The Week Ahead: US CPI; UK GDP.
With the US and the UK each having increased interest rates by 0.75 percentage points last week, attention now turns to economic data that could help shape the pace of rate hikes to come. On Thursday, we’ll get the October reading of US consumer price inflation, followed on Friday by the first estimate of the UK’s Q3 gross domestic product.
OUR TOP TWO EVENTS FOR 7-11 NOVEMBER:
Thursday – US CPI (October)
While headline inflation has begun to ease in the US, core prices have continued to go up. The US consumer price index (CPI) increased 8.2% in the year to September, slowing from both August’s reading of 8.3% and the June peak of 9.1%. However, core CPI, which excludes volatile food and energy prices, rose 6.6% in the year to September, up from 6.3% in August, hitting a fresh 40-year high.
Companies are now passing higher costs on to consumers in the form of higher prices. This trend is fuelling the increase in core prices, exacerbating the cost-of-living squeeze for consumers. Stubbornly high inflation led the US Federal Reserve to raise interest rates by 75 basis points (bp) for the fourth time in a row this week, lifting the federal funds rate to a target range of 3.75% to 4%. Unsurprisingly, bond markets sold off sharply on the news. Markets now expect the key policy rate to reach at least 5% by the end of Q1 next year.
In the wake of the Fed’s latest 75 bp rate hike, the upcoming CPI reading for October could play an important role in determining whether we see another 75 bp increase at the Fed’s next meeting in December. Fed chair Jay Powell hinted that policymakers might soon consider easing the pace of tightening, saying: “That time is coming, and it may come as soon as the next meeting, or the one after that”.
Friday – UK Q3 GDP
The UK economy grew by an upwardly revised 0.2% in Q2, versus an initial estimate of a contraction of 0.1%, according to data published by the Office for National Statistics. While this reprieve may have given the UK government a chance to claim that the economy is in better shape than many economists originally feared, news of economic growth won’t alleviate the cost-of-living squeeze that many people are experiencing.
Similarly, Friday’s first reading of Q3 GDP is likely to underplay the extent of the pinch being felt by consumers across the country. Recent purchasing managers’ index (PMI) readings have come in under 50, pointing to economic contraction, while in August and September retail sales fell on a month-on-month basis by 1.7% and 1.4%, respectively.
Monthly GDP figures offer little hope of growth, with GDP expanding just 0.1% in July and falling 0.3% in August. September is unlikely to have been much better, given the bank holiday for the funeral of Queen Elizabeth II. Consensus estimates suggest that GDP may have contracted 0.5% in Q3.
Overall, last week saw an aggressive risk on move across asset classes as forward looking investors continued to position for a gradual
slow down in pace of interest rate increases. Despite the Fed’s rhetoric maintaining its hawkish stance, market participants found comfort in the central banks commitment to bring inflation under control. A notable out performer wast the UK’s FTSE 100 and I’d expect that continue this week as seasonal positioning will require investment managers to push cash to work