As the ECB resumed its meetings to discuss interest rates this week after taking a break in August, next week, it will be followed by the US Federal Reserve and Bank of England. Before that, however, the UK will present its latest inflation data, which could influence the decision to be taken at the BoE's rate meeting. The current consensus is for the BoE to raise rates by 25 basis points, while the Fed is expected to hold rates steady.
Tuesday 19.09. 09:00 GMT, Euro Area Consumer Price Index (CPI) YoY (August)
The CPI index measures changes in the prices of consumer goods and services. It covers different types of products, such as food, fuel, transportation services, cosmetics, household goods, clothing, and many others. The purpose of the CPI index is to measure the increase or decrease in the cost of living for consumers. As the CPI index rises, consumers' purchasing costs increase, affecting their money's purchasing power. The CPI index is used to monitor inflation or the overall rise in prices in the economy. It allows us to assess whether prices are rising too fast or too slowly and to determine what economic policy measures should be taken to offset the adverse effects of inflation.
According to the preliminary data for August, the annual inflation rate in the eurozone remained unchanged from July at 5.3%, surpassing the European Central Bank's target by more than 2.5 times and exceeding the market consensus of 5.1%. Notably, the rate of decline in energy prices slowed to -3.3%, compared to July's -6.1%.
Inflation rates decelerated in various other categories, including food, alcohol, and tobacco, dropping to 9.8% from 10.8%. Additionally, non-energy industrial goods saw a decline in inflation from 5.0% to 4.8%, and services also exhibited a slight dip from 5.6% to 5.5%.
On a monthly basis, consumer prices experienced a 0.6% increase in August, as per initial estimates. This reading exceeded the consensus of 0.4% and was considerably higher than the previous month's -0.1%. Meanwhile, the core inflation rate, an essential indicator that filters out the volatile influence of food and energy prices, followed the anticipated cooling trend, declining to 5.3% from July's 5.5%.
Source: Tradingeconomics.com
If the reading is higher than expected, inflation is higher, possibly favouring a fall in the EUR. Meanwhile, it is also a stimulus for the ECB to raise interest rates and reduce the money supply, causing an increase in the EUR. If the reading is lower than expected, it may give the ECB an argument to stop its policy of raising interest rates.
Impact: EUR, STOXX, DAX and other indices
Wednesday 20.09. 06:00 GMT, UK Consumer Price Index (CPI) YoY (August)
In July 2023, consumer price inflation in the United Kingdom experienced a decrease, falling to 6.8% from 7.9% in June. This reduction brought the inflation rate to its lowest point since February 2022, aligning with market expectations. The primary driver of this decline was a significant decrease in fuel prices.
Furthermore, the core inflation rate, which excludes volatile components like energy and food, remained steady at 6.9%, the same as June's reading. However, it is still above the Bank of England's target of 2.0%, allowing the central bank to maintain its ongoing tightening policy.
Transportation prices continued to decrease (-2.1% compared to -1.8% in June), primarily due to a substantial 24.9% drop in fuel and lubricant costs. Additional downward pressure on inflation was observed in categories such as food and non-alcoholic beverages (14.8% vs 17.3%), furniture and household goods (6.2% vs 6.5%), recreation and culture (6.5% vs 6.7%), and miscellaneous goods and services (6.0% vs 6.5%).
On a monthly basis, consumer prices decreased by 0.4%, marking the first decline since January. This result was slightly above the market consensus, which had predicted a 0.5% decrease, and followed a 0.1% increase in June.
Source: Tradingeconomics.com
If the reading is higher than expected, inflation is higher, which may favour a fall in the GBP. Meanwhile, it is also a stimulus for the BoE to raise interest rates and reduce the money supply, causing an increase in the GBP. If the reading is lower than expected, it may give the BoE an argument to stop its policy of raising interest rates.
