BoE officials to testify on interest rate outlook

OVERNIGHT

Asian equity market performance is mixed this morning as uncertainty persists about economic conditions. US President Biden and Congressional House Speaker McCarthy described talks on raising the Federal debt ceiling as “productive”. However, no agreement has yet been reached, which means that the possibility of a US debt default still overhangs markets. Meanwhile, US Federal Reserve policymakers made mixed comments yesterday over whether interest rate hikes would be ‘paused’ at their next policy update in June. The UK posted a £24.7bn public sector deficit in April close to double the level at the same point last year.

THE DAY AHEAD

Today’s May PMIs readings for the Eurozone, UK and the US will provide timely updates on the strength of activity in their respective economies as markets continue to grapple with the question of what will happen next to interest rates. In the UK, the April survey saw a pickup in the composite PMI measure, which combines manufacturing and services, to its highest for a year and we expect only a modest pullback in May. That highlights the risk that growth is not slowing by enough to ease domestic inflationary pressures.

The outturns for the US and the Eurozone are also expected to show activity continuing to rise at a faster pace than was expected at the start of the year. The surveys in all three areas also continue to show uneven growth with services much stronger than manufacturing.

Bank of England Governor Bailey and several of his colleagues on the Monetary Policy Committee are scheduled to testify to a House of Common’s Committee today. The focus will be on the BoE’s May Monetary Policy Report and the MPC’s decision to raise interest rates by another 25 basis points. The session comes a day ahead of the release of the latest inflation data. Nevertheless, markets will be looking for indications whether interest rates are likely to be raised further in June particularly given that the Report highlighted concerns that inflation is proving stickier than expected.

April CPI data for the UK will be released early Wednesday. It is expected to show annual inflation falling to 8.4% from 10.1% in March largely due to energy prices. In contrast, core inflation is forecast to be unchanged at 6.2%. Headline inflation is set to fall considerably further this year due to lower energy and food prices but a key issue for the BoE is to what extent domestic inflationary pressures, particularly those emanating from a tight labour market, are set to ease. 

MARKETS

US Treasury yields rose again yesterday reflecting uncertainty about the interest rate environment and about the debt ceiling negotiations. UK gilt yields also rose to touch their highest level for the year. In currency markets, sterling fell slightly against both the euro and the US dollar as today’s comments form BoE officials were nervously awaited.