Economic Highlights

The Bank of England unsurprisingly left interest rates unchanged at 0.1%, but increased its asset purchase limit (QE) by £100bn to £745bn, with the weekly purchase rate halving to £7bn. Although some were disappointed by this (forecasts ranged as high as £200bn), the underlying message that liquidity conditions are returning to normal and that the economic trough was not as bad as it might have been were more positive. This view was reflected in a Retail Sales print for May that saw a y/y drop of “only” 9.8% vs a forecast -14.9%. Inflation continues to track lower, with the latest core rate falling to 1.2%, down from 1.4% in April.

The weekly employment data were not a strong as expected in terms of the bounce back, but still moving in the right direction. Continuing jobless claims dropped from 20.93m to 20.64m. Star release of the week was the Philadelphia Federal Reserve Business Outlook survey for regional manufacturing, which jumped from -43.1 to +27.5 (f/c -21.4). Shipments, new orders and employment all improved.

Core euro zone inflation remains very low at just 0.9%, with no sense that it will recover soon. The ECB’s 2% target looks as distant as ever. We still await signing of the EU’s €750bn stimulus package, with the “Frugal Four” only reluctantly being brought into line.