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ECONOMIC DATA ANALYSIS - UK EMPLOYMENT RATE TO FALL AGAIN
ANALYSIS FRIDAY 11 JULY 2014
UK EMPLOYMENT RATE TO FALL AGAIN
- Soft UK inflation
and earnings growth to signal little need for an early rate move
- Fed Chair Yellen
testifies to Congress
- Zew survey provides
first signal on Germany for Q3
Risk off again?.. The market impact of
June’s strong US payrolls report proved to be short lived. In a week with
little economic news, equity markets came under pressure due to renewed
concerns over peripheral euro markets. This caused a move into safe haven
assets and the yen.
UK rate debate to resurface?...
Domestically, the dichotomy of the policy debate looks set to continue in the
week ahead, with the latest labour market and inflation releases taking centre
stage. A combination of firm employment gains and another sizeable drop in
unemployment are expected to lead to a further decline in the unemployment rate
to 6.5% from 6.6% previously. While this may fuel concerns over the amount of
slack in the economy, the absence of wage inflation suggests that this still
remains substantial. We forecast headline average earnings growth dropping to
just 0.6% in the latest release from 0.7%. Similarly, the CPI inflation
outlook continues to remain benign. Following May’s drop to a 4 ½ year low of
1.5%, we forecast CPI ticking up temporarily in June to 1.6% before the
downward trend is resumed in the coming months. Comments from Governor Carney
and several other members of the Bank of England’s FPC will be closely watched
when they testify to the Treasury Select Committee (Tues) about the recent
Financial Stability Report.
US data to point to a firm June...
With little domestic data news of real note, US asset prices were impacted by
global developments this week. As a result, Treasuries regained all the ground
lost in the wake of the previous week’s stronger than expected employment
report. The coming week is set to be more eventful, with a busy data calendar
and Fed Chair Janet Yellen’s testimony to Congress. The pick of next week’s
data is June retail sales (Tues), which will provide an indication of the strength
of consumer spending at quarter end. May retail sales were disappointing but
reports from both car dealers and department stores point to a stronger
outturn in June (we forecast 0.8%). Housing remains an area of weakness in the
economy, although much of the data for May pointed to a pick up. Housing starts
and building permits (Thurs) will show whether this continued into June, while
the NAHB Index (Weds) provides a preliminary indication for July. June
industrial production and the Fed Empire and Philly surveys for July will
provide early evidence on whether the spring manufacturing upturn has
continued. Meanwhile, producer prices will be watched closely given other signs
of inflation rebounding.
Yellen’s testimony to be
closely watched... Fed Chair Yellen’s semi-annual
testimony to Congress will be the first indication of whether her reading of
the economy has been changed since the stronger payrolls data. She testifies to
the Senate on Tuesday and to the House on Wednesday. We expect her to
acknowledge recent signs of improvement, particularly in the labour market, but
to reiterate that a very loose policy stance remains appropriate for now.
Questions to her will probably include whether Fed policy is encouraging
excessive speculation. She may also be asked about a potential House Bill to
constrain Fed actions.
Eurozone outlook remains soft...
The weakness in euro area wide May industrial activity should be confirmed in
the aggregate industrial production release (Mon). However, with the
focus shifting to the outlook for Q3, the Germany ZEW survey will be closely
watched. The expectations component is forecast to post a seventh consecutive
drop in July, raising concerns over the growth outlook for the German economy.
And finally ... There are
central bank meetings in both Canada and Japan next week. Neither is expected
to result in a policy change. In China, the first estimate of Q2 GDP is
released on Wednesday. We expect GDP to remain at 7.4% y/y in Q2, unchanged
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