This coming week is a particularly important one in terms of major economic indicators, which have the potential to shift market sentiment and monetary policy around the world. The United States can expect to officially announce a 3.0% growth in its second-quarter Gross Domestic Product (GDP) quarter-over-quarter. As such, today’s announcement should provide an interesting check on the overall strength of the economy. Investors will be looking especially closely at the core Personal Consumption Expenditures (PCE) index. This index is the Federal Reserve’s favorite measure of inflation and has a huge impact on interest rate policy.
The Atlanta Federal Reserve’s GDPNow model currently predicts a fairly conservative 2.3% growth rate. It raises eyebrows if the actual to final are way off from such expectations. We’ll be looking at inflation measures here in the U.S. and abroad. On Friday we look for the first set of preliminary Consumer Price Index (CPI) readings out of Italy, France and Germany.
U.S. Economic Growth Projections
U.S. GDP growth for the second quarter is projected to reach 3.0%. This figure will be subsequently adjusted on a seasonally annualized rate (SAAR). This number is indicative of a strong economy and will likely provide further reassurance to investors of the strength and resiliency of the American economy. The Atlanta Fed’s GDPNow model paints an entirely different picture, now predicting just a 2.3% growth rate. This gap leads to legitimate questions about the real robustness of economic indicators. Expect economists and market participants to plunge further into the weeds as a consequence.
The confirmation of these GDP figures will be especially important as they arrive in the midst of swinging inflation data. The core CPI, which measures inflation excluding volatile food and energy prices, has accelerated to 3.1% year-over-year from a previous reading of 2.9%. Such an increase is an indication of growing price pressures and would likely lead to speculation about possible shifts in monetary policy.
Investors will be particularly attentive to how these growth projections align with inflation metrics, as the Federal Reserve seeks to balance economic growth with efforts to combat inflation effectively. The core PCE index, which has maintained a strong correlation with core CPI over the past decade (0.75), will likely serve as a focal point for the Fed in determining future interest rate decisions.
Global Inflation and Monetary Policy
With U.S. inflation figures stealing the show, international counterparts are about to kick off a wave of provisional CPI figures. Italy, France and Germany will issue releases which should help paint a picture of inflation trends across Europe. These findings may inform the European Central Bank’s (ECB) approach moving forward. Markets are betting that the ECB will only deliver limited cuts. They are counting on a drop of 10 basis points by the end of this year.
Market expectations for the Bank of Canada (BoC) are more hawkish. Any soft GDP print from Canada might be enough to cement the case for at least one more rate cut by the BoC before year-end. The current state of economic performance and inflation metrics will be a key factor in guiding central banks’ moves. This is particularly the case in regard to the U.S. and Canada.
In Japan, former Foreign Minister Taro Aso has suggested that raising interest rates is necessary to strengthen the weak yen. His remarks highlight the long-rumbling debate over whether the central bank should change monetary policy in regard to rising currency and inflationary pressures.
Market Reactions and Investor Sentiment
Falling commodity prices helped the U.S. dollar gain strength this week, as investors scaled back their expectations for Fed rate cuts. There’s a 33% chance of a quarter-point reduction at the Federal Reserve’s next meeting on Sept. 17. The chances for doing so in December increase to a stunning 90%. The dramatic about-face illustrates just how quickly confidence is returning. Most expect that the inflation numbers will cement the Fed’s decision to hold pat and not signal heavy rate cuts any time soon.
This acceleration in U.S. PCE might put a spanner in the works. As such, investors might take a more dovish view on the Fed’s monetary policy path. As central banks navigate through these complex economic landscapes, market participants will closely monitor how various indicators impact their decisions.