Rate cut expectations remain under scrutiny after stronger UK wage data

JPY: Higher Japanese yields failing to reverse continued yen sell-off

The yen has continued to gradually re-weaken during the Asian trading session resulting in USD/JPY rising back above 156.50. Similar to the price action from yesterday, the yen is not deriving any support from the ongoing adjustment higher for Japanese yields. The 10-year JGB yield has tested overnight the cyclical high from November of last year at 0.97%. The sell-off in the Japanese government bond market at the start of this week was encouraged by yesterday’s decision from the BoJ to scale back the size of their regular bond purchase operation by around JPY 50 billion to JPY425 billion for 5-10 years JGBs. The size of purchases was towards the bottom of the planned range between JPY400 billion and JPY550 billion. While only a small step, it potentially signals that the BoJ is becoming more comfortable to slowdown the pace of JGB purchases from around JPY6.0 trillion/month at the start of this year. At a press conference overnight, Japanese Finance Minister Suzuki stressed the importance of coordination and collaboration between the government and the BoJ to ensure they don’t hinder each other in pursuing their policy objectives. He stated that “we will continue to closely communicate with the BoJ to ensure that there is no friction between our mutual policy objectives”. He added that he was aware of the comments made from BoJ Governor Ueda in parliament last week when he stated that ”abrupt and one-sided yen moves raise uncertainties and are negative for Japan’s economy. The latest developments support our forecast the BoJ to tighten policy sooner by 15bps at the July policy meeting although we can’t rule out an even earlier hike in June.

However, the ongoing adjustment higher in Japanese yields is failing to reverse the yen weakening trend while US yields continue to move higher as well. The US dollar strengthened modestly yesterday after the release of the New York Fed’s latest survey of consumer inflation expectations. The survey revealed that US consumers expect higher short-term inflation. Inflation expectations at the one-year horizon rose to 3.26% in April from 3.00% in March. It was the highest reading since November and has added to market participants unease over the pick-up in US inflation at the start of this year ahead of the releases this week of the US PPI and CPI reports for April. It follows the release of the University of Michigan survey at the end of last week for May that also showed a pick-up in inflation expectations that contributed to sharp drop in consumer confidence. Recent  unfavourable inflation developments in the US are keeping pressure on Japanese officials to respond to a yen weakness.             

UK WAGE GOWTH REMAINS AN INFLATION CONCERN 

Source: Macrobond, Bloomberg & MUFG Research

GBP: Strong wage growth argues against earlier BoE rate cut

The main economic data release at the start of the European trading session has been the release of the latest UK labour market report. The report revealed that wage growth continues to remain elevated and is only slowing gradually which will keep the BoE concerned over the risk of more persistent inflation in the UK. The report revealed that average weekly earnings for regular pay excluding bonuses remained stable at 6.0% on a 3-month average YoY basis. While it has slowed from a peak in August of last year at 7.9%, it is still well above pre-COVID levels from in 2019 when it was fluctuating between 3.0% and 4.0%. Looking at the more recent trend for regular pay growth over the last six months, it has increased by an annualized rate of just under 5.0% indicating more of slowdown but still uncomfortably high. The PAYE measure of median pay was also disappointing as it picked up to an annual rate of 6.9% in April up from 6.4% in March. Other labour market data will have at least provided some reassurance to the BoE that the UK labour market is softening which should help to ease upward pressure on wages going forward. The number of payrolled employees fell sharply by -85k in April which was the weakest reading since May 2020 during the COVID shock. The unemployment rate also ticked higher by 0.1ppt to 4.3% matching the cyclical high from July of last year although doubts remain over the quality of the data.

Overall, the latest UK labour market report argues more in favour of the BoE remaining cautious over beginning to cut rates as soon as at their policy meeting in June. It should further reinforce market expectations that the BoE will wait until the August MPC meeting to begin cutting rates. A 25bps rate cut from the BoE is almost fully priced in by August while the probability of a rate cut in June has dropped back closer to a 50:50 probability. It also follows the much stronger rebound in UK growth in Q1 when GDP expanded robustly by 0.6% compared to the BoE’s forecast of 0.4%. A gradual economic recovery in the UK economy this year should help to prevent a sharper deterioration in labour market conditions. A speech from BoE Chief Economist Pill will now be scrutinized closely this morning to assess rate cut timing. Those developments are offering more support for the pound in the near-term even after the BoE indicated last week that it is moving closer to cutting rates. Cable and EUR/GBP have been consolidating at around 1.2500 and 0.8600 respectively. We are still sticking to our bearish bias for the pound (click here) but acknowledge the recent UK data flow has not been favourable for our view. 

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	08:30	BoE MPC Member Pill Speaks	--	--	--	!!
GE	10:00	German ZEW Current Conditions	May	-75.0	-79.2	!!
US	11:00	NFIB Small Business Optimism	Apr	88.1	88.5	!
EC	11:00	Eurogroup Meetings	--	--	--	!!
US	13:30	PPI (YoY)	Apr	2.2%	2.1%	!
US	14:10	Fed Governor Cook Speaks	--	--	--	!
EC	14:15	ECB's Schnabel Speaks	--	--	--	!!
US	15:00	Fed Chair Powell Speaks	--	--	--	!!!

Source: Bloomberg