Sunday June 16, 2024 11:51 AM
Investors will have plenty of data on the domestic economy this week, including the Bank of England’s interest rate decision, but will still be nervously watching political developments across the English Channel.
French government bond yields have risen sharply since Emmanuel Macron called early parliamentary elections last Sunday, while shares of major French banks fell sharply.
In the past week alone, BNP Paribas and Credit Agricole have lost roughly eight percent, while Societie Generale has lost nearly 11 percent.
“The big concern centers on future fiscal slippage and the impact if a change in government leads to increased spending that pushes up the government’s budget deficit and raises the debt-to-GDP ratio,” said Chris Weston, head of research at Pepperstone.
As for the UK, May inflation data will be released on Wednesday before the Bank of England announces its latest interest rate decision on Thursday.
Most economists expect headline inflation to finally fall to the 2 percent target, while the Bank of England expects inflation to fall to 1.9 percent.
However, it is highly unlikely that the bank will start cutting interest rates this week. Last week’s data showed wage growth remained stubbornly strong, while April inflation came in well ahead of expectations.
Most experts also think the Bank of England would be reluctant to cut interest rates during the election campaign. Policymakers had to cancel appearances during the campaign, making it difficult for them to explain any change in policy.
Investors will then have a glut of data to absorb on Friday, with May’s retail sales data due out alongside monthly lending data at 7am ahead of the S&P “flash” purchasing managers’ index (PMI).
Economists at Capital Economics hoped for a “partial recovery” in retail sales in May after a slump in April.
Retail sales fell 2.3 percent in April, but most experts believe that was largely due to bad weather rather than deteriorating purchasing power.
Investec forecasts retail sales volumes will rise 2.7 percent in May, more than offsetting April’s poor performance. However, Capital Economics is forecasting a smaller increase of 1.0 percent.
The PMI reading, meanwhile, is likely to show that the economy continues to grow, albeit at a much slower pace than in the first quarter of the year. Traders will be closely watching what the PMI reveals about inflation dynamics.
“Most important for the Bank of England will be whether the strength of demand has increased the ability of service firms to pass on their high labor costs to consumers,” economists at Capital Economics said.