ACM Update 12-08-24
We saw a turbulent start to last week, mainly driven by the hangover from the previous Friday’s US Non-Farm Payrolls release. The data led to nerves about a US recession, which came at the same time as concerns about big-tech companies being overvalued.
Stock markets tumbled as a result, and safe haven currencies like the USD and Swiss Franc saw a wild few days. The Dollar gained over 1% vs GBP before falling back during the week.
This week is heavy with UK data releases, with Unemployment figures, CPI inflation, economic growth in the form of GDP and Retail Sales numbers.
The US Dollar saw the majority of market movement, thus we shall begin there. Following on from the Fed’s decision to hold interest rates on 31st July, many market analysts have already suggested the move was a mistake. The above-mentioned volatility last week was started by the underwhelming Non-Farm Payrolls release, and even led to rumours of an emergency rate cut from Powell & Co to calm markets. By the middle of the week though, the idea of this had drifted away.
However, there has been plenty of talk of “jumbo-sized” rate cuts from the Fed throughout the rest of the year. Citibank and JP Morgan both suggested 0.5% cuts in September and November were needed and likely. The Goldman Sachs market update webinar was slightly calmer, still suggesting 0.25% cuts in the next three meetings (18th September, 7th November & 18th December).
However, the Goldman comments stressed another “dire” jobs report for August could encourage a 0.50% cut in September. Their own analysis of the July jobs drop though showed the fall was led by an increase in temporary layoffs, rather than anything sustained.
On the topic of interest rates, Donald Trump suggested (again) the President should have “some say” on monetary policy, going against the system of the Fed being independent of political forces. Trump criticised Jerome Powell for being “a little bit too early and a little bit too late” on moving interest rates.
Meanwhile an actual policymaker, Kansas City Fed member Jeffrey Schmid, suggests he is not yet ready to reduce rates despite the cooling jobs market. His colleague Michelle Bowman sang a similar tune in her own comments, suggesting she still sees upside risks to inflation, as well as continued strength in the jobs market. On which note, weekly unemployment claims fell to 233k last week, from (an upwardly revised) 250k the week before. The 250k was the worst figure in 13 months.
Sterling-Dollar volatility last week can be seen in the chart below:
Based on the knock-on effects of a potential US recession, GBP fell early in the week. Thursday saw the lowest GBP-EUR rate since mid-April and a month low versus the Dollar. Most data releases from the UK were positive though, which aided the slight recovery later in the week.
The BRC (British Retail Consortium) retail sales figures showed a year-on-year rise of 0.5% in July, which was mainly attributed to the ever-popular reason of “better weather”. They warned consumers still remain cautious with their spending habits due to recent inflation pressures.
The UK Services PMI figure was 52.5 and on expectation, whilst renewed confidence in the construction sector saw the respective PMI figure at 55.3 for July, its highest since June 2022. This is logically linked to increased homebuilding, as a result of the long-awaited interest rate cut from the Bank of England. The cut was also a factor in a boost in home prices in July according to Halifax figures, which were up by 0.8% in the month.
Meanwhile, new Chancellor Rachel Reeves is still trying to work out how to fill the £22 billion black hole in the UK’s finances, that the Labour Government have inherited. She is yet to rule out increasing capital gains tax, after warning that “difficult decisions” will have to be taken in the October budget. All this whilst she seeks to boost economic growth.
In the employment area, we saw figures released last week showing companies have recently increased hiring for “white-collar roles” and permanent contracts. The Bank of England have concerns that this will put upward pressure on wages, feeding into inflation. The never-ending battle.
Despite the battering the pound took last Monday, recent UK data has been relatively positive for the economy. This week though will deliver a substantial amount of UK figures, first thing each morning from Tuesday to Friday.
In the Eurozone, a pretty quiet week all in all. European stock markets suffered too from the knock-on effect fears of a US slowdown early in the week. For the Euro itself, Eurozone Services PMI data was broadly OK across the board, with German figures the standout improver.
The Eurozone PPI (Producer Price Index) spiked in July by 0.5%, further boosting the chances of a European Central Bank rate hold in September. The PPI metric measures the change in prices that producers pay, which are often passed on to the end consumer in the form of CPI inflation.
As the Paris 2024 Olympics drew to a close last night, the event seems to have gone down as a success, despite all of the French political turmoil in the run-up. The IOC President, Thomas Bach, referred to them as “Seine-sational”……
Attention will now turn to how much of a boost the Olympics will deliver to the French (and indeed Eurozone-wide) economic figures for the third quarter. French GDP is forecast to grow by 0.4% in the quarter, up on the 0.3% seen in both Q1 & Q2. This is attributed to a boost from ticket sales and TV rights contracts generating extra revenue.
GBP-EUR movements last week can be seen in the chart below:
The week ahead:
Monday – Japan Bank Hol, US Federal Budget Balance (19:00 UK time)
Tuesday – UK Claimant Count/Unemployment/Average Earnings (07:00), US PPI & Core PPI (13:30), Fed Bostic (18:15)
Wednesday – RBNZ rate announcement (03:00), UK CPI exp 2.3% (07:00), US CPI exp 3.0% (13:30)
Thursday – AUS Unemployment Rate (02:30), UK GDP exp 0.1% (07:00), US Retail Sales (13:30), EU BANK HOLIDAYS
Friday – RBA Gov Bullock speech (00:30), UK Retail Sales (07:00)
Looking at this week, we have a full influx of UK data releases to come. Tuesday begins with Unemployment figures with Claimant Count data, the Average Earnings and headline Unemployment rate. Average Earnings are forecast to fall from a 5.7% to 4.6% increase in the three months to June. This will be welcome news for the Bank of England, but the suggested uptick in headline Unemployment won’t be.
Speaking of inflation, Wednesday morning sees the CPI release, forecast to show UK inflation bouncing back up to 2.3% in July. UK economic growth (GDP) is forecast to show a mighty 0.1% uptick from May to June. Retail Sales figures will close out the week, expected to bounce back in July, but not to the pre-June levels.
The Eurozone sees a Flash GDP release on Wednesday morning, expected to show a 0.3% growth for the bloc in Q2, in line with ECB estimates. Aside from that, most Eurozone countries have public holidays on Thursday, thus expect Friday to be a quiet one too.
The US will provide the latest round of Producer Price Index inflation figures, hopefully not showing a further uptick in inflation there. The CPI (headline inflation) figure arrives the following day. The two could well provide further sentiment on what the Federal Reserve will do in mid-September.
Overall, one would hope for a less volatile week than we saw last week. However, the stock market meltdown of last Monday shows what can happen. As an example, GBP saw a swing of 4% versus the Australian Dollar last week, thus it is important to consider what impact such moves would have on your pending currency conversions and budgeting.
Protecting your costs and budget are important approaches to foreign exchange, so make sure to reach out to the team for more information on how to do this.
Have a great week.
