This week, we will see the monthly GDP for August. The July figure saw a drop as a result of strike action and poor weather. The markets expect a rebound in August of up to 0.3%. Consumer-facing services and construction activity should have benefited from the improvement in the weather. Industrial production is expected to be weaker and either flat or show a small fall. The recent weak PMI surveys suggest that there will be a more significant fall in the manufacturing activity component of around 0.5%. Growth in the first quarter was revised up to 0.3% recently, suggesting we may see stronger growth overall than previously thought. We expect overall growth in the third quarter to remain positive, around 0.1%.
Whilst markets still focus on the interest rate outlook, the 10-year gilt yield has continued to rise as high as 4.66%, suggesting market expectations of higher rates in the longer term. There was a revision to the September services PMI from 47.2 to a much stronger 49.3. This still suggests a contraction in services activity, but at a lower rate than previously indicated. This led to Bank of England Deputy Governor Broadbent warning about clear signs that demand is weakening and unemployment rising.
The level of growth suggested by the forward-looking PMI surveys is lower than is currently being seen in the GDP data. This suggests that we could see weaker growth going forward. Other indicators of activity will be watched for signs of this, including BRC retail sales and RICS housing market surveys this week. The BoE’s quarterly credit conditions survey will also give an indication of the impact of monetary policy on lending conditions.
GBPUSD – 1.2227
GBPEUR – 1.1577
This week, we will see some evidence of activity in the third quarter with German and Eurozone industrial production data. German factory orders bounced in August but remain lower than this time last year. The PMI readings from the Eurozone PMI suggest a contraction in the third quarter. We are still waiting to see whether this translates into the official GDP figures when they are eventually released.
This week, we will get to see the ECB minutes from its September meeting. Markets are particularly interested to see whether there is any indication of what would be required to see further interest rate hikes. The expectation is that the focus will switch to keeping rates at restrictive levels for some time. Any indications on what may cause the bank to ease rates and when this may happen will also be sought. The IMF releases its World Economic Outlook, with suggestions that the chances of a global soft landing have risen.
EURUSD – 1.0561
EURGBP – 0.8638
Last week, we saw a further rise in Treasury bond yields (close to 4.9%) and the US dollar, which reflects a strong US economy. The labour market report revealed a much stronger non-farm payrolls figure of 336,000 jobs being added in September. There were also positive revisions to previous figures. On the flip side, wage growth had edged lower and unemployment didn’t reverse the increase of last month. The overall stronger data has led to speculation that the Fed could raise rates again at the next meeting in November.
The focus this week will be the CPI inflation figures. The oil price has fallen back after appearing likely to hit $100. This recent fall will not show in this set of figures, which may show headline inflation holding steady at 3.7%. This measure has been rising since June (3.0%, July 3.2%, August 3.7%). The core inflation measure, excluding energy and food is expected to show a further fall to 4.1%, which would be a two-year low. In addition to the CPI data, we will also see the PPI data, Fed minutes and the University of Michigan consumer sentiment index. These data may give further insight into whether the Fed may hike again this year.
GBPUSD – 1.2227
EURUSD – 1.0561
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*Interbank rates are correct at 7am on the date of publishing.
