No surprises expected from FOMC; prelim US Q2 GDP and July payrolls stand out

DATA TO HIGHLIGHT US/EURO AREA DIVERGENCE

• No surprises expected from FOMC; prelim US Q2 GDP and July payrolls stand out
• Euro area CPI inflation may have fallen below 0.5% in July
• July surveys to provide early clues about UK Q3 GDP momentum

The shadow of a geopolitical crisis looms large as tensions in the Ukraine and Middle East continue to dominate news headlines. Financial markets will have the distraction of an important week for economic releases, albeit the holiday season is now also in full steam. Data-wise, the focus is on the US in the coming week, with some key releases sharing the spotlight with the FOMC policy meeting.

That said, the FOMC meeting (Wed) is unlikely to deliver any major surprises: there is no press conference and Fed Chair Yellen has recently updated the markets with the Fed’s latest thinking in her testimony to Congress. We expect no change to policy with the exception of a further $10bn tapering of Fed asset purchases to $25bn. However, the press statement will still be dissected for any clues about the policy outlook. There have been strong signals tapering will be completed at the October FOMC meeting with interest rates expected to remain unchanged for a 'considerable time' after QE ends.

Ahead of the FOMC meeting the preliminary estimate of US Q2 GDP will draw attention. There is risk of a surprise here, coming after the weather-related contraction in Q1. We forecast Q2 GDP growth rebounded to 3.5% annualised from -2.9% in Q1, which is above the median forecast of 2.9%. On a sequential basis, this would still leave GDP almost unchanged in H1, albeit we expect the Q1 outturn to be revised higher in time. More tellingly, even if the US economy were to expand at a similar 3-4% (annualised) pace in Q3 and Q4, it would still leave calendar year growth for 2014 as a whole well below last year’s 1.9% rate. The IMF cut their forecast to 1.7% this week.

While the GDP data may support a cautious approach to tightening monetary policy, the signals from the labour market contrast with this benign picture. The US labour market report (Friday) is expected to show the sixth successive increase in payrolls above 200k in July (we forecast 220K, down from 288k in June). Meanwhile, the unemployment rate is forecast to remain at 6.1%, its lowest level since September 2008. Given this, the more interesting data this week could well be average earnings and hours worked, as indicators of the degree of slack in the labour market. There is a strong chance the payrolls report overshadows the FOMC meeting and Q2 GDP data. The July manufacturing ISM is also published on Friday.

In the euro area, the main focus will be on inflation. German state CPI data for July will be closely watched on Tuesday morning ahead of the official release and euro area preliminary CPI the next day. Reflecting the fall in global oil prices and the euro, we forecast German CPI inflation eased to 0.8% this month, from 1.0% in June. There is a significant risk euro area CPI eased below 0.5% in July - the slowest annual rate since October 2009. Various sentiment surveys, including euro area final PMIs, are released during the week. These are expected to confirm a mixed, but slightly better, picture following the firmer ‘flash’ PMIs this week (led by Germany). Labour market data (Thurs.) are expected to show German unemployment posted a modest decline of 5k in July, with the unemployment rate forecast to have held at 6.7%.

Elsewhere, it is a thin week for UK data. Attention is likely to centre on July business surveys. Our own Lloyds Bank Business Confidence Barometer (Weds.) and the manufacturing PMI (Fri.) will both be watched for an early insight into strength of Q3 GDP. The manufacturing PMI is expected to hold at its recent high of 57.5, but there are downside risks. Earlier in the week (Tues.) money supply, mortgage approvals and consumer credit are also due.

Finally, in China, we expect the positive economic sentiment to continue, with the July official PMI predicted to touch its highest level in 26 months. This should provide the clearest sign yet that the economy is benefiting from “mini” stimulus measures announced earlier this year.