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Week Ahead: Is hot UK inflation here to stay?
Quite a lot to look out for in terms of big data this week. First up, we have UK CPI data. Is inflation sticking around for longer than we thought? UK and EU flash PMIs come too at a time when it looks like economic activity is starting to slow down. It’s also US earnings season with leading tech players reporting in.
UK CPI: circling hawks and hot prints
On the data front, one of the week’s big releases are the latest UK Consumer Price Index numbers.
September’s print showed that UK inflation had far exceeded the Bank of England’s 2% target in August. Consumer prices surged by 3.2% in the twelve months up to that month official data showed – the highest month-on-month increase since records began in 2017.
The Office for National Statistics said the surge was “likely to be a temporary change” and flagged the government’s Eat Out to Help Out (EOHO) scheme may have been a contributing factor to the jump.
“In August 2020 many prices in restaurants and cafes were discounted because of the government’s Eat Out to Help Out scheme, which offered customers half-price food and drink to eat or drink in (up to the value of £10) between Mondays and Wednesdays,” the ONS said in its statement.
“Because EOHO was a short-term scheme, the upward shift in the August 2021 12-month inflation rate is likely to be temporary.”
The official line has been that higher prices are transitionary – but voices from within the Bank of England warn it could be here for longer than first thought.
The BoE’s new Chief Economist Huw Pill has said he believes hot inflation could be sticking around.
“In my view, that balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated,” Pill said in September.
Pill lends his voice to the hawkish chorus steadily building in the Bank of England’s council. A number of MPC members are calling for a rate hike early next year. As such, another high CPI print in September may lead to a turning up of the volume from the hawks.
PMI rush to signpost economic slowdowns?
It’s also the time of the month when flash PMI scores start landing thick and fast.
British and EU data is released this week off the back of last month’s reports which indicate growth is slowing in these two major economies.
Let’s start with the UK. The IHS Markit flash composite for September indicated output had dropped to the lowest level since February. The UK’s score came in at 54.1 that month, slipping from 54.8 in August.
Recovery appears to be stalling as we head into the winter months. Lower economic activity matched with higher inflation does not create the most positive of outcomes for Britain’s economy going forward.
The PMI for the services sector fell to 54.6 in September from 55.0 in August, its lowest level since February when Britain was still in lockdown. Manufacturing fell from 60.3 to 56.4, which is again the lowest level since February.
It’s the same story across the Channel. European growth was stymied by supply constraints pushing input costs the 20-year highs throughout the EU last month. Will this month’s PMI data show the same?
In terms of scores, the IHS composite reading showed economic growth had dropped to a five-month low in September. The EU scored 56.1 that month against 59.0 in August.
This was well below market forecasts. A Reuters poll indicated economists and analysts believed output would slow, but at the much lower rate of 58.5.
Supply line squeezes coupled with a general slowing of GDP growth appear to be the main factors here. The EU economy is approaching its pre-pandemic size, so a slowdown was always on the cards, but not one quite so drastic.
I would expect to see a lower EU PMI print on Friday when the latest data lands.
Wall Street earnings keep on coming – enter the tech stocks
Next week, we’ll be in the thick of it when it comes to Q3 earnings season. Big banks, including Goldman Sachs, Citigroup, and JPMorgan, kicked things off for us last week. Now, it’s the turn of some big tech mega caps to share their latest financials.
Netflix and Tesla are the two headliners to watch out for this week. Both reported strong Q1 and Q2 figures but have advised performance may start to drop off in 2021’s third quarter.
For more information on which companies are reporting and when be sure to check out our US earnings season calendar.
