MPC inflation tolerance wearing thin
UK retail sales data printed a 1.2% decline for May, more than the forecasted 0.8% decline, with annual sales growth held to 0.9%. Underlying prices rose at the fastest pace since March 2012, reinforcing the Bank of England’s “catch 22” with weaker growth and higher inflation.
There was no change to UK interest rates (0.25%) following the latest policy meeting but there was a 5-3 vote as McCafferty and Saunders voted with Forbes for a rate hike to 0.50%. The vote was closer than expected and the bank warned that inflation was likely to be higher than expected previously. There was still caution over the growth outlook and surprise over subdued earnings growth. Overall, the bank moved close to a rate hike and Sterling spiked with a move towards 1.2800 against the Dollar from lows below 1.2700.
Theresa May announced that the Queen’s speech would be delivered next week regardless. Brexit talks will start as planned on June 19th as the Euro declined to 1.1461 against the UK currency.
The Dollar continued to gain support yesterday, before the US market opened with a carry-over of positive sentiment following the Federal Reserve statement amid some underlying shift in expectations.
US jobless claims declined further to 237,000 in the latest week maintaining confidence in the labour market. The New York Empire manufacturing index improved sharply to 19.8 for June from -1.0 previously and this was the strongest reading since September 2014 while there was a robust reading of 27.6 for the Philadelphia Fed manufacturing index which has been in positive territory for 11 successive months. Overall confidence in the economy improved after the business surveys despite a flat reading for industrial production and a small decline in the NAHB housing index.
Overall, confidence in the Dollar was also firmer following Wednesday’s generally upbeat Fed statement, with expectations that there would be further policy normalisation over the second half of 2017.
The Eurozone secured a deal with Greece over the latest loan tranche of 8.5Bn, and a potential debt re-profiling which helped underpin sentiment, although there was no significant Euro impact with the single currency still vulnerable to some position adjustment. Overall, the single currency declined to lows near 1.1130 with the Dollar’s trade-weighted index at two-week highs.
A bigger drop in the Eurozone May CPI would weigh over the common currency. The annualised core inflation growth is expected to have slowed to 0.9% from the previous month’s 1.2% rise.
Data To Watch:
10:00am EUR Labour Cost (Q1), Consumer Price Index (MoM) (YoY), Consumer Price Index – Core (MoM) (YoY).
1:30pm USD Building Permits (MoM), Housing Starts (MoM), Housing Starts Change (MoM) Housing Starts Change (May), Building Permits Change (May), Labour Market Conditions Index (May).