USA
The labor market is showing some supportive signs for the economic outlook and remains a key sector to monitor closely. The sharp 10 percent drop in continuing jobless claims since late June is mostly the result of better employment conditions rather than claimants exhausting their benefits. If jobless claims continue to fall at the recent rapid pace, the peak in the unemployment rate may prove lower and come sooner.
The evolution of the labor market is a key factor in determining the health of the consumer and, more broadly, in shaping the nascent economic recovery. It is also an important driver of Fed policy 's Fed Chairman Bernanke has suggested the Fed will wait to withdraw easy policy until improvement in the labor market has "advanced sufficiently." Against this backdrop, leading labor market indicators, such as jobless claims, move to the forefront.
Euro zone
Last Friday's PMI data add shining colors to last week's news that the euro area economy is close to coming out of the worst recession in the post-war environment, with real GDP contracting -0.1 percent q/q in Q2 09 after -2.5 percent in Q1 09.
The composite PMI was 50.0 in August, the first time it reached the "no-change" benchmark since May last year. Assuming further improvement in September, the PMIs would be consistent with the expectations that euro area real GDP increases +0.5 percent q/q in Q3 09. Many analysts suggest now that the recovery will be modest but sustained.
This puts some upside risks to the projection that ECB will keep the policy rate unchanged at 1 percent through 2010. It is becoming visible that driving forces lifting euro countries out of recession are two-fold: long lasting national fiscal support and net export contributions.
Central and Eastern Europe
The Hungarian Monetary Council is to cut rates by 50bp this week, as the risks on the forint look to have abated, leaving the monetary council able to focus on the country's large output gap, and easing inflation expectations (typically gauged by wage growth in Hungary) as reasons to cut more. As such, policy rates been cut to 6.5 percent by the end of this year (current 8.50 percent) and then down to 5.0 percent by the end of 2010.
Though the market is pricing in the anticipated cut, the potential for successive cuts is not evident, which means that any comments by the monetary council on a scenario of poor medium-term growth should see a significant shift lower in rates markets. As further evidence of the strain on the domestic economy, analysts would look for June retail sales (out Tuesday) to show a contraction of 4.3 percent y/y. For Poland, the recent upside surprises in consumer price inflation and wage growth (+3.9 percent y/y against consensus 2.0 percent) will strengthen the hand of members already calling for a 'wait and see' approach and the market's expectations are for rates to be left on hold.
Neither wage growth, having risen to 3.9 percent y/y in July (from 2.0 percent in June), nor retail sales, which are expected to show an increase of 1.4 percent y/y when July data are released, suggest much pressure for the MPC to act. The fact that the policy meeting is being held before the release of Q2 GDP data should also strengthen the argument for a pause in rates. Analysts expect the GDP release to show the economy growing just 0.5 percent y/y in Q2.
Written using materials from Bloomberg and Reuters Research
