Week Ahead: US CPI to confirm another jumbo-sized Fed rate hike

Updated September 11, 2022

We get the latest US inflation data published on Tuesday, arguably the most important data release on the risk calendar. This is the last economic piece in the puzzle ahead of the FOMC meeting next week. It also comes during the Fed’s blackout period when central bank officials do not comment on monetary policy.

The US CPI core reading will probably give a better read on the current pace of price pressures and the risks ahead. This is because the headline print may be weighed down by the rapid drop in oil prices But, it seems only a huge surprise could push markets back to a 50bp rate hike. This would take the steam out of the recent dollar rally which hit 20-year highs last week. The chance of another jumbo-sized rate hike of 75bps currently sits at over 85%, up from last week’s 57% probability.

EUR/USD is still dabbling with parity even after the ECB got more hawkish last Thursday with a big rate rise and potentially more to follow. But the eurozone is heading into a likely recession while the US economy continues to power on.

The Bank of England meeting originally scheduled for Thursday has been postponed until the following Thursday 22 September. But we still have the usual mid-month data dump including GDP, jobs numbers, CPI and retail sales. The announcement of an energy price cap by the new UK Prime Minister cuts the chance of a more prolonged downturn and possibly a technical recession. Economists reckon inflation will be lowered by around 4-5% in the autumn from a potential peak of 16%+. Falling fuel prices are likely to pull headline CPI lower.

The pound is still stuck in a long-term downtrend with headwinds aplenty. Last week’s low just about pierced the pandemic spike bottom at 1.1409 but buyers pushed sterling up with its first positive week in four. The weak undertone may persist until markets get more colour on the cost implications of the government energy bill action.

Here are the key risk events on the calendar:

12 September, Monday:

UK GDP: Economists expect a big rebound after the Jubilee bank holiday saw a 0.1% contraction in June. They estimate an increase of 0.3% on the back of moderate growth seen in recent business surveys. Going forward, the BoE forecasts a five-quarter recession beginning in the last three months of the year.  

13 September 2022, Tuesday:

-UK Jobs: Consensus expects the jobless rate to fall to 3.7% in July from 3.8%. Wage growth is expected to remain solid but will ease going forward as numerous headwinds limit the ability of firms to offer wage rises.

-US CPI: Analysts forecast a drop in the headline print in August to -0.1% m/m and 8.1% y/y from a flat reading and 8.5%. That would be the first monthly drop in two years. The core is seen picking up a tick to 0.4% m/m and by two-tenths to 6.1% y/y. This is the last major data before the September FOMC meeting.

14 September 2022, Wednesday:

UK CPI: Consensus predicts headline inflation will likely advance to 10.4% from 10.1% in July. The 6% fall in fuel prices may impact prices with some analysts expecting a fall below 10%. Going forward, the government energy price cap should help lower CPI by around 5% from the autumn.

15 September 2022, Thursday:

US Retail Sales: Analysts anticipate a rise to 0.2% in August from the prior flat print. Higher rates and inflation are expected to hurt demand and spending capacity in the coming months, as the Fed’s tightening policy implicitly slows growth.

16 September 2022, Friday:

UK Retail Sales: Expectations are for activity to contract following the 0.3% expansion in July. The cost-of-living crisis and double-digit inflation is forecast to squeeze disposable incomes.  Consumer sentiment is subdued at present, though the government’s energy price cap may improve the mood. 

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