WEEKLY REPORT: WAITING FOR CENTRAL BANKS TO LEAD

ECB, US FEDERAL RESERVE & BANK OF ENGLAND There is still a few weeks to go before the next set of announcements from the European Central Bank (9 th June), US Federal Reserve (14th June) and BoE (15th June). In the meantime, comments from policymakers will continue to be examined closely for clues on their intentions. All central banks currently face a dilemma over whether concerns about high inflation on the one hand and headwinds to growth on the other. However, it appears that there are differences in how these risks are being weighed up, and certainly some are more clearly signalling their near-term intentions. The US Fed’s message is clearest with its policymakers united in indicating that for now they are more concerned about inflation and that, as result, 50 basis point increases in interest rates are likely in both June and July. Consequently, it seems unlikely that much new will be learned from the minutes of the Fed’s May policy meeting, to be released on Wednesday. There has been some speculation that the Fed could act even more aggressively and raise rates by 75bp in one go and so there will be interest in whether this was discussed. However, a series of Fed officials have already said that this not a probable option for now. Meanwhile, recent ECB comments indicate that an increasing number of policymakers and, possibly a majority, now favour or are open to an interest rate hike at the 21st July policy update despite ongoing economic uncertainties. Minutes of their April meeting released this week noted that several policymakers were ready to move rates at that point. But that obviously was not true of the majority and the consensus now seems to be building around using the June update to signal a July move. In contrast, signals from the Bank of England of its intentions for June are harder to interpret. As noted earlier, comments this week from BoE Governor Bailey and Chief Economist Pill suggested that another rate hike seems to be on the cards, although this may not be a unanimous view on the MPC.

UK PMIS SUGGEST THE ECONOMY IS STILL GROWING In the UK, potentially the most interesting releases next week will be ‘flash’ estimates for the May manufacturing and services PMIs on Tuesday. While showing some evidence of slowing growth in the past couple of months partly as post-Omicron impetus begins to fade, both measures still point to continued growth. That means they seem more positive than official GDP data which showed no growth in February and a small fall in March. The May readings will again be impacted by the Ukrainian crisis and by Covid restrictions in China but, overall, we expect another set of solid outturns. We see the manufacturing measure rising to 56.5 from 55.8 in April and the services measure down to 57 from 58.9. Monthly UK public finance data, also Tuesday, may be primarily watched for indications of the leeway for the government to offer extra support to households. In his Budget speech, the Chancellor said he has little room for more fiscal stimulus. However, as concerns about the ‘cost of living squeeze’ have intensified , there have been growing calls for action and recent media reports have suggested a package may be introduced before the parliamentary recess in July. Potential measures that have been talked about include further specific support for fuel bills and a temporary cut to VAT. EUROZONE SERVICES ACTIVITY PICKING UP In the Eurozone, PMI data and the German IFO survey will both provide indications of May economic trends. As is the case in UK, the Eurozone PMI data are still solidly in growth territory and we expect that to once again be the case in May. The German IFO survey has been somewhat less optimistic, signalling a sharp recent fall in confidence and it may fall modestly further this month. The US data calendar is busy but none of the releases seem set to decisively change expectations about the economic outlook. The Fed’s preferred inflation measure (the consumer expenditure deflator) is forecast to confirm the message from timelier CPI data that inflation fell in April but remains very high. New home sales are likely to have fallen in April, providing further evidence that the housing market is being hurt by rising interest rates. However, consumer spending numbers for April are predicted to point to continued solid growth. May PMIs readings are also forecast to be consistent with an economic growth picture that is unlikely to change the Fed’s mind about further interest rate hikes.

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