Yahoo Finance Bank of England to take centre stage for markets amid continuing fallout from Macron’s gamble
Investors will have a lot of domestic economic data to digest this week, including a Bank of England interest rate decision, but will still be keeping a nervous eye on political developments across the Channel.
Yields on French government bonds have risen rapidly since Emmanuel Macron called a snap parliamentary election last Sunday, while shares in France’s big banks have fallen precipitously.
In the last week alone BNP Paribas and Credit Agricole have lost around eight per cent while Societie Generale has lost nearly 11 per cent.
“The big concern centres around the future fiscal slippage and the fallout if a change in government leads to increased spending that pushes out the government budget deficit and increases the debt/GDP ratio,” Chris Weston, head of research at Pepperstone, said.
Turning to the UK, May’s inflation figures will be released on Wednesday before the Bank of England announces its latest interest rate decision on Thursday.
Most economists expect the headline rate of inflation to finally fall to the two per cent target while the Bank of England has projected inflation will fall to 1.9 per cent.
However, the Bank is very unlikely to start cutting interest rates this week. Figures out last week showed wage growth remained stubbornly strong while April’s inflation was well ahead of expectations.
Most experts also think that the Bank of England would be reluctant to cut interest rates during an election campaign. Policymakers have had to cancel speaking engagements during the campaign, which would make it more difficult for them to explain any change in policy.
Then on Friday, investors will have a glut of data to absorb with May’s retail sales figures due out alongside the monthly borrowing figures at 7am before S&P’s ‘flash’ purchasing managers’ index (PMI).
Economists at Capital Economics were hopeful there would be a “partial recovery” in retail sales in May after April’s washout.
Retail sales plunged 2.3 per cent in April but most experts think this was largely due to poor weather rather than deteriorating spending power.
Investec forecast that retail sales volumes would rise 2.7 per cent in May, more than making up for April’s poor performance. However, Capital Economics forecast a smaller 1.0 per cent increase.
The PMI reading, meanwhile, is likely to show that the economy continues to grow, albeit at a much slower pace than in the first quarter of the year. Traders will be keeping a close eye on what the PMI reveals about inflationary dynamics.
“Most important for the Bank of England will be whether the strength of demand increased services firms’ ability to pass on their high labour costs to consumers,” economists at Capital Economics said.
