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Interest Rates Remain the Key Focus for Markets

Last week we saw Sterling remain on the backfoot as comments from the central bank turned slightly cautious. Bank of England (BoE) Governor Bailey stated that the UK was facing a very large shock to income and spending while the shock from energy prices this year is likely to be larger than any single year in the 1970s. Bailey went on to state that the bank is beginning to see evidence of a slowdown in the economy while there is a very large trade-off between inflation and output. Following this, BoE Deputy Governor Broadbent stated that the appropriate path of interest rates is necessarily unpredictable given the unexpected shocks to the economy. Broadbent noted the very difficult combination of even higher inflation, but weaker demand and that market participants should focus on data rather than comments from BoE officials.

In the meantime, European Central Bank (ECB) Chief Economist Lane stated that policy settings should be adjusted if inflation expectations become de-anchored and added that it is especially important to be data-dependent. Inflation in March reached 7.5% on an annual basis, an all-time high for the eurozone. The March data is the first reading from Eurostat that takes into account the consequences of the war in Ukraine, which has now entered its second month with no resolution in sight.

The main focus in the US was on inflation and unemployment data. The headline Non-Farm Payrolls for March rose by 431,000, below the consensus forecast of around 480,000. This is still extremely good at a time when unemployment is falling to 3.6%, which surpassed expectations. In the meantime, the Federal Reserve’s (Fed) favoured measures of underlying US inflation pressures, the Personal Consumption Expenditure (PCE) Price Index reported that annual inflation in the US rose to 5.4% in February. With both inflation and employment remaining elevated the signposting for a 50-basis point hike at the next meeting remains at play.

Will UK Officials Continue to Pour Cold Water on the Path of Rates?

Both the BoE Gov Bailey and Dept Gov Cunliffe are due to speak on Monday. Recently the tone from the members has been slightly dovish of late. Despite the cautious comments, the market is still expecting five hikes for the rest of the year taking interest rates up to 2%. In terms of economic data, we have the services and construction PMI data on Tuesday and Wednesday. On Thursday, the BoE Chief Economist Pill is also due to speak.

Eurozone Economic Data to Point the Way

Looking to the week ahead there are several data points set for release. Today we have the Spanish unemployment data set for release. The PMI service sector data is expected to remain in the expansionary territory; this is the second reading with no major change expected. On Thursday the all-important retail sales numbers are due for release.

Will US data and News Continue to Point to Super Hike?

The next policy meeting for the Federal Reserve (Fed) is due in May and is currently pricing in at a 50-basis point hike following comments from Fed officials and solid economic data. This week the market will continue to focus on economic data with the release of ISM Services set for release on Tuesday and the weekly jobless claims on Thursday. The Fed will release the minutes of its March policy meeting on Wednesday which will be deciphered for signals about the likelihood of a bigger rate rise next month. More up-to-date comments will come from several Fed officials, including Governor Brainard (Tue) who speaks at a forum on inflation and St Louis Fed President Bullard (Thu) discussing the economy and monetary policy.

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