All eyes on the Fed and ECB policy decisions

Chris Scicluna
Emily Nicol

Euro area flash inflation to be watched ahead of Thursday’s ECB decision
Ahead of the ECB’s policy decision on Thursday, today’s economic data from the euro area, including the flash April HICP estimate and latest bank lending numbers, will help to determine whether the Governing Council hikes by 25bps or 50bps. While headline euro area HICP inflation fell 1.6ppts to a 13-month low of 6.9%Y/Y in March, its Q1 average exceeded the ECB’s forecast. Moreover, core inflation continued to rise in March, reaching a new series-high of 5.7%Y/Y. With policymakers unsure about whether the peak in core inflation had been reached and the hawks concerned about upside risks to the medium-term inflation outlook, a further increase in core inflation in today’s would seem likely to trigger another 50bps rate hike. While figures from Germany, France and Spain published last week suggested that headline inflation was little changed in April, the Dutch figures published this morning – which saw the harmonised rate jump 1.4ppts to 5.9%Y/Y – suggest some upside risks. But Friday’s figures also suggested that core inflation (excluding food and energy) might well have eased slightly – hopefully marking the start of a steady shift lower. And that would strengthen the case for a smaller rate hike this time around.

Euro area bank lending numbers likely to report a further tightening of credit standards
Policymakers will also look to today’s bank lending figures for March and quarterly Bank Lending Survey for further signs of tightening of credit standards in the wake of the recent turbulence amid the collapse of SVB and Credit Suisse. Indeed, a further loss of momentum in new lending in March, coupled with an additional net tightening of credit standards in the latest bank lending survey, would seem likely to persuade the majority on the Governing Council that the rate hikes already implemented have yet to be fully felt on inflation.

German retail sales disappoint at the end of Q1, with widespread weakness on spending
Friday’s Q1 GDP figures from Germany came in on the soft side, with growth merely flat at the start of the year, and Destatis suggesting that household and government consumption declined. This was supported by this morning’s retail sales numbers for March, which confirmed still very weak spending on goods at the end of the quarter. In particular, sales fell for the second successive month and by a much steeper-than-expected 2.4%M/M. While the drop in February was softer than previously estimated, this still left sales down 1.4%3M/3M and 6.5%Y/Y. Spending on food fell a further 1.1%M/M in March, to be down a whopping 10.3%Y/Y, the most since the start of the series in 1994, illustrating the significant erosion of household purchasing power amid record high food prices. But spending on non-food items also fell sharply (-2.3%M/M), with online and mail order sales down by almost 5%M/M.

This morning will also bring the final manufacturing PMIs for April. According to the flash estimates, manufacturing output weakened last month, with the respective PMI dropping 1.9pts to a contractionary 48.5, the lowest level since December. The deterioration was centred on strike-afflicted France, where the output PMI fell almost 5pts to 41.9, while the equivalent German index eased back just 0.2pt to a lacklustre 50.3. The preliminary survey also suggested a further easing of supply-chain and cost pressures in the sector and a significant easing in factory selling-price inflation too to the softest rate since 2020.

UK shop price inflation stabilises despite record high food inflation
According to the BRC, shop price inflation in the UK is likely to have peaked as it edged slightly lower from March’s series high on the survey, by 0.1ppt to 8.8%Y/Y. Amid an easing in supply-side pressures and lacklustre domestic demand, the easing principally reflected heavy Spring discounting on clothing and furniture – indeed, non-food inflation moderated 0.4ppt to 5.5%Y/Y. In contrast, and despite a decline in wholesale food costs, fresh food inflation rose to a new record high of 17.8%Y/Y, to leave the survey’s measure of overall food inflation up 0.7ppt to 15.7%Y/Y. While food prices should start to moderate over coming months, shop price inflation remains stubbornly high.

UK house prices rose for the first month in eight in April
This morning’s Nationwide house price report was somewhat more encouraging than expected, reporting the first increase in house prices in eight months. In particular, prices rose 0.5%M/M in April, which followed a softer than previously estimated drop in March. Admittedly, this still left prices down 2.7%Y/Y and about 4% below the August peak. And with the BoE set to raise interest rates this month (and possibly again in June), higher mortgage rates, lower household disposable income and historically weak consumer confidence will continue to act as a headwind on the housing market.

Like in the euro area, the final UK manufacturing PMIs are expected to confirm a challenging start to the second quarter. The flash release saw the output component fall for the second successive month to 48.5 in April, with a notable weakening in new orders, with the respective index down 4pts to a three-month low of 46.1.

US job openings, factory orders and vehicle sales figures due
As the Fed’s two-day policy-setting meeting gets underway, today’s dataflow is unlikely to have any significant bearing on Wednesday’s policy outcome. Nevertheless, the latest job openings figures are likely to report another decline in March in line with slowing job growth that month. Our Daiwa America economist Lawrence Werther expects a drop of 331k, to leave openings some 2.4mn lower than the record high of 12.027mn a year ago, albeit still above the pre-pandemic peak of 7.594mn in November 2018. The final factory orders data for March are also due, along with vehicle sales numbers for April. 

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