A warning sign for longs that we can't keep the gains from the data
As I wrote in the data post, I'm suspecting that a lot of today's rally was factoring in better numbers. By and large they got them.
The CPI numbers were much better than expected, PPI wasn't hot but it wasn't soft, and house prices aren't tumbling. They rose 1.3% vs July.
Prices have been rising quite strongly across the UK, not just in the usual hot areas like London and the South East, and the BOE will need to take that into account.
UK House prices
What is notable is that prices are rising even though sales volumes are down. June volumes were down 32.2% vs a year ago and there's negative numbers for the whole of the UK.
That confirms that prices are rising due to homes being in short supply, and that's a reason why the Chancellor announced his £5bn housing fund at the Conservative conference. In the bigger picture, we can strike housing and house prices off the Brexit worry list as the data shows that the property market isn't being affected by Brexit. As I've mentioned before, it will be foreign investors who will be more worried than the UK population.
On the inflation front, it's probably far too soon to see this latest drop in the pound affecting prices that much and if we were to, it would be seen in PPI before CPI. Input prices y/y are running quite hot already but weren't as high as expected and the difference on Aug was much greater due to the revision. That suggests some of the initial impact has filtered through (probably more from oil that the quid). If we are to see a full pass through into CPI then we need to keep watching the output prices.
One of the others factors to think about is that the quid had already fallen from its lofty heights in 2014, and we haven't seen inflation rising too much on that fall. What will flow through to inflation quicker is the price of oil, and we're seeing that already in fuel prices. I'll start swearing if I have to mention price rises at the pumps compared to the actual price moves of oil ;-)
Overall, there's plenty here to suggest that the BOE should not cut in Nov but that will be decided on how they view inflation. If the headline number had gone up without a higher move in the core, they would have mostly overlooked CPI when making their decision, as they would have taken a view that the inflation was imported, something monetary policy can largely do nothing about. If they feel that inflation is more broad based, i.e both imported and domestic, it's going to make it tough for them to ease again in Nov. There's next to no chance of them thinking about hikes but a move away from cuts will be enough to boost the pound.
In the lead up to the 3rd Nov inflation report and MPC meeting we have the jobs report, retail sales, Q3 GDP, and the construction, manufacturing and services PMI's. If they continue to show moderate strength I think we can rule out any rate action from the BOE.
Whether the pound agrees is another question but I'm getting an itchy trigger finger on trading that outcome. From here I'm going to start looking at GBP longs if I can start getting in down around the low 1.21's and 1.20. My only fear is that it's not taking much to sink the pound these days and the "headline" risk is very high right now. In that scenario, I'll be looking to scale in in smaller size than usual and I'll be very concerned if we break 1.20.
Stripping out the political rubbish, the immediate fundamentals are all saying that things aren't as bad as people (particularly the BOE) expected. That flies in the face of the moves we've seen in the pound. What happens to the economy next year or two years down the line is of little consequence to what will move the price over the next few weeks and months and that's what I'm looking to trade. My ideal trade would be to run longs into the BOE meeting, take some profits into the Nov FOMC in case they hike, then take more off in any rally if they don't. I'll then look to reload a drop in the pound if the Fed hikes in Dec.
