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ECONOMIC DATA ANALYSIS - FRIDAY 1 AUGUST 2014
ANALYSIS FRIDAY 1 AUGUST 2014
Friday 1 August 2014
IS WEALE ABOUT TO TURN?
developments and Fed rate expectations to continue to buffer markets
- MPC policy to
remain unchanged, but debate becoming more heated
- Euro area and US
data watched for further signs of divergence
The past week has been dominated by a
sell-off in global equities, weighed down by rising US rate expectations, weak earnings and
ongoing geopolitical tensions. The catalyst for the shift in US rate
expectations were the much better than expected US Q2 GDP data, which surged by
an annualised rate of 4.0%. Although it has recovered some of its losses after
today’s weaker-than-expected US employment report, the S&P 500 has
dropped by around 2.2%, the FTSE 100 by 1.4%. In the bond markets, yields have
generally risen, with the 10-yr gilt up around 2bp at 2.59%. Sterling
meanwhile, has continued to fade amid a resurgent US dollar, with GBP/USD at
1.6840 - a 7-week low.
Over the coming week,
developments in Eastern Europe and the Middle East will no doubt continue to
hang over the markets. Geopolitics aside, monetary
policy meetings in Europe, and key services and industrial data will
compete for attention. The past week's bounce in US Q2 GDP growth and further
fall in euro area inflation has thrown the conflicting fortunes of the two
regions into sharp relief. The coming week's services data in the US and across
Europe, together with German industrial production, will provide further
insight into the relative fortunes of these economies.
for us, the spotlight will be on Thursday's MPC meeting. This
meeting is especially interesting as the MPC will be revisiting its economic
forecasts ahead of the August Inflation Report. Although both Bank Rate and the
size of the APF are expected to remain on hold, the noon announcement is likely
to belie a more hotly contested debate, which should be revealed when the
minutes are published in two weeks' time.
The minutes of recent
meetings suggest one or two members have been gearing up to vote for a rise in
interest rates. Given the historical tendency of MPC
members to change their views at ‘quarterly Inflation Report ‘ meetings, when
they have an opportunity to discuss and communicate their views more comprehensively,
we believe there is a is a good chance that Martin Weale, may vote for a
rate increase. For most members, however, the prevailing weakness of inflation
are likely to stay their hand - particularly given recent signs of a
softening in the housing market and the wider economy.
The ECB also meets. Forward-looking
surveys over the past month have been mixed, while CPI inflation slowed to just
0.4% y/y in July. However, having only recently announced additional stimulus,
the ECB is highly unlikely to follow up with any further measures. Still,
President Draghi’s post-meeting press conference will be pored over for clues
on the outlook. The potential economic ramifications of tensions in Eastern
Europe are likely to feature heavily.
Otherwise, the data
calendar across Europe is relatively thin. German factory
orders (Weds) and industrial production (Thurs) are due. After sharp
falls the previous month, both are expected to rebound in June, albeit by less
than the previous month’s drop. Final services PMIs across the region are
also released (Tues). The euro area PMI is expected to be unchanged from its
‘flash’ estimate, at 54.4, well up on the previous month’s 52.8 reading .
Industrial production and the services PMI will be released in the UK. The drop
in the July manufacturing PMI adds downside risk to the latter, although, after
the sharp drop in May, June industrial production should be firmer.
UK construction output and external trade data for June are also
due (see back page).
this week’s key data, the coming week is quieter in the US, with
the July non-manufacturing ISM (Tues) the only first-tier release. This is
expected to show growth in the key services sector has continued to pick-up in
the early part of Q3. June international trade figures (Weds) will also be
watched closely. We forecast a below consensus trade deficit, which will
increase the chances of an upward revision to Q2 GDP growth.
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