NIKKEI225: Weak US Inflation Data not Enough to Keep Bull Trend Alive

U.S. inflation slowed to 3% YoY from 3.1% creating greater hope for a Fed cut. But the yen strengthened against the dollar.

The yen rallied against the dollar yesterday after the weaker inflation number. The USD/JPY reached 157.45, sparking speculation that the BoJ also intervened in the forex market to push the yen higher by 8% on the day.

The sharp move in the forex market coupled with a selloff in tech stocks. The NAS100 saw a sharp decline despite a positive inflation figure. The NIKKEI225 pressured by these two factors, followed suit and lost over 2% on the day.

The market decided to take profits as the number was a positive one, but already priced in. So, far today the Japanese index is down 0.85%, and looking set to print a red candle.

When a market overshoots, then the reaction to the fact is usually a correction, as reality didn’t live up to expectations. The market was clearly hoping for an even better inflation number that would have put the Fed on a path to lower ratees.

As it is, the actual number may not be enough. We also know that the Fed wants to see further proof of stabilizing inflation, as many Fed officials have stated. The central bank’s favorite index is the PCE. Which has been stable over the past months, but still far from the 2% target.

It’s likely any drop from the current level of 2.6% YoY PCE might fuel another rally in stocks. However, a small increase would just as easily create downside volatility.

The BoJ a Weak Yen and Rising Yields

The BoJ has its own battle to fight, which is opposite to the Fed’s forward policy. The Japanese central bank is fighting rising inflation and a weakening yen. To counter a weak yen the central bank can intervene in the forex market as it seems it has.

But these interventions are always short lasting, and the other options can dramatically affect GDP and the stock market. The BoJ has also been reducing its bond purchasing program, to keep yields high and fend attacks on the yen.

To fight inflation the option the BoJ has is to raise rates again, this would also help the yen. However, it would also make the Japanese stock market less attractive to foreign investors. At the same time bond yields would rise and bleed investor appetite for stocks.