Major economic data
|Mon 18-Oct||3:00am||CNY||GDP q/y|
|3:00am||CNY||Retail Sales y/y|
|2:15pm||USD||Industrial Production m/m|
|3:30pm||CAD||BOC Business Outlook Survey|
|Tue 19-Oct||1:30am||AUD||Monetary Policy Meeting Minutes|
|Wed 20-Oct||7:00am||GBP||CPI y/y|
|1:30pm||CAD||Common CPI y/y|
|1:30pm||CAD||Median CPI y/y|
|1:30pm||CAD||Trimmed CPI y/y|
|3:30pm||USD||Crude Oil Inventories|
|Thu 21-Oct||1:30pm||USD||Philly Fed Manufacturing Index|
|Fri 22-Oct||7:00am||GBP||Retail Sales m/m|
|8:15am||EUR||French Flash Manufacturing PMI|
|8:15am||EUR||French Flash Services PMI|
|8:30am||EUR||German Flash Manufacturing PMI|
|8:30am||EUR||German Flash Services PMI|
|9:00am||EUR||Flash Manufacturing PMI|
|9:00am||EUR||Flash Services PMI|
|9:30am||GBP||Flash Manufacturing PMI|
|9:30am||GBP||Flash Services PMI|
|1:30pm||CAD||Core Retail Sales m/m|
|1:30pm||CAD||Retail Sales m/m|
|2:45pm||USD||Flash Manufacturing PMI|
|2:45pm||USD||Flash Services PMI|
|Tentative||USD||Treasury Currency Report|
Key earnings data
|Tue 19 Oct||Wed 20 Oct||Thu 21 Oct||Fri 22 Oct|
|Philip Morris International (PM)||Verizon Communications Inc (VZ)||AT&T (T)||American Express (AXP)|
|Johnson & Johnson (JNJ)||International Business Machines (IBM)||Intel Corp (INTC)||Schlumberger Ltd (SLB)|
|Procter & Gamble (PG)||Tesla Inc (TSLA)||Snap Inc A (SNAP)|
|Netflix Inc (NFLX)|
Bank of England responds to hot inflation print
The Bank of England will need to respond to biggest jump in inflation on record when it convenes this week. Inflation accelerated to 3.2% in August from 2% in July, well above the central bank’s 2% target. Could this force the BoE to tighten monetary policy sooner than had been expected? A hawkish-sounding Bank of England would be a boost for sterling. In order to be hawkish enough to nudge sterling higher and show it’s prepared to kill inflation as required, the Bank probably ought to end QE now – as the now ex-MPC hawk Andy Haldane argued for last time around. There is a clear risk inflation will overshoot the 4% forecast, let alone the 2% goal. Unanchored inflation expectations are the worst possible outcome for a central bank they’ve been too slow to recognise the pandemic has completely changed the disinflationary world of 2008-2020. Hikes will be required too in the not too distant future and the bank should appreciate that a bitter pill now would be better than even harsher medicine later on. A jobs market with 1m vacancies does not suggest the UK economy is in trouble at the moment. Wage growth remains strong – albeit the picture is very complex due to furlough, the pandemic and base effects + inflation on real wages.
Does the bank go for a more hawkish signal? That is harder to say: it’s already well into a taper and markets anticipate the BoE will be raising rates 2-3 times over the next couple of years – does it need to do more than that? The question is whether the inflation ready has got the right kind of attention that it deserves or whether the BoE is ignoring the red flags. My own view, for what it’s worth, is that the Bank, just like the Fed, has allowed inflation overshoots to allow for the recovery, but it’s been too slow and too generous. Much like the response to the pandemic itself, the medicine (QE, ZIRP) being administered may be doing more harm (inflation) than good (growth, jobs).
Stocks stage a bounce after Monday selloff
A battling close lifted the spirits on a very tough day for equity markets on Monday. European markets are taking that bounce at the death on Wall Street – and a firmer close for Europe – and rallying this morning after a drubbing in yesterday’s session. Basic resources leading the way – what went down furthest yesterday is bouncing the most today. Shell rallied 3% in early trade, whilst IAG continued to catch bid on the reopening of the lucrative transatlantic trade. The airline group trades +6% after a double-digit rally yesterday as the US said it would let UK and EU travellers back in. Lufthansa is also up more than 4%.
Question now is whether this rally has enough puff or if there is a tendency – as I suggested last Wednesday – to sell into rallies rather than buy the dip. Not a lot of data to get in the way and a two-day Fed meeting that starts today suggest risk appetite will be moderate for the time being. Market indicators are flashing – US 10yr swap spreads at widest in 6 months, Vix spiked to its highest since May. To answer this – have market fears that led to the sell-off gone away or been fully priced? For now, I like a -10% decline rather than just 5% but so much depends on what the Fed delivers tomorrow.
The S&P 500 closed down 1.7%, its worst daily decline since May, but rallied a solid 50pts in the last 45 minutes or so of the session. That ought to offer some encouragement for bulls that there are still dips to be bought but we should caution that the uptrend is broken, and we should look for recovery of the Sep 14-16 highs around the 4,485 mark for a sign that the downswing is over. The Nasdaq fell 2.2%. Shares in Tokyo fell 2% as it caught up following a holiday – just wait until Chinese equity markets reopen on Wednesday. Hang Seng almost flat, Evergrande down a little over 1% as the panic moderated.
European stocks closed off the lows: FTSE –0.86% at 6,904, having touched an intra-day low of 6,8027. The DAX finished –2.3% at 15,117, having hit a low of 15,132. Bid started to come through just ahead of the US cash open- which though soft – was encouraging as it marked the low of the day for the futures. 4,350 is the key near-term support for the S&P 500, eyes down for the 200-day SMA at 4,100, having tested the 100-day SMA at 4,326 with a low of 4,305 yesterday.
• Coinbase stock fell 3.5% as the company dropped plans to launch its Lend programme, following a major spat with the SEC.
