US Federal Reserve raises key rate by a half-point in bid to tame inflation

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Macro Snapshot —Fed expected to fight inflation with rate hike; French services sees strong growth

RIYADH: The US Federal Reserve is expected to raise interest rates as it combats inflation levels, while  India’s central bank raised its key rate by 40 basis points for similar reasons. 

Russian manufacturing activity shrank for the third month running in April, whereas Italy and France saw growth in their services activity, according to S&P Global Purchasing Managers’ Index. 

Germany’s exports fell more than expected in March, while Spain’s April unemployment shrank 2.77 percent to 3.02 million.

Australian retail sales sped ahead in Q1

Australian retail sales easily sped past forecasts for a third straight month in March as spending built a head of steam that should help it weather this week’s rise in interest rates.

Data from the Australian Bureau of Statistics showed retail sales jumped 1.6 percent in March to a record A$33.6 billion ($23.9 billion), topping forecasts of a 0.6 percent gain.

That came after hefty gains in January and February and left sales up 9.4 percent on a year earlier. 

While some of that spending would have been eaten up by surging inflation, it still points to an upbeat quarter for economic growth.

“Even allowing for a strong increase in retail prices, we estimate that volumes rose by a solid 1.5 percent q/q,” said Marcel Thieliant, a senior economist at Capital Economics.

“While falling consumer confidence amid soaring inflation and rising interest rates poses downside risks, we think that the still high savings rate will allow for further solid gains in spending over coming quarters.”

Fed expected to step up inflation fight with big rate hike

The US Federal Reserve is expected to raise interest rates by half of a percentage point and announce the start of reductions to its $9 trillion balance sheet as central bankers intensify efforts to bring down high inflation.

Fed policymakers have widely telegraphed a double-barreled decision that would lift the Fed’s short-term target policy rate to a range between 0.75 percent and 1 percent, and set in motion a plan to trim its portfolio of Treasuries and mortgage-backed securities by as much $95 billion a month.

The policy statement is due to be released at 1800 GMT following the end of the Fed’s latest two-day meeting.

Markets have priced in further rate increases through this year and into next, including at least a couple more half-percentage-point hikes, as traders bet the central bank moves much more quickly than it had anticipated it would in March to get borrowing costs up to where they will start actively curbing inflation.

With no fresh Fed economic or policy rate projections due until the central bank’s June meeting, most clues on how far and how fast it is prepared to go will come from Fed Chair Jerome Powell’s news conference.

Russian manufacturing activity shrinks again in April 

Russian manufacturing activity shrank for the third month running in April, driven by further output and employment declines, though at a slower pace than in the previous month, a business survey showed on Wednesday.

The S&P Global Purchasing Managers’ Index rose to 48.2 from 44.1 in the previous month, staying below the 50.0 mark that separates expansion from contraction.

The survey did not mention Ukraine, but S&P Global said sanctions had weighed on client demand and firms’ ability to source raw materials.

Western nations have imposed unprecedented sanctions against Moscow over Russia’s actions in Ukraine.

“Logistics delays and material shortages led to longer lead times for inputs, with April seeing the third-steepest lengthening of supplier lead times over 25 years of survey history,” S&P Global said in a statement.

The outlook was gloomy, impacted by expectations of reduced purchasing power among customers. Greater import substitution and hopes of a longer-term improvement of economic conditions kept the reading for future output above the 50.0 mark, but the degree of optimism was at its second-lowest in 23 months.

“Output expectations were historically subdued amid concerns regarding the impact of sanctions on future demand and new orders,” S&P Global said.

French services activity growth strongest in over four years in April

France’s dominant services sector enjoyed its sharpest increase in activity in more than four years in April as fewer COVID-19 restrictions gave businesses a boost, although inflation remained a concern, a survey showed on Wednesday.

S&P Global said its final services PMI was 58.9 points last month, up from 57.4 in March and broadly in line with a flash estimate.

Any reading above the 50 point mark indicates growth. The final services PMI number in April was the highest in any month since January 2018.

A final April reading of France’s composite PMI index, which includes both the services and manufacturing sectors, meanwhile rose to 57.6 points from 56.3 in March, broadly in line with an earlier flash forecast.

