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Dollar weakens amid better than expected inflation readings

NBK MONEY MARKETS REPORT

KUWAIT: Producer prices in the US rose more than expected in April, increasing by 0.5 percent compared to a forecasted 0.3 percent rise. The increase was largely due to service prices, which jumped 0.6 percent, with increases in service costs such as portfolio management and hotel stays. This indicates that inflation remains high. The rise comes after surveys showed people expect inflation to increase, leading to less expectation of the Federal Reserve cutting interest rates in September.

While inflation rose in the first quarter due to factors like businesses raising prices and service providers catching up on increased costs, economists are hopeful it will go down again this quarter as the job market cools down. However, Federal Reserve Chair Jerome Powell is not as confident in this prediction. Financial markets reacted to the news with stocks rising, the dollar weakening, and bond prices increasing. The chance of a rate cut in September is now seen as 60 percent, down from 64 percent before the PPI data release. Some economists believe the Fed might even cut rates in July.

Fed Chair Powell speaks

With inflation running faster than anticipated through the first three months of the year, the US Chair of the Federal Reserve Jerome Powell acknowledged that “my confidence in that is not as high as it was,” but he still believes it is unlikely that the Fed would have to raise rates further, even if the likelihood of rate cuts has become less certain. “We did not expect this to be a smooth road, but these were higher than I think anybody expected” Powell added referring to recent inflation readings. Despite this, he gave a bullish outlook stating, “I expect that inflation will move back down ... on a monthly basis to levels that were more like the lower readings that we were having last year.” Markets are pricing in two rate cuts by year-end.

Consumer price index

US consumer price index increased less than expected in April, where the month-over-month figure showed a 0.3 percent increase, lower than the previous figure of 0.4 percent. The year-over-year figure showed a slight decrease from the previous 3.5 percent figure at 3.4 percent for the month. Core CPI was also slightly lower for the month at 0.3 percent, in line with expectations. The majority of the increase for the figure was attributed to shelter and gasoline costs, where shelter rose 0.4 percent for the third straight month, and gasoline rose 2.8 percent following a 1.7 percent increase in March.

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Retail sales

US retail sales was flat in April, with the month-over-month figure showing no change, well below expectations of a 0.4 percent increase, and below a downward revised 0.6 percent increase seen in March. The figure supports the narrative that consumer spending is losing momentum, with gasoline prices ticking higher, and consumers pulling back from spending on goods. Speculation for rate cuts continues to vary greatly among economists, while market expectations for rate cuts to begin in September increased slightly following the data release.

Unemployment claims

There’s a recent rise in unemployment claims in the US, reaching the highest level since late August 2023. This could signal a shift in the previously hot job market. The Labor department data showed an increase in both new claims (231,000) and continuing claims (1.78 million) compared to the prior week. This comes after a period of strong hiring, but April’s numbers fell short of expectations. Additionally, job openings are dropping, suggesting a possible slowdown in the job market throughout the year.

The greenback extended gains over the week, last trading at 104.670.

BoE monetary policy

The Bank of England decided to hold interest at (5.25 percent) to fight inflation. Three members wanted to raise rates further. This high interest rate environment is likely to last for a while to ensure inflation gets back down to their target of 2 percent. The Bank of England Governor emphasized that they are still focused on bringing down inflation and won’t be considering lowering rates anytime soon.

Japan’s producer price index

Japan’s producer prices continued to climb in April 2024, rising 0.9 percent year-over-year for the second month in a row. This marks the 39th consecutive month of producer prices increases and the highest inflation rate for manufacturers since October 2023. The increase was broad-based, with most categories experiencing rising costs. Notably, transportation equipment, food and beverages, and various machinery sectors saw significant price hikes. However, there were some exceptions: chemicals and iron and steel prices continued to decline. Overall, this data suggests ongoing inflationary pressures for Japanese manufacturers, potentially leading to higher consumer prices in the near future.

The Japanese yen continues its weakening trend, with the USD/JPY pair closing at 153.52.

China’s consumer price index

CPI in China grew for the third straight month rising 0.3 percent y/y versus expectations and previous figure of a 0.1 percent growth. The reading comes amid stronger than expected Chinese imports data, indicating that local demand in the world’s second largest economy is starting to pick up. Despite this, PPI continues to lag, declining 2.5 percent in April, more than forecasts of a 2.3 percent fall. Chinese business activity remains under pressure amid weak overseas demand. Additionally, volatile local consumer spending and the continuation of the property slump adds to the problems faced by Chinese policymakers despite introducing a series of easing measures to support the economy.

The USD/CNY currency pair is up on the week, last seen at 7.2219.

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USD/KWD closed last week at 0.30655.

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