-    Boost to industrial metals from China and euro-zone PMI data is unlikely to last

-    Germany’s Q2 GDP growth was probably boosted by temporary factors (07.00 BST)

-    Household spending may have driven most of the UK’s GDP growth in Q2 (09.30 BST)

Key Market Themes

The 10-year US Treasury yield rose to a new two-year high of more than 2.9% following the publication of the minutes of the US FOMC’s late-July meeting on Wednesday. However, the yield has since stabilised at a slightly lower level and US equities have recouped some of the losses they incurred.

There is still some uncertainty as to whether the Fed will scale back QE3 in September or December and how precisely tapering will be conducted. (See below.) However, we suspect that the market has now fully acclimatised to the prospect of less accommodative monetary policy and would not be surprised if the 10-year yield fell back a little by the end of the year. That being said, we expect it to then drift higher over 2014 and 2015 to 3.5%. (Jessica Hinds)

Meanwhile, the flash PMIs for China and the euro-zone rose to multi-month highs in August (see below), buoying the prices of industrial metals such as copper. However, we are sceptical that this will last. (See our Commodities Data Response, “China and euro-zone data provide some cheer (for now)”, published on Thursday.) For a start, China’s rebound has been largely built on a rapid expansion of credit, so it is unlikely to be sustained. Furthermore, although the new orders component of China’s PMI reached a four-month high in August, it is still only consistent with a stabilisation of global copper prices. Finally, the flash euro-zone composite PMI indicated that the region’s recovery is still heavily dependent on Germany and we expect euro-zone GDP growth to flatline in 2014.

Therefore, we continue to think the backdrop for commodities in general, and industrial metals in particular, will be very challenging. We expect the price of copper to fall from around $7,350 per tonne to less than $6,000 in 2014. (Ross Strachan)

What to watch for today: North America

Following the big increase in US new home sales (15.00 BST) in June and the spike in mortgage interest rates in recent months, we anticipate a relatively subdued set of housing market activity data for July. The 8.3% m/m rise in new home sales in June was encouraging, but it is typical for large gains in activity to be followed by some drop back. We are expecting a 2% m/m decline to 487,000 annualised in July. (Paul Diggle)

We estimate that Canada’s headline annual inflation (13.30 BST) rose to 1.3% in July, up from the 1.2% reported in the previous month. The official core inflation figure probably rose to 1.4% from the 1.3% in June. These small increases against the uncertain economic backdrop should have no implication for monetary policy. (David Madani)

While it is far from a certainty, the minutes from the FOMC meeting in late July on Wednesday appeared to support our view that the Fed will begin to slow its monthly asset purchases at the next meeting in mid-September. Nevertheless, with the FOMC still split on when to start the taper we suspect that, as a compromise, officials could opt to start the taper next month, but begin with a smaller-than-expected initial reduction of $10bn. (Paul Ashworth)

Continental Europe

The breakdown of Germany’s GDP (07.00 BST) should reveal that Q2’s 0.7% quarterly increase was broad-based, but boosted by temporary factors. The press release with the flash estimate stated that consumer and government spending both rose and that there was a “marked increase” in investment due mainly to an improvement in the weather. Net trade apparently also contributed positively to GDP growth as exports rose more sharply than imports. (Jennifer McKeown)

Euro-zone consumer confidence (15.00 BST) is likely to have edged up again in August, suggesting an improved outlook for household spending. Consumers should have been encouraged by the news that the euro-zone economy finally began to recover in Q2. In particular, the labour market shows tentative signs of stabilising after the jobless count fell in June. Overall, then, we expect a rise in the consumer confidence index from -17.4 to about -15.5. (James Howat)

August’s flash euro-zone PMIs (released on Thursday) provided further evidence that the currency union continued to expand in Q3, albeit at a pretty modest pace. The composite index rose from 50.5 to 51.7, above the consensus forecast of 50.9 and the highest reading since June 2011. On past form, the index is consistent with quarterly growth in euro-zone GDP of about 0.2%, a bit weaker than the 0.3% expansion seen in Q2. But growth remains a long way short of the rates required to start to address the region’s debt crisis. (Jonathan Loynes)

UK

Our best guess is that the second estimate of Q2 GDP (09.30 BST) will leave the provisional estimate of a 0.6% quarterly rise unrevised. More interesting will be what the expenditure breakdown tells us about what is driving the recovery. We suspect that household spending was responsible for the lion’s share of Q2’s increase. (Michael Pearce)

Japan

No major data or events scheduled for today.

China

The flash manufacturing PMI for August from HSBC and Markit, released on Thursday, surged from 47.7 in July to 50.1. The headline PMI, which had been the last remaining major indicator that was still weakening, has finally turned a corner this month. This should reassure even the most bearish that China has avoided a hard landing for now. Indeed, our China Activity Proxy shows that economic conditions have started to thaw in key sectors of the economy. This implies that there is little need for further stimulus. The government’s focus should return to reining in overcapacity and credit. (See Wednesday’s China Activity Monitor and Thursday’s China Data Response for more.) (Qinwei Wang)

Other Emerging Markets

Peru’s Q2 GDP data are scheduled to be released today. The latest monthly indicators suggest that growth accelerated in the second quarter, with a rebound in manufacturing and mining helping the economy to recover from a weak start to the year. We forecast a 5.5% y/y expansion in Q2, up from 4.8% y/y in Q1. (Michael Henderson)

Key Data and Events

Fri 23rd      -    Per  GDP (Q2)   

            07.00  Ger  GDP (Q2, Final)  

            09.00  Twn  Industrial Production (Jul)  

            09.30  UK   GDP (Q2, 2nd Est.)     

            09.30  UK   Index of Services (Jun)

            13.30  CA   Consumer Prices (Jul)

            13.30  CA   Core Consumer Prices (Jul)

            15.00  EZ   EC Consumer Confidence (Aug)

            15.00  US   New Home Sales (Jul) (saar)