Mixed message expected from Eurozone inflation

OVERNIGHT

Asian equity markets are mixed this morning. China has seen some of the strongest gains despite the news that the composite PMI dipped to 52.3 in June from 52.9 in May. Revised UK Q1 GDP showed overall growth unchanged at 0.1% but business investment spending was revised up sharply. 

THE DAY AHEAD

The June Business Barometer released earlier this morning showed a rebound in business confidence after   last month’s dip. That means it has risen in three out of the last four months. The latest report showed increases in optimism both about firms’ trading prospects and the wider economy. Sentiment was up in ten of the twelve UK regions and nations and rose across the four main sectors. Staffing expectations are at a one-year high, having risen in six out of the past seven months. Firms’ expectations for average pay growth also appear to have picked up compared with the start of the year. Both wage and firms own price expectations remain elevated relative to pre-pandemic levels.

Today’s June Eurozone CPI data are expected to show annual inflation down to 5.5% from 6.1% in May. That would be its lowest rate since January 2022. However, the ‘core’ rate is predicted to accelerate to 5.5% from 5.3% in May, emphasising that some inflationary pressures remain sticky. 

Already released June CPI data for some of the larger countries in the region have been mixed as inflation fell sharply in France, Italy and Spain but picked up by more than expected in Germany. So far the readings seem to be consistent with our Eurozone forecast. Such an outturn seems likely to further reinforce expectations that the ECB will hike interest rates again in July but the outlook for the following update in September is more uncertain.

In the US yesterday’s upward revision to Q1 GDP growth and the lower-than-expected outturn for weekly unemployment claims provided further evidence that so far economic activity remains stronger than expected. We expect today’s personal spending release for May to show slower growth than April but to still be consistent with the economy still growing in Q2. The report will also contain the Fed’s preferred inflation measure the consumer expenditure deflator. It is forecast to show a sizeable fall in headline inflation but the core rate is predicted to be unchanged from May at 4.7%, leaving it well above the Fed’s 2% target.

MARKETS

US Treasury bond yields rose yesterday after the stronger than expected US economic data, while UK gilt yields saw more modest rises. Sterling slipped against a broadly higher US dollar but was up slightly versus the euro.