Fed Is About to Nod at a Rate Cut as Job Growth Moderates

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(Bloomberg) — Federal Reserve officials are preparing to cut borrowing costs within months, a move that Chair Jerome Powell could signal as soon as next week as risks to a strong but moderate labor market mount.

U.S. central bankers are widely expected to keep interest rates at their highest levels in more than two decades for a full year when their two-day meeting ends on Wednesday. Instead, investors expect Federal Reserve officials to cut benchmark rates in September.

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Recent data has been promising, with moderate price increases alongside strong economic growth, but the Fed wants more assurances that inflation will continue to decline toward its 2% target.

Lower price pressures, coupled with high unemployment, have brought the Fed’s two goals – maximum employment and stable prices – into balance. Officials want to tame inflation, but they also don’t want to cause undue harm to the labor market by keeping interest rates high for too long.

That puts Friday’s closely watched monthly jobs report in the spotlight, along with other readings due on the labor market.

The July employment report is likely to show continued weakness in hiring amid a limited number of layoffs. Nonfarm payrolls are expected to rise by 178,000 jobs — a healthy but more moderate pace. The unemployment rate, which has risen in each of the past three months, is expected to hold steady at 4.1%.

Hurricane Beryl, which hit Texas earlier this month, is a wild card and could limit work hours. New figures on job openings and resignations due Tuesday will also be scrutinized.

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The Conference Board’s consumer confidence index on Tuesday will provide insight into the state of consumers, and investors will get an update on the beleaguered manufacturing sector with the Institute for Supply Management’s factory report on Thursday.

What Bloomberg Economics says:

“Most Fed officials are likely to agree on one thing when they meet on July 30-31: The downside risks to the U.S. central bank’s full-employment mandate are broadly balanced by the upside risks to inflation. We expect broad agreement that a rate cut is appropriate “soon,” but there are likely to be slight differences on the timing.”

—Anna Wong, Stuart Paul, Eliza Winger, Estelle Au, and Chris J. Collins, economists. For the full analysis, click here

In the north, Statistics Canada is due to release GDP data for May, which economists expect to show a modest 0.2 per cent monthly gain. The agency will also release a preliminary estimate for June, shedding light on whether the economy is on track to match the Bank of Canada’s estimate of 1.5 per cent annual growth in the second quarter.

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Elsewhere, interest rate decisions in Japan and the United Kingdom will be closely watched – the former to raise rates and the latter to cut them. Eurozone GDP data will give a snapshot of the state of the eurozone and its major economies in the second quarter. Together with July inflation data, these will provide clues to whether the European Central Bank will be able to cut borrowing costs again in September.

Click here to see what happened last week, and here’s our summary of what’s coming in the global economy.

Asia

The Bank of Japan is expected to be the highlight of the week in Asia, with a monetary policy meeting on Wednesday that is sure to provide fresh news.

The authorities have already announced that they will detail their plans to reduce monthly bond purchases in a first step toward quantitative tightening, with the consensus looking to reduce purchases to 5 trillion yen ($32.72 billion) from 6 trillion yen, and eventually halve them over two years. Most economists also see the risk of a rate hike, though only about 30% have that as their baseline scenario.

On the monetary policy front, the State Bank of Pakistan is also expected to cut its benchmark interest rate to 19.5% this week.

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In data, Australia will receive consumer inflation data for June on Wednesday after price growth there rose more than expected in May. Another set of hot readings could prompt the Reserve Bank of Australia to raise interest rates when its board meets next week.

On the same day, China releases its official purchasing managers’ index for July, figures that have been largely dampened by surprise interest rate cuts.

Elsewhere, South Korea gets consumer price data that could show inflation edged up slightly in July, breaking a streak of three straight slowdowns and giving the central bank an incentive to delay policy changes. Vietnam gets its CPI report, along with trade statistics.

Trade data is also due for Australia, Thailand, South Korea, Sri Lanka, Pakistan and Kazakhstan, while industrial output figures will be released for Japan and South Korea.

• For more information, read Bloomberg Economics’ full report on the week ahead in Asia.

Europe, Middle East and Africa

The Bank of England is likely to cut interest rates for the first time in more than four years on Thursday, with traders seeing the vote as crucial.

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Investors are betting on a 50% chance that the Bank of England will cut interest rates from a 16-year high of 5.25% despite persistent signs of domestic price pressures. Economists expect the BoE to follow other central banks in signaling a gradual easing of monetary policy once it starts cutting rates.

The Bank of England is due to present new forecasts for inflation and growth alongside a decision that economists expect to be a narrow five-to-four vote to cut rates.

In the eurozone, the main focus will be on GDP and inflation readings. Tuesday’s output data is expected to show a slowdown in the 20-nation bloc, with growth forecast at 0.2% in the second quarter, down from 0.3% at the start of the year. Momentum is also likely to slow in Germany, Italy and Spain.

The following day, July figures are likely to show that inflation remained at 2.5%, while the core index – which strips out volatile items such as energy and food – fell to 2.8%.

No ECB official is scheduled to speak about interest rates next week, leaving markets to draw their own conclusions.

GDP growth in the Czech Republic is expected to be stronger, which is good news for the central bank, which is expected to cut borrowing costs again next week. GDP readings in Hungary and inflation in Switzerland are also due.

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Data from Saudi Arabia is expected to show the kingdom’s overall economy contracted for the fourth straight quarter in the second quarter following the kingdom’s decision to cut oil production last year. However, the government is focusing primarily on non-oil growth as it seeks to transform the economy, and after a slowdown in the first quarter, officials hope growth will accelerate between April and June.

Moving to Africa, Mozambique’s central bank is set to become the first in Africa on Wednesday to cut interest rates for the fourth time in a row this year as inflation is contained at around 3%.

• For more information, read next week’s full Bloomberg Economics report for Europe, the Middle East and Africa.

latin america

Mexican GDP data due Tuesday is likely to show that Latin America’s second-largest economy maintained positive momentum in the second quarter. Growth is likely to lag the central bank’s forecast, but headwinds will worsen going forward.

Next week, four of the region’s largest economies will publish their June unemployment reports. Labor markets in Brazil and Mexico are at historic levels of tightness, while those in Chile and Colombia remain deeply slack. It is worth noting that Brazilian labor market data mask a high degree of informality.

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Brazil also reports industrial output for June, while Colombia’s central bank releases its quarterly monetary policy report.

A very light week in Peru brings Lima consumer price data for July. The central bank is holding back on data due to high core price readings.

Three central banks are due to make interest rate decisions this week. Chile’s recent surge in inflation is of interest to policymakers, although most analysts expect central bank governor Rossana Costa to cut interest rates for the ninth time in a row to 5.5%.

Colombia’s central bank appears to have decided to cut its interest rate by 50 basis points to 10.75%, disappointing the enthusiasts on the board of directors, including President Gustavo Petro and Finance Minister Ricardo Bonilla.

In Brazil, inflation and expectations have risen, leaving policymakers led by Roberto Campos Neto with little room to maneuver. Inflation is expected to hold at 10.5% for the second time in a row.

• For more information, read Bloomberg Economics’ full report on the week ahead for Latin America.

—With assistance from Brian Fowler, Vince Juhl, Robert Jameson, Laura DeHillon Kane, Tom Rees, Piotr Skolimowski, Monique Vanek and Alexander Weber.

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