Key events in developed markets next week

In the US we are building up to the 16 September FOMC meeting where we are likely to see new forward guidance from officials.

They have already announced the conclusions to their strategy review which shows they will now tolerate periods of inflation modestly in excess of 2% through shifting to a framework of average inflation targeting 2%. Effectively, this means the Fed will not pre-emptively raise rates before inflation has hit 2%, directly implying that interest rates will be lower for longer. The new language may well include a time factor, such as saying interest rates will not rise before the end of 2022. Or it could be outcome contingent, such as they will not raise interest rates before the unemployment rate has fallen to 5% and inflation has sustainably reached 2%.

Either way, this is unlikely to be massively market-moving given the Fed’s “dot plot” of individual member forecasts suggests just two members expect rates to be raised before the beginning of 2023 – it will merely reinforce the message that the Fed really, really won’t be raising rates imminently, thereby anchoring the short end of the curve even more sturdily.

The UK government has put forward a bill which could potentially grant powers to override parts of the withdrawal agreement, in particular related to state aid.

This casts a real cloud over talks, and at best chances of a deal now appear to be 50:50. The next question though is whether the bill can get through parliament. Unlike last year, where we became accustomed to late-night votes, this is unlikely to have any trouble going through the House of Commons over the next couple of weeks.

But with the bill containing provisions that would break international law, the bigger question is whether the House of Lords will seek to block it. This is presumably what Brussels will be keeping a keen eye on over the next few weeks. Successful passage would presumably see the chances of a deal recede yet further.

Like the rest of Europe, the ‘mechanical’ rebound in GDP (rising activity by virtue of the fact that shops and restaurant have re-opened) is coming to an end, and recovery is likely to stall as we head towards the winter. It might be too early to see signs of that in next week’s data, and again we think the jobs data is unlikely to see a sharp rise in unemployment just yet. But this is likely to change – the ONS reckons there is a pool of just over 1 million workers who have become either inactive or unpaid (but still employed) as a result of the pandemic. As these dislocated workers begin their job search, this will see them reclassified as unemployed for the purposes of labour statistics.

Unfortunately, there are also growing signs that redundancies have continued through the summer, and this too is likely to push up the unemployment rate as we head into the winter – potentially to around 9%.

We also have inflation next week, which is likely to plummet on the combined forces of the Eat Out to Help Out scheme (50% off food on certain days during August) and targeted VAT cuts. There is a chance that headline inflation dips into negative, although this is of course temporary. Still, our broader view is that the crisis is unlikely to be inflationary, given the emerging slack in the jobs market.

For the Bank of England, the combination of muted inflation, higher unemployment and a longer recovery all point to further stimulus. The main question next week for markets will be whether the Bank signals a more cautious outlook, but also if policymakers give any further clues on negative rates. Recent communication suggests they are in the toolbox, but that QE is seen as a more important tool for offering extra support.

After the ECB kept its powder dry last week, focus in the eurozone will return to how fast the recovery is at the moment.

August data was pretty downbeat, but next week’s industry data for July will probably still cast the recovery in a rather favourable light. In fact, as manufacturing PMI outperformed services in August, it could well be that the rebound of the industrial sector lasts somewhat longer. Also interesting will be trade data, which will be dominated by reopening effects but could be curbed by an appreciating euro.

The ECB did not appear to be overly concerned by the stronger euro from an inflation perspective just yet, but will we already see signs of slowing exports?