Last week’s UK data and MPC commentary overwhelmingly pointed towards a rate cut from the Bank of England.
Fixed income markets behaved accordingly, with the implied probability of a rate cut rising from about 5% in the first week of January to well above 70% on Friday in the wake of December’s poor retail sales data.
Data to look out for:
- Monday 13th: UK GDP contracts 0.3% in November vs 0.0% expectation. Gertjan Vlieghe tells the Financial Times on Sunday he will vote for a rate cut barring an “imminent and significant” improvement in macro data.
- Wednesday 15th: December Consumer Price Index data shows year on year inflation falling to 1.3% vs expectations of 1.5%. Michael Saunders – historically a dovish MPC member – argued in a speech that rates should be cut sooner rather than later to maximise the impact.
- Friday 17th: December Retail Sales report shows sales falling 0.8% vs expectations of 0.8% growth, leaving Q4 sales down 1% compared to the previous quarter, the worst print since Q1 2017. Retail sales have failed to grow for five consecutive months, the longest such run since records began in 1970.
Chart: OIS-Implied Probability of Rate cut rises on bad data and dovish MPC comments
Friday’s PMI Prints now last barrier to a rate cut from MPC
After Friday’s dismal Retail Sales figures, the MPC is now in a real dilemma. Cutting rates now runs the risk of an investment boom in Q1 forcing a quick retreat.
However, should the much hoped for investment pickup not materialise, a 25 basis point cut may prove too little, too late, and the MPC will find itself uncomfortably close to the negative interest rate vortex that has engulfed the Eurozone and Japan.
The MPC cut rates in response to a crash in survey optimism after the 2016 EU referendum, only to see business sentiment quickly recover and ultimately reverse its decision, raising the bank rate back to 0.75%, where it remains today.
However, the recent slowdown in the economy has been confirmed by hard data such as GDP and retail sales, making the case to ease more compelling.
In this context this week’s UK data will take on even more significance. November labour market figures, released on Tuesday, may well contain some nasty surprises given the GDP miss and fall in retail sales seen in Q4.
As lagged data, however, it may be less important than Friday’s PMI survey results, which will relate to January. The median forecast submitted to Bloomberg is for the Composite PMI index to rise to 50.5 after two months of contraction – but such a modest increase may not be enough to give the MPC serious cause for hesitation in the face of last week’s releases.