ECB and BoE raise rates, Fed next?

Europe saw higher interest rates yesterday as both the European Central Bank and the Bank of England raised rates. From FT:

Interest rates rose across Europe on Thursday as the European Central Bank increased rates by an expected quarter point to 3 per cent, while the Bank of England surprised markets with an equivalent rise of its main interest rate to 4.75 per cent.

Data yesterday showed that the euro area continues to grow, with retail sales volume up 0.5 percent in June -- reversing a fall in May -- and the services Purchasing Managers Index moderating to 57.9 in July from 60.7 in June.

The surprise move by the BoE yesterday came amid reports that house prices rose 0.2 percent in July, constructing orders rose four percent in the second quarter and the services business index dipped to 57.9 in July from 58.7 in June.

In the US, doubts remain over whether the Federal Reserve will raise rates, especially after yesterday's data. From Reuters:

The Institute for Supply Management's services index fell to 54.8 in July from 57.0 in June... The ISM services prices-paid index rose to 74.8 in July from 73.9 in June, while the jobs component increased to 54.5 from 52.0, and new orders slipped to 55.6 from 56.6...

New orders at U.S. factories rose a smaller-than-expected 1.2 percent in June... After stripping out transportation, factory orders rose a scant 0.1 percent, the weakest since a 2.5 percent drop in February... [U]nfilled orders for items meant to last more than three years rose 1.6 percent... However, inventories of goods rose for the fifth time in the last six months.

An industry report on Thursday showed mixed results for U.S. chain store sales. Sales rose 3.5 percent on a year-over-year basis in July, but were below the 3.8 percent average for the 2006 fiscal year, the International Council of Shopping Centers said...

On the employment front, the number of workers seeking initial jobless aid rose 14,000 last week, but remained at levels still indicative of a stable labor market.

Tim Duy thinks that inflation concerns will ultimately trump slowdown concerns for the Fed.

In short, I want to believe the “growth slowdown means a pause” story, but the inflation numbers keep circling around me like a pack of hyenas just waiting for me to drop my guard. Central bankers tend to hold onto hawkish leanings longer than expected. I simply suspect that while financial markets appear to be more focused on the slowdown story, the Fed will focus on the inflation story. Moreover, I doubt the Fed finds the GDP report to be particularly dismal. Consequently, I think the call is much closer than the betting on Wall Street indicates, close enough for me to expect another hike next week.