The UK PMI construction index was unchanged at a 9-month high of 59.1 for March and above consensus forecasts of 57.8. Cost pressures remained intense with input price costs increasing at the fastest rate for six months. Overall business optimism dipped to a 17-month low, matching the decline seen in both the manufacturing and services sectors. As well as unease over the Ukraine situation, there were important reservations over the impact of higher inflation with UK confidence fragile. Sterling moves overall were still dominated by global developments with markets waiting for any fresh guidance from the Bank of England.
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German factory orders declined 2.2% for February after a revised 2.3% increase the previous month and weaker than consensus forecasts. The Euro was able to resist further selling pressure in early Europe on Wednesday and secured a tentative rebound with an element of short covering and a wider dollar correction. The Euro peaked before drifting lower again amid underlying concerns over the Euro-zone outlook. ECB chief economist Lane stated that it was important not to over-react to the inflation surge. He added that the bank can’t respond to current high inflation and the bank’s orientation is towards the medium term. Lane has maintained a consistently dovish stance and these comments suggested that the economics department will not be backing a tighter policy.
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9.00 Retail Sales (YoY) (Feb) Exp. 4.8% Prev. 7.8%
Minutes from March’s policy meeting recorded that all participants emphasised the importance of remaining vigilant to the danger of more upward pressure on prices and that it would be appropriate to quickly shift the stance of monetary policy towards neutrality. Many participants stated that they would have liked a 50 basis-point increase at the meeting and also remarked that one or more 50 basis-point increases may be appropriate at future meetings, especially if inflation pressure stay elevated or intensify. There was also agreement that it would be appropriate to start balance-sheet reduction soon, potentially as early as immediately after the May meeting. The overall tone was hawkish, but market expectations have already shifted sharply, especially after Brainard’s comments on Tuesday and there was choppy trading following the release.
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