Europe | Monetary Policy & Inflation
Watching for a Slowdown in Services
- By Henry Occleston
- 4 min read
Key Points
- Services PMIs will be watched closely for further signs of a slowing economy.
- Minutes are released for the last Fed and ECB meetings.
- Expectations remain for a relatively strong non-farm payroll number on Friday, which leaves room for disappointment.
Services PMIs
Recession fears are continuing to build across the market, with bonds well bid through the second half of the week, while equities sold off. Quarter-end flows complicated the picture somewhat, but without doubt it seems that the risk-off trade was dominant. The mood was helped by weak final June manufacturing PMIs across the Eurozone, and UK. Meanwhile, in Europe, while inflation surprised positively across Italy and Spain, and fell in Germany (on the back of the €9-euro train tickets), Eurozone core CPI missed expectations (3.7% YoY), showing the first sign of a YoY peak. The final reading will be out in two weeks, shortly before the ECB’s meeting on 21 July. Together, with the worsening survey data it points towards the probability of a less hawkish ECB than the market is pricing. The main juncture will be their September meeting, and be dependent on what their forecasts are saying then. If inflation is truly slowing, then by that point the need to hike may have come off quite significantly. On that basis, we are watching the data closely.
This week brings us the final readings for June Services PMIs. Expectations across France, Germany, the UK and the Eurozone are for no change from the preliminary reading. That would confirm a relatively strong downward trajectory, even at a time when services should still be getting a lift from pent-up demand. Elsewhere, Manufacturing and Industrial production data across the Eurozone will be released for May.
In the UK, the BoE’s decision maker panel survey (their survey of small, medium, and large UK business CFOs) could be very important for the BoE’s path in August (when the market is pricing it will hike 50bp). Of particular interest will be signs whether or not inflation expectations remain anchored, and how much pressure is being felt from labour market tightness.
Central Bank Minutes
The week will see the release of Fed (Wed) and ECB (Thu) minutes. Expect these to be scrutinized closely. For the US, the market will likely be looking for some stronger explanation of the decision to go 75bp, and whether this kind of size might come again. For the ECB, it may be less interesting. The rushed emergency meeting that followed up the scheduled on 9 June showed how little planning had been done at that time with regards to fighting fragmentation. On this basis we can expect little by way of new details on their crisis tool. An idea of when inflation is expected to peak, and whether the growth outlook’s deterioration has fed into their assessment may be interesting though.
US Labour Market Data
It’s a holiday-shortened week in the US, with Independence Day on Monday. That will mean no US trading, and lighter volumes in other markets, which may drive some choppy conditions. Thereafter, in the US the focus will be predominantly on Friday’s release of June labour market data. Right now, the market is looking for a healthy 300k rise. That would be the lowest rate since last April, but decently above the historic average. Given recent economic data, there may be decent room for a downside surprise.
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