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The Federal Reserve’s preferred measure of inflation is expected to slow further in May, adding to evidence from the consumer and producer price indices that inflation in the US has begun to ease after stagnating for months.
The personal consumption expenditures index published on Friday is forecast to have risen at an annual rate of 2.6 per cent, down from 2.7 per cent in April, according to economists surveyed by Bloomberg. The core measure, which strips out the volatile food and energy sectors and is most closely watched by the Fed, is expected to be 2.6 per cent, down from the 2.8 per cent.
The PCE data will follow encouraging consumer price figures earlier this month, which showed that inflation fell to 3.3 per cent in May. Investors are now betting on multiple interest rate cuts this year, even after the Fed’s own forecasts showed a single cut by December.
A slowdown in producer price growth, another measure of inflation, has also given investors confidence PCE will be low. The annualised PPI rate slipped to 2.2 per cent in May, below the forecast 2.5 per cent, and less than the upwardly revised April reading of 2.3 per cent.
While a lower PCE rate could keep traders betting on two rate cuts this year, the timing of them will still be in question.
“Even if May’s core-PCE print comes in at 0.0 per cent, that won’t create a path for a July cut. Moreover, the stickiness of inflation seen during the first quarter was the real shock, and returning to the trend of cooler inflation seen in the second half of 2023 shouldn’t be a surprise at this stage,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets. Kate Duguid
Has the storm in French bond markets blown over?
French markets steadied this week after the prospect of big gains for the far-right and hard left in upcoming snap parliamentary elections sparked the biggest sell-off in years. But analysts warn that the turmoil could resume if the polls start to indicate the Rassemblement National and its allies are on course for an absolute majority in parliament.
The gap between benchmark French and German bond yields — viewed as a barometer for the risk of holding France’s debt — has eased from a peak of 0.82 percentage points last week to 0.75 percentage points, but remains close to levels not seen since 2017.
An opinion poll on Thursday put Marine Le Pen’s RN at 34 per cent, the left alliance at 29 per cent and President Emmanuel Macron’s party trailing at 22 per cent. On Thursday a Harris poll forecast the far-right and its allies are on track to win 235 to 280 seats in parliament, which would fall short of the 289 needed to govern without forming a coalition.
“The market is likely to be most concerned about the scenario where RN achieves an absolute majority,” said Rohan Khanna, head of European rates strategy at Barclays, adding that the tone the government takes would matter, and could push France’s risk premium above a full percentage point.
Mohit Kumar, an economist at Jefferies, said he thinks spreads won’t widen to levels seen last week ahead of the election, but there was a risk that spreads “take another turn for the worse post-election”.
He agreed that an RN majority was the biggest concern for markets currently but added from the various possible outcomes, “a far left government will be of a greater concern for the markets than a RN one”. Mary McDougall
Has Turkey reached the end of its rate-rising cycle?
Turkey’s central bank is poised to hold its main interest rate at an elevated level on Thursday as policymakers seek to quell the country’s long-running inflation crisis.
The central bank boosted its benchmark one-week repo rate from 8.5 per cent a year ago to 50 per cent in March after Turkish President Recep Tayyip Erdoğan abandoned his disastrous policy of holding borrowing costs at ultra-low levels despite years of runaway inflation. Central bank chief Fatih Karahan has pledged to do “whatever is necessary” to cool inflation, which registered 75 per cent last month.
Turkey’s gross domestic product increased at a 5.7 per cent annual rate in the first quarter of 2024, despite higher interest rates and big increases in taxes on petrol and other goods. But data released in recent weeks on the factory and retail sectors “indicate[s] a weakening outlook for the Turkish economy”, according to Oxford Economics.
Financial experts at Turkish banks and companies expect policymakers will hold the one-week repo rate at 50 per cent for at least the next three months, helping to bring inflation down to 44 per cent by the end of this year, according to a central bank survey.
International economists are also growing increasingly confident that Erdoğan, an avowed critic of high rates, will stick to the programme: “An extended pause in interest rates is likely for some time,” said Liam Peach at Capital Economics in London. Adam Samson
