ACM Update 19-12-22
50…. 50…. 50…. 50…. Four interest rate announcements from four of the G10 currency central banks last week. Four rate hikes of 50 basis points. Rate hikes begin to slow as inflation slowly begins to come under control, but is it just a case of everyone else trying to keep up with the Fed?
With the Eurozone behind others in the current inflation cycle, ECB President Christine Lagarde struck a bullish tone in her press conference, stealing a lot of the headlines. Will the Euro continue to benefit as we get into a period of lower trading volumes throughout the festive period?
There were significant releases aplenty last week with no less than four major interest rate announcements. Clearly those at the head of the central banks are keen to get their festive break underway earlier than the rest of us…
Let’s start off on home shores in the UK, which was in the thick of the action. Monday kicked off with yet another demonstration of a slowdown in UK property prices. Rightmove figures show that prices have fallen by 2.1% in the last month. Interest rates shooting upwards and the panic in the mortgage market caused by September’s mini budget, have had the delayed impact many expected. This is likely to be one of a number of months where Rightmove print a minus.
UK GDP numbers showed that the August to October quarter saw a drop of 0.3% when compared to the previous three-month period. High inflation and mortgage rates are a substantial factor in this naturally. The UK now finds itself half way towards a (widely forecast) recession, which could well last five quarters according to the Bank of England. The economy did bounce back by 0.5% in October, but in context it had shrunk by 0.6% the previous month due to the extra bank holiday for the funeral of Queen Elizabeth II.
The latest round of UK inflation data was also released, this time for the month of November. The figures showed a drop from 11.1% to 10.7% which will be a welcome relief to the Bank of England amongst others. This was better than the 10.9% economists had forecast, and is at least now showing a turn the right way. It is still however more than five times the 2% target.
With the economy slowing, UK unemployment has bounced off its recent lows which dated back to 1974. The figure is now running at 3.7%, with the slowdown again linked to reduced spending by households, thus impacting hiring. The vicious circle of inflation continues….
The Bank of England’s interest rate announcement on Thursday was the main UK story though, albeit with a widely expected 50-basis point hike. This was their ninth rate hike in a row. However, there was dissent in the ranks of the 9-person monetary policy committee, leading to a split decision. Six members wanted the 50-basis point hike and one wanted a more aggressive 75 basis points. Meanwhile two thought any rate hike would be unnecessary in the current climate and instead preferred to hold the current position. This gave a muddy picture on future BoE policy, which meant sterling suffered throughout the afternoon on Thursday.
This slide for GBP later in the week can be seen in the chart below, covering recent movements in GBP-USD:
The Dollar definitely had a better week than of late, especially against GBP where it stemmed the 11% losses seen over the previous six weeks. US inflation data released on Tuesday lunchtime showed the action year to date from the Federal Reserve is bringing inflation back under control. Admittedly, still not as quickly as Jerome Powell and Joe Biden might like it to be. The annualised figure is now back down to 7.1%, from 7.7% the previous month. The Federal Reserve know they still have work to do to tame the problem, with numbers having fallen from 9.1% in July of this year.
As a result, Jerome Powell and co continued their aggressive stance on rate hikes, with a further 50-basis point rise in their Wednesday evening meeting. As mentioned, this 50-basis point move was widely insinuated by the Fed in their recent conferences and publications. Despite an initial knee-jerk reaction of about 0.5% in favour of the Dollar, things soon flattened out and maintained similar levels. The question now becomes, what can we expect in the next meeting on 1st February?
The Fed are still keen to avoid the dreaded “hard landing” for the US economy, hoping they can essentially avoid recession. The retail sales figures for November though, showed a drop of 0.6% compared to the previous month, which isn’t an optimistic number. Especially when you consider November contained Thanksgiving and Black Friday.
The Euro was the real mover last week, largely thanks to ECB President Christine Lagarde. As already suggested, Frankfurt opted for (you guessed it) a 50-basis point hike last week in their battle to tame inflation. The Eurozone is still behind the UK & US in their inflationary battle and is largely having to follow the Fed in their interest rate hikes. After all, if they don’t it means essentially importing already inflated goods from elsewhere, compounding the issue.
It was Lagarde’s press conference which got people talking though, with her bullish comments regarding monetary policy in the bloc. With the two most recent meetings delivering 75 basis points each, the ECB President was questioned as to whether the bank were about to change course about future rate rises:
“Anybody who thinks this is a pivot for the ECB is wrong. We’re not pivoting. We’re not wavering.”
As someone who has been accused of vague monetary policy in the past, this was about as confident and firm as you can get. Many market commentators stating that this was the most iconic ECB speech since the Mario Draghi era, specifically in 2013. The result was the Euro gaining circa 2% against the pound throughout Thursday as shown in the chart below:
The fourth G10 currency with a central bank meeting last week? The Swiss National Bank delivering their own 50 basis point hike, with the CHF largely unmoved.
The week ahead:
Tuesday: Australian Monetary Policy Minutes (12:30am UK time), Bank of Japan Monetary Policy statement (time TBC)
Wednesday: Canadian CPI Inflation (13:30)
Thursday: UK Final GDP figures Q3 (07:00), US Final GDP figures Q3 & US Unemployment Claims (13:30)
Friday: Canadian GDP (13:30)
Into the final full trading week of the year and significant market data releases are as thin on the ground as a sunny day in the UK at the moment. Another G10 interest rate announcement from Japan is probably the only real highlight, but the BoJ are highly unlikely to follow the 50-basis point formalities of last week.
After recent Dollar weakness, this week could be a good opportunity for Dollar sellers to make exchanges in what could be a brief period of respite. Make sure to reach out to the team if you have requirements of this nature. Equally, the Euro strength late last week has presented a favourable position for anyone looking to sell the single currency, amidst what could be a bit of a bleak winter on the continent.
The Aston offices will remain open during the Christmas period on the days which are not UK Bank Holidays. These are:
- Monday 26th December – Aston Offices CLOSED
- Tuesday 27th December – Aston Offices CLOSED
- Wednesday 28th December – OPEN as usual
- Thursday 29th December – OPEN as usual
- Friday 30th December – OPEN as usual
- Monday 2nd January 2023 – Aston Offices CLOSED
- Tuesday 3rd January 2023 – OPEN as usual
On behalf of the entire Aston team, have a great Christmas period however you are spending it and a Happy New Year also. We look forward to working with you in 2023.