After Thursday’s gross domestic product data from Europe, today’s main events will centre on data from the United States. Markets will likely be dominated by news from Ukraine.
Yesterday, Russia’s president Vladimir Putin stated that he wanted to avoid conflict, but by nightfall Western journalists witnessed Russian armoured vehicles crossing the border into Ukraine. Putin has two choices – either Russia offers military support to the Ukrainian separatists, or the Ukrainian army will mow the separatists down.
UK Q2 Gross Domestic Product (08:30 GMT).
This is the second estimate and is expected to leave the preliminary 0.8 percent increase from the first quarter and 3.1 percent increase from a year ago unchanged. After the Bank of England (BoE) presented its quarterly inflation outlook on Wednesday, surprising the market with a lower wages growth forecast, governor Mark Carney’s presentation suggested that a rate hike in 2014 appears unlikely. Currently, the BoE is expected to raise rates in the first quarter of 2015 or the second quarter at the latest.
UK’s economy is reaching a state where the BoE is expected to begin tightening monetary policy. Unemployment has fallen and the inflation outlook has improved. But at the same time, the global economy and especially the Eurozone – a key market for the UK – looks weak. The BoE’s situation is almost identical to that of the Federal Reserve Bank (Fed): the central banks would like to jack up interest rates a little too late, rather than act too early and derail the recovery.
With this in mind, today’s GDP breakdown by expenditure components could provide clues on the timing of the first rate hike. It is likely that private consumption has been the main source of growth and not exports. While export-led growth is more vulnerable to shocks from the global economy, it is less inflationary than private consumption. Even though there may be no surprises from the headline figure, the devil could be in the detail. Note how GBPUSD plummeted after the BoE’s inflation outlook, hitting new lows for the year, but recovering somewhat thereafter. The consumer price index will be published next Tuesday followed by retail sales figures on Thursday. The official report will be published by the Office for National Statistics.
US July Producer Price Index (12:30 GMT).
The consensus forecast sees producer prices in July increasing by only 0.1 percent and the core price index, which excludes volatile food and energy items, by 0.2 percent from a month ago. Year-on-year, this means the headline index is increasing by 1.8 percent and the core index by 1.6 percent. This would be the second month below that level, after the headline index touched the 2 percent level that the Fed is currently targeting in May.
This should alleviate fears that the increasing inflation would push the Fed towards the first rate hike. Still, core inflation is slowly but surely beginning to increase, and in the end it shouldn't matter much whether the rate hike comes in January or March. I discussed earlier why markets seem so anxious about the Fed’s timing here.
US July Industrial Production & Capacity Utilisation (13:15 GMT).
Production is expected increase by 0.2 percent in July, just as in June. Industry’s capacity utilisation rate is also expected to remain unchanged at 79.1. The Institute of Supply Management's Manufacturing Index for July was quite strong and new orders sub-index rose to a new yearly high, suggesting good times for the industrial sector.
With capacity utilisation now near the higher end of its historical ranges, the need to invest in new capacity and the case for a self-reinforcing cycle of growth is in place. If investment does not pick up, the alternative would be higher prices or investments abroad. Overall, the industry’s performance suggests inflation in the not-too-distant future is poised to increase.
