Japanese Growth on the Upswing

The Bank of Japan has telegraphed inflationary expectations to financial markets numerous times, citing the drop in energy prices as the factor preventing the Central Bank from achieving its ambitious inflation target. Nevertheless, the tailwinds from the weaker Yen are providing tailwinds for the economy as evidenced by the preliminary GDP figures released overnight. First quarter GDP printed at 0.60% versus forecasts of 0.40% expansion after recording 0.30% growth in the prior period. Annualized economic expansion came in at a surprising 2.40% versus estimates of 1.50%. This sharp move higher in economic activity highlights the benefits of monetary stimulus, with the Nikkei 225 complementing the data by rising to 1-month highs. USDJPY continues to benefit from the positive news, breaking above 121 after consolidating within a narrow range for several weeks.

In a stunning turn of events, this yesterday’s CPI print from the United Kingdom fell into negative territory in the first such instance since 1960. Although European Central Bank leaders are cheering about the monetary union being free and clear from the deflationary threat, UK policymakers are under the impression that inflation should rise towards the end of the year, trending back towards the 2% longer-term target. The drop in consumer prices came mainly on the back of weaker energy and food prices, helping ease the cost of living expenses for citizens of the Kingdom. However, this will likely delay any potential shift in monetary policy until inflation rebounds, pushing back any potential interest rate hikes until 2016. After tumbling following yesterday’s US housing data, GBPUSD has leveled out modestly, retracing approximately half of the election gains.