A pre-election soft patch

• First cut of Q1 UK GDP data to show growth well short of pace implied by surveys
• FOMC’s take on Q1 data softness key for markets, but no change in policy expected
• Eurozone deflation impulse fading, as Greek situation continues to fester

Backdrop of Greek event risk continues to taint market sentiment. Amid ongoing slippage relative to the 20 February agreement timetable, expectations of progress in funding negotiations at the Eurogroup meeting beginning 24 April had been scaled back substantially. Despite the expressed desire from Greek PM Tsipras to respect the end-April agreement deadline, the government’s scramble to consolidate its liquidity reserves seems likely to ensure the payment of upcoming sovereign liabilities, including €200m of interest due to the IMF on 1 May, even without any early release of EU funds. But with differences in talks apparently remaining very wide, the next Eurogroup meeting on 11 May sets yet another deadline for urgently-needed progress in interim technical discussions.

April FOMC statement to give steer on US Q1 data weakness. Although the FOMC is widely expected to leave policy unchanged at its April meeting (Wed), of interest will be its interpretation of Q1 data trends in the post-meeting statement. With Q1 GDP data (Wed) expected to expand by an anaemic c.1% annualised pace, partly reflecting adverse weather effects, any indication in the statement that downside risks to growth are deemed to be higher or more durable than previously assumed would be the likeliest trigger for a market reaction. Meanwhile, explicit guidance on the likelihood of tightening at its next meeting in June is likely to be contentious and as such may be avoided in the statement. Data-wise, the bellwether manufacturing ISM survey (Fri) will also attract scrutiny for any impact of currency strength, with a modest rise relative to March readings expected. The March PCE deflator data (Thu) is forecast to mirror the already-released CPI data with relatively firm ‘core’ readings, providing the FOMC reassurance on inflation trends.

Eurozone deflation impulse expected to fade. A turn in Eurozone inflation data (Thu, with German data due on Wed) may provide similar comfort for the ECB. Headline CPI inflation is expected to pick up to 0.0% in preliminary data for April, with core inflation projected to hold at 0.6%. Although pressures already in the supply chain may still impart some downward pressure on Eurozone inflation trends, the ongoing recovery in oil prices along with the lower euro exchange rate should combine to deliver an upward trajectory. Meanwhile, Spanish Q1 GDP data (Thu) will give the first indication of official growth in the Eurozone, with a brisk quarterly gain of 0.8% expected.

UK growth hits a soft patch in Q1. In contrast to strengthening official data in the Eurozone, the first cut of UK GDP data for Q1 (Tue) is expected to indicate a slowdown. Although survey data over Q1 - notably the PMIs - have remained firm, official monthly output indicators have disappointed across the services, production and construction sectors. Absent revisions to the published monthly data, we anticipate a 0.4% quarterly pace of GDP expansion, the weakest since 2013 Q4. As the last key economic release in advance of the General Election, media comments seem likely to lazily ascribe the slowdown to political uncertainty. Balanced with stronger survey data BoE policymakers are likely to be more sanguine, and should look through the weakness in anticipation of revisions. Meanwhile, with employment growth remaining brisk, the weak output data will bring into still-sharper relief the ongoing disappointments on UK productivity growth, which adds to the case for an early tightening of UK monetary policy.

BoJ watched for change of policy stance. With Japanese activity and inflation trends disappointing official expectations, the BoJ’s policy meeting (Thu) could herald the unleashing of further monetary stimulus.