Friday October 9, 2015 - 15:51:22 GMT
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WEEK AHEAD: ECONOMIC DATA ANALYSIS - LOW INFLATION ENCOURAGES FED & BOE TO WAIT AND SEE
Friday 09 October 2015
LOW INFLATION ENCOURAGES FED & BOE TO WAIT AND SEE
September readings to show low headline inflation in UK and US
UK labour market appears to be continuing to tighten
ZEW to provide further evidence that euro area economic activity has slowed
Inflation still very low for now. The coming week will see further evidence of very low current inflation. September headline CPI inflation in both the UK (Tue) and the US (Thu) will show the ongoing impact of low oil prices. In the US this is likely to push the annual inflation rate back into negative territory for the first time since April, while in the UK we forecast the rate to be 0% for the second successive month. In both cases, however, ‘core’ inflation is expected to be stable at higher levels. With the oil price already moving up in early October and the annual comparisons set to become less favourable, we expect headline inflation in both countries to start to move up before year end. However, it still seems likely to be below target, particularly in the UK, for some time yet.
Continued uncertainty over Fed policy. The current low level of inflation adds to the Fed’s monetary policy dilemma. The FOMC has indicated that they will not wait until inflation is back at target before raising interest rates. With inflation currently so low, however, it is easy to see why the FOMC may feel it can afford to hold steady, while awaiting more evidence on the strength of economic activity. We expect the picture painted by next week’s data will be mixed. The September retail sales (Wed) should confirm the continued strength of consumer spending, led by auto sales. However, industrial production (Fri) and the Empire and Philadelphia Fed surveys (Thu) will probably show manufacturing activity continued to be impeded by the uncertain international background and the strong dollar.
UK labour market and tightening. In the UK, despite current low inflation rates, signs of a tightening labour market and of a gradual acceleration in wage growth highlight the risk of a build-up in domestic inflationary pressures. Next week’s labour market data (Wed) will provide further evidence. We forecast a return to employment growth, along with a pickup in annual earnings growth to above 3%. The minutes of the October MPC meeting showed that any concerns members have about the labour market are having little immediate impact on monetary policy. Next month’s Inflation Report will need to take stock of accelerating cost pressure, and may see greater differences emerging between members’ views.
Further monetary stimulus seems likely in the euro area. In the euro area, the German ZEW survey (Tue) will provide one of the first updates on economic activity in October. The gauge of future conditions is expected to slide for the fourth successive month. As a survey of financial market analysts the ZEW is strongly influenced by market fluctuations. The recent decline in expectations, however, coincides with a weakening in other indicators. Euro area industrial production (Wed) for August could also be weak given the slide in German activity. With inflation also surprising on the downside, speeches by ECB Board members next week will be scrutinised for any indication of an increased willingness to extend its QE programme
Chinese data to remain a key focus for markets. While the stock market has greeted the resumption of trading after the Golden Week holiday with a rally, it is premature to conclude that the bear market is now over. A stabilisation will at least partly depend upon the market’s reading of domestic economic conditions. Of particular interest in the coming week will be September data on export growth (Tue). The rebalancing of the economy towards domestic demand and services means that export growth is less important than in the past. Nevertheless, a stabilisation in export growth would still be a signal that activity is stabilising more broadly. Money supply and loan data for September will provide a further update on the strength of domestic demand.
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