Week Ahead – Inflation Data May Keep Pound in the Firing Line, China GDP on Tap

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Inflation will dominate the market theme again in the coming week as, after the United States, it will be the turn of others to face their inflation demons. With the risk of recession growing by the day but not a lot changing with the inflation dynamics, UK CPI figures will attract the most attention, while a modest pickup in Japan is unlikely to spur any policy shifts at the Bank of Japan. China will also come under the spotlight as it releases GDP estimates for the third quarter and its leaders convene for the National Congress of the Communist Party.

Pound battles soaring inflation and budget mess

The pound has been rocked to its core by the recent loss of investor confidence in the UK government’s macroeconomic policy credentials. The Bank of England’s intervention to address the distress in the gilts market threw a much-needed lifeline to the currency but that support is set to end on October 14. Hence, come Monday, there is a very big risk that bond yields could surge again should investors decide to dump UK bonds and other assets. Without BoE support, a sharp jump in gilt yields could trigger a collapse in pension and other liability-driven investment funds. Although it’s unlikely that the Bank would allow this to happen, any fresh turmoil would again undermine sterling.

Even if the week gets off to a calm start, there could be trouble for the pound on Wednesday when the latest CPI numbers are due. UK inflation moderated slightly to 9.9% y/y in August but is forecast to edge back up to 10.1% in September. The core rate is also expected to rise again to 6.4% y/y.

However, whether inflation is a few percentage points above or below the forecasts, it won’t change the overall picture that consumer prices are expected to continue rising well above the Bank of England’s 2% target over the next year as the risks are to the upside. Energy bills are set to go up in October and the pound’s recent devaluation is certain to push up import costs.

The BoE will probably ramp up the pace of its rate hikes in November but no amount of catchup to the Fed will be able to offer meaningful support to sterling when the economic outlook for Britain is so much gloomier than America’s – something that has been exacerbated by Prime Minister Liz Truss’s dangerous economic policies.

Friday’s retail sales data for September are not anticipated to inject much optimism either. But there are increasing signs that Truss is about to abandon the most reckless parts of the tax cuts announced in the mini budget after sacking Chancellor Kwasi Kwarteng. This would help restore some confidence in the UK’s finances and stabilize the pound.

Chinese GDP rebound may not allay slowdown worries

Another country where there’s been a marked deterioration in the outlook lately is China. Nevertheless, with fewer large-scale lockdowns in the September quarter compared to the prior three months and a rebound in consumption, GDP is expected to have expanded by 3.5% over the quarter, while year-on-year growth is projected at 3.4%.