• Tesla dropped 4% as regulators took aim at the carmaker’s self-driving function. The US National Highway Traffic Safety Administration (NHTSA) has already announced an investigation into Tesla’s Autopilot over its possible involvement a number of crashes. Now the National Transportation Safety Board (NTSB) is weighing in, calling the approach Tesla is taking “misleading and irresponsible”. Jennifer Homendy, the new head of the regulator, told the WSJ that “[Tesla] has clearly misled numerous people to misuse and abuse technology.”
• Shares in Universal Music Group surged on debut in Amsterdam, rallying +35% above the reference price after its spin-off from Vivendi, which declined 17% on the dilution. Tomorrow will be a difficult second album for the biggest listing in Europe this year.
• Minutes from the Reserve Bank of Australia reiterated that there will be no rate rise until 2024 and that the Delta variant “delayed, but not derailed, the recovery”.
• Stagecoach +17%, National Express +5% on news that they are exploring a merger that would create some big synergies and an even bigger national travel operator. Immediately I think competition concerns might be a problem. Shares in the pair have been cut by the pandemic – a tie-up makes sense.
• Return of sporting events lifted Compass, with revenues +86% over 2019 levels. Shares just traded a tad light on the news.
• Kingfisher shares down 5% to the bottom of the FTSE despite strong performance and a hike to the dividend. The interim dividend is up 40% and LFL sales up 22.8% and corresponding 2-year LFL up 21.3%. Retail profits rose 45%, though free cash flow was 30% lower as result of the reversal of working capital inflow in the prior year related to inventory. But H2 is up against some very tough comparisons as Kingfisher was a big winner from lockdowns. Management expect LFL sales to be between -7% to -3% (previously -15% to -5%), with corresponding 2-year LFLs of +9% to +13%. Full year adjusted pre-tax profit is now seen in the range of c.£910 million to £950 million. Always going to be incredibly tough for KGF after the monster rally during the pandemic on some pretty amazing performance – investors will want to see more on the longer-term strategy on how to carry on the momentum.
Elsewhere, Bitcoin dropped to its weakest since the start of August having crashed through its 200-day SMA as the entire crypto space was smashed down as it was caught up the broad market sell-off. The riskier the asset, the quicker it is to be sold in times of stress, so hardly a surprise that crypto takes a beating whenever markets turn.
New highs for the dollar were made yesterday but just seeing some pause in early trade this morning. EURUSD still looking weak and bearish MACD still in play. Bit of RSI divergence to watch that might call for a flip as dollar strength looks overdone.
GBPUSD: Again some pushback from sterling bulls this morning – RSI/MACD divergence may be calling for a rebound once the descending triangle plays out.
What is Forex trading and how can you start?
If you’re a newcomer to the world of forex trading, it might seem a bit intimidating. In this beginner’s guide, we run through the basics so you can start your FX trading journey.
What is forex?
Forex, also shortened to FX, stands for foreign exchange. In practice, it’s the exchanging and trading of different currencies.
FX is the most popular trading activity in the world. Every day, $6 trillion – more than the GDP of the UK and France put together – exchanges hands.
A number of different types of traders are involved in the FX trader, including banks, companies, individual retail investors, and even governments.
There is no centralised exchange when it comes to Forex. It’s typically done over-the-counter. Essentially, anyone can get involved – but please only commit any capital if you are comfortable taking any losses.
In our case at Markets.com, we offer FX trading via contracts for difference (CFDs). With CFDs, you do not own the underlying asset. These are leveraged products. That means you gain exposure for a fraction of the total trade’s value. However, profit and loss is gauged by the total size of your position, not your deposit, and can far outweigh your initial deposit. Your risk of loss is higher.
What makes FX trading appealing?
There are lots of reasons why foreign exchange is so popular, such as:
- Market size – roughly $6 trillion changes hands every day!
- Variety – We offer over 60 different currency pairs to trade at Markets.com
- Accessibility – Unlike stocks and other assets tied to exchanges, currency can be traded 24/7
- Leverage – As mentioned above, currency pairing CFDs allow you to open a trade at a fraction of the trade’s total value
There is also a degree of flexibility with forex.
CFDs allow speculation on price movements in both directions. If you think the currency pairing is going to lose value, you will take a short position. If you think it will gain value, you’ll take a long position.
What are currency pairs?
Currency pairs are the financial instrument used in foreign exchange.
It is a quotation for two different currencies. It’s basically the amount you would pay in one currency for another.
Let’s look at an example.
The currency pair is GBP/USD at 1.15.
That means you could exchange 1 GBP for 1.15 USD.
If one of the paired currency’s value changes, then the currency pair’s value will change too.
For example, GBP/USD has started the day at 1.15. By the end of the day, it has risen to 1.16. That is because the strength of pound sterling has risen in value against the US dollar.
If the currency pair starts the day at 1.15, then drops to 1.13, for instance, that means the value of pound sterling has weakened against the US dollar.
At Markets.com, our currency trading offer is split into three categories: Majors, minors, and exotic.
