US – Release of important indicators at low market liquidity

Eurozone – Unemployment rate unchanged, has inflation passed its trough?

US – Release of important indicators at low market liquidity

Eurozone – Unemployment rate unchanged, has inflation passed its trough?

The unemployment rate was reported at 11.1% in June, thus unchanged compared to May. Due to an increased negative contribution from energy prices, headline inflation in July remained stable at 0.2% y/y, but core inflation (without energy and food prices) increased to 1% y/y (June: 0.8% y/y), representing the highest value in more than one year. Based on the ongoing economic recovery, a further decline in unemployment and abating negative base effects from oil prices, we expect rising inflation over the course of this year. We expect average inflation of 0.3% y/y in 2015, which is the same as the forecast published by the ECB staff.
However, this figure is based on slightly higher oil prices (currently: USD 54 per barrel). We will closely monitor the development of the Eurozone’s core inflation (excluding energy and food prices) in the coming months.
The latter is an important indicator (independent of external price effects, namely the oil price) of whether the economic recovery is strong enough to support a sustainable trend reversal of inflation towards price stability.
Currently, bond markets are focusing on macro data, so Bund yields have slightly increased following the release.

US labor market data to determine expectations for timing of ‘lift-off’

The ISM Index for July will be published on Monday. After the slump in the first months of the year, the index from the manufacturing sector recovered during the last few months. The levels reached were significantly above the 50 point mark, clearly indicating growth in this sector of the economy. The ISM is also a good indicator for economic activity overall, which was again proven in the second quarter. Currently, markets expect for July an unchanged number compared to June. Any significant deviation of the actual outcome should move markets. One risk to the downside is possible repercussions from the stock market crash in China.

Without doubt, the most important release next week will be the labor market report for July on Friday. Attention will be especially high, as just this week the Fed’s FOMC confirmed that the timing of the first rate hike would depend mostly on a further improvement of the labor market.
Before the next FOMC meeting, only two more labor market reports are scheduled. The ADP report on Wednesday will give a first indication of how employment might have developed. Generally, better than expected labor market data should have the strongest impact on markets, in our view. Such an outcome would clearly favor September as the date for the first rate hike. Currently, markets are leaning more towards December as the date for the ‘lift-off’. Wage growth should get special attention, as any surprise on the upside would increase the pressure on the FOMC to act instantly. We think that only a deterioration of labor market data would push the first rate hike to December. A recovery of the labor market at the speed seen in recent months should be sufficient to trigger the ‘lift-off’ in September. We reason that the unemployment rate is already at a low level and, given the current extremely low target rate, already justifies a rate hike, in our view. Any impact of the releases next week might be amplified by the traditionally low market liquidity around this time of the year.