Weekly outlook: UK and US central banks poised to slow interest rate hikes?

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09 December 2022

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Portfolio Adviser

Monday 12 December

– German wholesale price inflation
– UK monthly GDP growth
– UK industrial, manufacturing and construction output data
– In the US, quarterly results from GameStop

Tuesday 13 December

– Full-year results from Chemring
– First-half results from Begbies Traynor and Superdry
– Trading statement from Capita
– German ZEW financial market and economic survey
– US NFIB smaller companies survey
– US inflation figures
– In Europe, quarterly results from Zara-owner Inditex
– In the US, quarterly results from housebuilder Lennar

Wednesday 14 December

– Full-year results from TUI
– Trading statement from SThree
– Japanese Tankan business survey
– UK inflation figures

The latest UK inflation data set will be released on Wednesday by the Office for National Statistics. In October, the UK Consumer Price Index (CPI) reached 11.1% – its highest level since 1981.

November’s figures will likely feed into the Bank of England’s decision-making when the Monetary Policy Committee (MPC) meets a day later to vote for its latest action on interest rates.

Ben Jones, director of macro research at Invesco, said: “The UK continues to deal with significant inflationary pressures that show little sign of abating. November’s CPI print will very likely remain in double digits.

“This puts the BoE in a difficult position as it is forced to act on inflation while the government tightens fiscal policy aggressively. Together they threaten to tip the UK into a deep recession. But these risks are well known and for now the gilt market is likely to show muted reaction to inflation prints as [prime minister Rishi] Sunak and [chancellor Jeremy] Hunt appear to have bought the UK market some time. Large cap UK stocks generate most of their revenue overseas and are, therefore, largely immune to UK economic data.”

– EU industrial production
– US oil inventories
– Federal Reserve FOMC meeting

The Fed will announce its latest monetary policy decisions on Wednesday, ahead of the BoE and European Central Bank on Thursday.

The latest US inflation data, set to be released on Tuesday, will set the tone for any decision on hiking rates. Last time out, US inflation unexpectedly fell 50bps to 7.7%.

On US inflation, Jones said: “We expect the November CPI print will show inflation has further moderated. Goods inflation is easing, as is healthcare inflation, and there are signs that rental inflation is peaking. While US CPI has likely peaked, the war on inflation has not been won and we expect greater volatility in inflation going forward and for CPI to settle above the Fed’s 2% target. Recent price action suggests that the market will cheer a softer inflation print. However, while inflation might have peaked, rates have not and the Fed will keep hiking. Any multiple expansion is, therefore, likely to be short-lived.”

On the outcome of the Federal Open Market Committee (FOMC) meeting, AJ Bell investment director Russ Mould and financial analyst Danni Hewson said: “Financial markets are currently expecting—or at least hoping for—a slowdown in the rate of increases leading to a pause and peak in the first half of 2023, with the first rate cuts coming in late 2023 or early 2024.

“It is this narrative of pause and then pivot which has done so much to help share and bond prices rally around the globe since early October and also weaken the US dollar. The US Federal Reserve is expected to raise by 50bps to 4.5%, to end a run of four three-quarter point hikes.”

– In Europe, quarterly results from German retailer Metro
– In the US, quarterly results from Adobe and Oracle

Thursday 15 December

– Full-year results from RWS and Character Group
– Chinese retail sales, industrial output and fixed asset investment growth numbers
– US weekly unemployment claims
– BoE, European Central Bank and Swiss National Bank make monetary policy announcements

Following the Fed, the BoE will announce its latest interest rates decision on Thursday. Mould and Hewson expect the bank to slow its hiking cycle by raising rates 50bps, after it delivered the largest single increase of rates in 33 years at the last MPC meeting in November.

Susannah Streeter, Hargreaves Lansdown senior investment and markets analyst, said: “The BoE looks set to unwrap another unwelcome present of an interest rate rise just 10 days before Christmas, inflicting fresh cost-of-living pain on borrowers.

“The base rate is set to rise by 50bps to 3.5%. The last time it was above 3% was 14 years ago, as the effects of the financial crisis were taking hold and the bank was in the process of rapidly reducing rates to help keep the costs of borrowing down and help companies and consumers. This time, even though the UK is heading into recession, the bank is still set to ratchet rates up further because inflation is seen as a greater threat to the economy. The base rate is set to rise to an expected peak of between 4.5% to 4.75% by the middle of next year,” she added.

Looking further ahead, Streeter said: “The BoE may have changed its ultra-bleak forecasts about the depth and length of the recession, given its last outlook was published before the Trussenomics tax cuts were reversed and financial stability had largely returned. However, the UK is still entering a long and difficult period of contraction, as inflation’s stubborn resistance is slowly broken down by rate rises, which will in turn bash consumer and company resilience.’’