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Next week, the FOMC, the Fed's monetary policy-making body, meets. We expect a 75 basis point (bp) hike in key interest rates, in line with the market. At the last meeting, Fed Chairman Powell announced that there would be a decision on a 50bp or 75bp hike in July. The crucial economic data released since then clearly favor the stronger hike. The inflation rate for June showed a further increase, reaching 9.1%. Energy and food prices are the decisive factors for the continuous increases that have been seen for months. In the remaining areas (core inflation), the inflation rate has declined in recent months, but only very slowly. Although sharp price increases from the previous year have dropped out of the calculation, at the same time, current inflationary pressures have been high since last fall and show no signs of abating. The labor market data for June published earlier showed a continued robust development. The number of newly created jobs has been stable at a high level for months. The unemployment rate has remained near record lows. Finally, retail sales showed solid growth in private consumer demand. Notably, the sharp rise in inflation also fueled short-term expectations of a 100bp rate hike. However, after a number of FOMC members rejected such a rate hike, the likelihood of this happening is low.
The most exciting thing about the upcoming FOMC meeting should therefore be the outlook. However, we do not expect any changes compared to June. Fed Chairman Powell should also put a rate hike of 50bp or 75bp on the agenda for the September meeting. Inflation developments will remain the key determinant. The further development is very uncertain, as it will be determined, among other things, by supply bottlenecks depending on the conflict with Russia and the lockdowns in China. In general, however, the economy in the US and globally has started to cool down, which should counter inflationary pressure. Commodity prices, for example, have already fallen significantly. We expect to see a slight reduction in the inflation rate by the September meeting. Furthermore, based on the latest survey of FOMC members in June, next week's rate hike will bring policy rates very close to a neutral level, which should allow the Fed to proceed somewhat more slowly, so that in total we expect a rate hike of 50bp in September.
EZ – Inflation could rise slightly again
Next week (July 29), a first flash estimate of inflation for July will be published. In June, inflation rose further to 8.6% y/y, mainly due to increasing momentum in food and energy prices. By contrast, core inflation stabilized at around 3.7% y/y.
As a result of the development of food, electricity and gas prices, there are also upside risks to the inflation rate in July. By contrast, the slight drop in the price of gasoline and diesel in some countries should have a dampening effect on inflation. In view of the recent decline in producer price momentum, we believe it is more likely that core inflation will also gradually lose momentum in the coming months.
Due to the recent sharp correction on the global commodity markets, the probability of a general slowdown in inflation momentum in the fall has increased. For Europe, however, the tight situation in electricity and gas supply remains a significant uncertainty factor that could delay a decline in inflation rates. Overall, we expect inflation to reach 7.6% in 2022. Due to the current correction in global commodity prices, we forecast inflation to fall to 3.9% in 2023.
EZ – Record inflation is a risk factor for 2Q GDP
Next week (July 29), a first flash estimate of GDP growth in 2Q22 will also be published. In 1Q, the Eurozone grew surprisingly strongly at 0.5% q/q, due to special effects. However, high inflation already weighed on consumption in 1Q, which contracted by 0.7% q/q.
The further sharp rise in inflation in 2Q to an average of 8% represents a significant downside risk for private consumption and thus for the overall economy in the Eurozone. We therefore expect the economy to stagnate roughly in 2Q. Falling inflation momentum would be helpful for an improvement in the economic outlook. In addition, a decisive factor for the outlook for private consumption is the question of how quickly and to what extent employees will be compensated for the record inflation levels via wage increases. Given the stronger than expected growth in 1Q, we expect GDP to grow 2.7% in 2022, despite the challenging environment. In 2023, growth momentum should drop further to 1.8%.
IT – New elections in autumn
This week, President Mattarella accepted the resignation of Prime Minister Mario Draghi and dissolved parliament. New elections are now expected between mid-September and early October.
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