BOE: DMP Leans Dovish, But Not Enough To Materially Impact BOE Outlook
BOE May DMP here. While the forward looking responses around inflation and wage growth lean dovish, it doesn't seem enough to materially change the outlook for the BOE. The SONIA Dec '25 future has gained one tick since the data was released, now +1.5 ticks today at 96.24. The questions around the impact of US tariffs are also not too surprising, with the UK known to be more insulated from the trade war than the likes of the EU - more so given the recent trade agreement made with the US.
- "Firms reported that their realised own-price growth remained unchanged at an average annual rate of 3.5% in the three months to May".
- "Year-ahead own-price inflation was expected to be 3.7% in the three months to May, 0.2 percentage points lower than firms reported in the three months to April. Businesses therefore expect output price inflation to increase by 0.2 percentage points over the next year, based on three-month averages."
- "Expectations for year-ahead CPI inflation remained unchanged at 3.2% in the three months to May. The corresponding measure for three-years ahead CPI inflation expectations was 2.8% in the three months to May, which has been unchanged since the three months to January. "
- "Firms reported that annual wage growth was 4.7% in the three months to May, 0.1 percentage points lower than in the three months to April. Expected year-ahead wage growth fell by 0.1 percentage points to 3.7% on a three-month moving-average basis in May."
- " Across all questions on sales, prices and investment over 70% of firms reported that changes to US trade policy would have no material impact on their firms."
- "US trade policy was reported to be one of the top three sources of uncertainty for 12% of businesses, significantly lower than the 22% who reported it to be a top-three source of uncertainty in April. "
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MNI: UK FINAL APR SERVICES PMI 49.0 (FLASH 48.9, MARCH 52.5)
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GERMANY: Merz Falls Short In First Round Of Chancellor Voting
In a shock result, Friedrich Merz, leader of the centre-right Christian Democratic Union (CDU), has fallen short of the required overall majority in the first round of voting in the Bundestag. He achieved 310 votes in favour, with 307 against, three abstentions and one invalid vote. The CDU, its Bavarian sister party the Christian Social Union, and the centre-left Social Democrats hold 328 seats between them, well above the 316 majority threshold. The first-round result would therefore indicate a sizeable number of SPD lawmakers refusing to back the conservative Merz, despite the approval of their party's leadership for the gov't programme.
- Under Germany's Basic Law, a second round of voting can take place, once again requiring an absolute majority of 316 in favour. If this threshold cannot be reached then a third round can take place in which only a relative majority of those voting is required.
- The second round must take place within 14 days. It remains to be seen whether Merz seeks an immediate re-vote or takes his time. In this two-week period an unlimited number of candidates are able to seek election as chancellor, but all would require an absolute majority of 316 votes.
- This is the first time in Germany's post-war history that a chancellor has failed to be elected in the first round. In 1949, Konrad Adenauer achieved the exact 202 votes required for an absolute majority, the smallest margin of election until today. The result will be a bitter blow to Merz, and will cast a pall over the start of his chancellery even if he wins in subsequent ballots.
GILTS: Goldman Sachs: Past Performance Not Indicative Of Future Gilt Returns
Goldman Sachs write “our economists expect a 25bp cut at this week’s MPC meeting, with communication likely to turn more dovish, opening the door to consecutive cuts through to November”
- They believe that “the latest inflation and GDP growth projections are likely to support policy easing, given trade risks to growth and the disinflationary effects of low energy prices and GBP appreciation”.
- Goldman suggest that “this combination should be supportive for gilts across the curve, especially in combination with the DMO’s ongoing skew towards shorter maturities. In our view, this skews the risk towards a lower term premium, which has risen in absolute and relative terms over the latest 12 months. This is also consistent with the conclusions of our historical analysis of real yields through policy rate cycles, which suggests the gilt curve - especially the real component of yields - is currently too steep when benchmarked against macro fundamentals”.
