Will the Bank of England signal rate cuts are close?

Markets and economists widely expect the Bank of England to keep interest rates at a 16-year high of 5.25 per cent when the monetary policy committee meets on Thursday, but will be closely watching for any changes in its forward guidance.

Policymakers last month signalled the possibility of a rate cut as early as June, but investors now see little chance of that, after economic growth, wage expansion and services inflation all came in higher than expected.

Moreover, the general election on July 4, and a period of silence for policymakers before that, make a rate cut in June an unlikely choice.

However, while there will be no conference or new monetary policy report, analysts will be poring over the wording of the minutes, which some economists believe could change.

The BoE has for several months said that rates need to stay restrictive for “an extended period”. James Smith, an economist at the bank ING, thinks that policymakers might want to at least water down their view ahead of the first rate cut. “Doing so next week would be a clear sign that an August rate cut is more likely than markets are pricing,” he explained.

Greater clarity on the possibility of a rate cut in August will come from May inflation data published on Wednesday. Economists polled by Reuters forecast that price growth will slow to the BoE’s target of 2 per cent in May, from 2.3 per cent in April.

Inflation is likely to be driven down by goods prices as lower energy prices gradually filter through the supply chain. Annual good price growth turned negative to minus 0.8 per cent in April.

However, policymakers will closely monitor services inflation, which was higher than expected at 5.9 per cent in April, suggesting persistent domestic price pressures. Valentina Romei

Will business activity pick up in the Eurozone?

The Eurozone economy has been showing tentative signs of recovery since the start of this year but rapidly rising wages have kept price pressures high in the labour-intensive services sector. 

After the European Central Bank started cutting interest rates earlier this month, investors will be watching Friday’s S&P Global survey of business activity to see if these trends continue in June.

Most economists expect the Eurozone purchasing managers’ index to signal mild improvement in the business climate this month. The composite PMI score for the bloc is expected to rise from 52.2 a month ago to 52.5, according to a Reuters poll. A reading above 50 indicates growth from the previous month.

“Following modest recessions at the end of last year, economic growth in Europe recovered faster than expected in the first quarter,” George Buckley, an economist at Nomura, wrote in a note to clients. “Still, we continue to expect only moderate near-term recoveries in 2024.”

Recent PMI reports have indicated that price pressures are easing but remain high for companies in the services sector because of strong growth in wages, as workers seek to regain lost purchasing power. ECB officials will hope for more signs that these pressures are fading.

“Encouragingly, last month’s PMI data indicated a weakening in the high pricing power of services firms,” said Marco Valli, chief economist at UniCredit. “We expect this to continue, pointing to a broadening of the disinflationary drivers.” Martin Arnold

What will retail sales tell investors about the state of the US consumer?

Investors expect solid US retail sales data for May on Tuesday that will offer fresh insights into the resilience of consumer spending when the highest interest rates in decades have raised borrowing costs.

The Census Bureau on Tuesday is expected to report a headline 0.2 per cent increase in overall retail sales in May compared with April, when the reading was flat, according to a poll conducted by Reuters.

Stripping out the sales of cars, which tends to be more volatile, retail sales are expected to have increased 0.2 per cent, the same monthly rate as April.

The likely robust figures suggest that US consumers remain strong even as higher rates have crimped household budgets.

Analysts at Bank of America estimate the headline figure could be 0.3 per cent. The bank added that the numbers may not show much impact from the public holiday at the end of May.

“We note that the strength in travel around Memorial Day will not be entirely reflected in retail sales, as a lot of the associated spending would likely have been in services,” their analysts wrote. 

Traders will also be looking for signs of slowdowns. Last week policymakers at the Federal Reserve indicated it was expecting to cut interest rates only once this year, down from an expected three cuts when they last made their forecasts in March.

Keeping interest rates at current high levels will cut into retail spending, so May’s expected strong data may not persist without cuts. Kate Duguid