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Economics Weekly - Interest rate decision and key data releases due in US
Economics Weekly 29 October 2007
Interest rate decision and key data releases due in US
Financial market attention this week will be dominated by the Fed interest rate decision and a busy US data calendar, which includes preliminary Q3 gdp on Wednesday and the October labour market report on Friday. In the UK, the focus will be on the housing market, with September mortgage lending figures due today and the October Nationwide house price survey later in the week. It is a relatively quiet week for EU-13 data, headed up by the 'flash' CPI estimate for October on Wednesday. Interest rate decisions are due in Japan, Sweden and Norway this week, where there is the strong possibility that the Riksbank may hike rates to 4% on Tuesday.
â€¢ Although a 0.25% cut in US interest rates is widely expected on Wednesday, based primarily on recent weak data on the housing market, we believe the outcome is far from the foregone conclusion suggested by the Fed funds futures market. We expect US economic data this week to highlight that the economy is on a stronger footing than many analysts suggest, with gdp growth at 2.7% in Q3 and another 95,000 payrolls added in October. Given the inflationary risks posed by the weaker dollar and record high oil prices, the Fed actually has only limited room for manoeuvre. We believe therefore interest rates could remain on hold at 4.75% this week but we would not be surprised if a 0.25% ease takes place. We remain of the view interest rates will rise in the second half of 2008, as the economy recovers and inflation becomes more of a threat.
â€¢ There are a host of other key data released in the US this week, which may elicit strong financial market reaction should they deviate far from consensus estimates. After falling surprisingly in September to the lowest level since November 2005, the consumer confidence index on Tuesday may struggle to rebound given continuing concerns about the housing market and rising oil prices. However, we forecast only a modest fall to 99.5 in October, primarily reflecting the resilient labour market. Ahead of the non-farm payrolls data on Friday, the ADP employment report on Wednesday will be eagerly awaited for any clues to the outcome. Data on the Fed's preferred inflation gauge, the core PCE deflator, is due on Wednesday and Thursday. We expect the annual rate to remain at 1.8% in September, close to the upper end of the Fed's 1%-2% implicit target range. Inflation risks should also be highlighted by hourly earnings data in the labour market report on Friday, with wage growth likely to remain close to 4% y/y.
â€¢ Data from the UK this week are expected to show a further slowdown in housing market activity in September. BoE mortgage approvals figures on Monday should show the sharp slowdown reported by the BBA last week, with the total market outturn forecast to have hit a two-year low of 103,000. However, net mortgage lending is forecast to have held up around Â£8.5bn, reflecting strong approvals earlier in the year. Although we predict a 0.2% rise in house prices in October according to the Nationwide survey, the annual growth rate should ease to 8.5% - a year low. On Wednesday, we expect the Gfk consumer confidence index to fall to -8 in October, in line with the results of our own LTSB Corporate Markets Consumer Barometer survey, which showed weaker employment confidence in October. The manufacturing PMI, on Thursday, could show a modest fall, following on from the weak CBI survey last week. BoE MPC members Blanchflower and Bean speak on Tuesday and Wednesday, respectively.
â€¢ After rising above the ECB's 2% ceiling in September for the first time since August 2006, EU-13 consumer prices may have edged up to 2.3% in October, based on the outturn of preliminary German data last week.
Jeavon Lolay, Senior Economist
Economic Research,10 Gresham Street,
Lloyds TSB Corporate
London EC2V 7AE,
0207 626 - 1500
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