Strong data prints could unsettle the delicate balance at the BoE – Preview
October 16, 2023 8:27 am
Key data releases coming up as the market digests geopolitical developments
All eyes on CPI release (Wednesday 06:00 GMT) as the BoE is uneasy with strong prints
Calendar also includes labour market information, average earnings data and retail sales
The Bank of England does not really favour further rate hikes
At the September meeting the BoE kept its bank rate unchanged at 5.25%. It was a very close call, reminiscent of past and more turbulent times at the BoE. Governor Bailey kept the door open to further tightening steps if there were to be evidence of more persistent inflationary pressures. However, the market is aware of BoE’s sclerotic stance in terms of delivering further rate hikes, and it is thus almost fully convinced that the tightening cycle has been completed.
Most investment houses have started debating the timing of the first rate cut, pleasing many BoE members. However, four members voted for a rate hike at the September meeting and, to their eyes, little has changed over the past month. All in all, with the geopolitical developments taking center stage and thus raising the possibility of new oil and natural gas rallies, their rhetoric is unlikely to shift towards the dovish spectrum.
Wednesday is inflation day
Understandably, the economic data releases determine, to a great extent, the BoE outlook, and this week is action-packed. On Wednesday, the September inflation report will be published. The headline CPI for August surprised on the downside by dropping to 6.7% YoY, the lowest print since February 2022. The market expects further deceleration at the annual rate to 6.5%. In comparison, the recent US CPI figure for September edged a tad higher to 3.7% YoY while Germany showed a sizeable drop to just 4.5% YoY increase.
It is evident that inflation in the UK remains elevated despite the numerous BoE rate hikes. A possible upside surprise on Wednesday, especially if it rises again above 7%, will not go down well with the hawks. Such an outcome will add fuel to the hawkish fire allowing them to increase their commentary and pressure for a 25bps rate hike move at the upcoming November meeting. This is probably the worst-case scenario for Governor Bailey as he has been the frontrunner of making measured monetary policy steps.
Earnings matter but retail sales show only marginal improvement
Crucially, on Tuesday the average earnings figures for August will be released as central banks globally have been all over this data. For example, in Japan the BoJ has pinned its hopes for some form of policy normalization on stronger earnings and the next round of wage negotiations.
UK consumers are probably happy to finally enjoy earnings increases above the inflation rate, but the same cannot be said for the BoE. Second-round effects are dreaded by central banks as they feed expectations of higher future inflation. The market is forecasting another strong print at 7.8% YoY at the average earnings (excluding bonuses) indicator, unchanged from the July figure.
In the meantime, the labour market remains very strong, and Tuesday’s report is unlikely to hold any surprises. Stronger earnings and a tight labour market should, in principle, support retail sales. However, despite some improvement seen recently, the yearly pace of retail sales remains in negative territory. This situation could possibly reflect the consumers’ concerns about the upcoming winter-related utilities bills, thus most likely affecting their consumer spending habits and putting a dent on the short-term growth outlook for the UK economy.
Euro-pound to remain range bound if CPI fails to surprise
The consistent sell-off from the February 3 high has stopped as the euro-pound pair has been range-bound since early June. Attempts by both sides to stage sizeable moves have not materialized yet but this week’s data releases could reignite the pound bulls’ appetite, especially if an upside CPI surprise is recorded. In this case, a move below the 0.8596-0.8607 area could be considered plausible, potentially opening the door to a retest of the 2023 lows. On the flip side, euro bulls are anxiously trying to find an opening and push the euro-pound pair above the busy 0.8670-0.8720 region.
Key data releases coming up as the market digests geopolitical developments
All eyes on CPI release (Wednesday 06:00 GMT) as the BoE is uneasy with strong prints
Calendar also includes labour market information, average earnings data and retail sales
The Bank of England does not really favour further rate hikes
At the September meeting the BoE kept its bank rate unchanged at 5.25%. It was a very close call, reminiscent of past and more turbulent times at the BoE. Governor Bailey kept the door open to further tightening steps if there were to be evidence of more persistent inflationary pressures. However, the market is aware of BoE’s sclerotic stance in terms of delivering further rate hikes, and it is thus almost fully convinced that the tightening cycle has been completed.
Most investment houses have started debating the timing of the first rate cut, pleasing many BoE members. However, four members voted for a rate hike at the September meeting and, to their eyes, little has changed over the past month. All in all, with the geopolitical developments taking center stage and thus raising the possibility of new oil and natural gas rallies, their rhetoric is unlikely to shift towards the dovish spectrum.
Wednesday is inflation day
Understandably, the economic data releases determine, to a great extent, the BoE outlook, and this week is action-packed. On Wednesday, the September inflation report will be published. The headline CPI for August surprised on the downside by dropping to 6.7% YoY, the lowest print since February 2022. The market expects further deceleration at the annual rate to 6.5%. In comparison, the recent US CPI figure for September edged a tad higher to 3.7% YoY while Germany showed a sizeable drop to just 4.5% YoY increase.
It is evident that inflation in the UK remains elevated despite the numerous BoE rate hikes. A possible upside surprise on Wednesday, especially if it rises again above 7%, will not go down well with the hawks. Such an outcome will add fuel to the hawkish fire allowing them to increase their commentary and pressure for a 25bps rate hike move at the upcoming November meeting. This is probably the worst-case scenario for Governor Bailey as he has been the frontrunner of making measured monetary policy steps.
Earnings matter but retail sales show only marginal improvement
Crucially, on Tuesday the average earnings figures for August will be released as central banks globally have been all over this data. For example, in Japan the BoJ has pinned its hopes for some form of policy normalization on stronger earnings and the next round of wage negotiations.
UK consumers are probably happy to finally enjoy earnings increases above the inflation rate, but the same cannot be said for the BoE. Second-round effects are dreaded by central banks as they feed expectations of higher future inflation. The market is forecasting another strong print at 7.8% YoY at the average earnings (excluding bonuses) indicator, unchanged from the July figure.
In the meantime, the labour market remains very strong, and Tuesday’s report is unlikely to hold any surprises. Stronger earnings and a tight labour market should, in principle, support retail sales. However, despite some improvement seen recently, the yearly pace of retail sales remains in negative territory. This situation could possibly reflect the consumers’ concerns about the upcoming winter-related utilities bills, thus most likely affecting their consumer spending habits and putting a dent on the short-term growth outlook for the UK economy.
Euro-pound to remain range bound if CPI fails to surprise
The consistent sell-off from the February 3 high has stopped as the euro-pound pair has been range-bound since early June. Attempts by both sides to stage sizeable moves have not materialized yet but this week’s data releases could reignite the pound bulls’ appetite, especially if an upside CPI surprise is recorded. In this case, a move below the 0.8596-0.8607 area could be considered plausible, potentially opening the door to a retest of the 2023 lows. On the flip side, euro bulls are anxiously trying to find an opening and push the euro-pound pair above the busy 0.8670-0.8720 region.
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