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Yen advances despite inflation concerns; Stock market shows mixed performance

May 24, 2024
  • Japanese CPI eased in April; record wage rises haven’t impacted general prices.
  • BoJ’s challenge: Hiking into economic weakness with uncertain inflation path.
  • Nasdaq Composite, S&P 500, Dow Jones all saw dips
  • Nvidia shares surged over 9%, topping $1,000 for the first time due to AI demand.

The Japanese Yen (USD/JPY) has seen contained advances recently, despite mixed signals from economic indicators and policies from the Bank of Japan (BoJ). April’s consumer price index (CPI) data showed a decrease in headline inflation to 2.5%, down from 2.7% in March.

Core inflation, which excludes fresh food, fell to 2.2%, while the measure excluding both fresh food and energy dropped to 2.4%. This decline is largely attributed to reduced consumer activity impacting the wage-price relationship.

Despite these news, the BoJ faces a rather complex scenario. For a rate hike, the bank requires confidence that inflation will sustainably exceed 2% and that the inflation is demand-driven rather than cost-push. This goal remains elusive. While Japanese wages rose at the highest annual rate in 33 years, inflation has not consistently reflected these increased labor costs.

Also see: US economic indicators continue to influence Yen performance

Japan’s economic activity has also presented hurdles. The country’s GDP contracted by 0.5% in Q1 after a stagnant Q4 last year. Weak consumer spending and general consumption remain significant concerns. Market sentiment anticipates a potential 10 basis point hike in July, bringing the total expected hike for the year to 25 basis points.

The Japanese Government Bond (JGB) market shows a decreasing trend in sellers, with the 10-year yield surpassing 1%. This indicates market acceptance of an upward trajectory for rates and yields.

However, these higher yields haven’t bolstered the yen due to rising US yields and the Federal Reserve’s hawkish statements.

Consequently, the Ninja has been trading closer to 160, with gradual increases aimed at avoiding volatility. The dollar is expected to continue performing well due to the preference for higher-yielding currencies.

During the late 1980s bubble economy, rapid wage increases and loose monetary policy led to significant asset price inflation, which eventually caused a prolonged economic downturn.

More recently, the 2013-2014 period saw the BoJ’s aggressive monetary easing under Abenomics, which initially boosted inflation and economic activity but struggled with long-term sustainability.

How did the stock market perform as of May?

Recent stock market performance has been influenced by a combination of corporate earnings and economic data. The Nasdaq Composite fell about 0.4%, the S&P 500 dropped nearly 0.8%, and the Dow Jones Industrial Average dipped more than 1.5%, shedding over 600 points for its worst day since March 2023. This decline was largely driven by investor concerns over interest rates.

Nvidia (NVDA) was an exception, with shares surging over 9% and topping $1,000 for the first time. The company’s strong earnings and raised guidance, buoyed by robust AI demand, eased fears about losing steam in the tech sector.

Also see: A technical assessment of gold, Cable, Ninja, and Nvidia performance in May

This positive performance had a ripple effect, boosting other chipmakers and AI-related stocks, such as Dell, which saw an approximate 4% rise.

Conversely, Boeing (BA) experienced a significant drop, with shares falling 7% following an announcement of delayed plane deliveries. This news negatively impacted the Dow’s overall performance.

The release of the Federal Reserve minutes reignited concerns over interest rates, further influencing market sentiment. Economic data showed the S&P Global Purchasing Managers Index (PMI) for May at 54.4, up from 51.3 last month.

This flash reading was higher than expected, indicating the fastest acceleration in business activity in two years, despite the Fed’s efforts to control price pressures.

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