More Rate Rises Likely


Next Wednesday’s US monetary policy update is likely to be the key event of the coming week for markets. The announcement of a fourth successive interest rate increase is seen as a near certainty. However, there is some doubt over the size of the increase. The three successive hikes since March have all seen the Fed eral Reserve up the ante with an initial increase of 25bp being followed by rises of 50bp in May and 75bp in June. Markets briefly discounted a 100bp rise following a bigger than expected rise in June CPI which took it to a new high for the year of 9.1%. However, subsequent comments from some officials that they are more likely to opt for a 75bp hike and signs that longer-term inflation expectations remain under control have led markets to price in the same sized hike as in June. Nevertheless, a larger increase is still seen as a risk. Also of interest will be signals that the Fed sends about its future policy intentions. In addition to the expected July hike, markets continue to price in a further rises in rates of just over 100bp by early 2023. However, growing concerns about downside risks to growth means that just over 50bp of rate cuts are now priced in for later in the year This is not one of the meetings wh en Fed policymakers update their forecasts and so there will be no new ‘dot plot’ of their interest rate expectations. However, both the press statement and Fed Chair Powell’s press conference will be watched for any clues on whether these expectations are shifting. Most Fed officials are still saying that they think the US economy looks strong. However, recent activity data has mostly surprised on the downside and it will be interesting to see to what extent that is acknowledged on Wednesday. Powell’s key message is likely to continue to be that getting inflation under control is still the number one priority, but he is bound to be quizzed on what would cause the Fed to hold off from further rate rises and how much risk there is of a ‘hard landing’ for the economy.


The Q2 US GDP release seems set to provide further confirmation that growth disappointed in H1. The unexpected fall in Q1 GDP was generally thought at the time not to be a major concern as both consumer and investment spending had speeded up. However, retail sales have fallen in real terms in Q2 and overall consumer spending growth has been modest, while business investment has also slowed. Q2 growth is now forecast to be only a very modest 0.5% annualised rise and there is a risk of a second consecutive quarterly decline. Meanwhile, the June reading for Fed’s preferred measure of consumer price inflation is predicted to record another rise, taking it even further above the Fed’s inflation target. Finally, the employment cost index, an important measure of wages, is expected to post a deceleration in Q2 but still show labour costs growing at an uncomfortably rapid pace. The Eurozone data releases are also forecast to provide an uncomfortable combination of slowing activity but still elevated inflation. GDP growth in Q2 is expected to be only 0.1%, much slower than Q1’s 0.6% rise. Weakening global demand exacerbated by ongoing supply issues and increasing worries about energy are weighing on manufacturing activity. Services activity is also affected by the ‘cost of living’ squeeze and a fading rebound from economic reopening. The concern is that the momentum will continue to weaken, raising prospects of contraction in H2. The disappointing July PMI have already boosted those concerns and next week’s German IFO survey and Eurozone business confidence data may add to that. The July CPI report may show headline inflation down only modestly from the June high, while core inflation is forecast to rise. In the UK, the calendar is light on key official data but a couple of business surveys are of note. The Lloyds Business Barometer as so far showed business confidence holding up relatively well this year but the June headline reading did fall by 10 points. However, that still only took it back down to its long -term average so the July measure will be watched keenly. Finally, the July CBI industrial survey also contains quarterly results and possibly of most interest will be the extent to which investment intentions are holding up.

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