ECB meeting account to provide further insights into debate on rates

Chris Scicluna
Emily Nicol

ECB meeting account to provide further insights into debate on rates
After last week brought renewed hawkish signals from key Executive Board member Isabel Schnabel, Thursday will bring further information on the debate on the ECB’s Governing Council with the publication of the account of the 20-21 July monetary policy meeting, when its previous forward guidance was ignored and its key interest rates were raised by 50bps to bring an end to the era of negative interest rates. While President Lagarde insisted that future policy decisions would from now on be made on a meeting-by-meeting basis, the account will be watched for insights into the likely magnitude of tightening to be agreed at the ECB’s 7-8 September policy meeting. The debate surrounding the criteria for activation of the new Transmission Protection Instrument (TPI) will also be of interest, not least for possible insights into the extent to which Governing Council members might be able to resist its eventual deployment.

Flash euro area and UK PMIs to suggest growing recession risks
The euro area’s data flow in the coming week will be dominated by August survey indicators, including the flash PMIs and Commission consumer confidence index tomorrow, which will give further insight to the risks that the economy is now slipping into recession. Given concerns about high inflation, supply disruptions, rising interest rates and slowing global demand, the PMIs seem likely to signal a further weakening in conditions in August, with the headline euro area composite output index falling further into contractionary territory from 49.9 in July. Signals from the German manufacturing seem likely to remain extremely downbeat as concerns about energy supply were compounded by fears about the implications of low water levels in the Rhine. However, a much better tourist season should maintain support for services in France and southern Europe. The Commission’s preliminary consumer confidence indicator is likely to remain at or below July’s record low level of -27.0, as households become increasingly concerned about their future financial situation amid higher inflation and rising interest rates.

A relatively quiet week for UK economic data will nevertheless also bring the flash August PMIs tomorrow, which will similarly likely flag growing recession risks. Having dropped in July for the third month out of the past four to 52.8 – roughly 3pts below the average in the first half of the year and implying the softest growth since February 2021 – the composite PMI is likely to fall further towards 50 in August reflecting a deterioration in both services and manufacturing. The CBI’s industrial trends survey for this month is also due tomorrow and will likely similarly point to a slowdown in manufacturing activity and a further deterioration in firms’ selling price expectations. And Thursday will bring the CBI’s distributional trades survey for August, which is likely to indicate that the downtrend in retail sales volumes continues as high inflation squeezes household budgets and consumer confidence hits record lows. Also of significant note in the UK will be the announcement on Friday by Ofgem of its increase in the regulated energy price cap, which will likely rise from £1971 to above £3500 in October, representing a new blow to real disposable incomes. A further rise to above £4200 in January currently seems likely, with the government’s response remaining unclear as the policy vacuum persists in Downing Street.

Japanese flash PMIs to flag uneven activity, Tokyo inflation set to rise to highest rate since 2014
As in Europe, the August flash PMIs (tomorrow) will be the main economic focus in Japan in the first half of the week. Given persisting supply bottlenecks, sluggish global demand and higher cost burdens, manufacturers are likely to report that output and orders remained subdued this month. And reflecting the rise in Covid infections as well as squeezed household budgets amid higher prices, services activity seems unlikely to have rebounded following the slowdown in July. As such, the composite output PMI might well fall further from the 50.6 reading recorded last month. In terms of prices, Friday’s Tokyo CPI figures for August are expected to show that headline inflation rose 0.2ppt to 2.7%Y/Y, which would be the highest rate since September 2014. While this will in part reflect higher energy and food prices, this release is likely to show a further broadening in underlying prices pressures too.

Powell to give updated policy signal at Jackson Hole but likely magnitude of September hike to remain unclear
All eyes this week will be on the Jackson Hole symposium (Thursday to Saturday), with Fed Chair Powell’s speech on Friday on the economic outlook to be watched closely for an updated signal on possible near-term policy shifts. While Powell seems bound to reiterate further tightening is on the horizon, with the August employment and inflation reports set to be published before the next monetary policy meeting (20-21 September) he seems likely to remain ambiguous about the likely magnitude of the next hike. It remains to be seen whether he will address directly the appropriateness of current market pricing, which anticipates rate cuts next year.

Friday will also bring the latest monthly personal income and consumption figures for July, which our colleagues in Daiwa America expect to report solid growth of around ½%M/M, with spending to have been boosted by sales of new vehicles as well as higher prices. Meanwhile, the softer CPI release suggests that the monthly increase in the core PCE will be a touch softer than the average over the past six months (0.3%M/M vs an average 0.4%M/M), which would see the annual rate ease back 0.1ppt to 4.7%Y/Y, some 0.6ppt down from February’s peak. Advance goods trade (Friday) and durable goods orders (Wednesday) data for July will also be published, alongside revised Q2 GDP figures (Thursday). Upward adjustments to consumer spending and inventory investment suggest a modest positive revision to GDP growth last quarter, although output still likely contracted (-0.5%Q/Q annualised vs -0.9% in the first estimate).

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