Fed speakers key as US risks are re-assessed
Between now and next Friday there are ten different Federal Reserve officials scheduled to speak, which will give us a clue as to whether markets should really be re-pricing the outlook for monetary policy. For now the economy is growing strongly and inflation pressures are rising with both headline and core CPI above the Fed’s own 2% target.
This week’s retail sales numbers should show a rebound from surprise weakness in February, aided by strong employment growth and a positive impulse from tax cuts. Industrial production should also be supported by a competitive dollar and stronger global demand together with robust domestic orders. Nonetheless, concerns over a potential trade war with China linger on. The minutes to the March FOMC meeting suggested that officials believe that were the situation to escalate the fear of downside risks for growth would outweigh the concern about upside risks to inflation resulting from the tariffs. There has been a slight easing of trade tensions recently, but this could quickly change, hence why getting the perspective of key officials is so important. For now we continue to look for three further interest rate rises this year.
Eurozone data and ECB comments to be watched ahead of next meeting
As it is the week ahead of the next ECB meeting, market participants will have a close eye on Eurozone data and possible comments by ECB officials. Given increasing signs of an unexpected soft patch of the entire Eurozone economy in the first quarter, the doves at the ECB should gain the upper hand, increasing the odds of an QE extension not only until the end of the year but possibly even beyond.
A mixed week for UK data is unlikely to throw the Bank of England off course
With markets now more-or-less fully pricing in a UK rate hike in May, the big question next week is whether the dataflow can change policymaker’s minds. We suspect it won’t.
Another increase in the annual rate of wage growth – a key factor for the BoE – should bolster the Bank’s view that earnings will grow faster this year as firms encounter skill shortages. Like last month, it’s worth remembering that these figures say just as much about the weak patch this time last year, as they do about current pay momentum. But even so, we suspect the committee will be happy enough that wages remain on-track.
The rest of the dataflow could be fairly mixed. Core inflation may temporarily notch back up because of the early Easter and resulting higher air fares. But as this unwinds and the effect of the pound’s depreciation continues to wear-off, we think it could dip to 2.2% as early as next month. Coupled with rising wage growth, this means the worst of the household squeeze is behind us. But confidence remains depressed (particularly when compared to Europe/US) and we expect this to continue to weigh on spending in the near-term. We suspect that’ll keep a lid on retail sales next week, although the torrid weather may be a bigger factor this time around.
German ZEW index to hint at a dissapointing first quarter
After disappointing hard data for the first two months and weakening sentiment indicators, the ZEW index will be the first soft data for the month of April, providing some guidance for the future path of the German economy. We expect some more weakening, hinting at a somewhat disappointing first quarter for the entire economy.