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US labor data bucks the trend as Eurozone post record high inflation

It was a shortened week for the UK with the extended holiday for the Jubilee celebrations. Economic data was fairly light. The Lloyds Bank business confidence data recorded a net gain for May which will provide some relief, but overall confidence in the economy remains negative. The CBI survey on the economy was downbeat whilst UK mortgage approvals declined net lending slowed from the previous month. Uncertainty continues to increase over the tenure of Prime Minster Boris Johnson as we move closer to 54 letters which will the trigger point of confidence vote. According to ITV news, it is thought that the number of no confidence letters submitted may have already passed 30, however just 17 Tory MPs have penned theirs publicly. In an article published on Sunday night, Bloomberg stipulated that Tory rebels could force a vote of no confidence in a matter of days with MP returning to Westminster this week.

Across the pond in the US, much of the focus was on the job market with three days of job data released from Wednesday to Friday. The majority of the focus was on the government figures released at the end of the week. The Non-Farm payrolls (NFP) stipulated that the U.S. economy added 390,000 jobs in May, better than expected despite fears of an economic slowdown and with a roaring pace of inflation. Despite the headline NFP beat, the Unemployment Rate remained steady at 3.6% versus an expected drop to 3.5%, whilst the Monthly rate of Average Hourly Earnings growth was lower than expected at 0.3%, in line with April’s reading and below expectations for a rise to 0.4%. Given the recent slowing of economic data the US Dollar strengthened as the payrolls bucked the trend slightly.

The Euro has benefited from hawkish European Central Bank (ECB) signals as policymakers look set to move away from negative interest rates after Eurozone inflation hit yet another high. Euro zone inflation came in at 8.1% for the month of May, hitting a record high for the seventh month in a row and up from April’s record high of 7.4%. ECB chief economist Philip Lane commented that a normalisation of monetary policy will be gradual, his comments reinforced President Christine Lagarde’s roadmap for exiting negative rates by the end of September. Lane further signalled that the ECB has a strong case to lift interest rates in 25-basis point increments at the July and September meetings.

Vote of no confidence triggered

Political drivers could be the biggest threat to Sterling’s stability this week. Announced this morning, MP Graham Brady says threshold reached for confidence vote. Boris Johnson will face a leadership vote in his ruling Conservative Party tonight from 6pm following a series of scandals, including becoming the first sitting prime minister found to have broken the law. At the time of writing Smarkets has a 62.5% probability of Johnson winning the vote. However, he could be mortally wounded as both Thatcher and May won confidence votes but resigned shortly after. Boris Johnson’s Conservative Party is heading for a thumping defeat in this month’s special election in Wakefield, according to a poll published in the Sunday Times. According to a J.L. Partners survey of 501 adults in Wakefield, the main opposition Labour Party has 48% support whilst the Tories have just 28%. This so-called Red Wall seat was won by the Conservatives in 2019. The by election is due to take place on 23rd June. There will be another special election for another Tory seat in Tiverton & Honiton England on the same day. Both votes are the result of the incumbent Tory member of Parliament stepping down because of separate sex scandals. According to betting site, the Lib Dems are an 81% probability to take the Tiverton seat. Labour has a 95% chance to triumph in Wakefield. With Westminster returning.

ECB to signpost rate policy path

The European Central Bank is due to meet this week (Thursday) and deliver their monetary policy verdict. While no change in policy is expected, given that its asset purchase program is still running, the calculus here has already shifted towards a rate hike in July, and possibly September too. This policy pivot has become more urgent given that inflation across the EU has been accelerating at the same pace and CPI in the US appears to be slowing down, and possibly plateauing. The biggest challenge for the ECB this week will be trying to justify why they are waiting until July to act, given the urgency of the situation. The market will decipher the rhetoric to articulate the path for rates for the remainder of this year and next.

Inflation and confidence data due

It is a quieter week for the US following on from last week’s labour data. Whilst the labour data has put at ease the market’s concern regarding momentum, the market will focus on the data releases due on Friday. The headline inflation readings are set for release via the consumer price index which is expected to accelerate from 0.3% to 0.7% on the monthly basis. Also releases on Friday is the UoM consume sentiment reading which will provide the market with some context of how the consumer is feeling about raising rate and inflation.

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