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Forex Research - Economics Weekly:- Economic data to counter credit market fears about growth
Economic data to counter credit market fears about growth
â€¢ Financial markets this week will be focused on the wider implications of the turmoil in global credit markets. However, economic data are likely to suggest that this crisis is a correction though it may persist for a while even with emergency funds being provided by central banks. But the question the financial markets will debate is whether the normalisation of lending rates in credit markets will spread and destabilise the real economy â€“ we think not.
â€¢ In the UK, economic data are likely to show that inflation is receding or stable and growth is weakening, albeit slowly, in response to the 125 basis point rise in official short term interest rates since August 2006. The question of whether this pace of response is acceptable to the central bank will be seen in the August vote by the MPC on official interest rates. We look for a split vote of 7:2 to keep base rates on hold at 5.75% that month, with the dissenters voting for a hike to 6%.
â€¢ US data are likely to be mixed, but we think that the most likely outcome will be to support the Fed view that rate cuts are not yet required, even with the spreading of the crisis in the sub prime market to credit markets globally and perhaps to some banks.
â€¢ In the euro zone, the central bank has already signalled that it will raise interest rates in September and it would be a surprise if it did not, even with the crisis in credit markets. The reason is that it is focused on inflation and the wider economy and is providing liquidity to the money markets to address any spillover from credit market woes to other financial markets and so to the wider economy.
Credit conditions are likely to remain the main issue in the financial markets this week, perhaps overshadowing the plethora of economic data that are due to be released in the US, UK and EU area. Nevertheless, the data are important for the evolution of interest rates in the months ahead. If the economic data stay robust, as seems likely in our view, then central banks may not react to current events by cutting official interest rates, on the basis that risks are still contained in credit markets. Moreover, global economic growth remains solid, revised up to over 5% this year recently by the IMF, and employment in the US remains high and rising. Credit market concerns might be eased - though not erased - by the action taken by a number of central banks to provide as much liquidity as required by financial institutions. Whether this will be enough to calm credit market fears is uncertain (though we believe that it will be), but there is a dilemma for central banks between cutting rates and concern about continuing robust economic growth leading to higher price inflation.
As far as US economic data are concerned, we look for the release of consumer and producer price inflation, retail sales, industrial production, trade data and housing market figures to show that the real economy remains robust and that inflation remains a concern though residential housing remains weak. US inflation is expected to show little slowdown in annual terms, with core CPI to remain above 2%. Sales should recover, on no acceleration in gasoline prices and higher employment and rising confidence. High oil prices imply that producer prices will stay elevated, but strong global growth is also supporting manufacturing output growth although the trade deficit will remain wide. All this makes it unlikely that the Fed will cut rates, unless there is clear damage to the real economy, so expectations of a rate cut seem excessive to us.
In Europe, UK economic data are most plentiful, with annual price inflation, Tuesday, expected to fall slightly and earnings growth to remain weak, despite falling unemployment. This should offer some reassurance that UK base rates are close to or at a peak, especially with the current crisis in credit markets. Our view is that the latter may give more time for the UK economy to weaken in response to higher base rates and so prevent a rate rise from occurring. On that point, the release of MPC minutes for the August meeting on Wednesday may show that 2 members voted for a base rate hike to 6%. In the euro zone, advance gdp figures for Q2 will be released and could show that growth was as robust as in Q1. This should support the ECB in its signal to raise rates in September, though widening credit spreads suggest that this might be put on hold. Figures for final inflation for June will also be released but nothing so far suggests that the ECB will not raise rates to 4.25% in September. Norway may raise its interest rate this week, despite credit market conditions.
Trevor Williams, Chief Economist
Economic Research,10 Gresham Street,
Lloyds TSB Corporate
London EC2V 7AE,
0207 626 - 1500
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