Tomorrow we will be getting a host of data out of the UK. Some of it is likely to move the markets significantly, and some of it won’t.
We could see a bunch of volatility, with the market trying to digest a lot of moving parts all at once. Naturally, the CPI inflation data will be the one to get the headlines. But let’s try to make sense of PPI, PRI, HPI and the others.
This will be a good chance to get a gauge of the market ahead of the next barrage of data that comes out in Friday, led by Retail Sales data. Even without the looming discussions of Brexit, the pound is in for a pretty active week.
What We Are Expecting
Set your watches for the flood of data at 10:30 CET (or 04:30 EST) when we get all the UK data for the day. The ones likely to get the market’s attention are the titular CPI data, but PPI can also move the market on its own. Especially in this scenario where the expectations for each set of data are pointing in different directions.
Traditionally it’s the core numbers that are the most relied on. But, in the case of the UK, we’ll be focusing on the headline results. Of course, CPI takes precedence, because that’s what the BOE looks at when setting policy. However, PPI also influences inflation, so it’s quite relevant as well.
Inflation Outlook and Analysis
The consensus among analysts is that the UK monthly inflation rate for April was 0.3%. This is a little above the previous month’s 0.2%. A result like this would take the annualized rate to 1.8%, a step in the wrong direction from the 1.9% prior. The core rate is also expected to come in at 1.8%.
UK inflation has remained just below the BOE’s target since the beginning of the year. Even though the next move is still expected to be a hike around November, the lack of growth in the rate could put a damper on that expectation. However, there is a significant number of analysts who are projecting a higher inflation rate. They are expecting it to pop over 2.0% annualized. This would help affirm the hawkish outlook.
Underlying Price Moves
The Producer Price Index is expected to stay flat on input and tick up 0.1% on output, both on a monthly basis. On an annualized basis both input and output producer prices are well above the target inflation rate.
A matter of concern for businesses is that input prices continue to grow faster than output prices. This shows that UK producers are having difficulty passing the cost increases on to customers, which would show a certain absorption of inflation.
This would be a bad sign for the FTSE, even though through the last earnings season, most UK companies reported robust trading in the first quarter. Should businesses manage to pass increasing materials costs on to customers, we could see an increase in inflation in the near future.
The Market Moves
Generally, we can expect a 40-60 pip move immediately after CPI data. The question this time around is whether the PPI data is going to exacerbate or mute the market reaction.
If we get outperformance in both, then we could expect a good deal of strength in the pound. Even though there is a public consensus on a somewhat flat outlook in inflation, the market appears to be pricing in at least some of the more optimistic outlook.
Should the data disappoint enough, we could be looking at a delay to the expected hike by the BOE, or even the potential of a change in stance. That would be negative for the pound, though most negativity seems to have been wrung out by the constant Brexit news.