Policy rates approaching the peak for the cycle

Emily Nicol
Chris Scicluna

In Japan, wage growth is expected to remain above 2% for a third consecutive month, but real wage growth to remain in negative territory
After a relatively quiet start to the week, a key focus in Japan in the week ahead will be Friday’s release of July average wages figures, which should reflect more than 80% of this year’s wage negotiations. This is expected to show that total wage growth increased 2.4%Y/Y, the third consecutive above-2% rate, although given persistence in Japanese inflation, real wage growth is expected to have remained in negative territory (-1.4%Y/Y) for a sixteenth consecutive month. Friday will also bring updated GDP figures for Q2. Following the notable upside surprise to the preliminary release, which saw growth accelerate 1.5%Q/Q, the most since Q420, GDP is expected to be revised down slightly amid a weaker outturn in private sector capex. The economy watchers survey (Friday) and finals services PMIs (tomorrow) are expected to point to ongoing solid expansion over the summer. Monthly household spending figures (tomorrow) and the BoJ’s consumption activity index (Thursday) will offer updates on consumer spending at the start of the third quarter. Meanwhile, elsewhere in Asia, the Chinese goods trade report (Thursday) is expected to report that exports and imports continued to fall sharply compared with a year earlier in August, albeit the pace of contraction is expected to have moderated from July.

Euro area PPI, ECB consumer expectations survey and final services PMI to provide updates on near-term inflation outlook; German factory orders and IP numbers in focus at the end of the week
This week’s euro data flow will provide updates on the inflation outlook, with the release tomorrow of July’s producer price figures, the latest ECB consumer expectations survey and the final August services PMIs. While producer prices are likely to illustrate the steady downtrend in factory sector costs, the preliminary services PMIs reported an unexpected uptick in the input price component (up 1.5pts to 62.5) amid continued firm wage growth in the sector. Developments in medium-term household expectations will also be watched by Governing Council members, with the median forecast for three years ahead having remained above the ECB’s 2% target in June (2.3%). The final services PMIs – for which the flash activity index (48.3) implied the steepest drop since February 2021 – the construction PMIs (Wednesday) and Sentix investor survey (today) are all expected to signal deteriorating economic momentum over the summer period.

In terms of hard economic data, updated euro area national accounts data for Q2 (Thursday) are likely to confirm that the economy grew 0.3%Q/Q, although Friday’s 0.1ppt downwards revision in Italy (to -0.4%Q/Q) raises the probability of a downwards revision for the euro area as a whole. The first official expenditure breakdown of euro rea GDP is expected to show that growth was supported by net trade and private inventories, while consumption remained lacklustre. Euro area retail sales numbers (Wednesday) are expected to have started the third quarter on the back foot too. Meanwhile, German goods trade numbers, published this morning, brought a slight narrowing in the surplus in July as the value of exports fell (-0.9%M/M) for the first month in four and import values rose (1.4%M/M). German factory orders (Wednesday) and industrial production (Thursday) figures will also be watched closely, with surveys having signalled a significant deterioration in business conditions in the sector at the start of Q3.

UK surveys likely to flag slowdown in economic activity and labour market, but signal that price pressures in the services sector remain historically high
Surveys will continue to dominate the UK’s data flow this week too, kicking off tomorrow with the BRC retail sales survey, final services PMIs and SMMT new car registrations data, all for August. The BRC survey is likely to echo the findings of the CBI distributive trades survey to point to another month of subdued sales following the sizeable weather-affected drop in July. And the final services PMIs are likely to repeat the weak message of the flash release, whereby the headline activity index fell almost 3pts to a seven-month low of 48.7 to point towards contraction. Nevertheless, the PMIs also pointed to still-substantive cost pressures in the sector, with the input (68.4) and output price (56.2) indices both still very high by historical standards despite easing back slightly from July. Meanwhile, the BoE Decision Maker Panel (DMP) survey (Thursday) will be watched closely for developments in business inflation expectations after the July survey reported that one-year ahead CPI inflation expectations fell 0.3ppt to 5.4%Y/Y while three-year ahead expectations dropped 0.4ppt to 3.3%Y/Y. Focus that day will also be on the latest REC report on jobs, which is likely to point to a continued loss of momentum in the labour market, with moderating labour demand, increased staff availability and somewhat less pressure on starting salaries. Beyond the economic data, BoE Governor Bailey and colleagues will testify before the House of Commons Treasury Select Committee on Wednesday.

US services ISM expected to signal ongoing expansion, with the prices paid component expected to have ticked slightly higher.
When US markets reopen after today’s labour day holiday, it should be a relatively quiet week ahead for top-tier US economic releases. Wednesday’s release of the services ISM is arguably of most interest and expected to signal ongoing resilience in the sector over the summer, with the headline activity index forecast to have eased just 0.2ppt to 52.5. Meanwhile, the prices paid component is expected to have ticked slightly higher. Wednesday will also see the Fed release its Beige Book Meanwhile, factory orders numbers (tomorrow) are expected to have reversed the 2.3%M/M rise recorded in June amid a steep drop in durable goods orders, whereby the advance release recorded a decline of 5.2%M/M due to slump in typically volatile transportation bookings. July’s full trade report (Wednesday) is expected to report a modest deterioration in the deficit (by $2.5bn to -$68bn) in line with the widening in the advance goods trade deficit. Finally, revised productivity data for Q2 are expected to be nudged slightly lower, and unit labour costs growth revised a touch higher.

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