More positive signs start to emerge?

• US data to post more convincing signs of post-winter rebound
• UK unemployment rate forecast to drop to 7.0%, but CPI inflation to inch lower 
• China GDP expected to be softer than consensus, adding to concerns

Activity data to post more positive tone ? ... As well as ongoing geopolitical tensions, markets have been concerned recently by Chinese activity indicators. Added to this, more dovish noises from both the ECB and Federal Reserve have boosted bond markets, with US 10-year yields hitting 2.62% - a six-week low. However, the coming week is likely to post more solid signs of activity. The IMF meeting included a more upbeat outlook for global growth, which continues over the coming days. The coming week should see signs of a US post-winter rebound and a further tightening of the UK labour market. Both raise policy rate uncertainty, despite subdued inflation outlooks.


Evidence of post-winter rebound ? ... Despite being Easter-shortened, data should start to fulfil post-winter rebound expectations over the coming week. The Empire State survey, should see some catch-up in the headline index, which has lagged the rebound in other surveys. We also pencil in further modest gains for the Philadelphia survey. Housing starts and the NAHB housing survey are both expected to move higher on the month. And retail sales look set to post an impressive 1% rise in March, buoyed in part by strong car sales. Yet sales would illustrate the broader economic dynamic. Even after a strong March, sales in Q1 would still be down 0.2%. While broader consumer spending has been firmer, it is likely to rise by a slower 2.0% (annualised) in Q1 from 3.2% in Q4, weighing on GDP. However, March’s rebound should set Q2 up for a more robust gain. CPI inflation is also expected to rise this month, although we expect ‘core’ rates to remain stable. Fed Chair Yellen speaks twice this week and we expect a repeat of the more dovish message emphasised since the post-FOMC press conference. But markets may focus on firmer activity figures.


Inflation suggests UK spare capacity despite jobless drop ... The coming week sees labour market and inflation reports for the UK. We forecast the unemployment rate slipping to 7.0%, below the consensus 7.1% - although November’s strong employment creates an uncertain base effect. If right, this would mark the end of the MPC’s initial phase of forward guidance. We do not expect any immediate call for tighter policy. But with unemployment likely to fall further and earnings growth accelerating, more hawkish commentary is likely. That said, CPI inflation is expected to dip to 1.6% in March, before rebounding closer to 2% in April reflecting volatility in part caused by Easter. However, with PPI inflation also very subdued, we expect inflation to retrace again over the summer, which should ease near-term rate hike concerns.


Further signs of China slowdown ... Broader concerns about the pace of Chinese growth were compounded by a sharp fall in import growth in March. China posts Q1 GDP estimates on Wednesday. We forecast quarterly growth rose 1.4% - modestly below consensus and a two-year low. We expect some acceleration in the coming quarters to maintain the annual growth rate around 7.2% over the rest of this year. This will be helped by the fiscal nudges provided over the past few weeks. However, market concerns are likely to persist and if our expectations prove optimistic, further fine-tuning stimulus may be forthcoming.


Little to guide the ECB QE question ... Markets are increasingly considering the prospect of ECB QE. Yet a quiet week is unlikely to take this debate further. The German ZEW survey is expected to remain around current, upbeat levels. Euro area March inflation is expected to stay at 0.5%. The ECB holds its non-rate meeting on Wednesday, but we will likely have to wait until after Easter to see if this results in any change of tone.