Market Insight: Week Ending 21 July
In the US:
It was quite a week for the US. According to the Bureau of Labour Statistics (BLS) on Wednesday, consumer price inflation slowed to its lowest level since March 2021 at 3.0% in the twelve months to June (vs expected 3.1% [down from 4.0% in May]). Core inflation—excludes energy and food—also cooled to 4.8% (vs expected 5.0% [down from 5.3% in May]). Additionally, Thursday revealed that the US Producer Price Index (PPI) printed a smaller-than-expected increase. This indicator measures inflationary pressures on the wholesale side: before it reaches the consumer. US wholesale prices rose less than anticipated in the twelve months to June, gaining 0.1% (vs expected 0.4% [previous: downward revision to 0.9%]), with core wholesale prices—less foods, energy, and trade services—slowing to 2.6% (vs expected 2.6% [previous: 2.8%]). This, as well as softer jobs growth (the US economy added 209,000 jobs in June [slightly below the market consensus of 225,000]), is unlikely to derail the Fed from raising the Fed Funds target rate on 26 July, but casts doubt on the Fed hiking beyond this month’s meeting, despite Fed officials’ forecasts.
In the US this week, industrial production is expected to remain suppressed, with US retail sales and housing data also on the radar. While retail sales data are expected to increase from May to June by 0.5%, the YoY measure is anticipated to slow to 1.1% in June, down from 1.6% in May. Regarding housing data, economists are forecasting a correction, with housing starts, building permits and existing home sales projected to come in lower. Overall, though, these releases are unlikely to alter the Fed’s decision to push rates higher by 25bps later this month. Also notable this week, Fed speak will be on pause as Fed officials enter their blackout period (15-27 July) ahead of the Fed rate decision.
The US Dollar Index is testing long-term support at 99.67, following a one-sided tumble last week. This could prompt profit-taking this week and see a minor recovery unfold.
In the UK:
Inflation data is back in the spotlight this week; only this time, it’s June’s inflation numbers from the UK. It is certainly an economic event worth pencilling in the diary this Wednesday at 7:00 am GMT+1. You will recall that UK wages were 7.3% higher (vs 7.1% expected [7.2% prior]) in the three months to May, compared to a year prior, and, including bonuses, wages were 6.9% higher (vs 6.8% expected [6.5% prior]) for the same period. Although the unemployment rate climbed to 4.0% in May, up from 3.8% in April (median consensus: 3.8%), the latest UK pay data will concern the Bank of England (BoE), which next meet on 3 August. Wednesday’s consumer price inflation data for June, as aired above, will be a key watch this week, with both headline and core measures poised to slow. Headline YoY inflation is expected to cool to 8.3% (median forecast), down from 8.7% in May. YoY core annual inflation is also expected to slow to 7.0% for the same period, down from 7.1%.
A marked deviation to the upside in inflation this week would likely seal the deal for a 50bp rate increase. As of writing, short-term interest rate markets are pricing in a 60% probability that the BoE will hike by another 50bps, bringing the Bank Rate to 5.5%. Interestingly, the terminal rate has nudged lower, currently forecasted to reach around 6.18% in early 2024 and remain at this level for most of the year.
The GBP/USD surged north last week, adding 2.0%. Key technical indicators suggest the currency pair is overbought (overvalued), with price action also nearing long-term resistance at $1.32.
It was quite a week for the US. According to the Bureau of Labour Statistics (BLS) on Wednesday, consumer price inflation slowed to its lowest level since March 2021 at 3.0% in the twelve months to June (vs expected 3.1% [down from 4.0% in May]). Core inflation—excludes energy and food—also cooled to 4.8% (vs expected 5.0% [down from 5.3% in May]). Additionally, Thursday revealed that the US Producer Price Index (PPI) printed a smaller-than-expected increase. This indicator measures inflationary pressures on the wholesale side: before it reaches the consumer. US wholesale prices rose less than anticipated in the twelve months to June, gaining 0.1% (vs expected 0.4% [previous: downward revision to 0.9%]), with core wholesale prices—less foods, energy, and trade services—slowing to 2.6% (vs expected 2.6% [previous: 2.8%]). This, as well as softer jobs growth (the US economy added 209,000 jobs in June [slightly below the market consensus of 225,000]), is unlikely to derail the Fed from raising the Fed Funds target rate on 26 July, but casts doubt on the Fed hiking beyond this month’s meeting, despite Fed officials’ forecasts.
In the US this week, industrial production is expected to remain suppressed, with US retail sales and housing data also on the radar. While retail sales data are expected to increase from May to June by 0.5%, the YoY measure is anticipated to slow to 1.1% in June, down from 1.6% in May. Regarding housing data, economists are forecasting a correction, with housing starts, building permits and existing home sales projected to come in lower. Overall, though, these releases are unlikely to alter the Fed’s decision to push rates higher by 25bps later this month. Also notable this week, Fed speak will be on pause as Fed officials enter their blackout period (15-27 July) ahead of the Fed rate decision.
The US Dollar Index is testing long-term support at 99.67, following a one-sided tumble last week. This could prompt profit-taking this week and see a minor recovery unfold.
In the UK:
Inflation data is back in the spotlight this week; only this time, it’s June’s inflation numbers from the UK. It is certainly an economic event worth pencilling in the diary this Wednesday at 7:00 am GMT+1. You will recall that UK wages were 7.3% higher (vs 7.1% expected [7.2% prior]) in the three months to May, compared to a year prior, and, including bonuses, wages were 6.9% higher (vs 6.8% expected [6.5% prior]) for the same period. Although the unemployment rate climbed to 4.0% in May, up from 3.8% in April (median consensus: 3.8%), the latest UK pay data will concern the Bank of England (BoE), which next meet on 3 August. Wednesday’s consumer price inflation data for June, as aired above, will be a key watch this week, with both headline and core measures poised to slow. Headline YoY inflation is expected to cool to 8.3% (median forecast), down from 8.7% in May. YoY core annual inflation is also expected to slow to 7.0% for the same period, down from 7.1%.
A marked deviation to the upside in inflation this week would likely seal the deal for a 50bp rate increase. As of writing, short-term interest rate markets are pricing in a 60% probability that the BoE will hike by another 50bps, bringing the Bank Rate to 5.5%. Interestingly, the terminal rate has nudged lower, currently forecasted to reach around 6.18% in early 2024 and remain at this level for most of the year.
The GBP/USD surged north last week, adding 2.0%. Key technical indicators suggest the currency pair is overbought (overvalued), with price action also nearing long-term resistance at $1.32.
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