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MPC Expects Inflation to Move Higher in Near Term

Last week, the Bank of England delivered some sombre news at its monetary policy meeting. As expected, it increased interest rates by 50 basis points to 1.75%. However, some downbeat messaging from the central bank stipulated that the UK economy is likely to enter a recession later this year, lasting for five quarters.

Meanwhile, the MPC expects inflation to move even higher in the near term, with the CPI headline rate forecast to exceed 13% in October in response to the energy price cap rise. The Bank of England said they don’t expect inflation to fall back to target until late 2024. Currently, the market believes that interest rates will peak at 3% early next year.

With the talk of recession fresh in the minds of the market from the MPC assessment, all eyes will be on the GDP numbers set for release at the end of the week. The month and quarterly figures will likely report contractions. The monthly figure is expected to contract by 1.2%, whilst the flash reading of the quarterly figure will show a probable contraction of -0.1%. In addition, the British Retail Sales is due for release on Tuesday.

Strong payrolls data ease recession fears

Risk sentiment fell sharply towards the end of last week after the US employment report showed larger-than-expected payroll gains and wage growth, which will keep the Fed aggressively tightening monetary policy. The widely viewed labour markets report showed that the US economy added 528k payrolls in July, well above market expectations of 250k and above an upwardly revised 398k in June. The report also highlighted the US unemployment rate decreased to 3.5% in July 2022. This figure was the lowest since February 2020 and down from 3.6% in June.

Shortly after the US employment report release, Treasury rates spiked higher on suggestions that the Fed will continue raising borrowing costs aggressively to reduce demand and tame higher inflation. The data reinforces the recent hawkish comments from several Fed policymakers and may prevent policymakers from pivoting to a more dovish stance.

Looking to the week ahead, the July US CPI report, scheduled for release on Wednesday, will draw significant attention across financial markets, following on from last week’s strong labour market report. Elsewhere it’s a lighter US economic calendar this week; investors will review PPI data due for release on Thursday, followed by the University of Michigan Consumer Sentiment survey near the end of the week.

Euro area data remains positive, but currency unable to capitalise

Despite some solid economic data, the single currency could not make headway due to the ongoing uncertainty surrounding gas prices. The headline eurozone consumer prices inflation rate increased to a fresh record high of 8.9% for July from 8.6% and above consensus forecasts of 8.7%. The underlying rate rose to 4.0% from 3.7% and slightly above expectations of 3.9%. In addition, the GDP data was more substantial than expected, with a flash growth estimate of 0.7% for the second quarter after an upwardly-revised 0.6% increase for the previous three months. The ongoing conflict and the economic concerns from raising interest rates persistently hinder the single currency from making any real gains.

Economic data is very quiet for the rest of the week. The market will continue to focus on the developments from the ongoing conflict in Ukraine.

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