ACM Update 22-07-24
As the latest round of interest rate announcements kicked off last week, we saw a widely expected hold in policy from the ECB following their June cut. Expectations are beginning to build in the UK and the US for rate cuts soon, given recent data.
Politically speaking, the US Presidential race took a turn over the weekend, with Joe Biden stepping down after immense pressure, to be replaced by Kamala Harris in the battle vs Trump. Sir Keir Starmer will continue to meet world leaders this week, with G20 meetings taking place. Data-wise, the latest Manufacturing & Services PMI figures are published.
After the almost global IT meltdown on Friday caused by a tech issue from the cybersecurity firm Crowdstrike, things seem to be starting to return to normal now. We are pleased to report that none of the Aston systems were impacted, thus no delays to our service.
For the second month in a row, UK inflation remains “on track” at 2.0% according to the latest figures from the Office for National Statistics. The data released on Wednesday morning showed the metric had been kept at this level again, slightly above market expectations of a fall to 1.9%.
Discounts on clothes and footwear in summer sales were detailed as the main contributing factor, as well as food and drink inflation slowing. Factors pushing in the other direction were package holidays and hotel prices, which are showing further signs of increases. The latter was up 8.8% versus the previous month.
Sterling benefitted from the figure on Wednesday morning. The fact inflation did not fall is likely to mean a hold in interest rates on 1st August from the Bank of England. Estimates before the data suggested a 50:50 hold to cut ratio, whereas after this was more like 70:30. The central bank remain concerned that inflation pressures will still persist, thus are reluctant to cut yet. This latest release has provided further substance to such concerns.
Other inflation linked metrics also arrived last week in the form of UK unemployment data. These came in as forecast, with the average earnings index (wage growth) slowing slightly to 5.7% and the overall unemployment rate remaining constant at 4.4%. Retail sales meanwhile fell by -1.2% after a damper June in the UK kept shoppers away.
Another inflation-related topic in the news is the potential increase in the minimum wage in the UK, as well as above inflation pay rises in the public sector. Both moves have been mooted by new Chancellor Rachel Reeves, as the new Government looks to put an end to the industrial action of recent years. Where the funding might come from though is yet to be clarified, but such a move would almost inevitably put upward pressure on inflation, best described by increased spending power and the classic supply vs demand matrix.
All of the above measurements seem to suggest a hold in policy from the Bank of England on 1st August is indeed the likely outcome. Governor Bailey has been somewhat silent lately though, barely hosting any speeches or press conferences for some time, thus his sentiment is tough to gauge.
Sterling came down slightly from the highs of the start of last week vs the Euro, but overall only saw 0.5% worth of movement. The latest moves are in the chart below:
As eluded to, the European Central bank kicked off their summer break nice and early with their latest interest rate meeting. This now gives Lagarde & Co some time on the beach until the next gathering on 12th September.
Following their somewhat over-promised June rate cut, the ECB opted to keep rates on hold in this meeting, with mounting concerns from their policymakers that inflation may well bounce back up in the second half of 2024. Caution seemed to be a subtle undertone, whilst Lagarde maintained that the September meeting is “wide open” in terms of possible outcomes. However, her comments regarding downside concerns for growth would indicate a cautious approach to policy is indeed the case.
Markets however are still suggesting a “September cut remains firmly on the agenda” according to a JPMorgan economist. The debate is open though as to whether there will be just one or two (September & December) cuts to come this year. Lagarde as usual didn’t give too much thought to that, suggesting the usual meeting by meeting approach would be used.
The Euro did weaken somewhat off the back of her comments. However, the overall position for the week versus the Dollar was stable. This was largely thanks to the latest Final CPI figure from the bloc, which came in at the forecast 2.5%. As in the UK, Services sector inflation remains sticky on the continent and is keeping inflation somewhat static. In fact, the ECB only expect inflation to get “consistently back to target” in the second half of 2025.
