ACM Update 08-04-24
Anyone expecting the US jobs market to slow down faced a reality check on Friday, as March’s Non-Farm Payrolls figure yet again showed impressive growth. The metric has now outperformed market expectations in 20 of the last 24 months.
This coupled with overall unemployment dropping slightly, takes pressure off the Federal Reserve to be cutting interest rates any time soon. The minutes from their 20th March meeting are released this week. Meanwhile, the most recent European Central Bank minutes slightly strengthened the case for an interest rate cut in the June meeting. Their next meeting (the final one prior to June’s decision), comes this Thursday.
Given the majority of the data last week was US-orientated, it wasn’t too much of a surprise to see wild Dollar swings throughout the week. With most European markets closed last Monday for the Easter public holiday, US markets remained open and the Dollar duly benefitted by around 0.75% during the day.
Almost all of the US data releases and relevant speeches last week were positive for the US, but that didn’t necessarily mean it was all one way traffic. The US manufacturing sector has taken a while to bounce back, but does now seem to be joining the party. The sector posted its best figure in two years, last Monday, and is now into expansionary territory once more.
The same couldn’t be said for the equivalent services sector release though, which makes up a larger share of the economy. This came in quite a bit under expectation on Wednesday and saw the Dollar erase all of its Monday gains.
A Wednesday evening speech from Jerome Powell meanwhile saw him sticking to his guns on previously stated projections for interest rate cuts. Despite Fed member comments recently supporting a strong Dollar, the economy itself is the main factor keeping the USD in the ascendency. It has gained against most major currencies in 2024, as the prospect of numerous interest rate cuts have gradually been scaled back.
As always for the first week of a new month, everything else out of the US was about jobs, employment and thus unemployment. With the overall employment situation still flying along, there is no need for Powell and colleagues to look at cutting interest rates urgently. If the economy was sluggish and the unemployment wavering (as is somewhat the case in the UK and Eurozone), it would be a different picture.
The JOLTS job openings numbers and ADP figures of Tuesday and Wednesday respectively, both painted a positive picture, in the run-up to Friday’s Non-Farm Payrolls release. This showed 303,000 jobs were added to the US economy in March, beating the estimates of around 200,000.
As mentioned already, this marks the 20th time in the last two years that the figure has been in excess of the expected number. In fact, many of these have been considerably above the forecast, such has been the unexpected outperformance of the US jobs market. Unemployment, released simultaneously, also showed a slight fall to 3.8% (from 3.9%). A first US interest rate cut as far off as September looks more and more likely.
GBP-USD volatility last week can be seen in the chart below:
For GBP, there was very little going on last week in terms of data or events. In positive news, the manufacturing sector posted an expansionary reading of 50.3 in the March PMI figures. This marked both the best performance for the sector and the first expansionary figure, since August 2022. The equivalent services sector figure fell short of the forecast, but still into expansion.
Another relatively quiet few days for UK releases to come this week too, with the February GDP numbers and a smattering of MPC member speeches spread throughout the week.
It was a busier week in the Eurozone though, where the ECB minutes from their latest meeting in March were released, slightly delayed by the Easter break. These continued to express downside concerns on growth and concerns around inflation in the services sector specifically. Lagarde & Co used this to stipulate that the fight against inflation is not yet won.
However, the committee deemed “that it would be premature to discuss rate cuts at the present meeting”, but that “the case for considering rate cuts was strengthening”. With their next meeting coming unusually soon (this Thursday), all eyes are indeed on the June meeting for potential action.
This was further compounded by the closing statement, containing “the Governing Council would have significantly more data and information by the June meeting”. From that, we can digest a rate cut in this Thursday’s meeting is highly unlikely, and it may just be used to set things up for 6th June.
Inflation meanwhile continues to fall in the bloc, as CPI in March fell from 2.6% to 2.4%. This was against an expectation of 2.5%. Adding to the positivity were the Manufacturing and Services PMI releases, which were ahead of expectations across the major EU economies. An excellent sign following recent lacklustre growth.
Further afield, the latest Reserve Bank of Australia meeting minutes showed the committee did not consider the case for an interest rate change, last time out. This gave confidence to the AUD, with the prospect of interest rates there remaining higher for a while. The AUD moved to its best versus the Pound in about ten weeks.
And finally, the recent decision from the Swiss National Bank to cut interest rates, seems to have got off to a positive start. Inflation remained unchanged (0.0% month-on-month) from February to March, a great sign for the first of the big central banks to cut interest rates.
The moves for the week on GBP-EUR can be seen in the chart below:
The week ahead:
Monday – MPC Sarah Breeden speech (16:30 UK time)
Tuesday – British Retail Consortium Retail Sales Monitor (00:01)
Wednesday – RBNZ rate announcement (03:00), US CPI Inflation (13:30), Bank of Canada rate announcement (14:45), Federal Reserve meeting minutes (19:00)
Thursday – ECB rate announcement (13:15), US PPI Inflation (13:30), ECB Lagarde press conference (13:45), MPC Greene speech (19:00)
Friday – UK GDP m/m exp 0.1% (07:00), MPC Greene speech (08:40), University of Michigan consumer sentiment (15:00)
Both of the big US events of this week arrive on Wednesday and will provide more colour regarding upcoming US monetary policy. The March CPI inflation release is forecast to show a slight tick back up from 3.2% to 3.4%. Governor Powell has mentioned that the path to 2% wont be linear, so this shouldn’t come as too much of a surprise to the Fed’s rate-setting committee, if indeed the forecast figure is correct.
Later that same evening, we have the minutes from the latest Federal reserve meeting which took place before Easter. This is likely to compound the rhetoric of rate cuts still being a few months away yet, but as always the panel is made up of a raft of differing opinions on monetary policy. It will be interesting to see if there were any outliers to the general consensus.
In Europe, as mentioned already the ECB have their latest policy decision this Thursday. Inflation continues to fall in the bloc, and growth is far from impressive. Despite last week’s CPI number of 2.4% being close to the 2.0% inflation target, this feels too early for the ECB to cut following recent comments. For the matter not to have even been considered in the last meeting, to an interest rate cut in this one, seems somewhat far-fetched.
The one substantial UK release on Friday morning of the February GDP number will give a further indication as to whether the UK economy has indeed turned a corner in 2024. The 0.2% growth for January is expected to be backed up by a further 0.1% growth in February, which if correct should be more than enough to stave off any recession mumblings for the third quarter in a row.
A few speeches from MPC Members Sarah Breeden and Megan Greene might give a little more colour on their thoughts ahead of the next Bank of England meeting in early May.
For now, the US dollar seems to be holding ground well, but US data this week will be interesting to digest. After a stronger week for the Eurozone last week against Sterling and the US Dollar, we are unlikely to see too much movement on the pair until the ECB meeting and press conference on Thursday.
Do reach out to the team if you have any pending requirements to discuss.
Have a great week.
