Market Update

Global risk sentiment improved overnight following Italian President Mattarella’s decision to give the populist parties more time to form a more amiable cabinet line-up.

Surveys of UK business and consumer confidence for May provided further evidence that domestic economic activity will have recovered in the second quarter, after Q1’s weather-impacted slump.

The GfK consumer sentiment report showed an improvement to -7 from -9, while the Lloyds Business Barometer picked up from 33 to 35.

As developments in Italy and Spain continue to dominate market sentiment, today’s euro area inflation print for May is likely to provide only a temporary distraction.

An unwinding of Easter-related effects and the impact of higher oil prices are predicted to deliver a sharp jump in both the headline and core rates of inflation. These effects were evident in yesterday’s release of national inflation data from Germany and Spain, where inflation in Spain picked up to 2.1%y/y from 1.1%y/y, while in Germany the annual rate accelerated to 2.2% from 1.4% in April. We forecast the headline rate of euro area inflation picking up to 1.6% y/y and the core rate to 0.9% y/y. However, the risks are skewed towards a stronger increase.

In the US, today’s focus will also be inflation with the release of the Fed’s preferred measure of US inflation – the ‘core’ PCE deflator – for April. Relevant information from last week’s US CPI report for April suggests that the ‘core’ PCE deflator increased by just 0.1% m/m, which would see the annual rate ease to 1.8% from 1.9%. However, over the coming months, we still expect this measure of inflation to grind gradually higher, supported by some further increases in CPI inflation and a resilient economic backdrop. On the latter, today’s personal spending report for April is expected to show a further increase of 0.4% m/m.

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