ACM Update 15-09-25
Data from the US economy continues to cause confusion, as recent releases again showed mixed results. Consumer inflation rose to 2.9% in August whilst producer prices fell, but unemployment claims spiked, as has the Federal budget deficit.
In the UK, July’s GDP data saw a flatlining economy record 0.0% growth, as fears of stagflation raise their head once more.
This Wednesday sees a tough interest rate decision from the Federal Reserve, who are forecast to cut rates by 0.25%, which would be their first move this year. The Bank of England meet on Thursday, who seem odds on to keep UK interest rates as they are for now.
It was another gloomy month for UK data in July, as the economy failed to grow at all. Despite optimistic retail sales numbers recently, these did not translate into any form of expansion in GDP as the manufacturing sector saw its biggest contraction in a year.
As reiterated by Rachel Reeves previously though, monthly changes can be volatile, so a wider view is required. Following June’s 0.4% expansion, the rolling three months to July sits at a 0.2% growth for the UK economy.
The Government remains keen to push UK growth, given it was one of Labour’s major priorities when they came into power. However, the ONS comments alongside the figures confirmed the UK economy has “continued to slow” over the past three months, following +0.7% in Q1 and +0.3% in Q2.
Low growth, combined with higher inflation and UK borrowing costs going to a 27-year the week before, are all compounding for Reeves and Starmer. That is even without the embarrassment of the recent Cabinet reshuffles. Tax rises in the Budget look almost inevitable, thus the Chancellor will be hoping for further Bank of England rate cuts in the interim to ease the pain.
Opposition leader Kemi Badenoch stated last week that she is “really worried” that the UK may need a bailout from the IMF to sure up the country. Whilst this currently seems a slight exaggeration, what is clear is that confidence in the economy and the Pound, are both very low at the moment.
The GDP release also featured a number of other gloomy figures, with industrial production and trade balance figures also much worse than expected. Sterling-Dollar finished the week not far from where it started, despite over a 1% trading range. Movements on the pair can be seen below:
Dollar movements were heavily driven by geopolitics in the early part of the week, following the situation in Qatar. Times of instability and uncertainty always favour the Dollar as a safe haven. Beyond that though, the muddy picture of US data continues.
Inflation figures for August were published, initially with the PPI (Producer Price Index) coming in lower than forecast. This was down to 2.8% versus the 3.5% estimate, easing fears that rising prices will soon be passed on to end consumers.
But the CPI (Consumer Price Index) figures for the same month moved up to 2.9% from 2.7% in July, which marked the biggest monthly gain since January. The Core CPI figure, excluding food and energy, recorded 3.1%.
Despite the rise in inflation, the Fed are unlikely to be deterred from a 0.25% rate cut this week. This is due to the slowing jobs market, illustrated not only by the Non-Farm Payrolls data of 10 days ago, but also the latest weekly unemployment claims figure spiking. This surged to a four-year high last week in hitting 263,000 new jobless claims. The Fed are highly likely to prioritise the jobs market in their policy decision, especially considering their view that the current tariff-induced inflation spike will just be temporary.
The number of jobs added to the US economy in the year to March 2025, also saw a downward revision of 911,000 jobs in total. This means that the number of new jobs created was more than slashed in half, from the original 1.76m. The move leaves an average of 70,000 new jobs per month in the period.
Further bad news for Trump came from the Federal Budget Balance rising again, now with a reported -$345 billion gap between income and expenditure. This was much worse than market estimates.
Ahead of this week’s Fed decision, the President has also been stopped from removing Governor Lisa Cook, following her mortgage fraud allegations. She is therefore likely to attend and vote in this week’s crucial meeting. One would suspect her decision won’t be influenced by the man she is in court against!
The ECB took their own policy decision last week in Frankfurt, which as expected ended up in no change. As previously, inflation remains on target whilst the bank focus on growth, allowing them to maintain current levels. The main source of nervousness remains the fallout from US tariffs.
Christine Lagarde’s follow-up speech pointed out the risks to growth are now “more balanced” than before, suggesting less nervousness. She stated the ECB are “still in a good place”. But international trade conditions and further tariff uncertainty could change that quickly. For now though, many economists think the ECB’s recent easing cycle has ended, something echoed in a Friday speech by German ECB policymaker Joachim Nagel.
Investors do seem to be carrying nerves about the state of the bloc however. The most recent investor confidence figure recorded the lowest reading this month since April. A lot of this comes from the instability in France currently, with the ousting of Prime Minister Francois Bayrou last week. Emmanuel Macron was then forced to name his fifth PM in less than two years, in appointing Sebastien Lecornu.
The credit rating agency Fitch also moved to downgrade France’s rating from AA- to A+ over the weekend. This comes directly as a result of the political instability and ballooning debt. On the other side of the coin, Portugal’s debt rating was raised to A from A- as a result of its falling debt to GDP ratio. The former of these two is more likely to catch market attention however.
Sterling-Euro movement was limited during the week, with barely a 0.5% range on the pair as illustrated in the chart below:
The week ahead:
Monday – UK Rightmove HPI (00:01), Bundesbank Monthly Report (11:00), ECB Lagarde speech (19:30)
Tuesday – UK Unemployment (07:00), German/EU ZEW data (10:00), US Retail Sales (13:30),
Wednesday – UK CPI inflation (07:00), ECB Lagarde speech (08:30), Bank of Canada rate announcement (15:30), Federal Reserve rate announcement (19:00) & Press Conference (19:30)
Thursday – ECB Lagarde speech (08:10), Bank of England rate announcement (12:00), US Unemployment Claims (13:30)
Friday – Bank of Japan rate announcement (03:00), UK Retail Sales & Government Borrowing (07:00)
A big week ahead of releases then, with no fewer than four significant interest rate announcements. These come from Canada, the US, the UK and Japan, in that order.
The UK has quite a few other major releases to consider too. Tuesday morning sees the latest unemployment release, featuring claimant count figures and average earnings also. The unemployment stats will show if the impact from April’s tax changes continues to harm jobs. Wednesday morning then provides the CPI inflation reading, projected to show no change between July and August, at 3.8%.
Thursday’s Bank of England meeting, whilst important, is projected to produce no change to policy, leaving interest rates at 4.00% following the August cut. A clearer vote split of 8-1 is expected, rather than the 5-4 call from the previous meeting. The inflation and unemployment figures may well concrete the rate decision. August’s retail sales figures close out the week from a UK perspective.
The most significant of the rate announcements would be the Federal Reserve’s rate decision on Wednesday evening, UK time. The Fed have been under pressure from Trump to cut rates for a while now, but with the US economy and jobs market slowing under the weight of tariffs, now looks to be the time anyway. A cut of 0.25% is predicted, with an outside possibility of more given recent US data.
European news will be slightly quieter, although there are a number of speeches from Christine Lagarde throughout the week. The ECB President may well give more colour on last week’s rate decision.
Aside from this, the Bank of Canada and Bank of Japan interest rate announcements (Wednesday & Friday respectively).
Markets remain volatile at present on all fronts. Economic data releases continue to be unpredictable in the current tariff environment, whilst geopolitics unpredictably pops up to drive currencies, most notably the Dollar. For those with Dollar-related requirements this week, make sure to reach out to the team to understand how to protect your currency exposure.
Have a great week.
