After a summer lull, the state of the UK economy will comes back into focus this week with jobs data, inflation, interest rates, and retail sales covering off Tuesday to Friday data releases. This follows better-than-expected GDP data on Sept. 11.
This week UK stock markets went into reverse as rising oil prices and an interest rate rise in Europe rattled investors. UK bond yields moved higher, with the 10-year gilt yielding 5.34% at the end of the week and the 30-year bond threatening to push above 6%.
In This Week’s Markets Brief
- Financial markets are not expecting the Bank of England to change interest rates on Thursday, but the pressure is building for it to take action on inflation.
- Food prices are in focus again and will be a closely watched component of the UK CPI data.
- Hyperscalers are raising money in London, but are in competition with high-yielding goverment debt.
- The UK consumer is under pressure again, as revealed in recent retail earnings. Official data will give one side of the story, bellwether retail stock Next will provide another
Could the Bank of England Surprise With an Interest Rate Increase?
Investors have a tricky job on their hands trying to predict what the Bank of England will do next as it takes in a patchwork of fresh information.
Policymakers will have had early sight of UK Consumer Prices Index inflation data for August, due out on Wednesday. FactSet consensus has headline inflation at 3.2% for this period, up from the 2.9% recorded for the 12 months to July.
Within this data set, food prices will once more be in the spotlight after a warning from the UK’s Food & Drinks Federation that food inflation will hit 4% by the end of the year, and could move to 6.4% next year.
Financials markets suggests the Bank’s latest decision, the last before the Autumn Budget, will be a rate hold, with increases to follow in November and February.
Will the Bank of England wrongfoot markets? It’s happened before: notably in November 2021 when it voted to hold rates when markets expected a hike. Perhaps likelier this time around will be a repeat of the close vote seen in August last year, when the Bank’s MPC voted by a slim majority to cut rates after the first vote was inconclusive. At the last meeting in July, three members voted for a rise in rates, with six voting for no change. Will more committee members, including the governor, Andrew Bailey, switch sides this week?
Bailey appeared before MPs on Sept. 8 and was asked why policymakers couldn’t give more “forward guidance” about the future direction of interest rates. He said that markets and the public often misinterpret rate-setters’ public communications as predictions.
“I sometimes get quite frustrated privately that a lot of them are interpreted as unconditional statements, but they are conditional because the world is uncertain,” he said.
“What I want to dispel is the idea that we’ve really got a secret plan, we know where we’re going to go to and it’s unconditional,” he added.
AI Bonds Jostle With Government Debt For Investor Cash
Amazon AMZN entered the sterling bond market for the first time on Sept. 9, becoming the latest hyperscaler to extend its AI financing to Britain. The bond sale raised a total £4.25 billion across three-, six-, 12- and 19-year maturities, according to LSEG data. The offering was nearly three times oversubscribed.
The e-commerce giant follows Alphabet GOOG into the UK market, after the Google owner issued £5.5 billion sterling bonds in February, including a rare 100-year bond.
It comes as part of a growing trend of the hyperscalers diversifying their funding streams as they build out AI infrastructure.
The AI bond market is expanding at pace, with Bank of America analysts estimating roughly USD 300 billion a year could be issued to fund the AI buildout over the next four years.
Henrietta Pacquement, fixed income COO and head of sustainability at Allspring Global Investments, says AI-related bonds are competing not just in the corporate bond market, but against longer-dated government debt, where yields have been rising recently.
“These are very large issuers, and because they have been issuing long-dated debt, they face considerable competition for capital,” she said at a media briefing in London.
Pacquement says a notable widening in credit spreads on hyperscaler debt—the extra return that a corporate bond pays over a government bond—has taken place since the start of the year.
Amid a heavy supply of long-term debt—and fears over hyperscalers’ debt and the risks of these ventures—corporate issuers are having to offer higher yields to investors, despite these companies’ investment grade credit ratings.
“In some cases, we are talking about approximately 50 basis points of spread widening since the beginning of the year, comparable with moves seen in high yield,” she says.
UK Consumer in Focus as Retail Sales Figures Due
Friday’s retail sales figures will round off a heavy week for economic data releases.
In corporate news, housebuilder Barratt Redrow BTRW and defense contractor Babcock International BAB report earnings on Wednesday.
FTSE 100 retailer Next NXT, often viewed as a bellwether for UK consumer sentiment, reports its half-year results on Sept. 17.
The release, alongside the retail sales data, will reveal how the consumer sector is coping with inflation and cost of living pressures. UK retail sales volumes fell 0.5% in July, according to the ONS.
“The UK consumer continues to struggle with the cost of living, as persistent inflation caused by high energy and food prices pressures wallets,” says Guy Thornewill, direct equities director at Canaccord Wealth.
He says the pressures are apparent in recent retail company earnings with Primark-owner Associated British Foods ABF reporting soft sales last week.
“John Lewis Partnership also reported lower sales, and although its food retail business Waitrose saw higher sales year over year, profits were crimped by higher costs due to the summer heatwaves. In short, the outlook for UK retailers remains tough,” he says.
