The data from the UK last week was, in general, better than expected. Firstly we had March labour market figures, which reported larger employment growth, up 83,000 versus an expected 4,000 rise, the unemployment rate dropping to a fresh low of 3.7%, headline average earnings growth of 7% on a 3m year-on-year basis, and more vacancies than people unemployed for the first time ever. Consumer price inflation figures for April recorded a marginally lower than expected headline rate of 9% year-on-year, and April retail sales figures reported an unexpected increase in volumes of 1.4% month-on-month, when a small fall had been expected. However, all was not as rosy as first appeared, with the retail sales volumes data recording volumes down almost 5% on a year earlier. The most damning release though was the GfK consumer confidence for May, which fell to a new record low, with virtually every main element of consumer confidence continuing to fall.

Bank of England Governor Andrew Bailey began last week arguing that the world’s poor faced a potential catastrophe in terms of food pricing, and indicated that there was little that the BoE could do in the short term to resolve the situation. Later in the week, Chief Economist Huw Pill made remarks to suggest that there were some additional upside risks to inflation and that the bank was not yet done with the monetary tightening. That indicates there could be hikes in June and August (25 basis points each), but it does not correspond to the BoE’s own inflation forecast which is barely two weeks old. This therefore suggests that the ability of any central bank, let alone the Bank of England, to get on top of the inflation problem is limited at best. I would argue that this has always been the case, but the question is how bad will it let the economy get in any, potentially futile, attempts to reassert control?

The pound performed better over the course of last week, rallying against the USD above $1.25. Against the EUR, a rally at the beginning of the week took GBPEUR back above €1.18, where we held towards the end of the week, and that despite the European Central Bank signalling more overtly that a tightening was coming in July. 

For this week, the data and surveys are far less important. The UK public finances data for April are released early on Tuesday morning and will be followed swiftly by the preliminary May manufacturing and services Purchasing Managers' Indices (PMIs). There is also the CBI distributive trades survey for May released later on that day. I think the risk is that the figures report a slowing in activity, but the public finances data might come in better than expected, thanks to inflation, rather than output growth. As for the GBP, I suspect there will be trouble ahead for the currency, but whether the problems emerge this week or in the weeks to come may not be dependent on events in the UK, in my opinion.

Last week saw yet more evidence of creeping weakness in the US economy. First out of the gate was the May Empire manufacturing survey, which reported the index dropping to -11.6 from a reading of 24.6 in April. Outside of the pandemic, that is the largest single month fall in the index since records began back in 2001. There was ongoing strength in retail sales and industrial production in April when both were released on Tuesday, but then another awful release, with the National Association of Home Builders housing market index. That fell from 77 in April to 69 in May, the lowest reading since the pandemic rebound in 2020. April housing starts fell, albeit there was a sizeable downward revision to the March figures, whilst the May Philadelphia Fed business outlook index fell from 17.6 to 2.6, the lowest reading in 2½ years outside of the pandemic. There was also a drop in the existing home sales data for April, and an 11% slump in weekly mortgage applications. Were that not enough, the equity markets saw US retailers routed as profit warnings were sounded by some of the biggest market names.

Comments from various Federal Reserve speakers continued to press for the need for additional monetary tightening. There was also some suggestion that the Fed were still working towards a soft landing, but I genuinely believe that this is not possible. The efforts to control inflation are likely to prove fruitless given that the supply issues remain, particularly of necessity goods. Bringing about a soft landing under those circumstances was unlikely a few months ago, and gets even harder for each monetary tightening that the Federal Reserve authorise.

This week’s data and survey releases include the provisional May manufacturing and services Purchasing Managers Indices (PMIs), revised Q1 GDP, April pending home sales, April personal income and spending data, and the final May University of Michigan consumer sentiment index. Will these report a further weakening in economic conditions or buck the trend of recent weeks? The one to watch is the University of Michigan consumer sentiment release. Are consumers continuing to fret about the effects of inflation, or are we heading into a bottoming out of confidence?

As for the US dollar, it has suffered a setback against other majors, with some strength against the euro given back over the course of last week. I remain concerned about a further retrenchment of risk appetite, which ought to help the USD. I do not expect that the data or surveys from next week will prove especially helpful for the currency, but the Federal Reserve’s determination to tighten monetary policy, even whilst observing significant equity market volatility ought to support the dollar for a further quarter or two, in my view.

Comments from European Central Bank arch-hawk Olli Rehn, and additional commentary from central bank Governors Kazaks (Latvia), Muller (Estonia), Knot (Netherlands), Centeno (Portugal) and Villeroy (France) all suggested they were leaning towards a tightening in July. So the only question is likely to be how large a tightening the ECB will sanction? That could still be influenced by the performance of the Euroland economy, and in particular whether there has been any sign of a de-anchoring of inflation expectations in second round inflation effects. 

Last week saw the European Commission downwardly revise forecasts for growth in the European Union in 2022 and 2023, although those forecasts could still be overly optimistic following both Finland and Sweden seeking fast track accession to NATO. Russia threatened retaliation to the prospects of territories close to its borders being members of NATO, and there were comments from Finnish importer Gasum Oy that Russia would turn-off supplies to Finland as early as last Saturday morning. Russia is using its energy supplies as leverage in the geopolitical maelstrom that Europe is experiencing, and could expand those countries it plans to cut gas supplies to, undermining growth further. Meanwhile the data and surveys from Euroland continue to point to problems, although there was a modest upward revision to GDP growth in Q1 and a small improvement in the consumer confidence index for May.

This week, we’ve already had the release of the German IFO business climate index for May, and that recorded a surprise rise in the index, up from a revised 91.9 to 93.0, with both the current assessment and expectations indices rising, albeit that the current assessment index rose a lot more. 

The main releases of interest in the remainder of the week are the Euroland manufacturing and services PMI indices (provisional May) on Tuesday and May confidence figures from Italy released on Thursday. The PMIs are already expected to record signs of a softening in economic activity, but will the surveys surprise the markets by beating expectations, or will performance be worse in services than in manufacturing? 

As for the EUR, the upside will get more challenging, and if the improvement in the surveys fails to materialise then the risks are likely to be more to the downside than the upside, in my view. It’s also worth keeping a close watch on the performance of bond and equity markets. Can they sustain the recent moves, and what happens if they can’t?

Last week’s central bank meetings revolved around the central bank decisions of the Philippines and South Africa. As expected, the central bank of the Philippines hiked by 25 basis points and the South African Reserve Bank hiked 50 basis points. It would appear that neither central bank is yet done with hiking interest rates, but they are treading cautiously given the uncertain nature of economic activity globally.

For this week, the central bank of Israel has already raised interest rates a greater-than-expected 40 basis points, and the Reserve Bank of New Zealand is set to raise interest rates by 50bps early on Wednesday. The Bank of Indonesia is set to leave interest rates on hold in between those two meetings. The Bank of Korea is set to hike interest rates on Thursday, closing out a week of generally tighter monetary policy, albeit that the pace of monetary tightening around the globe appears to be slowing.