Week ahead: Fed raise less likely after disappointing growth
THIRD-quarter growth figures from the US and Britain will be scrutinised by financial markets this week, and a business survey will provide the first evidence on how the euro zone has fared going into the fourth quarter.
Disappointing growth in the world’s largest economy might make it less likely that the US Federal Reserve will raise interest rates in December. Markets now put the chances the Fed will act at about 70 percent.
“A number in the 2.5 percent range seems reasonable to expect, and that would likely be good enough for the Fed even if it’s only the first decent quarter for growth in the past four quarters and ahead of the frequent Q1 growth disappointments,” said Derek Holt at Scotiabank.
Stubbornly weak inflation has so far stayed the Fed’s hand after it nudged rates up late last year. Policymakers have repeatedly said they want more concrete evidence of a turnaround before pulling the trigger again.
Blackout period
Several Fed policy makers are due to speak early in the week, before the blackout period preceding the November 2 meeting. But they would have to be unusually hawkish to swing expectations towards a rate increase hike next month, which comes just before the presidential election.
On Thursday, Britain publishes the first full quarter of economic growth data since the country voted to leave the EU at the end of June. Soon after the referendum, most economists predicted the country would fall into a shallow recession.
Since then, official data and private surveys have all shown the economy has proved resilient so far. However, suspicion that Prime Minister Theresa May is leaning towards a “hard Brexit” – giving up trying to remain in the EU’s single market in order to impose controls on immigration – could rekindle those fears.
Brexit proceedings have yet to begin, so there are few clues as to what path they will take. However, all but one of 27 economists polled recently said they expected the EU to take a hard or very hard line with Britain.
“I say very firmly, (if) Mrs May wants a hard Brexit, the negotiations will be hard,” French President François Hollande said at an EU summit on Thursday.
The overall outlook for growth remains significantly weaker than it was before the referendum. Figures on Thursday are likely to show Britain’s economy expanded 0.3 percent last quarter, less than half the second quarter’s 0.7 percent rate.
“The flash estimate of Q3 gross domestic product (GDP) data will be scrutinised in the UK, with markets looking for evidence of any initial Brexit impact,” said Madhur Jha at Standard Chartered.
“While real economy indicators have yet to show any material slowdown, sentiment indicators suggest weaker growth over the coming quarters.”
Sterling has fallen about 18 percent against the dollar to multi-decade lows since the referendum. That should help exporters, but it also means inflation is likely to rise sharply, muddying the monetary policy outlook. – Reuters