Markets to Watch This Week – Get Ready for the BoE’s Final Hike

We standardise WoW price changes across different markets to allow for cross-market comparisons. 

Last Week’s Highlights 

ECB pulled off a dovish hike, but we see more to come. The ECB hiked by 25bps as Henry had expected for some time. They also increased their interest rate forecasts for this year and next, driven by higher energy prices. Growth forecasts, however, were revised lower, with the ECB expecting just 1% growth in 2024. Here are the key statements: 

‘Key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.’ 

‘The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction’. 

Probabilities of a hike were around 20% the week before but neared 60% on the day before. Despite this, the EUR/USD ended the week lower even as Bund yields rose. We think their forecasts, particularly around core inflation, will be too low, which means further hikes will be required.  

US inflation data was stronger on higher oil prices. August CPI was broadly above expectations: headline YoY was 3.7% vs 3.6% consensus, and core MoM was 0.3% vs. 0.2% expected. By contrast, headline MoM and core YoY aligned with consensus at 0.6% and 4.3% respectively. Inflation accelerated across all broad categories, except OER, which nevertheless stayed near 0.4% MoM. However, it only had a limited market impact. The OIS-based estimate of the December 2023 FFR was roughly unchanged on the day at 5.45%, while the December 2024 estimate fell about 7bps to 4.42%. The market continues to price four cuts in 2024. 

US housing market surviving higher rates (for now). US homebuilder Lennar reported on Friday and beat EPS estimates by earning $3.91 a share, versus expectations of around $3.51. New home deliveries rose 8%, and new home orders of 19.7k, versus expectations of around 18.7k. Gross margins on home sales also beat expectations at 24.4% versus expectations of 23.7%. The summary from the earnings call was that demand continues to outstrip supply and consumers have broadly adjusted to higher rates: 

‘The current housing market is generally defined by a very short supply of affordable products and strong demand for affordable products. The consumers have now adjusted to an excessive “higher for longer” interest rates and are willing to purchase or rent what they can afford.’ 

What to Watch 

What should we expect from the September SEP? The Fed meets Wednesday with the probability of remaining on hold at 98%. The key issues include the ongoing growth acceleration, which is inconsistent with slowing inflation, and the ongoing rally in energy prices. Rather than the rate decision, the market will watch the Fed’s latest forecasts as it updates the Summary of Economic Projections (SEP). Dominique expects it to show a further hike this year, two interest rate cuts next year, rather than three, and better growth forecasts.   

Strikes in the US. The United Auto Workers strike against the Detroit Three automakers entered its third day on Sunday with no immediate resolution on the horizon. Negotiators for the UAW and Ford had ‘reasonably productive discussions’ toward a new contract on Saturday, the union said. Chrysler-parent Stellantis said it hiked its offer, proposing raises of 20% over a four-and-a-half-year contract term, including an immediate 10% hike. That matched proposals from GM and Ford. For context, the proposals are about half the 40% wage hike the UAW is demanding through 2027, including an immediate 20% boost. The resolution of these negotiations will indicate labour’s bargaining power and union membership going forward.  

Is Thursday the BoE’s last rate hike? The BoE will announce policy on Thursday. This will not only see rate policy, but also provide guidance for the next 12 months of QT. Henry believes this will be a final hike of 25bp (to 5.5%).   

Before the BoE on Thursday, we have inflation Wednesday. Headline CPI is expected to tick up on the back of fuel costs and alcohol duty, but Bailey has already warned they can look through such a rise. Core inflation is expected to drop back, which would constitute a decent fall in MoM core momentum. 

Another rate cut in Poland? The August releases for IP, retail sales, wages and employment could provide clues for the 4 October MPC meeting. Governor Glapinski justified the shock 75bp rate cut earlier this month partly on much weaker economic growth. Any significant miss on this week’s data, alongside the September CPI later this month, would likely provide enough ammunition for another rate cut. Poland’s 15 October general election is undoubtedly the main driver – it also leaves significant scope for another rate cut next month.   

The Week Ahead: Watch Dominique and Andrew as they discuss last week’s US inflation data while also discussing the auto strikes and the broader impact they could have. Dominique provides an update on student loan repayments while laying out her expectations for the Fed this week.  

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-market research.

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