Depending on one's outlook, this week has been a half-empty-half-full one for Sterling. The endless Brexit impasse has cost Sterling some value. The only consolation is that but it could have been worse much worse.
The Bank of England and the US Federal Reserve will provide monetary policy updates next week. Of these the BoE looks the more interesting. Thursday will be one of the occasions when the Bank also releases an updated Inflation Report with new economic forecasts and BoE Governor Carney holds a press conference. We expect interest rates will be left unchanged, and despite a media report that some Committee members are concerned that policy should be moving in a more hawkish direction, we think the vote will be unanimous. However, we also expect the Bank to again signal the need for modest increases in Bank Rate over the forecast horizon above those currently expected by markets. Since its last forecast update in February, when the Bank also signalled the likelihood of higher than expected rates, Q1 2019 GDP growth looks to have beaten the Bank’s forecast, while the labour market remains tight and wage inflation still seem to be on the rise. On the other hand inflation is still below target for now and the Brexit ’fog of uncertainty’ has not lifted. So the message from the Bank will probably still be that there is no urgency to raise rates but possibly there will be a bit more emphasis on a building need for rates to eventually rise. In contrast, it seems likely that the Fed will be in wait-and-see mode through this meeting and for several more months. After policy signals at the last two meetings that surprised markets the latest update from the US central bank is likely to be lower key. Interest rates will be left unchanged on Wednesday and the majority of members have indicated that they expect them to now be on hold for at least the rest of this year. It is arguable that some of the ‘headwinds’ for the US economy that the FOMC highlighted at its last meeting have already begun to ease. However, it is unlikely that policymakers will think that the environment has changed by enough to justify a meaningful revision to its message, particularly as inflation is continuing to run below target. Consequently, we expect the message to still be that it intends to be “patient” before making any further changes to US interest rates There are no official data releases in the UK this week but there are a number of unofficial surveys, including the Lloyds Business Barometer and the Markit PMIs, which will provide timely updates for April. Data released so far suggests that UK GDP has probably grown by more than expected in Q1, with forecasts now indicating that it could be as high as 0.5%. However, some of that was probably pre-Brexit stockbuilding and so momentum may slow in Q2. The coming week’s surveys will provide the first indications for the present quarter. However, their message may be made more difficult to interpret as those surveys seemed to underestimate Q1 growth when compared to official data. We look for April to show a reversal of March’s pattern in the PMI’s with the manufacturing index forecast to decline (Wed), while construction (Thu) and services (Fri) are both predicted to rebound. Today’s estimate for Q1 US GDP growth of 3.2% annualised growth up from 2.2% in Q4 of last year was much stronger than consensus forecasts. Moreover, as both retail sales and investment orders ended the quarter looking particularly buoyant the initial indications for Q2 growth also look positive. Within this week’s full US data calendar the initial indications for the present quarter will get particular attention. Friday’s labour market report is likely to show further solid employment growth in April (190k), a stable 3.8% unemployment rate, and a pickup in wage growth to 3.3%y/y. Also of interest will be the ISM manufacturing (Wed) and non-manufacturing (Fri) indices for April, with the latter likely to show that activity outside manufacturing remains well supported. Business surveys for the Eurozone have suggested that economic growth has been tepid. However, official data particularly for industrial production and retail sales have been more buoyant, which points to the likelihood that Q1 GDP growth (Wed) will be stronger than expected. We look for a rise of 0.4% up from 0.2%. However, the underlying pace of growth is probably slower and so we will look for a deceleration in Q2. Meanwhile, Eurozone inflation (Fri) is forecast to have accelerated in April. We look for an increase to 1.6%y/y (from 1.4%) in the headline rate, with the core measure expected to be up 1.0%y/y (from 0.8% in March).
See you next week!
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