EUROPEAN DATA WRAP: Hawkish UK CPI; Gloomy German Ifo

Analysis details (15:00)

UK CPI, April

• Overall, the morning’s release delivered the long-anticipated easing in the pace of inflation though by a smaller magnitude than markets and the BoE had expected, sparking a marked and perhaps overdone hawkish repricing.


• UK CPI YY (Apr) 8.7% vs. Exp. 8.2% (Prev. 10.1%); MM 1.2% vs. Exp. 0.8% (Prev. 0.8%)


• UK Core CPI YY (Apr) 6.8% vs. Exp. 6.2% (Prev. 6.2%); MM 1.3% vs. Exp. 0.7% (Prev. 0.9%)


• While the headline saw a decrease in the pace of inflation to 8.7% from 10.1%, this was markedly above the BoE’s forecast from the May MPC for an 8.4% print. Nonetheless, the release does show the easing in inflationary pressure Governor Bailey guided participants towards from this period onward; albeit, this has been heavily flagged given energy-related base effects.


• However and concerningly for the BoE, the headline core metric saw an acceleration as did the crucial All Services measure to 6.9% from 6.6%. Though, some of this increase can be attributed to the usual April annual price adjustments for key services and given the expected moderating of utilities upward-pressure, with ING looking for this to be essentially net-neutral by July, service inflation may well have peaked; reminder, a new Ofgem energy price cap will be announced on May 25th for July-September.


• Given the above mitigations, particularly referring to energy-related pressure, the morning’s marked hawkish reaction to as much as 100bp of further tightening i.e. a 5.50% December 2023 peak may be somewhat overdone given the headlines trajectory. However, on the flip side, the Flash May PMIs indicated growth-driven “renewed inflationary pressures” for the services side of the economy. Post-release, Bailey said he is not willing to speculate on how this impacts their forecasts and highlighted that food inflation is taking longer than expected to fall.


• Ultimately, the day prior to the June BoE policy announcement the May inflation metrics will be published; nonetheless, a number of desks have lifted their terminal call to a 5.00% or 5.25% peak.

German Ifo, May

• Overall, the release was softer than expected with the Expectations and Business Climate metrics markedly below forecasts/prior. Echoes the ZEW and Flash PMIs in terms of the overarching findings, with ECB implications somewhat dovish.


• German Ifo Business Climate New (May) 91.7 vs. Exp. 93.0 (Prev. 93.6, Rev. 93.4); Expectations 88.6 vs. Exp. 91.9 (Prev. 92.2); Current Conditions 94.8 vs. Exp. 94.8 (Prev. 95.0; Rev. 93.1)


• The headline metrics all fell from their prior readings, though Current Conditions were ultimately revised down, painting a gloomy picture for the German economy though not necessarily a surprising one given the tone of recent data prints. In particular, the May Flash PMIs for the region showed marked pressure in the manufacturing sector with attention on the slump in China into Q2. Slightly more dated, but the May ZEW also highlighted a downturn and remarked that Germany could slip into a mild recession – a finding that was not shared by the PMI or Ifo. With the latter reporting the domestic economy is treading water and Q2 is heading towards stagnation.


• On the inflationary front, Ifo highlights that the number of firms looking to increase prices in May has decreased further. This, when coupled with the downbeat growth narrative, points towards a more cautious approach from Central Bankers; though, ultimately, the ECB’s approach will continue to be dictated by inflation and the all-important Core CPI measure.

24 May 2023 - 15:00- Fixed IncomeData- Source: Newsquawk