Majors are some of the most popularly traded pairs on the market, coming from the largest global economies. They’re essentially the engines of global commerce and economics. Major currency pairs include:
- GBP/USD – Pound sterling to US dollar
- EUR/USD – Euro to US dollar
- JPY/USD – Japanese yen to US dollar
- USD/CHF – US dollar to Swiss franc
- AUD/USD – Australian dollar to US dollar
- NZD/USD – New Zealand dollar to US dollar
- CAD/USD – Canadian dollar to US dollar
The minor pairings are still from important economies but do not include the US dollar. These are still popular trading assets. Take a look at some examples below:
- AUD/CAD – Australian dollar to Canadian dollar
- CAD/JPY – Canadian dollar to Japanese yen
- EUR/GBP – Euro to pound sterling
- USD/DKK – US dollar to Danish kroner
Exotic pairings are pairings featuring potentially more volatile currencies. In the past, such currencies may also have had unique or difficult conversion requirements. Many come from emerging economies.
- CHF/PLN – Swiss franc to Polish zloty
- EUR/RUB – Euro to Russian rouble
- GBP/TYR – Pound sterling to Turkish lira
- USD/ZAR – US dollar to South African rand
What factors affect the currency market?
Like any financial instrument, currency pairs are affected by numerous external factors. If you’re looking to enter the world of forex trading, be aware of the following:
- Central bank policy & interest rates – It’s the job of central banks to essentially watch over all aspects of a nation’s monetary policy. That will give it oversight over many things that can affect currency prices. Interest rates are a key part of this. If a central bank increases its overnight rate, then currency traders looking to enjoy higher yields may end up buying more. This can make currency prices rise.
- Economic releases – Big economic releases, such as monthly, quarterly, and annual GDP growth figures, manufacturing and services PMIs, employment figures, and inflation all have an influence on FX prices.
- Politics – It goes without saying that political tussles can affect a currency pairing’s valuation. Think how the pound slid dramatically after the Brexit vote, or how the USD wobbled in the wake of the US/China trade war under the Trump administration.
- Volatility – The above factors will have an impact on price volatility, which can then affect how traders trade. Some may prefer to trade on volatile currency pairs; others may wish to hold off until markets fall back to normal. Be aware that some currency pairings are more volatile than others.
Some currency trading tips for beginners
- Research – Don’t commit any of your money until you’ve done your research. Study the markets. Take time to head over to our news and analysis section. You’ll find plenty of pieces on what’s moving markets and how major currency pairs are currently fairing. The old adage fail to prepare; prepare to fail runs true here. Make sure you’re informed before placing a trade.
- Practice – A com demo account lets you practice trades with $10,000 in demo credit to play about with. That way you can get a feel for currency markets, familiarise yourself with our platform, and see how tools can help impact your trades, in a risk-free environment. You won’t be spending any money.
- Tools – We have a suite of powerful trading tools designed to help you. From various different charts to sentiment indicators, and much more besides, these are all designed to give you a potential trading edge. Click here to learn more about our tools.
- Know your limits – Only trade if you are comfortable taking losses. Don’t be afraid to cut your losses either if you feel you are losing too much. Do not overextend. At the same time, don’t be tempted to take all of your potential profit out the first time it appears. You can be confident – but only you will know your own limits.
Remember: trading is inherently risky. The value of your trades can down as well as going up. Bear this in mind if you decide to take the forex trading plunge.
Stocks pick up, bonds remain bid ahead of Fed minutes
European stocks edged higher early Wednesday after taking a sharp tumble in yesterday’s afternoon session. Bonds and the dollar rallied, leaving benchmark yields at their lowest in some months, knocking the wind out of the cyclical recovery trade. The FTSE 100 ended the day down 0.9% at 7100 but has regained some poise in the early part of today’s session to trade at 7,130. European markets remain very much stuck in month-long ranges. Shell shares rose more than 2% on a promise if higher shareholder returns.
Mega cap growth helped the US market keep a more level head as the S&P 500 declined 0.2%, easing away from a record high set last week, whilst the Nasdaq rallied by almost the same amount. The Dow Jones fell 0.6% as economically sensitive names like Caterpillar, Chevron, Home Depot and JPMorgan slipped. US 10yr yields are under 1.34% this morning, a five-month low. Similar story for gilts, with the yield on 10yr paper at 0.627%, the lowest since Feb.
Yesterday’s pullback and the sharp drop in bond yields reflected doubts about the pace of growth, and the extent to which costs are going up for businesses. The talk is that peak growth is behind us and The ISM services PMI reflected the trouble for growth is not on the demand side; quite the reverse. Businesses anecdotally reported ‘supply chain outages, logistics delays and employee- and management-staffing constraints’ and that ‘business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market’. I fail to see how this implies inflation will be transitory.
