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Next week, developed markets such as the US will be closely monitoring the release of core inflation statistics and retail sales figures. Anticipated weakness, particularly in car sales, will be of paramount interest. In the UK, the Bank of England’s upcoming monetary policy decision will be influenced by various data releases, including wage growth and services inflation, highlighting the significance of developments in developed markets.
In US Developed Markets: Aiming for a 0.3% Month-on-Month Increase in Core Inflation Rate
The likelihood of a March Federal Reserve interest rate cut has drastically decreased due to vital jobs and growth data; even May is more complex than it appeared two weeks ago. Officials have resisted the likelihood of an impending change in monetary policy, even though they are still open to the concept. We believe that the Fed realized that its 2021 claim that “inflation is transitory” had hurt its reputation, so it had to quickly change course and raise interest rates significantly in 2022 and 2023. The last thing the Fed wants to happen is to make a mistake again at a crucial juncture, loosen too soon, and rekindle inflationary pressures. It wants to ensure that the evidence completely supports inflation going back to 2% and remaining there.
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The Fed’s preferred inflation gauge, the core PCE deflector, is already moving at the right pace. The falling employment cost index and declining quit rates indicate that labor market inflation pressures are lessening. The Fed, however, would prefer to see a bit of wiggle room in the labor market brought about by a “soft landing” or a slowdown in growth rates. Retail sales and industrial output are this week’s activity highlights, and consumer price inflation is also anticipated for release. These statistics could indicate a shift in that direction. Beginning with, the CPI has been increasing more quickly month over month than the PCE deflector. This is mainly because housing and cars are heavily weighted in the basket of goods and services used to determine the inflation rate. Although open market rents are slowing, official data takes a while to reflect these moves due to how the CPI report constructs the series. The prices of vehicles at the Mannheim used car auction indicate that car costs will harm January inflation. Our target for the core inflation rate is a 0.3% MoM increase, with a bit of bias towards a 0.2% increase instead of a 0.4% increase.
Given the dismal car sales data already released, retail sales will probably be modest. While lousy weather has undoubtedly contributed, credit card, auto, and personal loan borrowing costs that have been soaring for more than 20 years are not helping. Additionally, mounting evidence shows that the extra savings from the epidemic will encourage expenditure. Meanwhile, strong utility demand is expected to boost industrial production, but manufacturing is expected to remain muted, given the persistent decline indicated by the ISM survey.
Chair Jerome Powell stated at the FOMC meeting in January that the monetary policy is already well into “restrictive territory” and that at some point this year, it will be “appropriate to dial back.” May will mark the beginning, at which point we believe the central bank will have the confidence to lower rates due to continued modest core inflation measures. By year’s end, the policy rate is expected to drop to 4%; by mid-2025, it will have dropped to 3%. This will only bring us near neutral territory; according to the Fed, the long-term average is 2.5%. There is potential for far more significant cuts than we are projecting if the economy does enter a more problematic phase, maybe due to banking stresses.
UK: Services inflation and wage growth likely to remain sticky
A tonne of UK data is coming our way next week, some of which may influence the timing of the Bank of England’s rate cut. Inflation in services and wage increases in the private sector will significantly impact the rate outlook. The former will probably rise due to some erratic fluctuations in airfare. The latter will likely decline fairly sharply once more, partly due to the recent slowdown in the employment market. However, the BoE still finds service inflation and wage growth excessive, so they are expected to stay sticky in the first quarter.
This week, growth statistics are also expected. The December decline in retail sales may have been sufficient to cause the economy to decrease just a little bit more. It will be the second contraction of such kind, and many headlines about a recession will follow, but in actuality, this is just a recession in name. The UK economy’s prospects are improving and will witness a return to modest but positive growth numbers this year. The date of the Bank of England’s first-rate decrease will be determined by something other than these GDP numbers, especially the erratic monthly form.
Conclusion
The coming week’s events in developed markets pose challenges and opportunities. Investors and traders can navigate these events with confidence and strategic savvy by staying informed, analyzing expert insights, and adhering to a calculated approach.
Remember, as much as markets move with the news, they also move with sentiment. Keep your ear to the ground, your eyes on the data, and be prepared to act when the time is right.
