The main theme of uncertainty within the global outlook remains and we expect volatility to continue across most markets. The markets are now shifting expectations towards a slowdown in growth with potential peaks in inflation and interest rates. Last week, we saw the PMI data steady and consistent with modest growth. The reading of 53.1 is significantly lower than at the start of the year. The future output index, however, decreased for the fifth month in a row. Meanwhile, consumer confidence fell to an all-time low of -41, no doubt driven by rising inflation, with CPI inflation increasing to a new 40-year high of 9.1%. The Bank of England expects inflation to rise as high as 11% later in the year, as energy prices rises feed through again.
This week, we will get an update on first-quarter GDP which is likely to confirm 0.8% growth over the quarter. With inflation rising and cost-of-living issues, the markets will be focusing on the disposable income and savings data. This will give some indication of how households are funding themselves at the moment and how this may be impacted going forward. The Bank of England money and credit data including mortgage approvals will give further insight into spending patterns. Nationwide house prices will also give some indication of the current state of the market. Last month’s data showed a 10% increase, though the rising living costs and interest rates are likely to have an impact in the future. The latest RICS data already shows a reduction in new enquiries from buyers.
GBPEUR – 1.1626
GBPUSD – 1.2277
A key focus this week is the ECB’s forum in Sintra. It covers challenges for monetary policy in a rapidly changing world. It will no doubt touch on inflation which continues to be driven by energy and imported goods prices, exacerbated by the war in Ukraine. Signs that inflation is broadening out towards services will draw attention to discussions in a policy panel at Sintra on Wednesday consisting of ECB President Lagarde, Fed Chair Powell and BoE Governor Bailey. That will no doubt keep the focus on uncertainty and geopolitics, with the G7 and NATO summits taking place in the coming days.
The key European data will be the preliminary ‘flash’ estimate for June Eurozone inflation. We expect Eurozone CPI to increase to a new high of 8.4 from 8.1% in May. Food and energy prices have continued to rise. This will no doubt give the ECB further urgency in its planned rate hike of 25bp in July. It will also suggest that we will see further rate hikes throughout the year. Eurozone unemployment is expected to fall to 6.7%, which suggests the labour market is tight as with the UK and US. The Eurozone economic sentiment index is expected to fall, with lower consumer and industrial confidence due to the disruption and cost of living increases. The recent PMI readings were the lowest in over a year, suggesting fading demand and slowing growth.
EURUSD – 1.0559
EURGBP – 0.8601
The signs are increasing of a global slowdown. This is seen as a sign that a loss of momentum may also bring a peak in inflation and thereafter in interest rates. PMI surveys have reinforced the evidence of softening activity and suggest we may see an easing of inflationary pressures. In turn, this may mean that central banks may not have to raise rates as much as previously thought. Interest rates in the US are still expected to rise further this year, but markets are now pricing in potential rate cuts next year. The economic outlook is still mired in uncertainty so we expect volatility to persist. Fed Chair Powell acknowledged that a soft landing for the economy is very challenging and that a recession is a possibility.
First-quarter GDP is expected to confirm a contraction of 1.5%. The underlying picture suggests a return to growth in this current quarter. However, headwinds to growth have been building. Initial jobless claims have edged higher, suggesting the labour market is softening. This week, we have a range of data that is expected to confirm the slowdown in activity, including durable goods orders, the goods trade balance and construction spending. We will also see the consumer confidence survey, likely to show dented confidence due to rising prices and uncertainty. The Fed’s preferred inflation gauge, the personal consumption expenditure (PCE) deflator, is likely to back up the CPI inflation, showing a further increase to 6.5%.
GBPUSD – 1.2277
EURUSD – 1.0559
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*Interbank rates correct at 7 am on the date of publishing.