Investing.com – As the Federal Reserve’s (Fed) July 26-27 policy meeting nears, markets will be keeping an eye on the data flow to see whether to expect a dovish or hawkish stance in the statement that accompanies the decision.
Fed fund futures showed on Tuesday a 0% chance that the U.S. central bank would make a move to tighten policy and even put a 2.4% probability on a 25 basis point cut.
Even as far out as the February 1 decision, markets gave odds at 84% for the Fed to stand pat on interest rates.
Yet the latest projections from the Fed showed back in June that its members expected two rate hikes this year and even St. Louis Fed president James Bullard, self-proclaimed “most dovish” component of the monetary authority, still expected one hike this year even after the U.K. chose to leave the European Union (EU) in the June 23 referendum.
Prior to that vote, Fed chair Janet Yellen had admitted that the risks surrounding a Brexit, as the decision to leave was termed, was one of the factors that convinced the central bank to stay its hand back in mid-June.
Additionally, she had mentioned the slowdown in China along with the dismal May jobs report.
However, the vote has come and gone and both Cleveland Fed president Loretta Mester and St. Louis Fed chief James Bullard commented on separate post-Brexit occasions that the impact on the U.S. economy would be limited.
Fed vice chair Stanley Fischer pointed out that while it will still take time before the Brexit impact can be assessed due to the long, drawn out process, he noted that recent U.S. data had been “looking good” and also added that the impact was likely to be smaller on the American economy than on others.
Economists appeared to be split on the question of a Fed rate hike this year, but David Lebovitz, global market strategist at JPMorgan Asset Management, warned on Friday that one could arrive even if markets weren’t expecting it.
Even though Lebovitz said that it was hard to gauge how what was going on in the U.K. and Europe would affect the U.S. economy, he explained to CNBC on Friday that second quarter activity data had been holding up quite well.
Of course, the advanced read of the second quarter gross domestic product (GDP) will not be published until after the decision on July 29, but markets will able to follow data points leading up to the event that could give clues on the health of the U.S. economy.
At the moment, the Atlanta Fed’s last estimate expected growth of 2.6%, while the New York Fed forecast an expansion of 2.1% and consensus predicted growth of 2.4%.
While no one expects the Fed to be able to return to the normalization of monetary policy at the July meeting, the focus will be on whether they opt for a message that is dovish or hawkish.
In the countdown to the Fed decision and statement, Investing.com compiled a list of the most relevant events on the economic calendar that are most likely to affect the Fed’s outlook:
July 6: The advance goods trade balance for May will give an indication of the balance of exports and imports mid-quarter.
The ISM non-manufacturing purchasing managers’ index (PMI) for June will give an indication of the overall health of the activity in the services sector at the end of the second quarter.
The minutes from the last Fed meeting will provide additional clues on what policymakers were thinking at the last big meeting in mid-June, although it should be kept in mind that was before the U.K. voted to leave the EU.
July 8: June’s employment report will be a key factor for determining the Fed’s outlook, especially since it could serve to help clarify whether May’s numbers were simply transitory.
Complicating the matter will be the return of more than 30,000 Verizon Communications workers who were on strike in May. They’ll be added back to the June report and inflate the headline number.
Some observers also suggested that a low number of firms responded to the May survey which could imply a sizeable upward revision to the weak job creation number that month.
In any case, the June report is expected to show the unemployment rate rise slightly to 4.8% despite an increase of 175,000 nonfarm payrolls. Additionally, consensus forecasts average hourly earnings to rise by 0.2%.
An upbeat employment report would help support the case for the Fed to steadily tighten monetary policy this year.
July 12: May JOLTS (job openings and labor turnover survey), mentioned by Yellen herself as one of the preferred barometers of the health of the labor market, will provide its latest read.
July 13: The Beige Book will give the outlook on current economic conditions in the 12 Fed districts.
July 14: Weekly jobless claims will continue to give input on the state of the employment.
The June producer price index (PPI) will the measure the change in the price of goods sold by manufacturers and is considered a leading indicator of consumer price inflation (CPI).
Out of the nine confirmed appearances by Fed officials in the run-up to the quiet period, markets may do well to focus on Kansas City Fed president Esther George’s speech on the economy.
George voted against the policy decisions back in March and April, preferring a 25 basis point increase to 0.50%-0.75%, but recanted in the June decision ahead of the Brexit referendum.
Whether or not she decides to return to her hawkish stance could help signal a shift in the Fed outlook.
July 15: The June CPI number will be key to show the state of inflation at the end of the second quarter with a high reading putting pressure on the Fed to tighten.
June retail sales will shine a light on the strength of the American consumer, responsible for 70% of U.S. economic growth.
June industrial production will provide a reading of the output produced by manufacturers, miners and utilities at the end of the second quarter.
Preliminary data from the University of Michigan for consumer sentiment in July will show the state of the American spending attitudes as the third quarter kicks off.
July 21: Weekly jobless claims will give an additional read on the state of the employment in July.
July 22: Markit’s flash manufacturing PMI for July, though not as widely followed as the Institute of Supply Management’s own version that will not be released until after the meeting, will give a preliminary indication of activity in the manufacturing sector at the start of the third quarter.
July 26: As the Fed begins its two-day meeting, Markit’s flash services PMI for July will gauge activity in the sector, also at the beginning of the third quarter.
July consumer confidence will define Americans’ outlook on spending as the second half of the year begins.
July 27: June durable goods, especially the core number, will gauge ordering trends and manufacturing activity and will be the last economic reference before the Fed announces its decision and publishes the statement.
Yellen will not hold a press conference at the end of this meeting.