A cautious Fed should provide some support for Treasuries - Capital Economics | Outlook Data
- US non-manufacturing ISM index may have edged up in June (13.30 BST)
- National Bank of Poland set to cut interest rates …
- … but Sweden’s Riksbank is likely to stand pat (08.30 BST)
Key Market Themes
We think the US federal funds rate will have been raised to about 4% by the end of 2017. (See our US Economics Focus, “All you need to know about the Fed’s exit strategy”, published on Tuesday.) However, based on a decomposition of the Treasury yield curve, it looks like the bond market is more or less braced for such an outcome already.
What’s more, we expect the Fed to tighten the monetary screws with great care and anticipate that the federal funds rate may still be as low as 1% at the end of 2015. This is a key reason why we forecast that the 10-year Treasury yield will have only risen to around 3.5% by then. (See our Global Markets Update, “Is the Treasury market braced for future Fed tightening?”, also published on Tuesday.) (John Higgins)
What to watch for today: North America
We anticipate that the US monthly trade deficit (13.30 BST) was $40.3bn in May, unchanged from the month before, with both exports and imports increasing modestly. More generally, we expect the deficit to remain around its current level for much of the next couple of years. The US economy is likely to outperform other developed economies, particularly the euro-zone, which points to a small increase in the real deficit. However, that increase should be broadly offset by the continued decline in the cost of imported petroleum. Projections suggest that US domestic oil production will continue to rise, making it less dependent on imported oil. (Paul Ashworth)
Both the regional activity indices and the growth rate of retail spending suggest that the US ISM non-manufacturing index (15.00 BST) may have remained broadly unchanged at 54.0 in June, from 53.7 in May. On a national basis, the annualised growth rate of core retail sales, which sometimes leads the ISM non-manufacturing index, has held steady. Elsewhere, it will be interesting to see whether the employment index remains at levels that would be consistent with a slowdown in payroll growth in June. (Amna Asaf)
Continental Europe
We expect the Riksbank to leave interest rates unchanged at 1.0% at today’s monetary policy meeting (08.30 BST). Since its last meeting, the hard data that have been published point to sluggish growth ahead. But the Bank may take some comfort from the 5% fall in the krona against both the dollar and the euro since the last interest rate decision in April. Not only will this reduce fears about the effects of the strong krona on exports, it could also push inflation a bit closer towards target. But while we think that rates will remain unchanged this month, we would not rule out a rate cut, perhaps later this year, if the economy performs worse than the Riksbank expects and inflation remains in negative territory. (Ben May)
UK
We expect a rise in the CIPS services headline activity index (09.30 BST) from 54.9 to 55.5 in June. The new business balance in May gave its strongest reading since February 2010, suggestive, on past form, of a further upward movement in the headline measure. And the manufacturing PMI already released rose in June (although the construction survey held steady). The Bank of England’s latest Credit Conditions Survey and housing equity withdrawal figures are also released at 09.30 BST, while the latest BRC shop price figures will have been released overnight. (Martin Beck)
Japan
No major data or events scheduled for today.
Tuesday’s official release confirmed that labour cash earnings were still subdued in May, but we can already be confident that higher summer bonuses will result in much better headlines in the next two months. Dealing with the May data first, labour cash earnings were flat on a year-on-year basis, as was the case in April. However, according to a recent survey by Keidanren, Japan’s business federation, summer bonuses will rise by 7.4%, the largest increase since 1990. Assuming no major change in other components, labour cash earnings will probably climb by around 3% y/y in June and 2% in July. This would of course be welcomed by employees and generate some further positive headlines for “Abenomics”, especially as the government has been putting pressure on firms to lift wages sooner than they would normally do. Unfortunately, while bonuses may be rebounding, there is no guarantee that basic pay will follow. (Julian Jessop)
China
No major data or events scheduled for today.
Other Asia-Pacific
No major data or events scheduled for today.
The Reserve Bank of Australia (RBA) kept its cash rate on hold at 2.75% at its meeting on Tuesday, as was widely expected. In its accompanying statement, the RBA stressed that it expects an improvement in the economy in 2014. This more optimistic tone means that an imminent rate cut has become less likely, but we still expect one rate cut of 25bp before the end of the year to help support the economy as mining activity cools. We also think that the RBA is more likely to cut rates in 2014 than to raise them, against consensus’ expectations for the cash rate to be hiked next year. (Krystal Tan)
Other Emerging Markets
We expect the National Bank of Poland to cut its benchmark interest rate by 25bp to 2.50% today. Admittedly, the MPC remains highly divided, meaning that the decision is likely to be a close call. But we think the weakness of the latest activity and inflation data should tip the balance in favour of further policy easing. (William Jackson)
Key Data and Events
Wed 3rd - Pol Interest Rate Announcement
00.01 UK BRC Shop Price Index (Jun)
02.30 Aus Trade Balance (May)
02.45 Aus Retail Sales (May)
08.30 Swe Riksbank Interest Rate Announcement
09.00 EZ Composite PMI (Jun Final)
09.30 UK CIPS/Markit Report on Services (Jun)
09.30 UK BoE Credit Conditions Survey (Q2)
09.30 UK Housing Equity Withdrawal (Q1)
10.00 EZ Retail Sales (May)
13.15 US Change in ADP Employment (Jun)
13.30 US International Trade (May)
13.30 US Initial Jobless Claims (29th Jun)
13.30 CA International Merchandise Trade (May)
15.00 US ISM Non-Manufacturing Index (Jun)
