Week Ahead: Bank of England to follow Fed with hawkish tilt?

The Bank of England gives us a fresh monetary policy update this week as inflation pressure starts to build. Will the first readings give the bank jitters or is it made of sterner stuff? Elsewhere, PMI data comes from the US, UK and EU, following on from a bumper may. OPEC and allies are busy too with another range of policy-deciding meetings kicking off. 

Andrew Bailey and the Bank of England are next week’s headline act. The UK’s central bank delivers its latest monetary policy decision and is expected to stand pat, though it comes against a backdrop of fast economic growth and rising inflation. 

A change in thinking could be underway. Governor Bailey has repeatedly stated in the past that if prices consistently outstrip the BoE’s 2% inflation target, he’ll have no problems tightening up policy. In this instance, that could mean a rate hike. 

The BoE’s base rate has remained at 0.1% for the past year as part of the range of emergency pandemic economic measures enacted by the bank.   

Consumer price inflation rose 2.1% on an annualised basis in May, according to Office of National Statistics figures released last week. Month-to-month inflation clocked in at 0.6%.  

There is no indication, however, that a rate change will happen immediately. While there is more at play here, a lot of inflationary pressure stems from the reopening of the UK economy, and base effects from 2020. But consistency will be key. If we see more inflation increases month to month, the BoE may be forced to react 

Turning to data, purchasing manager index readings from the US, UK and EU are released this week. All these major economies will be looking to build on May’s impressive momentum.   

For instance, IHS Markit’s US manufacturing PMI hit its highest levels since October 2009 in May, with a reading of 61.5. Domestic demand and consumption spurred on US manufacturing last month, but producers are still warning of supply chain issues, including raw material and labour shortages. A lower reading in June may be realistic.  

US services’ expansion outstripped manufacturing. May’s PMI read 70.1, jumping away above April’s 64.7. Higher consumer confidence paired with the US’ impressive vaccine rollout explains the high level of new service sector business. 

Likewise, the UK experienced an eye-popping level of services output growth in May as lockdown restrictions loosen. The sector’s PMI reached 62.9 – the highest level since May 1997. Manufacturing surged, driven by a deluge of new orders, reached 65.6 last month, a 29-year high. 

May was also a good month for Eurozone business activity. IHS Markit’s composite EU PMI reached a three-year high, with a score of 57.1, comfortably above April’s 53.8. Remember, growth is indicated by a reading of 50 or higher, so while the pace wasn’t as fast as in the UK or US, the EU showed good signs of economic resilience last month. Can it do the same again in June? 

Sticking with data, the final reading of US Q1 GDP growth is also due this week. The final reading acts as a sort of confirmation, a check of economic health in broad terms. May’s earlier advanced figure was 6.4%, showing signs of an economy poised to boom. PMI flashpoints back this up. Double digit GDP growth could be on the way in Q2 too. 

Away from raw economic data, OPEC and allies gather on Thursday for another series of meetings. Rising oil prices will no doubt put the cartel in a good mood, but it needs to proceed with caution here. Any unexpected spikes in production output, as opposed to OPEC+’s current steady tapering programme, could result in oversupply, despite confident global demand recovery forecasts. 

OPEC+ decided in April to return 2.1 million barrels per day (bpd) of supply to the market between May and July. We could see a wider plan come together this week for post-July tapering. 

The cartel is sticking with its optimistic oil demand outlook. Its June monthly report states demand would rise by 6.6% to hit 5.95 million bpd in 2021. The forecast was unchanged for a second consecutive month. 

How OPEC and allies proceed is critical here. With WTI and Brent reaching over $72 and $74 at the time of writing, some of the highest prices for years, the signs of intensified global oil demand are there – but any oversupply may tip the scales back to retraction instead of price growth.  

Major economic data 

Date  Time (GMT+1)  Asset  Event 
Mon 21-Jun  2.30am  AUD  Retail sales m/m 
       
Wed 23-Jun  8.15 am  EUR  French Flash Manufacturing PMI 
  8.15 am  EUR  French Flash Services PMI 
  8.30 am  EUR  German Flash Manufacturing PMI 
  8.30 am  EUR  German Flash Services PMI 
  9.00 am  EUR  Flash Manufacturing PMI 
  9.00 am  EUR  Flash Services PMI 
  9.30 am  GBP  Flash Manufacturing PMI 
  9.30 am  GBP  Flash Services PMI 
  1.30 pm  CAD  Core Retail Sales m/m 
  1.30 pm  CAD  Retail Sales m/m 
  2.45 pm  USD  Flash Manufacturing PMI 
  2.45 pm  USD  Flash Services PMI 
  3.30pm  OIL  US Crude Oil Inventories 
       
Thu 24-Jun  All Day  OIL  OPEC+ Meetings 
  12.00 pm  GBP  MPC Official Bank Rate Vote 
  12.00 pm  GBP  Monetary Policy Statement 
  12.00 pm  GBP  MPC Asset Purchase Facility Votes 
  12.00 pm  GBP  Official Bank Rate 
  1.30pm  USD  Final GDP q/q 
  3.30pm  GAS  US Natural Gas Inventories 

 

Key earnings data 

Date  Company  Event 
Mon 21-Jun  Naspers  Q4 2021 Earnings 
     
Wed 23-Jun  Markit  Q2 2021 Earnings 
     
Thu 24-Jun  Nike Inc.  Q4 2021 Earnings 
  Accenture plc  Q3 2021 Earnings 
  FedEx Corp.  Q4 2021 Earnings