Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 31st of July. Japan has been busy with the Ministry of Finance apparently deciding to order the Bank of Japan to intervene in the foreign exchange markets.
It's the Ministry of Finance's money that's being used here. The intervention led to a 5 yen move in the dollar-yen exchange rate that has now partially unwound. Intervention in support of a currency works in one of two scenarios.
If the intervention is against speculative attacks on the currency, as it increases the risks of speculation, or if the intervention is used to buy time in order to correct the underlying fundamentals that have caused the currency to weaken in the first place. Japan's intervention seems more likely directed at the pace of recent weakness rather than driving the exchange rate to any specific level. There is also a suggestion that the intervention is a preventative measure ahead of a period of low liquidity during the August holiday season, when more dramatic moves in foreign exchange markets might potentially occur.
After all that excitement, the Bank of Japan policy decision, unchanged rates, was rather dull in comparison. However, it is a trend. The UK's Bank of England also left interest rates unchanged, although there were three dissents, just like the Federal Reserve in the United States.
Unlike the US Fed, the Bank of England decision did not cause a sell-off in the long end of the bond market. This is probably due to the fact that Bank of England Governor Bailey is articulate and communicates clearly to the markets, which means that monetary policy in the UK is not adding unnecessary risk premia or raising real yields in an economically damaging fashion. Bailey's comments after the decision seem designed to calm market concerns about imminent rate increases.
There is quite a lot of inflation data due today. The Japanese Tokyo inflation figures were a touch higher than expected in July, but purely driven by energy prices. From Europe, France, Italy and others provide their flash consumer price inflation estimates for July, and then the euro area aggregate is due.
Yesterday, Spain's numbers were a fraction higher than expected, with Germany in line with expectations. The only place inflation seems to be a looming problem is in the imaginations of the ECB's Bundesbank faction. Out in the real world, there is no smoking gun of price increases to cause undue concern.
The United States has little to compete with all of this drama. There is the Michigan Consumer Sentiment Poll, which is of little economic value these days. Yesterday's data confirmed that consumers in the States are doing OK, and the willingness to spend is not checked by the rather soggy levels of wage growth.
It's noticeable that wage and salary growth has been below 4% for two consecutive quarters. That's something which hasn't happened since 2016. Of course, the growth of side hustles and alternative income streams, and the increasing importance of pension income to the overall health of the US consumer, mean that there are other ways the consumer may be supported.
But this data is not really suggestive of second-round inflation effects arising from the labour market in the United States. That's all for today. Have a good day.
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