Week of 5/26: PCE Remains Stable, Turkey’s Worrying Inflation, and Pressure Mounting on the PBoC

Welcome to "Worldview: Central Bank Insights" – your shortcut to understanding recent trends in global finance.

In this twenty-second episode, we will discuss how the personal consumption index in the US remains stable, Turkey's inflation worries continuing, and pressure rising on Beijing regarding a weaker RMB.

Contact: 

Email: rabossong2@gmail.com

Transcript

Hello and welcome to the 22st episode of "Worldview: Central Bank Insights”. I am your host, Reagan Bossong, a sophomore at the Wharton School of Finance, and it is my pleasure to guide you through another exploration of the largest stories regarding global financial dynamics over the past week. In today's discourse, we will begin by discussing how the personal consumption index in the US remains stable, Turkey's inflation worries continuing, and pressure rising on Beijing regarding a weaker RMB.

To begin, in April, the Federal Reserve's preferred inflation metric, the personal consumption expenditures (PCE) index, remained steady at 2.7% year-on-year, matching economists' expectations and the March rate. The Fed aims for a 2% target for the headline PCE index, while the core PCE, which excludes food and fuel prices, was at 2.8%. Monthly increases were 0.3% for the headline figure and 0.2% for the core figure. The Fed's next rate-setting decision is on June 12, with officials indicating the need for more inflation data before reducing current interest rates of 5.25%-5.5%. Investors anticipate a potential rate cut before the US presidential elections in November, with a quarter-point cut expected this year and a possibility of it occurring in September. Data from the Bureau of Economic Analysis also indicated a 0.1% decrease in real consumer spending, aligning with expectations of slowing consumer activity due to high interest rates and a cooling labor market. 

Next, let’s discuss Turkey which is approaching the peak of its inflation crisis, with annual price growth expected to have reached approximately 75% in May, up from just under 70% in April. This rise follows a period of loose monetary policy, fiscal spending, and instability in the lira. The central bank's adoption of more conventional economic policies since President Recep Tayyip Erdogan's reelection suggests inflation might start decelerating. Policymakers forecast inflation to drop to 38% by the end of the year, though this is considered ambitious by some economists. Any significant deviation from these expectations might necessitate further rate hikes, after a year of aggressive tightening brought the benchmark rate to 50% in March. Recent measures have focused on restraining loan growth and removing excess liquidity. The central bank has paused official borrowing costs but maintains restrictive financial conditions through alternative tools. 

Finally, let’s move over to China, where market pressure is increasing on the People’s Bank of China (PBoC) to allow the RMB  to weaken, as the gap between Chinese and US bond yields leads investors to sell the Chinese currency. The PBoC has maintained a strong yuan policy, keeping its daily fixing rate within a narrow range, but the RMB has recently traded up to 2% below this rate, indicating significant selling pressure. The gap in bond yields, with US 10-year Treasury yields at 4.57% and Chinese 10-year government bonds at 2.3%, is driving capital towards higher-yielding US markets. Traders expect a possible one-off depreciation of the yuan, reminiscent of the 2015 devaluation that caused financial turmoil and significant capital outflows. Despite this, the PBoC favors stability, as President Xi Jinping has prioritized a strong currency to enhance China’s financial status. A weaker RMB could affect global trade, increasing tensions with the US by making Chinese exports more competitive. The PBoC allows the RMB to fluctuate within a 2% band around the fixing rate but has resisted depreciation pressures. The central bank claims it can maintain the RMB’s stability, citing improved import and export data and a consolidating economic recovery. However, high US interest rates have also impacted other Asian currencies, with the yen and won falling more sharply than the RMB. Analysts are divided on the RMB's future direction. Some believe the yuan will weaken due to the interest rate gap, while others argue that increased central government spending will support the currency. The PBoC aims to keep interest rates low to address economic weaknesses and may cut rates further if needed. The IMF has urged Beijing to allow more exchange rate flexibility to reduce deflation risks and absorb external shocks. Despite market pressure, the PBoC has not indicated any plans to change its approach. 

So yeah, in conclusion,  we began by discussing how the personal consumption index in the US remains stable, Turkey's inflation worries continuing, and pressure rising on Beijing regarding a weaker RMB. As we continue to live throughout this financial landscape, the ripples of change will definitely continue being felt across economies worldwide. That’s a wrap for this week's central bank roundup. If you have topics you want me to dive into or thoughts on today's podcast, let me know anytime. You'll find all my contact details in the show notes. Until next time. Thank you!