(Bloomberg) — The Federal Reserve’s path to cutting interest rates is likely to become clearer next week amid fresh signs that inflation is weakening and economic activity is moderating.
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Economists expect the personal consumption expenditures price index, which excludes food and energy, due to be released on Friday to rise for the second straight month at 0.1% in June, which would send three-month annualized core inflation to its slowest pace this year and below the Fed’s 2% target.
The monthly inflation report, part of data on personal consumption and incomes, will follow the government’s initial estimate of second-quarter gross domestic product, which forecasters expect to rise at an annualized rate of 1.9%, following a 1.4% pace in the first three months of the year.
That would mark the weakest quarter of economic activity in two years and, combined with slowing job and wage growth, give Fed policymakers room to begin easing monetary policy.
The U.S. central bank’s next meeting is on July 30 and 31 and a rate cut is unlikely, but investors see a quarter-point cut as a virtual certainty at its September meeting.
Bloomberg Economics:
“June’s PCE inflation data will be encouraging news for the Fed, as the monthly pace of core PCE inflation, the Fed’s preferred price gauge, is likely to be in line with its 2% target for the third consecutive time. A cooling labor market, slowing personal income growth and tightening consumer spending habits likely set the stage for a rate cut in September.”
— Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou, and Chris G. Collins, Economists. For a more detailed analysis, click here.
Next week’s busy economic data calendar includes reports on new and existing home sales in June. Economists expect new home purchases to increase modestly while contract signings for existing properties will decline for the fourth consecutive year.
The existing home market has been depressed by homeowners’ reluctance to give up their low-interest mortgages, a so-called “lock-in effect.” That’s a positive development for homebuilders, many of whom are offering incentives to spur demand.
Demand for big-ticket items will also become clear this week, with the government’s durable goods orders report for June showing orders for commercial equipment are expected to weaken as higher borrowing costs curb investment.
Looking north, a majority of economists in a Bloomberg survey expect the Bank of Canada to cut its key policy rate for the second consecutive time when it meets on Wednesday.
Traders are expecting volatility of more than 90% after the June inflation report showed the headline measure slowed to 2.7% year-on-year.But an acceleration in the three-month moving average of core price pressures may give some policymakers pause.
Elsewhere, finance ministers and central bank governors from the Group of 20 (G20) will meet for two days in Brazil, purchasing managers’ surveys will be released from Japan to the UK, and central banks from Turkey to Russia to Nigeria will set interest rates.
Click here to read about last week’s events, and below for our outlook for the global economy.
Asia
The People’s Bank of China will start the week by setting a de facto benchmark lending rate.
The People’s Bank of China is expected to ignore weak second-quarter growth and keep the five-year prime mortgage rate unchanged at 3.95% and the one-year prime mortgage rate at 3.45%.
Industrial profits data due on July 26 could signal continued weakness in the private sector, facing headwinds from a sluggish housing market and weak consumer demand.
Elsewhere in the world, Australia, Japan and India are due to release purchasing managers’ indexes, while Singapore, Malaysia, Hong Kong and Tokyo are due to release inflation data. A pick-up in July could give Bank of Japan officials a reason to consider raising interest rates when they meet at the end of the month.
India’s new coalition government is due to present its budget for the current fiscal year on Tuesday, and economists expect the fiscal deficit to narrow slightly due to a surge in revenue.
South Korea’s gross domestic product data due on Thursday is likely to show second-quarter growth was nearly stagnant, while still on track to meet official forecasts for the year.
Trade figures are due to be released from New Zealand, Hong Kong, South Korea and Thailand.
Europe, Middle East, and Africa
The European Central Bank (ECB) met on Thursday, beginning an unusual eight-week summer break between meetings, with President Christine Lagarde telling investors that the outlook for a Sept. 12 interest rate decision was “still open.”
Officials may also be largely silent, but four are due to appear next week: European Central Bank Vice President Luis de Guindos and chief economist Philip Lane will speak at a conference they are hosting in Frankfurt starting Tuesday. Bundesbank President Joachim Nagel will speak at a G20 meeting on Thursday, and Lagarde will take part in events marking the Olympics in Paris the same day.
Among the data releases to watch, officials may pay particular attention to the ECB’s inflation expectations survey, due for release on Friday.
Other reports will offer a glimpse into the economy’s health at the start of the second half: Eurozone consumer confidence is due out on Tuesday, followed by the region’s purchasing managers’ index on Wednesday.
Germany’s closely watched Ifo business confidence index, due tomorrow, may show a slight improvement in business confidence in Europe’s largest economy, but its industry is still suffering from a long-term slump. A comparable measure of French manufacturing is also due to be released on Thursday.
In the UK, a rate cut is highly unlikely as Bank of England policymakers are expected to remain silent ahead of their decision on August 1. UK PMI data are due to be released on Wednesday at the same time as the euro zone.
Looking to Africa, Ghana’s Finance Minister Mohammed Amin Adamu is due to present the country’s interim budget on Tuesday. He is expected to announce an upward revision to the country’s economic growth figures.
Also in South Africa, inflation was forecast on Wednesday to fall slightly to 5.1% in June from 5.2% in the previous month, due in part to lower fuel prices.
Across the broader region, four major central bank decisions are due to take place.
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Turkish authorities are likely to keep interest rates on hold at 50 percent when they meet for the fourth time on Tuesday, even as consumer price growth appears to finally be slowing. Governor Fatih Karahan told Bloomberg this month that he wants to be sure the country can hit its inflation target beyond this year before discussing a rate cut.
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Also on Tuesday, Hungary is expected to continue its monetary easing cycle, with economists expecting it to cut borrowing costs to 6.75% from 7%.
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A decision is also due to be made on that day in Nigeria, where policy makers are set to raise interest rates for the 12th consecutive time to 27.25% in a bid to support the naira and keep inflation in check.
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In Russia, the central bank is expected to raise interest rates from the current 16% on Friday after inflation accelerated for the sixth straight month in June. TASS reported Deputy Governor Alexei Zabotkin as saying this month that authorities would probably consider a 100-200 basis point increase.
latin america
Latin America’s two largest economies are due to release inflation data in mid-July and their central banks will scrutinize it ahead of interest rate decisions scheduled in the coming days.
Mexico on Wednesday will release consumer price data for the first half of the month as policymakers grapple with the fallout from currency fluctuations caused by June’s presidential election.
The central bank has kept borrowing rates unchanged for the past two meetings, but analysts expect rates to be cut at its Aug. 8 meeting.
A day later, Brazil is expected to see inflation rise well above its 3% target. Roberto Campos Neto’s central bank paused its nearly year-long monetary easing cycle in June and has given no clear indication of when it might resume easing as policymakers prepare for a July 31 interest rate decision.
In addition, finance ministers and central bank governors from G20 countries are due to meet in Rio de Janeiro on Thursday and Friday, after their delegations held talks there earlier this week.
Brazilian President Luiz Inacio Lula da Silva will unveil plans for an international alliance to eradicate hunger on Wednesday, and participants are expected to discuss other topics, including a proposed global tax on billionaires.
–With assistance from Laura Dhillon Kane, Brian Fowler, Matthew Malinowski, Monique Vanek, Paul Wallace, and Tony Halpin.
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