Key events in developed markets next week

Financial markets are now fully pricing in six rate hikes from the Federal Reserve following the very strong jobs data for January and the fact inflation is at a 40-year high. Fed funds futures contracts imply a better than evens chance of a 50bp hike, with St Louis Fed President James Bullard seemingly on board. Other officials are more cautious though. What can interest rate increases do when inflation is primarily the result of labour market shortages, supply chain strains and production bottlenecks? However, taking some of the strength out of the economy can allow a better demand-supply balance. We will be closely following the Fed commentary over the coming weeks to see how balance of thought is shifting within the Federal Open Market Committee.

Of course, the data could yet have an influence. The highlights next week will be retail sales and industrial production. Retail sales have been soft in recent months, but auto sales jumped in January and should ensure a decent overall gain. However, outside of this component sales growth is likely to be softer given that the Omicron variant clearly had a detrimental impact on consumer behaviour with a notable drop-off in restaurant dining, air passenger numbers, and mobility in areas of retail and recreation. Should sales come in softer than hoped it could reignite fears of a potential flat to even negative 1Q GDP reading. Industrial production should be OK, with the cold January set to boost utility output as people tried to heat their homes. The ISM survey also points to ongoing growth.

The Bank of England appears on track to hike interest rates at both the March and May meetings, and there’s not much in next week’s data calendar that’s likely to alter that timeline.

We expect another notch lower in the unemployment rate, which now sits virtually where it was pre-virus – albeit beneath the surface employment is still some way below, while the number of working-age people who have left the labour market has risen. Elsewhere, the consensus for UK inflation looks a touch high, and in fact we expect headline CPI to tick slightly lower. However, this is only a temporary blip. Inflation is set to peak close to 7% in April when the electricity price hike comes through.

Finally, we expect a decent bounce-back in retail sales after December’s fairly shocking decline. At the time that appeared to be partly the consequence of people shifting Christmas shopping into October and November relative to past years. Still, the outlook for retail looks difficult this year amid the rising cost of living and an ongoing rotation away from goods spending towards services.