Economic Highlights

Following an extremely rapid expansion during the second half of 2020, when the Stamp Duty holiday ignited a surge in transaction volumes, mortgage approvals cooled to more normal levels through the third quarter of 2021. Since then, they have broadly flatlined, but April’s data pointed to a resumption of the downtrend, falling from March’s 70k to 66k, a somewhat larger drop than anticipated. However, being very near their 2019 average, this looks like a housing market that has lost some steam rather than its momentum entirely – for now at least. The same can be said for net mortgage lending which, at £4.1bn in April, was also very close to its 2019 mean. We would expect some further dampening in housing demand and mortgage lending in response to the rise in mortgage rates, but a clear move lower would probably require sharply higher rates and/or a weaker labour market. Net consumer lending expanded more rapidly than expected in April, by £1.4bn. The extent to which this can be attributed to a revival in consumer demand for previously unavailable services (such as international travel) or to households being forced to take on unsecured debt to fund spending on essentials can, however, not be gauged from these numbers.

Nonfarm payrolls rose 390k in May, above consensus of +318k. The details of the report were softer, with a second month of downward revisions and of underperformance in household employment. The unemployment rate was unchanged at 3.6% against expectations for a drop, the underemployment rate increased for the second month, and household employment rose by just 45k on a nonfarm-payroll-adjusted basis. Average hourly earnings growth slowed to 5.2% year-on-year, similar to consensus. The deceleration in wage growth is encouraging because it suggests that the broader cyclical price pressures in the economy are close to peaking. But it might take a slowdown in annual wage growth to closer to 4% before the Federal Reserve can claim it is making significant progress towards its inflation goal. The Fed is expected to raise rates by 0.5% in both June and July, before returning after its summer break with at least another 0.25% in September.

Euro area inflation accelerated further in May reaching a new record high of 8.1%, from the previous record of 7.4% seen in both March and April. Energy pushed up the headline rate of inflation once again, with prices rising 39.2% year-on-year, representing a 4.3 percentage point contribution to the annual inflation rate. Further upward pressures were also evident in food prices. Stripping out these volatile items core HICP inflation (ex food, energy, alcohol and tobacco) also reached a new record high of 3.8%. We suspect that inflation is nearing its peak and should moderate through the second half of this year, but ultimately still stand notably above target (2%) at the end of the year. This latest reading will fuel the European Central Bank’s Governing Council members’ arguments for tighter policy. Its next meeting begins on Thursday. We expect the ECB’s inflation projections to see notable upward revisions which should prompt an announcement confirming the winding down of asset purchases and the prospect of a deposit rate rise at its July meeting.

China services activity continues to disappoint , with the Caixin services PMI printing at 41.4 in May, below consensus expectations of 46.0, although still up from 36.2 in April. The index has remained in contraction territory for the third straight month, and the limited recovery leaves services activity near the depths of the original Covid shock in 2020. However, with more restrictions being lifted, this series should continue to recover.