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ECONOMIC DATA ANALYSIS - BoE TO CUT SOME SLACK
ANALYSIS FRIDAY 8 AUGUST 2014
BoE TO CUT SOME SLACK
- BoE QIR to revise
down estimate of economic slack, but overall tone to be balanced
- Weak Q2 euro area
GDP to contrast with improving US data
- Sharp fall in
Japanese GDP to add to pressure for further stimulus
It has been a week
of significant price gains in the bond market, as rising geopolitical
tensions and short positioning have combined with thin summer trading volumes.
Remarkably, 10-yr German bund yields are currently poised just above the 1%
level, while yields at the ultra long end of the UK curve have plummeted.
Although economics will continue to be trumped by geopolitics, the coming
week’s calendar contains some key data releases.
The domestic calendar is dominated by Wednesday’s
BoE Inflation Report and updated forecasts. The key metric
to watch will be the Bank’s latest estimate of economic slack. Given the fall
in the unemployment rate, we expect this to be nudged down from 1-1.5% of GDP in
May to 0.75-1.25%. In insolation, this would be unambiguously bearish for
the short end of the sterling curve. But balanced against this, market reaction
is likely to be tempered by the general geopolitical backdrop and a downward
revision to the BoE’s inflation forecast. There is also a chance that the BoE’s
GDP forecast is lowered slightly.
The Governor’s comments will be scrutinised for
signs of dissent on the MPC. There is a risk that Martin
Weale may have voted for an immediate rate hike at this week’s policy meeting,
but for the majority of MPC members, the weakness of wage inflation is likely
to provide a forceful argument for keeping rates unchanged. Ahead of the
Inflation Report, the latest labour market release will underscore the dilemma
facing the MPC: the unemployment rate is forecast to drop to a 5½-yr low of
6.3% in June, while there is a risk headline wage growth turns negative.
The 2nd estimate of Q2 GDP is released (Fri) (see back page).
the euro area, the policy debate is very different. While the ECB
also kept policy unchanged at its meeting this week, in his post-meeting press
conference President Draghi did his best to put a brave face on what, as the
10-yr bund yield suggests, are growing deflationary forces across the region.
the coming week, focus turns to the first estimate of euro area Q2 GDP,
along with national data for Germany and France (Thurs). Having risen by a
meagre 0.2% in Q1, we forecast Q2 GDP growth to be flat, with the risk of a
negative print. Although Spain posted firmer than expected growth of 0.6% in
Q2, news that Italy slipped back into recession (-0.2%q/q) drew far more
attention. Judging by the weak industrial data, Germany is also forecast to
have contracted last quarter and France is unlikely to fare much better.
Looking ahead, the drop in EUR/USD to a 9 month low this week may provide some
solace for beleaguered euro area exporters, but this is likely to be
overshadowed by its key cause: growing concern over the fallout from the
Ukraine crisis. Indeed, this is likely to be reflected in a sharp drop in the
August German ZEW survey (Tues).
There has been better news in the US.
The improvement in this week’s June external trade data holds out the prospect
of an upward revision to the already strong Q2 GDP print, while the latest ISM
non-manufacturing survey and drop in jobless claims - to a recovery low - added
to signs of improvement in Q3. In the coming week, retail sales (Wed) are
expected to show another solid rise. Although car sales were somewhat weaker,
High Street retailers reported strong gains in July. The JOLT job
opening survey (Tues) - highlighted by Fed Chair Yellen - will also be watched.
Business surveys point to buoyant July industrial production (Fri), while the
Empire survey is likely to show continued strength in August.
Finally, Q2 GDP data are released in Japan.
These could prompt a sizeable market reaction. GDP is forecast to have fallen
back sharply - we look for an annualised drop of 7% - after the front-loading
of consumption ahead of April’s tax increase boosted Q1. This will heap
more pressure on Prime Minister Abe and BoJ Governor Kuroda to enact further
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