CPI turns negative on a month-on-month basis, BOJ follows up with further measures

The U.S. CPI released last night was shocking, with an overall CPI month-on-month decrease of -0.1%, marking the first negative turn since May 2020. Market expectations for a Fed rate cut this year have significantly increased, leading to a sharp drop in U.S. bond yields. The market is pricing in a close to 100% probability of a rate cut in September, with an expectation of 2.5 rate cuts within the year.

Negative Turn in June CPI MoM

In June, inflation in the U.S. weakened across the board, not only with the overall inflation turning negative, but also with the year-on-year growth rate of core CPI hitting a new low since April 2021, and the stickiest service inflation cooling significantly.

Overall CPI:

MoM -0.1% (expected 0.1%, previous value 0%), rounded to -0.06%

YoY 3.0% (expected 3.1%, previous value 3.3%)

Core CPI:

MoM 0.1% (expected 0.2%, previous value 0.2%), rounded to 0.06%

YoY 3.3% (expected 3.4%, previous value 3.4%)

Core Services Excluding Housing:

MoM -0.05% (previous value -0.04%)

YoY 4.67% (previous value 4.83%)

Looking at the details, the weakening of various sub-items this month is very evident:

Energy decreased by 2.0% MoM, marking the second consecutive month of decline

Core goods fell by 0.1% MoM, mainly due to deflation in new cars (-0.2%) and used cars (-1.5%)

Core services rose by 0.1% MoM, the lowest MoM since August 2021. Housing slowed from 0.4% to 0.2%, and the stickiest rent inflation finally saw a turning point.

Excluding housing, core services decreased by -0.05% MoM, marking a significant decline for the second consecutive month.

BOJ Strikes Back

Approximately 5 minutes after the lower-than-expected CPI announcement, USDJPY suddenly dropped from 161 to 157.44, then slowly rose back above 159 later in the evening.

Following the volatility of the Japanese yen yesterday, Japanese official media have acknowledged intervention in the foreign exchange market, with the market estimating the scale to be around $20 billion. In early trading on Friday, there were reports that the Bank of Japan conducted a Rate check on the yen, seen as a precursor to intervention as well I have to admire the BOJ's timing ability. The last intervention was on April 28th and May 1st, taking advantage of the weakening US non-farm data and the decline in US bond yields. However, this time USDJPY only dropped 400 pips from the high point, which is significantly less than the previous two times when USDJPY dropped by 600 points each.

Monday is a Japanese holiday, and it is not ruled out that the Japanese government may intervene again during the period of low liquidity.

Trading Idea

In summary, the "weak CPI" market is unlikely to end so soon, and the reversal signal for USDJPY has already appeared. It may continue to follow the decline in interest rate differentials.

At the end of this month, on July 31st, both the BOJ and FOMC meetings will happen to be on the same day. Currently, the market is pricing in a 50% probability of a rate hike by the BOJ in July, while the pricing for a rate cut by the FOMC in July is only 8%. Will there be a surprise of rate hike vs rate cut?

Author: Fang Yuqi, Source: Good Morning Market, Original Title: "CPI Turns Negative Month-on-Month, BOJ Strikes While the Iron is Hot"