- Economists expect UK claims for jobless benefits to rise again in May
- US headline consumer inflation is on track to hold steady in the May report
- US Fed is expected to hike rates today but maintain modest growth forecasts
The UK economy remains in focus today with the monthly update on the labour market. Later, the US will grab the headlines with the US Federal Reserve's monetary policy announcement, along with a new set of economic forecasts and a press conference with Fed Chair Janet Yellen. We’ll also see new US inflation data via the May report on consumer prices.
UK: Labour Market Report (0830 GMT): Yesterday’s stronger-than-forecast inflation report brought more worrisome news for Britain’s economy. Today’s question: Will the update on the labour market weigh on macro sentiment too?
The combination of a slowing economy and rising inflation is never encouraging, but the pairing is especially unwelcome as the UK grapples with Brexit negotiations and a weakened government that lost its parliamentary majority in last week’s election.
The ongoing acceleration in inflation is certainly a complicating factor. Prices rose at a four-year high in May in annual terms. “This spike in inflation will exert further downward pressure on real household disposable income, at a time when wage growth remains modest and in turn squeeze consumer spending,” said the head of UK macroeconomic forecasting at the National Institute of Economic and Social Research. “We expect inflation to rise further over the course of this year and to reach a peak in the final quarter of 2017.”
Meantime, the burning question is simply: Is the economy stumbling? Today’s labour market update offers a fresh round of numbers for analysis. Economists are looking for another rise in the claimant count, which would suggest that employment growth is cooling. TradingEconomics.com’s consensus forecast calls for new filings for jobless benefits to rise 20,300 in May, marking the third straight monthly increase.
In short, today’s data on the claimant count is expected to renew worries about the economic outlook at a time of accelerating inflation and heightened political uncertainty.
US: Consumer Price Index (1230 GMT): Softer inflation expectations raise new questions about the wisdom of raising interest rates.
The New York Fed on Monday advised that its survey of consumers points to a decline in three-year-ahead inflation expectations to 2.47% in May – a 16-month low. The one-year estimate also edged down, slipping to 2.59% from 2.79% in April.
Hard data is even weaker. The Fed’s preferred measure of inflation, core Personal Consumption Expenditures (less food and energy), advanced 1.5% in the year through April, the smallest rise in more than a year.
Some analysts are expecting core inflation to trend even lower in the months ahead. “In stark contrast to market expectations, US inflation is in the midst of a big downturn,” according to an economist at Precision Macro. “Core inflation is likely to end this year close to 1%, far below the Federal Reserve’s target of 2%.”
Deciding if that’s a reasonable outlook starts with today’s update on consumer price inflation for May. The crowd’s looking for headline inflation to dip to an annual 2.0% rate from 2.2% in April while core inflation holds steady at a 1.9% year-over-year pace, according to Econoday.com’s consensus forecast.
The estimates leave the Fed with enough wiggle room to rationalise a rate hike, although weaker-than-expected inflation data would, in theory, provide the basis for putting monetary policy on hold for the near term.
US: Federal Reserve Announcement, Economic Forecasts (1800 GMT) and Press Conference (1830 GMT): The Fed is expected to raise interest rates today, lifting the Fed funds target rate by 25 basis points to a 1.0%-to-1.25% range. If so, does tighter policy imply that the central bank will lift its outlook for economic growth and inflation?
The interest-rate decision will draw the most attention, but the Fed’s revised forecasts may be more revealing about the future path for policy. In the March release, the central bank left its forecasts largely unchanged from the December meeting. GDP growth for this year was projected at a moderate 2.1% increase and inflation remained on track to rise 1.9% in 2017. Next year’s estimates look roughly the same via the March release.
Will today’s update reshuffle the outlook by a meaningful degree? Perhaps, but with inflation estimates from other sources ticking lower recently it would be surprising to see even a fractional rise in the Fed’s forecast for inflation in the near term.
Keep your eye on today’s update for growth estimates too. The Fed will probably maintain the roughly 2% trend for economic activity. It’s debatable if that’s sufficiently strong to justify another rate increase. Although most forecasters see GDP growth picking up in the second quarter after a sluggish increase in Q1, the rebound isn’t expected to strengthen in the second half of the year and push the full-year estimate higher.
The New York Fed’s GDP forecasts for 2017 and 2018, for instance, ticked down in the May 31 release. Output is on track to rise 1.9% this year, down from 2.2% in the February projection, the bank advised.
Given what we know about the economy at the moment, it's unlikely that today’s quarterly forecast from the Fed unveils a materially stronger trend for the rest of the year.
Disclosure: Originally published at Saxo Bank TradingFloor.com