Week ahead: November 13th – 17th
US and UK inflation prints, other key data in focus
Next week’s market movers
- In the US, CPI data for October could play a major role in shaping market expectations regarding how many times the Fed will hike rates in 2018.
- Over in the UK, although we believe inflation is likely to accelerate further, we don’t expect this to have a major impact on the BoE’s policy plans, as the Bank expects inflation to have peaked in October.
- We also get key economic data from Sweden, the UK, the US, Canada, China, and Australia.
On Monday, we have no major events or indicators on the economic calendar.
On Tuesday, during the Asian day, China will release its retail sales, industrial production and fixed asset investment data, all for October. The forecast is for industrial production and fixed asset investment to have slowed, while retail sales are anticipated to have accelerated. The forecast for a slowdown in industrial production is supported by the nation’s official manufacturing PMI, which declined notably in October, indicating a slowdown in output growth.
In the UK, all eyes will be on the CPI data for October. In the absence of a forecast, we see the case for both the headline and the core rates to have held steady, with risks skewed to the upside. We base that view on the nation’s Markit services PMI, which in October showed inflation reaching a six-month high. That said, even in case of further rise in these rates, we doubt this will have much impact on the BoE’s policy, considering that in its November Inflation Report, the Bank noted that it expects the CPI rate to have peaked in October. Therefore, we doubt that accelerating CPIs will materially bring forth market expectations regarding the timing of the next BoE rate hike, which at the time of writing is priced in for December 2018.
We also get CPI prints for October from Sweden, but no forecast is available. At its latest gathering, the Riksbank kept interest rates untouched, while the tone of the statement accompanying the decision was more or less the same as the previous time. Interestingly though, that day SEK collapsed against the wounded EUR, which suffered significant losses following the ECB’s “dovish tapering”. In our view this revealed expectations that the Nordic Bank is unlikely to begin scaling back its stimulus in mid-2018 as it noted in its latest statement. In order for market participants to bring back forth those expectations, we may need to see a decent acceleration these consumer price data.
On Wednesday, the main event will be the release of the US CPI and retail sales data, all for October. Kicking off with the CPIs, the consensus is for the headline rate to have declined, while the core rate is expected to have held steady. We share the view for a pullback in the headline number, while we view the risks surrounding the core forecast as somewhat tilted to the downside. We base that view on the nation’s Markit services PMI for the month, which showed inflation easing to a six-month low. Even if we do see a modest pullback in these rates, we doubt that it will be enough to materially curb market expectations regarding another rate hike this year. The implied probability for such action is currently 92%, and given how widely this move has been signaled, at this point it appears that only something catastrophic could derail the Fed’s December plans. That said, looking further out, the market is much less certain, having only priced in roughly one-and-a-half rate increases in 2018. Thus, although softness in the CPIs is unlikely to change expectations for a December hike, it could bring further down the number of hikes that are priced in for 2018.
With regards to retail sales, the forecast is for a marked slowdown in both the headline and the core prints, though that appears somewhat normal to us considering the remarkable surges in September. Consumer sentiment indicators did not paint a clear picture during the month, with the CB index rising markedly, but the U of M print declining. In any case, considering also that retail sales will be released at the same time as the inflation data, they may attract less attention than usual, especially if the actual figures come out more or less in line with the forecasts.
In the UK, the employment report for September is coming out. The unemployment rate is forecast to have remained steady at 4.3%, while average weekly earnings excluding bonus are expected to have slowed somewhat. We share the view that the unemployment rate may have held steady, based on the nation’s services PMI for the month. The report indicated a sustained rise in service-sector employment, with the rate of job creation easing only slightly from August’s 19-month high. As for the earnings, we see the risks as tilted to the upside. The Markit UK Report on Jobs noted that starting salaries rose at the second steepest rate in 22 months, after August, which suggests that the yoy wage rate is likely to rise, given that the calculation will now include two months with stellar salary gains.
From Australia, we will get the all-important wage price index for Q3. Without a forecast available, we see the case for wages to have accelerated both in quarterly and yearly terms. We base that view on the NAB business survey for Q3, which showed labor costs accelerating. Having in mind the RBA’s latest downgrade of its inflation forecasts, accelerating wages could come as pleasant news for policymakers and may ease some of their concerns on the inflation front.
On Thursday, during the Asian day, Australia’s employment data for October will attract attention, though no forecast is available. The nation’s labor market has tightened significantly throughout the year so far, and we see no reason for that to change this month, considering that the only major employment gauge we have was quite optimistic. The ANZ job ads indicator rose markedly in October, something consistent with ongoing strength in the labor market.
In the UK, retail sales for October will attract attention, though no forecast is available yet. Our own view is that the mom sales rate likely remained in negative territory, following a sharp plunge in September. UK consumer sentiment indicators were mixed in the month, with the Gfk print declining a little further into the negative area, while the TR/IPSOS index rose somewhat. That said, the BRC retail sales monitor rate declined sharply in October, tilting the overall risks towards yet another soft retail sales print, we think.
Finally on Friday, Canada’s inflation data for October will be in focus. No forecast is available yet, while the nation’s Markit manufacturing PMI was not particularly enlightening on the subject either, simply indicating that prices charged rose solidly again. In any case, we think these prints will be closely followed, as they could play a major role in shaping expectations regarding a near-term BoC rate hike. At the time of writing, the market is assigning only a 15% probability for a hike in December, but around 50% chance for such action in January.
