UK data dominates, as dovish BoE shift comes into question

As we head into a week thick with critical UK economic data, traders find themselves weighing up an environment with a multitude of macroeconomic variables playing out on the domestic and global stage. Two major reports – the Jobs Report on Tuesday and the Inflation Report on Wednesday – will potentially light the path for market expectations, but what looms within these figures, and how should traders position themselves?

Questions around economic health in the UK provide the backdrop to these releases, with a surprising dovish turn from the Bank of England in question should the economy prove resilient and inflation fails to subside. The recent rise in unemployment does highlight the risk that the Bank of england’s tightening is only just really taking hold on the economy, and thus any further signs of distress in the jobs market could further consolidate the dovish turn from the Bank of England. Energy markets have seen a new lease of life of late and thus while inflation is already far too high there is a risk that we may see the disinflationary pattern stopped in its tracks before long. Will we see UK inflation turn higher like its US counterparts?

Tuesday: Jobs dominate

Tuesday’s jobs report brings a fresh view of the UK employment market, coming off the back of a surge in unemployment that has seen the rate rise from 3.8% to 4.3% in just three months. While markets expect to see unemployment remained steady this time around, another move higher would provide a warning signal to the Bank of England and lessen the likeliness of further tightening.

The claimant count change figure is expected to tick higher following last month’s reading of 0.9k, with the expected figure 2.3k representing the fourth consecutive positive figure. While 2021 and 2022 were dominated by negative claimant count figures as COVID job losses return to the market, the recent trend has been less positive. A sharp uptick in claimants would provide a warning over weakness in the jobs market. Finally, average earnings finally look to be taking a turn in the right direction, with the continued rise in wages providing a concerning underlying inflation risk going forward. Markets are predicting a decline in the August average earnings figure, from 8.5% to 8.3%, Following four consecutive months of gains. A reading below 8.3% would likely weaken the pound given the fact that the Bank of England will see this as a sign that the inflation picture is rolling over.

Wednesday: Inflation

The inflation predicament comes back into view on Wednesday, with markets keenly watching out for the latest pre-market inflation report. Expectations point towards a modicum of relief, with headline Consumer Price Index (CPI) predicted to decline from 6.7% to 6.5%, and the core CPI, which excludes volatile items like food and energy, slated to reduce from 6.2% to 6%. While this would be a welcome continuation of the disinflation trend, the slow progress being made does highlight the risk that high inflation becomes ingrained as businesses and consumers bring forward consumption in anticipation of higher prices down the road. The rise of crude oil in September pushed US CPI and PPI inflation metrics higher. While some will question whether such a move will happen in the UK given our greater sensitivity to gas prices, the events of the last week have also seen European LNG rise to a six-month high. If we see inflation reverse upwards, the Bank of England may feel the need to step in once again.

For traders, a secondary surge in inflation would intensify the ‘higher for longer’ story, driving risk assets lower. That enhances the potential for a decoupling between energy prices and risk assets. Typically, a risk-on mood benefits energy prices as it implies economic strength and thus buoyant demand. However, there is a good chance that a push higher in energy prices could increase fears of a second inflation wave, driving markets lower. Ultimately, we would need to see that rising energy has had an impact on headline inflation, and Wednesday will provide the latest opportunity for that to come to fruition.