Soft UK inflation and earnings growth to signal little need for an early rate move

• Soft UK inflation and earnings growth to signal little need for an early rate move
• Fed Chair Yellen testifies to Congress
• Zew survey provides first signal on Germany for Q3

Risk off again?.. The market impact of June’s strong US payrolls report proved to be short lived. In a week with little economic news, equity markets came under pressure due to renewed concerns over peripheral euro markets. This caused a move into safe haven assets and the yen.

UK rate debate to resurface?... Domestically, the dichotomy of the policy debate looks set to continue in the week ahead, with the latest labour market and inflation releases taking centre stage. A combination of firm employment gains and another sizeable drop in unemployment are expected to lead to a further decline in the unemployment rate to 6.5% from 6.6% previously. While this may fuel concerns over the amount of slack in the economy, the absence of wage inflation suggests that this still remains substantial. We forecast headline average earnings growth dropping to just 0.6% in the latest release from 0.7%. Similarly, the CPI inflation outlook continues to remain benign. Following May’s drop to a 4 ½ year low of 1.5%, we forecast CPI ticking up temporarily in June to 1.6% before the downward trend is resumed in the coming months. Comments from Governor Carney and several other members of the Bank of England’s FPC will be closely watched when they testify to the Treasury Select Committee (Tues) about the recent Financial Stability Report.

US data to point to a firm June... With little domestic data news of real note, US asset prices were impacted by global developments this week. As a result, Treasuries regained all the ground lost in the wake of the previous week’s stronger than expected employment report. The coming week is set to be more eventful, with a busy data calendar and Fed Chair Janet Yellen’s testimony to Congress. The pick of next week’s data is June retail sales (Tues), which will provide an indication of the strength of consumer spending at quarter end. May retail sales were disappointing but reports from both car dealers and department stores point to a stronger outturn in June (we forecast 0.8%). Housing remains an area of weakness in the economy, although much of the data for May pointed to a pick up. Housing starts and building permits (Thurs) will show whether this continued into June, while the NAHB Index (Weds) provides a preliminary indication for July. June industrial production and the Fed Empire and Philly surveys for July will provide early evidence on whether the spring manufacturing upturn has continued. Meanwhile, producer prices will be watched closely given other signs of inflation rebounding.

Yellen’s testimony to be closely watched... Fed Chair Yellen’s semi-annual testimony to Congress will be the first indication of whether her reading of the economy has been changed since the stronger payrolls data. She testifies to the Senate on Tuesday and to the House on Wednesday. We expect her to acknowledge recent signs of improvement, particularly in the labour market, but to reiterate that a very loose policy stance remains appropriate for now. Questions to her will probably include whether Fed policy is encouraging excessive speculation. She may also be asked about a potential House Bill to constrain Fed actions.

Eurozone outlook remains soft... The weakness in euro area wide May industrial activity should be confirmed in the aggregate industrial production release (Mon). However, with the focus shifting to the outlook for Q3, the Germany ZEW survey will be closely watched. The expectations component is forecast to post a seventh consecutive drop in July, raising concerns over the growth outlook for the German economy.

And finally ... There are central bank meetings in both Canada and Japan next week. Neither is expected to result in a policy change. In China, the first estimate of Q2 GDP is released on Wednesday. We expect GDP to remain at 7.4% y/y in Q2, unchanged from Q1.