Economic data flew largely under the radar this week as the mourning period continues following the passing of Her Majesty Queen Elizabeth II. That said, there have been some key economic releases from the UK in the form of employment data and inflation data. The employment data from the UK was mixed.
UK wages rose at a faster than expected pace (albeit below the rate of inflation). However, jobless claims rose in August by 6.3K (the first monthly rise since Feb-21). One possible rationale for this is that evidence of a moderate wage-price spiral in the UK is beginning to erode labour demand as margins are squeezed.
This morning, the UK’s headline inflation data was released. According to the Office for National Statistics, it dipped to 9.9% in the 12 months to August. Falling petrol prices were the main reason the pace of inflation eased. The Bank of England said inflation could peak more than 13% this year. Despite the positive data from the UK, it still finds itself on the back foot due to a positive US dollar move following stronger-than-expected inflation readings.
The market will closely follow how the energy prize freeze will affect spending. Royal procedures will likely dominate newswires for the remainder of the week. In the meantime, UK retail sales are due for release on Friday and will likely show consumer demand falling, given the economic backdrop.
Inflation data dampens risk appetite
The August US CPI report significantly impacted financial markets on Tuesday, which saw the US dollar soar against several major trading pairs and US stocks drop rapidly. Headline US inflation increased by 0.1% on a month-on-month basis and 8.3% on an annualised basis. Both figures exceeded forecasts of a no-change consensus on the monthly reading and an 8.1% annual increase. The core reading was hotter than expected, coming in at 0.6% month-on-month versus a forecast of 0.3%. The yearly rate came in at 6.3% versus the 6.1% expected.
Markets will factor in a 100% probability chance of a 75-basis point rate hike by the Federal Reserve. It’s worth noting that there is around a 25% chance that the US Federal Reserve (Fed) will announce a 1.0% increase in the benchmark Fed rate at the September meeting.
Thursday’s US Retail Sales data for August and Friday’s preliminary reading of the Michigan Consumer Sentiment Index for September will provide updates ahead of the next week’s Federal Open Market Committee interest rate meeting.
Hawkish signals fail to lift the Single currency
The single currency reversed its recent gains against the US dollar on Tuesday, following the announcement of stronger-than-expected US inflation data. Before the announcement, the euro gained support from hawkish comments from European Central Bank president Christine Lagarde. Lagarde recently hinted that policymakers could follow September’s 75-basis point rate hike again as part of several moves by the central bank to tackle rising inflation
Further to signalling its policy outlook, the ECB significantly revised higher its inflation projections, now expecting inflation to average 8.1% in 2022 and 5.5% in 2023. Meanwhile, they revised down expected GDP growth to 3.1% in 2022 and 0.9% in 2023.
In economic data released on Tuesday, the German ZEW Economic Sentiment Index declined to -61.9 for September from -55.3 the previous month, which was slightly weaker than consensus forecasts and a fresh record low for the index, while there was a steeper decline in the current condition’s component.
On Wednesday, investors will pay attention to any announcements outlining plans to tackle the energy crisis across the Eurozone, including measures to reduce consumption and a windfall tax on energy surplus profits. Towards the end of the week, attention will turn to the release of Eurozone CPI data on Friday.
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