Attention will remain very much on the US economy and the Federal Reserve as we head into week and month-end.
The Fed statement released on Wednesday gave few clues on the timing of the first rate hike but left the door open to September while reiterating its data dependency. There appears to be a clear preference for a rate hike this year but the Fed is keeping its cards very close to its chest.
Yesterday’s GDP release didn’t really change much, with growth in the second quarter falling slightly below expectations at 2.3% but first quarter growth being revised higher to 0.6%. Today’s data could arguably be of greater importance, particularly the employment cost index which offers insight into future inflation pressures.
If businesses are paying more for labour, it’s clearly a good indication of wage inflation but also, these cost increases are likely to be passed on to the end consumer in the form of price increases. Given that the Fed is clearly seeking evidence of inflationary pressures to compensate for the deflationary impact of falling commodity prices, this and other similar measures could be key.
A quarterly rise of 0.6% is expected today which would extend the good run of at least 0.6% growth to five quarters. Of course, plenty of improvement is still required in order to return to pre-financial crisis levels but these are the best consistent figures we’ve seen since the end of 2008. Whether the Fed deems them good enough to ensure price stability or not is yet to be seen.
The Chicago PMI will also be of interest to traders and is expected to return to growth territory following two months in contraction. Also of note is the revised UoM consumer sentiment reading, which is expected to be revised from 93.3 to 94. The consumer is extremely important to the US economy and to future price inflation as strong demand tends to precede price hikes.
The inflation expectation component is also very important because as long as this remains high, the deflationary impact of commodity prices are unlikely to weigh on long-term inflation. It’s when this starts to decline that the Fed has a real problem on its hands.
The S&P is expected to open 2 points lower, the Dow 33 points lower and the Nasdaq 4 points lower.
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