US inflation will be the big macroeconomic focus in the coming week, with UK monthly gross domestic product and balance of trade figures for several major economies.
Some insight will also be provided into the UK labour market with the latest KPMG and REC report on jobs.
A monthly UK gross domestic product (GDP) estimate from the Office for National Statistics is due on Friday, along with trade data, and services and production indices. Next week’s other releases from the ONS include business insights and impact on the UK economy on Thursday, along with ’real time’ indicators on economic activity and social change.
US inflation under market spotlight
Overall, it’s a relatively quiet week from an economic data perspective, heavier at the back end with US consumer price inflation on Thursday and producer prices on Friday.
Financial markets rushed to price in earlier US rate cuts after the December dovish pivot by the Federal Reserve, but this week expectations have been pushed back a bit.
US CPI in November stood 3.1% higher than a year earlier, which as it was the joint-lowest reading since spring 2021, matched the market narrative that 2024 will see further cooling in inflation and a soft US economic landing to enable the Fed to begin cutting interest rates.
PPI data last month also offered further encouragement, rising just 0.9% year-on-year as prices for final demand goods fell 1.5%.
Core CPI is set to break below 4% year-on-year for the first time since May 2021, and this is expected to give the Fed added confidence that inflation is on the path to reaching its 2% target by the middle of the year.
“With PPI a likely lead indicator for CPI, it seems logical to expect a further cooling in the headline number,” said analysts at AJ Bell, although noting that oil prices are on the rise and the base for comparison will start to soften, too.
If PPI and CPI continue to retreat it see the rate predictions swing again.
Some think the Fed may sanction a first one-quarter point rate cut as soon as March, though many think it will be the summer before cut arrive.
The first 2024 meeting of the Federal Open Markets Committee will be on 31 January, with the second not until 20 March.
Will UK GDP point to recession?
The most recent monthly GDP figures showed economic activity contracted in October, mostly due to an unusually large dip in manufacturing activity.
“The truth is that these figures are becoming increasingly unhelpful for judging the state of the UK economy, and assuming most of the factors behind October’s dip were temporary, we’d expect a bit of a bounce back in the November figures,” said economists at ING.
Whether or not that happens, they added, could indicate whether the UK economy entered a “technical recession”, following a very slight fall in overall third-quarter GDP following recent revisions to the data.
“The reality is that a couple of quarters of -0.1% growth, if it happens, is not much to write home about,” the economists said.
They noted that while the jobs market is cooling, so far there aren’t the widespread signs of job losses that are more typically associated with recessionary periods.
“For now, we think the UK economy will flatline through the first half of this year as positive real wage growth is offset by the ongoing passthrough of higher interest rates,” they added, with ING’s call being that a first rate cut will come in August.
“The Bank of England is still more heavily focused on the inflation numbers – and with both wage growth and services inflation likely to stay sticky in the near term, the market may be getting ahead of itself in pricing a May rate cut.”
This means a lot will depend on the next couple of jobs and inflation reports, scheduled for the following week, Tuesday 16 and Wednesday 17 January respectively.