What awaits investors in the third quarter?

The global economy showed a much stronger recovery during the first half of 2017 than in the same period last year. However, the pickup in growth masked varying speeds at which economies across the globe are expanding. Recent Purchasing Managers’ Index (PMI) surveys showed the gap between advanced economies and emerging markets widening — with softer growth seen in the latter.

If growth in emerging markets pulls back further in the coming months, the recovery in global growth could be at risk. Therefore, the worldwide releases of PMI surveys this week will provide an early look into global growth and inflation trends at the start of the third quarter. Analysts will monitor July’s data to gauge the future course of global monetary policy, particularly in the United States, the United Kingdom and Europe.

With the US Federal Reserve hinting at reducing its balance sheet as soon as September, policy-watchers will be eager for signs of the world’s largest economy being on track for tighter policy. A key official data release will therefore be the US non-farm payrolls for July. The previous figure surprised analysts, showing a stronger-than-expected gain of 222,000 in June. Another strong month of job gains in July will add to flash PMI signals that US economic growth has gained momentum at the start of the third quarter, supporting the case for further tightening by the Fed.

In the UK, the spotlight will be on the Bank of England’s policy meeting and its updated projections for gross domestic product growth and inflation. The lacklustre performance of the UK economy in the first half of this year seemed to have diminished the likelihood of an interest rate hike any time soon, especially as growth prospects have become increasingly gloomy.

Preliminary official data showed the UK economy expanded at a meagre rate of 0.3 per cent during the second quarter. The publication of UK PMI data for July will provide clues as to how the economy fared at the start of the third quarter.

Second-quarter flash GDP numbers for the euro-area, alongside July inflation data, will meanwhile be monitored by traders for further signals of the direction of future European Central Bank policy. PMI surveys are signalling a 0.7 per cent expansion. However, the flash Eurozone PMI has indicated a slowing in the pace of economic growth and the accompanying easing of price pressures, adding to the belief that ECB policymakers will be in no rush to taper policy.

About the author: Bernard Aw is Principal Economist at IHS Markit