UK wage and inflation data will be the big domestic economic stories of the coming week, potentially putting a bead on when the Bank of England could pause interest rates hikes.
Earlier this month, the Bank of England chief economist Huw Pill said the Monetary Policy Committee's (MPC) tightening effort over the past 18 months “is working,” while his boss, governor Andrew Bailey, noted that there were “multiple paths” interest rates could take in coming meetings – signalling that a September hike was not necessarily set in stone.
To judge how many further rate hikes are needed, what Bailey, Pill and co are watching is services inflation and wage data – “and not a whole lot else”, said economist James Smith at ING.
A September pause is, says Smith, “unlikely but not totally out of the question”, with the chances that next month will see the base rate reach its peak hinging on these two data points showing improvement, which brings us to this week.
UK labour market indicators, including wages, are out on Tuesday at 7am and the Office for National Statistics will follow this up on Wednesday with its ‘prices day’, before releasing retail sales data on Friday, the same day as the GfK consumer confidence survey.
With the UK jobs market cooling, there should be further signs of improving worker supply in next week’s figures, Smith said, with a risk that the unemployment rate ticks up.
“For now though wage pressures remain strong and we think private sector wage growth will remain at 7.7% (measured as the last three month’s average compared to the same period last year). That will slip back over the next few readings, but the downtrend is going to be slow.”
As for inflation, Ruth Gregory at Capital Economics noted that the UK consumer prices index (CPI) is still more than twice the US rate but while it has started to fall, is not likely to follow drop as quickly.
UK inflation on Wednesday will however probably begin to close the gap, thanks to the near 20% fall in the energy price cap in July means she expects a sharp fall in CPI inflation from 7.5% to about 6.5%.
But the MPC will need to see services CPI print in line with forecasts or lower for at least two consecutive reports to be reassured into pausing rate hikes, said economist Sanjay Raja at Deutsche Bank, adding that services CPI that matters most to the MPC due to concerns around inflation persistence.
At present, the MPC sees services CPI staying put at around 7.3% in July, edging down to 7.2% in August, and falling to 7% in September.
The committee forecasts headline CPI will fall to 6.8%.
“If inflation tracks in line (or comes in better than expected), this would be enough for the MPC to gain some confidence that its monetary policy medicine is working,” said Raja.
Other economic data
Elsewhere, key releases include US retail sales, industrial production and minutes from the latest Federal Open Market Committee (FOMC) meeting, China retail sales on Tuesday and a Norway central bank meeting.
"All eyes will be on retail sales and industrial production releases next week as investors attempt to assess whether the economy will avoid
slipping into recession," said Deutsche Bank research analyst Galina Pozdnyakova.
DB's economists expect Tuesday's retail sales to continue growing at 0.2% month-on-month and industrial production on Wednesday to rebound by 0.5% on the month, following the reverse reading in June.
"Another important insight into the US consumer will come from American retailers' earnings, including Home Depot (Tuesday), Target (Wednesday) and Walmart...Other bellwether stocks releasing results include Deere on Friday."
Investors also await the FOMC meeting minutes from the Federal Reserve on Wednesday and will scrutinise the wording for hints on the direction of rates.
ING economists see the minutes of the July FOMC meeting as likely to "continue to exhibit hawkish sentiments with the Fed wary about signalling an imminent peak in US interest rates, fearing that this could intensify 2024 interest rate cut expectations and in turn trigger a sharp fall in Treasury yields that would be detrimental to the fight to get inflation back to target.
"Nonetheless, recent Fed comments have suggested that some members of the committee think they may have done enough with the latest inflation data likely to see more members thinking along those lines."
The next big Fed event will be the Jackson Hole symposium between 24-26 August, where ING expects to hear Fed Chair Jerome Powell give a bit more guidance on the potential near-term path for policy rates.