UK CPI to Cast Further Doubt on Near Term Hike

European indices are on course for a slightly weaker open on Tuesday, taking a negative lead from Asia following some more disappointing trade figures from China. The focus will soon shift to the U.K. though with the latest inflation figures due out and we’ll also hear from the new external member of the Monetary Policy Committee Gertjan Vlieghe, who will be grilled by the Treasury Select Committee.

Chinese trade figures have been a source of concern for some time now, with both dollar-denominated exports and imports having contracted for most of the year when compared to 12 months previous. The biggest concern is the huge decline in imports and while a large part of this can be attributed to the collapse in commodity prices and should therefore ease of in the coming months, there does also appear to be a domestic demand problem as well.

Many countries in the region rely heavily on sales to China so unless this demand picks up in the coming quarters, not only are we going to see below 7% growth in the world’s second largest economy, it’s going to decline sharply for many of its trade partners as well. More Chinese data will be released as the week goes on which should give a better idea of how the country is coping in these challenging times. We’ll also get the third quarter GDP reading on Monday which is expected to slip below 7% for the first time since the first quarter of 2009.

The U.K. will release inflation data for September later on this morning and just as the Bank of England warned last week, we’re expecting no change in prices compared to the same month last year. The core reading which largely strips out the temporary effects of the commodity price declines is expected to rise to 1.1%, still well below the BoE’s 2% target. Inflation is now expected to remain lower for longer which has been taken as a sign that it will actually be the end of next year before rates finally rise, although that may change once the impact of lower commodity prices wears off and if wages continue to rise as they have been.

We’ll get the views of the newest addition to the MPC, Gertjan Vlieghe, when he speaks before the Treasury Select Committee today. The bulk of the questions are likely to focus around his ties to former employers Brevan Howard, a hedge fund where he was recently a partner. There is still likely to be some probing into his personal views on interest rates though which should provide some insight into whether he intends to continue voting against a rate hike or join his colleague Ian McCaffery in voting in favour. McCafferty is also due to testify and could provide further arguments to support his call for a rate hike again this month.

ZEW economic sentiment figures will also be released this morning for Germany and the eurozone. These figures have softened dramatically recently, particularly in Germany which conducts a lot of trade with China and other countries in the region that are currently experiencing a slowdown. The Volkswagen scandle is likely to weigh further again this month given the importance of the motor industry to the country’s export market.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam