Tomorrow is a big day for central bank watchers! We will be getting the UK and eurozone CPI figures one after the other in the middle of the trading session.
We could expect some extra volatility this time around in both the pound and the euro. Now that it’s all but confirmed that the Fed will cut rates in their next meeting, we’re watching closely to see how the ECB and BOE will react.
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Many analysts are already penciling in a cut by the ECB, and continued underperformance in the core inflation number would give further weight for their case. We’ve already had the results from the major constituents of the eurozone, so this data is likely not to be as much of a surprise for the markets as the UK data.
Both numbers are also highly relevant ahead of the release of Q2 GDP figures. We’d be interested to see if there is a break of the pattern of low GDP growth and inflation while still having low unemployment and wage growth.
What to Expect
The first figures to come out are those likely to have the biggest market impact: UK CPI.
At the same time, we also get PPI input and output as well. The market typically focuses on the monthly series. But, given the wealth of UK data coming out at the same time, we could see some ups and downs immediately after the release
The consensus among analysts is that UK CPI will cross into negative at -0.1%. This would be a considerable drop from 0.3% in the prior month. A negative result is not unusual for the series, but this would be three consecutive months of a declining inflation rate.
It’s Not All Negative
Despite the monthly drop, however, on an annualized basis, we expect inflation to come in at 2.1%. This would be up a tick from the 2.0% prior and virtually exactly where there BOE wants it. Core CPI lags a little behind at 1.7%, but still within striking distance of the target.
As far as how that impacts the BOE, the outlook depends mostly on how the Brexit negotiations go. Over the weekend, BOE member Vlieghe reiterated the view that should Britain not get a deal, then interest rates would likely drop to zero, a three quarter-point drop. On the other hand, without negative fallout of a no-deal Brexit, the bias remains for a hike within the next three years.
Across the channel, the market focus is on the Core CPI monthly figure. Expectations are for this to register at 0.2% in June, an improvement over -0.1% in the prior month.
But this wouldn’t be enough to change the annual number, which is expected to remain at 1.1%. This is evidently far from the ECB’s target. And it fuels the anticipation of a cut even if the expectations are met.
A lower result would push the bias even more in favor of a rate cut, even as soon as the next meeting to keep pace with the Fed. We’d have to see a significant beat of expectations to substantially push forward the expectation of an ECB cut.
Even including the more volatile components, the eurozone’s CPI is not doing all that much better. On a monthly basis, expectations are for 0.2%. This is in comparison to 0.1% prior, which annualized comes out to 1.2%. And that is identical to the prior month.