Markets expect a US inflation slowdown this week with CPI forecast at 8.1%, down from 8.5% in August, likely supporting a 75-basis-point Fed rate hike. The ECB may raise rates 75 basis points in October as the Bank of England tightens toward 4.5% by mid-2024, while dollar weakness lifts EUR/USD and other major pairs.
Chapters
Hello and welcome back to the channel. I hope you had a lovely weekend. Before I begin, as per usual, don't forget to like and subscribe to the channel for all of the videos we'll be putting out. Been working on a new Academy series of some more explainers about market topics, which I'll be dropping later on this week and then one every week thereafter. So do check that out. But just taking a look at the week ahead, what can we expect? And very much a continuation of where we finished things at the end of last week. So actually a return of a bit of risk appetite after US equities closed out one of their first up weeks in quite a while. We are seeing further dollar weakness in extension of those moves this morning, and that's helping assist then the dollar major pairs. So EURUSD, CAD, AUD all trading firmer this morning, and it comes amid further hawkish commentary as well from ECB officials. One of the main things we're looking out for, of course, this week is going to be US CPI data that is coming out on Tuesday. And the headline, as we'll discuss in a moment, is expected to further decline in reflection to gasoline prices. But look, let's jump straight in and talk about some of the key things to be aware of, starting off with the UK. And that's because we've already had some UK GDP data come out this morning, and the GDP estimate month on month for July came in at 0.2%. That was lower than expected, 0.4%. And it comes, of course, after a 0.6% decline we saw in June when GDP was curtailed by that extra bank holiday for the Queen's Platinum Jubilee, if you remember. Um, the death of the Queen, of course, um, and another holiday for her funeral on September 19th, so next Monday, will be enough to tip the economy into a recession in the current quarter. That's according to analysts at both Deutsche Bank and Nomura have said this morning. Despite the slowdown though of the, the British economy, the Bank of England still remains far from done with tightening with their policy. In terms of a bit of perspective, investors are expecting a half-point increase and potentially more. The, the BoE meeting's happening on the 22nd of September, with the benchmark rate now hitting almost, as far as market pricing is concerned, around 4.5% by the middle of next year, compared with the current Of course, 6 rate hikes that we've seen, but rates are only at 1.75% given the more incremental start that they had to the rate hiking cycle. Uh, of course, one of the main things that investors will be very keen to see is the UK CPI data, which will be coming out later on this week. Um, the year-on-year figure is expected to rise again to 10.4%. You can see here the prior reading we had at the 40-year high in July, was at 10.1%. The energy package announced by the new Prime Minister Liz Truss last week should put a peak, or a cap I should say, not just on energy prices but also on the expected peak of inflation. That though being over the medium term, because given what's likely to happen is prices are going to go up at least in the period ahead, i.e., the coming months. So further rate Increases are anticipated from the Bank of England, and inflation is expected to go up very short term, but the energy price cap should help by multiple percentage points to alleviate some of those pressures beyond that point. Otherwise, a few other things to be aware of. The ECB, as I said, continued hawkish rhetoric, this time coming out of the Bundesbank President Nagel, who said the ECB is required to continue raising interest rates if the current trend of inflation is set to continue, which is like to be the case. The ECB is prepared to delay deliver another 75 basis point rate increase at their October meeting if the outlook warrants an additional big step, according to sources familiar with the debates internal at the central bank at the moment. This morning, as I said, the euro continues to climb. We've actually tested back to a 1.02 handle amid as well some of the dollar weakness. Cable as well finding a bit of a light reprieve from otherwise what has been a lot of bearish commentary of late, and that's trading back to 1.17 handle. Having traded down to 114 last week. A few other things to be aware of— this probably lesser market moving for right now, but something just to be aware on US and China relations— and that is that the Biden administration plans next month to broaden curbs on US shipments to China semiconductors used for AI and chipmaking tools. This is citing several sources familiar with the matter in a Reuters article this weekend. And you can imagine then that that rhetoric is going to remain pretty sharp as we go into the final run to the midterms in regards to the US stance on China. So I don't think it's too surprising. Looking at the week ahead, of course, as I mentioned, US CPI is really a main focal point. In fact, this is the last full week of economic data ahead of the September FOMC meeting, and it's really going to take some surprising numbers to really deviate the market's expectation away from what is, as you can see here, a 90% probability that markets are expecting a 75 basis point rate hike from the Fed for third consecutive meeting at this point in time. In terms of the inflation reading, the actual headline is expected to come down a little bit. Actually, the consensus estimate is for 8.1. If you think about it, that's from 8.5 and the prior June reading of 9.1. So US CPI is expected to be trending lower at this point of time as lower gasoline prices. And actually, from a month-to-month perspective, we was flat last time. We're actually expecting a -0.2% reading. And if we do get a negative print, that would be the first time on a month-on-month US inflation gauge for CPI, at least for 2 years, of a negative reading. However, one thing to be aware of is that the core inflation figure is still likely to rise, again just showing how broad-based inflation has been, and thus the fact that it's likely to not detract from the Fed's course of action of 75, at least in this upcoming meeting. but it could well shape some of the future decisions in subsequent meetings if this inflationary trend continues and core prices start to also dampen a little bit. As far as the week is concerned, the other things to be aware of on the, on the docket would be US business inventories, Empire Manufacturing, retail sales in the US, initial jobless claims, and industrial production are all coming out later on in the week on Thursday. Then at the end of the week, you've got Chinese home sales, retail sales, industrial production, fixed assets, and jobs data. So that's all from China on Friday. We also get the eurozone CPI reading and the UK retail sales report, with UK jobs data also due on Tuesday, kind of bookending either side of the CPI data in the UK midweek. And then you've got the preliminary University of Michigan sentiment reading for September, always makes for interesting reading, uh, just given how low that figure had been in reflection of the state of US consumer confidence. But with gasoline prices having pulled quite dramatically lower in recent weeks, be interested to see whether or not that's fed through into US psyche on the street. All right, that is it. I'll leave it there. Any questions at all, feel free to drop me a comment. Don't forget to like and subscribe to the channel. As I said, some new videos we've been working on will be coming out soon. Excited to share them. And I wish you a great week ahead. Take care.
