The Fed is likely to cut interest rates again next week. Markets are pricing in a quarter point cut in the Fed funds rate to 2 per cent. The move will be a response to fears that the inverted yield curve is signalling recession, and to the fact that inflation is stable enough to justify a move.
But data in the week will suggest another reason for the cut. They are likely to show that although industrial production rose in August it is still lower than it was at the start of the year – which suggests that the trade war is hurting domestic industry, not just China’s. We might, though, see better news from surveys by the New York and Philadelphia Federal Reserves. These should show that manufacturing activity in both regions is growing at around its post-2010 average, with companies expecting continued moderate growth.
The Bank of England is unlikely to emulate the Fed, however, even though recent purchasing managers’ reports suggest the economy is close to recession. Wednesday’s inflation numbers will suggest a reason why. They are likely to show that consumer price index (CPI) inflation is on target, at around 2 per cent: a petrol price rise in August 2018 will drop out of the data, offsetting mild upward pressure from sterling’s recent weakness.
Although producer price numbers should show that output price inflation is steady at just under 2 per cent, they could show that sterling’s fall is pushing up input prices: these could be up by almost 3 per cent since March.
We’ll get mixed news about the personal sector next week. Retail sales volumes might show another slight rise in August, putting us on course for good quarter-on-quarter growth. In volume terms, the consumer is one of the few healthy features of the economy – retailers’ problems are costs and margins, not volumes.
On the other hand, though, official figures will confirm the weakness of the housing market. They are likely to show that prices rose less than 1 per cent in the past 12 months (and that they fell in London), which means they are falling in real terms.
Elsewhere, we should watch two other developments. One is Germany’s ZEW survey of finance professionals’ assessment of the economy. Last month this slumped to its lowest level since December 2011, although it is doubtful how good a lead indicator it is.
Another is the US Treasury’s measure of capital flows. Last month, these showed big foreign buying of US equities, implying that investor sentiment is improving from low levels. If this continues, it will weaken one of the strongest bull cases for global equities.
