• S&P closes higher for the 5th week in a row. The NASDAQ index up for the 8th week
• WTI Crude Oil futures settles at $71.78
• Treasury semi-annual currency report says no major US trading partners manipulated FX
• Baker Hughes oil rig down -4 at 552
• European equity close: French stocks lead a strong finish to the week
• Reminder: It’s a long weekend in the US
• Fed mon pol report: Bringing inflation down will require period of below-trend growth
• NY Fed underlying inflation gauge 3.5% vs 4.0% prior
• April final UMich consumer sentiment 63.9 vs 60.0 expected
• “Reading the tape” in the USDJPY.
• Richmond Fed Barkin: Comfortable doing more on interest rates if demand does not slow
• Waller: It’s ‘disturbing’ that core inflation not improving
• US consumer sentiment wraps up a whirlwind week
• Fed’s Waller: US economy is still ‘ripping along’
• The GBP is the strongest and the JPY is the weakest as the North American session begins
• ForexLive European FX news wrap: Yen fall continues, ECB leaves door open for Sept hike

The day and week is ending with the GBP as the strongest and the JPY as the weakest.

The JPY sharp fall was triggered by the Bank of Japan rate decision. The Bank of Japan (BOJ) decided to keep its short-term interest rate target at -0.1% and its 10-year Japanese Government Bond (JGB) yield target around 0%, with a band up and down 0.5% each. This decision, part of the BOJ’s yield curve control (YCC) strategy, was made unanimously. In the statement, the BOJ observed that Japan’s economy is improving, and it expects the moderate recovery to continue. They noted that key economic indicators such as exports, output, capital expenditure, and consumption are exhibiting moderate increases. However, core consumer inflation is expected to decelerate towards the middle of the fiscal year. The BOJ noted that inflation expectations, which had previously heightened, are now moving sideways. The BOJ reiterated that there’s considerable uncertainty surrounding Japan’s economic outlook, primarily driven by global factors.

BOJ’s new Governor Kazuo Ueda made additional comments indicating that more time is needed to achieve the 2% inflation target. He anticipates inflation to slow down around the middle of fiscal year 2023. He mentioned the need for careful monitoring of foreign exchange and financial markets and that the BOJ has refrained from changing its policy as Japan’s inflation isn’t sustainable.

The news – preUS session – sent the USDJPY and JPY crosses sharply higher (JPY lower). The biggest mover was the GBPJPY at 1.44%, and all but the CHFJPY moved greater than 1% on the day.

In the North American session, the University of Michigan’s (UMich) Consumer Sentiment data for June 2023 exceeded expectations. The overall consumer sentiment came in at 63.9, which was higher than the expected 60.0 and the previous value of 59.2.

The data reflects increased confidence in current economic conditions, which came in at 68.0, surpassing the expected 65.5 and prior 64.9. Consumer expectations also saw an increase to 61.3, exceeding the anticipated 56.5 and the previous 55.4.

The one-year inflation expectations tumbled to 3.3%, down from 4.2%, marking the lowest value since March 2021. If only the core/services inflation would follow that trend. The 5-10 year inflation expectations move was not so dramatic, declining slightly to 3.0% compared to the previous 3.1%.

The consumer sentiment was likely helped by resolution of the debt ceiling talks which may have given a temporary boost to confidence simply because it was not a default disaster.

Also released was the Fed’s semi-annual monetary policy report ahead of the Fed Chair Powells testimony on Capitol HIll on Wednesday and Thursday (key event next week). In the report, the Federal Reserve indicated that the outlook for the funds rate is subject to considerable uncertainty, with further policy actions dependent on evolving economic conditions. The Fed reiterated that negative income does not impact its operations. It highlighted that slowing inflation might depend, in part, on further easing of the tight labor market conditions. Moreover, the report noted that the core services inflation, excluding housing, has not shown signs of easing, implying persisting inflationary pressures.

In the international context, several major foreign central banks continued tightening their monetary policy but emphasized the need for caution due to uncertainties and lags in the transmission of policy actions. Furthermore, the Fed raised concerns about somewhat elevated indicators of future business defaults.

The report detailed that financial conditions have tightened further since January, with bank credit conditions tightening even more since March. The Fed said it’s ready to adjust the pace of balance sheet contraction if needed, underlining its flexible approach to policy adjustment.

Significantly, the Fed observed that the turmoil in the banking system in March had reportedly left an imprint on bank lending conditions, especially for mid-sized and small banks. Bringing inflation down to the target level is likely to require a period of below-trend growth and some softening of labor market conditions, according to the report. This all comes against the backdrop of inflation being well above the target and the labor market being very tight.

A few Fed members, restarted the Fed-speak after two weeks of silence ahead of the rate decision on Wednesday.

• Richmond Fed President Barkin indicated that he is comfortable with implementing further interest rate increases if incoming data doesn’t show a slowing in demand, which would return inflation to the 2% target. He acknowledged that higher rates may risk a more significant slowdown, but highlighted that experiences from the 70s show the Fed shouldn’t back away from battling inflation prematurely. He maintained that the 2% target has been effective for a generation. Despite this, he notes that inflation has been stubbornly persistent, and he remained unconvinced that weakening demand will control it.
• Federal Open Market Committee member (FOMC) Waller pointed out that the US economy is still ‘ripping along’, with the banking system appearing calm for the moment. He suggested that global impacts from expected coordinated central bank tightening haven’t fully materialized. While acknowledging recent bank failures, he noted they don’t seem to have had a significant effect on credit conditions and that monetary policy shouldn’t be changed due to poor management at a few banks. Waller emphasized the Fed’s role in using monetary policy to fight inflation and the responsibility of bank leaders to manage interest rate risk. He expressed concern that core inflation isn’t improving and anticipated it will likely require more tightening, revealing that it hasn’t come down as he previously expected. Still, he acknowledged that the labor market appears to be softening without a significant increase in unemployment.

Looking around the market today:

• Crude oil is up $1.04 at $71.85.
• Gold is trading up $2.51 or 0.13% at $1957.45. For the week of gold was little changed at -0.16%
• silver is up $0.36 or 1.49% at $24.18. Silver is ending the week down -0.34%
• Bitcoin did find a bid and traded $26,378

In the US stock market, the major indices fell on the day but closed higher for the week:

• Dow industrial average fell -0.32%, but gained 1.25% this week
• S&P index fell -0.37%, but gained 2.58%. The move higher was the largest since March 27 week and was the 5th consecutive week higher
• NASDAQ index fell -0.68%, but rose 3.25% for the week. The gain was the 8th consecutive week higher.

In the US at that market, yields move higher despite the lower inflation reading from the Michigan survey:

• 2-year yield 4.714% +6.6 basis points
• 5-year yield 3.982% +5.9 basis points
• 10-year yield 3.765% +3.5 basis points
• 30-year yield 3.854% +1.5 basis points

for the trading week:

• 2-year yield rose 11.6 basis points
• 5-year yield rose 7.0 basis points
• 10-year yield rose 2.0 basis points
• 30-year yield fell 3 basis points

This article was written by Greg Michalowski at www.forexlive.com.