TradingView, click to enlarge chart)

The US dollar has strengthened across the board against other major currencies reinforced by a further recovery in the US Treasury yields in place since last Friday, 17 May, and the 10-year yield is now just a whisker away from a key 4.50% technical level after it rallied by 16 basis points from last Wednesday low of 4.31% to yesterday, 23 May closing level of 4.48%.

So far, based on a 5-day rolling performance basis, the JPY is the third major weakest currency against the US dollar with the USD/JPY recording a gain of +0.8% at this time of the writing and surpassing the return of the US Dollar Index at +0.6% (see Fig 4).

USD/JPY has held above its 20-day moving average for 5 consecutive days

Fig 5: USD/JPY medium-term & major trends as of 24 May 2024 (Source: TradingView, click to enlarge chart)

Fig 6: USD/JPY short-term trend as of 24 May 2024 (Source: TradingView, click to enlarge chart)

The short-term uptrend phase of the USD/JPY remains intact, supported by a rising daily RSI momentum indicator that is above the 50 level, and has yet to reach its overbought level of above 70 (see Fig 5)

Watch the key short-term pivotal support at 155.90 (also the 20-day moving average) to maintain the short-term bullish tone for the next near-term resistance to come in at 158.00 and above it sees the 159.60/160.30 long-term pivotal resistance zone (see Fig 6).

On the other hand, a break below 155.90 invalidates the bullish bias for a minor corrective slide to expose the next near-term supports at 154.30 and 153.70 (also the 50-day moving average).

Markets

Core bonds fell yesterday with German Bunds marginally underperforming US Treasuries. A solid European May services PMI (unchanged at 53.3) and an improving manufacturing one (47.4 from 45.7) coupled with record-matching Q1 wage negotiations (picking up from 4.5% to 4.7%) hurled German yields between 4.2 and 7.4 bps higher. The front of end of the curve - in swaps as well - rose to new YtD highs. The German 10-yr yield attacked 2.59% resistance and finished just a few bps shy of the April 2024 high. US rates swung 4.3 to 6.7 bps higher with similar front-end underperformance in response to strong country PMIs. Reversing a slowdown over the prior three months, service sector activity (54.8 from 51.3) was the strongest in a year as new orders picked up. Increased manufacturing output and a moderating drag from new orders lifted the headline figure from 50 to 50.9 in May. Sharply rising input prices, especially in manufacturing, led to higher selling prices. PMI owner S&P Global concluded that “rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Fed’s 2% target still seems elusive.” The dollar’s sharp intraday U-turn resulted in the fourth daily loss for EUR/USD this week. The pair finished at 1.0815 after trading as high as 1.086. DXY moved beyond 105. A setback in the UK services PMI offered EUR/GBP (0.8516) some breathing room after testing the critical 0.85 support area. PM Sunak’ surprise announcement of general elections on July 4 already left no marked impact on sterling. The Tories have been trailing the opposition Labour party for a very long time and their defeat seems discounted for now. US stock markets are showing signs of exhaustion with bearish engulfers popping up in the S&P500 and Nasdaq. Both indices were flirting overbought territory in recent days. The upcoming long weekend in the US for Memorial Day on Monday may have served as an excuse to take some chips off the table as well. Against this background we doubt whether US durable goods orders will move markets in a significant way. Fed Waller’s keynote speech on the neutral rate is worth mentioning though. Following yesterday’s jump we don’t expect US rates to show similar vigour ahead of the (long) weekend but the downside for now looks well protected. Closing the week with new YtD highs in European (short-term) rates would be technically important. EUR/USD is testing support at 1.0811. Breaking below would bring the pair back within the downward 2024 trend channel. EUR/GBP jumped towards 0.853 before paring gains after the UK released disastrous retail sales this morning. We nonetheless believe the pair is ready for a gradual recovery within the sideways 0.85-0.87 trading range again. The UK is also headed for an extended weekend (Spring bank holiday on Monday).

News & Views

UK consumer confidence as measured by Growth for Knowledge improved further in May, from -19 to -17, the best level since December 2021 and beating -18 consensus. Details showed personal financial prospects, savings and the general economic outlook all improving whereas willingness to buy big-ticket items declined. The latter reinforces the fact that the cost-of-living crisis is still a day-to-day reality for all of us according the GfK. Client strategy director Staton added though that the latest drop in headline inflation and the prospect of interest-rate cuts in due course suggest that the trend is certainly positive after a long period of stasis. All in all, consumers are clearly sensing that conditions are improving, anticipating further growth in confidence in the months to come.

