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Economics Weekly - Markets to focus on US private sector job creation, policy meetings

Economics Weekly 2 August 2010

 

Markets to focus on US private sector job creation, policy meetings

 

The highlight of the week in the UK is the BoE policy announcement which will be made in light of the latest Inflation Report forecasts. No change is expected to bank rate or the size of the QE programme, but views on the MPC are clearly divided. For the third month in a row Andrew Sentance is expected to vote for an interest rate hike, but there is little to suggest that he will find support from his colleagues. In fact, in early July, for a number of MPC members, the immediate decision was not whether to tighten policy, but rather whether to implement additional QE. Since then, a stronger than expected Q2 GDP figure may have alleviated some near-term concerns, but judging by the recent comments, the MPC as a whole, will likely maintain its wait-and-see stance for some time. In terms of economic data, manufacturing output figures for June should confirm strong quarterly growth in Q2 (the ONS has already published a preliminary estimate as part of the first GDP release). But the latest PMI readings are expected to indicate that both industrial and services sector activity is slowing.

 

With the EU bank ‘stress tests’ behind us, the focus this week returns to regular ECB monetary policy where we look for the main refinancing rate to remain on hold at 1%. And in all likelihood, despite the tests being generally well-received by financial markets, Jean-Claude Trichet will repeat that the ECB continues to be in a mode of ‘unlimited liquidity supply’. This week also sees the release of preliminary Q2 GDP in Italy. Here, we look for an outturn of +0.4% quarter-on-quarter, ahead of other euro area Q2 releases next week. Finally, factory orders and industrial output data for Germany are due. We expect production to have risen by 1.5% m/m during June.

 

It is a key week for US data, culminating with the publication of July payrolls report. The reversal of temporary hiring related to Census 2010 is expected to result in the second successive month of falling payrolls in July. We look for a decline of 55,000, coming on the back of a fall of 125,000 in June. However, particular interest will be paid to the change in private payrolls, which we expect to be +120,000 – the highest for two months but still well below April (241,000). The unemployment rate is forecast to edge up 0.1% to 9.6% in July, while average earnings growth is likely to have remained subdued. The data are unlikely to bode well for personal consumption, which last week’s annual GDP revisions showed as weaker-than-previously thought. Further signs that the soft patch for growth has persisted into the current quarter are expected to come from the July ISM surveys. We look for the manufacturing index (Monday) to post a third successive drop to 55, while the nonmanufacturing index (Thursday) is predicted to ease to 53.4 from 53.8. As always, the employment index of the ISM non-manufacturing index and ADP employment report (Wednesday) will be watched closely to help refine estimates for July payrolls. In other events, Fed Chairman Bernanke will take to the stage on Monday to discuss the economy.

 

The RBA is expected to keep interest rates on hold, following a softer than expected Q2 inflation report. Nonetheless, we still look for interest rates to rise twice more in 2010, to end the year at 5%.

 

Economic Research,

Lloyds TSB Corporate

Markets,

10 Gresham Street,

London EC2V 7AE,

Switchboard:

0207 626 - 1500

www.lloydstsb.com/corporatemarkets

 

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