ACM Update 06-11-23
We had the latest Bank of England
meeting last week, which as expected saw Andrew Bailey and Co continuing along the Top of “Table Mountain”. The Federal Reserve also followed suit with a hold/pause with their own rate announcement.
The big mover of the week came in the shape of Friday afternoon’s Non-Farm Payrolls data which failed to meet expectations. This drove the Dollar lower, with GBP-USD its highest in six weeks, and EUR-USD its best in seven.
The Bank of England vote split moved from 5-4 in favour of a hold in the last meeting, to 6-3 this time, with new member (& Deputy Governor) Sarah Breeden shifting the balance slightly. This was all as forecast and the FX markets barely flinched on Thursday lunchtime.
Governor Bailey commented in the press conference that it is “far too early to be thinking about rate cuts”. Current market expectations are for at least two rate cuts in 2024, beginning in Q3. Alongside the rate announcement, the BoE also downgraded its growth forecast to “broadly flat” for 2024, with 0.25% growth the current best guess for 2025. A gloomy outlook for the UK economy and the pound.
The housing market also continues to be a victim of the higher interest rates, with monthly mortgage approvals for September their lowest since February. Andrew Bailey has mentioned recently that he expects inflation to “fall dramatically” when the next month of data is released on 15th November.
The current estimate for October’s CPI figures is “sub 5%”, versus the 6.7% flatlining in August and September. Indeed, another inflation metric (shop price inflation via the British Retail Consortium) showed prices 5.2% higher year on year in October, down from 6.2% in September.
Sterling benefitted from weaker Dollar data last week pushing the pair to its best since mid-September. Please see the chart below for recent GBP-USD movements:
In the US, we also had the Federal Reserve take the stage for their own latest rate announcement on Wednesday evening. Again, we saw a hold/pause from the Fed, but what many economists considered a “hawkish pause”. At the time, at least.
Governor Jerome Powell followed up in his press conference with hints that the hiking cycle may be complete, stating “the question we’re asking is, should we hike more?” He didn’t however completely close the door on a further rate hike.
However it was the US Non-Farm Payrolls data which moved markets around a lot on Friday afternoon. Versus a forecast 178,000 jobs added to the US economy, the actual figure came in at 150,000 jobs. This was the lowest Non-Farm Payrolls figure since February 2021 and was impacted by the current high interest rates and also the recent widespread strikes in the US. Overall unemployment also nudged back up to 3.9%, its highest since February 2022.
The weaker employment figures highlight the slowdown in the US jobs market and pours considerably cold water on the chances of another interest rate hike in December. The USD saw 1-2% losses on Friday afternoon as a result.
In the Eurozone, we had contrasting opinions from different ECB Committee members. Boris Vujcic, Governor of the Croatian Central Bank, believes Frankfurt are done with the process of raising rates for now. Meanwhile, his colleague Isabel Schnabel of Germany, believes the door shouldn’t be closed to future hikes.
She believes current inflation expectations are very fragile and that “renewed supply-side shocks can destabilise the picture”. Schnabel was speaking following the release of the latest Eurozone CPI Flash Estimate, which registered inflation as falling from 4.3% to 2.9% in October. This further backs up Andrew Bailey’s hopes for the equivalent UK release plummeting in nine days time.
Recent moves on GBP-EUR can be seen here:
Elsewhere, Japanese PM Kishida announced a stimulus package to help growth and support households hit by inflation. This came alongside the latest Bank of Japan rate announcement, neither of which offered support to the Yen.
The Australian Dollar meanwhile continues to makes gains ahead of Tuesday’s rate announcement. A slowing economy domestically and increasing inflation globally are expected to force another rate hike from the RBA.
The week ahead:
Monday – US Time Change, SPA/ITA/FRA/GER/EU Services PMI (08:15-09:00 UK time), Huw Pill speech (17:00)
Tuesday – RBA rate announcement (03:30), Halifax HPI (07:00), Fed Member Waller speech (15:00)
Wednesday – Andrew Bailey speech (09:30), Eurozone Retail Sales (10:00), Jerome Powell speech (14:15)
Thursday – Chinese CPI (01:30), Huw Pill speech (08:30) US Unemployment Claims (13:30), Christine Lagarde speech (17:30), Jerome Powell speech (19:00)
Friday – UK GDP exp 0.0% (07:00), Christine Lagarde speech (12:30)
So less central bank meetings and more central banker speeches for this week. A number of the Federal Reserve, ECB and Bank of England’s biggest players are speaking at various events spread throughout the week.
In terms of rate announcements, the Reserve Bank of Australia are expected to hike interest rates by 0.25% to combat inflation. This follows the four previous months of rates being kept on hold at 4.10%.
All focus is now really on the Dollar and how Friday’s jobs numbers will feed through into the new week. Investors have firmly interpreted the figures as a sign that the US economy is starting to slow, leading to further rate hikes (for now at least) seeming unlikely. Sterling-USD remains in a favourable position as we open the new week, with potential for further gains on the cards if ongoing US data follows suit.
Meanwhile GBP-EUR has also nudged up off the back of recent events, as the Bank of England’s “Table Mountain approach” to interest rates, appeals to investors in search of higher interest rates for a sustained period.
Given the GBP-USD positivity, now presents a good time to be looking at limit orders or forward contracts to lock in gains. Make sure to reach out to the team via contact@astoncm.com if you have imminent payments.
Have a great week.
