Key events in developed markets next week

With the Federal Reserve signalling it has a strong stomach for the fight against inflation we have to expect further significant interest rate hikes in coming months. But by going harder and faster into restrictive territory there is a greater risk of a hard landing and a potential recession. The housing market is particularly vulnerable given prices are up nearly 40% nationally since the start of the pandemic due to stimulus-fuelled demand vastly outstripping the limited supply of properties for sale. Now that mortgage rates have surged higher and consumer confidence has plunged, we are already starting to see demand weaken and supply rise. The number of new home sales plunged 16.6% in April and we will be looking to see if there is any rebound in May. Existing home sales are measured when the keys are received rather than when the contracts are signed (as for new home sales) so we expect to see a big drop in May's existing home sales. This is worrying as residential construction accounts for more than 2% of economic output while housing transactions also correlate strongly with spending on furniture, home furnishings, and electronics.

The Bank of England has kept the door firmly ajar to a 50bp rate hike in August, and whether it follows through with this will in part depend on whether we get another upside inflation surprise next week. We expect a slight acceleration in the headline rate, though the impact of the latest rise in petrol prices won’t feed through until we get the June figures in July. Whether or not inflation goes higher from here will partly depend on how the ONS classifies the government’s recently-announced energy price discounts. But either way, even if inflation doesn’t go dramatically higher from here, it’s unlikely to fall much, if at all, through the rest of this year. However, we should begin to see more meaningful declines in 2023 as energy effects fade and wage pressures begin to cool.

Norway’s central bank has already told us it is going to hike next week, and it has also hinted that it could step up the pace from its recent string of 25bp moves. With oil prices high and global market interest rates rising, we think Norges Bank will follow through with a 50bp hike next week – or failing that, hint strongly that it could begin hiking at every meeting, as opposed to every alternate one.