Week ahead: Just how hot is UK inflation running?

British inflation data is the week’s key release as we ask how hot can it run? We’re also preparing for a fresh round of PMI data to gauge Omicron’s impact. It’s earnings season too, so get ready for the earnings report deluge that’s about to hit Wall Street. 

UK inflation insights with CPI report 

First up is the UK’s latest Consumer Price Index data. 

Hot inflation from the December report, detailing November’s numbers, has already forced the Bank of England’s hand. The BoE’s Monetary Policy Committee announced back towards the end of 2021 rates would rise to 0.25%. 

Inflation is running hot. Much like the US report from last week, we’re waiting to see how hot it ran in December 2021. 

November’s data showed a 5.1% year-on-year rise in the CPI. That’s the highest level for ten years. Not quite as drastic as US inflation’s 40-year high, but still enough to cause consternation amongst BoE policymakers. 

The 5.1% rise is nearly double the Bank’s target rate. 

2022 forecasts from a variety of commentators and economic observers predict that inflation is yet to peak.  

ING and Deutsche Bank, for example, both think we’ll reach peak inflation by April when headline CPI will reach 6.5%. After that, price pressures should start to cool, but they will still be high at 4% by year’s end. 

It’s not a pretty picture really. A fairly toxic combo of slowing growth and high inflation means 2022 will probably be a tough year for the UK economy. Rates could be increased at an accelerated pace. But let’s get this month’s CPI reading out of the way before we make any strident economic projections.  

Watch for January PMI data 

It’s the first PMIs blitz of 2021 with flash estimates for the EU and UK coming on Thursday. 

Pressures facing the EU in December, the current most up-to-date data available, may not be as strong as once thought as we await January’s readings. 

While Omicron cases are high on the continent, there is a growing feeling that this current strain is not as deadly as others. We could be shifting from pandemic to endemic. 

But, in December at least, pandemic-induced pressures, coupled with Omicron uncertainty, were weighing fairly heavily on Eurozone activity. Growth dropped at a higher-than-expected rate, giving the overall flash estimate its lowest reading since March 2021. 

In December, the IHS Flash Composite Purchasing Managers Index fell from 55.4 in November to 53.4.  

Supply chain and logistical issues continue to limit factory output. The manufacturing PMI fell to 58.0 – a ten-month low. However, services fell furthest, with the index falling from November’s 55.9 reading to 53.3. 

In the UK, December’s narrative was much the same: Omicron’s initial outbreak stunted business growth. 

The initial Flash Composite Index dropped 53.2 in December from 57.6. I think this was probably to be expected as the UK, like the EU, was caught up in a wave of Omicron panic. 

Naturally, services saw the sharpest decline. The slump from 58.5 to 53.2 brought the Services PMI to its lowest level since February 2021.  

“Concerns about prolonged pandemic restrictions and the subsequent hit to business and consumer confidence had a negative influence on growth expectations for 2022,” IHS Markit said. 

Conversely, manufacturing output was up, with the Index rising from 52.7 to 53.3. Factories have been slightly more resilient towards COVID disruptions compared with the services sector – but do watch for further logistics bottlenecks impacting growth going forward. We are not out of the woods yet. 

What to expect with this next round of flash Purchasing Manager Index data? I would expect to see slight bumps in manufacturing output, but still not massive strides as those supply chains woe float in the background. Services performance will possibly continue to fall, as both the EU and UK continue to adjust to Omicron. 

Q4 2021 earnings season is here 

Technically, the season started on Friday as big US banks kicked things off in traditional fashion. JPMorgan, Wells Fargo, and Citigroup are due to start proceedings in what is very probably going to be another rock solid quarter for the big boys. 

As our Chief Markets Analyst Neil Wilson says: “2021 was defined really by two things – the release of loan loss provisions flattering the bottom line, and surging investment banking revenues. No one is really going to pay too much attention to the figures for the last quarter – we know they’ll be good.” 

At the time of writing, the banks had yet to report. 

Even so, we’re expecting another bumper quarter for megacaps across the board. FactSet research predicts average earnings growth of 21.3% for US firms reporting on Wall Street this quarter. That would make it the fourth straight quarter of earnings growth if correct. 

Goldman Sachs, Morgan Stanley, and Bank of America all report this week, alongside the first FAANG stock to do so: Netflix 

Be sure to check out our earnings calendar to see who is reporting and when this earnings season. 

Keep scrolling to see the companies reporting on Wall Street this week. 

Major economic data 

Key earnings data