【MACRO Insight】US June CPI Data Announcement - Triggering Fed Rate Cut Expectations and Yen Volatility

The release of the US June CPI data has sparked market expectations for a Federal Reserve rate cut and triggered significant fluctuations in the yen-to-US dollar exchange rate, which may be related to market interventions by Japanese authorities. Although there is no clear evidence of intervention, these events highlight the complexity of global economic interdependence. Investors need to pay attention to future economic indicators and policy changes to capture market trends and potential risks. The decline in US inflation and the yen's exchange rate fluctuations both point to the importance of global economic stability and the flexibility of monetary policy.

Following the CPI data announcement, the market experienced significant volatility. The US inflation rate has notably decreased, with the year-on-year inflation rate falling to 3%, a new low since June 2023. This trend indicates that the pace of price increases is slowing down, supporting the possibility of a rate cut by the Federal Reserve by the end of summer. The core CPI increase has also dropped to 0.1%, the lowest level since January 2021. Prices in the second quarter have generally fallen, exceeding economists' expectations, in stark contrast to the rapid inflation increase in the first quarter of this year. Kevin Cummins, Chief US Economist at NatWest Markets, noted that the slowdown in inflation is a positive signal for the Federal Reserve.

Despite Federal Reserve Chairman Powell's earlier mention that the labor market may weaken further, this could also help reduce inflation, providing conditions for a rate cut. Investors currently do not expect the Federal Reserve to cut rates at the July 30-31 meeting, and Federal Reserve officials have not yet reached a consensus on a rate cut. However, the possibility of a rate cut in September has increased. Mary Daly, President of the Federal Reserve Bank of San Francisco, stated that although she expects a rate cut may be necessary in the future, she does not support taking action at the July meeting. She emphasized that as long as the market understands the possible direction of the Federal Reserve, the impact of deciding to cut rates at the July or September meeting is not significantly different.

After the CPI report was released, investors' expectations for a rate cut by the Federal Reserve this year have increased, with expectations for rate cuts at the meetings in September, November, and December. The report also shows that housing costs, which had risen sharply after the pandemic, have begun to slow down, leading to a decrease in the overall CPI index price. In addition, the decline in airfare and hotel accommodation costs is particularly evident, reflecting that airlines have increased flights and reduced ticket prices to meet the record number of passengers. Although inflation has cooled, many Americans are not relieved because the price increase of various goods and services since 2021 is still significant. Executives of PepsiCo also pointed out that consumers have started to reduce spending due to inflation fatigue, especially in food and other consumer goods. Auto insurance remains a hot spot for inflation, but car prices have recently fallen back.

The Federal Reserve's rate cut is particularly beneficial to small businesses, as they usually have more floating-rate debt. The US Treasury market also responded positively to the inflation report, with yields falling. Although there are signs that the economy is cooling down, there is currently no cause for concern about an economic recession. The White House welcomed the positive results of the CPI report, with Jared Bernstein, Chairman of the Council of Economic Advisers, emphasizing that although the work is not yet complete, the data from the CPI report shows that families' budget pressures in key areas have eased, which is a step in the right direction.

At the same time, after the release of the US inflation data, the yen rose more than 2% against the US dollar, and the market reported that Japanese authorities may have intervened in the market to support their own currency. This fluctuation continued in the early opening of the Asian market on Friday, with the yen rising rapidly by 160 points against the US dollar to 157.75, but then quickly giving up all the gains and fluctuating within a wide range. According to the Nikkei, the Bank of Japan checked the yen's exchange rate against the euro, indicating that Japan may be preparing to intervene in the foreign exchange market. Japanese Deputy Finance Minister Masato Kanda did not comment on whether there was an intervention in his speech, saying he was confused about the reported intervention and agreed with US Treasury Secretary Yellen's view that foreign exchange intervention should be rare. Kanda pointed out that the recent depreciation trend of the yen may be related to the yield gap between the US and Japan and speculative behavior.

The fluctuation of the yen against the US dollar began after the release of the US CPI data, when the yen once rose sharply. The Asahi Shimbun quoted an unnamed government source as saying that Japan may have intervened in the foreign exchange market, but Masato Kanda said he could not judge whether this was an intervention. Market observers were originally worried that if the US inflation was higher than expected, the yen might plummet, but the possibility of weak data pushing the yen to rebound and the possibility of authorities' intervention were not fully anticipated. Kanda said that the fluctuation of the yen may be a response to the US CPI data, but there may also be other factors.

The yen has continued to depreciate over the past year, becoming the worst-performing currency in the G10 group. Last week, the yen-to-US dollar exchange rate hit the lowest level since 1986, prompting Japanese authorities to issue a warning, indicating their willingness to take action to support the yen. The sharp rise of the yen on Thursday was similar to the intervention earlier this year, when Japanese authorities bought a large amount of yen to support the currency.

Some traders and analysts believe that the sharp fluctuation of the yen may be an intervention by the Japanese authorities, especially considering that the trading volume after the release of the US CPI data is comparable to the previous intervention period. However, there is currently no clear evidence of intervention. If the latest fluctuation of the yen is indeed interventional, it may indicate that the Japanese authorities are trying to take advantage of the trend of the yen's strength. Although this may reduce the cost of suppressing the depreciation of the yen, it may also be criticized by other countries, including the United States. US Treasury Secretary Yellen emphasized that foreign exchange intervention should be rare and should give reasonable warning when used.

Portfolio Manager Leah Traub said that if the US and Japanese policies do not change, the yen is unlikely to continue to strengthen. Currently, the yield difference between 10-year US and Japanese government bonds is still far above the average level of the past decade. Although the Bank of Japan has raised the short-term policy rate, the market sentiment towards the yen is still low, and the bearish yen positions are dominant. Data from the Commodity Futures Trading Commission shows that speculative traders have accumulated a large number of short positions in yen, which may lead to greater fluctuations in the yen. Ruchir Sharma from Nomura International pointed out that the market currently has two-way activities, but there is no obvious directional tendency, and hedge funds are seeking to protect their arbitrage transactions from market volatility.