ACM Update 20-01-25
UK inflation fell fractionally last week, potentially giving the Bank of England a hint of wriggle room for an interest rate cut in a couple of weeks. The US CPI equivalent went the wrong way though. The Fed’s Beige Book of data for their next meeting was published, as were the most recent ECB minutes.
This week, Trump inbound! The incoming President re-assumes his role today, in Washington DC. His impact has been felt on FX markets for some months now, especially in the form of substantial Dollar strength since November’s election. US markets will be closed today for the Martin Luther King public holiday.
Donald Trump continues to cause a stir despite not taking office yet, until today. The inauguration has taken a step inside the Capitol Building for the first time in 40 years due to the cold weather. There is definitely an ironic slant to that given the events of 6th January 2021….
On the data front, the UK saw the most last week, with not much of it being pretty. It started well, as UK inflation took a turn back downwards in the December numbers, their first monthly drop since the September data. The move was a fraction lower than what was expected, with a forecast of 2.6% for a second month, bettered by 2.5%.
The main contributory factors for the CPI slowdown were hotel and restaurant price increases slowing, as well as those of cigarettes and tobacco. Second hand car prices and the cost of fuel were pushing the metric the other way though.
The data may open the door slightly for a further rate cut from the Bank of England at the start of February, but it remains far from a certainty. The mere prospect of it though did drive sterling downwards in the middle part of the week.
The newest member of the Bank of England’s rate setting committee wasn’t shy in giving his opinions on the topic though. Alan Taylor thinks the Bank of England should be moving quickly to bring down interest rates, as the UK economy is already flagging. He voted for cuts in the most recent two meetings, despite being heavily out-voted in the December gathering. In his speech last week, he spoke of the need to “cut rates pre-emptively” for now.
He does seem to have a point though, as UK data remains weak. November’s GDP release arrived last week, showing a 0.1% month-on-month increase in the size of the economy. This was in fact the first growth in three months, however small. Markets had naturally been expecting more, but the news came as no surprise to the NIESR (National Institute of Social and Economic Research), whose own forecasts suggest 0.0% worth of growth throughout Q4.
Retail Sales for December also painted a poor picture, with a -0.3% shift in the month. All of these releases show just how little momentum the UK economy had at the end of 2024.
Perhaps the only glimmer came when looking forwards for 2025. The latest IMF forecasts upgraded the UK projection for the year, from 1.5% to 1.6%. The independent body did warn about looming threats from President Trump, not just in the UK but globally.
The growth revision was something the Chancellor, Rachel Reeves, said made the UK “the only G7 country apart from the US” to have the growth forecast upgraded. Clutching at straws in Downing Street methinks, off the back of a week in the wrong headlines courtesy of the Treasury Minister having to resign.
For the first time in a while, GBP didn’t in fact lose much ground at all versus the US Dollar last week. However, the possibility of another UK interest rate cut to come kept things towards the lower end of the range.
Movements on the pair last week can be seen in the chart below:
Over in the US, the Trump momentum continues to build ahead of today’s inauguration within the Capitol Building. Those “day one” tariffs have been a threat to many countries, but his negotiations on the TikTok situation and a temporary reprieve for the platform might well be an initial order of business.
Whilst UK inflation falls, US inflation continues to nudge up and this continued in December. Since a low of 2.4% in September, the reading is now back at 2.9% even in advance of the proposed incoming tariffs. Food and energy prices were predominantly to blame for the nudge up, with eggs specifically being impacted by a strain of bird flu impacting supply.
As inflation nudges up, the US economy and jobs market continues to grow, so the chances of us seeing another Fed rate cut for now seem unlikely. As eluded to recently, they are acutely aware of the possible impacts Trump will have on inflation ahead, so we expect them to hold steady in next week’s policy meeting, with some degree of confidence. On the Producer side of things though, US PPI inflation slowed last month by more than expected. This could give clues as to what is to come next in end consumer pricing.
With the next Fed meeting imminent, the Beige Book release provided the most current data on the US economy for policymakers. This showed “slight to moderate” growth at the end of last year, but that the economy itself was “solid”. This further strengthens the case for policy to be held next week.
A few Fed officials chipped in with their own thoughts on recent data and current events. New York member John Williams maintained the stance of data dependency, in what he described as a “very uncertain environment”. Austan Goolsbee was more dovish, urging patience on rate cuts to come. All were notably cautious on the subject of the incoming President though.
To finish off US data, Retail Sales for December were a slight disappointment. These fell short of expectation for the first time since June, but still recorded 0.4% worth of uptick and are now without a negative figure in eleven months.
In Europe, what can only really be described as a quiet week with one significant release. The minutes from the December ECB meeting were kept on the back burner over the festive period, but Thursday saw their release.
As of late, the ECB are growing incredibly worried about growth across the continent, leading this to now seemingly be their primary objective. Narrative has wandered away from the “achieving the 2% inflation target”, to “stabilise sustainably at the target”. With this believed to be under control, Lagarde & Co can focus on getting growth back on track.
However, the committee was firmly split in December as to how aggressive upcoming rate cuts should be. Some members thought it appropriate to reduce more sharply to cushion the economy against increasing risks, but others felt a rapid move could send the wrong signal to financial markets.
As it was, the 0.25% cut was deemed enough for now to provide the desired combination of assisting sluggish growth and counterbalance easing inflationary pressures. But given the noted debate on whether a 0.50% cut should have been taken, one would feel confident in a further rate cut to come in the 30th January announcement.
The Euro lost marginal ground against both GBP and the US Dollar but overall closed relatively flat on the week versus both. Movements on GBP-EUR recently can be seen in the chart below:
The week ahead:
Monday – US Bank Holiday (Martin Luther King Day), Trump Inauguration, WEF Annual Meetings
Tuesday – ECOFIN Meetings, UK Unemployment & Claimant Count (07:00 UK time), EU ZEW Economic Sentiment (10:00), Canada CPI inflation (13:30)
Wednesday – ECB Lagarde speech (15:15)
Thursday – Canada Retail Sales (13:30), US Unemployment Claims (13:30)
Friday – Bank of Japan Rate Announcement (03:00), FRA/GER/EU/UK/US Manufacturing & Services PMIs (08:15-14:45), ECB Lagarde speech (10:00)
The new week starts with D-Day, that is D for Donald Trump. The new President takes the helm again today, already promising a host of sweeping executive orders, potentially more than 200 today alone. Such an explosion of policies and information would usually cause some market movement, were today not a public holiday in the US.
Aside from that, there are a number of world financial gatherings this week in the form of the World Economic Forum and ECOFIN committee meetings. Most will likely be discussing Trump indirectly, if not necessarily by name.
UK news is likely to be all about the Unemployment data out on Tuesday morning, that may offer further hints on Bank of England action to come in a couple of weeks’ time. In terms of monetary policy in the US & Europe, both now have less than ten days before their next meetings. Christine Lagarde holds a couple of speeches this week, where we would expect her to lean more in the direction of implying another rate cut next week.
Amidst all the economic doom and gloom, GBP remains firmly on the back foot. The Pound is now down 2% in the last two weeks versus the Euro, and a slither under 10% down in four months versus the Dollar. Perhaps not the honeymoon period that Starmer & Co had hoped for.
Volatility is likely to remain high this week, especially in light of US events. Should you have any concerns about upcoming payments and want to discuss in more detail, reach out to the team. Different approaches such as limit orders to try and make the most of a moving market, or forward contracts to help protect against adverse movements, are proving popular.
Get in touch via your usual Aston team member, or via contact@astoncm.com.
Have a great week.
