PPI inflation from the US and the Bank of England - decision on another hike today

European markets had another moderately negative session yesterday after the US CPI for April fell to 4,9% two-year low, while core prices fell slightly, as expected, to 5,5%.

US markets were more positive and ended the day in the red with the Nasdaq 100 leading the gains and the Dow lagging as yields and the US dollar fell. Yesterday's data on inflation were particularly welcome as they supported the narrative that the cycle of interest rate hikes will be put on hold Fed at the next meeting.

Today's April PPI data could further reinforce that narrative if it continues to slow at the pace we have seen over the past few months. Since the end of last year, the PPI has fallen from 6,2% in December to 2,7% in March and is expected to slow down even further to 2,5% today.

Core PPI was a bit more stable but also slowed down from 5.8% in December to 3.4% in March and is expected to be 3.3%. As a leading indicator for the CPI, this should support the idea that inflation has yet to come down, but it still doesn't mean the Fed will be willing to cut rates this year, especially with a resilient labor market and wage growth at current levels.

Today's weekly jobless claims are expected to remain unchanged at 245.

The Bank of England will raise interest rates

There will be a meeting before today's US data Bank of England, which will raise rates for the 12th time in a row.

Earlier this year, the Bank of England, along with several other major institutions, predicted a disastrous year for the British economy. World Bank, MFW extension and the OECD were unanimous in their doomsday warnings, with the IMF predicting a contraction of -0,6% for the year, although this was quickly revised to -0,3% in April.

In February, the Bank of England followed suit, forecasting a contraction of -0,7% by the end of this year compared to last year, predicting a shorter and shallower recession than that predicted in November. As for inflation, it was projected to fall sharply to around 4% by the end of this year and return to target in about 12 months.

Over the last few months it has become clear that the Bank of England's management of monetary policy over the past 12 months has been questionable to say the least, without any self-reflection or introspection on the part of MPC members.

From the deaf talk of the likes of Bank of England Governor Andrew Bailey about the risk of demanding higher wages, and his chief economist Huw Pill, who recently said that British consumers will have to get used to a lower standard of living due to persistently high levels of inflation, or risk falling interest rates. remain higher for a long time, there was no sign of admission of policy failure on the part of the bankers.

As wages slowly begin to catch up with the headline CPI in various parts of the country, it is highly likely that we will see another 25bps hike today, albeit with a split vote, with headline CPI still above 10% and core prices at 6,2%.

Much will depend on how much of a fall we see after the April and May CPI figures are released over the next few weeks when base effects kick in and the cap on energy prices is lifted but the fact is if the Bank of England hadn't fallen asleep at the wheel , when it became clear that inflation was starting to accelerate towards the end of 2021, inflation might not be as high or as entrenched as it is now.

Of course, we'll never know what the counterfactual scenario would be, but if rates matched the pace of the US Federal Reserve, and there is a chance, we could be much closer to the prospect of a rate cut than we are now.

Under current conditions and with wages rising 10% or more in some parts of the country, it's hard to imagine rates falling much sooner than mid-next year, which is bad news for those looking to exit fixed-rate mortgages .

The Bank of England will also tell us about its latest inflation projections, as well as its views on the outlook for the UK economy, with GDP expected to be revised upwards, although as with most of their forecasts, they are likely to end up wrong. Nevertheless, we should know their mindset regarding expectations for further rate hikes, which are likely to be dovish. Governor of the Bank of England, Andrew Bailey, has a habit of talking about the economy and sterling down after a rate hike. It is unlikely that today will be any different.

We have certainly come a long way from the gloomy prospect of the worst recession since the 30s, which was predicted late last year.