Turkish central bank keeps rates unchanged

The Turkish central bank kept its benchmark one-week repo rate on hold at 50.0% at its May MPC meeting yesterday, in line with expectations. This marked the second consecutive hold from the TCMB and the aggressive tightening implemented since June last year (a cumulative 4,150bps of hikes over 10 meetings) has likely now come to an end even as price growth remains elevated (69.8% y/y in April). The bank’s communiqué noted that ‘Recent indicators point to a slowdown in domestic demand compared to the first quarter’, and that given the ‘lagged effects of monetary tightening’, keeping rates on hold was the correct course of action. Rate cuts are likely some way off still, however, until ‘a significant and sustained decline in the underlying trend of monthly inflation is observed.’

The Central Bank of Egypt also kept its benchmark interest rates on hold at its meeting yesterday, leaving the overnight deposit rate at 27.25%. The bank’s commuiqué noted that both headline and core inflation had already peaked and that it expected an ongoing moderation in price growth through the year and a ‘significant decline’ in H1 2025. The CBE also noted that the improved external financing conditions following the increase in international support in recent months should also provide disinflationary support. We expect that the CBE will remain on hold through the next several meetings before cutting by a cumulative 200bps at the final two meetings of the year.

PMI data out of the major European economies was mixed for May according to preliminary estimates. Germany’s composite PMI published by HCOB improved to 52.2 from 50.6 a month earlier thanks to improvements in both the manufacturing and services components. However, The France composite PMI dropped below 50 in May, reversing the single month it spent above the level delineating expansion from contraction. Both the services and manufacturing components were below 50 in May though manufacturing was less weak than anticipated. In both France and Germany, output prices were modest for April, helping to feed into a disinflationary trend at work in the Eurozone economy. In the UK the headline composite PMI dropped to 52.8 in May from 54.1, missing market estimates. The dropped was down to weaker than expected services activity (52.9 in May from 55 a month earlier).

The US S&P Global PMI for May improved to 54.4, its strongest print since April 2022. The manufacturing component beat expectations at 50.9 for the month, up from 50.0 a month earlier, while services jumped to 54.4 from 51.3. Input prices were also higher, at almost their highest level since Q3 2023.

Inflation in Japan slowed in April to 2.5% y/y for the headline CPI measure. Core inflation, stripping out food prices, rose by 2.2% in April, down from 2.6% a month earlier. The Bank of Japan has only just begun to normalize policy and is likely to keep tightening its policy stance even amid the relatively low levels of inflation.

The UAE has said it will invest USD 10bn into Pakistan’s economy following a visit of the country’s president to Abu Dhabi. No specific sectors were announced for the targeted investments but the funds would help to provide an anchor of external finance for Pakistan’s economy which has entered into an IMF programme.

Today’s Economic Data and Events

• 10:00 UK retail sales Apr m/m: forecast -0.5%
• 16:30 CA retail sales Mar m/m: forecast -0.1%
• 16:30 US durable goods orders m/m Apr: forecast -0.8%

Fixed Income

• US Treasury yields rose following the stronger than expected PMI numbers for May. Yields on the 2yr UST rose almost 7bps to 4.9353% while the 10yr added almost 6bps to close at 4.4767%.
• Raphael Bostic, president of the Atlanta Fed, said that the economy’s “sensitivity to our policy rate…is going to be a lot less” since many in the US locked in debt at lower rates prior to the hiking cycle. He also said he did not want the Fed to start cutting and then have to reverse course as it would create “policy uncertainty.”
• Moody’s changed their outlook on Emirates NBD to positive from stable.
• Fitch raised their outlook on Saudi Electricity Company to ‘A+’ with a stable outlook.

FX

• Currency markets drifted lower against the US dollar over night as the PMI print provided more evidence of price pressures in the US economy. EURUSD closed marginally lower at 1.0815 while GBPUSD settled lower by 0.1% at 1.2699. USDJPY was slightly higher, up less than 0.1% at 156.93.
• USDCAD also moved in favour of the US dollar, adding 0.3% to settle at 1.3729 while AUDUSD fell 0.2% to 0.6606.

Equities

• US equity markets slumped overnight with the Dow Jones falling by 1.5% while the S&P 500 fell by 0.7% and the NASDAQ dropped 0.4%. European markets fared slightly better with the Euro Stoxx index up 0.25% while the FTSE dropped by 0.4%.
• Asian markets are selling off in trading today with the Nikkei down 1.3% and the Hang Seng lower by 1%.

Commodities

• Oil prices continued to drift lower, fading a mid-day gain. Brent prices settled at USD 81.36/b, down 0.7%, while WTI fell by 0.9% to close at USD 76.87/b. Markets will be focused on the OPEC+ meeting next week to provide the next trajectory for prices.