Markets focusing on interest rate and debt ceiling concerns

OVERNIGHT

Asian equity markets are down this morning following declines in US and European markets yesterday. The minutes of the June monetary policy meeting of the US Federal Reserve showed that policymakers were divided on whether to now ‘pause’ their interest rate hikes. Republican Congressional leader McCarthy expressed optimism that a deal could be reached on raising debt ceiling in time to avoid a debt default. However, credit rating agency Fitch said that it has put the US’s credit rating on watch. German Q1 GDP numbers were revised down to show the economy in recession over the winter. Offgem have just confirmed that the energy price cap will be lowered to £2,074 from July. THE DAY AHEAD

Today’s UK data calendar is light with the CBI’s retail survey for May the only notable release. This unofficial measure of retail activity comes out a day before the April official reading. The consumer outlook remains cloudy but there have been tentative signs of stabilisation in early 2023. Retail sales fell in March but that followed gains in the previous two months. The CBI measure has also bounced after a weak January outturn, while GFK’s consumer confidence measure has edged up for four months in a row.

Given the considerable headwinds to consumer spending including incomes still falling in real terms and rising interest rates the outlook still looks precarious. However, the consensus expectation is that today’s CBI reading will show another improvement, while both we and the consensus expect the official retail sales measure to have risen in April. Market expectations of another Bank of England interest rate hike in June have already risen this week after higher-than-expected inflation data and further signs of consumer resilience might provide another lift.

In the US today’s Q1 GDP release is a second estimate that is not forecast to show revisions. The first release showed the economy still growing albeit at a slower rate than in 2022 Q4. Weekly initial jobless claims data will provide timelier news on labour market developments. Those slipped last week but in general they have trended up of late. A resumption of that move would be evidence that the ‘red hot’ US labour market is now cooling and support the case for the Fed to pause its interest rate hikes.

Jonathan Haskel, one of the external members of the BoE’s Monetary Policy Committee, is scheduled to speak about international inflation developments at an event in Washington. That will allow him to give his views on the latest UK inflation news. Other speakers today include Fed policymakers Barkin and Collins. 

MARKETS

US Treasury yields rose again yesterday following the more hawkish than expected signals on US interest rates intentions from the Fed minutes. UK gilt yields also moved up as market UK interest rate expectations rose after higher-than-expected inflation data. In currency markets, sterling fell slightly against both the euro and a generally stronger US dollar.