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ECONOMIC DATA ANALYSIS - GEOPOLITICS TO TRUMP UK RATE DEBATE?
ANALYSIS FRIDAY 18 JULY 2014
GEOPOLITICS TO TRUMP UK RATE DEBATE?
- Geopolitical risk
puts financial markets back on the defensive
- MPC minutes, retail
sales and first sight of Q2 GDP dominate busy UK calendar
focus will be on US CPI, home sales and euro area ‘flash’ PMIs
Heightened geopolitical tensions in Eastern Europe
and the Middle East have dominated market headlines over the past couple of days.
The shooting down of a Malaysian airliner over the Ukraine, coupled with
reports that Israel have started a ground offensive in Gaza, have
prompted a sharp flight to safety. Since hitting an intra-week high on
Wednesday, the FTSE 100 has fallen around 50 points to 6750 while the 10-yr
gilt yield has dropped 7bp, back below 2.60%. In the currency markets, sterling
is holding its own against the US dollar, above $1.70, but has hit a fresh 2-yr
high against the euro just shy of 1.27. Against this background, the coming
week’s economic data could play second fiddle. Still, it is an important
week for UK releases. The minutes of the July MPC meeting and the
preliminary estimate of Q2 GDP dominate an otherwise quiet week for global
The MPC had sight of the surprise jump in June
CPI to 1.9% at this month's policy meeting, but not the
latest drop in wage growth. We suspect the MPC largely dismissed the rise in
June inflation as temporary - due to the better weather and delayed
discounting. Still, with the economy continuing to expand at a robust
pace, support on the Committee for policy tightening appears to be building.
There is an outside chance that one or two members of the MPC, including Martin
Weale, may have voted for an immediate rate hike this month. But on balance, we
expect the vote to keep policy unchanged was unanimous.
Those MPC members inclined to vote for a rate rise
are more likely to do so next month when the August
Inflation Report is published. The case for a rate rise, however, is far from
clear cut. The strength of sterling’s exchange rate and the prevailing weakness
of wage growth pose a significant constraint on the inflation outlook.
Moreover, June retail sales (Thurs.) and Q2 GDP (Fri.) data are unlikely to
particularly strengthen the case. Given the drop in May industrial production
and construction output there is a downside risk to our 0.8% q/q Q2 GDP growth
forecast. Similarly, the weakness of last month’s BRC and CBI Distributive
Trades reports adds to the downside risks to June retail sales although, after
the drop in May, sales should post some bounce-back (forecast: +0.4%) - see
the focus in the euro area will be on July business surveys, with
the German IFO and ‘flash’ PMIs due. We expect the tone of these to be
weaker: the German IFO is predicted to post its third consecutive monthly
decline, to 109.4; while the euro area manufacturing and services ‘flash’ PMIs
are forecast to edge down to 51.5 and 52.5, respectively. Euro area M3 growth
for June is also due. Given the stimulus announced by the ECB last month, we
expect broad money growth to have picked up a little last month, although only
enough to lift the three month annual rate from 0.9% to 1.0% - still well below
the rate required to instil hopes of a sustained recovery.
In the US, data over the past week have been
decidedly mixed. While the Empire State and Philadelphia
Fed surveys posted strong improvements, the surprise (10%) drop in May housing
starts served to underscore the fragility of the recovery in this sector. In
the coming week, the focus in the US will remain on the housing market, with
June new and existing home sales due. Our international team expect these to
confirm that performance remains mixed. June US CPI is also released. In sharp
contrast to Europe, US inflation has risen steadily since February, reaching
a 2-yr high of 2.1% in May. We expect it to have remained at this rate in
June, although the core rate is predicted to have eased 0.1ppt to 1.9%. June
durable goods orders are also due (Fri.). We predict these to rebound
after the aircraft-related weakness in May. The accompanying shipments figures
(ex aircraft and defence) will also attract interest as they form part of the
calculation of Q2 GDP.
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