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The European Central Bank is widely expected to keep interest rates on hold when it meets in Frankfurt next week, and investors will be closely watching for signals about the timing and size of any future policy changes.
Markets are expecting further rate cuts in September, with around an 85 percent chance that the ECB will cut its benchmark deposit rate by 0.25 percentage points to 3.5 percent.
But policymakers appear determined to keep their options open, unlike earlier this year when they clearly signalled they would start cutting rates as soon as June.
More hawkish rate setters point to annual wage growth of about 5% and services inflation above 4% as reasons to be cautious, and say there is no rush to cut rates further with the unemployment rate at a record low of 6.4%.
“The ECB wants to retain full discretion over the timing and size of rate cuts, and hawks need more convincing that wage inflation is reversing and services inflation is slowing before cutting rates again,” said Mark Wall, chief European economist at Deutsche Bank.
But doves say the latest data suggests a recent acceleration in euro zone economic growth is already running out of steam, and that profit margins are starting to fall as a sign companies are absorbing higher labor costs rather than passing them on to customers.
European Central Bank President Christine Lagarde summed up the cautious stance this month: “Strong labor markets allow us time to gather new information, but we also need to be mindful that the growth outlook remains uncertain.” Martin Arnold
How quickly are inflationary pressures easing in the UK?
Investors will be closely watching upcoming U.K. inflation and wages data for signs whether the Bank of England will start cutting interest rates from a 16-year high of 5.25% in August or September.
Markets are roughly split on whether the first rate cut will come on Aug. 1. Signs that underlying price pressures remain strong could support the case for keeping rates on hold for longer, especially as the economy recovers more quickly than expected from the slump of the past two years.
Economists surveyed by Reuters expect full-year headline and core inflation, excluding food and energy, to be 2 percent and 3.5 percent respectively, unchanged from the previous month.
It also forecasts profit growth to slow to 5.7% year-on-year in the three months to May, down from 5.9% in the previous quarter. However, a key measure of underlying price pressures is the trend in services inflation, which remained particularly high at 5.7% in May.
Rob Wood, an economist at consulting firm Pantheon Macroeconomics, saw services inflation ease slightly to 5.6%, well above the Monetary Policy Committee's forecast of 5.1%, arguing that it reflected still-high wage growth, particularly the 9.8% increase in the minimum wage in April, which is filtering through to prices.
“We therefore expect prices for accommodation, housing, entertainment and culture to be higher than in a typical June,” Wood said.
However, the latest Bank of England minutes said that while services inflation rose above expectations in May, there was “no significant change to the disinflationary trajectory that the economy was on”.
Economists said the start of the Euro 2024 soccer tournament and Taylor Swift's concert tour may also have led to a temporary rise in prices. Valentina Romei
What do retail sales reveal about the health of the U.S. consumer?
The U.S. retail sales data will provide insight into consumer well-being at a time when the highest interest rates in decades are putting pressure on the weakest parts of the economy.
The Census Bureau is expected to report on Tuesday that retail sales did not increase month-over-month in June after an increase in May. Excluding the automobile sector, which tends to be volatile, retail sales are expected to have increased 0.1%.
If retail sales come in weaker than expected, the data, combined with recent evidence of a slowing labor market and weakening inflation, could help persuade the Federal Reserve to start cutting interest rates in September.
“We expect retail sales to fall sharply in June due to the sharp declines in auto and gasoline sales,” TD Securities analysts wrote. “Separately, subdued inflation in June and a softening labor market increase the likelihood of a rate cut in September. Fed comments next week could be in order. [chair Jay] Chairman Powell's speech on Monday could signal that Fed officials have reached that conclusion, too.”
Expectations for a rate cut have risen this week after weaker than expected inflation data. Futures markets are now fully pricing in a September rate cut. Kate Duguid