The health of the global economy appears to be frail after China’s retail sales fell by over 11% in April while its industrial production contracted by 2.9%. Both readings are the worst since the start of the pandemic in 2020. The Chinese economy looks set to shrink this quarter due to the country’s lockdown policy hitting consumer spending. The decline confirms a significant loss in demand in the world’s second largest economy as major population centres are shut down to prevent the spread of Covid. It is however reported that Shanghai is to end its lockdowns and return to normal life in June.

EUR

Eurozone growth forecasts were cut yesterday as the energy crisis drives up inflation within the bloc. The European Commission cut its growth forecasts for the year and revised upwards its inflation forecast for the remaining of the year. They forecast real GDP growth in both the EU and euro area at 2.7% in 2022, down from the 4% forecast three months ago.

For 2023, growth is projected to reach 2.3%, down from the previous 2.8% in the EU and 2.7% in the euro area. Inflation is expected to average 6.1% in 2022 but will peak at 6.9%, which represents a considerable upward revision compared to the previous winter forecast of 3.5%. As a result of poor economic data, the euro continues to lose ground against the pound and US dollar.

GBP

In the UK, the Governor of the Bank of England warned that apocalyptic rise in food prices is on the cards as a result of the war in the Ukraine. Andrew Bailey said the invasion had led to a global shortage of wheat and cooking oil which in turn was driving up prices. He went on to say that food inflation was a major worry for the central bank. The BoE Governor has blamed the war in Ukraine for the highest inflation in the UK for three decades and warned that the rise in food prices caused by Russia’s invasion could have a disastrous impact on the world’s poorest populations.

The BoE’s credibility has been under scrutiny lately as it battles to keep inflation under control. Bailey told MP’s that while he was unhappy about the prices increasing, 80% of the inflation target overshoot was caused by factors out of the bank’s control. Bailey reiterated that the BoE could not have been expected to predict a war in Ukraine.

The pound so far this morning has gained against the euro and US dollar after stronger-than-forecast labour market data. The data showed a strong jump in wages and a fall in unemployment. The unemployment rate fell to 3.7% from 3.8% despite slow economic growth. This will add pressure to the BoE to continue to raise interest rates and could support Sterling in the short term.

On Wednesday official figures are projecting the annual rate of inflation to rise above 9% and expecting it to continue to rise above 10% when the energy cap is further raised this October.

There is no high tier eurozone data or UK data release for today with the focus being on US retail sales figures out at 1.30pm and this evening’s speech from Fed Chair Powell.

Key announcements

11:05 – GBP – MPC member Cunliffe speaks
13:00 – USD – FOMC member Bullard Speaks
13:30 – USD – US Core Retail sales, forecast 0.4%
13:30 – USD – US Retail sales, forecast 1%
19:00 – USD – Fed Chair Powell speaks