Business research

Markets Today: UK Sticker Inflation Warns Caution

In Australia, earnings data for the 3 months ending May disappointed most forecasters, although the result was in line with the RBA August SoMP (and NAB) forecast.


Today’s Podcast

Overview Serious

  • UK inflation surprises up to 10.1% y/y
  • Bonds sell, led by gilts with UK 2yr +24bp at 2.38%
  • Yields up, dollar up (+0.2% on DXY) and stocks down (S&P500 -0.7%)
  • FOMC minutes less hawkish than expected, USD and US 2-year yield gains
  • RBNZ +50bp at 3.0% as expected
  • Upcoming: RBNZ AU, Orr Jobs

I think it’s serious, it’s getting worse, and I’m in trouble – Gwen Stefani

A surprise rise in UK inflation saw gilts sell off sharply and global bond yields rose more broadly. Stocks are generally lower, the S&P500 -0.7%, amid risk sentiment, while the USD is stronger against most G10 currencies. Short-term US yields and the USD pared some of their earlier gains following the FOMC minutes. RBNZ recorded an OCR increase of 50bps yesterday as expected and raised its forecast OCR trajectory to post a peak of 4.1%, although there was little reaction in rated NZ compared to NZD.

UK inflation stronger than expected at 10.1% YoY vs 9.8% expected, with more to come in October when energy bills are expected to rise by 75%. Food prices rose 2.3% in July and 12.3% year-on-year, with higher food prices also reflected in higher takeout prices. The data showed the magnitude of the price increases, with the core reading excluding energy, food, alcohol and tobacco also higher than expected at 6.2% year-on-year from 5.9% .

Market prices for the BoE now see the Bank Rate above 3.7% by March next year and peaking at 3.74 in May, 28bp higher than yesterday. Yields on the 2-year gilts rose 24 bps to 2.38%, outpacing a 16-bp rise on the 10-year. With the upside surprise refocusing the inflation challenge after some respite in last week’s downside surprise on the US CPI, bond yields were higher globally. The US 10-year rose 8bp to 2.89% and the German 10-year rose 11bp to 1.08%. The implied yield on Australian 10-year futures rose 12 basis points.

The July FOMC minutes saw short-term yields paring their gains in the US. Overall, the market response suggested they were interpreted as somewhat less hawkish than expected. The 2-year yield was around 5bp lower at 3.28% after minutes, but still 2bp higher during the day. To aid this interpretation, there was a repetition of the line that “it would probably become appropriate at some point to slow the pace of policy rate increases. A comment that many participants noted that given long and variable timelines, “there was also a risk that the committee could tighten the policy position more than necessary” also helped. It should be noted, however, that this came immediately after a comment that participants deemed “a significant risk” that inflation could take root “if the public began to question the Committee’s determination to adjust inflation sufficiently. policy direction” and elsewhere in the paper it was noted that “moving to a restrictive short-term policy rate stance would also be appropriate from a risk management perspective.” The minutes “also underlined that it was essential to move to a sufficiently restrictive policy position” and “Some participants indicated that once the policy rate had reached a sufficiently restrictive level, it would probably be appropriate to maintain this level for a while.

Stocks were generally weaker with the S&P500 down 0.7%. Earnings at Target showed a decline in profits as the company said it saw customers cut spending on discretionary items even as revenues rose, with Target’s CEO saying “we continue to see a very healthy American consumer . ,” while Lowe’s earnings beat expectations after strong reports from Walmart and Home Depot on Tuesday. The S&P was still up 17% from its recent low in mid-June. The Nasdaq was down 1.2% while European stock markets were red across the board, with the Euro Stoxx 50 down 1.3%. Previously, Asian stocks were generally higher.

The USD was generally stronger amid higher rates , up 0.2% on the DXY after paring earlier gains of 0.4% after the FOMC minutes. On higher yields, the USD was up 0.6% against the Yen at 135.09, but broadly trended sideways against the Euro, which strengthened 0.1% to 1.0179. The AUD and NZD underperformed on the day, down 1.2 and 1.1%. The Aussie is now back below 70c at 0.6935. The move in the AUD was accompanied by a stronger dollar following UK inflation after only a modest and short-lived reaction to weaker than expected payroll data (see below).

In other data streams, U.S. retail sales were flat, close to consensus for a 0.1% rise, but details showed a stronger release than the title suggests and showed a still healthy consumer despite recession fears. Non-auto sales increased by 0.4% (-0.1% expected) and the control group by 0.8% (0.6% expected). Additionally, there was an upward revision of 0.9% in the control group. Lower gasoline prices during the month contributed to a 1.8% drop in gas station sales, suggesting that consumers invested much of that benefit in other spending.

On the RBNZ, the Bank raised its OCR by 50bp to 3.0%, as universally expected . The RBNZ also slightly raised its forecast OCR path to project a cash rate peak of 4.1% next year (previously 3.95%), and signaling a strong likelihood of 50 basis point hikes at each of the next two meetings in October and November. The tone of the statement was hawkish, as expected, and highlighted that core inflation was still far too high and the labor market too tight. After an initial higher spike within an hour or two of the MPS release, both NZD and New Zealand rates stabilized near where they were before the statement.

In Australia, payroll data for the 3 months ending May again disappointed most forecasters, rising 0.7% q/q and 2.6% y/y vs. 0.8% q/q expected . Although the result is in line with RBA August SoMP (and NAB) predictions. The detail reveals a continued acceleration in wage growth alongside the earlier labor market tightening and shows that wage growth is already above pre-pandemic levels before further acceleration is in prospect. A key indicator, the average private sector wage increase for those who have seen a pay change, reached 3.8%, its highest level since 2012. Overall, this probably remains consistent with the movement of the RBA by 50 bps in September. Market prices have a price of around 42 basis points.


  • AU labor market data for July broadly confirms the strength seen in June’s blockbuster print, although job growth is slowing. The jobless rate would hold steady at 3.5% on a 25k employment gain (NAB 3.5/20).
  • The United States is getting initial jobless claims and the Philadelphia Fed’s trade outlook, which after the Empire Manufacturing Index fell earlier this week may get more attention than usual.
  • RBNZ Governor Orr attends the Finance and Expenditure Select Committee this morning and Orr and his deputies typically engage in media interviews in the days following an MPS

Market price

NAB Markets Research Disclaimer