ECB: Expect another 25bp rate cut as downside risks to outlook appear to be increasing
* The conclusion of the ECB’s monetary policy meeting on Thursday looks firmly set to confirm a further cut of 25bps in the Deposit Rate to 3.50%. While the pre-agreed narrowing of the rate corridor from 18 September will also be confirmed, the resulting 60bps cut in the Refi Rate to 3.65% will be far less significant. Given that the ECB’s hawks remain preoccupied with the lingering upside risks to inflation, the policy statement will likely repeat that rates will be restrictive for as long as necessary, and that decisions will remain data dependent and hence relatively backward-looking.

* But the ECB’s updated macroeconomic projections will need to nudge down its outlook for economic activity. And while the profile for core inflation will be revised slightly higher over the near term, the updated projections should continue to suggest that headline inflation will be back to 2.0%Y/Y on average by end-2025 and slightly below target by the end of the horizon. So, with Chief Economist Lane having recent warned of the dangers of keeping rates too high for too long, which would risk unnecessarily restraining growth, weakening the labour market and pushing inflation well below target over the horizon, President Lagarde might well adopt a more dovish tone in her press conference.

* It should be a relatively quiet week for top-tier euro area data, with the main focus on final August inflation figures from Germany (tomorrow), France (Friday) and Spain (Thursday). The preliminary estimates recorded a notable drop in headline inflation last month due principally to lower energy prices. In contrast, on the national measure, services inflation remained steady in Germany and ticked higher in France, with this week’s figures likely to confirm that this principally reflected opportunistic pricing by firms in the accommodation and restaurant sectors during the Paris Olympics.

US: All eyes on Wednesday’s CPI report
* Ahead of the Fed’s monetary policy meeting next week, the main focus this week will be the August CPI report on Wednesday. Consumer prices are expected to have risen 0.2%M/M, unchanged from the rise in July. This would leave the annual CPI rate down 0.3ppt to 2.6%Y/Y, the lowest since March 2021. An anticipated decline in energy prices will likely be offset by food prices, with prices of core goods and services also expected to rise 0.2%M/M, unchanged from July, but half the pace in the first quarter of the year. This would leave annual core inflation unchanged at 3.2%Y/Y, down more than 1ppt over the past year, well below the 6.6%Y/Y peak in September 2022 and the joint-softest since March 2021. August PPI figures will follow on Thursday, along with the preliminary results of September’s University of Michigan consumer sentiment survey on Friday, with the inflation expectations measures to be closely watched. 

UK: Labour market and GDP data to provide an update on conditions at the start of Q3
* A busy week for UK data will bring an update on labour market conditions (tomorrow) and economic activity (Wednesday) at the start of Q3. Having unexpectedly fallen in the three months to June by 0.2ppt to 4.2%, the ILO unemployment rate is expected to edge slightly lower in July to a six-month low of 4.1%, still some ½ppt above the low reached almost two years ago. This will coincide with another increase in employment in the three months to July, by more than 100k. But despite signs that the labour market remains tight, average wage growth is expected to moderate notably further in July, by 0.4ppt to 4.1%3M/Y, which would be the softest since November 2021. When excluding bonus payments, regular pay growth is also expected to ease to a two-year low, albeit a full percentage point higher that headline wage growth..

* After GDP moved sideways in June, we expect a return to expansion in July with growth of 0.3%M/M, which would leave the three-month rate unchanged at 0.6%3M/3M. Growth will in part reflect a pickup in retail sales (0.5%M/M) that month as the improvement in weather gave a boost to demand. The PMIs also pointed to an improvement in services activity, while the manufacturing output index rose to the highest in more than two years. So, despite a strong increase in manufacturing output in June, we expect growth in July to be widespread across the main subsectors. Among other data due, Friday will bring the results of the BoE’s latest household inflation expectations survey for Q3.

Japan: Q2 GDP growth 0.7%Q/Q the strongest for four quarters despite modest downwards revision
* Updated national accounts figures published overnight brought a modest downwards revision to GDP in Q2. Nevertheless, growth of 0.7%Q/Q reversed the contraction in Q1 (-0.6%Q/Q) and was the firmest in a year, to leave the level of output some 2½% above the pre-pandemic level in Q120. Despite a modest downwards revision from the preliminary estimate, growth in household consumption of 0.5%Q/Q countered four consecutive declines, while growth in fixed investment of 0.2%Q/Q reversed the decline in Q1. Meanwhile, public sector investment rose (0.2%Q/Q) for the first quarter in four. But, like in the preliminary release, private inventories and net trade subtracted from growth, by 0.1ppt and 0.3ppt respectively.

* Survey-wise, the economy watchers report published today was more encouraging about economic momentum over the summer. In particular, the headline current conditions diffusion index (DI) rose 1.5pts to a five-month high of 49.0, led by a further improvement in household-related demand, with the respective DI similarly up to its highest since March. In contrast, manufacturers remained more downbeat about conditions in August. The MoF’s business outlook survey (Thursday) will provide further insight into sentiment for the second half of the year. And PPI figures (also Thursday) will provide an update on factory pipeline price pressures in August.