ACM Update 03-07-23

Written by: David Comber
Date posted: 03-07-23
Sintra, Portugal

Most of the central bank heads spent the end of June over in the Portuguese town of Sintra, at the ECB Forum. With little other market content of note, the events of Sintra were the major talking points of the week.

This week begins with bank holidays, including Independence Day in the US on Tuesday. The remainder of the week is US-dominated, with the minutes from the latest Federal Reserve meeting being released, before Non-Farm Payrolls data on Friday.

From a UK perspective, Andrew Bailey’s appearance at the ECB Forum was nothing short of “underwhelming”. When questioned on his thoughts on interest rates in the short to medium term, the Bank of England chief responded to host Sarah Eisen with:

“I have always been interested that the market thinks the peak will be short-lived in a world where we’re dealing with more persistent inflation”.

The latest expectations are thus for the base rate to peak around 6% by February 2024, before coming back down towards Q4 of the same year. Chief Economist Huw Pill also presented but kept himself out of the news this time.

Elsewhere we had other speeches from MPC members. Outgoing member, Silvana Tenreyro, maintained her stance that the Bank has no need to raise rates further to curb inflation. This was her final speech as part of the committee, in which she suggested lowering rates would be needed to meet the inflation target. Fellow dove Swati Dhingra thinks there are “promising signs” that inflation is coming down. She also dismissed wage increases causing an inflation spiral, suggesting these are just a delayed response to CPI and will cool once inflation does the same.

In terms of UK market data, releases were thin on the ground. UK mortgage approvals for May remained strong despite a cocktail of falling house prices and soaring interest rates. Meanwhile UK GDP was confirmed as having “grown by 0.1% between Q4 2022 and Q1 2023.

A reasonably narrow range of movement for GBP-EUR, as demonstrated in the chart below:


Christine Lagarde was also in Sintra, where she admitted that interest rates are likely to be raised by the ECB in July. The usual comments of “inflation is still too high” and “rates will stay high for as long as necessary” made further appearances. Generally speaking, she came across much better than her counterpart Bailey.

In Germany, both retail sales data and import prices continued to show movement in the right direction. The latest Flash estimate for Eurozone CPI came in at 5.5%, a fraction better than forecast. Going into this week it we may well see the ongoing unrest in France weighing heavily on the Eurozone.

Jerome Powell was part of the Sintra trip too. He commented that the Fed are not averse to interest rate hikes at their next two meetings despite skipping action at their most recent one.

Powell and the markets both seem to expect two more rate hikes before the end of the year, but the prospect of those coming back-to-back provided a boost for the Dollar on Wednesday. Month end flows for June saw a slight sell off in the Dollar the close out the week & month.

Movements for the week on GBP-USD can be seen in the chart below:


Elsewhere, Australian inflation dropped quite sharply to 5.6% (versus 6.1% forecast), down from 6.8% a month before. Canadian inflation fell to 3.4% for May, from 4.4% the month before. Fuel prices drops were the main factor. The Riksbank in Sweden raised interest rates by 0.25% as forecast to 3.75% on Thursday.

The week ahead:

Monday – CANADA BANK HOLIDAY, EU/UK/US Manufacturing PMI (08:15 to 15:00 UK time)

Tuesday – US BANK HOLIDAY, Reserve Bank of Australia interest rate announcement (05:30)

Wednesday – OPEC Meetings, Federal Reserve Meeting Minutes (19:00)

Thursday – EU Retail Sales (10:00), US Unemployment Claims (13:30)

Friday – Andrew Bailey speech (08:30), Non-Farm Payrolls & Unemployment (13:30), Christine Lagarde speech (17:45)

Into the second half of the year we go now. Sterling performed relatively well at times during the opening part of the year so it will be interesting to see how Q3 develops.

This week the focus will be on US announcements, with Wednesday’s Fed meeting minutes the first major one to land. Jerome Powell and other Fed members have been fairly vocal with their sentiment of late, so one wouldn’t expect too many surprises here.

Friday’s Non-Farm Payrolls though will likely cause plenty of volatility. Forecasts are for 222,000 jobs to have been added to the US economy in June, bit with the last fourteen straight months having come in over estimate we could well see a higher figure.

Keep in touch with the Aston team for any pending requirements on the horizon.

Have a great week.