The UK construction PMI index edged higher to 51.6 for May from 51.1 previously, above expectations of 51.0 and the fourth successive reading above 50.0. There was further strength in the commercial sector, but residential activity declined for the sixth successive month and, excluding the 2020 pandemic period, it was the sharpest rate of contraction for 14 years. Overall inflation pressures continued to ease for the month while business optimism remained firm. There has been no shift in Bank of England expectations at this stage with futures markets indicating at least two further rate hikes are likely. Sterling drifted lower during the day with the moves were influenced primarily by global considerations.
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German factory orders declined 0.4% for April after a revised 10.9% decline the previous month, although slightly better than the 2.2% decline expected. Euro-Zone retail sales were unchanged for April with a year-on-year decline of 2.6%. The German construction sector remained in recession for May, maintaining underlying concerns. ECB council member Knot stated that inflation is still too high, but that the worst is now behind them. He added that the bank was seeing the first signs that policy tightening is being transmitted to the real economy. The latest ECB survey recorded that 12-month inflation expectations had declined to 4.1% in April from 5.0% the previous month.
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The Federal Reserve remains in the blackout period ahead of next week’s policy meeting. There was little net change in Fed expectations during the day with the chances of a rate hike at the June meeting edging lower to just below 20% while the chances of a July hike are still just over 60%. Markets will remain on alert for any media briefings through the Wall Street Journal as the Fed will not want market expectations where they are now if the bank is looking to raise rates at next week’s meeting.
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