UK economy grew in Q1

OVERNIGHT

Equities across Asia were mixed as investors weighed up signs of cooling in the US jobs market – following yesterday’s above expectation rise in jobless claims – against efforts being made by the US and China to ease rising tensions between the two nations. Meanwhile, a meeting scheduled between US President Joe Biden and House Speaker Kevin McCarthy for today to discuss the debt ceiling has been postponed as their aides continued their negotiations towards avoiding an US default.

THE DAY AHEAD

Just released data for March UK GDP showed the economy contracted by 0.3%m/m, below market expectations for a flat growth outturn and even weaker than our sub-consensus call for a 0.2%m/m fall in GDP. The drop largely reflected a sharp fall in service sector output, which fell by 0.5%m/m and was mostly due to a decline across consumer-facing services activity where output fell 0.8% in March. The ONS also noted that industrial action in March also had a notable impact on a number of different sectors, particularly health, the civil service, education and transport. Nevertheless, despite these factors, overall GDP in Q1 was reported to have risen by 0.1%q/q, which is marginally firmer than the 0.0%q/q outturn that the Bank of England expected in yesterday’s latest forecast update.

The remainder of the day is relatively quiet with no major data releases due. BoE Chief Economist Huw Pill, who voted with the majority of the MPC yesterday for a 25bp rise in interest rates, is scheduled to speak today at around 12:15BST. In recent comments Mr Pill noted that households and businesses should accept they are now poorer because of inflation.

Elsewhere in Europe, the final estimate of Spanish CPI for April is expected to confirm that inflation accelerated last month, with the headline seen at 4.1% and the ‘core’ rate at 6.6%. In the US, the data focus will be on the University of Michigan consumer sentiment reading for May. Confidence is expected to have deteriorated relative to last month as rising interest rates and elevated inflation combined to constrain consumer activity. Some attention will also be on the survey’s measures of inflation expectations, particularly following last month’s sharp rise where the one-year ahead measure rose to 4.6% from 3.6% in the prior month. Signs of some reversal will ease fears over the prospect of further interest rate increases in the US. Meanwhile, San Francisco Fed President Mary Daly is due to speak later this evening (19:20 BST).

MARKETS

Despite the Bank of England hiking Bank Rate by 25bp at its meeting yesterday, and continuing to signal that the door remained open to further hikes if necessary, GBP/USD has fallen back below 1.26, briefly touching below 1.25 yesterday afternoon. With today’s calendar relatively quiet, the next major UK data will come next week in the shape of the March labour market release on Tuesday.