Changing the inflation story

Despite a rake of political headlines—such as the G7 agreement on minimum corporate tax rates—little has changed the short-term fundamental outlook since last week. The markets preferred barometer of economic recovery remains to be inflation, its composition and likelihood of persistence. In the UK, two noteworthy things are happening in the next week:

1.      We shall receive UK GDP and NIESR m/m GDP numbers, to help us track the economic benefit of recently eased restrictions

2.      The government will decide whether they will delay the final easing of restrictions, tentatively scheduled for 21st June

If those releases point to faster growth and continued reduction of restrictions respectively, then we could see it feed into UK inflation expectations via a surge in demand. 

Bottom line: Of course, demand isn’t the only contributor to inflation spikes, other factors such as Brexit inefficiencies, rising commodities prices and surging shipping costs—what we might term supply-side inflation—continue to hit UK consumers. Unfortunately, the financial press often discuss these as the same thing, but it’s an increase in the former and reduction of the latter that will have a salutary affect on growth expectations. In the US, we are seeing a similar dynamic, where recent inflation is of the transitory variety but demand side inflation—payroll data—has disappointed, which signals a lower inflation picture in the near term.  This week, we should see if the UK begins to pull ahead of the America or is repressed by Covid once more.

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The week ahead

GBP

The UK’s exit from coronavirus restrictions could be in jeopardy as the Health Secretary Matt Hancock has suggested the Delta variant could make unlocking plans difficult. It is expected the vaccine programme will be extended to the under-30s in the next few days, in an attempt to fully vaccinate before the variant proves too much to handle. Cable has been trading mostly range bound as a result and the decision to unlock or delay could create significant movements in the short term. Elsewhere, UK house prices jumped 10.9% in the year to May as tax breaks introduced during the pandemic had a marked effect, presenting a fresh risk for the UK economy.

  • The BRC Retail Sales Monitor y/y is due out on Tuesday which read 39.6% last month compared with a 9.3% forecast.
  • Monetary Policy Committee member Andy Haldane is expected to speak on Tuesday and Thursday.
  • GDP m/m for April is forecast at 2.4% vs 2.1% in March.
  • UK Manufacturing Production m/m looks set for a decline to 1.5% in April vs 2.1% in March.

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​​​EUR

After weak Non-Farm Payrolls on Friday, the Euro jumped back above $1.2150 against the Dollar after a difficult week for the common currency. Trading is fairly muted today ahead of the meeting of the European Central Bank this Thursday. Markets will be looking for clarity on when monetary stimulus could begin to be tapered, but it is expected Christine Lagarde will remain tight lipped. The EU cannot afford another rally in bond yields which would undo the hard work that has got the bloc on track for a recovery from the pandemic.

  • German Industrial Production m/m is scheduled for release on Tuesday, expected at 0.3% for April vs 2.5% in March.
  • Eurozone ZEW Economic Sentiment is forecast at 85.5 vs 84.0 last month.
  • The European Central Bank will provide a monetary policy update this Thursday along with any interest rate decision.
  • The G7 meetings will take place on Friday.

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USD

The US Dollar Index only managed a gain of 0.09% last week despite hitting highs of 0.63% after disappointing Non-Farm Payrolls. Demand from consumers is outweighing the supply of workers, and in some cases materials, as economies begin to unlock and businesses struggle to meet this demand. This has cooled Federal Reserve inflation fears and if CPI falls this week, taper speculation could begin to subside. However, over the weekend, Treasury Secretary Janet Yellen reignited taper talk stating higher interest rates would be good for the Fed. This boosted the Dollar and sent Cable lower to the $1.41 level.

  • US CPI m/m is forecast at 0.4% for May vs 0.8% in April while Core CPI m/m looks set to read 0.4% for May vs 0.9% in April.
  • Unemployment Claims are forecast to fall slightly to 370K vs 385K over the week.
  • Preliminary UoM Consumer Sentiment looks to be on the rise again predicted to read 84.0 vs 82.9 previously.
  • Preliminary UoM Inflation Expectations are due on Friday with the previous reading coming in at 4.6% which marked a fifth straight month of rising inflation expectations.

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