Fed policy to dominate market discussions

Some major economic data is due for release this week including the Personal Consumption Expenditure (PCE) Deflator today (the Fed’s targeted inflation index) as well as the non-farm payrolls report on Friday. Both data points have deep relevance to the Fed’s dual mandates of price stability and full employment.

Coming off the Jackson Hole Conference of central bankers over the weekend, and given the last set of labour market and inflation data before the Federal Open Market Committee meets next month, the information will have great bearing.

Should the data surprise substantially on the upside, there will be a high probability for a rate hike next month. Our base case scenario, however, remains one rate hike this year in December.

While Fed policy will likely dominate market discussions this week, we should not turn a blind eye to the region across the Atlantic.

On Tuesday, a bevy of eurozone confidence indicators will be released, offering deeper insights into the state of the bloc’s economy post-Brexit.

Brexit implies a short-term shock to the United Kingdom economy and a slower longer-term growth path, largely due to impaired trade and investment flows.

The UK’s services and manufacturing Purchasing Managers’ Index drastically deteriorated in July, signalling weak business confidence after the vote.

The impact on the rest of Europe is less clear: Signs have been encouraging and it is difficult to make a case for a material slowdown in the eurozone.

Steady PMI readings for July were repeated in the flash release for this month. Services are doing slightly better than manufacturing, which is reasonable considering the exchange rate movement. The eurozone PMIs continue to point to a solid cyclical recovery. This implies that other internal factors are more important than the Brexit-related uncertainty for the eurozone.

This is pertinent to monetary policy: If eurozone growth continues to look resilient in the face of Brexit uncertainties, there is little pressure for the European Central Bank (ECB) to move with more drastic monetary easing. It will also be less tempted to match the Bank of England’s recent easing package.

The ECB, whose policy meeting is scheduled for Sept 8, could extend the quantitative easing programme beyond March 2017, but no further.

About the author: Gregory Choy is Head of Wealth Advisory at OCBC Bank