Friday October 30, 2015 - 17:47:20 GMT
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WEEK AHEAD: ECONOMIC DATA ANALYSIS Friday 30 October 2015
MPC PLAYING FOR TIME
- BoE’s Inflation Report to paint the prospect of an eventual but unhurried tightening
- US labour market report pivotal to Fed’s ‘data-dependent’ lift-off
- Further reassurance sought on Chinese activity trends
Fed’s hawkish statement places the burden of proof on the data. The FOMC’s post-meeting statement for its October decision re-awakened markets to the prospect of monetary policy lift-off still in 2015. The hawkish tone seemed to position a tightening in policy as the baseline case provided the economy’s evolution does not disappoint. Morover, it set aside the concern about international developments that added an unexpected dimension to the Fed’s reaction function at its September meeting. With markets re-pricing a move in December to a 50-50 call (Chart 1), the burden of proof now lies squarely on the data to deliver the conditions required for a tightening. The October employment report (Fri) will be key. A stronger outturn both for payrolls growth - following two soft prints - alongside a mild uptick in earnings growth would be the needed support to both parts of the FOMC’s criteria for moving towards a policy tightening.
‘Fedspeak’ still a lightning rod for expectations. With signs of discord on the FOMC evident in advance of October’s meeting, remarks from key Committee members remain a focus. While Chair Yellen’s testimony to Congress in the coming week is not on monetary policy, a set piece speech from Vice Chair Fischer (Wed) and panel remarks from Governor Brainard (Fri) - who has recently expressed unease about a move in policy this year - could be most relevant.
Chinese trends a focus for international developments. A softer global activity backdrop is likely to continue to taint some US indicators, by implication requiring higher conviction about the economy’s domestic momentum. Notably, the manufacturing ISM (Mon) may fall below 50, which would signal contraction, though the non-manufacturing report (Wed) should stay firmer. Stabilisation in Chinese PMIs (Sun, Wed) would provide the needed reassurance about trends at the epicentre of the global slowdown.
MPC bides its time as it seeks clarity on competing narratives. A key week for the UK is set to see policy left unchanged by the MPC (Thu), with the focus on the simultaneous publication of the MPC minutes and the Inflation Report. Against a backdrop of softer global activity and some recent ebbing of domestic momentum, the MPC will need to revisit its previous assumptions of ongoing relative UK economic strength gradually leading to firmer cost pressures. We expect the MPC to play for time. Despite downward revisions to the near-term outlook in its projections for both GDP growth and inflation, the MPC is still likely to point to an inflation overshoot beyond the 2-year horizon. The emphasis would thus remain on an eventual policy tightening, though with the timing allowed to slip by a quarter. Even this passive change could be seen as dovish. Crucially, the MPC’s forecasts will be conditioned on a much shallower policy rate profile than in August (Chart 2). As such, the MPC’s signalling of steeper rate expectations would start from a much lower base.
A 2016 Q1 MPC hike would require additional hawkish votes. A move early in 2016, as has been our view, would require a weightier constituency for a hike than Ian McCafferty alone. Though we see the possibility of Martin Weale or Kristin Forbes also voting for higher rates on signs of strengthening unit labour cost growth and a weaker exchange rate, an unchanged 8-1 vote split would render more likely a move later in 2016.
UK data to reassure on activity trends. The coming week’s PMI reports (Mon, Tue, Wed) will provide early colour on activity trends in Q4. The internationally-exposed manufacturing sector is likely to see further pressure, but some recovery in the services PMI would help reassure that Q3’s soft 0.5% GDP growth is likely to be short-lived. Meanwhile, ‘hard’ industrial production data (Fri) will be checked for divergence from estimates built currently into the first Q3 GDP estimate.
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