The pace of national Japanese headline inflation remained unchanged in April at 0.2% M/M. In Y/Y-terms, inflation slowed from 2.7% to 2.5%. The main contributor was a deceleration in processed food prices. The Bank of Japan’s preferred ex fresh food gauge was flat M/M, with the Y/Y-measure extending its disinflationary trend from 2.6% to 2.2%. Services inflation declined by 0.1% M/M with Y/Y growth slowing from 2.1% to 1.7%. Japanese inflation is falling towards the BoJ 2% inflation target but today’s data are unlikely to derail plans to very gradually increase the policy rate with strong wage gains (>5% for large companies) expected to spur spending and inflation.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed’s higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed’s Powell left the door open for rate cuts later this year. Soft US ISM’s and weaker than expected payrolls supported markets’ hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view but slower than expected April disinflation and a surprise general election on July 4 complicated matters. A June cut in line with the ECB looks improbable. Sterling extends a recent bull rally. A test of EUR/GBP’s 2024 YtD low (0.8489) is possible. We expect this important support level to hold.

In focus today

From the US, April durable goods orders and revised May Michigan consumer sentiment survey are due for release. The flash release showed consumers' inflation expectations ticking notably higher, but the recent decline in retail gasoline prices could mean that expected inflation has also moved lower. The Fed's Waller (voter) will be on the wires in the afternoon, his views have often reflected broader consensus among the FOMC participants.

Swedish PPI for the month of April is published today. In March, the import price index's seasonally adjusted three-month rate turned positive again (albeit very mildly). Sweden therefore no longer import deflation at the producer level. Meanwhile, the Riksbank is currently (23-24/5) hosting a high-level academic conference on inflation targeting, with speakers such as Olivier Blanchard and Mervyn King on today's agenda. The conference can be streamed via the following link.

Economic and market news

What happened overnight

In Japan, inflation slowed further in April, with headline CPI in at 2.5% y/y (prior: 2.7%) and core inflation at 2.2% (cons: 2.2%, prior: 2.6%), in line with consensus expectations. This will make the Bank of Japan (BoJ) more cautious about future rate hikes. However, we still await the effects from the wage hikes at 5.25%, which Japanese firms agreed to earlier this spring.

What happened yesterday

Euro area PMI rose slightly more than expected in May to 52.3 (cons: 52.0, prior: 51.7). Services PMI was unchanged at 53.3 in contrast to expectation of a rise (cons: 53.6, prior: 53.3) while manufacturing PMI rose more than expected to 47.4 (cons: 46.1, prior: 45.7). With the composite PMI above 50 for three consecutive months the momentum is gathering in the euro area economy. The increase in manufacturing PMIs was driven especially by rising new orders. Most importantly, the service sector price index ticked down in both output and inputs costs, meaning it is at the lowest level in three years, but still above the historical average. This is good news for the ECB, but risks nevertheless persist as the employment index continued to rise in May and activity is gathering momentum.

Euro area wage growth picked up in Q1 rising to 4.69% y/y from 4.49% in Q4. Hence, the wage pressure in the euro area economy is still substantial. This leaves upside risks to the inflation outlook especially on services inflation due to a relatively larger role of wages. Especially domestically driven services inflation has been a key concern for the ECB lately in their communication. With high wage growth the upside risks to inflation thereby persists as the labour market is also tight.

In the US, flash PMIs surprised to the upside as well, driven especially by stronger services activity. Composite index remains firmly in 'growth territory'. Output price indices (key measures of inflation pressure) remain mostly unchanged, services 54.0 (from 53.7) and manufacturing 54.5 (from 54.7) - close to long-term averages.

In the UK, preliminary PMIs surprised to the downside. Manufacturing measure rose into expansionary territory at 51.3 (from 49.1) as the manufacturing sector continues to recover. Services and the composite measure remain above 50 but drop to 52.9 (from 54.7) and 52.8 (from 54.0) respectively. Businesses reported the softest increase in average selling prices for over three years and private sector firms continue to increase prices at a slower rate. Overall, good news for the BoE on track for a summer cut with growth pick-up up after a technical recession in H2 and survey signals point to price pressures easing.

The Central Bank of Turkey kept its policy rate unchanged at 50% as widely expected. The monetary policy statement was also broadly unchanged. The committee continues to highlight that the tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. The central bank expects disinflation will be established in the second half of 2024.

Daily Pivots: (S1) 1.0794; (P) 1.0827; (R1) 1.0850; More...

Intraday bias in EUR/USD remains neutral for the moment. On the upside, break of 1.0894 will resume the rise from 1.0601 to 1.0980 resistance. Decisive break there will confirm that whole fall from 1.1138 has completed at 1.0601 already. However, firm break of 1.0810 will dampen this bullish case, and turn bias back to the downside for 1.0723 support.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

Daily Pivots: (S1) 1.2674; (P) 1.2710; (R1) 1.2736; More...

Breach of 1.2685 minor support suggests short term topping at 1.2760 already. Intraday bias is mildly on the downside. Firm break of 55 4H EMA (now at 1.2661) will target near term channel support (now at 1.2563). On the upside, break of 1.2760 will resume the rebound from 1.2298 towards 1.2892 resistance.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351 (2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.

Daily Pivots: (S1) 0.9128; (P) 0.9143; (R1) 0.9160; More....

