ACM Update 29-07-24
The latest round of Manufacturing & Services sector PMI figures were released last week, as well as the Federal Reserve’s chosen inflation-measuring index of Core PCE inflation. As geopolitical tensions have escalated over the weekend, this could well be a further influential factor for markets over the coming days.
In terms of data, this week brings significant interest rate announcements from the US Federal Reserve and the Bank of England. Both decisions are more in the balance than they have been for some time, due to shifts in inflation-linked metrics recently. The US Non-Farm Payrolls data will provide July’s jobs market news on Friday lunchtime.
To recap the last seven days, let’s start with US-focussed news, as that is where the majority of events came from. As the fallout continued from Joe Biden’s announcement of the previous weekend that he will be stepping aside from running for a second term, the President addressed the country from the Oval office. He announced his decision to step aside come November’s election as a “defence of democracy”.
New Democratic candidate Kamala Harris has been on the campaign trail, but also in talks with Israel about ending the war in Gaza. She struck a more direct tone than Biden, at a time when geopolitical tensions have risen considerably over the weekend. Such times of instability can often lead to USD strength as a safe-haven asset.
On the data front, there were two important US releases. The first was Advance GDP for Q2, which indicated a substantial bounceback on Q1’s (relative) slowdown. Growth from April-June was recorded as an increase of 2.8% in the US, up from 1.4% last quarter and beating the 2.4% for the corresponding period in 2023. This allayed concerns slightly that the US economy is feeling the squeeze from higher interest rates.
The other notable release was the Core PCE (Personal Consumption Expenditures) Price Index, which is the Federal Reserve’s chosen method of reading inflation. The figure read 2.6% as last month, fractionally up on the 2.5% forecast. Whilst a rate cut in this week’s meeting is a possibility, the September meeting looks more likely for such a move. Although even that is not yet guaranteed.
The latest Flash Manufacturing & Services PMI numbers for July thus far were also published. The former dropped under 50 again and confidence was its lowest since December’s figures. The Services sector meanwhile (hospitality etc) recorded 56.0 which was its best since March 2022. The sector remains strong, but lingering inflation concerns remain in areas such as hotel pricing.
Given the proximity to the next Federal Reserve meeting (this Wednesday evening), there was little by the way of commentary from committee members. Broadly, sterling endured a relatively flat week versus the Dollar, losing around 0.5% over the course of the week. Movements on the pair can be seen in the chart below:
UK news was relatively sparse in terms of data, as we near an important interest rate announcement this Thursday lunchtime from the Bank of England. Amidst somewhat radio silence from the Bank’s Governor, Andrew Bailey, it is tough to say which way the committee will lean this week.
Looking at recent data with inflation at 2.0%, one could argue the time is right to begin a cutting cycle. However, services sector inflation still remains high, with hotel prices a notable concern. Bloomberg Economic analysis though, puts a lot of the hotel price inflation at the door of a certain Taylor Swift, as her Wembley dates sent hotel prices through the roof.
The other side of the equation though is listening to comments from the members of the nine-strong Monetary Policy Committee. A number of committee members have continued in recent weeks to voice their concerns on cutting rates too soon, and they seem enough in number to keep the balance in favour of a hold. That is, barring any last-minute changes of heart.
The only real UK data releases last week were the equivalent Manufacturing and Services PMI figures, which were frankly pretty buoyant. The former recorded its most optimistic figure in 24 months, whilst the latter remained strong at 52.4. Both were above the 50-mark indicating a positive outlook. Again, good news for both despite the weight of higher interest rates.
Europe saw a busier week, not only due to the start of the Paris Olympics on and around the rain-soaked Seine. Fingers crossed the event should bring some economic growth to France and the bloc as a whole, which would be warmly received by the ECB in their search for growth.
Speaking of which, amidst the recent rate hold from the European Central Bank, investors have been searching for clues as to the next policy action. President Christine Lagarde has as always remained tight-lipped on the subject, stating last week that the next meeting is “wide open”. Her deputy though, Luis de Guindos, suggested the possibility of a further rate cut in September, given the bank will have had more time and data released to assess the situation.
The Eurozone data arriving last week was not what one would call spectacular though. The PMI releases showed lacklustre figures in the manufacturing sector, falling under expectation across the bloc. The services sector saw the same fate, bar the French figure which was better than expected. One could easily argue the optimism there was Olympics-related. Consumer confidence in the bloc though is at its “least pessimistic” since February 2022. Small wins….
There was little movement for GBP versus the Euro either, with about 0.7% all in. Movements on the pair last week can be seen in the chart below:
The week ahead:
Monday – UK Mortgage Approvals (09:30 UK time), UK Chancellor Reeves speech to Parliament (12:00)
Tuesday – German Preliminary CPI (07:00), Spanish Flash CPI (08:00), German Preliminary GDP (09:00), US JOLTS Job Openings & CB Consumer Confidence (15:00)
Wednesday – Australian CPI (02:30), Bank of Japan rate announcement (03:00), French Preliminary CPI (07:45), Eurozone CPI Flash Estimate (10:00), ADP Non-Farm Employment Change (13:15), Federal Reserve rate announcement (19:00) & Press Conference (19:30)
Thursday – UK Nationwide HPI (07:00), SPA/ITA/FRA/GER/EUR/UK Manufacturing PMIs (08:15-09:30), Bank of England rate announcement (12:00) & Bailey Conference (12:30), US ISM Manufacturing PMI (15:00), BoE Pill speech (22:15)
Friday – BoE Pill speech (12:15), US Non-Farm Payrolls & Unemployment Rate (13:30)
A much busier week ahead this week for certain, with some sizeable announcements. A quick dive into UK politics will see new Chancellor Rachel Reeves delivering a statement to Parliament on Monday lunchtime, regarding the state of the country’s finances. Transparency has been her motto from day one, and this statement is aimed to deliver a behind the scenes look at the country’s finances which Starmer and Co have inherited. Will the analysis be a warm-up act for tax hikes to come in her Autumnal Budget?
Following an interest rate cut from the Bank of Canada last week, will the Federal Reserve look to do the same on Wednesday evening for the US? Most opinions and analyses suggest not, as concerns remain that inflation will remain sticky for the second half of the year according to many Fed members, including the aptly named Raphael Bostic.
We expect to see the Fed leave rates on hold this time around, but the decision may be a close-run thing. Powell’s post-announcement press conference will deliver more information, and potentially lay the groundwork for a September rate cut to come.
The Bank of England will follow on Thursday lunchtime, in a decision that is probably the more finely poised of the two. Most indications suggest a 70% chance of a rate hold, given recent comments from a number of the nine decision makers. Equally, the MPC could well lay the groundwork for their next meeting on 19th September. The Bank’s Chief Economist, Huw Pill, has a pair of speeches on Thursday afternoon and Friday morning, with the potential of more insight if we don’t get anything from the meeting itself.
The week closes out with Non-Farm Payrolls from the US, which as always will cause volatility. As already eluded to, watch out for geopolitical tensions influencing FX movements this week also, especially for safe-haven currencies such as the Swiss Franc and US Dollar.
Given a flatter week last week, significant events are highly likely to cause movement this week. As always, second guessing the outcome can be the costliest decision. Aston has a range of risk management approaches to assist in such scenarios, so ensure to reach out to the team for any looming requirements.
Have a great week.
