Societe Generale on Central Banks - FJElite

The week ahead will be mostly about the labour market. Our expectation is for a very muted payrolls change for April, with a constant unemployment rate. In a low labour supply growth environment, we don’t need a lot of payrolls growth to keep the unemployment rate in check, and month-to- month payroll changes will also be more volatile than before. Given this environment it’s not surprising that at the April FOMC meeting the Fed signalled a greater concern about the inflation outlook anda growing willingness to entertain the possibility of rate hikes when needed to ward off further inflation acceleration.

The past week saw a wealth of, mainly soft, data pointing to both upside risks to inflation and downside risks to growth. And as expected, the ECB stayed on hold with little clarity over the impact from the energy shock on activity and wage growth. Still, with energy prices staying high, we believe the risks to core inflation are sufficiently high for the ECB to start a moderate tightening in June. Next week is light on data and events, but we keep our eyes peeled on the ECB’s Wage Tracker for any signs of a fast reaction of wage growth to rising inflation.

The MPC kept Bank Rate unchanged at 3.75% in an 8-1 vote split. Our base case remains for Bank Rate to stay on hold throughout the year, although the call is finely balanced. See our postmortem here. This week, the local elections will take centre stage. A poor showing for Labour could catalyse a leadership challenge against the Prime Minister, although this is far from guaranteed. Betting markets price the probability of Starmer leaving office by end-2026 at around 66%.