Key events in developed markets next week

The coming week will provide greater clarity on the thinking within the Federal Reserve on the potential path for monetary policy. We will get the minutes to the 2 May FOMC meeting while also hearing from eight different Federal Reserve officials, including Fed Chair Jay Powell. Given the apparent strength in recent data and the fact that inflation measures are at or above target suggest officials will reiterate the “gradual” path of policy tightening. At the moment officials are seemingly split between whether the Federal Reserve will hike interest rates two or three more times this year. We suspect this will largely come down to what happens to wages as to what they end up doing.

In this regard we suspect that the average hourly earnings numbers within the payrolls report are understating wage pressures given evidence within the Employment Cost Index series and the NFIB wage series, which reports that the proportion of firms raising pay has only been higher once in the series 34-year history. As such, we continue to favour three further rate hikes this year – one per quarter.

We think markets may have become too cautious on the UK rate hike outlook and that the possibility of an August rate rise may be underestimated. But a summer hike is still far from a done deal and it depends on how the activity data evolves between now and then.

On that front, a cold Easter weekend and ongoing consumer caution saw another bad month for footfall and credit card spending, and that might see another subdued retail sales release next week. Meanwhile core inflation looks set to fall again as the effect of the pound’s post-Brexit plunge continues to fade – we expect to see it back at target by the summer.

But the potential wildcard next week is the first revision of first quarter GDP. The Bank of England believes that the weak 0.1% initial figure may be wildly underestimated, and it will be interesting to see if there are any upward revisions.

Next week is fairly light on economic data in Scandinavia, with unemployment figures in Norway and Sweden the highlight. In Sweden, the Riksbank’s biannual Financial Stability Report and the speeches at the Riksbank’s 350-year anniversary conference may also provide further information on the central bank’s thinking on the housing market and SEK volatility.

All eyes should be on the Ifo index, hoping for signs of a sentiment stabilisation. Also, the ECB will release the minutes of the April meeting. While ECB President Mario Draghi told reporters that the ECB did not discuss the outlook for monetary policy in April, we expect the minutes to tell a slightly different story.