UK business confidence slips in May

OVERNIGHT

Asian equity markets are down this morning possibly reflecting disappointing China PMI data. In a sign that the post-restrictions rebound is petering out, the manufacturing index slipped to 48.8 (from 49.2 in April), although more positively the non-manufacturing index remained relatively elevated at 54.4 (56.4 in April). Meanwhile, concerns that the US Federal Reserve will raise interest rates again in June are rising. Yesterday Fed policymaker Mester said she saw no compelling reason to wait before hiking again

THE DAY AHEAD

The May Business Barometer released earlier this morning showed the first fall in business confidence for three months. Businesses were less optimistic both about their own trading prospects and the wider economy. Nevertheless, the decline in the overall measure only took it back to its long-term average, leaving it still above its level at the start of the year. Confidence among manufacturers increased to a one-year high but services saw a sharp fall. Meanwhile, the balance of businesses expecting to raise their prices declined fractionally, while wage expectations remained buoyant. 

In the Eurozone, May inflation data for some of larger economies will be watched for clues on Thursday’s outturn for the region as a whole. Yesterday’s data for Spain showed a larger than forecast fall in overall inflation and an unexpected decline in core inflation and France also surprised on the downside this morning. Today will also see updates for Germany and Italy. Comments from policymakers strongly suggest that the European Central Bank is on course to raise interest rates again in June but what happens after that is less certain so further downside surprises on core inflation could lower rate expectations.

Today’s US data calendar is sparse apart from the JOLTs survey which will provide further detail on labour market developments in April. In addition, the Federal Reserve will release its Beige Book which compiles anecdotal reports on the economy. That may provide further insight into the effectiveness of previous rate hikes.

Catherine Mann, one of the external members of the BoE’s Monetary Policy Committee, is scheduled to speak today. She seems to be one of the more hawkish of current UK monetary policymakers. At the last update she sided with the majority in favouring a 25 basis rise in rates but in the past she has voted for larger hikes. So her reaction to recent developments and whether that may cause her to argue for a larger increase in June will be particularly interesting.

MARKETS

US Treasury and UK gilt yields fell yesterday following confirmation that the US debt ceiling deal seems set to get through Congress. In currency markets, the US dollar continued to climb reflecting the decline in market conviction that the Fed will ‘pause’ its rate hikes in June.