Japanese Inflation and PMI Numbers Support a Hawkish BoJ Policy Stance
Ahead of the monetary policy decision, Japanese economic indicators sent mixed signals, fueling uncertainty about the BoJ’s rate path.
Headline inflation dropped from 2.9% in November to 2.1% in December, while ‘core-core’ inflation slipped from 3% to 2.9% in December. Meanwhile, the S&P Global Japan Services PMI rose from 51.6 in December to 53.4 in January. Importantly, labor market conditions tightened, with selling prices higher, supporting a more hawkish BoJ policy stance.
Ahead of the BoJ monetary policy decision, East Asia Econ commented on the PMI numbers and the monetary policy, stating:
“With the tariff impact being weaker than feared, and consumer confidence bouncing back strongly, today’s PMI suggests economic momentum in Japan is accelerating. Politics aside, lots of room for BoJ to sound more hawkish today.”
Crucially, a hawkish BoJ Governor Ueda press conference would likely influence risk sentiment. The prospect of narrower US-Japan rate differentials would make yen carry trades into US assets less profitable, potentially triggering a yen carry trade unwind as seen in mid-2024.
For context, Prime Minister Sanae Takaichi’s fiscal policy goals and the weaker yen are expected to fuel inflationary pressures. These factors have raised expectations of a hawkish BoJ policy stance.
US Services Sector and Earnings in Focus
US futures eyed a three-day winning streak during the Asian morning session on January 23. The Dow Jones E-mini and the Nasdaq 100 E-mini advanced 39 points and 32 points, respectively, while the S&P 500 E-mini advanced 11 points.
Later Friday, US services sector PMI data will influence market bets on a June Fed rate cut. Economists forecast the S&P Global Services PMI to increase from 52.5 in December to 52.8 in January. A higher PMI reading would signal a pickup in economic momentum, given that the services sector contributes roughly 80% to US GDP. The US economy expanded 4.4% quarter-on-quarter in Q3, up from 3.8% in the second quarter.
Beyond the headline PMI, traders should consider employment and price trends. Importantly, weaker prices charged would overshadow the headline PMI and signal lower consumer prices. A softer inflation outlook would support a more dovish Fed rate path, boosting demand for US equity futures.
Other economic data on Friday includes the S&P Global US Manufacturing PMI and finalized US consumer sentiment numbers for January. However, the Services PMI will likely be the key driver.
Key Technical Levels for Dow Jones, Nasdaq 100, and S&P 500
Following the morning gains, the Dow Jones E-mini, the Nasdaq 100 E-mini, and the S&P 500 E-mini remained above their 50-day and 200-day EMAs. The EMAs signaled bullish momentum, aligning with positive fundamentals.
Near-term trends will hinge on geopolitical headlines, the BoJ’s forward guidance, earnings, and US economic data. Key levels to monitor include:
Dow Jones
- Resistance: the January 13 record high of 49,901, and then 50,000.
- Support: 49,000 followed by the 50-day EMA (48,475).