Last week we saw a “risk off” mood following the increase in risk assets in recent weeks amid concerns of a second wave of Covid-19 infections, especially with reports of rises in cases in the US. Compounding the “risk off” mood was the decision taken by the Fed to keep rates at the zero lower bound and maintained asset purchases under QE “at least at the current pace”; whilst leaving the door ajar for further expansion. There was some speculation that QE would be expanded further. The latest median forecasts from individual committee members indicated that the interest rate was expected to remain at zero until the end of 2022 (only 2 members indicated rates higher in 2022).

Closer to home, UK Prime Minister Johnson and EU Commission President von der Leyen have agreed to intensify trade negotiations with a further meeting due this week, and a transition extension is likely to be ruled out formally. UK April GDP shrank by 20.4% – the largest monthly contraction on record as the UK spent its first full month in lockdown. However, market reaction was tepid as markets have acclimatised to negative backwards looking data.

Meanwhile, economic data from the Eurozone added to the negative sentiment as Eurozone April industrial production dropped by 17.1% following an 11.9% decline in March. Italian industrial production declined 19.1% for April following a 28.4% for the previous month with a shocking 42.5% annual slide. The data reinforced concerns over the Italian outlook and wider Euro-zone stresses.

Looking to the week ahead, the UK reopens non-essential retail whilst committing to begin discussions on the 2m social distancing rules. In terms of economic and political data, it’s a big week, with key data incoming from the UK, in addition; the FOMC Chair is due to testify before Washington and finally the EU meeting is due to be held by teleconference on 19th June.

Today

  • PM Boris Johnson and European Commission President Ursula von der Leyen meeting
  • US Empire State manufacturing data

In the UK, attention will also be on Brexit headlines, with high-level talks planned for today between PM Boris Johnson and European Commission President Ursula von der Leyen with the aim of injecting momentum into the stalled negotiations surrounding the future relationship. The US Empire State manufacturing data is expected to show another sizeable improvement in June, lifting it further away from the all-time low seen in April.

Tuesday

  • UK employment data
  • US retail sales results
  • FOMC Chair Powell semi-annual testimony

The labour market figures are expected to show a sharp decline in employment for the month of April. The headline figures will mask the deterioration to some extent as they cover a rolling three-month period, which we predict will show a 10k fall in employment and a rise in the unemployment rate to 4.3% from 3.9%. It’s hard to articulate how the market will react as the data is historic and at present the economy is starting to reopen. Across the pond, Fed Chair Powell makes his semi-annual testimonies to Congress, starting with the Senate. He is expected to reiterate comments made this week following the FOMC meeting which left interest rates at the zero lower bound and maintained asset purchases under QE “at least at the current pace”; whilst leaving the door ajar for further expansion.

Wednesday

  • UK inflation data
  • FOMC Chair Powell semi-annual testimony

UK CPI inflation is also forecast to fall to 0.5% in May from 0.8%, driven mainly by lower energy prices reflecting the lagged impact of lower global oil prices. BoE Governor Bailey’s letter to the Chancellor explaining why inflation is below target and how he intends to bring it back towards target. Fed Chair Powell continues his semi-annual testimonies to Congress, today he testifies before the House Financial Services Committee.

Thursday

  • BoE meeting
  • US weekly jobless claims
  • EU meeting begins

Comments and signposting from BoE MPC members suggest they are ready to increase the £645bn limit on asset purchases given that it is likely to be reached in July and the recent weak data. At the last policy meeting, two MPC members (Michael Saunders and Jonathan Haskel) voted for an immediate £100bn rise in the QE. It is expected that all nine members will agree to that at this month’s meeting raising the target to £745bn. The interest rate is expected to remain at record lows of 0.10% whilst the debate surrounding the merits of reducing interest rates into negative territory continue.

Friday

  • UK retail sales
  • EU meeting continued

The forecast for a significant rebound in UK May retail sales of 11.0% (including fuel) following the 18.1% fall in April. The EU meeting continues.

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