JPY: FX Jawboning Returns, But Mkt Concerns May Remain Low At This Stage
Earlier remarks from Japan FinMin Kato highlight that the recent break higher in USD/JPY hasn't gone unnoticed by the authorities. His remarks around closely watching FX moves and that markets will be monitored closely for excessive and disorderly movements. This is a reminder for markets around FX intervention risks, although as we argue in this bullet it is probably too soon for the market to be significantly concerned by such risks.
- We aren't too far away from spot levels that prevailed in the 2022 intervention episode. However, as the chart below highlights, USD/JPY's 1 month and 3 month rate of change is comfortably below levels that prevailed during this intervention episode and for those in 2024 as well. Both metrics are around +2% firmer, which is elevated but well within historical norms.
- We saw earlier that USD/JPY reacted little to the stronger household spending print. While not a tier one release, it speaks to the market comfort that a BOJ hike is likely to be off agenda in the near term.
- More broadly, with global risk appetite very well supported, this all feeds further into the carry trade.; The focus will now turn toward the pivotal 151/152 area a break of which will potentially start another leg higher. Expect dips to now find support unless there is push back on the market's views of Takaichi's policies.
- The over caveat is that USD/JPY looks too high relative to US-JP yield differentials, which may become a headwind if we test into the 151-152 area.
Fig 1: USD/JPY 1mth & 3mth Rate Of Change - Within Historical Norms
Source: Bloomberg Finance L.P./MNI
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