Impact: GBP, FTSE 100, and other indices
Wednesday, 20.09. 18:00 GMT, US Interest Rate Decision
Federal Open Market Committee (FOMC) members vote on whether to raise, decrease, or leave interest rates unchanged. These decisions affect the currency's value, and interest rate policy is among the key instruments to regulate inflation. Investors closely follow central banks' decisions and changes in the level of interest rates, as this information can be crucial to their trading strategies. The currency value tends to rise when interest rates are high, as they attract investors seeking higher returns on their deposits. Conversely, when interest rates are low, the currency's value tends to fall as investors look for other places to invest their money.
During his address at the Jackson Hole Symposium on 24-26 August 2023, Federal Reserve Chair Jerome Powell highlighted the potential need for the US Federal Reserve to implement further interest rate increases to effectively manage inflation. He emphasised that policymakers are carefully monitoring signs of declining inflation alongside the economy's strong performance and the labour market.
Simultaneously, Powell indicated that the Fed could opt to maintain interest rates at their current levels during the upcoming meeting in September. This decision would be contingent on officials' assessment of incoming data and the evolving economic outlook and associated risks. Powell also reiterated the central bank's commitment to maintaining a monetary policy stance that is appropriately stringent to guide inflation toward the targeted 2 percent. He emphasised that policymakers are exercising caution in deciding whether to continue the tightening process, or to keep the policy rate stable while awaiting further data.
In July 2023, the Fed Funds rate was increased by 25 basis points to a target rate of 5.25% – 5.50%. According to the CME FedWatch tool, there is a 93% chance that the interest rates would be left unchanged in the September meeting. It is in line with the Trading Economics forecasts of a 5.50% interest rate by the end of this quarter. In the longer term, the US Fed Funds Rate may be expected to trend around 4.75% in 2024 and 3.75% in 2025.
Source: Tradingeconomics.com
A higher-than-expected rate may be positive for the USD and negative for the stock market, while a lower-than-expected rate may be negative for the USD and positive for the stock market.
Impact: USD, S&P500, and other indices
Thursday, 21.09. 11:00 GMT, UK Interest Rate Decision
During its August 2023 meeting, the Bank of England decided to raise its policy interest rate by 25 basis points, reaching a level of 5.25%. This move marked the 14th consecutive interest rate increase, pushing borrowing costs to their highest since 2008. The central bank's primary aim is to combat the persistent issue of high inflation.
The decision received a 6-3 majority vote from the Monetary Policy Committee, with two members advocating for a consecutive 50 basis points increase and one member in favour of keeping rates unchanged. Policymakers acknowledged that the substantial rise in interest rates throughout the tightening cycle has created a restrictive monetary policy environment. However, they also emphasised their commitment to maintaining a sufficiently restrictive Bank Rate for an extended period, intending to achieve sustainable inflation return to the 2% target in the medium term.
Additionally, the central bank anticipates a substantial decrease in inflation to around 5% by the end of the year, a faster decline than initially projected in May, with the aim of reaching the 2% target by the second quarter of 2025. A 25-basis point increase may be expected in the upcoming BoE meeting, raising the key interest rate to a 4.50% level, which, according to Trading Economics forecasts, is also the expected level in 2024 before falling to 3.25% in 2025.
Source: Tradingeconomics.com
A higher-than-expected rate may be positive for the GBP and negative for the stock market, while a lower-than-expected rate may be negative for the GBP and positive for the stock market.
Impact: GBP, FTSE 100 and other indices
Stocks to watch
FedEx (FDX) announcing its earnings results for the quarter ending on 08/2023. Forecast EPS: 3.7. Positive earnings surprise in 5 out of the last 10 reports. Time: Wednesday, September 20, after the market closes.
General Mills (GIS) announcing its earnings results for the quarter ending on 08/2023. Forecast EPS: 1.09. Positive earnings surprise in 8 out of the last 10 reports. Time: Wednesday, September 20, before the market opens.
FactSet Research (FDS) announcing its earnings results for the quarter ending on 08/2023. Forecast EPS: 3.5. Positive earnings surprise in 7 out of the last 10 reports. Time: Thursday, September 21, before the market opens.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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