Key events in developed markets next week

Markets are now firmly of the view that the Federal Reserve will cut interest rates by at least 25bp at the July 31st meeting. There are still some in the market that think a 50bp move is possible with market futures implying 30bp of cuts are priced. We think this is unlikely given that the most dovish member of the FOMC, James Bullard, thinks such a move would be too much while some FOMC members, such as Philadelphia Fed President Harker sees no case for a rate cut at all! Moreover, the current trade truce and the better than expected June jobs report suggest the macro backdrop may be more positive versus last month.

We will have several more Fed speakers over the coming week together with the Fed’s Beige book – the anecdotal survey on the state of the economy – and the message is likely to be one that while there are external risks, the domestic story continues to look pretty solid. As such cautious precautionary loosening looks the order of the day. We look for a 25bp cut in July to be followed up with a further 25bp in September.

The market is currently pricing in an additional two 25bp cuts over the next 18 months, which we think is too aggressive. Data wise, retail sales and industrial production are the focus. Industrial production should post a modest increase given the fact the ISM remains in growth territory. Retail sales should be stronger, especially when the volatile auto and gasoline components are removed. Consumer confidence remains firm thanks to rising asset prices and falling gasoline prices while real household disposable incomes are rising strongly thanks to employment gains and wage growth running faster than inflation. This points to ongoing solid spending.

Markets are mulling over the possibility of a UK rate cut by the end of the year. But as things stand, Bank of England policymakers have signalled a willingness to tighten policy, albeit this is heavily conditioned on a smooth Brexit outcome. So who’s right?

Well, next week’s raft of UK data is likely to give ammunition to both sides of the argument. Regular pay growth is likely to tick back up to a post-crisis high of 3.5%, and this is being predominantly driven by skill shortages in certain parts of the jobs market (albeit last month’s acceleration was mainly down to a leap in public sector pay). But according to various indicators of retail sales, the high street isn’t feeling the benefit of this modest improvement in real wage growth. With consumer confidence still pretty low, it appears shoppers are holding off on non-essential purchases. We may get a modest rebound in retail sales for June, but this follows two back-to-back declines earlier in the quarter.

With Brexit noise only likely to increase over the coming months, and a risk that trade tensions could worsen, we think the Bank of England will keep rates on hold for the rest of the year.