United States (James Knightley)
Rate Expectations: In a 4 July holiday-shortened week, Thursday is the key day for data. Financial markets are increasingly pricing in the prospect that the Federal Reserve will lower interest rates earlier and more aggressively than thought if trade tensions continue to de-escalate. Having been stuck around 50bp of cuts in the second half, with 25bp cuts favoured in September and December, we are now getting close to a 50% probability of a third 25bp cut before the year is out. Two Fed officials, Kevin Warsh and Michelle Bowman, are suggesting they could potentially vote for a rate cut in July, but most other officials are more conservative and state that they want to make sure that the price impact of tariffs is only a short term phenomenon and doesn’t lead to a more permanent increase in inflation.
Employment (Thu): However, we need to remember that the Fed has a dual mandate in that they target inflation at 2%, just like most other central banks, but also are obliged to maximise employment. Next week’s jobs numbers are expected to hold up reasonably well, with around 100k jobs added. But, lead indicators, such as business employment surveys, job vacancy numbers, and rising jobless claims suggest that July through to September is a critical period that could see much softer data. If that is the case, then rather than wait until the fourth quarter and cut interest rates by 50bp as we are currently forecasting, the Fed may choose to cut rates in September and follow up with additional cuts in October and December.
Eurozone (Bert Colijn)
Inflation (Tue): Price growth in the eurozone has been very benign in recent months, which has prompted the European Central Bank to lower rates to 2%. Expectations are that inflation will continue to hover around 2% for the months ahead on the back of sluggish economic activity. For June though, higher oil prices have translated into a slight tick up in prices at the pump. The latest services inflation data from May were also disproportionately weak, so a slight increase seems to be in the making.
Unemployment (Wed): Unemployment continues to trend at record lows for the moment despite weakness in northern eurozone labour markets. The south is picking up the slack with declining unemployment in Spain, Italy, Greece and Portugal. Expect continued strong labour demand in the south to keep unemployment rates in the low 6% range despite softness in northern eurozone markets.