Economic Highlights

Headline inflation in May jumped to 2.1% y/y, above the expected level of 1.8%. The core reading was 2% (f/c 1.5%). Although the level surprised to the upside, the rising trend was very much as expected, and levels are forecast to rise yet further before settling back later in the year and into 2022. May’s retail sales pulled back 1.4% relative to April (during which there was a surge of 9.2% m/m). The 7.7% net increase since March probably gives a better picture of the underlying strong recovery trend. There seems to have been a marked shift from spending on food and drink at the supermarket to eating and drinking out, which should not come as a great surprise given the reduction in social restrictions. The Bank of England will disclose its latest policy decisions on Thursday this week, although no changes are expected.

The FOMC meeting dominated proceedings, despite no current policy changes. However, the views of the committee show an acceleration of the timeline for policy tightening, with interest rate rises and the tapering of asset purchases coming sooner than previously expected. The reaction of future inflation expectations was a sharp reduction in breakeven rates, suggesting that the market now gives more credibility to the Fed’s inflation-fighting capabilities, with a reduction in the probability of an inflationary policy mistake. If anything, the actual economic data releases last week were a touch disappointing, with data covering retail sales, the housing market and employment all coming in below expectations.

Key activity indicators all missed expectations in May. Industrial production came in at +8.8% y/y, with automobile manufacturing continuing to be a drag on overall production thanks to persistent chip shortages. Retail sales growth slowed to 12.4% y/y, with slower online goods sales reflecting delays of some purchases related to an online shopping festival on June 18th. Fixed asset investment growth (+15.4%) missed expectations as well, with property and infrastructure investment slowing in May. Surveyed unemployment fell slightly to 5% on a nationwide basis, but was stable in major cities.