This week, investors will focus on inflation data from the major Eurozone economies, seeking clues about the interest rate path of the European Central Bank (ECB).
Some key economic data will drive market sentiment, with the Consumer Price Indices (CPIs) from major European countries set to be in the spotlight this week. Additionally, Personal Consumption Expenditures (PCE) will be a focus for investors looking to gauge central banks’ interest rate trajectories.
Europe
Following the hotter-than-expected inflation data from the UK last week, major economies, including Germany, France, Spain, and Italy are poised to release their estimated CPI for May this week.
At a country level, Germany will release the prelim CPI for May on Wednesday. The country’s inflation stood at 2.2% year-on-year, the same as in March, and cooled from 2.5% in February. Spain and Italy are both poised to report their prelim CPI for May on Thursday. Spain’s inflation rose slightly to 3.3% in April, compared with 3.2% in March, while Italian inflation eased to 0.8% in April from 1.2% in the previous month. France will be the last economy in this group to release its preliminary CPI, which is due on Friday. The country’s inflation also fell to 2.2% in April, down from 2.3% in March.
The composite EU inflation will be released after the French data on Friday. The euro area headline inflation rate cooled to 2.4% year-on-year in April, the same as in March, marking the lowest level in three years. Core inflation, excluding food and energy, fell for the ninth straight month to 2.7%. As inflation moves towards the ECB’s target level of 2%, the central bank is widely expected to commence a rate cut in June. However, consensus suggests that headline inflation may climb slightly to 2.5% in May. A hotter-than-expected reading could dim hopes for a rate cut and place additional pressure on equity markets.
In the UK, the Bank of England (BoE) Governor and several members of the Monetary Policy Committee (MPC) will testify on inflation and the economic outlook before Parliament’s Treasury Committee on Thursday. This event will be critical for the regional market, as the country recently reported hotter-than-expected CPI data. Inflation cooled to 2.3% in April, higher than the estimated 2.1%, although significantly down from 3.2% in the previous month. Consequently, hopes for the BoE to implement a rate cut in June have weakened. Additionally, BoE Governor Andrew Bailey will speak at the Irish Association of Investment Managers annual dinner in Dublin on Thursday, offering further insights into the central bank’s monetary policy path.
The US
On Wall Street, the focus will be on key economic indicators from the US, including the CB Consumer Confidence for May, the Q1 preliminary GDP, and the PCE index for April. The Wall Street rally appeared to lose momentum last week. Softening economic data and persistent inflation could continue to pressure market sentiment.
Consumer confidence fell to 97.0 in April, the lowest level since July 2022, and a sharp decline from 104.7 in March. According to the Conference Board, “Consumers have become less positive about the current labour market situation,” stated Dana M. Peterson, chief economist.
The first-quarter GDP growth in the US also slowed, with the initial reading recorded at an annualised pace of 1.6%, compared to 3.4% in the previous quarter. The preliminary GDP figure, due this week, is the second estimate. According to the first reading, consumer spending contributed 1.68% to the GDP growth, while exports reduced it by 0.86%.
The PCE index is considered the Federal Reserve’s preferred indicator, as it reflects consumers’ affordability of goods and services. Alongside the CPI, it serves as a key measure of inflation in the US. In the first quarter, the PCE rose to an annualised pace of 3.4%, marking the largest increase in one year. On a monthly basis, the annual PCE index increased by 2.7% in March, up from 2.5% in February, and reached its highest level since November 2023. This data suggests that inflation remains elevated in the US.
Asia
Key economic data in the Asia-Pacific region this week includes Australia’s CPI for April, China’s manufacturing and services PMI for May, and Japan’s Tokyo Core CPI for May.
Annual inflation in Australia resurged to 3.5% in March from 3.4% in February while the annual core CPI in Japan cooled to 1.6% in April. The divergent trajectory in the two Asian countries’ inflation rates may continue to widen the gap between their respective government bond yields, potentially leading to further weakness in the Japanese Yen against the Australian dollar.
Meanwhile, China’s economic recovery has shown signs of acceleration in recent months, with its manufacturing PMI expanding for the second consecutive month in April. Both manufacturing and services PMIs are expected to continue expanding in May. However, the renewed trade tensions between the US and China have recently weighed on its stock markets.
In addition, OPEC and its allies will hold a virtual meeting on Saturday, discussing its joint production volume for the months ahead. Member countries led by Saudi Arabia and Russia have agreed to extend output cuts of 2.2 million barrels per day to the end of June. The group will likely maintain the level of production reduction to stabilise crude prices.
