Both the consumer price index and the core CPI — which excludes food and energy — decelerated on an annual basis, highlighting inflation’s descent since peaking last year. At 4%, year-over-year inflation is now at its lowest level since March 2021, according to the Bureau of Labor Statistics.
The core CPI however, rose 0.4% for a third straight month, in line with estimates. The overall CPI, however, increased a smaller 0.1%, aided by lower gasoline prices.
Federal Reserve officials paused on Wednesday (June 14) following 15 months of interest-rate hikes. The decision left the benchmark federal funds rate in a target range of 5% to 5.25%. Fresh quarterly Fed forecasts showed borrowing costs rising to 5.6% by year end, according to the median projection, compared with 5.1% in the previous round of projections. Nearly all Fed officials, however, expect it will be appropriate to raise interest rates “somewhat further” in 2023 to bring down inflation.
Inflation pressures continue to run high and the process of getting inflation back down to 2% has some way to go. The committee “judged it prudent” to hold rates steady this month given how quickly rates have rise.
Meanwhile, China’s central bank ramped up its monetary stimulus to help spur the economy amid signs of a weakening property market, a slump in business investment and record joblessness among young people. The People’s Bank of China lowered the rate on its one-year loans — or medium-term lending facility — by 10 basis points to 2.65%, the first reduction since August. That will prompt banks to lower their lending rates soon. The move came shortly before official data showed economic activity weakened in May. Growth in industrial output slowed to 3.5% from 5.6% in April, while retail sales grew 12.7%, below expectations. Fixed asset investment by private businesses contracted in the first five months of the year, while property investment deteriorated further.
The central bank has shifted to an easing mode after the economy lost momentum since the first-quarter’s post-pandemic surge.
China needs to “focus on repairing and expanding demand” and spur business and market confidence, the National Bureau of Statistics said.
Chinese stocks, which climbed after the rate cut, largely held their advance following the data. A gauge of shares listed in Hong Kong was up 1.3%, still leading gains in Asia. The offshore yuan extended its loss to trade 0.2% weaker at 7.1865 per US dollar.
Key highlights of the data were as follows:
• China’s May Manufacturing Output +4.1% year-on-year (y-o-y); By Industry
• China May Retail Sales +12.7% y-o-y, Autos +24.2%; By Category
• China Jan-May Fixed-Asset Investment +4% y-o-y; Est. +4.4%
• China Jan-May Home Sales +11.9% y-o-y; Property Investment -7.2%
The unemployment rate remained relatively elevated at 5.2% in May, while the jobless rate for young people between the ages of 16 and 24 rose slightly to 20.8%, a new record high since data became available in 2018.
The PBOC timed its easing just as the Federal Reserve paused its rate-hiking cycle for the first time in 15 months, while still signalling further tightening ahead. The widening gap between US and Chinese rates have fuelled capital outflows and put pressure on yuan, which is down more than 3% against the US dollar in 2023.
Historically, in Malaysia, the OPR is 100-150 basis points above the Fed Fund rate. It is still too soon to talk of an OPR cut (from 3.0%) as inflation is still elevated and our differential with the Fed Funds rate which remains above 2%. This (negative differential) is not good news for our exchange rate and is worse with the weakening economic conditions in China. BNM has some tough work to do to keep growth going and “smoothen” the depreciation of the ringgit. If oil prices remain above USD80/barrel for the year, there is hope on the exchange rate front. Depreciation is good news for exporters but not so for importers, students going overseas or those foreign workers remitting funds to their loved ones. Personally, I prefer a stronger exchange rate regime and a higher productivity. If not, we are “masking” our inadequacies through this depreciation strategy.
References:
US inflation slows, giving room for Fed to pause rate hikes, Reade Pickert, TheEdge CEO Morning Brief/Bloomberg, 14 June 2023
Powell says nearly all officials expect “some” further Fed hikes, Jonnelle Marte & Craig Torres. TheEdge CEO Morning Bried/Bloomberg, 16 June 2023
China’s central bank ramps up rate cuts as economy weakens, Bloomberg, 15 June 2023
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