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Take Five: Inflation watch

Published 05/24/2024, 03:40 AM
Updated 05/24/2024, 03:51 PM
© Reuters. Shoppers check foods at a supermarket in Tokyo, Japan January 10, 2023. REUTERS/Issei Kato/Files
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(Reuters) - Inflation data from the U.S., the euro zone and Japan in the days ahead will guide investors' expectations over the scale and pace of interest rate changes to come in major economies.

Markets are bracing for the shortening of trade settlements for U.S. securities, while South Africans will head to the polls in the most uncertain election in decades.

Here's your look at what's happening in markets this coming week from Rae Wee in Singapore, Lewis Krauskopf in New York, and Naomi Rovnick, Sinead Cruise and Marc Jones in London.

1/PRICING POWER

    Key U.S. inflation data - the personal consumption expenditures (PCE) price index - due on May 31 will give the next hints about whether the Federal Reserve is in position to start lowering interest rates later this year.

It follows separate data earlier this month that showed monthly consumer prices increasing less than expected, which kept alive investors' hopes for rate cuts at some point this year, after hotter-than-expected inflation reports in the first quarter.

Minutes of the last meeting showed Fed officials indicated they still had faith price pressures would ease, if only slowly. But they also said the Fed should wait several more months to ensure inflation is back on track to its 2% target before any moves.

2/BEYOND JUNE

The European Central Bank has all but promised to cut its deposit rate from a record high of 4% in June. But it's expected to keep markets guessing about how far and fast it will lower borrowing costs after that, particularly if monthly inflation data out on May 31 shows price pressures remain volatile.

Economists polled by Reuters expect euro zone inflation to have risen to 2.5% in May year-on-year, from 2.4% in April.

Societe Generale (OTC:SCGLY) economists predicted the ECB will cut rates in June and September but then pause to wait for the Fed to implement its first rate cut and assess inflationary risks from rising wages. Market pricing is less clear on when that second rate cut might come.

"With wage growth running high and the Fed forced to hold off rate cuts for now, we expect the language from the ECB to remain hawkish," the SocGen team said.

3/KEEPING WATCH

Consumer prices across Japan are in the spotlight as markets try to gauge when the Bank of Japan (BOJ) could next raise rates, with Tokyo inflation data scheduled for May 31 taking centre stage.

The figures come two weeks before the BOJ's next monetary policy meeting, where some are betting the central bank could deliver its second rate rise after March's historic move.

Policymakers have thus far remained reticent on how soon further hikes could come, but they face increasing pressure to do so as a fragile yen continues to cripple weak consumption.  

    May 31 will also see the periodic release of the Ministry of Finance's intervention data which covers the recent rounds of suspected intervention and the BOJ's bond buying schedule, where traders will look out for cuts in the amount of central bank purchasing.

4/A DASH FOR DOLLARS?

A Wall Street boom confounding the old 'sell in May and go away' investment adage is adding to worries among those tasked with ensuring a smooth transition from two-day to one-day trade settlement in the United States, Canada and Mexico on May 28 for U.S. stocks, corporate and municipal bonds, and other securities.

As trading activity climbs, so too do the risks of so-called trade "fails" - when intermediaries don't have necessary instructions to settle on behalf of clients within the tighter time frame. This might trigger a rush for dollars among non-U.S. investors who need to borrow at short notice to cover any temporary mismatch in inflows and outgoings.

Any disruption is expected to be temporary, and the move to T+1 is broadly considered a crucial step towards more liquid and efficient financial markets. But given time zones, the move to T+1 trade settlement is effectively T+0 for many in Asia, where preparations are seen lagging other regions.

5/ ANC YOU ON WEDNESDAY

South Africans vote in a national election on Wednesday and, for the first time since the end of apartheid 30 years ago, polls suggest the ruling African National Congress party (ANC) is at risk of losing its parliamentary majority.

If the ANC gets less than 50%, or even 45%, support it would have to seek one or more coalition partners to govern.

© Reuters. Shoppers check foods at a supermarket in Tokyo, Japan January 10, 2023. REUTERS/Issei Kato/Files

Get the more business friendly Democratic Alliance (DA) on board and the rand and other South African assets are likely to take it in their stride. But any hint that it might be the far-left Marxist Economic Freedom Fighters (EFF) or recently-formed MK, led by ex-President Jacob Zuma, then that stride might suddenly become a stumble.

The drama might not end there either. President Cyril Ramaphosa could face an internal leadership challenge if the ANC is perceived to have performed poorly.

(Graphics by Vineet Sachdev, Pasit Kongkunakornkul, Prinz Magtulis and Sumanta Sen; compiled by Karin Strohecker; Editing by Toby Chopra)

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