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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)|
Monthly recap: German elections, hot UK inflation and NFP miss
We recap some of the key market movers from September in this monthly round-up.
Monthly markets recap: September 2021
Germany waves goodbye to Angela Merkel in tight federal elections
After sixteen years at the helm, Angela Merkel will step down as German Chancellor following late September’s closely contested German elections.
It’s a hugely fragmented result. Pretty much all parties did worse than they thought. The SPD is the majority party, but they’re still very close to the CDU to really have a massive advantage. You could only separate them with a cigarette paper really.
The Green’s, after topping the polls four months ago, came in third while the FDP came in fourth.
Olaf Scholtz, the leader of the SPD, now has his work cut out trying to turn these close results into a working coalition. But what we’ve seen is what our political guru and Blonde Money CEO Helen Thomas calls a Code Red for Germany – that is a shift to the left with a bit of a green hint too.
What the next German federal government looks like now is up for debate. The Green Party is probably going to be central, after doubling their Reichstag presence, but it’s out of the CDU and FDP to see who becomes the third coalition partner. See Helen Thomas’ election round-up below for more information.
Nonfarm payrolls’ massive miss
Nonfarm payrolls came in well below expectations in a wobbly US jobs report.
In August, 275,000 new jobs were added to the US economy, falling far below the 750,000 forecast.
The unemployment rate dropped to 5.2% while labour force participation stayed unchanged at 61.7%. Hourly earnings rose 0.6% in August, surpassing market predictions of a 0.3% rise.
Jerome Powell and the Federal Reserve keeps a close eye on the jobs report. Labour market participation has been one of the key metrics the Fed has been looking at throughout the pandemic to decide on whether to start tapering economic support.
We know that Jerome Powell and the Fed loves a strong jobs report. But we also know that tapering is on its way anyway – likely in November. August’s job data may not have impacted decision making too much, given the tapering signals were made long before its release.
However, Fed Chair Powell still believes the US is still far from where he’d comfortably like employment to be.
Speaking last week, Powell said: “What I said last week was that we had all but met the test for tapering. I made it clear that we are, in my view, a long way from meeting the test for maximum employment.”
A recent survey taken by the National Association for Business Economics showed 67% of participating economists believed job levels won’t reach pre-pandemic levels until the end of 2022.
UK inflation jumps
August’s CPI data, released in September, showed UK inflation had reached 3.2%. That’s the highest level since 2012.
Rising from 2% in July, the latest CPI print also showed a huge month-on-month rise in prices. Inflation soared well clear of the Bank of England’s 2% target – although the UK central bank did say it believed inflation would hit 4% in 2021.
However, some market observers believe there is a risk that inflation will overshoot even the 4% level.
The question is how will the BoE respond? A more hawkish tilt could be possible.
Markets.com Chief Markets Analyst Neil Wilson said: “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.
“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).”
China intensifies its crypto crackdown
Bitcoin was rocked towards the end of September after being hit with a body blow landed by the People’s Bank of China.
The POBC has ruled that all cryptocurrency transactions in China are illegal. That includes all transactions made by Chinese citizens domestically and those coming from offshore and overseas exchanges.
BTC lost over 8% and nearly dropped below the $40,000 mark on the news from Beijing. It has subsequently staged a comeback, but this latest move from China tells us a couple of important things about crypto.
Number one: volatility is ridiculous. The fact that Bitcoin is still so susceptible to big swings on both positive and negative news shows it’s still very volatile. It seems hard to see a future driven by crypto right now if such price swings will be the norm. If this is the case, let’s hope it calms down in the future.
Secondly, it’s that central banks are still wary of digital finance. In China’s case, it loves control.
Beijing’s official stance is that cryptocurrency is a) illegitimate, b) an environmental disaster, and c) something it cannot control completely. Freeing finances from government oversight is the entire point of decentralised finance (DeFi) after all. In a country as centralised as China, that’s a no-go.
China has pledged to step up its anti-crypto, anti-mining efforts further. This could cause major ripples for Bitcoin and the digital finance sector as a whole. A significant chunk of global token supply comes from Chinese miners. Someone else will have to pick up the slack.