A run-up in the S&P 500 of 5% in the last two weeks looks to be unsustainable and at the very least I’d anticipate we see a pause and trading sideways, if not a deeper correction over the summer. For now, though, Tuesday’s dip is not a sign of reversal. The market is narrowing, too. The S&P 500 would have had a much sharper drop (~1%) had it not been for the 14 index points added by Apple and Amazon. Shares in Amazon rallied almost 5% as the US Defense department cancelled its $10bn JEDI contract with Microsoft, with the Pentagon saying it will seek a new multi-vendor contract. It will seek proposals from both Microsoft and Amazon.
The narrative and the ‘macro picture’ seem a little less understood – has growth peaked, will inflation wipe out economic gains, has the Fed really got inflation angst? We get to find out a lot more about that with today’s release of the minutes from the last FOMC meeting. Earnings season is coming up but it’s well known we are going to see some monster numbers and it is less obvious how Q2 reporting will drive the market higher – if anything it could lead to a round of profit taking and recalibration. Expectations are already so high. But we can’t ignore the bond market and equity market concentration in growth stocks – if bonds find more bid and the 10yr pushes yet lower to 1%, then the stock market can keep gliding higher.
The dollar is holding higher against peers ahead of the minutes from the June meeting. The meeting revealed a couple of things we had pretty well expected: a) Fed officials are talking about tapering, b) dots are coming in due to the rapid economic rebound and, less well anticipated, c) the Fed is a little bit concerned about letting inflation off the leash. The minutes should provide some further clarity/explanation about the Fed’s likely position but ultimately we don’t see any change until Jackson Hole in late August or the September meeting. The trouble for the market is dealing with the Fed’s reaction function in terms of yields: a hawkish Fed and quicker taper/hike ought to drive yields higher, but the reaction to the June meeting saw the reverse as the statement and projections implied the Fed wouldn’t let inflation get out of control. So now we know this, we are likely to see a more considered market reaction that, all else equal, should see rates move higher this year as the Fed lays down the tapering agenda and inflation remains more persistent than central banks think.
EURUSD made a fresh 3-month low in a further extension from the bear flag downside breakout.
GBPUSD: firm rejection of 1.39 yesterday and continues to stick to the downtrend. For now, continues to scrap around the 1.38 area, felling just below this morning and eyeing a break to 1.3660 area, the 200-day SMA and Mar/Apr double bottom.
Crude oil futures catching a little bid in early trade this morning after yesterday’s reversal. Concerns remain that the failure by OPEC to agree to gently increase production could lead to the output agreement unravelling, which could lead to more crude coming on the market. But there is a lot of uncertainty – if OPEC+ stick to the current quotas global inventories will draw down further and the market will further tighten, squeezing prices higher.
Gold is getting a filip from lower yields, though the stronger greenback is checking its advance. 10yr TIPS have slipped to –0.94%, the lowest since the middle of February as nominal rates fell. Price action remains above $1,800 with the bullish crossover on the MACD confirmed.
Stocks firm, oil runs into technical problems
European stocks moved higher in early trade Tuesday after a sizeable down day in the previous session and a rather limp handover from Asia. The FTSE 100 recaptured 7,100, rising 0.5%, after slipping below this level yesterday, having closed down 0.9%. European indices continue to trip along recent ranges having set post-pandemic highs earlier this month as the market looks for more direction re inflation and bond yields. Everyone seems happy to buy the line that inflation will be transitory: the super-hot peaks we are getting right now will be, we knew that as base effects and pent-up demand played out; the question is what sort of new inflation regime persists beyond this summer. Once the inflation genie is out the bottle it is hard to put back in easily.
US markets are grinding higher along the path of least resistance but on lower vols and declining breadth. As bond yields remain in check and inflation expectations cool, big tech and other bond proxies are providing the heavy lifting for the indices. The S&P 500 inched to a new all-time high with just healthcare and utilities up and twice as many advancers as decliners. Energy was smoked, registering a decline of 3%, with Valero, Halliburton, Phillips 66, Occidental and Marathon all down 5%. Cruise operator stocks sank 6-7% as Carnival announced an additional stock sale of $500m, whilst Disney delayed a planned test voyage. Growth is beating value right now as the reflation trade unwinds: the Nasdaq rallied 1%, whilst the Dow fell 151pts as the likes of Chevron and Boeing pulled back. US 10yr yields are back under 1.5%, and this morning US stock futures are flat. After a pause, AMC rallied more than 7%. SoFi (Nasdaq: SOFI) is the most talked about stocks on Wallstreetbets, with WKHS, WISH, CLOV, BB, SPCE and GME also still garnering some of the most mentions.
Among the big tech leaders making gains was Facebook, which rallied 4% to take its market capitalisation above $1tn for the first time as it saw off a monopoly legal threat. A judge rejected two antitrust lawsuits brought by the Federal Trade Commission and a coalition of 46 states. The news removed a significant headwind for the stock, though the FTC has a month to refile its complaint. It seems that the judge’s rejection of the case was based on the lack of evidence, or the way it was presented, which could be remedied with a new lawsuit.
