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UK CPI, Jobs to Make the Case for BOE

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The UK will release a trove of data this week, with the inflation and jobs numbers likely to have the biggest impact on the market. The consensus is that they will show a continued cooling in economic activity in the UK, which could support the idea that the BOE is finally bringing inflation to heel. But it could also suggest that the economy is about to slip into recession, and that could push the pound lower.

The main issue for the data is that the markets are on a knife’s edge about whether there will be another rate hike this year out of the BOE. Inflation remains persistently high, but the economy is seen as being in trouble. Both make arguments for hiking and for holding steady. Since this is the last key data before the BOE meets in early November, it could define market expectations for what the central bank will do. That means there could be a stronger than expected reaction in the pound pairs – or intense volatility if the data contradicts itself.

The BOE is “Puzzled”

At its last meeting when it held rates unchanged, the BOE suggested that the loosening in the labor market could contribute to getting inflation down. The bank has repeatedly said that inflation will fall quickly, but that has yet to happen. A tight labor market is seen keeping wages high (growing at faster than the inflation rate), which keeps demand resilient, allowing for prices to keep rising. This wage-price spiral has been troubling the BOE, and recently its Governor, Andrew Bailey, admitted to being “puzzled” that wages haven’t gone down.

The resilience in the labor market might be the trigger for the BOE to raise rates one more time this year. With the market pricing in about a 50-50 chance of that happening, it might take a small beat or miss on the data to tip over the consensus in either direction.

What the data says

The data barrage starts with the release of the UK unemployment rate for August, which is expected to remain unchanged at 4.3%. That’s seen as slightly below the structural level, which contributes to the labor market tightness. What could get more attention since it’s new data is September Claimant Count, which is seen jumping to 22.0K from 0.9K in August.

Generally, the higher the claimant count, the worse it is for the pound. That’s because it represents the number of people who have sought unemployment benefits, so a large increase would suggest that more people lost their jobs. That could be a sign for the loosening of the labor market that the BOE pointed to in justifying last month’s rate pause. On the other hand, average earnings (including bonuses) are expected to continue to outperform inflation at 8.0%, but down from the 8.5% prior.

Getting inflation back in line

Where things are expected to show continued complication for the BOE is with the September CPI change, which is expected to come in at 6.5% compared to 6.7% prior. That would more than triple the 2% inflation target, and still be the highest among the major economies. The core rate, which is more closely tracked by the BOE, is expected to be slightly better, falling three decimals to 5.9% from 6.2% prior.

What could provide some indication that the inflation could keep coming down is that PPI is expected to come in negative compared to the prior year, both in input and output components. A faster rate of decline in inflation could set expectations that the BOE will pause again in November. But if the core rate stays above 6.0%, it might be enough to incline the balance in favor of another rate hike before the year is out.

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