Chris Smith

Market Commentary

For the week ending 20 October 2017
Report by Chris Smith
Back to Latest
Chris Smith

UK economic data has been a particular focus in recent months, notably in the context of the future path of monetary policy. This week was no exception, beginning with Tuesday’s release of the Consumer Price Index (CPI) for September. The headline data showed prices having increased 3% year-on-year, a rise of 0.1% from August. While the figure was in line with market expectations, it did represent a five year high, as well as the eighth consecutive month of exceeding the Bank of England’s 2% target. Furthermore, Governor of the Bank of England Mark Carney suggested that this is unlikely to be the high point.  He commented that “I think it is more likely than not that I will be writing… a letter to the Chancellor,” referring to his obligation to explain to the Treasury overshoots in excess of 1%.

On a headline basis, inflation of this magnitude suggests an increased likelihood of an interest rate hike at the Monetary Policy Committee’s (MPC) 02 November meeting. Indeed, the market implied probability of this now stands at 78%. However, the detail suggests that an increase is by no means a foregone conclusion. Specifically, JPMorgan’s measure of core goods inflation, which strips out more volatile elements, actually stepped down 0.3% from the prior month, to 2.5%. The emphasis that specific MPC members place on such data will, therefore, be relevant.

As such, there was much interest in hearing from the Committee’s two newest members at their appointment hearings on Tuesday. However, their comments did not make drawing firm conclusions any more straightforward. Silvana Tenreyro placed herself amongst the “majority” of members looking to raise rates “in the coming months”. However, Sir Dave Ramsden’s comments were more dovish; he noted continuing slack in the economy, and that wage growth remains stubbornly subdued. The latter point was confirmed on Wednesday, when the Office for National Statistics (ONS) released data showing that real (adjusted for inflation) regular earnings for UK workers continued to fall at a pace of 0.4% year-on-year.

With real wages declining, it was perhaps unsurprising to see UK retail sales fall in data from the ONS that followed on Thursday. However, what was surprising was the magnitude of the drop.  Sales were down 0.8% month-on-month, well behind the -0.1% market consensus.  On the same day, a separate report from Moody’s warned that high and growing levels of UK household debt, combined with rising interest rates, were likely to cause problems for household finances going forward.  Indeed, the Financial Conduct Authority’s own report this week stated that 17% of households surveyed would struggle if their monthly mortgage or rent payments rose by less than £50.  The MPC’s margin for error appears slim. Only time will tell which path is the most appropriate.