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Jamie Jemmeson
May 30, 2022

Will growth prospects dictate rate policy?

BoE meeting postponed

Last week we saw Sterling fall for the first half of the week before recovering its losses. The Purchasing Managers’ Index (PMI) data reinforced concerns that the UK could fall into recession later in the year. Concerns were already elevated following the negative growth seen in March’s GDP figures. The composite PMI, which includes services and manufacturing fell to 51.8 in May from 57.6 in April, its lowest level since February last year. However, Sterling reclaim its losses following the response of the Government; whilst some may be cynical of the timing given the pressure from the Sue Grey report, there is not doubt it will help. Chancellor Sunak announced an additional package of measures worth £15bn to support mainly the most vulnerable households, including one-off payments for low-income households. There was also universal support for all households with a doubling of the energy rebate to £400 which is now a grant rather than a loan. A 25% windfall tax (energy profits levy) on oil and gas companies is expected to raise about £5bn, with a mechanism to incentivise investment.

In the meantime, we have seen a stronger rhetoric from ECB officials signposting a further acceleration in the pace that interest rate might be increased from July. European Central Bank (ECB) policymaker Martins Kazaks said on Tuesday that the bank should not rule out a 50-basis point rate hike, and that he sees possible rate hikes in July, September and potentially one more in Q4 of 2022. His remarks come after fellow ECB policymaker Holzmann called for a 50-basis point hike in July and commented that it is important for the ECB to end this year with rates in positive territory but fellow member Villeroy stated that this was not part of the consensus. In addition, ECB President Lagarde stated that markets should not translate words into percentage point moves, but also commented that the bank is attentive to the level of the Euro.

The Greenback strength this week has been question as it lost ground to both Sterling and the Euro by the end of the week as data has started to suggest that the economy may be losing momentum. The Services sector PMI posted a reading below expectations that was weaker than last month’s reading. The pace of expansion was reportedly weighed down by hikes in selling prices and concerns over higher interest rates. Compounding concerns was the New Home Sales reportedly sank 16.6% month-on-month the lowest since April 2020 and well below forecasts. The Fed’s preferred inflation gauge, the PCE deflator, meanwhile fell, which may be the start of a gradual descent, whilst the minutes of the Fed’s May policy update, reaffirmed that US policy rates are likely to rise by 50bp in the next two meetings in June and July. However, if we see economic data continue to disappoint, the longer term picture maybe reassessed.

Will data readings call for jubilation?

It is a quieter week for the UK given the extended Jubilee bank holiday on Thursday and Friday. There is no major data released today. Tuesday will see the release of the Lloyds Bank Business Barometer which will provide additional information on businesses’ trading prospects and their assessment of the economy. Given the current focus on the cost of living crisis and ongoing supply issues and raising rates, it will be keen to articulate confidence levels. In addition, UK mortgage approvals are due for release which could have downside risk given the concern surrounding the trajectory of rates. On Wednesday, the Nationwide House Price index is release along with the BRC shop price index.

Labour data to take centre stage

Looking to the week ahead, the US bank holiday on Monday may see a subdued start to the week before all eyes turn to the release of non-farm jobs later in the week. Investors are expecting another robust print in payrolls creation for May, with the accompanying unemployment rate and wages data also expected to show a solid reading. The unemployment rate is anticipated to fall back to pre-pandemic levels, meanwhile consensus forecasts signal the average earnings growth rate could edge lower for a second month in a row. It’s a busy week of US data releases, ahead of the key employment data, investors will review updated consumer confidence data on Tuesday, followed by ISM Manufacturing figures for May and the Fed’s Beige book report both scheduled for release on Wednesday. Markets will turn attention to Thursday’s ADP report which could set the tone ahead of the release of the non-farm and employment data to round off the week on Friday.

Will there be further hawkish signposting?

Looking at the week ahead, the data releases may explain the increasingly hawkish view across policymakers. Eurozone inflation (Tuesday) is expected to rise to 7.7% from 7.5% on the annualised basis, whilst the unemployment (Wednesday) is seen falling to 6.7% in April from 6.8% prior. In the meantime, given the hawkish tone that we have seen from policy makers, the market will keep a close eye on ECB President Lagarde who is due to participate in a panel discussion about central banks and green transition on Wednesday. The market will decipher her rhetoric for further clues on policy.

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