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Friday May 9, 2014 - 15:41:58 GMT
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  • BoE expected to play down the prospect of an early rise in UK interest rates.
  • Euro area Q1 GDP likely to show that recovery remains very uneven
  • Upcoming US activity data to strengthen prospect of rebound in Q2 GDP

ECB signals policy easing... It has been the turn of the ECB to dominate the global policy headlines this week. In a move that caught markets off-guard, President Draghi provided a very strong hint following the May Council meeting that the ECB is poised to sanction further stimulus as early as next month. His comments saw EUR/USD spiral down from just shy of 1.40 (a 2-1/2 yr high) to below $1.38 at the time of writing. In the absence of a marked recovery in the euro area’s fortunes over the coming month, a cut in the refi and deposit rate now looks on the cards. 

Disparate recovery prospects... In the coming week, the euro area highlight will be Q1 GDP data. We look for output to have risen by 0.3%, with the risk of a stronger reading. Although this would be the fourth consecutive increase in the region’s GDP, the recovery remains very uneven, with a robust reading in Germany (f:+0.7%q/q) counterbalanced by weakness in France (f: 0.0%q/q). This disparity is likely to maintain pressure on the ECB to act further.

Focus to shift back to the UK policy debate... The ECB and UK MPC face starkly contrasting environments. The main UK highlight in the coming week will be the BoE’s May Inflation Report (Weds).  Amid  a robust economic recovery, there is a growing market conviction that the UK will be the first of the major central banks to tighten policy from here.  With the MPC no longer constrained by its initial forward guidance, the  forecasts of GDP, inflation and the degree of economic slack will be scrutinised for hints of when the first tightening might occur.

Unemployment to drop to 6.8%... The Inflation Report is due the same day as the March/April labour market data. These are expected to show that the unemployment rate dropped to a new five-year low of 6.8% in March. While this could prompt a sharp knee-jerk reaction in the bond market, any rise in yields could prove short-lived, as we expect the Inflation Report to be balanced. With inflation below target, BoE Governor Carney is expected to play down the prospect of an early rise in interest rates. While acknowledging the strength of the recovery, we think he will highlight the risks and stress that the BoE has a range of tools available to support price and financial stability - hinting, perhaps, at possible action from the FPC next month.

US data watched for rebound... Elsewhere, after very weak GDP growth in Q1, the focus in the US is on the widely anticipated bounce back in Q2. In this regard, the coming week sees a raft of important activity data, including retail sales, industrial production,  housing starts and building permits. Overall, these are likely to be firmer. The markets may attach particular importance to the housing data, following Fed Chair Yellen’s recent comments that this  sector poses a key risk to the US recovery.

A short-lived jump in inflation... US CPI data are also due. Although the core CPI is forecast to have remained unchanged at 1.7% in April, headline inflation is predicted to jump from 1.5% to 2.0% -  partly due to a rise in energy prices and base effects associated with the later timing of Easter.  While this may temper concerns about US disinflation, it should be noted that headline inflation is likely to drop back again in May.  On the policy front, a number of Fed members are due to give speeches over the coming week. We doubt, however, these will provide any new insight into the policy debate ahead of the  April FOMC minutes due the following week.

Finally... In other markets, Q1 GDP in Japan is expected to post a strong improvement. We look for growth of 1.0%. The detail will reveal to what extent this is driven by front-loaded consumer spending ahead of the April sales tax increase.





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