Federal Reserve governor Jay Powell © FT montage; Bloomberg

Will inflation data give the Fed a good reason to cut rates?

Consumer price Inflation data released on Wednesday could provide justification for the US Federal Reserve to begin cutting interest rates, after Friday’s weak US jobs growth figures further darkened the outlook for the world’s biggest economy.

“The inflation number is the big thing,” said Jon Hill, a rates strategist at BMO Capital Markets. “If you start to see disappointing inflation as well then it is game over. The Fed will move into a cutting cycle.”

Jay Powell, Fed chair, has already vowed to “act as appropriate” to maintain the current economic expansion, which has been seen as a hint that the central bank is considering easing its monetary policy.

After Friday’s sharp drop in jobs growth, the chance of a rate cut as soon as July stood at 65 per cent, according to futures prices.

Despite the big fall in Treasury yields in anticipation of a rate cut from the Fed, benchmark 10-year US break-evens — a market measure of expectations for long-term price rises — remain subdued at just 1.74 per cent, below the Fed’s long-term inflation target of 2 per cent.

Nonetheless, current measures of price rises have remained resilient. Core CPI is expected to come in at 2.1 per cent for May, year-on-year.

Some investors see a cut in interest rates as almost a done deal as the Fed seeks to respond to escalating trade wars. Falling inflation could solidify that view.

The problem is that break-evens suggest that it may take more than a cut in rates to boost the economy, said Mr Hill.

“The surprising thing is the lack of pick-up in break-evens,” he said. “If part of the reason to justify a cut is to push up inflation expectations, then it doesn’t look like it’s going to work.” Joe Rennison

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Will Turkey’s central bank surprise the markets again?

If there is one thing that is certain about Turkey’s central bank, it is policymakers’ propensity to surprise the markets.

Economists and investors broadly expect the Central Bank of the Republic of Turkey will on Wednesday hold its one-week repo rate — the bank’s interest-rate benchmark — steady at 24 per cent.

The pace of inflation has eased to 18.7 per cent from a high last autumn above 25 per cent. Central bankers and Recep Tayyip Erdogan’s government have said that a slowing in the country’s rate of price growth is a clear sign that a “rebalancing” is under way following last year’s lira crisis that sparked a flight from Turkish assets.

But some analysts fear that a slowing rate of inflation and some recent stability for the currency could prompt the central bank to make a premature — and highly damaging — rate cut.

Mr Erdogan is a known critic of high rates, and emerging market analysts have long speculated that he has indirectly pushed policymakers into a more dovish approach.

Such concerns have flared repeatedly in recent months. In April, for instance, the central bank unnerved investors by removing the so-called tightening bias from its policy decision — a move many analysts saw as bizarre, given the high stakes of a potential rate cut.

“Any decision to cut policy rates before inflation expectations are solidly anchored risks undermining the value of the lira and exacerbating inflationary pressures,” Moody’s, the rating agency, warned last month.

Tim Ash at BlueBay Asset Management agreed, saying it would be a “huge gamble” for Turkey to reduce the repo rate at this juncture. Adam Samson

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Will gold continue to push higher?

Gold bugs finally have something to cheer about after months of frustration.

After trading in a narrow range for most of the year the yellow metal suddenly burst higher last week as the US dollar weakened on expectations the Federal Reserve will cut interest rates in response to concerns about slowing growth.

Gold gained more than 3 per cent over the week to trade close to $1,350 a troy ounce.

The question now is whether it can push on and hit $1,400 a troy ounce for the first time since 2013.

Much will depend on the performance of the US dollar, which has been the world’s haven asset of choice this year, according to traders.

Dollar-denominated commodities like gold tend to do well when the US currency weakens because it makes it cheaper for overseas buyers. As a non-interest bearing asset, gold also tends to get a boost when rates are low or falling. Neil Hume

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