-:- ECONOMIC ANALYSIS OF DATA-FOUR WEEKS LONG

ECONOMIC DATA ANALYSISFRIDAY 18 MAY 2012FOUR LONG WEEKS• Greek exit woes seeing evidence of tensions in Greece, but polls may signal turn.• Heavy UK calendar to reinforce expectations for further QE, headed by split MPC vote.• ‘Flash’ PMIs from euro area, US and China - focus to remain on from euro area.Greece confirmed that it could not form a government this week and a fresh election has been set for 17 June. This has fanned fears that Greece could leave the currency union, with a range of scenarios being considered in its wake. EU officials appear to be explaining to the Greek public that commitment to austerity measures is the only option consistent with euro membership, contrary to what Greece’s SYRIZA coalition suggested at the last election. This may be getting through. The latest opinion poll suggest an austerity-committed coalition could now be formed. However, it has also awakened wider fears. Reports suggest €2bn of deposits were withdrawn from Greek banks in the past two weeks. Compounded by further Greek sovereign rating downgrades and Moody’s Spanish bank downgrades, equity markets slumped and bond yields set fresh lows.Europe will continue to dominate in the coming week. Polls over the weekend will be important. Confirmation that the Greek public is shifting towards an austerity/in vote, could offer relief to markets currently at extreme levels. However, writing ahead of the G8 communique, we doubt this weekend’s meeting will draw to any firm public conclusions, though we feel sure that international pressure will be being applied behind closed doors by extra-euro area members for action. With Monti and Hol lande also pressing for change, German Chancellor Merkel may well feel the heat. But Wednesday’s EU Summit will be key. Markets, bruised by successive Summit disappointments, are sceptical that this meeting will deliver substantive growth stimulus. However, continued tensions in Greece and signs that this could spread, could demand a forceful response. As such the Summit could have a marked impact on markets, but we have been here before. ECB President Draghi speaks at a conference on the following day. This provides an opportunity to gauge his reaction.By contrast euro area data are unlikely to provide a constructive background. Our global team forecasts a slight rise in the key euro area ‘flash’ PMIs, but these are likely to remain deep in territory suggesting contraction in all economies outside of Germany (the German Ifo survey is also expected to slip, but remain fundamentally firm). While the UK outlook hinges on euro area developments, this week’s Inflation Report showed that domestic matters still influence markets. The Inflation Report painted a confused outlook for the UK and we look to the coming week’s MPC minutes to provide some clarity. We believe part of the confusion reflects a split Committee and look to a 7-2 vote for no further QE. It is even possible that Governor King dissented from the decision to suspend QE, something that would add to the dovish interpretation of this week’s Report. Other releases should add to such a trend. We expect retail sales to retrace most of March’s buoyant retail sales, affected in part by the wettest April on record. Q1 GDP looks likely to be downgraded after the substantial downward revision to construction. And CPI inflation also looks set to fall back to 3.2%, reinforcing hopes of renewed disinflation, although we see this more as volatility associated with the timing of Easter. Alongside continued uncertainty in Europe, market appetite for further QE looks set to grow. Further afield there is little scheduled to provide much steer. Preliminary estimates of HSBC’s China manufacturing PMI will be watched for any signs that the recent softer offical figures are reflected. We do not expect the PMI to slip from here. The US also sees a new ‘flash’ PMI released, but this is unlikely yet to garner sufficient market attention. Which leaves the focus squarely on Europe.UK DATA PREVIEW FRIDAY 18 MAY 2012CPI inflation (Apr)   CPI inflation ticked higher in March to 3.5%, its first rise since September’s peak. Some of this likely reflected the fact that Easter fell early in April and we think this is the main reason why inflation should fall back this time. We forecast inflation dropping to 3.2%. In the main this will be driven by last year’s Easter rises (namely in airfares and clothing) not being repeated. This effect should prove temporary. Moreover, with water charges, gas tariffs and even petrol edging higher on the year, we see little discernible downward trend in inflation over this summer, an outlook recently reflected in the BoE’s latest Inflation Report projections. We think that this change in outlook had some impact on the Bank’s desire and ability to provide further stimulus to the economy. RPI inflation looks set to drop further to 3.4% in April from 3.7% in March. The preliminary estimate of Q1 GDP suggested that the economy contracted by 0.2%, putting the UK back into recession. Since then, the subsequent release of weaker construction output for March has raised the likelihood of a downward revision to Q1 output. While we believe that services output continues to be understated by official data, in the absence of any correction, the quarterly reading is likely to be revised lower to -0.3%. The release will also provide the first insight into the performance of the demand components. The solid 0.8% rise in Q1 retail sales raises the prospect of household spending posting a second consecutive quarter of growth (+0.3%q/q). However, with the consumer still facing significant headwinds, this is unlikely to mark the beginning of a turnaround in prospects for the sector.MPC minutes (May)  May’s Inflation Report did little to clear up the outlook for monetary policy. The Bank lowered its GDP and medium-term inflation outlook further and despite the economy reportedly in renewed recession, chose not to provide fresh stimulus. Where, the medium-term Inflation Report failed to shed light, we look to the minutes to provide more insight. Not least, we expect a split decision in May with two members likely to have voted for more stimulus. We think that this will include David Miles, but could also include Governor King. Notwithstanding the Bank’s lower GDP outlook, its central forecast stills seems rosy and we expect weaker activity. On balance, we think this could tip the Committee back towards more QE, particularly if downside risks materilaise across the Euro area.GDP (Q1, 1st revision) The preliminary estimate of Q1 GDP suggested that the economy contracted by 0.2%, putting the UK back into recession. Since then, the subsequent release of weaker construction output for March has raised the likelihood of a downward revision to Q1 output. While we believe that services output continues to be understated by official data, in the absence of any correction, the quarterly reading is likely to be revised lower to -0.3%. The release will also provide the first insight into the performance of the demand components. The solid 0.8% rise in Q1 retail sales raises the prospect of household spending posting a second consecutive quarter of growth (+0.3%q/q). However, with the consumer still facing significant headwinds, this is unlikely to mark theRetail sales (Apr) Headline retail sales rose strongly in March, up by 1.8% - the fastest monthly increase since April 2011. The sharp rise in March was driven by a combination of pre-Easter spending, unseasonably good weather and panic buying of fuel ahead of a potential strike. With these representing one-off factors and with fading impetus from housing sales, we expect April ’s retail sales to reverse last month’s gain. We pencil in a 0.9% drop in ex-auto fuel sales, with the wettest April on record dampening shopping enthusiasm. A reversal of March’s 4.9% spike in fuel sales should see the headline rate drop further, by 1.5%. Longer-term, conditions for the consumer remain challenging, as real incomes continue to contract and labour market conditions remain soft. 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