Consumer confidence is also not the best in Europe presently, with the EU-wide ZEW Economic Sentiment figure of 43.7 well under the expected 48.1 (anything sub-50 indicates pessimism). This is also the lowest for the figure since March. Sterling-Euro movements for now will be driven by what happens with UK interest rates on 1st August.
Over in the US, the political race couldn’t really have had much more of a rollercoaster ten days, despite the election still being over 100 days away. Trump survived an assassination attempt and now seems to be stronger than ever politically. Biden caught COVID and after facing repeated calls to step aside as the Democratic candidate due to his age, did exactly that last night to let Kamala Harris lead the charge. Whilst these events aren’t yet driving the Dollar, that may well start to happen soon.
Economically, optimism is building that the Federal Reserve will start their rate-cutting cycle soon. There were a number of pieces of evidence for this last week from Fed policymakers:
- Chairman Jerome Powell stated that Q2 economic data has provided greater confidence that inflation is heading to the 2% target, but he wouldn’t give any forward guidance.
- Mary Daly suggested confidence on inflation is growing.
- Adriana Kugler said it would be appropriate to cut rates “later this year” if inflation continues to cool.
- Christopher Waller said the economy is getting closer to a point where a cut is plausible, but would like to see “a bit more evidence” that inflation is on a sustained downward trend.
- Whilst ex-Fed policymaker Robert Kaplan sees a cut in September as likely, but not to expect the start of a full cutting cycle.
The above language from the Fed does suggest that we are getting close to a rate cut, however most seem to be in agreement that the 31st July meeting is to soon. The data is also leaning towards cuts being likely/needed too. The US economy saw a “slight to modest pace of growth” according to the Fed’s Beige Book release of Wednesday evening. This provides much of the headline data which policymakers use in their meeting, two weeks later.
Markets are still seemingly undecided on how many rate cuts to project for the Federal Reserve this year, with bets ranging from one to three for the remainder of the year. Goldman Sachs meanwhile think conditions are already “ripe for easing”. Retail sales from May to June recorded 0.0% growth, suggesting the US retail sector would benefit from a cut too.
Overall, Sterling-Dollar fell during the week as the July Fed meeting now seems likely to deliver a hold in policy. This supported the Dollar and dragged rates back from their 1.30 peak seen at the start of the week. Moves can be seen in the chart below:
The week ahead:
Monday – No significant data
Tuesday – EU Consumer Confidence (15:00 UK time)
Wednesday – FRA/GER/EUR/UK/USA Flash Manufacturing & Services PMIs (08:15-14:45), Bank of Canada interest rate announcement (14:45) & Press Conference (15:30)
Thursday – German IFO Business Climate (09:00), US Advance GDP & Unemployment Claims (13:30), ECB Lagarde speech (16:00), G20 Meetings – Day One
Friday – US Core PCE price index (13:30), G20 Meetings – Day Two
The new week starts with very little by the way of data releases at all until Wednesday. This then delivers the latest round of Flash PMI figures for July from the Manufacturing and Services sectors across Europe, the UK & the US. These will likely cause some movement during the day dependent on the data. This is then followed by an interest rate decision from the Bank of Canada, expected to deliver their second 0.25% cut in a row.
Aside from that the Advance GDP figure from the US is expected to show a 1.9% quarter on quarter growth for the US economy in Q2. This would back up the aforementioned stats from the Beige Book release last week, confirming a “slight to modest pace of growth”. The largest US release of the week will be the Core PCE Index on Friday afternoon though, which is the Fed’s chosen inflation measure.
Christine Lagarde meanwhile makes a brief speech on Thursday afternoon. She speaks at the International Summit on Sport and Sustainable Development in Paris, the day before the opening ceremony of the Paris 2024 Olympics.
As eluded to, geopolitics will continue to dominate headlines with potential for surprise FX movement. Tensions in the Middle East continue to escalate and the US Presidential race will no doubt start to influence the Dollar soon. Such events make foreign exchange movements notoriously difficult to predict. Make sure to reach out to the Aston team to discuss the best ways to protect your upcoming currency requirements.
Have a great week.
