Friday September 25, 2015 - 15:48:46 GMT
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WEEK AHEAD - ECONOMIC DATA ANALYSIS FRIDAY 25 SEPTEMBER 2015
STILL ASSESSING THE LIKELIHOOD OF US FED LIFTOFF IN 2015
Main focus on the US employment report and slew of Fed speakers Eurozone flash
CPI risks falling into negative territory
China official PMI and UK index of services and manufacturing PMI are due
The US dollar stengthened over the past week, as Fed Chair Yellen revealed in a speech on Thursday that she favours a rise in interest rates this year. She remained positive about the US outlook, but cautioned that uncertainty remains high and that economic surprises could change policy expectations. Market pricing suggests that the probability of a rate hike by December rose near to 50% from around 40% prior to Yellen’s speech. Market expectations of the first UK rate hike, nevertheless, have been pushed out to November 2016, helped also by dovish comments from the MPC’s Broadbent and Haldane. There is also growing speculation that the ECB may be leaning towards an extension of its QE programme, perhaps as soon as its next policy meeting in October, even though latest business survey indicators point to eurozone activity remaining resilient.
The US employment report (Fri) is expected to show continued tightening of the labour market, with nonfarm payrolls forecast to increase by 200k in September. As usual, this report is preceded by the ADP employment figures (Wed). The unemployment rate is forecast to stay at a 7-year low of 5.1%. This nevertheless is likely to be understating the degree of slack in the labour market, given the low participation rate and high involuntary part-time employment. There has therefore yet to be a significant acceleration in wage growth, though we anticipate average hourly earnings growth to edge up to 2.4%. Policymakers remain cautiously confident that inflation will pick up in the medium term, assuming economic activity remains solid and negative energy price effects recede. The Fed’s preferred inflation gauge, the core PCE deflator (Mon), is expected to be unchanged at 1.2% in August.
A slew of Fed speakers next week will attempt to provide some more clarity about prospects for US monetary policy. They include Dudley (Mon, Wed), Evans (Mon), Fed Chair Yellen (Wed), Brainard (Thu) and Vice Chair Fischer (Fri). Other speakers include Williams (Mon, Thu) and Bullard (Wed). Separately, the end of the fiscal year on 30 September raises the risk of a shutdown of US federal agencies operating non-essential services unless a temporary stopgap funding measure is passed.
There is a risk that flash eurozone CPI (Wed) may fall into negative territory in September, but our central forecast is a deceleration to 0.0% from 0.1% in August. We expect weak energy prices will continue to be a drag on headline inflation, while core CPI is expected to be steady at 0.9%. The ECB has already given notice that it expects near-term inflation to remain weak. Nevertheless, the rise in the trade-weighted euro in recent weeks has increased the risk that headline inflation may remain below the 2% target ceiling for longer than policymakers are comfortable with.
Domestically, the index of services (Wed) and manufacturing PMI (Thu) will provide signals of activity for the current quarter. We look for a monthly rise of 0.2% in services output in July, while the manufacturing PMI is seen edging down to 51.0 in September from 51.5. The Lloyds Business Barometer (Wed) will also provide a timely guide to activity. The current account deficit (Wed) could narrow to around £22bn in Q2, but it would remain sizeable. Other data releases include Bank of England mortgage approvals (Tue), the CBI distributive trades survey (Tue) and GfK consumer confidence (Wed).
Elsewhere, the official China PMI for September (Thu) will be closely watched in light of the fall in the latest Caixin manufacturing survey. Japan’s Q3 Tankan survey (Thu) is expected to show a fall in sentiment.
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