U.S. central banks, which have held interest rates at their highest level in more than two decades for a year, are expected to leave them there after their two-day meeting on Wednesday. Investors instead expect Fed officials to cut their benchmark rate in September.
Recent data is promising, with more moderate price increases and robust economic growth, but the Fed wants a little more assurance that inflation will continue to fall toward its 2% target.
The decline in price pressures, combined with a rise in the unemployment rate, has brought the Fed’s two goals of maximum employment and stable prices closer together. Policymakers want to keep inflation under control, but they also don’t want to do excessive damage to the labor market by keeping rates high for too long.
That puts Friday’s closely watched monthly jobs report and other expected labor market releases in even greater focus.
The July jobs report is likely to show a continued slowdown in the pace of hiring amid still-limited layoffs. Nonfarm payrolls are expected to rise by a healthy but more moderate 178,000. The unemployment rate, which has increased in each of the past three months, is expected to hold at 4.1%.
Hurricane Beryl, which hit Texas earlier this month, poses a threat and could reduce work hours. New figures released Tuesday on job openings and quits will also be closely watched.
The Conference Board’s consumer confidence index, released Tuesday, will offer a snapshot of the state of consumers, and investors will get an update on the struggling manufacturing sector with the Institute for Supply Management’s factory report on Thursday.
What Bloomberg Economics says:
“Most Fed officials will likely agree on one thing at their July 30-31 meeting: The downside risks to the U.S. central bank’s full-employment mandate are roughly balanced with the upside risks to inflation. We expect broad consensus that a rate cut will be appropriate “soon,” but there will likely be minor differences on the timing.”
—Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou and Chris G. Collins, economists.
Further north, Statistics Canada is set to release gross domestic product data for May, which economists expect to show a modest monthly increase of 0.2 per cent. The agency will also release a preliminary estimate for June, which will provide insight into whether the economy is on track to meet the Bank of Canada’s estimate of 1.5 per cent annualized growth in the second quarter.
Elsewhere, rate decisions in Japan and the UK will be closely watched, with the former forecasting a hike, the latter a cut. Eurozone GDP data will provide a snapshot of the state of the region’s economy and its major economies in the second quarter. Combined with inflation data for July, these data will provide clues as to whether the European Central Bank will be able to cut borrowing costs again in September.
Asia
The Bank of Japan is set to be the highlight of the week in Asia with a monetary policy meeting on Wednesday that should provide fresh data.
The authorities have already said they will unveil details of their plan to reduce monthly bond purchases, a first step toward quantitative tightening. The consensus is for a reduction from 6 trillion yen ($32.72 billion) to 5 trillion yen, and for a possible halving of the purchases over two years. Most economists also see the risk of a rate hike, although only about 30% see it as a base case.
On the policy front, Pakistan’s central bank is also expected to cut its benchmark rate to 19.5% this week.
Australia will release June consumer inflation figures on Wednesday after price growth there rose more than expected in May. Another round of positive data could prompt the Reserve Bank of Australia to raise rates when the board meets the following week.
On the same day, China released its official purchasing managers’ index for July, a figure whose significance was far outweighed by surprise rate cuts.
Separately, South Korea receives consumer price data that could show inflation edged up in July, ending a run of three consecutive decelerations and prompting the central bank to postpone a policy change. Vietnam receives a CPI report, as well as trade statistics.
Trade data are also due from Australia, Thailand, South Korea, Sri Lanka, Pakistan and Kazakhstan, while industrial production figures will be released from Japan and South Korea.
Europe, Middle East, Africa
The Bank of England could cut rates for the first time in more than four years on Thursday, with traders viewing the vote as a close call.
Investors are pricing in a 50% chance that the British central bank will cut rates to a 16-year high of 5.25%, despite persistent signs of domestic price pressures. Economists expect the BOE to echo other central banks in signaling a gradual easing of monetary policy once it begins cutting rates.
The BOE will present new inflation and growth forecasts alongside the decision, which economists say could be a narrow five-to-four vote in favor of tapering.
In the euro zone, GDP and inflation figures are in focus. Output figures released on Tuesday are expected to show a slowdown in the 20-member bloc, with growth of 0.2% in the second quarter, down from 0.3% at the start of the year. Momentum in Germany, Italy and Spain is also likely to have slowed.
The following day, figures for July will likely show that inflation held steady at 2.5%, while the core indicator – which excludes volatile items such as energy and food – likely fell to 2.8%.
No ECB member is expected to speak in the coming week, allowing markets to draw their own conclusions.
Czech GDP is expected to grow stronger, good news for the central bank, which is expected to cut borrowing costs again next week. Hungarian GDP and Swiss inflation figures are also due.
Data from Saudi Arabia is expected to show that the overall economy contracted for the fourth straight period in the second quarter, following the kingdom’s decision to cut oil production last year. Even so, the government is focusing primarily on non-oil growth as it seeks to transform the economy and, after a slowdown in the first quarter, officials hope it will accelerate between April and June.
In Africa, Mozambique’s central bank is expected to become the first in Africa on Wednesday to cut rates for the fourth consecutive time this year, as inflation remains contained at around 3%.
Latin America
Mexican production data, due Tuesday, are expected to show that Latin America’s second-largest economy maintained positive momentum in the second quarter. However, growth is expected to fall short of the central bank’s forecasts and there will be no shortage of headwinds on the horizon.
Four of the region’s largest economies will release June unemployment figures next week. Labor markets in Brazil and Mexico are at historically tight levels, while those in Chile and Colombia still show considerable room for maneuver. It is worth noting that Brazilian labor market data mask a high degree of informality.
Brazil also releases June industrial production, while Colombia’s central bank releases its quarterly monetary policy report.
A very quiet week in Peru nevertheless gives us data on consumer prices from Lima for the month of July. The central bank kept its interest rate on hold due to high base values.
Three central banks announced their interest rate decisions this week. Chile’s recent rise in inflation is keeping policymakers’ attention, although most analysts expect Governor Rosanna Costa to make her ninth straight interest rate cut, to 5.5%.
Colombia’s central bank BanRep appears stuck on a 50 basis point cut to 10.75%, disappointing monetary policy advocates as well as President Gustavo Petro and Finance Minister Ricardo Bonilla.
In Brazil, inflation numbers and expectations are both rising, leaving little room for maneuver for policymakers led by Roberto Campos Neto. Expect a second consecutive pause at 10.5%.
cnbctv18-forexlive
