ACM Update 09-09-24
Last Friday’s raft of jobs data from the US offered a mixed picture, and offered little clarity on what the Federal Reserve might do with monetary policy next week. The employment sector has definitely slowed down of late, but perhaps not by enough to prompt a “jumbo cut” from Powell & Co.
This week sees big releases from the UK, US and Europe. The focal point will be Thursday’s ECB meeting, where it seems likely interest rates will come down on the continent, for the second time this year. Such a move will hopefully boost a sluggish German economy.
When the Federal Reserve stipulated their new focus on the jobs market recently, last week’s employment releases were always going to be significant. Especially so following the fallout of last month’s Non-Farm Payrolls figures, which sparked widespread concerns about an emergency rate cut in the US. Nothing of the sort materialised, so markets were left waiting for the August figures to be released on 6th September, for more clues. Indeed, clues were provided, but clarity was not obtained.
It was a quieter start in the US last week with the Labor Day bank holiday on Monday. Beyond that, the August figures for the manufacturing sector were released, which fell short of expectation for the fifth month in a row. They also suggest a contraction for the same number of consecutive months.
The above caused little movement though, such was the significance of the jobs data to come. Wednesday’s JOLTS jobs figure measured the total number of job openings reported during the month and continues to show a slowdown. First, the previous month was revised down (quite heavily), alongside the August figure also disappointing. The total of 7.67m openings was in fact the lowest since April 2021. The statistic saw the Dollar weaken during the afternoon, as it added fuel to the fire for larger interest rate cuts.
Thursday’s jobs figures didn’t help Dollar strength much either. The ADP jobs figure suggested the slowest month for jobs added to the economy since October last year, whilst weekly jobless claims remained stable.
The headline-grabbing Friday lunchtime releases offered a very mixed picture, which sent GBP-USD yo-yoing all the way to the close of the week. Expectations had been for a slight recovery when compared to last month, which did happen but not by as much as hoped. The figures suggest 142,000 jobs were added in August, but July’s numbers were also revised down heavily.
The overall unemployment rate ticked back down fractionally to 4.2% (from 4.3%, as forecast), whilst average earnings came in higher than expected for the period. There was also an addendum to the release, which pointed out that much more overtime had been reported, which could imply an increase in demand.
Therefore, there was something for everyone is this data. For those hoping for a 0.25% rate cut to come on 18th September, overall unemployment had improved and average earnings (consumer buying power) had increased. A rise in overtime also points to strong activity and a robust sector not requiring a large rate cut. But for those expecting the bigger cut, the number of jobs added to the overall economy continues to slow in all sectors, as well as vacancies being down. Perhaps this is a sign of things to come.
The final Dollar activity on Friday was driven by Fed policymaker Christopher Waller, thanks to a late afternoon speech. Like Chairman Powell a few weeks ago, Waller echoed the sentiment of “the time has come” to begin rate cuts this month, before adding that he is open-minded on the size and pace of policy changes. He referenced the “continued moderation in the labor market”. His final comments about rate cuts needing to be “done carefully” suggest a 0.25% cut may be in his mind. All in all, the Dollar strengthened on Friday.
At present, markets are still undecided as to what to price in from the 18th September meeting. Wednesday evening also saw the Fed’s Beige Book release, containing all of the data the committee have at their disposal for the meeting. There will be little in the way of speeches from the Fed members between now and the meeting itself, so movements will be driven by speculation on the outcome.
Moves on Sterling-Dollar, notably Friday afternoon’s 1% volatility, can be seen in the chart below:
Compared to activity on the other side of the Atlantic, the Pound had a very quiet week on the sidelines. The August interest rate cut from the Bank of England seems to be fuelling the UK housing market, which hit a two-year high in August according to Halifax figures. They suggest prices are up 4.3% compared to last year, and further rate cuts, as and when they happen, will inevitably boost this further.
Aside from this, the latest measurements of growth in the Manufacturing, Services and Construction sectors for the month of August were released. The Manufacturing industry is enjoying a stronger 2024, and the latest figures recorded the best month since June 2022 in terms of growth, at 52.5.
