Another Fed rate hike
It will be another important week with the Federal Reserve set to hike interest rates again. The growth story looks very strong with activity rebounding sharply in 2Q18 while the jobs market has stepped up the pace of employment creation with payrolls growth averaging 207k a month 2018 YTD versus a monthly average of 182k in 2017. At the same time inflation is pushing higher and there are growing signs of building wage pressures. In this environment the Fed will continue to emphasise its gradualist approach to policy tightening with a further two rate hikes expected in the second half of the year.
As for the US data, retail sales should post another decent gain given the strength in consumer sentiment - for now the strong jobs market and rising asset prices are offsetting any negatives from the pick-up in fuel and borrowing costs. Meanwhile, industrial production should remain robust given the improvements in the manufacturing ISM index and robust oil and gas prices boosting US drilling. Inflation will also creep higher as rising fuel costs feed through.
Focus on the ECB and quantitative easing
In the Eurozone, the April industrial production figure will be closely watched as hard data points about the zone in 2Q18 have been sparse so far. A lot of disappointing data has passed over recent weeks, a strong number here could put that into a somewhat more positive perspective.
After Peter Praet’s speech this week, speculations about the outcome of next week’s ECB meeting have clearly gained traction. It seems as if there is a growing majority of ECB officials in favour of stopping QE this year. However, the two main questions are when will the ECB announce an end of QE and how will it look like.
Given increased uncertainties, be it the Italian political situation, disappointing macro data or the impact from a starting trade war, we still think that the ECB will want to keep the most flexibility possible.We expect the ECB to announce another recalibration of QE already next week i.e. an extension of QE at a reduced pace of 10bn euro per month at least until December 2018.
Raft of UK data in focus as odds of summer rate hike gradually increase
Following a better UK PMI, markets are now gradually thinking more carefully about the possibility of a summer rate rise. At face value, the fact that core inflation is set to return to the 2% target next week takes some pressure off policymakers. However, as was the case back in November when the Bank of England lifted rates, wage growth is a bigger focus. With average earnings growth likely to remain within touching distance of 3% next week, there is increased evidence that firms are having to lift pay more rapidly to cope with staff shortages.
But the key risk to a summer rate rise remains the consumer. Retail sales may receive a boost from the better weather, and of course the recent royal wedding, but the underlying picture of consumer caution has not gone away. This means an August hike is far from a done deal – as one policymaker said recently, the cost of waiting to raise rates is fairly small.
Scandinavian central banks focus on inflation
Inflation data will be the key data points next week, ahead of central bank meetings in Norway (third week of June) and Sweden (first week of July). We expect headline inflation to remain at or above target in Sweden (2%) and Norway (2.4%). But this is driven largely by rising energy prices. Core inflation remains some way off, at 1.5% in both Sweden and Norway. Swedish house price data in Friday are also worth watching, as the housing market remains under pressure.