ACM Update 16-09-24
As widely forecast, the ECB kicked off the latest round of interest rate meetings with a quarter per cent rate cut on Thursday. There was little on offer though for anyone hoping for a bit of forward guidance on future policy. The UK economy failed to grow again in July, whilst unemployment data showed improvement for now.
In the US, inflation dropped down to 2.5% adding support to just a 25 basis point rate cut this week. That announcement from the Federal Reserve comes on Wednesday evening, before the Bank of England provide their decision on Thursday lunchtime.
There was a good healthy dose of market data last week from the major markets. Despite this, we saw relatively narrow trading ranges, apart from on the US Dollar, as expectation builds for the aforementioned looming rate decision.
Thursday’s ECB meeting was definitely the highlight on the continent last week though. We saw Lagarde & Co decide (as widely predicted) to move for another interest rate cut, their second of the year. They brought the headline interest rate down by another quarter of a per cent. The move fits in line with current market expectations of one cut per quarter from Frankfurt for the next 12 months.
The biggest talking point in the run-up was what would be said with regards to ongoing monetary policy, and this turned out to be very little. ECB policymakers are back to the data-dependent rhetoric in stating that the committee “is not pre-committing to a particular rate path”. Seemingly lessons have been learnt from earlier in the year.
They did cut their growth forecast slightly however from 0.9% for 2024, to 0.8%. This came amidst comments that the Eurozone’s economic recovery is facing headwinds. Their inflation forecasts remained static though, expecting the measure to nudge back up in the latter part of 2024. They predict inflation to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.
A hold in interest rates looks likely for their next meeting, which takes place on 17th October, with suggestions of a cut in the December meeting more likely. Eurogroup & ECOFIN meetings also took place over the weekend, providing little to report.
As mentioned, with the ECB rate outcome being so widely expected, GBP-EUR saw very little movement throughout the week. The pair amassed barely 0.5% from the bottom to the top of the range, as illustrated in the chart below:
UK news meanwhile was limited to a few releases in the first half of the week. Unemployment figures for August showed progress across the three measurements. Overall unemployment was down from 4.2% to 4.1% (as forecast), whilst the claimant count figures for July were miles short of expectation, in another positive sign.
Perhaps most importantly, the Average Earnings Index (wage growth) recorded 4.0% worth of gains in the last three months, down considerably from July’s 4.6%. This is a good sign for the Bank of England that wage inflation is coming back down and may well ease expectations for another rate cut this week.
Also related to unemployment, the Government continued their good news bulletins in declaring a “grim” September to come as 6,000 jobs are set to go across oil and steel industries. This follows their manifesto promising £2.5bn to “revitalise” the UK steel industry…. Oops. Scunthorpe and Port Talbot will be the areas most impacted by the cuts. We can therefore expect the next round of UK jobs data to not be quite as rosy.
Elsewhere, the UK economy “grew” by 0.0% for the second month in a row in July. The Euros and Olympics were expected to have provided such figures a boost for the month, but that didn’t materialise. Another dent for the Government who were hoping for growth and thus an additional boost to tax revenue.
GDP flat-lining led to further gloom-mongering from Chancellor Rachel Reeves regarding the looming budget, which comically lands the day before Halloween. One can’t help but feel the UK tabloid headlines have already written themselves.
Over in the US, inflation was the main event as the metric fell from 2.9% to 2.5% in August, its lowest in over three years (February 2021). The prices of petrol and used cars fell, contributing to the slowdown in inflation. The former has in fact come down by over 10% in the US, in the last 12 months.
The release on Wednesday strengthened the Dollar by around 0.8% versus GBP, with many believing the shift is enough for the Federal Reserve to opt for just a 0.25% rate cut this Wednesday evening. This sentiment was also backed up by the fact that Core CPI for the month rose by more than expected, showing how higher interest rates in the US are still required to quash sticky inflation there.
However, with the Fed’s dual mandate on inflation and the jobs market, there is still a small chance of a larger rate cut. Former Fed member William Dudley stated he “sees scope” for a larger rate cut this week, whilst Goldman Sachs CEO David Solomon stated he believes there is still a chance of the 50 basis point cut too. All eyes on 7pm Wednesday UK time for the official announcement.
A more volatile week for Sterling-Dollar than GBP had versus the Euro, as illustrated in the chart below:
The week ahead:
Monday – Rightmove UK House Price Index (00:01 UK time)
Tuesday – German ZEW Economic Sentiment (10:00), Canada CPI inflation & US Retail Sales (13:30)
Wednesday – UK CPI inflation exp 2.2% (07:00), Eurozone Final CPI exp 2.2% (10:00), Fed rate announcement exp 0.25% cut (19:00) & Powell press conference (19:30)
Thursday – BoE rate announcement exp hold & 7-2 split (12:00), US Unemployment Claims (13:30)
Friday – Bank of Japan rate announcement (03:00), UK Retail Sales (07:00), Canada Retail Sales (13:30), ECB Lagarde speech (16:00), Fed Harker speech (19:00)
A week of numerous significant interest rate policy announcements to come then. Having announced they were ready to pull the pin on cutting interest rates back at the Jackson Hole Symposium a little over three weeks ago, Jerome Powell & co will be highly likely to deliver just that on Wednesday evening. The question since then has been not if, but by how much do they cut.
Recent data suggests a 0.25% rate cut will be the likely starting point, rather than the 0.50% that many have been calling for in recent weeks. Balancing their dual mandates of inflation and the employment market is vital for Fed policymakers, which their first cut should help satisfy both sides of. The remaining policy decisions for the remainder of 2024 will likely follow a similar approach.
However, the Jerome Powell press conference shortly after the rate announcement may offer further clues as to that. It will also likely suggest just how much discussion was given to whether a larger rate cut was considered in this meeting.
On UK soil, the latest UK inflation data arrives first thing on Wednesday, just over 24 hours before the Bank of England make their own decision on monetary policy. A hold in policy this time around is expected, but last month delivered a vote which was on a knife-edge and we could see similar this time around too. Retail Sales data closes out the week.
We are likely to have a rollercoaster week of movement, with interest rate decisions aplenty. Equally, decisions which are not as much of a foregone conclusion as last week’s ECB meeting. If you have requirements involving Sterling or Dollar payments, ensure to reach out to the Aston team as to the different approaches we have to protect your budget.
Have a great week.
