22 Oct 2024 | 5 minutes to read
UK data showed signs of cooling off last week, but is it enough for the Bank of England (BoE) to accelerate the pace of cuts? The August to September employment data was, on the surface, buoyant, with the headline rate of unemployment falling from 4.1% to 4.0%. However, this rate is calculated based on the Labour Force Survey, participation in which is currently low, making other data more relevant. Payrolls were softer, declining by around -15,000 in September, after a downwardly revised -35,000 decline in August, while wage growth also continued to cool in September, slowing to 4.9% from 5.1%. This slowdown in wage growth is key, as in time this should facilitate a slowdown in services price inflation, which can help maintain healthy real-terms pay growth for households.
Looking at Consumer Prices Index (CPI) inflation data itself, September’s print was softer than expected, slowing to a yearly rate of 1.7%, from 2.2%. However, examining the detail, this decline reflected a significant deceleration in transport prices, while housing and utility prices actually accelerated.
Retail sales also cooled in September, rising 0.3% after a 1.1% rise in August, excluding petrol. However, given the wet weather in September and the fact that sales were strong in July and August, a 0.3% increase actually sends a relatively buoyant message, signaling fairly buoyant consumer behavior. This was also reflected in official house price data for September, which showed prices rising 2.8% year-on-year, up from 1.8% in August.
Overall, while wage growth and inflation show clear signs of cooling, broader activity measures remain robust in the UK. Positive real-terms wage growth should support consumption spending in the second half of the year. If this comes to pass, it may be difficult to make the case for a more aggressive pace for interest rate cuts over coming months.
The big unknown remains the budget, now a week away. While additional public spending could support GDP growth, personal tax increases have the potential to crimp consumer confidence and spending activity. This in turn will impact BoE forecasts, which will be published at the November meeting of the rate setting Monetary Policy Committee (MPC).
As in the UK, US data was surprisingly resilient this week, leading to a re-pricing in rate cut expectations.
Retail sales data for September showed a 0.5% increase, excluding autos, while the “control group” (which excludes other volatile items as well as autos, such as gasoline, food service and building materials costs) increased by 0.7%, following August’s 0.3% increase.
Unemployment claims data also painted a brighter picture, despite storms leading to a rise in jobless claims. Initial claims slowed to 241,000, following an increase in the prior week of 260,000.
One area of persistent weakness was housing. Starts fell by -0.5% in September, while permits declined -2.9%. This reflects the fact that new mortgage rates remain high, especially relative to the average rate on existing mortgages.
Overall, the week’s data strengthened the case for a gradual pace of monetary tightening, with market pricing adjusting. While as many as three further interest rate cuts had been priced in for the remainder of 2024 only a few weeks ago, today futures markets are anticipating just one or two.
The European Central Bank (ECB) voted to cut interest rates at the October meeting last week, taking the refinancing rate to 3.4%, the lending rate to 3.65% and the deposit rate to 3.25%. While this was well anticipated, the tone of the meeting was more dovish than expected.
The policy statement acknowledged that recent growth and inflation data have been softer than expected, affording greater confidence that “the “disinflationary process is well on track”. Guidance also changed from a quarterly pace of tightening to a meeting-by-meeting approach, making a further cut possible in December.
That decision will depend on activity and survey data over the coming weeks, as well as the outcome of the US election and pay bargaining negotiations, as well as 2025 fiscal budget plans.
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