Save the last hike for me

Weekly update
  • Weekly update
  • 5 minute read

A good week for

  • Equities broadly gained in sterling terms, especially Japan and the UK
  • Oil rose 3.6% in dollar terms to over $90 per barrel

A bad week for

  • Sterling softened against main currency pairs
  • Bonds weakened modestly in the US and Europe

UK employment

UK employment data painted a mixed picture ahead of this week’s Bank of England meeting. In many respects, the data points to an easing labour market that would allow inflation to return sustainably to target. Unemployment rose modestly further to 4.3% in July from 4.2% in June. The number of payroll employees was also estimated to have fallen by 1k, as opposed to the 30k rise expected. The 3-month average number of job vacancies also slipped below 100,000 for the first time since June 2021. However, wage growth data remained strong. Whole economy regular pay rose by 7.8% and total pay, including bonuses, by 8.5%. This was flattered by the 12.2% increase in public sector total pay, pushed up by one off bonuses to NHS workers. Regular public sector pay increased by 6.7%. However, private sector pay likely also remains too strong for the Bank of England’s comfort, with regular pay rising at 8% and total pay rising 7.6%. We expect this to slow as activity sags and inflation cools further but the Bank is expected to deliver one more hike at this week’s meeting.


UK growth was softer than expected in July, falling by -0.5% on the month. Both the services and construction sectors declined by -0.5%, while manufacturing declined by -0.8%. This follows a strong June, when activity benefitted from a larger number of working days. The fall in output is likely in part due to industrial action, with strikes in healthcare and education detracting around 0.24 percentage points off GDP. This is likely to be less of a drag in subsequent months, as teachers have reached a pay agreement. Weather was another headwind – while fine weather in June boosted activity in hospitality and retail sales, July was wetter than average, impacting the services sector particularly. Growth is expected to remain weak for the rest of the year but a recession is still expected to be avoided.

US inflation

US inflation strengthened in August, rising to 3.7% from 3.2%. A key driver was a 10.6% month-on-month rise in petrol prices in August, reflecting higher oil prices. However, core inflation decelerated from 4.7% in July to 4.3% in August, due to base effects, offsetting the impact of higher energy prices in the core basket. Higher fuel costs did manifest in a 4.9% rebound in airfares, though these have softened in recent months. Core goods prices continued to soften, pulled down by falling used auto prices. Rent and rent-equivalent costs, which make up a large share of the CPI basket, remain elevated but timely data suggest these costs will fall sharply in coming months. While higher oil prices could put upward pressure on CPI prints in coming months, oil prices are not expected to remain elevated for long, given the weaker outlook for demand. This is expected to allow the Fed to keep monetary close to the current rate for some time.

Eurozone monetary policy

The Governing Council of the European Central Bank voted to raise rates by 0.25% last week, taking the main refinancing rate to 4.5%. The hike was expected, but the comments accompanying the announcement were more dovish than anticipated. The statement commented that “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.” This was interpreted as suggesting that the ECB may have finished hiking. However, President Lagarde did note that there was a “solid majority” of policymakers who supported a hike, and emphasised that this may not yet be a peak in rates. Nonetheless, like the Fed, the ECB is now focussing on how long monetary policy must remain restrictive as opposed to how much higher rates need to go.

China economy

After a number of weak data prints, Chinese economic data gave investors cause for optimism. August data saw activity strengthen, with retail sales growing 4.6% year-on-year, and industrial production 4.5% year-on-year. Property and investment sectors remain subdued, with year-to-date property investment down -8.8% and fixed assets growing by 3.2%. While it is encouraging to see greater strength in consumption spending, the property sector may need more support to avoid housing market weakness weighing on consumer confidence.


Important information
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.


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