Two central banks meet next week, and for once, they are facing the same problem from opposite ends. The Federal Reserve's June 17 meeting, the first chaired by Kevin Warsh, arrives less than two weeks after a series of hot inflation readings, and the Bank of Japan gathers in the same window. Both arrive at the table with inflation that refuses to behave and a labor market that keeps undercutting the case for easing. Markets spent the past week violently repricing what that means, and the tape is still finding its footing.
The Number That Killed The Cut
Friday's May payrolls report was the loudest data point of the cycle. Hiring came in at 172,000, far above the consensus estimate for 80,000, the unemployment rate held at 4.3%, and prior months were revised higher. For a Fed that took office under explicit pressure to lower rates, that is an awkward gift. The unexpectedly strong gain, compounded by sharp upward revisions, makes the case for policy easing even weaker, particularly given elevated inflation and the Iran war. Markets that recently debated the timing of the next cut now lean the other way; odds of at least one rate hike by the December decision have climbed to roughly 58%. Warsh inherits a board already fracturing, and his first meeting is effectively a hold with the door left open in either direction.
Tokyo Caught In The Crossfire
The Nikkei 225 fell about 4% on Monday, a third consecutive session of losses, mirroring Wall Street's chip selloff. Persistent yen weakness has weighed on foreign appetite for Japanese equities, with net foreign selling hitting a new high for the year as USD/JPY again touched the Bank of Japan's intervention window at 160. Here the setup is genuinely two-sided. The Bank of Japan is widely expected to raise rates later this month as policymakers contend with inflation driven by higher energy costs, a move that historically argues for a stronger yen. Yet Prime Minister Takaichi's preference for looser policy and a heavy dollar bid have kept the currency weak regardless. A clean hike could finally pull the pair down; a hold, or any sign the government has boxed the central bank in, leaves intervention as the only brake. PM Takaichi has said the government aims to strengthen confidence in the yen by improving economic fundamentals.
Oil Stays On The Fence
Crude remains the wildcard that can override all of it. Iran and Israel launched strikes against each other on Sunday night, the first conflict since the ceasefire, before Tehran confirmed it had ceased its strikes while warning hostilities would resume if operations in Lebanon continue. WTI briefly retreated to around the $90 level as traders wait to see whether the Strait of Hormuz reopens. The risk premium is compressing, but slowly. The issue is that longs are exhausted, for months have they been provided the fundamental factors for the asset to climb at least back to its $120 highs, and yet the asset instead has been in a slow downtrend. It’s gotten to the point where traders are wondering what it would take for Oil to actually move higher.