Market movers today
German GDP growth for Q1 is due for release today and we estimate strong growth of 0.6% q/q, up from 0.4% q/q in Q4 16, as business sentiment has shown optimism throughout Q1, especially observed in strong PMIs and ifo expectations. Additionally, the euro area reported quarterly GDP growth of 0.5% q/q in Q1 already, which – although not as strong as indicated by the PMI figures – suggests that the German figure should also be solid.
Focus will also be on US inflation with the release of the CPI figure for April. We expect some reversal in both headline and core inflation after they fell sharply in March, driven partly by the timing of Easter and by lower energy prices. We estimate CPI core inflation was 2.0% y/y and headline inflation was 2.3% y/y, which would mean headline inflation has fallen from 2.8% to 2.3% in just two months, with a large part of this due to the base effects of oil prices. Note that although these numbers are at or above 2%, the Fed is more concerned about PCE core inflation, which is still below 2% and showing no signs of accelerating.
US retail sales figures for April are also due for release. Since October 2016, consumer confidence has been very high, indicating tailwinds for private consumption. However, we believe that consumer confidence has run ahead of actual developments and will come down rather than retail sales accelerating. The weak GDP growth in Q1 was driven largely by weak private consumption. Hence, if GDP growth is to pick up in Q2, we need a strong print in the retail sales control group for April. The University of Michigan consumer confidence is also due to be released today and in line with the argument above, we estimate a decline.
Selected market news
The Bank of England (BoE) kept all policy measures unchanged at yesterday’s meeting and kept its neutral stance by repeating it could move ‘in either direction’. However, the BoE believes the current market pricing of hikes will be a bit too soft should the economy live up to expectations. One member of the Monetary Policy Committee voted again for a hike, but she is leaving the BoE at the end of June. We still believe the BoE will remain on hold for the next 12 months, as it seems unlikely it will tighten monetary policy in a time of elevated political uncertainty, while a substantially slower growth and/or higher unemployment is likely to be needed before easing. See BoE review:Mainains hawkish twist to neutral stance, 11 May.
ECB Vice-President Vitor Constancio argues that maintaining its ultra-loose monetary policy for longer is a safer way for the ECB to avoid an economic relapse. ECB Chief Economist Peter Praet also attempted to dampen rate hike expectations saying, ‘there is a very strong chain of logic behind the decision to first scale back QE, raising the term premium included in long-term rates, and only then hiking short-term rates’. The market is currently pricing in the first 10bp deposit rate hike from the ECB for the summer next year.
The European Commission is warning France on risks to its public finances, arguing that reining in spending would prove more difficult than previously thought. Presidentelect Emmanuel Macron has promised to bring France’s deficit under the 3% ceiling this year given this has consistently been missed since the financial crisis.
According to the FT, Italy is set to remain a concern for EU officials. The country is expected to be the slowest growing euro area country, while its debt ratio will grow to 133.1% this year.