Elsewhere, in FX the dollar is mildly bid with GBPUSD testing the Jun 22th low around 1.3860 and EURUSD creeping back to 1.1910. Chart pattern looks a bit bearish and flaggy.
Crude oil turned lower through the day after touching its best levels in almost three years. So far this market has been a buy-the-dip affair, and market fundamentals seem solid as supply remains tight, but we just need to be mindful from a technical perspective. Yesterday’s outside day bearish engulfing candle is one red flag, the bearish MACD crossover on the daily chart is another. Not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year. Anyway, market fundamentals remain firm and OPEC+ has scope to increase in August – it would be about 1.5m bpd short of demand without any additional output from OPEC or Iranian oil coming back online.
Bitcoin – still holding under the 200-day SMA but the selling may be done now as bears tire and weak hands are out; there is a potential rip higher incoming.
European stocks edge higher, BoE meeting ahead
Stocks seem to be largely marking time until there is more clarity on economic data like inflation with the major European bourses a little higher this morning but well within ranges. Bonds are steady with US 10s around 1.5% and stocks are likely to remain similarly directionless until the former start to motor. Wednesday saw US indices essentially flat but they remain +1% higher on the week after a sharp turnaround from the Fed-induced selling last week. The Nasdaq rose marginally to notch another record high with subdued bond yields allowing investors to get back into big tech growth. More Fed speakers today to watch for in the shape of Bostic, Harker, Williams, Bullard and Barkin but the sentiment seems to be that if the Fed is going to more mindful of inflation than was judged for most of the last year then it ought to keep control of yields and allow for gently rising stock markets. I’d still be mindful of a tantrum later this year when yields ought to pick up some steam.
Sterling trades close to $1.40 ahead of the Bank of England monetary policy statement today. As detailed in our preview, no change is expected but there are signs that inflation might run hotter than the MPC currently forecasts so we will be watching for any commentary around this. Yesterday’s UK PMI report pointed to strong inflationary pressures that will take CPI above the bank’s 2% target – the question is how far above and for how long – and how does the Bank respond. Bailey has made clear the MPC won’t tolerate above-target inflation for long. Could he spring a hawkish surprise today and say something like ‘inflation pressures are building and the bank has the tools to respond’? I don’t think this is the time yet to do this, but that’s why it would be a surprise.
GBPUSD: near term resistance at the 1.40 round number, support holding on the 100-day line at 1.3950.
WTI made a fresh high above $74 amid ongoing expectations that restrained supply and improving demand is leading to an increasingly tight crude market. Yesterday the EIA reported crude oil stocks declined by 7.6m. Stocks at the Cushing, Oklahoma hub fell to their lowest since March 2020 and US total petroleum demand rose 20.75m bpd, getting close to pre-pandemic levels. Meanwhile OPEC is signalling a stronger oil market. Chatter is that the cartel will increase production by 500,000 bpd from August as they continue to cautiously unwind production curbs.
Copper has staged a bit of comeback this week but there are some bearish indicators on the physical supply front with China releasing metal from reserves to counter rising inflation. Wednesday saw a bounce in copper as the release of 100,000 tonnes of base metals was less than expected, but this is being reversed. Import demand in the country is also reported to be the weakest since 2017, whilst LME stockpiles are 30% higher this month.
Bitcoin futures just running into resistance at the 200-day line, which had acted as support during recent plunges.
Bank of England preview: when to hike?
- No change in policy expected
- QE on autopilot into year-end
- Rate hike timing in focus with inflation outlook in question
Don’t expect fireworks from the Bank of England tomorrow (Thursday Jun 24th, 12:00 BST) – the Bank won’t be changing policy or announcing anything new – but there is still scope for volatility around the meeting. Inflation looks like it might be more of a problem than the Bank of England’s forecasters have led us to think. Andrew Bailey has made it clear the MPC won’t hesitate to act on rising inflation and high frequency data indicates this could become a problem for the Bank. Considering the Fed’s move last week to signal it’s not so deaf to inflation risks as we had been led to believe, could the BoE be the next central bank to deliver a hawkish surprise? I’m not so sure – not for this meeting at least since the UK economy has a little further to go yet and the BoE is not facing any pressure to act early.
It seems unlikely that the Bank of England, absent any fresh economic projections, will seek to signal it is worried about the path of inflation at this meeting, preferring to wait for some more data over the summer as the post-lockdown spike in activity starts to wane. Nevertheless, given the QE programme seems to be an autopilot to end this year – some further tapering to be announced in due course so it keeps buying through to Dec – the market attention seems to rest firmly on the timing off lift-off for policy rates.
