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Wage provides Sterling with a lift; will retail sale echo the same?

Yesterday we saw a big move from Sterling, rising from the lows following the positive employment data that was released. UK unemployment fell to its lowest rate in nearly half a century in the first quarter of 2022, as the number of job vacancies rose to a new high of 1.3m. Some sectors such as construction and financial services benefitted from bonus payments as firms put up pay to recruit staff, the ONS said. This saw total pay, which includes bonuses, rise by 7% between January and March, keeping pace with rising prices. If we see this trend continue it could make the conditions to raise interest rates more plateable for the Bank of England (BoE). Following the data, the yearend implied UK interest rate will increase. This morning we see the UK annual CPI inflation rising from 7.0% to 9.0% in April, slightly below expectations for 9.1% (the first undershoot in seven months) but nevertheless the highest since the CPI series began (40 years ago). The surge came as millions of people saw an unprecedented £700-a-year rise in energy costs last month as well as higher fuel and food prices, driven by the Ukraine war.

Looking to the remainder of the week it will be slightly quieter in terms of economic data. On Friday, UK retail sales are expecting another negative reading following the contract of 1.4% last month. If we do see another negative reading here, there will be further question marks about the strength of the economy.  Also on Friday, BoE Chief Economist, Huw Pill, is due to speak about the economy and monetary policy at an event hosted by the Association of Chartered Certified Accountants, in Wales. The market will keep a close eye on his rhetoric surround policy.

Retails Sales data supports a hawkish Fed policy

The rebound this week in global equities has stimulated a correction for the safe-haven US dollar strength and has seen a rebound for Sterling and the Euro. It’s a relatively quiet week of economic data releases on the US docket, however, US Retail Sales rose at a pace of 0.9% on a monthly basis in April. The most recent print was in line with the expectations but slower versus the previous month’s 1.4% month-on-month pace of gain which had been revised up from 0.7%. The updated figures will support the Fed’s aggressive tightening policy, with projections having already embarked on a tightening cycle and vowed to hike borrowing costs aggressively. Fed Chair Jerome Powell promised two additional double-dose 50 basis-point increases but has, for the most part, ruled out a 75-basis points hike. If signals continue to suggest that inflation is likely to remain persistent then the Fed may be forced to consider a more aggressive policy action to tame rising inflation. Speaking on Tuesday Fed Chair, Jay Powell, reiterated that he is comfortable with the prospect of 50-basis point hikes, however policymakers may speed up or slow down the pace of hikes if necessary.

After US gross domestic product (GDP) contracted 1.4% on an annualised basis during the first three months of this year, economists were quick to point out that activity would rebound in the near-term amid little indication that the consumer was beginning to crack. Tuesday’s release of Retail Sales data confirms that assessment and sets the economy up for a good start to the second quarter.

ECB Comments provide support for the Euro

The Euro found some support early in the week on hawkish signals from the European Central Bank (ECB) governing council members as officials commented that the central bank will shortly start hiking interest rates in an attempt to stave off rising inflation. Dutch Central Bank chief, Klaas Knot, commented that the policymakers should not rule out a 50-basis point hike in July, meanwhile fellow official Villeroy warned that a weaker Euro could threaten the ECB’s efforts to steer inflation towards its target. Current market expectations are for the policymakers to raise the deposit rate by 90-basis points this year, which would suggest that four 25-basis point rate hikes may be on the cards. The ECB, along with a range of other major central banks, is battling with an unwelcome double of sky-high inflation of 7.5% in April according to a flash estimate from Eurostat, along with faltering growth.

Notably, the European Commission recently downgraded European economic growth forecasts to 2.7% in 2022, down from a prior forecast of 4%.

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