ACM Update 05-08-24
Up, down and sideways. Three major central bank announcements in the space of two days last week. Three very different policy approaches. The Bank of Japan, Bank of England and Federal Reserve took their own respective paths in the latest meetings.
Sterling weakened off as a result of the above, especially versus the Euro where it lost one per cent from Thursday lunchtime to the close on Friday. Major events are sparse this week, so last week’s policy decisions and rapidly escalating tensions in the Middle East are likely to be market-moving factors.
It had been on a knife-edge for a while, but the 1st August meeting from the Bank of England delivered a long-awaited rate cut for the UK. Inflationary pressures have subsided back down to 2.0% for the last two months, and with the economy still slowly rebuilding from the shallow recession at the end of last year, the Bank of England decided now was the time to begin cutting rates.
The move marked the first cut since the pandemic, but only just happened. Economists surveyed by Bloomberg suggested a 57% chance of a rate cut, and the eventual 5-4 decision from the nine members proved how close a call this was. As always, Governor Andrew Bailey has the casting vote, and he joined the four of his colleagues wanting to cut rates by a 0.25% back down to 5.00%. In fact, the post decision press conference was indeed the first such speech from Bailey of any kind, since late May.
The cut is designed to have wide-ranging benefits, for various corners of the economy. However, interest rates are still at an elevated level, despite the cut. Mortgage-holders and businesses will be hoping for more cuts to come, but Bailey warned not to expect a sharp fall in interest rates in the coming months. He commented that the committee “needed to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much”.
The Governor was asked if this was therefore “one and done” for rate cuts? To which he gave no future visibility on policy and would assess it meeting by meeting. Markets made their own decisions though, pricing in a high 75% probability of another rate cut in November, just after the first Labour budget at the end of October.
One of the members who didn’t vote for a cut, was the Bank’s Chief Economist. Huw Pill warned in a Thursday afternoon speech of his own that efforts to contain inflation aren’t finished yet, and companies are still driving up prices. In a week where he was also confirmed as serving a second term on the MPC (until 2027), Pill too offered no promises of rates falling further in the short term.
One area expected to see a boost from a cut in interest rates is the property market. Figures released by Nationwide last week, revealed that property prices rose by 2.1% in the year to July. This marked the fastest annual growth since the December 2022 figures. Wage growth and optimism on upcoming interest rate cuts has been a driver.
Please see below, the volatile GBP-USD chart for last week:
As you can see from the above, there was plenty of Dollar-based movement last week. This is hardly unsurprising given an interest rate announcement and the other big Dollar news of the month, in the shape of Non-Farm Payrolls.
Starting off with the interest rate announcement, this one too was meant to be a close decision from the US. But as it turned out, the Federal Reserve unanimously maintained their monetary policy at present levels for another month. US inflation is remaining stubborn, showing little sign of subsiding despite elevated interest rates. Economic growth and the jobs market are both starting to slow though, thus the Fed may have their hand forced by the time the next rate announcement comes in September.
Indeed, Chairman Powell wasn’t shy with his own thoughts on policy to come in the next meeting. When quizzed in the press conference, he noted that “a reduction in our policy rate could be on the table as soon as the next meeting in September”. Thus, whilst the Dollar benefitted on Wednesday evening from the rate hold, Powell’s forward guidance for the next meeting saw a slight reversal. For now though, US interest rates remain at their highest level in more than two decades.
Everything else out of the US last week was employment market related. The July JOLTS job openings figure kicked things off, displaying the highest number of job openings available since April’s figures, at 8.18m vacancies. This however was followed by the weekly unemployment claims of last week demonstrating their highest figure in 13 months. Is the robust US jobs market finally feeling the squeeze from higher interest rates?
The two other major releases of the week would certainly imply so. The PMI figures for the manufacturing sector were well under forecast, and were in fact their lowest for 2024 so far, suggesting a pessimistic outlook in the sector. The Non-Farm Payrolls metric, also demonstrated serious signs of a job market slowdown in July, delivering only 114,000 jobs added to the economy, the lowest since January 2021’s figures.
What does all this mean for the Dollar? With Powell declaring the door open for a September rate cut, and major economic indicators suggesting such a move would be sensible, we seem to be edging closer to a cut. Markets are back to pricing in three cuts to close out the year. The Dollar weakened off considerably on Friday afternoon as a result, erasing all the gains of the week against sterling. Euro-Dollar also moved over 1% and to its highest in two weeks.
We have covered the down and the sideways, but the Bank of Japan moved interest rates up in their own announcement last week. Governor Kazuo Ueda opted to move their own base rate up again, by 0.15%. The Bank only brought the lending rate back into positive figures earlier on this year, but struck a more hawkish tone alongside the policy announcement.
The Eurozone had a quieter week last week. Given a large proportion of the continent is either on holiday or enjoying a European Olympics, this isn’t too much of a surprise. Sliding nicely into the data, French Flash GDP displayed a positive picture for the economy in Q2 of the year, with 0.3% growth in the period. This matches the (upwardly revised) figure for Q1 and Paris 2024 will hope to boost the Q3 equivalent.
The Spanish economy continues to be a real positive outlier for the Eurozone. Figures for Q1 and Q2 both delivered 0.8% quarterly growth each, which is more akin to what the ECB want to see across the board. German figures meanwhile are still struggling, with a quarterly shrinking of -0.1% for the economy, and a rise in inflation of 0.3% monthly in July. The Eurozone as a whole grew by 0.3% from Q1 to Q2.
Inflation figures remain stagnant here too. The early flash estimate showed the metric ticked back up to 2.6% from 2.5% last month. This does tie in with what Christine Lagarde and her ECB colleagues been expecting for some time mind you. Core inflation remained stable at 2.9%.
The Euro gained ground against sterling last week as a result of the UK rate cut. Movements can be seen in the chart below:
The week ahead:
Monday – SPA/ITA/FRA/GER/EU/UK/USA Services PMIs (08:15-14:45 UK time), Canada Bank Holiday
Tuesday – Reserve Bank of Australia rate announcement (05:30), UK Construction PMI (09:30), Eurozone Retail Sales (10:00)
Wednesday – German Industrial Production (07:00), Halifax UP House Price Index (07:00)
Thursday – Reserve Bank of Australia Governor Bullock speech (03:40), US Unemployment Claims (13:30)
Friday – Canada Unemployment Rate
A volatile start to Monday morning already as Asian markets react to Friday afternoon’s US Non-Farm Payrolls data, which arrived at a time when they were already closed. Concerns are rising that the US has waited too long to cut rates, amidst a July slowdown in the jobs market of the world’s largest economy. Goldman Sachs meanwhile have revised their probability for a US recession in the next 12 months, from 15% to 25%. The chance of rapid rate cuts from the Federal Reserve continues to grow, ignited by Friday afternoon’s data.
The Japanese economy will be closely watched too as the fallout from last week’s policy action continues. The Yen has already rallied by circa 9% versus the pound in recent weeks.
Other than the latest round of Services PMI figures and an interest rate announcement from the Reserve Bank of Australia, there is little of note this week. As mentioned, markets will continue to digest the economic events of the second half of last week, as well as escalating tensions in the Middle East over the weekend. The former may not help the Dollar, but the latter is likely to offer it some support as a safe-haven asset.
The possibility of unexpected swings is high, especially across the major currencies. For any pending requirements, reach out to the Aston team who as always will be happy to assist.
Have a great week.
