With some hawkish statements from Fed officials and the likely continued high rate of inflation, which the Fed prefers, a pause at the June FOMC monetary policy meeting is not a given. For the UK, next week’s inflation data will be the key to determining whether policymakers break the tightening cycle
USA: The market is nervous about a possible interest rate hike in June
Market interest rate expectations have risen over the past week on a combination of positive headlines expressing hopes that an agreement to avoid a default on raising the debt ceiling can be reached in the coming week, as well as some hawkish comments from Federal Reserve officials, which mean the following: A pause at the June FOMC monetary policy meeting is not a given. The same two themes will dominate market thinking for the week ahead. Politicians have spoken of a vote on raising the debt ceiling as early as next week. This would be a very positive outcome but given the personalities of the people involved we have to remain cautious until the deal is signed and approved. Should the talks collapse, it would lead to a rapid deterioration in market sentiment.
The data includes GDP revisions, the minutes of the last FOMC meeting and the Fed’s preferred measure of inflation: the core personal consumption expenditure deflator. This inflation metric is likely to remain high, which could make the market nervous about a potential rate hike in June. Nevertheless, the economic environment continues to weaken as real consumer spending is expected to be flat in April compared to the previous month. With credit conditions tightening rapidly in the wake of recent bank failures, recession risk remains high and we still see the potential for lower interest rates before year-end.
UK: Inflation data will have a major impact on BoE’s June decision
Next week’s UK inflation data is one of two such releases ahead of the Bank of England’s June meeting and will play a key role in deciding whether policymakers halt the tightening cycle as expected or hike it by another 25 basis points. More specifically, this depends on whether there is an unexpected pick-up in service sector inflation, which otherwise looks poised to peak.
Wage pressures appear to be easing, albeit slowly, while lower gas prices are good news for the hospitality sector, which accounts for a large part of the recent surge in headline inflation in the service sector. We will also keep a close eye on retail sales which could partially recover after spending was very negative in March and in general the prospect of lower real wage pressures and improved consumer confidence suggest the worst is behind us for the sector .
Major events in developed markets next week
Source: Refinitiv, ING
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