Investors are bracing for a busy day on Wednesday in the UK with the release of the Chancellor’s Spring Statement and February inflation data. Both could influence investors views on monetary policy.
The Office for Budget Responsibility is expected to cut its GDP growth forecast for this year from the 2 per cent forecast in October to closer to the 1 per cent forecast by economists polled by Reuters.
Chancellor Rachel Reeves has said she will not raise taxes. However she is expected to announce further cuts to public spending, following a £5bn reduction on welfare.
“Britain’s public finances are operating under increasingly fine margins and Chancellor Rachel Reeves faces tough spending decisions at the 26 March Spring Statement, amid rising debt interest cost,” said James Smith, an economist at the bank ING.
Earlier on Wednesday, an ONS data release is expected to show that annual consumer price inflation has marginally declined to 2.9 per cent in February from 3 per cent in January, according to economists polled by Reuters.
Economists anticipate higher food price inflation being offset by weaker price pressure in clothing.
In February, the Bank of England forecast that the inflation data would slow to 2.8 per cent. Still, Philip Shaw, economist at Investec said he did “not expect an overshoot of this size to jeopardise a further cut in rates in May”.
The BoE left interest rates unchanged at 4.5 per cent this week, saying that inflation should rise to 3.7 per cent by this summer. Domestic cost pressures, the BoE said, had boosted goods inflation despite weaker wholesale energy costs.
“The committee will continue to monitor closely the risks of inflation persistence and what the evidence may reveal about the balance between aggregate supply and demand in the economy,” according to the BoE minutes. Valentina Romei
Will signs of growth finally emerge for the Eurozone?
Investors hoping for renewed Eurozone growth will be looking for clues in business activity survey data next week.
The S&P Global purchasing managers’ index has hovered around a neutral reading for several months, indicating stagnation. Economists polled by Reuters expect only a slight expansion to 50.5 for March from 50.2 last month. A reading above 50 indicates expansion.
“Unless the PMI data shows a substantial move in either direction, I don’t think it will change what the [European Central Bank] wants to do,” said Athanasios Vamvakidis, Bank of America’s Head of G10 Foreign Exchange strategy. Most expect the ECB to hold interest rates steady in April after its quarter-point cut earlier this month.
“At this point, the focus is more on inflation, and also on tariff risks,” added Vamvakidis.
US President Donald Trump has pledged to introduce new tariffs on the Eurozone in the coming weeks. This trade tension, as well as the continuing war in Ukraine, has driven the recent pessimism about the bloc’s growth prospects. This has eased somewhat after the German parliament passed a historic €1tn fiscal stimulus package this week.
Economists at RBC Capital Markets predict a positive “sentiment shift” thanks to the German fiscal measures. They expect an above consensus figure of 51 this month, but noted they will be looking out for a “burst in new export orders from the US” ahead of looming tariff threats. Emily Herbert
How is corporate America dealing with America’s aggressive trade policies?
Intensifying fears about slowing growth and rising inflation in the world’s biggest economy have punctured a shortlived post-election Wall Street rally.
With sentiment surveys already pointing to increasing pessimism among consumers, investors will scrutinise upcoming gauges of business activity for clues about how well corporate America is handling Donald Trump’s aggressive trade policies and an increasingly uncertain economic backdrop.
S&P’s purchasing managers’ index for manufacturing is expected to give a reading of 52.2 for March, according to a preliminary consensus estimate from FactSet — slightly below the previous month’s figure of 52.7.
At the same time, S&P’s services PMI due on Monday is expected at 50.1, down from 51. While any reading above 50 signals expansion, such a figure would teeter on the edge between growth and contraction.
Signs of greater weakness in either survey could spark a deepening of the sell-off in US stocks, which has already sent the benchmark S&P 500 well into “correction” territory.
The Federal Reserve this week lowered its growth forecast and lifted its inflation outlook, while keeping interest rates steady, intensifying fears about ‘stagflation’ — a toxic combination of stagnating economic growth and rising prices.
Economists at Deutsche Bank say that their “long-standing view” is for the Fed to keep interest rates on hold this year. Still, they add, “a realisation of downside risks to the economy, in the absence of a material increase in inflation expectations, could require the Fed to reduce rates in 2025.”
“Like the Fed, we hope to get a better sense of the details around policies before deciding whether an adjustment is needed,” Deutsche says, but “the data and financial markets might not allow us (or the Fed) to be so patient.” Harriet Clarfelt
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