It was a relatively quiet week with only the GDP of any note in terms of economic data. Following the recent comments from the BoE, the market was already slightly negative on this reading. The UK economy shrank by 0.6% in June as the impact of two bank holidays for the Jubilee celebrations weighed on output.
However, this was smaller than the anticipated decline of 1.2%. The headline quarterly figure showed the UK economy contracted by -0.1% in the second quarter, its first non-pandemic-restriction related decline since 2012. This means if the figure is confirmed at the next release and the Q3 figure post a negative reading, the UK has entered a technical recession.
Unlike last week, we have a packed calendar for the UK. On Tuesday, the employment data will be closely monitored. The headline numbers will likely remain positive, with the unemployment rate at lows of 3.8% and the claimant count sliding. However, with the forecasted five quarters of recession, the market will look for signs that the job market is starting to slow. Timely weekly data suggests that job vacancies are now falling.
On Wednesday, unlike in the US, the inflation reading indicates a rise to a fresh 40-year high of 9.9%. The core reading (excluding food and energy) is also expected to rise to 6%, from 5.8% in June. That move may add to concerns that the rise in prices is becoming broader. What will be more concerning is that BoE calculates that it could move above 13% when the next Ofgem price cap comes into effect. If we see higher than expected figures here on a monthly basis, there will be real concerns that the 13% forecast could be breached. Finally, the retail sales are set for release on Friday and are expected to post another decline.
Cautious mood supports the US dollar ahead of Fed Minutes report
The US dollar staged a solid recovery towards the end of last week, supported by a bounce in US Treasury yields and fallen sharply on expectations of a slower Federal Reserve tightening pace amid soft inflation data. Last week, US headline CPI inflation data fell more than expected in July. Meanwhile, the core rate of inflation, which strips out food and energy prices, remained at 5.9%.
The initial reaction from Fed policymakers was cautious, signalling that shallower hikes may be preferred should upcoming economic data continue to support the suggestion that inflation may have peaked. Richmond Federal Reserve bank president Thomas Barkin commented that raising interest rates will continue to bring inflation under control. He added that policymakers would review upcoming economic data to decide how big a rate hike to support at the Fed’s next meeting in September.
Highlight economic releases this week include US Retail sales, industrial production data, and updated housing activity. The highlight release comes in the form of the Fed Minutes report on Wednesday, which may provide investors with early insight as to whether the Fed members will vote for a 50-basis point or 75-basis point hike at the September meeting. At the most recent July meeting, Fed Chair Powell wanted to see further evidence that inflation is returning towards the target before considering a significant change in the pace of tightening. This week, the US dollar might face some headwinds if policymakers signalled a shift in forward monetary guidance and a greater willingness to implement smaller rate hikes.
Europe logistical problems continue
Last week was a quiet week for the Eurozone, with no significant data released. EURUSD did push higher following the release of the US inflation data as interest rate expectations diminished. The heatwave in Europe is a topical subject given strains from the Russia-Ukraine conflict. Rivers continue to evaporate with the Rhine River, a pillar of the German, Dutch and Swiss economies for centuries, set to become virtually impassable at a key waypoint later this week. The Rhine’s nautical bottleneck at Kaub is expected to dip below the mark of 40 cm early Friday and keep falling over the weekend.
Looking to the week ahead, the market will keep an eye on the economy as sentiment, growth and inflation all come into play. Tuesday sees the release of the German ZEW figure, with the market focused on economic sentiment and how the institutional sector articulates the view moving forward. The labour data and flash GDP (second reading) will also release. Finally, on Thursday, the headline inflation is due (second release) and will likely remain at 8.9%
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