Friday May 15, 2015 - 16:27:51 GMT
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Week Ahead - ECONOMIC DATA ANALYSIS
ECONOMIC DATA ANALYSIS FRIDAY 15 MAY 2015
STILL SKIRTING CLOSE TO DEFLATION
- Headline inflation rates in UK and US set to remain low, despite firmer oil prices
- Official policy minutes unlikely to provide a firm steer on interest rate outlook
- Tone of forward-looking European data to soften, but recovery dynamic still intact
European event risk recedes for another week. With discussions around the release of Greek bailout funds continuing behind the scenes, expectations are hardening that an extraordinary Eurogroup meeting on 25 May is the next checkpoint for an interim agreement. Although the terms of any deal could yet be put to a referendum vote, Greece faces no unusual payment hurdles in the coming week. A perception of progress towards an agreement is still required, however, to secure ongoing increases in ELA support for Greece, with a vocal ECB minority, notably Germany’s Weidmann, vigorously opposed.
Tone of European data is expected to soften a little. Despite the first estimate of Q1 GDP growth in the Eurozone outpacing that for the UK and US, it appears unlikely this will spill over into forward-looking activity indicators for Q2. Market attention is likely to focus on May’s ‘flash’ estimates of Eurozone PMIs (Thu) and the German IFO survey (Fri). An expected softening in the data would not, however, change our view that the Eurozone recovery dynamic remains broadly intact. Notably, any retrenchment in the German ZEW survey (Tue), often seen as an advance read for the IFO, is likely to be attributable to the financial market volatility from late April. That is likely to weigh more heavily on the ZEW survey’s financial community respondents than those in the real economy.
FOMC minutes unlikely to sate market’s appetite for policy clues. With US data continuing to disappoint, the minutes of the April FOMC meeting (Wed) will be scoured for signs of dispersion in individual policymakers’ forward-looking assessments. But with the Committee as a whole in data-dependent mode, a strong steer on Fed liftoff timing seems unlikely to be forthcoming. One notable source of improvement in the external backdrop is the easing in the dollar effective exchange rate,by over 6% since its peak in mid-March. This fading of the dollar’s recent strength should help limit falls in import prices in the months to come, and their drag on overall inflation. Here, CPI data (Fri) are expected to show a slight easing of the annual headline rate to -0.2% in April, despite firmer oil prices, as well as a slowing in the ‘core’ rate to 1.7%. While such readings will not give the Fed the confidence they need to move towards tightening policy, official anxieties that the US is entering a deflationary spiral likewise remain limited.
UK inflation also hovering around zero. Updated projections in the Bank of England’s Inflation Report were on balance little changed from February, maintaining the expectation that inflation will hold around zero over the course of Q2 with a downside skew to the inflation projection overall. While we see CPI data for April (Tue) holding at a record low rate of 0.0% despite some pickup in fuel prices, even a mild negative print would not come as a marked surprise to the MPC. Importantly, the MPC appears to have become a little more relaxed about a deflationary dynamic taking hold with inflation expectations, in their view, remaining consistent with the 2% inflation target. Meanwhile, signs of a slower pace of high street discounting could weigh on growth of retail sales volumes (Thu), although underlying momentum seems likely to remain robust. In the aftermath of the Inflation Report, the minutes of May’s MPC meeting (Wed) are unlikely to impart much new information.
Japanese trends back in focus.With BoJ Governor Kuroda recently dampening expectations of expanded monetary stimulus, focus will return to the dynamics of economic data. A first cut of Q1 GDP (Wed) is expected to show quarterly growth of 0.4%, despite worries about weak inflation momentum. Trends here and in other data will become clearer with last April’s consumption tax hike soon dropping out of calculations.
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