The start of this week has brought with it a host of UK data that has allowed investors to speculate about the Bank of England’s interest rate decision on Thursday. This morning, UK CPI held steady at 3.8% in August, matching expectations, while core inflation (excluding things such as energy and food) also remained elevated. The main upward drivers were food and drink prices, hotel and restaurant costs (boosted by event-driven demand), and fuel prices, which rose slightly year-on-year after falling last summer.
While the data shows inflation remains sticky and well above the Bank of England’s 2% target, it was not the only release to be considered. On Tuesday, UK unemployment data showed the jobless rate holding at 4.7% on year in July (unchanged from the previous month but still the highest level in four years). Markets reacted only slightly to the news, with the FTSE 100 opening marginally lower on Tuesday morning. Earnings growth also eased, rising 4.8% in the three months to July, while payroll numbers began to decline and businesses reported fewer vacancies. Stubbornly strong wage growth has posed a challenge for the Bank of England in recent months, but the latest slowdown – alongside signs it may weaken further as the year goes on – in conjunction with the latest weakening in the jobs market could influence policymakers’ forward thinking on the timing of rate cuts. Markets are currently pricing in a hold on rates at 4% at the Bank’s meeting this Thursday, reinforced by this morning’s persistently strong inflation print.
Meanwhile, in China, early Monday data revealed a moderation in consumer spending in August. Retail sales rose 3.4% year-on-year, down from July’s 3.7% gain, driven largely by weaker demand for home appliances and electronics as the boost from Beijing’s consumer goods trade-in subsidies began to fade. Industrial output also slowed, growing just 5.2% (the weakest reading since August last year) highlighting softening domestic demand. There are renewed calls for supportive macroeconomic policies to keep growth on track for the government’s 5% target off the back of the data however some expect consumption to rebound in September due to unfavourable base effects that characterised the last round of data.
On Tuesday, traders received news that relation between India and the U.S. were maybe beginning to thaw, with officials describing their latest trade discussions as ‘positive’, ‘forward-looking’, and with agreements made to accelerate work toward an early, mutually beneficial deal. While sticking points remain, the tone marked a step toward easing tensions that had escalated after Washington doubled tariffs to 50% on key Indian exports last month. The impact of those tariffs is already showing, with India’s exports to the U.S. falling to $6.86 billion in August from $8.01 billion in July. Markets welcomed the constructive tone, with the Nifty 50 and Sensex both up about 0.15% in early Wednesday trade, led by small- and mid-cap gains.
Still to come this week we have the Fed’s interest rate decision, where markets are expecting a cut of 25 basis points as well as Japan’s core inflation rate and UK retail sales.
Nicola Tune, Portfolio Specialist