The Services sector also remains strong at 53.7 which marks the 10th month of expansion in a row. Construction-related activity has too been buoyed by the recent interest rate cut. Despite this month falling short of what was forecast, it did still produce a figure well into expansion at 53.6.
Aside from the above, UK focus is now going to be on what will happen on 19th September at the next Bank of England meeting. The question becomes which (if any) of the five members who voted for a cut in August, might change their mind this time to sway the balance to a hold. New committee member Clare Lombardelli opted for a cut in her first meeting, whilst Governor Andrew Bailey admitted his decision was a close one. Only time will tell.
Multiple cuts in a row are not unheard of in the current climate though. We only need to look to Canada, where the Bank of Canada last week delivered their third interest rate cut in a row. The headline interest rate there is now 4.25%, having been 5.00% at the start of the April meeting.
In Europe meanwhile, we are just a few days away from the latest policy decision from Frankfurt. Markets are expecting a further cut from the ECB, which has already been priced in as a result. General expectations going forwards are for quarterly rate cuts for the bloc, maintaining that pace until they get back down to 2.5% a year from now.
Economic growth however, will be the biggest variable in this now inflation seems to be under control on the continent. Germany continues to be the problem child though, which is never ideal considering it is the area’s biggest economy. Manufacturing statistics from the country are sluggish and consumer spending remains an area of concern.
The PMI Manufacturing releases from the various corners of the Eurozone were moderately favourable. Spanish figures led the way, with (as above) German figures lagging behind. A reading suggesting optimism in German manufacturing hasn’t been recorded in over two years now.
Unsurprisingly, Eurozone Services sector PMI numbers took a big jump up in August. The “Paris 2024” factor was definitely good news, bouncing the French figure up by 10% compared to the previous month as hotels, bars and other hospitality-related businesses thrived. The figure for the bloc as a whole benefitted too, despite another low reading for the German figure.
Movements on Sterling-Euro last week are as below:
The week ahead:
Monday – Japan Final GDP (00:50 UK time)
Tuesday – German CPI inflation & UK Unemployment/Claimant Count/Average Earnings (07:00)
Wednesday – UK GDP (07:00), US CPI inflation (13:30)
Thursday – ECB rate announcement (13:15), US PPI inflation (13:30), ECB Press Conference (13:45)
Friday – Eurogroup & ECOFIN Meetings, University of Michigan Inflation Expectations (15:00)
With interest announcements to come from each of the “big three” (ECB, Fed & BoE), we are likely to see a volatile fortnight ahead. For the ECB, a rate cut this week seems likely. In the case of the Federal Reserve, it is more a question of how much as the debate between 0.25% and 0.5% rumbles on. Will action from elsewhere mean the Bank of England cut too, so as not to fall behind their counterparts? For now, we would expect a hold in UK policy next week.
As already mentioned, the big event of this week will be the European Central Bank meeting which is on Thursday lunchtime. Given a cut seems highly likely from the committee, Christine Lagarde’s subsequent press conference will be watched for clues as to what to expect from the following meeting, on 17th October.
UK eyes meanwhile will be more geared towards the unemployment and GDP releases, of Tuesday and Wednesday morning respectively. Growth for July is forecast to show a 0.2% increase, which would mean the first seven months of the year have seen either flat or positive growth. The economy seems to be in much better shape than last year, but will looming tax hikes from the new Government mean a different picture in Q4?
The US will be all about inflation this week, with the headline CPI release. The figure is expected to drop down to 2.6% for August, which would mark the lowest since March 2021. Another twist in the 25/50 basis point debate for the following week perhaps.
As we start the new week, the Dollar seems to be in the ascendency slightly. This seems logical as Asian markets digest the jobs data from after they were closed on Friday. With the buildup to Thursday’s ECB meeting, we expect a busy week as the three main central banks watch the actions of one another. Will we see alignment from the three, or a cut, a big cut and a hold respectively?
Do make sure to reach out to the Aston team regarding your upcoming requirements and we can assist accordingly. Leaving things until the last minute can not only be stressful, but will also leave you exposed to market forces and having to accept what is perhaps a less beneficial rate of exchange. Get in touch to understand the solutions we have to protect your budget.
Have a great week.
