Upcoming UK Data to Make or Break BOE Hike Case After Surprise GDP

After the better-than-expected preliminary GDP figure last week, the BOE was given the green light for more hikes. But just how much could be up to the trove of data coming out this week?

Good Jobs Numbers are Bad for the BOE

Last week's preliminary GDP coming in above expectations helped alleviate one of the major obstacles for the BOE's campaign to get inflation down: If rates rise too much, the economy might tip over into contraction. But household consumption remained robust, with even industrial production above expectations. However, consumer activity might be at the expense of higher inflation. Average earnings are expected to be reported at 7.1% in July, increasing from the 6.9% in June, potentially exacerbating those second-round effects BOE Governor Andrew Bailey has been worried about.

A strong labour market could be the impetus for the BOE to keep the pressure on the money supply. On Tuesday, it's expected that the ONS will report that the unemployment rate has remained steady at 4.0%, below what many deem is the structural level, helping to push up wages. The claimant count is expected to drop by 30K compared to the 25.7K increase reported in the prior month. Fewer Britons are seen filing unemployment claims as the economy continues to grow.

The Key Data of the Week

In what might be a good sign for the consumer in the short term, Wednesday's forecast is for inflation to be reported below jobs growth for the first time since the summer of 2021. With annual headline CPI change expected to fall to 6.9%, that would be below the expected growth in average wages of 7.1%. While this might continue to support the economy and bring up hopes that the UK might manage a "soft landing", it means wage prices are consolidating way higher than the BOE's target.

There is always the possibility that inflation will fall below expectations, like in the prior month. But what matters for monetary policy is the core rate, and that's expected to only come down to 6.8% from 6.9% prior. Economists have been warning that the full effects of rate hikes have yet to be felt on the full economy, but with core rates more than tripling the target and the economy moving away from stagnation, rates left untouched will be a hard case to make at the BOE. Meanwhile, Footsie continues to benefit from the shift in global expectations for growth from China to the US since most of its constituents are major international firms. But, the prospect of more rate hikes, if the jobs numbers and inflation figures don't soften, could weigh on homebuilders and banks again.

Double Bottom Keeps Record Highs Open

Without a break above 7730 or below 7200, clarity in UK 100’s direction will remain blurry as the prices appear consolidating. A double-bottom formation at the market low has raised the chances of revisiting record highs, with 7940 as the last resort for bears. Conversely, a slide under the short-term support at 7430 may see that formation break, opening the door to fresh 2023 lows.

Source: SpreadEx / UK 100

Key Takeaways

UK's preliminary GDP has allowed the BOE to consider more hikes while raising concerns about potential inflationary pressure as robust consumer and industrial production data could lead to higher inflation. Moreover, average earnings are expected to increase in July, potentially exacerbating inflation concerns. A strong labour market, with a steady unemployment rate and fewer unemployment claims, could further justify monetary tightening despite inflation being forecasted to slow lower than jobs growth. The core inflation rate is expected to remain high, though, making it difficult for the BOE to justify keeping rates untouched. The FTSE-100 index continues to benefit from global growth expectations, but the prospect of further rate hikes may hurt homebuilders and banks.