The American Rising Tide To Lift All The World's Economic Boats?
MARKETS TAKE STOCK OF STRONG US DATA Official economic data confirmed that the UK economy has started to expand again after the drop in activity at the start of the year due to the national lockdown. GDP increased by 0.4% in February after falling 2.2% (revised from a 2.9% decline) in January. With with reopening of schools, output is set to increase again in March ahead of the broader resumption of economic activity in Q2. While GDP is still likely to have contracted in Q1 as a whole, the decline will probably be sub-2%, much less than the Bank of England’s projection in February. The positive momentum through Q1, as evidenced by survey and real-time data, augurs well for Q2 as further restrictions are lifted. From an international perspective, US data have been very strong, partly reflecting the bounce-back from some temporary weather-related weakness in February and also the impact of the latest fiscal stimulus package and progress in Covid-19 vaccinations. Retail sales soared by 9.8% in March, while weekly initial unemployment claims dropped by 193,000 to 576,000, the lowest since the start of the pandemic. Housing starts also rose strongly, while CPI inflation jumped up to 2.6% from 1.7%, although economic forecasters had largely anticipated this by predicting an increase to 2.5%. Despite the positive US data, 10-year Treasury yields fell below 1.60%, as markets appeared to take stock of the sharp rise in yields earlier this year. That applied some downward pressure on the US dollar over the week, while the euro posted modest gains, perhaps on growing confidence that vaccinations will be ramped up, although rising Covid-19 cases in Germany and France remain a particular concern in the near term. The pound fell briefly after news that the Bank of England’s Chief Economist, Andy Haldane – currently considered the most hawkish member on the MPC – will step down in June. POSITIVE UK RELEASES SET TO CONTINUE
Next week’s economic data calendar is quite UK heavy, with releases including labour market statistics (Tue), CPI inflation (Wed) and retail sales (Fri). Survey releases include the CBI industrial trends survey (Thu), GfK consumer confidence (Fri) and flash PMIs (Fri). Flash PMIs are also released for the Eurozone and the US (both Fri). Central bank meetings include the Bank of Canada (Wed) and the European Central Bank (Thu). We expect UK unemployment to have remained at 5.0% in the three months to February. Evidence from the Lloyds Bank UK Recovery Tracker and the Business Barometer survey suggest that firms are less inclined to make redundancies, while hiring intentions have risen. That raises hopes a high proportion of the furloughed workforce will hold on to their jobs once the Coronavirus Job Retention Scheme ends in September. Annual CPI inflation is forecast to increase to 0.7% in March from 0.4% in February, led by fuel prices, with energy prices set to boost inflation further in April. We also predict a rise of 1.2% for retail sales in March on the back of the 2.1% increase in February. UK consumer confidence increased to a one-year high in March to -16. We forecast another rise to -13 in April. For the PMIs, manufacturing activity jumped up to 58.9 in March, reflecting buoyant demand and notwithstanding ongoing supply-chain disruptions. We expect the headline manufacturing PMI to edge up to 59.0 in April. Services PMI, which leapt to 56.3 in March, is forecast to rise significantly again to 59.0 in April, coinciding with a further easing of restrictions during the month.
ECB ON HOLD, WATCHING THE PMI SURVEY
The US data calendar is somewhat quieter next week. Rises are predicted for March existing home sales (Thu) and new home sales (Fri). We also forecast further increases in the April manufacturing and services PMIs (Fri) to 60.0 (from 59.1) and 61.5 (from 60.4), respectively, although the separate ISM reports due in early May tend to receive more attention. There are no scheduled Fed speakers ahead of the following week’s FOMC meeting (27-28 April). The Bank of Canada may announce a tapering of its bond purchases, but the ECB is likely to keep policy settings unchanged. Eurozone headline CPI inflation has risen significantly this year from 0.3%y/y in December up to 1.3%y/y in March. That has been driven mostly by higher energy prices, but core inflation has also risen from 0.2%y/y to 0.9%y/y over the same period, partly reflecting higher VAT rates in Germany. Further rises in headline inflation towards 2% are predicted this year, before falling back in 2022. As elsewhere, rising inflation rates this year are expected to be temporary. That being the case, the ECB is in no hurry to rein back policy stimulus; in fact, it did the opposite at last month’s policy meeting when it announced it will increase the pace of asset purchases in Q2. The June meeting will be more significant when the ECB will be armed with new economic forecasts to decide whether accelerated asset purchases should continue into Q3. Eurozone flash PMIs (Fri) will make particularly interesting reading, because of potential opposing forces affecting activity. On the one hand, the global economic recovery should have a positive impact on domestic activity. On the other, concerns about rising Covid-19 cases and extended lockdowns in France and Germany could continue to weigh on activity in the short term. We have pencilled in moderate falls in both the Eurozone manufacturing and services PMIs to 62.0 (from 62.5) and 49.0 (from 49.6), respectively, which means that services activity remains in contraction territory.
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