Proactive Investors - As we approach the big central bank meetings, next week's economic data in both the US and the UK will have rate setters pouring over the detail, and burning the midnight oil, as they decide not whether rates go up, but by how much.
This week’s cooling in US inflation figures has bolstered market hopes that the Fed will reduce its aggressive rate rising strategy at its next meeting to ‘just’ 25bp but in the UK today’s better-than-expected GDP figures combined with ongoing wage pressures could prompt a 50bp increase by the Bank of England.
US retail sales to drop again?
Next week in the US there is a further hefty batch of data and information to help the Fed inform its view when it decides things on the first day of February.
The list of releases includes retail sales, industrial production, housing transactions and producer price inflation.
ING Economics forecast the activity numbers are likely to be soft with retail sales dragged down by a big fall in auto sales in December, while squeezed household incomes and bad weather may also help to dampen spending.
The market consensus is for a monthly fall of 0.5% in December compared to a 0.6% decline in November.
Industrial production is also likely to have fallen given the weakness seen in key surveys such as the ISM manufacturing report, whose production component fell into contraction (sub-50) territory for the first time since May 2020, they suggested.
Consensus here is for a slight drop of 0.1% in December after a 0.2% fall in November which was hit by a sharp decline in manufacturing activity of 0.6%.
On the housing front and ING said that inevitably, this “will be weak given that mortgage rates have more than doubled over the past 12 months, making a property purchase even less affordable” they added.
Inflation, average earnings and retail sales - key numbers to watch in the UK
Across to the UK now and with City pundits split between a 25bp and 50bp rate hike at the Bank of England’s 2 February meeting, there are some key releases which should help firm up opinions one way or the other and give the Bank’s Monetary Policy Committee plenty of food for thought.
ING pointed out “the centre of gravity on the committee shifted noticeably in favour a ‘smaller’ 50bp hike back in December, and the minutes of that meeting contained vague hints that a further slowdown could be on the cards.”
First up on Tuesday will be unemployment and wage growth figures, followed by inflation numbers on Wednesday while retail sales data and the latest GfK UK consumer sentiment survey close the week on Friday.
The unemployment figures are always a slightly lagging indicator covering as they do the three months to November.
For the prior period to October the employment rate was 75.6%, still a fraction below pre-pandemic levels, while the unemployment rate was 3.7%. The latter is expected to remain unchanged as the jobs market continues to hold up despite declining economic activity.
Attention will focus on vacancy rates which fell for the sixth time in a row in October to just under 1.2mln as an indicator of where the jobs market is heading which has implications for wage growth as well with average earnings (including bonuses) forecast to have grown 6.1%, unchanged from the previous reading.
ING said “We’ll be watching for any hints of redundancies increasing, as firms battle higher energy costs and interest rates, though we suspect these will remain low for the time being.”
Tuesday’s wage growth figures will be set alongside Wednesday’s headline consumer price index, inflation figure, to see just how much price pressures are easing, if at all.
In November the CPI fell to 10.7% from 11.1% and as AJ Bell analysts said “economists, politicians and central bankers will be looking for another deceleration this time around.”
“The Bank of England will be looking for a retreat in inflation toward its 2% target so it can cut interest rates and boost the economy, and workers will be looking for a deceleration, so their pay goes further” they pointed out.
Nevertheless as ING noted it is likely “to remain in double digits through early 2023.”
Consensus forecasts are for a slight decrease to 10.6% with the core rate expected to also fall slightly to 6.2% from 6.3%.
On Friday, there will be an indication as to how the consumer is feeling with retail sales figures and the GfK UK consumer confidence index due for report.
November’s figures showed a surprise fall but ING expects a small bounce-back in December, though that’s likely to reflect volatility surrounding Christmas more than anything else.
Trading statements this week from a host of retailers have on balance been positive and this may be reflected in the overall figure with consensus forecasts going for a rise of 0.7% in December’s total.
Bank of Japan to tweak monetary policy again?
In Europe, the calendar is quieter but we will get a rate decision in Norway with a 25bp hike expected while elsewhere there will be a Bank of Japan (BoJ) meeting.
The yen has been the big topic in forex circles in recent weeks after the BoJ shocked markets in December by widening the band around its yield target up to 0.50% from the previous cap of 0.25%.and a further tweak could be on the cards after a report in a Japanese newspaper suggested that the central bank will review the side-effects of its accommodative monetary policy at next week’s policy meeting.