US Will Have a Soft Landing, But No One Believes – Here is How

JPY: BoJ Governor Ueda fuels USD/JPY bounce

Yesterday, US Treasury Secretary Janet Yellen expressed a positive outlook on the current economic conditions in the United States, and this sentiment was mirrored in the recent market trends. Falling inflation has fostered optimism about a smooth economic landing in the US. Yellen further bolstered this optimism in her interview on Bloomberg TV, stating that the US labour market is cooling down without faltering, as the intense demand for hiring by firms has subsided, and there are no signs of significant distress associated with this cooling.

If economic data continues to support this optimistic view, the confidence in a soft landing will likely persist, contributing to a gradual decline in the dollar's value. Yesterday, the S&P 500 saw a 0.7% increase, approaching levels last seen in early April when inflation concerns took hold.

Recent retail sales data from the US also aligns with the notion of a soft landing, as consumer spending continues to grow, albeit at a slower pace. The yen, after experiencing notable gains last week, is now underperforming in an environment that favours carry trades. In Japan, the TOPIX index has risen by 1.0%, and the 10-year swap rate has retraced some of the surges from this month after breaching 0.70% on Friday for the first time since March. Governor Ueda's comments at the G20 summit in India played a role in the renewed bounce in USD/JPY and the drop in longer-term yields. His statement emphasized that the 2% inflation goal remains "some distance away," based on the unchanged assumption that was also reiterated in the overall narrative.

The market reaction to Governor Ueda's comments has led to reduced speculation about a yield curve control (YCC) change in the upcoming week. However, it is still possible that the July meeting's updated forecasts could provide justification for the Bank of Japan (BoJ) to make changes to YCC, even though yields are not currently experiencing upward pressure and are not threatening the 0.50% band limit. The upcoming CPI data on Friday will be crucial and could reignite speculation depending on its outcome.

Overall, amid an improved risk appetite and optimistic expectations for a soft landing, USD/JPY is understandably recovering some of its previously lost ground.

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