(Reuters) – The U.S. Department of Labor released the Consumer Price Index (CPI) for March on March 10, rising more than expected due to rising gasoline and housing costs. Expectations of a June interest rate cut by the US Federal Reserve may be further reduced.
We asked market participants for their views.
◎Aiming for 5% US long-term interest rates; upward pressure on yen interest rates is limited
The timing of interest rate cuts within this year has been postponed due to the upward trend in the US Consumer Price Index (CPI). With inflation remaining at a high level, the possibility of it increasing, and the US economy’s strength in terms of employment, expectations for a rate cut by the end of this year will further decline, and we expect it to eventually reach zero. After that, the US Federal Reserve (Fed) will begin to consider raising interest rates in order to respond to real inflation. US long-term interest rates are likely to aim for 5%.
We believe that upward pressure on yen interest rates from the external environment will be limited. With stock prices falling sharply due to rising US interest rates, bonds are likely to be bought as there is a flight to quality. Additionally, as Bank of Japan Governor Kazuo Ueda has stated, “the underlying inflation rate is slightly below 2%,” the environment is not ripe for the Bank of Japan to raise interest rates in earnest.
Even if the dollar appreciates and the yen depreciates due to rising US interest rates, this is due to the supply-side factors such as external factors, which are the “first force,” and not due to the “secondary force,” which is domestic demand-driven prices. In other words, there is no true inflation, and further interest rate hikes by the Bank of Japan are unlikely for the time being.
◎High US interest rates will weigh on high-tech stocks, while Japanese stocks will remain flat?
The US consumer price index (CPI) in March exceeded market expectations, confirming once again the persistence of US inflation. The market is showing the expected reaction: rising US interest rates, an overall appreciation of the dollar, and falling stock prices. Normally, a weaker yen would be a positive factor, but in the current situation, Japanese stocks are likely to react more easily to lower U.S. stocks.
With expectations for a U.S. interest rate cut receding, there is a possibility that U.S. interest rates will remain high for a long time in the near term, which is likely to weigh on high-tech stocks. The Nikkei Stock Average is likely to remain flat for some time as the tops of high-tech stocks, which have been driving stock prices up until now, will become heavier. However, from a long-term perspective, the prolonged high U.S. interest rates are expected to suppress inflation, and the market will likely calm down.
After passing the US CPI, it looks like we will be waiting for new materials for a while. The next time the stock market will become active is likely to be after the long holidays, when corporate settlements will be in full swing. In response to the TSE’s request to improve capital efficiency, we believe stock prices will rise if companies confirm that they have disclosed information that will be evaluated by investors (such as shareholder return measures).
◎Does the dollar test its value for the time being? Intervention cautions are intensifying
The U.S. consumer price index (CPI) rose more than expected in March due to increases in gasoline and housing costs. Photographed in Washington in 2022 (2024 Reuters/Sarah Silbiger)
The reason why there was no intervention to buy the yen even though the yen fell to a historic low of 152 yen in response to the CPI that exceeded expectations was that even before the announcement, the dollar had been in the high 151 yen range, and the price range had changed so much that it was a sudden change. This is thought to be due to the fact that Prime Minister Fumio Kishida was visiting the United States and could face direct criticism of currency manipulation.
Tonight, the much-watched wholesale price index (PPI) will be announced in the United States, and depending on the results, the dollar may rise by another 1 yen or so. If the yen depreciates by 1 yen every day, intervention may be necessary.
With the dollar finally breaking free of the stalemate at 151 yen-high, the dollar is likely to test its upside for the time being. The more the dollar rises, the more the market becomes wary of intervention. Some in the market are pointing out that it may be better to suddenly implement live ammunition intervention rather than rate checks, which have limited effectiveness. If the tone of the restraining statements becomes stronger, the yen market may react.
◎Confirms the Fed’s concerns about a resurgence of inflation
The CPI confirms the Federal Reserve’s concerns that a stronger-than-expected economy could lead to a resurgence of inflation in the spring and summer, which will undoubtedly put off any interest rate cuts.
There is still a possibility of a rate cut in July. Several important indicators will be announced by then. However, I would be surprised if A) there is a rate cut in June, and B) there are two or more rate cuts this year.
◎Fed rate cut start delayed to July
As expected, the results exceeded the forecast. It’s not a huge difference, but it’s enough to keep the debate going over when the Federal Reserve will start cutting interest rates. The timing of the first interest rate cut has been pushed back by at least a month, to July.
◎There is no basis for interest rate cuts
Unfortunately, with inflation becoming more tenacious, there is no basis for a rate cut. Given the Federal Reserve’s failure to meet its desired responsibilities, discussions about raising interest rates, or even the possibility of another rate hike, seem impossible to rule out.
Our code of conduct:Thomson Reuters “Principles of Trust” New Tab, opens new tab