Q2 growth trends key to policy directions

Second-quarter growth trends will likely be key to future policy decisions at major central banks, especially in the United States and Europe. That means important data releases this week will be closely scrutinised.

An early read of global economic performance in the second quarter comes from the worldwide releases of Purchasing Managers’ Index (PMI) surveys. These business surveys will also provide important signals for inflation trends, which are a crucial gauge for policymakers at many central banks.

Traders will be watching for signals as to the US Federal Reserve’s next move. Flash PMI surveys indicated that expansion in US business activity gained slight momentum this month, supporting the view that growth in the US economy is expected to rebound in the second quarter after a weak first quarter. Furthermore, the upturn is being accompanied by solid inflationary pressures. All of these add to expectations of the Fed raising interest rates again next month. Indeed, markets are pricing in an 80 per cent-plus probability of an interest rate hike next month.

Besides final IHS Markit’s PMI surveys and the ISM (Institute For Supply Management) manufacturing index, employment growth data is also key for the Fed’s policymaking. April’s US non-farm payrolls had exceeded expectations, but new job additions are expected to ease to around 160,000 this month, according to flash PMI data.

Other key US data include the PCE (personal consumption expenditures) price index, personal income and spending, which provide indications of US inflation and private consumption trends.

Meanwhile, eurozone economic growth continued to run at its fastest for six years, according to PMI survey data. Employment growth also perked up to one of the strongest recorded over the past decade amid improved business optimism.

The recent eurozone PMI readings are historically consistent with the European Central Bank taking on a hawkish stance, but the dip in cost pressures will add weight to the argument that there is no need to rush to taper monetary policy, especially given ongoing concerns over Italy’s banking woes and Greece’s bailouwt.

Elsewhere, first-quarter gross domestic product (GDP) numbers are due for two of the world’s largest emerging markets: India and Brazil.

The consensus is that India’s GDP growth has slowed further from the 7 per cent in the final quarter of last year to 6.9 per cent. Recent PMI data indicated that growth remained fragile at the start of the second quarter.

Brazil was in recession for the last two years. The release of first-quarter GDP alongside a host of other important data will signal if a recovery is in sight. On top of this, policymakers at Brazil’s central bank will decide whether or not to further lower interest rates to help stimulate growth.

ABOUT THE AUTHOR: Bernard Aw is an economist at IHS Markit