- UK consumer inflation is on track to hold steady at a moderately elevated rate in May
- The mood among German financial analysts is projected to strengthen again
- US Small Business Optimism Index is set to continue its slow descent this year
The UK consumer inflation report for May will be widely read after last week’s surprising setback for the government in the general election. Later, we’ll see an update on business sentiment in Germany for May via ZEW’s monthly report, followed by the May update of the US Small Business Sentiment Index.
UK: Consumer Price Index (0830 GMT): Ill winds appear to be blowing across Britain’s economy. Business confidence dropped sharply in the wake of last week’s general election. “It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders, and the consequences could – if not addressed immediately – be disastrous for the UK economy,” said the director general of the Institute of Directors, which conducted the poll.
New data on consumer spending is flashing a warning, too. Numbers published by IHS Markit and Visa show that consumption fell 0.8% in the year through May – the first negative year-on-year print since 2013.
Rising headwinds arrive at a precarious juncture for UK Prime Minister Theresa May’s government, which lost its majority in Parliament last week. The setback in political power creates more uncertainty about Brexit negotiations, which are due to begin later this month.
Will today’s monthly update on consumer prices further complicate the UK macro outlook? Inflation has been accelerating this year, rising 2.7% through April, close to a four-year high and moderately above the Bank of England’s 2.0% target. Core inflation, which strips out volatile energy and food prices, is advancing at a softer 2.4% rate, although that’s been trending higher too.
Another round of faster inflation in today’s release will raise the risk of stagflation. GDP growth is expected to slow, according to last week’s estimate from the National Institute of Economic and Social Research. The consultancy advised that output increased by 0.2% for the three months through May, down sharply from the 0.7% gain as recently as January.
“The current political backdrop may lead to greater uncertainty and a drag on growth prospects, in particular business investment, which contracted in 2016,” a NIESR spokesman said.
The good news is that today’s release is expected to show inflation stabilising, albeit at a moderately elevated pace. The consensus forecast sees headline CPI holding steady at 2.7% for the year through May, unchanged from the previous report, according to TradingEconomics.com. Core CPI is also on track to remain unchanged at a 2.4% annual rate.
Given the recent headlines, however, it’s a safe bet that an upside surprise in today’s report will raise more warning flags for the UK economy. Faster inflation per se isn't necessarily a negative, assuming it's accompanied by faster growth. But with GDP projections moving lower, a bigger-than-expected rise in CPI would be worrisome.
Germany: ZEW Economic Survey (0900 GMT) Macro momentum for Europe’s largest economy remains solidly positive, according to recent data.
Last week’s update on industrial production, for example, revealed a strong rebound in April. Output climbed 0.8% for the month, lifting the year-on-year trend to 2.8%, a moderately firmer pace over March’s 2.2% gain.
Meanwhile, the latest survey data for the retail sector paints an encouraging profile. The monthly gain in May marks the second-strongest increase in nearly two years, according to IHS Markit Germany Retail PMI.
“The latest retail PMI data, coupled with a new post-unification low unemployment rate in May, suggest that German consumers will support overall economic growth in the second quarter,” an economist at the consultancy said last week. “IHS Markit is expecting GDP growth to trend at around 0.6% quarter-over-quarter for the remainder of 2017.”
The stock market’s on board with a bullish forecast as well. The DAX 30 Index at midday on Monday was trading close to a record high.
The buoyant mood among investors suggests that today’s monthly review of business sentiment in Germany will extend the recent gains in the ZEW benchmarks. That’s also the outlook via economists. Econoday.com’s consensus forecast sees the current situation benchmark ticking up to a two-year high in June and the expectations data is on track to climb to the highest reading since 2011.
“Economic growth is projected to remain solid, and the unemployment rate to fall further,” the OECD advised earlier this month.
Today’s ZEW data looks set to reaffirm that forecast.
US: Small Business Optimism Index (1000 GMT): The pace of jobs creation has slowed in recent months, but it’s not obvious that the deceleration is weighing on the critical small-business sector, at least not yet.
ADP’s estimate of payrolls for US companies with fewer than 50 employees perked up in May, rising 104,000 over the previous month. That’s a middling rate for the year so far, but companies in this corner have been minting new jobs at a faster rate in 2017 vs. the sluggish pace in last year’s second half. That’s an encouraging sign when you consider that small-company employment is a critical factor for the US labour market overall.
The mood among small-firm executives continues to hold at a relatively elevated rate compared with last year’s readings. Today’s May profile of the Small Business Optimism Index is expected to nudge lower to 104.0, down fractionally from the previous month, according to Econoday.com’s consensus forecast.
Note, however, that the benchmark has been slipping all year, albeit only slightly. The political logjam in Washington is cited as the main source of concern, according to the president of the National Federation of Independent Business, which publishes the index.
“Congress and the White House must understand that small business owners are paying close attention, and they are making decisions that affect the economy based on how Washington performs,” said Juanita Duggan last month. “The drop in expected business conditions should be a warning to Washington that health care reform, regulatory reform, and tax reform have implications far bigger than politics.”
Based on today’s outlook for another dip in the index, the still-optimistic-but-wary outlook in the small-business community looks set to spill over into June.
Disclosure: Originally published at Saxo Bank TradingFloor.com