Key events in developed markets next week

The US economy is growing strongly and is creating jobs, but inflation is making the headlines.

This week we are likely to see consumer price inflation rise further – our forecast is 4.8% year-on-year for May with core (ex-food and energy inflation) rising to 3.3% from 3%. For the former this would mark the highest inflation reading since 2008 – when oil prices surged to $146/barrel - while for the core rate it would be the strongest reading since 1993!

This should mark the peak in inflation, though, given much of it is being driven by comparing price levels in a vibrant re-opening economy versus those of twelve months ago, when there were sharp falls in prices across the board as companies desperately sought cash. Nonetheless, supply chain issues, rising commodity prices, labour market shortages and rising house prices suggest to us inflation could remain more elevated and be more persistent than the Federal Reserve are publicly forecasting. This is a key factor why we think the Fed will raise the interest rate sooner than 2024.

Other data includes consumer confidence, which should remain firm, but look out for a further increase in inflation expectations, which could signal consumers are getting more anxious. If it happens it could offer evidence that rising worker wage demands could be a factor that also keeps inflation higher for longer. Meanwhile, the trade balance may shrink marginally, but this likely reflects issues surrounding supply chain issues and trouble getting components and parts rather than any drop-off in domestic demand.

Here are our three things to watch out for from the ECB - for the full preview, see here

1. New forecasts: While confidence indicators point to strong activity, actual 1Q GDP was weaker than ECB staff had expected in March. We, therefore, expect the growth projections to remain broadly unchanged for 2021 and 2022. The inflation projections, however, could be revised upwards.

2. Assessing financing conditions: Last year, favourable financing conditions suddenly became a new quasi target for the ECB. No clear definitions were given, but since December, bond yields have increased by around 40bp. The ECB will provide the first quarterly assessment of financing conditions and official comments that rising yields were a natural development at turning points in recovery already point to a possible communication line, preventing the ECB from being caught in its own logic from a few months ago.

3. (Avoiding) Taper talk: Even if economic developments would, in our view clearly justify at least having a first tapering discussion, the sheer mention of such a discussion could push up bond yields further and consequently undermine the economic recovery before it has actually started. The fact that several more dovish statements have been made by ECB officials recently underlines this view. However, the ECB will not be able to avoid the tapering discussion for long.

The reopening of shops and outdoor hospitality/recreation in April will, unsurprisingly, lead to another decent monthly growth figure in the UK. But while much of this is a simple byproduct of lockdown easing, it's also clear that confidence has really bounced back too among both consumers and businesses. Social spending had already exceeded last summer's levels before indoor hospitality reopened in May, while the number of job adverts in hospitality is above pre-virus levels.

But this recovery in confidence is likely to face its first real test over coming weeks as concerns surrounding the new 'delta' Covid-19 variant (first detected in India) grow. Latest estimates suggest it may be 50% more transmissible than the previously dominant strain, which in theory means that hospitalisations could rise quickly among unvaccinated groups. The more positive news is that the vaccines still seem to work, though are more reliant on the second dose. 50% of the population has now had both doses, but there is likely to be growing talk about pushing back the final 21 June step of the reopening plan to buy more time for greater vaccine coverage.

That said, this doesn't necessarily need to cause a major issue for the path of GDP - the April/May reopening stages were more consequential in this regard. But it will be more economically problematic if the renewed spread begins to dent confidence. We suspect this will most heavily depend on whether vaccines continue to show promise in preventing serious illness, particularly among more vulnerable groups.

The central bank has outlined the case for a 2H22 interest rate increase and this is likely to be repeated at the upcoming meeting given a surprisingly resilient economy and a vaccine program that has got real traction. The Bank of Canada may also lay the groundwork for a third tapering of the QE asset purchases at the July policy meeting, which would see weekly bond-buying cut to C$2bn.