ACM Update 31-07-23
A quieter few days for sterling, but that didn’t keep the Bank of England out of the news. After calls previously from Andrew Bailey and Chief Economist Huw Pill for public restraint on pay to help cool inflation, the BoE did…… the opposite in house. Figures showed the bank paid out over £25 million in bonuses last year. They will just have to “accept” being richer…..
This week is a slightly busier affair, with the latest interest rate announcement from the aforementioned BoE. A quarter per cent hike seems the most likely outcome following the most recent inflation data. Anything other than this could well cause movement. Non-Farm Payrolls from the US close out the week.
The only economic data release on UK shores last week was the Flash Manufacturing and Services data for July. Both figures came in under expectation and at their lowest in six months. The Manufacturing numbers remain a concern, now demonstrating a contraction for 12 months in a row.
A lot of the focus last week was on central banks, with the Federal Reserve first up. Powell & Co raised interest rates to their highest in 22 years in their battle against inflation. There wasn’t much by the way of indication regarding what will happen in the September meeting, with the subsequent press conference non-committal. A further hike or a pause for now both seem open options.
The main positive for the US is that the economy has not suffered from the rapid increase in interest rates. So much so that the Fed are no longer forecasting a recession. This was further demonstrated by Dollar data on Thursday, in the form of Advance GDP for Q2, showing a growth of 2.4% since Q1, against a forecast of 1.8%. Another boost was weekly Unemployment Claims hitting their lowest since March (221k), thus we saw the Dollar strengthen over 1% on Thursday afternoon.
Overall Sterling-Dollar ended up pretty much where it started the week, with a rollercoaster ride in the middle. Movements for the week can be seen in the chart below:
Thursday saw the turn of the ECB to take the stage. Lagarde and Co mirrored the Federal Reserve, both in terms of a 25 basis point hike and setting their benchmark rate at the highest in 22 years. The bank feel though that the near term outlook has deteriorated, most notably a stagnating German economy. German IFO business climate figures came in below expectation, which itself was already pretty low.
Like the Federal Reserve, the next European Central Bank meeting in September could also see either a hike or a pause. For now, the narrative remains that future decisions will be based on “assessment of the inflation outlook, in light of economic and financial data”. Follow the Fed/wait and see, continues in Frankfurt.
A quieter week for GBP-EUR as a result, illustrated below:
Elsewhere, Australian inflation continues to come steadily back down. Having peaked at 8.4% in January, it is now back at 5.4%. The RBA opted to keep interest rates on hold at 4.10% in their last meeting. A 25 basis point hike is expected this week though.
The Bank of Japan left rates on hold but loosened its stance on bond yields. This was viewed as the Bank moving more into line with other major central banks.
The week ahead:
Monday – German Retail Sales & Import Pri
ces (07:00 UK time), UK Mortgage Approvals (09:30), Eurozone CPI Flash Estimate (10:00), EU Economic Forecasts (12:00)
Tuesday – RBA interest rate announcement (4.35% exp, 05:30), Eurozone & UK Manufacturing data (08:15 - 09:30), Eurozone Unemployment Rate (10:00), US ISM Manufacturing PMI data (15:00)
Wednesday – Bank of Japan monetary policy meeting minutes (00:50), ADP Non-Farm Employment Change (13:15)
Thursday – Eurozone & UK Services PMI data (08:15 - 09:30), Bank of England interest rate announcement (5.25% exp, 12:00) & Bailey press conference (12:30), US Weekly Unemployment Claims (13:30)
Friday – Eurozone Retail Sales (10:00), Huw Pill speech (12:15), US Non-Farm Payrolls (exp 200k, 13:30)
An action-packed few days ahead one would think, the Bank of England and Non-Farm Payrolls sharing the headlines.
Andrew Bailey and Co aren’t winning many popularity contests with their rate hikes and the aforementioned bonus payouts. The likelihood is that the Monetary Policy Committee will vote for a further rate hike this week, probably of 0.25%.
What will be interesting is how the new committee member, US economist Megan Greene, opts to vote first time around. Whether she will follow the tone of her predecessor Silvana Tenreyro, remains to be seen.
Non-Farm Payrolls will continue to provide a good indication as to whether the US economy is indeed headed for the desired “soft landing”. The jobs market have slowed, but not drastically. The expectation is for 200,000 new jobs to have been added in June. A reminder that last month’s figure of 209,000 was the first figure coming in under expectation in over a year.
As always, plenty of volatility likely so do reach out to the Aston team should you have any immediate requirements you wish to discuss or look to protect.
Have a great week.
