PBoC Extends Liquidity as Fed Doves Fly Away Amid Jump in US Inflation Expectations

The People’s Bank of China (PBoC) kept the interest rates unchanged at today’s monetary policy meeting, but extended long-term liquidity to boost anemic Chinese growth.

Many analysts expected a rate cut from the PBoC today, after the latest set of economic data revealed slowing exports and a faster-than-expected fall in Chinese inflation – both being a strong sign of insufficient growth momentum for the EM giant.

Today’s status quo in PBoC rate policy strengthens odds for an imminent PBoC rate cut. The first rate cut is expected in June.

But interestingly, the higher PBoC liquidity and looser PBoC rate expectations couldn’t boost global growth optimism this Monday. Crude oil slipped below $70pb, while copper futures slipped below the 200-DMA last week, and remain under decent selling pressure despite the PBoC news.

US inflation expectations jump

Data released Friday showed that the US consumer sentiment fell to a 6-month low, as long-term inflation expectations jumped to a 12-month high, fueling worries that the Federal Reserve (Fed) may not stop hiking the interest rates, or, it won’t be able to cut the rates anytime soon.

The June rate hike expectations rose to around 16%, the dollar index rallied past the 50-DMA and equities fell.

Selloff in equities were also fueled by a renewed pressure on US regional bank stocks as the selloff in PacWest shares extended to a second day after the bank revealed having lost nearly 10% of its deposits last week.

The S&P 500 tested the 4100, but closed the week a few points above this psychological mark, while Nasdaq advanced to a fresh high since last summer, but gave in to higher yields and close the session 0.37% lower.

While the Fed rate discussions swing in both directions, the ongoing stress on the US regional bank level will likely bring the Fed to inject liquidity into the system to keep the financial system sound and stable. In this context, excess liquidity will likely continue being supportive for stock valuations.

Debt ceiling saga

Rising US yields and the US debt ceiling impasse are major drags to investor appetite.

The meeting that was supposed to take place between Biden and McCarthy on Friday was postponed to this week. The latter has been partly taken as a sign that the staff level negotiations progress, and that an eventual agreement on spending could pave the way for an agreement on debt ceiling.

But nothing is less sure, and the debt ceiling suspense will likely continue until the last minute, keeping investors cautious, looking for safety in long-term US sovereign bonds and gold.

Tight, tight

Sunday’s Turkish election results were tight. According to the latest results, no candidate, including President Erdogan got a majority of votes to avoid a runoff.

It looks like Turks will go back to voting in two weeks to decide who between Recep Erdogan and Kemal Kilicdaroglu will be the next president.

Political uncertainty is never good for investor sentiment and the next two weeks will be marked by uncertainty, low predictability and high volatility in Turkish assets.

The USDTRY is holding up so far, but the pair advanced to the highest levels on record. The central bank of Turkey (CBT) is putting a lot of weight and money to keep the lira stable against the greenback.

Turkey’s 10-year yield jumped more than 8% this morning, while the BIST 100 is down by 1% at the time of writing.

The major risk is the lira. Will the CBT keep its FX strategy unchanged and defend the lira? Will it be able to counter an eventually increased selling pressure on the lira? If no, what happens to the lira?

A sudden jump in dollar-try is a possibility, a severe devaluation of the lira could inject further volatility to Turkish stock and bond markets.