US Inflation Hits 13-Year High, While the Yen Records 3-Year Low

With inflationary pressures remaining strong in September, the dollar index recovered some of its earlier losses on Wednesday to trade at 94.5. This is the highest level since September of 2020, increasing expectations that the Fed would tighten policy sooner than anticipated. The minutes of the FOMC meeting, which are expected to be released later today, could offer additional insight into the central bank’s plans for the future.

In the meanwhile, the Japanese yen was trading at about 113.5 per US dollar, hovering around the three-year low reached in December of last year against the backdrop of a general strengthening of the dollar as investors remained confidence in the US Federal Reserve starting to tighten monetary policy in November.

With Japan in deflation since October last year, the Bank of Japan will likely keep its ultra-loose monetary policy unchanged. This is due mostly to decreasing consumption caused from the continuing COVID-19 epidemic. Energy price increases have also weakened Japan’s trade relations, which will have an adverse effect on the country’s current account.

As of September of 2021, the annual inflation rate in the United States had increased to a 13-year high of 5.4%, up from a previous reading of 5.3%, and was above market forecasts of 5.3%. The main drivers of inflation were the cost of housing (3.2% vs. 2.8% in August), food (4.6% vs. 3.7%, the most since December 2011), particularly food at home (4.5% vs. 3%) new cars (8.7% vs. 7.6%), and energy (24.8 percent vs 25 percent ). However, prices for used vehicles and trucks dropped by 24.4%, transportation services by 4.4%, clothing by 3.4%, and medical care services by 0.9% over the same period.

Consumer prices rose by 0.4% on a monthly basis, above expectations of 0.3%, with food and housing indices accounting for almost half of the rise. The core index, which does not include food or energy, rose by 0.2% mom and 4.0% yoy, which was in line with expectations and matching the August figures.

Markets increased their bets on the benchmark 10-year US Treasury note’s yield over 1.59% on Wednesday after US CPI data came in slightly higher than expected and as traders wait for FOMC minutes coming later in the day for further insight into the Fed’s future policy moves.

Despite the fact that oil price rally seems to have temporarily stopped, investors are concerned that a rise in commodity costs would impact on GDP and drive inflation even higher. Excluding orders for ships and electric power firms, Japan’s core machinery orders dropped surprisingly in August 2021 by 2.4% month over month, missing market forecasts of a 1.7% increase and after a 0.9% rise a month earlier.

While the local COVID-19 situation and ongoing supply chain interruptions continue to be sources of worry, manufacturing orders dropped by 13.4%, the lowest level since February 2016 and a reversal from a 6.7% rise in July. Wholesale and retail trade, construction, and telecommunications all saw increases in non-manufacturing orders, which had fallen by 9.5% in July.

Core machinery orders rose by 17% on an annual basis, marking the fifth consecutive month of annual growth, exceeding expectations of 14.7% and after a rise of 11.1% in July. In October 2021, the Reuters Tankan Sentiment Index for Japanese manufacturers dropped to 16 from 18 the month before, marking the lowest level since April.

Automobile and transportation equipment sentiment dropped to a new low of -31 points from -14 points in September, while steel and nonferrous metals sentiment remained unchanged at zero points from 16 points in September. Precision machinery/others fell to 27 points from 20. Likewise, metal products/machinery decreased to 34 points from 38 points from the previous month.

With solid CPI data in place, the market is certain that the Fed will begin tapering next month. Therefore, the greenback is likely to remain strong in the days leading to November 3 policy meeting.