Attention will be on a number of key economic releases in the U.S. on Wednesday, two weeks before the Federal Reserve meeting at which policy makers could agree on the first rate hike in almost a decade.
Fed vice Chair Stanley Fischer warned on Friday that the decision on whether to raise interest rates in September could be influenced by data in the weeks leading up to the meeting. The Fed has shown a determination to raise rates this year and begin the path to normalisation and the September meeting has long been touted as the month in which that would start, but recent market volatility and concerns over China and emerging markets has thrown a spanner into the works.
With recent events casting doubts on a September rate hike, the economic data over the next couple of weeks could either convince policy makers to push on with the hike or be the final nail in the coffin. Naturally, many people will look to Friday’s jobs report as being the make or break moment for a rate hike this month, but I don’t think the Fed will be so narrow minded.
Two figures released today could prove to be equally, if not more, important than Friday’s report, non-farm productivity and unit labour costs. It is very clear that the inflation part of the Fed’s dual mandate is what is standing in the way of a rate hike, rather than employment. Fischer also made it clear that they cannot afford to wait for inflation to hit the 2% target before raising rates, all they require is evidence that future inflationary pressures exist.
This can come from a number of different data points, two of which are productivity gains as they tend to precede wage growth and unit labour costs as the added expense is often passed on to the end consumer. Following two negative quarters, productivity is expected to have risen sharply in the second quarter, by 2.8%. This could indicate future wage growth and therefore future inflationary pressures.
Unit labour costs are expected to have fallen by 0.9% in the same quarter which wouldn’t come as a surprise following the disappointing employment cost index figure we had for the same period. Marginally higher employment costs, up 0.2% in the second quarter, and higher productivity would explain the expected unit labour cost saving by employers as they seek to offset the negative impact of the stronger dollar. The question that the Fed will face is whether they expect it to persist as this will weigh on the inflation outlook, with companies seeking to keep prices low.
On top of these releases, we’ll also get the ADP non-farm employment change number which is intended to be an estimate of Friday’s official non-farm payrolls figure. Quite often, it’s not a very accurate estimate although it can be useful as a warning that the number is going much larger or smaller than expected.
Crude oil inventories is another important release today. Oil prices saw a strong three-day rally prior to yesterday, including an 8.8% gain in WTI on Monday, as OPEC said in a release that it is willing to talk to all other producers. This was seen as a sign that they would be open to join production cuts and boost prices from the current loss making levels. However, record output from the Saudi’s in June cast doubt on this interpretation and selling continued yesterday. We’re expecting a small build in oil stocks today but anything larger could get quite a negative reaction, with the three-day rally potentially creating opportunities for those still bearish on oil.
For a look at all of today’s economic events, check out our economic calendar.