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ECONOMIC DATA ANALYSIS - KING'S LAST INFLATION REPORT
ECONOMIC DATA ANALYSIS FRIDAY 10 - 16 MAY 2013
KING'S LAST INFLATION REPORT
• BoE Governor King presents his last Inflation Report
• First estimates of euro area Q1 GDP likely to show contraction continued into 2013
• A firmer tone to US data before attention reverts to fiscal uncertainty
Equities post further gains ... Despite a quiet week for economic data, markets found fresh impetus from signs of firmer global activity. The S&P 500 reached a new all-time high above 1600 (up 1% on the week), with the FTSE 100 reaching a 6-year high its wake. Against this backdrop, government bonds backed up sharply, with 10-yr gilt yields rising around 20bps on the week, to above 1.8%.
Inflation Report likely to add little to outlook ... The coming week's Inflation Report will present the Bank's latest medium-term outlook. We do not expect the growth projections to have changed much with the softer tone of international economic releases (now less clear) balanced by firmer domestic activity. The inflation outlook may soften a touch following the easing in international commodity prices. This will be last time BoE Governor King chairs the press conference after twenty years at the helm. Given his pending departure, his comments are likely to carry less market relevance. The focus is now firmly on Mark Carney’s arrival on 1 July and the Bank’s assessment of its new Remit, published in August.
Labour market normalising? ... The UK labour market figures are due in the coming week. Employment posted its first contraction since mid- 2011 in the three months to February. While we anticipate a modest rise in March, we doubt the pace of job growth will be sustained over the coming months, as companies rebuild productivity.
Euro area contraction to continue ... The euro area posts first estimates of Q1 GDP. In line with March’s industrial output, our global team forecasts Germany to rebound in Q1 (0.3%), following a sharp 0.6% drop in Q4. Yet this looks insufficient to drive a broader euro area expansion, particularly as we expect declines in the second and third largest economies, France and Italy (down 0.3% and 0.6%, respectively). In total, the euro area looks likely to contract by 0.2% in Q1. Recession looks set to continue in Q2 and, despite the ECB's latest easing, we see stabilisation rather than recovery in H2 2013.
Euro FM’s to focus on banking union ... Following today's G7 meeting, focus shifts to the meeting of euro area finance ministers amid ongoing signs of economic weakness across the region. Specifically, with a June deadline looming, the meeting is likely to focus on plans for an EU bank resolution scheme - a key part of a broader banking union. More contentious developments on
national deposit guarantees, which may lead to a common scheme, are likely to wait until after the German elections in September.
Signs of firmer global activity ? ... After questions about the implied strength of the Chinese economy from strong import growth, industrial output and retail sales releases in the coming week will provide a further snapshot. In the US, the focus will be on April's retail sales, where falling gasoline prices are likely to weigh on the headline figures. May's Empire State and Philadelphia Fed surveys will also be watched. The recent downturn in both has raised concerns about the impact of fiscal tightening. We believe these concerns, however, may be overplayed and expect some improvement in both.
Focus turns to US debt ceiling deadline ... While this suggests a more encouraging outlook, the end of the week marks the expiry of the temporary agreement on the Federal debt ceiling. As before, the Treasury has indicated it will be able to undertake measures to forestall any significant shutdown - we believe until into October. However, the deadline will again draw attention to fiscal tightening and the political intransigence preventing a medium-term fiscal strategy.
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