My Setup CPI m/m vs Breakout Strategy

My Setup CPI m/m vs Breakout Strategy

OVERNIGHT

Asian equity markets were in negative territory ahead of today’s key US inflation figures, following the US S&P 500 index closing more than 2% lower which erased most of its recent gains. Sentiment in Asia was weighed by a confluence of factors including reports of rising Covid cases in China, concerns around the currency market and mixed results in the US midterm elections. In the UK, the RICS housing survey confirmed weaker price expectations and activity in the sector. The survey’s net balance for new buyer enquiries fell to -55% in October from -36% in September. Going forward, it was noted that “the settling down in financial markets could provide some relief”.

THE DAY AHEAD

US CPI inflation and a raft of central bank speakers, particularly from the US Federal Reserve but also the BoE’s Ramsden, will be the economic focus for today. Tomorrow morning at 07:00 GMT also sees the release of official UK GDP for September and Q3, with the data expected to confirm a contraction and the likely start of a technical recession. 

The rise in US inflation has been skewed more towards domestic price pressures compared with Europe. Last week’s labour market report showed annual average hourly earnings growth slowing but remaining uncomfortably high for the Fed. Core CPI excluding the volatile food and energy components has also surprised on the upside in the past two months, rising to a forty-year high of 6.6% in September. For October, we expect core CPI inflation to edge up to 6.7%, above consensus forecasts, but the headline rate to fall slightly to 8.1%. 

In contrast to the US and the Eurozone where Q3 growth rates were positive, the UK economy is expected to have contracted relative to the prior quarter. Part of the reason lies with the extra Bank Holiday in September for the Queen’s funeral. Nevertheless, the monthly GDP reports for July and August had already highlighted slowing momentum. We forecast a fall in September GDP of 0.5%m/m, resulting in a decline in Q3 of 0.5%q/q. As the chart below shows, the BoE expects growth to continue to contract in Q4 and at least to the end of 2023, implying that a technical recession has already begun.

MARKETS

The US dollar rallied yesterday, led by safe-haven demand, but was broadly steady in Asia. The pound fell below 1.14 against both the US dollar and the euro. US Treasury and UK gilt yields fell yesterday, but the former was little changed overnight. Brent crude oil was lower for a fourth day.