GBP – BoE holds rates

Last week, the Bank of England left rates unchanged, though expectations are still for gradual rate rises. This week, BoE Governor Carney and fellow MPC members Cunliffe, Tenreyro and Saunders testify on the latest Inflation Report at the Treasury Select Committee after the BoE holds rates. The assumptions within the Inflation Report now appear to be somewhat optimistic.

The Bank also said this week that “the perceived likelihood of a no-deal Brexit has risen”. The BoE still expect moderately higher interest rates in the coming years. The Conservative Party leadership contest is now down to Boris Johnson and Jeremy Hunt. There will be a series of hustings across the country in the coming weeks. Party members will choose the new leader in the week commencing 22 July. Johnson remains the favourite to become the next PM, though a disturbance involving his partner on Friday has dented those hopes. He has vowed to renegotiate the Brexit agreement and has said a departure from the EU on 31 October is “eminently feasible”. The EU continues to insist the Withdrawal Agreement will not be reopened, but amendments to the non-binding declaration on the future relationship could be made.

Last week, headline inflation fell to 2.0% in May from 2.1% with retail sales also falling for a second month. Business and consumer surveys for June are the highlights for this week. Markets expect a slight fall in the headline consumer confidence index with concerns about the economic outlook. The ONS will release an update of Q1 GDP expected to be unrevised at 0.5%. The Bank of England currently predicts Q2 GDP growth to be flat.

EUR – EU roles to be filled

Last week EU leaders failed to reach an agreement on candidates for key roles, including the presidencies of the European Commission and the ECB. These roles become vacant later in the year. The process to find a compromise candidate for Commission President has begun and an emergency summit has been called for 30 June. Following ECB President Draghi’s comments that further policy easing may be necessary, the focus will be on data.

Last week saw slight improvements in manufacturing and services PMIs, though manufacturing was still not showing growth. This week we will see the Eurozone flash CPI for June. We expect Eurozone inflation to stay at 1.2%, with higher core inflation offset by lower energy prices. Although core inflation has been volatile in recent months, it remains well below the ECB target.

The German IFO business survey is likely to show a modest improvement though it still remains weaker than last year. The European Commission will also release its economic sentiment survey which is likely to suggest weaker growth.

USD – Trump meets Xi

Dovish signals given by the US Federal Reserve and the ECB have helped to reduce investor concerns about intensifying global trade tensions. The Fed sent a message of the possibility of a rate cut that markets expect as early as next month. Financial markets currently attach around a 20% probability to a 50bps Fed rate cut next month and more than 50% chance of an ECB rate cut by September. US interest is likely to centre on Fed speakers and personal spending data, including the deflator, for May.

The G20 summit takes place in Osaka starting on Friday. US President Trump is expected to hold an “extended meeting” with his Chinese counterpart Xi on the sidelines with the aim of resuming trade negotiations. Trump has previously threatened to impose tariffs on all Chinese imports but has held off so far.

Among this week’s Fed speakers, Chair Powell will discuss the economic outlook and monetary policy. Several other voting members are also scheduled to speak. The spending figures are expected to be broadly consistent with last week’s retail sales report which suggested that consumer spending is likely to provide a greater impulse to second quarter GDP. Overall second-quarter GDP growth should soften from the first quarter. Inflation will likely remain below 2%, enabling the Fed to counter any downside risks to US economic activity.

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