The meeting of the Federal Open Markets Committee (FOMC) is looming large on Wednesday and dominates the announcements this week. There are several key issues we are looking out for, covering inflation, employment and of course, the dot plots. Away from the Fed, there is also a batch of tier one US and UK data to watch for.
For Wednesday’s FOMC meeting we are looking out for the economic projections, dot plots and an update on “substantial further progress”.
US data watch includes US Retail Sales and Industrial Production
UK Unemployment, CPI and retail sales mean an interesting week ahead for GBP
Enough doubt for FOMC to remain patient
The June Fed meeting often marks the beginning of the summer trading season. Whilst the US economic recovery is still progressing, there is enough doubt for the Fed to remain patient. We still believe that the first formal hint of tapering in Fed chair Powell’s speech at Jackson Hole in September. The June FOMC meeting is too soon.
There is still over 7m fewer US workers than in February 2020, so there is a lot of slack in the labor market. The recent Non-farm Payrolls data have underwhelmed and there needs to be more progress to alleviate the bottleneck in labor supply which still hangs over from the pandemic.
However, there is undoubted improvement still in the economy. Growth has recovered to pre-pandemic levels and is on course to overshoot the pre-pandemic trend later in the year. Inflation is also running hot with multi-year highs on core and headline CPI.
The staff projections for the economy are likely to upward revisions to 2021 GDP and inflation, but the labor market is holding the Fed back from tapering sooner.
The Dot plots are likely to be interesting. Currently, we see the balance of the committee not expecting a rate hike until 2024 at the earliest. However, it would only take three members to shift their opinions to higher rates in 2023 to pull the FOMC mean to a 2023 rate hike projection (to make it 10:8 in favour of a hike). This is something that we are anticipating in the coming meetings, but it may be too soon in the June meeting. If it did happen though markets would certainly move (yields higher, USD rebound versus EUR).
One more aspect we are also looking for, is maybe clarification on how close the US economy is to “substantial further progress” being made before tightening. This is something to watch for during the press conference questions.
On Tuesday there is a clutch of US data to watch for. US PPI (factory-gate inflation) will be watched. The rise in input prices is certainly an issue for US industry and any surprise in the data could impact volatility.
US Retail Sales will also be watched after April’s surprise downside miss (after huge growth in March). However, forecasts suggest core sales improve in May and help to play into the economic recovery.
Industrial Production is expected to grow another +0.6% in May. Whilst the year on year growth will now begin to moderate sharply as the enormous decline of April 2020 drops out of the data, monthly growth remains strong. Capacity utilization is also expected to continue its improvement but is still likely to be around -2% below pre-pandemic levels.
UK data also show continued recovery
Three key UK data announcements are also due this week. Starting with unemployment on Tuesday. Consensus expects that wage growth will pick up (to +4.9% from +4.0%) whilst the headline unemployment rate will fall to 4.7% (from 4.8%).
UK inflation is expected to follow the broad major economy trend of strong increases, with headline up to +1.8% (from +1.5%) and core to +1.5% (from +1.3%). This should not put undue pressure on the Bank of England to tighten but watch for the PPI Input Prices. Growing at another expected +1.0% on the month, the sharp increase in factory gate price pressures is something that markets will be keeping an eye on.
Finally, on Friday the UK Retail Sales numbers are expected to increase by +1.6% on the month in May. By any normal measure, this is a very strong reading but is a moderation compared with +9.2% in April’s data.
As ever any data surprises have the potential to increase volatility this week.
There is much for traders to take note of on the economic calendar in the coming days. The Fed stands front and centre, and although it is still too early for anything concrete on tapering, this could still be a very interesting meeting. Add a clutch of tier one US and UK data into the mix and it could be an interesting week.