ACM Update 17-02-25
The UK economy unexpectedly bounced back in December, with 0.4% worth of monthly growth and the biggest uptick since July 2023. This turned Q4 into a positive quarter for growth, much to the relief of Reeves & Starmer no doubt. Meanwhile in the US, inflation nudged back up to 3% and Retail Sales slowed considerably.
This week starts with a US bank holiday, followed by a raft of UK data releases. Unemployment, CPI Inflation and Retail Sales, all make an appearance, providing some insight into the path for UK interest rates.
Is the UK economy back in business? Not yet, but 0.4% month on month growth certainly came as a surprise for December. Whilst the figure was definitely well above the negative figure forecast, the economy remains lacklustre, with one “better” month not suggesting a turnaround.
The figure salvaged Q4 for the Government, which means that the quarter overall ended up providing a growth of 0.1%. This bettered Starmer & Reeves’ first quarter in power, which saw GDP flatline at 0.0% for Q3. Chancellor Reeves declared herself “not satisfied” with the growth, in a week where she also made all the wrong headlines, with historical claims about an inaccurate CV and an expenses investigation.
Reeves also tried to take credit for the recent Bank of England interest rate cuts. She suggested the three cuts since Labour came into power were “only possible because of the stability that this Government have returned to the economy”. Nothing is more neutral and stable than 0% growth Rachel, agreed!
As mentioned last week, Bank of England rate setter Catherine Mann spoke on Tuesday morning about her recent call for a bigger interest rate cut than was delivered. Mann remains concerned about the economy, and her calls for a 50 basis point cut were designed to support growth.
Her Bank of England counterpart, Megan Greene, is taking the opposite view though. She sees a “cautious and gradual approach” to rate cuts being required, in order to push back against ongoing inflationary pressures.
Governor Andrew Bailey spoke last week too. His comments were more of a warning, aimed at those criticising financial regulation in the UK. He provided a reminder of the 2008 financial crisis, aimed at Rachel Reeves who seems to be wanting to loosen regulation to encourage growth.
The above events kept Sterling relatively flat against the Euro last week, as shown in the chart below:
On the Euro side of the coin, Russia-Ukraine headlines in the second half of the week were the main driver. The potential of talks between the two were positive for the single currency itself, despite the manner in which they arose not being as intended by Europe.
The Euro benefitted from the prospect of peace on its eastern front, likely to bring more stability to prices, energy flows etc. As major European leaders meet this week to discuss the situation, we will see how things unfold with Trump getting increasingly more involved in the picture.
Christine Lagarde spoke off the back of the ECB’s latest Economic Bulletin. During the discussion with the European Parliament, she confirmed that “inflation is converging towards our target on a sustained basis”, echoing previous remarks. The ECB President remains cautious about geopolitical tensions and issues surrounding “trade tensions”, and as a result maintains the bank are not committing to a pre-set rate path.
Like the UK, the Eurozone managed a meagre 0.1% growth across the bloc in Q4, according to the latest Eurostat figures. Overperformers included Portugal at 1.5% & Spain at 0.8%, whilst bottom of the class were Ireland (-1.3%), Germany (-0.2%) & France (-0.1%).
Over in the US, Trump continues on his tariff tirade. Last week saw him looking to fight back with “reciprocal trade tariffs” to those who impose them on the US. He sees this as a way to boost investment into the US and increase home-grown manufacturing. However, Wall Street commentators are already suggesting this could well harm US earnings data in Q1. The logic behind this is that many orders and investments may have been hurried into Q4 of last year, to avoid any Trump-related risks.
Trump remains at the centre of worldwide news at present, not only on tariffs but naturally due to his involvement in proposed Russia-Ukraine talks. Other headlines saw US Government officials spend their weekend trying to rehire nuclear safety employees that Trump had fired just five days previously. All this whilst the man himself was in his motorcade leading the field for the Daytona 500 NASCAR race.
In economic news though….. US inflation ticked back up to 3.0% in January, marking the highest figure since May of last year. Energy prices were a main factor, alongside airfares, and groceries. Egg prices are still on the rise in the US (in fact up by 15% last month) due to avian flu outbreaks.
Inflation nudging back up makes the Federal Reserve even more likely to sit on their hands for now in terms of interest rate policy. Chairman Jerome Powell spoke in front of the House & Senate last week, and sang the same tune on monetary policy. There is no rush to slash interest rates and the economy is performing well.
One blot on the copy book was the Retail Sales data for January though. This saw a monthly drop of -0.9%, the worst monthly change since March 2023’s data. Something to keep an eye on for the resilient US economy.
Overall, the Dollar did suffer last week as concerns regarding tariffs took precedent over raw economic data. The Euro and GBP both gained over 2% versus the Dollar throughout the week, with GBP-USD hitting its best since before Christmas.
Movements on the pair last week are shown below:
The week ahead:
Monday – US BANK HOLIDAY – Presidents Day, Eurogroup Meetings
Tuesday – Reserve Bank of Australia rate announcement (03:30 UK time), UK Unemployment data (07:00), BoE Bailey speech (09:30), Canada CPI inflation (13:30),
Wednesday – Reserve Bank of New Zealand rate announcement (01:00), UK CPI inflation (07:00), Federal Reserve Meeting Minutes (07:00)
Thursday – US Unemployment Claims (13:30), RBA Bullock speech (22:30)
Friday – UK Retail Sales (07:00), FRA/GER/EU/UK/US Manufacturing & Services PMIs (08:15-14:45)
The new week starts on a quieter note, with the Presidents Day bank holiday in the US. This will keep trading conditions slightly quieter, and volumes lower as a result.
Beyond this there are a couple of major interest rate announcements for those in Oceania. The Reserve Bank of Australia meet on Tuesday and are projected to cut interest rates by 25 basis points to 4.10%. The following day the Reserve Bank of New Zealand are expected to go for a cut of 0.50% in their own meeting.
Aside from these, UK data releases are the main focal point. These start with Unemployment data on Tuesday morning, expected to show an uptick in overall unemployment to 4.5%. The other key metric in this release will be Average Earnings, which displays wage growth and thus is often a frontrunner for inflation.
Speaking of which, the latest CPI inflation release is on Wednesday morning, again forecast to show a move back upwards. Estimates suggest 2.8%, which could well lean the Bank of England more towards a hold in interest rates next time around (20th March). UK Retail Sales data for December closes out the week, ahead of the range of Manufacturing and Services PMI figures.
So aside from any Trump-related shenanigans, UK data will be the main driver this week. The range of releases can all be easily linked back to UK interest rates, so it will be interesting to see how they all shake out.
Given the recent uptick in GBP-USD, make sure to reach out to the team for any pending requirements. With the pair at its highest in 8 weeks, forward contracts are a useful tool to lock in a favourable rate of exchange. Limit orders are the alternative for those looking to be slightly more optimistic than current levels.
Have a great week.
