BIG WEEK AHEAD FOR UK DATA

OVERNIGHT

Most Asia-Pacific equity markets are down by 1% or more this morning reflecting concerns about global economic growth prospects. Australia’s central bank left the policy rate unchanged at 4.1% and hinted that interest rates may have peaked. Meanwhile, the Reserve Bank of New Zealand is expected to leave interest rates at 5.5% this week.  

THE DAY AHEAD

Last week was another volatile one in markets, with the positive impact of hopes of a second US interest rate pause offset by rising concerns of global economic slowdown. Confirmation that US core inflation fell again in July added to the conviction that the Federal Reserve will not hike again. However, although bonds were rallying beforehand in anticipation of the news, they subsequently sold off and ended the week down. Meanwhile, major currency crosses saw only minor fluctuations. 

Even before the US inflation data, Fed policymakers seemed to be signalling the likelihood of a rate hike pause in September. The market now attaches only about an 11% probability to an increase. In contrast, in the Eurozone and the UK, market expectations of further rate hikes are much higher at 42% and 70% respectively.

Today should be a quiet start to the week, with no data releases of note. However, the data calendar for the rest of the week is busy. That is particularly the case in the UK where tomorrow’s labour market report will be followed by inflation data on Wednesday and retail sales on Friday. A likely mixed set of outturns will highlight that the Bank of England may again face a finely balanced situation next month when deciding on whether to sanction another interest rate hike.

Our forecasts imply that the labour market report due early Tuesday will again stoke ongoing domestic inflationary concerns. In its August Monetary Policy Report, the BoE noted that there are tentative signs that labour market pressures are now easing. A likely further fall in the reported level of unfilled job vacancies may be seen as another sign of that on Tuesday. However, we expect employment to have risen by a further 155k in the three months to June and for the unemployment rate to be unchanged at 4.0%.  Both indicate that the labour market remains tight. Moreover, annual average earnings growth is forecast to have accelerated, with regular pay growth expected to have hit a new multi-year high of 7.4%. That is a set of outcomes that will do nothing to ease the pressure on the BoE.  

MARKETS

US Treasury yields ended last week sharply higher and have risen further in early Monday trading. UK gilt yields and Eurozone yields also rose on Friday. In currency markets, sterling rose against the euro on Friday helped by stronger-than-expected GDP data but struggled against a generally stronger US dollar.