We had flagged the potential for producer prices to dip yet there are additional signs this could be the beginning of a larger move lower. USDJPY continues to look bullish as it heads back above 114 for the 2nd session this week.
Where producer prices missed, consumer prices tried to make up today to narrow the gap between the two inflationary reads. CPI expanded 1.2% compared with 0.9% YoY in April and by 0.1% MoM previously. The rising cost of commodities remains to be the key driver for production costs, although we can see that by historical standards there remains a large gap between producer prices and that of the consumer.
We had warned of the potential for producer prices to take a breather back in February, as both raw material prices and PPI had reached historically high levels which tended to precede a downturn in prices. In 2010 when raw material prices (commodities) expanded more than 20% YoY, it marked the beginning of a 3-year downturn in prices. Whilst producer prices remained around the 4-6% mark until late 2012, they too began to move lower and track commodity prices into contraction territory.
So, at this stage, whilst commodity prices have taken a turn lower, it is possible we may see producer prices hold onto some ground and send inflationary forces higher up the chain. Yet if there is a worrying sign that producer prices may indeed move much lower, it is to see manufacturing input prices (amount paid for commodities by producers) expand at a much slower pace. In fact, they have slowed their pace of expansion for 5 consecutive months. If we are to see producer prices fall then then this puts less upwards pressure on consumer prices and again brings back into question the viability of the reflationary forces, see during 2016. This matters because central banks are only now either tightening, or considering to do so after years of deflating following the GFC. When we consider that balance sheets for Fed and ECB are at eye-watering levels, then this undermines their costly efforts.
In Japan, the leading index nudged higher from 104.7 to 105.5 whilst the coincident slipped to 114.6 to 115.2. These indicators aim to assess the longer-term trends of the economic cycle, although we note that the leading is indeed moving higher in tandem with the official quarterly tankan and monthly version by Reuters.
USDJPY appears set to retest the highs after creeping back above 114 this session. The milestone was achieved initially overnight which ousted it to its highest level in 8-weeks. There had been some profit taking near the end of the Asia session, although the initial moves lower could also be attributed to the firing of FBI director James Comey. Yet the announcement has done little to change the near-term trend which remain clearly bullish.
USDJPY is bouncing nicely along the 8 and 21 eMAs, whilst producing textbook higher highs and lows. Whilst H4 is yet to close it appears set to confirm a Morning Star Reversal pattern to generate a potential buy signal. The monthly pivots close by may prove an obstacle to break initially so we could wait for a move above them for added confirmation. Alternatively take comfort from the string trend which took us here and assume the trend remains out friend.