US Federal Reserve officials are on the verge of lowering borrowing costs within months, a move that chairman Jerome Powell may signal this week as the risks grow of imperilling a solid but moderating job market.
US central bankers, who have kept interest rates at a more than two-decade high for a full year, are widely expected to leave them there again when their two-day meeting ends on Wednesday (Jul 31). However, investors expect Fed officials to lower their benchmark rate in September.
Recent data has been promising, with milder price increases alongside robust economic growth, but the Fed wants a bit more assurance that inflation will continue to fall towards its 2 per cent target.
The downdraft in price pressures, paired with an upward creep in the unemployment rate, has brought the Fed’s two goals – maximum employment and stable prices – more into balance. Officials want to tame inflation, but they also do not want to cause undue harm to the labour market by holding rates high for too long.
That puts the closely-watched US jobs report on Friday even more in the spotlight, along with other readouts due on the country’s labour market.
The July employment report is likely to show a continued softening in the pace of hiring amid a still-limited number of layoffs. Non-farm payrolls are forecast to advance by 178,000 – a healthy but more moderate pace. The unemployment rate, which has climbed in each of the past three months, is seen holding at 4.1 per cent.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Hurricane Beryl, the storm that struck Texas earlier this month, presents a wild card and could restrain hours worked. Fresh figures out on Tuesday on job openings and quitting will also be scrutinised.
The Conference Board’s consumer confidence index, also out on Tuesday, will offer insight into the state of consumers, and investors will get an update on the beleaguered manufacturing sector with the Institute for Supply Management’s factory report on Thursday.
“Most Fed officials will likely agree on one thing when they convene for their Jul 30-31 meeting: Downside risks to the US central bank’s full employment mandate are about balanced with upside risks to inflation. We expect broad agreement on that a rate cut will be appropriate sometime ‘soon’, but there likely will be minor differences about the timing,” said a group of five economists at Bloomberg Economists in a recent note.
Other central banks being watched
Rate decisions in Japan and the UK will be closely watched – the former for a hike, the latter for a cut. Gross domestic product data in the euro area will give a snapshot of the state of the economy in the region and its top economies in the second quarter.
Combined with inflation data for July, that will provide clues on whether the European Central Bank will be able to lower borrowing costs again in September.
The Bank of Japan is poised to be the highlight of the week in Asia with a policy meeting on Wednesday that is guaranteed to break news.
Authorities have already said they will release details of plans to cut monthly bond purchases in a first step towards quantitative tightening, with the consensus looking for a reduction to five trillion yen (S$43.8 billion) from six trillion yen, and an eventual halving of purchases over two years. Most economists also see the risk of a rate hike, although only about 30 per cent have that as a base case scenario.
In data, Australia gets June consumer inflation data on Wednesday after price growth there surged more than expected in May. Another set of hot readings could nudge the Reserve Bank of Australia towards a rate hike when the board gathers the following week.
On the same day, China gets its official purchasing managers’ index for July, figures whose importance have largely been superseded by surprise cuts to policy rates.
Elsewhere, South Korea gets consumer price data that may show inflation picked up a tad in July, breaking a string of three straight decelerations and giving the central bank incentive to postpone a policy pivot. Vietnam gets a consumer price index report, along with trade stats.
Trade data are also due in Australia, Thailand, South Korea, Sri Lanka, Pakistan and Kazakhstan, while industrial output numbers will be released in Japan and South Korea.
The Bank of England (BOE) may lower rates for the first time in over four years on Thursday, with traders seeing the vote as a close call.
Investors are betting on a 50 per cent chance of the UK central bank reducing rates from a 16-year high of 5.25 per cent despite lingering signs of domestic price pressures. Economists expect the BOE to echo other central banks by signalling a gradual loosening of monetary policy once it begins cutting rates.
The BOE will present new inflation and growth forecasts alongside the decision that economists predict could be a tight, five-to-four vote for a cut.
Before that, new Chancellor of the Exchequer Rachel Reeves will paint a dire picture of the UK’s public finances in a speech on Monday. She is expected to tell the House of Commons that the country is “broke and broken”, with crises or chaos in housing, health, water, education, defence, transport and migration.
In the euro area, the main focus is on GDP and inflation readings. Tuesday’s output data is expected to show a slowdown in the 20-member bloc, with growth seen at 0.2 per cent in the second quarter, down from 0.3 per cent at the start of the year. Momentum in Germany, Italy and Spain probably also slowed.
The following day, numbers for July will likely reveal that inflation held at 2.5 per cent, while the core gauge – which strips out volatile elements such as energy and food – probably edged down to 2.8 per cent.
Not a single ECB rate setter is scheduled to speak in the coming week, which will allow markets to draw their own conclusions. BLOOMBERG
