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Friday May 23, 2014 - 14:47:43 GMT
Lloyds TSB Financial Markets -

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  • EU parliamentary results risk putting the euro under further pressure
  • US inflation moving up toward the Fed’s target 
  • UK data watched, as signs of dissent emerge on the MPC

Europe waits on the ECB...   The early part of next week will see European markets coming to terms with EU parliamentary election results. If media reports/polls are correct, fringe and anti-EU parties will do well. In practice, however, these parties will have little direct impact on policy. Nevertheless their poll ratings reflect, in part, electoral concern about the state of the European economy. This could ratchet up expectations that the ECB will loosen monetary policy at its June meeting. At the very least it could add to recent downward pressure on the euro. There is little news over the remainder of the week that is likely to either add to or subtract from the case for an ECB policy move. Markets will await May euro area inflation data and the ECB policy meeting the following week. 

UK rate debate more finely poised... The seesawing of UK interest rate expectations has resumed over the past week. Having dropped sharply following a relatively dovish BoE Inflation Report, rate expectations have again ratcheted higher following stronger April retail sales (+1.3% m/m) and some tentative signs of policy dissent in the May MPC minutes. In particular, sterling rate markets were unsettled by the revelation that “for some members the monetary policy decision was becoming more balanced”.  Over the week, 10-yr gilt yields rose by around 10bp to 2.65%, fuelled also by a sell-off in US Treasuries; sterling, meanwhile, recovered some of its previous week’s drop to trade back above $1.6850.

Data watched for signs of Q2 strength... Looking ahead, its a holiday shortened week.  Early focus when market participants return on Tuesday, could well be on Sunday’s EU election result and the inroads made by the UKIP.  Data wise, the UK calendar is limited to BBA mortgage approvals, GfK consumer confidence, the CBI distributive trades and the Lloyds Bank Business Barometer. With GDP confirmed at 0.8% in Q1, we expect the data to suggest that Q2 growth will be much the same (see back page).

Divisions on the FOMC... US Treasuries have sold off modestly over the past week. As was the case with the previous week’s sharp rally, the market move was only partially due to US domestic news. There was little new data and the minutes of the April FOMC were broadly as expected. Still the minutes and subsequent media commentary make clear there was a particularly extensive discussion of the amount of slack in the labour market. Two camps seem to be emerging on the FOMC: those concerned that a falling unemployment rate is a strong signal of a tightening labour market, and those who still believe the economy has ample scope to grow. With Fed Chair Yellen very clearly in the dovish camp, the prospect of a material near-term shift in interest rate sentiment is limited. However, if the fall in the unemployment rate starts to put upward pressure on wages this debate is likely to intensify. 

Rising US inflation... Data releases in the coming holiday-shortened week are likely to be mixed. The second estimate of Q1 GDP (Thursday) is forecast to be revised down to show a small fall (f:-0.2%). However, this should be seen as old news with more attention likely to be paid to the strength of the Q2 rebound. Durable goods orders (Tuesday) and pending home sales (Thursday) are both expected to rise modestly. Of most interest will be the personal consumption deflator (Friday) - the Fed’s preferred inflation measure. This is expected to have risen to an annual rate of 1.7% in May, from below 1% only two months ago. Although this would still leave inflation below the Fed’s 2% target (and the core rate has been more stable), the rebound should alleviate some concerns that inflation is too low







This document, its contents and any related communication (altogether, the 'Communication') does not constitute or form part of any offer to sell or an invitation to subscribe for, hold or purchase any securities or any other investment. This Communication shall not form the basis of or be relied on in connection with any contract or commitment whatsoever. This Communication is not intended to form, and should not form, the basis of any investment decision. This Communication is not and should not be treated as investment research, a research recommendation, an opinion or advice. Recipients should conduct their own independent enquiries and obtain their own professional legal, regulatory, tax or accounting advice as appropriate. Any transaction which a recipient of this Communication may subsequently enter into may only be on the basis of such enquiries and advice, and that recipient’s own knowledge and experience. This Communication has been prepared by, and is subject to the copyright of, Lloyds. This Communication may not, in whole or in part, be reproduced, transmitted, stored in a retrieval system or translated in any other language in any form, by any means without the prior written consent of Lloyds. This Communication is provided for information purposes only, and is confidential and may not be referred to, disclosed, reproduced or redistributed, in whole or in part, to any other person. This Communication is based on current public information.


 Whilst Lloyds TSB ank plc (“Lloyds TSB”) and Bank of Scotland plc ("Bank of Scotland") have exercised reasonable care in preparing this material and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the facts and data contained herein.


This material has been prepared for information purposes only and Lloyds TSB, Bank of Scotland, their directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. Under no circumstances should this material be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds TSB or Bank of Scotland Relationship Manager for clarification.


Lloyds Bank Corporate Markets, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc, Lloyds TSB Scotland plc and Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC32700. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.




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