Oil & gas prices stage major rally
A global gas shortage and tighter oil supplies pushed prices into overdrive towards the end of September.
Natural gas, in particular, was flourishing. At one point, gas had climbed above $6.30, reaching highs not seen for three years. Basically, there’s not enough gas to go around. High demand from the UK and EU is pushing prices up, while the US, which is meant to be in injection season, is also suffering. Asian demand is also intensifying.
In terms of oil, a supply squeeze coupled with higher demand caused by major economies reopening is putting a support under oil prices.
Traders are also confident. Energy markets are the place to be right now. As such, trader activity appears to be pushing these new highs and is confident regarding the market’s overall strength.
Goldman Sachs has also revised its oil price targets upwards.
Goldman said: “While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.
“The current oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.”
Week Ahead: Fed meeting to assess inflation landscape
With the G7 event in Cornwall wrapping up on Sunday, the Federal Reserve meeting is the big event in the markets this week, whilst traders will also be keeping a close watch on high frequency data such as unemployment claims, retail sales and manufacturing indices from the US. Meanwhile UK inflation data will be assessed for any signs of pressures building in prices that could nudge the Bank of England to tighten monetary policy earlier than thought.
Wednesday’s statement from the Federal Reserve is not expected to feature any fireworks, but it is an important meeting as it will offer clues about the reaction function of the central bank to rising inflation fears. We know the Fed is happy to let inflation run a little hot over the summer as it pins everything on its employment mandate. So, labour market data is arguably more important than inflation numbers right now. On that front the last NFP jobs report was something of a Goldilocks number – not too hot to worry about an early taper of the Fed’s $120bn-a-month bond buying programme, but not so cool as to fret about the recovery. The truth is the Fed is looking at both and this meeting comes at a time of great uncertainty over whether inflation will indeed prove to be as transitory as policymakers believe.
Minutes from the FOMC meeting in April had the Fed floating a trial balloon, as these indicated some policymakers are thinking about thinking about tapering asset purchases. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. Members of the FOMC also stressed the importance of “clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases”. Tentative – the question remains: when does the Fed think it’s hit the landing area for the economy, and does inflation take off in the meantime? This week’s meeting is not expected to deliver any surprises – the jobs numbers are positive right now but the labour market is some way off the Fed’s goal, whilst the inflation story is fairly well understood for now.
US economic data
There is also going to focus on a batch of important high frequency data out of the US, including retail sales for May, producer price inflation and manufacturing indices for the New York and Philadelphia regions. Expectations for retail sales are heating up – last week the National Retail Federation raised its growth expectations for US retail sales in 2021 to between 10.5% and 13.5%. May should show a pick-up in sales after unexpectedly stalling in April as the boost from stimulus cheques faded. An acceleration is expected in the coming months thanks to a huge savings glut and the rapid reopening of the economy.
The Bank of England does not think inflation will run away, so Wednesday morning’s CPI print will be closely watched by GBP traders. Although it significantly upgraded its near-term economic forecasts and announced a form of ‘technical’ taper’ of bond purchases at its last meeting, the Bank’s outlook on inflation suggests it will be in no rush to raise rates this year. This is acting as a headwind for sterling – an above-forecast reading could be a tailwind.
Major economic data
|Jun 14th||10:00||EZ industrial production|
|Jun 15th||07:00||UK unemployment|
|13:30||US retail sales, PPI, Empire State manufacturing index|
|14:15||US industrial production|
|Jun 16th||03:00||China industrial production, retail sales, fixed asset investment|
|07:00||UK CPI inflation|
|13:30||Canada CPI inflation|
|15:30||US crude oil inventories|
|19:30||FOMC press conference|
|Jun 17th||02:30||Australia unemployment|
|08:30||Swiss National Bank statement|
|10:00||EZ final CPI inflation|
|13:30||US unemployment claims, Philly Fed manufacturing index|
|Jun 18th||tentative||Bank of Japan statement|
Key earnings data
|Jun 15th||Oracle Corp.||Q4 2022 Earnings|
|On The Beach||Interims|
|Jun 17th||Adobe Inc.||Q2 2021 Earnings|