The week ahead 05 June 2023 - Inflation eases in the Eurozone
What to watch out for in the UK economy and property market this week.
Last week saw another plot twist in the global debate on interest rates, as Euro Area inflation fell markedly. Headline inflation dropped from 7.0% in April to 6.1% in May, while core inflation (which excludes volatile items like fuel) sank from 5.6% to 5.3%. Forecasters had expected a figure of 5.5% for core inflation and 6.3% for headline. One-year Euro swap rates slid on the news to 3.81% last Thursday, down from 3.94% a week earlier. German 10-year bond yields stood at 2.25%, down from 2.48% on a seven-day comparison. Nevertheless, the ECB is likely to conclude that inflation is still too high, and we expect to see at least another 25 bps rate increase at the June policy meeting. Then perhaps a further 25 bps hike will follow in July depending on the next set of inflation data. The question now is whether second round effects can be avoided and the downwards trajectory for core inflation continues?
In the UK, ONS released figures that showed companies maintained their profit margins in Q4 of last year, adding to the evidence that the economy held up better than expected in late 2022. Private sector non-financial corporations enjoyed a net rate of return of 9.8%, which was unchanged on the previous quarter; although service sector firms reported a 1% increase to 15.7%. It is interesting that the headline UK figure held up so well given there was a marked fall in profits for ‘UK Continental Shelf’ firms (i.e. North Sea oil and gas). From a property perspective, this bodes well on rent collection and tenant covenant; although higher interest rates will weigh on the finances of occupiers this year which may prompt some to look for cost savings in their property estates.
This week sees initial jobless claims data from the US, following better-than-expected job openings figures last week and payroll numbers last Friday that were a long way above their forecast. Another set of strong US labour market indicators will stoke debate on whether the Fed needs to hike interest rates again. In Germany, industrial production figures will be published, giving an indication on whether growth for the commercial sector of the economy is compensating for weak consumer spending.
Things to watch for this week
Tuesday 6th June
Eurozone Retail Sales, April
Previous: -3.8% y-on-y
Forecast: -3.8%
With inflation still high by historic standards, particularly for food, we are expecting another negative figure for retail sales growth in April.
Wednesday 7th June
Germany Industrial Production, April
Previous: -3.4% m-on-m
Forecast: 0.6%
After the negative spike in March, we see industrial production returning to growth, as seen in January and February, thanks to lower energy costs and easing supply chain bottlenecks.
Thursday 8th June
US Initial Jobless Claims, Week to June 3rd
Previous: 235k
Forecast: 233k
We are expecting a figure of over 230,000 US workers filing for jobless benefits in the last week, which is consistent with a tight labour market.
