There are concerns over the rise in the number of Indian Covid cases. So far, however, markets have not been impacted. Whilst new cases are 20% higher than a week ago, the Indian Covid variant has not led to a significant rise in hospitalisations. This suggests the vaccine programme, which continues to speed up, is proving effective. The markets will wait to see how these cases and hospitalisation data change in the run-up to the 14th June decision on further easing of restrictions on 21st June.
This week, we will see second readings for the PMI manufacturing and services data. They are unlikely to change much from the first estimate and were both strong above 60 for the second month in a row. With the strong growth they suggest, the surveys point to concerns about inflationary pressures. There is evidence of recruitment difficulties in addition to supply chain bottlenecks and higher commodity prices. The construction PMI for May is the first reading. This is still expected to show strong expansion, though it may have fallen back slightly.
The Bank of England’s money supply and bank lending data for April may provide some interest. Following the temporary reduction in stamp duty on the housing market, there may have been an increase in lending with the increased numbers of transactions. Last week, the UK CBI retail survey saw a rise to 25 for May from 20 last month. Sterling continues to look fairly strong on the back of the ongoing firm data.
GBPEUR – 1.1638
GBPUSD – 1.4227
This week, the May CPI is the highlight of the data. Eurozone inflation has been rising and a further increase is expected for May. Recent French data showed a rise to 1.8% from 1.6%. Markets expect Eurozone headline inflation to rise to 1.9% from 1.6% in April. That would be the highest level since November 2018. It would still be in line with the ECB’s inflation target of close to but below 2.0%. As with other countries, the rise is mostly due to higher energy prices with the core measure likely to be around 0.8%.
The inflation data is unlikely to push the ECB into action. The European Central Bank meeting is next week and we may well hear that ECB policymakers do not believe they are close to achieving the inflation target on a sustainable basis. Eurozone second PMI readings for May are unlikely to change much. If they are in line with the first estimates, it will support expectations for a rebound in GDP in the second quarter.
EURUSD – 1.2223
EURGBP – 0.8593
There were some more dovish comments from central bank policymakers last week. They are generally not concerned by the ongoing rise in inflation. This is despite the PCE deflator rising 3.6%, which is the biggest rise in inflation in nearly three years. A minority of Fed policymakers have suggested that it might soon be time to start thinking about tapering asset purchases. The majority, however, have stayed with Fed Chair Powell’s position that this would be too soon. With the US dollar generally weak, the Fed’s position may also have an impact on other central banks. If they were to move towards higher rates for reduced purchases, it could lead to a further rise in their own currencies.
The monthly labour market report will be watched closely as always. Last month, we saw weaker employment data generally. However, large falls in jobless benefit claims in recent months suggest that may have been a blip. Markets expect a much larger rise in non-farm payrolls of around 900k on Friday. The unemployment rate is also forecast to fall back, to a new post-pandemic low of 5.8%. Ahead of this, we will see the ISM manufacturing and services numbers. Both are forecast to show rises and further evidence of strong economic growth.
GBPUSD – 1.4227
EURUSD – 1.2223
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*Interbank rates correct at 7 am on the date of publishing.
