Has inflation slowed US consumer spending?
EY-Parthenon chief economist Gregory Daco says the US has already reached peak inflation, but the big factor for consumers will be the pace at which price growth cools, and what level it eventually reaches.
The core personal consumption expenditures price index, a measure that strips out food and energy prices, has begun receding. Core PCE rose 5.2 per cent year over year in March, compared with a 5.3 per cent increase in February. Economists expect a further decline to a 4.9 per cent rate of increase in the April data, which are published on Friday. PCE is released after other inflation reports, including the consumer price index, but as the Federal Reserve’s preferred inflation measure, it is closely watched by investors.
Oren Klachkin, lead US economist at Oxford Economics, will also be monitoring the consumer spending figures that are included in the PCE data to see if there is a shift from goods to services. “We actually want to see a rotation towards services,” he said. “It means that we’re returning towards normal after two-plus years of dealing with Covid.”
Daco said a pullback in goods consumption was expected, but that a decline in services spending, particularly in leisure categories, would indicate that the economy was more fragile than expected.
Recent quarterly earnings show that spending on goods may be slowing. Walmart cut its full-year profit forecast last Tuesday and Target reported a 52 per cent decline in net income a day later. Jaren Kerr
Will Turkey’s central bank act to steady the lira?
The Turkish lira has returned to choppy waters in recent weeks, losing 16 per cent of its value against the dollar this year amid soaring inflation and a challenging global economic outlook. But that does not mean that Turkey’s central bank will take action.
Members of its monetary policy committee will almost certainly opt to keep the policy rate on hold at 14 per cent on Thursday.
The bank — which is effectively run by president Recep Tayyip Erdoğan, who holds unconventional views on monetary policy — has sat on the sidelines even as inflation has reached 14 times its official target of 5 per cent, hitting almost 70 per cent last month.
As deeply negative real interest rates have put pressure on the currency, authorities have sought to hold the lira steady using an array of unconventional measures. They include a government-backed saving scheme that seeks to tempt Turkish residents into holding lira by promising to protect them from exchange rate losses. The central bank has also increasingly put pressure on corporations not to buy foreign currency — and urged commercial banks not to sell it to them.
But analysts warn that these tactics may be reaching their limits. Per Hammarlund, chief emerging markets strategist at the Swedish bank SEB, said that a “perfect storm” was building for the lira with rising inflation, a growing current account deficit, high global energy prices and the risk of a slump in vital export revenues as growth slows worldwide.
“A rate hike and a credible commitment to bring down inflation would stabilise the lira more permanently,” he wrote in a recent note to clients. “But with President Erdoğan staunchly opposed to hikes, it will be a last resort only.” Laura Pitel
How is eurozone business activity holding up?
Business activity has held up in the eurozone so far this year. But economists worry this could soon change if the fallout from Russia’s invasion of Ukraine and China’s strict coronavirus lockdowns take a heavier toll on output.
A key test will come on Tuesday from S&P Global’s latest survey of purchasing managers, which will be watched by European Central Bank policymakers as they weigh how soon to stop buying more bonds and start raising interest rates.
The survey is expected to show eurozone business activity has been stable in May from the previous month, with the composite PMI reading slipping 0.5 points to 55.3, according to a poll of economists by Reuters.
Services companies are expected to report a slight boost to their activity from the lifting of coronavirus restrictions, offsetting a slowdown in growth at manufacturers due to the fallout from the war in Ukraine and supply chain disruptions.
Annalisa Piazza, an analyst at MFS Investment Management, said China’s coronavirus lockdowns would hit eurozone industry in two ways. “It will cause more supply constraints and this will further slow down production, primarily of intermediate industrial goods,” said Piazza. “But for eurozone exports, there is also sure to be an immediate impact.”
German manufacturers are particularly vulnerable to such headwinds. Investors will learn more about their outlook on Monday when the Ifo Institute in Munich publishes its latest business survey results, which are expected to show a dip in sentiment due to expectations dropping to a two-year low. Martin Arnold