Yen weakens as BOJ holds steady

Asian stocks rise, US retail sales defy inflation; market awaits key data

By Ahmed Azzam | @3zzamous | 16 June 2023

  • Yen weakens as BOJ maintains yield curve control policy

  • ECB raises interest rates amidst recession, surprising market participants

  • Resilient US retail sales defy inflation and interest rate pressures

  • Market focuses on EU CPI for insights into potential decline in inflation

Yen weakens as BOJ keeps yield curve control policy unchanged

The Japanese yen experienced a modest decline, and Japanese Government Bonds (JGBs) showed fluctuations as the Bank of Japan (BOJ) decided to maintain its yield curve control policy, aligning with market expectations. Meanwhile, Asian stocks mostly gained traction, buoyed by optimistic sentiments surrounding potential stimulus measures from China and the continued upward momentum of the S&P 500, which extended its rally for a sixth consecutive day. Treasuries faced selling pressure, leading to a decline, while the US dollar edged higher. Additionally, Brent crude oil prices dipped marginally, maintaining overall stability.

During its June meeting, the Bank of Japan unanimously voted to keep its key short-term interest rate unchanged at -0.1% and maintained the 10-year bond yield at approximately 0%, mirroring the central bank's consistent approach. Furthermore, the BOJ made no alterations to its cap of 0.5% on bond purchases. While acknowledging the potential easing of inflation later this year, policymakers emphasized their commitment to maintaining an accommodative monetary stance, actively responding to economic uncertainties, price dynamics, and prevailing financial conditions.

ECB Surprises markets with eighth consecutive interest rate hike amid recession

The European Central Bank (ECB) raised interest rates by an additional 25 basis points during its June meeting. This decision pushed the rate on main refinancing operations to 4%, marking its highest level since the 2008 financial crisis. Simultaneously, the rate on the deposit facility reached a 22-year high of 3.5%. Notably, this marks the eighth consecutive rate hike by the ECB, despite the eurozone entering a recession earlier this year and headline as well as core inflation rates remaining persistently above the central bank's target of 2%. As part of its revised outlook, the ECB upwardly adjusted its inflation forecasts while slightly lowering growth projections for the current and upcoming years. ECB President Christine Lagarde, in a subsequent news conference, hinted at further rate hikes in July, signaling the bank's commitment to recalibrating monetary policy. This aggressive tightening stance by the ECB resulted in the euro surging above the $1.09 level, reaching its strongest position since May 10.

Resilient US retail sales defy inflation and interest rate pressures

Contrary to expectations, retail sales in the United States exhibited surprising resilience, climbing by 0.3% month-over-month in May 2023. This uptick follows a 0.4% increase in April and surpassed projections of a 0.1% decline. The data suggests that consumer spending remains robust despite mounting inflationary pressures and rising interest rates. This unexpected strength in retail sales showcases the willingness of US consumers to continue spending, providing a potential boost to the broader economy.

Market focus on EU CPI and US consumer sentiment

Market participants are closely monitoring key economic events, with particular attention on the Consumer Price Index (CPI) release from the European Union. This eagerly anticipated data is expected to shed light on whether inflationary pressures have eased, potentially showing a decline to 6.1%. Additionally, investors are keenly awaiting the release of the Preliminary UoM Consumer Sentiment and Preliminary UoM Inflation Expectations from the United States, which will provide insights into the confidence levels and inflation expectations of American consumers. These data points are crucial for gauging the current economic landscape and shaping future market expectations.