ACM Update 02-09-24
Sterling’s recent run of good form continues, achieving against the Euro levels last seen just prior to the 1st August interest rate cut from the Bank of England. Meanwhile Fed policymaker comments and US data helped support the Dollar slightly. GBP-USD remains comfortably above 1.31 for now.
This week starts with a US and Canadian bank holiday on Monday for Labor Day. Wednesday onwards brings the latest round of US jobs data, culminating in Non-Farm Payrolls on Friday. Will the Fed get what they need from this to make an interest rate cut in two weeks a certainty?
The Pound continued its recent trend last week, with GBP nudging to 1.19 versus the Euro for the first time in a month. The Bank of England’s rate cut on 1st August was expected to be the end of GBP strength, but likely upcoming monetary policy moves from elsewhere in September have kept sterling strong.
With Monday’s UK bank holiday meaning a four-day week last week, UK data was slightly thinner for the first time in a while. Versus the Euro this meant that upward momentum continued, with a likely interest rate cut coming on the continent, but potentially not in the UK. The upcoming decision dates on monetary policy are as follows – 12th September - ECB, 18th September - Federal Reserve, 19th September - Bank of England.
The only UK data releases were housing market related. The sector has taken a boost recently from the August rate cut, and mortgage approvals duly displayed this. The number of these nudged up from July, meaning the metric hit its highest since October 2022. Needless to say, this was the month that Liz Truss began wreaking havoc in the mortgage market, with her infamous “Trussenomics”. The sector has now finally recovered one could argue.
The other release was the latest Nationwide House Price Index. This recorded a slight fall in average prices, of -0.2% in August. This was put down to a general summer lull, but average prices were still up 2.4% year on year. Further interest rate cuts over the coming months are likely to strengthen buyer appetites further. Sellers were also waiting to see how any changes by the new Government would influence housing.
The UK is one of (at least) 64 countries holding EU or national elections in 2024. Sir Keir Starmer continues to paint a less than positive picture for the October Budget, as he warns of tough times ahead to fill the budget black hole.
As mentioned, the GBP recovery versus the Euro continued last week. Current levels are just 0.25% off the highest GBP-Euro rate in the last two years. Moves over the last seven days can be seen in the chart below:
With a quieter period on the continent too, Eurozone news was heavily focused on the looming ECB decision, arriving in a ten days. Friday morning provided the latest CPI inflation flash estimate, which saw a drop to 2.2% from the 2.6% of last month. This marks its lowest reading since July 2021, adding to confidence of a further rate cut.
However, Services sector inflation actually rose to 4.2% (from 4.0%) in the month. This figure will specifically be of concern to ECB rate-setters, with Lagarde previously having mentioned it as a reason not to be cutting interest rate prematurely. Logically though, given the Paris Olympics taking place in the month, the bounce in Services could easily be attributed to this.
For now, a September rate cut by Christine Lagarde and her European Central Bank colleagues in Frankfurt, seems odds on.
German inflation numbers are now back on track, with the August figure confirmed as 2.0% last week, dropping from 2.6%. Spain’s moved from 2.9% to 2.4%, with France dropping from 2.7% to 2.2%. Most of these were driven by falling energy prices. Core inflation fell by 0.1% to 2.8%.
Whilst German inflation is back on track, growth there is still languishing at the bottom of the “G7 league table” in terms of expansion since just before the COVID pandemic. The German economy has grown by a cumulative +0.3%, only just surpassing the +0.2% achieved in Japan over the period. Unsurprisingly, the US has seen by far the most cumulative growth at +10.1%. Other figures were Canada +5.8%, Italy +4.0%, France +3.1%, UK +2.3%.
Meanwhile on the German political front, there were further far right gains over the weekend in two state elections. The winning AfD party is heavily anti-immigration, and continues a trend seen across the EU elections in recent months.
A busier week from the US, but naturally everything is being linked back to the looming 18th September interest rate announcement from the Federal Reserve also. Policymakers on the whole have been clear that they are finally feeling ready to start cutting interest rates for the first time in four years, as inflation begins to cool. This caused the Dollar to lose ground against the majority of major currencies during August.
Despite recent comments, one policymaker who still seems to not be certain is Raphael Bostic. He retreated back to the fence last week, remarking it “may be time” to cut rates. Elaborating further he stated he had moved forward his expectations on when a cut was due, but is awaiting further data to support a September move.
