Here they come

Easing inflation and slowing wage growth are paving the way for the Bank of England to continue cutting interest rates. And there was further evidence that cuts to date are helping rate-sensitive sectors like housing. Retail sales are also climbing, suggesting consumers are ready to deploy some firepower to support the recovery. Meanwhile, the European Central Bank trimmed its benchmark rate to 3.25% in response to cooling growth and progress on reducing inflation. In China, the 5% GDP growth target looks within reach, particularly with evidence that stimulus measures look to be gaining some traction.

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What’s the latest in the UK?

Easing inflation reinforces rate cut expectations. Undershooting the MPC’s projection and the consensus, headline UK inflation fell to 1.7% in September, dropping below the 2% target for the first time since early 2021. Likewise, core inflation came in lower than expectations, goods prices continued their six-month deflation trend, and perhaps most promisingly, services inflation dropped to 4.9% following a rebound to 5.6% in August. Whilst heavily attributable to erratic factors such as motor fuel and airfares, there’s enough progress to enable the Bank of England to continue cutting rates. A second interest rate cut in the current cycle is widely believed to be coming in early November. Read more here.

Falling wage inflation also keeps the BoE on track for November rate cut. UK labour market data for August shows average weekly earnings growth (excluding bonuses) slowed to 4.9% year-over-year, matching the consensus.  The unemployment rate also fell to 4.0% - from 4.1% in July - bolstered by a higher-than-expected pace of hiring according to the labour force survey. Three-month-on-three-month employment growth was 373k, beating the consensus estimate of 240k. On the other hand, PAYE data from HMRC shows payroll employee numbers have remained broadly flat over the last three months. Vacancies have now returned to pre-covid average levels, and redundancies remain historically low. Mixed signals from labour market data means policy makers can’t put too much emphasis on the monthly data, but the overall trend is still consistent with a resilient but gradually loosening labour market. Read more here.

Rate cuts continue to feed through to the housing market strongly. The official house price index rose by 1.0% month-to-month in August. Homebuyers have been benefitting from falling interest rates for three months, as markets anticipated the Bank Rate cut in August. The average quoted interest rate on a 2-year fixed rate 75% LTV mortgage was 4.6% in September, down from a peak of 5.2% in May. But the ONS measure of house prices collects prices at the completion stage, rather than approval, so the rate cut in August will only feed through with a lag. Falling borrowing costs will continue to boost the pries in the coming months. Meanwhile, the construction PMI’s housing activity index rose to 54.3, its highest level since March 2022, suggesting that housing supply is also responding to falling rates. Read more here.

Retail sales beat expectations as consumer spending remains resilient. UK retail sales saw a 0.3% increase in September, exceeding the consensus and marking the third straight month of growth. Year-on-year, sales rose 3.9%, well above the 3.2% consensus. This boost was driven by strong demand in the tech sector, particularly for the new iPhone, while supermarket sales fell due to bad weather and households continuing to cut back on non-essential items. Falling inflation and robust wage growth have supported greater purchasing power, fuelling hopes of continued retail momentum for the final quarter, retailers’ busiest period. Read more here.

Lessons from the pandemic. MPC member, Swati Dhingra, highlighted the impact of exceptional circumstances, including the COVID-19 pandemic, energy price shocks, and geopolitical tensions, which led to significant data uncertainty. It critiques a reliance on model-based forecasts, noting that forecast errors were persistent across various central banks, regardless of their approaches. Research suggests that rising inactivity did not drive wage inflation, and the complexities of global supply chains challenge traditional inflation metrics. Ultimately, it calls for innovative data interpretation to navigate future uncertainties and enhance forecasting accuracy, especially given the increasing vulnerabilities posed by geopolitics and climate change. Read more here.

What’s the latest in the Eurozone?

All agree to lower rates to boost the eurozone economy. In dovish tones, the ECB unanimously agreed to ease money policy last week, by 25pbs – taking the key rate to 3.25%. The Governing Council felt disinflation is ‘on track’, while economic growth has cooled and, at 15.7%, the savings rate is too toppy – consumers remain cautious.  Much of this applies to the UK of course, including the expected energy-driven rise in inflation. We even currently share the same inflation rate (1.7%). Central banks tend to move in packs. So markets expect the Bank of England will soon follow. Read more here.

Germany’s economic outlook is looking brighter. October’s ZEW Economic Sentiment Index jumped 9.5 points from September to 13.1, marking the first improvement after 3 consecutive months of decline. This optimism is likely fuelled by expectations of stable inflation, ECB rate cuts, and a strengthening export market, particularly in the automobile and machinery sectors. Economic expectations have also improved significantly for the eurozone, US and China. However, concerns about the current economic situation in Germany linger, with sentiment scores falling to -86.9 points. Overall, despite a welcome upswing in future expectations, negativity about the current economic landscape dominate. Read more here.

What’s the latest in China?

China’s 5% growth target moves into view. China’s economy expanded by 4.6%y/y during the third quarter, bringing growth so far this year to 4.8%. More encouragingly, data for the latter part of the quarter suggest the significant dose of stimulus that’s been announced of late might be helping put a floor under the economy. Retail sales growth accelerated during September with government subsidies for upgrading consumer goods sparking a rebound in home appliances and car sales performing better, too. But the data also showed that prices fell across the economy for the sixth straight quarter – the longest deflation streak since 1999 and underscoring the work that stimulus still has to do. Read more here.