US interest rates will remain unchanged at 5.25 per cent on Thursday but the recent turmoil in the bond market, reflecting renewed uncertainty about the outlook for US monetary policy, could be fuelled further by this week’s data releases.

The ripples from the bond market sell-off have spread into credit markets and further volatility seems certain. Marc Ostwald, fixed income strategist at Insinger de Beaufort, points out that 10-year swap spreads, key instruments that allow institutions to manage their exposure to fluctuations in interest rates, have risen to the highest levels since mid-2003.

Mr Ostwald says this is a major shift that indicates that the underpricing of risk in credit markets is being slowly but clearly adjusted and this could put further pressure on the complex structures of the credit derivatives market. The question that then arises is, if the abundance of credit that has fuelled the leveraged buy-out market is repriced on less economically attractive terms, this will have a knock-on impact on equities as so many share prices, particularly in the UK, have been boosted by bid speculation.

Monday brings existing home sales for May, expected to fall from 5.99m in April to 5.97m, followed by new home sales on Tuesday, which, after a strong bounce in April, are forecast to fall from 981,000 to 925,000.

US consumer confidence for June, due on Tuesday, is expected to fall from 108 in May to 105.5 as high petrol prices eat into household budgets. High energy prices and rising food prices will curb discretionary consumer spending. This has yet to show in monthly US personal income and spending data, due on Friday, but may do so later this year.

Personal income fell 0.1 per cent in April but a rebound of 0.6 per cent is expected in May, raising annual growth to 6.5 per cent. Rising headline inflation will shrink real income growth below the current 3.7 per cent, putting more pressure on consumers.

Friday also brings the Fed’s preferred inflation measure – the core personal consumption expenditure deflator – which is expected to ease from 2 per cent in April to 1.9 per cent. Although the core PCE is within policymakers’ comfort zone, the Fed remains concerned about the inflation outlook due to the high level of resource utilisation.

In spite of the housing slowdown, the US economy appears to be regaining momentum, helped by rising investment spending. This is reflected in an upturn in core durable goods orders, due on Wednesday, which rose 1.9 per cent year on year in April.

In the UK, the Nationwide measure of house price inflation, due on Thursday should ease back from 10.3 per cent in May to 10.2 per cent as property market activity has started to slow. There will be further evidence of activity slowing in the Bank of England’s data on consumer credit and mortgages, due on Friday. Mortgage approvals are forecast to fall from 107,000 in April to 105,000. Rising interest rates are keeping growth in consumer credit subdued and May’s increase is expected to equal April’s rise of £0.5bn.

No change is expected to the headline measure for GDP growth of 2.7 per cent in the revsions to first quarter data, due for release on Friday. The first quarter current account data will provide interest after a sharp deterioration in the deficit in the final three months of last year to 3.8 per cent of GDP, the largest since 1990. The consensus forecast f for the deficit to narrow from £12.7bn in the fourth quarter to £11.9bn.

Rising interest rates and the slowdown in the housing market will meant that UK consumer confidence should weaken in data for June, due on Friday.

In the Eurozone, ongoing improvements in the labour market are expected to lead to a further rise in consumer confidence in June, due on Friday. The initial estimate for Eurozone inflation in June, also due on Friday, is expected to be unchaged from may’s 1.9 per cent, remaining below the European Central Bank’s ceiling. However, in common with the Fed, the ECB remains wary about the possibility of inflationary pressures mounting as indicators such as growth in Eurozone broad money supply remain far higher then policymakers believe is consistent with maintaining price stability.

Get alerts on US downturn when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Comments have not been enabled for this article.