Push and Pray Pricing
Another week of macro data has failed to match pains consistent with pricing for a rapid and deep cutting cycle. UK activity remains resilient, with GDP growth tracking beyond its potential pace for three consecutive quarters and the unemployment rate declining. That’s the opposite of a disinflationary recession. Meanwhile, US inflation slightly exceeded expectations, with core CPI and PPI inflation back to 0.3% m-o-m. Yet market pricing remains dovish far beyond the fundamentals.
More specifically, UK unemployment extended its decline in July to reach 4.14%, 0.2pp less than a year earlier, despite a 0.1pp rise in the long-term rate, amid resurgent employment. Redundancies have fallen towards historic lows while vacancies are relatively stable, suggesting there isn’t labour hoarding to clear before new worker rights arrive. Slowing wage growth can reassure the BoE to cut again in November. However, a lack of labour market slackening could still necessitate a policy reversal in 2025 (see UK: Unemployment Lower Than Last Year ).
UK GDP was unchanged for the second consecutive month in July, disappointing expectations as it is quickly decelerating back to its trend after recovering H2’s shortfall. Growth in the PMI-consistent sectors has slowed abruptly, aligning with residual seasonality that should reach a trough nearby within the next two months. However, three quarters of GDP growth at least matching potential corroborates unemployment falling over the year (see UK: GDP Quickly Decelerating To Trend ).
UK inflation on Wednesday is the final significant domestic data release before the BoE’s decision on Thursday. We forecast a 6bp rise in the CPI rate to 2.3% y-o-y, which is 0.1pp above the current consensus. That may be because of accommodation services (hotels), which were shockingly weak this July, setting up for a rebound, whereas prices surged in July 2023, creating space for an August decline. Positive payback also fits my anecdotal experience of equivalent UK city hotel prices almost doubling between my July and August trips in 2024.
This week's monetary policy focus was the ECB and its unsurprising unanimous 25bp deposit rate cut, which provided little guidance on what’s next. It was not a no to cutting in October, but that still seems unlikely. Forecasts are the current communication tool, and stability won’t justify a panicked acceleration of easing. We still expect the next 25bp ECB rate cut in December. Although risks skew dovishly for October, a historically optimistic call for productivity booming beyond profit norms presents hawkish risks to the ECB’s 2025 forecast (see ECB: Noctober With Shifting Risks ).
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Next week is primarily about the Fed. Market participants appear to be attempting to bully the Fed into cutting deeper. If a fast and deep cutting cycle were required, it would make sense to get started and not disappoint expectations. But this is not a normal cutting cycle. Nothing has broken in markets. There is no recessionary regime. Moreover, steeply inverted yield curves no longer risk becoming self-fulfilling without aggressive action to get ahead of it because banks hold ample deposits, avoiding the need to borrow short in wholesale markets to lend for longer terms. Hopes that dovish press previews reflect underhand policymaker guidance belie that pricing is also split, and former officials enjoy a lively public debate about cutting 25bp over 50bp.
Either way, the BoE is unlikely to cut in September, having barely scraped together support to cut in August. Even some members who backed the 5:4 decision saw it as finely balanced, meaning they effectively frontloaded monetary easing beyond the evidence. Unemployment’s drop since then, plus mounting upward pressure on wages from the public sector and likely minimum wage rises, mean there is a negligible case to significantly accelerate easing by going again in September. Indeed, we expect only one MPC member to dissent in favour of another 25bp cut this month.