All major central banks except the Bank of Japan remain on track to tighten monetary policy

The US trade deficit narrowed by 6.1% to $91.1 billion from $97.1 billion in April. But even with the reduction in May, the trade deficit is up more than 10% since March. According to analysts, trade is likely to be a drag on US economic growth in the second quarter.

Tesla (TSLA) shares jumped more than 2% on optimism that lower prices supported demand and pushed sales to record levels in the April-June quarter. Analysts estimate Tesla could sell 155,000 vehicles in China in Q2, up 13% from the first quarter.

ECB President Christine Lagarde said yesterday that if the base case scenario holds, the European Central Bank will continue to raise rates in July. She added that core inflation is not declining as expected and did not comment on the September meeting. At the same time, Fed Chairman Powell indicated that monetary policy was not restrictive enough and said he did not rule out the possibility of raising rates at the next meetings. The Fed chief added that the strong labor market continues to fuel consumer spending, which accounts for about two-thirds of economic growth. The policymaker’s comments increased the likelihood of a Fed rate hike in July to about 82%, up from 74% the day before.

Governor Bailey told the European Central Bank Forum that last week’s decision to raise the bank rate from 4.5% to 5% was the best way the Bank of England could have responded to the latest economic data. Market indicators imply further bank rate hikes to 6.00% by the end of the year as service sector price-fixing boosted core inflation for the second month in a row. That said, markets are predicting no rate cuts this year and for most of 2024 through September.

Inflation in Italy was softer than expected and down significantly from the previous month, which bodes well for the broader EU inflation figure to be released Friday. Italy’s inflation rate fell to 6.4% from 7.6% y/y. Germany will release the inflation data today.

Asian markets were mostly bullish yesterday. Japan’s Nikkei 225 (JP225) gained 2.02%, China’s FTSE China A50 (CHA50) gained 0.36%, Hong Kong’s Hang Seng (HK50) added 0.12% on the day, while Australia’s S&P/ASX 200 (AU200) closed up by 1.10% on Wednesday.

Bank of Japan (BOJ) Governor Kazuo Ueda said Wednesday that the Central Bank would see a good reason to change monetary policy if it is “reasonably confident” that the country’s inflation rate will accelerate in 2024 after a period of slowdown. The Bank of Japan expects inflation to slow due to the waning effects of past import price hikes before rising again in 2024, Ueda said at the Central Bank forum. Asked whether Japan could intervene in the currency market to support the yen, Ueda said that the decision fell under the jurisdiction of the Finance Ministry.