ACM Update 13-11-23

Written by: David Comber
Date posted: 13-11-23

As has been the case recently, UK data continues to underwhelm. The economy failed to grow at all in Q3, despite 0.2% growth recorded for September. The current high interest rates may well be strangling the economy. The latest round of inflation numbers for the UK land this week on Wednesday.

Meanwhile we saw Federal Reserve Chairman Powell maintaining his stance that the Fed will continue to move carefully in their policy moves, vowing to raise rates further if appropriate.

UK data remains in the spotlight at present and last week it was the turn of the latest GDP numbers. The last few months have painted a fairly bleak picture and September was little different, registering a meagre growth of 0.2% versus the August equivalent. This brought the full quarter figures in at a flatlining 0.0%.

That said, this is in line with what the Bank of England recently suggested would be the expected growth for the whole of 2023. The question remains whether the economy will dip into recession through the end of this year and into next. This is a factor weighing heavily on the pound at present, as the ongoing effects of higher interest rates filter through.

Bank of England Governor Andrew Bailey continues to reinforce his message that it is too early to be cutting interest rates at present. In a speech last week he also spoke about the risks of “fragmentation” to the global economy. He described how the current picture in the economy has been harmed by the pandemic, the Russian invasion of Ukraine, as well as Brexit creating a “reduction in the openness” of the UK economy.

Meanwhile the Bank’s Chief Economist Huw Pill also went some way to suggest that interest rates will be remaining higher for longer. His Thursday speech suggested it was vital that interest rates remain at 5.25% for an extended period, to truly squash inflation. UK inflation remains one of the highest of large & advanced economies, recording 6.7% in September. This week we see the latest round of numbers for October, with markets expecting a sizeable drop to 4.7%. If true, this would mark the lowest print for UK inflation since November 2021.

Generally, sterling remains in a somewhat lacklustre pattern at present. Data is disappointing and with questions surrounding the actions of cabinet ministers it isn’t a pretty political picture either. For now, one would expect sterling to continue to suffer from this, drifting lower against other majors as we have seen of late.

Recent moves on sterling versus the Euro can be seen in the chart below:


Dollar-based moves were largely dictated by press conferences from Federal Reserve Chairman, Jerome Powell, last week. With little else of note, the greenback thus continues to gradually strengthen against the Euro and GBP, amongst others.

Powell’s latest speeches didn’t fundamentally change the rhetoric we have seen for some time now, essentially stating the Fed will move to raise interest rates higher if needed. This continues the “data-driven” mindset we have seen for some months now, placing further importance on US data releases over the coming weeks and months. On which note, US weekly unemployment claims came in almost bang on forecast last week, albeit slightly up on previous weeks. The latest round of US inflation news lands this week also, on Tuesday afternoon.

Whilst inflation will be the most significant US data release, focus now returns back to the looming US Government shutdown on Friday. This follows the most recent avoidance of a shutdown back in September.

As is often the case, expect an 11th hour resolution to be passed, but further time is likely to be needed to pass a full budget. This is largely due to the fact that a large part of the intended 45-day extension since the last Budget Ceiling, has been spent appointing a new House Speaker following the Kevin McCarthy debacle. Should a shutdown occur, this would have a negative impact on the Dollar come the end of the week. Historically though, this would seem an unlikely outcome.

The continued drift lower in GBP-USD can be seen in the chart below:


In the Eurozone, we continue to see mixed news from different corners of the bloc. Retail sales saw a slight drop back in September (compared to August), shrinking by -0.3%. Other data releases were the Services PMI numbers. The Spanish figure was above expectation and in growth, whilst the French and Italian equivalent were below and into contraction.

As always, the German figures were closely watched and came in slightly above the expected figure, albeit dipping from last month. Factory orders were up but industrial production was down, creating a mixed picture.

To complete the trilogy of central bank speeches, Christine Lagarde took the stage last week also. She dodged questions regarding rate cuts to come from the ECB, despite big drops in inflation to 2.9% recently. The ECB President warned inflation may actually jump back up in the new year once energy price shifts from 12 months previous come out of the calculations.

Expectations are for ECB rates to remain at their current level for a couple of quarters, with the first cut forecast for Q2 2024.

In another wobble elsewhere in the Eurozone, we are faced with an election on 10th March in Portugal. Prime Minister Antonio Costa unexpectedly resigned last week following a probe into possible government corruption. Another unwanted concern for a corner of the Eurozone.

In other news, we saw the widely forecast rate hike from the Reserve Bank of Australia. With inflation remaining high, new Governor Bullock had her hand forced into the 13th hike of the current cycle.

The week ahead:

Monday – Canadian Bank Holiday, Federal Reserve’s Lisa Cook speech (13:50 UK time), Bank of England’s Catherine Mann speech (16:05)

Tuesday – UK Unemployment & Claimant Count data (07:00), EU Flash GDP (10:00), Bank of England’s Swati Dhingra speech 12:00), US CPI Inflation (13:30), Bank of England’s Huw Pill speech (13:45)

Wednesday – UK CPI Inflation (07:00), UK House Price Index (09:30), US Retail Sales & PPI (13:30)

Thursday – Australian Unemployment (00:30), ECB’s Christine Lagarde speech (11:30), US Weekly Unemployment Claims (13:30)

Friday – US Government shutdown deadline, UK Retail Sales (07:00), ECB’s Christine Lagarde speech (08:30), Eurozone Final CPI Inflation (10:00)

Onwards into November we go with a week of inflation figures ready to emerge. Many expect this month to produce big drops in inflation across the major economies. Nobody will be hoping that happens more than Bank of England Governor Andrew Bailey, as he wrestles UK inflation (hopefully) back beneath the 5% mark. That is the expectation, if not better. Anything above this figure could prompt more action in mid-December from the Bank of England but at the moment they seem happy with their policy stance.

US inflation data (CPI) is expected to produce a print of 3.3% when released on Tuesday. This would continue the recent steady declines seen year to date in US data. Another rate hike seems unlikely from the Federal Reserve prior to Christmas, but as always it will be data dependent.

Speeches from leading central bank members are also spread throughout this week. Markets are now looking more for clues on cuts in interest rates than anything else. If UK Retail Sales continue to slow down come the back part of this week, that could also be a leading indicator of the Bank of England having to change stance.

For now, we expect to see the current Dollar strength remain front and centre. As mentioned above, inflation releases will be a major driver of currencies this week. To speak to the team about how to protect yourself from ongoing market fluctuations, do reach out to your point of contact.

Have a great week.