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ECONOMIC DATA ANALYSIS - FORWARD GUIDANCE DESPITE RECOVERY
ECONOMIC DATA ANALYSIS FRIDAY 2 - 8 AUGUST 2013
FORWARD GUIDANCE DESPITE RECOVERY
• Despite ongoing signs of economic recovery, the MPC to adopt forward guidance
• RBA expected to cut cash target rate to 2.5% from 2.75%
• Service sector PMIs, US refunding and Chinese data also in focus
After a busy week of policy meetings and US data, trading volumes look set to slow. The onset of the August holiday season coincides with a calendar which, with the exception of the services PMIs and Chinese updates, comprises mostly second-tier releases. Instead, the main focus is likely to be on monetary policy in the coming week. The RBA and BoJ both hold policy meetings, while the MPC is due to make its eagerly-awaited announcement on forward guidance.
RBA expected to cut rates... After the FOMC, ECB and MPC all chose to keep policy unchanged, it is the turn of the RBA (Tues) and BoJ (Thurs) to deliver their latest pronouncements. While the BoJ is likely to refrain from further stimulus for now, the softening in the Australian economy and recent comments from RBA Governor Stevens point to a 25bp cut in the cash target rate to 2.5%.
MPC to announce forward guidance... Domestically, the MPC’s verdict on forward guidance, published in the August Inflation Report, will take centre stage (Weds). Although the MPC refrained from issuing a full statement after Thursday’s policy meeting, market expectations are riding high that the Committee will commit to keeping Bank Rate low. Despite signs of economic recovery, ample spare capacity and the desire to achieve ‘escape velocity’ make the case for further action. We expect the MPC will adopt forward guidance, with the intention of signalling ongoing monetary policy accommodation until at least 2016.
Longer-term rate expectations to fall further... Forward guidance will most likely be linked to some intermediate threshold. The precise indicator the MPC will adopt is uncertain but, on balance, we suspect, it will be the unemployment rate. The target will also be important. Although longer-term market interest rate expectations have dropped sharply over the past month in anticipation of forward guidance, we suspect they have further to fall.
Services PMIs watched for steer on Q3 growth... On the data front, the calendar is dominated by services PMIs. After the surge in the UK manufacturing PMI in July, we look for a rise in the UK services PMI from 56.9 to 57.9. If realised, this would be its strongest outturn for over three years. In the euro area, the July preliminary estimate rose to 49.6 from 48.3. The final reading will be watched for confirmation that the composite index remained above 50 - i.e. in expansionary territory. The US non-manufacturing ISM is also forecast to post a slight improvement, from 52.2 to 53.0, with upside risks following the strong manufacturing ISM. In the US, external trade figures are also due, along with the quarterly refunding where $72bn of 3-yr, 10 and 30-year Treasury stock are on offer.
UK industrial activity to undershoot ONS estimate... Apart from the services PMI, industrial production, external trade and our own employment confidence survey are released in the UK. The IP data should confirm that the manufacturing sector ended Q2 on a strong note. That said, we doubt it will be quite as strong as the estimate embodied in preliminary Q2 GDP - we look for a rise in IP of 0.7%. A rise in June IP should also be reflected in some improvement in the UK’s “core” visible trade deficit in June. Elsewhere in Europe, IP and trade figures are also released in Germany along with Italian Q3 GDP.
Further signs of slowdown in China?... Finally, it is a relatively heavy week for Chinese data, with CPI, retail sales, fixed investment and industrial production. These data take on added importance given signs of economic weakness. The data will provide a gauge of whether the cooling in the Chinese economy has run its course
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