Fri, Jun 09, 2023 @ 14:25 GMT
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Weekly Focus – Inflation Battle Not Done as BoE Follows Suit

In the absence of any bad news from the US banking sector, markets started the week off in a calm manner with yields edging higher. The US CPI print was markets’ key focus point this week, and it printed very close to consensus, with core CPI unchanged at 0.4% mom, still way too high. On balance, it was to the soft side, though, as service inflation eased somewhat indicating beginning signs of easing price pressures in the part of the economy, which is running particularly hot. It triggered a move lower in US yields, most notably in the front-end and the market pricing of 3x25bp of rate cuts in the second half of the year further consolidated. Safe haven currencies have been the winners this week, amid uncertainty regarding the US regional banking sector and the US debt ceiling. EUR/USD has traded back below 1.10 and JPY has also seen some tailwinds.

In the US, news on credit conditions showed tightening lending growth and weaker demand for commercial loans but for the right reasons. Overall, the credit tightening was clearly not as worrying as the market had expected and feared. Initial jobless claims surprised to the upside, rising to the highest level since 2021, providing further evidence of a cooling labour market. That said, the labour market remains very tight and we continue to think this pricing is overdone.

China does not have a problem with high inflation, and April CPI printed even lower than consensus at 0.1%. The print triggered a decline in metal prices with copper trading at four-month lows on worries over the strength of the economic recovery. On the positive side, this paves the way for continued policy stimulus and we could see a rate cut from the People’s Bank of China soon, which would boost Chinese demand and perhaps the struggling global manufacturing sector in the wake of that. South Korean export figures for the first 10 days of May were down 10% yoy, with semiconductor shipments particularly plummeting, which indicates manufacturing weakness continuing in May.

In Europe, Bank of England hiked by 25bp and left the door open for another hike in June due to a continued high wage and inflation pressure. We have pencilled in another 25bp hike in June in our expectations, marking the peak bank rate at 4.75%. In Germany, hard data confirmed the headwinds to the manufacturing sector following an otherwise promising start to the year, as industrial production declined 3.4% in March.

With major central bank meetings and April inflation figures just behind us, next week will be quieter on the data front. Retail sales will be interesting, not least in China, as the consumer is set to drive the recovery.

The following week, euro area PMIs will be scrutinised for clues on whether the service sector continues to be the key driver for euro area growth and inflation. In the US, April leading indicators were broadly quite upbeat, and it is going to be interesting to see if the strength will be reflected in the hard data as well, and if it has continued into May.

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Danske Bank
Danske Bank
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