Monetary policy
ECB set to cut rates by 25bps on Thursday, but Lagarde likely to downplay the chances of a July cut
The main monetary policy decision this week will be the ECB’s announcement on Thursday. The ECB has signalled clearly that a rate cut is coming this week, with the key deposit rate expected to be cut by 25bps to 3.75%. But after Friday’s upside surprise to euro area inflation in May, and in particular the significant strength in the services component, the Governing Council will make clear that policy will still remain restrictive for an extended period and that future decisions will remain data dependent. Indeed, the Eurosystem’s updated projections will likely nudge up slightly the near-term profile of inflation and GDP. And while inflation will still be expected to return to target on a sustainable basis in H225, in her press conference ECB President Lagarde will likely downplay significantly the chances of a further rate cut in July.

Data highlights this week
Today:
The Japanese MoF’s capital spending survey suggested that nominal capex fell ½%Q/Q in Q1, compared with an equivalent rise of ½%Q/Q recorded in the first estimate of Q1 GDP. This followed a significant rise in Q4 (8.2%Q/Q) and still left capex - on the MoF measure - up 6.8%Y/Y. The weakness was driven by manufacturing (-3.0%Q/Q), but rose for a third consecutive quarter in non-manufacturing (1.0%Q/Q) to the highest since Q108. While sales edged slightly lower, profits jumped to a new record high, suggesting that fixed investment should be supported over coming quarters.

In the US, the manufacturing ISM index for May is expected to record the 18th sub-50 reading out of the past 19 months, tallying soft result from other manufacturing surveys. Meanwhile, the prices paid components is expected to remain close to the 21-month high recorded in April.

Tomorrow:
After the euro area’s unemployment rate fell to a new series low in April, German and Spanish labour market figures will provide an update for May. Jobless claims in Germany are expected to have risen modestly for a 17th consecutive month, albeit leaving the unemployment rate unchanged at 5.9% for sixth successive month.

In the US, the JOLTS data for April are likely to signal a further weakening in demand for labour, with job openings likely to have fallen to the lowest for more than three years.

Wednesday:
In Japan, average wage growth is expected to have accelerated in April to 1.8%Y/Y, having slowed to 1.0%Y/Y in March, which would mark the strongest growth since June last year. Like-for-like earnings growth is expected to have risen 2.1%Y/Y, broadly in line with the average over the past year.

In the euro area, the final services PMIs are expected to confirm the findings of the flash release that suggested accelerated recovery momentum in May, with the headline activity index up to a twelve-month high of 53.3. In contrast, the flash UK services PMI implied slowing growth momentum, with the activity index declining 2.1pts to a six-month low of 52.9, while price pressures also moderated significantly.

In the US, the services ISM is expected to return to growth territory in May following the drop in April to 49.4 – the first sub-50 reading since December 2022 – nevertheless remaining below the average over the past year or so and therefore suggestive of slowing economic momentum. The prices paid component is likely to remain elevated, close to April’s reading of 59.2.

Thursday:
In the euro area, April retail sales figures are expected to report a soft start to the second quarter. Declines in German and French spending suggest that euro area sales fell about ½%M/M. In Germany, following three consecutive declines, factory orders are expected to post growth of about ½%M/M in April. May construction PMIs are also due.

In the UK, the BoE’s Decision Maker Panel survey will provide an update on firms’ inflation expectations in May. We expect firms’ expectations for CPI inflation to remain well anchored in May after their forecast for three years ahead declined to just 2.6%Y/Y in April. Policymakers will also watch developments in wage expectations, which previously eased to a two-year low of 4.6%Y/Y, albeit remaining above levels consistent with the BoE’s 2% inflation target over the medium term.

In the US, April’s trade deficit is likely to have widened – by around $6.6bn to $76bn – in line with the advance goods figures to suggest that net trade was a drag on growth at the start of Q2. Weekly jobless claims and Challenger job cuts data for May and updated productivity and labour costs figures for Q1 are also due.

Friday:
In the US, attention will be on the May labour market report. Daiwa America’s Lawrence Werther expects non-farm payrolls to increase a further 175k last month, in line with growth in April, but down notably from the Q1 average of 269k. The unemployment rate is forecast to moved sideways at 3.9%. Meanwhile, after slowing to 0.2%M/M in April, average hourly earnings growth is expected to return to average of the past year of 0.3%M/M.

In the euro area, the third estimate of Q1 GDP should confirm growth of 0.3%Q/Q, which was the strongest in six quarters and 0.2ppt above the ECB’s projection. The expenditure breakdown is likely to suggest that growth was firmest in fixed investment, not least however as mild winter weather supported a (likely temporary) surge in construction activity. In addition, household consumption likely grew for a fifth successive quarter. And growth in export volumes likely outpaced that in imports. In contrast, we think that stock adjustments subtracted from GDP growth for a third successive quarter as firms looked to reduce excess inventory in the face of declining new orders.

German industrial production figures for April are also due. Leading indicators point to a pickup in manufacturing output that month following a drop of 0.4%M/M in March. However, we see downside risks to overall German IP due to the likelihood of a pullback in construction following the weather-related surge of 3.9%Q/Q in that sector in Q1.

In Japan, household spending is expected to have picked up in April, with the annual rate of growth returning to positive territory for the first time in fourteen months. In China, May trade figures are expected to report a notable improvement in exports growth, in part reflecting base effects from weakness a year ago.