Financial Markets Look for Direction Ahead of Friday’s Inflation Data

Rates trend higher as markets await inflation data. Today’s relatively quiet rates session was highlighted by weak demand at a $66B 2-year UST auction where the ratio of total demand vs. the amount offered was under the 1-year average for UST auctions. Comments from Fed President Bostic were also impactful, as he stated that he expects only one rate cut in 2024, a shift that was a “close call” from his previous forecast of two 25bp rate cuts. After a gradual sell-off throughout the trading session, rates closed 4-5bps higher. Elsewhere, the S&P 500, NASDAQ, and Dow declined 0.27%-0.41%, a slight reversal after the S&P 500 had its best week of 2024 last week.

Core PCE is expected to remain flat at a multiyear low. Rates markets have largely shifted attention toward Friday’s PCE slate as the Fed searches for evidence that recent hot inflation prints were temporary bumps in the road. Core PCE growth is expected to slow MoM to +0.3% and remain flat YoY at +2.8%. The latter would be tied for the slowest rate of growth since March 2021, though PCE would remain well above the Fed’s 2% long-term target. Meanwhile, headline PCE growth is expected to rise 0.1% to +0.4% MoM and +2.5% YoY.

Japan’s top currency official says yen weakness is unwarranted. The yen has remained historically weak against the US dollar and remains the worst performing G10 currency this year, falling ~6.8% against the US dollar. The yen failed to rebound last week after the BOJ announced the end of Yield Curve Control, as markets still expect Japanese rates to remain relatively low. Japan’s top currency official Masato Kanda said today that “The current weakening of the yen is not in line with fundamentals and is clearly driven by speculation…we will take appropriate action against excessive fluctuations, without ruling out any options.” He added that Japan is “always prepared” to directly intervene in the currency market. The yen dropped to 151.86 per dollar during intraday last Friday, near the 152 level that prompted direct intervention in 2022.