Macro insights

ECB to signal easing bias, US GDP growth to soften ahead of rate cut, UK will gain new Prime Minister

European Central Bank (ECB) back to easing bias.

On Thursday, we expect the ECB to remain on hold and to signal its intention to cut the deposit rate in September by 10 basis points (bps) - with the introduction of a tiering system in our baseline scenario - through an adjustment of its forward guidance. This would see the return of the ‘easing bias’ with an expectation of interest rates at their present levels or lower. We however do not expect the ECB to relaunch net asset purchases (quantitative easing) in the near term and believe such a move would require a deterioration of macroeconomic data, not just an absence of improvement. Still, ECB President Mario Draghi is likely to reiterate his Sintra message that the ECB has ample easing margins.

The US begins the week of the long wait until the Federal Open Market Committee (FOMC) decision next Wednesday.

Fed participants followed usual practice by going in to purdah this week. Signing off the communication ahead of July’s meeting proved trickier for the Fed. Federal Reserve Bank of New York President John Williams gave a speech on Thursday discussing the need to move “aggressively”. However, the New York Fed issued a statement afterwards to explain this was a long-term assessment and “not about potential policy actions”. Moreover, Federal Reserve Bank of Boston President Eric Rosengren, a voting member of the FOMC, gave the last comments before the blackout and said that he didn’t want to ease if the economy is doing well. Upbeat recent data have left a difficult decision for the Fed, but we fully expect a 0.25% cut next week, with another expected later this year – we anticipate in September. Ahead of this, we expect US GDP to record an annualised 1.6% expansion in the second quarter (Q2) on Friday, basically in line with current consensus expectations for 1.8%. This would confirm some softening from 3.1% in Q1, but a solid rebound in consumption should suggest the US economy continues to expand at a decent clip for now. This week will also be watched for progress over fiscal matters. Following successive conversations between US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi, there is growing expectation that a deal that raises the federal debt limit for two years and addresses discretionary spending limits could be announced this week. This would reduce one of the downside risks facing the US economy over the rest of this year.

The UK will conclude its search for a new Prime Minister this week.

We expect Boris Johnson to be announced as the new Tory leader and next Prime Minister (PM) on Tuesday. Current PM Theresa May will deliver Prime Minister’s Questions on Wednesday and then hand her resignation in to the Queen, to be replaced by the winner of the Tory contest, whether it is Johnson or the other contender Jeremy Hunt. The new Prime Minister will then continue the quest to deliver Brexit. Johnson has promised to leave the European Union (EU) on 31 October “do or die, come what may”. He has also suggested that any deal with the EU should not include the Irish backstop agreement, and that the chances of leaving the EU without a deal is “one in a million”. This set of statements appears inconsistent and is likely to prove at least time inconsistent – in the sense that what might make policy sense - and good campaign rhetoric - now might not appear so sensible in late October. If Johnson does become the next PM, it remains to be seen which particular aspect of his above comments he places most weight on and which he lets slip. We continue to expect a further extension of Article 50 and a Brexit saga that looks set to extend beyond the current Halloween deadline.

The Japanese Upper House elections delivered another strong majority for Prime Minister Shinzo Abe’s ruling LDP party.

The victory illustrates continued support for PM Abe’s policies and leaves him on track to be Japan’s longest serving Prime Minister from November. This suggests the government will be able to proceed with plans to raise the consumption tax to 10% from 8% in October – for which the authorities are already preparing countervailing easing measures and something that could embroil the Bank of Japan. However, the majority fell short of the two-thirds super majority that the government sought to achieve constitutional reform over the role of the military in Japan.         

Easing cycle begins for Indonesia and South Korea.

Last week, Bank of Indonesia (BI) and Bank of Korea (BoK) joined the ranks of central banks easing by cutting 25bps each. While BI’s decision was in line with the consensus, BoK’s cut surprised the market as it is well-known for its perfect historical track record of not moving ahead of the Fed. These cuts were made on the bases of rising growth concerns, declining export growth as well as low inflationary pressure. Furthermore, the dovish policy statements issued suggest further rate cuts are in the pipeline and we expect more easing in the second half of 2019 for the region.


Upcoming events
US: FHFA House Price Index (Monday), preliminary manufacturing Purchasing Managers’ Index (PMI) (Wednesday), goods trade balance (Thursday), GDP (Q2 first estimate), core Personal Consumption Expenditure Price Index (Friday)
Euro Area: Euro Area consumer confidence (Tuesday), preliminary composite PMI (Euro Area, Germany, France) (Wednesday), ECB interest rate announcement, German Ifo Business Climate Index, Spanish unemployment (Thursday)   
UK: Conservative Party leadership contest result, Bank of England Chief Economist Andy Haldane speech (Tuesday), Theresa May resignation and new PM formal appointment (Wednesday), House of Commons rises for summer recess (Thursday)
Japan: Preliminary manufacturing PMI (Wednesday)
Other: IMF World Economic Outlook update (Tuesday)

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