Let's Get Real

It may almost be August but despite that, the week ahead is a busy one for financial markets. It's also an even busier one for Zimbabwean thumbs as we keep up with the upcoming election!

The economic focus, will be on policy announcements from three major central banks – the US Federal Reserve, the Bank of Japan and the Bank of England. The update from the BoE is likely to be particularly significant as we expect both a rate hike and guidance that rates are likely to rise further in coming years.

We expect the Bank of England is likely to raise interest rates by 0.25% on Thursday, taking its policy rate to 0.75%. In effect this is the rate hike that the majority on the rate-setting committee had originally intended to enact in May. They backed off then because economic growth in the first few months of the year had proved to be much weaker than expected. However, more recent data has supported the view that much of that slowdown was weather related. Consequently, given ongoing concerns that capacity constraints, and a seemingly tight labour market, will fuel a rise in domestic inflationary pressures, a majority on the Monetary Policy Committee (MPC) will probably feel that another rate increase is prudent. The move may not be unanimous as a couple of members may wish to wait for more evidence. But we expect at least seven of the nine members to vote for a rise. The immediate policy move should not be a surprise to markets as “futures” pricing suggests that it is already pretty much discounted. So markets may be more interested in the guidance from BoE Governor Mark Carney and his colleagues on what will happen next to interest rates. Previously they have indicated that further gradual rate hikes are likely over the next few years. That would suggest at least one increase next year and in 2020. However, it seems that now they will go a bit further and give us a target for the ‘neutral’ or ‘equilibrium’ interest rate.

They have to because the time for pulling rabbits out of hats is over!

Next week’s two other central bank announcements should be less exciting. The US Federal Reserve is very unlikely to make any changes to monetary policy and there will be no post-meeting press conference on this occasion. So the only immediate information will be the press statement. That is likely to be largely unchanged from June. But will probably acknowledge the strength of recent data including the rapid rise in Q2 GDP growth and may drop some hints that US interest rates will be hiked for the third time this year in September. Speculation that the Bank of Japan may be about to tweak its asset purchase programme has led to a rise in Japanese government bond yields. Given that Japanese inflation is still well target we are sceptical that a policy change is imminent, and even if the BoJ plans to move, it seems more likely to do so in the autumn. However, any signal of a policy shift from BoJ head Kuroda may have a significant impact on international bond markets collectively. There are also a number of important economic data releases.

In the UK, these are mainly business and consumer surveys, so called ‘soft’ data, for July. These include the latest PMI estimates, GFK consumer confidence and the Lloyds Business Barometer. We do not expect them to send a signal that will strongly question the BoE’s rate decision.

In the US, next Friday’s labour market report will as usual be seen as a key barometer of economic activity. We expect further rapid employment gains, while the monthly earnings data and the less timely Q2 employment cost index (Tue) will be watched for any signs of rising wage pressures. Finally we expect the first estimate of Eurozone Q2 GDP (Tue) to match the 0.4%q/q growth rate seen in Q1. That means year-on-year growth rate is forecast to ease to 2.2% from 2.5%.Meanwhile, Eurozone CPI inflation is forecast to have held steady at 2.0%y/y in July, and the ‘core’ rate to rise modestly to 1.0% from 0.9%

See you next week! To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.

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