Both last Friday’s US Non-Farm payrolls and this week’s CPI figures came out higher than expected but there was no reaction from Fed Chair Powell to rein in market expectations for a rate cut at the end of this month - as analysts would normally expect.
He continued to emphasise economic uncertainty and said that the relationship between economic slack and inflation has “gone away”. He noted that the neutral interest rate and natural unemployment rate were lower than previously thought. A quarter-point reduction on 31 July is fully priced, according to Bloomberg calculations, while a half-point cut is accorded approximately 20% probability.
ECB officials are also signalling more policy stimulus. The minutes of the June meeting revealed ‘broad agreement’ to be “ready and prepared to ease the monetary policy stance”. In truth; how much more easing can they do to havea genuine impact?
Indications from the ECB suggest possible adjustments to its forward guidance and interest rates and a resumption of QE. A change in its rates guidance at the 25 July meeting would pave the way for a rate cut in September.
BoE policymakers, however, seemed to somewhat temper their dovish pronouncemts from last week. They broadly stuck to the line that rates should rise gradually over the medium term, assuming a smooth Brexit, although there is little appetite to increase rates until some of the uncertainties subside. UK May GDP rebounded by 0.3%, almost reversing the 0.4% drop in April, helped by car manufacturers returning to more normal work patterns. The most significant aspect of the data was upward revisions to previous months, which makes a Q2 GDP contraction less likely than before.
Analysts expect UK labour market figures (Tue) to show the unemployment rate edging up to 3.9% in May, up from the four-decade low of 3.8% previously. Employment growth is seen slowing to 15k in the latest three months. Regular wage growth (excluding bonuses) is forecast to rise marginally to 3.5% from 3.4%, but headline wage growth is expected to edge down to 3.0% from 3.1% due to quirks in bonuses. Overall, the labour market remains tight and should continue to underpin household incomes. Nevertheless, analysts predict retail sales (Thu) to fall 0.4% (including fuel) in June, with anecdotal evidence suggesting that the poor weather and ongoing Brexit uncertainty may have weighed on spending. A slight rise in UK core CPI inflation, which excludes the volatile food and energy components, to 1.8% from 1.7% should offset an anticipated downward impact of petrol prices. Hence, we forecast headline CPI (Wed) to be unchanged at 2.0%. BoE Governor Carney (Tue) speaks on a panel in Paris.
There is a conga of Fed speakers next week ahead of the 30-31 July FOMC meeting. They include Chair Powell (Tue), Williams (Mon/Thu), Evans (Tue) and Bullard (Fri) – these members may vote for a rate cut this month. Bowman (Tue) and Rosengren (Fri) are on the more hawkish end of the spectrum, and may favour leaving policy unchanged. Bostic (Tue/Thu) also speaks, but is a non-voter this year. US retail sales (Tue), industrial production (Tue) and housing starts / building permits (Wed) are the key releases next week. Also due are timelier business and consumer survey updates, including the Empire / Philly Fed business surveys (Mon/Thu) and the University of Michigan consumer sentiment report (Fri). Analysts look for a rise of 0.3% in headline retail sales, a 0.1% rise in industrial production and a marginal fall in consumer sentiment at 98.0. Overall US Q2 GDP growth is set to slow from the annualised 3.1% pace in Q1, but the extent of the moderation remains unclear. Latest indicators suggest positive momentum for consumer spending, but weaker business investment. The latest Bloomberg consensus forecast for Q2 GDP is 2.6%, while the Atlanta Fed ‘GDPNow’ indicator is currently 1.4%.
It’s a quieter week ahead in the Eurozone. Analysts think there is a risk that June CPI (Wed) is revised up to 1.3% from 1.2%, following the upward revision to German figures this week. Still, inflation remains uncomfortably low for EU and ECB policymakers.
See you next week!
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