Bostic noted a preference to err on the side of waiting longer, rather than cutting and having to subsequently hike again. Given the recent focus on the stagnating jobs market, this week’s raft of employment sector data may be the data releases he has in mind. The latest jobless claims numbers remained stable at 231,000 new claimants last week, almost flatlining after the unexpected blip up a month ago.
Another chosen Fed metric in the form of Core PCE inflation was released on Friday. This produced a figure of 2.5% year on year for inflation, below estimates of 2.6%. Core inflation was just behind the headline figure at 2.6%. The numbers are trending the right way, adding further evidence for the Federal Reserve’s decision makers.
As already alluded to, economic growth remains strong in the US. The latest GDP figure for Q2 was released on Thursday lunchtime, showing a reading of 3.0% for that quarter. After a weaker Q1, this bounces back to a similar level to what the US economy was producing in the latter part of 2023. Consumer confidence remains high, with Conference Board figures recording the highest for the metric since March.
Overall, the Dollar recovered some of the ground lost recently against GBP, tracking back down circa 1% from the 29-month high of the previous week. Moves of late can be seen in the chart below:
The week ahead:
Monday – US & CANADA BANK HOLIDAY, SPA/SWI/ITA/FRA/GER/EUR/UK Manufacturing PMIs (08:15-09:30 UK time)
Tuesday – UK BRC Retail Sales Monitor (00:01), Swiss CPI inflation (07:30), Swiss GDP (08:00), US ISM Manufacturing (15:00)
Wednesday – SPA/ITA/FRA/GER/EUR/UK Services PMIs (08:15-09:30 UK time), Bank of Canada rate announcement (14:45), JOLTS Job Openings (15:00), Bank of Canada Press Conference (15:30), Fed Beige Book (19:00)
Thursday – UK Construction PMI (09:30), ADP Non-Farm Employment Change (13:15), ISM Services PMI (15:00)
Friday – Halifax HPI (07:00), US Non-Farm Payrolls/Unemployment/Average Earnings Index (13:30), Fed Williams speech (13:45)
Already we find ourselves into the final third of 2024. With the so-called “summer lull” out of the way, we are now back to major data releases again, as well as the aforementioned looming interest rate announcements.
As mentioned, today (Monday) is a bank holiday in the US & Canada meaning trading volumes will be lower to start the week. Beyond that, it is a busy week of data for the US from Wednesday onwards. The Federal Reserve’s data compilation, the Beige Book, is released on Wednesday evening. This provides all of the recent data available to policymakers in their decision, and signals two weeks until their next meeting.
Beyond this, everything else from the US will be jobs market news. The Fed have made the employment sector a greater focal point recently, thus these will be significant for the September rate decision. As usual, JOLTS Job Openings, ADP figures and weekly Unemployment Claims are the warmup act.
Non-Farm Payrolls and the headline Unemployment Rate come on Friday and are of most importance. The former slowed to its lowest growth since February 2021 in last month’s data, beginning the Dollar weakening spree since. This month’s figure is forecast to be 164,000 but these are usually wildly inaccurate. Even the published figures for the first half of the year were revised down heavily just a few weeks ago.
The Unemployment Rate itself is forecast to come down to 4.2% after rising for the last few months. Looking at the wider picture, another poor showing from the Payrolls data could easily see further momentum build for a 50 basis point cut in two weeks, rather than just the currently expected 0.25%.
UK and European data meanwhile will be mainly the latest round of PMI releases from the Manufacturing and Services sectors. These arrive on Monday and Wednesday morning respectively. Aside from that, any interest rate related narrative will be closely watched.
Of the three looming rate announcements, the Bank of England look like the most likely to hold. With inflation falling last month in Europe and low growth, the ECB will likely be forced towards a rate cut this time around, to revive the Eurozone economy. In the US, this week’s jobs data will more likely aid a decision on the size of September’s rate cut more than anything else.
Rates are remaining buoyant for GBP versus the Euro and US Dollar, but the summer months have demonstrated how quickly things can move. Should you have any pending requirements you wish to protect, reach out to the team to discuss the relevance of limit orders or forward contracts, to assist in your budgeting.
Have a great week.
