Weekly Market Outlook – This week is loaded with economic data that could influence interest rate decisions. As the world mourns the passing of Queen Elizabeth this week, the Bank of England postponed its upcoming interest rate decision meeting to September 22nd. Nevertheless, data releases will continue as planned. The US CPI report’s release will provide some insight into the Fed’s September 21st meeting expectations. It is expected that the BOE will increase rates by 75bps after the RBA, the BOC, and the ECB all hiked rates by 50bps. In the APAC region, the Australian and New Zealand dollars await local employment and GDP data, respectively.
Key Data to watch on the Economic Calendar this week
- UK: GDP (JUL)
- UK: Manufacturing Production (JUL)
- UK: Industrial Production (JUL)
- US: CPI (AUG)
- UK: Inflation data (AUG)
- US: PPI Final Demand (AUG)
- New Zealand: GDP
- Australia: Employment Change (AUG)
- US: Retail Sales (AUG)
- US: Empire State Manufacturing Index (SEP)
- UK Retail Sales (Aug)
- EU: CPI Final (AUG)
- US: Consumer Sentiment Prelim (SEP)
Global — Central Banks
The RBA, BOC, and ECB all hiked interest rates last week and intend to raise them again in the near future. In a statement, the RBA said it expects to increase interest rates in the months ahead so inflation can fall to its target of 2% to 3%. However, RBA Governor Lowe hinted on Thursday that tightening might be slowed. Accordingly, next month’s RBA meeting is expected to only include a 25bps hike.
The BOC increased its key rate by 75 basis points to 3.25%. As with the Reserve Bank, the BOC said inflationary conditions will necessitate a further rate rise. A few months will be needed for inflation to return to 2%, according to Rogers of the BOC. Is the BOC going to hike again in its next meeting? The Employment Change for August was released by Canada on Friday. With -39,700 jobs lost over the past three months, the total is -113,500. Will the BOC continue to raise rates until a certain number of jobs are lost?
ECB rates were also raised from 0% to 0.75% by 75 basis points. The statement also stated that additional rate hikes are necessary to counter higher inflation expectations. Christine Lagarde, however, clarified that the central banks doesn’t have a predetermined path, and decisions will be made according to the meeting agenda.
USD — US CPI in Focus
Inflation in the US is expected to decline by 0.1% M/M in August (vs unchanged in July), which would mark the first quarterly decline in two years; core inflation, however, is expected to rise to +0.4% M/M (prev. +0.3%). It is expected that the data release will play a crucial role in determining expectations for the FOMC’s September 21st meeting. If the reading is hot, the central bank would likely act more aggressively, as it prioritizes capping price pressures over supporting growth, whereas if it were soft, it would likely opt to act less aggressively.
It is expected that the central bank will opt for an 85% rate hike instead of a smaller 50bps increment at the September confab, after a strong August jobs report, upside surprises in the influential ISM business surveys for the month, and hawkish rhetoric from Fed officials. Many, however, have stressed that incoming data will be crucial to their decision at the September meeting.
Traders will be paying close attention to the impact the data has on expectations of how many hikes the Fed will fire this cycle. According to market expectations, the terminal rate will likely be raised in Q1 to the current range of 3.75-4.00% as a result of the more constructive tone of macro indicators in Q3. According to the Fed’s June forecasts (which will be updated in September), the terminal rate is expected to be 3.8% by 2023. According to analysts, if the Fed remains at the terminal for three to fifteen months on average, it could signal a rate-cutting cycle in H2-2023.
US Retail Sales: Retail sales are forecast to rise 0.2% M/M in August (prev. 0%), while ex-autos are also expected to rise 0.2% M/M (prev. 0.4%). “Retail sales have been performing well in recent months, but we maintain a weak outlook for real goods demand in the next few quarters,” Credit Suisse says. Consequently, the Fed’s explicit policy of slowing growth may result in sour sentiment and tightening financial conditions, while incremental shocks may cause a broader, unemployment-driven slowdown, skewed to the downside.
GBP — BOE to take drastic measures
As of today, we will find out the results of the monthly GDP, which is expected to show another negative growth, but not as much as last month. According to estimates, UK GDP will decline by 0.1% in July, compared with -0.6% in June. Tuesday brings employment figures. Job growth has not been a huge concern for the BOE since it is focusing primarily on inflation. However, earnings data may provide insight into pricing pressures caused by demand-side factors. The tightness of the labour market could affect that, too. A 50bps hike instead of a 75bps hike might be justified by lower wages and increasing claimant count, as expected.
According to estimates, the UK August claimant count will decrease to -4K from -10.5K in July. This number is a measure of how many people are seeking unemployment benefits, so the higher this number is, the better it is for the economy. There are no changes expected in July’s unemployment rate. Despite this, average earnings growth is expected to slow to 4.6% in July from 5.1% in June. Considering that inflation is at 10.1%, employee purchasing power is further eroded. The BOE is trying to bring inflation down, so Wednesday’s data is crucial. However, there are no inflation forecasts this far in advance. Due to the passing of the Queen, the ONS delayed publishing the Friday statistics until next week.
It is expected that inflation will increase, but a higher CPI would make the BOE take more drastic steps. At this point, markets are likely to price in expectations for the BOE meeting the next day. Wednesday will also see the release of PPI figures, which are considered a precursor to inflation trends. Prices have to keep increasing if inflation is to adjust meaningfully. Nonetheless, there may be less relevance this time around since the new government may implement a plan to reduce energy costs. However, it has not yet been established exactly how the mechanism will work and what effect it will have on inflation. Later in the month, Chancellor Kwarteng will provide more details.
EUR — Eurozone CPI data make headlines
CPI data for the Euro area for August 2022 is scheduled for release on September 16. Eurostat, the statistical office of the European Union, has released a flash estimate of the annual inflation rate for the Euro area in August 2022, which is expected to rise from 8.9% in July to 9.1% according to the information.
As a result of Russia’s conflict in Ukraine, inflation rates in the EU countries that use the euro currency rose to a record 8.9% in July, from 8.6% in June, as a result of higher energy prices. Across all markets, the energy price surged by 39.7%, the food price spiked by 9.8%, and the price of other goods went up by 4.5%.
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