The Week Ahead – The FOMC, inflation and growth all in the spotlight

After a turn around in equity markets last week, where the S&P 500 was up over 2%, The Federal reserve will take centre stage this week along with a slew of inflation and growth figures coming out of developed economies looking to set the market tone.

It’s a big week ahead for the US with the July FOMC meeting being the highlight, but also the important Q2 GDP figure and the Feds preferred inflation gauge the core PCE Price Index being released.

US GDP is expected to come in at a modest 0.4% growth, though another negative print is a definite possibility, one that many analysts are predicting, and this would meet the technical definition of recession after the negative print in Q1. If this happens, will the Fed be swayed from their current tightening cycle by this? Unlikely, judging from the communication coming out the Fed which has made it abundantly clear that fighting inflation over the medium-term trumps short term growth concerns.

Going into Wednesdays FOMC meeting expectations are firmly centred on a 75bp interest rate increase, rates markets were pricing in a possibility of a 100bp move after the hot June 9.1% inflation print earlier in the month. Since then we have seen a softer batch of economic data and more importantly the Feds biggest two hawks Bullard and Waller push back on the need for a 100bp hike at this time, without their votes 100bp is highly unlikely, rates markets seem to agree with yields pulling back to price in 80bp (small chance of a bigger than 75bp)

Also on Wednesday , belated Q2 CPI figures are set to be released in Australia, after the recent strong labour report, CPI will need to come in soft to lessen the chances of another 50bp hike from the RBA at it’s  August meeting, a hotter than expected could see the rates market start to seriously price in a 75bp move. With the futures market currently pricing in 47bp (1.82% up from 1.35%) at the next meeting,  AUD traders shouldn’t miss this figure as we may get some decent moves if the futures re-price on the back of the CPI figure.