BoE expected to hike by a further 25bps, but an upside surprise to CPI this week could justify a 50bps move
Following last week’s policy announcements from the Fed, ECB and BoJ, focus this week turns to the BoE’s decision on Thursday. Given the upside surprise to April CPI data and an unexpected acceleration in private sector pay, the MPC is bound to hike rates again. But the magnitude of tightening, as well as the guidance on future policy, is uncertain. Key for this week’s decision will be the May CPI figures (due Wednesday). We expect these to report a further moderation in headline inflation, by 0.4ppt to 8.3%Y/Y. More importantly, we also expect a modest easing in core CPI in May, by 0.1ppt to 6.7%Y/Y. If we are right, in line with the consensus, we would also expect the MPC to vote for a further 25bps increase in Bank Rate to 4.75%, taking the cumulative tightening so far this cycle to 465bps.

The MPC’s decision is unlikely to be unanimous, however. Most notably, the more hawkish external members – Mann and possibly Haskel – will want to consider a larger hike of 50bps. And should the May CPI report again surprise significantly on the upside, we wouldn’t rule out the majority voting for a 50bps hike too. Moreover, regardless of the detail of the CPI report, the MPC will certainly leave the door open to additional tightening over the summer. Indeed, the precise wording of its guidance might be little changed from May. However, if it retains some confidence in its expectation that inflation will fall steadily over coming quarters, and is also wary that the tightening of financial conditions currently being delivered by the markets might be economically damaging, in the absence of another nasty inflation surprise on Wednesday the MPC might seek to challenge current market pricing.

Flash UK PMIs, consumer confidence and retail sales figures due at the end of the week
Aside from the CPI release, it will be a busy end to the week for top-tier UK data releases too, with data for retail sales in May, and consumer confidence and the flash PMIs for June all due on Friday. The composite PMI is likely to suggest a slightly moderation in recovery momentum in June, although remain consistent with a slight increase in GDP growth in Q2, supported by the services sector. Meanwhile, despite a likely boost to food store sales, we suspect that the extra national holiday for the King’s coronation will have had an adverse effect on retail spending in May. And while the latest GfK survey is expected to report a further modest improvement in consumer confidence in June, the headline sentiment index will remain well below the long-run average and therefore still consistent with subdued private consumption.

Euro area flash PMIs to provide an update on economic recovery momentum at the end of Q2
June sentiment surveys will be the highlights of the euro area’s dataflow this week, with most notably the flash PMIs on Friday. Having risen to an eleven-month high in April (54.1) but fallen back in May (52.8), the composite output PMI is expected to have moderated slightly further in June, albeit remaining consistent with positive GDP growth in Q2. The services PMIs will similarly imply ongoing expansion thanks not least to the release of pent-up demand, but the manufacturing indices will also again signal contraction reflecting softer demand for goods at home and abroad. The survey’s price indices will also continue to illustrate divergence in inflationary pressures between the sectors, with ongoing persistence in services but a further cooling in manufacturing. Other data due in the coming week include euro area construction output figures for April and German PPI figures for May (tomorrow).

Japanese inflation to see headline CPI rate ease, but underlying price pressures continue to rise
In Japan, the main focus this week will be the May inflation figures on Friday. As signalled by the Tokyo figures, headline CPI is expected to have eased by 0.3ppt to 3.2%Y/Y reflecting a further decline in energy prices related to government policy. But Friday’s release is likely to signal a further increase in underlying price pressures. Indeed, when excluding food and energy, core inflation is expected to have risen to a fresh 41-year high from 2.5%Y/Y in April. Friday will also bring the flash PMI surveys for June, which will follow the Reuter Tankan indices (Thursday). Both surveys are expected to report a further improvement in recovery momentum at the end of Q2, supported by robust growth in the services sector.

Powell’s monetary policy testimony to Congress likely to signal further policy tightening ahead
Focus in the US this week will be on Fed Chair Powell’s semi-annual monetary policy testimony to Congress on Wednesday (and Thursday), with Powell likely to reiterate the message from the past week’s FOMC meeting that the inflation outlook likely justifies further policy tightening this cycle and that July is very much a “live” meeting. The dataflow is relatively thin this week, kicking off tomorrow with housing starts numbers for May and existing home sales data for May (Thursday). Various Fed activity survey indices will be published through the week, along with the flash PMIs for June (Friday).