Unemployment Falls

UK UNEMPLOYMENT The UK's unemployment rate fell to 4.8% in the three months to Marchwhich was better than the market consensus forecast which expected no change at 4.9%. Employment over the same period increased by 84k, above market expectations for a 50k rise. The extension of the government’s furlough scheme to September and the pickup in job creation in response to the rolling back of lockdown restrictions mean that the unemployment rate is predicted to peak at a much lower level than previously envisaged. The Bank of England, for example, now sees the peak at just under 5½% in Q3. UK retail sales for April, meanwhile, soared by 9.2% on the month (42.4%y/y), and surveys for May point to further rises in consumer and business activity, all of which support expectations of a strong bounce-back in GDP growth in Q2.

BOE MPC TESTIMONY TO PARLIAMENT

The coming week’s global economic calendar is less busy, but different views on the risks for the inflation outlook could maintain a degree of volatility in financial markets. Participants will also continue to weigh signals confirming the economic recovery with concerns about new variants and rising Covid cases in some parts of the world. Here in the UK, the government is keeping a very close eye on rising cases of the so-called Indian variant, with the next stage of the easing of restrictions in England set for 21 June. Data wise, the CBI Distributive Trades survey (Tue) will provide an early indication of retail activity for May and the Lloyds Business Barometer (Fri) will also provide an update on business trading prospects and wider economic sentiment. Business confidence in last month’s survey increased to the highest level for two-and-a-half years. BoE Governor Bailey, Deupty Governor Cunliffe, outgoing Chief Economist Haldane (hawkish) and external MPC member MPC Saunders (dovish) will testify to Parliament’s Treasury Select Committee on the Monetary Policy Report (Mon). Speeches will be provided by external MPC members Tenreyro (Tue) on “Economic Challenges from the Pandemic” and Vlieghe (Thu) on “What government bond yields can tell us about future growth and inflation”.

US INFLATION

In the US, this week’s initial jobless claims data fell to a new pandemic low of 444k, suggesting that May payrolls in a couple of weeks could be stronger than April’s underwhelming rise of 266k. Next week, markets will be eyeing closely the April PCE deflator (Fri) which is the Fed’s preferred inflation measure, especially after the surge in the CPI measure. Headline PCE inflation is forecast to rise to 3.5% from 2.3%. Higher inflation might be one reason for a potential fall in the Conference Board’s consumer confidence index (Tue) to around 120 in May from 121.7, while backward-looking Q1 GDP (Thu) is expected to be unrevised at 6.4% (annualised). A number of monthly indicators, such as durable goods orders (Thu) and the goods trade data (Fri), will enable economists to hone their estimates of Q2 GDP growth which is expected to be even stronger than in Q1.

GERMAN IFO SURVEY

Eurozone attention will be on the German IFO business survey (Tue), which provides a closely watched guide to the single currency area’s largest economy. We look for a further rise in the headline IFO index to 98.3 in May from 96.8, providing further support for an anticipated return to growth following the contraction in Q1. The Eurozone economic sentiment survey (Fri) is also expected to show an improvement. This week’s Eurozone flash composite PMI increased to 56.9, helped by the services PMI rising to 55.1 (holding above the 50 mark for a second month), while manufacturing activity remained strong. Meanwhile, French flash CPI for May (Fri) is also worthy of some attention, given that it will be the first major Eurozone country to release inflation data for May, while German and Eurozone estimates are due in the following week. Eurozone headline inflation rose to 1.6% in April and we anticipate a further rise in May. In fact, Eurozone inflation may reach 2% earlier than the ECB expected in its latest March forecasts, given the recent trend higher in oil prices (despite this week’s pullback), but it is expected to drop back sharply early next year mainly on base effects.

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