Some Fresh Policy Signals – Currency Thoughts
Some Fresh Policy Signals
May 27, 2025
Officials at Japan’s Ministry of Finance signaled an intent to dampen Japanese bond issuance in an effort to counter upward pressure on long-term yields.
Governor Ueda of the Bank of Japan warned of upside risks surrounding core inflation in an apparent indication that the next BOJ interest rate hike is coming sooner rather than later.
In advance of minutes from the Federal Open Market Committee’s last policy review that will be published tomorrow, Minneapolis Fed President Kashkari, speaking overnight in Tokyo, said Fed officials have been debating whether to look through the immediate impact of tariff hikes and revealed that he has been one of the policymakers arguing against doing that. Fed policy lost some credibility in 2021-22 when the rise in U.S. inflation was initially characterized as a transitory supply side shock. A similar type of supply shock now looms from the disruption to supply chains from a tariff war, and Kashkari chooses not to be complacent this time.
After holiday closures on Monday, today is the first chance for U.S. and U.K. financial markets to react to President Trump’s delay announced Sunday night in the possible imposition of 50% tariffs against the European Union. In the meantime, trade talks between the U.S. and EU will kick into a higher gear, with both side’s presumably making concessions that weren’t made previously. There’s still a huge lack of clarity on whether a deal will be reached and how such might impact tariff levels. The one sure thing is that every time that the Trump Administration changes its tune on trade policy, businesses, consumers, and investors become more disinclined to engage in what they normally might do, and that’s never good for an economy.
U.S. stock futures shortly before today’s release of data had made solid overnight gains of 1.4-1.6%. In the Pacific rim, equities had risen 0.6% in Australia and 0.5% in Japan and Singapore but fallen by 0.9% in Taiwan, 0.8% in India and 0.2% in China. European stock markets were mostly higher but by less than 1%.
The dollar trimmed Monday losses especially against the yen, which fell 0.9%. Other dollar advances amounted to 0.7% against the Swiss franc and kiwi, 0.6% versus the Aussie dollar, 0.3% relative to the won and euro but just 0.1% against the Turkish lira and sterling.
The price of gold has slumped 2.2%. Bitcoin edged 0.1% higher, but oil is 0.5% lower.
Ten-year sovereign debt yields dropped overnight by five basis points in Japan, four bps in the United States, two bps in Great Britain and one basis point in the U.K., France and Spain.
Central bank authorities at the Bank of Israel and National Bank of Kyrgyzstan left their key interest rates unchanged at 4.5% and 9.0%, respectively, after scheduled policy reviews. Israel’s rate has been cut just once and by a quarter of percentage point from a peak of 4.75% maintained from May 2023 until January 2024. Israeli CPI inflation had decelerated from 5.4% at the start of January 2023 to 2.5% by February 2025 but was last quoted above the 1-3% target range as of April. Kyrgyzstan’s policy interest rate has stayed at 9.0% since back-to-back 200 basis point reductions done in April and May of 2024. Kyrgyzstani consumer price inflation rebounded from 3.8% last August to a 16-month high of 7.1% last month, and economic growth has lately been very buoyant.
The monthly measure of economic sentiment in the euro area recovered more than forecast this month to a 2-month high of 94.8 from 93.8 in April. The high this year so far was a score of 96.2 in February. While sentiment in the industrial sector rose to a 14-month high in May, confidence in services dropped to its lowest point in 47 months. consumer confidence was left unrevised from its preliminary reading and 2-month high of -15.2. Price expectations subsided, providing another reason to expect ECB officials to cut their interest rate at the upcoming policy meeting.
British data reported today showed a 0.1% year-on-year dip in shop prices last month, which matched March’s result that was the smallest 12-month rate of decrease in nine months. A second release, the Confederation of British Industry’s distributive trades index worsened more sharply than anticipated to a 2-month low of -27 in May after -8 recorded in April.
U.S. home price inflation fell in March to a 21-month low of 3.7% according to the FHFA index and an 18-month low of 4.1% according to the Case-Shiller index of 20 metropolitan areas. The early 2024 peaks in those measures had been 7.1% and 7.5%.
A 6.3% monthly drop in U.S. durable goods orders last month was actually not quite as steep as feared, and it followed a 7.6% leap in March. Durable orders in January-April was 4.2% higher than a year earlier. Recent wide swings reflect tariff-related uncertainty, which continues to unfold in unexpected and mysterious ways. Orders for non-defense capital goods orders excluding aircraft, which is an early indicator of future business investment in the U.S. were only 1.3% higher on average in January-April than a year before.
Indicators of consumer confidence in May reported around the world today rose to 7-month highs in Germany and South Korea and a 2-month high in Sweden but fell to a one-year low in Portugal and a 3-month low in Finland.
Total French consumer price inflation of only 0.7% in May according to the preliminary estimate was its lowest in 51 months. Core inflation printed at 1.3% for a third straight month.
Switzerland recorded a record high CHF 6.33 billion trade surplus in April as imports took a huge 15.6% dive. The January-April surplus of CHF 19.7 billion was 58% larger than a year earlier.
Austria’s May purchasing managers survey among manufacturers yielded another sub-50 reading, but the 48.4 score indicated the slowest rate of contraction in 28 months. Confidence in the future improved to an 11-month high, and price pressure receded.
Chinese corporate profits moved back into positive territory early this year, with a 1.4% year-on-year average increase in the first four months compared to calendar year declines of 3.3% in 2024, 2.3% in 2023 and 4.0% in 2022.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Israel, Euroland economic sentiment, French inflation, German consumer confidence, National Bank of Kyrgyzstan, U.S. home prices and durable goods orders
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