Published: 31/05/2022 By ECAPThe PMIs of economic activity were softer in the UK in May than in continental Europe, a puzzling divergence that bears watching. Any forecasts for sustained Bank of England interest rate hikes presupposes healthy readings in this key indicator, certainly no lower than the disappointing 51.8 number we saw in the composite index. Sterling did, however, take the data in stride, as did rate markets, with the pound partly supported by the more generous than expected fiscal package announced by the UK government designed to allay the ongoing cost of living crisis. This week's data out of the UK will be mostly second tier and/or lagging, so expect the pound to trade off developments elsewhere. The shortened trading week in the UK due to the Jubilee celebrations may also limit activity.
A slew of second-tier data came out mostly below expectations last week. Weakness in the housing market, in particular, helped the US bond market continue its rally and the 12-month spread between US and Euro rates is now lower than it was at the end of March, which no doubt explains much of the euro's recent rebound. With inflation still far above the Fed target, we do not expect this incipient weakness to do much to stay the Fed's hand. This week, we get the last key data point before the June Federal Reserve meeting - the labour market report for May. Markets are expecting a pull back in wages, which are still lagging prices. A positive surprise here may trigger markets to start pricing in three back to back 50 basis point hikes from the Fed.