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ECONOMIC DATA ANALYSIS - CARNEY MISSES MARK ON CLARITY
ECONOMIC DATA ANALYSIS FRIDAY 9 AUGUST 2013
CARNEY MISSES MARK ON CLARITY
• Markets not convinced rates lower for longer - coming week unlikely to add to conviction
• Euro area Q2 GDP set to rise, supported by “marked” German expansion
• US economic releases to point to further improvement in Q3
UK markets buck calm broader trend ... Global developed markets experienced a relatively calm week. Continued signs of firmer global activity, particularly from China and the euro area, were absorbed without marked reaction. The coming week includes preliminary estimates of euro area Q2 GDP, which looks set to return to growth; Japan publishes Q2 GDP; while several US releases will help gauge the pace of Q3 GDP. In contrast, UK markets have been more volatile, dominated by the BoE’s forward guidance. The coming week’s MPC minutes will be watched, but forward guidance increases the importance of inflation and unemployment reports, also due.
Guidance adds to market confusion ... The Bank of England’s intention of signalling an extended period of policy stasis by tying future policy tightening to the unemployment rate has so far proven unsuccessful. Short-term money market rates now price a greater chance of policy tightening over the next two years after the release. August’s MPC minutes will include a one-off vote on the adoption of of forward guidance. Some differences over the precise format of the guidance seem likely. This may have resulted in a split vote, which could add to market disquiet. Yet any future withdrawal of forward guidance will be based on an assessment of the knockout clauses, not the polic as a whole, reducing the relevance of August’s outcome.
Labour market garners more attention? ... Forward guidance focuses attention on economic updates, not individual MPC members’ opinions. July’s CPI inflation may allay some concerns about the inflation knockout clause being breached. Though close, we forecast sharp falls in clothing and food prices resulting in the annual CPI rate dipping to 2.8%. However, the coming week also looks set to see further falls in unemployment and we forecast the rate inching lower to 7.7% This may add to doubts that it will take another three years to reach 7%. Retail sales also look set to rise by a strong 1.2% in July, boosted by good weather. In all, releases look unlikely to add to market conviction that policy will remain on hold for the next three years.
Signs of euro area recovery ... Preliminary estimates of Q2 GDP from key euro area states are released over the coming week. Comments from German economy minister that the economy grew “markedly faster” in Q2 add to positive signs from official data. Our global team forecasts an above consensus 0.7% rise in Q2. This would be the strongest rise in over two years and looks set to boost euro area GDP (helped by less contraction in key peripheral economies). We forecast an increase of 0.3% across the euro area - a rise that would mark the end of the six quarter recession. Markets will also watch Germany’s ZEW release to gauge Q3 activity.
Japan’s GDP adds to taxing debate ... Japan also posts first estimates of Q2 GDP. We forecast a 0.8% rise, leaving the economy on track to record growth of 1.6% in 2013 as a whole. Focus is likely to return to the consumption tax debate as submissions for FY 14 Budget begin.
US releases to fuel tapering outlook ... The US is set for a busy week. Our global team forecast above consensus, further gains in August’s Empire and Philadelphia Fed survey and a 0.5% rise in industrial production. With retail sales expected to rise by 0.4% in July, and signs of a further pick-up in housing, the outlook for Q3 is for faster expansion. We expect an acceleration towards 3%. Such a rise not only underpins our expectation of tapering in September, but may rekindle speculation about the timing of an eventual tightening in US monetary policy, which could fuel further increases in yields.
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