Market Brief: UK CPI Inflation misses expectation

15 Nov 2017

Shaun Garrett

Dealing team

The Pound continued its losing streak this week as UK headline CPI inflation data missed the consensus of 3.1% and remained steady at 3% in October.

Today's data releases
  Key levels
09:30 UK jobless claims and average earnings   Support Resistance
12:00 UK PMQs
GBP/USD 1.3030 1.3230
12:00 US MBA mortgage applications GBP/EUR 1.1070 1.1375
13:30 US CPI and retail sales

Market overview

The Pound continued its losing streak this week as UK headline CPI inflation data missed the consensus of 3.1% and remained steady at 3.0% in October. In the near-term this means that BoE Governor Mark Carney may well escape writing a letter to the Chancellor to explain a miss from the 2.0% inflation target in excess of 1ppt. Still, the committee’s policy discussions are placing considerable emphasis on its assessment of spare capacity and with the rate of unemployment below the MPC’s ‘equilibrium’ estimate of 4.5%, the committee’s collective angst over the risks of inflationary pay growth is unlikely to be alleviated. Accordingly our baseline case is still that the MPC will raise the Bank rate in two more 25bp steps to 1.0% by the end of 2019, consistent with the message conveyed in the recent quarterly Inflation Report.
Meanwhile, policymaker Jon Cunliffe has said that he believes U.K. domestic inflation isn’t strong enough to warrant higher interest rates right now. In an analysis of wages, unemployment and inflation, the BOE deputy governor said Tuesday that the risk that domestic price growth undershoots expectations is “not immaterial.” He was one of two policy makers on the nine-member committee to unsuccessfully oppose the rate increase.
After positive German GDP data yesterday morning, Italy outperformed shortly after beating expectations by 0.1%. EU GDP was released at 10:00am and came in-line with expectations maintaining its solid pace of expansion, keeping it on track for its best annual performance in a decade. Draghi helped the Euro continue its gains after he said ‘forward guidance has now become a full-fledged monetary policy instrument like everything else… we formulated a framework where various parts of forward guidance – the interest rates on one side and the asset purchases on the other – would interact in a synergy so that each would actually amplify the effect of the other one.’ These comments, alongside positive growth data, helped push the EUR back above 1.18 (against the USD) for the first time in a month.
David Davis yesterday committed to protecting talent within financial services after Brexit as he gave his clearest indication of the government's thinking for the sector yet. The Brexit secretary set out his vision of the City's future relationship with the EU after March 2019, based on three key planks: protecting financial stability, ensuring consumer protection and supporting the system built since the 2008 crash. The second day of withdrawal bill discussions continues today: almost 500 amendments are expected to be scrutinised over 8 days which is likely to stretch into Mid-December. As reported by the Financial Times, the five most contentious points are expected to be: the exit date; parliament’s vote on the final deal; what role the European Court of Justice will play; devolution – moving power from Brussels to administrations in Scotland, Wales and Northern Ireland; finally, what powers Minsters will have post Brexit. Any Government concessions in these areas are expected to give parliament more opportunity to cause trouble, thus creating further political instability. 

The day ahead

UK labour market data is released this morning at 9:30am, markets will be focussing on wage growth for September as the gap between headline inflation and wage inflation currently stands at 0.8ppt. Many economists have said this month’s rate rise was unnecessary because of the slowing domestic economy, weak productivity and wage growth, and uncertainty about Britain’s future trade relationship with the EU. This afternoon we head to the States for Retail Sales and CPI inflation data at 13:30, expectations are for slightly softer data for the month of October.

Thought of the day

Australia has become the latest country to vote in favour of legalising same sex marriage after a historic postal vote across the nation. An emphatic Yes vote was returned allowing the government to table legislation in parliament today and to push for a vote by MPs before Christmas. Celebrations were sparked across the country after the result was announced and Prime Minister Malcolm Turnbull said that "They voted yes for fairness, yes for commitment, yes for love". It was back in 2000 that the Netherlands became the first country to pass legislation providing for same sex marriage and 26 other nations have followed suit since then, including the UK in 2013. Bearing in mind it was still illegal to be in a same sex relationship only 50 years ago, in this ever changing modern world it’s important to be on the front foot and as well informed as possible. The FX landscape is also ever changing and it certainly pays to stay ahead of the curve. Speak to the Investec Dealing team today to help you stay informed of what’s happening and any changes that are afoot!

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