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US Fed’s fight against inflation lacks progress

NBK Weekly Report

KUWAIT: Retail sales in the United States topped estimates, rising 0.7 percent on the month doubling expectations of a 0.3 percent increase. The greater than expected print suggests resilience within US consumers and upwards pressure on inflation persists. The latest retail sales numbers come amid a time where CPI was up 0.4 percent on the month and 3.5 percent annually, while recent non-farm payrolls show 303,000 jobs added to the economy, indicating that US consumers are willing to spend despite inflation reaccelerating backed by a historically tight labor market that continues to fuel demand in the economy. Following the release of the retail sales data, markets pushed back expectations of a first rate cut from July to September.

Empire State Manufacturing Index

The Empire State Manufacturing Survey for April 2024 shows continued decline in manufacturing activity in New York. Despite a small increase, the general business conditions index remained negative. New orders, shipments, and employment all contracted. Inventories edged higher for the first time in months, and delivery times shortened. Prices paid for inputs rose slightly, but selling prices held steady. While firms expect some improvement in the next six months, optimism is subdued, with a significant decline in the outlook for employment growth.

Words from Jerome Powell

Stocks closed mixed, treasury yields rose, while the greenback was slightly up after Fed Chair Jerome Powell lamented about the “lack of further progress” on inflation this year. Commenting on the recent economic data, Powell stated that it “shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2 percent inflation goal.” He added that “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.”

Furthermore, Powell said that “We can maintain the current level of restriction for as long as needed” indicating that he is walking back from his statements weeks ago where he signaled that he is happy with the progress of inflation falling to 2 percent, and that the Fed are on track to cut rates sooner rather than later. As markets digested the comments made by Powell, they significantly reduced expectations of a cut in June and July, instead favoring a first rate cut to occur in September’s meeting.

Bank of England governor

The Bank of England Governor, Andrew Bailey, suggested the UK might lower interest rates sooner than the US. He believes inflation in the US is driven by high demand, while the UK is still recovering from supply chain issues and the war. This contrasts with the Federal Reserve Chair who sees US inflation lasting longer. As a result, some speculate the Bank of England or European Central Bank could cut rates before the US Federal Reserve. However, investors are cautious, pushing back expectations for a UK rate cut from August to September and reducing their forecasts for the total number of cuts this year. Despite Bailey’s comments, the value of the pound remained relatively unchanged.

UK CPI

The Consumer Price Index in the UK was unchanged in March 2024 compared to February, while the Consumer Prices index including owner occupiers’ housing costs (CPIH) increased by 0.6 percent. On an annual basis, CPI decreased to 3.2 percent from 3.4 percent in February, and CPIH remained unchanged at 3.8%. Compared to annual changes, prices increases were larger for both CPI and CPIH in March 2024.

Food prices rose at as lower pace in March 2024 compared to a year ago, while motor fuel prices increased this year but decreased compared to March 2023. Both core CPI and core CPIH decreased slightly on a year-to-year basis. Price increases for core goods slowed down for both CPI and CPIH. Overall, inflation slowed slightly in March 2024compared to February. However, prices are still higher than they were a year ago.

Retail sales

Retail Sales in March 2024 showed no change compared to the previous month. This follows a small increase in February that was later revised to flat growth. There were mixed results across sectors, with fuel and non-food stores experiencing a slight rise, while food stores and online retailers saw a decrease in sales volume. However, looking at the bigger picture, retail sales for the past quarter have grown slightly compared to the previous quarter, likely due to the low sales figures during the December holidays.

Industrial production

China’s economy grew faster than expected in the first quarter, at 5.3 percent. However, this growth may not be sustainable. The strong performance was driven by public investment, while private consumption and production remained weak. This uneven growth raises concerns about a potential housing market crisis and excess capacity in some industries. Despite these challenges, economists still believe China’s 5 percent growth target for the year is achievable. The question remains whether the government will take further action to boost domestic demand and stabilize the property market.

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