“It was another positive month for France’s services firms in April as business activity in the largest sector of the economy increased at the fastest rate in over four years,” said S&P Global senior economist Joe Hayes.

“The economy is still reaping the benefit of reduced COVID-19 restrictions as many companies linked strong and sustained growth in their order books to the pandemic recovery.”

Italian services activity expands in April amid stronger demand 

Italy’s services sector expanded in April at the strongest pace since November, a survey showed on Wednesday, brightening hopes for economic growth prospects in the second quarter amid reports of stronger domestic and foreign demand.

S&P Global’s PMI for services rose to 55.7 in April from 52.1 in March, pushing further above the 50 mark that separates growth from contraction.

The reading beat the median forecast of 54.5 in a Reuters survey of 14 analysts.

The sub-index for new business in the service sector jumped to 56.0 in April from 52.6 in March.

Italy’s service sector took longer to recover from COVID-19 lockdowns than the smaller manufacturing sector, which has seen growth for nearly two years.

The manufacturing PMI recorded its 22nd consecutive month of expansion in April, though growth slowed from the month before. 

German exports fall more than expected in March

German exports fell more than forecast in March, easing by 3.3 percent, while imports rose by 3.4 percent, according to data released by the Federal Statistical Office on Wednesday.

A Reuters poll had predicted a month-on-month fall in exports of 2.0 percent.

Exports to Russia plunged by 62.3 percent in March compared with February partly because of sanctions imposed as a result of the war in Ukraine, the Office said in a statement.

In March, Germany had a seasonally adjusted trade surplus 3.2 billion euros ($3.4 billion), the Office reported, versus a forecast 9.8 billion euros.

Spain’s April jobless falls 2.77 percent from March to 3.02 mln

The number of people registering as jobless in Spain fell 2.77 percent in April from March, or by 86,260 people, leaving 3.02 million people out of work, Labour Ministry data showed on Wednesday.

Spain added 33,244 net jobs during the month, separate data from the Social Security Ministry showed.

The data marks the third consecutive month of falling jobless figures and the lowest number of unemployment in a month of April since 2008, the ministry said.

Polish central bank to hike rates by 100 bps to tackle inflation

The National Bank of Poland is expected to deliver its second 100 basis point hike in a row on Thursday, a Reuters poll showed, bringing the cost of credit to 5.5 percent as it grapples with the highest inflation in almost a quarter of a century.

Consumer price inflation surged past analysts’ estimates to hit 12.3 percent in April, according to a flash estimate from the statistics office, and analysts expect a sharp rise in rates to counter price growth that has reached its highest level since 1998 in part due to the war in Ukraine. 

UK consumer and mortgage lending rise again in March 

British consumer borrowing rose solidly in March and mortgage lending hit its highest since September as house prices surged, according to Bank of England data that showed no early sign of a hit to the economy from the country’s cost-of-living squeeze.

Lending to consumers rose by £1.3 billion ($1.6 billion) in net terms, as expected in a Reuters poll of economists and following a nearly £1.6 billion increase in February.

Credit card lending accounted for more than half of the increase in March, which was before a sharp rise in energy costs and an increase in taxes in April.

The BoE reported £7 billion of net mortgage lending, up from £4.6 billion in February, and 70,961 mortgage approvals, down slightly from the previous month but still well above the pre-pandemic norm.

Britain’s housing market retained much of its momentum in the first months of 2022, despite the phasing out of temporary tax breaks on property purchases in the second half of 2021.

The BoE is watching for signs of how fast-rising inflation is affecting the economy as it considers how much further it needs to raise interest rates. The central bank is expected to increase its bank rate to 1.0 percent from 0.75 percent on Thursday

India cenbank raises key rate by 40 bps to tame inflation

The Reserve Bank of India’s monetary policy committee raised the key lending rate by 40 basis points on Wednesday, in a surprise move, as it sought to take calibrated steps to exit the extraordinary accommodation and contain rapid inflation.

The MPC raised the key lending rate or the repo rate by 40 basis points to 4.40 percent, Governor Shaktikanta Das said in a virtual address, announcing the decision after an off-cycle meeting of the committee on May 2 and May 4. 

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