Asian equity markets are under pressure ahead of tomorrow’s US CPI inflation data and key central bank updates on Wednesday and Thursday. The negative risk tone follows a late Friday sell-off on Wall Street. Futures markets point to lower stocks at the start of trading in Europe.
The UK economy bounced back by 0.5%m/m in October, slightly above market expectations for a 0.4% rise. The increase follows September’s sharp 0.6% fall which was affected by the extra bank holiday for the late Queen’s state funeral. Health activity within services was also supported by the Covid booster campaign, while manufacturing and construction output beat expectations. Energy demand, however, fell which was possibly due to the unseasonably warm weather during the month and high prices.
Overall output in the economy is 0.4% (slightly) above February 2020 before the pandemic began to affect economic activity. Despite the positive start to the quarter, underlying activity is expected to remain weak with the economy forecast to contract for a second consecutive quarter and therefore signal a technical recession.
Early tomorrow sees the release of the latest monthly UK labour market report. The data is expected to show further signs of cooling but overall conditions remaining tight. Unfilled vacancies, for instance, remain very high but have started to fall, an indication that the demand for labour may be moderating. However, labour shortages persist as the inactivity level among the working-age population remains high relative to pre-Covid levels. We expect the unemployment rate to edge up to 3.7% for the three months to October, but underlying wage growth (excluding bonuses) is forecast to accelerate to 5.9% from 5.7%.
A busy week continues in the UK with CPI inflation figures on Wednesday and the Bank of England policy decision on Thursday. We expect the headline inflation rate to ease only slightly to 10.9% in November. The BoE, meanwhile, is expected to raise interest rates by a further 50bp to 3.5% after the 75bp rise at the last meeting.
Outside the UK this week, US CPI inflation data is the key release on Tuesday ahead of the US Federal Reserve update on Wednesday. In the Eurozone, the ECB announces policy on Thursday shortly after the BoE. Like the BoE, both the Fed and the ECB are expected to dial back the hiking pace to 50bp from 75bp in the previous meetings.
The pound was slightly firmer following this morning’s UK monthly GDP figures, but the overarching driver was broader dollar strength in response to the risk-off sentiment. GBP/USD has fallen from Friday’s highs above 1.23 and is also lower against the euro.
