UK Price Inflation Pressures Raise Rate Hike Expectations
The UK service sector prices rose to a record high in September according to Services PMI released yesterday. The official figure read 55.4 which is slightly up from 55.0 in August, demonstrating expansion within the leading sector. It was noted that due to supply chain issues, rising fuel & energy costs and subsequent inflationary pressures, costs were passed onto consumers in September according to an IHS survey. The same can’t be said for Manufacturing PMIs and the sector as a whole which continues to hinder UK economic growth. According to manufacturing PMI from September, the index rose very marginally from 54.8 to 54.9 the month prior, representing the weakest manufacturing output since February this year.
Looking at fuel prices, they surged to an eight-year high on Monday (figure reported yesterday). The price of petrol increased by 91p per litre to 136.1p, marking the highest increase since September 2013. The figures provide some confirmation that the UK’s fuel crisis remains in play despite the Army being drafted in earlier in the week. The increased fuel price is expected to push UK inflation expectations even higher, with the Bank of England (BoE) now forecasting to exceed 4% by the end of the year. The expectation for a rate hike in December has grown to 42% probability from 8% last month.
Looking ahead at today, the macro-calendar is fairly light for the UK. The Prime Minister is due to speak this afternoon to close the Conservative Party Conference. It is expected that he will comment further about the UK becoming a high wage economy and rejecting the policy of using mass immigration to fill current labour shortages.
The EU Single Currency Remains Weak
Yesterday we saw the downward pressure continue with EURUSD testing the yearly low as interest rate expectations from the region remain muted. The final Eurozone PMI services index reading was revised marginally higher, but both the Italian and Spanish readings were below market expectations for the month. The weaker than expected readings in these countries reinforced concerns that the surge in energy prices will undermine activity, especially in southern Europe where the increase in costs has been most extreme. European Central Bank (ECB) President Lagarde stated that the bank will pay close attention to wage developments but remained confident that higher inflation would be transitory.
Looking to the day ahead the key focus will be on the Eurozone retail figures.
US Attention Turns To ADP Employment And Payroll Data
The US trade deficit widened greater than expected last month amid worries over slower growth and persistently higher inflation. The official trade deficit figure increased to 4.2% to $73.3 billion against a consensus forecast of $70.5 billion consensuses. At the same time, market participants look forward to US jobs data for a further clue on the timing of the Federal Reserve (Fed) policy tightening. The odds are increasing that the Fed will start cutting stimulus next month.
In the meantime, the IMF said on Tuesday that it expects global economic growth to fall below its July forecast of 6%, amid risks associated with debt and inflation rates.
Attention today will turn to September’s ADP employment figures, expected at 428k and up from August’s 374k reading.
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