This week just ended

Mid-August, that time of year in which hundreds of thousands of A Level students endure one of the most stressful mornings life has to offer, opening that dreaded envelope and hoping for some high percentages inside. However, it was not just a cast of students that had to experience the ritual this week, as those at the Bank of England (BoE) also sweated on some numbers that could also shape their future.

Bringing inflation back down below their 2% target has been the real test for the BoE over the last 18 months or so, with data this week showing some aspects of price rises slowing but the overall grade remains a “could do better” for those at Threadneedle Street.

Tuesday saw the Office for National Statistics release its Average Earnings Index data as well as the UK unemployment rate. Basic wages, excluding bonuses, rose 7.8% on an annual basis, the biggest jump since records began back in 2001. Contributing to this rise in wages, it was the finance and business services sectors that saw the largest annual growth, at 9.4%, followed by the manufacturing sector at 8.2%. Although the jump in wages is bad news for the BoE and their fight against inflation, news that the UK’s unemployment rate unexpectedly ticked up to 4.2% for 4%, showed that recent rate rises have at least been having some effect on what is still a very hot labour market.

More significant news for the BoE was to come on Wednesday as Consumer Price Index (CPI) numbers showed that inflation fell to 6.8% from last month’s reading of 7.9%. Although the news takes some heat off the consumer, driven down by falling energy and food costs, marks have to be taken off for sticky core inflation which removes the more volatile sectors of the reading, remaining at 6.9%, unchanged from last month and above consensus expectations of 6.8%. After the news, sterling rose against the US Dollar on increasing bets that the BoE will have to keep hiking rates in to quell what is still the highest level of inflation in the western world.

It is not just those collecting their exam results this week who have reaping the benefits of revision, with economists also being given some cause for cheer from the Federal Reserve on Wednesday. Having predicted that the world’s largest economy would fall into recession the US central bank has now changed their mind. Minutes from their last meeting showed that whilst during May and June, projections "continued to assume" the U.S. economy would be in recession by the end of the year. Their view has now very much changed, citing that "the staff no longer judged that the economy would enter a mild recession toward the end of the year."

However, although the minutes did include some good news for the US economy, under further examination, views on whether more rate hikes are required seem to have split the committee. It looks as though cautionary voices about the effects of continued monetary tightening appeared to play a more prominent role in the debate at last month's meeting. With a "couple" of participants advocating leaving rates unchanged in July. However, the door was left ajar for further tightening if required, with members stating, “their commitment to bring inflation down to the 2% objective," giving a pass for the bank to digest more economic data in the coming months.

This coming week

After a busy few weeks of economic data releases, the coming week has something of a quieter feeling about it as we head into the next long weekend.

The foundations for the next few days, admittedly along with the walls and roof should come in the form of online estate agent, Rightmove’s, Housing Price Index. With house price growth having slowed to 1.7% according to last week’s data, and values in London having fallen on an annual basis, the complementary reading will allow us to further gauge the state of the domestic housing market, especially as rates look set to rise further.

From home addresses to central bank addresses, Tuesday sees a host of US Federal Reserve officials give press conferences, talking about their views on the economy and dropping hints towards future rate policy. We will hear from both Michelle Bowman and Austan Goolsbee during a “Fed Listens” event hosted by the Federal Reserve Bank of Chicago. With a flurry of stronger than expected data emanating from the US in recent weeks, their words should take on added significance as investors mull the dwindling chances of a rate cut before the end of the year.

The middle of the week will bring with a host of Flash Purchasing Manager Index (PMI) data, detailing the results of a survey asking businesses to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries and inventories. Covering both the manufacturing and services sectors for Germany, France, an overall European composite, the UK and US, the readings will give us an invaluable sense of the global economy at a company level.

The end of the week brings us a trip to Wyoming, in particular Jackson Hole, for the annual Economic Policy Symposium the town hosts. The summit will be attended by central bankers, finance ministers, academics, and financial market participants from around the world. The meetings are closed to the press, but officials usually talk with reporters throughout the day. Comments and speeches from central bankers and other influential officials can create significant market volatility and will certainly be watched closely for any hints that the central banks hiking cycle we have seen is coming to an end.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used, you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 18 August 2023.