The Federal Reserve meets next week for a scheduled policy meeting but with no change in rates expected, the focus will likely fall on the balance sheet reduction plan. Data-wise, second quarter GDP estimates will be watched for France, the United Kingdom and the United States. Japanese and Australian inflation data will also be important, while flash PMIs for the Eurozone and the US should give the first glimpse on economic activity in July.
Starting the week on Monday will be the flash PMI releases for the Eurozone for July. Eurozone growth eased slightly in June according to IHS Markit’s PMI indicator but held not too far from April and May’s 6-year high. July’s flash readings are forecast to show the manufacturing PMI falling marginally to 57.2, the services PMI improving slightly to 55.5 and the composite PMI remaining unchanged at 56.3.
More business surveys will follow on Tuesday with the release of the German Ifo report and the European Commission’s economic sentiment index on Friday. Meanwhile, France will publish the first estimate of GDP growth for the second quarter on Friday. Growth in the Eurozone’s second largest economy is forecast to edge up to 0.5% quarter-on-quarter in the three months to June. Next week’s data should provide further evidence of a broadening recovery in the euro area and reinforce expectations that the ECB will begin to scale back its asset purchases early in 2018, despite Mario Draghi’s efforts to bypass the topic at the European Central Bank’s policy meeting on Thursday.
Australian inflation eyed as aussie rallies to 2-year highs
The Australian dollar rocketed to a more than 2-year high this week after the Reserve Bank of Australia sounded more confident about the growth outlook in its meeting minutes than had been expected. However, inflation remains low and the aussie’s recent sharp appreciation has the potential to add significant downside pressure on prices. Inflation data out on Wednesday will therefore be watched closely given the premature talk of a rate hike in the markets this week, which has been rebutted by the RBA.
Japanese inflation making snail-pace progress towards target
The Bank of Japan held policy unchanged on Thursday and reiterated its commitment in maintaining its ultra-loose monetary policy until inflation has reached its 2% goal. Data out on Friday will likely show the target remains far-off as annual CPI excluding fresh foods is forecast to stay unchanged at 0.4% in June. Other data out of Japan on Friday will also come into focus, which will include household spending, retail sales and the unemployment rate. Household spending growth in June is expected to turn positive on a year-on-year basis for the first time since February 2016. Retail sales are also forecast to improve in June, while the unemployment rate is expected to decline to 3.0%.
A recovery in consumer spending from a tightening labour market remains the BoJ’s best hope of lifting inflation. But the yen is unlikely to respond much to any data surprises on the upside just yet as only a sustained improvement in the key indicators would warrant a shift in tone by the BoJ.
UK to report another quarter of lacklustre growth
Just as the Bank of England begins to contemplate raising UK rates for the first time in a decade, serious doubts are being raised about the UK’s growth prospects as the start of Brexit negotiations has so far only added to the uncertainty. GDP data out on Wednesday is forecast to show the UK economy had another poor quarter, with growth recovering only modestly from 0.2% q/q in the first three months to 0.3% in the second quarter. A stronger-than-expected reading could provide the pound some support after it came under pressure this week on weak inflation data and renewed fears of a ‘hard’ Brexit.
Fed to hold rates but could begin balance sheet reduction
There will be plenty of US data next week to keep investors busy, though the focal point will be the FOMC meeting and the preliminary GDP estimates for the second quarter. Starting things off on Monday are the flash PMI readings for July, along with existing home sales. There will be more housing data on Tuesday with the CaseShiller 20-city house price index and new home sales on Wednesday. Also out on Tuesday is the Conference Board’s consumer confidence index, which is expected to ease slightly in July. The latest durable goods orders are due out on Thursday and are forecast to rebound by 1.9% month-on-month in June. But the data highlight will likely be Friday’s GDP figures. After a traditionally soft first quarter, US growth is expected to gather pace in the second quarter, though the rebound is projected at only a paltry annualized rate of 2.5%.
The week’s other big headline will the FOMC meeting on Wednesday. The Fed is almost certain to keep rates at between 1.00-1.25% but could surprise with a decision to proceed with its balance sheet reduction plans earlier than expected. Most analysts anticipate the Fed to announce its plans in September and to initiate it in October, but an earlier date cannot be ruled out given that despite the undershoot in inflation, overall growth has been solid.