U.S. economic growth slows down

[The growth rate of the U.S. economy has slowed down slightly]

Growth in the U.S. economy has slowed slightly as consumers cut back on spending. Consumer spending, the main engine of the economy, grew at an annual rate of 1.4% instead of the originally reported 2.1%. Economists say the U.S. will struggle to match fourth-quarter performance in the first three months of 2023, even if the economy is so flat in the fourth quarter. According to early economic data, the expansion rate of the US economy will slow down sharply, and even contract. Rising interest rates and high inflation are forcing consumers and businesses to cut spending and investment, especially in rate-sensitive sectors like housing and construction.

[U.S. initial jobless claims fell to the lowest level in three weeks]

The number of Americans filing new claims for unemployment benefits unexpectedly fell to its lowest level in three weeks, pointing to continued tightness in the labor market. The labor market is tight by many measures, with strong job creation, low unemployment and millions of unfilled positions. That has been a major concern for the Fed, as policymakers point to a strong labor market as a factor in keeping inflation high. Institutional economists said Fed officials likely believed the jobs data provided support for the need to continue raising interest rates after the FOMC meeting in March.

[The Fed is determined to let the labor market release some slack signals]

The Fed is determined to let some signs of slack in the labor market to ensure inflation doesn't become entrenched at current high levels, said Bill Adams, chief economist at Comerica Bank. By mid-2023, year-on-year CPI inflation is likely to moderate below the federal funds rate. But if inflation surprises again, or unemployment falls further, the Fed could hike rates more than we forecast.

[Upgrade the forecast for short-term U.S. bond yields at the end of this year]

BofA rate strategists raised their forecasts for 2023 2-year and 5-year U.S. Treasury yields, citing "(U.S.) economic re-acceleration and inflation risks." Raise the forecast for the two-year Treasury bond yield by the end of 2023 to 3.00% (previously 2.75%), and raise the five-year yield forecast to 3.15% (previously 3.00%). The 10-year and 30-year yield forecasts are unchanged at 3.25% and 3.5%, respectively.

[Inflation in Japan remained at 4% or above for the second consecutive month]

Japan's inflation rate accelerated further, holding at or above 4% for a second month in a row, underscoring how far prices were rising before the latest boost to a government subsidy program began to take full effect. Data released today showed consumer prices excluding fresh food rose 4.2 percent in January from a year earlier, up from a 4 percent rise in December. That's the highest level since 1981. Most economists believe the acceleration in inflation will stop in February as additional effects from Prime Minister Fumio Kishida's power subsidy plan are expected to emerge. Fumio Kishida's stimulus package, worth 39 trillion yen ($289 billion), is expected to have some impact on curbing price increases. Economists predict that a series of anti-inflation measures may cause the CPI to fall below 4% in February.

[Fed’s interest rate hike may exceed expectations, which may cause the yen to fall back to 145]

The yen is set to retreat toward 32-year lows in late 2022 as the Fed's tightening moves extend beyond many in financial markets' expectations. Hill predicts that the yen may fall towards the 140-145 range against the dollar. Hill believes that the direction of the U.S. economy and the Federal Reserve may be the key to determining the direction of the yen. The dollar has so far recovered ground lost at the start of the year as the strong data stoked bets on more tightening by the Federal Reserve. Traders now expect the Fed's policy rate to peak at about 5.38 percent in July, up from expectations of around 5 percent in early February.