It’s been a brighter start to the European session on Tuesday as indices pare yesterday’s losses amid positive earnings reports, good data from the U.K. and an easing of the sell-off in China as regulators and the central bank step in.
The U.K. economy grew by 0.7% in the second quarter of the year according to the preliminary GDP reading, led primarily by the services sector but supported by stronger than expected industrial production performance. While being in line with market expectations, the figure is slightly better than the 0.6% that Bank of England Governor Mark Carney stressed would be needed to eliminate the remaining spare capacity in the economy.
Of course, Carney was referring to a sustained period of quarterly growth at this level but with wages rising and inflation remaining low, the potential is certainly there for this to be achieved. This also comes after Carney and other members of the monetary policy committee warned that the first rate hike could come sooner than previously anticipated, with it even being suggested that it could be considered later this year. Like in the U.S., the BoE is clearly more concerned with the pace of rate hikes rather than the timing of the first as this would be a greater threat to the recovery. Still, the first quarter of next year looks the most likely at this stage barring an unexpected rise in spending and inflation in the coming months.
The race is not on between the Federal Reserve and the BoE for which will be the first major central bank to raise interest rates. The Fed is widely expected to be the first and could move as early as September. It will begin its two day July meeting today but no change in rates is expected just yet. Especially with it not hosting a press conference with Chair Janet Yellen afterwards, an unlikely move for the first rate hike in more than nine years. You would imagine Yellen would hold a press conference after the first rate hike and attempt to talk down the significance of the move, most likely by focusing on the slow path of hikes, as she has in the past.
U.S. data today may offer some additional insight into the state of the economy ahead of the Fed meeting. The flash services and composite PMIs will be released shortly before the U.S. open today. A small improvement is expected in the services PMI reading, to 55 from 54.8. This would mark the first improvement in the reading since March which is quite consistent with the mixed retail sales figures seen this year. This is despite incomes increasing at a decent rate this year and consumers benefiting from lower oil prices. An improvement in services sector confidence may point to spending picking up in the second half of the year.
The CB consumer confidence reading may provide additional insight into what we can expect from the consumer ion the coming months. These numbers haven’t been far from pre-financial crisis highs for much of this year, though, which isn’t being reflected in the final sales figures. Regardless, we’re expecting the number to fall slightly to 100.0, still at levels that reflect stronger consumer spending than we’re currently seeing.
The S&P is expected to open 14 points higher, the Dow 88 points higher and the Nasdaq 28 points higher.
For a look at all of today’s economic events, check out our economic calendar.
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