- G7 meeting focused on Japan and the weak yen.
- Fed's exit plan is back on the agenda.
- Tax hike likely to weigh on U.S. retail sales today.
In connection with the G7 finance ministers’ meeting in the U.K. this weekend, policy makers and central bankers reaffirmed their commitment not to manipulate currencies and that central bank policy will be focused only on domestic objectives. According to an article on WSJ.com, the Bank of Japan’s monetary policy and the weak yen were subject to major discussion. While several participants commented on Bank of Japan’s policy, none of the countries actually criticised the bank’s actions and the G7 countries once again signalled acceptance of the weak yen.
Last week's speculation that an exit from the Fed’s bond buying program has moved forward, accelerated after another positive surprise from the U.S. labour market data and the debate within the FOMC whether to slow down or expand the pace of its bond purchases. Another indication that a change in the Fed’s communication may not be too far away is found in a weekend article on WSJ.com. According to the article, Federal Reserve officials have mapped out a strategy for scaling down the bond-buying program while preserving flexibility and being able to manage market expectations. It appears that the Fed plans to scale down the amount of bonds it buys in careful and potentially halting steps, varying its purchases as confidence about the job market and inflation evolves. Moreover, the article says that while the timing on when to start is still being debated, the plan is focusing on clarifying the strategy so markets do not overreact to the next moves.
U.S. stock indices closed with gains on Friday, and both the Dow Jones and the SP500 index closed at new record highs. S&P500 ended the day 0.4% higher and it was the eighth week running that the index ended the week higher. Japanese stocks are rallying this morning as further JPY weakness, combined with an ongoing recovery in the U.S. economy bode well for Japanese exporters. Nikkei is up 1.15%, while most other Asian indices are trading in negative territory.
The U.S. yield curve steepened with yields on 2-year notes and 10-year treasuries rising 0.2bp and 3bp respectively as focus has turned back to a possible scaling down of Fed monthly bond purchases.
In FX markets, the dollar has strengthened against all currencies in the G10 sphere on the back of renewed talk of the Fed scaling back on its bond purchase programme. The EUR/USD is back below 1.30, while the USD/JPY was temporarily above 102 overnight.
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