US inflation & UK labour market in focus

Chris Scicluna; Emily Nicol

Data highlights in the week ahead

While the BoE left the door open to a June rate cut, much will depend on how risks to inflation persistence evolve. In this respect, tomorrow’s UK labour market figures will be closely watched. Despite the solid rise in economic output and slight uptick in job vacancies in March, the unemployment rate is forecast to have increased slightly further that month, up 0.1ppt to an eight-month high of 4.3%, due in part to the steepest quarterly decline in employment since Q320. Meanwhile, having moved sideways in February at its joint-softest rate in 18 months (5.6%3M/Y), total wage growth is expected to have eased only marginally in the three months to March, perhaps reflecting the phasing in of the near-10% rise in the National Living Wage that came into effect at the start of April. Certainly, other measures of wage growth have been mixed, with the Indeed wage tracker rising to a three-month high in March (up 0.5ppt to 6.5%Y/Y), while median pay growth based on PAYE figures fell to a four-month low (6.1%3M/Y) with the single-month figure (5.6%Y/Y) the softest since November 2021.

Ahead of Wednesday’s US CPI release, tomorrow will bring US PPI figures for April. Expectations are for producer prices to have increase 0.3%M/M, a touch firmer than in March but a softer pace than in the first two months of the year. This would leave annual PPI inflation up 0.1ppt at 2.2%Y/Y, which would be the firmest for eleven months. Attention in this release will be on financial services and insurance inflation, which feed into the Fed’s core PCE deflator.

Japan’s producer price inflation figures for April will be watched for signs of upwards inflationary pressures from imported prices associated with recent yen depreciation. Meanwhile, final estimates of German and Spanish CPI inflation for April will provide more granular detail, while the German ZEW investor sentiment survey for May should reaffirm expectations of firmer economic activity ahead.

All eyes will be on US CPI inflation for April. The monthly increase in consumer prices is expected to be unchanged at 0.4%M/M for a third consecutive month in April, which would leave the annual rate ticking only slightly lower by 0.1ppt to 3.4%Y/Y. Food inflation is expected to be given a boost due not least to higher prices of eating out in California following the hike in the minimum wage in the fast-food sub-sector. Energy prices also likely increased on the back of higher gasoline prices. Meanwhile, the monthly increase in core prices likely moderated slightly to 0.3%M/M, to leave the annual inflation rate down 0.2ppt to 3.6%Y/Y, which would mark the lowest rate for three years, albeit remaining too high for the Fed’s comfort. Meanwhile, US retail sales figures for April are also due. Having risen in March at the firmest pace since January 2023, sales growth is expected to have slowed slightly, reflecting a moderation in pay growth last month.

Updated estimates of euro area GDP for Q1 are expected to confirm a return to positive growth for the first quarter in three and by 0.3%Q/Q, the firmest pace since Q322 and 0.2ppt above the ECB’s projection. This release will also include a first estimate of employment in Q1. Figures already published from Germany (+38k) and Spain (+205k) suggest another quarter of steady jobs growth. Meanwhile, the latest industrial production figures for March, also due Wednesday, will provide further insight into the manufacturing performance at the end of the first quarter. Data published so far from the member states have been mixed, with declines in Germany (-0.4%M/M), France (-0.3%M/M), Italy (-0.5%M/M) and Spain (-0.7%M/M) contrasting with a jump in output from Ireland (12.8%M/M) and Portugal (2.6%M/M). Overall, we expect aggregate euro area production to have increased in March, by a little more than ½%M/M, to leave it down around 1%Q/Q in Q1.

In Japan, focus will be on the first estimate of Q1 GDP. Contrasting with solid growth in the US and a return to positive growth in the euro area and UK, Japan’s economy is expected to have contracted last quarter, by 0.3%Q/Q. But this will principally reflect a marked decline in manufacturing output amid the temporary halt in output at Toyota’s small-car unit following safety concerns. Final monthly industrial production figures for March – also due Thursday – are expected to confirm growth of 3.8%M/M in the preliminary release, supporting expectations that Japan’s economy will return to growth in Q2.

In the US, April figures for industrial production and housing starts are due. Consistent with weak sentiment survey’s, manufacturing output is expected to have remained subdued at the start of Q2 (0.2%M/M). Meanwhile, following a sharp decline in March, housing starts are expected to have risen in April, supported in party by favourable weather conditions. In addition, the Philly Fed and New York Fed services business surveys for May are also due.

In the euro area, the end of the week will bring updated estimates of April inflation. The flash inflation reading saw the headline HICP rate move sideways at the start of Q2, at 2.4%Y/Y – nevertheless matching November’s 28-month low – as the drag from energy (-0.6%Y/Y) was the softest in twelve months reflecting the further rise in petrol prices and withdrawal of government support for household bills in countries such as Germany and Spain. Having reached a 2½-year low in March, inflation of food, alcohol and tobacco also rose (2.8%Y/Y). But the core components continued to decline in April, with non-energy industrial goods inflation at a near-three-year low of 0.9%Y/Y, while services inflation dropped 0.3ppt to 3.7%Y/Y, the lowest since August 2022. So, while the flash core HICP rate was a touch firmer than expectations, it declined for a ninth consecutive month to 2.7%Y/Y, the lowest since January 2022. The granular detail to be published with this release will likely suggest that the moderation in services in part reflected base effects associated with the early timing of Easter this year.

Finally, in China, the monthly activity figures, including industrial production, retail sales and fixed investment, for April will provide insight into recovery momentum at the start of Q2.

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