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SPI Management Newsletter 12.05.23

Updated: May 19, 2023

April Inflation Report Suggests Federal Reserve's Pause on Interest Rate Hikes

The recent inflation report suggests that the Federal Reserve's consideration for a pause in interest rate hikes might be well-timed. Officials have been evaluating if their actions have effectively moderated the economy and inflation. The new data implies that the intensity of price pressures may be plateauing, or even potentially decreasing, particularly as the slower growth in rental-housing costs start to reflect in official inflation metrics.

While inflation is yet to showcase a convincing slowdown, enough to allay concerns about it exceeding double the Fed's 2% target, Fed Chair Jerome Powell had earlier expressed that multiple slower inflation readings were not necessarily a condition for a pause in rate hikes.

Inflation was reported to be 4.9% in April, a decrease from a peak of 9.1% in June 2022. The core inflation, which excludes the volatile food and energy prices, was noted to be 5.5% in April, down from its recent peak of 6.6% in September.

Despite individual data releases being significant, the Fed has hinted that at key inflection points, they might not be as critical in deciding the course of action for the next meeting. This was evident in November when the Fed was prepared to decelerate its rapid rate hikes, even if inflation data didn't show clear signs of improvement. This was due to the greater emphasis placed on the delayed impact of their earlier moves.

The same logic seems to hold true now. Following the recent rate hike that brought the benchmark federal-funds rate to a range between 5% and 5.25%, the highest level in 16 years, Mr. Powell outlined reasons they might consider pausing rate increases at their next meeting. This pause is also being considered due to the delayed impacts of recent strains in the banking system, particularly following the unexpected failure of Silicon Valley Bank in mid-March.

These signs point towards a possible pause in rate hikes during their June and potentially July meetings.

Chinese Inflation Hits Two-Year Low Amid Economic Uncertainty

China's consumer inflation slowed to its lowest level in over two years, registering a mere 0.1% rise in April compared to the same month last year, according to the National Bureau of Statistics. This slowdown indicates a potentially shaky recovery in domestic demand as the country wrestles with issues such as high youth unemployment, a volatile housing market, and declining corporate profits.

Despite the lower-than-expected inflation, economists predict the recovery to persist, with core inflation likely to climb throughout the year. Therefore, China's central bank is not expected to make imminent cuts to policy rates to stimulate growth.

However, the persistently soft demand and declining food and energy prices have prompted Standard Chartered to revise its full-year consumer inflation prediction downwards to 1%. This cautious stance reflects the ongoing uncertainties surrounding China's economic rebound.

BoE Aligns with Fed's Interest Rate Increase, Hints at Potential Further Raises

The Bank of England (BoE) has increased its key interest rate to 4.5%, marking its 12th consecutive raise. This decision aligns with similar actions from the Federal Reserve and the European Central Bank. Yet, unlike the Fed and the ECB, the BOE hinted that further rate increases may be in store should inflation remain persistently high.

The UK's inflation rate in March was the highest among the G7 countries, as consumer prices soared 10.1% from a year earlier. Despite this, the BOE had previously suggested that their series of rate rises might be nearing an end. However, recent higher-than-expected inflation figures and a tight job market have caused the bank to continue tightening policy.

Interestingly, the BOE noted that much of the impact from previous rate rises is yet to be felt, particularly as fixed-rate mortgage deals begin to expire over the next year. This suggests that another rise in the key rate may not be necessary. Despite the overall decision to increase rates, two of the BOE’s nine rate setters voted to keep borrowing costs unchanged.

Adapted from WSJ, Reuters, CNBC, NYT

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