The US Federal Reserve might raise the fed funds rate next week, by a quarter point to a target range of 1.75-2 per cent.
Figures in the week will show why. We should see decent rises in both retail sales and industrial production, with the New York Fed’s survey confirming strong growth in the latter. All this would be consistent with economists’ expectations that real GDP is growing at an annualised rate of around 3 per cent this quarter. Against this background, Fed members will believe that a significantly negative real interest rate is no longer justified. However, given that inflation isn’t rising much, the committee will repeat that future rises will be gradual and small.
The eurozone, however, is not so healthy. Although Wednesday’s official data should show that industrial production rose in April, it might well still be below the levels of late last year. Although it’s too soon to speak of recession, this does mean the economy has slowed markedly. This message should be reinforced by Germany’s ZEW survey, which is likely to show that finance professionals are more pessimistic about the economy than at any time since 2012.
In the UK, the main news could be that CPI inflation rose slightly last month. This would be largely due to higher petrol price inflation. This is also likely to raise producer input price inflation to over 6 per cent, its highest rate since November.
Wage inflation, however, is likely to barely move from recent months, being stuck around 2.7 per cent, despite Tuesday’s figures showing that unemployment is at its lowest rate since 1975. This means that real wages are growing only slightly.
A big reason for this is that productivity is falling: Tuesday’s figures will show that hours worked have risen faster than GDP. If we’re not producing more it’s difficult to earn more.
We’ll see one impact of this in Thursday’s retail sales numbers. These could show a slight fall in May, after spending was boosted in April by people catching up on spending they couldn’t do because of March’s snowstorms. This would leave sales less than 2 per cent up on a year ago.
Investors might, however, get some hope from Wednesday’s US capital flows data. These should show that net foreign buying of US equities has slowed recently: in fact, there was net selling in the last two months. Because high net buying has in the past led to falling global share prices in the following 12 months, this is one reason to be less pessimistic about equities than a few months ago.