Current market expectations indicate hikes in Q2 next year. However, it would not be a major surprise if the Bank were to act faster due to rising inflation, with perhaps 2-3 hikes next year beginning in Q1 2022. Wage growth from a shortage of workers is one factor to consider that could make above-target more sustained without tightening so comments on the labour market will be very carefully considered. We would also need to be mindful of household savings being unleashed more than the roughly 10% the Bank expects.
CPI rose 2.1% last month on an annual basis, up from +1.5% in April. The rate of month-on-month inflation was +0.6% as the economy reopened more. Of course, base effects exert a strong influence but there are a couple of points I made at the time which I believe are important. First the core reading of +2.0% was well ahead of the consensus +1.5%. Second, watch that second consecutive +0.6% month-on-month reading, which is about more than just base effects from last year. Couple more month-on-months like that and MPC will have to act.
Today’s PMI survey also points to strongly rising inflation. The release notes: “The rate of input cost inflation accelerated for the fifth month running and was the joint-fastest on record, equal with that seen in June 2008. While inflation continued to be led by the manufacturing sector, service providers also posted a marked increase in input prices. In turn, the rate of output price inflation hit a fresh record high for the second month running.” The evidence from the survey is strong suggestive that inflation will rise well above the Bank’s 2% – the question is how far above and for how long? Again, it’s the whole transitory question mark over inflation that is bedevilling the Fed. Anyway, right now the Bank will stand pat and not wish to deliver anything like a hawkish surprise. Tapering is underway to let QE expire by the end of the year, and this is not the time for the BoE to signal it’s in a rush to raise rates too. Over the coming weeks and months I expect markets to bring forward rate hike expectations as the BoE reacts to strong inflation readings and for this to lead to a stronger pound with cable to retest 1.4250 in Q3 2021, with a potential move to 1.45 thereafter.
Week Ahead: Bank of England to follow Fed with hawkish tilt?
The Bank of England gives us a fresh monetary policy update this week as inflation pressure starts to build. Will the first readings give the bank jitters or is it made of sterner stuff? Elsewhere, PMI data comes from the US, UK and EU, following on from a bumper may. OPEC and allies are busy too with another range of policy-deciding meetings kicking off.
Andrew Bailey and the Bank of England are next week’s headline act. The UK’s central bank delivers its latest monetary policy decision and is expected to stand pat, though it comes against a backdrop of fast economic growth and rising inflation.
A change in thinking could be underway. Governor Bailey has repeatedly stated in the past that if prices consistently outstrip the BoE’s 2% inflation target, he’ll have no problems tightening up policy. In this instance, that could mean a rate hike.
The BoE’s base rate has remained at 0.1% for the past year as part of the range of emergency pandemic economic measures enacted by the bank.
Consumer price inflation rose 2.1% on an annualised basis in May, according to Office of National Statistics figures released last week. Month-to-month inflation clocked in at 0.6%.
There is no indication, however, that a rate change will happen immediately. While there is more at play here, a lot of inflationary pressure stems from the reopening of the UK economy, and base effects from 2020. But consistency will be key. If we see more inflation increases month to month, the BoE may be forced to react
Turning to data, purchasing manager index readings from the US, UK and EU are released this week. All these major economies will be looking to build on May’s impressive momentum.
For instance, IHS Markit’s US manufacturing PMI hit its highest levels since October 2009 in May, with a reading of 61.5. Domestic demand and consumption spurred on US manufacturing last month, but producers are still warning of supply chain issues, including raw material and labour shortages. A lower reading in June may be realistic.
US services’ expansion outstripped manufacturing. May’s PMI read 70.1, jumping away above April’s 64.7. Higher consumer confidence paired with the US’ impressive vaccine rollout explains the high level of new service sector business.
Likewise, the UK experienced an eye-popping level of services output growth in May as lockdown restrictions loosen. The sector’s PMI reached 62.9 – the highest level since May 1997. Manufacturing surged, driven by a deluge of new orders, reached 65.6 last month, a 29-year high.
May was also a good month for Eurozone business activity. IHS Markit’s composite EU PMI reached a three-year high, with a score of 57.1, comfortably above April’s 53.8. Remember, growth is indicated by a reading of 50 or higher, so while the pace wasn’t as fast as in the UK or US, the EU showed good signs of economic resilience last month. Can it do the same again in June?
Sticking with data, the final reading of US Q1 GDP growth is also due this week. The final reading acts as a sort of confirmation, a check of economic health in broad terms. May’s earlier advanced figure was 6.4%, showing signs of an economy poised to boom. PMI flashpoints back this up. Double digit GDP growth could be on the way in Q2 too.
Away from raw economic data, OPEC and allies gather on Thursday for another series of meetings. Rising oil prices will no doubt put the cartel in a good mood, but it needs to proceed with caution here. Any unexpected spikes in production output, as opposed to OPEC+’s current steady tapering programme, could result in oversupply, despite confident global demand recovery forecasts.
