James McCann, Deputy Chief Economist, ahead of the next Fed meeting coming up later this week:
“This will be one of those Fed meetings where the focus is less on what they do, and more on what they say. A 25bps hike looks nailed on, with this move well telegraphed at the previous meeting. But how might the central bank’s signals on future policy shift in the wake of the encouraging deceleration of inflation in June?
“We don’t think the Fed will get too ahead of itself at this stage, given it has been wrongfooted by false dawns on slower inflation in the past. Indeed, Chair Powell will likely continue to signal that inflation remains too high, the labour market too tight, and that more tightening is probably required to bring price growth sustainably back to target.
“Despite this tough talk, we think a July hike will be the last of the cycle, as the effect of past tightening increasingly weighs on US activity through the second half of this year. We still think this drag culminates in recession around the turn of the year. But if the economy remains more resilient, the path to a soft landing does look to be widening slightly in the face of more encouraging developments on the inflation front.”
Felix Feather, European Economic Analyst, comments ahead of the next ECB meeting:
“A 25 basis point hike from the ECB later this week is almost locked in, as officials have undoubtedly expressed since the Governing Council’s last meeting in June.
“However, it is becoming increasingly clear that interest rates are fast nearing their peak. The communication that surrounds ECB’s policy decision will provide us with more information as to how near the end of the hiking cycle is. Indeed, this week’s hike could well prove to be the last.
“We don’t think the ECB is likely to commit either way regarding its decision at its September meeting at this stage. Speakers have stressed the openness and data-dependence of this decision in recent weeks, and investors will need to closely monitor the data flow and compare it to the ECB’s forecasts should they wish to anticipate it.
“Policy makers are likely to look through the recent increase in the core inflation rate, which was driven by base effects associated with last year’s introduction of new public transport subsidies in Germany, and changes to the weights in the basket of goods and services used to calculate inflation. However, strong wage growth putting upward pressure on services prices remains a concern. The ECB will be looking for the lagged effects of past tightening to overcome a tight labour market and force a moderation in underlying inflationary pressures before long.
“Recent revisions to GDP data mean the “winter recession” no longer qualifies as such. The knock-on effect of this change might marginally improve expectations of GDP numbers over this year. However, recent survey data has not been so positive, and the composite PMI slipping into contractionary territory serves as a reminder that recession risks remain. And there is building evidence of the lagged impact of earlier policy tightening weighing on credit growth and investment. However, the Council will remain firmly focussed on the current inflation overshoot for now.”