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ECONOMIC DATA ANALYSIS - •ECB policy debate more nuanced as inflation drifts upwards
ANALYSIS FRIDAY 27 JUNE 2014
US PAYROLLS TO POST A SOLID GAIN
- ECB policy debate
more nuanced as inflation drifts upwards
- US payrolls to post
a solid rise in June
- UK PMIs to soften a
touch, but remain consistent with solid growth in Q2
ECB on hold... Following the package
of measures announced earlier this month, the coming week’s ECB meeting is
highly unlikely to result in a change in policy. However, at the post-meeting
press conference, ECB President Draghi is expected to provide further detail on
the technical aspects and timings of future operations under the TLTRO
programme. While it is too early to assess the effect that the new
measures will have, the evolution of inflation will remain a key
barometer of the likelihood of future policy action.
in euro inflation... The euro area sees a number of data releases
across the coming week including PMIs and M3 money supply. However, market
focus will be on the preliminary estimate of June’s HICP inflation (Mon).
Following May’s drop to 0.5%, we forecast the June reading ticking back up to
0.7%, partly reflecting this week’s sizeable jump in the preliminary measures
of German inflation. While this would be the ninth consecutive sub 1% monthly
reading, a rise to 0.7% would take euro area wide inflation a small step
further away from the spectre of deflation. The ECB’s latest monthly bulletin,
noted that the threat of deflation remains remote, “a too-prolonged”
period of low but positive inflation may require further policy
US GDP revised down again... Last
week’s sharp downward revision to Q1 GDP to -2.9% (annualised) was largely
shrugged off by both economists and markets. We believe this is justified. The
fall in Q1 appears to be primarily a result of bad weather and weak inventory
growth and so a sizeable rebound remains likely in Q2. Moreover, the latest
downward revision was primarily concentrated in healthcare spending and
reflects the difficulty of accounting for Obamacare. It should be stressed that
other data, including employment, industrial production, ISM surveys and retail
sales were nowhere near as weak in Q1 and are pointing to stronger growth in
Q2. Nevertheless markets will be looking for further confirmation that the
outlook is improving.
US... The coming week’s data
calendar is a full one, with June payrolls the primary focus. This has been
brought forward to Thursday because of Friday’s holiday. We expect payrolls to
rise by 210k. If realised, this would be the first time that payrolls have
risen by more than 200k for five months in succession since 1999. There will
also be considerable interest in other parts of the report. The unemployment
rate is forecast to fall further to 6.2%, although this is a close call.
Average earnings will be watched particularly closely. Fed Chair Yellen has dismissed
the recent rise in inflation as “noise” but this will be harder to sustain if
wage growth starts to move up. The other key releases are June ISM
manufacturing (Mon) and non-manufacturing (Thurs), both of which are expected
to rise from already relatively high levels. Pending home sales (Mon) is a
leading indicator of the housing market and so could signal whether the May
rebound continued into June. Finally, May trade (Thurs) will help show whether
net exports will provide a sizeable contribution to Q2 GDP growth.
UK data to be soft... The UK
also sees key releases, with markets focusing on the next round of PMI reports
for manufacturing (Tues), construction (Wed) and services (Thurs). We expect
drops in each but only modest ones, leaving them relatively unchanged from the
previous month and consistent with 0.8 - 1.0% GDP growth in Q2. The record of
the Bank of England’s FPC meeting earlier this month is published on Tuesday.
However, with the recommendations already having been announced, this is unlikely
to be a market mover. Finally, the Bank’s mortgage approvals release will also
attract some interest. We expect these to be broadly unchanged on the month at
63.0k in May, consistent with this week’s BBA data (see back page).
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