OPEC+ decided in April to return 2.1 million barrels per day (bpd) of supply to the market between May and July. We could see a wider plan come together this week for post-July tapering.
The cartel is sticking with its optimistic oil demand outlook. Its June monthly report states demand would rise by 6.6% to hit 5.95 million bpd in 2021. The forecast was unchanged for a second consecutive month.
How OPEC and allies proceed is critical here. With WTI and Brent reaching over $72 and $74 at the time of writing, some of the highest prices for years, the signs of intensified global oil demand are there – but any oversupply may tip the scales back to retraction instead of price growth.
Major economic data
|Mon 21-Jun||2.30am||AUD||Retail sales m/m|
|Wed 23-Jun||8.15 am||EUR||French Flash Manufacturing PMI|
|8.15 am||EUR||French Flash Services PMI|
|8.30 am||EUR||German Flash Manufacturing PMI|
|8.30 am||EUR||German Flash Services PMI|
|9.00 am||EUR||Flash Manufacturing PMI|
|9.00 am||EUR||Flash Services PMI|
|9.30 am||GBP||Flash Manufacturing PMI|
|9.30 am||GBP||Flash Services PMI|
|1.30 pm||CAD||Core Retail Sales m/m|
|1.30 pm||CAD||Retail Sales m/m|
|2.45 pm||USD||Flash Manufacturing PMI|
|2.45 pm||USD||Flash Services PMI|
|3.30pm||OIL||US Crude Oil Inventories|
|Thu 24-Jun||All Day||OIL||OPEC+ Meetings|
|12.00 pm||GBP||MPC Official Bank Rate Vote|
|12.00 pm||GBP||Monetary Policy Statement|
|12.00 pm||GBP||MPC Asset Purchase Facility Votes|
|12.00 pm||GBP||Official Bank Rate|
|1.30pm||USD||Final GDP q/q|
|3.30pm||GAS||US Natural Gas Inventories|
Key earnings data
|Mon 21-Jun||Naspers||Q4 2021 Earnings|
|Wed 23-Jun||Markit||Q2 2021 Earnings|
|Thu 24-Jun||Nike Inc.||Q4 2021 Earnings|
|Accenture plc||Q3 2021 Earnings|
|FedEx Corp.||Q4 2021 Earnings|
UK preliminary GDP q/q preview (Wed, 07:00 BST)
The Bank of England anticipates UK economic output contracted by 1.5% in the first quarter of the year, which should be pretty much our reference point for the print on Wednesday, with the consensus at –1.6%. The –2.2% in January was stronger than expected and was followed by a 0.4% expansion in February. Whilst March data does not capture the reopening of non-essential shops, there is evidence that spending and activity were already picking up before the Apr 12th easing of lockdown restrictions. Moreover, the UK economy has proved to be a lot more resilient to lockdown 3 than lockdown 1. Put that down to the adjustment of people and business to the displacement; for instance the embrace of remote working, as well the lockdown rules themselves being less restrictive to economic activity than the first lockdown a year before. Better and more comprehensive testing has also played an important part in keeping in most economic activity going.
The March IHS Markit / CIPS services PMI showed a strong rebound in March, with the index rising to 56.3 from 49.5 in Feb. The robust PMI coupled with other evidence of increased card spending and mobility suggest a solid bounce back in the final month of the quarter, with a month-on-month expansion of around 1.3% expected. Whilst not a direct read on the Q1 numbers, Barclays today says that April card spending has exceeded pre-pandemic levels.
But this all remains rear-view fare: the market is more interested in the +7% growth expected in 2021 which is going to imply some pretty impressive expansion in the third and fourth quarters in particular. Strongest expansion since WW2 is more eye-catching than a mild contraction in Q1 that has been well and truly priced. Going forward, we are not really going to know what the true size of the economy really is for some time because there has been a huge displacement in economic activity as well as the velocity of people. Adjusting to this new normal will take time and measures of output will always lag what is really happening. Moreover, as Friday’s nonfarm payrolls report in the US evinces, hard data is liable to being way off forecasts because it’s so hard to get a handle on what we are comparing it with; furlough and other emergency schemes masked the true depth of the economic contraction. Just as the pandemic led to an unprecedented contraction, there is not really a playbook for this recovery, so we should be careful not to over-read individual prints.
By way of context, the NIESR this morning estimates that the UK economy will recover 2019 levels by the end of 2022. The recovery is strong but it’s coming from a low base. To add further context, as of Feb the British economy remains 7.8% smaller than it was a year before. Moreover, it is still 3.1% below where it was at the peak of the post-lockdown recovery in October 2020 – evidence that this long third lockdown over the first quarter has set things back some way. NIESR also estimates that UK unemployment will peak at 6.5% rather than 7.5%, reflecting the extent to which government support schemes have masked what is really going on.