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ECONOMIC DATA ANALYSIS - FOCUS ON CENTRAL BANK MINUTES
ANALYSIS FRIDAY 15 AUGUST 2014
FOCUS ON CENTRAL BANK MINUTES
- MPC minutes could highlight
divergent views on monetary policy at the Bank of England
- Differences also emerging at the
Fed but Yellen likely to remain dovish at Jackson Hole
- Euro area PMIs to shape
expectations for Q3 GDP
Weaker economic data and ongoing geopolitical
concerns led to further falls in global bond yields over the past
week. In the euro area weaker-than-expected Q2 GDP data reinforced
concerns about the health of the economy. Meanwhile, a sizeable fall in
Japanese Q2 GDP added to pressure on the Bank of Japan to do more to stimulate
growth. In the UK, the Bank of England’s latest Inflation Report was initially
seen as dovish by markets, prompting a slide in both sterling and gilt yields.
Even in the US, where the economic data has generally been improving, softer
retail sales and unemployment claims were enough to send 10-year Treasury
yields below 2.40%. Geopolitical events will continue to buffer markets but
there are also some potentially important economic events next week.
Monetary policy will continue to be in focus. We
do not fully share the market’s dovish reading of the BoE Inflation Report and
Governor Carney’s press conference. In particular, we see it as significant
that the Bank revised down its estimate of the amount of slack in the
economy. While the Governor stopped short of suggesting that the MPC is
as yet actively considering raising interest rates, his obfuscation when asked
whether Bank rate could rise this year was telling. It suggests that the debate
at the August MPC meeting was more contested than the Governor’s central
message portrays. Given this, the August minutes, to be released on
Wednesday, should make for interesting reading. On balance, we continue to
expect Bank Rate to remain on hold until well into 2015. However, we concede
that the strength of employment and the consequent steady erosion of slack
points to the risk of an earlier move. There is a strong possibility that these
arguments will have been enough to induce at least Martin Weale to vote for an
immediate rate rise.
the coming week, the economic data are expected to further highlight the
dilemma facing the MPC with continued signs of buoyant activity
against a relatively benign inflation outlook. July retail sales (Thurs) are
forecast to have started Q3 on a strong note (+0.9% m/m) supported in part by
the delayed onset of summer discounting at clothing and footwear stores. While
CPI inflation is forecast to have pared back to 1.7% following last month’s
unexpected spike to 1.9% (see back page).
minutes of the last FOMC policy meeting have the potential to
highlight growing differences on policy. It is already known that one member,
Philly Fed President Plosser, deferred from the majority vote, although his
objection was around the guidance on future policy and not to the immediate
policy stance. Clearly no FOMC participant favours an immediate change in
interest rates but there are likely to be a growing divergence of views
on the timing of any interest rate hike. The July minutes are likely to show
these differences are relatively well contained for now, with most members
content that there is sufficient slack in the economy for the first hike to be
some way away. However, if the economic data continues to pick up this debate
will get more heated, particularly after October when tapering of asset
purchases will come to an end.
coming week will also see the Fed’s annual symposium at Jackson Hole.
The highlight for markets will be Fed Chair’s Yellen’s speech on Friday.
The focus will be on whether there is any divergence from her, so far, very
dovish line in response to recent stronger data. We expect not. There are also
several data releases, although most of these are ‘second tier’. The July CPI
is expected to show inflation holding above 2% for the 4th successive month,
while the August Philly Fed survey should be consistent with continued
improvement in manufacturing. There are also several housing indicators, which
should on the whole point to an improvement.
after the disappointing GDP data the euro area August PMIs (Thurs)
will be watched closely. These are forecast to be down from July but only to
levels historically consistent
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