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Week Ahead: ECONOMIC DATA ANALYSIS FRIDAY 24 JULY 2015
FED STATEMENT WATCHED FOR CLUES ON RATE OUTLOOK
Fed statement watched for signals of a near-term policy rate hike
First estimates of UK and US Q2 GDP to show a pickup in growth
Euro area inflation to hold steady in July despite decline in oil price
Fed on hold for now. Market attention is now back on central bank policy. The coming week’s FOMC meeting (Wed) will further fuel speculation about when the Fed will raise interest rates for the first time in almost a decade. No policy move is expected at this meeting. However, with recent comments from Fed Chair Yellen seemingly increasing the odds of a September hike, investors will be looking for a clearer signal on the timing. There is no press conference, nor will the Committee update its forecasts and so the only immediate clues will be in the post meeting press statement.
Fed may want to send a signal. The comments in the Fed’s press statement will likely be more upbeat on recent economic performance. It may also note less concern about the downside risks to inflation, although the recent fall in the oil price argues against this. A bigger question is whether the Fed wants to send a clearer signal that it intends to hike in September. This is the last FOMC meeting before September. At the start of the previous interest rate tightening cycle in 2004, the statement was changed to read "the Committee believes that policy accommodation can be removed at a pace that is likely to be measured". A similar change in language this time would strongly suggest that the FOMC intends to hike at the next meeting, unless the economic data takes a decisive turn for the worse.
US growth picked up in Q2. The coming week will also feature some important data releases in the US. The first estimate of Q2 GDP growth (Thurs) is expected to show a significant rebound, after stagnation in Q1. We expect annualised growth of about 3%. The latest data may also reflect the impact of an inquiry into seasonal adjustment, which could lead to an upward revision to Q1 (-0.2). The employment cost index (Fri), which is generally regarded as the best measure of labour costs will also be of interest. This is expected to show a gradual pickup in wage growth.
UK economy also looking stronger. The first estimate of UK Q2 GDP growth (Tues) will also be released. This is forecast to show that quarterly growth accelerated to 0.6%, from 0.4% in Q1. As in the US, recent comments from BoE policymakers have boosted speculation about when interest rates will start to rise. Indeed, the minutes of the July MPC meeting suggested that some Committee members only held back from voting for an immediate hike because the Greek crisis was at its height. With the August MPC meeting due in less than two weeks, we expect to see some members vote for higher rates for the first time this year. August will also see the BoE initiate its new reporting schedule, with the policy decision; Inflation Report and meeting minutes all released at the same time (Aug 6). In the meantime, the MPC will go into their pre-announcement purdah period from the middle of the coming week.
Euro area inflation to remain steady. July inflation for the euro area (Fri) is expected to show the annual rate unchanged from June at 0.2%. The fall in the oil price points to some downside risk, but this may be offset by a modest rise in ‘core’ inflation. Nevertheless, with inflation remaining well below target, it will reinforce ECB President Draghi’s message that there will be no early end to the ECB’s QE programme. Today’s ‘flash’’ euro area PMI estimates for July fell modestly from June, possibly reflecting some negative impact from uncertainties over Grexit. However, the readings were still close to four-year highs. With a compromise having been reached on Greece, at least for now, it seems likely that economic activity will continue to benefit from the ECB’s stimulus programme, lower oil prices and a weaker euro.
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