US Fed about to find out if it can pause rates

US inflation data in the coming week will provide clues about whether the Federal Reserve can pause its series of interest-rate hikes at next month’s meeting.

The core consumer price index, which excludes food and energy, probably increased by 5.5% in April from a year ago after a 5.6% increase a month earlier. The annual advance would suggest just a slight moderation in the pace of underlying price pressures, and that inflation is proving persistent.

The core rate has hovered in a 5.5% to 5.7% range for the past four months, underscoring the sticky nature of inflation. Wednesday’s report will be the first of two CPI releases Fed policymakers will have in hand before its June rate decision.

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US central bankers on May 3 raised their benchmark interest rate a quarter point, as had been widely expected, but signalled they may take a break from the most aggressive tightening campaign since the 1980s.

While progress in beating back inflation has been slow, the Fed has to consider recent strain at regional banks and the sum of its yearlong hiking effort on the economy, where rate increases work with a lag.

Aside from the CPI, data on prices paid to producers will be released on Thursday. Economists project a firming in cost pressures for April compared with a month earlier. The upshot is that the figures will indicate the downtrend in goods prices may prove bumpy.

Fed Chair Jerome Powell said at the May FOMC meeting that rates might already be ‘sufficiently restrictive’ — but he needs more time to observe developments before he can have confidence in that judgment.

“Neither April’s CPI nor PPI prints will be reassuring, with both expected to show headline inflation accelerating,” Bloomberg economists said.

Elsewhere, the Bank of England may raise rates by a quarter point, while peers from Peru to Poland will probably keep borrowing costs on hold. A Group of Seven meeting of finance chiefs in Japan will also draw attention.

Asia

China’s latest trade data is expected to show a year-on-year jump in April, building off March’s surprise increase that suggested demand from Asia and Europe has been holding up better than expected.

Inflation data later in the week will probably reveal that price pressures continue to weaken in the world’s second-largest economy.

Australia may record its first budget surplus in 15 years, bolstering the centre-left government’s economic credentials as Treasurer Jim Chalmers moves to reinforce the Reserve Bank’s efforts to peg back inflation.

Economists reckon Tuesday’s fiscal blueprint will show a A$5 billion ($3.4 billion) shortfall, or 0.2% of GDP, in the 12 months to June 30, but local media report the government will deliver a slim surplus amid windfall revenue from high export prices and a bigger income tax-take due to low unemployment.

Finance ministers and central bank governors from the world’s wealthiest nations gather in Japan with a long list of issues to discuss, from debt risks to the state of international financial markets. The G-7 officials will meet Thursday through Saturday in the northern Japanese city of Niigata.

Europe, Middle East, Africa

After a signal of intent by the European Central Bank to keep tightening after the latest quarter-point rate hike, peers around the region may offer a contrast.

For the Bank of England, an increase of that size is anticipated by economists on Thursday, but they’re split on what might follow, with most forecasting a pause.

Data on Friday that’s likely to show a weak pace of growth in the first quarter may underscore the vulnerability of the British economy after what may well, by then, amount to 440 basis points of tightening.

But with UK inflation still in double digits, noticeably higher than in the euro zone, and a tight labor market, investors are betting on further rate hikes ahead. BOE forecasts this month and Governor Andrew Bailey’s remarks will be scrutinised for clues on the outlook.

Several other rate decisions are due around Europe in the coming week. Here’s a selection:

• Poland’s central bank may hold rates steady again on Wednesday as investors wonder if a cut may transpire before general elections in the fall.
• The same day, Romanian officials will probably also keep borrowing costs unchanged, counting on inflation to ease.
• On Thursday, Serbia’s central bank may either call a halt to its steepest tightening rate cycle or opt for yet another hike to tame inflation.

Other major numbers due include March industrial production for Germany and Italy.

In Hungary, numbers on Wednesday will show if the European Union’s fastest pace of inflation has slowed substantially for the first time, possibly paving the way for a rate cut.

Data in Norway may reveal possible slowing in inflation and expansion of only 0.1% during the first quarter. And minutes of the Riksbank’s recent decision, which hit Sweden’s economy with a new half-point rate increase, will also be published.

Italy’s credit-rating update from Fitch Ratings will be released on Friday, a week before Moody’s Investors Service determines if the country should keep investment-grade status. Fitch’s current assessment is one notch higher than that of its competitor.

Turkey goes to the polls

Turkey’s May 14 election will be a key market event, with the possibility it could herald the end to President Recep Tayyip Erdogan’s lengthy rule.

Further south, figures the same day may show Saudi Arabia’s rapid economic expansion is starting to slow, with an outcome of 4.1% anticipated for the first quarter.

And in Africa, Ghanaian inflation will be released on Wednesday. Currently at 45%, it probably slowed for a fourth straight month in April.

Latin America

Brazil’s central bank publishes minutes of its May 2-3 meeting, where board members said there’s almost no room to ease and so kept the key rate at 13.75%. Inflation won’t get back to target before 2027 even with restrictive policy, according to economists surveyed by the central bank.

Both Banco Central de Chile and Banco Central de Reserva del Peru meet in the coming week; neither has given any indication that disinflation has them ready to begin easing. Look for Peru to hold its key rate at 7.75% and Chile at 11.25%

Also in Chile, the April inflation report is all but certain to show consumer prices cooled for a fifth month, and quite possibly dipped back below 10%.

In Mexico, Banxico gets one last look at inflation ahead of its May 18 rate decision. Readings are expected to be lower but a sticky set of core prints — almost 150bps above the headline numbers — may make the case for a 16th straight hike.

Back in Brazil, it’s not hard to see the April consumer price report, expected to show inflation near a 2 1/2-year low, prompting yet another round of central bank bashing by President Luiz Inacio Lula da Silva, who’s furious at policymakers for keeping rates high with the economy struggling.

Additional reporting by Andrea Dudik, Robert Jameson, Malcolm Scott and Sylvia Westall.

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