UK GDP Eyed As BOE Ponders Rate Hike

It’s been another turbulent session in China overnight, with regulators and the central bank once again being forced to step in and shore up the market which was on course for another shocking decline on Tuesday. In Europe today, focus will be on the U.K. where the preliminary second quarter GDP reading could shed some light on whether the Bank of England is right to suddenly be so hawkish on interest rates.

The Shanghai Composite opened around 4% lower today following an 8.5% decline on Monday in what threatened to be another awful day for Chinese investors. The People’s Bank of China responded by injecting 50 billion yuan into the markets via reverse repurchase agreements in order to ensure there remained plenty of liquidity while hinting at the possibility of further monetary easing. Meanwhile, the securities regulator claimed it would be prepared to increase its purchasing of stocks in order to offer support to equity markets, while reiterating its position on anyone aggressively shorting the markets.

The Chinese index has recovered somewhat to trade only 1% lower but given the short-term nature of previous attempts by the central bank and regulator, I am far from confident that the markets won’t go into freefall again in the afternoon session.

Preliminary second quarter U.K. GDP data will be the highlight of the morning session in Europe, thanks in no small part to the BoEs sudden change of heart on the potential timing of the first interest rate hike. Until recently, the middle of next year had been touted as the likely lift-off point for rates but recent interviews with members including Governor Mark Carney suggest that is no longer the case.

It is no coincidence that suddenly we’re seeing different policy makers making a case for an earlier than previously anticipated rate hike. Clearly, they see upside risks to inflation earlier than previously thought which could be explained by the recent rise in earnings. In a low inflation environment driven primarily by lower oil prices, it is only sensible to anticipate spending will rise bringing larger inflationary pressures with it.

While certain areas of the U.K. economy may still be facing strong headwinds, most notably the country’s exporters being hit hard by the stronger pound, it’s the services sector that makes up around two thirds of output. This is the component of today’s GDP figure that I expect will drive a large part of the 0.7% quarterly rise we’re expecting.

It’s worth noting that the Federal Reserve will begin its two day monetary policy meeting today, ahead of its decision and statement tomorrow. This may prompt increased caution and risk aversion from investors due to the large amounts of volatility that we can see in the markets around the announcement.

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Commodity markets remained under pressure again on Monday as Brent crude fell to a more-than four month low, while gold slipped back below $1,100. While the decline can’t be attributed to dollar strength on this occasion, given that it suffered its worst day this month, it is likely to weigh heavily on commodity prices going forward. Further turmoil in Chinese markets isn’t going to help matters either.

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Written By: MarketPulse