Monetary and financial statistics for May released today are encouraging in three respects.

First, the Bank of England's proxy measure for M4 excluding money holdings of financial intermediaries probably grew respectably, following a hefty 1.0% gain in April. The Bank currently has insufficient information to produce a firm estimate but headline M4 rose by 0.2% in May and was again depressed by intra-banking-group transactions – excluded from the proxy measure. Based on available evidence, the proxy may have risen by 0.5% or more last month.

Secondly, M4 lending – excluding the effects of securitisations and loan transfers – bounced back to show 0.9% growth in May after a rare 0.3% decline in April. As with M4, the rise would have been larger but for a decline in intra-group business. At the margin, this should lessen MPC concerns that lending constraints will be a major impediment to an economic recovery. (The Bank's latest Trends in Lending survey, also released today, is gloomy but Lending Panel banks report an ongoing modest recovery in mortgage approvals and a small net rise in corporate loan facilities in May.)

Thirdly, consistent with quantitative easing improving companies' access to non-bank finance, private non-financial firms raised a net £4.1 billion from issues of bonds, shares and commercial paper in May, up from £3.1 billion in April and well above the monthly average of just £400 million over 2003-08 – see chart. Companies have raised a net £13.6 billion in these markets so far in 2009, equivalent to 2.7% of outstanding sterling bank borrowing at the end of 2008.

The Monetary Policy Committee has been encouraged by recent better economic news and a pick-up in "adjusted" M4 but retains the view expressed in the May Inflation Report that further easing is likely to be required to prevent inflation from undershooting the target over the medium term, according to minutes of the June meeting released today.

This suggests that the odds slightly favour the MPC expanding asset purchases to the £150 billion current maximum at its July meeting, while simultaneously seeking Treasury authority for a higher limit. However, the Committee could yet choose to suspend QE at £125 billion if forthcoming business surveys and monetary data show further improvement. (The Governor's Mansion House speech this evening may provide more information.)

Labour market statistics also released today continue the recent pattern of better-than-expected news. The monthly rise in claimant-count unemployment slowed to 39,000 in May, down from a peak of 137,000 in February and the smallest increase since July 2008. This slowdown should soon be reflected in the lagging Labour Force Survey unemployment measure – see first chart.

Labour demand appears to holding up better than many feared. The monthly number leaving the claimant count has risen steadily so far this year (admittedly partly reflecting some claimants exhausting entitlements), while the rate of decline of job vacancies has eased. Indeed, the 6% drop in vacancies in the three months to May is consistent with other evidence that the economy has stopped contracting – second chart.

The smaller-than-expected fall in UK annual consumer price inflation in May partly reflects the continuing after-effects of sterling's plunge during 2008, discussed in earlier posts (e.g. here). With the exchange rate recovering recently, however, inflation prospects are improving, although the MPC's forecasts are too optimistic.

Headline CPI inflation edged down from 2.3% in April to 2.2% in May but remains above target and would be significantly higher but for December's VAT cut. Assuming retailers passed on half of the VAT reduction, "true" inflation is probably 2.7-2.8%. (The CPI at constant tax rates shows a larger rise, of 3.3%, but assumes unrealistically that the cut was passed on in full.)

As well as the VAT change, slowing food and energy prices have contributed to the recent decline in the headline rate. Core trends, however, remain sticky: the annual increase in the CPI excluding unprocessed food and energy moved up from 2.0% in April to 2.1% in May and would be an estimated 2.7% without the VAT reduction (again assuming 50% pass-through).

The impact of the lower exchange rate is evident in less favourable price trends for such categories as clothing and footwear, audio-visual goods and package holidays. Currency weakness has also reduced the benefit of lower global commodity prices: a 7.8% annual rise in the UK CPI for food and non-alcoholic beverages in May compares with an increase of just 0.3% in the Eurozone.

Sterling's recent rally, however, will curb import price pressures. The chart shows annual rates of change of manufactured import prices and the effective exchange rate, plotted inverted. Import cost inflation has already slowed from an annual 15% in December to 10% in April and prices are likely to fall later in 2009 if the effective rate remains at its current level.

The MPC appears once again to have underestimated current-quarter inflation in its latest Inflation Report: the 2.25% April / May average compares with a central projection of 1.9%. The MPC was forecasting a fall to just 0.4% by the fourth quarter but is likely to revise this up in the August Report, reflecting recent higher-than-expected outturns, better economic data and higher oil prices.

The recent sharp rise in US Treasury yields may partly reflect supply pressures and investor worries about longer-term inflationary risks from quantitative easing (QE) but the key driver has been a recovery in economic momentum.

The first chart shows three-month changes in the 10-year Treasury yield and the Institute for Supply Management (ISM) manufacturing new orders index – a good summary measure of economic momentum. A positive correlation is apparent, with the recent yield surge coinciding with the largest three-month rise in the new orders index since 1983.

The relationship suggests that the direction of yields depends not on the rate of economic growth but on whether it is accelerating or decelerating. When the new orders index reached a record low of 23 last December, it was clearly much more likely to rise than fall, implying that Treasuries were high risk. The bearish case is now less clear-cut – even though the ISM index is back above 50, signalling economic expansion.

To assess Treasury market prospects, therefore, it is helpful to have an idea where the new orders index could be heading. The second chart compares the recent revival with an average of five prior recoveries from troughs when the index fell below the 40 level. (The troughs occurred in January 1958, December 1974, June 1980, January 1991 and January 2001.)

The historical pattern suggests that the new orders index could rise further to 55-60 in the short term. Interestingly, however, the average registers a peak in August 2009, treading water over the autumn before a further move up around year-end. If the current cycle follows this template, Treasuries could enjoy a short-term rally later this summer, even in the context of an ongoing economic recovery.