-    Trio of central bank decisions: Fed (Wed.), Bank of England (Thurs.) and ECB (Thurs.)

-    US Q2 GDP data may be disappointing (Wed.) …

-    … but we expect US July payrolls data to show extra 200,000 jobs (Fri.)

Key Market Themes

After a quiet week with little in the way of fresh data or events, a trio of major central bank decisions sandwiched between US GDP and employment data mean there will be plenty for markets to focus on in the days ahead. However, we expect the overall impact on the financial markets to be quite limited.

For a start, we don’t expect any of the three major central banks to spring a major surprise.  A soft Q2 GDP number should stay the Fed’s hand until September. The ECB is unlikely to make any radical changes after introducing forward guidance last month. And any formal announcement of something similar from the MPC won’t be forthcoming for another week. 

The US payrolls data on Friday have more potential to move the markets, especially in thinner summer holiday trading conditions. We expect another strong number, which should reinforce expectations that the Fed will start to scale back its bond purchases as early as September. However, the central bank has been at pains to stress that it will be very careful in withdrawing its accommodation, so even if the gain in payrolls is more than anticipated, markets are unlikely to conclude that there will be a sudden radical shift in policy. This should help to prevent a renewed surge in bond yields.  (Jessica Hinds)

What to watch for this week: North America

Recent data have suggested that US Q2 GDP growth (Wednesday) could be particularly disappointing. Our forecast is that growth slowed to 1.0% on an annualised basis and we think a sub-1.0% reading is possible. This should prevent the Fed from making any changes to monetary policy at its two-day meeting which concludes on Wednesday. At most, the accompanying statement might include some modest changes, perhaps to highlight the further improvement made in the labour market. On that front, we anticipate that July’s employment figures, due for release on Friday, will show another 200,000 increase in non-farm payrolls. The ISM manufacturing index for July (Thursday) should also show some improvement in conditions. We expect a further rise to 52.0 from 50.9 in June. (Paul Ashworth)

The evidence suggests that GDP in Canada (Wednesday) grew by a 0.3% m/m in May, up from 0.1% in the month before. We think industrial production (Tuesday) contributed only modestly. Otherwise, construction activity was probably dampened by the slowdown in residential activity. In contrast, output among service-producing industries may have grown strongly, especially among retailers and wholesalers. (David Madani)

Continental Europe

This week’s ECB meeting and press conference on Thursday could see stronger hints from Mario Draghi of another cut in interest rates, possibly as soon as September. (See ECB Watch, “Moving towards a rate cut?”, published on 25th July.) Elsewhere, we expect a rise in the main Economic Sentiment Indicator of the EC survey (Tuesday) to provide further evidence of an improvement in near-term growth prospects. But the euro-zone unemployment rate (Wednesday) looks set to remain at a high 12.2%, while CPI inflation (also Wednesday) also looks likely to stay unchanged at 1.6%.

Outside the currency union, GDP in Sweden (Tuesday) looks likely to have contracted in the second quarter for the first time since Q4 2011, thanks largely to weakness in the industrial sector. (Jonathan Loynes)

UK

Thursday’s MPC meeting could pass without event, since any interest rate commitment will be announced alongside the Inflation Report on 7th August. That said, there is an outside chance of a resumption of QE or the start of another form of policy action. Otherwise, this week sees the publication of figures for household borrowing and M4 (Monday, 09.30 BST) for June, which we expect to show a continuation of the divergence between consumer lending, which is picking up, and corporate borrowing, which is falling. Meanwhile, we think that July’s CIPS report on manufacturing (also Thursday) will provide further confirmation that a recovery in the industrial sector is finally getting off the ground. (Samuel Tombs)

Japan

The traditional end-month rush means there are plenty of potentially interesting data releases this week. June retail sales (Monday, 00.50 BST) are likely to suggest that growth in consumer spending slowed in Q2. Small business confidence (Tuesday) and the manufacturing PMI (Wednesday) probably both dipped in July, albeit from high levels. Industrial production probably also fell in June (Tuesday) after a run of strong months, but firms are likely to forecast a rebound in July and August. In contrast, higher bonus payments mean that the risks to the consensus forecast that labour cash earnings were little changed in June (Wednesday) are clearly on the upside. Overall, the usual mixed bag, but nothing that looks likely to unsettle the markets. (Julian Jessop)

China

This week’s manufacturing PMIs (Thursday) will give further clues to the state of the economy at the start of Q3. The HSBC/Markit flash PMI already released for this month weakened. This index has now dropped back to where it stood in the middle of last year. There have been more encouraging signs elsewhere though. For example, sales of earthmoving equipment are picking up. This might be a sign that investment spending is recovering. If so, the official PMI, which gives a high weight to heavy industry, might do better than the HSBC/Markit measure. (Mark Williams)

Other Asia-Pacific

The Reserve Bank of India has a policy meeting on Tuesday, when it is expected to keep interest rates on hold. Indonesia (Friday) and Taiwan (Wednesday) are due to report Q2 GDP data this week. We expect growth to have remained relatively weak in Taiwan. Growth in Indonesia is likely to have stayed strong, although the pace of expansion probably cooled slightly. A number of countries are due to report their July PMIs at the start of August. The numbers should indicate that Asia’s industrial sector remains weak. (Gareth Leather)

Other Emerging Markets

We expect the Czech National Bank to keep its benchmark interest rate on hold at 0.05% on Thursday. However, with growth still extremely weak and inflation pressures subdued, policymakers are increasingly likely to seek further monetary stimulus, probably in the form of FX intervention to weaken the koruna. (William Jackson)

In what looks like being another close call, we think the Central Bank of Egypt (CBE) will keep interest rates on hold at 9.75% on Thursday. Admittedly, the CBE could use the pick-up in inflation in June as cover for hiking rates, which would help to ease some of the strains in Egypt’s balance of payments. But for now, we think that the recently announced $12bn of financing from Saudi Arabia, Kuwait and the UAE should provide the CBE with the firepower to defend the pound without needing to raise interest rates. (Jason Tuvey)

Key Data and Events

Mon 29th    00.50  Jpn  Retail Sales (Jun)     

            09.00  Ita  Business Confidence Index (Jul)    

            09.30  UK   Net Consumer Credit (Jun)    

            09.30  UK   BoE Mortgage Approvals (Jun) 

            09.30  UK   M4 Money Supply (Jun)  

            11.00  UK   CBI Distributive Trades Survey (Jul)     

            15.00  US   Pending Home Sales (Jun)