Political focus switches back to Greece

• Bank of England Inflation Report to reflect impact of sterling strength 
• Negotiations about Greek debt to again come to the fore
• Euro area Q1 GDP growth to highlight the region’s outperformance in early 2015

Surprising majority sets markets alight... Sterling and UK asset prices spiked higher on Friday on the news that the Conservative Party had won an overall majority of seats in the House of Commons. The result confounded widespread pre-election expectations that the General Election would lead to a prolonged period of political uncertainty. Over the medium term, markets could still focus on the uncertainty surrounding a potential EU referendum. Moreover, the strong performance of the Scottish National Party raises questions about the future of Scotland. For now, however, market attention is likely to move away from UK politics.

Attention turns to the Bank of England... Domestically, the focus in the upcoming week will primarily be on the Bank of England. The May MPC announcement (Mon) will likely see monetary policy unchanged. However, of more interest will be Wednesday’s release of the Inflation Report. Even before Friday’s sterling rally it seemed likely that a stronger exchange rate would be a key influence on the BOE’s updated economic projections. The Bank has also promised a review of its supply side assumptions. Given the ongoing weakness of productivity growth it may feel obliged again to push out the expected recovery in productivity. However, with MPC members remaining anxious about the risk of pervasive disinflation, despite the recent rise in oil prices, we expect the overall message to be dovish, maintaining the current assumption of economic slack estimated at 0.5%. A somewhat contradictory note is likely to be struck by the latest labour market data (also Wed). A pick up in wage inflation remains the needed development that will shift the MPC in a more hawkish direction. We expect a further fall in unemployment and rise in earnings growth in the three months to March that will leave a November interest rate rise still on the cards.

Greece uncertainty to the fore. The coming week is also a key one for Greece. Negotiations over a compromise between Greece and its creditors continue ahead of Monday’s Eurogroup meeting. A final agreement by then seems unlikely. However, it is probable that progress will be sufficient to justify a more positive message post meeting. It is also seems likely that the Greek government will make the repayment due to the IMF the following day and it also seems to have the funds to pay its mid-month wage and pensions bill. Meeting these hurdles will give Greece a little more time in which to reach a deal.

While the euro area economy outperforms. The release of euro area GDP data for Q1 should highlight that that the region’s economy has outperformed both the US and the UK in early 2015. Euro area growth could be as strong as 0.6%, although weaker than expected March German industrial production numbers hint at downside risks.

Signs of a spring rebound in the US? This week’s US data will be watched for further signs that the economy is rebounding from its weak start to the year. April retail sales (Wed) will likely get most attention. These picked up in March after falling for 3 months. Weak car dealer reports suggest that the headline rise will be modest (we forecast 0.3%m/m). However, ‘core sales’ are expected to be stronger at 0.5%. Recent weakness in activity has been particularly evident in manufacturing, possibly due to that sector being highly exposed to the strong dollar. April industrial production data and the Empire State survey (both Fri) will provide timely updates.

Oil price could fall back. Finally the coming week’s updates from OPEC and the IEA on supply and demand pressures in the oil market will be important determinants of whether the recent oil price rally is set to continue.