Monday starts off quietly, with no major scheduled events for the FX market apart from the U.S. durable goods orders m/m. On Tuesday, Japan will release the BoJ core CPI y/y, while in the U.S. the focus will be on the CB consumer confidence and the Richmond manufacturing index.
Wednesday brings Australia’s inflation data, then attention will shift to the FOMC monetary policy announcement in the U.S. On Thursday, the Bank of England will announce its monetary policy decision and the U.S. will get the advance GDP q/q, core PCE price index m/m, and weekly unemployment claims data.
Finally, on Friday in Japan, attention will be on the Tokyo core CPI y/y print and the BoJ meeting. The eurozone will release the flash core CPI estimate y/y, Canada will get the GDP m/m, and the U.S. will report the revised UoM consumer sentiment and revised inflation expectations.
In Australia, the consensus for CPI m/m is 0.2%, compared with the prior -0.7%. CPI y/y is expected to remain unchanged at 4.0%, while trimmed mean CPI m/m is forecast at 0.4% vs. 0.4% prior.
Inflationary pressures in Australia have picked up following the escalation of the Middle East conflict. Even so, for Q2 the annual CPI is expected to ease slightly to 4.0%.
According to Westpac analysts, the temporary halving of the fuel excise is expected to dampen quarterly inflation, while softer-than-expected holiday travel costs should also help limit upside price pressures. Westpac forecasts the monthly CPI rose 0.4% in June, which in their estimation will bring the y/y inflation to 4.2%.
The second quarter is expected to show the first signs of inflationary spillovers from the Middle East conflict, with price pressures emerging in categories such as new dwelling construction, repairs and maintenance, and meals out and takeaway. Westpac expects the Q2 outcome to lift annual trimmed mean inflation to 3.7%.
In the U.S., the Fed is widely expected to leave the federal funds rate unchanged at this week’s meeting, giving policymakers more time to assess incoming economic data.
Recent inflation and labor market data have come in softer than expected, supporting the case for keeping rates on hold. However, the renewed rise in oil prices remains a potential source of inflationary pressure and could complicate the outlook.
Wells Fargo analysts note that the meeting could feature at least two hawkish dissents, with Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack seen as the most likely candidates.
With no updated Summary of Economic Projections scheduled for this meeting, the policy statement and Chair Warsh’s press conference are expected to provide only limited new guidance. Warsh is likely to emphasize that monetary policy is well positioned to remain on hold while the Committee gathers more information, while reaffirming the Fed’s commitment to returning inflation to target.
Markets will be looking for any clues about the conditions that could eventually justify further policy tightening, particularly in light of upcoming inflation data. The baseline expectation remains that the FOMC will keep interest rates unchanged for now and that core inflation will moderate in upcoming months.
The BoE is also expected to keep interest rates unchanged at 3.75% at this week’s meeting. As a reminder, the June decision suggested that the Monetary Policy Committee remains relatively hawkish beneath the surface. Although the vote to leave rates unchanged was 7–2, policymakers continue to express significant concern about upside risks to inflation.
Recent economic data have given the BoE greater scope to adopt a wait-and-see approach. Inflation came in below expectations, services inflation eased, and the labor market continued to cool, with private-sector regular pay growth also slowing.
Higher household costs remain a concern, particularly following the 13.5% increase in the Ofgem energy price cap and with household inflation expectations staying elevated at 4.0%. However, there is little evidence that these higher costs are feeding through more broadly, Wells Fargo analysts said.
Markets will be watching closely for any clues about the BoE’s next policy move. A 25bps rate hike is still expected in the fourth quarter, although that could be delayed if economic growth weakens further or the labor market softens more than anticipated.
In the U.S., the consensus for the core PCE price index m/m is 0.1%, compared with the prior 0.3%. Personal income m/m is expected to rise 0.3% versus 0.7% previously, while personal spending m/m is forecast at 0.4%, compared to 0.7%.
The data will be released after the FOMC meeting and will provide an updated assessment of underlying inflation and consumer spending trends.
According to Wells Fargo analysts, core PCE is expected to increase 0.2% m/m, which would leave annual core inflation at 3.3%, down from 3.4% in May, despite the softer-than-expected CPI and PPI readings for June.
Underlying inflation remains concentrated in a relatively small number of categories. Strong demand from hyperscalers and technology companies continues to support prices for computer software and related products amid the ongoing AI investment cycle. Because these categories carry a larger weight in the PCE index than in the CPI, the report is expected to show only a modest easing in underlying inflation, Wells Fargo said.
The strong June retail sales suggest consumer spending remained resilient, but it’s not certain for how long households can sustain that pace of spending since real disposable income growth has weakened and the saving rate is the lowest it’s been in years. The higher energy costs also weigh on purchasing power and any extra cash consumers got from tax refunds has likely been used by this point.
In the U.S., the consensus for advance GDP q/q is 2.3%, compared with the prior 2.1%. The economy was supported by strong business investment, particularly in equipment spending related to the ongoing AI buildout. However, weaker net exports are likely to offset part of that strength.
Consumer spending for the second half of the year is expected to be more subdued and, along with a softer labor market, will weigh on the broader economic activity.
The Bank of Japan is expected to leave its policy rate unchanged at 1.00% at this week’s meeting while maintaining a tightening bias. Although headline inflation picked up in June, underlying price pressures eased, suggesting the increase was driven primarily by higher energy costs rather than broad-based inflation.
The renewed energy shock could lift import costs and generate additional pressure while weighing on household purchasing power and squeezing corporate profit margins. Markets continue to anticipate a 25 bps rate hike in the fourth quarter, most likely at the October meeting, which would lift the policy rate to 1.25% by year-end.
In the eurozone, the consensus for the core CPI flash estimate y/y is 2.4%, unchanged from the previous reading, while the headline CPI flash estimate y/y is expected to rise to 2.9% from 2.8%.
Headline inflation is expected to edge higher in July. Although the consensus calls for core inflation to remain unchanged at 2.4%, some analysts believe it could increase to 2.5%.
While underlying price pressures have remained relatively contained, higher energy costs are increasingly feeding through to businesses. Rising input costs are putting pressure on profit margins, prompting some firms to pass these higher costs on to consumers.
From a monetary policy perspective, markets continue to expect the ECB to deliver a 25 bps rate hike at its September meeting, provided incoming inflation and growth data remain broadly in line with expectations.
This article was written by Gina Constantin at investinglive.com.