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Week Ahead - Economic Data Analysis 14 August 2014
MARKETS WATCH FOR HINTS ON FED POLICY
After a week of volatility the Chinese yuan continues to be a key focus for markets
Inflation in the UK and the US to remain low but ‘core’ rates stable
Minutes of the last FOMC meeting watched for hints on when the Fed will raise rates
China concerns rattle global markets. Concerns about the outlook for China have dominated markets in the past week and are likely to remain front of mind in the coming week. The depreciation of recent days may reflect an attempt to open up the financial sector to market forces rather than an attempt by the authorities to use a weaker currency to kick start growth. However, coming at a time of mounting concern about Chinese economic growth, the yuan’s depreciation has led to further sell-offs in emerging markets equities, currencies and in commodity prices. With no further Chinese economic data until Friday’s Caixin ‘flash’ manufacturing PMI for August, market attention will be primarily on whether the yuan continues to fall and if the PBoC attempts to counter any further depreciation.
Inflation data to remain tame. Inflation data in both the UK and the US for July will show the impact of the renewed slide in the oil price. Since reaching a near-term peak in early May, oil prices have subsequently fallen back close to their January lows. However, as much of the decline took place in July, any impact on inflation is more likely to start to show through from the August data. For July we expect the annual headline inflation rates in both the UK and the US to be little changed from June. Inflation should still rebound back close to target next year in both countries as the impact of this year’s oil price declines fall out of the annual comparisons. But the latest oil price decline implies that this will now take longer.
Fed September rate hike still on the cards. The impact of China and of the weaker oil price complicates monetary policy decisions in both the UK and the US. After its August meeting the Bank of England intimated that a hike in policy rates is now unlikely this year, partly owing to external influences. In contrast, however, the Fed still seems inclined to look through near-term weakness in inflation and raise interest rates this year. The coming week’s release of the minutes of the July FOMC meeting may provide further detail on how close the Committee is to pulling the trigger. Recent data including not only payrolls but also retail sales and the ISM reports all suggest that economic activity is strengthening. However, in making its decision the Fed will have to weigh this against current low inflation and an uncertain international background. On balance, we still expect the Fed to raise rates in September.
UK retail sales to rebound in July. In the UK, aside from inflation the main focus of attention will be July retail sales. Recent economic data have been mixed and June retail sales unexpectedly fell. We expect a rebound in July and forecast a 0.5% rise. That would be consistent with Q3 GDP growth at close to the pace of the previous quarter.
Greek deal looks imminent. The Greek parliament’s approval of the bailout plan is one further step forward to a resolution of the crisis. However, as a number of Syriza MPs voted against the government, a vote of no confidence will now take place. The outcome of today’s meeting of euro area finance ministers was not known at the time of writing but the likelihood is that they will approve the plan. Assuming that they do so then other euro area parliaments will need to vote on the deal early next week, in order for the Greek’s to receive the funds before a €3.2bn repayment to the ECB is due on 20th August. A bridging loan to meet the payment is the alternative option in the absence of a full agreement.
Japanese GDP expected to contract. The preliminary estimate of Q2 Japanese GDP growth is forecast to post the first decline for 3 quarters. This will ramp up the pressure on the BoJ to take more action. Meanwhile, ‘flash’ PMIs for the euro area will provide early indications of the strength of its economy in August.
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