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This week, Cable traders will have a lot to look at. Of course the big event later in the week is the long anticipated Autumn Budget that is expected to be released on Thursday. It’s not expected to be such a controversial affair this time around, but there are still some pending issues that could shake up the markets. And pending nervousness after what happened last time a new Chancellor announced a spending plan.
The main issue is how will Chancellor Hunt balance the books over an expected shortfall of £60B due to slower economic outlook and increasing costs. What has been leaked so far suggests that it will be a combination of higher taxes and spending cuts. While these measures are generally understood to weigh on economic growth, they are also expected to help with the inflation situation.
It’s stagflation now
What happens with the budget is particularly relevant for the BOE, since it is facing something of a crossroads. After UK GDP came in negative for the third quarter, it’s expected to show the beginning of the prolonged recession the BOE anticipated. The BOE is also forecasting that inflation will remain in the double digits for a couple of months, and won’t start trending lower definitively until the middle of next year. In other words, stagflation.
The question is how will the BOE choose to deal with this situation. One way is to raise rates aggressively to kill off inflation, provoking a hard landing for the economy. Another is to try to rescue the economy and let inflation run hot until productivity can increase and stabilize the currency. Both are politically difficult solutions. Since the BOE and the new Chancellor are on the same wavelength, that could work with the Autumn Budget. An “austerity” budget would work with crushing inflation sooner, and shoring up the government’s finances for an expected growth strategy later. Though, all of that is in theory; practice might be an entirely different matter. But it’s useful to have some insight into how officials are thinking.
The data that could shake things up
The first bit of important information comes out tomorrow, which are labor figures. Here the market’s focus is likely to be on the claimant count numbers, since the employment change and unemployment rates are from previous months. October claimant count is expected to continue its rise and reach 27K, up from 25.5K previously. That would be the largest number of people going on unemployment since March of last year.
Wednesday has what could be the market mover in cable this week, which is the release of October inflation, which is expected to move up to 10.6%, and another multi-decade high. That’s above the previous 10.1%. The BOE doesn’t expect inflation to peak until next year.
To tighten or not to tighten
Where the BOE could see some relief is in the core inflation rate, which is expected to tick lower to 6.4% from 6.5% prior, the first drop in months. This is likely to have more of an impact on monetary policy, since the BOE appears to be worried about tightening too much, which could impact liquidity in the financial sector. With the government looking to cut spending, liquidity could be even tighter.
So, if core inflation starts to move lower (or moves down faster than the market anticipates, like it did in the US), then that opens the very real possibility the BOE could let up on the tightening. That would weaken the pound, and push cable lower.
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