Doves Drown in Hot Data
A heavy week of UK data has poured an unrelenting torrent of cold water on dovish assumptions that economic activity was suffering too much for cost pressures to be passed on to consumers. UK policy rate expectations accordingly repriced higher, even as the Fed’s shifted down. Hawkish ECB comments made this a European move against the US. Actual policy decisions were unsurprising, with cuts from Australia (-25bp to 4.1%) and New Zealand (-50bp to 3.75%), while rates were held in Indonesia at 5.75%. Next week, should bring another expected cut in Korea and hold in Thailand.
Hawkish news came from UK unemployment, wages, inflation, retail sales and, to a lesser extent, the PMIs, following significant previous upside in GDP. The UK’s only disappointing aspect was the public finance data, but awkwardly high borrowing is no reason to ignore unambiguously hawkish news elsewhere. Some of it is noise or statistical effects. Yet that doesn’t negate the policy relevance when some committee members get wrongfooted by the equivalent downside. Moreover, the 2.1% m-o-m surge in retail sales is oppositely signed to the dovish narrative.
Unemployment’s rising trend was a dovish crutch broken by stability in December, with the turn in underlying changes repeating the hawkish patterns after Jul-23 and Feb-24. An intensification of wage growth to 0.7% m-o-m extended its hawkish trend to return the annual rate to around 6%, meaning no progress on where it started in 2024. Payback in unemployment follows that in GDP, bringing a hawkish alignment at yearend (see UK: Hawkish Alignment As 2024 Ends).
UK CPI inflation jumped 0.2pp beyond expectations to 3% y-o-y in January amid broadly excessive price rises, to the extent that the median annualises at almost 6%. Underlying pressures have been trending higher since easing began, and the headline rate is set to keep rising, albeit with little change before the BoE’s likely cut in May. Demand growth keeps unemployment low, suggesting monetary conditions are too loose for tight cyclical pressures. Indeed, we expect rate hikes in 2026 to reverse premature cuts (see UK Prices Surge Into 2025).
Meanwhile, on the geopolitical front, the commentariat’s misinterpretation of the Trump/Putin phone conversation partly explains why markets are currently ahead of the curve on Russia/Ukraine issues. As long as European leaders continue to deny the state of transatlantic relations, the situation remains uncertain. Given the current circumstances, investors should proceed cautiously, remembering the buyer beware principle (see US vs EU Part 3: Russia/Ukraine).