USA
- FOMC: Inflation running more than “somewhat” below 2 % and balance sheet rundown to start “relatively soon”.
- Hence, third rate hike this year uncertain but begin of balance sheet normalization ahead.
In the statement of the federal open market committee (FOMC) released last Wednesday, the FOMC says information received since the June meeting indicates that the labor market continued to strengthen and that economic activity has been rising moderately so far this year. Overall inflation and core inflation have declined and are running below 2 %. Previously, the statement had said that inflation was running “somewhat” below 2 %.
The FOMC continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation is expected to remain somewhat below 2 % in the near term but to stabilize around the 2 % objective over the medium term. The FOMC underlined that it is “monitoring inflation developments closely”.
The FOMC expects that economic conditions will evolve in a manner that will warrant gradual increases in the fed funds rate. In addition, it was stated to begin implementing the balance sheet normalization “relatively soon”. Given subdued inflation, there is uncertainty about the third rate hike this year (after March and June).
Eurozone
- First Q2 GDP country results were sound. Confidence indicators keep indicating solid expansion.
- Austria continues strong recovery.
Sentiment indicators suggest a continuation of a robust business cycle in the Euro Area (Figure 1). In July, the composite purchase manger index (PMI) printed at 55.8 after 56.3 in the previous month. Although the index retreated softly, it keeps implying strong expansion in economic activities in the third quarter of the year. The result for the services sector remained unchanged (55.4), while the manufacturing PMI slowed from 57.4 to 56.8. The French composite PMI index decreased from 56.6 to 55.7 amid a weaker services sector print while the manufacturing PMI index rose slightly. In Germany, PMI results were also marginally lower in July than previously (Composite: 55.1 after 56.4). On the other side, the ifo Business Climate index rose further (116.0) amid increases in the judgement of the current situation as well as in business expectations. The ifo index has actually been rising to historical highs.
A purely PMI based GDP model for the Euro Area would imply continuing quarterly GDP growth around 0.6 % (the result for Q2 will be released on 1st August).
Country-level GDP data for the second quarter was released last week. Austria’s economy posted a strong quarterly GDP increase (Figure 2). Accord to the the first estimate (Austrian Economic Institute) real GDP rose by 0.8 % (trend-business cycle component) after 0.8 % in the first quarter and by 2.2 % in annual terms. Based on Eurostat (swda), the q/q-increase was 0.9 % and likely among the highest in the Euro Area. Growth is driven by both domestic and export demand. Household consumption and fixed investment advanced by 0.3 % and 1.2 % and exports growth accelerated to 2.4 % while imports grew by 2.1 % (q/q).
According to additional GDP data releases last week, France’ economy expanded by 0.5 % (q/q) and 1.8 % (y/y) and Spain continued buoyant growth (0.9 % q/q and 3.1 % y/y).