The UK economy remains in a fragile place. Inflation remains high but now there is confirmation that retail sales are continuing to show signs of falter. Retail sales dropped by 0.2% in September, adding to signs of weakness in the recovery from COVID-19; this was also below economist expectation of 0.5%. UK consumer confidence retreated to an 8-month low of -17 from -13 previously while inflation expectations hit the highest level since at least 1985. This does highlight the challenge that the central bank faces with the concerns of stagflation.
Overnight, Bank of England (BoE) Chief Economist Pill stated that inflation is likely to hit 5% and that the November central bank meeting is live (not a formality). He also stated that the emergency policy settings are no longer needed with the decision finely balanced, maintaining speculation that there would be a small rate hike next month.
Looking to the day ahead, the ‘flash’ PMI releases will provide an early indication of activity and price pressures at the start of Q4. A slight decline is expected in the UK manufacturing and services data which could throw up more questions.
US Jobs Data Looks Positive
Markets remain focused on US data as it continues to decipher and guess the likelihood as to whether the central bank will make the first move in its path to tightening policy by taper QE in November. US initial jobless claims declined slightly to 290,000 in the latest week from a revised 296,000 previously and slightly below consensus forecasts of 300,000. The continuing claims also suggest that the labour data is improving despite the disappointing reading in the Non-Farms Payrolls at the beginning of the month. Continuing claims posted their lowest reading since March 2020. In the meantime, the Philadelphia Fed manufacturing index declined slightly below expectations. There were stronger rates of growth in new and unfilled orders while shipments continued to increase at a solid rate.
In the meantime, Fed Governor Waller stated that inflation is the biggest upside risks and that the next five months would be critical in assessing whether inflation is transitory.
Looking to the day ahead, the ‘flash’ PMI releases will provide an early indication of activity and price pressures at the start of Q4. There will also be particular attention on Fed Chair Powell who will take part in a policy panel discussion on post-COVID-19 monetary and financial stability challenges.
Will EU PMI Data Confirm Inflationary Pressure Is Here To Stay?
Yesterday was a fairly quiet day with no major data release on the calendar. European Central Bank (ECB) council member Visco stated that supply bottlenecks could last for longer than expected, maintaining the potential for further upward pressure on costs. The market will focus on the PMI data today to see if there is any evidence of this. The PMIs will be a central story today in the eurozone, with France and Germany’s numbers released before the eurozone-wide data this morning. In addition, ECB member Villeroy is set to speak today. The markets are determined to stick to their current pricing of 10bp of ECB tightening within the next 12 months and will decipher Villeroy’s words for further confirmation of this. If this remains the case, the Euro will remain fragile as markets are looking to UK and US for when not if they raise rates in the next 12 months.
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