Intraday bias in USD/CHF remains neutral first and further rise is in favor with 0.9077 minor support intact. On the upside, above 0.9157 will resume the rebound from 0.8987 to retest 0.9223 high. On the downside, break of 0.9077 support will bring retest of 0.8987. Break there will resume the fall from 0.9223 to 38.2% retracement of 0.8332 to 0.9223 at 0.8883.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance, followed by sustained break of 38.2% retracement of 0.8332 to 0.9223 at 0.8883 will strengthen this case, and maintain medium term bearishness. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish for 1.0146.

Daily Pivots: (S1) 156.55; (P) 156.92; (R1) 157.30; More...

Intraday bias in USD/JPY is back on the upside with break of 156.78 resistance. Rise from 161.86, as the second leg of the corrective pattern from 160.20, should now target 100% projection of 151.86 to 156.78 from 153.59 at 158.51. On the downside, below 155.83 minor support will turn intraday bias neutral first. Further break of 153.69 will target 151.86 and below as the third leg.

In the bigger picture, a medium term top might be formed at 160.20. But as long as 150.87 resistance turned support holds, fall from there is seen as correcting rise from 150.25 only. However, decisive break of 150.87 will argue that larger correction is possibly underway, and target 146.47 support next.

Daily Pivots: (S1) 0.6586; (P) 0.6619; (R1) 0.6641; More...

While AUD/USD's retreat from 0.6713 extends lower, it's staying above 0.6578 cluster support (38.2% retracement of 0.6361 to 0.6713 at 0.6579. Intraday bias remains neutral for the moment, and further rally is in favor. As noted before, fall from 0.6870 has probably completed with three waves down to 0.6361 already. Above 0.6713 will target 0.6870 resistance next. However, firm break of 0.6578 will dampen this bullish view, and bring deeper fall to 61.8% retracement at 0.6495.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance.

The week hasn’t been pleasant for the market bulls. On Wednesday, the FOMC minutes showed the disturbing truth that ‘many’ Fed members wondered whether keeping the rates ‘high for longer’ was sufficiently restrictive to tame inflation, and if hiking the rates wouldn’t be a better idea. Then, the UK PM Sunak announced a general election beginning of July – way earlier than many expected – abating the slightest glimmer of hope to see the Bank of England (BoE) cut its rates in June. Meanwhile, the latest British CPI data came in hotter-than-expected, anyway, warning that the policy easing wouldn’t necessarily be on the pipeline for June. Across the Channel, the data released this week showed that wage growth in the euro area increased 4.7% in Q1 – a red flag for officials who have been banking on a slowdown to keep inflation in check. And finally, a set of too-strong-to-be-pleasant data from the US gave a final punch to the bulls. The US services PMI accelerated way faster than expected in May, according to the S&P’s preliminary PMI data, manufacturing activity also improved, while jobless claims came in soft. The US 2-year yield – which captures the rate expectations – advanced to 4.95%, the 10-year gilt yield reached 4.25%, the 10-year Bund yield hit 2.60%, the S&P500 and Nasdaq sold off from a record, the Stoxx 600 managed to eke out a small gain, but the FTSE 100 is down by more than 1.50% since last week’s peak, hit by a decent decline in energy prices as well.

Waning reflation appetite?

US crude extended losses below the 100-DMA for a third session, and is set for a further fall toward the $75pb level. Copper futures gave back almost 10% since the Monday peak and gold lost more than $100 per ounce since Monday record. If the reflation trade loses momentum due to a hawkish shift in major central bank expectations, we shall see a period of pullback and profit-taking in risk assets, and a further dollar appreciation against major counterparts.

The US dollar index strengthened past the 50-DMA following the hawkish Federal Reserve (Fed) minutes and yesterday’s strong economic data, the EURUSD slipped below its 100-DMA and is preparing to test the 1.08 support. Cable eased below 1.27 and could reasonably expected to extend losses on the back of fading appetite before the general election, while the USDJPY is now back above 157. Inflation data out this morning showed a slowdown in core CPI to 2.2%, ruling out any sense of emergency for the BoJ to continue hiking the rates. And the AUDUSD tipped a toe below the 66 cents mark this morning and could lose the latest positive momentum if the pair slips below 0.6580, the major 38.2% Fibonacci retracement on the latest rebound.

Clear skies

Nvidia remains a well-sheltered harbor from the rising hawkish winds. Nvidia jumped more than 9% after beating revenue expectations for Q1 and exceeding the forecast for the current quarter. Nvidia is catapulted to the overbought market territory following yesterday’s rally, but nothing suggests that the company’s good fortunes, or demand for AI, are about to reverse. Therefore, there is a good chance that the $1000 per share level becomes the new dip for those who are willing to jump on the back of a bull.

UK retail sales volume fell sharply by -2.3% mom in April, much worse than expectation of -0.6% mom. Sales volumes fell across most sectors, with clothing retailers, sports equipment, games and toys stores, and furniture stores doing badly as poor weather reduced footfall. More broadly, sales volumes rose by 0.7% in the three months to April 2024 when compared with the previous three months

Full UK retail sales release here.