UK inflation data disappoint again

OVERNIGHT

Asian equity markets are mixed this morning with Chinese indices showing the biggest losses possibly reflecting disappointment that Chinese interest rates have not yet been cut further. Just released UK CPI data for May showed inflation remaining sticky. Annual headline CPI inflation was unchanged from April at 8.7% in May, while core inflation rose sharply for the second month in a row to 7.1% from 6.8%. More positively sizeable falls in both output and input producer price indices suggests that some pipeline pressures are lessening. Nevertheless, the data is unlikely to ease market expectations that UK interest rates are set to move significantly higher before year end and will put further pressure on Bank of England policymakers ahead of tomorrow’s monetary policy update.

THE DAY AHEAD

This morning’s other UK economic data release is likely to have less impact on interest rate expectations.  Nevertheless, public finance data for May showed a net borrowing figure of £19.2bn, which was close to expectations but more than twice its level at the same point last year confirming at this early stage that net borrowing   for this fiscal year is running well ahead of last. In the March budget, the Office for Budget Responsibility had forecast a smaller deficit for this year but nevertheless noted after the release of last month’s figures that the rise had been bigger than expected. It will be interesting to see their reaction to the May data particularly given speculation that the government may want to cut taxes next year.

Later this morning, the UK’s June CBI industrial survey will be watched for an update on a sector that seems to be flagging. Last month’s results showed factory orders still falling with export orders particularly weak. As manufacturing sectors seemingly struggle across the world it will be interesting to see if today’s results bring any better news.

In the Eurozone and the US, the focus will be primarily on comments from central bank policymakers. In the US, Federal Reserve Chair Powell will give his semi-annual testimony to a House of Representatives Committee today (and to the Senate tomorrow). He is bound to be quizzed closely on last week’s indications from the Fed that, although US interest rates were left unchanged this month, they could be raised again in July. The Fed’s Goolsbee is also scheduled to speak and as he seems to be the most dovish of the Fed’s policymakers his views on the chances of a July hike will be particularly interesting.  

MARKETS

Sterling spiked higher this morning following the higher-than-expected inflation outturn that will have added to concerns ahead of tomorrow’s UK interest rate update. The pound briefly touched new highs for the year against both the euro and the US dollar before falling back. UK gilt yields fell yesterday but are likely to rise sharply on the open after this morning’s data.