ACM Update 13-05-24
The UK is back in growth after a short and shallow technical recession at the end of last year. Will this “boost” mean that Rishi Sunak calls the general election? We also saw a widely expected interest rate hold from the Bank of England on Thursday, but they are edging towards loosening monetary policy.
Over in the US, the question is more a case of are interest rates high enough to combat sticky inflation? Federal Reserve Chairman, Jerome Powell, speaks this week ahead of the latest US CPI inflation figures.
There were two main sets of UK headlines last week, as the latest round of economic growth figures were released just a day after May’s Bank of England rate announcement.
Starting off with the former, the UK economy grew by 0.6% between January and March, versus a forecast 0.4% rise. This marked the fastest rate of growth for two years and allowed PM Sunak & Chancellor Hunt to deliver themselves a firm pat on the back. The opposition Labour party declared it wasn’t time for a “victory lap”.
The news was indeed a positive though, after the technical recession to close out 2023. A number of factors may have led to a slight sway in the figures, one example being an earlier Easter break in 2024, thus falling into Q1. But overall, it shows that things are moving in the right direction from a UK economic perspective. The growth was led by progress in the Services sector, which includes hospitality & entertainment.
In fact amongst the raft of UK growth releases on Friday morning, all areas recorded growth with the exception of the construction sector which was down slightly. Perhaps not a surprise given the Q1 weather!
The uptick in growth also puts a new spin on the Bank of England’s upcoming interest rate decisions. The fact the economy is growing again puts less pressure on the Bank’s committee to cut interest rates any time soon. Sterling saw a positive impact on Friday morning off the back of the release as a result.
Speaking of the Bank of England, their latest rate decision saw a widely-expected hold in policy. What did come as a surprise though, was the vote split which saw a 7-2 in favour of a hold, following the previous 8-1. Eternal dove, Swati Dhingra was joined in her rate cut call, by Deputy Governor Dave Ramsden.
The move signals the Bank are edging towards a rate cut, albeit slowly. Given the uptick in growth, the decision to cut rates in June is now seen as more of a 50:50, but with the latest UK inflation data being released next Wednesday (22nd) we will get more clarity on that. In recent speeches, the remainder of the MPC members seem to be urging caution on not cutting too soon.
Broadly speaking, sterling slightly lost ground in the run-up to the Bank of England announcement but recovered towards the end of the week with the rate hold and positive growth figures. It wasn’t a massive week of movement though for Sterling-Euro, at just over 0.5%.
The moves of GBP-EUR for the week can be seen in the chart below:
In Europe amidst a smattering of bank holidays, the main release was the minutes from the latest ECB meeting on 11th April, which were posted on Friday. These further confirmed the Bank’s intention to start cutting their own interest rate as of their 6th June meeting. This is now firmly priced in by markets and will be delivered barring anything drastic on the continent in the next four weeks.
To give the exact quote:
“It was seen as plausible that the Governing Council would be in a position to start easing monetary policy restriction at the June meeting if additional evidence received by then confirmed the medium-term inflation outlook embedded in the March projections.”
To cut a long story short, the ECB are ready, as are markets prepared.
The minutes also made reference to concerns that high inflation in the US may lead to a lower Euro-Dollar exchange rate, in turn leading to further inflationary pressures on Europe. This was something Christine Lagarde was asked about in the April press conference also. Whilst the June rate cut seems set in stone, the potential for further ones to come in 2024 seems far from certain. We can expect a cautious rate cutting cycle from Lagarde & Co ongoing.
The latest set of European retail sales figures for March were also released, which displayed a 0.8% growth on the month before. These came in ahead of the estimate (0.6%) for the first time since January 2023 and recorded the biggest monthly growth since January 2022. Perhaps some positivity in Europe also?
A quieter week of US data last week, but that didn’t stop varying opinions in the background on what to expect from interest rates throughout the remainder of the year. This became the main Dollar driver given the lack of other data.
The “higher for longer” approach seems to be the mantra amongst nearly all Fed members now as interest rate cuts keep getting kicked further and further down the road. In fact, the current question is whether rates are high enough? Jerome Powell’s latest press conference suggested that he thinks rates are at the right level, but not all of his colleagues are on board with that.
Amongst a number of different Federal Reserve speakers last week, the overriding view was that the committee are at a sensitive juncture in terms of policy. Vice Chair, Philip Jefferson, suggested that the Fed can “proceed carefully” in whether any further rate hikes are needed.
Other members such as Susan Collins and Neel Kashkari both think the current two-decade high will need to be held for longer than previously thought, citing “an extended period”. Read into that what you will.
Overall, GBP-USD saw a similar pattern to Sterling-Euro. Losses in the run up to the Bank of England meeting and a slight recovery by the end of the week.
GBP-USD moves can be seen below:
The week ahead:
Monday – EU Eurogroup Meetings, Fed Jefferson & Mester speeches (14:00 UK time)
Tuesday – UK Unemployment & Claimant Count (07:00), German ZEW Economic Sentiment (10:00), US PPI inflation (13:30), Fed Chair Powell speech (15:00)
Wednesday – EU Flash GDP (10:00), US CPI inflation & Retail Sales (13:30)
Thursday – MPC Greene speech (12:00), US Unemployment Claims (13:30)
Friday – MPC Mann speech (09:00), EU Final CPI (10:00), Fed Waller speech (15:15)
Inevitably the big focus this week will be on Wednesday’s US CPI inflation reading. The metric is forecast to come in at 3.4% down from 3.5% last month If recent form is anything to go by though, the last four months in a row have delivered a reading above the expected number. Whatever the figure, it is likely to give us a clearer idea as to when, or if, we can expect interest rate cuts throughout the remainder of the year.
The EU will see a similar release with Final CPI on Friday morning. As previously mentioned, the EU seem set for a June rate cut, barring anything very drastic in CPI data releases.
UK data will be driven by the Unemployment related releases on Tuesday morning, as well as the various Monetary Policy Committee member speeches throughout the week. Friday morning’s speech from Catherine Mann will be an interesting one to see if her viewpoint has shifted any further.
As always, markets are volatile, so do reach out to the team should you have any requirements to protect.
Have a great week.
