Week Ahead: US Inflation and ECB Meeting to spark volatility

The risk event calendar picks up this week with top tier US and UK data, the ECB meeting and a slew of Chinese figures to watch out for. The big recent theme across the summer has been the resilience in US economy data and the rise in both Treasury yields and the greenback. Last week, upside surprises included the ISM Services index and the weekly initial jobless claims which dropped back to the lowest levels since February. The figures again question the narrative that tightness in the US labour market is cooling. Can the dollar move higher for a ninth straight week, which was last seen nearly nine years ago？

Upcoming US economic releases include inflation and retail sales for August. Higher energy costs are expected to push the headline CPI rate higher, but relatively firm monthly prints are likely to be a temporary blip in the longer-term disinflationary trend. That said, with activity data staying strong, it seems the market may be more minded to buy into the idea of another ‘skip’ which means the Fed not hiking in September but hiking again later in the year. Clearly, this pushes the idea of a Fed easing cycle further into 2024 and keeps the dollar stronger for longer.

The ECB is seemingly caught between a rock and a hard place amid signs of stagflation. The region‘s economy is certainly experiencing a slowdown with the second quarter GDP downward revision reviving recession angst. The latest PMIs also showed a deepening downturn in August while weakening demand in Europe’s key export markets is acting as a headwind. But the multiple reasons to keep the deposit rate unchanged at 3.75% could be trumped by core inflation which is still too far above the ECBs 2% target at 5.3%. Some policymakers have expressed a desire to do too much rather than too little in the fight against inflation which means this could be the last hurrah for the hawks on the Governing Council before agreeing to a prolonged pause.

Sterling traders will be watching the employment data out of the UK released midweek. The Bank of England is widely seen as the one major central bank still with some heavy lifting to do in terms of more rate hikes. But we have heard a more dovish tone by MPC officials recently, including Governor Bailey who hinted that the bank was “much nearer” to the end of the tightening cycle. That has hit sterling, which is the second worst performing major currency month-to-date. Cable is currently on a four-day losing streak with buyers hoping the 200-day simple moving average will offer some support just above 1.24.

The end of the week brings Chinese data including retail sales and industrial production. It will probably be too early to tell what impact the recent support measures by the authorities have had, as any substantial improvement in demand will probably not feed through until the fourth quarter.

Major risk events of the week:

12 September 2023, Tuesday

-UK Jobs: Wage growth and the vacancy/jobless ratio are key inputs into the BoE rate decision in two weeks time. The former has surged above 8% in the private sector, but there is hope this has peaked. Markets currently price in around 35bps of rate hikes by February.

13 September 2023, Wednesday

-UK GDP: Data is likely to show that the economy is sluggish but not sliding into recession. The prior report saw m/m growth of 0.5% in June. Markets may not pay too much attention to this backward-looking report with revisions more important too.

-US CPI: Consensus see the headline rising to 0.5% m/m and 3.6% y/y with the core remaining at 0.2% m/m and 4.3% y/y. Higher gasoline prices will drive the headline, offsetting falling food and shelter costs. Stronger data would tip the balance in favour of a November rate hike which is currently just under a 50/50 bet.

14 September 2023, Thursday

-Australia Jobs: A reversal of last months job losses is expected with consensus expecting around 25,000 job gains. Ongoing increases in the labour force could see the unemployment rate dip lower in August. This is forecast to print one-tenth lower at 3.6%. The aussie along with other cyclical currencies has been struggling recently. AUD/USD is consolidating recent lows just below 0.64.

-ECB Meeting: This meeting is a close call and will be a battle between the hawks and doves. The lagged effect of prior rate rises and deteriorating economic activity argue in favour of a pause. But the hawks worry about high, sticky inflation. Markets price in around a 38% chance of a 25bp rate hike. The falling euro needs some support. The May low in EUR/USD sits at 1.0635.

-US Retail Sales: Expectations are for a 0.2% m/m rise in August, a slowdown after the 0.7% gain the month before and a solid three month to July. Remember this is a value figure so higher gas prices will support overall sales.

15 September 2023, Friday

–China Data: Industrial production is forecast to improve modestly to 4.8% y/y from 3.7% in July. Retail sales could see growth of 2.8% from 2.5% previously, as we near the end of the summer holiday season. The data will be closely watched to check the health of the worlds second biggest economy and the recent drip-fed stimulus. USD/CNH is a whisker away from long-term highs from October 2022 just above 7.37.