-    US jobless, inflation data shorten the odds of Fed tapering QE3 in September

-    Euro-zone’s trade surplus probably widened again in June (10.00 BST)

-    UK heatwave provided decent support to overall retail sales in July

Key Market Themes

The 10-year US Treasury yield hit a two-year high and global equities fell on Thursdayafter better-than-expected US initial jobless claims and a rise in US consumer price inflation in July (see below) rekindled investors’ fears about an early end to the US Fed’s accommodative policy.

We think investors may have run ahead of themselves. After all, even if the Fed does start to scale back its bond purchases in September as we expect, interest rates will remain very low for an extended period of time. Consequently, we forecast the yield of the 10-year US Treasury to fall back from its current level of nearly 2.8% to 2.5% by the end of the year. We don’t expect renewed strength in US equities, though, as they have weathered concerns about a shift in monetary policy much better than bonds. What’s more, profit margins and valuations remain stretched. We forecast the S&P 500 to end the year at 1,625, a few percentage points below its current level. (Jessica Hinds)

Meanwhile, Japanese equities were also undermined on Thursday by cautious comments from officials about the prospects for corporate tax cuts, as well as overnight weakness in the US and another pause in the yen’s decline. Our view is that, even without the need to mitigate the impact of the planned doubling of the consumption tax, the arguments for lowering Japan’s relatively high corporate tax rates would be very strong. But with a substantial fiscal squeeze coming, the arguments appear irresistible. (For more, see our Japan Economics Update, “Options for the consumption tax”, published on Wednesday.)

Admittedly, Japan’s government could still decide to delay the consumption tax hike scheduled for April 2014. The damage to credibility may be lessened if the economy is clearly too weak and a sensible alternative plan (with fiscal “forward guidance”) is put in place. However, we think it more likely that the government will press ahead with the hikes due in both 2014 and 2015. The economic costs could be mitigated by some offsetting fiscal measures – including cuts in corporate taxes – and a further loosening in monetary policy. This combination should be negative for the yen, which we expect to fall to 105 against the dollar by end-2013 and to 110 by end-2014, but positive for JGBs and the Nikkei. (Julian Jessop)

What to watch for today: US

After touching the long-term average of 85 in July, the University of Michigan measure of consumer confidence (14.55 BST) is likely to fall back a bit this month to around 82. The upward trend in equity prices stalled in early August and gasoline prices remained close to the recent high of $3.75 a gallon. What’s more, mortgage rates are inching higher and labour market conditions are improving only gradually. Finally, seasonal factors tend to subtract two points from the index of confidence in August. Under these circumstances, we expect the index to drift lower, in tandem with some of the other measures of confidence already released. (Amna Asaf)

The latest building permit numbers point to a reversal of June’s sharp fall in housing starts (13.30 BST). Although housing permits also fell in June, at 911,000 they remain above the level of starts. Given that permits have run above starts for three months now, there may be a backlog of projects waiting to get off the ground. As such, we have forecast a rise in starts to 925,000 in July, which would be a 10% m/m gain. (Paul Diggle)

The fading of the downward pressure on core inflation and the fall in initial jobless claims to a six-year low mean the odds on the Fed beginning to taper QE3 next month have shortened further. The 0.2% m/m rise in consumer prices (consensus +0.2%) pushed the annual CPI rate up from 1.8% in June to leave it bang in line with the Fed’s 2.0% target. Core prices also rose by 0.2% m/m (consensus +0.2%) and although the annual rate remained at 1.7%, the timelier three-month annualised rate rose to 2.1%, from 1.5% in June. This will make the Fed less concerned that core price pressures are too weak. July’s industrial production data threw some cold water on all this – production was flat and manufacturing output fell by 0.1% m/m. But given that overseas demand appears to be improving, we don’t think it will be long before industry is growing at respectable rates again. (Paul Dales)

Continental Europe

The euro-zone’s trade surplus (10.00 BST) is likely to have widened again to historic levels in June. In light of already-released German and French data pointing to a small rise in exports and a moderate fall in imports, we have pencilled in a rise in the surplus from €14.6bn to €17.5bn. Meanwhile, final CPI data for July (also 10.00 BST) are likely to confirm that the euro-zone’s headline inflation rate held steady at 1.6% and that core inflation fell slightly from 1.2% to 1.1%, underlining the weakness of price pressures in the region. (James Howat)

UK

No major data or events scheduled for today.

With retail sales volumes in July (published on Thursday) rising by a monthly 1.1%, that month’s heatwave (the sixth warmest July since 1900) appears to have provided decent support to overall sales. With consumer confidence on the rise and continued growth in employment, the retail sector looks well set for the third quarter, even as the boost from the weather fades. However, with real pay expected to continue falling into next year and households eating into their savings, the resources to sustain growth in sales still look lacking. (Martin Beck)

Japan

No major data or events scheduled for today.

Other Asia-Pacific

The Central Bank of Sri Lanka (CBSL) has kept the repo and reverse repo rates unchanged at 7.0% and 9.0% respectively, after cutting them by 50bp in May. Cuts today (03.00 BST) are unlikely since the currency has weakened by 4% since the start of June and inflation remains one of the highest in the region. (Krystal Tan)

Hong Kong’s GDP figures for Q2 are scheduled to be released today (09.30 BST). Recent data suggest that Hong Kong grew by a subdued pace. We forecast growth of 0.5% q/q, up slightly from the 0.2% expansion recorded in Q1. Looking ahead, with exports equivalent to 200% of GDP, trends in global demand will determine how Hong Kong performs. Although stronger US demand should help, a return to growth of 5%-plus looks unlikely anytime soon given our view that growth in the euro-zone and China will disappoint.

Bank Indonesia’s decision to leave interest rates on hold on Thursday does not mean the end of the tightening cycle. But with the recent spike in inflation likely to prove temporary and the economy weakening, any future tightening is likely to be gradual. (Gareth Leather)

Key Data and Events

Fri 16th    03.00  Sri  Repurchase Repo Rate (Aug)   

            03.00  Sri  Reverse Repo Rate (Aug)

            09.00  EZ   Current Account (Jun)  

            09.30  HK   GDP (Q2)   

            10.00  EZ   CPI (Jul, Final) 

            10.00  EZ   CPI Core (Jul, Final)  

            10.00  EZ   Trade Balance (Jun)    

            10.00  Ita  Current Account (Jun)  

            13.30  US   Non-Farm Productivity (Q2 Prov.)   

            13.30  US   Unit Labour Costs (Q2 Prov.) 

            13.30  US   Housing Starts (Jul)   

            14.55  US   Uni. of Mich. Consumer Confidence (Aug Prov.)