Key events in developed markets next week

The eurozone will get a first sense of how the month of June is shaping up in terms of economic activity, as the PMI and consumer confidence data is released. Last month brought a pretty bleak report on the economy as the PMI indicated that services experienced slower growth and manufacturing experienced a sharper contraction. The upside was around fading inflation expectations. So far, there’s little indication that activity has picked up from there. Let’s see if the survey turns this around on Friday.

After some unwelcome inflation and wage data, markets now expect the Bank of England to take rates close to 6% over the coming months. That equates to almost six additional rate hikes and is very close to the highs we saw in the midst of the ‘mini budget’ crisis last year. The question for Thursday’s meeting, where a 25bp hike is highly likely, is whether the Bank offers up similar pushback against investor expectations.

We suspect it won’t, mainly because it will be reluctant to commit to any particular policy path given the recent tendency of inflation data to come in above forecasts. April’s core inflation number came in much higher than expected, and May’s data due next week will show only a fractional decline, if anything. Indeed services inflation – arguably of most relevance for the BoE – is likely to remain flat at 6.9%, or perhaps notch slightly higher.

But not pushing back against rate expectations is not the same thing as validating them. And we have strong doubts that the BoE will take rate hikes as far as markets expect. Near-6% mortgage rates would be highly problematic for the growth outlook, assuming they stayed there for some time. And beyond the headline figures, more forward-looking measures of inflation, including from the BoE’s own survey of chief financial officers, suggests the story should turn more noticeably through the summer. Barring some further unpleasant and consistent surprises in the services inflation figures over the coming months, we think a 5% peak for the Bank rate seems reasonable.

The hawkish hold from the Federal Reserve feels like an uncomfortable compromise, and then there is the legitimate question – if you say you are going to do an additional two interest rate rises this year, despite deteriorating leading indicators and slowing inflation, why did you not just do it immediately? There is clearly a broad range of views within the Federal Reserve FOMC, and Fed Chair Jerome Powell will be in the spotlight once again as he is grilled by politicians on Capitol Hill about the Fed’s policy stance, inflation and the chances of recession. This will accompany the release of the Federal Reserve’s semi-annual monetary policy report. We hope he will provide more clarity on what will be the catalyst for the next policy move, but we won’t hold our breath. Unless we see a substantial drop in inflation and a material slowing in job creation, we have to accept that a July rate hike will be likely. After all, the Federal Reserve appears intent on stamping out any inflation threat once and for all even if that results in a recession.

The data flow mainly centres on the housing market. Mortgage rates are back at 7% and affordability is stretched to the limit, but the lack of available properties for sale means that prices are holding up. Existing homes are simply not available – people who would ideally move are being held prisoner by their ultra-low mortgage rate on their current property. They can’t afford to take out a new mortgage on a different property at perhaps double the mortgage rate. Consequently, existing home transactions are likely to slow further with the result being new home sales are performing well as those few home buyers out there have little other option. We are therefore left with the highly unusual situation that housing construction is improving and housing starts are rising due to the dearth of properties available for sale even in such a weak demand environment.

Norway’s central bank is poised for another rate hike, which is unlikely to be the last. We’ll get another set of interest rate projections next week, and it’s likely to signal a peak of roughly 3.75%, which is higher than the last version in March. The krone is weaker on a trade-weighted basis than Norges Bank had anticipated, albeit less so over recent days. Swap rates have also risen globally since the last forecasts in March, which came amid the US banking crisis. Inflation has been a tad hotter as well. We currently expect a peak rate of 3.75% to be reached by September, though further NOK weakness and additional Fed rate hikes, were they to happen, could build the case for a 4% terminal rate.