Tomorrow we have an avalanche of data from the UK just before the market opening. Several bits are key for economic projections and whether or not the BOE will finally go through with its rate hike.
Here’s a reminder of what the BOE has been up to. There was a 50-50 chance they’d raise rates at the last meeting, and they didn’t. This led to many analysts suspecting they will raise rates at the December meeting, but that’s not a guarantee. And the data coming out tomorrow might go a long way to either confirm that prediction or make it a lot more uncertain.
Governor Bailey has been calling for a hike for some time now. However, when he was given the opportunity he voted to wait. More analysts are starting to suspect the BOE is looking to “jawbone” the market with hawkish rhetoric, but not delivering. At some point, though, the talk won’t be enough to push the markets.
So, the reaction of the markets to the data tomorrow could also set the tone for the pound over the coming weeks. Moreover, we could see quite a bit of volatility in the sterling pairs tomorrow too.
What’s at the top of the focus list?
What’s likely to be the start of the event is the release of Q3 GDP data. Better performance in the economy is likely to cement the outlook that the BOE will raise rates.
Nonetheless, if there is significant underperformance of expectations, then we could see weakness in the pound. And the consensus of a near-term rate hike could get a little more shaky. UK equities, which experienced a relatively good quarter, could get a further boost if the GDP data disappoints.
Economists project the UK’s Q3 GDP to come in at a quarterly growth rate of 1.5%. That is significantly lower in comparison to the 5.5% in the second quarter.
However, that’s typical as the economy “normalizes” after the recovery from the winter. Let’s not forget that last winter the UK faced not only the covid problem but also Brexit. That said, 1.5% growth is still relatively strong and would be in line with expectations that the BOE will likely raise rates.
Annual GDP projections are 6.8% lower than the 23.6% recorded last quarter. That’s mostly due to the comparables, as the last quarter was compared to the worst part of the covid recession.
Overall, this shows how far the UK economy has recovered. In fact, results within a percentage point or two of expectations would reaffirm the general perception that the UK economy remains resilient.
The other data to keep in mind
For the economy to grow, businesses need to be investing. And if they expect the economy to keep growing, they will keep investing. So, the quarterly Business Investment data might also have an important impact on the market, even if it doesn’t get as much media coverage.
Analysts expect the UK Q3 Quarterly Business Investment to slow down to 2.6% from 4.6% prior. Again, the slower pace has more to do with the extraordinary comparable from covid. It is still way above pre-pandemic levels. This suggests businesses not only expect that the recovery will continue, but are putting money towards that end.
It should be noted, though, that the BOE’s talk of raising rates could be pushing this figure up, as businesses try to take advantage of low-interest rates before the hike. That is part of the aims of monetary policy.
A return to normal in this figure could be an indication that the BOE might consider their rhetoric has run its course and might be more willing to raise rates.