Voting, Spending and Lending

The Spanish local elections should give the market a better feel of how the ‘insurgent parties’ are faring

Next Week’s Preview
Euro area
The situation in Greece is likely to remain a focal point, with considerable uncertainty on whether a deal is likely to materialise in time for the government to pay the IMF on June 5th. Investors may also focus on the Spanish local elections, and monitor how the ‘insurgents’ fare. On the data front, we expect some improvement in French consumer spending, though the overall trend remains weak. M3 money supply in the eurozone should have accelerated further, while loans to the private sector are likely to have continued to grow at a pace of 0.1%Y in April, after having turned positive for the first time in three years in March.

UK
We will focusing on the Queen’s Speech, which outlines the government’s legislative programme, and looking out for MPC commentary, as we haven’t heard from several MPC members in a while. On the data side, the highlight should be the second release of 1Q GDP . We expect a 0.1pp upward revision in the headline, with surveys pointing to stronger GDP growth than the 0.3% reported in the preliminary release of 1Q GDP. We also expect the detail to differ from last quarter, with the contribution from net trade likely to be a big negative rather than a positive.

This Week’s Review
Euro area
Most business surveys were relatively downbeat, but to varying degrees. The PMI numbers fell more than expected, just like the German ZEW survey. But the Ifo business climate fell only marginally. German GDP growth details came as a relief after weeks of weaker data in the eurozone’s largest economy. Growth in 1Q was negatively affected by reductions in inventories, contrary to other large economies such as the US or France.
Without the 0.3pp negative contribution from changes in inventories, growth would have been broadly in line with consensus expectations.

UK
Inflation dipped into deflationary territory , as headline April CPI fell one-tenth to -0.1%Y, although we think this reflected an Easter timing effect. However, other data pointed to a strong performance : retail sales (exauto) rose a strong 1.2%M, or 4.7% 3M/Y, housing starts in England in 1Q-15 rose 11%Y, and the April deficit fell significantly. The MPC minutes revealed another unanimous 9-0 vote to stay on hold , as expected. Mr Weale, to date one of the leading MPC advocates of early rate hikes, gave a speech in which he warned that inflation might surprise on the downside, which might indicate a softening in his position.

Morgan Stanley Research Europe