The BoJ’s search for 2% inflation continues to be as fruitful as some looking for UFO’s. And if they ever find it, they might have other problems as inflation won’t just stop at 2%, it would head to more worrisome levels because of the circumstances needed to even get 2% inflation. Headline CPI did rise .4% as expected y/o/y, twice the pace seen in March and which is actually just one tenth away from matching the highest level in two years. It was mostly all energy though as CPI ex food was higher by .3% and it was zero ex both food and energy. Now zero inflation is true price stability and that is what Japan has actually had since the bubble peak in the late 1980’s. In fact, since the Nikkei peaked in December 1989 at 38,916, headline CPI has averaged .4% y/o/y per year since then. Looking at inflation in May, Tokyo CPI ex food and energy was flat y/o/y. The Nikkei responded with a .6% drop and the yen is stronger. The 10 yr yield was little changed. Bottom line, searching for 2% inflation in Japan, let alone anywhere and calibrating a scorched earth monetary policy in order to get it, is losing all credibility.
The only thing of note in Europe was the Italian economic sentiment index for May that fell .6 pts to 106.2 with the manufacturing component falling almost 1 pt and consumer confidence dropping by 2 pts. The headline number and the manufacturing component though did hit the highest level since 2008 last month so these figures are still at much better levels for Italy. Consumer confidence though is now at the weakest level since January 2015 as little growth and high youth unemployment continues to plague that country. The size of Italy’s economy is still below where it was in 2008 and the MIB stock index is more than 50% below its 2007 peak.
The Italian MIB is down 1.2% today and is lower on the week. In fact, the STOXX 600 is now down on the week. Is it because of the stronger euro? Maybe. A drop in energy stocks is also a contributing factor. Or maybe the weakness today was this comment from our President Mr. Trump,
“The Germans are bad, very bad. See the millions of cars they sell in the US, terrible. We will stop this.”
Really? He again threatened a 35% border tax on German cars built outside of the US and sold in the US. BMW is lower by 1.5% and Daimler is down by 1.2% and weaker for a 5th straight day. BMW is down for the 10th day in the past 12. Peak autos in the US. What did the Germans say in response to the Trump comments, the Foreign Ministry Spokesman said that he is
“sometimes a bit unpredictable.”
For a 2nd day the yuan is ripping higher (I’m exaggerating but a .5% rise is a big move for it) because the Chinese seem to be getting tired of FX volatility. There is a story that the China FX Trade System is now telling banks that when fixing the daily yuan reference levels they will need to add a “counter cyclical factor” in determining the right price for the yuan. I did not see any details as to what these factors are and what would drive them but it’s clear what the intentions are. The CFETS said they want to reduce the “herd effects” of currency movements. What nonsense and a major step backwards in freely trading the Chinese currency.