Sterling was on the back foot following the dovish hike from the Bank of England (BoE) after interest rates were raised by 0.75% to 3% on Thursday from 2.25%. The rate rise was its most significant since 1989. It warned of a “very challenging” outlook for the economy, stating:
→ The UK was likely in recession, which it entered in the third quarter of 2022.
→ The recession will last until the middle of 2024 and cause the economy to shrink by 2.9%.
→ Unemployment will rise steadily to 6.4% by late 2025, up from 3.5% (the lowest figure since the 1970s).
Whilst the BoE’s forecasts were dovish, these were made under challenging circumstances amidst the reversal of the mini-budget. Chancellor Hunt will deliver the Autumn Statement on the 17th of November. The market will wait with bated breath to understand the breadth of the spending cuts/tax increases, affecting both the economic outlook and the BoE’s forecasts.
Data to watch
Looking to the week ahead, headlines will focus on the UK GDP numbers on Friday. These include both the monthly and first reading of the quarterly figure.
→ The monthly figure will likely shrink for the second consecutive month.
→ The quarterly figure is expected to contract by -0.5%.
US Midterms likely to dominate with inflation monitored
The US dollar strengthened significantly following the Federal Open Market Committee (FOMC) meeting. As expected, the FOMC raised rates by 0.75%. The Committee raised the target range for the federal funds rate to 3.75% and 4% – the highest since early 2008. The committee consistently raised rates over six meetings since March, marking the fastest round of hikes since former Fed Chair Paul Volcker’s fight to control inflation in the 1970s and 1980s.
Chair Powell said whilst it would be appropriate to slow the pace of increases, he added:
→ Ongoing increases will likely be needed to bring rates to a “sufficiently restrictive level” to return inflation to 2% over time”.
→ As a result, markets adjusted the expected terminal rate from 4.75% to 5%.
Last week’s labour data saw non-farm payrolls posting a significant increase with a higher-than-expected gain of 261,000 last month, beating almost every estimate in the Bloomberg survey of economists. This data reinforces the Fed’s path of interest rate hikes.
Data to watch
Looking to the week ahead, much of the headlines will likely focus on the midterm term elections with the frenzy of speculation over the 2024 presidential race. Midterm elections are similar to a referendum. Last week, former US President Trump told a crowd that he would “very, very, very probably do it again” in 2024.
Regarding economic data, the market will continue to articulate readings to determine the path of the terminal rate.
→ Wednesday’s Consumer Price Index (CPI) will likely show that inflation remains elevated at 8%, down from last month’s reading of 8.2%.
→ Friday’s University of Michigan Consumer Sentiment Index indicates that confidence is relatively unfazed.
Will the EU downgrade economic forecast?
Headline Eurozone consumer inflation rate increased to 10.7% for October from 9.9% the previous month. This figure was well above consensus forecasts of 10.2% and a fresh record high.
→ The core rate also increased to 5% from 4.8%, above market expectations of 4.8% and a record high.
→ The Eurozone also posted GDP growth of 0.2% for the third quarter compared with expectations of 0.1%.
Following last week’s hike, the market doubts that the data will change the European Central Bank’s mind. It is unlikely to undertake a more aggressive hike in the interest rate cycle.
Over the weekend, there were signs that the war in Ukraine is far from ending, with Putin telling French president Emmanuel Macron that the nuclear attacks on Hiroshima and Nagasaki show “you don’t need to attack major cities to end a war,” according to reports. Whilst the impact on the euro was limited, it suggests that the currency will remain fragile for some time.
Data to watch
Economic data is becoming less impactful, given the geopolitical backdrop. However, the market keeps one eye on the data releases to identify future shocks in growth.
This week, the Eurozone retail sales and the EU economic forecast will be particularly interesting:
→ Retail sales are due for release on Wednesday and will likely return to positive territory following last month’s contractionary reading.
→ The EU economic forecast is due on Friday, with the market focusing on any downgrades.
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