US Inflation Slows; Equity Markets Rally on Earnings News

The slowing down of US inflation has been a welcome development in the financial markets. Along with positive earnings news, this has contributed to a robust rally in equity markets. The EUR/JPY pair, however, has seen only a slight recovery from its intraday low, hovering around 154.80 as we head into Friday’s European session.

This performance of the EUR/JPY pair seems to reflect the recent bounce in Treasury bond yields, while also mirroring underwhelming data from Japan. Amid relatively slow trading hours, the US 10-year and two-year Treasury bond yields are showing modest gains around 3.78% and 4.65% respectively. This is after hitting a two-week low the previous day, indicating some form of recovery.

In Japan, the Government Bond (JGB) yields for 10-year have retreated from an 11-week high. This comes as the bond yields from Europe and Germany await the opening bell for their next move. Furthermore, Japan’s Industrial Production for May dropped significantly to -2.2% MoM and 4.2% YoY, compared to the previous figures of -1.6% and 4.7% respectively. This suggests a significant slowdown in Japan’s industrial sector. Capacity Utilization also fell sharply to -6.3%, a stark decline from the market forecast of -2.5% and previous readings of 3.0%.

On a more positive note, the Eurozone Industrial Production eased to 0.2% MoM for May on a seasonally adjusted basis. This was slightly below market forecasts of 0.3% and previous readings of 1.0%. During the European Central Bank’s (ECB) June policy meeting, it was revealed that at least two successive rate hikes would be necessary for inflation projections to materialize. This sentiment was echoed by ECB Governing Council member Ignazio Visco, who suggested that interest rates are nearing their peak.

Despite these dynamics, markets in the Asia-Pacific region remain strong. However, S&P500 Futures are printing mild losses while hovering near yearly top levels. The recent easing chatter about Japan’s intervention to defend the Yen is also contributing to the EUR/JPY pair’s corrective bounce.

Looking ahead, traders will likely be guided by the forthcoming release of the European Commission’s Economic Forecasts and trade numbers. These figures, along with ongoing global economic developments, will continue to shape market trends and currency movements in the weeks to come. It’s clear that the world’s financial markets are in a delicate state of balance, with every new piece of economic data potentially tipping the scales one way or another.