Week Ahead Economic Outlook: US to set agenda as Fed ponders rate rise

With the next Federal Reserve meeting a matter of weeks away and the possibility of an interest rate rise still on the table, data from the US will set the agenda over the coming week. US employment data are out this Friday and last month’s disappointing non-farm payroll reading initially led market participants to write off a June rate rise. However, hawkish comments from several Fed policymakers since have steadily pushed the chance of this happening back up to more than 30 per cent, according to futures prices. Expectations on Friday are for a gain of 165,000 jobs over May, slightly above the 160,000 jobs added in April; any significant deviation from this level will affect the June decision.

Other important data from the US come on Wednesday and again on Friday with the release of manufacturing and services activity surveys from the Institute for Supply Management. Growth in both sectors is thought to have weakened over May, the manufacturing reading will slip to 50.5 from 50.8 in April and the services reading will fall to 55.5 from 55.7 previously.

On Thursday the European Central Bank will announce its decision on interest rates for June, economic data since the ECB launched fresh stimulus in March have been generally positive, with moderate growth seen during the first quarter of the year. Inflation data however are yet to show the desired improvement, with overall prices falling by 0.2 per cent year on year in April.

Mario Draghi has emphasised the need for patience with inflation, but with the oil price up over half what it was at the start of the year, some upward movement in the headline rate should be being seen by now. On Tuesday we get an initial estimate of eurozone inflation for May, despite a slight improvement in the headline rate deflation is still expected, with the year-on-year change moving to -0.1 per cent.

Thursday’s meeting is unlikely to see any new policy announcements, although analysts at HSBC think the ECB may make some tweaks to the current asset purchase programme to extend the range of instruments available. This in turn would pave the way to a wave of fresh stimulus in September; meaning deeper negative rates and greater asset purchases before the end of the year.

The UK manufacturing Purchasing managers' index is out on Wednesday. The sector fell into contraction in April, attributed to the economic uncertainty around the EU referendum. A slight rally is expected for May with the index moving to 49.9, remaining within contractionary territory.