Written Commentary
- Digesting weaker than expected UK GDP and Japan Orders, awaiting India CPI and Industrial Production and US PPI; BoE FPC and FOMC minutes; further raft of central bank speakers including Lagarde and Bailey; UK, Germany, Portugal and US to auction debt
- UK: contradictory BoE signalling only serves to undermine confidence in UK policymakers
- UK August GDP: Q3 recession, however technical, now baked in the cake, prospects for Q4 hardly encouraging
- USA PPI: modest m/m gain to see headline y/y drop; sticky services pressures to boost core, leaving y/y unchanged; path to lower inflation likely to be slow and protracted
EVENTS PREVIEW
What looks like a busy data schedule is in truth very much front loaded, with Japan Machinery Orders and the swathe of UK monthly GDP and monthly activity indicators to be digested ahead of India CPI and Industrial Production, and somewhat unusually US PPI being published ahead of tomorrow’s CPI. The minutes of the BoE’s FPC meeting and the US FOMC meeting along with a further deluge of central bank speakers at the IMF and IIF annual meetings will perhaps garner rather more attention. Another busy day for govt bond issuance has Japan 30-yr, UK 5-yr, German 10-yr, Portuguese 3 & 9-yr and US 10-yr to digest. The UK sales come on the back of the latest intervention to buy I-L Gilts yesterday, and some confused signalling from the BoE on whether it will terminate the purchase programme on Friday as governor Bailey signalled in an interview yesterday, while the FT reports today that the BoE has privately indicated a willingness to extend the programme to market makers. Given that it has previously stated the pension fund crisis is a material threat to financial stability (as should be confirmed by the minutes of the FPC meeting today), such contradictory signalling only serves to further undermine market confidence in UK policy makers, particularly with the BoE and the Treasury seemingly unable to show any sign of co-ordination.
** U.K. – August GDP and monthly activity indicators **
At -0.3% m/m August GDP was much weaker than expected, with a large drag from manufacturing (-0.2 ppt), and a more modest drag from Health Services along with Arts, Recreation & Culture (both ca. -0.1 ppt) being the key contributors, along with Accommodation & Food (-0.06 ppt). Given that September will also see a contraction due to the period of national mourning for the late Queen and the additional bank holiday, the UK will be in recession when Q3 GDP is reported, even if mitigating circumstances due to the disruptions in both Q2 and Q3 will have many suggesting that this will be largely technical. But with the chaos surrounding the new govt’s economic policies and the pensions crisis, prospects for Q4 look to be even worse, per se rendering that line of argument as redundant.
** U.S.A. – September PPI **
Headline PPI is expected to rise 0.2% m/m, which would bring the y/y rate down to 8.4%, but core PPI is seen up 0.3% m/m leaving the y/y un rate unchanged at 7.3% y/y, and as such serving as a reminder that while inflation is past its peak, the road back to a sustainable level of inflation is likely to be slow and arduous. While goods PPI is set to slow further, second round effects in Services remain quite stubborn, and per se leave the Fed with little choice than to stick with its current hawkish mantras, even if there were clearly some concerns about tightening financial conditions being voiced earlier in the week by vice Chair Brainard.
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