Proactive Investors - After a gap of over a month, the coming week brings the Federal Reserve and European Central Bank, along with some weighty macroeconomic data.
For the UK, with the Bank of England’s own meeting not until the week after, there is a fairly quiet week of data, including manufacturing, services and constriction PMIs, and credit conditions, along with local elections around England.
For the Fed, another small hike of 25 basis points is expected by markets to take the Fed Funds rate to 5.25% at Wednesday’s meeting.
It is expected to be the last hike of the year, with a recession looming and so economists and traders now eyeing when the US central bank will move to begin cutting rates again – later this year or early next.
As well as the confirmation that officials expect a mild recession this year, at the last meeting in March, around 10 days after the collapse of Silicon Valley Bank, the main points were concerns about the stickiness of high inflation, anticipation that banking turmoil would be likely to result in tighter credit conditions.
Data since has shown that the economy is softening and credit conditions are tightening, with the ongoing troubles at First Republic Bank (NYSE:FRC) providing evidence that the problems in the sector have not gone away.
Concerns about stubbornly high core inflation are overriding this.
Andrew Hunter, US economist at Capital Economics: “The Fed looks set to deliver a final 25bp rate hike at the FOMC meeting next week, taking the fed funds target range to a peak of 5.00%-5.25%.”
The updated statement may still retain the guidance that “some additional policy firming may be appropriate”, but Hunter said that would “represent officials trying to keep their options open rather than a pre-set plan to raise rates further.”
“We suspect the Fed’s next move will be a rate cut, as economic weakness helps drive inflation lower over the second half of this year.”
Other big US data points in the week include manufacturing PMI on Monday, factory orders on Tuesday, the FOMC meeting preceded by ADP employment and services PMIs, with Friday’s big finish of the non-farm payrolls report.
“With markets sensitive to weak US economic data, I suspect USD bears could pounce at a whiff of weak employment data,” says market analyst Matt Simpson at StoneX, “especially if it appears to be a trend.”
A week ahead of time, jobs growth is expected to fall to a post-pandemic low of 181k and unemployment rise to 3.6%.
“Whilst this reflects a slight deterioration of the employment sector, I doubt it is enough to warrant a dovish undertone by the Fed when they presumably hike by 25bp on Wednesday,” says Simpson.
The ECB decision is a day after the Fed, with little doubt among economists or the market that a hike is coming, only whether it will be 25bps or 50bps.
Last time, Christine Lagarde revealed there had been a discussion over whether core inflation was already at a turning point, though some members feel that even if core inflation has peaked this is not necessarily enough to stop hiking.
A big day of data on Tuesday could “tip the balance”, said economists at ING.
“The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode,” said ING.
With a looming recession in the US and a potential credit crunch in the eurozone, “the risk is high that every next rate hike could turn out to be a policy mistake”.
Other EU data includes unemployment on Wednesday, the HCOB services PMI on Thursday and retail sales on Friday.