Key events in developed markets next week

After a very quiet week for US macro news we are back with a bang with the release of 2Q GDP and the Federal Reserve’s July FOMC policy decision together with several other data points of note.

In terms of the Federal Reserve, Jerome Powell made it clear in his recent testimony to Congress that he continues to believe inflation pressures will be largely transitory and there isn’t any pressing need to signal an imminent shift in policy given the fact that employment levels remain 6 million lower than before the pandemic started. Consequently, we are not expecting any change in the Fed funds target rate range of 0-0.25%, nor do we expect the Fed to lower its monthly asset QE asset purchases, which are currently running at $120bn per month

Nonetheless, there is a growing hawkishness creeping into the viewpoints expressed by other FOMC members and given the strong economy with inflation that is running at more than double its target we continue to believe that the August Jackson Hole Conference will see Fed officials starting to lay the groundwork for a QE taper with this fleshed out in more detail at the September FOMC meeting before being formally announced in December.

We see the risks to this time frame being skewed to a slightly swifter path since we see labour market supply issues being more sustained than the Fed is currently suggesting. There is growing evidence that an acceleration in early retirements are the biggest factor behind weaker labour supply and this is a permanent loss rather than the other factors often highlighted as constraints on worker supply such as extended unemployment benefits, childcare issues and Covid wariness.

2Q GDP is the main data release of note and while expectations have been pared back over recent weeks it is still expected to be strong – we are forecasting growth of around 9.5% annualised. This would mark the return of all the lost output caused by the pandemic and is a key milestone in the recovery process.

The reason for lower expectations is that supply chain bottlenecks and labour market shortages have meant that supply has not been able to keep pace with demand and that means output is lower than it could have been. This also has consequences for inflation with rising corporate pricing power set to mean inflation at high levels is going to be long lasting. This will again be evident in the Fed’s favoured measure of inflation – the core personal consumer expenditure deflator.

Other data releases include house prices, which should hit new highs as a lack of properties amidst vibrant demand adds to upside pressures. Elsewhere, Boeing experienced a huge jump in aircraft orders in June – 219 versus 73 in May - and this will lift durable goods orders more broadly while the ex-aircraft numbers will still be good based on the ISM report.

With all of continental Europe on vacation, Eurostat staff will be working extra hours this week with inflation, GDP and unemployment released next Friday.

Expect a sharp rebound for eurozone GDP growth in 2Q as the recovery gets underway. The figure may be slightly underwhelming due to supply chain problems hitting manufacturing and closed shops earlier in the quarter. Nevertheless, a big number can be expected as the economy was open for far longer on average than it was in 1Q.

Inflation will also be key with expectations of a higher reading thanks to German VAT effects, higher goods inflation and perhaps some reopening effects in services.