UK headlines since Thursday have been dominated by the death of Her Majesty The Queen, with her funeral (and bank holiday) confirmed for Monday 19th September. The Bank of England (BoE) had been scheduled to provide a policy update this coming Thursday (15 September) but that has been pushed back a week until 22 September to account for the period of National Mourning.
Prior to this it was announced by Prime Minister Liz Truss government’s Energy Price Guarantee announcement to freeze household energy bills for two years, with equivalent business support for six months with a review at the end of the period. This mechanically lowers forecasts for near-term inflation but BoE Chief Economist Huw Pill, stated that the energy measures will support household incomes and demand, and could lead to higher inflation further out in the forecast horizon. Moving forward, due to the unknown impact of the energy price freeze, it is possible that we will see a more split MPC in the coming meetings as they try to articulate the resulting path of inflation.
Whilst headlines are likely to continue to be dominated by Royal proceedings, there is a packed economic calendar for the UK this week. Data this morning has disappointed somewhat with the monthly GDP, industrial production and manufacturing production all missing forecasts. Tomorrow the headline employment data is set for release with keen eyes on the earning inflation. The UK’s headline inflation reading is due on Wednesday to remain at 10.1% which may now be ignored with the pending energy freeze. Finally on Friday, the retail sales is expected to show that consumer spending is expected to slide by 0.5%.
Inflation report to provide clues over Fed Policy outlook
Inflation is the highlight theme once again this week, with the US, the UK and the eurozone all set to announce their consumer price index (CPI) readings for August. In the US, headline inflation eased slightly in July and a further softening in the CPI release could see the Federal Reserve opt for a 50-basis point interest rate rise at their September meeting later this month. The suggestion that the Fed may slow its tightening pace saw the Dollar Index soften towards the end of last week. Expectations however continue to support the scenario that the central bank will announce a further rise in rates by 0.75-basis points as Fed policymakers have maintained a hawkish stance in their fight against inflation. The likeliness of another large hike has been further supported by hawkish comments from various Fed members, highlighting a primary consideration on returned inflation towards the 2% target. In economic data released last week, the US ISM services survey reported another strong number on a month-on-month basis adding further support to the consensus of maintaining an aggressive tightening pace.
There are several key economic data releases for market participant to review ahead of the next Fed policy meeting on September 20th-21st. Investors will pay close attention to the release of the CPI inflation report on Tuesday. Headline US inflation is expected to weaken to 8.0% year-on-year from 8.5% in July. While this is a welcome sign, the core gauge is expected to rise to 6.1% y/y from 5.9% in July. The difference between headline and core readings might be explained by fading oil prices. Elsewhere this week on the US calendar, US industrial production data, retail sales and the University of Michigan consumer sentiment survey will provide clues over the Fed policy outlook.
Market to monitor for clues on projected rate hikes
The ECB, as expected last week, raised interest rates by a record 0.75% and raised for a second consecutive month in a row. There was a unanimous decision to increase rates by a record 75bp, taking the interest rate on the deposit facility up to 0.75% from 0.0% with similar rises in the main refinancing rate to 1.25%. During the press conference it was indicated that ECB will rates interest rates in the coming policy meetings this year and potentially those in early 2023. Another 75bp rate rise at the next meeting has not been ruled out.
Looking forward to the week ahead markets are likely to remain focused on comments from central bankers to try and work out the trajectory of interest rates. In the meantime, the market will also focus on data releases to understand the impact of the slowdown being witnessed. Tuesday sees the release of the ZEW survey, followed by the industrial production on Wednesday.
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