Delayed rate cuts disturb Bank of Japan plans

Last week’s strong economic data

The February Durable Goods Orders, the final fourth quarter 2023 GDP reading, and February’s personal spending all surprised to the upside last week. Durable Goods Orders, in particular, provided markets with a sigh of relief after January’s -6.90% drop (revised down from an initial reading of -6.20%). Viewed as a key indicator of the health of the manufacturing industry and a reading of longer-term sentiment, the 1.40% growth reported this month helped recoup some of the losses from last month, particularly in the transportation segment.

Higher for longest

Over the last week, rates ticked up as markets believed rate cuts were three months away for the last six months. After Fed Chair Jerome Powell’s sentiment was largely unchanged at the prior week’s Federal Open Market Committee (FOMC) meeting, Federal Reserve Governor Christopher Waller stated on Wednesday that he believes, “It is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought.” He added that a rate hike appears exceptionally unlikely, but for rate cuts, "It’s just a question of when you start."

Waller’s comments were followed by a core PCE report that failed to surprise markets on Friday, coming in at 2.80%. Powell commented on the report saying, “We don’t need to be in a hurry to cut,” while also noting the current fed funds rate positions them well to react to “a range of different outcomes.”

Yen weakens, frustrating Japanese officials

As conventional wisdom would dictate, the dollar strengthened last week (i.e. higher rates equals a stronger dollar), but these rules did not prove universal. Across the Pacific, the Japanese yen oddly weakened despite the BoJ recently announcing their first rate hike in 17 years. After the BOJ first signaled their shift away from loose monetary policy late last year, the yen has weakened against the dollar to record highs.

As steps to tighten monetary policy have now come to fruition, the continued weakness of the yen has been described as “disorderly” by government officials, who are now reportedly discussing ways to intervene. Much of this trend is likely due to the “higher for longer” sentiment out of the U.S. as well as speculation resulting from the BOJ’s decision to hike rates being well-telegraphed and exaggerated by markets. While proving to be a headache for government officials in Japan, this has caught the attention of those who have entered yen cross-currency swaps. With these trades appreciating as a result, it may prove an opportune time to realize the gains and use them to push out the date of the settlement at maturity.

In the week ahead

Look out for a delayed market reaction from the PCE report, which was released over a holiday. On Tuesday, a flurry of FOMC members will speak at public events. OPEC will meet on Monday, and the March nonfarm payrolls will be released on Friday.