The first half of 2023 was characterized by economic growth surprising to the upside, but also inflation proving stickier than expected. As such, when policymakers from around the world gathered in Sintra this week for the ECB’s Forum on Central Banking, it was no surprise that (aside from Bank of Japan), central banks maintained a tightening bias towards H2.
ECB’s Lagarde reiterated that a 25bp hike in July is almost given, and Fed’s Powell noted that despite the pause in June, going back to consecutive hikes is not off the table. On Thursday, Riksbank hiked rates by 25bp and signalled at least one more 25bp hike going forward, in line with our expectations.
In July, markets’ focus will revert back towards macro data. Recent releases have been mixed, with this week’s German Ifo Business Climate cooling further in June, but US Conference Board’s consumer confidence rebounding – defying contrasting signals from PMIs last week. We still think growth is set to remain weak across most developed economies for the remainder of the year, with the US headed for a modest recession.
Next week brings a series of important US data releases, including ISM, JOLTs and the June Jobs Report, which will be key to watch ahead of the upcoming FOMC meeting on 26 July. Following a positive revision to Q1 GDP figures and lower jobless claims, markets are pricing the peak Fed Funds Rate at 35bp above the current level by November, implying a 40% probability of two more hikes. We forecast June non-farm payrolls at 180k, and if we do see further signs of wage inflation cooling followed by a lower Core CPI release on 12 July, we think the Fed could still end up staying on hold in the next meeting.
Euro Area inflation cooled further to 5.5% in June. Core inflation ticked slightly higher to 5.4%, but part of the increase reflects base effect from the last year’s German public transport subsidies. That said, we still think the ECB will hike both in July and September.
While Ueda refrained from hawkish hints in Sintra, we still think it is only a matter of time before the Bank of Japan will acknowledge the continuously building inflationary pressure in Japan by easing the yield curve control, which we expect to happen either at the next meeting on 28 July or in September. China is the only major economy where we expect further policy stimulus measures to be announced over summer.
After surprising both analysts and markets by hiking 50bp in June, we expect the Bank of England to hike by 25bp on 3 August. However, the return to smaller hikes depends on data not surprising significantly to the upside. BoE’s focus remains on wages and services inflation, so job market report (11 July) and CPI (19 July) will be the key to watch.
Besides macro, geopolitics came back on the radar last weekend. In Russia, the attempted mutiny by Yevgeny Prigozhin, the leader of the Wagner mercenary group, ended as quickly as it began. But even so, Putin’s position appears to have been weakened as his closest allies might not be as unified in support as previously thought. In our baseline expectation, we do not foresee major breakthroughs in the war in Ukraine over the coming weeks, but the Russian internal instability remains a key source of potential volatility for now.
