ACM Update 20-05-24
US inflation data for April showed a softening last week, but only marginally. The forecast drop prompted more discussion around Federal Reserve interest rate action over the coming months. Various US policymakers urged caution though.
Looking forwards, Wednesday morning sees the equivalent UK CPI release which is expected to show a sizeable move downwards in inflation to 2.1%, just above the Bank of England’s target. Will this change the tune of the Monetary Policy Committee? The minutes from the latest Federal Reserve meeting also arrive on Wednesday evening.
US-related news saw most of the headlines last week, with CPI the biggest release. Inflation there has remained sticky for some months now, but at least it came down fractionally in April. The reading of 3.4% was exactly as markets expected, just down from last month’s 3.5%. Higher rental prices and the price of fuel at the pumps formed the majority of the gain.
The move inevitably caused suggestions that rate cuts would thus be beginning sooner rather than later, however these were rebuffed by various Fed members throughout the week. Policymakers Williams, Barkin and Mester all argued it is still likely to take longer than some are expecting for US inflation to get back to the bank’s 2% target.
The “higher for longer” mantra indeed looks likely to remain, with two cuts now forecast for later in the year. This has moved up from one, which was the expected number of cuts as recently as a week ago. The Dollar did lose ground across the board during the week, with two-month highs on GBP-USD and EUR-USD. These can be attributed to the inflation drop and the above mentioned shift in sentiment regarding ongoing Federal Reserve policy.
The PPI inflation figures released the day before did show more of a monthly increase than had been hoped though. Chairman Powell was quick to pour cold water on the data, calling it “more mixed than hot”.
Powell also stated he didn’t expect the Fed’s next interest rate move to be a hike, having been somewhat non-committal on the topic the week before. Patience seems to be the name of the game for now. Again, another factor in the USD weakness throughout the week.
The rise in GBP-USD last week can be seen in the chart below:
UK data on the other hand, was significantly more sparse. Tuesday morning saw the latest Unemployment figures, with the headline rate nudging up to 4.3% from 4.2% last month, the third month in a row that the metric has risen, amidst further signs of a slowdown in the employment market. Such changes can also broadly be attributed to higher interest rates & borrowing costs, impacting hiring.
Average earnings rose by more than expected, whilst the number of those claiming benefits rose by less than expected. “This is the 10th month in a row that wages have risen faster than inflation”, chirped Jeremy Hunt. Is that enough though for Hunt & Sunak to gain votes though? Likely not.
The data will add more confusion for the Bank of England ahead of their 20th June meeting, given growth and demand for workers are two of their key metrics. Indeed, the number of UK job vacancies has dropped for a 22nd consecutive month.
Huw Pill commented later on Tuesday, that it was “not unreasonable” to think the central bank could consider cutting interest rates over the summer. Markets meanwhile are pricing in the chance of a June rate cut at 50:50.
New member Megan Greene commented last week that she thinks inflation persistence has waned since she joined the MPC in July, but it needs to continue that way. She continued, that data releases between now and the next meeting will give a clearer indication on "how far along the last mile we are”, and one would imagine, which way she will therefore be voting.
This week’s UK inflation release on Wednesday morning is forecast to show a big drop. This release will be key as to Bank of England policy over the coming months, so expect movement first thing, dependent on the outcome. One big drop in inflation doesn’t necessarily mean a guaranteed interest rate cut though.
In the Eurozone, GDP and CPI made appearances. The Flash GDP figure for Q1 saw a quarter-on-quarter growth of 0.3% which was a considerable improvement on recent numbers. The Eurozone desperately needs growth overall, despite some corners performing well.
The Final CPI inflation release meanwhile came in at 2.4%, further concreting the likelihood of a 6th June ECB rate cut. However, ECB Executive Board member, Isabel Schnabel, warned against the chances of back-to-back rate cuts in June and July. That indeed seems a fair assessment barring something very drastic in the interim.
A slight tick up took place in GBP-EUR as a result, seen in the chart below:
The week ahead:
Monday – BANK HOLIDAYS (FRA/GER/SWI/CAN), Fed Bostic speech (12:30 UK time), Fed Waller (14:00) Fed Jefferson (15:30) Fed Mester (19:00) speeches
Tuesday – Reserve Bank of Australia minutes (02:30), ECB Lagarde speech (09:00), Canadian CPI inflation (13:30), Fed Waller speech (14:00), BoE Bailey speech (18:00)
Wednesday – RBNZ rate announcement (03:00), UK CPI inflation exp 2.1% (07:00), Fed meeting minutes (19:00)
Thursday – Manufacturing & Services PMI data FRA/GER/EUR/UK/US (08:15-14:45), Fed Bostic speech (20:00)
Friday – UK Retail Sales (07:00), Fed Waller speech (14:35), University of Michigan Consumer Sentiment (15:00)
The week ahead is going to be all eyes on Wednesday morning from a UK perspective. The latest UK inflation release could be pivotal in deciding whether we will see a Bank of England interest rate cut in June or not. As mentioned, expectations are for a sizeable drop from 3.2% to 2.1% this month, which would please Andrew Bailey, Rishi Sunak and Jeremy Hunt, all in equal measure. All are likely to claim credit for it too.
It may not please those looking to sell GBP (buying EUR/USD etc), as such a move may well weaken sterling’s attractiveness and see it lose ground. We will wait and see on Wednesday morning. UK Retail Sales, forecast to take a drop, close out the week.
For now, GBP sits at its best position in a couple of months against the US Dollar, so a good opportunity for Dollar buyers. Over in the US, Wednesday evening’s minutes from the latest Federal Reserve meeting will be the biggest release. However there are numerous speeches from policymakers throughout the week, so any opinions on summer interest rate movements may well excite markets.
Eurozone news will be centred around a Tuesday morning Christine Lagarde speech, as well as the monthly raft of country-by-country Services and Manufacturing PMI releases. Those arrive on Thursday morning.
Given the strong position on GBP-USD, do reach out to the team should you have any requirements in that direction, before the major releases on Wednesday.
Have a great week.
