After last week’s market chaos, traders are likely getting to grips with a new reality, particularly with cable. As a result of the shift in perception, the BOE is not expected to cut at a slightly faster rate than the Fed. But both are seen easing a lot more than was expected when August started.
What investors appear to be worried about is that the UK will have another economic slowdown in the remainder of the year. The BOE only just narrowly moved to cut rates, and the thought among the pessimists is that the recent poor economic data points, including UK GDP Growth, will accelerate to the downside. That would likely force the BOE’s hawks off their perches and leave interest rates in the UK once again below those in the US. However, the BOE has been silent after being quite forceful in suggesting that further rate cuts aren’t guaranteed.
Picking Through the Data
The UK will issue a barrage of economic data this week with several key indicators, including UK GDP Growth, that could end up shaking up the market. Key to the reaction is whether the data confirms the recent pessimism or suggests that the rebound from earlier this year is likely to continue. Jobs numbers, GDP growth, and inflation are likely to be the focus as each has different reasons to move the market.
Here’s what’s coming up starting tomorrow and lasting all the way until Friday:
UK Jobs Numbers
Easing in the employment sector is seen as one of the key catalysts for the easing outlook, since persistent pressure in labor cost is the main reason cited by BOE hawks for their position. Most recently MPC member Catherine Mann (who voted to keep rates unchanged at the last meeting) pointed to wage pressures specifically as concerning signs inflation might not remain at the desired level.
The UK June unemployment rate is expected to remain unchanged at 4.4%, with the July claimant count number dropping to 18K from 32K prior. Note that this represents the net change in people seeking unemployment support, so a lower number typically supports the pound.
Inflation Set to Rebound
What could deliver a shock to the markets is the upcoming inflation figures on Wednesday. Headline CPI is expected to bounce back up to 2.5% from 2.0% due to seasonality pressures. The market could dismiss this as long the core CPI figure continues to decline to 3.4% from 3.5%. But, with such a small change expected, there is a high risk of an overshoot.
Markets could factor in that since the last BOE meeting, only the hawks have spoken publicly (Mann and Pill), giving a much tighter message than what traders are pricing in. A rebound in inflation could lead to a strong reversal in market sentiment and support the pound.
UK Growth Situation
Thursday sees the release of Q1 GDP figures, which is expected to match the prior quarter at 0.7%, despite monthly GDP growth falling back to 0.0% from 0.4% higher. Last month had a strong growth indicator, but it is subject to revision this time around. Stronger UK GDP Growth gives the BOE more room to keep rates up, so a disappointment here could help convince traders that easing is on the way.
Finally Friday sees monthly retail sales expected to bounce back 0.5% from -0.2% in the prior month, suggesting that UK residents are still resilient in their spending. Stable or growing consumer sentiment could keep prices high and make it more difficult for the BOE to bring down inflation.