The last time the BOE met, it didn’t have the benefit of the latest CPI figures for the country. The result of the meeting was seen as a little more hawkish than expected. Markets could interpret the upcoming inflation data releases as a potential mitigation of that stance. Particularly as concerns of a slowing economy grow.
Combined with retail sales data at the end of the week, it’s the last major data of the year. That could leave the pound set on its course for the holiday season. Investors might take some time to recalibrate for next year, in anticipation of Christmas sales season, which could impact the prospects for the UK economy.
A Shock to the System
Last week’s release of October GDP figures left traders worried about the UK’s outlook. With the economy shrinking by 0.3% (as opposed to growing at 0.2% as expected) worries that the BOE might have gone too far to reign in the economy and bring down inflation have resurfaced. Up until now, there was hope that the British Isles might escape slipping into the technical recession being seen on the Continent.
But the two areas are being buffeted by similar economic conditions, which means there is less hope that the British might escape the downturn seen in Germany and France recently. With traders now pricing in rate cuts in the Euro area, that expectation might be increased for the UK, where the BOE has been even more aggressive in hiking. The higher rates means there is more room for them to come down further. That could leave the pound under increased pressure compared to its Continental counterpart.
Are There Exceptions?
The one main difference between the UK and Europe in the data is that British workers have managed to see their wages rise faster than inflation. This has been a recurring headache for the BOE, but it does provide some hope that the UK’s consumers could keep the economy going. Even if that means rates stay higher for longer than the market currently anticipates.
So, while inflation figures are important, retail sales could take a starring role as well. Regulators are trying to get inflation down, so slowing CPI change is not necessarily a negative indicator for the economy. Particularly if wages remain upbeat. But negative retail sales – especially ahead of and through the key holiday selling season – might be a stronger indicator that the UK economy is slowing. Which in turn could put pressure on the BOE to cut sooner than it would like.
What to Look Out For
UK inflation for November is expected to come down to 4.3% from 4.6% prior. Numbers below that could support the narrative that the BOE will turn decidedly dovish at its next meeting. The core rate, on the other hand, is expected to remain even higher at 5.4% compared to 5.7% previously. This means the UK is still the major economy with the highest inflation, making the case for pricing in too many rate cuts next year difficult. The market has had a habit of getting ahead of itself in easing expectations.
On Friday, Retail Sales are expected to see a return to positive at 0.6%, up from 0.3% prior. That is seen as thanks to more grocery spending and higher fuel prices. Taking out those volatile elements, though, core retail sales are expected to see an annualized drop of -1.7% compared to -2.4% reported previously.
