Market focus shifts to the UK

The focus this week will shift to the United Kingdom as the Bank of England sets monetary policy and provides updated forecasts.

The UK central bank will publish its latest quarterly inflation report, containing new projections on economic growth and inflation, and simultaneously announce its policy decision. The expectation is for key interest rates to remain on hold, although some policymakers have started to make a case for higher interest rates.

The policy decision follows news that the UK economy expanded at its weakest rate in a year during the first quarter, as rising prices started to hit household spending, which adds to the rationale for an unchanged monetary policy.

However, recent strong UK Purchasing Managers’ Index (PMI) data will bolster the arguments of the hawks. The surveys showed growth regaining momentum in March and April. Latest data releases on industrial production, construction output and trade will provide further guidance on economic growth momentum and add to the debate. This could impact the pound in the run up to the general election in June.

Pivoting back to the United States, analysts will look to latest data on inflation and retail sales to confirm signs of building inflationary pressures and the resilience of the consumer. That will feed into expectations for the timing of the next policy move by the Federal Reserve.

Markets are pricing in about an 80 per cent chance of the Fed hiking again in June after the central bank viewed slower growth in the first quarter as transitory. This is consistent with our expectation for Gross Domestic Product to rebound in the second quarter, with annualised growth up from 0.7 per cent to about 3.3 per cent, led by a revival in consumer spending.

In China, market watchers will be eyeing a deluge of economic data releases, including trade, inflation, credit and money supply, to assess the health of the Chinese economy. Caixin China PMI surveys indicated a moderation in growth pace last month, with a further loss of momentum seen in both manufacturing and service sectors.

The easing in growth affected hiring. After two months of marginal gains, overall employment fell in April. Analysts will pay attention to updated trade numbers for any sign of waning external demand, especially as slower expansion in export orders partially contributed to softer production growth across the manufacturing economy.

At home, updated retail sales figures will provide important signals for Singapore’s service sector.

Nikkei Singapore PMI signalled that the Republic’s private sector started the second quarter on a stronger growth footing.

ABOUT THE AUTHOR: Bernard Aw is an economist at IHS Markit.